Td 9615 (temp)

Federal Register / Vol. 78, No. 53 / Tuesday, March 19, 2013 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9615]
RIN 1545–BJ75

Indirect Stock Transfers and the
Coordination Rule Exceptions;
Transfers of Stock or Securities in
Outbound Asset Reorganizations
Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
AGENCY:

This document contains final
and temporary regulations. These
regulations eliminate one of two
exceptions to the coordination rule
between asset transfers and indirect
stock transfers for certain outbound
asset reorganizations. The regulations
also modify the third exception to the
coordination rule for certain outbound
exchanges so that this exception is
consistent with the remaining asset
reorganization exception. In addition,
the regulations modify, in various
contexts, procedures for obtaining
reasonable cause relief. Finally, the
regulations implement certain changes
with respect to transfers of stock or
securities by a domestic corporation to
a foreign corporation in a section 361
exchange. The regulations primarily
affect domestic corporations that
transfer property to foreign corporations
in certain outbound nonrecognition
exchanges. The text of these temporary
regulations serves as the text of the
proposed regulations (REG–132702–10)
published in the notice of proposed
rulemaking on this subject in the
Proposed Rules section of this issue of
the Federal Register.
DATES: Effective Date: The final and
temporary regulations are effective on
March 19, 2013.
Applicability Date: For dates of
applicability, see § 1.367(a)–3T(g),
§ 1.367(a)–6T(e)(4), 1.367(a)–
7T(e)(2)(iv), 1.1248(f)–3T(a)(3), and
1.6038B–1T(f)(3)(iii).
FOR FURTHER INFORMATION CONTACT:
Robert B. Williams, Jr., (202) 622–3860
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
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SUMMARY:

Paperwork Reduction Act
The collections of information
contained in the regulations have been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of

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1995 (44 U.S.C. 3507(d)) under control
number 1545–2183.
The collections of information are in
§§ 1.367(a)–3(d)(2), 1.367(a)–3T(e)(3)
and (e)(6), 1.367(a)–7T(e), 1.1248(f)–3T,
and 1.6038–1T(f). The collections of
information are mandatory. The likely
respondents are domestic corporations.
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. Books and records relating to a
collection of information must be
retained as long as their contents might
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
On August 20, 2008, the Department
of the Treasury (Treasury Department)
and the Internal Revenue Service (IRS)
issued proposed regulations under
sections 367, 1248, and 6038B of the
Internal Revenue Code (Code) (2008
proposed regulations) concerning
transfers of property by a domestic
corporation to a foreign corporation in
an exchange described in section 361(a)
or (b) (section 361 exchange), and
certain nonrecognition distributions of
stock of a foreign corporation by a
domestic corporation (REG–209006–89,
73 FR 49278; 2008–41 IRB 867). A
correction to the 2008 proposed
regulations was published in the
Federal Register on September 26, 2008;
73 FR 56535 (2008–41 IRB 867). No
public hearing on the 2008 proposed
regulations was requested or held;
however, comments were received. All
comments are available at
www.regulations.gov or upon request.
Based, in part, on comments received,
the Treasury Department and the IRS
adopt portions of the 2008 proposed
regulations, with modifications, as final
regulations elsewhere in this issue of
the Federal Register. A portion of the
2008 proposed regulations is adopted,
with modifications, in this Treasury
decision as temporary regulations.
On February 11, 2009, the Treasury
Department and the IRS issued final
regulations under section 367 (2009
final regulations) concerning gain
recognition agreements with respect to
certain transfers of stock or securities by
United States persons to foreign
corporations (TD 9446, 74 FR 6952;
2009–9 IRB 607). A correction to the
2009 final regulations was published in
the Federal Register on March 27, 2009
(74 FR 13340; 2009–13 IRB 731). The
2009 final regulations included
regulations addressing the transfer of

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stock or securities by a domestic
corporation to a foreign corporation in
a section 361 exchange. The portion of
the 2009 final regulations concerning
outbound transfers of stock or securities
in a section 361 exchange is withdrawn,
revised, and issued in this Treasury
decision as temporary regulations.
Explanation of Provisions
A. Coordination Rule and Exceptions—
In General
Section 1.367(a)–3(d)(2)(vi)(A)
(coordination rule) provides that if in
connection with an indirect stock
transfer, as defined in § 1.367(a)–3(d)(1),
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 apply first to the direct asset
transfer and then to the indirect stock
transfer. There are three exceptions to
the coordination rule, as described in
this preamble.
Two exceptions to the coordination
rule provide that section 367(a) and (d)
do not apply to any assets transferred by
a domestic acquired corporation to a
foreign acquiring corporation in an asset
reorganization that are re-transferred to
a domestic corporation that is controlled
by the foreign acquiring corporation
(domestic controlled corporation).
These exceptions only apply, however,
if the domestic controlled corporation’s
basis in the re-transferred assets is not
greater than the domestic acquired
corporation’s basis in such assets (the
basis comparison rule), and the
conditions described in § 1.367(a)–
3(d)(2)(vi)(B)(1)(i) (section 367(a)(5)
exception) or (d)(2)(vi)(B)(1)(ii) (indirect
domestic stock transfer exception) are
satisfied. See § 1.367(a)–3(d)(2)(vi)(B)(1).
The section 367(a)(5) exception applies
only if the reorganization satisfies the
conditions described in section
367(a)(5) and any regulations issued
pursuant to section 367(a)(5). For
example, the domestic acquired
corporation must be controlled (within
the meaning of section 368(c)) by 5 or
fewer domestic corporations, and basis
adjustments must be made to the stock
of the foreign acquiring corporation
received in the reorganization. See
§ 1.367(a)–7(c).
The indirect domestic stock transfer
exception applies only if the
requirements of § 1.367(a)–3(c)(1)(i),
(c)(1)(ii), and (c)(1)(iv) are satisfied with
respect to the indirect stock transfer of
stock in the domestic acquired
corporation, and certain filing
requirements are satisfied.

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The third exception (section 351
exception) to the coordination rule
applies if a U.S. person (U.S. transferor)
transfers assets to a foreign corporation
in a section 351 exchange, to the extent
that such assets are transferred by such
foreign corporation to a domestic
corporation in another section 351
exchange. See § 1.367(a)–
3(d)(2)(vi)(B)(2). Consistent with the
section 367(a)(5) exception and the
indirect domestic stock transfer
exception, the section 351 exception
only applies if the domestic transferee’s
basis in the assets is not greater than the
basis that the U.S. transferor had in such
assets.
B. Notice 2008–10 and 2008 Proposed
Regulations
On December 28, 2007, the Treasury
Department and the IRS issued Notice
2008–10 (2008–1 CB 277) in response to
outbound asset reorganization
transactions that relied on the section
367(a)(5) exception to repatriate
earnings of a foreign corporation
without the recognition of a
corresponding amount of gain or income
inclusion. Notice 2008–10 announced
that the section 367(a) exception would
be revised to clarify that any adjustment
to basis required under section 367(a)(5)
can only be made to stock of the foreign
acquiring corporation received by the
controlling domestic corporate
shareholders in the asset reorganization.
In addition, the notice 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 controlling domestic
corporate shareholders in the
reorganization, the domestic acquired
corporation’s transfer of property to the
foreign acquiring corporation is subject
to section 367(a) and (d) (see
§ 601.601(d)(2)(ii)(b)).
The 2008 proposed regulations would
amend the current regulations to
incorporate, with modifications, the
clarifications to the section 367(a)(5)
exception announced in Notice 2008–
10. In addition, the preamble to the
2008 proposed regulations states that
the Treasury Department and the IRS
continue to study transactions that have
the effect of repatriating earnings and
profits of a foreign corporation without
the recognition of gain or a dividend
inclusion.
The 2008 proposed regulations also
would modify the section 367(a)(5)
exception and the indirect domestic
stock transfer exception to provide that
for purposes of determining whether the
domestic controlled corporation’s basis

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in the re-transferred assets is not greater
than the domestic acquired
corporation’s basis in such assets, any
increase in basis that results from gain
recognized by the domestic acquired
corporation on the transfer of the retransferred assets to the foreign
acquiring corporation is not taken into
account.
C. Elimination of Section 367(a)(5)
Exception
The Treasury Department and the IRS
have become aware of additional
transactions involving outbound asset
reorganizations that involve the
repatriation of earnings and profits of a
foreign corporation where taxpayers
take the position that the transaction
does not require the recognition of gain
or a dividend inclusion. These
transactions, which rely on the section
367(a)(5) exception and are structured to
avoid gain recognition under section
367(a), may not be affected by the
clarifications made to the section
367(a)(5) exception in Notice 2008–10.
In one such transaction, for example,
the foreign acquiring corporation issues
stock and property other than qualified
property (within the meaning of section
361(c)(2)(B)) in the reorganization and
transfers property that is not eligible for
an exception to section 367(a)(1) (such
as property used in the United States) to
a domestic controlled corporation. The
amount of stock issued by the foreign
acquiring corporation is sufficient to
preserve the built-in gain in the
property transferred to it by the
domestic acquired corporation in the
section 361 exchange. Thus, the parties
take the position that the section
367(a)(5) exception applies and that no
gain is recognized on the transfer under
section 367(a).
Although these types of transactions
are not directly covered by Notice 2008–
10, they give rise to the same
repatriation concerns that the notice
was intended to address.
The Treasury Department and the IRS
have, over time, clarified and modified
the coordination rule exceptions to
address various transactions that give
rise to policy concerns. See, for
example, TD 9243 (2006–1 CB 475) and
Notice 2008–10. These transactions
typically do not involve transactions
with unrelated parties, but instead arise
in connection with transactions with
affiliates that appear to be primarily
motivated to achieve U.S. tax benefits.
After studying these issues further,
including in light of the transactions
discussed above, the Treasury
Department and the IRS no longer
believe the section 367(a)(5) exception
is appropriate. As a result, the section

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367(a)(5) exception is eliminated by the
temporary regulations. The indirect
domestic stock transfer exception,
however, which involves transactions
between unrelated parties, is retained.
The Treasury Department and the IRS
continue to study nonrecognition
transactions that are intended to
repatriate earnings and profits of foreign
corporations without the recognition of
gain or a dividend inclusion.
D. Domestic Transferee’s Basis in Assets
for Purposes of the Section 351
Exception
In response to a comment, the
temporary regulations modify the basis
comparison rule in the section 351
exception so that it is consistent with
the basis comparison rule in the indirect
domestic stock transfer exception, as
modified by the 2008 proposed
regulations. Thus, the section 351
exception is modified in the temporary
regulations to provide that for purposes
of determining whether the domestic
transferee’s basis in the assets is not
greater than the U.S. transferor’s basis in
the assets, any increase in basis that
results from gain recognized by the U.S.
transferor with respect to such assets in
the initial section 351 exchange is not
taken into account.
E. Transfers of Stock or Securities in an
Outbound Section 361 Exchange
The current final regulations under
§ 1.367(a)-3(e) provide the general rule
that the outbound transfer of stock or
securities in a section 361 exchange is
subject to section 367(a)(1), unless
specified conditions are satisfied. One
condition is that the requirements of
section 367(a)(5) and any regulations
thereunder must be satisfied. Another
condition is that any control group
member that owns (with attribution)
five percent or more of the stock (by
vote or value) of the transferee foreign
corporation immediately after the
transaction must enter into a gain
recognition agreement with respect to
the control group member’s share of the
gain (based on its ownership interest in
the U.S. transferor) (GRA requirement).
In connection with final regulations
under section 367(a)(5), published
elsewhere in this issue of the Federal
Register, these temporary regulations
make conforming modifications to the
GRA requirement such that the fivepercent ownership threshold is
determined by reference to the U.S.
transferor’s ownership of the transferee
foreign corporation (rather than by
reference to ownership of the transferee
foreign corporation by control group
members). For this purpose, ownership
is determined immediately after the U.S.

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Federal Register / Vol. 78, No. 53 / Tuesday, March 19, 2013 / Rules and Regulations
transferor’s transfer of the stock or
securities to the transferee foreign
corporation in the section 361 exchange,
but prior to and without taking into
account the U.S. transferor’s
distribution under section 361(c) of the
stock received. If the U.S. transferor
meets the five-percent ownership
threshold with respect to the transferee
foreign corporation, then two conditions
must be satisfied in order to be eligible
to file a GRA. The first condition is that
each shareholder of the U.S. transferor
that is a ‘‘qualified U.S. person’’
(generally, any U.S. person except
domestic partnerships or special
corporate entities that are not subject to
tax) and satisfies the five-percent
ownership threshold must enter into a
gain recognition agreement, unless the
amount of gain that would otherwise be
subject to the gain recognition
agreement is zero. The gain recognition
agreement is subject to rules in addition
to those required under § 1.367(a)–8,
including special rules for determining
the amount of gain subject to the gain
recognition agreement. The second
condition is that the U.S. transferor
must recognize gain realized on the
transferred stock or securities
attributable to shareholders that are not
qualified U.S. persons or do not satisfy
the five-percent ownership threshold.
The Treasury Department and the IRS
believe that applying the five-percent
ownership threshold at the U.S.
transferor-level is more consistent with
the policy underlying gain recognition
agreements. In addition, this change is
consistent with the application of
§ 1.367(b)–4(b)(1) to outbound transfers
of foreign stock in a section 361
exchange. See § 1.367(b)–4(b)(1)(iii),
Example 4.
Other changes to the current final
regulations under § 1.367(a)–3(e)
conform the rules under § 1.367(a)–
3T(e) with other provisions, such as the
final regulations under §§ 1.367(a)–7,
1.367(b)–4, 1.1248(f)–1, and 1.1248(f)–2.
For example, the regulations provide
that § 1.367(a)–3T(e) is applied prior to
taking into account gain or deemed
dividends under any other provisions of
section 367, such as under §§ 1.367(a)–
6T, 1.367(a)–7, or 1.367(b)–4.
The other requirements necessary for
nonrecognition under the current final
regulations of § 1.367(a)–3(e) are
generally retained, with certain
modifications. For example, if the
transferred stock or securities are of a
domestic corporation, the reporting
requirements under § 1.367(a)–3(c)(6)
must be satisfied, in addition to the
requirements under § 1.367(a)–3(c)(1)(i),
(c)(1)(ii), and (c)(1)(iv).

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F. Coordination of Gain Recognition
Rules
In connection with final regulations
under section 367(a)(5), published
elsewhere in this issue of the Federal
Register, these temporary regulations
make a conforming modification to the
current temporary regulations under
§ 1.367(a)–6T by adding a sentence
providing that the amount of gain
recognized under the branch loss
recapture rules is determined prior to
determining the amount of any gain
recognized under § 1.367(a)–7.
Accordingly, any gain recognized under
the branch loss recapture rules is taken
into account in determining the amount
of any gain recognized under
§ 1.367(a)–7.
G. Reasonable Cause Relief Procedures
The 2008 proposed regulations
contain reasonable cause relief
provisions in § 1.367(a)–7(e)(2),
§ 1.1248(f)–3, and § 1.6038B–1(f)(3)
(reasonable cause procedures), pursuant
to which a taxpayer’s failure to timely
comply with certain requirements will
be deemed not to have occurred if the
failure was due to reasonable cause and
not willful neglect. These reasonable
cause procedures include a provision
that a taxpayer will be deemed to have
established that the failure to comply
was due to reasonable cause and not
willful neglect if the taxpayer requesting
relief is not notified by the IRS within
120 days of IRS acknowledgement of
receipt of the request. The Treasury
Department and the IRS do not believe
that the IRS’s processing time with
respect to a relief request should be a
determining factor in whether a
taxpayer has satisfied its filing
obligations. Accordingly, these
temporary regulations eliminate the
120-day provision from the reasonable
cause procedures. Other than the
elimination of the 120-day provision,
the reasonable cause procedures are
retained in the temporary regulations.
Effective/Applicability Dates
The regulations apply to transactions
occurring on or after March 18, 2013.

17055

regulations will not have a significant
economic impact on a substantial
number of small entities. Accordingly, a
regulatory flexibility analysis is not
required. These regulations primarily
will affect United States persons that are
large corporations engaged in corporate
transactions among their controlled
corporations. Thus, the number of
affected small entities—in whichever of
the three categories defined in the
Regulatory Flexibility Act (small
businesses, small organizations, and
small governmental jurisdictions)—will
not be substantial. The IRS and the
Treasury Department estimate that small
organizations and small governmental
jurisdictions are likely to be affected
only insofar as they transfer the stock of
a controlled corporation to a related
corporation. While a certain number of
small entities may engage in such
transactions, the IRS and the Treasury
Department do not anticipate the
number to be substantial. Pursuant to
section 7805(f) of the Code, this
regulation has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Drafting Information
The principal author of these
regulations is Robert B. Williams, Jr., of
the Office of Associate Chief Counsel
(International). However, other
personnel from the Treasury
Department and the IRS participated in
their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES

Effect on Other Documents
The following publication is obsolete
as of March 19, 2013:
Notice 2008–10 (2008–1 CB 277).

■

Special Analyses
It has been determined that these
temporary regulations are not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
is hereby certified that the collections of
information contained in these

Authority: 26 U.S.C. 7805 * * *
1.367(a)-3T is also issued under 26 U.S.C.
367(a).

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Paragraph 1. The authority citation
for part 1 is amended by adding an entry
in numerical order to read in part as
follows:

Par. 2. Section 1.367(a)–3 is amended
by:
■ 1. Revising paragraph (d)(2)(vi)(B).
■ 2. Revising paragraph (d)(3) Examples
6B, 6C, and 9.
■ 3. Revising paragraph (e).
■

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4. Revising paragraph (g)(1)(vii)(A).
5. Adding paragraph (g)(1)(ix).
6. Adding paragraph (k).
The revisions and additions read as
follows:

■
■
■

§ 1.367(a)-3 Treatment of transfers of
stock or securities to foreign corporations.

*

*
*
*
*
(d) * * *
(2) * * *
(vi) * * *
(B) [Reserved]. For further guidance,
see § 1.367(a)–3T(d)(2)(vi)(B).
*
*
*
*
*
(3) * * *
Example 6B. [Reserved]. For further
guidance, see § 1.367(a)–3T(d)(3),
Example 6B.
Example 6C. [Reserved]. For further
guidance, see § 1.367(a)–3T(d)(3),
Example 6C.
*
*
*
*
*
Example 9. [Reserved]. For further
guidance, see § 1.367(a)–3T(d)(3),
Example 9.
*
*
*
*
*
(e) [Reserved]. For further guidance,
see § 1.367–3T(e).
*
*
*
*
*
(g) * * *
(1) * * *
(vii)(A) [Reserved]. For further
guidance, see § 1.367–3T(g)(1)(vii)(A).
*
*
*
*
*
(ix) [Reserved]. For further guidance,
see § 1.367–3T(g)(1)(ix).
*
*
*
*
*
(k) [Reserved]. For further guidance,
see § 1.367–3T(k).
Par. 3. Section 1.367(a)–3T is added
to read as follows:

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§ 1.367(a)–3T Treatment of transfers of
stock or securities to foreign corporations
(temporary).

(a) through (d)(2)(vi)(A) [Reserved].—
For further guidance, see § 1.367(a)–3(a)
through (d)(2)(vi)(A).
(B) Exceptions. (1) If a transaction is
described in paragraph (d)(2)(vi)(A) of
this section, section 367(a) and (d) will
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 those assets (re-transferred assets)
are transferred to a domestic corporation
(domestic controlled corporation) in a
controlled asset transfer, provided that
each of the following conditions is
satisfied:
(i) The domestic controlled
corporation’s adjusted basis in the retransferred assets is not greater than the
domestic acquired corporation’s
adjusted basis in those assets. For this

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purpose, any increase in basis in the retransferred assets that results because
the domestic acquired corporation
recognized gain or income with respect
to the re-transferred assets in the
transaction is not taken into account.
(ii) The domestic acquired corporation
includes a statement described in
paragraph (d)(2)(vi)(C) of this section
with its U.S. income tax return for the
taxable year of the transfer; and
(iii) The requirements of paragraphs
(c)(1)(i), (c)(1)(ii), (c)(1)(iv), and (c)(6) of
this section are satisfied with respect to
the indirect transfer of stock in the
domestic acquired corporation.
(2) Sections 367(a) and (d) shall not
apply to transfers described in
paragraph (d)(1)(vi) of this section if a
U.S. person transfers assets to a foreign
corporation in a section 351 exchange,
to the extent that such assets are
transferred by such foreign corporation
to a domestic corporation in another
section 351 exchange, but only if the
domestic transferee’s adjusted basis in
the assets is not greater than the
adjusted basis that the U.S. person had
in such assets. Any increase in adjusted
basis in the assets that results because
the U.S. person recognized gain or
income with respect to such assets in
the initial section 351 exchange is not
taken into account for purposes of
determining whether the domestic
transferee’s adjusted basis in the assets
is not greater than the U.S. person’s
adjusted basis in such assets. This
paragraph (d)(2)(vi)(B)(2) will 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.
(C) through (d)(3), Example 6A
[Reserved]. For further guidance, see
§ 1.367(a)–3(d)(2)(vi)(C) through (d)(3),
Example 6A.
Example 6B. Section 368(a)(1)(C)
reorganization followed by a controlled asset
transfer to a domestic controlled
corporation—(i) Facts. The facts are the same
as in paragraph (d)(3), Example 6A of this
section, except that R is a domestic
corporation.
(ii) Result. As in paragraph (d)(3) Example
6A of this section, the outbound transfer of
the Business A assets to F is not affected by
the rules of § 1.367–3(d) and is subject to the
general rules under section 367. 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). The Business B
and C assets are part of an indirect stock
transfer under § 1.367–3(d), but must first be
tested under section 367(a) and (d). The

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Business B assets qualify for the active trade
or business exception under section
367(a)(3); the Business C assets do not.
However, pursuant to paragraph
(d)(2)(vi)(B)(1) of this section, 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 not greater
than the basis of the assets in the hands of
Z, the requirements of paragraphs (c)(1)(i),
(c)(1)(ii), (c)(1)(iv), and (c)(6) of this section
are satisfied, and Z attaches a statement
described in paragraphs (d)(2)(vi)(C) of this
section to its U.S. income tax return for the
taxable year of the transfer. V also is deemed
to make an indirect transfer of Z stock under
the rules of paragraph (d) of this section to
the extent the assets are transferred to R. To
preserve non-recognition treatment, and
assuming the other requirements of
paragraph (c) of this section are satisfied, V
must enter into a gain recognition agreement
in the amount of $50, which equals the
aggregate gain in the Business B and C assets,
because the transfer of those assets by Z was
not taxable under section 367(a)(1) and
constitute an indirect stock transfer.
Example 6C. Section 368(a)(1)(C)
reorganization followed by a controlled asset
transfer to a domestic controlled
corporation—(i) Facts. The facts are the same
as in Example 6B, except that Z is owned by
U.S. individuals, none of whom qualify as
five-percent target shareholders with respect
to Z within the meaning of paragraph
(c)(5)(iii) of this section. The following
additional facts are present. No U.S. persons
that are either officers or directors of Z own
any stock of F immediately after the transfer.
F is engaged in an active trade or business
outside the United States that satisfies the
test set forth in paragraph (c)(3) of this
section.
(ii) Result. The Business A assets
transferred to F are not re-transferred to R
and therefore Z’s transfer of these assets is
not subject to the rules of paragraph (d) of
this section. However, gain must be
recognized on the transfer of those 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 Business B and C
assets are part of an indirect stock transfer
under paragraph (d) of this section, but must
first be tested with respect to Z under section
367(a) and (d), as provided in paragraph
(d)(2)(vi) of this section. 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). The transfer of
the Business C assets generally is subject to
section 367(a)(1) because these assets do not
qualify for the active trade or business
exception under section 367(a)(3). However,
pursuant to paragraph (d)(2)(vi)(B) of this
section, the transfer of the Business B and C
assets is not subject to sections 367(a)(1) and
(d), provided the basis of the Business B and
C assets in the hands of R is no greater than
the basis in the hands of Z and certain other
requirements are satisfied. Z may avoid
immediate gain recognition under section
367(a) and (d) on the transfers of the Business

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B and Business C assets to F if, pursuant to
paragraph (d)(2)(vi)(B) of this section, the
indirect transfer of Z stock satisfies the
requirements of paragraphs (c)(1)(i), (c)(1)(ii),
(c)(1)(iv), and (c)(6) of this section, and Z
attaches a statement described in paragraph
(d)(2)(vi)(C) of this section to its U.S. income
tax return for the taxable year of the transfer.
In general, the statement must contain a
certification that, if F disposes of the stock
of R (in a recognition or nonrecognition
transaction) and a principal purpose of the
transfer is the avoidance of U.S. tax that
would have been imposed on Z on the
disposition of the Business B and C assets
transferred to R, then Z (or F on behalf of Z)
will file a return (or amended return as the
case may be) recognizing gain ($50), as if,
immediately prior to the reorganization, Z
transferred the Business B and C assets to a
domestic corporation in exchange for stock in
a transaction treated as a section 351
exchange and immediately sold such stock to
an unrelated party for its fair market value.
A transaction is deemed to have a principal
purpose of U.S. tax avoidance if F disposes
of R stock within two years of the transfer,
unless Z (or F on behalf of Z) can rebut the
presumption to the satisfaction of the
Commissioner. See paragraph (d)(2)(vi)(D)(2)
of this section. With respect to the indirect
transfer of Z stock, assume the requirements
of paragraphs (c)(1)(i), (c)(1)(ii), and (c)(1)(iv)
of this section are satisfied. Thus, assuming
Z attaches the statement described in
paragraph (d)(2)(vi)(C) of this section to its
U.S. income tax return and satisfies the
reporting requirements of paragraph (c)(6) of
this section, the transfer of Business B and
C assets is not subject to immediate gain
recognition under section 367(a) or (d).

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Example 7 through Example 8(C)
[Reserved]. For further guidance, see
§ 1.367(a)–3(d)(3), Example 7 through
(d)(3), Example 8(C).
Example 9. Indirect stock transfer by
reason of a controlled asset transfer—(i)
Facts. The facts are the same as in paragraph
(d)(3) Example 8 of this section, except that
R transfers the Business A assets to M, a
wholly owned domestic subsidiary of R, in
a controlled asset transfer. In addition, V’s
basis in its Z stock is $90.
(ii) Result. Pursuant to paragraph
(d)(2)(vi)(B) of this section, sections 367(a)
and (d) do not apply to Z’s transfer of the
Business A assets to R if M’s basis in the
Business A assets is not greater than the basis
of the assets in the hands of Z, the
requirements of paragraphs (c)(1)(i), (c)(1)(ii),
(c)(1)(iv), and (c)(6) of this section are
satisfied, and Z includes a statement
described in paragraph (d)(2)(vi)(C) of this
section with its U.S. income tax return for the
taxable year of the transfer. 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). Pursuant to paragraphs (d)(1) and
(d)(2)(vii)(A)(1) of this section, V is generally
deemed to transfer the stock of a foreign
corporation to F in a section 354 exchange
subject to the rules of paragraphs (b) and (d)

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of this section, including the requirement
that V enter into a gain recognition agreement
and comply with the requirements of
§ 1.367(a)–8. However, pursuant to paragraph
(d)(2)(vii)(B), paragraph (d)(2)(vii)(A) of this
section does not apply to the extent of the
transfer of business A assets by R to M, a
domestic corporation. As a result, to the
extent of the business A assets transferred by
R to M, V is deemed to transfer the stock of
Z (a domestic corporation) to F in a section
354 exchange subject to the rules of
paragraphs (c) and (d) of this section. Thus,
with respect to V’s indirect transfer of stock
of a domestic corporation to F, such transfer
is not subject to gain recognition under
section 367(a)(1) if the requirements of
paragraph (c) of this section are satisfied,
including the requirement that V enter into
a gain recognition agreement (separate from
the gain recognition agreement described
above with respect to the deemed transfer of
stock of a foreign corporation to F) and
comply with the requirements of § 1.367(a)–
8. Under paragraphs (d)(2)(i) and (d)(2)(ii) of
this section, the transferee foreign
corporation is F and the transferred
corporation is R (with respect to the transfer
of stock of a foreign corporation) and M (with
respect to the transfer of stock of a domestic
corporation). Pursuant to paragraph (d)(2)(iv)
of this section, a disposition by F of the stock
of R would trigger both gain recognition
agreements. In addition, a disposition by R of
the stock of M would trigger the gain
recognition agreement filed with respect to
the transfer of the stock of a domestic
corporation. To determine whether there is a
triggering event under § 1.367(a)–8(j)(2)(i) for
the gain recognition agreement filed with
respect to the transfer of stock of the
domestic corporation, the Business A assets
in M must be considered. To determine
whether there is such a triggering event for
the gain recognition agreement filed with
respect to the transfer of stock of the foreign
corporation, the Business B assets in R must
be considered.

Example 10 through Example 16
[Reserved]. For further guidance, see
§ 1.367(a)–3(d)(3), Example 10 through
Example 16.
(e) Transfers of stock or securities by
a domestic corporation to a foreign
corporation in a section 361 exchange—
(1) Overview—(i) Scope and definitions.
This paragraph (e) applies to a domestic
corporation (U.S. transferor) that
transfers stock or securities of a
domestic or foreign corporation
(transferred stock or securities) to a
foreign corporation (foreign acquiring
corporation) in a section 361 exchange.
Except as otherwise provided in this
paragraph (e), paragraphs (b) and (c) of
this section do not apply to the U.S.
transferor’s transfer of the transferred
stock or securities in the section 361
exchange. For purposes of this
paragraph (e), the definitions of control
group, control group member, and noncontrol group member in § 1.367(a)–
7(f)(1), ownership interest percentage in

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17057

§ 1.367(a)–7(f)(7), section 361 exchange
in § 1.367(a)–7(f)(8), and U.S. transferor
shareholder in § 1.367(a)–7(f)(13), shall
apply.
(ii) Ordering rules. Except as
otherwise provided, this paragraph (e)
shall apply to the transfer of the
transferred stock or securities in the
section 361 exchange prior to the
application of any other provision of
section 367 to such transfer.
Furthermore, any gain recognized
(including gain treated as a deemed
dividend pursuant to section 1248(a)) by
the U.S. transferor under this paragraph
(e) shall be taken into account for
purposes of applying any other
provision of section 367 (including
§§ 1.367(a)–6T, 1.367(a)–7, and
1.367(b)–4) to the transfer of the
transferred stock or securities.
(2) General rule. Except as provided
in paragraph (e)(3) of this section, the
transfer by the U.S. transferor of the
transferred stock or securities to the
foreign acquiring corporation in the
section 361 exchange shall be subject to
section 367(a)(1), and therefore the U.S.
transferor shall recognize any gain (but
not loss) realized with respect to the
transferred stock or securities. Realized
gain is recognized pursuant to the prior
sentence notwithstanding that the
transfer is described in any other
nonrecognition provision enumerated in
section 367(a)(1) (such as section 351 or
354).
(3) Exception. The general rule of
paragraph (e)(2) of this section shall not
apply if the conditions of paragraphs
(e)(3)(i), (e)(3)(ii), and (e)(3)(iii) of this
section are satisfied.
(i) The conditions set forth in
§ 1.367(a)–7(c) are satisfied with respect
to the section 361 exchange.
(ii) If the transferred stock or
securities are of a domestic corporation,
the U.S. target company (as defined in
paragraph (c)(1) of this section)
complies with the reporting
requirements of paragraph (c)(6) of this
section, and the conditions of
paragraphs (c)(1)(i), (c)(1)(ii), and
(c)(1)(iv) of this section are satisfied
with respect to the transferred stock or
securities.
(iii) If the U.S. transferor owns
(applying the attribution rules of section
318, as modified by section 958(b)) five
percent or more of the total voting
power or the total value of the stock of
the transferee foreign corporation
immediately after the transfer of the
transferred stock or securities in the
section 361 exchange, then the
conditions set forth in paragraphs
(e)(3)(iii)(A), (e)(3)(iii)(B), and
(e)(3)(iii)(C) of this section are satisfied.

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(A) Except as otherwise provided in
this paragraph (e)(3)(iii)(A), each U.S.
transferor shareholder that is a qualified
U.S. person (as defined in paragraph
(e)(6)(vii) of this section) owning
(applying the attribution rules of section
318, as modified by section 958(b)) five
percent or more of the total voting
power or the total value of the stock of
the transferee foreign corporation
immediately after the reorganization
enters into a gain recognition agreement
that satisfies the conditions of paragraph
(e)(6) of this section and § 1.367(a)–8. A
U.S. transferor shareholder is not
required to enter into a gain recognition
agreement pursuant to this paragraph if
the amount of gain that would be
subject to the gain recognition
agreement (as determined under
paragraph (e)(6)(i) of this section) is
zero.
(B) With respect to non-control group
members that are not described in
paragraph (e)(3)(iii)(A) of this section,
the U.S. transferor recognizes gain equal
to the product of the aggregate
ownership interest percentage of such
non-control group members multiplied
by the gain realized by the U.S.
transferor on the transfer of the
transferred stock or securities.
(C) With respect to each control group
member that is not described in
paragraph (e)(3)(iii)(A) of this section,
the U.S. transferor recognizes gain equal
to the product of the ownership interest
percentage of such control group
member multiplied by the gain realized
by the U.S. transferor on the transfer of
the transferred stock or securities.
(4) Application of certain rules at U.S.
transferor-level. For purposes of
paragraphs (c)(5)(iii), (e)(3)(ii), and
(e)(3)(iii) of this section, ownership of
the stock of the transferee foreign
corporation is determined by reference
to stock owned by the U.S. transferor
immediately after the transfer of the
transferred stock or securities to the
foreign acquiring corporation in the
section 361 exchange, but prior to and
without taking into account the U.S.
transferor’s distribution under section
361(c)(1) of the stock received.
(5) Transferee foreign corporation—(i)
General rule. Except as provided in
paragraph (e)(5)(ii) of this section, the
transferee foreign corporation for
purposes of applying paragraph (e) of
this section and § 1.367(a)–8 shall be the
foreign corporation that issues stock or
securities to the U.S. transferor in the
section 361 exchange.
(ii) Special rule for triangular asset
reorganizations involving the receipt of
stock or securities of a domestic
corporation. In the case of a triangular
asset reorganization described in

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§§ 1.358–(6)(b)(2)(i), (b)(2)(ii) or
(b)(2)(iii), or § 1.358–6(b)(2)(v)
(triangular asset reorganization) in
which the U.S. transferor receives stock
or securities of a domestic corporation
that is in control (within the meaning of
section 368(c)) of the foreign acquiring
corporation, the transferee foreign
corporation shall be the foreign
acquiring corporation.
(6) Special requirements for gain
recognition agreements. A gain
recognition agreement filed by a U.S.
transferor shareholder pursuant to
paragraph (e)(3)(iii)(A) of this section is,
in addition to the terms and conditions
of § 1.367(a)–8, subject to the conditions
of this section (e)(6).
(i) The amount of gain subject to the
gain recognition agreement shall equal
the product of the ownership interest
percentage of the U.S. transferor
shareholder multiplied by the gain
realized by the U.S. transferor on the
transfer of the transferred stock or
securities, reduced (but not below zero)
by the sum of the amounts described in
paragraphs (e)(6)(i)(A), (e)(6)(i)(B),
(e)(6)(i)(C), and (e)(6)(i)(D) of this
section.
(A) Gain recognized by the U.S.
transferor with respect to the transferred
stock or securities under section
367(a)(1) (including any portion treated
as a deemed dividend under section
1248(a)) that is attributable to such U.S.
transferor shareholder pursuant to
§ 1.367(a)–7(c)(2) or § 1.367(a)–7(e)(5).
(B) A deemed dividend included in
the income of the U.S. transferor with
respect to the transferred stock under
§ 1.367(b)–4(b)(1)(i) that is attributable
to such U.S. transferor shareholder
pursuant to § 1.367(a)–(e)(4).
(C) If the U.S. transferor shareholder
is subject to an election under
§ 1.1248(f)–2(c)(1), a deemed dividend
included in the income of the U.S.
transferor pursuant to § 1.1248(f)–2(c)(3)
that is attributable to the U.S. transferor
shareholder.
(D) If the U.S. transferor shareholder
is not subject to an election under
§ 1.1248(f)–2(c)(1), the hypothetical
section 1248 amount (as defined in
§ 1.1248(f)–1(c)(4)) with respect to the
stock of each foreign corporation
transferred in the section 361 exchange
attributable to the U.S. transferor
shareholder.
(ii) The gain recognition agreement
shall include the election described in
§ 1.367(a)–8(c)(2)(vi).
(iii) The gain recognition agreement
shall designate the U.S. transferor
shareholder as the U.S. transferor for
purposes of § 1.367(a)–8.
(iv) If the transfer of the transferred
stock or securities in the section 361

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exchange is pursuant to a triangular
asset reorganization, the gain
recognition agreement shall include
appropriate provisions that are
consistent with the principles of
§ 1.367(a)–8 for gain recognition
agreements involving multiple parties.
See § 1.367(a)–8(j)(9).
(v) The gain recognition agreement
shall not be eligible for termination
upon a taxable disposition pursuant to
§ 1.367(a)–8(o)(1) unless the value of the
stock or securities received by the U.S.
transferor shareholder in exchange for
the stock or securities of the U.S.
transferor under section 354 or 356 is at
least equal to the amount of gain subject
to the gain recognition agreement filed
by such U.S. transferor shareholder.
(vi) Except as otherwise provided in
this paragraph (e)(6)(vi), if gain is
subsequently recognized by the U.S.
transferor shareholder under the terms
of the gain recognition agreement
pursuant to § 1.367(a)–8(c)(1)(i), the
increase in stock basis provided under
§ 1.367(a)–8(c)(4)(i) with respect to the
stock received by the U.S. transferor
shareholder shall not exceed the amount
of the stock basis adjustment made
pursuant to § 1.367(a)–7(c)(3) with
respect to the stock received by the U.S.
transferor shareholder. This paragraph
(e)(6)(vi) shall not apply if the U.S.
transferor shareholder and the U.S.
transferor are members of the same
consolidated group at the time of the
reorganization.
(vii) For purposes of this section, a
qualified U.S. person means a U.S.
person, as defined in § 1.367(a)–
1T(d)(1), but for this purpose does not
include domestic partnerships,
regulated investment companies (as
defined in section 851(a)), real estate
investment trusts (as defined in section
856(a)), and S corporations (as defined
in section 1361(a)).
(7) Gain subject to section 1248(a). If
the U.S. transferor recognizes gain
under paragraphs (e)(3)(iii)(B) or
(e)(3)(iii)(C) of this section with respect
to transferred stock that is stock in a
foreign corporation to which section
1248(a) applies, then the portion of such
gain treated as a deemed dividend
under section 1248(a) is the product of
the amount of the gain multiplied by the
section 1248(a) ratio. The section
1248(a) ratio is the ratio of the amount
that would be treated as a deemed
dividend under section 1248(a) if all the
gain in the transferred stock were
recognized to the amount of gain
realized in all the transferred stock.
(8) Examples. The following examples
illustrate the provisions of paragraph (e)
of this section. Except as otherwise
indicated: US1, US2, and UST are

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domestic corporations that are not
members of a consolidated group; X is
a United States citizen; US1, US2, and
X are unrelated parties; CFC1, CFC2,
and FA are foreign corporations; each
corporation described herein has a
single class of stock issued and
outstanding and a tax year ending on
December 31; the section 1248 amount
(within the meaning of § 1.367(b)–2(c))
with respect to the stock of CFC1 and
CFC2 is zero; Asset A is section 367(a)
property that, but for the application of
section 367(a)(5), would qualify for the
active foreign trade or business
exception under § 1.367(a)–2T; the
requirements of § 1.367(a)–7(c)(2)
through 1.367(a)–7(c)(5) are satisfied
with respect to a section 361 exchange;
the provisions of § 1.367(a)–6T
(regarding branch loss recapture) are not
applicable; and none of the foreign
corporations in the examples is a
surrogate foreign corporation (within
the meaning of section 7874) as a result
of the transactions described in the
examples because one or more of the
conditions of section 7874(a)(2)(B) is not
satisfied.
Example 1. U.S. transferor owns less than
5% of stock of transferee foreign corporation.
(i) Facts. US1, US2, and X own 80%, 5%,
and 15%, respectively, of the stock of UST
with a fair market value of $160x, $10x, and
$30x, respectively. UST has two assets, Asset
A and 100% of the stock of CFC1. UST has
no liabilities. Asset A has a $150x basis and
$100x fair market value (as defined in
§ 1.367(a)–7(f)(3)), and the CFC1 stock has a
$0x basis and $100x fair market value. UST
transfers Asset A and the CFC1 stock to FA
solely in exchange for $200x of FA voting
stock in a reorganization described in section
368(a)(1)(C). UST’s transfer of Asset A and
the CFC1 stock to FA qualifies as a section
361 exchange. UST distributes the FA stock
received in the section 361 exchange to US1,
US2, and X pursuant to the plan of
reorganization, and liquidates. US1 receives
$160x of FA stock, US2 receives $10x of FA
stock, and X receives $30x of FA stock in
exchange for the UST stock. Immediately
after the transfer of Asset A and the CFC1
stock to FA in the section 361 exchange, but
prior to and without taking into account
UST’s distribution of the FA stock pursuant
to section 361(c)(1), UST does not own
(applying the attribution rules of section 318,
as modified by section 958(b)) five percent or
more of the total voting power or the total
value of the stock of FA.
(ii) Result. (A) UST’s transfer of the CFC1
stock to FA in the section 361 exchange is
subject to the provisions of this paragraph (e),
and this paragraph (e) applies to the transfer
of the CFC1 stock prior to the application of
any other provision of section 367 to such
transfer. See paragraphs (e)(1)(i) and (e)(1)(ii)
of this section. Pursuant to the general rule
of paragraph (e)(2) of this section, UST must
recognize the gain realized of $100x on the
transfer of the CFC1 stock (computed as the
excess of the $100x fair market value over the

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$0x basis) unless the requirements for the
exception provided in paragraph (e)(3) of this
section are satisfied. In this case, the
requirements of paragraph (e)(3) of this
section are satisfied. First, the requirement of
paragraph (e)(3)(i) of this section is satisfied
because the control requirement of
§ 1.367(a)–7(c)(1) is satisfied, and a stated
assumption is that the requirements of
§§ 1.367(a)–7(c)(2) through 1.367(a)–7(c)(5)
will be satisfied. The control requirement is
satisfied because US1 and US2, each a
control group member, own in the aggregate
85% of the stock of UST immediately before
the reorganization. Second, the requirement
of paragraph (e)(3)(ii) of this section is not
applicable because that paragraph applies to
the transfer of stock of a domestic
corporation and CFC1 is a foreign
corporation. Third, paragraph (e)(3)(iii) of
this section is not applicable because
immediately after the section 361 exchange,
but prior to and without taking into account
UST’s distribution of the FA stock pursuant
to section 361(c)(1), UST does not own
(applying the attribution rules of section 318,
as modified by section 958(b)) 5% or more
of the total voting power or the total value
of the stock of FA. See paragraph (e)(4) of this
section. Accordingly, UST does not recognize
the $100x of gain realized in the CFC1 stock
pursuant to this section.
(B) In order to meet the requirements of
§ 1.367(a)–7(c)(2)(i), UST must recognize gain
equal to the portion of the inside gain (as
defined in § 1.367(a)–7(f)(5)) attributable to
non-control group members (X), or $7.50x.
The $7.50x of gain is computed as the
product of the inside gain ($50x) multiplied
by X’s ownership interest percentage in UST
(15%). Pursuant to § 1.367(a)–7(f)(5), the
$50x of inside gain is the amount by which
the aggregate fair market value ($200x) of the
section 367(a) property (as defined in
§ 1.367(a)–7(f)(10), or Asset A and the CFC1
stock) exceeds the sum of the inside basis
($150x) of such property and the product of
the section 367(a) percentage (as defined in
§ 1.367(a)–7(f)(9), or 100%) multiplied by
UST’s deductible liabilities (as defined in
§ 1.367(a)–7(f)(2), or $0x). Pursuant to
§ 1.367(a)–7(f)(4), the inside basis equals the
aggregate basis of the section 367(a) property
transferred in the section 361 exchange
($150x), increased by any gain or deemed
dividends recognized by UST with respect to
the section 367(a) property under section 367
($0x), but not including the $7.50x of gain
recognized by UST under § 1.367(a)–
7(c)(2)(i). Pursuant to § 1.367(a)–7(e)(1), the
$7.50x of gain recognized by UST is treated
as recognized with respect to the CFC1 stock
and Asset A in proportion to the amount of
gain realized in each. However, because there
is no gain realized by UST with respect to
Asset A, all $7.50x of the gain is allocated to
the CFC1 stock. Furthermore, FA’s basis in
the CFC1 stock, as determined under section
362 is increased by the $7.50x of gain
recognized by UST. See § 1.367(a)–
1(b)(4)(i)(B).
(C) The requirement to recognize gain
under § 1.367(a)–7(c)(2)(ii) is not applicable
because the portion of the inside gain
attributable to US1 and US2 (control group
members) can be preserved in the stock

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17059

received by each such shareholder. As
described in paragraph (ii)(B) of this Example
1, the inside gain is $50x. US1’s attributable
inside gain of $40x (equal to the product of
$50x inside gain multiplied by US1’s 80%
ownership interest percentage, reduced by
$0x, the sum of the amounts described in
§ 1.367(a)–7(c)(2)(ii)(A)(1) through
(c)(2)(ii)(A)(3)) does not exceed $160x (equal
to the product of the section 367(a)
percentage of 100% multiplied by $160x fair
market value of FA stock received by US1).
Similarly, US2’s attributable inside gain of
$2.50x (equal to the product of $50x inside
gain multiplied by US2’s 5% ownership
interest percentage, reduced by $0x, the sum
of the amounts described in § 1.367(a)–
7(c)(2)(ii)(A)(1) through (c)(2)(ii)(A)(3))) does
not exceed $10x (equal to the product of the
section 367(a) percentage of 100% multiplied
by $10x fair market value of FA stock
received by US2).
(D) Each control group member (US1 and
US2) must separately compute any required
adjustment to stock basis under § 1.367(a)–
7(c)(3).
Example 2. U.S. transferor owns 5% or
more of the stock of the transferee foreign
corporation. (i) Facts. The facts are the same
as in Example 1, except that immediately
after the section 361 exchange, but prior to
and without taking into account UST’s
distribution of the FA stock pursuant to
section 361(c)(1), UST owns (applying the
attribution rules of section 318, as modified
by section 958(b)) 5% or more of the total
voting power or value of the stock of FA.
Furthermore, immediately after the
reorganization, US1 and X (but not US2) each
own (applying the attribution rules of section
318, as modified by section 958(b)) five
percent or more of the total voting power or
value of the stock of FA.
(ii) Result. (A) As is the case with Example
1, UST’s transfer of the CFC1 stock to FA in
the section 361 exchange is subject to the
provisions of this paragraph (e), and this
paragraph (e) applies to the transfer of the
CFC1 stock prior to the application of any
other provision of section 367 to such
transfer. See paragraphs (e)(1)(i) and (e)(1)(ii)
of this section. In addition, UST must
recognize the gain realized of $100x on the
transfer of the CFC1 stock (computed as the
excess of the $100x fair market value over the
$0x basis) unless the requirements for the
exception provided in paragraph (e)(3) of this
section are satisfied. For the same reasons
provided in Example 1, the requirement in
paragraph (e)(3)(i) of this section is satisfied
and the requirement of paragraph (e)(3)(ii) of
this section is not applicable.
(B) Unlike Example 1, however, UST owns
5% or more of the voting power or value of
the stock of FA immediately after the transfer
of the CFC1 stock in the section 361
exchange, but prior to and without taking
into account UST’s distribution of the FA
stock under section 361(c)(1). As a result,
paragraph (e)(3)(iii) of this section is
applicable to the section 361 exchange of the
CFC1 stock. Accordingly, in order to meet the
requirements of paragraph (e)(3)(iii)(A) of
this section US1 and X must enter into gain
recognition agreements that satisfy the
requirements of paragraph (e)(6) of this

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section and § 1.367(a)–8. See paragraph
(ii)(G) of this Example 2 for the computation
of the amount of gain subject to each gain
recognition agreement.
(C) In order to meet the requirements of
paragraph (e)(3)(iii)(C) of this section, UST
must recognize $5x of gain attributable to
US2 (computed as the product of the $100x
of gain realized with respect to the transfer
of the CFC1 stock multiplied by the 5%
ownership interest percentage of US2). The
$5x of gain recognized is not included in the
computation of inside basis (see § 1.367(a)–
7(f)(4)(i)), but reduces (but not below zero)
the amount of gain recognized by UST
pursuant to § 1.367(a)–7(c)(2)(ii) that is
attributable to US2. Furthermore, FA’s basis
in the CFC1 stock as determined under
section 362 is increased for the $5x of gain
recognized. See § 1.367(a)–1(b)(4)(i)(B).
Assuming US1 and X enter into the gain
recognition agreements described in
paragraph (ii)(B) of this Example 2, and UST
recognizes the $5x of gain described in this
example, the requirements of paragraph (e)(3)
are satisfied and, accordingly, UST does not
recognize the remaining $95x of gain realized
in the CFC1 stock pursuant to this section.
(D) As described in paragraph (ii)(B) of
Example 1, UST must recognize $7.50x of
gain pursuant to § 1.367(a)–7(c)(2)(i), the
amount of the $50x of inside gain attributable
to X. Pursuant to § 1.367(a)–7(e)(1), the
$7.50x of gain recognized by UST is treated
as recognized with respect to the CFC1 stock
and Asset A in proportion to the amount of
gain realized in each. However, because there
is no gain realized by UST with respect to
Asset A, all $7.50x of the gain is allocated to
the CFC1 stock. Furthermore, FA’s basis in
the CFC1 stock as determined under section
362 is increased for the $7.50x of gain
recognized. See § 1.367(a)–1(b)(4)(i)(B).
(E) As described in paragraph (ii)(C) of
Example 1, the requirement to recognize gain
pursuant to § 1.367(a)–7(c)(2)(ii) is not
applicable because the attributable inside
gain of US1 and US2 can be preserved in the
stock received by each shareholder. However,
if UST were required to recognize gain
pursuant to § 1.367(a)–7(c)(2)(ii) for inside
gain attributable to US2 (for example, if US2
received solely cash rather than FA stock in
the reorganization), the amount of such gain
would be reduced (but not below zero) by the
amount of gain recognized by UST pursuant
to paragraph (e)(3)(iii)(C) of this section that
is attributable to US2 (computed as $5x in
paragraph (ii)(C) of this Example 2). See
§ 1.367(a)–7(c)(2)(ii)(A)(1).
(F) Each control group member (US1 and
US2) must separately compute any required
adjustment to stock basis under § 1.367(a)–
7(c)(3).
(G) The amount of gain subject to the gain
recognition agreement filed by each of US1
and X is determined pursuant to paragraph
(e)(6)(i) of this section. With respect to US1,
the amount of gain subject to the gain
recognition agreement is $80x. The $80x is
computed as the product of US1’s ownership
interest percentage (80%) multiplied by the
gain realized by UST in the CFC1 stock as
determined prior to taking into account the
application of any other provision of section
367 ($100x), reduced by the sum of the

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amounts described in paragraphs (e)(6)(i)(A)
through (e)(6)(i)(D) of this section attributable
to US1 ($0x). With respect to X, the amount
of gain subject to the gain recognition
agreement is $7.50x. The $7.50x is computed
as the product of X’s ownership interest
percentage (15%) multiplied by the gain
realized by UST in the CFC1 stock as
determined prior to taking into account the
application of any other provision of section
367 ($100x), reduced by the sum of the
amounts described in paragraphs (e)(6)(i)(A)
through (e)(6)(i)(D) of this section attributable
to X ($7.50x, as computed in paragraph
(ii)(D) of this Example 2).
(H) In order the meet the requirements of
paragraph (e)(6)(ii) of this section, each gain
recognition agreement must include the
election described in § 1.367(a)–8(c)(2)(vi).
Furthermore, pursuant to paragraph (e)(6)(iii)
of this section, US1 and X must be
designated as the U.S. transferor on their
respective gain recognition agreements for
purposes of § 1.367(a)–8.
Example 3. U.S. transferor owns 5% or
more of the stock of the transferee foreign
corporation; interaction with section 1248(f).
(i) Facts. US1, US2, and X own 50%, 30%,
and 20%, respectively, of the stock of UST.
The UST stock owned by US1 has a $180x
basis and $200x fair market value; the UST
stock owned by US2 has a $100x basis and
$120x fair market value; and the UST stock
owned by X has a $80x fair market value.
UST owns Asset A, and all the stock of CFC1
and CFC2. UST has no liabilities. Asset A has
a $10x basis and $200x fair market value. The
CFC1 stock is a single block of stock (as
defined in § 1.1248(f)–1(c)(2)) with a $20x
basis, $40x fair market value, and $30x of
earnings and profits attributable to it for
purposes of section 1248 (with the result that
the section 1248 amount (as defined in
§ 1.1248(f)–1(c)(9)) is $20x). The CFC2 stock
is also a single block of stock with a $30x
basis, $160x fair market value, and $150x of
earnings and profits attributable to it for
purposes of section 1248 (with the result that
the section 1248 amount is $130x). On
December 31, Year 3, in a reorganization
described in section 368(a)(1)(D), UST
transfers the CFC1 stock, CFC2 stock, and
Asset A to FA in exchange for 60 shares of
FA stock with a $400x fair market value.
UST’s transfer of the CFC1 stock, CFC2 stock,
and Asset A to FA in exchange for the 60
shares of FA stock qualifies as a section 361
exchange. UST distributes the FA stock
received in the section 361 exchange to US1,
US2, and X pursuant to section 361(c)(1).
US1, US2, and X exchange their UST stock
for 30, 18, and 12 shares, respectively, of FA
stock pursuant to section 354. Immediately
after the reorganization, FA has 100 shares of
stock outstanding, and US1 and US2 are each
a section 1248 shareholder with respect to
FA.
(ii) Result. (A) UST’s transfer of the CFC1
stock and CFC2 stock to FA in the section
361 exchange is subject to the provisions of
this paragraph (e), and this paragraph (e)
applies to the transfer of the CFC1 stock and
CFC2 stock prior to the application of any
other provision of section 367 to such
transfer. See paragraphs (e)(1)(i) and (e)(1)(ii)
of this section. Pursuant to the general rule

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of paragraph (e)(2) of this section, UST must
recognize the gain realized of $20x on the
transfer of the CFC1 stock (the excess of $40x
fair market value over $20x basis) and the
gain realized of $130x on the transfer of the
CFC2 stock (the excess of $160x fair market
value over $30x basis), subject to the
application of section 1248(a), unless the
requirements for the exception provided in
paragraph (e)(3) of this section are satisfied.
In this case, the requirement of paragraph
(e)(3)(i) of this section is satisfied because the
control requirement of § 1.367(a)–7(c)(1) is
satisfied, and a stated assumption is that the
requirements of §§ 1.367(a)–7(c)(2) through
1.367(a)–7(c)(5) will be satisfied. The control
requirement is satisfied because US1 and
US2, each a control group member, own in
the aggregate 80% of the UST stock
immediately before the reorganization. The
requirement of paragraph (e)(3)(ii) of this
section is not applicable because that
paragraph applies to the transfer of stock of
a domestic corporation, and CFC1 and CFC2
are foreign corporations. UST owns 5% or
more of the total voting power or value of the
stock of FA (60%, or 60 of the 100 shares of
FA stock outstanding) immediately after the
transfer of the CFC1 stock and CFC2 stock in
the section 361 exchange, but prior to and
without taking into account UST’s
distribution of the FA stock under section
361(c)(1). As a result, paragraph (e)(3)(iii) of
this section is applicable to the section 361
exchange of the CFC1 stock and CFC2 stock.
US1, US2, and X each own (applying the
attribution rules of section 318, as modified
by section 958(b)) 5% or more of the total
voting power or value of the FA stock
immediately after the reorganization, or 30%,
18%, and 12%, respectively. Accordingly, in
order to meet the requirements of paragraph
(e)(3)(iii)(A) of this section, US1 and US2
must enter into gain recognition agreements
with respect to the CFC1 stock and CFC2
stock that satisfy the requirements of
paragraph (e)(6) of this section and
§ 1.367(a)–8. X is not required to enter into
a gain recognition agreement because the
amount of gain that would be subject to the
gain recognition agreement is zero. See
paragraph (ii)(J) of this Example 3 for the
computation of the amount of gain subject to
each gain recognition agreement. Assuming
US1 and US2 enter into the gain recognitions
agreements described above, the
requirements of paragraph (e)(3) are satisfied
and accordingly, UST does not recognize the
gain realized of $20x in the stock of CFC1 or
the gain realized of $130x in the stock of
CFC2 pursuant to this section.
(B) UST’s transfer of the CFC1 stock and
CFC2 stock to FA pursuant to the section 361
exchange is subject to § 1.367(b)–4(b)(1)(i),
which applies prior to the application of
§ 1.367(a)–7(c). See paragraph (e)(1) of this
section. UST (the exchanging shareholder) is
a U.S. person and a section 1248 shareholder
with respect to CFC1 and CFC2 (each a
foreign acquired corporation). However, UST
is not required to include in income as a
deemed dividend the section 1248 amount
with respect to the CFC1 stock ($20x) or
CFC2 stock ($130x) under § 1.367(b)–
4(b)(1)(i) because, immediately after UST’s
section 361 exchange of the CFC1 stock and

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CFC2 stock for FA stock (and before the
distribution of the FA stock to US1, US2, and
X under section 361(c)(1), FA, CFC1, and
CFC2 are controlled foreign corporations as
to which UST is a section 1248 shareholder.
See § 1.367(b)–4(b)(1)(ii)(A). However, if UST
were required to include in income as a
deemed dividend the section 1248 amount
with respect to the CFC1 stock or CFC2 stock
(for example, if FA were not a controlled
foreign corporation), such deemed dividend
would be taken into account prior to the
application of § 1.367(a)–7(c). Furthermore,
because US1, US2, and X are all persons
described in paragraph (e)(3)(iii)(A) of this
section, any such deemed dividend would
increase inside basis. See § 1.367(a)–7(f)(4).
(C) In order to meet the requirements of
§ 1.367(a)–7(c)(2)(i), UST must recognize gain
equal to the portion of the inside gain
attributable to non-control group members
(X), or $68x. The $68x of gain is computed
as the product of the inside gain ($340x)
multiplied by X’s ownership interest
percentage in UST (20%), reduced (but not
below zero) by $0x, the sum of the amounts
described in § 1.367(a)–7(c)(2)(i)(A) through
(c)(2)(i)(C). Pursuant to § 1.367(a)–7(f)(5), the
$340x of inside gain is the amount by which
the aggregate fair market value ($400x) of the
section 367(a) property (Asset A, CFC1 stock,
and CFC2 stock) exceeds the sum of the
inside basis ($60x) and $0x (the product of
the section 367(a) percentage (100%)
multiplied by UST’s deductible liabilities
($0x)). Pursuant to § 1.367(a)–7(f)(4), the
inside basis equals the aggregate basis of the
section 367(a) property transferred in the
section 361 exchange ($60x), increased by
any gain or deemed dividends recognized by
UST with respect to the section 367(a)
property under section 367 ($0x), but not
including the $68x of gain recognized by
UST under § 1.367(a)–7(c)(2)(i). Under
§ 1.367(a)–7(e)(1), the $68x gain recognized is
treated as being with respect to the CFC1
stock, CFC2 stock, and Asset A in proportion
to the amount of gain realized by UST on the
transfer of the property. The amount treated
as recognized with respect to the CFC1 stock
is $4x ($68x gain multiplied by $20x/$340x).
The amount treated as recognized with
respect to the CFC2 stock is $26x ($68x gain
multiplied by $130x/$340x). The amount
treated as recognized with respect to Asset A
is $38x ($68x gain multiplied by $190x/
$340x). Under section 1248(a), UST must
include in gross income as a dividend the
$4x gain recognized with respect to the CFC1
stock and the $26x gain recognized with
respect to CFC2 stock. Furthermore, FA’s
basis in the CFC1 stock, CFC2 stock, and
Asset A, as determined under section 362, is
increased by the amount of gain recognized
by UST with respect to such property. See
§ 1.367(a)–1(b)(4)(i)(B). Thus, FA’s basis in
the CFC1 stock is $24x ($20x increased by
$4x of gain), the CFC2 stock is $56x ($30x
increased by $26x of gain), and Asset A is
$48x ($10x increased by $38x of gain).
(D) The requirement to recognize gain
under § 1.367(a)–7(c)(2)(ii) is not applicable
because the portion of the inside gain
attributable to US1 and US2 (control group
members) can be preserved in the stock
received by each such shareholder. As

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described in paragraph (ii)(C) of this Example
3, the inside gain is $340x. US1’s attributable
inside gain of $170x (equal to the product of
$340x inside gain multiplied by US1’s 50%
ownership interest percentage, reduced by
$0x, the sum of the amounts described in
§ 1.367(a)–7(c)(2)(ii)(A)(1) through
(c)(2)(ii)(A)(3)) does not exceed $200x (equal
to the product of the section 367(a)
percentage of 100% multiplied by $200x fair
market value of FA stock received by US1).
Similarly, US2’s attributable inside gain of
$102x (equal to the product of $340x inside
gain multiplied by US2’s 30% ownership
interest percentage, reduced by $0x, the sum
of the amounts described in § 1.367(a)–
7(c)(2)(ii)(A)(1) through (c)(2)(ii)(A)(3)) does
not exceed $120x (equal to the product of the
section 367(a) percentage of 100% multiplied
by $120x fair market value of FA stock
received by US2).
(E) Each control group member (US1 and
US2) separately computes any required
adjustment to stock basis under § 1.367(a)–
7(c)(3). US1’s section 358 basis in the FA
stock received of $180x (equal to US1’s basis
in the UST stock exchanged) is reduced to
preserve the attributable inside gain with
respect to US1, less any gain recognized with
respect to US1 under § 1.367(a)–7(c)(2)(ii).
Because UST does not recognize gain on the
section 361 exchange with respect to US1
under § 1.367(a)–7(c)(2)(ii) (as determined in
paragraph (ii)(D) of this Example 3), the
attributable inside gain of $170x with respect
to US1 is not reduced under § 1.367(a)–
7(c)(3)(i)(A). US1’s outside gain (as defined
in § 1.367(a)–7(f)(6)) in the FA stock is $20x,
the product of the section 367(a) percentage
(100%) multiplied by the $20x gain (equal to
the difference between $200x fair market
value and $180x section 358 basis in the FA
stock). Thus, US1’s $180x section 358 basis
in the FA stock must be reduced by $150x
(the excess of $170x attributable inside gain,
reduced by $0x, over $20x outside gain) to
$30x. Similarly, US2’s section 358 basis in
the FA stock received of $100x (equal to
US2’s basis in the UST stock exchanged) is
reduced to preserve the attributable inside
gain with respect to US2, less any gain
recognized with respect to US2 under
§ 1.367(a)–7(c)(2)(ii). Because UST does not
recognize gain on the section 361 exchange
with respect to US2 under § 1.367(a)–
7(c)(2)(ii) (as determined in paragraph (ii)(D)
of this Example 3), the attributable inside
gain of $102x with respect to US2 is not
reduced under § 1.367(a)–7(c)(3)(i)(A). US2’s
outside gain in the FA stock is $20x, the
product of the section 367(a) percentage
(100%) multiplied by the $20x gain (equal to
the difference between $120x fair market
value and $100x section 358 basis in FA
stock). Thus, US2’s $100x section 358 basis
in the FA stock must be reduced by $82x (the
excess of $102x attributable inside gain,
reduced by $0x, over $20x outside gain) to
$18x.
(F) UST’s distribution of the FA stock to
US1, US2, and X under section 361(c)(1)
(new stock distribution) is subject to
§ 1.1248(f)–1(b)(3). Except as provided in
§ 1.1248(f)–2(c), under § 1.1248(f)–1(b)(3)
UST must include in gross income as a
dividend the total section 1248(f) amount (as

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defined in § 1.1248(f)–1(c)(14)). The total
section 1248(f) amount is $120x, the sum of
the section 1248(f) amount (as defined in
§ 1.1248(f)–1(c)(10)) with respect to the CFC1
stock ($16x) and CFC2 stock ($104x). The
$16x section 1248(f) amount with respect to
the CFC1 stock is the amount that UST
would have included in income as a
dividend under § 1.367(b)–4(b)(1)(i) with
respect to the CFC1 stock if the requirements
of § 1.367(b)–4(b)(1)(ii)(A) had not been
satisfied ($20x), reduced by the amount of
gain recognized by UST under § 1.367(a)–
7(c)(2) allocable to the CFC1 stock and
treated as a dividend under section 1248(a)
($4x, as described in paragraph (ii)(C) of this
Example 3). Similarly, the section 1248(f)
amount with respect to the CFC2 stock is
$104x ($130x reduced by $26x).
(G) If, however, UST along with US1 and
US2 (each a section 1248 shareholder of FA
immediately after the distribution) elect to
apply the provisions of § 1.1248(f)–2(c) (as
provided in § 1.1248(f)–2(c)(1)), the amount
that UST is required to include in income as
a dividend under § 1.1248(f)–1(b)(3) ($120x
total section 1248(f) amount as computed in
paragraph (ii)(F) of this Example 3) is
reduced by the sum of the portions of the
section 1248(f) amount with respect to the
CFC1 stock and CFC2 stock that is
attributable (under the rules of § 1.1248(f)–
2(d)) to the FA stock distributed to US1 and
US2. Assume that the election is made to
apply § 1.1248(f)–2(c).
(1) Under § 1.1248(f)–2(d)(1), the portion of
the section 1248(f) amount with respect to
the CFC1 stock that is attributed to the 30
shares of FA stock distributed to US1 is equal
to the hypothetical section 1248 amount (as
defined in § 1.1248(f)–1(c)(4)) with respect to
the CFC1 stock that is attributable to US1’s
ownership interest percentage in UST. US1’s
hypothetical section 1248 amount with
respect to the CFC1 stock is the amount that
UST would have included in income as a
deemed dividend under § 1.367(b)–4(b)(1)(i)
with respect to the CFC1 stock if the
requirements of § 1.367(b)–4(b)(1)(ii)(A) had
not been satisfied ($20x) and that would be
attributable to US1’s ownership interest
percentage in UST (50%), reduced by the
amount of gain recognized by UST under
§ 1.367(a)–7(c)(2) attributable to US1 and
allocable to the CFC1 stock, but only to the
extent such gain is treated as a dividend
under section 1248(a) ($0x, as described in
paragraphs (ii)(C) and (D) of this Example 3).
Thus, US1’s hypothetical section 1248
amount with respect to the CFC1 stock is
$10x ($20x multiplied by 50%, reduced by
$0x). The $10x hypothetical section 1248
amount is attributed pro rata (based on
relative values) among the 30 shares of FA
stock distributed to US1, and the attributable
share amount (as defined in § 1.1248(f)–
2(d)(1)) is $.33x ($10x/30 shares). Similarly,
US1’s hypothetical section 1248 amount with
respect to the CFC2 stock is $65x ($130x
multiplied by 50%, reduced by $0x), and the
attributable share amount is $2.17x ($65x/30
shares). Similarly, US2’s hypothetical section
1248 amount with respect to the CFC1 stock
is $6x ($20x multiplied by 30%, reduced by
$0x), and the attributable share amount is
also $.33x ($6x/18 shares). Finally, US2’s

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hypothetical section 1248 amount with
respect to the CFC2 stock is $39x ($130x
multiplied by 30%, reduced by $0x), and the
attributable share amount is also $2.17x
($39x/18 shares). Thus, the sum of the
portion of the section 1248(f) amount with
respect to the CFC1 stock and CFC2 stock
attributable to shares of stock of FA
distributed to US1 and US2 is $120x ($10x
plus $65x plus $6x plus $39x).
(2) If the shares of FA stock are divided
into portions, § 1.1248(f)–2(d)(2) applies to
attribute the attributable share amount to
portions of shares of FA stock distributed to
US1 and US2. Under § 1.1248(f)–2(c)(2) each
share of FA stock received by US1 (30 shares)
and US2 (18 shares) is divided into three
portions, one attributable to the single block
of stock of CFC1, one attributable to the
single block of stock of CFC2, and one
attributable to Asset A. Thus, the attributable
share amount of $.33x with respect to the
CFC1 stock is attributed to the portion of
each of the 30 shares and 18 shares of FA
stock received by US1 and US2, respectively,
that relates to the CFC1 stock. Similarly, the
attributable share amount of $2.17x with
respect to the CFC2 stock is attributed to the
portion of each of the 30 shares and 18 shares
of FA stock received by US1 and US2,
respectively, that relates to the CFC2 stock.
(3) The total section 1248(f) amount
($120x) that UST is otherwise required to
include in gross income as a dividend under
§ 1.1248(f)–1(b)(3) is reduced by $120x, the
sum of the portions of the section 1248(f)
amount with respect to the CFC1 stock and
CFC2 stock that are attributable to the shares
of FA stock distributed to US1 and US2.
Thus, the amount DC is required to include
in gross income as a dividend under
§ 1.1248(f)–1(b)(3) is $0x ($120x reduced by
$120x).
(H) As stated in paragraph (ii)(G)(2) of this
Example 3, under § 1.1248(f)–2(c)(2) each
share of FA stock received by US1 (30 shares)
and US2 (18 shares) is divided into three
portions, one attributable to the CFC1 stock,
one attributable to the CFC2 stock, and one
attributable to Asset A. Under § 1.1248(f)–
2(c)(4)(i), the basis of each portion is the
product of US1’s and US2’s section 358 basis
in the share of FA stock multiplied by the
ratio of the section 362 basis of the property
(CFC1 stock, CFC2 stock, or Asset A, as
applicable) received by FA in the section 361
exchange to which the portion relates, to the
aggregate section 362 basis of all property
received by FA in the section 361 exchange.
Under § 1.1248(f)–2(c)(4)(ii), the fair market
value of each portion is the product of the
fair market value of the share of FA stock
multiplied by the ratio of the fair market
value of the property (CFC1 stock, CFC2
stock, or Asset A, as applicable) to which the
portion relates, to the aggregate fair market
value of all property received by FA in the
section 361 exchange. The section 362 basis
of the CFC1 stock, CFC2 stock, and Asset A
is $24x, $56x, and $48x, respectively, for an
aggregate section 362 basis of $128x. See
paragraph (ii)(C) of this Example 3. The fair
market value of the CFC1 stock, CFC2 stock,
and Asset A is $40x, $160x, and $200x, for
an aggregate fair market value of $400x.
Furthermore, US1’s 30 shares of FA stock

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have an aggregate fair market value of $200x
and section 358 basis of $30x (resulting in
aggregate gain of $170x), and US2’s 18 shares
of FA stock have an aggregate fair market
value of $120x and section 358 basis of $18x
(resulting in aggregate gain of $102x). See
paragraph (ii)(E) of this Example 3.
(1) With respect to US1’s 30 shares of FA
stock, the portions attributable to the CFC1
stock have an aggregate basis of $5.63x ($30x
multiplied by $24x/$128x) and fair market
value of $20x ($200x multiplied by $40x/
$400x), resulting in aggregate gain in such
portions of $14.38x (or $.48x gain in each
such portion of the 30 shares). The portions
attributable to the CFC2 stock have an
aggregate basis of $13.13x ($30x multiplied
by $56x/$128x) and fair market value of $80x
($200x multiplied by $160x/$400x), resulting
in aggregate gain in such portions of $66.88x
(or $2.23x in each such portion of the 30
shares). The portions attributable to Asset A
have an aggregate basis of $11.25x ($30x
multiplied by $48x/$128x) and fair market
value of $100x ($200x multiplied by $200x/
$400x), resulting in aggregate gain in such
portions of $88.75x (or $2.96x in each such
portion of the 30 shares). Thus, the aggregate
gain in all the portions of the 30 shares is
$170x ($14.38x plus $66.88x plus $88.75x).
(2) With respect to US2’s 18 shares of FA
stock, the portions attributable to the CFC1
stock have an aggregate basis of $3.38x ($18x
multiplied by $24x/$128x) and fair market
value of $12x ($120x multiplied by $40x/
$400x), resulting in aggregate gain in such
portions of $8.63x (or $.48x in each such
portion of the 18 shares). The portions
attributable to the CFC2 stock have an
aggregate basis of $7.88x ($18x multiplied by
$56x/$128x) and fair market value of $48x
($120x multiplied by $160x/$400x), resulting
in aggregate gain of $40.13x (or $2.23x in
each such portion of the 18 shares). The
portions attributable to Asset A have an
aggregate basis of $6.75x ($18x multiplied by
$48x/$128x) and fair market value of $60x
($120x multiplied by $200x/$400x), resulting
in aggregate gain of $53.25x (or $2.96x in
each such portion of the 18 shares). Thus, the
aggregate gain in all the portions of the 18
shares is $102x ($8.63x plus $40.13x plus
$53.25x).
(3) Under § 1.1248–8(b)(2)(iv), the earnings
and profits of CFC1 attributable to the
portions of US1’s 30 shares of FA stock that
relate to the CFC1 stock is $15x (the product
of US1’s 50% ownership interest percentage
in UST multiplied by $30x of earnings and
profits attributable to the CFC1 stock before
the section 361 exchange, reduced by $0x of
dividend included in UST’s income with
respect to the CFC1 stock under section
1248(a) attributable to US1). The earnings
and profits of CFC2 attributable to the
portions of US1’s 30 shares of FA stock that
relate to the CFC2 stock is $75x (the product
of US1’s 50% ownership interest percentage
in UST multiplied by $150x of earnings and
profits attributable to the CFC2 stock before
the section 361 exchange, reduced by $0x of
dividend included in UST’s income with
respect to the CFC2 stock under section
1248(a) attributable to US1). Similarly, the
earnings and profits of CFC1 attributable to
the portions of US2’s 18 shares of FA stock

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that relate to the CFC1 stock is $9x (the
product of US2’s 30% ownership interest
percentage in UST multiplied by $30x of
earnings and profits attributable to the CFC1
stock before the section 361 exchange,
reduced by $0x of dividend included in
UST’s income with respect to the CFC1 stock
under section 1248(a) attributable to US2).
Finally, the earnings and profits of CFC2
attributable to the portions of US2’s 18 shares
of FA stock that relate to the CFC2 stock is
$45x (the product of US2’s 30% ownership
interest percentage in UST multiplied by
$150x of earnings and profits attributable to
the CFC2 stock before the section 361
exchange, reduced by $0x of dividend
included in UST’s income with respect to the
CFC2 stock under section 1248(a) attributable
to US2).
(I) Under § 1.1248(f)–2(c)(3), neither US1
nor US2 is required to reduce the aggregate
section 358 basis in the portions of their
respective shares of FA stock, and UST is not
required to include in gross income any
additional deemed dividend.
(1) US1 is not required to reduce the
aggregate section 358 basis of the portions of
its 30 shares of FA stock that relate to the
CFC1 stock because the $10x section 1248(f)
amount with respect to the CFC1 stock
attributable to the portions of the shares of
FA stock received by US1 (as computed in
paragraph (ii)(G) of this Example 3) does not
exceed US1’s postdistribution amount (as
defined in § 1.1248(f)–1(c)(6), or $14.38x) in
those portions. The $14.38x postdistribution
amount equals the amount that US1 would
be required to include in income as a
dividend under section 1248(a) with respect
to such portion if it sold the 30 shares of FA
stock immediately after the distribution in a
transaction in which all realized gain is
recognized, without taking into account basis
adjustments or income inclusions under
§ 1.1248(f)–2(c)(3) ($20x fair market value,
$5.63x basis, and $15x earnings and profits
attributable to the portions for purposes of
section 1248). Similarly, US1 is not required
to reduce the aggregate section 358 basis of
the portions of its 30 shares of FA stock that
relate to the CFC2 stock because the $65x
section 1248(f) amount with respect to the
CFC2 stock attributable to the portions of the
shares of FA stock received by US1 (as
computed in paragraph (ii)(G) of this
Example 3) does not exceed US1’s
postdistribution amount ($66.88x) in those
portions. The $66.88x postdistribution
amount equals the amount that US1 would
be required to include in income as a
dividend under section 1248(a) with respect
to such portion if it sold the 30 shares of FA
stock immediately after the distribution in a
transaction in which all realized gain is
recognized, without taking into account basis
adjustments or income inclusions under
§ 1.1248(f)–2(c)(3) ($80x fair market value,
$13.13x basis, and $75x earnings and profits
attributable to the portions for purposes of
section 1248).
(2) US2 is not required to reduce the
aggregate section 358 basis of the portions of
its 18 shares of FA stock that relate to the
CFC1 stock because the $6x section 1248(f)
amount with respect to the CFC1 stock
attributable to the portions of the shares of

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FA stock received by US2 (as computed in
paragraph (ii)(G) of this Example 3) does not
exceed US2’s postdistribution amount
($8.63x) in those portions. The $8.63x
postdistribution amount equals the amount
that US2 would be required to include in
income as a dividend under section 1248(a)
with respect to such portion if it sold the 18
shares of FA stock immediately after the
distribution in a transaction in which all
realized gain is recognized, without taking
into account basis adjustments or income
inclusions under § 1.1248(f)–2(c)(3) ($12x fair
market value, $3.38x basis, and $9x earnings
and profits attributable to the portions for
purposes of section 1248). Similarly, US2 is
not required to reduce the aggregate section
358 basis of the portions of its 18 shares of
FA stock that relate to the CFC2 stock
because the $39x section 1248(f) amount
with respect to the CFC2 stock attributable to
the portions of the shares of FA stock
received by US2 (as computed in paragraph
(ii)(G) of this Example 3) does not exceed
US1’s postdistribution amount ($40.13x) in
those portions. The $40.13x postdistribution
amount equals the amount that US2 would
be required to include in income as a
dividend under section 1248(a) with respect
to such portion if it sold the 18 shares of FA
stock immediately after the distribution in a
transaction in which all realized gain is
recognized, without taking into account basis
adjustments or income inclusions under
§ 1.1248(f)–2(c)(3) ($48x fair market value,
$7.88x basis, and $45x earnings and profits
attributable to the portions for purposes of
section 1248).
(J) The amount of gain subject to the gain
recognition agreement filed by each of US1
and US2 is determined pursuant to paragraph
(e)(6)(i) of this section. The amount of gain
subject to the gain recognition agreement
filed by US1 with respect to the stock of
CFC1 and CFC2 is $10x and $65x,
respectively. The $10x and $65x are
computed as the product of US1’s ownership
interest percentage (50%) multiplied by the
gain realized by UST in the CFC1 stock
($20x) and CFC2 stock ($130x), respectively,
as determined prior to taking into account
the application of any other provision of
section 367, reduced by the sum of the
amounts described in paragraphs (e)(6)(i)(A),
(e)(6)(i)(B), (e)(6)(i)(C), and (e)(6)(i)(D) of this
section with respect to the CFC1 stock and
CFC2 stock attributable to US1 ($0x with
respect to the CFC1 stock, and $0x with
respect to the CFC2 stock). The amount of
gain subject to the gain recognition
agreement filed by US2 with respect to the
stock of CFC1 and CFC2 is $6x and $39x,
respectively. The $6x and $39x are computed
as the product of US2’s ownership interest
percentage (30%) multiplied by the gain
realized by UST in the CFC1 stock ($20x) and
CFC2 stock ($130x), respectively, as
determined prior to taking into account the
application of any other provision of section
367, reduced by the sum of the amounts
described in paragraphs (e)(6)(i)(A),
(e)(6)(i)(B), (e)(6)(i)(C), and (e)(6)(i)(D) of this
section with respect to the CFC1 stock and
CFC2 stock attributable to US2 ($0x with
respect to the CFC1 stock, and $0x with
respect to the CFC2 stock). X is not required

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to enter into a gain recognition agreement
because the amount of gain that would be
subject to the gain recognition agreement is
$0x with respect to the CFC1 stock, and $0x
with respect to the CFC2 stock, computed as
X’s ownership percentage (20%) multiplied
by the gain realized in the stock of CFC1
($20x multiplied by 20%, or $4x) and CFC2
($130x multiplied by 20%, or $26x), reduced
the amount of gain recognized by UST with
respect to the stock of CFC1 and CFC2 that
is attributable to X pursuant to § 1.367(a)–
7(c)(2) ($4x and $26x, respectively, as
determined in paragraph (ii)(C) of this
Example 3). Pursuant to paragraph (e)(6)(ii)
of this section, each gain recognition
agreement must include the election
described in § 1.367(a)–8(c)(2)(vi).
Furthermore, pursuant to paragraph (e)(6)(iii)
of this section, US1 and US2 must be
designated as the U.S. transferor on their
respective gain recognition agreements for
purposes of § 1.367(a)–8.

(9) Illustration of rules. For rules
relating to certain distributions of stock
of a foreign corporation by a domestic
corporation, see section 1248(f) and
§§ 1.1248(f)–1 through 1.1248(f)–3.
(f) through (g)(1)(vi) [Reserved]. For
further guidance, see §§ 1.367(a)–3(f)
through (g)(1)(vi).
(vii)(A) Except as provided in this
paragraph (g)(1)(vii), the rules of
paragraph (e) of this section apply to
transfers of stock or securities occurring
on or after April 17, 2013. For matters
covered in this section for periods
before April 17, 2013, but on or after
March 13, 2009, see § 1.367(a)–3(e) as
contained in 26 CFR part 1 revised as of
April 1, 2012. For matters covered in
this section for periods before March 13,
2009, but on or after March 7, 2007, see
§ 1.367(a)–3T(e) as contained in 26 CFR
part 1 revised as of April 1, 2007. For
matters covered in this section for
periods before March 7, 2007, but on or
after July 20, 1998, see § 1.367(a)–
8(f)(2)(i) as contained in 26 CFR part 1
revised as of April 1, 2006.
(g)(1)(vii)(B) through (g)(1)(viii)
[Reserved]. For further guidance see
§ 1.367(a)–3(g)(vii)(B) through (g)(viii).
(ix) Paragraphs (d)(2)(vi)(B) and (d)(3),
Example 6B, Example 6C, and Example
9 of this section apply to transfers that
occur on or after March 18, 2013. See
paragraphs (d)(2)(vi)(B) and (d)(3),
Example 6B, Example 6C, and Example
9 of this section, as contained in 26 CFR
part 1 revised as of April 1, 2012, for
transfers that occur on or after January
23, 2006, and before March 18, 2013.
(g)(2) through (j) [Reserved]. For
further guidance, see § 1.367(a)–3(g)(2)
through (j).
(k) Expiration date. Paragraphs
(d)(2)(vi)(B), (d)(3), Example 6B,
Example 6C, and Example 9, and
paragraph (e) of this section expire on
March 18, 2016.

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17063

Par. 4. Section 1.367(a)–6T is
amended by:
■ 1. Adding a sentence at the end of the
paragraph (e)(4).
■ 2. Adding paragraph (j).
The additions to read as follows:
■

§ 1.367(a)–6T Transfer of foreign branch
with previously deducted losses
(temporary).

*

*
*
*
*
(e) * * *
(4) * * * For transactions occurring
on or after April 17, 2013,
notwithstanding the prior sentence, this
paragraph (e)(4) shall apply before the
rules of § 1.367(a)–7(c).
*
*
*
*
*
(j) Expiration date. The second
sentence of paragraph (e)(4) of this
section expires on March 18, 2016.
■ Par. 5. Section 1.367(a)–7T is added
to read as follows:
§ 1.367(a)–7T Outbound transfers of
property described in section 361(a) or (b).

(a) through (e)(1) [Reserved]. For
further guidance, see § 1.367(a)–7(a)
through (e)(1).
(2) Reasonable cause for failure to
comply (temporary)—(i) Request for
relief. A control group member’s failure
to timely comply with any requirement
of this section shall be deemed not to
have occurred if the control group
member is able to demonstrate that the
failure was due to reasonable cause and
not willful neglect using the procedure
set forth in paragraph (e)(2)(ii) of this
section. Whether the failure to timely
comply was due to reasonable cause and
not willful neglect will be determined
by the Director of Field Operations
International, Large Business &
International (or any successor to the
roles and responsibilities of such
person) (Director) based on all the facts
and circumstances.
(ii) Procedures for establishing that a
failure to timely comply was due to
reasonable cause and not willful
neglect—(A) Time of submission. A
control group member’s statement that
the failure to timely comply was due to
reasonable cause and not willful neglect
will be considered only if, promptly
after the control group member becomes
aware of the failure, an amended return
is filed for the taxable year to which the
failure relates that includes the
information that should have been
included with the original return for
such taxable year or that otherwise
complies with the rules of this section,
and that includes a written statement
explaining the reasons for the failure to
timely comply.
(B) Notice requirement. In addition to
the requirements of paragraph

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(e)(2)(ii)(A) of this section, a control
group member must comply with the
notice requirements of this paragraph
(e)(2)(ii)(B). If any taxable year of the
control group member is under
examination when the amended return
is filed, a copy of the amended return
and any information required to be
included with such return must be
delivered to the Internal Revenue
Service personnel conducting the
examination. If no taxable year of the
control group member is under
examination when the amended return
is filed, a copy of the amended return
and any information required to be
included with such return must be
delivered to the Director.
(iii) Cross-reference for reasonable
cause relief requests by U.S. transferor.
If the U.S. transferor fails to timely
comply with any requirement of this
section, the U.S. transferor will be
treated as having timely complied with
the requirement if the U.S. transferor (or
the foreign acquiring corporation on
behalf of the U.S. transferor) satisfies the
reasonable cause requirements
described in § 1.6038B–1T(f)(3).
(iv) Effective/applicability date. The
rules of paragraphs (e)(2)(i) through
(e)(2)(iii) of this section shall apply to
transactions occurring on or after April
17, 2013.
(v) Expiration date. Paragraphs
(e)(2)(i) through (e)(2)(iv) of this section
expire on March 18, 2016.
(e)(3) through (j) [Reserved]. For
further guidance, see § 1.367(a)–7(e)(3)
through (j).
■ Par. 6. Section 1.1248(f)–3T is added
to read as follows:

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§ 1.1248(f)–3T Reasonable cause and
effective/applicability dates (temporary).

(a) Reasonable cause for failure to
comply—(1) Request for relief. If an 80percent distributee, a distributee that is
a section 1248 shareholder, or the
domestic distributing corporation
(reporting person) fails to timely comply
with any requirement under § 1.1248(f)–
2, the failure shall be deemed not to
have occurred if the reporting person is
able to demonstrate that the failure was
due to reasonable cause and not willful
neglect using the procedure set forth in
paragraph (a)(2) of this section. Whether
the failure to timely comply was due to
reasonable cause and not willful neglect
will be determined by the Director of
Field Operations International, Large
Business & International (or any
successor to the roles and
responsibilities of such person)
(Director) based on all the facts and
circumstances.
(2) Procedures for establishing that a
failure to timely comply was due to

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reasonable cause and not willful
neglect—(i) Time of submission. A
reporting person’s statement that the
failure to timely comply was due to
reasonable cause and not willful neglect
will be considered only if, promptly
after the reporting person becomes
aware of the failure, an amended return
is filed for the taxable year to which the
failure relates that includes the
information that should have been
included with the original return for
such taxable year or that otherwise
complies with the rules of this section,
and that includes a written statement
explaining the reasons for the failure to
timely comply.
(ii) Notice requirement. In addition to
the requirements of paragraph (a)(2)(i) of
this section, the reporting person must
comply with the notice requirements of
this paragraph (a)(2)(ii). If any taxable
year of the reporting person is under
examination when the amended return
is filed, a copy of the amended return
and any information required to be
included with such return must be
delivered to the Internal Revenue
Service personnel conducting the
examination. If no taxable year of the
reporting person is under examination
when the amended return is filed, a
copy of the amended return and any
information required to be included
with such return must be delivered to
the Director.
(3) Effective/applicability date. This
section applies to distributions
occurring on or after April 17, 2013.
(4) Expiration date. Paragraphs (a)(1)
through (a)(3) of this section expire on
March 18, 2016.
■ Par. 7. Section 1.6038B–1T is
amended by revising paragraph (f) to
read:
§ 1.6038B–1T Reporting of certain
transfers to foreign corporations.

*

*
*
*
*
(f)(1) through (f)(2) [Reserved]. For
further guidance, see § 1.6038B–1(f)(1)
through (f)(2).
(3) Reasonable cause for failure to
comply—(i) Request for relief. If the U.S.
transferor fails comply with any
requirement of section 6038B and this
section, the failure shall be deemed not
to have occurred if the U.S. transferor is
able to demonstrate that the failure was
due to reasonable cause and not willful
neglect using the procedure set forth in
paragraph (f)(3)(ii) of this section.
Whether the failure to timely comply
was due to reasonable cause and not
willful neglect will be determined by
the Director of Field Operations
International, Large Business &
International (or any successor to the
roles and responsibilities of such

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person) (Director) based on all the facts
and circumstances.
(ii) Procedures for establishing that a
failure to timely comply was due to
reasonable cause and not willful
neglect—(A) Time of submission. A U.S.
transferor’s statement that the failure to
timely comply was due to reasonable
cause and not willful neglect will be
considered only if, promptly after the
U.S. transferor becomes aware of the
failure, an amended return is filed for
the taxable year to which the failure
relates that includes the information
that should have been included with the
original return for such taxable year or
that otherwise complies with the rules
of this section, and that includes a
written statement explaining the reasons
for the failure to timely comply.
(B) Notice requirement. In addition to
the requirements of paragraph
(f)(3)(ii)(A) of this section, the U.S.
transferor must comply with the notice
requirements of this paragraph
(f)(3)(ii)(B). If any taxable year of the
U.S. transferor is under examination
when the amended return is filed, a
copy of the amended return and any
information required to be included
with such return must be delivered to
the Internal Revenue Service personnel
conducting the examination. If no
taxable year of the U.S. transferor is
under examination when the amended
return is filed, a copy of the amended
return and any information required to
be included with such return must be
delivered to the Director.
(iii) Effective/applicability date. This
section applies to distributions
occurring on or after April 17, 2013.
(iv) Expiration date. Paragraphs
(f)(3)(i) through (f)(3)(iii) of this section
expire on March 18, 2016.
(f)(4) [Reserved]. For further guidance,
see § 1.6038B–1T(f)(4).
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 8. The authority citation for part
602 continues to read as follows:

■

Authority: 26 U.S.C. 7805 * * *

Par. 9. In § 602.101, the table in
paragraph (b) is amended by adding the
following entry numerical order:

■

§ 602.101

*

OMB Control numbers.

*
*
(b) * * *

*

*

CFR part or section where
identified and described
*
*
*
1.367(a)–3T ..........................

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*

*
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Federal Register / Vol. 78, No. 53 / Tuesday, March 19, 2013 / Rules and Regulations
CFR part or section where
identified and described

Current OMB
control No.

*
*
*
1.367(a)–7T ..........................

*

*
1545–2183

*
*
*
1.1248(f)–3T .........................

*

*
1545–2183

*
*
*
1.6038B–1T ..........................

*

*
1545–2183

*

*

*

*

*

Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Approved: February 19, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2013–05696 Filed 3–18–13; 8:45 am]

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