Reg-209006-89

Wednesday,
August 20, 2008

Part III

Department of the
Treasury

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26 CFR Part 1
Transfers by Domestic Corporations That
Are Subject to Section 367(a)(5);
Distributions by Domestic Corporations
That Are Subject to Section 1248(f);
Proposed Rule

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Federal Register / Vol. 73, No. 162 / Wednesday, August 20, 2008 / Proposed Rules

Internal Revenue Service
26 CFR Part 1
[REG–209006–89]
RIN 1545–AM97

Transfers by Domestic Corporations
That Are Subject to Section 367(a)(5);
Distributions by Domestic
Corporations That Are Subject to
Section 1248(f)
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.

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AGENCY:

SUMMARY: This document contains
proposed regulations under sections
367(a), 367(a)(5), 367(b), 1248(a),
1248(e), 1248(f), and 6038B of the
Internal Revenue Code (Code). The
proposed regulations under sections
367(a)(5) and 367(b) apply when a
domestic corporation transfers certain
property to a foreign corporation in an
exchange described in section 361(a) or
(b). The proposed regulations under
section 1248(e) suspend the application
of section 1248(e) when capital gains are
taxed at a rate equal to or greater than
the rate at which ordinary income is
taxed. The proposed regulations under
section 1248(f) apply when a domestic
corporation distributes stock of certain
foreign corporations in a distribution to
which section 337, 355, or 361 applies.
The proposed regulations under section
1248(f) include regulations described in
Notice 87–64 (1987–2 CB 375). The
proposed regulations under section
6038B establish reporting requirements
for certain transfers of property by a
domestic corporation to a foreign
corporation in certain exchanges
described in section 361(a) or (b).
Finally, the proposed regulations under
section 367(a) include the regulations
described in Notice 2008–10 (2008–3
IRB 277).
The proposed regulations included in
this document affect domestic
corporations that transfer property to
foreign corporations in certain
transactions, or that distribute the stock
of certain foreign corporations, and
certain shareholders of such domestic
corporations. The proposed regulations
are necessary, in part, to provide
guidance on changes to the law made by
the Technical and Miscellaneous
Revenue Act of 1988 (Pub. L. 100–647,
102 Stat. 3342).
DATES: Written or electronic comments
and requests for a public hearing must
be received by November 18, 2008.

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Send submissions to:
CC:PA:LPD:PR (REG–209006–89), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–209006–
89), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington, DC 20224, or sent
electronically, via the Federal
eRulemaking Portal at
www.regulations.gov (IRS REG–209006–
89).
FOR FURTHER INFORMATION CONTACT:
Concerning the regulations, Daniel
McCall, (202) 622–3860; concerning
submissions of comments, requests for a
public hearing, and/or to be placed on
the building access list to attend a
hearing, Richard Hurst
([email protected]),
or (202) 622–7180 (not toll-free
numbers).
ADDRESSES:

DEPARTMENT OF THE TREASURY

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collections of information
contained in this notice of proposed
rulemaking have been submitted to the
Office of Management and Budget for
review in accordance with the
Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the
collections of information should be
sent to the Office of Management and
Budget, Attn: Desk Officer for the
Department of Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collections of
information should be received by
October 20, 2008.
Comments are requested concerning:
Whether the proposed collections of
information are necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collections
of information;
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collections of information
may be minimized, including through
the application or automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,

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and purchase of service to provide
information.
The collections of information in
these proposed regulations are in
§§ 1.367(a)–7(c)(4) and (5); 1.1248(f)–
2(b)(1) and (c)(1); and 1.6038B–1(c)(6).
The collections of information are
mandatory. The likely respondents are
domestic corporations.
Estimated total annual reporting
burden: 3260.
Estimated average annual burden
hours per respondent: 10.69.
Estimated number of respondents:
305.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
Books and records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
This document contains proposed
amendments to 26 CFR part 1 under
sections 367(a), 367(a)(5), 367(b),
1248(a), 1248(e), 1248(f), and 6038B of
the Code.
Section 367(a)(1) generally provides
that if a United States person transfers
property to foreign corporation in
connection with an exchange described
in section 332, 351, 354, 356, or 361,
then the foreign corporation shall not be
considered a corporation for purposes of
determining the extent to which the
United States person recognizes gain on
the transfer. Sections 367(a)(2) and
367(a)(3), respectively, provide
exceptions to the general rule of section
367(a)(1) for transfers of stock or
securities of a foreign corporation that is
a party to the exchange or a party to the
reorganization, and for certain property
used in an active foreign trade or
business. However, section 367(a)(5)
provides that, except to the extent
provided in regulations, the exceptions
to the general rule of section 367(a)(1)
provided by section 367(a)(2) and (a)(3)
do not apply to a transfer of property by
a domestic corporation to a foreign
corporation in an exchange described in
section 361(a) or (b).
Section 367(b)(1) provides that in the
case of any 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

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the extent provided in regulations
prescribed by the Secretary which are
necessary or appropriate to prevent the
avoidance of Federal income taxes. A
fundamental policy of section 367(b) is
to preserve the potential application of
section 1248 following the acquisition
of the stock or assets of a foreign
corporation by another foreign
corporation. H.R. Rep. No. 94–658, at
242 (1975).
Section 367(c)(1) provides that for
purposes of section 367, any
distribution described in section 355 (or
so much of section 356 as relates to
section 355) shall be treated as an
exchange whether or not it is an
exchange.
Section 1248(a) provides that a United
States person shall include in gross
income as a dividend any gain
recognized on the sale or exchange of
stock of a foreign corporation that was
a controlled foreign corporation (CFC)
(as defined in section 957(a)) at any time
during the five-year period ending on
the date of the sale or exchange but only
if the United States person owned (or is
considered to have owned, within the
meaning of section 958) 10 percent or
more of the total combined voting
power of the foreign corporation at any
time during that five-year period (a
section 1248 shareholder). The amount
of the gain recognized by the United
States person on the sale or exchange
that is recharacterized as a dividend is
limited to the earnings and profits of the
foreign corporation, and of certain
foreign subsidiaries of such corporation,
attributable to the stock sold or
exchanged that were accumulated in
taxable years of the foreign corporation
beginning after December 31, 1962, and
during the period or periods the stock
was held by the United States person
while the foreign corporation was a
CFC.
Section 1248(e) provides that, except
as provided in regulations, if a United
States person sells or exchanges stock of
a domestic corporation that was formed
or availed of principally for the holding,
directly or indirectly, of stock of one or
more foreign corporations, such sale or
exchange shall be treated for purposes
of section 1248 as a sale or exchange of
the stock of the foreign corporations
held by the domestic corporation.
Section 1248(f)(1) provides that,
except as provided in regulations, a
domestic corporation that distributes
stock of a foreign corporation in a
distribution to which section 311(a),
337, 355(c)(1), or 361(c)(1) applies, shall
include in gross income as a dividend
an amount equal to the excess of the fair
market value of such stock over its
adjusted basis, but only to the extent of

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the earnings and profits of the foreign
corporation attributable (under
regulations prescribed by the Secretary)
to such stock which were accumulated
in taxable years of such foreign
corporation beginning after December
31, 1962, and during the period or
periods the stock was held by the
domestic corporation while the foreign
corporation was a CFC.
Explanation of Provisions
A. Section 367(a)(5)
1. Overview
As noted in the Background part of
this preamble, section 367(a)(2) and (3)
provide exceptions to the general rule of
section 367(a)(1). Section 367(a)(2)
provides that, except to the extent
provided in regulations, section
367(a)(1) shall not apply to the transfer
of stock or securities of a foreign
corporation that is a party to the
exchange or a party to the
reorganization. Section 367(a)(3)
provides that, except to the extent
provided in regulations, section
367(a)(1) shall not apply to the transfer
of property used in an active foreign
trade or business. Sections 1.367(a)–2T
and § 1.367(a)–3, along with other
related provisions, implement the
exceptions in section 367(a)(2) and
(a)(3). In addition, section 367(a)(6)
grants the Secretary authority to
promulgate regulations providing
additional exceptions to the general rule
of section 367(a)(1).
Section 367(a)(5) provides that the
exceptions to the general rule of section
367(a)(1) provided under section
367(a)(2) and (3) shall not apply in the
case of a transfer of property by a
domestic corporation (U.S. transferor) to
a foreign corporation (foreign acquiring
corporation) in an exchange described
in section 361(a) or (b) (section 361
exchange). The general rule under
section 367(a)(5), therefore, is that a
transfer of property by a U.S. transferor
to a foreign acquiring corporation in a
section 361 exchange is subject to the
general rule of section 367(a)(1). In that
case, the U.S. transferor recognizes gain
with respect to the transfer of
appreciated property in the section 361
exchange. See section 367(a)(1) and the
regulations under that section.
Section 367(a)(5), however, further
provides that subject to such basis
adjustments and such other conditions
as shall be provided in regulations the
general rule of section 367(a)(5) shall
not apply (and therefore the exceptions
to the general rule of section 367(a)(1)
may be available) if the U.S. transferor
is controlled (within the meaning of
section 368(c)), by five or fewer

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domestic corporations. For purposes of
the control requirement, members of the
same affiliated group (within the
meaning of section 1504) are treated as
a single corporation. The legislative
history to section 367(a)(5) explains that
regulations are expected to provide
relief from the general rule only if the
‘‘U.S. corporate shareholders in the
transferor agree to take a basis in the
stock they receive in a foreign
corporation that is a party to the
reorganization equal to the lesser of (a)
the U.S. corporate shareholders’ basis in
such stock received pursuant to section
358, or (b) their proportionate share of
the basis in the assets of the transferor
corporation transferred to the foreign
corporation.’’ S. Rep. No. 100–445, at 62
(1988).
The legislative history explains that
‘‘the requirement that five or fewer
domestic corporations own at least 80
percent of the U.S. transferor’s stock
assures that the bulk of the built-in gain
[in the transferred property] remains
subject to U.S. taxing jurisdiction.’’ The
legislative history further states that ‘‘it
is expected that regulations [issued
under section 367(a)(5)] will require the
U.S. corporate transferor to recognize
immediately any built-in gain that does
not remain subject to U.S. taxing
jurisdiction by virtue of a substituted
stock basis.’’ For example, the U.S.
transferor would recognize gain ‘‘where
20 percent or less of the U.S. corporate
transferor is owned by foreign
shareholders who receive substituted
basis stock in the transferee corporation,
which stock would not be subject to
U.S. taxing jurisdiction on disposition.’’
The U.S. transferor would also
recognize gain to the extent each
controlling domestic corporate
shareholder does not receive an amount
of stock of the issuing corporation in the
reorganization sufficient to preserve its
share of the built-in gain in the property
transferred by the U.S. transferor in the
section 361 exchange.
2. Explanation of Proposed Regulations
The proposed regulations confirm the
general rule of section 367(a)(5), but
provide an elective exception to the
general rule pursuant to which the
exceptions provided by section 367(a)
and the regulations under that section
may be available.
(a) General Rule of Section 367(a)(5)
Consistent with section 367(a)(5), the
proposed regulations confirm that the
exceptions to the general rule of section
367(a)(1) provided in section 367(a)
generally are not available to a transfer
of property by a U.S. transferor to a
foreign acquiring corporation in a

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section 361 exchange. As noted, under
the general rule of section 367(a)(5),
section 367(a)(1) would require the U.S.
transferor to recognize gain on the
transfer of appreciated property to the
foreign acquiring corporation in the
section 361 exchange. This general rule
applies even if the conditions and
requirements for the application of such
exceptions would otherwise be met. The
proposed regulations clarify that the
general rule of section 367(a)(5) applies
to a transfer of property pursuant to an
exchange described in section 351
(section 351 exchange) that qualifies as
both a section 351 exchange and a
section 361 exchange. See Notice 2008–
10, 2008–3 IRB 277.
(b) Elective Exception to the General
Rule
The proposed regulations provide an
elective exception to the general rule of
section 367(a)(5) if certain conditions
and requirements are satisfied
(discussed in parts A.2.b.i through v of
this preamble). If the exception applies,
then the exceptions to the general rule
of section 367(a)(1) provided in section
367(a) and the regulations under that
section are available to the transfer of
property by the U.S. transferor to the
foreign acquiring corporation in the
section 361 exchange, subject to any
conditions and requirements for the
application of such exceptions. In
addition, even if the exception provided
by the proposed regulations applies, the
U.S. transferor may still recognize gain
on the section 361 exchange in certain
circumstances (discussed in part A.2.b.ii
of this preamble), including any gain
otherwise required to be recognized
under section 367(a). See, for example,
section 367(a)(3)(B) and (C).
The conditions and requirements of
the elective exception carry out the
policy of section 367(a)(5) by ensuring
that the exceptions to the general rule of
section 367(a)(1) are available only to
the extent the net built-in gain in certain
property transferred by the U.S.
transferor in the section 361 exchange
remains subject to corporate-level
taxation in the hands of the controlling
domestic corporate shareholders of the
U.S. transferor through their ownership
of stock received in the transaction.
References to ‘‘stock received’’ in this
preamble include stock deemed
received in the transaction.
The proposed regulations apply to all
property transferred by the U.S.
transferor in the section 361 exchange,
other than property to which section
367(d) applies (section 367(d) property).
But see part D.2 of this preamble
regarding proposed regulations under
section 367(a) that require section

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367(d) property to be treated as property
to which section 367(a) applies (section
367(a) property) in transactions that
may be eligible for the exception to the
coordination rule of § 1.367(a)–
3(d)(2)(vi)(A) provided by § 1.367(a)–
3(d)(2)(vi)(B)(1). For purposes of these
proposed regulations, section 367(a)
property includes any property
transferred by the U.S. transferor in the
section 361 exchange (other than section
367(d) property), whether the property
is appreciated (built-in gain property) or
depreciated (built-in loss property) at
the time of the section 361 exchange.
The proposed regulations preserve (or
require the recognition of) the net builtin gain in the section 367(a) property
transferred in the section 361 exchange
(generally defined as ‘‘inside gain’’ by
the proposed regulations). In this regard,
a transfer of section 367(a) property
pursuant to a section 361 exchange to
which the elective exception applies is
treated differently than a transfer of
built-in gain property and built-in loss
property by a U.S. person to a foreign
corporation in a section 351 exchange
that is not also a section 361 exchange.
In the latter transaction, only the builtin gain property would be subject to
section 367(a)(1), and the U.S. transferor
would be required to recognize gain
with respect to such property without
offsetting the gain with losses related to
the built-in loss property.
The proposed regulations contain an
anti-stuffing rule pursuant to which any
property that would otherwise
constitute section 367(a) property shall
not be considered section 367(a)
property for purposes of any
determination under the proposed
regulations for which the amount of
section 367(a) property is relevant, if the
U.S. transferor acquires such property in
connection with the section 361
exchange with a principle purpose of
affecting any such determination (for
example, inside gain and inside basis).
This rule may apply, for example, if the
U.S. transferor acquires built-in loss
property or cash proceeds from
indebtedness incurred in connection
with the transaction.
The conditions and requirements for
the application of the exception
provided by the proposed regulations
ensure that, in the aggregate, the inside
gain is recognized currently by the U.S.
transferor or preserved for future
taxation in the stock received in the
transaction by the controlling domestic
corporate shareholders of the U.S.
transferor. If the entire inside gain is
preserved in the stock received by the
controlling domestic corporate
shareholders, the basis adjustment
required by the exception (discussed in

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part A.2.b.iii of this preamble)
effectively results in the section 361
exchange being treated similarly to a
transfer of the section 367(a) property in
a section 351 exchange insofar as, in the
aggregate, the controlling domestic
corporate shareholders’ adjusted basis
in the stock received in the transaction
generally would reflect the aggregate
bases of the section 367(a) property and
the net built-in gain in such property on
the date of the section 361 exchange.
The inside gain equals the amount by
which the aggregate gross fair market
value of the section 367(a) property
transferred by the U.S. transferor in the
section 361 exchange exceeds the sum
of the aggregate bases of such property
and a proportionate amount of any
liabilities of the U.S. transferor assumed
in the section 361 exchange or satisfied
in the reorganization pursuant to section
361(c)(3), but only to the extent the
payment of any such liability would
give rise to a deduction (deductible
liabilities). For this purpose, gross fair
market value means fair market value
determined without regard to mortgages,
liens, pledges, or other liabilities.
However, the fair market value of any
property subject to nonrecourse
indebtedness shall not be less than the
amount of such indebtedness. In
addition, the aggregate bases of the
section 367(a) property is determined
after taking into account any gain
otherwise required to be recognized by
the U.S. transferor under section 367(a).
See, for example, section 367(a)(3)(B)
and (C). The proposed regulations
provide rules for determining the
proportionate amount of any deductible
liabilities taken into account in
determining the inside gain. The IRS
and Treasury Department believe that
taking deductible liabilities into account
in determining inside gain comports
with the policy of section 367(a)(5) to
protect the corporate tax base following
the repeal of the ‘‘General Utilities’’
doctrine, insofar as the U.S. transferor
would have received the benefit of any
deductible liabilities if it had disposed
of its assets in a taxable transaction in
which the deductible liabilities were
assumed by the acquirer.
In determining the inside gain, the
IRS and Treasury Department declined
to consider attributes (for example, net
operating losses and foreign tax credits)
of the U.S. transferor other than the tax
bases of the section 367(a) property and
deductible liabilities allocable to section
367(a) property. These attributes are not
considered for this purpose because of
concerns regarding the complexity for
determining how any limitations on the
use of such attributes should be taken
into account and the potential for

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duplicating the benefit of such
attributes. Comments are requested
regarding whether and how other
attributes of the U.S. transferor should
be taken into account for determining
inside gain.
If the section 361 exchange is part of
a divisive reorganization described in
section 368(a)(1)(D) in which the U.S.
transferor distributes the stock of the
foreign acquiring corporation in a
distribution to which section 355
applies (section 355 distribution) and,
as part of a plan or series of related
transactions, such stock is subsequently
distributed in one or more section 355
distributions, in addition to the
conditions discussed in parts A.2.b.i
through v of this preamble, two
additional conditions must be satisfied.
First, each section 355 distribution must
be to a member of the affiliated group
(within the meaning of section 1504)
that includes the U.S. transferor at the
time of the 361 exchange. Second, each
affiliated group member that receives
stock of the foreign acquiring
corporation in the final section 355
distribution must adjust the basis of the
stock received (as determined under
section 358 and the regulations under
that section) as required by the
proposed regulations (discussed in part
A.2.b.iii of this preamble). These two
additional conditions ensure that the
amount of inside gain attributable to the
U.S. transferor’s controlling domestic
corporate shareholders remains subject
to corporate-level taxation following the
final section 355 distribution and permit
section 355 distributions of the stock of
the foreign acquiring corporation within
an affiliated group.
(i) Control Requirement
At the time of the section 361
exchange, the U.S. transferor must be
controlled (within the meaning of
section 368(c)) by five or fewer, but at
least one, domestic corporations (the
control group). For this purpose,
members of the same affiliated group
(within the meaning of section 1504) are
treated as one corporation. If the U.S.
transferor is controlled (within the
meaning of section 368(c)) by more than
five domestic corporations, but some
combination of five or fewer domestic
corporations control the U.S. transferor
within the meaning of section 368(c),
the U.S. transferor must designate the
five or fewer domestic corporations that
comprise the control group on Form
926, ‘‘Return by a U.S. Transferor of
Property to a Foreign Corporation.’’
Although a regulated investment
company (as defined in section 851(a))
(RIC), a real estate investment trust (as
defined in section 856(a)) (REIT), and a

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subchapter S corporation (as defined in
section 1361(a)) is each generally treated
as a domestic corporation for purposes
of the Code, such entities are not
generally subject to corporate-level
taxation. Therefore, the proposed
regulations provide that these entities
cannot be members of the control group.
The proposed regulations confirm that
because the stock ownership threshold
for the control requirement is
determined by reference to section
368(c), only direct ownership of the
stock of the U.S. transferor is taken into
account. The IRS and Treasury
Department declined to exercise the
authority under section 367(a)(6) to
permit indirect ownership (through a
partnership or other entity) to be taken
into account for this purpose, in part,
because of the complexity and
administrative difficulties that would
arise from the basis adjustments
(discussed in part A.2.b.iii of this
preamble) that would be needed to
account for the intervening partnership
or other entity. For example, in the case
of indirect ownership through a
partnership, basis adjustments would
need to account for differences between
a partner’s basis in its partnership
interest and the partnership’s basis in
the stock of the U.S. transferor.
Comments are requested regarding the
manner in which indirect ownership
could be taken into account for this
purpose without undue complexity.
(ii) Gain Recognition by U.S. Transferor
Even if the exception provided by the
proposed regulations applies, in two
instances the U.S. transferor must
recognize gain on the transfer of section
367(a) property in the section 361
exchange. This is the case even if an
exception to the general rule of section
367(a)(1) would otherwise apply to such
transfer.
First, the U.S. transferor must
recognize gain equal to the aggregate
amount of inside gain allocable to noncontrol group members. The inside gain
is allocated among control group
members and non-control group
members based on each shareholder’s
ownership interest (by value) in the U.S.
transferor at the time of the section 361
exchange. The U.S. transferor must
recognize gain with respect to noncontrol group members even if the
entire inside gain could be preserved in
the stock received by the control group
members as a group.
Second, the U.S. transferor must
recognize gain to the extent any control
group member cannot preserve its share
of inside gain in the stock received that
is allocable to the section 367(a)
property transferred in the section 361

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exchange. The amount of a control
group member’s share of inside gain that
cannot be preserved in the stock
received is the amount by which the
control group member’s share of inside
gain exceeds the fair market value of the
stock received by the control group
member that is allocable to section
367(a) property. Gain is required to be
recognized in such a case because the
fair market value of the stock equals the
maximum amount of the control group
member’s share of inside gain that can
be preserved in such stock (if the basis
of such stock were zero). Under this
rule, stock received that is allocable to
property other than section 367(a)
property is not available to preserve any
portion of the control group member’s
share of inside gain. The U.S. transferor
may be required to recognize gain under
this rule when, for example, nonqualifying property (property other than
stock or securities permitted to be
received under section 361(a)) is
received or when the foreign acquiring
corporation assumes certain liabilities of
the U.S. transferor in the section 361
exchange.
The proposed regulations provide
rules for determining the portion of the
stock received by a control group
member that is attributable to section
367(a) property that are consistent with
general tax principles, including Rev.
Rul. 68–55, 1968–1 CB 140, and the
authorities cited therein. Under these
rules, stock received by a control group
member is allocated between the
aggregate section 367(a) property and all
other property transferred in the section
361 exchange based on relative gross
fair market value.
The U.S. transferor must recognize
gain with respect to any control group
member that cannot preserve its entire
share of inside gain in the stock
received in the transaction even if the
control group members’ aggregate share
of inside gain can be preserved in the
stock received by the control group
members as a group. For example,
assume that the U.S. transferor is wholly
owned by two domestic corporations
(US1 and US2) and that each control
group member’s share of inside gain is
$40x. If in the transaction US1 received
stock with a value of $30x and $20x of
non-qualifying property, the U.S.
transferor would recognize $10x gain
with respect to US1, even if US2
received sufficient stock to preserve
$50x gain (the sum of US2’s $40x share
of inside gain and the portion of US1’s
share of inside gain ($10x) that cannot
be preserved in the stock received by
US1).

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(iii) Adjustments To Basis of Stock
Received by Control Group Members
Under the proposed regulations, each
control group member’s basis in the
stock received in the transaction as
determined under section 358 and the
regulations under that section (section
358 basis) that is allocable to the section
367(a) property transferred by the U.S.
transferor in the section 361 exchange is
reduced to the extent necessary to
preserve the control group member’s
share of inside gain. As a general matter,
if the U.S. transferor must recognize
gain with respect to a control group
member because the control group
member’s entire share of inside gain
cannot be preserved in the stock
received by the control group member
in the transaction (see part A.2.b.ii of
this preamble), the control group
member’s section 358 basis in the stock
received that is attributable to section
367(a) property is reduced to zero.
Only the basis of stock received by the
control group member that is
attributable to section 367(a) property
transferred in the section 361 exchange
is reduced (for example, the basis of
stock attributable to section 367(d)
property is not reduced). The reduction
to a control group member’s section 358
basis in the stock received that is
attributable to section 367(a) property
equals the amount, if any, by which the
control group member’s share of inside
gain (reduced by the amount of any gain
recognized by the U.S. transferor with
respect to the control group member
(discussed in part A.2.b.ii of this
preamble)) exceeds the built-in gain in
such stock (outside gain). The outside
gain is the amount by which the fair
market value of such stock exceeds the
section 358 basis of the stock (as
determined before any required
adjustment to such basis under the
proposed regulations). The proposed
regulations provide special rules that
apply if the control group member holds
more than one block of stock received
in the transaction.
If the section 361 exchange is part of
a divisive reorganization described in
section 368(a)(1)(D) that is eligible for
the exception (see part A.2.b of this
preamble for additional conditions that
must be satisfied in such a case), each
affiliated group member that receives
stock of the foreign acquiring
corporation in the final section 355
distribution must reduce the section 358
basis of such stock to the same extent
that the control group member that
initially received the stock from the U.S.
transferor would have reduced its
section 358 basis in such stock. In such
a case, the control group member that

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received the stock of the foreign
acquiring corporation from the U.S.
transferor is not required to reduce the
section 358 basis of such stock.
A section 361 exchange that is subject
to section 367(a)(5) may be part of a
triangular reorganization in which the
control group members receive stock of
the corporation that controls the foreign
acquiring corporation (the controlling
corporation). In such a case, the
proposed regulations require the control
group members to adjust (if necessary)
the section 358 basis of the stock of the
controlling corporation (whether foreign
or domestic) received in the transaction.
The IRS and Treasury Department
believe adjusting the basis of such stock
to be appropriate even if the controlling
corporation is domestic because the
control group members’ aggregate share
of inside gain may not be preserved in
the stock of the foreign acquiring
corporation held by the controlling
corporation in all cases. For example,
liabilities assumed or incurred by the
foreign acquiring corporation in
connection with the transaction could
reduce the amount of inside gain
preserved in such stock. Moreover, even
if the control group members’ aggregate
share of inside gain could be preserved
in such stock, such an approach would
shift the inside gain to the domestic
controlling corporation, rather than to
the control group members as intended
by section 367(a)(5).
(iv) Agreement To Recognize Gain and
File Amended Tax Return
The proposed regulations require the
U.S. transferor to include a statement
with its U.S. income tax return for the
year of the section 361 exchange
certifying that if the foreign acquiring
corporation disposes of a significant
amount of the section 367(a) property
transferred in the section 361 exchange
in one or more related transactions
entered into with a principal purpose of
avoiding the U.S. tax that would have
been imposed on a sale of such property
by the U.S. transferor at the time of the
section 361 exchange, then the U.S.
transferor (or the foreign acquiring
corporation on behalf of the U.S.
transferor) shall file a U.S. income tax
return (or amended U.S. income tax
return, as the case may be) for the year
of the section 361 exchange reporting
the gain realized but not recognized on
the section 361 exchange. This
requirement is intended to prevent the
potential use of reorganizations subject
to section 367(a)(5) to avoid the repeal
of the ‘‘General Utilities’’ doctrine.
Interest must be paid (determined under
section 6621) on the amount of any
additional tax due on such return. For

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this purpose, a disposition of a
significant amount of the section 367(a)
property occurs if the foreign acquiring
corporation disposes of an amount of
the section 367(a) property transferred
in the section 361 exchange that is
greater than forty percent of the fair
market value of the section 367(a)
property at the time of the section 361
exchange. Comments are requested
regarding whether an exception from
this rule should be provided for
dispositions of section 367(a) property
occurring in the ordinary course of
business.
(v) Election and Reporting Requirements
To elect to apply the exception, the
proposed regulations require the U.S.
transferor and the control group
members to enter into a written
agreement to make such election on or
before the due date for the U.S.
transferor’s timely-filed return for the
taxable year in which the section 361
exchange occurs. Each party to the
written agreement must also include a
statement with its timely-filed return for
the year of the section 361 exchange
reporting the election and other
specified information. If the section 361
exchange is part of a divisive
reorganization described in section
368(a)(1)(D) that is eligible for the
exception (see part A.2.b of this
preamble for additional conditions that
must be satisfied in such a case), each
affiliated group member that receives
stock of the foreign acquiring
corporation in the final section 355
distribution must enter into the written
agreement and include the reporting
statement with its timely-filed return
(instead of the control group member
that initially received the stock of the
foreign acquiring corporation from the
U.S. transferor.) Relief for reasonable
cause may be available for the failure to
comply with the election and reporting
requirements.
3. Special Entities
The proposed regulations apply to
property transfers by U.S. transferors,
including RICs, REITs, and subchapter S
corporations. Comments are requested
regarding whether and the extent to
which the IRS and Treasury Department
should exercise the authority under
section 367(a)(6) to provide an
exception from the general rule of
section 367(a)(5) for a transfer of
property by a RIC, a REIT, or a
subchapter S corporation to a foreign
corporation pursuant to a section 361
exchange.

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B. Section 367(b)

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1. Overview
Section 367(b)(1) provides that in the
case of any 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.
A fundamental policy of section
367(b) is to preserve the potential
application of section 1248 following
certain section 367(b) exchanges. H.R.
Rep. No. 94–658, at 242 (1975). Thus, if
the potential application of section 1248
cannot be preserved immediately
following the acquisition of the stock or
assets of a foreign acquired corporation
by a foreign acquiring corporation in a
section 367(b) exchange, the final
regulations (TD 8862) under section
367(b) issued on January 24, 2000 (2000
final regulations) require certain
shareholders of the foreign acquired
corporation to include in income as a
dividend the section 1248 amount
attributable to the stock of the foreign
acquired corporation. See § 1.367(b)–
4(b). For example, the inclusion in
income of the section 1248 amount is
required if the section 367(b) exchange
results in the loss of section 1248
shareholder status or if the foreign
acquired corporation or foreign
acquiring corporation is not a CFC
immediately after the section 367(b)
exchange. See § 1.367(b)–4(b)(1)(i).
2. Outbound Asset Reorganizations—In
General
The 2000 final regulations require a
U.S. transferor that is a section 1248
shareholder of a foreign acquired
corporation and that transfers the stock
of such corporation to a foreign
acquiring corporation in a section 361
exchange to include in income the
section 1248 amount attributable to the
stock of the foreign acquired
corporation. The U.S. transferor must
include the section 1248 amount in
income even if the foreign acquiring
corporation and the foreign acquired
corporation are CFCs with respect to
which the U.S. transferor is a section
1248 shareholder immediately after the
section 361 exchange. See § 1.367(b)–
4(b)(1)(iii), Example 4. Moreover, under
section 1248(f)(1) the U.S. transferor
generally would be required to include
in income the section 1248 amount
attributable to the stock of the foreign
acquiring corporation distributed under
section 361(c)(1). The section 1248

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amount attributable to the stock of the
foreign acquiring corporation would
generally include the section 1248
amount attributable to the stock of the
foreign acquired corporation. See
generally § 1.1248–8.
The final regulations (TD 9243) under
section 367(b) issued on January 26,
2006 (2006 final regulations) provided
an exception to the general rule of
§ 1.367(b)–4(b)(1)(i) that applies in
certain triangular reorganizations where
the exchanging shareholder receives
stock of a domestic corporation that
controls the foreign acquiring
corporation. This exception only
applies, however, to a shareholder that
exchanges stock of the foreign acquired
corporation for stock of the domestic
corporation in an exchange described
under section 354 or 356. Thus, the
exception provided by the 2006 final
regulations does not apply where the
U.S. transferor receives stock of a
domestic controlling corporation for
stock of a foreign acquired corporation
in a section 361 exchange.
After studying the issue further and in
response to comments received, the IRS
and Treasury Department have
determined that requiring the U.S.
transferor to include the section 1248
amount in income may not be necessary
in cases where the section 1248 amount
attributable to the stock of the foreign
acquired corporation can be preserved.
Accordingly, the proposed regulations
under section 367(b) included in this
document provide an additional
exception to the general rule of the 2000
final regulations that applies to certain
transfers of stock of a foreign acquired
corporation by a U.S. transferor to a
foreign acquiring corporation in a
section 361 exchange.
In such a case, the proposed
regulations provide that the U.S.
transferor must include in income the
section 1248 amount attributable to the
stock of the foreign acquired corporation
only if immediately after the section 361
exchange the foreign acquiring
corporation or the foreign acquired
corporation is not a CFC with respect to
which the U.S. transferor is a section
1248 shareholder. Example 4 in
§ 1.367(b)–4(b)(1)(iii) is modified
accordingly. The proposed regulations
under section 1248(f) included in this
document supplement this exception to
ensure that the section 1248 amount can
be preserved in the hands of a corporate
section 1248 shareholder following the
distribution of the stock of the foreign
acquiring corporation by the U.S.
transferor. See part C of this preamble
for discussion of the proposed
regulations under section 1248(f).

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3. Special Rules for Outbound
Triangular Asset Reorganizations
As noted, the 2000 final regulations
also require the U.S. transferor to
include in income the section 1248
amount attributable to stock of a foreign
acquired corporation transferred to a
foreign acquiring corporation in a
section 361 exchange that is part of
triangular asset reorganization, even if
the corporation that controls the foreign
acquiring corporation is domestic. The
provisions of § 1.367(b)–13 (TD 9243) do
not apply to preserve the section 1248
amount attributable to the stock of the
foreign acquired corporation in such a
case. The proposed regulations under
section 367(b) included in this
document, however, would provide an
exception to the general rule of the final
2000 regulations in such triangular asset
reorganizations.
If the controlling corporation is
foreign, the exception applies if,
immediately after the section 361
exchange, the foreign controlling
corporation, the foreign acquiring
corporation, and the foreign acquired
corporation are CFCs with respect to
which the U.S. transferor is a section
1248 shareholder. If the controlling
corporation is domestic, the exception
applies if, immediately after the section
361 exchange, the foreign acquired
corporation is a CFC with respect to
which the domestic controlling
corporation is a section 1248
shareholder. In addition, in either case,
the controlling corporation (foreign or
domestic) must apply the principles of
§ 1.367(b)–13 to determine the
adjustment to the basis of the stock of
the foreign acquiring corporation
(instead of the over-the-top basis
adjustment rules of § 1.358–6) to ensure
that the section 1248 amount
attributable to the stock of the foreign
acquired corporation at the time of the
section 361 exchange is preserved in the
stock of the foreign acquiring
corporation immediately after the
section 361 exchange. Under these
principles, each share of stock of the
foreign acquiring corporation would
generally be divided into the portions
necessary to preserve the pre-exchange
section 1248 amounts attributable to the
stock of the foreign acquired corporation
and the foreign acquiring corporation,
respectively. If the controlling
corporation is foreign, the proposed
regulations under section 1248(f)
included in this document supplement
this exception to ensure that the section
1248 amount can be preserved following
the distribution of the stock of the
foreign controlling corporation by the
U.S. transferor to its shareholders.

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C. Section 1248(f)
1. Overview
Section 1248(f)(1) provides that,
except as provided in regulations, if a
domestic corporation (domestic
distributing corporation) that is a
section 1248 shareholder with respect to
a foreign corporation distributes the
stock of such foreign corporation in a
distribution described in section 311(a),
337, 355(c)(1), or 361(c)(1), then
notwithstanding any other provisions of
the Code, the domestic distributing
corporation must include in income as
a dividend the section 1248 amount
attributable to such stock. Section
1248(f)(1) requires the inclusion of the
section 1248 amount because the
section 1248 amount attributable to the
stock distributed may not be preserved
in the hands of the distributee
shareholders following the distribution.
Section 1248(f)(1) does not apply to the
extent the domestic distributing
corporation otherwise recognizes gain
on the distribution, in which case the
gain recognized would be
recharacterized as a dividend under
section 1248(a), as appropriate.
Section 1248(f)(2), however, provides
that section 1248(f)(1) shall not apply to
a domestic distributing corporation’s
distribution of stock of a foreign
corporation to a domestic corporation
that is treated as holding the stock for
the period during which the stock was
held by the domestic distributing
corporation and that, immediately after
the distribution, is a section 1248
shareholder with respect to the foreign
corporation. The legislative history
explains that where ‘‘the corporate
distribute[e] does not receive a stepped
up basis as a result of the distribution
and* * *the potential for the future
application of section 1248 still exists,
it is not necessary to [apply section
1248(f)(1) to] override the
nonrecognition provisions which
otherwise apply to a corporate
distribution.’’ S. Rep. No. 94–938, at 270
(1976).
The legislative history provides that
the Treasury Department may exercise
the regulatory authority granted under
section 1248(f)(1) to provide that, where
section 1248(f)(2) does not otherwise
apply, ‘‘the recipient corporation may
be required to take a carryover basis in
the stock received (rather than a
substituted basis under section 358, for
example, in the case of a section 355 or
361 distribution) and section 1248(f)(1)
will not apply to such distribution.’’ S.
Rep. No. 100–445, at 64 (1988).
In Notice 87–64 (1987–2 CB 375), the
IRS and Treasury Department
announced that, in the case of section

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355 distributions of CFC stock,
regulations under section 1248(f) may
limit the application of section
1248(f)(1) to distributions in which the
CFC is no longer a CFC after the
distribution or in which one or more of
the distributees are not United States
shareholders (within the meaning of
section 951(b)) of the CFC after the
distribution. The notice further states
that the regulations would ensure that,
subsequent to a section 355 distribution
of CFC stock that would not be subject
to section 1248(f)(1) under the
regulations, the amount of gain
recognized from a disposition of the
CFC stock that would be recharacterized
as a dividend under section 1248(a)
would include the earnings and profits
attributable to the CFC stock under
section 1248 as of the date of the section
355 distribution. To achieve this result,
the notice provides that the regulations
may require appropriate adjustments to
the basis and holding period of the CFC
stock received by one or more of the
distributees.
2. General Rules
The proposed regulations under
section 1248(f) included in this
document provide that a domestic
distributing corporation that is a section
1248 shareholder of a foreign
corporation and that distributes stock of
such foreign corporation in a
distribution to which section 337
applies (section 337 distribution), shall
generally include in income as a
dividend the section 1248 amount
attributable to the stock distributed.
The proposed regulations further
provide that a domestic distributing
corporation that is a section 1248
shareholder of a foreign corporation and
that distributes stock of such foreign
corporation in a section 355
distribution, other than stock received
by the domestic distributing corporation
in a section 361 exchange, shall
generally include in income as a
dividend the section 1248 amount
attributable to the stock distributed.
This rule applies, however, only to the
extent the domestic distributing
corporation does not otherwise
recognize gain on the section 355
distribution, in which case the gain
recognized would be recharacterized as
a dividend under section 1248(a), as
appropriate.
Finally, the proposed regulations
provide that a domestic distributing
corporation that is a section 1248
shareholder of a foreign distributed
corporation and that distributes stock of
such corporation received in a section
361 exchange, in a section 355
distribution or a distribution to which

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section 361 applies (section 361
distribution), shall, notwithstanding any
other provision of the Code, include in
income as a dividend the ‘‘section
1248(f) amount’’ attributable to the stock
distributed. The section 1248(f) amount
equals the aggregate amount that would
be included in income as a dividend by
the foreign distributed corporation
under section 964(e) if, immediately
after the section 361 exchange that
preceded the section 355 distribution or
section 361 distribution, the foreign
distributed corporation sold the stock of
each foreign corporation received in the
section 361 exchange. This rule
supplements the proposed regulations
under section 367(b) which provide an
exception to the general rule of
§ 1.367(b)–4(b)(1)(i) in certain cases
where stock of a foreign acquired
corporation is transferred by a U.S.
transferor in a section 361 exchange.
3. Exceptions to the General Rules
The proposed regulations incorporate
the statutory exception provided by
section 1248(f)(2) for distributions that
meet certain conditions. The proposed
regulations also provide elective
exceptions for section 355 distributions
and section 361 distributions. The
exceptions for such distributions are
elective because applying the
exceptions may reduce a corporate
distributee’s section 358 basis in the
stock received in the distribution. The
conditions of the exceptions carry out
the policy of section 1248(f) by limiting
the exceptions to distributions where
the potential application of section 1248
and the relevant section 1248 amounts
can be preserved following the
distribution.
(a) Section 337 Distributions
The general rule will not apply to a
section 337 distribution of the stock of
a foreign corporation if immediately
after the distribution the 80-percent
distributee (described in section 337(c))
is a section 1248 shareholder with
respect to the foreign corporation, the
80-percent distributee’s holding period
in the stock received in the distribution
is the same as the domestic distributing
corporation’s holding period in such
stock at the time of the distribution, and
the 80-percent distributee’s basis in the
stock received in the distribution is not
greater than the domestic distributing
corporation’s basis in such stock at the
time of the distribution.
The IRS and Treasury Department
believe the conditions should be
satisfied in most section 337
distributions because of the application
of sections 334 and 1223. However,
comments are requested regarding any

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cases where these conditions may not be
met and whether the 80-percent
distributee should be permitted to
adjust the basis or holding period of the
stock received so that the conditions can
be met.
(b) Certain Section 355 Distributions
The proposed regulations provide an
elective exception to the general rule for
a section 355 distribution of stock of a
foreign corporation not received by the
domestic distributing corporation in a
section 361 exchange to a domestic
corporation that is a section 1248
shareholder with respect to the foreign
corporation immediately after the
distribution. The election to apply the
exception is irrevocable and must be
made by the domestic distributing
corporation and all such section 1248
shareholders. If the election is made,
adjustments may be made to each
section 1248 shareholder’s section 358
basis and holding period in the stock
received to preserve the section 1248
amount attributable to such stock at the
time of the distribution.
To apply the exception, the proposed
regulations require the domestic
distributing corporation and the section
1248 shareholders to enter into a written
agreement on or before the due date
(including extensions) of the domestic
distributing corporation’s tax return for
the taxable year during which the
section 355 distribution occurs. The
proposed regulations also require the
domestic distributing corporation and
each section 1248 shareholder to
include a statement with its tax return
for the taxable year during which the
distribution occurs reporting that the
election to apply the exception has been
made and any required adjustments to
stock basis or holding period. Each
party to the agreement must retain the
original or a copy of the agreement as
part of its records. The proposed
regulations provide relief for reasonable
cause for the failure to comply with the
election and reporting requirement.
If the exception applies, two
adjustments may be required with
respect to each section 1248
shareholder. First, solely for purposes of
section 1248, immediately following the
distribution the section 1248
shareholder’s holding period in the
stock received in the distribution shall
equal the domestic distributing
corporation’s holding period in such
stock at the time of the distribution.
Second, if the section 1248 amount
attributable to the stock of the foreign
corporation at the time of the
distribution exceeds the section 1248
shareholder’s postdistribution amount
attributable to such stock (excess

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amount), the section 1248 shareholder’s
section 358 basis in such stock is
reduced by the excess amount. The
postdistribution amount is the section
1248 shareholder’s section 1248 amount
attributable to the stock received in the
distribution, computed immediately
after the distribution and taking into
account the adjustment to the
shareholder’s holding period in such
stock.
(c) Distributions Pursuant to a Plan of
Reorganization
The proposed regulations provide an
elective exception to the general rule for
a section 355 distribution or section 361
distribution of stock of a foreign
corporation received by the domestic
distributing corporation in the section
361 exchange that precedes such
distribution to a domestic corporation
that is a section 1248 shareholder with
respect to the foreign corporation
immediately after the distribution. The
election to apply the exception is
irrevocable and must be made by the
domestic distributing corporation and
all such section 1248 shareholders. If
the exception applies, adjustments may
be made to each section 1248
shareholder’s section 358 basis (as
adjusted under the proposed regulations
under section 367(a)(5)) and the amount
of earnings and profits attributable to
the stock received for purposes of
section 1248 to preserve the section
1248(f) amount attributable to such
stock at the time of the distribution.
To apply the exception, the proposed
regulations require the domestic
distributing corporation and the section
1248 shareholders to enter into a written
agreement on or before the due date
(including extensions) of the domestic
distributing corporation’s tax return for
the taxable year during which the
distribution occurs. The proposed
regulations also require the domestic
distributing corporation and each
section 1248 shareholder to include a
statement with its tax return for the
taxable year during which the
distribution occurs reporting that the
election to apply the exception has been
made and any required adjustments to
stock basis or the amount of earnings
and profits attributable to the stock
received for purposes of section 1248.
Each party to the agreement must
include the original or a copy of the
agreement as part of its records. The
proposed regulations provide relief for
reasonable cause for the failure to
comply with the election and reporting
requirements.
If the exception applies, two
adjustments may be required with
respect to each section 1248

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49285

shareholder. First, each share of stock of
the foreign corporation received by the
section 1248 shareholder is divided into
portions attributable to each block of
stock of a foreign acquired corporation
transferred by the domestic distributing
corporation in the section 361 exchange
with respect to which the domestic
distributing corporation was a section
1248 shareholder at the time of the
section 361 exchange, and to all other
property transferred by the domestic
distributing corporation in the section
361 exchange. For example, if in the
section 361 exchange the domestic
distributing corporation transfers a
block of stock in each of three foreign
corporations with respect to which it is
a section 1248 shareholder, then each
share of stock of the foreign distributed
corporation received by the section 1248
shareholder must be divided into three
portions. Alternatively, if multiple
blocks of stock in each of the three
foreign corporations were transferred in
the section 361 exchange, then each
share of the stock of the foreign
distributed corporation would be
divided into additional portions to
account for the additional blocks of
stock transferred. The proposed
regulations further provide that, for
purposes of section 1248, the earnings
and profits attributable to each block of
stock of a foreign acquired corporation
transferred in the section 361 exchange
that results in a divided portion of a
share of stock of the foreign acquiring
corporation (or whole share, if no
division is required) are attributable to
such portion (or whole share, if no
division is required) based on the
section 1248 shareholder’s ownership
interest (by value) in the domestic
distributing corporation at the time of
the section 361 exchange.
Second, if the section 1248(f) amount
attributable to a portion of a share (or
whole share, if no division is required)
of stock of the foreign distributed
corporation received in the distribution
exceeds the section 1248 shareholder’s
postdistribution amount attributable to
such portion (or whole share) (excess
amount), then the section 1248
shareholder’s section 358 basis in such
portion (or whole share, if no division
is required), as adjusted under the
proposed regulations under section
367(a)(5) (discussed in part A.2.b.iii of
this preamble), is reduced by such
excess amount. This adjustment ensures
that the section 1248 shareholder’s
share of the section 1248 amount
attributable to the stock of each foreign
acquired corporation transferred in the
section 361 exchange is preserved in the
stock of the foreign distributed

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corporation received by such
shareholder in the distribution.
The IRS and Treasury Department
declined to adopt rules that would not
require the division of shares to
preserve section 1248 amounts because
such rules could inappropriately
increase or decrease the section 1248
amount attributable to the stock of the
foreign distributed corporation received
by a section 1248 shareholder in the
distribution. For example, if in the
section 361 exchange the domestic
distributing corporation transferred
appreciated tangible property and stock
of a CFC with earnings and profits for
purposes of section 1248(a) in excess of
the built-in gain in such stock, then the
appreciation in the tangible property
could inappropriately increase the
section 1248 amount attributable to the
stock of the foreign distributed
corporation received by a section 1248
shareholder in the distribution (to the
extent the CFC’s earnings and profits
exceed the section 1248 amount
attributable to the CFC stock at the time
of the section 361 exchange). A similar
inappropriate increase would result if
the domestic distributing corporation
transferred appreciated stock of two
CFCs in the section 361 exchange, one
CFC without a section 1248 amount and
the other CFC with a section 1248
amount but with earnings and profits for
purposes of section 1248 in excess of
such section 1248 amount.
The IRS and Treasury Department
also declined to adopt rules that would
preserve any reduction to a section 1248
shareholder’s section 358 basis in a
portion of a share (or whole share, if no
division is required) of stock of the
foreign distributed corporation received
in the distribution by increasing the
basis of other portions of the share (or
other whole shares, if no division is
required) of stock or by establishing a
suspended basis account equal to the
basis reduction. Those rules were not
adopted because a capital loss would be
created that could economically offset
the section 1248 amount, which would
not be consistent with the policy
underlying section 1248(f) and the
regulations described in Notice 87–64.
S. Rep. No. 94–938, at 270 (1976).
Comments are requested on how the
rules of the proposed regulations can be
simplified and how the rules should
apply to different classes of stock.
4. Section 964(e) and Inclusions Under
Section 367(b)
Comments are requested regarding
whether the IRS and Treasury
Department should exercise the
authority under section 367(b) to apply
the principles of section 1248(f)(1) to

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section 355 distributions or section 361
distributions of stock of a foreign
corporation by a CFC, to the extent the
transaction does not otherwise result in
an income inclusion to the exchanging
shareholders of the CFC under section
367(b) and the regulations under that
section. Comments should consider the
appropriate balance between the policy
of sections 1248(a) and 964(e) and the
associated complexity and compliance
burdens.
D. Changes to Exception to
Coordination Rule of § 1.367(a)–
3(d)(2)(vi)(A)
1. Overview
Section 1.367(a)–3(d)(2)(vi)(A) (the
coordination rule) provides that if, in
connection with an indirect stock
transfer, a U.S. person transfers assets to
a foreign corporation (direct asset
transfer) in an exchange described in
section 351 or section 361, the rules of
section 367 and the regulations under
that section shall first apply to the direct
asset transfer and then to the indirect
stock transfer. However, an exception to
the coordination rule (coordination rule
exception) provides that section 367(a)
and (d) shall not apply to a direct asset
transfer otherwise subject to the
coordination rule to the extent that
assets transferred by a domestic
acquired corporation to a foreign
acquiring corporation in an asset
reorganization are re-transferred to a
domestic corporation controlled by the
foreign acquiring corporation (domestic
controlled corporation), but only if the
domestic controlled corporation’s basis
in the retransferred assets is not greater
than the domestic acquired
corporation’s basis in such assets and
other conditions are satisfied. See
§ 1.367(a)–3(d)(2)(vi)(B)(1).
The 2006 final regulations established
the conditions for the application of the
coordination rule exception. The
preamble to the notice of proposed
rulemaking that preceded the 2006 final
regulations explained that the
conditions were adopted to limit the use
of asset reorganizations subject to the
coordination rule that might facilitate
inversion transactions and certain
divisive transactions. See REG–125628–
01 (issued January 5, 2005).
2. Clarification of Conditions for
Application of the Coordination Rule
Exception
In response to transactions intended
to use the coordination rule exception
inappropriately to repatriate earnings
and profits of foreign corporations
without the recognition of gain or a
dividend inclusion, the IRS and

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Treasury Department issued Notice
2008–10 (2008–3 IRB 277). The notice
announced that the conditions for the
application of the coordination rule
exception would be revised to clarify
that any adjustment to basis required
under section 367(a)(5) must be made to
the basis of stock of the foreign
acquiring corporation received by the
control group members in the asset
reorganization such that the appropriate
amount of built-in gain in the property
transferred by the domestic acquired
corporation to the foreign acquiring
corporation is reflected in such stock.
The notice clarifies that the control
group members cannot satisfy the basis
adjustment requirement by adjusting the
basis of stock of the foreign acquiring
corporation held before the
reorganization. The notice further states
that the revised regulations would
confirm that to the extent the
appropriate amount of built-in gain in
the property transferred by the domestic
acquired corporation cannot be
preserved in the stock received by the
control group members in the
reorganization, then the domestic
acquired corporation’s transfer of
property to the foreign acquiring
corporation shall be subject to section
367(a) and (d).
The proposed regulations included in
this document incorporate, with
modifications, the clarifications to the
conditions for the application of the
coordination rule exception announced
in the notice. The proposed regulations
also provide that to the extent any of the
re-transferred assets constitutes section
367(d) property, the coordination rule
exception shall apply only if the section
367(d) property is treated as section
367(a) property for purposes of
satisfying the conditions and
requirements of section 367(a)(5) and
the regulations under that section. Thus,
for example, any gain that the U.S.
transferor must recognize on the direct
asset transfer or any adjustment
required to a control group member’s
section 358 basis in stock received in
the transaction must take into account
any inside gain attributable to section
367(d) property (treated as section
367(a) property for purposes of
determining such inside gain) that is
part of the re-transferred assets.
The IRS and Treasury Department
continue to study transactions that have
the effect of repatriating earnings and
profits of foreign corporations without
the recognition of gain or a dividend
inclusion. Temporary regulations were
recently issued (TD 9400 and TD 9402)
under sections 367(b) and 956(e) to
address the inappropriate use of certain
cross-border triangular reorganizations

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and other nonrecognition transactions to
repatriate earnings and profits of a
foreign corporation without the
recognition of gain or a dividend
inclusion. The IRS and Treasury
Department are evaluating other
transactions that have a similar effect to
determine whether guidance is
appropriate. In particular, the IRS and
Treasury Department are analyzing
whether it is appropriate for the gain
limitation rule of section 356(a)(1) to
apply in an acquisitive asset
reorganization involving a foreign
acquiring corporation, considering that
a policy of section 367(b) is ‘‘to protect
against tax avoidance in transfers to
foreign corporations and upon the
repatriation of previously untaxed
foreign earnings.’’ H.R. Rep. No. 94–658
(1975). Comments are requested in this
regard, including whether the
application of any such guidance should
be limited to cases where section
356(a)(2) would otherwise apply to the
shareholder’s receipt of non-qualifying
property.
The IRS and Treasury Department
also continue to study whether
appropriate modifications should be
made to the ‘‘all earnings and profits’’
inclusion requirement of § 1.367(b)–3(b)
when a domestic corporation acquires
the assets of a foreign corporation
pursuant to an acquisitive asset
reorganization under section 368(a)(1)
and then transfers all or part of the
acquired assets to another foreign
corporation in a transaction described in
§ 1.368–2(k). Comments are requested in
this regard, including regarding the
appropriate adjustment to the domestic
corporation’s basis in the stock of the
foreign corporation to which the
acquired assets are transferred to ensure
that the basis of such stock reflects an
after-tax amount.

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E. Other Proposed Regulations Under
Section 367(a)
The proposed regulations under
section 367(a) would revise current
§ 1.367(a)–1T(b)(4)(i)(B) to provide that
an increase to basis for the amount of
gain recognized by a U.S. person under
section 367(a) in connection with a
transfer of property to a foreign
corporation is allocated among the
transferred property with respect to
which gain is recognized in proportion
to the gain realized by the U.S. person
on the transfer of such property. The
IRS and Treasury Department believe
the current temporary regulation may
produce inappropriate results because it
allocates the basis increase among the
transferred property with respect to
which gain is recognized in proportion

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to the amount realized by the U.S.
person on the transfer of such property.
The proposed regulations also clarify
that a transfer of property by a U.S.
person to a foreign corporation that is
subject to section 367(a) is not
recharacterized for U.S. Federal tax
purposes merely because the U.S.
person is required to recognize gain in
connection with such transfer under
section 367(a). For example, if a U.S
person transfers appreciated stock of a
CFC to another CFC in a section 351
exchange, the section 351 exchange is
not recharacterized as other than a
section 351 exchange for U.S. Federal
tax purposes merely because the U.S.
person recognizes gain in connection
with the exchange under section 367(a).
F. Other Proposed Regulations Under
Section 1248
The proposed regulations under
section 1248(a) remove as deadwood an
exception from the application of
section 1248(a) for gain recognized
under section 356. In addition,
consistent with Notice 87–64, the
proposed regulations under section
1248(e) suspend the application of
section 1248(e) for periods when capital
gains are taxed at a rate that equals or
exceeds the rate of tax on ordinary
income.
G. Effective/Applicability Dates
1. Sections 367(a)(5) and 6038B
Section 1.367(a)–7 and the revisions
to § 1.6038B–1 apply to transfers
occurring on or after the date that is 30
days after the date these regulations are
published as final regulations in the
Federal Register.
2. Section 1248(e)
In accordance with Notice 87–64
(1987–2 CB 375), § 1.1248–6(d)
(suspending application of section
1248(e)) applies to sales, exchanges, or
other dispositions of stock of a domestic
corporation occurring on or after
September 21, 1987.
3. Changes to Coordination Rule
Exception
The revisions to § 1.367(a)–
3(d)(2)(vi)(B)(1) and (2) described in
Notice 2008–10 (2008–3 IRB 277)
generally apply to transactions
occurring on or after December 28, 2007.
The requirement to treat section 367(d)
property as section 367(a) property for
purposes of the coordination rule
exception (as discussed in part D.2 of
this preamble) applies to transactions
occurring on or after August 19, 2008.

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4. Sections 1248(f) and 367(b)
Section 1.1248–8(b)(2)(iv),
§§ 1.1248(f)–1 through 1.1248(f)–3, and
the modifications to § 1.367(b)–4 apply
to transfers or distributions occurring on
or after the date that is 30 days after the
date these regulations are published as
final regulations in the Federal Register.
H. Adjustments Under Section 367(a)(5)
Before Final Regulations Are Published
The general rule of section 367(a)(5) is
that the exceptions to section 367(a)(1)
provided by section 367(a)(2) and (a)(3)
are not available for a transfer of
property by a domestic corporation to a
foreign corporation in a section 361
exchange, including a section 351
exchange that also qualifies as a section
361 exchange. However, until the date
that is 30 days after the date these
regulations are published as final
regulations, taxpayers may make
reasonable adjustments, as described in
the legislative history to section
367(a)(5), that are consistent with the
policy of section 367(a)(5) so that the
exceptions provided by section 367(a)(2)
and (a)(3) may apply to the transfer of
property by a U.S. transferor to a foreign
corporation in a section 361 exchange.
Reasonable adjustments must include
adjusting the basis of the stock received
by the control group members in the
transaction that is attributable to section
367(a) property so that each control
group member’s basis of such stock
equals the lesser of (1) the control group
member’s section 358 basis in the stock
or (2) the control group member’s
proportionate share of the basis of the
section 367(a) property transferred by
the U.S. transferor in the section 361
exchange. Adjusting the basis of stock of
the foreign acquiring corporation held
by a control group member before the
section 361 exchange shall not be a
reasonable adjustment.
In addition, the U.S. transferor must
recognize gain to the extent it has
shareholders that are not control group
members and to the extent any built-in
gain in the section 367(a) property
transferred in the section 361 exchange
cannot be preserved in the hands of the
control group members through their
ownership of stock received in the
transaction in exchange for the stock or
securities of the U.S. transferor. For
example, the U.S. transferor may
recognize gain if the control group
members receive non-qualifying
property in the transaction, if the
foreign acquiring corporation assumes
liabilities of the U.S. transferor in the
section 361 exchange, or if the U.S.
transferor distributes the stock received
in the section 361 exchange

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disproportionately to its shareholders.
For this purpose, the stock or other
property received by the U.S. transferor
in the section 361 exchange must be
allocated between the section 367(a)
property and all other property
transferred in the section 361 exchange
consistent with general tax principles,
including the principles of Rev. Rul. 68–
55, 1968–1 CB 140, and the authorities
cited therein.
Adjustments made in accordance with
the proposed regulations under section
367(a)(5) included in this document
shall be considered reasonable and in
accordance with the policy of section
367(a)(5).
Availability of IRS Documents
IRS notices cited in this preamble are
made available by the Superintendent of
Documents, U.S. Government Printing
Office, Washington, DC 20402.

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Effect on Other Documents
The following publications are
proposed to be obsolete as of the date
30 days after the date these regulations
are published as final regulations in the
Federal Register:
Notice 87–64 (1987–2 CB 375).
Notice 2008–10 (2008–3 IRB 277).
Special Analyses
It has been determined that this
Treasury Decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required.
Section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) and
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) apply to these regulations.
It is hereby certified that the
collection of information contained in
this regulation will not have a
significant economic impact on a
substantial number of small entities.
Accordingly, a regulatory flexibility
analysis is not required. This regulation
primarily will affect large domestic
corporations engaged in cross-border
corporate transactions. Thus, the
number of affected small entities will
not be substantial. A certain number of
small domestic corporations may be
shareholders of a larger domestic
corporation the stock or assets of which
are acquired by a foreign corporation in
connection with an asset reorganization,
and such shareholders may be required
to make certain adjustments in the stock
of the foreign acquiring corporation.
Nonetheless, the IRS and Treasury
Department do not anticipate the
number of such shareholders to be
substantial. Furthermore, the IRS and
Treasury Department estimate that any
small entities that are affected by the

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regulations will likely face a burden of
approximately ten hours (at an hourly
rate of $200) from the adjustments made
to the basis of the stock received in the
reorganization. Considering that the
collections of information enable
taxpayers to defer or avoid the
recognition of potentially large amounts
of gain, the IRS and Treasury
Department believe that $2000 is not a
significant economic impact. Comments
about the accuracy of this certification
may be submitted to the addresses
provided in the preamble. Pursuant to
section 7805(f) of the Internal Revenue
Code, this regulation has been
submitted to the Administrator of the
Small Business Administration for
comment on their impact on small
business.
Comments and Request for a Public
Hearing
Before these regulations are adopted
as final regulations, consideration will
be given to any written comments (a
signed original and eight (8) copies) or
electronic comments that are submitted
timely to the IRS. The IRS and Treasury
Department request comments on the
clarity of the proposed rules and how
they can be made easier to understand.
All comments will be available for
public inspection and copying. A public
hearing will be scheduled if requested
in writing by any person that timely
submits written comments. If a public
hearing is scheduled, notice of the date,
time, and place for the public hearing
will be published in the Federal
Register.
Drafting Information
The principal author of these
regulations is Daniel McCall of the
Office of Associate Chief Counsel
(International), within the Office of
Chief Counsel, Internal Revenue
Service. Other personnel from offices of
the IRS and Treasury Department
participated in developing the
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Corporations, Corporate
distributions, Corporate adjustments,
Reorganizations.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
in numerical order to read in part as
follows:

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Authority: 26 U.S.C. 7805 * * *
Section 1.367(a)–3(d)(2)(vi)(B)(1)(i) also
issued under 26 U.S.C. 367(d).
Section 1.367(a)–7 also issued under 26
U.S.C. 367(a), (b), (c), and 337(d).
Section 1.1248–6 also issued under 26
U.S.C. 1248(e).
Section 1.1248–8(b)(2)(iv) also issued
under 26 U.S.C. 1248(a), (c), and (f).
Section 1.1248(f)–1 also issued under 26
U.S.C. 367(b) and 1248(f).
Section 1.1248(f)–2 also issued under 26
U.S.C. 367(b) and 1248(f).
Section 1.1248(f)–3 also issued under 26
U.S.C. 367(b) and 1248(f).* * *
Par. 2. Section 1.358–6 is amended by
adding a new sentence at the end of
paragraph (e) to read as follows:
§ 1.358–6 Stock basis in certain triangular
reorganizations.

*

*
*
*
*
(e) * * * For rules relating to certain
triangular reorganizations involving
transfers to which the exception
provided in § 1.367(a)–7(c) applies, see
§ 1.367(b)–4(b)(1)(ii)(B).
*
*
*
*
*
Par. 3. Section 1.367(a)–1T is
amended by:
1. Revising the second sentence of
paragraph (b)(4)(i)(B).
2. Adding new paragraphs (b)(4)(i)(C)
and (g)(4).
The revision and additions to read as
follows:
§ 1.367(a)–1T Transfers to foreign
corporations subject to section 367(a): In
general (temporary).

*

*
*
*
*
(b) * * *
(4) * * *
(i) * * *
(B) * * * Any increase in the basis of
the property received by the foreign
corporation under section 362(a) or (b)
for gain recognized by a U.S. person due
to the application of section 367(a) shall
be allocated to the transferred property
with respect to which gain is recognized
in proportion to the gain realized by the
U.S. person on the transfer of such
property. * * *
(C) A transfer of property by a U.S.
person to a foreign corporation shall not
be recharacterized for U.S. Federal tax
purposes solely because the U.S. person
recognizes gain in connection with the
transfer under section 367(a)(1). For
example, if a U.S. person transfers
appreciated stock or securities to a
foreign corporation in an exchange
described in section 351, the transfer is
not recharacterized as other than an
exchange described in section 351
solely because the U.S. person
recognizes gain in connection with the
transfer under section 367(a)(1).
*
*
*
*
*

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(g) * * *
(4) The rules in paragraphs (b)(4)(i)(B)
and (C) of this section apply to transfers
occurring on or after the date 30 days
after the date these regulations are
published as final regulations in the
Federal Register. For guidance with
respect to paragraph (b)(4)(i)(B) of this
section before the date 30 days after the
date these regulations are published as
final regulations in the Federal Register,
see 26 CFR part 1 revised as of April 1
for the year before the date these
regulations are published as final
regulations in the Federal Register.
Par. 4. Section 1.367(a)–3 is amended
by:
1. Revising the third to the last
sentence of paragraph (a).
2. Revising paragraphs (b)(1) and
(c)(1).
3. Revising paragraphs (d)(2)(vi)(B)(1)
and (d)(2)(vi)(B)(1)(i).
4. Adding two new sentences at the
end of paragraph (d)(2)(vi)(B)(2).
5. Revising the first and fourth
sentences of paragraph (d)(3), Example
6A (ii).
6. Revising the second and fifth
sentences of paragraph (d)(3), Example
6B (ii), and add two new sentences after
the fifth sentence.
7. Revising the second and fourth
sentences of paragraph (d)(3), Example
6C (ii).
8. Adding a new sentence between the
second and third sentences of paragraph
(d)(3), Example 8 (ii).
9. Revising the first sentence of
paragraph (d)(3), Example 8B (ii).
10. Revising the first sentence of
paragraph (d)(3), Example 8C (ii).
11. Revising the second sentence of
paragraph (d)(3), Example 9 (ii), and
removing the third sentence.
12. Revising the third sentence of
paragraph (d)(3), Example 10 (ii).
13. Revising the second to last
sentence of paragraph (d)(3), Example
11 (ii), and adding a new sentence after
the second to last sentence.
14. Revising the second sentence of
paragraph (d)(3), Example 12 (ii), and
removing the last sentence.
15. The heading for paragraph (g) is
revised.
16. Paragraph (g)(1)(E) is revised.
The revisions and additions to read as
follows:
§ 1.367(a)–3 Treatment of transfers of
stock or securities to foreign corporations.

(a) * * * For additional rules
regarding a transfer of stock or securities
in an exchange described in section
361(a) or (b), see section 367(a)(5) and
§ 1.367(a)–7. * * *
(b) Transfers by U.S. persons of stock
or securities of foreign corporations to

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foreign corporations—(1) General rule.
Except as provided in § 1.367(a)–7, a
transfer of stock or securities of a foreign
corporation by a U.S. person to a foreign
corporation that would otherwise be
subject to section 367(a)(1) under
paragraph (a) of this section shall not be
subject to section 367(a)(1) if either—
*
*
*
*
*
(c) Transfers by U.S. persons of stock
or securities of domestic corporations to
foreign corporations—(1) In general.
Except as provided in § 1.367(a)–7, a
transfer of stock or securities of a
domestic corporation by a U.S. person
to a foreign corporation that would
otherwise be subject to section 367(a)(1)
under paragraph (a) of this section shall
not be subject to section 367(a)(1) if the
domestic corporation the stock or
securities of which are transferred
(referred to as the U.S. target company)
complies with the reporting
requirements in paragraph (c)(6) of this
section and if each of the following four
conditions is met:
*
*
*
*
*
(d) * * *
(2) * * *
(vi) * * *
(B) Exceptions. (1) If a transaction is
described in paragraph (d)(2)(vi)(A) of
this section, section 367(a) and (d) shall
not apply to the extent a domestic
corporation (domestic acquired
corporation) transfers assets to a foreign
corporation (foreign acquiring
corporation) in an asset reorganization,
and such assets (re-transferred assets)
are transferred to a domestic corporation
(domestic controlled corporation) in a
controlled asset transfer, provided that
the domestic controlled corporation’s
basis in the re-transferred assets is not
greater than the domestic acquired
corporation’s basis in such assets and
the conditions contained in paragraphs
(d)(2)(vi)(B)(1)(i) or (d)(2)(vi)(B)(1)(ii) of
this section are satisfied. For purposes
of determining whether the domestic
controlled corporation’s basis in the retransferred assets is not greater than the
domestic acquired corporation’s basis in
such assets, the domestic acquired
corporation’s basis in the re-transferred
assets shall reflect any increase in basis
due to gain recognized by the domestic
acquired corporation on the transfer of
the re-transferred assets to the foreign
acquiring corporation.
(i) The conditions and requirements
of section 367(a)(5) and § 1.367(a)–7(c)
are satisfied with respect to the
domestic acquired corporation’s transfer
of assets to the foreign acquiring
corporation. To the extent any of the retransferred assets constitutes property to
which section 367(d) applies (section

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367(d) property), however, the
exception under paragraph
(d)(2)(iv)(B)(1) shall apply only if such
property is treated as property subject to
section 367(a) for purposes of satisfying
the conditions and requirements of
section 367(a)(5) and § 1.367(a)–7(c).
The preceding sentences shall apply
before the application of the exception
under paragraph (d)(2)(vi)(B)(1) of this
section. See paragraph (g)(1)(E)(3) of this
section for rules under this paragraph
(d)(2)(vi)(B)(1)(i) that apply to
transactions that occur on or after
December 28, 2007, and before the date
30 days after the date these regulations
are published as final regulations in the
Federal Register.
*
*
*
*
*
(2) * * * This paragraph
(d)(2)(vi)(B)(2) shall not, however, apply
to an exchange described in section 351
that is also an exchange described in
section 361(a) or (b). An exchange
described in section 351 that is also an
exchange described in section 361(a) or
(b) is only eligible for the exception in
paragraph (d)(2)(vi)(B)(1) of this section.
*
*
*
*
*
(3) * * *
Example 6A. * * *
(ii) * * * The transfer of the Business
A assets by Z to F does not constitute
an indirect stock transfer under
paragraph (d) of this section, and,
subject to the conditions and
requirements of section 367(a)(5) and
§ 1.367(a)–7(c), the Business A assets
qualify for the section 367(a)(3) active
trade or business exception and are not
subject to section 367(a)(1). * * *
* * * Subject to the conditions and
requirements of section 367(a)(5) and
§ 1.367(a)–7(c), the Business B assets
qualify for the active trade or business
exception under section 367(a)(3).
* * *
Example 6B. * * *
(ii) * * * However, subject to the
conditions and requirements of section
367(a)(5) and § 1.367(a)–7(c), the
Business A assets qualify for the section
367(a)(3) active trade or business
exception and are not subject to section
367(a)(1). * * *
* * * However, pursuant to
paragraph (d)(2)(vi)(B)(1) of this section
and subject to the conditions and
requirements of section 367(a)(5) and
§ 1.367(a)–7(c), the Business B and C
assets are not subject to section 367(a)
or (d), provided that the basis of the
Business B and C assets in the hands of
R is no greater than the basis of the
assets in the hands of Z. If all or a
portion of the Business B and C assets
constituted section 367(d) property, as
defined in § 1.367(a)–7(f)(10), then

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paragraph (d)(2)(vi)(B)(1) of this section
would apply to Z’s transfer of such
property only if such property is treated
as property subject to section 367(a) for
purposes of satisfying the conditions
and requirements of section 367(a)(5)
and § 1.367(a)–7(c). Treating such
section 367(d) property as property
subject to section 367(a) for this purpose
could further reduce V’s basis in the F
stock received in the reorganization, or
result in the recognition of additional
gain by Z, under section 367(a)(5) and
§ 1.367(a)–7(c). * * *
Example 6C. * * *
(ii) * * * However, gain must be
recognized on the transfer of such assets
under section 367(a)(1) because the
section 367(a)(3) active trade or business
exception is inapplicable pursuant to
section 367(a)(5) and § 1.367(a)–7(b).
* * *
* * * The transfer of the Business B
assets (which otherwise would satisfy
the section 367(a)(3) active trade or
business exception) generally is subject
to section 367(a)(1) pursuant to section
367(a)(5) and § 1.367(a)–7(b). * * *
*
*
*
*
*
Example 8. * * *
(ii) * * * Subject to the conditions
and requirements of section 367(a)(5)
and § 1.367(a)–7(c), the Business B
assets qualify for the active trade or
business exception under section
367(a)(3). * * *
Example 8B. * * *
(ii) * * * Under section 367(a)(5) and
§ 1.367(a)–7(b), the active trade or
business exception under section
367(a)(3) does not apply to Z’s transfer
of assets to R. * * *
Example 8C. * * *
(ii) * * * Under section 367(a)(5) and
§ 1.367(a)–7(b), the active trade or
business exception under section
367(a)(3) does not apply to Z’s transfer
of assets to R. * * *
Example 9. * * *
(ii) * * * Subject to the conditions
and requirements of section 367(a)(5)
and § 1.367(a)–7(c), Z’s transfer of the
Business B assets to R (which are not retransferred to M) qualifies for the active
trade or business exception under
section 367(a)(3). * * *
Example 10. * * *
(ii) * * * Subject to the conditions
and requirements of section 367(a)(5)
and § 1.367(a)–7(c), the Business B
assets qualify for the active trade or
business exception under section
367(a)(3). * * *
Example 11. * * *
(ii) * * * Because D is owned by F,
a foreign corporation, the control
requirement of section 367(a)(5) and
§ 1.367(a)–7(c)(1) cannot be satisfied.

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Therefore, section 367(a)(5) and
§ 1.367(a)–7(b) preclude the application
of the active trade or business exception
under section 367(a)(3) from applying to
any assets transferred by D to Z. * * *
Example 12. * * *
(ii) * * * Subject to the conditions
and requirements of section 367(a)(5)
and § 1.367(a)–7(c), the active trade or
business exception under section
367(a)(3) applies to E’s transfer of
Business X assets. * * *
*
*
*
*
*
(g) Effective/applicability dates.
(1) * * *
(E)(1) Except as provided in
paragraphs (g)(1)(E)(2) through
(g)(1)(E)(4) of this section, the rules of
paragraph (d)(2)(vi) of this section apply
only to transactions occurring on or
after January 23, 2006. See § 1.367(a)–
3(d)(2)(vi), as contained in 26 CFR part
1 revised as of April 1, 2005, for
transactions occurring on or after July
20, 1998 and before January 23, 2006.
(2) Except to the extent provided in
paragraph (g)(1)(E)(3) of this section,
paragraph (d)(2)(vi)(B)(1)(i) of this
section applies to transactions occurring
on or after the date 30 days after the date
these regulations are published as final
regulations in the Federal Register.
(3)(i) For purposes of paragraph
(d)(2)(vi)(B)(1) of this section, except as
provided in paragraph (g)(1)(E)(3)(iii) of
this section, the conditions of paragraph
(d)(2)(vi)(B)(1)(i) of this section shall be
satisfied for transactions occurring on or
after December 28, 2007, and before the
date 30 days after the date these
regulations are published as final
regulations in the Federal Register,
provided the conditions in paragraph
(g)(1)(E)(3)(ii) are satisfied.
(ii) The domestic acquired corporation
is controlled (within the meaning of
section 368(c)) by five or fewer (but at
least one) domestic corporations
(controlling domestic corporations) at
the time of the section 361 exchange,
appropriate basis adjustments under
section 367(a)(5) are made to the stock
received (or deemed received) by the
controlling domestic corporations in the
reorganization, and any other conditions
as provided in regulations under section
367(a)(5) are satisfied. For purposes of
determining whether the domestic
acquired corporation is controlled by
five or fewer domestic corporations, all
members of the same affiliated group
within the meaning of section 1504
shall be treated as one corporation. Any
adjustments to stock basis required
under section 367(a)(5) must be made to
the stock received (or deemed received)
by the controlling domestic corporations
in the reorganization such that the

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appropriate amount of built-in gain in
the property transferred by the domestic
acquired corporation to the foreign
acquiring corporation in the section 361
exchange is reflected in such stock. The
basis adjustment requirement cannot be
satisfied by adjusting the basis in stock
of the foreign acquiring corporation held
by the controlling domestic corporations
before the reorganization. To the extent
the appropriate amount of built-in gain
in the property transferred by the
domestic acquired corporation to the
foreign acquiring corporation in the
section 361 exchange cannot be
preserved in the stock received (or
deemed received) by the controlling
domestic corporations in the
reorganization, the domestic acquired
corporation’s transfer of property to the
foreign acquiring corporation shall be
subject to sections 367(a) and (d).
(iii) The second sentence of paragraph
(d)(2)(vi)(B)(1)(i) shall apply to
transactions occurring on or after
August 19, 2008 and before the date 30
days after the date these regulations are
published as final regulations in the
Federal Register.
(4) The last two sentences of
paragraph (d)(2)(vi)(B)(2) shall apply to
transactions occurring on or after
December 28, 2007.
*
*
*
*
*
Par. 5. Section 1.367(a)–7 is added to
read as follows:
§ 1.367(a)–7 Rules under section 367(a)(5)
applicable to exchanges described in
section 361(a) or (b).

(a) Scope and purpose. This section
provides rules under section 367(a)(5)
that apply to a transfer of certain
property, including stock and securities,
by a domestic corporation (U.S.
transferor) to a foreign corporation
(foreign acquiring 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). The purpose of
this section is to ensure that the net gain
realized by the U.S. transferor in
connection with the transfer of certain
property to the foreign acquiring
corporation in the section 361 exchange
is, in the aggregate, recognized currently
by the U.S. transferor or, to the extent
permitted under the rules of this
section, preserved in the stock received
(or deemed received) in the
reorganization by certain domestic
corporate shareholders of the U.S.
transferor in exchange for stock or
securities of the U.S. transferor. This
section applies only to the transfer of
section 367(a) property in the section
361 exchange. See section 367(d) and

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the regulations under that section for
rules applicable to transfers of section
367(d) property.
(b) General rule. Except as provided
in paragraph (c) of this section, the
exceptions to section 367(a)(1) provided
in section 367(a) and the regulations
under that section shall not apply to a
transfer of section 367(a) property by a
U.S. transferor to a foreign acquiring
corporation in a section 361 exchange.
(c) Exception. Except to the extent
provided in paragraph (d) of this
section, paragraph (b) of this section
shall not apply to the transfer of section
367(a) property in a section 361
exchange if the conditions of paragraphs
(c)(1) through (c)(4) of this section are
satisfied and an election to apply the
exception provided by this paragraph (c)
is made in the manner provided by
paragraph (c)(5) of this section. If
paragraph (b) of this section does not
apply to a section 361 exchange, see, for
example, §§ 1.367(a)–2T, 1.367(a)–3,
1.367(a)–4T, or 1.367(a)–5T, as
applicable, for additional requirements
that must be satisfied to avoid the
application of section 367(a)(1) to the
transfer of section 367(a) property in the
section 361 exchange. Nothing in this
section shall permit the nonrecognition
of gain not otherwise permitted under
another provision of the Internal
Revenue Code or the regulations under
that section. See, for example, section
367(a)(3)(B) and § 1.367(a)–5T.
(1) Control. At the time of the section
361 exchange, the U.S. transferor is
controlled (within the meaning of
section 368(c)) by five or fewer, but at
least one, control group members.
(2) Gain recognition—(i) Gain
recognition due to non-control group
members. The U.S. transferor recognizes
gain equal to the product of the inside
gain and the aggregate ownership
interest (by value) in the U.S. transferor
by all shareholders of the U.S. transferor
at the time of the section 361 exchange
that are not control group members.
(ii) Gain recognition where control
group member is unable to preserve
gain. With respect to each control group
member, the U.S. transferor recognizes
gain equal to the amount, if any, by
which—
(A) The product of the inside gain and
the control group member’s ownership
interest (by value) in the U.S. transferor
at the time of the section 361 exchange;
exceeds
(B) The product of the section 367(a)
percentage and the fair market value of
the stock received (or deemed received)
by the control group member in
exchange for stock or securities of the
U.S. transferor under section 354, 355,
or 356. For an illustration of gain

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recognition under this paragraph, see
paragraph (g) of this section, Example 2.
(3) Basis adjustments—(i) General
rule. Except as provided in paragraphs
(c)(3)(ii)(A) and (C) of this section, each
control group member’s aggregate basis
in the stock received (or deemed
received) in exchange for stock or
securities of the U.S. transferor under
section 354, 355, or 356, as determined
under section 358 and the regulations
under that section (section 358 basis), is
reduced by the amount, if any, by
which—
(A) The product of the inside gain and
the control group member’s ownership
interest (by value) in the U.S. transferor
at the time of the section 361 exchange,
reduced by any gain recognized by the
U.S. transferor with respect to such
control group member under paragraph
(c)(2)(ii) of this section; exceeds
(B) The control group member’s
outside gain.
(ii) Special rules—(A) General
applicability. Paragraph (c)(3)(i) of this
section shall apply only to stock that
was received by the U.S. transferor in
the section 361 exchange and
distributed to the control group
member.
(B) Multiple blocks of stock. If a
control group member holds multiple
blocks of stock received (or deemed
received) in the transaction, the section
358 basis of each block of stock must be
reduced pro rata based on the relative
section 358 basis of each block of stock.
(C) Successive distributions to which
section 355 applies. Paragraph (c)(3)(i)
of this section shall not apply to a
control group member that distributes
the stock of a foreign acquiring
corporation received from the U.S.
transferor in a distribution to which
section 355 applies (section 355
distribution), that is in connection with
a transaction described in paragraph (d)
of this section. If paragraph (c)(3)(i) of
this section does not apply to a control
group member pursuant to the previous
sentence, then paragraph (c)(3)(i) of this
section shall apply to the final
distributee (as defined in paragraph (d)
of this section) that receives the stock of
the foreign acquiring corporation in the
final section 355 distribution described
in paragraph (d) of this section. If the
final distributee holds multiple blocks
of stock of the foreign acquiring
corporation after the final section 355
distribution, the rules of paragraph
(c)(3)(ii)(B) of this section shall apply to
reduce the section 358 basis of such
blocks of stock.
(iii) Applicable cross-references. For
illustrations of the adjustment to stock
basis under paragraph (c)(3)(i) of this
section, see paragraph (g) of this section,

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49291

Example 1 and Example 2, and
§ 1.1248(f)–2(d), Example 2. For an
illustration of the adjustment to stock
basis under paragraph (c)(3)(ii)(A) of
this section, see § 1.1248(f)–2(d),
Example 4. For an illustration of the
adjustment to stock basis under
paragraph (c)(3)(ii)(B) of this section, see
paragraph (g) of this section, Example 3.
(4) Agreement to amend or file a U.S.
income tax return—(i) General rule.
Except as provided in paragraph
(c)(4)(ii) of this section, the U.S.
transferor complies with the
requirements of § 1.6038B–1(c)(6)(iii).
(ii) Exception. Section 1.6038B–
1(c)(6)(iii) shall not apply to the extent
any section 367(a) property transferred
in the section 361 exchange is
transferred in connection with a
transaction described in § 1.367(a)–3(e)
and a gain recognition agreement is filed
pursuant to § 1.367(a)–8 with respect to
the transfer of such property.
(5) Election and reporting
requirements—(i) General rule. The U.S.
transferor and each control group
member elect to apply the provisions of
paragraph (c) of this section in the
manner provided under paragraph
(c)(5)(ii) or (iii) of this section, as
applicable, and by entering into a
written agreement described in
paragraph (c)(5)(iv) of this section. If a
control group member distributes the
stock of the foreign acquiring
corporation received from the U.S.
transferor in a section 355 distribution
that is in connection with a transaction
described in paragraph (d) of this
section, the final distributee that
receives such stock in the final section
355 distribution elects to apply the
provisions of this paragraph (c) and
enters into the written agreement
instead of the control group member.
(ii) Election and reporting by control
group member or final distributee—(A)
Time and manner of making election.
Each control group member (or final
distributee) elects to apply the
provisions of paragraph (c) of this
section by including a statement (in the
form and with the content specified in
paragraph (c)(5)(ii)(B) of this section) on
or with its timely-filed return for the
taxable year in which the section 361
exchange occurs. If the control group
member (or final distributee) is a
member of a consolidated group for the
taxable year of the section 361
exchange, the common parent of the
consolidated group makes the election
on behalf of the control group member
(or final distrubutee).
(B) Form and content of election
statement. The statement shall be
entitled, STATEMENT TO ELECT TO

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APPLY EXCEPTION UNDER § 1.367(a)–
7(c) and must set forth:
(1) The name and taxpayer
identification number of the control
group member (or final distributee);
(2) The name and taxpayer
identification number of the common
parent of the consolidated group, if any;
(3) The amount of the adjustment (if
any) to stock basis required under
paragraph (c)(3)(i) of this section, the
resulting adjusted basis in such stock,
and the fair market value of such stock;
and
(4) The date on which the written
agreement described in paragraph
(c)(5)(iv) of this section was entered
into.
(iii) Statement by U.S. transferor. The
U.S. transferor elects to apply the
provisions of paragraph (c) of this
section in the form and manner set forth
in § 1.6038B–1(c)(6)(ii).
(iv) Written agreement. The U.S.
transferor and each control group
member (or final distributee) must enter
into a written agreement on or before
the due date (including extensions) for
the U.S. transferor’s tax return for the
taxable year during which the section
361 exchange occurs. Each party to the
agreement must retain the original or a
copy of the agreement in the manner
specified by § 1.6001–1(e). Each party to
the agreement must provide a copy of
the agreement to the Internal Revenue
Service within 30 days of the receipt of
a request for the copy of the agreement
in connection with an examination of
the taxable year during which the
section 361 exchange occurs. The
written agreement must—
(A) State the document constitutes an
agreement entered into pursuant to
paragraph (c)(5) of this section;
(B) Identify the U.S. transferor and
each control group member (or final
distributee);
(C) State the amount of gain (if any)
recognized by the U.S. transferor under
paragraph (c)(2) of this section; and
(D) With respect to each control group
member (or final distributee), state the
amount of the adjustment (if any) to
stock basis required under paragraph
(c)(3)(i) of this section, the resulting
adjusted basis in such stock, and the fair
market value of such stock.
(d) Section 361 exchange followed by
successive distributions to which section
355 applies. If the U.S. transferor
distributes stock of the foreign acquiring
corporation received in the section 361
exchange to a control group member in
a section 355 distribution and, as part of
a plan or series of related transactions,
such stock is further distributed in one
or more successive section 355
distributions, paragraph (c) of this

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section shall apply to the section 361
exchange only to the extent each
subsequent section 355 distribution is to
a member of the affiliated group (within
the meaning of section 1504) that
includes the U.S. transferor at the time
of the section 361 exchange. In such a
case, each affiliated group member that
receives stock of the foreign acquiring
corporation in the final section 355
distribution (final distributee) shall be
subject to the requirements of
paragraphs (c)(3) and (c)(5) of this
section.
(e) Other rules—(1) Section 367(a)
property on which gain is recognized.
Gain recognized by the U.S. transferor
pursuant to paragraph (c)(2) of this
section shall be treated as recognized
with respect to the section 367(a)
property transferred in the section 361
exchange in proportion to the amount of
gain realized by the U.S. transferor on
the transfer of each item of section
367(a) property. This paragraph (e)(1)
shall be applied after taking into
account any gain recognized by the U.S.
transferor on the transfer of the section
367(a) property in the section 361
exchange pursuant to all other
provisions under section 367(a) and the
regulations under that section. See, for
example, section 367(a)(3)(B) and
§ 1.367(a)–4T. See § 1.367(a)–1T(b)(4)
for additional rules on the character,
source, and adjustments relating to gain
recognized under section 367(a).
(2) Reasonable cause exception for
failure to comply—(i) Request for relief.
If a control group member (or final
distributee) fails to comply with any
requirement of this section, the control
group member (or final distributee) shall
be considered to have complied with
such requirement if it submits a request
for relief as provided under paragraph
(e)(2)(ii) of this section and can
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 control group member’s (or final
distributee’s) tax return for the taxable
year, that such failure was due to
reasonable cause and not willful
neglect. Whether the failure to comply
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 control group member
(or final distributee) in writing within
120 days if it is determined that the
failure to comply was not due to
reasonable cause, or if additional time
will be needed to make such
determination. For this purpose, the
120-day period shall begin on the date

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the Internal Revenue Service notifies the
control group member (or final
distributee) in writing that the request
for relief has been received and assigned
for review. Once such period
commences, if the control group
member (or final distributee) is not
again notified within 120 days, then the
control group member (or final
distributee) shall be deemed to have
established reasonable cause.
(ii) Requirements for reasonable cause
relief—(A) Time of submission. Requests
for reasonable cause relief under
paragraph (e)(2)(i) of this section will be
considered only if as soon as the control
group member (or final distributee)
becomes aware of the failure to comply
with any requirement of this section, the
control group member (or final
distributee) attaches the statements or
other documents that should have been
filed, as well as a complete written
statement setting forth the reasons for
the failure to comply, to an amended
return that amends the return to which
the documents should have been
attached pursuant to this section. The
amended return and all required
attachments must be filed with the
applicable Internal Revenue Service
Center with which the control group
member (or final distributee) filed its
original return to which the documents
should have been attached.
(B) Notice requirement. In addition to
the requirement of paragraph
(e)(2)(ii)(A) of this section, the control
group member (or final distributee)
must comply with the requirements of
paragraph (e)(2)(ii)(B)(1) or (2) of this
section, as applicable.
(1) If the control group member (or
final distributee) is under examination
for any taxable year when the request
for reasonable cause relief is filed, a
copy of the amended return and
attachments must be provided to the
Internal Revenue Service personnel
conducting the examination.
(2) If the control group member (or
final distributee) is not under
examination for any taxable year when
the request for reasonable cause relief is
filed, a copy of the amended return and
attachments must be provided to the
Director having jurisdiction over the
return.
(iii) Cross-reference for reasonable
cause relief requests by U.S. transferor.
If the U.S. transferor fails to comply
with any requirement of this section, the
U.S. transferor shall be treated as having
complied with such requirement if the
U.S. transferor (or the foreign acquiring
corporation on behalf of the U.S.
transferor) complies with the reasonable
cause exception procedures described in
§ 1.6038B–1(f)(3).

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(f) Definitions. The following
definitions apply for purposes of this
section:
(1) Block of stock is a group of shares
of the same class of stock and that have
an identical basis.
(2) Control group and control group
member—(i) General rule. Except as
provided in paragraph (f)(2)(ii) of this
section, the control group is the five or
fewer, but at least one, domestic
corporations that control (within the
meaning of section 368(c)) the U.S.
transferor at the time of the section 361
exchange. If the U.S. transferor is
controlled by more than five domestic
corporations at the time of the section
361 exchange, but some combination of
five or fewer domestic corporations
control the U.S. transferor at such time,
the U.S. transferor shall designate the
five domestic corporations that
comprise the control group on Form
926, ‘‘Return by a U.S. Transferor of
Property to a Foreign Corporation.’’ For
purposes of this paragraph, members of
the same affiliated group (within the
meaning of section 1504) shall be
treated as one corporation. Except as
provided in paragraph (f)(2)(ii) of this
section, a control group member is a
domestic corporation that is part of the
control group.
(ii) Exception for certain entities.
Neither a regulated investment company
(as defined in section 851(a)), nor a real
estate investment trust (as defined in
section 856(a)), nor an S corporation (as
defined in section 1361(a)) shall be a
control group member.
(3) Deductible liability is any liability
of the U.S. transferor that is assumed in
the section 361 exchange or satisfied in
connection with the reorganization
(within the meaning of section
361(c)(3)), but only if the payment of
such liability would give rise to a
deduction.
(4) Gross fair market value means fair
market value determined without regard
to mortgages, liens, pledges, or other
liabilities. The fair market value of any
property subject to a nonrecourse
indebtedness shall not be less than the
amount of such indebtedness.
(5) Inside basis is the amount equal to
the aggregate bases of the section 367(a)
property transferred by the U.S.
transferor in the section 361 exchange,
increased by any gain recognized by the
U.S. transferor on the transfer of such
property in the section 361 exchange,
including gain treated as a dividend
under section 1248(a), but not including
any gain recognized under paragraph
(c)(2) of this section (including any such
gain treated as a dividend under section
1248(a)).

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(6) Inside gain is the amount by which
the aggregate gross fair market value of
the section 367(a) property transferred
in the section 361 exchange exceeds the
sum of the inside basis and the product
of the section 367(a) percentage and the
aggregate deductible liabilities of the
U.S. transferor.
(7) Outside gain is the product of the
section 367(a) percentage and the
amount by which—
(i) The aggregate fair market value of
the stock received (or deemed received)
by a control group member in exchange
for stock or securities of the U.S.
transferor under section 354, 355, or
356; exceeds
(ii) The control group member’s
aggregate section 358 basis of such stock
(as determined without regard to any
adjustment to such basis required under
paragraph (c)(3) of this section).
(8) Section 367(a) percentage is the
ratio of the aggregate gross fair market
value of the section 367(a) property
transferred by the U.S. transferor in the
section 361 exchange to the aggregate
gross fair market value of all property
transferred by the U.S. transferor in the
section 361 exchange.
(9) Section 367(a) property—(i)
General rule. Except as provided in
paragraph (f)(9)(ii) of this section,
section 367(a) property is any property
other than section 367(d) property.
(ii) Special rule. Any property that
would otherwise constitute section
367(a) property under paragraph (f)(9)(i)
of this section shall not constitute
section 367(a) property for purposes of
any determination under this section for
which the amount of section 367(a)
property transferred in the section 361
exchange is relevant, if such property is
acquired by the U.S. transferor in
connection with the section 361
exchange with a principal purpose of
affecting any such determination,
including, for example, the section
367(a) percentage, inside gain, and
inside basis.
(10) Section 367(d) property is
property to which section 367(d)
applies.
(11) Timely-filed return is a U.S.
income tax return filed on or before the
due date set forth in section 6072(b),
plus any extension of time to file such
return granted under section 6081.
(g) Examples. The rules of this section
are illustrated by the following
examples. The analysis of the following
examples is limited to a discussion of
issues under this section. Unless
otherwise indicated, for purposes of the
following examples assume: DP1, DP2,
and DC are domestic corporations that
do not join in the filing of a
consolidated return; FP and FA are

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foreign corporations that are unrelated
to DP1, DP2, and DC; each corporation
has a single class of stock outstanding;
each shareholder of DC owns one block
of stock in DC; DC’s Business A
constitutes section 367(a) property that
could qualify for the exception to
section 367(a)(1) under § 1.367(a)–2T;
DC has no liabilities, and the
requirements in paragraph (c)(5) of this
section and § 1.6038B–1(c)(6)(ii) are
satisfied.
Example 1. Tainted assets and non-control
group ownership. (i) Facts. DP1, DP2, and FP
own 50%, 30%, and 20%, respectively, of the
outstanding stock of DC. DP1’s DC stock has
a $80x basis and $100x fair market value.
DP2’s DC stock has a $50x basis and $60x fair
market value. DC owns inventory with a $40x
basis and a $100x fair market value. DC also
owns Business A with a $10x basis and
$100x fair market value. In a reorganization
described in section 368(a)(1)(F), DC transfers
the inventory and Business A to FA, a newly
formed corporation, in exchange for all of the
outstanding stock of FA. DC’s transfer of the
inventory and Business A to FA qualifies as
a section 361 exchange. DP1, DP2, and FP
exchange the DC stock for a proportionate
amount of FA stock pursuant to section 354.
(ii) Result. (A) Under section 367(a)(3)(B),
DC must recognize $60x gain on the transfer
of the inventory to FA. Under § 1.367(a)–
1T(b)(4)(i)(B), the section 362 basis increase
is allocated to the inventory such that FA’s
basis in the inventory is $100x. Under
section 367(a)(5) and paragraph (b) of this
section, DC’s transfer of Business A to FA is
subject to the general rule of section
367(a)(1). As a result, DC must also generally
recognize $90x gain on the transfer of
Business A to FA notwithstanding the
application of section 351 or section 361.
However, if the conditions and requirements
of paragraph (c) of this section are met, DC’s
transfer of Business A to FA may be partially
eligible for the active foreign trade or
business exception provided by section
367(a)(3) and § 1.367(a)–2T. See § 1.367(a)–
2T for the requirements of the active foreign
trade or business exception.
(B) The requirement of paragraph (c)(1) of
this section is satisfied because DC is
controlled (within the meaning of section
368(c)) by DP1 and DP2 at the time of the
section 361 exchange.
(C) Under paragraph (c)(2)(i) of this
section, DC must recognize $18x gain on the
transfer of Business A with respect to FP, a
non-control group member. The $18x gain
equals the product of the inside gain ($90x)
and FP’s 20% ownership interest (by value)
in DC at the time of the section 361 exchange.
Under paragraph (f)(6) of this section, the
$90x inside gain is the amount by which the
aggregate gross fair market value ($200x) of
the section 367(a) property (the inventory
and Business A) exceeds the $110x inside
basis. Under paragraph (f)(5) of this section,
the inside basis equals the $50x aggregate
basis of the section 367(a) property
transferred in the section 361 exchange,
increased by the $60x gain recognized by DC
on the transfer of the inventory to FA, but not

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by the $18x gain recognized by DC under
paragraph (c)(2)(i) of this section with respect
to FP. Under paragraph (e)(1) of this section,
the $18x gain recognized under paragraph
(c)(2)(i) of this section is treated as
recognized with respect to Business A.
(D) DC is not required to recognize gain
under paragraph (c)(2)(ii) of this section with
respect to either DP1 or DP2. DP1’s share of
inside gain ($45x) does not exceed the
product of the section 367(a) percentage
(100%) and the fair market value of the FA
stock ($100x) received in exchange for its DC
stock. DP1’s share of inside gain is
determined based on its 50% ownership
interest (by value) in DC at the time of the
section 361 exchange. DP2’s share of inside
gain ($27x) does not exceed the product of
the section 367(a) percentage (100%) and the
fair market value of the FA stock ($60x)
received in exchange for its DC stock. DP2’s
share of inside gain is determined based on
its 30% ownership interest (by value) in DC
at the time of the section 361 exchange.
(E) Under paragraph (c)(3) of this section,
DP1’s section 358 basis in the FA stock
($80x) received in exchange for its DC stock
must be reduced by $25x, the amount by
which DP1’s share of inside gain ($45x)
exceeds DP1’s $20x outside gain. DP1’s share
of inside gain is determined based on its 50%
ownership interest (by value) in DC at the
time of the section 361 exchange. Because DC
does not recognize gain on the section 361
exchange with respect to DP1, DP1’s share of
inside gain is not reduced under paragraph
(c)(3)(i)(A) of this section. DP1’s $20x outside
gain equals the product of the section 367(a)
percentage (100%) and the amount by which
the fair market value ($100x) of the FA stock
received by DP1 in exchange for its DC stock
exceeds the section 358 basis of such FA
stock ($80x). As adjusted, DP1’s basis in its
FA stock is $55x. Similarly, under paragraph
(c)(3) of this section, DP2’s section 358 basis
in the FA stock ($50x) received in exchange
for its DC stock must be reduced by $17x, the
amount by which DP2’s share of inside gain
($27x) exceeds DP1’s $10x outside gain.
DP2’s share of inside gain is determined
based on its 30% ownership interest (by
value) in DC at the time of the section 361
exchange. Because DC does not recognize
gain on the section 361 exchange with
respect to DP2, DP2’s share of inside gain is
not reduced under paragraph (c)(3)(i)(A) of
this section. DP2’s $10x outside gain equals
the product of the section 367(a) percentage
(100%) and the amount by which the fair
market value ($60x) of the FA stock received
by DP2 in exchange for its DC stock exceeds
the section 358 basis of such stock ($50x). As
adjusted, DP2’s basis in its FA stock is $33x.
(F) Under paragraph (c)(4) of this section,
DC must comply with the requirements of
§ 1.6038B–1(c)(6)(iii).
Example 2. Triangular reorganization
involving the exchange of section 367(d)
property for stock and cash. (i) Facts. (A) DP1
wholly owns DC. DP1 and DC file a
consolidated return. DP1’s DC stock has a
$175x basis and $200x fair market value. DC
owns Business A ($10x basis and $150x fair
market value) and a patent ($0x basis and
$50x fair market value). The patent is section
367(d) property. FP wholly owns FA.

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(B) In a triangular reorganization described
in section 368(a)(1)(A) by reason of section
368(a)(2)(D), DC transfers Business A and the
patent to FA in exchange for $180x of FP
stock and $20x cash. DC’s transfer of
Business A and the patent to FA is a section
361 exchange. DP1 exchanges its DC stock for
the $180x of FP stock and the $20x cash
pursuant to section 356. The triangular
reorganization constitutes an indirect stock
transfer under § 1.367(a)–3(d)(1)(i), and DP1
files a gain recognition agreement under
§ 1.367(a)–8 with respect to such transfer.
(ii) Result. (A) Under section 367(a)(5) and
paragraph (b) of this section, DC’s transfer of
Business A to FA is subject to the general
rule of section 367(a)(1). As a result, DC must
generally recognize $140x gain on the
transfer of Business A to FA notwithstanding
the application of section 361. However, if
the requirements of paragraph (c) of this
section are satisfied, DC’s transfer of Business
A to FA may be eligible for the active foreign
trade or business exception provided by
section 367(a)(3) and § 1.367(a)–2T. See
§ 1.367(a)–2T for the requirements of the
active foreign trade or business exception.
For rules applicable to DC’s transfer of the
patent to FA, see section 367(d) and the
regulations under that section.
(B) The requirement of paragraph (c)(1) of
this section is satisfied because DC is
controlled (within the meaning of section
368(c)) by DP1 at the time of the section 361
exchange.
(C) DC is not required to recognize gain
under paragraph (c)(2)(i) of this section
because at the time of the section 361
exchange DC is wholly owned by DP1, a
control group member. Under paragraph
(c)(2)(ii) of this section, DC must recognize
$5x gain, the amount by which the product
of the inside gain ($140x) and DP1’s 100%
ownership interest (by value) in DC at the
time of the section 361 exchange exceeds the
product of the section 367(a) percentage
(75%) and the fair market value ($180x) of
the FP stock received by DP1 in exchange for
DC stock. The $140x inside gain equals the
aggregate gross fair market value of Business
A ($150x) less the inside basis ($10x). Under
paragraph (e)(1) of this section, the $5x gain
recognized is allocated to Business A. Under
§ 1.1502–32(b)(2), DP1 increases the basis of
its DC stock by $5x.
(D) Under paragraph (c)(3) of this section,
DP1’s section 358 basis ($180x) in the FP
stock ($180x basis of DC stock, decreased by
$20x cash received, and increased by the
$20x gain recognized under section 356) is
reduced by $135x, the amount by which the
product of the $140x inside gain, reduced by
the $5x recognized by DC under paragraph
(c)(2)(ii) ($135x) and DP1’s 100% ownership
interest (by value) in DC at the time of the
exchange exceeds DP1’s outside gain ($0x).
The $0x outside gain equals the product of
the section 367(a) percentage (75%) and the
amount by which the fair market value of the
FP stock received by DP1 ($180x) exceeds the
section 358 basis of such stock ($180x). As
adjusted, DP1’s basis in the FP stock is $45x.
(E) Under paragraph (c)(4)(i) of this section,
DC must comply with the requirements of
§ 1.6038B–1(c)(6)(iii).
Example 3. Adjustment to basis of multiple
blocks of stock. (i) Facts.(A) DP1 wholly

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owns DC. DP1’s DC stock is divided into two
blocks of stock (Block 1 and Block 2). Block
1 has a $60x basis and $100x fair market
value. Block 2 has a $120x basis and $100x
fair market value. DC owns Business A ($15x
basis and $150x fair market value) and a
patent ($0x basis and $50x fair market value).
The patent is section 367(d) property.
(B) In a reorganization described in section
368(a)(1)(F), DC transfers Business A and the
patent to FA, a newly-formed corporation, in
exchange for 2 shares of FA stock. DC’s
transfer of Business A and the patent to FA
qualifies as a section 361 exchange. DP1
exchanges Block 1 and Block 2 for the two
shares of FA stock pursuant to section 354.
Pursuant to § 1.358–2(a)(2)(i), one share of
the FA stock corresponds to Block 1 (Share
1) and the other share of FA stock
corresponds to Block 2 (Share 2). The basis
and holding period of Share 1 and Share 2
correspond to the basis and holding period
of Block 1 and Block 2, respectively.
(ii) Result. (A) Under section 367(a)(5) and
paragraph (b) of this section, DC’s transfer of
Business A to FA is subject to the general
rule of section 367(a)(1). As a result, DC must
generally recognize $135x gain on the
transfer of Business A to FA notwithstanding
the application of section 351 or section 361.
However, if the requirements of paragraph (c)
of this section are met, DC’s transfer of
Business A to FA may be eligible for the
active foreign trade or business exception
provided in section 367(a)(3). See § 1.367(a)–
2T for the requirements of the active foreign
trade or business exception. For rules
applicable to DC’s transfer of the patent to
FA, see section 367(d) and the regulations
under that section.
(B) The requirement of paragraph (c)(1) of
this section is satisfied because DC is
controlled (within the meaning of section
368(c)) by DP1 at the time of the section 361
exchange.
(C) DC is not required to recognize gain
under paragraph (c)(2)(i) of this section
because, at the time of the section 361
exchange, DC is wholly owned by DP1. DC
is not required to recognize gain under
paragraph (c)(2)(ii) of this section because
DP1’s 100% share of inside gain ($135x) does
not exceed the product of the section 367(a)
percentage (75%) and the fair market value
($200x) of the FA stock received by DP1 in
exchange for its DC stock ($150x). Under
paragraph (f)(6) of this section, the $135x
inside gain equals the aggregate gross fair
market value of the section 367(a) property
($150x) less the inside basis ($15x).
(D) Under paragraph (c)(3) of this section,
DP1’s aggregate section 358 basis in Share 1
($60x) and Share 2 ($120x) must be reduced
by $120x, the amount by which DP1’s 100%
share of inside gain ($135x) exceeds DP1’s
$15x outside gain. The $15x outside gain
equals the product of the section 367(a)
percentage (75%) and the amount by which
the fair market value of the FA stock received
by DP1 ($200x) exceeds the section 358 basis
of the FA stock ($180x) (75% of $20x).
(E) Under paragraph (c)(3)(ii)(B) of this
section, the $120x reduction to basis is
allocated between Share 1 and Share 2 based
on the relative section 358 basis of each
share. Therefore, the basis in Share 1 is

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reduced by $40x ($120x multiplied by $60x/
$180x). As adjusted, DP1’s basis in Share 1
is $20x. The basis in Share 2 is reduced by
$80x ($120x multiplied by $120x/$180x). As
adjusted, DP1’s basis in Share 2 is $40x.
(F) Under paragraph (c)(4)(i) of this section,
DC must comply with the requirements of
§ 1.6038B–1(c)(6)(iii).

(h) Applicable cross-references. For
rules relating to the character, source,
and adjustments resulting from gain
recognized by a U.S. transferor under
section 367(a), see § 1.367(a)–1T(b)(4).
For rules relating to the acquisition of
the stock or assets of a foreign
corporation by another foreign
corporation, see § 1.367(b)–4. For rules
relating to transfers of section 367(d)
property by a U.S. transferor to a foreign
corporation, see section 367(d) and the
regulations under that section. For rules
relating to distributions of stock of a
foreign corporation by a domestic
corporation under section 355 or 361,
see §§ 1.1248(f)–1 through –3. For
additional rules relating to certain
reporting requirements of a U.S.
transferor, see § 1.6038B–1.
(i) [Reserved.]
(j) Effective/applicability date. This
section shall apply to transfers
occurring on or after the date 30 days
after the date these regulations are
published as final regulations in the
Federal Register.
Par. 6. Section 1.367(b)–4 is amended
by:
1. Revising paragraphs (b)(1)(i)(B)(2),
(b)(1)(ii), and (b)(1)(iii), Example 4 (ii).
2. Adding paragraph (b)(1)(iii),
Example 5.
The revisions and additions to read as
follows:
§ 1.367(b)–4 Acquisition of foreign
corporate stock or assets by a foreign
corporation in certain nonrecognition
transactions.

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*

*
*
*
*
(b) * * *
(1) * * *
(i) * * *
(B) * * *
(2) Immediately after the exchange,
the foreign acquiring corporation or the
foreign acquired corporation (if any,
such as in the case of the acquisition of
the stock of a foreign acquired
corporation) is not a controlled foreign
corporation as to which the United
States person described in paragraph
(b)(1)(i)(A) of this section is a section
1248 shareholder.
(ii) Special rules for certain triangular
reorganizations—(A) Exception for
receipt of domestic stock. In the case of
a triangular reorganization described in
§ 1.358–6(b)(2), or a reorganization
described in section 368(a)(1)(G) and

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(a)(2)(D), an exchange is not described
in paragraph (b)(1)(i) of this section if—
(1) The stock received in the exchange
is stock of a domestic corporation that
immediately after the exchange is a
section 1248 shareholder of—
(i) The foreign acquired corporation,
in the case of a triangular B
reorganization or a reorganization in
which stock of the foreign acquired
corporation is acquired pursuant to a
transfer to which the exception
provided in § 1.367(a)–7(c) applies; or
(ii) The surviving corporation, in the
case of a transaction that is not
described in paragraph (b)(1)(ii)(A)(1)(i)
of this section and that is a triangular C
reorganization, a forward triangular
merger, a reorganization described in
section 368(a)(1)(G) and (a)(2)(D), or a
reverse triangular merger; and
(2) The foreign acquired corporation
or surviving corporation is a controlled
foreign corporation. See paragraph
(b)(1)(iii) of this section, Example 3B for
an illustration of this rule.
(B) Adjustments to basis of stock of
foreign acquiring corporation—(1)
Transfers to which exception under
§ 1.367(a)–7(c) applies. If the stock of
the foreign acquired corporation is
acquired by the foreign acquiring
corporation pursuant to a triangular
reorganization described in § 1.358–
6(b)(2)(i) through (iii), or a
reorganization described in section
368(a)(1)(G) and (a)(2)(D), to which the
exception provided in § 1.367(a)–7(c)
applies and that is not described in
paragraph (b)(1)(i) of this section, the
corporation (foreign or domestic) that
controls the foreign acquiring
corporation shall apply the principles of
§ 1.367(b)–13 to adjust the basis of the
stock of the foreign acquiring
corporation so that the section 1248
amount attributable to the stock of the
foreign acquired corporation
(determined when the foreign acquiring
corporation acquires such stock) is
reflected in the stock of the foreign
acquiring corporation immediately after
the exchange. See paragraph (b)(1)(iii) of
this section, Example 5, for an
illustration of this rule.
(2) Other triangular reorganizations.
See § 1.367(b)–13(c) for rules regarding
the adjustment to the basis of the stock
of the foreign acquiring corporation in
other triangular reorganizations
described in paragraph (b)(1)(ii)(A)(1)(ii)
of this section.
(iii) * * *
Example 4. * * *
(ii) Result. DC2, the exchanging
shareholder, is a U.S. person and a section
1248 shareholder with respect to FC2, the
foreign acquired corporation. Whether DC2 is
required to include in income the section

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1248 amount attributable to the FC2 stock
under paragraph (b)(1)(i) of this section
depends on whether, immediately after DC2’s
exchange of the FC2 stock for FC1 stock (and
before the distribution of the FC1 stock to
DC1 under section 361(c)(1)), FC1 and FC2
are controlled foreign corporations as to
which DC2 is a section 1248 shareholder. If,
immediately after the exchange, FC1 and FC2
are both controlled foreign corporations as to
which DC2 is a section 1248 shareholder,
then DC2 is not required to include in
income the section 1248 amount attributable
to the FC2 stock under paragraph (b)(1)(i)
because neither condition in paragraph
(b)(1)(i)(B) is satisfied. Alternatively, if
immediately after the exchange either FC1 or
FC2 is not a controlled foreign corporation as
to which DC2 is a section 1248 shareholder
then, pursuant to paragraph (b)(1)(i) of this
section, DC2 must include in income the
section 1248 amount attributable to the FC2
stock exchanged. For the treatment of DC2’s
transfer of assets to FC1, see also section
367(a)(1) and (a)(3) and the regulations under
that section. Because DC2’s transfer of assets
to FC1 is described in section 361(a) or (b),
see section 367(a)(5) and § 1.367(a)–7. If any
of the assets transferred are intangible assets,
see section 367(d) and the regulations under
that section. With respect to DC2’s
distribution of the FC1 stock to DC1 under
section 361(c)(1), see section 1248(f)(1),
§ 1.1248(f)–1 and § 1.1248(f)–2.
Example 5. (i) Facts. DC1, a domestic
corporation, wholly owns DC2, a domestic
corporation. DC1’s DC2 stock has a $30 basis
and a $100 fair market value. DC2’s only
asset is all the outstanding stock of FC2, a
foreign corporation. DC2’s FC2 stock has a
$30 basis, $100 fair market value and a $20
section 1248 amount. USP, a domestic
corporation unrelated to DC1, DC2 or FC2,
wholly owns FC1, a foreign corporation. In
a triangular reorganization described in
section 368(a)(1)(C), DC2 transfers all the FC2
stock to FC1 in exchange solely for voting
stock of USP and then distributes the USP
stock to DC1 under section 361(c)(1). DC1
exchanges its DC2 stock for the USP stock
under section 354. DC2’s transfer of the FC2
stock to FC1 is described in section 361(a)
and therefore, under section 367(a)(5) and
§ 1.367(a)–7, is generally subject to section
367(a)(1). However, DC2’s transfer of the FC2
stock to FC1 qualifies for the exception
provided in § 1.367(a)–7(c). DC1 and DC2
elect to apply the rules of § 1.367(a)–7(c) in
accordance with § 1.367(a)–7(c)(5). DC1 is
not required to adjust the basis of its USP
stock (determined under section 358) under
section 367(a)(5) and § 1.367(a)–7(c)(3).
(ii) Result. Under paragraph (b)(1)(ii)(A) of
this section, because the stock received by
DC2 in exchange for its FC2 stock is stock of
a domestic corporation (USP) and,
immediately after the exchange, USP is a
section 1248 shareholder of FC2 (the foreign
acquired corporation) and FC2 is a controlled
foreign corporation, DC2’s exchange of its
FC2 stock for USP stock is not described in
paragraph (b)(1)(i) of this section. Therefore,
DC2 is not required to include in income the
section 1248 amount attributable to the FC2
stock. Under paragraph (b)(1)(ii)(B)(1) of this
section, USP must apply the principles of

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§ 1.367(b)–13 to adjust the basis of its FC1
stock so that the $20 section 1248 amount
attributable to the FC2 stock at the time of
the exchange is reflected in the FC1 stock
immediately after the exchange. Under the
principles of § 1.367(b)–13, each share of FC1
stock held by USP after the exchange must
be divided into one portion attributable to
the FC1 stock immediately before the
exchange and one portion attributable to the
FC2 stock acquired in the exchange. The $30
basis in the FC2 stock and the earnings and
profits attributable to the FC2 stock before
the exchange are attributable to the divided
portions of the FC1 stock to which the FC2
stock relates.

*

*
*
*
*
Par. 7. Section 1.367(b)–6 is amended
by revising paragraph (a)(1) to read as
follows:

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§ 1.367(b)–6 Effective dates and
coordination rules.

(a) Effective date—(1) In general—(A)
Except as otherwise provided in this
paragraph (a)(1) and paragraph (a)(2) of
this section, §§ 1.367(b)–1 through
1.367(b)–5, and this section, apply to
section 367(b) exchanges that occur on
or after February 23, 2000.
(B) The rules of §§ 1.367(b)–3 and
1.367(b)–4, as they apply to
reorganizations described in section
368(a)(1)(A) (including reorganizations
described in section 368(a)(2)(D) or (E))
involving a foreign acquiring or foreign
acquired corporation, apply only to
transfers occurring on or after January
23, 2006.
(C) The second sentence of paragraph
(a) in § 1.367(b)–4 applies to section
304(a)(1) transactions occurring on or
after February 23, 2006; however,
taxpayers may rely on this sentence for
all section 304(a)(1) transactions
occurring in open taxable years.
(D) Section 1.367(b)–1(c)(2)(v),
(c)(3)(ii)(A), (c)(4)(iv), (c)(4)(v),
§ 1.367(b)–2(j)(1)(i), (l), and § 1.367(b)–
3(e) and (f), apply to section 367(b)
exchanges that occur on or after
November 6, 2006. For guidance with
respect to § 1.367(b)–1(c)(3)(ii)(A) and
(c)(4)(iv) and (v) and § 1.367(b)–2(j)(1)(i)
for exchanges that occur before
November 6, 2006, see 26 CFR part 1
revised as of April 1, 2006.
(E) Section 1.367(b)–4(b)(1)(ii) and
§ 1.367(b)–4(b)(1)(iii), Examples 4 and 5
apply to section 367(b) exchanges that
occur on or after the date that is 30 days
after the date these regulations are
published as final regulations in the
Federal Register. For guidance with
respect to § 1.367(b)–4(b)(1)(ii) and
§ 1.367(b)–4(b)(1)(iii), Example 4, for
exchanges that occur before the date 30
days after the date these regulations are
published as final regulations in the
Federal Register, see 26 CFR part 1

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revised as of April 1 for the year before
the date these regulations are published
as final regulations in the Federal
Register.
*
*
*
*
*
Par. 8. 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

1.1248–1(a)(1), second to last sentence.
1.1248–1(a)(1), last
sentence.
1.1248–3(a)(6), first
sentence.
1.1248–3(a)(6), first
sentence.
1.1248–7(a)(1), second to last sentence.

Add

1248(f)

1248(g)

1248(g)

1248(h)

1.1248–4

1.1248–2

1.1248–7

1.1248–8

1248(g)

1248(h)

Par. 9. Section 1.1248–1 is amended
by:
1. Revising paragraphs (b) and (e).
2. Revising the second sentence of
paragraph (c).
The revisions to read as follows.
§ 1.1248–1 Treatment of gain from certain
sales or exchanges of stock in certain
foreign corporations.

*

*
*
*
*
(b) Sale or exchange. For purposes of
this section and §§ 1.1248–2 through
1.1248–8, the term sale or exchange
includes the receipt of a distribution
that is treated as in exchange for stock
under section 302(a) (relating to
distributions in redemption of stock) or
section 331(a) (relating to distributions
in complete liquidation of a
corporation).
(c) * * * Thus, for example, if a
United States person exchanges stock in
a foreign corporation and no gain is
recognized on such exchange under
section 332, 351, 354, 355, or 361,
taking into account the application of
section 367, then no amount is
includible in the gross income of such
person as a dividend under section
1248(a).
*
*
*
*
*
(e) Exceptions. Under section 1248(g),
this section and §§ 1.1248–2 through
1.1248–8 shall not apply to:
(1) Distributions to which section 303
(relating to distributions in redemption
of stock to pay death taxes) applies; or
(2) Any amount to the extent that
such amount is, under any other
provision of the Internal Revenue Code
(Code), treated as (i) a dividend, (ii) gain
from the sale of an asset which is not
a capital asset, or (iii) gain from the sale

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of an asset held for not more than 1
year.
*
*
*
*
*
Par. 10. Section 1.1248–6 is amended
by:
1. Adding a new sentence at the end
of paragraph (a).
2. Adding paragraphs (d) and (e).
The additions to read as follows:
1.1248–6 Sale or exchange of stock in
certain domestic corporations.

(a) * * * See paragraph (d) of this
section for a rule suspending the
application of this section in certain
circumstances.
*
*
*
*
*
(d) Temporary suspension of section
1248(e). Section 1248(e) and the rules of
this section shall not apply to a sale,
exchange, or other disposition of the
stock of a domestic corporation during
a period when capital gains are taxed at
a rate that equals or exceeds the rate at
which ordinary income is taxed.
(e) Effective/applicability date.
Paragraph (d) of this section shall apply
to a sale, exchange, or other disposition
of the stock of a domestic corporation
on or after September 21, 1987.
Par. 11. Section 1.1248–8 is amended
by:
1. Revising paragraphs (a)(3),
(b)(1)(iv)(A), (b)(2)(i), and (d).
2. Adding new paragraph (b)(2)(iv).
The revisions and addition to read as
follows:
§ 1.1248–8 Earnings and profits
attributable to stock following certain nonrecognition transactions.

(a) * * *
(3) Application of section 381. Stock
of a foreign corporation that receives
assets in a transfer to which section
361(a) or (b) applies in connection with
a reorganization described in section
368(a)(1)(A), (C), (D), (F), or (G), or in a
distribution to which section 332
applies, and to which section
381(c)(2)(A) and § 1.381(c)(2)–1(a)
apply. See paragraph (b)(6) of this
section; or
*
*
*
*
*
(b) * * *
(1) * * *
(iv) * * *
(A) In a restructuring transaction
qualifying as a nonrecognition
transaction within the meaning of
section 7701(a)(45) and described in
section 354, 356, or 361(a) or (b), stock
in an acquired corporation for stock in
either a foreign acquiring corporation or
a foreign corporation that is in control,
within the meaning of section 368(c), of
an acquiring corporation (whether
domestic or foreign); or
*
*
*
*
*

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(2) * * *
(i) Exchanging shareholder exchanges
property that is not stock of a foreign
acquired corporation with respect to
which the exchanging shareholder is a
section 1248 shareholder or a foreign
corporate shareholder. Except as
provided in paragraph (b)(2)(iv) of this
section, where the exchanging
shareholder exchanges in a restructuring
transaction property that is not stock of
a foreign acquired corporation with
respect to which the exchanging
shareholder is a section 1248
shareholder or a foreign corporate
shareholder immediately before such
transaction, the earnings and profits
attributable to the stock that the
exchanging shareholder receives in the
restructuring transaction shall be
determined in accordance with
§ 1.1248–2 or § 1.1248–3, whichever is
applicable, without regard to any
portion of the section 1223(1) holding
period in that stock that is before the
restructuring transaction. See paragraph
(b)(7) Example 1 of this section.
*
*
*
*
*
(iv) Exchanging shareholder
exchanges stock of a domestic acquired
corporation for stock of a foreign
corporation with respect to which the
exchanging shareholder is a section
1248 shareholder after the exchange. If
in a restructuring transaction described
in § 1.1248(f)–2(c) and to which the
exception provided by § 1.1248(f)–
2(c)(1) applies, the earnings and profits
attributable to a portion of a share of
stock of a foreign corporation created
pursuant to § 1.1248(f)–2(c)(2) (or a
whole share, if no division is required)
shall be determined pursuant to
paragraphs (b)(2)(iv)(A) and (B) of this
section.
(A) The earnings and profits
attributable to a portion of a share of
stock created pursuant to § 1.1248(f)–
2(c)(2)(i) (or a whole share, if no
division is required) shall be the
earnings and profits attributable to the
stock of the foreign corporation received
by the section 1248 shareholder under
section 354, 355, or 356 determined in
accordance with § 1.1248–2 or § 1.1248–
3, whichever is applicable, without
regard to any portion of the section
1223(1) holding period in that stock that
is before the restructuring transaction.
(B) The earnings and profits
attributable to a portion of a share of
stock created under § 1.1248(f)–
2(c)(2)(ii) (or whole share, if no division
is required) shall be the sum of—
(1) The earnings and profits
attributable to the stock of the foreign
corporation transferred in the section
361 exchange that relates to such

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portion (or share) multiplied by the
section 1248 shareholder’s ownership
interest (by value) in the domestic
distributing corporation at the time of
the restructuring transaction; and
(2) The earnings and profits
attributable to the stock of the foreign
corporation received by the section 1248
shareholder under section 354, 355, or
356 determined in accordance with
§ 1.1248–2 or § 1.1248–3, whichever is
applicable, without regard to any
portion of the section 1223(1) holding
period in that stock that is before the
restructuring transaction. See
§ 1.1248(f)–2(d), Examples 2 through 4.
*
*
*
*
*
(d) Effective/applicability dates—(1)
General rule. Except as provided in
paragraph (d)(2) of this section, this
section applies to income inclusions
that occur on or after July 30, 2007.
(2) Exception. Paragraph (b)(2)(iv) of
this section applies to restructuring
transactions occurring on or after the
date 30 days after the date these
regulations are published as final
regulations in the Federal Register.
Par. 12. Section 1.1248(f)–1 is added
to read as follows:
§ 1.1248(f)–1 Certain nonrecognition
distributions.

(a) Scope and purpose. This section
and §§ 1.1248(f)–2 and 1.1248(f)–3
provide rules that apply when a
domestic corporation (domestic
distributing corporation) distributes
stock of a foreign corporation (foreign
distributed corporation) in a
distribution to which section 337, 355,
or 361 applies. The purpose of this
section is to confirm the general rule of
section 1248(f)(1) that requires the
domestic distributing corporation to
include in gross income the section
1248 amount or section 1248(f) amount,
as applicable, that is attributable to the
stock of the foreign distributed
corporation distributed under section
337, 355, or 361, and to provide
exceptions to the general rule to the
extent the section 1248 amount or
section 1248(f) amount, as applicable,
can be preserved immediately following
the distribution in the hands of a
distributee that is a domestic
corporation. This section provides the
general rule and definitions. Section
1.1248(f)–2 provides the exceptions to
the general rule. Section 1.1248(f)–3
provides a reasonable cause exception
for a failure to comply with certain
requirements of § 1.1248(f)–2. Section
1.1248(f)–3 also provides the effective
dates of this section and § 1.1248(f)–2.
(b) General rule—(1) Section 337
distributions. Except as provided in
§ 1.1248(f)–2(a), a domestic distributing

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49297

corporation that is a section 1248
shareholder of a foreign distributed
corporation and that distributes stock of
such corporation in a distribution to
which section 337 applies (section 337
distribution), shall, notwithstanding any
other provision of subtitle A, include in
gross income as a dividend the section
1248 amount attributable to the
distributed stock. This paragraph (b)(1)
shall apply only to the extent the
domestic distributing corporation does
not recognize gain on the section 337
distribution under any other provision
of subtitle A.
(2) Certain section 355 distributions.
Except as provided in § 1.1248(f)–2(b), a
domestic distributing corporation that is
a section 1248 shareholder of a foreign
distributed corporation and that
distributes stock of such corporation,
other than stock received in a section
361 exchange, in a distribution to which
section 355 applies (section 355
distribution), shall, notwithstanding any
other provision of subtitle A, include in
gross income as a dividend the section
1248 amount attributable to the
distributed stock. This paragraph (b)(2)
shall apply only to the extent the
domestic distributing corporation does
not recognize gain on the section 355
distribution under any other provision
of subtitle A.
(3) Distributions pursuant to a plan of
reorganization. Except as provided in
§ 1.1248(f)–2(c), a domestic distributing
corporation that is a section 1248
shareholder of a foreign distributed
corporation and that distributes stock of
such corporation received in a section
361 exchange in a section 355
distribution or a distribution to which
section 361 applies (section 361
distribution), shall, notwithstanding any
other provision of subtitle A, include in
gross income as a dividend the section
1248(f) amount attributable to the stock
distributed. This paragraph (b)(3) shall
apply without regard to the amount of
gain realized by the domestic
distributing corporation on the
distribution.
(c) Definitions. Except as otherwise
provided, the following definitions
apply for purposes of this section and
§§ 1.1248(f)–2 and 1.1248(f)–3.
(1) 80-percent distributee is a
corporation described in section 337(c).
(2) Block of stock has the meaning set
forth in § 1.1248–2(b).
(3) Distributee is a shareholder of the
domestic distributing corporation that
receives stock of a foreign distributed
corporation in a section 355 distribution
or section 361 distribution.
(4) Postdistribution amount is the
section 1248 amount attributable to the
stock of a foreign distributed

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corporation received (or deemed
received) by a distributee, computed
immediately after the distribution but
without taking into account any
adjustments to the basis of such stock
under § 1.1248(f)–2(b)(3) or (c)(3). The
postdistribution amount attributable to
stock of a foreign distributed
corporation received in a section 355
distribution described in paragraph
(b)(2) of this section shall be determined
based on the distributee’s holding
period in such stock as adjusted under
§ 1.1248(f)–2(b)(2). The postdistribution
amount attributable to stock of a foreign
distributed corporation received in a
section 355 distribution or section 361
distribution described in paragraph
(b)(3) of this section shall be determined
after applying the rules in §§ 1.1248–
8(b)(2)(iv) and 1.1248(f)–2(c)(2).
(5) Section 358 basis is the basis of
stock determined under section 358 and
the regulations under that section.
(6) Section 361 exchange is an
exchange described in section 361(a) or
(b).
(7) Section 1248 amount is the net
positive earnings and profits (if any)
attributable to the stock of the foreign
distributed corporation under § 1.1248–
2 or § 1.1248–3 (as adjusted by § 1.1248–
8) and that would be included in gross
income as a dividend under section
1248(a) if the stock were sold by the
holder of such stock.
(8) Section 1248(f) amount is the
aggregate amount of the net positive
earnings and profits (if any) attributable
to the stock of each foreign corporation,
under § 1.1248–2 or § 1.1248–3 (as
adjusted by § 1.1248–8), transferred by
the domestic distributing corporation to
the foreign distributed corporation in
the section 361 exchange that precedes
the section 355 distribution or section
361 distribution of the stock of the
foreign distributed corporation, and that
would be included in gross income as
a dividend under section 964(e) by the
foreign distributed corporation if it sold
such stock immediately after the section
361 exchange. The section 1248(f)
amount is attributable to the stock of the
foreign distributed corporation received
in the section 361 exchange.
(9) Section 1248 shareholder is a
domestic corporation that satisfies the
ownership requirements of section
1248(a)(2) with respect to a foreign
corporation.
(10) Timely-filed return is a U.S.
income tax return filed on or before the
due date set forth in section 6072(b),
plus any extension of time to file such
return granted under section 6081.
Par. 13. Section 1.1248(f)–2 is added
to read as follows:

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§ 1.1248(f)–2 Exceptions for certain
distributions.

(a) Section 337 distributions. Section
1.1248(f)–1(b)(1) shall not apply to a
section 337 distribution of stock of the
foreign distributed corporation if the
conditions of paragraphs (a)(1) through
(a)(3) of this section are satisfied.
(1) 80-percent distributee is a section
1248 shareholder. Immediately after the
section 337 distribution, the 80-percent
distributee is a section 1248 shareholder
with respect to the foreign distributed
corporation.
(2) Holding period. The 80-percent
distributee is treated as holding the
stock of the foreign distributed
corporation received in the section 337
distribution for the period during which
the stock was held by the domestic
distributing corporation.
(3) Basis. The 80-percent distributee’s
basis in the stock of the foreign
distributed corporation received in the
section 337 distribution does not exceed
the domestic distributing corporation’s
basis in such stock at the time of the
section 337 distribution.
(b) Certain section 355 distributions.
Section 1.1248(f)–1(b)(2) shall not apply
to a section 355 distribution of stock of
the foreign distributed corporation not
received by the domestic distributing
corporation in a section 361 exchange to
a distributee that is a section 1248
shareholder with respect to the foreign
distributed corporation immediately
after the distribution, if the domestic
distributing corporation and all such
section 1248 shareholders elect to apply
the provisions of this paragraph (b) in
accordance with paragraph (b)(1) of this
section. See paragraphs (b)(2) and (b)(3)
of this section for adjustments that
occur as a result of electing to apply the
provisions of this paragraph (b).
(1) Election and reporting—(i)
Statement required by section 1248
shareholders and domestic distributing
corporation—(A) In general. The
domestic distributing corporation and
the section 1248 shareholders elect to
apply the provisions of paragraph (b) of
this section by each including a
statement, described in paragraph
(b)(1)(i)(B) of this section, with its
timely-filed return for the taxable year
during which the section 355
distribution occurs and by entering into
a written agreement described in
paragraph (b)(1)(ii) of this section. If the
domestic distributing corporation or a
section 1248 shareholder is a member of
a consolidated group at the time of the
section 355 distribution, the common
parent of the consolidated group makes
the election on behalf of the domestic
distributing corporation or section 1248

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shareholder. The election made under
this paragraph (b)(1) is irrevocable.
(B) Form and content. The statement
of election must be entitled,
STATEMENT TO ELECT TO APPLY
EXCEPTION UNDER § 1.1248(f)–2(b).
The statement must state that the
domestic distributing corporation and
each section 1248 shareholder have
entered into a written agreement
described in paragraph (b)(1)(ii) of this
section and must set forth the
adjustment to each section 1248
shareholder’s holding period or section
358 basis (if any) in the stock of the
foreign distributed corporation received
in the section 355 distribution required
under paragraph (b)(2) or (b)(3) of this
section.
(ii) Written agreement. The domestic
distributing corporation and the section
1248 shareholders must enter into a
written agreement described in this
paragraph (b)(1)(ii) on or before the due
date (including extensions) of the
domestic distributing corporation’s U.S.
income tax return for the taxable year
during which the section 355
distribution occurs. Each party to the
agreement must retain the original or a
copy of the agreement as part of its
records in the manner specified by
§ 1.6001–1(e). Each party to the
agreement must provide a copy of the
agreement to the Internal Revenue
Service within 30 days of the receipt of
a request for the agreement in
connection with an examination of the
taxable year during which the section
355 distribution occurs. The agreement
must—
(A) State the document is an
agreement under paragraph (b)(1)(ii) of
this section;
(B) Identify the domestic distributing
corporation and each section 1248
shareholder;
(C) With respect to each section 1248
shareholder, state the holding period in
the stock of the foreign distributed
corporation received in the section 355
distribution as adjusted under
paragraph (b)(2) of this section; and
(D) With respect to each section 1248
shareholder, identify the section 358
basis of the stock of the foreign
distributed corporation received in the
section 355 distribution and the
adjustment (if any) to such basis under
paragraph (b)(3) of this section.
(2) Holding period adjustment. For
purposes of section 1248, immediately
after the section 355 distribution, each
section 1248 shareholder’s holding
period in the stock of the foreign
distributed corporation received in the
section 355 distribution shall equal the
domestic distributing corporation’s

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holding period in such stock at the time
of the distribution.
(3) Basis adjustments. If the domestic
distributing corporation’s section 1248
amount attributable to the stock of the
foreign distributed corporation received
by a section 1248 shareholder in the
section 355 distribution exceeds the
section 1248 shareholder’s
postdistribution amount attributable to
such stock (excess amount), the section
1248 shareholder’s section 358 basis in
such stock is reduced by such excess
amount. For an illustration of the rule
in this paragraph (b)(3), see paragraph
(d) of this section, Examples 1 and 4.
(c) Distributions pursuant to a plan of
reorganization. Section 1.1248(f)–1(b)(3)
shall not apply to a section 355
distribution or section 361 distribution
of stock of the foreign distributed
corporation received by the domestic
distributing corporation in the section
361 exchange that precedes the
distribution, to a distributee that is a
section 1248 shareholder with respect to
the foreign distributed corporation
immediately after the distribution, if the
domestic distributing corporation and
all such section 1248 shareholders elect
to apply the provisions of this paragraph
(c) in accordance with paragraph (c)(1)
of this section. See paragraphs (c)(2) and
(c)(3) of this section for the adjustments
that result from electing to apply the
provisions of this paragraph (c). The
adjustments provided in paragraphs
(c)(2) and (c)(3) of this section shall
apply after any adjustments required
under section 367(a)(5) and § 1.367(a)–
7(c). For illustrations of this exception,
see paragraph (d) of this section,
Examples 2 through 4.
(1) Election and reporting—(i)
Statement required by section 1248
shareholders and domestic distributing
corporation—(A) In general. The
domestic distributing corporation and
the section 1248 shareholders elect to
apply the provisions of paragraph (c) of
this section by each including a
statement, in the form and with the
content listed in paragraph (c)(1)(i)(B) of
this section, with its timely-filed return
for the taxable year during which the
distribution occurs and by entering into
a written agreement described in
paragraph (c)(1)(ii) of this section. If the
domestic distributing corporation or a
section 1248 shareholder is a member of
a consolidated group at the time of the
distribution, the common parent of the
consolidated group makes the election
on behalf of the domestic distributing
corporation or section 1248 shareholder.
The election made under this paragraph
(c)(1) is irrevocable.
(B) Form and content. The statement
of election must be entitled,

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STATEMENT TO APPLY EXCEPTION
UNDER § 1.1248(f)–2(c). The statement
must state that the domestic distributing
corporation and each section 1248
shareholder have entered into a written
agreement described in paragraph
(c)(1)(ii) of this section and must
describe, with respect to each section
1248 shareholder, the extent to which
the shares of stock of the foreign
distributed corporation received in the
section 361 distribution are divided into
portions under paragraph (c)(2) of this
section and any adjustments to the
section 358 basis of such stock under
paragraph (c)(3) of this section.
(ii) Written agreement. The domestic
distributing corporation and the section
1248 shareholders must enter into a
written agreement described in this
paragraph (c)(1)(ii) on or before the due
date (including extensions) of the U.S.
transferor’s U.S. income tax return for
the taxable year during which the
distribution occurs. Each party to the
agreement must retain the original or a
copy of the agreement as part of its
records in the manner specified by
§ 1.6001–1(e). Each party to the
agreement must provide a copy of the
agreement to the Internal Revenue
Service within 30 days of the receipt of
a request for the agreement in
connection with an examination of the
taxable year during which the
distribution occurs. The agreement
must—
(A) State the document is an
agreement under paragraph (c)(1)(ii) of
this section;
(B) Identify the domestic distributing
corporation and each section 1248
shareholder;
(C) With respect to each section 1248
shareholder, describe the extent to
which the shares of stock of the foreign
distributed corporation are divided into
portions under paragraph (c)(2) of this
section;
(D) With respect to each section 1248
shareholder, state the amount of any
adjustment to the section 358 basis of
the stock of the foreign distributed
corporation under paragraph (c)(3) of
this section; and
(E) With respect to each section 1248
shareholder, state the amount of
earnings and profits attributable to the
stock of the foreign distributed
corporation received in the distribution.
See § 1.1248–8(b)(2)(iv).
(2) Portions. If the domestic
distributing corporation transfers
property to the foreign distributed
corporation in the section 361 exchange
that precedes the section 355
distribution or section 361 distribution,
other than a single block of stock of a
foreign corporation with respect to

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49299

which the domestic distributing
corporation is a section 1248
shareholder at the time of the section
361 exchange, then each share of stock
of the foreign distributed corporation
received by a section 1248 shareholder
in the distribution must be divided into
portions as follows:
(i) One portion attributable to all
property transferred in the section 361
exchange, other than stock of a foreign
corporation with respect to which the
domestic distributing corporation is a
section 1248 shareholder at the time of
the section 361 exchange; and
(ii) One portion attributable to each
block of stock of a foreign corporation
transferred in the section 361 exchange
with respect to which the domestic
distributing corporation is a section
1248 shareholder at the time of the
section 361 exchange. For the
determination of the earnings and
profits attributable to a portion of a
share of stock of the foreign distributed
corporation, see § 1.1248–8(b)(2)(iv).
(3) Basis adjustments. If the section
1248(f) amount attributable to a portion
of a share of stock (or whole share, if no
division is required) of the foreign
distributed corporation received (or
deemed received) by a section 1248
shareholder in the distribution exceeds
the section 1248 shareholder’s
postdistribution amount attributable to
such portion (or whole share, if no
division is required) (excess amount),
then the section 1248 shareholder’s
section 358 basis in such portion (or
whole share, if no division is required)
as adjusted under § 1.367(a)–7(c)(3), is
reduced by such excess amount. For an
illustration of this rule, see paragraph
(d) of this section, Example 3.
(4) Rules applicable to divided shares
of stock—(i) Basis. The basis of a
portion of a share of stock of the foreign
distributed corporation created under
paragraph (c)(2) of this section is that
amount of the section 1248
shareholder’s section 358 basis (as
adjusted under § 1.367(a)–7(c)(3)) in the
share of stock that bears the same ratio
that the fair market value of the property
received by the foreign distributed
corporation in the section 361 exchange
to which such portion relates bears to
the aggregate fair market value of all
property received by the foreign
distributed corporation in the section
361 exchange. For illustrations of this
rule, see paragraph (d) of this section,
Examples 2 and 3.
(ii) Fair market value. The fair market
value of a portion of a share of stock of
the foreign distributed corporation
created under paragraph (c)(2) of this
section is that amount of the fair market
value of the share of stock of the foreign

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corporation that bears the same ratio
that the fair market value of the property
received by the foreign distributed
corporation in the section 361 exchange
to which such portion relates bears to
the aggregate fair market value of all
property received by the foreign
distributed corporation in the section
361 exchange. For illustrations of this
rule, see paragraph (d) of this section,
Examples 2 and 3.
(iii) Rules for subsequent exchanges.
For purposes of determining the gain
realized on the sale or exchange of a
share of stock of the foreign distributed
corporation that has a divided portion
pursuant to paragraph (c)(2) of this
section, the amount realized on the sale
or exchange of such share shall be
allocated to each divided portion based
on the relative fair market value of the
property to which such portion relates
as determined at the time of the section
361 exchange.
(iv) Duration of divided shares. Shares
of stock of the foreign distributed
corporation that are divided into
portions under paragraph (c)(2) of this
section are not required to be divided as
of the date on which section 1248(a)
would not apply to a sale or exchange
of such shares.
(d) Examples. The rules of this section
are illustrated by the following
examples. The analysis of the examples
is limited to a discussion of issues
under this section. For purposes of the
examples, unless otherwise indicated,
assume: DP1, DP2, DP3, DC, and USD
are domestic corporations; X is a United
States resident individual; FP and FA
are foreign corporations that are not,
and have never been, controlled foreign
corporations; CFC1, CFC2, and FC are
controlled foreign corporations; each
corporation has a single class of stock
outstanding and uses the calendar year
as its taxable year; each shareholder
owns a single block of stock in each
corporation; DC owns Business A,
which consists solely of section 367(a)
property that could satisfy the
requirements of the active foreign trade
or business exception under section
367(a)(3) and § 1.367(a)–2T; and DC
owns no other assets and has no
liabilities. Further assume the
requirements in § 1.367(a)–7(c)(5) are
satisfied, any requirement to file a gain
recognition agreement is satisfied, and
no earnings and profits of a foreign
corporation are described in section
1248(d).
Example 1. Section 355 distribution, gain
recognition, and adjustment to stock basis—
(i) Facts. DP1, FP, and X own 80%, 10%, and
10%, respectively, of the outstanding stock of
USD. DP1’s USD stock has a $140x basis, a
$160x fair market value, and a 2 year holding

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period. USD wholly owns FC. USD’s FC
stock has a $50x basis, a $100x fair market
value, a $25x section 1248 amount, and a 3
year holding period. On December 31, Year
3, USD distributes all of the FC stock to DP1,
FP, and X on a pro-rata basis in a section 355
distribution. The fair market value of the FC
stock received by DP1, FP and X is $80x,
$10x, and $10x, respectively. After the
distribution, DP1’s section 358 basis in its FC
stock is $70x.
(ii) Result. (A) Under § 1.367(e)–1(b)(1),
USD must recognize $5x gain on the
distribution of FC stock to FP (10% of the
$50x gain in the FC stock). Under § 1.367(b)–
5(b)(1)(ii), USD must recognize $5x gain on
the distribution of FC stock to X (10% of the
$50x gain in the FC stock). Of the aggregate
$10x gain recognized by USD, $5x is
recharacterized as a dividend under section
1248(a) (20% of the section 1248 amount
($25x) attributable to the FC stock). See
§ 1.1248–1 for additional consequences.
(B) USD’s distribution of FC stock to DP1
is described in section 1248(f)(1) and
§ 1.1248(f)–1(b)(2). As a result, USD must
generally include in gross income as a
dividend the section 1248 amount
attributable to such stock ($20x, or 80% of
the $25x section 1248 amount). However, if
DP1 and USD elect to apply the rules of
paragraph (b) of this section (as provided in
paragraph (b)(1) of this section), § 1.1248(f)–
1(b)(2) shall not apply to USD’s distribution
of FC stock to DP1. If DP1 and USD make that
election, then:
(1) Under paragraph (b)(2) of this section,
for purposes of section 1248, immediately
after the distribution DP1 will have a 3 year
holding period in the FC stock received in
the section 355 distribution, the same
holding period USD had in such stock at the
time of the distribution.
(2) Under paragraph (b)(3) of this section,
DP1’s section 358 basis in the FC stock ($70x)
received in the distribution is reduced by
$10x, the amount by which USD’s section
1248 amount ($20x) attributable to such FC
stock exceeds DP1’s postdistribution amount
($10x) attributable to such stock. As adjusted
under paragraph (b)(3) of this section, DP1’s
basis in the FC stock is $60x. Under
§ 1.1248(f)–1(c)(4), DP1’s postdistribution
amount ($10x) equals the amount that DP1
would include in gross income as a dividend
under section 1248(a) if it sold the FC stock
immediately after the distribution ($80x fair
market value, $70x basis, and $20x earnings
and profits attributable to the FC stock for
purposes of section 1248 taking into account
DP1’s 3-year holding period in such stock as
required by paragraph (b)(2) of this section).
Example 2. Section 361 distribution —(i)
Facts. DP1, DP2, and FP own 50, 30, and 20,
respectively, of the 100 outstanding shares of
stock of DC. DP1’s DC stock has a $180x basis
and a $200x fair market value. DP2’s DC
stock has a $100x basis and $120x fair market
value. DC owns Business A and wholly owns
CFC1 and CFC2. DC’s Business A has a $10x
basis and a $200x fair market value. DC’s
CFC1 stock has a $20x basis, a $40x fair
market value, and $30x of earnings and
profits attributable to it for purposes of
section 1248(a). DC’s CFC2 stock has a $30x
basis, a $160x fair market value and $150x

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of earnings and profits attributable to it for
purposes of section 1248(a). On December 31,
Year 3, in a reorganization described in
section 368(a)(1)(D), DC transfers CFC1, CFC2
and Business A to FA in exchange for 60
shares of FA stock. DC’s transfer of CFC1,
CFC2 and Business A to FA in exchange for
the 60 shares of FA stock qualifies as a
section 361 exchange. DC distributes the FA
stock to DP1, DP2 and FP on a pro-rata basis
in a section 361 distribution. DP1, DP2 and
FP exchange their DC stock for 30, 18, and
12 shares, respectively, of FA stock pursuant
to section 354. After the reorganization, FA
has 100 shares of stock outstanding. DP3
owns the other 40 shares of FA stock.
(ii) Result. (A) In general, under section
367(a)(5) and § 1.367(a)–7(b), DC’s transfer of
the stock of CFC1 and CFC2 and Business A
to FA is subject to the general rule of section
367(a)(1). As a result, DC must generally
recognize gain on the transfer of such
property to FA in the section 361 exchange.
However, if the conditions and requirements
of § 1.367(a)–7(c) are met (which includes the
making of the election under § 1.367(a)–
7(c)(5)), DC’s transfer of the stock of CFC1
and CFC2 and Business A to FA may, in part,
be eligible for the exceptions to section
367(a)(1) provided by §§ 1.367(a)–2T and –3.
See §§ 1.367(a)–2T and –3(b) for additional
requirements. In addition, DC may not be
required to include in income the section
1248 amount attributable to the CFC1 and
CFC2 stock under § 1.367(b)–4(b)(1).
However, if the exception provided under
paragraph (c) of this section does not apply,
then under § 1.1248(f)–1(b)(3) DC must
include in gross income as a dividend the
section 1248(f) amounts attributable to the
FA stock distributed. DC must include in
income as a dividend the section 1248(f)
amount attributable to the FA stock
distributed to FP even if the exception
provided by § 1.367(a)–7(c) applies.
(B) The requirement of § 1.367(a)–7(c)(1) is
satisfied because DC is controlled (within the
meaning of section 368(c)) by DP1 and DP2
at the time of the section 361 exchange.
(C) Under § 1.367(a)–7(c)(2)(i), DC must
recognize $68x gain on the section 361
exchange with respect to FP. The $68x gain
equals the product of FP’s 20% ownership
interest in DC (by value) at the time of the
section 361 exchange and the $340x inside
gain. The inside gain equals the excess of the
aggregate gross fair market value of the
section 367(a) property ($400x) over the $60x
inside basis. Under § 1.367(a)–7(e)(1), the
$68x gain recognized is allocated among the
CFC1 stock, the CFC2 stock and Business A
in proportion to the amount of gain realized
by DC on the transfer of such property. The
amount allocated to the CFC1 stock is $4x
($68x gain multiplied by $20x/$340x). The
amount allocated to the CFC2 stock is $26x
($68x gain multiplied by $130x/$340x). The
amount allocated to Business A is $38x ($68x
gain multiplied by $190x/$340x). Under
§ 1.367(a)–1T(b)(4)(i)(B) and section 362(b),
the basis of each asset is increased by the
amount of gain allocated to such asset. Under
section 1248(a), DC must include in gross
income as a dividend the $4x gain recognized
with respect to the CFC1 stock (20% of the
$20x section 1248 amount attributable to

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such stock) and the $26x gain recognized
with respect to CFC2 stock (20% of the $130x
section 1248 amount attributable to such
stock). If the built-in gain in the CFC1 stock
or CFC2 stock exceeded the section 1248
amount attributable to such stock, the
amount of the gain recognized by DC on the
transfer of such stock in the section 361
exchange recharacterized as a dividend
under section 1248(a) would be less.
(D) DC is not required to recognize gain on
the section 361 exchange under § 1.367(a)–
7(c)(2)(ii) with respect to DP1 or DP2. With
respect to DP1, the product of the inside gain
($340x) and DP1’s 50% ownership interest
(by value) in DC at the time of the section 361
exchange (or $170x) does not exceed the
product of the section 367(a) percentage
(100%) and the fair market value of the FA
stock received by DP1 ($200x). With respect
to DP2, the product of the inside gain ($340x)
and DP2’s 30% ownership percentage (by
value) in DC at the time of the section 361
exchange (or $102x) does not exceed the
product of the section 367(a) percentage
(100%) and the fair market value of the FA
stock received by DP2 ($120x).
(E) Under § 1.367(a)–7(c)(3), DP1’s section
358 basis ($180x) in the FA stock received in
the section 361 distribution is reduced by
$150x, the amount by which DP1’s 50%
share of inside gain ($170x) exceeds DP1’s
$20x outside gain. DP1’s share of inside gain
is not reduced under § 1.367(a)–7(c)(2)(ii)
because DC did not recognize gain with
respect to DP1. DP1’s $20x outside gain
equals the product of the section 367(a)
percentage (100%) and the excess of the fair
market value of the FA stock received by DP1
($200x) over the section 358 basis of such
stock ($180x). As adjusted, DP1’s basis in the
FA stock is $30x. Similarly, DP2’s section
358 basis ($100x) in the FA stock received in
the section 361 distribution is reduced by
$82x, the amount by which DP2’s 30% share
of inside gain ($102x) exceeds DP1’s $20x
outside gain. DP2’s share of inside gain is not
reduced under § 1.367(a)–7(c)(2)(ii) because
DC did not recognize gain with respect to
DP2. DP2’s $20x outside gain equals the
product of the section 367(a) percentage
(100%) and the excess of the fair market
value of the FA stock received by DP2
($120x) over the section 358 basis of such
stock ($100x). As adjusted, DP2’s basis in the
FA stock is $18x.
(F) Under § 1.367(a)–7(c)(4)(i), DC must
comply with the requirements of § 1.6038B–
1(c)(6)(iii) with respect to Business A. Under
§ 1.367(a)–7(c)(4)(ii), DC is not required to
comply with the requirements of § 1.6038B–
1(c)(6)(iii) with respect to the stock of CFC1
or CFC2.
(G) DC is not required to include in income
as a dividend the remaining section 1248
amount attributable to the stock of CFC1
($16x) or CFC2 ($104x) under § 1.367(b)–
4(b)(1)(i) because immediately after the
section 361 exchange, FA, CFC1, and CFC2
are controlled foreign corporations with
respect to which DC is a section 1248
shareholder.
(H) Under § 1.1248(f)–1(b)(3), DC must
generally include in gross income as a
dividend the section 1248(f) amount ($120x)
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DP1, DP2 and FA in the section 361
distribution. The section 1248(f) amount
equals the sum of the amounts that FA would
include in income as a dividend under
section 964(e) if it sold the CFC1 stock ($16x
gain and $26x earnings and profits
attributable to such stock—calculated in
paragraph (K)(3) of this Example) and CFC2
stock ($104x gain and $124x earnings and
profits attributable to such stock—calculated
in paragraph (K)(3) of this Example)
immediately after the section 361 exchange.
(I) [Reserved.]
(J) However, if DP1, DP2, and DC elect to
apply the provisions of paragraph (c) of this
section (as provided in paragraph (c)(1) of
this section), then § 1.1248(f)–1(b)(3) shall
not apply to DC’s distribution of FA stock to
DP1 and DP2. Even if such election is made,
however, DC must include in gross income
as a dividend the section 1248(f) amount
($24x) attributable to the 12 shares of FA
stock distributed to FP (20% of the $120x
section 1248(f) amount.)
(K) If DP1, DP2, and DC elect to apply the
provisions of paragraph (c) of this section,
then under paragraph (c)(2) of this section
each share of FA stock received by DP1 (30
shares) and DP2 (18 shares) is divided into
portions attributable to the CFC1 stock, the
CFC2 stock and Business A. Under
paragraphs (c)(4)(i) and (ii) of this section,
the basis and fair market value of each
portion of each share of FA stock is that
amount of the total basis and fair market
value of the FA stock that bears the same
ratio that the fair market value of the
property (exchanged for such FA stock) to
which such portion relates bears to the
aggregate fair market value of all property
exchanged for the FA stock in the section 361
exchange.
(1) With respect to DP1’s 30 shares of FA
stock, the portions attributable to the CFC1
stock have an aggregate basis of $3x ($30x
multiplied by $40x/$400x) and a fair market
value of $20x ($200x multiplied by $40x/
$400x); the portions attributable to the CFC2
stock have an aggregate basis of $12x ($30x
multiplied by $160x/$400x) and a fair market
value of $80x ($200x multiplied by $160x/
$400x), and the portions attributable to
Business A have an aggregate basis of $15x
($30x multiplied by $200x/$400x) and a fair
market value of $100x (50% of $200x).
(2) With respect to DP2’s 18 shares of FA
stock, the portions attributable to the CFC1
stock have an aggregate basis of $1.8x ($18x
multiplied by $40x/$400x) and a fair market
value of $12x ($120x multiplied by $40x/
$400x); the portions attributable to the CFC2
stock have an aggregate basis of $7.2x ($18x
multiplied by $160x/$400x) and a fair market
value of $48x ($120x multiplied by $160x/
$400x); and the portions attributable to
Business A have an aggregate basis of $9x
($18x multiplied by $200x/$400x) and a fair
market value of $60x ($120x multiplied by
$200x/$400x).
(3) Under § 1.1248–8(b)(2)(iv), the earnings
and profits of CFC1 attributable to the
portions of DP1’s 30 shares of FA stock
attributable to the CFC1 stock is $13x ($26x
earnings and profits amount multiplied by
DP1’s 50% ownership interest (by value) in
DC at the time of the section 361 exchange),

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and the earnings and profits of CFC2
attributable to the portions of DP1’s 30 shares
of FA stock attributable to the CFC2 stock is
$62x ($124x earnings and profits amount
multiplied by DP1’s 50% ownership interest
in DC at the time of the section 361
exchange). Similarly, the earnings and profits
of CFC1 attributable to the portions of DP2’s
18 shares of FA stock attributable to the CFC1
stock is $7.8x ($26x earnings and profits
amount multiplied by DP2’s 30% ownership
interest (by value) in DC at the time of the
section 361 exchange), and the amount of
earnings and profits of CFC2 attributable to
the portions of DP2’s 18 shares of FA stock
attributable to the CFC2 stock is $37.2x
($124x earnings and profits amount
multiplied by DP2’s 30% ownership interest
(by value) in DC at the time of the section 361
exchange). The $26x earnings and profits
with respect to the CFC1 stock equals the
$30x earnings and profits amount attributable
to the CFC1 stock immediately before the
section 361 exchange reduced by the $4x
included in income by DC as a dividend
under section 1248(a) on the transfer of the
CFC1 stock to FA in the section 361
exchange. The $124x earnings and profits
with respect to CFC2 equals the $150x
earnings and profits attributable to the CFC2
stock immediately before the section 361
exchange reduced by the $26x amount
included in income by DC as a dividend
under section 1248(a) on the transfer of the
CFC2 stock to FA in the section 361
exchange. See sections 959(e) and 1248(d)(1).
(L) Under paragraph (c)(3) of this section,
DP1 is not required to reduce the aggregate
section 358 basis of the portions of its 30
shares of FA stock attributable to the CFC1
stock or CFC2 stock. DP1’s postdistribution
amount ($13x) attributable to the portions of
its FA shares attributable to the CFC1 stock
exceeds its allocable share of the section
1248(f) amount attributable to the CFC1 stock
immediately after the section 361 exchange
($8x, or 50% of $16x). DP1’s postdistribution
amount ($62x) attributable to the portions of
its FA shares attributable to the CFC2 stock
exceeds its allocable share of the section
1248(f) amount attributable to the CFC2 stock
immediately after the section 361 exchange
($52x, or 50% of $104x).
(M) Similarly, DP2 is not required to
reduce the aggregate section 358 basis of the
portions of its 18 shares of FA stock
attributable to the CFC1 stock or CFC2 stock.
DP2’s postdistribution amount ($7.8x)
attributable to the portions of its FA shares
attributable to the CFC1 stock exceeds its
allocable share of the section 1248(f) amount
attributable to the CFC1 stock immediately
after the section 361 exchange ($4.8x, or 30%
of $16x). DP2’s postdistribution amount
($37.2x) attributable to the portions of its FA
shares attributable to the CFC2 stock exceeds
its allocable share of the section 1248(f)
amount attributable to the CFC2 stock
immediately after the section 361 exchange
($31.2x, or 30% of $104x).
Example 3. Section 361 distribution and
adjustment to stock basis. (i) Facts. DP1
wholly owns DC. DP1’s DC stock has a $180x
basis and a $200x fair market value. DC
wholly owns CFC1 and CFC2. DC’s CFC1
stock has a $70x basis, a $100x fair market

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value, and $40x of earnings and profits
attributable to it for purposes of section 1248.
DC’s CFC2 stock has a $130x basis, a $100x
fair market value, and $80x of earnings and
profits attributable to it for purposes of
section 1248. On December 31, Year 1, in a
reorganization described in section
368(a)(1)(F), DC transfers the CFC1 stock and
the CFC2 stock to FA, a newly formed
corporation, in exchange for 100 shares of FA
stock. DC distributes the 100 shares of FA
stock to DP1 in a section 361 distribution.
DC’s transfer of the stock of CFC1 and CFC2
to FA in exchange for FA stock qualifies as
a section 361 exchange. DP1 exchanges its
DC stock for the 100 shares of FA stock
pursuant to section 354. DP1 and DC elect to
apply the rules of § 1.367(a)–7(c) in
accordance with § 1.367(a)–7(c)(5). DC is not
required to recognize gain under § 1.367(a)–
7(c)(2), and DP1 is not required to reduce its
section 358 basis in the FA shares under
§ 1.367(a)–7(c)(3).
(ii) Result. (A) DC is not required to
include in income as a dividend the section
1248 amount attributable to the CFC1 stock
under § 1.367(b)–4(b)(1)(i) because,
immediately after the section 361 exchange,
FA and CFC1 are controlled foreign
corporations with respect to which DC is a
section 1248 shareholder. At the time of the
section 361 exchange the section 1248
amount attributable to the CFC2 stock is zero.
(B) Under § 1.1248(f)–1(b)(3), DC must
generally include in income as a dividend
the section 1248(f) amount ($30x) attributable
to the FA stock upon its distribution of such
stock to DP1 in the section 361 distribution.
The section 1248(f) amount is the amount
that FA would include in income as a
dividend under section 964(e) if it sold the
CFC1 stock immediately after the section 361
exchange. Immediately after the section 361
exchange, the section 1248(f) amount
attributable to the CFC2 stock is zero.
(C) However, if DP1 and DC elect to apply
the rules of paragraph (c) of this section (as
provided in paragraph (c)(1) of this section),
then § 1.1248(f)–1(b)(3) shall not apply to
DC’s distribution of the FA stock to DP1. If
that election is made then:
(1) Under paragraph (c)(2)(ii) of this section
each share of FA stock received by DP1 is
divided into one portion attributable to the
CFC1 stock and one portion attributable to
the CFC2 stock. Under paragraphs (c)(4)(i)
and (ii) of this section, the basis and fair
market value of each portion is that amount
of the total section 358 basis and fair market
value, respectively, of the FA stock that bears
the same ratio that the fair market value of
the property (the CFC1 stock and CFC2 stock)
to which such portion relates bears to the
aggregate fair market value of all property
exchanged by DC for the FA stock in the
section 361 exchange. Therefore, the portions
attributable to the CFC1 stock have an
aggregate basis of $90x ($180x multiplied by
$100x/$200x) and a fair market value of
$100x ($200x multiplied by $100x/$200x).
The portions attributable to the CFC2 stock
also have an aggregate basis of $90x ($180x
multiplied by $100x/$200x) and a fair market
value of $100x ($200x multiplied by $100x/
$200x).
(2) Under § 1.1248–8(b)(2)(iv), the $40x
earnings and profits attributable to the CFC1

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stock at the time of the section 361 exchange
are attributed to the portions of the shares of
FA stock that relate to the CFC1 stock.
Similarly, the $80x of earnings and profits
attributable to the CFC2 stock are attributed
to the portions of the 100 shares of the FA
stock that relate to the CFC2 stock.
(3) Under paragraph (c)(3) of this section,
DP1’s aggregate section 358 basis in the
portions of the 100 shares of FA stock
attributable to the CFC1 stock ($90x) is
reduced by $20x, the amount by which the
section 1248(f) amount attributable to the
CFC1 stock ($30x) exceeds DP1’s
postdistribution amount ($10x) with respect
to the portions of the shares of FA stock
attributable to the CFC1 stock. The
postdistribution amount is the section 1248
amount attributable to the portions of the FA
stock attributable to the CFC1 stock
immediately after the section 361
distribution ($100x fair market value less
$90x basis, and $40x earnings and profits
attributable to such portions). As adjusted,
DP1’s aggregate basis in the portions of the
shares of FA stock attributable to the CFC1
stock is $70x. No adjustment is required to
DP1’s aggregate basis in the portions of the
FA stock attributable to the CFC2 stock
because no portion of the $30x section
1248(f) amount is attributable to the CFC2
stock.
Example 4. Section 361 exchange followed
by distribution of stock pursuant to plan of
reorganization. (i) Facts. DP1 owns all 100
outstanding shares of stock of DC. DP1’s DC
stock has a $180x basis, $200x fair market
value, and 2 year holding period. DC owns
all 60 shares of the outstanding stock of
CFC1. DC’s CFC1 stock has a $50x basis, a
$60x fair market value, $30x of earnings and
profits attributable to it for purposes of
section 1248, and a 3 year holding period. DC
also owns all 40 shares of the outstanding
stock of CFC2. DC’s CFC2 stock has a $30x
basis, a $40x fair market value, and $20x of
earnings and profits attributable to it for
purposes of section 1248. DC also owns
Business A that has a fair market value of
$100x. On December 31, Year 4, in a divisive
reorganization described in section
368(a)(1)(D), DC transfers the CFC2 stock to
CFC1 in exchange for 40 additional shares of
CFC1 stock. DC then distributes the 100
shares of CFC1 stock to DP1. DC’s transfer of
the CFC2 stock to CFC1 qualifies as a section
361 exchange. DP1 and DC are eligible to and
make the elections provided in § 1.367(a)–
7(c)(5) and paragraphs (b) and (c) of this
section.
(ii) Result. (A) DC is not required to
recognize gain under § 1.367(a)–7(c)(2).
(B) Under section 358, DP1 must allocate
the $180x pre-distribution section 358 basis
in its DC stock between the shares of DC
stock and the shares of CFC1 stock held after
the distribution based on the relative fair
market values of such shares. After the
allocation of the pre-distribution basis, the
basis of DP1’s DC stock is $90x, and the basis
of DP1’s CFC1 stock is $90x. With respect to
the $90x basis in the CFC1 stock, $36x is
attributable to the 40 shares of CFC1 stock
received by DC in the section 361 exchange,
and $54x is attributable to the 60 shares of
CFC1 stock owned by DC before the section
361 exchange.

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(C) Pursuant to § 1.367(a)–7(c)(3)(ii)(A),
any adjustment to basis required under
§ 1.367(a)–7(c)(3) applies only to the 40
shares of CFC1 stock received by DC in the
section 361 exchange. Under § 1.367(a)–
7(c)(3)(i), DP1 must reduce its section 358
basis ($36x) in the 40 shares of CFC1 stock
by $6x, the amount by which DP1’s 100%
share of the inside gain ($10x) exceeds DP2’s
outside gain ($4x). DP1’s share of inside gain
is not reduced under § 1.367(a)–7(c)(2)(ii)
because DC does not recognize gain on the
transfer of the section 367(a) property in the
section 361 exchange. The outside gain
equals the product of the section 367(a)
percentage (100%) and the amount by which
the fair market value ($40x) of the 40 shares
of CFC1 stock exceeds DP1’s section 358
basis of such stock ($36x). After the $6x
reduction to stock basis required under
§ 1.367(a)–7(c)(3), but before the application
of § 1.1248(f)–2(c)(2), DP1’s basis in such 40
shares of CFC1 stock is $30x.
(D) DC is not required to include in income
as a dividend the section 1248 amount
attributable to the CFC2 stock under
§ 1.367(b)–4(b)(1)(i), because immediately
after the section 361 exchange CFC1 and
CFC2 are both controlled foreign
corporations with respect to which DC is a
section 1248 shareholder.
(E) Because DP1 and DC elect to apply the
rules under paragraph (c) of this section,
§ 1.1248(f)–1(b)(3) does not apply to DC’s
distribution to DP of the 40 shares of CFC1
stock received in the section 361 exchange.
(1) Under paragraph (c)(2) of this section,
the 40 shares of CFC1 stock received by DC
in the section 361 exchange are attributable
to the CFC2 stock. Thus, the 40 shares are not
required to be divided into portions under
paragraph (c)(2) of this section because DC
exchanged a single block of stock of CFC2 for
the 40 shares of CFC1 stock in the section
361 exchange. The 40 shares of CFC1 stock
have an aggregate basis of $30x (after the
adjustment described in paragraph (C) of this
Example) and fair market value of $40x.
(2) Under § 1.1248–8(b)(2)(iv), the $20x of
earnings and profits attributable to the CFC2
stock at the time of the section 361 exchange
are attributable to the 40 shares of CFC1
stock.
(3) DP1’s basis ($30x) in the 40 shares of
CFC1 stock attributable to the CFC2 stock is
not required to be reduced under paragraph
(c)(3) of this section because the section
1248(f) amount ($10x) attributable to the 40
shares of CFC1 stock does not exceed DP1’s
postdistribution amount ($10x) attributable
to such stock. The postdistribution amount
equals the amount that DP1 would be
required to include in income as a dividend
under section 1248(a) if it sold the 40 shares
of CFC1 stock immediately after the
distribution ($40x fair market value, $30x
basis, and $20x earnings and profits
attributable to such stock for purposes of
section 1248). The $10x section 1248(f)
amount equals the amount CFC1 would
include in income as a dividend under
section 964(e) if it sold the CFC2 stock
received from DC immediately after the
section 361 exchange.
(F) Because DP1 and DC make the election
provided in paragraph (b)(1) of this section,

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§ 1.1248(f)–1(b)(2) does not apply to DC’s
distribution to DP1 of the 60 shares of CFC1
stock it owned before the section 361
exchange.
(1) Under paragraph (b)(2) of this section,
for purposes of section 1248, DP1 has a 3year holding period in the 60 shares of CFC1
stock immediately after the distribution, the
same holding period that DC had in such
shares at the time of the distribution.
(2) Under paragraph (b)(3) of this section,
DP1’s section 358 basis in the 60 shares of
CFC1 stock ($54x) must be reduced by $4x,
the amount by which DC’s section 1248
amount ($10x) attributable to such shares
immediately before the distribution exceeds
DP1’s postdistribution amount ($6x)
attributable to such shares immediately after
the distribution. The $6x postdistribution
amount equals the amount that DP1 would be
required to include in income as a dividend
under section 1248(a) if it sold the 60 shares
of CFC1 stock immediately after the
distribution ($60x fair market value, $54x
basis, and $30x earnings and profits
attributable to such stock for purposes of
section 1248). After the reduction, DP1’s
basis in the 60 shares of CFC1 stock is $50x.

(e) Applicable cross-references. For
rules relating to the attribution of
earnings and profits to the stock of a
foreign corporation following certain
nonrecognition transactions, see
§ 1.1248–8. For rules relating to a
transfer of property by a domestic
corporation to a foreign corporation in
a section 361 exchange that precedes a
section 355 distribution or section 361
distribution to which section 1248(f)(1)
applies, see § 1.367(a)–7. For rules
relating to an acquisition of the stock of
a foreign corporation by another foreign
corporation in a section 361 exchange,
see § 1.367(b)–4. For rules relating to a
section 355 distribution of stock of a
foreign corporation by a domestic
corporation, see §§ 1.367(b)–5(b)(1) and
1.367(e)–1.
Par. 14. Section 1.1248(f)–3 is added
to read as follows:

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§ 1.1248(f)–3 Reasonable cause exception
and effective dates.

(a) Reasonable cause exception for
failure to comply—(1) General rule. If a
section 1248 shareholder or the
domestic distributing corporation fails
to comply with any requirement under
§ 1.1248(f)–2, the section 1248
shareholder or the domestic distributing
corporation shall be considered to have
complied with such requirement if it
submits a request for relief as provided
under paragraph (a)(2) of this section
and can 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 section 1248 shareholder’s or
domestic distributing corporation’s tax

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return for the taxable year during which
the distribution occurs, that such failure
was due to reasonable cause and not
willful neglect. Whether the failure to
comply 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 section 1248
shareholder or domestic distributing
corporation in writing within 120 days
if it is determined that the failure to
comply was not due to reasonable
cause, or if additional time will be
needed to make such determination. For
this purpose, the 120-day period shall
begin on the date the Internal Revenue
Service notifies the section 1248
shareholder or domestic distributing
corporation in writing that the request
for relief has been received and assigned
for review. Once such period
commences, if the section 1248
shareholder or domestic distributing
corporation is not again notified within
120 days, then the section 1248
shareholder or domestic distributing
corporation shall be deemed to have
established reasonable cause.
(2) Requirements for reasonable cause
relief—(i) Time of submission. Requests
for reasonable cause relief will only be
considered if as soon as the section 1248
shareholder or domestic distributing
corporation becomes aware of the
failure to comply with any requirement
of § 1.1248(f)–2, the section 1248
shareholder or domestic distributing
corporation attaches the statements or
other documents that should have been
filed, as well as a complete written
statement setting forth the reasons for
the failure to comply, to an amended
return that amends the return to which
the documents should have been
attached pursuant to § 1.1248(f)–2. The
amended return and all required
attachments must be filed with the
applicable Internal Revenue Service
Center with which the section 1248
shareholder or domestic distributing
corporation filed its original return to
which the documents should have been
attached.
(ii) Notice requirement. In addition to
the requirement of paragraph (a)(2)(i) of
this section, the section 1248
shareholder or domestic distributing
corporation must comply with the
requirements of paragraph (a)(2)(ii)(A)
or (B) of this section, as applicable.
(A) If the section 1248 shareholder or
domestic distributing corporation is
under examination for any taxable year
when the request for reasonable cause
relief is filed, a copy of the amended
return and attachments must be
provided to the Internal Revenue

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49303

Service personnel conducting the
examination.
(B) If the section 1248 shareholder or
domestic distributing corporation is not
under examination for any taxable year
when the request for reasonable cause
relief is filed, a copy of the amended
return and attachments must be
provided to the Director having
jurisdiction over the return.
(b) Effective/applicability date.
Sections 1.1248(f)–1 and 1.1248(f)–2
and this section shall apply to
distributions occurring on or after the
date 30 days after the date these
regulations are published as final
regulations in the Federal Register.
Par. 15. Section 1.6038B–1 is
amended by revising paragraphs (c)(6),
(f)(3), and the heading and the first
sentence of paragraph (g)(1), and adding
paragraph (g)(5), to read as follows:
§ 1.6038B–1 Reporting of certain transfers
to foreign corporations.

*

*
*
*
*
(c) * * *
(6) Transfers subject to section
367(a)(5)—(i) In general. This paragraph
applies to a domestic corporation (U.S.
transferor) that transfers section 367(a)
property (as defined in § 1.367(a)–
7(f)(9)) to a 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) and to which the
provisions of § 1.367(a)–7(c) apply.
Paragraph (c)(6)(ii) of this section
establishes the time and manner for the
U.S. transferor to elect to apply the
provisions of § 1.367(a)–7(c). Paragraph
(c)(6)(iii) of this section establishes the
manner for the U.S. transferor to satisfy
the requirement of § 1.367(a)–7(c)(4).
(ii) Election. The U.S. transferor elects
to apply the provisions of § 1.367(a)–
7(c) by including a statement entitled,
STATEMENT TO ELECT TO APPLY
EXCEPTION UNDER § 1.367(a)–7(c)
with its timely-filed return (within the
meaning of § 1.367(a)–7(f)(11)) for the
taxable year during which the section
361 exchange occurs, that includes the
information described in paragraphs
(c)(6)(ii)(A) through (c)(6)(ii)(C) of this
section. See § 1.367(a)–7(c)(5)(ii) for the
statement required to be filed by a
control group member, as defined in
§ 1.367(a)–7(f)(2), or final distributee, as
defined in § 1.367(a)–7(d).
(A) The name and taxpayer
identification number of each control
group member and final distributee (if
any), and the aggregate ownership
interest (by value) in the U.S. transferor
of each control group member or final
distributee.

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(B) A calculation of the gain
recognized (if any) by the U.S. transferor
under § 1.367(a)–7(c)(2)(i) and (ii).
(C) The date on which the U.S.
transferor and each control group
member or final distributee entered into
the written agreement described in
§ 1.367(a)–7(c)(5)(iv).
(iii) Agreement to amend U.S.
transferor’s tax return. The U.S.
transferor complies with the
requirement of § 1.367(a)–7(c)(4)(i) by
attaching a statement to its timely-filed
return (within the meaning of
§ 1.367(a)–7(f)(11)) for the taxable year
in which the section 361 exchange
occurs, entitled STATEMENT UNDER
§ 1.367(a)–7(c)(4) FOR TRANSFERS OF
ASSETS TO A FOREIGN
CORPORATION IN A SECTION 361
EXCHANGE. The statement must certify
that if the foreign acquiring corporation
disposes of a significant amount (as
defined in paragraph (c)(6)(iii)(A) of this
section) of the section 367(a) property
received from the U.S. transferor in the
section 361 exchange in one or more
related transactions described in
paragraph (c)(6)(iii)(B) of this section,
then the exception provided in
§ 1.367(a)–7(c) shall not apply to the
section 361 exchange and the U.S.
transferor shall recognize the gain
realized but not recognized in the
section 361 exchange. The U.S.
transferor (or the foreign acquiring
corporation on behalf of the U.S.
transferor) shall file a U.S. income tax
return (or amended U.S. income tax
return, as the case may be) for the year
of the section 361 exchange, reporting
such gain.
(A) Disposition of significant amount.
For purposes of this paragraph (c)(6)(iii),
a disposition of a significant amount
occurs if, in one or more related
transactions, the foreign acquiring
corporation disposes of an amount of
the section 367(a) property received
from the U.S. transferor in the section
361 exchange that is greater than 40
percent of the fair market value of all of
the property transferred in the section
361 exchange.
(B) Gain recognition transaction—(1)
General rule. A transaction is described
in this paragraph (c)(6)(iii)(B) if the
transaction is entered into with a
principal purpose of avoiding the U.S.
tax that would have been imposed on
the U.S. transferor on the disposition of
the property transferred to the foreign
acquiring corporation in the section 361
exchange. A disposition may have a
principal purpose of tax avoidance even
if the tax avoidance purpose is
outweighed by other purposes when
taken together.

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(2) Presumptive tax avoidance. For
purposes of this paragraph (c)(6)(iii)(B),
the principal purpose of the foreign
acquiring corporation’s disposition of a
significant amount of the section 367(a)
property within two years of the section
361 exchange (whether in a recognition
or nonrecognition transaction) shall be
presumed to be the avoidance of the
U.S. tax that would have been imposed
on the U.S. transferor on the disposition
of the property transferred to the foreign
acquiring corporation in the section 361
exchange. However, this presumption
shall not apply if it is demonstrated to
the satisfaction of the Area Director,
Field Examination, Small Business/Self
Employed or the Director of Field
Operations, Large and Mid-Size
Business (Director) that the avoidance of
U.S. tax was not a principal purpose of
the disposition.
(3) Interest. If additional tax is
required to be paid as a result of a
transaction described in paragraph
(c)(6)(iii)(B) of this section, then interest
must be paid on that amount at rates
determined under section 6621 with
respect to the period between the date
prescribed for filing the U.S. transferor’s
income tax return for the year of the
section 361 exchange and the date on
which the additional tax for that year is
paid.
*
*
*
*
*
(f) * * *
(3) Reasonable cause exception for
failure to comply—(i) Request for relief.
The provisions of paragraph (f)(1) of this
section shall not apply if the U.S.
transferor can 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 U.S. transferor’s tax return for the
taxable year, that a failure to comply
was due to reasonable cause and not
willful neglect. Whether the failure to
comply 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 to comply
was not due to reasonable cause, or if
additional time will be needed to make
such 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 relief has been
received and assigned for review. Once
such period commences, if the U.S.
transferor is not again notified within
120 days, then the U.S. transferor shall

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be deemed to have established
reasonable cause.
(ii) Requirements for reasonable cause
relief—(A) Time of submission. Requests
for reasonable cause relief will only be
considered if, as soon as the U.S.
transferor becomes aware of the failure
to comply, the U.S. transferor attaches
all the documents that should have been
filed, as well as a complete written
statement setting forth the reasons for
the failure to timely comply, to an
amended return that amends the return
to which the documents should have
been attached pursuant to the rules of
section 6038B and the regulations under
that section. The amended return and
all required attachments must be filed
with the applicable Internal Revenue
Service Center with which the U.S.
transferor filed its original return to
which the documents should have been
attached.
(B) Notice requirement. In addition to
the requirement of paragraph (f)(3)(ii)(A)
of this section, the U.S. transferor must
comply with the requirements of
paragraph (f)(3)(ii)(B)(1) or (2), as
applicable.
(1) If the U.S. transferor is under
examination for any taxable year when
it requests relief, the U.S. transferor
must provide a copy of the amended
return and attachments to the Internal
Revenue Service personnel conducting
the examination.
(2) If the U.S. transferor is not under
examination for any taxable year when
it requests relief, the U.S. transferor
must provide a copy of the amended
return and attachments to the Director
having jurisdiction over the U.S.
transferor’s return.
*
*
*
*
*
(g) Effective/applicability dates. (1)
Except as provided in paragraphs (g)(2)
through (5) of this section, this section
applies to transfers occurring on or after
July 20, 1998, except for transfers of
cash made in tax years beginning on or
before February 5, 1999 (which are not
required to be reported under section
6038B), and except for transfers
described in paragraph (e) of this
section, which applies to transfers that
are subject to §§ 1.367(e)–1(f) and
1.367(e)–2(e). * * *
(5) Paragraphs (c)(6) and (f)(3) of this
section shall apply to transfers
occurring on or after the date 30 days
after the date these regulations are
published as final regulations in the
Federal Register. For guidance with
respect to paragraphs (c)(6) and (f)(3) of
this section before the date 30 days after
the date these regulations are published
as final regulations in the Federal
Register, see 26 CFR part 1 revised as of

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April 1 for the year before the date these
regulations are published as final
regulations in the Federal Register.
Linda E. Stiff,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. E8–18885 Filed 8–19–08; 8:45 am]

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