Td 9446

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DEPARTMENT OF THE TREASURY
Treasury Decision 9446
Gain Recognition Agreements With Respect to Certain Transfers of Stock or Securities by
United States Persons to Foreign Corporations
2009-1 C.B. 607; T.D. 9446; 2009 IRB LEXIS 127; 2009-9 I.R.B. 607
March 02, 2009
[*1]
APPLICABLE SECTIONS:
26 CFR 1.367 (a)-3: Treatment of transfers of stock or securities to foreign corporations.
TEXT:
AGENCY:
Internal Revenue Service (IRS), Treasury.
ACTION:
Final regulations and removal of temporary regulations.
SUMMARY:
This document contains final regulations under section 367 (a) of the Internal Revenue Code (Code) concerning
gain recognition agreements filed by United States persons with respect to transfers of stock or securities to foreign
corporations. The regulations finalize temporary regulations published on February 5, 2007 (T.D. 9311, 2007-1 C.B.
635). The regulations primarily affect United States persons that transfer (or have transferred) stock or securities to
foreign corporations and that will enter (or have entered) into a gain recognition agreement with respect to such a
transfer.
DATES:
Effective Date: These regulations are effective February 11, 2009.
Applicability Dates: For dates of applicability, see §§1.367 (a)-3 (g) and 1.367 (a)-8 (r).
ADDRESSES:
Send submissions to: CC:PA:LPD:PR (REG-147144-06), room 5203, Internal Revenue Service, PO Box 7604,
Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the [*2] hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-147144-06), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically via the Federal eRulemaking
Portal at www.regulations.gov (IRS REG-147144-06).
FOR FURTHER INFORMATION CONTACT:

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S. James Hawes, (202) 622-3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information in these regulations have been reviewed and approved by the office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507 (d)) under control number 1545-2056.
The collections of information in these final regulations are in §1.367 (a)-8 (d), (g), (k), and (o). Responses to the
collections of information are required to avoid recognizing gain under an existing gain recognition agreement and to
facilitate electronic filing. The regulations also require the amount of any gain recognized under a gain recognition
agreement and applicable interest due with respect to any additional tax due with respect to such gain to be reflected
on a schedule included with the electronically-filed return of the taxpayer.
An agency may [*3] not conduct or sponsor, and a person is not required to respond to, a collection of information, unless the collection of information displays a valid control number.
Books and records relating to these collections of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are
confidential, as required by 26 U.S.C. 6103.
Background
On February 5, 2007, the IRS and Treasury Department issued temporary and proposed regulations under section 367 (a) concerning the terms and conditions for a gain recognition agreement (GRA) filed by a United States
person (the U.S. transferor) in connection with a transfer of stock or securities to a foreign corporation (transferee
foreign corporation) and the impact of certain transactions on an existing GRA (the 2007 regulations). 72 F.R. 5184
(T.D. 9311, 2007-1 C.B. 635). No public hearing on the 2007 regulations was requested or held; however, numerous
comments were received. After considering the comments received, the IRS and Treasury Department adopt the
2007 regulations, with modifications, as final regulations [*4] under section 367 (a). This Treasury decision also
removes the temporary regulations and revises cross-references where appropriate to reflect the removal and replacement of the temporary regulations with final regulations.
Summary of Comments and Explanation of Revisions
A. Subsequent Nonrecognition Transfers-In General
The 2007 regulations provide specific exceptions for certain dispositions or other events that would otherwise
require gain to remove the watermark to be recognized under an existing GRA (triggering event). The exceptions generally apply to dispositions that qualify for nonrecognition treatment under the Code and require the U.S. transferor
to enter into a new GRA with respect to the initial transfer for the remaining term of the existing GRA.
Several commentators asserted that the exceptions provided by the 2007 regulations did not literally apply to various dispositions qualifying for nonrecognition treatment because the entity making the transfer is not described in
the relevant exception, thus inappropriately resulting in gain recognition under a GRA. For example, assume that in
year 1 a domestic corporation, USP, transfers stock of a foreign corporation, [*5] FS1, to another foreign corporation, FS2, pursuant to an exchange to which section 351 applies (the initial transfer). USP files a GRA with respect
to the initial transfer. In year 2, FS2 transfers the FS1 stock received from USP in year 1 to another foreign corporation, FS3, solely in exchange for stock of FS3 under section 351. The year 2 transfer of the FS1 stock by FS2 would
constitute a triggering event for purposes of the GRA filed by USP with respect to the initial transfer, but the transfer qualifies for an exception under the 2007 regulations. USP complies with the requirements of the 2007 regulations with respect to the GRA filed for the initial transfer. In year 3, FS3 contributes the FS1 stock received from
FS2 in year 2 to another foreign corporation, FS4, solely in exchange for stock of FS4 under section 351. The year 3
transfer of the FS1 stock by FS3 is a triggering event with respect to the GRA entered into by USP in connection
with the initial transfer.

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The 2007 regulations provide an exception for certain subsequent transfers of the transferred stock in a transaction to which section 351 applies (section 351 exchange), but the exception does [*6] not clearly apply when the
transferor in the section 351 exchange is not the transferee foreign corporation. Commentators expressed similar
concerns with respect to other nonrecognition transactions, including liquidations described in section 332 (section
332 liquidation), transactions to which section 355 applies (section 355 transactions), and transactions involving
partnerships. The commentators suggested various alternatives for avoiding the inappropriate triggering of a GRA in
such cases.
The IRS and Treasury Department agree that certain nonrecognition transactions that may not qualify for an exception under the 2007 regulations should not trigger an existing GRA. Because specific exceptions provide certainty
to the relevant transactions, the final regulations retain the exceptions of the 2007 regulations with modifications so
that the exceptions apply to transactions involving one or more entities not clearly described in the 2007 regulations. For example, under the final regulations the exception for a section 351 exchange of the transferred stock applies to any transfer of the transferred stock regardless of the identity of the transferor. The final regulations [*7]
include additional specific exceptions and a general exception for certain transactions that cannot be adequately covered by a specific exception because of the myriad factual permutations.
The general exception provided by the final regulations applies generally to any disposition or other event that
would otherwise constitute a triggering event if the disposition is a nonrecognition transaction (as defined in section
7701 (a) (45), but including an exchange described in section 351 (b) or 356 even if all gain realized is recognized); a
U.S. transferor retains a direct or indirect interest in the transferred stock or securities (or the assets of the transferred
corporation, such as where the transferred corporation has liquidated in the interim); and the U.S. transferor that retains such direct or indirect interest enters into a new GRA with respect to the initial transfer. However, if, as a result
of the disposition or other event, a foreign corporation acquires all or part of the transferred stock or securities (or
substantially all the assets of the transferred corporation) the general exception shall apply only if the U.S. transferor owns at least five percent [*8] (applying the attribution rules of section 318, as modified by section 958 (b)) of
the total voting power and the total value of the outstanding stock of such foreign corporation immediately after the
disposition or other event. This five percent ownership condition is intended to limit the application of the general
exception in transactions where the U.S. transferor retains a minimal interest in the transferred stock or securities
(or substantially all the assets of the transferred corporation). The final regulations include examples to illustrate the
application of the general exception.
A disposition or other event to which the general exception applies shall be subject to the provisions of the final
regulations to the same extent and in the same manner as a disposition or event to which a specific exception applies.
For example, even though a specific exception is generally available for a section 351 exchange of the transferred
stock by the transferee foreign corporation, the U.S. transferor must still recognize gain under the existing GRA to
the extent the transferee foreign corporation would otherwise recognize gain in the exchange under section 351 (b).
[*9] The U.S. transferor must therefore similarly recognize gain in connection with a disposition or other event to
which the general exception applies to the extent that the transferee foreign corporation would otherwise recognize
gain in the exchange under section 351 (b).
A new GRA filed under the general exception is generally subject to the same terms and conditions as the existing GRA, but must also describe the subsequent dispositions that would constitute triggering events (based on the
principles of the final regulations, but not including any triggering event otherwise described in the final regulations) and include a statement that the U.S. transferor agrees to treat such dispositions as triggering events. In addition, the final regulations provide that, with respect to a new GRA filed under the general exception, a triggering
event shall also include any other disposition or event that is inconsistent with the principles of the triggering event
exceptions including, for example, an indirect disposition of the transferred stock or securities or of substantially all
of the assets of the transferred corporation. This additional condition is similar to
[*10] the condition applicable to
a GRA filed in connection with an indirect stock transfer described in §1.367 (a)-3 (d).
One commentator requested that an exception be provided for a securities lending transaction to which section
1058 applies. The final regulations do not provide such an exception.
B. Dispositions Pursuant to an Intercompany Transaction
Under the 2007 regulations, a complete or partial disposition by the U.S. transferor of the stock of the transferee
foreign corporation received in the initial transfer generally requires the U.S. transferor to recognize gain under the

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GRA. Exceptions to this general rule are provided for certain nonrecognition transfers to which sections 351, 354,
or 721 applies. As described further in part D. of this Preamble, the 2007 regulations provide further that a GRA
shall instead terminate (in whole or in part) if the U.S. transferor disposes of all or part of the stock of the transferee
foreign corporation received in the initial transfer pursuant to a transaction in which all gain realized is recognized
currently and included in taxable income as a result of the disposition, but only if the basis of the stock disposed
[*11] of (excluding certain adjustments to such basis) is not greater than the basis in the transferred stock or securities at the time of the initial transfer.
If the U.S. transferor disposes of stock of the transferee foreign corporation pursuant to an intercompany transaction (within the meaning of §1.1502-13) that is not described in section 351 or 354, the conditions for terminating the
existing GRA (in whole or in part) are not satisfied because, under the provisions of §1.1502-13, the U.S. transferor
generally defers taking into account any gain realized and recognized on the disposition. Thus, such a disposition
would be a triggering event.
Several commentators asserted that it is inappropriate to require the U.S. transferor to recognize gain under the
GRA in such cases because the stock of the transferee foreign corporation remains within the consolidated group of
which the U.S. transferor is a member. It is also inappropriate to terminate the GRA because the intercompany item
has not been taken into account. Instead, the commentators recommended that the GRA remain in effect for its remaining term. The IRS and Treasury Department agree with this recommendation, [*12] and the final regulations
provide a specific exception for dispositions of stock of the transferee foreign corporation pursuant to an intercompany transaction (intercompany transaction exception) to which a specific triggering event exception does not apply.
If the intercompany transaction exception applies, the U.S. transferor remains subject to the existing GRA. But see
the discussion below when the intercompany transaction is a nonrecognition transaction in which an amount of gain
is recognized.
The intercompany transaction exception is available if two conditions are satisfied. The first condition is that the
basis of the stock of the transferee foreign corporation disposed of in the intercompany transaction is not greater
than the sum of the aggregate basis in the transferred stock or securities at the time of the initial transfer, any increase to the basis of the transferred stock or securities by reason of gain recognized by the U.S. transferor in connection with the initial transfer, and any increase to the basis of the stock of the transferee foreign corporation by
reason of income inclusions by the U.S. transferor (for example, pursuant to section 961). [*13] To satisfy this
basis condition, the U.S. transferor can elect to reduce the basis of the stock of the transferee foreign corporation,
effective immediately before the intercompany transaction.
The second condition is that the annual certification filed with respect to the existing GRA for the taxable year
during which the intercompany transaction occurs includes a complete description of the intercompany transaction
and a schedule illustrating how the basis condition is satisfied.
Because the final regulations provide specific exceptions for certain nonrecognition transfers of stock of the
transferee foreign corporation (for example, pursuant to a section 351 exchange), the new intercompany transaction
exception applies only to the extent the intercompany transaction gives rise to an intercompany item (as defined in
§1.1502-13 (b) (2)). If the intercompany item is a gain, the existing GRA must be divided into two separate agreements - one that remains with the U.S. transferor (of an amount equal to the intercompany item) and another that
moves to the acquiring member (of an amount equal to the remaining amount of the existing GRA amount). For example, assume [*14] the amount of the existing GRA is $100x, the intercompany transaction is described in
section 351 (b), and the U.S. transferor recognizes $20x gain (the intercompany item) in the intercompany transaction. The intercompany transaction exception applies to the extent of the $20x intercompany item, and the exception
for section 351 exchanges applies to the remainder of the transfer. Thus, the U.S. transferor remains subject to a
$20x GRA (to the extent of the $20x intercompany item), and the acquiring member becomes subject to an $80x
GRA. This result is similar to that of a transfer of the stock of the transferee foreign corporation to a domestic acquiring corporation in a section 351 exchange that is not an intercompany transaction but in which the U.S. transferor
recognizes gain under section 351 (b). In such a case, the amount of the new GRA entered into by the domestic acquiring corporation is reduced by the amount of gain recognized by the U.S. transferor on the transfer under section
351 (b). The U.S. transferor does not remain subject to a GRA because the gain recognized under section 351 (b) is
taken into account. By contrast, if the section 351 exchange [*15] were an intercompany transaction, the U.S.
transferor must remain subject to a GRA in an amount equal to the gain recognized under section 351 (b) because the
gain has not been taken into account.

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If the intercompany item is a loss, however, the U.S. transferor shall remain subject to the entire GRA. In addition, in such a case, the termination rule that applies to dispositions of the stock of the transferee foreign corporation
in which all realized gain is recognized and included in taxable income during the taxable year of the disposition
shall not apply.
The final regulations provide rules to coordinate the subsequent inclusion in taxable income of an intercompany
item and an amount of gain recognized under the GRA. Generally, under the coordination rule, if subsequent to an
intercompany transaction to which the intercompany transaction exception applies, a disposition or other event occurs that requires the U.S. transferor to take into account the intercompany item related to the intercompany transaction (under the provisions of §1.1502-13), the disposition shall not constitute a triggering event. Instead the GRA
shall terminate without further effect or [*16] the amount of gain subject to the GRA shall be reduced based on
the principles of the termination rule that applies to certain dispositions of the stock of the transferee foreign corporation received in the initial transfer. The final regulations include an example illustrating this rule.
C. Divisive Reorganizations
The preamble to the 2007 regulations requested comments concerning whether specific exceptions should be
provided for divisive reorganizations involving the U.S. transferor, the transferee foreign corporation, or the transferred corporation. No comments were received. However, the final regulations provide a specific exception for
divisive reorganizations involving a transfer of the stock of the transferee foreign corporation received in the initial
transfer to a domestic corporation (domestic controlled corporation) before the distribution of the stock of the domestic controlled corporation. The specific exception applies if the domestic controlled corporation enters into a new
GRA with respect to the initial transfer. The IRS and Treasury Department expect the general exception to apply to
other divisive reorganizations, as appropriate. The final [*17] regulations include examples illustrating the application of the general exception to divisive reorganizations.
D. GRA Termination Events
If certain conditions are met, under the 2007 regulations an existing GRA terminates without further effect (termination rule) if the U.S. transferor (or other specified United States persons) re-acquires the transferred stock or
securities, or the U.S. transferor disposes of the stock of the transferee foreign corporation received in the initial
transfer. One condition for the application of the termination rule is that, with certain adjustments, the basis of the
transferred stock or securities in the hands of the U.S. transferor (or other specified United States person) immediately following the acquisition or the basis of stock of the transferee foreign corporation disposed of by the U.S.
transferor, as relevant, must not be greater than the basis of the transferred stock or securities at the time of the initial transfer. To satisfy this basis condition, the 2007 regulations generally permit the U.S. transferor (or other United
States person) to reduce the basis of the transferred stock or securities (or the stock of the [*18] transferee foreign
corporation, as applicable). The 2007 regulations further permit an increase to basis of other stock or securities in the
transferred corporation (or stock of the transferee foreign corporation, as applicable) by a corresponding amount,
but not in excess of fair market value.
The final regulations retain the termination rule and the conditions for its application, including the option to reduce basis. However, the IRS and Treasury Department have determined that it is inappropriate to permit the shifting of basis to other stock or securities in the case of an election to reduce the basis of stock or securities. The final
regulations, therefore, do not permit the U.S. transferor (or other United States person) to increase the basis of other
stock or securities of the transferred corporation (or stock of the transferee foreign corporation, as applicable). The
general exception, however, may apply allowing the U.S. transferor (or other United States person) to enter into a
new GRA in connection with a transaction in which the transferred stock or securities are re-acquired in lieu of reducing the basis of the transferred stock or securities.
One [*19] commentator questioned whether the termination rule applies in the case of a downstream asset
reorganization of the transferee foreign corporation into the transferred corporation because the U.S. transferor receives newly-issued stock of the transferred corporation in the transaction and not the stock transferred in the initial
transfer. The IRS and Treasury Department believe it is appropriate for the termination rule to apply in the case of
such downstream asset reorganizations. Accordingly, by revising the location of a rule contained in the 2007 regulations, the final regulations clarify that the term transferred stock or securities includes any stock or securities of the
transferred corporation with a basis determined, in whole or in part, by reference to the basis of the stock or securities transferred in the initial transfer. Thus, in the case of a downstream asset reorganization, for purposes of the

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termination rule, the newly-issued stock of the transferred corporation deemed distributed by the transferee foreign
corporation to the U.S. transferor under section 361 (c) is the stock transferred in the initial transfer.
The 2007 regulations provide [*20] an exception for certain expropriation losses that would otherwise constitute triggering events. The final regulations modify the rule to provide instead that the amount of gain subject to a
GRA is reduced to the extent a loss is sustained with respect to stock of the transferee foreign corporation, the
transferred stock or securities, or substantially all the assets of the transferred corporation by reason of an expropriation of such property by the government of a foreign country, any political subdivision thereof, or any agency or
instrumentality of the foregoing.
E. Transfers by U.S. Transferor Pursuant to an Outbound Asset Reorganization
The 2007 regulations provide an exception for a transfer of stock of the transferee foreign corporation by the
U.S. transferor to a domestic corporation pursuant to an asset reorganization described in section 368 (a) (1). See
§1.367 (a)-8T (e) (3) (i). The preamble to the 2007 regulations requested comments concerning whether an exception should also be provided for an outbound transfer of the stock of the transferee foreign corporation by the U.S.
transferor to a foreign corporation pursuant to an asset reorganization [*21] described in section 368 (a) (1). No
comments were received. However, after studying the issue further and considering the principles of the proposed
regulations recently issued under sections 367 (a) (5), 367 (b), and 1248 (f) (73 FR 49278), the IRS and Treasury
Department have determined that it is appropriate for an exception to apply to such an outbound transfer. The final
regulations do not include a specific exception for such outbound transfers, but the IRS and Treasury Department
expect the general exception provided by the final regulations to apply to such transfers, as appropriate. The final
regulations include an example illustrating the application of the general exception to such a transfer.
F. Ordering Rule if Triggering Event Affects Multiple GRAs
The final regulations provide an ordering rule to determine the amount of gain recognized under a GRA when a
disposition or other event requires gain to be recognized under more than one GRA. The ordering rule adopts a
"first-in-time" approach, providing that gain must first be recognized under the GRA that relates to the earliest initial transfer, then under the GRA that relates to the transfer immediately [*22] following the initial transfer, and
so forth until the appropriate amount of gain under each GRA has been recognized. This ordering rule clarifies that
the gain recognized under a GRA is determined after taking into account any increase to the basis of the transferred
stock or securities resulting from gain recognized under another GRA that relates to an earlier initial transfer. The
final regulations include an example to illustrate the ordering rule.
G. Section 301 Distributions
The 2007 regulations define a disposition as any transfer that would constitute a disposition for any purpose of
the Code and the regulations under the Code, but exclude a stock redemption described under section 302 (d) (dividend equivalent redemption) to the extent section 301 (c) (1) applies. One commentator requested that the final regulations clarify whether the rule for dividend equivalent redemptions applies to redemptions of stock of the transferee foreign corporation, the transferred corporation, or both. The commentator also requested that the final regulations confirm that a distribution of property to which section 301 (c) (2) applies (including in the case of a dividend
[*23] equivalent redemption) does not constitute a disposition of the relevant stock.
The final regulations provide that a disposition generally does not include the receipt of a distribution of property
with respect to stock to which section 301 applies, including by reason of section 302 (d). The final regulations provide further that a dividend equivalent redemption shall constitute a disposition if the U.S. transferor does not enter
into a new GRA that includes appropriate provisions to account for the redemption. The final regulations include an
example illustrating this rule and describing the types of appropriate provisions that should be included in the new
GRA. The provisions to be included in the GRA are necessary, for example, to account for a dividend equivalent
redemption that occurs pursuant to a transaction to which section 304 (a) (1) applies and in which the transferor
does not retain a direct or indirect interest in the acquiring corporation. In such a case, the GRA would need to provide appropriate provisions to account for indirect dispositions of the transferred stock that should require gain to be
recognized under the new GRA.
The final regulations [*24] provide that the U.S. transferor must recognize gain under a GRA to the extent
gain is recognized under section 301 (c) (3) with respect to the transferred stock and that the amount of gain subject

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to the GRA is reduced to the extent the U.S. transferor recognizes gain under section 301 (c) (3) with respect to the
stock of the transferee foreign corporation received in the initial transfer.
H. Elections under Section 338
One commentator requested that the final regulations provide an exception for a deemed sale of the assets of the
transferred corporation or the transferee foreign corporation by reason of an election under section 338 (g). The
commentator posited a fact pattern where the U.S. transferor entered into a GRA in connection with a transfer of
less than 20 percent of the outstanding stock of the transferred corporation to the transferee foreign corporation,
and, within the GRA term, the transferee foreign corporation acquires additional stock of the transferred corporation
constituting a qualified stock purchase (within the meaning of section 338 (d) (3)) and makes an election under section 338 (g) with respect to such acquisition. The deemed asset [*25] sale that results from the section 338 (g)
election is a sale for all purposes of the Code (see §1.338-2 (c) (6)) and thus, under the 2007 regulations, would
require the U.S. transferor to recognize the full amount of gain subject to the GRA. The commentator asserted that
providing an exception for such a deemed asset sale was consistent with the policies of the GRA regime because the
deemed asset sale is not a monetization of the assets or stock of the transferred corporation.
The IRS and Treasury Department agree with the commentator, and the final regulations provide that a deemed
sale of assets of the transferred corporation or the transferee foreign corporation by reason of an election under section 338 (g) shall not constitute a triggering event for purposes of the GRA. However, the sale of stock of the target
corporation pursuant to the qualified stock purchase shall be taken into account for purposes of a GRA. The sale of
stock of the transferred or transferee foreign corporation by the seller should either require gain to be recognized under a GRA or terminate the GRA without further effect if the conditions for the termination rule are satisfied, [*26]
even if an election under section 338 (g) is made.
By contrast, a deemed sale of assets of a domestic corporation by reason of an election under section 338 (h)
(10) shall continue to be taken into account for purposes of §1.367 (a)-8. Thus, for example, if an election under
section 338 (h) (10) were made with respect to the U.S. transferor, the deemed sale of the stock of the transferee
foreign corporation held by the U.S. transferor would constitute a disposition of such stock that either requires gain
to be recognized under the GRA or terminates the GRA if the conditions for the termination rule are satisfied.
On August 22, 2008, the IRS and Treasury Department issued proposed regulations under section 336 (e)
(REG-143544-04, 2008-42 I.R.B. 947) that provide rules generally consistent with the rules that apply to elections
under section 338 (h) (10). The proposed regulations under section 336 (e) shall be applicable to dispositions occurring on or after the proposed regulations are published as final regulations in the Federal Register. The proposed
regulations do not apply if the selling corporation or the target corporation is foreign. When final regulations [*27]
under section 336 (e) are promulgated, the IRS and Treasury Department anticipate that a deemed asset sale pursuant
to a section 336 (e) election with respect to a domestic corporation shall be taken into account for purposes of §1.367
(a)-8, similar to a deemed asset sale pursuant to an election under section 338 (h) (10). Comments are requested in
this regard, including what special rules would be required with respect to an existing GRA if an election under
section 336 (e) were permitted if the selling corporation or the target corporation were foreign.
I. Expatriation under Section 877A
The 2007 regulations provide that a GRA shall be triggered immediately before the date on which an individual
U.S. transferor loses United States citizenship or ceases to be taxed as a lawful permanent resident (as defined in
section 877 (e) (2)). This rule applies even if the individual U.S. transferor would have recognized gain with respect
to the stock of the transferee foreign corporation under section 877. The final regulations generally retain this rule,
modified for the enactment of section 877A. Further, the final regulations make clear that the termination rule
[*28] that applies in certain cases where the U.S. transferor disposes of the stock of the transferee foreign corporation is not applicable to an individual U.S. transferor that is subject to section 877A.
J. GRA Content
Comments were received regarding whether the information required with a GRA could instead be made available by the U.S. transferor "upon request." The final regulations confirm that the information required with a GRA
must be included with the GRA as filed with the tax return of the U.S. transferor.

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K. Other Changes
Under the 2007 regulations, certain dispositions that qualify for an exception nonetheless require the U.S. transferor to recognize gain under the existing GRA. For example, to the extent the transferee foreign corporation would
be required to recognize gain under section 351 (b) or 356 (a) (1) in connection with an exchange of the transferred
stock, the U.S. transferor must recognize gain under the GRA notwithstanding that an exception applies to the exchange of the transferred stock. The final regulations retain this rule; however, the final regulations refer to any
disposition or event that requires gain to be recognized under a GRA [*29] as a "gain recognition event." A gain
recognition event includes a triggering event, a disposition that would constitute a triggering event but for the application of an exception (such as the section 351 (b) or 356 exchange described above), and a section 301 distribution that would require gain to be recognized under section 301 (c) (3) with respect to the transferred stock.
The final regulations clarify the amount of gain subject to a GRA that is filed by a domestic corporate shareholder of a domestic corporation (the U.S. transferor) that transfers stock or securities to the transferee foreign corporation pursuant to an outbound asset reorganization that is subject to section 367 (a) (5) and the regulations under
that section.
The final regulations clarify that, if a GRA is entered into in connection with a transfer of a partnership interest,
a complete or partial disposition of such partnership interest shall constitute a triggering event for purposes of the
GRA.
The 2007 regulations provide exceptions for certain dispositions of stock of the transferee foreign corporation or
of substantially all the assets of the transferred corporation that are described [*30] in section 351, 354 (but only
in the case of a reorganization described in section 368 (a) (1) (B)), or 721, if, in addition to other requirements, the
U.S. transferor complies with requirements similar to those for the exception that applies to similar dispositions of
the transferred stock or securities. See §1.367 (a)-8T (e) (1) (ii). In response to comments requesting certainty concerning the requirements that must be satisfied, the final regulations identify the specific requirements that must be
satisfied with respect to such dispositions.
The 2007 regulations provide that, if the transferred corporation is domestic and at the time of the initial transfer
the U.S. transferor owned stock in the transferred corporation satisfying the requirements of section 1504 (a) (2),
the GRA shall terminate without further effect if the transferred corporation disposes of substantially all of its assets
in a transaction in which all gain realized is recognized currently. The final regulations retain this termination rule but
add, as an additional condition for its application, that the U.S. transferor and the transferred corporation were members of the same consolidated [*31] group on the date of the initial transfer. This change was made because the
IRS and Treasury Department expect a lesser degree of inside and outside basis disparity within a consolidated
group.
The final regulations provide that, if the initial transfer and one or more dispositions or other events (even if an
exception applies) that affect the GRA filed by the U.S. transferor with respect to the initial transfer occur within
the same taxable year of such U.S. transferor, or if multiple dispositions or events that affect an existing GRA (even
if an exception applies) occur in a taxable year of the U.S. transferor that does not include the initial transfer, the U.S.
transferor is only required to enter into a single GRA for such taxable year. The GRA must describe the initial transfer and/or each subsequent disposition or other event that affects the GRA. This rule does not apply, however, if a
disposition or other event requires a new GRA to be filed by a United States person that was not the U.S. transferor
with respect to the existing GRA.
The final regulations provide that the determination of whether a disposition of substantially all of the assets of
the [*32] transferred corporation has occurred shall be made on the basis of one or more related transactions.
The final regulations provide further that the determination shall be made without regard to a disposition of assets
described in section 1221 (a) (1) in the ordinary course of business.
Effective/Applicability Dates
The final regulations generally apply to transfers of stock or securities occurring on or after March 13, 2009. The
final regulations shall not apply to transfers of stock or securities occurring on or after March 13, 2009 that are entered into pursuant to a contract that was binding before February 11, 2009 (subject to customary conditions) and all
times thereafter. However, taxpayers may apply the final regulations to such transfers provided the final regulations
are applied consistently to all such transfers. Taxpayers may also apply the rules of the final regulations that were not

Page 9
2009-1 C.B. 607; T.D. 9446;
2009 IRB LEXIS 127, *; 2009-9 I.R.B. 607
already effective under §1.367 (a)-8 (see 26 CFR part 1, revised April 1, 2006) and §1.367 (a)-8T to any gain recognition agreement filed with respect to a transfer of stock or securities occurring on a date that is before March 13,
2009 and during a taxable year for [*33] which the period of limitations on assessments under section 6501 (a) of
the Code has not closed.
Availability of IRS Documents
IRS documents cited in this preamble are made available by the Superintendent of Documents, U.S. Government
Printing Office, Washington, DC 20402.
Effect on Other Documents
The following publication is obsolete as of February 11, 2009: Notice 2005-74, 2005-2 C.B. 726.
Special Analyses
It has been determined that this Treasury Decision is not a significant regulatory action as defined in Executive
Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that 5 U.S.C. 553 (b)
and (d) do not apply to these regulations.
It is hereby certified that the collections of information contained in these regulations will not have a significant
economic impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required. These regulations primarily will affect United States persons that are large corporations engaged in
cross-border corporate transactions. Thus, the number of affected small entities-in whichever of the three categories
defined in the Regulatory Flexibility [*34] Act (small businesses, small organizations, and small governmental
jurisdictions)-will not be substantial. The IRS and Treasury Department estimate that small organizations and small
governmental jurisdictions are likely to be affected only insofar as they might hold a portfolio interest in stock or
securities and in the unlikely event that they transfer such stock or securities to a foreign corporation. While a certain
number of small entities may transfer stock or securities to a foreign corporation in connection with an acquisition
or reorganization, the IRS and Treasury Department do not anticipate the number to be substantial. Furthermore, the
IRS and Treasury Department estimate that those small entities that are affected by the regulations will likely face a
burden of approximately two hours at an hourly rate of $200. Considering that the collections of information enable
taxpayers to defer the current recognition of gain that is subject to a gain recognition agreement, the IRS and Treasury believe that $400 is not a significant economic impact. Pursuant to section 7805 (f) of the Internal Revenue Code,
this regulation was submitted to the Chief Counsel [*35] for Advocacy of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal authors of these regulations are Daniel McCall, formerly of the Office of the Associate Chief Counsel (International), and S. James Hawes, of the Office of the Associate Chief Counsel (International). However, other
personnel from the IRS and the Treasury Department participated in their development.
***
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1-INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by removing the entries for §§1.367
(a)-3T (e) and 1.367 (a)-8T to read in part as follows:

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

Page 10
2009-1 C.B. 607; T.D. 9446;
2009 IRB LEXIS 127, *; 2009-9 I.R.B. 607

Par. 2. Section 1.338-1 is amended by adding a new sentence at the end of paragraph (a) (2), to read
as follows:

§1.338-1. General principles; status of old target and new target.
(a) * * *
(2) * * * See also §1.367 (a)-8 (k) (13) for a rule applicable to gain recognition
agreements (filed under section §§1.367 (a)-3 (b) (1) (ii) and 1.367 (a)-8) and deemed
asset sales as a result of an election under section 338 (g).
***
§1.367 (a)-3 [Amended]

Par. 3. For each entry [*36] in the table in the "Section" column, remove the language in the
"Remove" column and add the language in the "Add" column in its place.
Section
Remove
Add
1.367 (a)-3 (c) (3) (iii) (B) (1) (i) (A)
1296 (b)
1297 (b)
1.367 (a)-3 (d) (2) (iii)
§1.367 (a)-8T (b) (3) (i)
§1.367 (a)-8 (c)(1) (i)
and (d)
1.367 (a)-3 (d) (2) (v)
§ 1.367 (a)-8T (d) (2)
§1.367 (a)-8 (j)(2) (i)
§§1.367 (a)-3 (d) (3), Example 1(ii), fourth sentence
§1.367 (a)-8T (d) (1)
§1.367 (a)-8 (j) (1)
1.367 (a)-3 (d) (3), Example 1(ii), fourth sentence
§1.367 (a)-8T (b) (1)(vii)
§1.367 (a)-8 (c) (2)(vi)
1.367 (a)-3 (d) (3), Example 1(ii), fifth sentence
§1.367 (a)-8T (b) (1)(vii)
§1.367 (a)-8 (c) (2)(vi)
1.367 (a)-3 (d) (3), Example 1A(ii), first sentence
§1.367 (a)-8T (a) (3)
§1.367 (a)-8 (d) (3)
and (e) (1) (i)
1.367 (a)-3 (d) (3), Example 1A(ii), second sentence
§1.367 (a)-8T (d) (4)
§1.367 (a)-8 (j) (5)
1.367 (a)-3 (d) (3), Example 1A(ii), second sentence
§1.367 (a)-8T (e) (8)
§1.367 (a)-8 (k)(10)
1.367 (a)-3 (d) (3), Example 4(i), first sentence
§1.367 (a)-8T (d) (2)
§1.367 (a)-8 (j) (2)(i)
1.367 (a)-3 (d) (3), Example 4(ii), first sentence
§1.367 (a)-8T (d) (2)
§1.367 (a)-8 (j) (2)
1.367 (a)-3 (d) (3), Example 4(ii), second sentence
§1.367 (a)-8T (g) (2)
§1.367 (a)-8 (o) (4)
1.367 (a)-3 (d) (3), Example 5A(ii), second to last sentence §1.367 (a)-8T (g) (2)
§1.367 (a)-8 (o) (4)
1.367 (a)-3 (d) (3), Example 6(ii), last sentence
§1.367 (a)-8T (d) (2)
§1.367 (a)-8 (j) (2)(i)
1.367 (a)-3 (d) (3), Example 7(ii), second sentence
§1.367 (a)-8T (g) (2)
§1.367 (a)-8 (o) (4)
1.367 (a)-3 (d) (3), Example 7(ii), third sentence
§1.367 (a)-8T (e) (1)(iii)
§1.367 (a)-8 (k) (4)
1.367 (a)-3 (d) (3), Example 7A(ii), fourth sentence
§1.367 (a)-8T (g) (2)
§1.367 (a)-8 (o) (4)
1.367 (a)-3 (d) (3), Example 7A(ii),last sentence
§1.367 (a)-8T (b) (5)
§1.367 (a)-8 (g)
1.367 (a)-3 (d) (3), Example 7A(ii),last sentence
§1.367 (a)-8T (e) (1)(iii)
§1.367 (a)-8 (k) (4)
1.367 (a)-3 (d) (3), Example 8(ii), second to last sentence §1.367 (a)-8T (d) (2)
§1.367 (a)-8 (j) (2)(i)
1.367 (a)-3 (d) (3),Example 9(ii), last sentence
§1.367 (a)-8T (d) (2)
§1.367 (a)-8 (j) (2)(i)
1.367 (a)-3 (d) (3), Example 11(ii), sixth sentence
§1.367 (a)-8T (d) (1)
§1.367 (a)-8 (j) (1)
1.367 (a)-3 (d) (3), Example 11(ii), sixth sentence
§1.367 (a)-8T (b) (1)(vii)
§1.367 (a)-8 (c) (2)(vi)
1.367 (a)-3 (d) (3), Example 12(ii), third sentence
§1.367 (a)-3T (e)
§1.367 (a)-3 (e)
1.367 (b)-4 (b) (1) (iii), Example 4(i), last sentence
§1.367 (a)-3T (e)
§1.367 (a)-3 (e)(1)(iii),
1.367 (b)-13 (a) (2) (iii)
or (iii) or in
or (iv)
sections 368 (a) (1)(G)
and (a) (2) (D)
Par. [*37] 4. For each entry in the table, redesignate the paragraph designated in the "Old Paragraph" column as the new paragraph designation in the "New Paragraph" column to read as follows:

Page 11
2009-1 C.B. 607; T.D. 9446;
2009 IRB LEXIS 127, *; 2009-9 I.R.B. 607

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

Old Paragraph
1.367 (a)-3 (g) (1) (A)
1.367 (a)-3 (g) (1) (B)
1.367 (a)-3 (g) (1) (B) (1)
1.367 (a)-3 (g) (1) (B) (2)
1.367 (a)-3 (g) (1) (B) (3)
1.367 (a)-3 (g) (1) (B) (4)
1.367 (a)-3 (g) (1) (B) (5)
1.367 (a)-3 (g) (1) (B) (6)
1.367 (a)-3 (g) (1) (C)
1.367 (a)-3 (g) (1) (D)
1.367 (a)-3 (g) (1) (D) (1)
1.367 (a)-3 (g) (1) (D) (2)
1.367 (a)-3 (g) (1) (D) (3)
1.367 (a)-3 (g) (1) (E)
1.367 (a)-3 (g) (1) (F)
1.367 (a)-3 (g) (2) (G)

New Paragraph
1.367 (a)-3 (g) (1) (i)
1.367 (a)-3 (g) (1) (ii)
1.367 (a)-3 (g) (1) (ii) (A)
1.367 (a)-3 (g) (1) (ii) (B)
1.367 (a)-3 (g) (1) (ii) (C)
1.367 (a)-3 (g) (1) (ii) (D)
1.367 (a)-3 (g) (1) (ii) (E)
1.367 (a)-3 (g) (1) (ii) (F)
1.367 (a)-3 (g) (1) (iii)
1.367 (a)-3 (g) (1) (iv)
1.367 (a)-3 (g) (1) (iv) (A)
1.367 (a)-3 (g) (1) (iv) (B)
1.367 (a)-3 (g) (1) (iv) (C)
1.367 (a)-3 (g) (1) (v)
1.367 (a)-3 (g) (1) (vi)
1.367 (a)-3 (g) (1) (vii)

Par. 5. Section 1.367 (a)-3 is amended by:

1.

In the first sentence of paragraph (b) (1), [*38] remove the words "Except as provided in section 367 (a) (5)" and add "Except as provided in section 367 (a) (5) and
paragraph (e) of this section" in their place.

2.

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

3.

Revising paragraphs (d) (2) (iv).

4.

Revising the last sentence of paragraph (d) (3), Example 5(ii).

5.

Removing the last sentence of paragraph (d) (3), Example 5A(ii).

6.

Revising paragraph (e).

7.

Revising and reserving paragraph (f).

Page 12
2009-1 C.B. 607; T.D. 9446;
2009 IRB LEXIS 127, *; 2009-9 I.R.B. 607

8.

Revising the heading for paragraph (g) and adding new paragraph (g) (1) (viii).

The revisions and addition read as follows:

§1.367 (a)-3 Treatment of transfers of stock or securities to foreign corporations.
***
(d) * * *
(2) * * *
(iv) Gain recognition agreements involving multiple parties. The U.S. person's
agreement to recognize gain, as provided in §1.367 (a)-8, shall include appropriate
provisions consistent with the principles of § 1.367 (a)-8. See Examples 5 and 5A of this
section and §1.367 (a)-8 (j) (9).
***
(3) * * *
Example 5. * * *
(ii) * * * Under §1.367 (a)-8 (j) (9), the [*39] gain recognition agreement would
be triggered if F sold all or a portion of the stock of S.
***
(e) Transfers by a domestic corporation to a foreign corporation in a section 361
exchange-(1) General rule. If a domestic corporation (U.S. transferor) transfers stock or
securities to a foreign corporation (transferee foreign corporation) in an exchange described in section 361 (a) or (b), or in an exchange described in section 351 that is also
described in section 361 (a) or (b) (collectively, a section 361 exchange), such transfer
shall be subject to section 367 (a) (1), unless the conditions of paragraphs (e) (1) (i)
through (iv) of this section are satisfied.
(i) The conditions set forth in section 367 (a) (5) and any regulations under that
section have been satisfied including that:

(A)

The U.S. transferor is controlled (within the meaning of section 368 (c))
by five or fewer (but at least one) domestic corporations (control group
members) at the time of the section 361 exchange;

(B)

The U.S. transferor recognizes the amount of the gain realized in the section 361 exchange that is allocable to any shareholder that is not a control
group member (based on the value of [*40] the ownership interest in
the U.S. transferor held by the shareholder at the time of the section 361
exchange);

(C)

The U.S. transferor recognizes the amount of the gain realized in the section 361 exchange allocable to a control group member that cannot be
preserved in the stock received by the control group member in the transaction; and

Page 13
2009-1 C.B. 607; T.D. 9446;
2009 IRB LEXIS 127, *; 2009-9 I.R.B. 607

(D)

Appropriate adjustments are made to the basis of the stock received by
each control group member in the transaction.

(ii) If the stock or securities transferred in the section 361 exchange are of a domestic corporation, the conditions in paragraphs (c) (1) (i), (ii), and (iv) of this section are
satisfied.
(iii) Each control group member that owns five percent or more (applying the attribution rules of section 318, as modified by section 958 (b)) of the total voting power
or the total fair market value of the stock of the transferee foreign corporation immediately after the transaction enters into a gain recognition agreement as provided in §1.367
(a)-8. The amount of gain subject to the gain recognition agreement shall equal the
amount of the gain realized by the U.S. transferor on the transfer of the stock or securities in the [*41] section 361 exchange that is allocable to such control group member (based on the ownership interest (by value) in the U.S. transferor held by the control
group member at the time of the section 361 exchange) reduced by the amount of such
allocable gain that is recognized by the U.S. transferor with respect to the control group
member. The gain recognition agreement shall designate the control group member as
the U.S. transferor for purposes of paragraphs (b) and (c) of this section and §1.367
(a)-8.
(iv) Each control group member that enters into a gain recognition agreement pursuant to paragraph (e) (1) (iii) of this section makes the election described in § 1.367
(a)-8 (c) (2) (vi).
(2) Certain triangular asset reorganizations. If a transfer of stock or securities described in paragraph (e) (1) of this section is pursuant to a triangular asset reorganization
described in §1.358-6 (b) (2) (i) through (iii), the gain recognition agreement filed by a
control group member pursuant to paragraph (e) (1) (iii) of this section shall include
provisions consistent with the principles of §1.367 (a)-8 to account for all the parties to
the reorganization. See §1.367 (a)-8 (j) (9).
(3) [*42] Examples. The following examples illustrate the provisions of paragraph (e) (1) of this section. Except as otherwise indicated, assume US1, US2, USP, and
UST are domestic corporations; US1 and US2 are not related; CFC1, CFC2, FA, and
FC are foreign corporations; the section 1248 amount attributable to the stock of a foreign corporation is zero; and section 7874 does not apply to the transaction.

Example 1. Outbound asset reorganization. (i) Facts. US1 and US2
own 60% and 40%, respectively, of the outstanding stock of UST. UST
wholly owns FC. The FC stock held by UST has a $20x basis and a
$100x fair market value. UST merges with and into FC in an asset reorganization described in section 368 (a) (1) (A). In the section 361 exchange that is part of the reorganization, UST transfers all of its FC stock
to FA. UST distributes the FA stock it received in the section 361 exchange to US1 and US2 pursuant to the plan of reorganization. The conditions set forth in the second sentence of section 367 (a) (5) and the
regulations under that section are satisfied, including adjusting the basis
of the FA stock received by US1 and US2 in the reorganization, as appropriate. After [*43] the reorganization, US1 and US2 own 6% and
4%, respectively, of the outstanding stock of FA.
(ii) Result. If the conditions of paragraph (e) (1) (i) through (iv) of
this section are satisfied, the transfer of the FC stock by UST to FA in the
section 361 exchange is not subject to section 367 (a) (1). Because US1

Page 14
2009-1 C.B. 607; T.D. 9446;
2009 IRB LEXIS 127, *; 2009-9 I.R.B. 607
and US2 complied with the requirements of section 367 (a) (5), the requirement of paragraph (e) (1) (i) of this section is satisfied. Paragraph (e)
(1) (ii) of this section is not applicable because FC is a foreign corporation. Pursuant to paragraph (e) (1) (iii) of this section, US1 enters into a
gain recognition agreement with respect to its share of the gain realized
by UST on the transfer of the FC stock to FA in the section 361 exchange ($48x, or 60% of $80x). The amount of gain subject to the gain
recognition agreement is $48x because UST did not recognize any
amount of such gain under section 367 (a) (5) or the regulations under
that section with respect to US1. US1 is designated as the U.S. transferor
on the gain recognition agreement for purposes of paragraph (b) of this
section and §1.367 (a)-8. US1 makes the election described in §1.367 (a)-8
(c) (2) (vi) [*44] with respect to the gain recognition agreement. Because US2 owns less than 5% of the stock of FA after the reorganization,
US2 is not required to enter into a gain recognition agreement with respect to its share of the gain realized by UST on the transfer of the FC
stock to FA in the section 361 exchange.
(iii) Alternate facts. The facts are the same as in paragraph (i) of this
Example, except that, in year 4, FA disposes of 25% of the FC stock in a
taxable exchange. Under §1.367 (a)-8 (c) (1) (i) and (j) (1), the partial
disposition of the FC stock requires US1 to include in income 25% of the
gain subject to the gain recognition agreement filed in year 1 ($12x, or
25% of $48x) and pay applicable interest on any additional tax due on
such inclusion.
(iv) Alternate facts. The facts are the same as in paragraph (iii) of this
Example, except that US1 and US2 are members of a consolidated group
of which USP is the common parent. Because US2 is considered to own
at least 5% of the stock of FA following the reorganization by reason of
the attribution rules of section 318, as modified by section 958 (b), a gain
recognition agreement must also be entered into on behalf of [*45]
US2 with respect to the amount of the gain realized but not recognized by
UST on the transfer of the FC stock to FA that is allocable to US2 ($32x,
or 40% of $80x). Under §1.367 (a)-8 (d) (3) and §1.1502-77 (a) (1), USP
enters into the gain recognition agreements on behalf of US1 and US2.
In year 4, US1 and US2 must include in income 25% of the amount of
gain subject to their respective gain recognition agreement ($12x for US1
and $8x for US2) and pay applicable interest on any additional tax due on
such inclusion.
Example 2. Divisive reorganization. (i) Facts. US1 wholly owns
UST. The UST stock has a $120x basis and $150x fair market value. UST
wholly owns CFC2. The CFC2 stock has a $20x basis and a $50x fair
market value. UST also owns Business A that has a fair market value of
$100x. In a divisive reorganization that satisfies the requirements of section 368 (a) (1) (D), UST transfers the CFC2 stock to CFC1, a newly-formed corporation, in exchange solely for CFC1 stock. The transfer of
the CFC2 stock to CFC1 is a section 361 exchange. UST then distributes
the CFC1 stock to US1 in a transaction that qualifies under section 355.
Under section 358, the pre-exchange [*46] basis in the UST stock
($120x) is allocated between the UST stock and the CFC1 stock based on
the relative fair market values of such stock. Therefore, immediately after
the transaction, the basis of the UST stock is $80x ($120x multiplied by
$100x/$150x), and the basis of the CFC1 stock is $40x ($120x multiplied
by $50x/$150x). The conditions set forth in section 367 (a) (5) and the
regulations under that section are satisfied, including reducing the basis of

Page 15
2009-1 C.B. 607; T.D. 9446;
2009 IRB LEXIS 127, *; 2009-9 I.R.B. 607
the CFC1 stock received by US1 in the transaction by $20x so that the
$30x built-in gain in the CFC2 stock transferred in the section 361 exchange is preserved in the CFC1 stock received by US1 in the transaction.
(ii) Result. Because US1 complied with the requirements of section
367 (a) (5) and regulations under that section, the requirement of paragraph (e) (1) (i) of this section is satisfied. Paragraph (e) (1) (ii) of this
section is not applicable because CFC2 is a foreign corporation. Pursuant
to paragraph (e) (1) (iii) of this section, US1 enters into a gain recognition
agreement with respect to its share of the gain realized by UST on the
transfer of the CFC2 stock to CFC1 in the section 361 exchange [*47]
($30x). The amount of gain subject to the gain recognition agreement is
$30x because UST did not recognize any amount of such gain under
section 367 (a) (5) or the regulations under that section with respect to
US1. US1 is designated as the U.S. transferor on the gain recognition
agreement for purposes of paragraph (b) of this section and §1.367 (a)-8.
US1 makes the election described in §1.367 (a)-8 (c) (2) (vi) with respect
to the gain recognition agreement.

(4) Cross-references. For other examples that illustrate the application of this paragraph (e), see §1.367 (a)-8 (q) (2), Examples 6 and 24. For rules relating to an acquisition of the stock of a foreign corporation by another foreign corporation in a section
361 exchange, see Par. 7. Section 1.367 (a)-8 is revised to §1.367 (b)-4 (b) (1) (iii), Example 4. For read as follows: rules relating to certain distributions of stock of a foreign
corporation by a domes §1.367 (a)-8 Gain recognition agreement tic corporation, see
section 1248 (f) and requirements. the regulations under that section.
(f) [Reserved].
(g) Effective/applicability date (1) * * *
(viii) (A) Except as provided in this paragraph (g) (1) (viii), the rules [*48] of
paragraph (e) of this section apply to transfers of stock or securities occurring on or after
March 13, 2009. For matters covered in this section for periods before March 13, 2009 but
on or after March 7, 2007, the rules of §1.367 (a)-3T (e) (see 26 CFR part 1, revised April
1, 2007) apply. For matters covered in this section for periods before March 7, 2007, but
on or after July 20, 1998, the rule of §1.367 (a)-8 (f) (2) (i) (see 26 CFR part 1, revised
April 1, 2006) applies.
(B) Taxpayers may apply the rules of §1.367 (a)-3 (e) to transfers occurring before
March 13, 2009 and during a taxable year for which the period of limitations on assessments under section 6501 (a) has not closed, if done consistently to all such transfers occurring during each taxable year. A taxpayer applies the rules of §1.367 (a)-3 (e) to transfers occurring before March 13, 2009 and during a taxable year for which the period of
limitations on assessments under section 6501 (a) has not closed, by including the gain
recognition agreement, annual certification, or other information filing, that is required as
a result of the rules of §1.367 (a)-3 (e) applying to such a transfer, with an amended tax
return [*49] for the taxable year in which the transfer occurs that is filed on or before
August 10, 2009. A taxpayer that wishes to apply the rules of §1.367 (a)-3 (e) to transfers
occurring before March 13, 2009 and during a taxable year for which the period of limitations on assessments under section 6501 (a) has not closed but that fails to meet the filing
requirement described in the preceding sentence must request relief for reasonable cause
for such failure as provided in §1.367 (a)-8.
***
§1.367 (a)-3T [Removed]

Page 16
2009-1 C.B. 607; T.D. 9446;
2009 IRB LEXIS 127, *; 2009-9 I.R.B. 607

Par. 6. Section 1.367 (a)-3T is removed.
Par. 7. Section 1.367 (a)-8 is revised to read as follows:

§1.367 (a)-8 Gain recognition agreement requirements.
(a) Scope. This section provides the terms and conditions for a gain recognition
agreement entered into by a United States person pursuant to §1.367 (a)-3 (b) through (e)
in connection with a transfer of stock or securities to a foreign corporation pursuant to an
exchange that would otherwise be subject to section 367 (a) (1). Paragraph (b) of this section provides definitions and special rules. Paragraphs (c) through (h) of this section identify the form, content, and other conditions of a gain recognition agreement. Paragraph (i)
[*50] of this section is reserved. Paragraph (j) of this section identifies certain events that
may require gain to be recognized under a gain recognition agreement. Paragraph (k) of
this section provides exceptions for certain events that would otherwise require gain to be
recognized under a gain recognition agreement. Paragraph (l) of this section is reserved.
Paragraph (m) of this section provides rules that require gain to be recognized under a
gain recognition agreement in connection with certain events to which an exception under
paragraph (k) of this section otherwise applies. Paragraph (n) of this section provides special rules in the case of a distribution of property with respect to stock to which section
301 [*51] applies. Paragraph (o) of this section provides rules for certain transactions
that terminate or reduce the amount of gain subject to a gain recognition agreement. Paragraph (p) of this section provides relief for reasonable cause for certain failures to comply
with the requirements of this section. Paragraph (q) of this section provides examples that
illustrate the rules of the section. Paragraph (r) of this section provides effective dates for
the provisions of this section.
(b) Definitions and special rules. The following definitions and special rules apply
for purposes of this section.
(1) Definitions-(i) Asset reorganization-(A) General rule. Except as provided in
paragraph (b) (1) (i) (B) of this section, an asset reorganization is a reorganization described in section 368 (a) (1) that involves an exchange of property described in section
361 (a) or (b) (a section 361 exchange).
(B) Exceptions. An asset reorganization does not include the following:

(1)

A reorganization described in section 368 (a) (1) (D) or (G) if the requirements of section 354 (b) (1) (A) and (B) are not met.

(2)

For purposes of paragraphs (j) (2) (ii) (B), (k) (6) (ii), and (k) (6) (iii) of
this section, a [*52] triangular asset reorganization. For rules applicable
to a triangular asset reorganization, see paragraph (k) (7) of this section.

(ii) A consolidated group has the meaning set forth in § 1.1502-1 (h).
(iii) Disposition. Except as provided in this paragraph (b) (1) (iii), a disposition includes any transfer that would constitute a disposition for any purpose of the Internal
Revenue Code. A disposition includes an indirect disposition of the stock of the transferred corporation as described in §1.367 (a)-3 (d). Except as provided in paragraph (n)
(1) of this section, a disposition does not include the receipt of a distribution of property
with respect to stock to which section 301 applies (including by reason of section 302

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(d)). See paragraphs (n) (2) and (o) (3) of this section for rules that apply if gain is recognized under section 301 (c) (3). A complete or partial disposition by installment sale
(under section 453) shall be treated as a disposition in the year of the installment sale.
(iv) A gain recognition event is an event described in paragraphs (j) through (o) of
this section that requires gain to be recognized under a gain recognition agreement.
(v) The initial [*53] transfer means a transfer of stock or securities (transferred
stock or securities) to a foreign corporation pursuant to an exchange that would otherwise be subject to section 367 (a) (1) but with respect to which a gain recognition
agreement is entered into by a United States person pursuant to §1.367 (a)-3 (b) through
(e).
(vi) An intercompany item has the meaning set forth in §1.1502-13 (b) (2).
(vii) An intercompany transaction has the meaning set forth in §1.1502-13 (b) (1).
(viii) A nonrecognition transaction has the meaning set forth in section 7701 (a)
(45). In addition, a nonrecognition transaction includes an exchange described in section
351 (b) or 356 even if all gain realized in the exchange is recognized.
(ix) The terms P, S, and T have the meanings set forth in §1.358-6 (b) (1) (i), (ii),
and (iii), respectively.
(x) The determination of whether substantially all of the assets of the transferred
corporation have been disposed of is based on all the facts and circumstances.
(xi) A timely-filed return is a Federal income tax return filed by the due date set
forth in section 6072 (a) or (b), plus any extension of time to file such return granted
under section 6081.
(xii) [*54] Transferee foreign corporation. Except as provided in this paragraph
(b) (1) (xii), the transferee foreign corporation is the foreign corporation to which the
transferred stock or securities are transferred in the initial transfer. In the case of an indirect stock transfer, the transferee foreign corporation has the meaning set forth in
§1.367 (a)-3 (d) (2) (i). The transferee foreign corporation also includes a corporation
designated as the transferee foreign corporation in the case of a new gain recognition
agreement entered into under this section.
(xiii) Transferred corporation. Except as provided in this paragraph (b) (1) (xiii),
the transferred corporation is the corporation the stock or securities of which are transferred in the initial transfer. In the case of an indirect stock transfer, the transferred
corporation has the meaning set forth in §1.367 (a)-3 (d) (2) (ii). The transferred corporation also includes a corporation designated as the transferred corporation in the
case of a new gain recognition agreement entered into under this section.
(xiv) A triangular asset reorganization is a reorganization described in §1.358-6 (b)
(2) (i), (ii), (iii), or [*55] (v).
(xv) The U.S. transferor is the United States person (as defined in §1.367 (a)-1T
(d) (1)) that transfers the transferred stock or securities to the transferee foreign corporation in the initial transfer. For purposes of determining the U.S. transferor in the case of
a transfer by a partnership, see §1.367 (a)-1T (c) (3) (i). The U.S. transferor also includes the United States person designated as the U.S. transferor in the case of a new
gain recognition agreement entered into under this section including, for example, under paragraph (k) (14) of this section.
(2) Special rules-(i) Stock deemed received or transferred. References to stock received include stock deemed received (for example, pursuant to section 367 (c) (2)).
References to a transfer of stock or securities include a deemed transfer of stock or securities.

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(ii) Stock of the transferee foreign corporation. References to stock of the transferee foreign corporation includes any stock of the transferee foreign corporation the basis of which is determined, in whole or in part, by reference to the basis of the stock of
the transferee foreign corporation received by the U.S. transferor in the initial transfer.
(iii) [*56] Transferred stock or securities. References to transferred stock or securities includes any stock or securities of the transferred corporation the basis of
which is determined, in whole or in part, by reference to the basis of the stock or securities transferred in the initial transfer.
(c) Gain recognition agreement-(1) Terms of agreement-(i) General rule. Except
as provided in this paragraph (c) (1) (i), if a gain recognition event occurs during the
period beginning on the date of the initial transfer and ending as of the close of the fifth
full taxable year (not less than 60 months) following the close of the taxable year in
which the initial transfer occurs (GRA term), the U.S. transferor must include in income the gain realized but not recognized on the initial transfer by reason of entering
into the gain recognition agreement. In the case of a gain recognition event that occurs as
a result of a partial disposition of stock, securities, or a partnership interest, as applicable, the U.S. transferor is required to recognize a proportionate amount of the gain subject to the gain recognition agreement, determined based on the fair market value of the
stock, [*57] securities, or partnership interest, as applicable, disposed of (measured
at the time of the partial disposition) as compared to the fair market value of all the
stock, securities, or partnership interest, as applicable (measured at the time of the partial disposition). If the U.S. transferor must recognize gain under this paragraph as a
result of an event described in paragraph (m) or (n) of this section, see those paragraphs
to determine the amount of the gain that must be recognized. The amount of gain subject to the gain recognition agreement shall be reduced by the amount of gain recognized under this paragraph. If the amount of gain subject to the gain recognition agreement is reduced to zero, the gain recognition agreement shall terminate without further
effect.
(ii) Ordering rule for gain recognized under multiple gain recognition agreements.
If a gain recognition event occurs that requires gain to be recognized under multiple gain
recognition agreements, gain shall first be recognized under the gain recognition
agreement that relates to the earliest initial transfer, then under the gain recognition
agreement that relates to the immediately following initial [*58] transfer and so
forth until the appropriate amount of gain has been recognized under each gain recognition agreement. The amount of gain recognized under a gain recognition agreement
shall be determined after taking into account, as appropriate, any increase to basis (including the basis of the transferred stock or securities) under paragraph (c) (4) of this
section resulting from gain recognized under another gain recognition agreement. For
an illustration of this ordering rule, see paragraph (q) (2) of this section, Example 6.
(iii) Taxable year in which gain is reported-(A) Year of initial transfer. Except as
provided in paragraph (c) (1) (iii) (B) of this section, the U.S. transferor must report any
gain recognized under paragraph (c) (1) (i) of this section on an amended Federal income tax return for the taxable year of the initial transfer. The amended return must be
filed on or before the 90th day following the date on which the gain recognition event
occurs.
(B) Year of gain recognition event. If an election under paragraph (c) (2) (vi) of
this section is made with the gain recognition agreement or if paragraph (c) (5) (ii) of
this section applies to the [*59] gain recognition agreement, the U.S. transferor must
report any gain recognized under paragraph (c) (1) (i) of this section on its Federal income tax return for the taxable year during which the gain recognition event occurs. If
an election under paragraph (c) (2) (vi) of this section is made with the gain recognition
agreement or if paragraph (c) (5) (ii) of this section applies to the gain recognition
agreement but the U.S. transferor does not report the gain recognized on its Federal in-

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come tax return for the taxable year during which the gain recognition event occurs, the
Commissioner may require the U.S. transferor to report the gain on an amended Federal income tax return for the taxable year during which the initial transfer occurred.
(iv) Offsets. No special limitations apply with respect to offsetting gain recognized
under paragraph (c) (1) (i) of this section with net operating losses, capital losses, credits against tax, or similar items.
(v) Payment and reporting of interest. Interest must be paid on any additional tax
due with respect to gain recognized by the U.S. transferor under paragraph (c) (1) (i) of
this section. Any interest due shall be determined [*60] based on the rates under section 6621 for the period between the date that was prescribed for filing the Federal income tax return of the U.S. transferor for the year of the initial transfer and the date on
which the additional tax due is paid. If paragraph (c) (1) (iii) (B) of this section applies,
any interest due must be included with the payment of tax due with the Federal income
tax return of the U.S. transferor for the taxable year during which the gain recognition
event occurs (or should reduce the amount of any refund due to the U.S. transferor for
such taxable year). A schedule entitled "Calculation of Section 367 Tax and Interest"
that separately identifies and calculates any additional tax and interest due must be included with the Federal income tax return on which any interest due is reported.
(2) Content of gain recognition agreement. The gain recognition agreement must be
entitled "GAIN RECOGNITION AGREEMENT UNDER §1.367 (a)-8" and include
the information described in paragraphs (c) (2) (i) through (viii) of this paragraph with
the corresponding paragraph numbers. The information required under this paragraph (c)
(2) and paragraph (c) (3) of this section [*61] must be included in the gain recognition agreement as filed.
(i) A statement that the document constitutes an agreement by the U.S. transferor to
recognize gain in accordance with the requirements of this section.
(ii) A description of the transferred stock or securities and other information as required in paragraph (c) (3) of this section.
(iii) A statement that the U.S. transferor agrees to comply with all the conditions
and requirements of this section, including to recognize gain under the gain recognition
agreement in accordance with paragraph (c) (1) (i) of this section, extend the statute of
limitations on assessments of tax as provided in paragraph (f) of this section, and file the
certification described in paragraph (g) of this section.
(iv) A statement that arrangements have been made to ensure that the U.S. transferor
is informed of any events that affect the gain recognition agreement, including triggering events or other gain recognition events.
(v) In the case of a new gain recognition agreement filed under this section-

(A)

A description of the event (such as a triggering event) and the applicable
exception, if any, that gave rise to the new gain recognition [*62]
agreement (such as a triggering event exception), including the date of the
event and the name, address, and taxpayer identification number (if any)
of each person that is a party to the event;

(B)

As applicable, a description of the class, amount, and characteristics of
the stock, securities or partnership interest received in the transaction; and

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(C)

As applicable, a calculation of the amount of gain that remains subject to
the new gain recognition agreement as a result of the application of
paragraph (m), (n), or (o) of this section.

(vi) A statement whether the U.S. transferor elects to include in income any gain
recognized under paragraph (c) (1) (i) of this section in the taxable year during which a
gain recognition event occurs. See paragraph (c) (5) (ii) of this section for a rule that
requires, in certain cases, for the gain recognized pursuant to a new gain recognition
agreement to be included in income during the taxable year in which the gain recognition event occurs.
(vii) A statement whether a gain recognition event has occurred during the taxable
year of the initial transfer.
(viii) A statement describing any disposition of assets of the transferred corporation
[*63] during such taxable year other than in the ordinary course of business.
(3) Description of transferred stock or securities and other information. The gain
recognition agreement shall include the following:

(i)

A description of the transferred stock or securities including-

(A)

The type or class, amount, and characteristics of the transferred
stock or securities;

(B)

A calculation of the amount of the built-in gain in the transferred
stock or securities that are subject to the gain recognition agreement, reflecting the basis and fair market value on the date of the
initial transfer;

(C)

The amount of any gain recognized by the U.S. transferor on the
initial transfer; and

(D)

The percentage (by voting power and value) that the transferred
stock (if any) represents of the total stock outstanding of the
transferred corporation on the date of the initial transfer.

(ii)

The name, address, place of incorporation, and taxpayer identification
number (if any) of the transferred corporation.

(iii)

The date on which the U.S. transferor acquired the transferred stock or securities.

(iv)

The name, address and place of incorporation of the transferee foreign
corporation, and a description of the stock [*64] or securities received
by the U.S. transferor in the initial transfer, including the percentage of

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stock (by vote and value) of the transferee foreign corporation received in
such exchange.

(v)

If the initial transfer is described in §1.367 (a)-3 (e), a statement that the
conditions of section 367 (a) (5) and any regulations under that section
have been satisfied, and a description of any adjustments to the basis of
the stock received in the transaction or other adjustments made pursuant
to section 367 (a) (5) and any regulations under that section.

(vi)

If the transferred corporation is domestic, a statement describing the application of section 7874 to the transaction, and indicating that the requirements of §1.367 (a)-3 (c) (1) are satisfied.

(vii)

If the transferred corporation is foreign, a statement indicating whether
the U.S. transferor was a section 1248 shareholder (as defined in § 1.367
(b)-2 (b)) of the transferred corporation immediately before the initial
transfer, and whether the U.S. transferor is a section 1248 shareholder
with respect to the transferee foreign corporation immediately after the
initial transfer, and whether any reporting requirements or [*65] other
rules contained in regulations under section 367 (b) are applicable, and, if
so, whether they have been satisfied.

(viii)

If the initial transfer involves a transfer by a partnership (see §1.367
(a)-1T (c) (3) (i)) or a transfer of a partnership interest (see section 367
(a) (4) and §1.367 (a)-1T (c) (3) (ii)) a complete description of the transfer, including a description of the partners in the partnership.

(ix)

If the transaction involved the transfer of property other than the transferred stock or securities and the transaction was subject to the indirect
stock transfer rules of §1.367 (a)-3 (d), a statement indicating whether-

(A)

The reporting requirements under section 6038B have been satisfied with respect to the transfer of such other property;

(B)

Whether gain was recognized under section 367 (a) (1);

(C)

Whether section 367 (d) applied to the transfer of such property;
and

(D)

Whether the other property transferred qualified for the active foreign trade or business exception under section 367 (a) (3).

(4) Basis adjustments for gain recognized. The following basis adjustments shall be
made if gain is recognized under paragraph (c) (1) (i) of this section.

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(i) Stock or [*66] securities of transferee foreign corporation. The basis of the
stock or securities, as applicable, of the transferee foreign corporation received by the
U.S. transferor in the initial transfer shall be increased as of the date of the initial transfer
by the amount of gain recognized.
(ii) Transferred stock or securities. The basis of the transferred stock or securities
shall be increased as of the date of the initial transfer by the amount of the gain recognized.
(iii) Other appropriate adjustments. The basis of other stock, securities, or a partnership interest shall be increased, as appropriate, in accordance with the principles of
this paragraph (c) (4). Under no circumstances shall the basis of stock, securities, or of a
partnership interest held by a U.S. person that does not recognize gain under paragraph
(c) (1) (i) of this section be increased under this paragraph (c) (4). In addition, under no
circumstances shall the basis of any property be increased by the amount of any additional tax due or interest paid with respect to such tax, nor shall the basis of the assets
of the transferred corporation be increased as a result of gain recognized by the U.S.
transferor [*67] under paragraph (c) (1) (i) of this section.
(iv) Cross-reference. See paragraph (q) (2) of this section, Examples 1, 2, 3, and 5
for illustrations of the rules of this paragraph (c) (4). See also §1.367 (a)-1T (b) (4) for
rules that determine the increase to basis of property resulting from the application of section 367 (a).
(5) Terms and conditions of a new gain recognition agreement-(i) General rule. A
new gain recognition agreement entered into pursuant to this section shall replace the
existing gain recognition agreement, which shall terminate without further effect. The
term of the new gain recognition agreement shall be the remaining term of the existing
gain recognition agreement. The amount of gain subject to the new gain recognition
agreement shall equal the amount of gain subject to the existing gain recognition
agreement, reduced by any gain recognized under paragraph (c) (1) (i) of this section
with respect to the existing gain recognition agreement by reason of the gain recognition event that gives rise to the new gain recognition agreement. The new gain recognition agreement shall, as applicable, be subject to the conditions and requirements of
[*68] this section to the same extent as the existing gain recognition agreement. For
example, a triggering event with respect to the new gain recognition agreement will
generally include a disposition of the transferred stock or securities or of substantially
all the assets of the transferred corporation. If, however, the transferred stock is canceled
or redeemed pursuant to the disposition or other event that gives rise to the new gain
recognition agreement (for example, pursuant to a liquidation where the transferee foreign corporation is the corporate distributee (within the meaning of section 334 (b) (2)),
or an asset reorganization where the transferee foreign corporation is the acquiring
corporation) the transferred stock is not subject to the new gain recognition agreement.
(ii) Special rule for inclusion of gain. If the U.S. transferor with respect to the new
gain recognition agreement is not the U.S. transferor with respect to the existing gain
recognition agreement, or a member of the consolidated group of which the U.S. transferor with respect to the existing gain recognition agreement was a member on the date
of the initial transfer, then any gain recognized [*69] under paragraph (c) (1) (i) of
this section with respect to the new gain recognition agreement must be included in income in the taxable year during which the gain recognition event occurs.
(d) Filing requirements-(1) General rule. A gain recognition agreement entered into
with respect to an initial transfer must be included with the timely-filed return of the
U.S. transferor for the taxable year during which the initial transfer occurs.
(2) Special requirements-(i) New gain recognition agreement. A new gain recognition agreement entered into under this section must be included with the timely filed return of the U.S. transferor (as identified in the new gain recognition agreement) for the

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taxable year during which the disposition or event that requires the new gain recognition agreement occurs. If the new gain recognition agreement is entered into by the
U.S. transferor that entered into the existing gain recognition agreement, the new gain
recognition agreement is in lieu of the annual certification otherwise required for such
taxable year under paragraph (g) of this section with respect to the existing gain recognition agreement.
(ii) Multiple events within a taxable [*70] year. Except as otherwise provided in
this paragraph (d) (2) (ii), if the initial transfer and one or more dispositions or other
events (even if a triggering event exception applies) that affect the gain recognition
agreement entered into by the U.S. transferor with respect to the initial transfer occur
within the same taxable year of such U.S. transferor, or if multiple dispositions or other
events occur in a taxable year of the U.S. transferor that does not include the initial
transfer, only one gain recognition agreement is required to be entered into and included
with the timely-filed return of the U.S. transferor for such taxable year. The gain recognition agreement must describe the initial transfer and/or each disposition or other
event that affects the gain recognition agreement (even if a triggering event exception
applies). This paragraph does not apply, however, if any such disposition or other event
requires a new gain recognition agreement to be entered into by a United States person
other than the U.S. transferor with respect to the initial transfer or that entered into the
existing gain recognition agreement, as applicable.
(3) Common parent as [*71] agent for U.S. transferor. If the U.S. transferor is a
member but not the common parent of a consolidated group, the common parent of the
consolidated group is the agent for the U.S. transferor under §1.1502-77 (a) (1). Thus,
the common parent must file the gain recognition agreement on behalf of the U.S. transferor. References in this section to the timely-filed return of the U.S. transferor include
the timely-filed return of the consolidated group of which the U.S. transferor is a
member, as applicable.
(e) Signatory-(1) General rule. The gain recognition agreement must be signed
under penalties of perjury by an agent of the U.S. transferor that is authorized to sign
under a general or specific power of attorney, or by the appropriate party based on the
category of the U.S. transferor described in this paragraph (e) (1).
(i) If the U.S. transferor is a corporation but not a member of a consolidated group,
a responsible officer of the U.S. transferor. If the U.S. transferor is a member of a consolidated group, a responsible officer of the common parent of the consolidated group.
(ii) If the U.S. transferor is an individual, the individual.
(iii) If the U.S. transferor [*72] is a trust or estate, a trustee, executor, or equivalent fiduciary of the U.S. transferor.
(iv) In a bankruptcy case under Title 11, United States Code, a debtor in possession
or trustee.
(2) Signature requirement. The inclusion of an unsigned copy of the gain recognition
agreement with the timely-filed return of the U.S. transferor shall satisfy the signature
requirement of paragraph (e) (1) of this section if the U.S. transferor retains the original
signed gain recognition agreement in the manner specified by §1.6001-1 (e).
(f) Extension of period of limitations on assessments of tax-(1) General rule. In
connection with the filing of a gain recognition agreement, the U.S. transferor must extend the period of limitations on assessments of tax with respect to the gain realized but
not recognized on the initial transfer through the close of the eighth full taxable year following the taxable year during which the initial transfer occurs. The U.S. transferor extends the period of limitations by filing Form 8838 "Consent to Extend the Time to Assess Tax Under Section 367-Gain Recognition Agreement." The Form 8838 must be

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signed by a person authorized to sign the gain recognition
paragraph (e) (1) of this section.

[*73]

agreement under

(2) New gain recognition agreement. If a new gain recognition agreement is entered
into under this section, the U.S. transferor must extend the period of limitations on assessments of tax on the initial transfer through the close of the eighth full taxable year
following the taxable year during which the initial transfer occurs, consistent with paragraph (f) (1) of this section, unless the U.S. transferor with respect to the new gain
recognition agreement is the U.S. transferor with respect to the existing gain recognition
agreement, or a member of the consolidated group of which the U.S. transferor with respect to the existing gain recognition agreement was a member on the date of the initial
transfer.
(g) Annual certification. Except as provided in paragraph (d) (2) (i) of this section,
the U.S. transferor must include with its timely-filed return for each of the five full
taxable years following the taxable year of the initial transfer a certification (annual
certification) that includes the information described in paragraphs (g) (1) through (3)
of this section, as appropriate. The annual certification must be signed [*74] by a
person authorized under paragraph (e) (1) of this section to sign the gain recognition
agreement for the initial transfer. The inclusion of an unsigned copy of the annual certification with the relevant timely-filed return of the U.S. transferor shall satisfy the signature requirement of paragraph (e) (1) of this section provided the U.S. transferor retains the original signed certification in the manner specified by §1.6001-1 (e).
(1) A statement of whether a gain recognition event has or has not occurred during
such taxable year. If a gain recognition event has occurred during such taxable year, the
annual certification must state:

(i)

The amount of gain subject to the gain recognition agreement at the time
of the gain recognition event;

(ii)

The amount of gain recognized under the gain recognition agreement by
reason of the gain recognition event; and

(iii)

A calculation of the reduction to the amount of gain subject to the gain
recognition agreement by reason of the gain recognition event (for example, in the case of a gain recognition event described in paragraph (n) (2)
of this section).

(2) A complete description of any event occurring during such taxable year that
[*75] has terminated or reduced the amount of gain subject to the gain recognition
agreement (for example, an event described in paragraph (o) of this section), including a
calculation of any reduction to the amount of gain subject to the gain recognition agreement.
(3) A statement describing any disposition of assets of the transferred corporation
during the taxable year not in the ordinary course of business.
(h) Use of security. The U.S. transferor may be required to furnish a bond or other
security that satisfies the requirements of §301.7101-1 if the Area Director, Field Examination, Small Business/Self Employed or the Director of Field Operations, Large and
Mid-Size Business (Director) determines that such security is necessary to ensure the
payment of any tax on the gain realized, but not recognized, upon the initial transfer.
Such bond or security generally will be required only if the transferred stock or securi-

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ties are a principal asset of the U.S. transferor and the Director has reason to believe that
a disposition of the stock or securities may be contemplated.
(i) [Reserved.]
(j) Triggering events. Except as provided in this section, if an event described in
paragraphs [*76] (j) (1) through (10) of this section (triggering event) occurs during
the GRA term, the U.S. transferor must recognize gain under the gain recognition
agreement in accordance with paragraph (c) (1) (i) of this section. This paragraph (j)
generally requires the U.S. transferor to recognize gain (and pay applicable interest with
respect to any additional tax due as provided in paragraph (c) (1) (v) of this section)
under the gain recognition agreement to the extent the transferred stock or securities are
disposed of, directly or indirectly. This paragraph (j) also requires the U.S. transferor to
recognize gain under the gain recognition agreement in certain cases where it is not appropriate for the gain recognition agreement to continue. See paragraph (k) of this section for exceptions available for certain events that would otherwise constitute triggering events under this paragraph (j). See paragraph (o) of this section for certain events
that terminate or reduce the amount of gain subject to a gain recognition agreement.
(1) Disposition of transferred stock or securities. A complete or partial disposition
of the transferred stock or securities. See paragraph (q) [*77] (2) of this section, Example 2 for an illustration of the rule of this paragraph (j) (1).
(2) Disposition of substantially all of the assets of the transferred corporation-(i)
General rule. Except as provided in paragraph (j) (2) (ii) of this section, a disposition in
one or more related transactions of substantially all of the assets of the transferred corporation (including stock or securities in a subsidiary corporation or a partnership interest). If the transferred corporation is domestic, see paragraph (o) (4) of this section.
(ii) Exceptions. For purposes of paragraph (j) (2) (i) of this section, the following
dispositions shall be disregarded-

(A)

Dispositions of property described in section 1221 (a) (1) occurring in the
ordinary course of business;

(B)

An exchange of stock or securities described in section 354 that is pursuant to an asset reorganization; and

(C)

An exchange of stock by a corporate distributee (as defined in section 334
(b) (2)) pursuant to a complete liquidation to which section 332 applies.

(3) Disposition of certain partnership interests. If the initial transfer occurs by
reason of the transfer of a partnership interest, a complete or partial disposition [*78]
of such partnership interest. See section 367 (a) (4) and §1.367 (a)-1T (c) (3) (ii).
(4) Disposition of stock of the transferee foreign corporation. A complete or partial
disposition of the stock of the transferee foreign corporation received by the U.S. transferor in the initial transfer. For purposes of this section, an individual U.S. transferor
that loses U.S. citizenship or ceases to be a lawful permanent resident of the United
States (within the meaning of section 7701 (b) (6)) shall be treated as disposing of all
the stock of the transferee foreign corporation received in the initial transfer as of the
date before the loss of such status.
(5) Deconsolidation. A U.S. transferor that is a member of a consolidated group
ceases to be a member of the consolidated group, other than by reason of an acquisition

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of the assets of the U.S. transferor in a transaction to which section 381 (a) applies, or by
reason of the U.S. transferor joining another consolidated group as part of the same
transaction.
(6) Consolidation. A U.S. transferor becomes a member of a consolidated group,
including a U.S. transferor that is a member of a consolidated group and that becomes a
[*79] member of another consolidated group.
(7) Death of an individual; trust or estate ceases to exist. A U.S. transferor that is an
individual dies, or a U.S. transferor that is a trust or estate ceases to exist.
(8) Failure to comply. The U.S. transferor fails to comply in any material respect with
any requirement of this section or with the terms of the gain recognition agreement, including failure to file an annual certification under paragraph (g) of this section. If a
failure to include information in a gain recognition agreement as filed constitutes a failure to comply in a material respect, the U.S. transferor cannot avoid the application of
this paragraph (j) (8) by subsequently making such information available. A material
failure under this paragraph (j) (8) shall extend the period of limitations on assessments
of tax until the close of the third full taxable year ending after the date on which the
Director of Field Operations or Area Director receives actual notice of the failure to comply from the U.S. transferor.
(9) Gain recognition agreement filed in connection with indirect stock transfers
and certain triangular asset reorganizations. With respect to a gain recognition [*80]
agreement entered into in connection with an indirect stock transfer (as defined in
§1.367 (a)-3 (d)), or a triangular asset reorganization under §1.367 (a)-3 (e) (2), an indirect disposition of the transferred stock or securities. For example, in the case of an indirect stock transfer described in §1.367 (a)-3 (d) (1) (iii) (A), a complete or partial
disposition of the stock of the acquiring corporation.
(10) Gain recognition agreement filed pursuant to paragraph (k) (14) of this section. In the case of a gain recognition agreement entered into pursuant to paragraph (k)
(14) of this section, in addition to any disposition or other event described in paragraphs (j) (1) through (9) of this section,-

(i)

Any disposition or other event identified as a triggering event in a new
gain recognition agreement as required under paragraph (k) (14) (iii) of
this section; and

(ii)

Any disposition or other event that is inconsistent with the principles of
paragraph (k) of this section including, for example, an indirect disposition
of the transferred stock or securities.

(k) Triggering event exceptions. Notwithstanding paragraph (j) of this section, a
disposition or other event described [*81] in paragraphs (k) (1) through (14) of this
section shall not constitute a triggering event. This paragraph (k) generally provides exceptions for certain dispositions that constitute nonrecognition transactions but only if,
immediately after the disposition, a U.S. transferor retains, as applicable, a direct or indirect interest in the transferred stock or securities, or in the assets of the transferred
corporation, and a new gain recognition agreement is entered into with respect to the
initial transfer in accordance with this paragraph (k). Notwithstanding the application
of this paragraph (k), if a gain recognition event described under paragraphs (m) and
(n) of this section occurs during the GRA term the U.S. transferor may be required to
recognize gain under the gain recognition agreement in accordance with paragraph (c)
(1) (i) of this section. See paragraph (o) of this section which provides that, notwith-

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standing paragraph (j) of this section, certain dispositions or other events shall instead
terminate or reduce the amount of gain subject to a gain recognition agreement.
(1) Transfers [*82] of stock of the transferee foreign corporation to a corporation or partnership. A disposition of stock of the transferee foreign corporation received in the initial transfer pursuant to an exchange to which section 351, 354 (but only
in a reorganization described in section 368 (a) (1) (B) that is not a triangular reorganization), 361 (but only in a divisive reorganization to which section 355 applies), or 721
applies, shall not constitute a triggering event if a new gain recognition agreement is
entered into in accordance with paragraphs (k) (1) (i) through (iv) of this section, as
applicable. In the case of an exchange to which section 354 applies that is pursuant to a
triangular reorganization described in section 368 (a) (1) (B), see paragraph (k) (14) of
this section and paragraph (q) (2) of this section, Example 4.
(i) In the case of an exchange to which section 351 or 354 applies in which stock
of a foreign acquiring corporation is received, the U.S. transferor includes with the new
gain recognition agreement a statement that a complete or partial disposition of the stock
of the foreign acquiring corporation received in the exchange shall constitute a triggering
[*83] event. The principles of paragraph (o) (1) (i) or (ii), as appropriate, shall be applied to determine whether a subsequent complete or partial disposition of the stock of
the foreign acquiring corporation received in the exchange shall instead terminate or reduce the amount of the new gain recognition agreement.
(ii) In the case of an exchange to which section 351 or 354 applies in which stock
of a domestic acquiring corporation is received, the domestic acquiring corporation enters into the new gain recognition agreement, which must designate the domestic acquiring corporation as the U.S. transferor for purposes of this section. For an illustration of
the rule provided by this paragraph (k) (1) (ii), see paragraph (q) (2) of this section, Example 3.
(iii) In the case of a section 361 exchange that is pursuant to a divisive reorganization
to which section 355 applies and in which stock of a domestic corporation (domestic
controlled corporation) is received, the domestic controlled corporation enters into the
new gain recognition agreement, which must designate the domestic controlled corporation as the U.S. transferor for purposes of this section. For an illustration [*84] of
the rule provided by this paragraph (k) (1) (iii), see paragraph (q) (2) of this section,
Example 11.
(iv) In the case of an exchange to which section 721 applies, the U.S. transferor includes with the new gain recognition agreement a statement that a complete or partial
disposition of the partnership interest received in the exchange shall constitute a triggering event for purposes of the new gain recognition agreement.
(2) Complete liquidation of U.S. transferor under sections 332 and 337. A distribution by the U.S. transferor of the stock of the transferee foreign corporation received in
the initial transfer to which section 337 applies, that is pursuant to a complete liquidation
under section 332, shall not constitute a triggering event if the corporate distributee (as
defined in section 334 (b) (2)) is a domestic corporation (domestic corporate distributee)
and the domestic corporate distributee enters into a new gain recognition agreement. The
new gain recognition agreement must designate the domestic corporate distributee as
the U.S. transferor for purposes of this section.
(3) Transfers of transferred stock or securities to a corporation or partnership. A
disposition [*85] of the transferred stock or securities pursuant to an exchange to
which section 351, 354 (but only in a reorganization described in section 368 (a) (1)
(B)), or 721 applies, shall not constitute a triggering event if the U.S. transferor enters
into a new gain recognition agreement that provides that the dispositions described in
paragraphs (k) (3) (i) and (ii) of this section shall constitute triggering events for purposes of the new gain recognition.

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(i) A complete or partial disposition of the stock, securities, or partnership interest
(as applicable) received in exchange for the transferred stock or securities.
(ii) Any other event that is inconsistent with the principles of this paragraph (k), including the indirect disposition of the transferred stock or securities.
(4) Transfers of substantially all of the assets of the transferred corporation. A
disposition of substantially all of the assets of the transferred corporation pursuant to an
exchange to which section 351, 354 (but only in a reorganization described in section
368 (a) (1) (B)), or 721 applies, shall not constitute a triggering event if the U.S. transferor enters into a new gain recognition agreement [*86] that provides that a complete
or partial disposition of the stock, securities, or partnership interest (as applicable) received in exchange for the assets shall constitute a triggering event for purposes of the
new gain recognition agreement.
(5) Recapitalizations and section 1036 exchanges. A complete or partial disposition
of the transferred stock or securities, or of the stock of the transferee foreign corporation received in the initial transfer, pursuant to a reorganization described under section
368 (a) (1) (E), or pursuant to a transaction to which section 1036 applies, shall not
constitute a triggering event if the U.S. transferor enters into a new gain recognition
agreement.
(6) Certain asset reorganizations-(i) Stock of transferee foreign corporation. If
stock of the transferee foreign corporation received in the initial transfer is transferred
to a domestic acquiring corporation in a section 361 exchange that is pursuant to an asset reorganization, the exchanges made pursuant to the asset reorganization shall not
constitute triggering events if the domestic acquiring corporation enters into a new gain
recognition agreement that designates the domestic acquiring [*87] corporation as
the U.S. transferor for purposes of this section. For an illustration of the rule provided by
this paragraph (k) (6), see paragraph (q) (2) of this section, Example 5. If the acquiring
corporation is foreign, see paragraph (k) (14) of this section and paragraph (q) (2) of this
section, Example 6.
(ii) Transferred stock or securities. If the transferred stock or securities are transferred to a foreign acquiring corporation in a section 361 exchange that is pursuant to
an asset reorganization, the exchanges made pursuant to the asset reorganization shall
not constitute triggering events if the U.S. transferor enters into a new gain recognition
agreement that designates the foreign acquiring corporation as the transferee foreign
corporation for purposes of this section. For an illustration of the rule provided by this
paragraph, see paragraph (q) (2) of this section, Example 7. If the transfer is to a domestic acquiring corporation, or is pursuant to a triangular asset reorganization, see paragraph (k) (14) or (o) (5) of this section.
(iii) Assets of transferred corporation. If substantially all of the assets of the transferred corporation are transferred [*88] to a foreign or domestic acquiring corporation in a section 361 exchange that is pursuant to an asset reorganization, the exchanges
made pursuant to the asset reorganization shall not constitute triggering events if the
U.S. transferor enters into a new gain recognition agreement that, unless the acquiring
corporation is the transferee foreign corporation, designates the acquiring corporation as
the transferred corporation for purposes of this section. Only the assets of the transferred corporation received by the acquiring corporation shall be treated as assets of the
transferred corporation for purposes of this section (for example, only such assets will be
taken into account for purposes of paragraph (j) (2) of this section). For an illustration
of the rule provided by this paragraph, see paragraph (q) (2) of this section, Example 8.
If the transferred corporation is domestic, see section 367 (a) (1) and (a) (5), and paragraph (o) (4) of this section. If the transfer is pursuant to a triangular asset reorganization, see paragraph (k) (14) of this section.

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(7) Certain triangular reorganizations-(i) Transferee foreign corporation. If substantially all of the assets [*89] of the transferee foreign corporation are transferred to a
foreign acquiring corporation in a section 361 exchange that is pursuant to a triangular
asset reorganization, the exchanges made pursuant to the reorganization shall not constitute triggering events if a new gain recognition agreement is entered into in accordance with paragraphs (k) (7) (i) (A) through (C) of this section. If the acquiring corporation is domestic, see paragraph (k) (14) of this section. For rules that apply to gain
recognition agreements entered into as a result of an indirect stock transfer, see §1.367
(a)-3 (d) (2) (iv) and paragraph (j) (9) of this section.
(A) If P is foreign, the new gain recognition agreement designates P as the transferee
foreign corporation and includes a statement that the U.S. transferor agrees to treat a
complete or partial disposition of the S stock held by P as a triggering event.
(B) Except as provided in paragraph (k) (7) (i) (C) of this section, if P is domestic, P
enters into the new gain recognition agreement that designates P as the U.S. transferor
and S as the transferee foreign corporation.
(C) If the triangular asset reorganization is described in section 368 (a) (1) (A)
[*90] by reason of section 368 (a) (2) (E) and the transferee foreign corporation is the
merged corporation, the U.S. transferor enters into the new gain recognition agreement
and designates the surviving corporation as the transferee foreign corporation.
(ii) Transferred corporation. If substantially all of the assets of the transferred corporation are transferred in a section 361 exchange pursuant to a triangular asset reorganization, the exchanges made pursuant to the reorganization shall not constitute triggering events if the U.S. transferor enters into a new gain recognition agreement in accordance with paragraph (k) (7) (ii) (A) of this section and, as applicable, paragraph (k) (7)
(ii) (B) or (C) of this section.
(A) The new gain recognition agreement includes a statement that the U.S. transferor agrees to treat a complete or partial disposition of the P stock received in the reorganization as a triggering event.
(B) If the triangular asset reorganization is described in section 368 (a) (1) (C), or
section 368 (a) (1) (A) or (G) by reason of section 368 (a) (2) (D), the new gain recognition agreement includes a statement that the U.S. transferor agrees to treat a complete
[*91] or partial disposition of the S stock held by P as a triggering event.
(C) If the triangular asset reorganization is described in section 368 (a) (1) (A) by
reason of section 368 (a) (2) (E) and the transferred corporation is the merged corporation,
the new gain recognition agreement includes a statement that the U.S. transferor agrees
to treat a complete or partial disposition of the stock of the surviving corporation as a
triggering event.
(8) Complete liquidation of transferred corporation. A distribution of substantially
all of the assets of the transferred corporation to which section 337 applies, and the related exchange of the transferred stock to which section 332 applies, shall not constitute triggering events, if the U.S. transferor enters into a new gain recognition agreement. If the transferred corporation is domestic, see § 1.367 (e)-2 and paragraph (o) (4) of
this section. See paragraph (q) (2) of this section, Example 9 for an illustration of the
rules provided in this paragraph (k) (8).
(9) Death of U.S. transferor. The death of a U.S. transferor shall not constitute a
triggering event if the person winding up the affairs of the U.S. transferor-

(i)

Retains [*92] sufficient assets of the U.S. transferor to satisfy any
possible Federal tax liability of the U.S. transferor under the gain recog-

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nition agreement for the duration of the extended period of limitations on
assessments of tax on the gain realized but not recognized in the initial
transfer;

(ii)

Provides security as required under paragraph (h) of this section for any
possible Federal tax liability of the U.S. transferor under the gain recognition agreement; or

(iii)

Obtains a ruling from the Internal Revenue Service providing for one or
more successors to the U.S. transferor under the gain recognition agreement.

(10) Deconsolidation. A deconsolidation of the U.S. transferor shall not constitute a
triggering event if the U.S. transferor enters into a new gain recognition agreement.
(11) Consolidation. A consolidation of the U.S. transferor shall not constitute a
triggering event if the U.S. transferor enters into a new gain recognition agreement. See
paragraph (d) (3) of this section.
(12) Intercompany transactions-(i) General rule. If, pursuant to an intercompany
transaction, the U.S. transferor disposes of stock of the transferee foreign corporation
received in the initial [*93] transfer, this paragraph (k) (12) applies to such disposition to the extent the intercompany transaction creates an intercompany item that is not
taken into account in the taxable year during which the intercompany transaction occurs.
To the extent this paragraph (k) (12) applies, the disposition shall not constitute a triggering event, and the U.S. transferor shall remain subject to the gain recognition
agreement if the conditions of paragraphs (k) (12) (i) (A) and (B) of this section are
satisfied. To the extent the intercompany transaction does not create an intercompany
item see, for example, paragraph (k) (1) and paragraph (q) (2) of this section, Example
20. See paragraph (o) (6) of this section for the effect on a gain recognition agreement
when an intercompany item from an intercompany transaction to which this paragraph
(k) (12) (i) applies is taken into account.
(A) At the time of the disposition, the basis of the stock of the transferee foreign
corporation received in the initial transfer that is disposed of in the intercompany transaction is not greater than the sum of the amounts described in paragraphs (k) (12) (i) (A)
(1) through (3) of this section. [*94] If only a portion of the stock of the transferee
foreign corporation received in the initial transfer is disposed of, then the basis of such
stock shall be compared with a proportionate amount (measured by value as determined at the time of the disposition) of the amounts described in paragraph (k) (12) (i) (A)
(1) through (3) of this section. To satisfy the basis condition of this paragraph (k) (12)
(i) (A), the U.S. transferor may reduce the basis of the stock of the transferee foreign
corporation received in the initial transfer that is disposed of in the intercompany transaction in accordance with the principles of paragraph (o) (1) (iii) of this section.
(1) The aggregate basis of the transferred stock or securities at the time of the initial
transfer;
(2) The amount of any increase to the basis of the transferred stock or securities by
reason of gain recognized by the U.S. transferor on the initial transfer; and
(3) The amount of any increase to the basis of the stock disposed of by reason of
an income inclusion by the U.S. transferor with respect to such stock (for example, pursuant to section 961 (a)).
(B) The annual certification filed with respect to the existing [*95] gain recognition agreement for the taxable year during which the intercompany transaction occurs

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includes a complete description of the intercompany transaction and a schedule illustrating how the basis condition of paragraph (k) (12) (i) (A) of this section is satisfied.
(ii) Certain dispositions following intercompany transaction. A subsequent disposition of stock of the transferee foreign corporation that is transferred in an intercompany
transaction to which the exception provided by paragraph (k) (12) (i) of this section applies shall not constitute a triggering event if-

(A)

(A) The stock is transferred to a member of the consolidated group that includes the U.S. transferor immediately after the disposition, and

(B)

(B) The annual certification filed with respect to the existing gain recognition agreement for the taxable year during which the subsequent disposition occurs includes a complete description of the disposition.

(13) Deemed asset sales pursuant to section 338 (g) elections. A deemed sale of
the assets of the transferred corporation or the transferee foreign corporation as a result
of an election under section 338 (g) shall not constitute a triggering [*96] event. This
paragraph does not apply to the sale of the stock of the target corporation (within the
meaning of section 338 (d) (2)) with respect to which such election is made.
(14) Other dispositions or events. A disposition or other event that would constitute
a triggering event, without regard to this paragraph (k) (14), shall not constitute a triggering event if the conditions of paragraph (k) (14) (i) through (iii) of this section, as applicable, are satisfied. See paragraph (q) (2), Examples 4, 6, 10, 12, 17, 21, and 23 of this
section for illustrations of the rules provided by this paragraph (k) (14).
(i) The disposition qualifies as a nonrecognition transaction.
(ii) Immediately after the disposition or other event, a U.S. transferor retains a direct
or indirect interest in the transferred stock or securities or, as applicable, in substantially
all of the assets of the transferred corporation (for example, in a case where the transferred corporation has been liquidated pursuant to section 332). If, as a result of the disposition or other event, a foreign corporation acquires the transferred stock or securities
or, as applicable, substantially all the assets of the [*97] transferred corporation, the
condition of this paragraph (k) (14) (ii) shall be satisfied only if the U.S. transferor
owns at least five percent (applying the attribution rules of section 318, as modified by
section 958 (b)) of the total voting power and the total value of the outstanding stock of
such foreign corporation.
(iii) A new gain recognition agreement is entered into by the U.S. transferor described in paragraph (k) (14) (ii) of this section that includes-

(A)

An explanation of why this paragraph (k) (14) applies to the disposition or
other event; and

(B)

A description of each subsequent disposition or other event that would
constitute a triggering event, other than those described in paragraph (j)
of this section, with respect to the new gain recognition agreement based
on the principles of paragraphs (j) and (k) of this section including, for
example, an indirect disposition of the transferred stock or securities.

(l) [Reserved.]

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(m) Receipt of boot in nonrecognition transactions-(1) Dispositions of transferred
stock or securities. Notwithstanding paragraph (k) of this section, if gain is required to
be recognized (not including any gain that would be treated as [*98] a dividend
under section 356 (a) (2)) in connection with a disposition of the transferred stock or
securities to which an exception under paragraph (k) of this section otherwise applies
(triggering event exception), the U.S. transferor shall recognize gain under paragraph (c)
(1) (i) of this section equal to the amount of gain required to be recognized in connection with the disposition, but not in excess of the amount of gain subject to the gain
recognition agreement. For purposes of this paragraph (m) (1), the amount of gain required to be recognized in connection with the disposition shall be determined before
taking into account any increase to the basis of the transferred stock or securities under
paragraph (c) (4) (ii) of this section. See paragraph (q) (2) of this section, Example 13,
for an illustration of the rule provided by this paragraph (m) (1).
(2) Dispositions of assets of transferred corporation. If gain is required to be recognized (not including any gain that would be treated as a dividend under section 356 (a)
(2)) in connection with a disposition of substantially all of the assets of the transferred
corporation to which a triggering event exception [*99] otherwise applies, the U.S.
transferor shall recognize gain under paragraph (c) (1) (i) of this section equal to the
amount of gain required to be recognized in connection with the disposition, but not in
excess of the amount of gain subject to the gain recognition agreement.
(n) Special rules for distributions with respect to stock-(1) Certain dividend equivalent redemptions treated as dispositions. A redemption of the transferred stock or of
stock of the transferee foreign corporation received in the initial transfer that is treated
by reason of section 302 (d) as a distribution of property to which section 301 applies
shall constitute a disposition for purposes of this section unless the U.S. transferor enters into a new gain recognition agreement that includes appropriate provisions to account for the redemption. For an illustration of the rule of this paragraph (n) (1), see
paragraph (q) (2) of this section, Example 14.
(2) Gain recognized under section 301 (c) (3). If gain is required to be recognized
under section 301 (c) (3) with respect to the transferred stock, the U.S. transferor shall
recognize gain under the gain recognition agreement in accordance with [*100]
paragraph (c) (1) (i) of this section in an amount equal to the gain required to be recognized under section 301 (c) (3), but not in excess of the amount of gain subject to the
gain recognition agreement. For this purpose, the amount of gain required to be recognized under section 301 (c) (3) shall be determined before taking into account any increase in the basis of the transferred stock under paragraph (c) (4) (ii) of this section.
(o) Dispositions or other events that terminate or reduce the amount of gain subject to the gain recognition agreement. Notwithstanding paragraph (j) of this section, the
following dispositions or other events shall not constitute triggering events but instead
shall terminate or reduce the amount of gain subject to the gain recognition agreement.
(1) Taxable disposition of stock of the transferee foreign corporation-(i) Complete
disposition. Except as otherwise provided in this paragraph (o) (1) (i), if the U.S. transferor disposes of all the stock of the transferee foreign corporation received in the initial
transfer in a transaction in which all gain realized is recognized and included in taxable
income during the taxable year of [*101] the disposition, the gain recognition
agreement shall terminate without further effect if, at the time of the disposition, the aggregate basis of such stock is not greater than the sum of the amounts described in paragraphs (o) (1) (i) (A) through (C) of this section. This paragraph shall not apply to a
disposition of stock of the transferee foreign corporation pursuant to an intercompany
transaction to which paragraph (k) (12) of this section applies. This paragraph shall also not apply to an individual U.S. transferor that loses U.S. citizenship or ceases to be a
lawful permanent resident of the United States (within the meaning of section 7701 (b)
(6)).

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(A) The aggregate basis of the trans ferred stock or securities at the time of the initial transfer;
(B) The amount of any increase to the basis of the transferred stock or securities by
reason of gain recognized by the U.S. transferor on the initial transfer; and
(C) The amount of any increase to the basis of the stock disposed of by reason of
an income inclusion by the U.S. transferor with respect to such stock (for example,
pursuant to section 961 (a)).
(ii) Partial dispositions. A partial disposition by the [*102] U.S. transferor of the
stock of the transferee foreign corporation received in the initial transfer in a transaction
otherwise described in paragraph (o) (1) (i) of this section shall reduce the amount of
gain subject to the gain recognition agreement based on the relative fair market value of
the stock disposed of (measured at the time of the disposition) compared to the fair
market value of all of the stock of the transferee foreign corporation received in the initial transfer (measured at the time of the disposition). For determining whether the basis condition of paragraph (o) (1) (i) of this section is satisfied in the case of a partial
disposition, the aggregate basis of the stock disposed of is compared to a proportionate
amount (based on fair market value, as measured at the time of the partial disposition)
of the amounts described in paragraphs (o) (1) (i) (A) through (C) of this section. For an
illustration of the rules of this paragraph (o) (1) (ii), see paragraph (q) (2), Example 15,
of this section.
(iii) Reduction of stock basis. For purposes of satisfying the basis condition of paragraph (o) (1) (i) or (ii) of this section, the U.S. transferor may [*103] reduce the aggregate basis of the stock of the transferee foreign corporation received in the initial
transfer, effective immediately before the disposition. For an illustration of the rules of
this paragraph (o) (1) (iii), see paragraph (q) (2), Example 16, of this section. The U.S.
transferor reduces the basis of the stock of the transferee foreign corporation by including a statement with the timely-filed return of the U.S. transferor for the taxable
year in which the disposition occurs, entitled "Election to Reduce Stock Basis Under
§1.367 (a)-8 (o) (1) (iii)" and that includes-

(A)

A description, including the date, of the disposition;

(B)

A description of the stock of the transferee foreign corporation disposed
of and the basis adjustments made under this paragraph (o) (1) (iii); and

(C)

The fair market value of all the stock of the transferee foreign corporation
held by the U.S. transferor at the time of the disposition.

(2) Gain recognized in connection with certain nonrecognition transactions. If the
U.S. transferor recognizes gain in connection with a complete or partial disposition of
stock of the transferee foreign corporation received in the initial transfer [*104] that
is described in paragraph (k) of this section, and the basis condition of paragraph (o) (1)
(i) or (ii) of this section, as applicable, is satisfied with the respect to such disposition, the
amount of gain subject to the new gain recognition agreement filed under paragraph (k)
of this section as a result of such disposition shall equal the amount of gain subject to
the existing gain recognition agreement reduced by the amount of gain recognized by the
U.S. transferor on the disposition. If the U.S. transferor recognizes gain in connection
with a complete or partial disposition of the stock of the transferee foreign corporation
received in the initial transfer that is described in paragraph (k) of this section, and the
condition of paragraph (o) (1) (i) or (ii) of this section, as applicable, is satisfied with

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the respect to the disposition, but a new gain recognition agreement is not filed with respect to such disposition so that a triggering event exception does not apply to the disposition, the amount of gain required to be recognized by the U.S. transferor under the
existing gain recognition agreement shall be reduced by the amount of the gain recognized on [*105] the disposition.
(3) Gain recognized under section 301 (c) (3). If the U.S. transferor recognizes
gain under section 301 (c) (3) with respect to the stock of the transferee foreign corporation received in the initial transfer, the amount of gain subject to the gain recognition
agreement shall be reduced by the amount of such recognized gain.
(4) Dispositions of substantially all of the assets of a domestic transferred corporation. Except as otherwise provided in this paragraph (o) (4), the gain recognition agreement shall terminate without further effect if substantially all of the assets of the transferred corporation are disposed of in a transaction in which all gain realized is recognized and included in taxable income during the taxable year of the disposition, but only
if, at the time of the initial transfer, the U.S. transferor owned stock in the transferred
corporation satisfying the requirements of section 1504 (a) (2) and the U.S. transferor
and the transferred corporation were members of the same consolidated group. If the
initial transfer was part of an indirect stock transfer, the gain recognition agreement
shall terminate without further effect if substantially [*106] all of the assets of the
transferred corporation (taking into account §1.367 (a)-3 (d) (2) (v)) are disposed of in
a transaction in which all gain realized is recognized and included in taxable income
during the taxable year of the disposition, but only if at the time of the initial transfer
the U.S. transferor owned stock in the transferred corporation satisfying the requirements
of section 1504 (a) (2) (for example, in the case of a reorganization described in section
368 (a) (1) (A) by reason of section 368 (a) (2) (E)) and the U.S. transferor and the
transferred corporation were members of the same consolidated group.
(5) Certain distributions or transfers of transferred stock or securities to U.S. persons. To the extent a distribution or transfer of the transferred stock or securities satisfies
the conditions of paragraphs (o) (5) (i) through (iii) of this section, the gain recognition
agreement shall terminate without further effect, or the amount of gain subject to the gain
recognition agreement shall be reduced, as appropriate.
(i) Distributions or transfers described in section 337, 355, or 361. The transferred
stock or securities are distributed or transferred [*107] pursuant to a transaction described in paragraph (o) (5) (i) (A) through (D) of this section, as appropriate.
(A) A distribution described in section 337 that is pursuant to a complete liquidation
described in section 332. See paragraph (q) (2) of this section, Example 18, for an illustration of the rule provided by this paragraph (o) (5) (i) (A).
(B) A distribution to which section 355 applies. See paragraph (q) (2) of this section, Example 19, for an illustration of the rule provided by this paragraph (o) (5) (i)
(B).
(C) A section 361 exchange that is pursuant to an asset reorganization. See paragraph
(q) (2) of this section, Example 22, for an illustration of the rule provided by this paragraph (o) (5) (i) (C).
(D) A distribution to which section 361 (c) applies that is pursuant to an asset reorganization. See paragraph (q) (2) of this section, Example 22, for an illustration of the
rule provided by this paragraph (o) (5) (i) (D).
(ii) Qualified recipient. The recipient of the transferred stock or securities in the
relevant transaction described in paragraph (o) (5) (i) of this section (qualified recipient)
is-

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(A)

The U.S. transferor;

(B)

A member of the consolidated group [*108] that includes the U.S.
transferor immediately after the transaction; or

(C)

An individual that is a United States person.

(iii) Basis requirement-(A) General rule. Immediately after the relevant transaction
described in paragraph (o) (5) (i) of this section, the aggregate basis of the transferred
stock or securities received by the qualified recipient is not greater than the aggregate
basis of such stock or securities at the time of the initial transfer (as adjusted for gain
recognized by the U.S. transferor on the initial transfer attributable to such stock or securities). For this purpose, the basis of the transferred stock in the hands of the qualified recipient shall be determined without regard to any basis attributable to income inclusions with respect to the stock (for example, under section 961 (a)). In the case of a
distribution to which section 355 applies, any adjustments to basis under §1.367 (b)-5 (c)
shall be made before determining whether the basis condition of this paragraph is satisfied.
(B) Election to reduce basis in transferred stock or securities. If the basis condition
of paragraph (o) (5) (iii) (A) of this section is not satisfied, each qualified [*109] recipient may reduce the basis of the transferred stock or securities received in the transaction to the extent necessary to satisfy the basis condition. A qualified recipient reduces
the basis of the transferred stock or securities by including a statement with its timely-filed return for the taxable year during which the distribution or transfer occurs entitled "Election to Reduce Stock Basis Under §1.367 (a)-8 (o) (5) (iii) (B)" and that includes-

(1)

A complete description and the date of the distribution or transfer;

(2)

The fair market value of the transferred stock or securities received by the
qualified recipient in the transaction; and

(3)

The basis of the transferred stock or securities received by the qualified
recipient immediately before and after the basis reduction.

(6) Dispositions or other event following certain intercompany transactions. If,
subsequent to an intercompany transaction to which paragraph (k) (12) of this section
applies, a disposition or other event occurs that requires the U.S. transferor to take into
account the intercompany item related to the intercompany transaction (under the provisions of § 1.1502-13), the gain recognition agreement [*110] shall terminate without
further effect or the amount of gain subject to the gain recognition agreement shall be
reduced based on the principles of paragraph (o) (1) (i) or (ii) of this section, as appropriate. For an illustration of the rules of this paragraph (o) (6), see paragraph (q) (2) of this
section, Example 20.
(7) Expropriations under foreign law.
recognition agreement shall be reduced to
transferee foreign corporation received in
securities, or substantially all the assets of

The amount of gain subject to the gain
the extent the stock or securities of the
the initial transfer, the transferred stock or
the transferred corporation, are expropriated,

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seized, or subjected to a similar taking of such property by the government of a foreign
country, any political subdivision thereof, or any agency or instrumentality of the foregoing. Principles similar to those of paragraph (o) (1) (i) or (o) (1) (ii) of this paragraph,
as relevant, shall be applied to determine the amount of the reduction.
(p) Relief for reasonable cause for failure to comply-(1) Request for relief. A U.S.
transferor that fails to file timely a gain recognition agreement, waiver of period of limitations [*111] on assessments of tax, annual certification, or other information required under this section shall be considered to have satisfied the timeliness requirement with respect to such filing, and a failure to comply in any material respect with any
requirement of this section or with the terms of the gain recognition agreement that
would otherwise constitute a triggering event shall not constitute a triggering event, if a
request for relief is filed as provided under paragraph (p) (2) of this section and the
U.S. transferor is able to demonstrate to the Area Director, Field Examination, Small
Business/Self Employed or the Director of Field Operations, Large and Mid-Size Business (Director) having jurisdiction of the tax return of the U.S. transferor for the taxable year to which the failure relates, that such failure was due to reasonable cause and
not willful neglect. Whether the failure was due to reasonable cause and not willful
neglect will be determined by the Director after considering all the facts and circumstances. The Director shall notify the U.S. transferor in writing within 120 days if it is
determined that the failure was not due to reasonable cause, [*112] or if additional
time will be needed to make a determination. For this purpose, the 120-day period shall
begin on the date the Internal Revenue Service notifies the U.S. transferor in writing that
the request for reasonable cause relief has been received and assigned for review. If the
U.S. transferor is not again notified before the close of the 120-day period, the U.S.
transferor shall be deemed to have established that the failure to file timely or comply
was due to reasonable cause and not willful neglect.
(2) Procedures for filing requests for relief-(i) Time of submission. Requests for relief under paragraph (p) (1) of this section shall be considered only if, as soon as the
U.S. transferor becomes aware of the failure to file timely or comply in any material respect with any requirement of this section, an amended return is filed for the taxable
year to which the failure relates that includes the information that should have been included with the original return for such taxable year or otherwise complies with the
rules of this section and that includes a written statement explaining the reasons for the
failure to file timely or comply. The amended return [*113] must be filed with the
applicable Internal Revenue Service Center with which the U.S. transferor filed its
original return for such taxable year.
(ii) Notice requirement. In addition to the requirement of paragraph (p) (2) (i) of
this section, the U.S. transferor must comply with the requirements of paragraph (p) (2)
(ii) (A) or (B) of this section, as applicable.
(A) If any taxable year of the U.S. transferor is under examination when the
amended return is filed, a copy of the amended return and any information required to be
included with such return must be delivered to the Internal Revenue Service personnel
conducting the examination.
(B) If no taxable year of the U.S. transferor is under examination when the
amended return is filed, a copy of the amended return and any information required to
be included with such return must be delivered to the Director having jurisdiction over
the return.
(q) Examples-(1) Presumed facts and references. For purposes of the examples in
paragraph (q) (2) of this section, and except where otherwise indicated, the following is
presumed.
(i) UST, USP, and DC are domestic corporations that each use a calendar taxable
year.

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(ii) USP wholly [*114] owns UST and is the common parent of the consolidated
group of which UST is a member.
(iii) TFC, TFD, F1, and FA are foreign corporations.
(iv) UST wholly owns TFD.
(v) In a section 351 exchange, UST transfers all of the stock of TFD (TFD stock)
to TFC in exchange solely for stock of TFC (the initial transfer).
(vi) Pursuant to §1.367 (a)-3 (b) (1) (ii) and this section, UST enters into a gain
recognition agreement in connection with the initial transfer and makes the election
described under paragraph (c) (2) (vi) of this section with respect to the gain recognition
agreement.
(vii) As applicable, the section 1248 amount (within the meaning of §1.367 (b)-2
(c)) or all earnings and profits amount (within the meaning of §1.367 (b)-2 (d)) attributable to the stock of a foreign corporation is zero.
(viii) All transactions are respected under general principles of tax law, including
the step transaction doctrine.
(ix) References to a U.S. transferor entering into a gain recognition agreement
mean, where applicable, that the common parent of the consolidated group of which the
U.S. transferor is a member has filed the gain recognition agreement on behalf of the
U.S. transferor [*115] in accordance with paragraph (d) (3) of this section.
(x) Taxable years during the GRA term are referred to, for example, as year 1 and
year 2.
(2) Examples. The following examples illustrate the application of the rules of this
section.

Example 1. Basis adjustments from gain recognized under the gain
recognition agreement. (i) Facts. TFC wholly owns F1. In year 3, pursuant
to a section 351 exchange, TFC transfers all of the TFD stock to F1 in
exchange solely for voting stock of F1. UST enters into a new gain
recognition agreement with respect to the initial transfer under paragraph
(k) (3) of this section, and therefore the transfer by TFC of the TFD
stock to F1 is not a triggering event. Under paragraph (c) (5) (i) of this
section, the existing gain recognition agreement terminates without further effect. In year 4, in an exchange to which section 721 applies, UST
contributes the TFC stock received in the initial transfer to PRS, a domestic partnership, in exchange for a partnership interest. UST enters into a
new gain recognition agreement with respect to the initial transfer under
paragraph (k) (1) of this section, and therefore the transfer by UST of the
TFC stock [*116] to PRS is not a triggering event. Under paragraph
(c) (5) (i) of this section, the new gain recognition agreement filed by UST
in year 3 terminates without further effect. In year 5, TFD disposes of
substantially all of its assets in a transaction that constitutes a triggering
event under paragraph (j) (2) (i) of this section. Under paragraph (c) (1)
(i) of this section, UST recognizes the gain realized but not recognized
on the initial transfer by reason of entering into the gain recognition
agreement.
(ii) Result. Under paragraph (c) (4) of this section, the basis of the
PRS interest held by UST, the TFC stock held by PRS that was received
from UST in year 4, the F1 stock held by TFC that was received in ex-

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change for the TFD stock in year 3, and the TFD stock held by F1 that
was received from TFC in year 3 is increased by the amount of gain recognized by UST (but not by the additional tax or interest paid as result
of such gain) with respect to the initial transfer under the gain recognition
agreement. However, the basis of the assets of TFD (including the assets
disposed of in year 5) is not increased as a result of the gain recognized
by UST.
Example 2. Impact of [*117] gain recognition event on computation of income. (i) Facts. At the time of the initial transfer, the TFD stock
has a $50x basis, a $100x fair market value, and a $30x section 1248
amount. The amount of gain subject to the gain recognition agreement is
$50x. UST did not make an election under paragraph (c) (2) (vi) of this
section with respect to the gain recognition agreement. In year 3, TFC
disposes of the TFD stock received in the initial transfer in exchange for
$120x cash.
(ii) Result-(A) Gain recognition without an election. The disposition
by TFC of the TFD stock in year 3 is a triggering event under paragraph
(j) (1) of this section. As a result, under paragraph (c) (1) (i) of this section, UST must recognize and include in income $50x gain under the gain
recognition agreement. Under paragraph (c) (1) (iii) (A) of this section,
UST must report the $50x gain on an amended return filed for the taxable
year of the initial transfer. Under paragraph (c) (1) (v) of this section,
UST must pay applicable interest on any additional tax due with respect
to the $50x gain recognized. Under section 1248 (a), $30x of the gain
recognized by UST under the gain recognition [*118] agreement is
recharacterized as a dividend. Under paragraph (c) (4) of this section, as
of the date of the initial transfer, the basis of the TFC stock received by
UST in the initial transfer and the TFD stock received by TFC in the initial transfer, respectively, is increased by $50x. After taking into account
the increase to the basis of the TFD stock, TFC recognizes $20x gain on
the disposition of the TFD stock in year 3.
(B) Gain recognition with an election. If UST made an election under paragraph (c) (2) (vi) of this section with the gain recognition agreement filed for the initial transfer, the result would be the same as in paragraph (ii) (A) of this Example 2, except that UST must include in income the $50x gain recognized under the gain recognition agreement on
its tax return filed for year 3. Any additional tax due with respect to the
$50x gain and applicable interest on the additional tax due must be included with such return. The amount, if any, of the $50x gain recognized
by UST under the gain recognition agreement that is characterized as a
dividend under section 1248 (a) is determined in year 3.
Example 3. Transfer of stock of the transferee foreign [*119]
corporation to a domestic corporation in a section 351 exchange. (i)
Facts. UST wholly owns DC. In year 3, pursuant to a section 351 exchange, UST transfers all of the TFC stock received in the initial transfer to DC in an exchange solely for voting stock of DC.
(ii) Result. The year 3 transfer of the TFC stock by UST to DC constitutes a triggering event under paragraph (j) (4) of this section. However, the transfer shall not constitute a triggering event pursuant to paragraph (k) (1) (ii) of this section if DC enters into a new gain recognition
agreement with respect to the initial transfer that designates DC as the
U.S. transferor for purposes of this section. Pursuant to paragraphs (c) (4)
(i) and (ii) of this section, if DC is required to recognize gain under the

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new gain recognition agreement, the basis of the stock of TFC and TFD
would be increased by the amount of gain recognized. However, pursuant
to paragraph (c) (4) (iii) of this section, no adjustment would be made to
the basis of the DC voting stock received by UST in year 3 as a result of
such gain recognition. Alternatively, if the conditions for the application
of paragraph (k) (14) of this section are [*120] satisfied UST could
instead enter into the new gain recognition agreement with respect to the
initial transfer.
Example 4. Transfer of stock of the transferee foreign corporation in a
triangular section 368 (a) (1) (B) reorganization. (i) Facts. DC wholly
owns FA. In year 3, pursuant to a triangular reorganization described in
section 368 (a) (1) (B), UST transfers all of the TFC stock received in the
initial transfer to FA in exchange solely for 20% of the outstanding voting
stock of DC. At the time of the reorganization, the TFC stock has a basis
in excess of fair market value.
(ii) Result. (A) The transfer by UST of the TFC stock to FA is an indirect stock transfer under §1.367 (a)-3 (d) (1) (iii) (B). Accordingly, to
preserve nonrecognition treatment, UST must enter into a separate gain
recognition agreement under this section with respect to such transfer.
(B) With respect to the gain recognition agreement filed for the initial
transfer of the TFD stock, the transfer by UST of the TFC stock to FA is
a triggering event under paragraph (j) (4) of this section. However, the
transfer shall not constitute a triggering event if the conditions of the exception provided by [*121] paragraph (k) (14) of this section are satisfied.
(1) The condition of paragraph (k) (14) (i) of this section is satisfied
because the transfer qualifies as a nonrecognition transaction (assuming
UST enters into a gain recognition agreement as described in paragraph
(ii) (A) of this Example 4).
(2) The condition of paragraph (k) (14) (ii) of this section is satisfied
because immediately after the transfer DC, a domestic corporation that is
eligible to be a U.S. transferor, owns at least 5% (applying the attribution rules of section 318, as modified by section 958 (b)) of the total voting power and total fair market value of the outstanding stock of FA. As
a result, DC is treated as retaining an indirect interest in the TFD stock
immediately following the transfer.
(3) The condition of paragraph (k) (14) (iii) of this section is satisfied
if DC enters into a new gain recognition agreement with respect to the initial transfer of the TFD stock that, based on the principles of paragraph (j)
of this section, describes the subsequent dispositions or other events that
would constitute triggering events for purposes of the new gain recognition
agreement (other than the dispositions [*122] and other events described in paragraph (j) of this section). For example, a complete or partial disposition of the stock of FA would constitute a triggering event for
purposes of the new gain recognition agreement.
Example 5. Transfer of stock of the transferee foreign corporation to a
domestic corporation pursuant to an asset reorganization. (i) Facts. At
the time of the initial transfer the TFD stock has a $50x basis and a
$100x fair market value. Therefore, the amount of gain subject to the gain
recognition agreement is $50x. In year 3, pursuant to an asset reorganization described in section 368 (a) (1) (A), UST transfers its assets to DC

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in exchange solely for 20% of the outstanding stock of DC. UST distributes the stock of DC to USP pursuant to the plan of reorganization.
(ii) Result. The transfer by UST of the TFC stock to DC constitutes a
triggering event under paragraph (j) (4) of this section. However, pursuant to paragraph (k) (6) (i) of this section, if DC enters into a new gain
recognition agreement with respect to the initial transfer that designates
DC as the U.S. transferor, the transfer shall not constitute a triggering
event.
Example 6. Transfer of stock [*123] of the transferee foreign corporation to a foreign corporation pursuant to an asset reorganization. (i)
Facts. The facts are the same as in Example 5, except the acquiring corporation in the asset reorganization is FA, and, at the time of the asset reorganization, the TFC stock transferred by UST to FA has a $50x basis and
a $150x fair market value. All of the conditions under section 367 (a)
(5) and the regulations under that section are satisfied, and no adjustment
is required to the basis of the FA stock received by USP in the transaction.
(ii) Result. (A) The transfer by UST of the TFC stock to FA is described in section 361 (a) and is therefore subject to section 367 (a) (5). In
general, UST cannot file a gain recognition agreement with respect to
such transfer, and the transfer therefore is subject to the general rule of
section 367 (a) (1). However, if the conditions of §1.367 (a)-3 (e) (1) (i)
through (iv) are satisfied, USP can enter into a gain recognition agreement with respect to the transfer to avoid the recognition of gain by UST
on the transfer under section 367 (a) (1). If the exception provided by
paragraph (k) (14) of this section applies so that the [*124] transfer by
UST of the TFC stock to FA is not a triggering event with respect to the
gain recognition agreement filed for the initial transfer (discussed in paragraph (ii) (B) of this Example 6), the amount of gain subject to the gain
recognition agreement (if entered into) with respect to the transfer by UST
of the TFC stock to FA in the asset reorganization is $100x.
(B) Under paragraph (j) (4) of this section, the transfer of the TFC
stock by UST to FA is a triggering event with respect to the gain recognition agreement for the initial transfer. The exception provided by paragraph (k) (6) (i) of this section does not apply to such transfer because
FA, the acquiring corporation in the asset reorganization, is foreign. However, the transfer shall not constitute a triggering event if the conditions
of the exception provided by paragraph (k) (14) of this section are satisfied.
(1) The condition of paragraph (k) (14) (i) of this section is satisfied
because the transfer of the TFC stock to FA qualifies as a nonrecognition
transaction (assuming USP enters into a gain recognition agreement with
respect to such transfer).
(2) The condition of paragraph (k) (14) (ii) of this [*125] section
is satisfied because immediately after the transfer USP, a domestic corporation that is eligible to be a U.S. transferor, owns at least 5% (applying
the attribution rules of section 318, as modified by section 958 (b)) of the
total voting power and total fair market value of the outstanding stock of
FA. As a result, USP is treated as retaining an indirect interest in the
TFD stock immediately following the transfer.
(3) The condition of paragraph (k) (14) (iii) of this section is satisfied
if USP enters into a new gain recognition agreement with respect to the

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initial transfer of the TFD stock that, based on the principles of paragraph
(j) of this section, describes the subsequent dispositions or other events
that would constitute triggering events for purposes of the new gain
recognition agreement, other than those already provided in paragraph (j)
of this section. For example, a disposition of the stock of FA would constitute such a triggering event for purposes of the new gain recognition
agreement.
(iii) Alternate facts. Assume the same facts as in paragraph (i) of this
Example 6, including that paragraph (k) (14) of this section applies to the
year 3 reorganization [*126] so that USP enters into a new gain recognition agreement with respect to the initial transfer of the TFD stock that
occurred in year 1 (GRA 1), and that under §1.367 (a)-3 (e) USP enters
into a separate gain recognition agreement with respect to the initial
transfer of the TFC stock by UST to FA pursuant to the year 3 asset reorganization (GRA 2). Assume further that in year 4 TFC disposes of 10% of
the TFD stock pursuant to a transaction that constitutes a triggering event
with respect to GRA 1. The disposition of the TFD stock is not a triggering event with respect to GRA 2 because the TFD stock disposed of does
not constitute substantially all the assets of TFC. Under paragraphs (j) (1)
and (c) (1) (i) of this section, USP must recognize $5x gain (10% of
$50x) under GRA 1. Under paragraph (c) (4) (i) and (ii) of this section,
as of the date of the initial transfer (with respect to which GRA 1 was
filed), the basis of the TFC stock and TFD stock, respectively, is increased by $5x. Under paragraph (c) (1) (i) of this section, the amount of
gain subject to GRA 1 is reduced from $50x to $45x. Similarly, because
the transferred stock for purposes of GRA 2 is the TFC [*127] stock,
the amount of gain subject to GRA 2 is reduced from $100x to $95x to
reflect the increase to the basis of the TFC stock.
Example 7. Transfer of transferred stock to a foreign corporation
pursuant to an asset reorganization. (i) Facts. UST wholly owns FA. In
year 4, pursuant to a reorganization described in section 368 (a) (1) (D),
TFC transfers all of the TFD stock to FA in exchange solely for stock of
FA. TFC distributes the FA stock to UST pursuant to the plan of reorganization.
(ii) Analysis. In general, the year 4 transfer by TFC of the TFD stock
to FA and the exchange by UST of the TFC stock for FA stock constitute
triggering events under paragraphs (j) (1) and (4) of this section, respectively. However, under paragraph (k) (6) (ii) of this section, the transfers
shall not constitute triggering events if UST enters into a new gain recognition agreement with respect to the initial transfer that designates FA as
the transferee foreign corporation.
Example 8. Transfer of substantially all the assets of the transferred
corporation pursuant to an asset reorganization. (i) Facts. In year 4, pursuant to an asset reorganization described in section 368 (a) (1) (C),
TFD [*128] transfers all of its assets to FA in exchange solely for
voting stock of FA. TFD distributes the FA voting stock to TFC pursuant
to the plan of reorganization.
(ii) Analysis. The year 4 transfer by TFD of all its assets to FA and
the exchange by TFC of its TFD stock for FA voting stock pursuant to the
reorganization constitute triggering events under paragraphs (j) (2) and (j)
(1) of this section, respectively. However, under paragraph (k) (6) (iii) of
this section, the transfers shall not constitute triggering events if UST
enters into a new gain recognition agreement with respect to the initial

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transfer that designates FA as the transferred corporation. In addition,
under paragraph (k) (6) (iii) of this section only the assets of TFD acquired by FA in the asset reorganization shall be treated as assets of the
transferred corporation for purposes of the new gain recognition agreement.
Example 9. Complete liquidation of transferred corporation into
transferee foreign corporation. (i) Facts. UST does not make an election
under paragraph (c) (2) (vi) of this section in connection with the gain
recognition agreement entered into with respect to the initial transfer. In
year [*129] 3, TFD distributes all of its assets to TFC pursuant to a
complete liquidation to which sections 332 and 337 apply. Under paragraph (k) (8) of this section, UST enters into a new gain recognition
agreement with respect to the initial transfer such that the liquidation is
not a triggering event. Under paragraph (c) (5) (i) of this section, the
new gain recognition agreement is subject to the conditions and requirements of this section to the same extent as the existing gain recognition
agreement, except that the transferred stock is no longer subject to the
gain recognition agreement because the transferred stock is cancelled by
reason of the liquidation. In year 5 TFC disposes of substantially all of
the assets received from TFD in the year 3 liquidation.
(ii) Result. The year 5 disposition by TFC of substantially all of the
assets received from TFD in the year 3 liquidation is a triggering event
under paragraph (j) (2) of this section, and therefore UST must recognize the gain subject to the gain recognition agreement. UST must report
the gain recognized on an amended return for the taxable year during
which the initial transfer occurred. UST must also pay applicable
[*130] interest on any additional tax due with respect to the gain recognized. Under paragraph (c) (4) (i) of this section, the basis of the TFC
stock received by UST in the initial transfer is increased as of the date of
the initial transfer by the amount of gain recognized under the gain
recognition agreement. The basis of the assets of TFD, however, is not
increased.
Example 10. Transfer of transferred stock to foreign corporation in
section 351 exchange, followed by a section 332 liquidation of the foreign
corporation. (i) Facts. In year 3, pursuant to a section 351 exchange, TFC
transfers the TFD stock to F1, a newly formed corporation, in exchange
solely for voting stock of F1. The transfer by TFC of the TFD stock to
F1 is not a triggering event because UST complies with the conditions of
paragraph (k) (3) of this section. In year 5, F1 distributes all of its assets
to TFC in a complete liquidation to which sections 332 and 337 apply.
(ii) Result. The distribution of the TFD stock by F1, and the exchange of F1 stock by TFC pursuant to the year 5 liquidation of F1 constitute triggering events under paragraphs (j) (1) and (k) (3) (i) of this
section, respectively. However, [*131] if paragraph (k) (14) of this
section applies, neither the distribution of the TFD stock by F1, nor the
exchange by TFC of the F1 stock, shall constitute a triggering event.
(A) The condition of paragraph (k) (14) (i) of this section is satisfied
because the distribution of the TFD stock, and the exchange of F1 stock,
both qualify as nonrecognition transactions.
(B) The condition of paragraph (k) (14) (ii) of this section is satisfied
because immediately after the distribution UST, a domestic corporation
that is eligible to be a U.S. transferor, owns at least 5% (applying the at-

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tribution rules of section 318, as modified by section 958 (b)) of the stock
of TFC. As a result, UST is treated as retaining an indirect interest in the
TFD stock following the complete liquidation of F1.
(C) The condition of paragraph (k) (14) (iii) of this section is satisfied if UST enters into a new gain recognition agreement. Because after
the complete liquidation of F1, UST wholly owns TFC, which wholly
owns TFD, as was the case immediately after the initial transfer, UST is
not required to describe, with the new gain recognition agreement, other
dispositions or events that would constitute [*132] triggering events
based on the principles of paragraph (j) of this section, other than the
dispositions or events described in paragraph (j) of this section.
Example 11. Disposition of stock of transferee foreign corporation
pursuant to a divisive reorganization. (i) Facts. In year 3, pursuant to a divisive reorganization described in section 368 (a) (1) (D), UST transfers
all of the TFC stock to DC, a newly-formed corporation, in exchange
solely for stock of DC. UST then distributes all of the DC stock to USP in
a transaction to which section 355 applies.
(ii) Result. The transfer of the TFC stock by UST to DC constitutes a
triggering event under paragraph (j) (4) of this section. However, under
paragraph (k) (1) (iii) of this section, the transfer of the TFC stock shall
not constitute a triggering event if DC enters into a new gain recognition
agreement that designates DC as the U.S. transferor for purposes of this
section.
(iii) Alternate facts. The facts are the same as in paragraph (i) of this
Example 11, except that UST transfers only 90% of the TFC stock to DC.
Paragraph (k) (1) (iii) of this section applies only with respect to the
TFC stock transferred to DC. [*133] Thus, the conditions of paragraph (k) (1) (iii) of this section are satisfied if DC enters into a new gain
recognition agreement with respect to the TFC stock received from UST.
The amount of gain subject to the new gain recognition agreement entered into by DC equals 90% of the amount of gain subject to the gain
recognition agreement entered into by UST with respect to the initial
transfer. The amount of gain subject to the gain recognition agreement
entered into by UST with respect to the initial transfer is reduced by the
amount of gain subject to the new gain recognition agreement entered
into by DC. The gain recognition agreement entered into by UST with
respect to the initial transfer continues to apply to the remaining TFC
stock held by UST.
Example 12. Disposition of transferred stock pursuant to a divisive
reorganization. (i) Facts. In year 3, pursuant to a divisive reorganization
described in section 368 (a) (1) (D), TFC transfers all of the TFD stock to
F1, a newly formed corporation, in exchange solely for all of the outstanding stock of F1. TFC then distributes all of the F1 stock to UST in a
transaction to which section 355 applies.
(ii) Result. The transfer [*134] by TFC of the TFD stock to F1
constitutes a triggering event under paragraph (j) (1) of this section.
However, if paragraph (k) (14) of this section applies, neither the transfer
of the TFD stock by TFC to F1, nor the distribution of the F1 stock by
TFC to UST, shall constitute triggering events.
(A) The condition of paragraph (k) (14) (i) of this section is satisfied
because the dispositions of the TFD stock and F1 stock qualify as nonrecognition transactions.

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(B) The condition of paragraph (k) (14) (ii) of this section is satisfied
because immediately after the transfer UST, an eligible U.S. transferor,
owns at least 5% (applying the attribution rules of section 318, as modified by section 958 (b)) of the total voting power and the total fair market
value of the outstanding stock of F1. As a result, UST is treated as retaining an indirect interest in the TFD stock following the dispositions.
(C) The condition of paragraph (k) (14) (iii) of this section is satisfied if UST enters into a new gain recognition agreement with respect to
the initial transfer that describes the subsequent dispositions or other
events that would constitute triggering events based on the [*135]
principles of paragraph (j) of this section, other than those described in
paragraph (j) of this section. For example, a complete or partial disposition of the F1 stock would constitute a triggering event for purposes of the
new gain recognition agreement (subject to the exceptions provided by
paragraph (k) of this section).
Example 13. Receipt of boot by the transferee foreign corporation in
a subsequent section 351 exchange. (i) Facts. At the time of the initial
transfer, the TFD stock has a $50x basis and $100x fair market value.
The amount of gain subject to the gain recognition agreement is $50x. In
year 3, TFC and X, an unrelated foreign corporation, form F1. TFC transfers the TFD stock to F1 in exchange for $35x cash and $65x stock of
F1. At the time of the transfer, the TFD stock has a $50x basis and $100x
fair market value. The F1 stock received by TFC represents 25% of the
outstanding stock of F1. Without regard to the gain recognized under the
gain recognition agreement and any adjustments to basis under paragraph
(c) (4) (ii) of this section, under section 351 (b) TFC would recognize
$35x gain in connection with the transfer of the TFD stock to F1. UST
complies [*136] with the conditions of paragraph (k) (3) of this section, and therefore the disposition by TFC of the TFD stock does not constitute a triggering event.
(ii) Result. Under paragraph (m) (1) of this section, UST must recognize $35x gain under the gain recognition agreement as a result of the
year 3 disposition by TFC of the TFD stock. Thus, the amount of gain
subject to the new gain recognition agreement entered into by UST pursuant to paragraph (k) (3) of this section is $15x. Under paragraph (c) (4)
(ii) of this section, as of the date of the initial transfer, the basis of the
TFD stock held by TFC is increased by $35x, the amount of the gain
recognized by UST under the gain recognition agreement. Under paragraph
(c) (4) (i) of this section, the basis of the TFC stock received by UST in the
initial transfer is also increased by $35x. After taking into account the increase to the basis of the TFD stock under paragraph (c) (4) (ii) of this
section, TFC recognizes $15x gain under section 351 (b) in connection
with the year 3 transfer of the TFD stock to F1. Under section 362 (a), the
basis of the TFD stock in the hands of F1 is $100x.
Example 14. Complete disposition of [*137] transferred stock
pursuant to a section 304 (a) (1) transaction. (i) Facts. UST wholly owns
FA. In year 3, in a transaction to which section 304 (a) (1) applies, TFC
transfers all of the TFD stock to FA in exchange for cash. Under section
304 (a) (1), TFC and FA are treated as if TFC transferred the TFD stock
to FA in a section 351 exchange in exchange solely for FA stock, and
then FA redeemed the FA stock deemed issued in exchange for the cash.
Under section 302 (d), the redemption of the FA stock deemed issued by

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FA to TFC under section 304 (a) (1) is treated as a distribution to which
section 301 applies.
(ii) Result. (A) In general, the deemed contribution by TFC of the TFD
stock to FA in the section 351 exchange is a triggering event under paragraph (j) (1) of this section. However, under paragraph (k) (3) of this section the deemed contribution shall not be a triggering event if UST enters
into a new gain recognition agreement with respect to the initial transfer in
which it agrees to treat as a triggering event a complete or partial disposition of the FA stock deemed received by TFC.
(B) Under paragraph (n) (1) of this section, the redemption of the FA
stock deemed [*138] received by TFC in exchange for the TFD stock
shall not constitute a disposition if UST enters into a new gain recognition agreement with respect to the initial transfer that includes appropriate
provisions to take into account such redemption. Therefore, under the new
gain recognition agreement UST must agree to treat as a triggering event
a complete or partial disposition of the stock of FA. Pursuant to paragraph
(d) (2) (ii) of this section, UST is permitted to enter into a single new
gain recognition agreement in year 3, but the gain recognition agreement
must provide a complete description of the section 304 (a) (1) transaction
including the deemed section 351 exchange and redemption of the FA
stock.
Example 15. Reduction in amount of gain subject to gain recognition
agreement, followed by triggering event. (i) Facts. In year 3, UST disposes
of 60% of the TFC stock received in the initial transfer in a transaction in
which the conditions of paragraph (o) (1) (ii) of this section are satisfied.
Thus, the amount of gain subject to the gain recognition agreement is reduced by 60%. In year 5, TFC disposes of 50% of the TFD stock in a
transaction that constitutes a triggering [*139] event.
(ii) Result. As a result of the year 5 disposition by TFC of 50% of the
TFD stock, under paragraphs (j) (1) and (c) (1) (i) of this section, UST
must recognize and include in income 50% of the gain subject to the gain
recognition agreement (because of the year 3 disposition of TFC stock,
the amount of gain subject to the gain recognition agreement equals 40%
of the gain realized, but not recognized, on the initial transfer). UST
must pay applicable interest on any additional tax due with respect to the
gain recognized. The amount of gain subject to the gain recognition
agreement is reduced by the amount of gain recognized by UST (the remaining gain equals 20% of the gain realized, but not recognized, by UST
on the initial transfer).
Example 16. Taxable sale of stock of transferee foreign corporation
and election to reduce stock basis. (i) Facts. UST wholly owns F1 and
TFD. The F1 stock has a $100x basis and $90x fair market value, and
the TFD stock has a $0x basis and $100x fair market value. UST also
owns real property with a $10x basis and $10x fair market value. In year
1, pursuant to a section 351 exchange, UST transfers the real property,
the TFD stock, and [*140] the F1 stock to TFC in exchange solely for
20 shares of TFC stock. UST enters into a gain recognition agreement
with respect to the transfer of the TFD stock. The amount of the gain
recognition agreement is $100x. UST takes the position that the basis of
each share of TFC stock received in the exchange is $5.5x (a proportionate amount of the $110x aggregate basis of the transferred property). In
year 3, UST disposes of all its TFC stock in a transaction in which all
gain realized is recognized and included in taxable income.

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(ii) Result. The year 3 disposition of the TFC stock is a triggering
event under paragraph (j) (4) of this section. The disposition does not terminate the gain recognition agreement pursuant to paragraph (o) (1) (i)
of this section because the basis of each share of TFC stock received in
exchange for the TFD stock in the initial transfer is $5.5x, which exceeds
the $0x basis of the TFD stock at time of the initial transfer. However,
under paragraph (o) (1) (iii) of this section, to satisfy the basis condition
of paragraph (o) (1) (i) of this section, UST can reduce the basis of the
10 shares of the TFC stock received in exchange for the TFD stock
[*141] to $0x. If UST reduces the basis of the 10 shares of TFC stock to
$0x, under paragraph (o) (1) (i) of this section the disposition of the TFC
stock shall not constitute a triggering event but instead shall terminate the
gain recognition agreement without further effect.
Example 17. Successive section 351 exchanges, section 301 distributions, and transactions involving partnerships. (i) Facts. UST owns a 40
percent capital and profits interest in a foreign partnership (PRS). PRS
wholly owns TFD and other assets with basis equal to fair market value.
The TFD stock has a $50x basis and $200x fair market value. TFC wholly owns F1. On day 1 of year 1, in a section 351 exchange, UST transfers its PRS interest to TFC in exchange solely for stock of TFC (initial
transfer). On that same day, in a section 351 exchange, TFC transfers the
PRS interest received from UST to F1 in exchange solely for stock of
F1. In year 3, PRS receives a $150x distribution from TFD to which section 301 applies. Under section 301 (c), $25x of the distribution constitutes a dividend, $50x is applied against and reduces the basis of the TFD
stock held by PRS, and the remaining $75x is treated as gain [*142]
from the sale or exchange of property. With respect to the TFD stock
deemed transferred by UST in the initial transfer, under section 301 (c),
$10x (40% of $25x) of the distribution constitutes a dividend, $20x (40%
of $50x) is applied against and reduces the basis of TFD stock, and $30x
(40% of $75x) is treated as gain from the sale or exchange of property. In
year 5, pursuant to a distribution to which section 731 applies, PRS distributes all of the TFD stock to F1.
(ii) Result. (A) Successive section 351 transfers. Under section 367
(a) (4) and §1.367 (a)-1T (c) (3) (ii), the transfer of the PRS interest by
UST to TFC is treated, for purposes of section 367 (a), as a transfer by
UST to TFC of its proportionate share of the TFD stock held by PRS (the
initial transfer). The initial transfer by UST of the TFD stock to TFC is
subject to the general rule of section 367 (a) (1), unless UST enters into
a gain recognition agreement with respect to such transfer pursuant to
§1.367 (a)-3 (b) (1) (ii) and this section. Under paragraph (c) (3) (viii) of
this section, the gain recognition agreement must include a complete description of the transfer, including a description of [*143] the partners
of PRS. Even if UST enters into a gain recognition agreement with respect to the initial transfer, under paragraph (j) (3) of this section, the
subsequent transfer by TFC of the PRS interest to F1 is a triggering event
unless UST enters into a new gain recognition agreement with respect to
the initial transfer under paragraph (k) (14) that provides that, in addition to the triggering events provided in paragraph (j) of this section, a
complete or partial disposition of the F1 stock received by TFC in exchange for the PRS interest shall constitute a triggering event for purposes of the gain recognition agreement. The new gain recognition
agreement must also provide that any other disposition that is inconsistent
with the principles of paragraph (k), including an indirect disposition of

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the TFD stock or of substantially all of the assets of TFD, shall constitute
a triggering event for purposes of the new gain recognition agreement.
Under paragraph (d) (2) (ii) of this section, UST is permitted to enter into a
single gain recognition agreement with respect to the initial transfer and the
subsequent transfer by TFC of the PRS interest, but the agreement must
[*144] include a complete description of the initial transfer and the subsequent transfer of the PRS interest.
(B) Section 301 distribution from TFD to PRS. Under paragraph (b)
(1) (iii) of this section, the section 301 distribution received by PRS from
TFD is not a disposition (and therefore does not affect the gain recognition agreement) to the extent it is described in section 301 (c) (1) or (2).
However, under paragraph (n) (2) of this section, to the extent the distribution is described in section 301 (c) (3), UST must recognize gain
($30x) under the gain recognition agreement. For this purpose, the
amount of the distribution that is described in section 301 (c) (3) is determined before taking into account the increase to the basis of the TFD
stock under paragraph (c) (4) (ii) of this section.
(C) Distribution of TFD stock by PRS to F1. The year 5 distribution
of the TFD stock by PRS to F1 is a triggering event under paragraph (j)
(1) of this section, unless paragraph (k) (14) of this section applies.
(1) The condition of paragraph (k) (14) (i) of this section is satisfied
because the distribution qualifies as a nonrecognition transaction.
(2) The condition of paragraph [*145] (k) (14) (ii) of this section
is satisfied because immediately after the distribution UST, a domestic
corporation that is eligible to be a U.S. transferor, owns at least 5% (applying the attribution rules of section 318, as modified by section 958 (b))
of the total voting power and total value of the outstanding stock of F1.
As a result, UST is treated as retaining an indirect interest in the TFD
stock following the distribution.
(3) The condition of paragraph (k) (14) (iii) of this section is satisfied
if UST enters into a new gain recognition agreement with respect to the
initial transfer. The new gain recognition agreement need not describe
additional dispositions or other events that would constitute triggering
events because, pursuant to paragraph (c) (5) of this section, the dispositions or other events described in paragraph (j) of this section or in the
existing gain recognition agreement apply to the new gain recognition
agreement.
Example 18. Complete liquidation of transferee foreign corporation.
(i) Facts. TFD has 10 shares of stock outstanding immediately before the
initial transfer. On the date of the initial transfer, the TFD stock has a
$0x basis and [*146] $90x fair market value. In year 2, in exchange
for 1 share of TFD stock TFC transfers real estate to TFD with a $10x
basis and $10x fair market value. In year 4, TFC distributes the 11
shares of TFD stock to UST in a complete liquidation to which sections
332 and 337 apply.
(ii) Result. In determining whether the gain recognition agreement
entered into by UST with respect to the initial transfer is terminated under
paragraph (o) (5) of this section, or triggered under paragraphs (j) (1) and
(j) (4) of this section, only the 10 shares of TFD stock transferred by UST
in the initial transfer are considered. Thus, the 1 share of TFD stock received by TFC in exchange for the real estate in year 2 is not taken into
account.

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Example 19. Spin-off of transferred corporation. (i) Facts. Before the
initial transfer, the TFD stock has an $80x basis and a $100x fair market
value, and the TFC stock has a $100x basis and a $100x fair market
value. In year 4, TFC distributes all of the TFD stock to UST in a transaction to which section 355 applies. At the time of the distribution, the TFD
stock has a $200x fair market value, and the TFC stock (without regard
to the value of the TFD [*147] stock held by TFC) has a $100x fair
market value. At such time, the TFC stock has a $180x basis. As determined under section 358, immediately after the distribution, the TFC
stock has a $60x basis, and the TFD stock has a $120x basis.
(ii) Result. The distribution of the TFD stock by TFC in year 4 is a
triggering event under paragraph (j) (1) of this section. The distribution
does not terminate the gain recognition agreement under paragraph (o)
(5) of this section because after the distribution, the basis of the TFD
stock in the hands of UST ($120x) is greater than the basis of the TFD
stock at the time of the initial transfer ($80x). However, if UST reduces
the basis of the TFD stock to $80x (as provided under paragraph (o) (5)
(iii) of this section) the gain recognition agreement will terminate without
further effect. If UST does not elect to reduce the basis of the TFD stock,
see paragraph (k) (14) of this section.
Example 20. Intercompany transaction followed by disposition to
nonmember. (i) Facts. At the time of the initial transfer, the TFD stock
has a $50x basis and $100x fair market value. The amount of the gain
recognition agreement is $50x. In year 3, UST [*148] distributes all of
the TFC stock to USP in a transaction to which section 301 applies. At the
time of the distribution, the TFC stock has a $50x basis and $90x fair
market value. Under section 311 (b), UST must recognize $40x gain (the
intercompany item) on the distribution, but because the distribution is an
intercompany transaction, under the provisions of §1.1502-13, the $40x
gain is not taken into account in year 3. In year 4, USP sells all of the
TFC stock to X, an unrelated corporation. Under the provisions of
§1.1502-13, in year 4 UST takes into account the $40x intercompany item
as a result of the sale of the TFC stock to X.
(ii) Result. (A) The year 3 distribution of the TFC stock by UST to
USP does not terminate the gain recognition agreement under paragraph
(o) (1) of this section because UST does not include the $40x gain in
taxable income during year 3. Under paragraph (j) (4) of this section, the
year 3 distribution of the TFC stock by UST to USP is generally a triggering event; however, because the distribution is an intercompany transaction that creates an intercompany item, the distribution shall not constitute a triggering event if the conditions [*149] of paragraph (k) (12)
(i) of this section are satisfied.
(1) The condition of paragraph (k) (12) (i) (A) of this section is satisfied because the aggregate basis of the TFC stock distributed ($50x) is
not greater than the sum of the aggregate basis of the TFD stock at the
time of the initial transfer ($50x).
(2) The condition of paragraph (k) (12) (i) (B) of this section is satisfied if the next annual certification for the existing gain recognition
agreement includes a complete description of the intercompany transaction and an explanation of how the basis condition of paragraph (k) (12)
(i) (A) of this section is satisfied.

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(B) Under paragraph (o) (6) of this section and the principles of paragraph (o) (1) (i) of this section, because the year 4 sale of the TFC stock
to X requires UST to take into account the $40x gain (the intercompany
item) from the year 3 distribution, the year 4 sale terminates the gain
recognition agreement. If, alternatively, in year 4 USP had sold only 30%
of the TFC stock, then under paragraph (o) (6) of this section and the
principles of paragraph (o) (1) (ii) of this section the amount of gain subject to the gain recognition agreement would [*150] be reduced by
30%.
(iii) Alternate facts. Intercompany transaction followed by sale of
transferee foreign corporation to member. Assume the same facts as in
paragraph (i) of this Example 20, except that, instead of USP selling the
TFC stock to X, in year 4 USP sells the TFC stock to USS in exchange
for $90x cash. UST and USS are members of the USP consolidated group
immediately after the sale. The results of the year 3 distribution of the
TFC stock by UST to USP are the same as in paragraph (ii) of this Example 20. In addition, under paragraph (k) (12) (ii) of this section, the year 4
sale by USP of the TFC stock to USS is not a triggering event, provided
UST includes a complete description of the sale with the annual certification filed for the gain recognition agreement in year 4.
(iv) Alternate facts. Intercompany transaction followed by complete
liquidation of transferee foreign corporation. Assume the same facts as in
paragraph (i) of this Example 20, except that, instead of USP selling the
TFC stock to X, in year 4 TFC distributes all of its assets to USP in a
complete liquidation to which sections 332 and 337 apply. The result is
the same as in paragraph (ii) [*151] of this Example 20 because,
under the provisions of §1.1502-13, in year 4 UST takes into account the
$40x gain (the intercompany item) from the year 3 distribution.
(v) Alternate facts. Intercompany transaction followed by triggering
event. Assume the same facts as in paragraph (i) of this Example 20, except that instead of USP selling the TFC stock to X, in year 4 TFC disposes of all of the TFD stock in a transaction that constitutes a triggering
event under paragraph (j) (1) of this section. Under paragraph (c) (1) (i)
of this section UST must recognize $50x gain under the gain recognition
agreement. Under paragraphs (c) (4) (i) and (ii) of this section, as of the
date of the initial transfer the basis of the TFC stock and TFD stock, respectively, is increased by $50x.
(vi) Alternate facts. Intercompany transaction followed by section
351 transfer to member. The facts are the same as in paragraph (i) of this
Example 20, except that, in year 3, in a section 351 exchange UST
transfers all of the TFC stock to USS in exchange for $10x cash and $80x
of stock of USS. USS is a member of the USP consolidated group immediately after the exchange. The transfer of the TFC stock [*152] by
UST to USS is an intercompany transaction. Under section 351 (b), UST
must generally recognize $10x gain (intercompany item) in connection
with the transfer; however, under the provisions of §1.1502-13, UST
does not take the $10x gain into account in year 3. Under paragraph (k)
(12) of this section, as result of the intercompany transaction creating an
intercompany item ($10x gain), the existing gain recognition agreement
($50x gain) must be divided between UST and USS. UST shall remain
subject to a gain recognition agreement of $10x (equal to the amount of the
intercompany item). The amount of the gain recognition agreement entered
into by USS under paragraph (k) (1) of this section is $40x (equal to the

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amount of the existing gain recognition agreement, reduced by the
amount of the of the gain recognition agreement to which UST remains
subject).
Example 21. Transfer of transferred stock to United States person
other than U.S. transferor. (i) Facts. An individual (A) that is a United
States citizen wholly owns TFD, TFC, and DC. A transfers the TFD
stock to TFC in a section 351 exchange and enters into a gain recognition
agreement with respect to such transfer. [*153] In year 5, pursuant to
an asset reorganization, TFC transfers all of its assets to DC in exchange
solely for DC stock. TFC distributes the DC stock to A pursuant to the
plan of reorganization.
(ii) Result. The transfer by TFC of the TFD stock to DC and the exchange by A of the TFC stock for DC stock pursuant to the asset reorganization are triggering events under paragraphs (j) (1) and (j) (4) of this
section, respectively. The gain recognition agreement does not terminate
under paragraph (o) (5) of this section because DC is neither the U.S.
transferor, nor an individual that is a United States person, nor a member of the same consolidated group of which the U.S. transferor is a
member. However, if paragraph (k) (14) of this section applies the exchanges shall not constitute triggering events.
(A) The condition of paragraph (k) (14) (i) of this section is satisfied
because the transfer of the TFD stock to DC qualifies as a nonrecognition
transaction.
(B) The condition of paragraph (k) (14) (ii) of this section is satisfied
because immediately after the transfer DC, a domestic corporation that is
eligible to be a U.S. transferor, retains a direct interest in the TFD
[*154] stock following the transfer.
(C) The condition of paragraph (k) (14) (iii) of this section is satisfied if DC enters into a new gain recognition agreement with respect to the
initial transfer. Under paragraph (k) (14) (iii) (B) of this section, DC is
not required to describe any subsequent dispositions or other events that
(based on the principles of paragraph (j) of this section) would constitute
triggering events for purposes of the new gain recognition agreement,
other than the dispositions or other events described in paragraph (j) of
this section, because DC holds a direct interest in TFD after the asset reorganization.
Example 22. Transfer of transferred stock to consolidated group
member. (i) Facts. UST wholly owns DC, a member of the USP consolidated group that includes UST. In year 5, pursuant to an asset reorganization described in section 368 (a) (1) (A) TFC merges with and into DC.
Immediately after the asset reorganization, DC wholly owns TFD, and the
basis of the TFD stock is not greater than the aggregate basis of such
stock at the time of the initial transfer.
(ii) Result. The gain recognition agreement filed by UST with respect
to the initial transfer terminates [*155] without further effect if the
conditions of paragraph (o) (5) of this section are satisfied.
(A) The condition of paragraph (o) (5) (i) of this section is satisfied
because the transfer of the TFD stock is a section 361 exchange.
(B) The condition of paragraph (o) (5) (ii) of this section is satisfied
because DC is a member of the consolidated group that includes UST
immediately after the section 361 exchange.

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(C) The condition of paragraph (o) (5) (iii) of this section is satisfied
because the aggregate basis of the TFD stock immediately after the section 361 exchange is not greater than the aggregate basis of the TFD
stock at the time of the initial transfer (as adjusted for any gain recognized
by UST on such transfer). If the basis condition of paragraph (o) (5) (iii)
were not satisfied, under paragraph (o) (5) (iii) of this section, DC could
reduce the basis of the TFD stock received in the reorganization. Alternatively, a new gain recognition agreement could be entered into if paragraph (k) (14) of this section applied to the disposition of the TFD stock
pursuant to the section 361 exchange.
(iii) Alternate facts. The facts are the same as in paragraph (i) of this
[*156] Example 22, except that instead of TFC merging into DC, TFC
merges into TFD in a reorganization described in section 368 (a) (1) (A).
The gain recognition agreement terminates without further effect if the
conditions of paragraph (o) (5) of this section are satisfied.
(A) The condition of paragraph (o) (5) (i) of this section is satisfied
because the TFD stock issued by TFD to TFC in the reorganization,
which is treated as transferred stock under paragraph (b) (2) (iii) of this
section, is distributed by TFC to UST pursuant to section 361 (c).
(B) The condition of paragraph (o) (5) (ii) of this section is satisfied
because UST is the U.S. transferor.
(C) The condition of paragraph (o) (5) (iii) of this section is satisfied
if the aggregate basis of the TFD stock received by UST from TFC is not
greater than the aggregate basis of the TFD stock at the time of the initial transfer (as adjusted for any gain recognized by UST on such transfer). If the basis condition of paragraph (o) (5) (iii) were not satisfied,
under paragraph (o) (5) (iii) of this section, UST could reduce the basis
of the TFD stock received in the reorganization.
Example 23. Split-off of transferred stock. [*157] (i) Facts. X, a
domestic corporation that is unrelated to USP and UST, wholly owns
TFC. Pursuant to a reorganization described in section 368 (a) (1) (B),
UST transfers all of the TFD stock to TFC in exchange for 50% of the
outstanding voting stock of TFC. UST enters into a gain recognition
agreement with respect to such transfer. In year 4, in a split-off transaction to which section 355 applies, TFC distributes all of the TFD stock
to X in exchange for all the TFC stock held by X.
(ii) Result. Under paragraph (j) (1) of this section, the year 4 distribution of the TFD stock to X constitutes a triggering event. However, the
distribution shall not constitute a triggering event if paragraph (k) (14)
of this section applies. The gain recognition agreement does not terminate
under paragraph (o) (5) of this section because X is not a recipient described in paragraph (o) (5) (ii) of this section.
(A) The condition of paragraph (k) (14) (i) of this section is satisfied
because the distribution of the TFD stock qualifies as a nonrecognition
transaction.
(B) The condition of paragraph (k) (14) (ii) of this section is satisfied
because immediately after the distribution X, [*158] a domestic corporation that is eligible to be a U.S. transferor, retains a direct interest in
the TFD stock.
(C) The condition of paragraph (k) (14) (iii) of this section is satisfied if X enters into a new gain recognition agreement with respect to the

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2009-1 C.B. 607; T.D. 9446;
2009 IRB LEXIS 127, *; 2009-9 I.R.B. 607
initial transfer. Under paragraph (k) (14) (iii) (B) of this section, X is not
required to describe, with the new gain recognition agreement, any subsequent dispositions or other events that (based on the principles of paragraph (j) of this section) would constitute triggering events, other than
the dispositions described in paragraph (j) of this section, because X directly owns TFD after the distribution.
(D) If X were a United States citizen, the gain recognition agreement
would terminate if the condition of paragraph (o) (5) (iii) of this section
were satisfied. Alternatively, the gain recognition agreement would continue for its remaining term if the conditions for the application of paragraph (k) (14) of this section were satisfied.
(iii) Alternate facts. Distribution to unrelated foreign corporation.
The facts are the same as in paragraph (i) of this Example 23, except that
X is a foreign corporation wholly owned [*159] by DC. DC is unrelated to UST. The results are the same as in paragraph (ii) of this Example 23, except as follows.
(A) The condition of paragraph (k) (14) (ii) of this section is satisfied
because immediately after the distribution DC, a domestic corporation
that is eligible to be a U.S. transferor, owns at least 5 % (applying the
attribution rules of section 318, as modified by section 958 (b)) of the total voting power and total value of the outstanding stock of X. As a result,
DC is treated as retaining an indirect interest in the TFD stock immediately following the distribution.
(B) The condition of paragraph (k) (14) (iii) of this section is satisfied if DC enters into a new gain recognition agreement with respect to
the initial transfer. Under paragraph (k) (14) (iii) (B) of this section, DC
must, in addition to the dispositions described in paragraph (j) of this section, include as a triggering event a complete or partial disposition of the
stock of X.
(iv) Alternate facts. Distribution to nonresident alien individual. The
facts are the same as in paragraph (i) of this Example 23, except that X is
a nonresident alien individual. Paragraph (k) (14) of this section
[*160] does not apply to the distribution because the conditions of paragraph (k) (14) (ii) and (iii) of this section cannot be satisfied. Therefore,
the distribution is a triggering event, and UST will recognize gain under
the gain recognition agreement as required under paragraphs (c) (1) (i)
and (v) of this section. The result would be the same if X were a foreign
corporation and, immediately after the distribution, no United States
person owned at least 5% (applying the attribution rules of section 318, as
modified by section 958 (b)) of the total voting power and value of the
outstanding stock of X.
Example 24. Applicability of this section to gain recognition agreements filed before March 13, 2009. (i) Facts. The facts are the same as in
paragraph (i) of Example 6, except that the initial transfer occurred on
March 7, 2007, and the asset reorganization occurred on July 1, 2008.
(ii) Result. Under paragraph (r) (1) (ii) of this section, the rules of
§1.367 (a)-8T (see 26 CFR part 1, revised April 1, 2007) apply to the
transfers pursuant to the asset reorganization because the initial transfer
occurred on March 7, 2007. As a result of the disposition of the TFC
stock [*161] pursuant to the asset reorganization, under §1.367 (a)-8T
(d), USP is required to recognize the gain subject to the gain recognition
agreement and pay applicable interest on any additional tax due with

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2009-1 C.B. 607; T.D. 9446;
2009 IRB LEXIS 127, *; 2009-9 I.R.B. 607
respect to such gain. Because the acquiring corporation in the asset reorganization is foreign, an exception under §1.367 (a)-8T (e) is not available
for the exchange of TFC stock by USP. However, pursuant to paragraph
(r) (2) (i) of this section, because the exception provided by paragraph (k)
(14) of this section is not included in §1.367 (a)-8T, USP may apply
paragraph (k) (14) of this section to such exchange (provided the conditions of paragraph (k) (14) of this section are satisfied), if the statute of
limitations on assessments of tax for the 2007 tax year has not closed. If
USP applies paragraph (k) (14) of this section to its exchange of the TFC
stock pursuant to the asset reorganization, under paragraph (r) (2) (ii) of
this section USP must include the new gain recognition agreement required under paragraph (k) (14) (iii) of this section with an amended Federal income tax return for its 2008 tax year that is filed before August
10, 2009.
Example 25. Applicability [*162] of this section to gain recognition agreements filed before March 13, 2009. (i) Facts. The initial transfer occurs in 2004. In 2005, pursuant to a section 351 exchange, TFC
transfers the TFD stock to F1 in exchange solely for F1 voting stock.
UST does not file a new gain recognition agreement under §1.367 (a)-8
(g) (2) with respect to the exchange.
(ii) Result. Under paragraph (r) (1) (ii) of this section, the rules of
§1.367 (a)-8 (see 26 CFR part 1, revised April 1, 2006) apply to the year
2005 disposition of the TFD stock because UST filed the gain recognition agreement after July 20, 1998, but before March 7, 2007. Under
§1.367 (a)-8 (e) (see 26 CFR part 1, revised April 1, 2006), as a result of
the disposition of the TFD stock by TFC, UST must recognize the
amount of gain subject to the gain recognition agreement. Paragraph (r)
(2) (i) of this section does not apply because the rule provided by paragraph (k) (3) of this section was included in §1.367 (a)-8 (g) (2) (see 26
CFR part 1, revised April 1, 2006). However, UST may request relief for
reasonable cause under §1.367 (a)-8 (c) (2) (see 26 CFR part 1, revised
April 1, 2006) to file a new gain recognition [*163] agreement with
respect to the disposition of the TFD stock by TFC in 2005.

(r) Effective/applicability date-(1) General rule-(i) Transfers occurring on or after
March 13, 2009. The rules of this section apply to gain recognition agreements filed
with respect to transfers of stock or securities occurring on or after March 13, 2009.
However, the rules of this section do not apply to gain recognition agreements filed
with respect to any such transfer occurring on or after March 13, 2009, if such transfer
was entered into pursuant to a written agreement that was (subject to customary conditions) binding before February 11, 2009, and at all times thereafter. Solely for purposes
of this paragraph (r), a transfer described in the preceding sentence shall be deemed to
be a transfer occurring before March 13, 2009 to which the rules of §1.367 (a)-8 (see
26 CFR part 1, revised April 1, 2006) apply. See paragraph (r) (2) (iii) of this section
for the ability to apply the rules of this section with respect to gain recognition agreements filed for taxable years ending before March 13, 2009.
(ii) Transfers occurring before March 13, 2009. For matters covered in this section
[*164] for periods before March 13, 2009 but on or after March 7, 2007, the corresponding rules of §1.367 (a)-8T (see 26 CFR part 1, revised April 1, 2007) apply. For
matters covered in this section for periods before March 7, 2007 but on or after July 20,
1998, the corresponding rules of §1.367 (a)-8 (see 26 CFR part 1, revised April 1,
2006) apply. For matters covered in this section for periods before July 20, 1998, the

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2009-1 C.B. 607; T.D. 9446;
2009 IRB LEXIS 127, *; 2009-9 I.R.B. 607
corresponding rules of §1.367 (a)-3T (g) (see 26 CFR part 1, revised April 1, 1998) and
Notice 87-85, 1987-2 C.B. 395 apply. In addition, if a U.S. transferor entered into a
gain recognition agreement for transfers before July 20, 1998, then the rules of §1.367
(a)-3T (g) (see 26 CFR part 1, revised April 1, 1998) continue to apply in lieu of this
section in the event of any direct or indirect nonrecognition transfer of the same property. See also, §1.367 (a)-3 (h).
(2) Applicability to gain recognition agreements filed before March 13, 2009-(i)
General rule. Taxpayers may apply the rules of this regulation §1.367 (a)-8 that were
not included in §1.367 (a)-8T (see 26 CFR part 1, revised April 1, 2007), to gain
recognition agreements filed with [*165] respect to transfers of stock or securities
for all open taxable years, if done consistently to all transfers. A U.S. transferor subject
to section 877 and § 1.367 (a)-8T (d) (6) shall not apply the rules of this regulation to
reach a contrary result. A taxpayer that failed to file a gain recognition agreement for a
transfer, or to comply materially with any requirement of this section with respect to an
existing gain recognition agreement, must obtain relief for reasonable cause for such
failure under §1.367 (a)-8T (e) (10) before applying the rules of this regulation §1.367
(a)-8 that were not included in §1.367 (a)-8T as permitted by this paragraph (r) (2). See
paragraph (q) (2) of this section, Examples 24 and 25 for illustrations of the rule provided by this paragraph (r) (2) (i).
(ii) Taxable years ending before March 13, 2009. Notwithstanding the requirements
of §1.367 (a)-8 (d), any gain recognition agreement or other filing required by reason of
electing to apply the rules of this regulation §1.367 (a)-8 that were not included in
§1.367 (a)-8T, as permitted by this paragraph (r) (2), for a taxable year ending before
March 13, 2009 shall be considered [*166] filed in accordance with the requirements of §1.367 (a)-8 (d), provided the gain recognition agreement or other filing is attached to an original or amended return for such taxable year. An amended return required to be filed by reason of electing to apply the rules of this regulation §1.367 (a)-8
that were not included in §1.367 (a)-8T, as permitted by this paragraph (r) (2), must be
filed on or before August 10, 2009. A taxpayer that wishes to apply the rules of this
regulation § 1.367 (a)-8 that were not included in §1.367 (a)-8T, as permitted by this
paragraph (r) (2), but that fails to meet the filing requirement described in the preceding
sentence must request relief for reasonable cause under paragraph (p) of this section.
(iii) Taxable years ending after effective date. A taxpayer that entered into a gain
recognition agreement to which §1.367 (a)-8T (see 26 CFR part 1, revised April 1,
2007) applies may apply the rules of this section in a tax year ending on or after March
13, 2009 by attaching the agreement, certification, or other information related to such
gain recognition agreement that the rules of this section require in accordance with the
[*167] rules of this section and with the time and manner rules provided in §1.367
(a)-8 (d).
§1.367 (a)-8T [Removed]

Par. 8. Section 1.367 (a)-8T is removed.

PART 602-OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 9. The authority citation for part 602 continues to read as follows:

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

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2009-1 C.B. 607; T.D. 9446;
2009 IRB LEXIS 127, *; 2009-9 I.R.B. 607

Par. 10. In §602.101, paragraph (b) is amended by removing an entry for §1.367 (a)-8T from the table and adding an entry for §1.367 (a)-8 to the table in numerical order to read as follows:

§602.101 OMB Control numbers.
***
(b) * * *
CFR part or section where
identified and described
***
1.367 (a)-8
***

Current OMB
Control No.
1545-2056

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

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