Reg-161948-05

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Federal Register / Vol. 78, No. 174 / Monday, September 9, 2013 / Proposed Rules
data which results from this
classification is commonly referred to as
the Smith-Doxey classification or SmithDoxey data. While cotton classification
is not mandatory, practically every
cotton bale grown in the United States
today is classed by AMS under the
authority of the Cotton Statistics and
Estimates Act (7 U.S.C. 471–476) and
the U.S. Cotton Standards Act (7 U.S.C.
51–65) and under regulations found in
7 CFR part 28—Cotton Classing, Testing,
and Standards. The U.S. cotton industry
uses Smith-Doxey data to assign qualityadjusted market values to U.S. cotton
and market U.S. cotton both
domestically and internationally. SmithDoxey data is commonly used by the
cotton merchant community to indicate
which bales may be tenderable against
a cotton futures contract.
Conventional procedures employed
for verifying quality measurements for
bales to be included in futures contracts
consists of two futures classifications:
(1) Initial futures classification and (2)
final futures classification. AMS, Cotton
and Tobacco Programs revised these
procedures to incorporate Smith-Doxey
data into the cotton futures
classification process in March 2012 (77
FR 5379). When verified by a futures
classification, Smith-Doxey data serves
as an initial futures classification with
the verifying futures classification
serving as a final futures classification.
The use of Smith-Doxey data
significantly reduced the number of
futures classifications required for many
of the bales that were submitted for
certification.
The successful incorporation of
Smith-Doxey data into the futures
classification procedures prompted the
U.S. cotton industry and ICE to request
that the AMS, Cotton and Tobacco
Programs use Smith-Doxey data to
certify that bales submitted for quality
verification meet more restrictive
quality requirements and age parameters
set by ICE for use in a cotton futures
contract. The U.S. cotton industry and
ICE refer to this optional procedure the
‘‘registration option’’. Furthermore, the
U.S. cotton industry and ICE have
requested that AMS, Cotton and
Tobacco Programs make this option
available in December 2013 to coincide
with the implementation of ICE’s Cotton
Resolution No. 2, which is scheduled to
commence with the March 2014
contract month.
The established user fee for cotton
futures classification services is $3.50
per bale (7 CFR 27.80). Customers
choosing this cotton futures
classification option would incur this
charge. In the event that AMS
determines that a bale submitted under

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this option fails to meet quality or age
parameters set by the exchange
inspection agency, the owner of the bale
would be notified of the bale’s failure.
AMS, Cotton and Tobacco Programs
propose regulatory amendments that
would allow the use of original SmithDoxey data to certify that bales
submitted for quality verification meet
quality and age parameters set by the
applicable exchange inspection agency.
Accordingly, the definition of
‘‘Classification’’ in § 27.2, paragraph (n)
would be amended to allow for the
proposed registration option for the
futures classification services. Also in
§ 27.2, the term ‘‘Smith-Doxey data’’
would be defined in new paragraphs (p).
A thirty day comment period is and
deemed appropriate. It is anticipated
that AMS would make the futures
classification option available December
2013 to coincide with the
implementation of ICE’s Cotton
Resolution No. 2.
List of Subjects in 7 CFR Part 27
Commodity futures, Cotton.
For the reasons set forth in the
preamble, 7 CFR part 27 is proposed to
be amended to read as follows:
PART 27—[Amended]
1. The authority citation for 7 CFR
part 27 is revised to read as follows:

■

Authority: 7 U.S.C. 15b, 7 U.S.C. 473a–b,
7 U.S.C. 1622(g).

2. Amend § 27.2 to revise paragraph
(n) and add paragraph (p) to read as
follows:

■

§ 27.2

Terms Defined.

*

*
*
*
*
(n) Classification. The classification of
any cotton shall be determined by the
quality of a sample in accordance with
the Universal Cotton Standards (the
official cotton standards of the United
States) for cotton property
measurements of American Upland
cotton. High Volume Instruments will
determine all cotton property
measurements except extraneous matter.
Cotton classers authorized by the Cotton
and Tobacco Programs will determine
the presence of extraneous matter.
Original Smith-Doxey data may serve as
certification that bales submitted for
quality verification meet quality and age
parameters set by an applicable
exchange inspection agency as a futures
classification option.
*
*
*
*
*
(p) Smith-Doxey data. Data reflecting
the original classification of a cotton
bale provided to producers of cotton

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under the Smith-Doxey Act of April 13,
1937 (Pub. L. 75–28).
*
*
*
*
*
Dated: August 30, 2013.
Rex A. Barnes,
Associate Administrator, Agricultural
Marketing Service.
[FR Doc. 2013–21658 Filed 9–6–13; 8:45 am]
BILLING CODE 3410–02–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–161948–05]
RIN 1545–BF43

Limitations on the Importation of Net
Built-In Losses
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:

This document contains
proposed regulations under sections
334(b)(1)(B) and 362(e)(1) of the Internal
Revenue Code of 1986 (Code). The
proposed regulations apply to certain
nonrecognition transfers of loss property
to corporations that are subject to
Federal income tax. The proposed
regulations affect the corporations
receiving the loss property. This
document also invites comments from
the public regarding these proposed
regulations.

SUMMARY:

Written or electronic comments
and a request for a public hearing must
be received by December 9, 2013.
ADDRESSES: Send submissions to
CC:PA:LPD:PR (REG 161948–05), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–161948–
05), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically,
via the Federal eRulemaking Portal at
www.regulations.gov (IRSREG–161948–
05).
DATES:

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations,
John P. Stemwedel (202) 622–7790 or
Theresa A. Abell (202) 622–7000, and,
concerning submissions of comments
and requests for a public hearing,
Oluwafunmilayo (Funmi) Taylor at
(202) 622–7180 (not toll free numbers).
SUPPLEMENTARY INFORMATION:

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Paperwork Reduction Act
The collection of information
contained in this notice of proposed
rulemaking revises a collection of
information 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 1545–2019. Comments on the
revised collection of information should
be sent to the Office of Management and
Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of
information should be received by
November 8, 2013. Comments are
specifically requested concerning:
Whether the proposed revised
collection of information is necessary
for the proper performance of the
functions of the Internal Revenue
Service, including whether the
information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information;
How the quality, utility and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collection of information
may be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of service to provide
information.
The revised collection of information
in these proposed regulations is in
§§ 1.332–6, 1.351–3, and 1.368–3. By
requiring that taxpayers separately
report the fair market value and basis of
property (including stock) described in
section 362(e)(1)(B) and in 362(e)(2)(A)
that is transferred in a tax-free
transaction, this revised collection of
information aides in identifying
transactions within the scope of sections
334(b)(1)(B), 362(e)(1), and 362(e)(2) and
thereby facilitates the IRS’ verification
that taxpayers are complying with
sections 334(b)(1)(B), 362(e)(1), and
362(e)(2). The respondents will be
corporations and their shareholders.
Revised estimated total annual
reporting burden: 375,000 hours.
Revised estimated average annual
burden hours per respondent: 1.25
hours.
Estimated number of respondents:
225,000 (of the originally estimated

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350,000; original 0.75 hour estimate
unchanged for the remaining 125,000
respondents).
Estimated frequency of responses:
once.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by section
6103.
Background
Sections 334(b)(1)(B) and 362(e)(1)
(the anti-loss importation provisions)
were enacted in the American Jobs
Creation Act of 2004 (Pub. L. 108–357,
188 Stat. 1418 (2004)) to prevent erosion
of the corporate tax base through the
importation of loss in nonrecognition
transfers. This notice of proposed
rulemaking proposes regulations under
both of these anti-loss importation
provisions.
Explanation of Provisions
1. The Anti-Loss Importation Provisions:
Sections 334(b)(1)(B) and 362(e)(1)
Section 334(b)(1)(B) applies to
corporate acquisitions of loss property
in liquidations described in section 332
(complete liquidation of subsidiary).
Section 362(e)(1) applies to corporate
acquisitions of loss property in
transactions described in section 362(a)
(transactions to which section 351
applies and acquisitions of property as
paid-in surplus or contributions to
capital, each a section 362(a)
transaction) and in transactions
described in section 362(b)
(reorganizations). The application and
effect of the anti-loss importation
provisions are materially identical, and
so the proposed regulations use the
same nomenclature and operating rules
for both anti-loss importation
provisions.
The anti-loss importation provisions
apply when a corporation acquires
property that is described in section
362(e)(1)(B) in a transaction described
in section 332, 362(a), or 362(b), and,
under the generally applicable basis
rules (other than the anti-loss
duplication rule in section 362(e)(2)),
the acquiring corporation (Acquiring)
would take the property with an
aggregate basis in excess of ‘‘value’’
(generally equal to fair market value
under the proposed regulations; see

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paragraph 1.b.ii. of this preamble).
When an anti-loss importation rule
applies, Acquiring’s basis in each such
property is equal to the property’s value.
To the extent Acquiring receives
property in the transaction that is not
subject to the anti-loss importation
rules, Acquiring’s basis in the property
is determined under generally
applicable basis rules, including section
362(e)(2).
Property is described in section
362(e)(1)(B) (designated ‘‘importation
property’’ in the proposed regulations) if
two conditions are satisfied. First, any
gain or loss recognized on a disposition
of the property would not be subject to
Federal income tax in the hands of the
transferor immediately before the
transfer. Section 362(e)(1)(B)(i). Second,
any gain or loss recognized on a
disposition of the property would be
subject to Federal income tax in the
hands of the transferee immediately
after the transfer. Section
362(e)(1)(B)(ii).
Since the enactment of the anti-loss
importation provisions, a number of
questions have arisen concerning their
application. The principal concern has
been the determination of whether
property is importation property, but
various other questions (discussed
subsequently in this preamble) have
also been raised regarding the
application of the anti-loss importation
provisions and their interaction with
other rules of law. To address these
issues, the proposed regulations provide
a framework for identifying importation
property and determining whether the
transfer of the property is a transaction
subject to the anti-loss importation
provisions (designated a ‘‘loss
importation transaction’’ under the
proposed regulations).
a. Importation Property
The proposed regulations use a
hypothetical sale analysis to identify
importation property. Under this
approach, the actual tax treatment of
any gain or loss that would be
recognized on a sale of the property,
first by the transferor immediately
before and then by Acquiring
immediately after the transfer,
determines whether an individual
property is importation property. If any
gain or loss that would be recognized on
a hypothetical sale of the property by
the transferor immediately before the
transfer would not be subject to Federal
income tax in the hands of the
transferor, the first condition for
classification as importation property is
satisfied. If any gain or loss that would
be recognized on a hypothetical sale of
the property by Acquiring immediately

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after the transfer would be subject to
Federal income tax in the hands of
Acquiring, the second condition for
classification as importation property is
satisfied. Property is importation
property only if both conditions are
satisfied.
In general, the determination is made
by reference to the tax treatment of the
hypothetical seller of the transferred or
acquired property, that is, whether the
hypothetical seller would take the gain
or loss into account in determining its
Federal income tax liability. This
determination must take into account all
relevant facts and circumstances. The
proposed regulations include a number
of examples illustrating this approach.
Thus, in one example, a tax-exempt
entity transfers property to a taxable
domestic corporation, and the
determination takes into account
whether the transferor, though generally
tax-exempt, would nevertheless be
required to include the amount of the
gain or loss in unrelated business
taxable income under sections 511
through 514 of the Code. In other
examples, a foreign corporation
transfers property to a taxable domestic
corporation and the determination takes
into account whether the foreign
corporation would be required to
include the amount of gain or loss under
section 864 or 897 as income effectively
connected with, or treated as effectively
connected with, the conduct of a U.S.
trade or business. Although the
examples assume there is no applicable
income tax treaty, in the case of an
applicable income tax treaty, the
determination of whether property is
importation property would take into
account whether the transferor would be
taxable under the business profits article
or gains article of the income tax treaty.
i. Partnerships, S Corporations, Grantor
Trusts as Hypothetical Seller
Although the general rule in the
proposed regulations looks solely to the
tax treatment of the hypothetical seller,
a modified rule applies if a hypothetical
seller is a partnership, a small business
corporation that has elected under
section 1362(a) to be an S corporation,
or a grantor trust. In these cases, the
determination is made by reference to
the tax treatment of the gain or loss as
taken into account by the partners,
shareholders, or owners of the entities.
The modified rule recognizes that, in
these cases, the Code provides that the
gain or loss on the hypothetical sale
would be included by the partner,
shareholder, or owner, and would not
be taxable to the hypothetical seller,
irrespective of whether any amount is
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person. See section 701 (partnership not
subject to tax), flush language in section
362(e)(1)(B) (partners treated as owning
partnership property); sections 1363 and
1366 (S corporation’s income generally
taxable to shareholders, not S
corporation); section 671 (grantor or
other person treated as owning trust
property).
If an organizing instrument assigns
gain and loss to partners or beneficiaries
in different amounts, including by
reason of a special allocation under a
partnership agreement, the proposed
regulations make clear that the
hypothetical sale model makes the
determination of whether gain or loss is
subject to Federal income tax by
reference to the person to whom, under
the terms of the instrument, the
hypothetical gain or loss would actually
be allocated, taking into account the
entity’s net gain or loss actually
recognized in the tax period in which
the transaction occurs.
ii. Other Pass-Through Entities: AntiAvoidance Rule
In certain circumstances, the Code
permits distributions to effect a similar
shifting of tax consequences. For
example, under sections 651 and 652,
and sections 661 and 662, distributions
made by a trust are deducted from the
trust’s income and included in the
beneficiary’s (or beneficiaries’) income.
Certain domestic corporations are also
able to shift tax consequences by
distributing income or gain from a
property sale. These corporations
include regulated investment companies
(RICs, as defined in section 851(a)), real
estate investment trusts (REITs, as
defined in section 856(a)), and domestic
corporations taxable as cooperatives (see
section 1381).
The IRS and the Treasury Department
are concerned that disregarding the
effects of this shifting of tax liability
would in certain circumstances
undermine the anti-importation
provisions. However, the IRS and the
Treasury Department are also concerned
that applying a look-through rule in all
such cases would present a significant
administrative burden.
Accordingly, the proposed regulations
contain an anti-avoidance rule that
applies to domestic trusts, estates, RICs,
REITs, and cooperatives that directly or
indirectly transfer property (including
through other such entities) in a section
362 transaction, if the property had been
directly or indirectly transferred to or
acquired by the entity as part of a plan
to avoid the application of the antiimportation provisions. For purposes of
this rule, it is immaterial who had the
plan to avoid the anti-importation

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provisions. When the anti-avoidance
rule applies, the domestic entity, which,
absent application of the anti-avoidance
rule, would be treated under these
regulations as subject to Federal income
tax, is treated as subject to a lookthrough rule. Under the look-through
rule, the entity is presumed to distribute
the proceeds of the hypothetical sale
(which, for this purpose, are presumed
to be an amount greater than zero), and,
to the fullest extent permitted by the
terms of its organizing instrument, it is
presumed to make the distributions to
persons that would not take
distributions from the entity into
account in determining a Federal
income tax liability. If an interest in
such an entity is held indirectly through
one or more other such entities, the
principles of this rule apply to look to
the ultimate owners of the interest. The
determination of whether the property
is importation property is then made by
reference to the deemed distributees or,
in the case of tiered entities, to the
ultimate deemed distributees.
To illustrate, assume 90 percent of a
REIT’s shares are owned by persons that
would not take into account any gain or
loss in determining a Federal income
tax liability and that each share has an
equal right to any distribution by the
REIT. The REIT holds property that was
transferred to the REIT as part of a plan
to avoid the application of the antiimportation rule to a section 362
transaction. At a time when the
acquired property has a built-in loss, the
REIT transfers the property to a
domestic corporation in a section 362
transaction. In this case, the antiavoidance rule would apply. Thus, the
REIT is presumed to distribute all the
proceeds of the hypothetical sale of the
property transferred in the section 362
transaction, and the determination of
whether any gain or loss on that
hypothetical sale would be taken into
account in determining a Federal
income tax liability is made by reference
to the distributee REIT shareholders.
Thus, 90 percent of the property
transferred in the section 362
transaction would be importation
property. Alternatively, assume that the
property was originally acquired (as part
of a plan to avoid the application of the
anti-importation rule to a section 362
transaction) by a trust whose trustee has
discretion to distribute all or a portion
of the trust’s gain or loss to a person that
would not take any amount of such
distribution into account in determining
a Federal income tax liability and, when
the property has a built-in loss, the trust
transfers the property to a domestic
corporation in a section 362 transaction.

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In this case, all of the property
transferred in the section 362
transaction would be importation
property because the trustee could
distribute all of the proceeds from the
hypothetical sale to a person that would
not take the distribution into account in
determining a Federal income tax
liability.
The IRS and the Treasury Department
continue to study whether a lookthrough approach should be generally
applied to trusts and request comments
on the need for, and potential scope of,
such a rule.

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iii. Gain or Loss Affecting Certain
Income Inclusions
Practitioners have raised numerous
questions regarding the treatment of
property held by or transferred to
controlled foreign corporations (CFC), as
defined in section 957 (taking into
account section 953(c)). Because the
general rule looks to the tax treatment
of the hypothetical seller, and no
exception applies for CFCs, the general
operation of the proposed regulations
would not treat such amounts as subject
to Federal income tax. Nevertheless,
because the characterization of gain or
loss that would be taken into account in
determining a potential income
inclusion under section 951(a) has
generated some concern among
practitioners, the proposed regulations
include an express provision stating that
gain or loss recognized by a CFC is not
considered subject to Federal income
tax solely by reason of an income
inclusion under section 951(a). The
proposed regulations include a similar
provision to clarify that gain or loss
recognized by a passive foreign
investment company, as defined in
section 1297(a), is also considered not
subject to Federal income tax
notwithstanding that it could affect an
inclusion under section 1293(a).
Comments are specifically requested on
this approach.
iv. Gain or Loss Taxed to More Than
One Person
If any gain or loss realized on a
hypothetical sale would be includible in
income by more than one person, the
proposed regulations treat such property
as tentatively divided into separate
portions in proportion to the allocation
of gain or loss to each person.
Tentatively divided portions are treated
and analyzed in the same manner as any
other property for purposes of applying
the anti-importation provisions. (See
paragraph c. of this preamble for an
illustration of the application of this
rule.) Thus, the generally applicable
rules determine whether a portion of

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tentatively divided property is
importation property, and, if the
tentatively divided portion is
importation property, it is taken into
account (as described subsequently in
this preamble) with all other
importation property to determine
whether the transaction is a loss
importation transaction.
b. Loss Importation Transaction
Once the importation property has
been identified, Acquiring determines
the aggregate basis that it would have in
all importation property acquired in the
transaction (including the tentatively
divided portions of transferred
property), without regard to the anti-loss
importation provisions or section
362(e)(2). If the aggregate basis of the
importation property exceeds such
property’s aggregate value, the
transaction is a loss importation
transaction and subject to the anti-loss
importation provisions. If the aggregate
basis of importation property does not
exceed such property’s value, the antiloss importation provisions have no
further application.
i. Aggregate, Not Transferor-byTransferor, Approach
Under section 362(e)(1) and the
proposed regulations, the determination
of whether a section 362 transaction is
a loss importation transaction is made
by reference to the net amount of builtin gain and built-in loss in all
importation property acquired from all
transferors in the transaction. This
approach differs from the transferor-bytransferor approach of section 362(e)(2),
which expressly focusses on the net
built-in loss transferred by a particular
transferor in a section 362(a)
transaction.
ii. Valuing Partnership Interests
In general, the anti-loss importation
rules do not take liabilities into account
in determining the value of transferred
property and, thus, whether the transfer
of such property is a transfer of loss
property.
However, in both informal inquiries
and written comments, practitioners
have raised concerns about the effect of
this rule when the property transferred
is an interest in a partnership with
liabilities. In particular, practitioners are
concerned that the inclusion of a
partner’s share of partnership liabilities
in outside basis may create the
appearance of a built-in loss because
partnership liabilities do not
correspondingly increase the value of
the interest. The amount of cash at
which the partnership interest would
change hands between a willing buyer

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and willing seller, neither being under
any compulsion to buy or sell and both
having reasonable knowledge of
relevant facts, should reflect the
appropriate measure of fair market
value. When a partnership interest is
sold, the amount realized may include
a share of partnership liabilities from
which the transferor is discharged,
which is generally equal to the amount
of liabilities included in the transferor’s
outside basis. As such, the sale of a
partnership interest properly accounts
for the transferee partner’s share of
partnership liabilities and therefore,
reflects the value of that partnership
interest.
To address this issue, the proposed
regulations generally adopt the
approach proposed by commentators
and modify the definition of ‘‘value’’
(generally, fair market value) to take
liabilities into account when
determining whether a partnership
interest is a loss asset. However, because
there can be differences between
Transferor’s share of partnership
liabilities and Acquiring’s share of
partnership liabilities, the proposed
regulations provide that the value of a
partnership interest is the sum of cash
that Acquiring would receive for such
interest, increased by any § 1.752–1
liabilities (as defined in § 1.752–1(a)(4))
of the partnership that are allocated to
Acquiring with regard to such
transferred interest under section 752.
The proposed regulations include an
example that illustrates the application
and effect of this rule. The proposed
regulations also clarify that any section
743(b) adjustment to be made as a result
of the transaction is made after any
section 362(e) basis adjustment.
c. Acquiring’s Basis in Acquired
Property
If a transaction is a loss importation
transaction, Acquiring’s basis in each
importation property received
(including the tentatively divided
portions of property determined to be
importation property) is an amount
equal to value, notwithstanding the
general rules in sections 334(b)(1)(B),
362(a), and 362(b). This rule applies to
all importation property, regardless of
whether the property’s value is greater
or less than its basis prior to the loss
importation transaction.
Immediately following the application
of the anti-loss importation provisions
(and prior to any application of section
362(e)(2)), any property that was treated
as tentatively divided for purposes of
applying these provisions ceases to be
treated as divided and is treated as one
undivided property (re-constituted
property) with a basis equal to the sum

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of the bases of the portions determined
under the anti-importation provision
and the bases of all other portions
determined under generally applicable
provisions (other than section 362(e)(2)).
For example, assume that property is
transferred in a section 362(a)
transaction and the property is treated
as tentatively divided for purposes of
applying section 362(e)(1) (see
paragraph a.iv. of this preamble).
Further assume that one tentatively
divided portion (basis $125, value $100)
is determined to be importation
property and the other (basis $125,
value $100) is not. Finally, assume that,
the aggregate basis of all importation
property transferred in the transaction
(including the $125 basis of the
tentatively divided portion) is $900 and
the aggregate value of all importation
property (including the $100 value of
the tentatively divided portion) is only
$800. Thus, the importation property
has a net loss, the transaction is a loss
importation transaction, and the basis of
each importation property is equal to its
value. Accordingly, immediately after
the application of section 362(e)(1), the
tentatively divided property is treated as
one single property with a basis of $225
($100 basis in the importation portion
plus $125 basis in the non-importation
portion).
If the transaction is described in
section 362(a), the transferred property
(including the re-constituted property
that was tentatively divided for
purposes of applying section 362(e)(1))
is then aggregated on a transferor-bytransferor basis to determine whether
further adjustment will be required to
the bases of loss property under section
362(e)(2). Therefore in the example in
the preceding paragraph, after the
application of section 362(e)(1), the
provisions of section 362(e)(2) may
apply to adjust the basis of the property
further because the transfer is a section
362(a) transaction. The proposed
regulations include a cross-reference to
section 362(e)(2) as well as examples
illustrating the application of both
sections 362(e)(1) and section 362(e)(2)
to situations involving multiple
transferors and multiple properties that
are not all importation properties.
Because section 362(e)(2) only applies
to transactions described in section
362(a), section 362(e)(2) has no
application to liquidations or to
reorganizations that do not include a
transaction described in section 362(a).
The proposed regulations include
examples illustrating the interaction of
these provisions.

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2. Filing Requirements
To facilitate the administration of
both the anti-loss importation
provisions and the anti-duplication
provisions in section 362(e)(2), the
proposed regulations modify the
reporting requirements applicable in all
affected transactions (section 332
liquidations and transactions described
in section 362(a) or section 362(b)) to
require taxpayers to identify the basis
and value of property subject to those
sections.
3. Modifications to Liquidation
Regulations
The proposed regulations also include
several modifications to the regulations
applicable to corporate liquidations.
These modifications are not changes to
current substantive law; they are
intended solely to update the
regulations to reflect certain statutory
changes. The statutory changes reflected
in these modifications include the
repeal of the General Utilities doctrine
(reflected in the modification of sections
334(a) and 337(a), and the repeal of
sections 333 and 334(c)), the removal of
former section 334(b)(2) (replaced by
section 338), and the relocation of
former section 332(c) (subsidiary
indebtedness) to current section 337(b).
In response to certain regulatory
changes, the proposed regulations also
add several cross-references to
regulations under section 367 and 897
to highlight the treatment of certain
transfers between foreign corporations.
The proposed regulations do not
address the regulations under section
346 and no inference should be drawn
from the omission of a proposal under
that section.
Effective/Applicability Date
These regulations are generally
proposed to apply to transactions
occurring on or after the date the
regulations are published as final
regulations in the Federal Register,
unless completed pursuant to a binding
agreement that was in effect
immediately before the date such final
regulations are published and all times
afterwards. It is also proposed that
taxpayers would be permitted to apply
the final regulations (when published)
to transactions occurring after October
22, 2004.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866, as
supplemented by Executive Order
13563. Therefore, a regulatory
assessment is not required. It has also

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been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations. Further, it is hereby
certified that these proposed regulations
will not have a significant economic
impact on a substantial number of small
entities. This certification is based on
the fact that the collection of
information requirement in these
regulations modifies an existing
collection of information by requiring
that certain information be reported
separately instead of in the aggregate.
Although there may be an increase in
reporting burden, the increased burden
is expected to be minimal because
taxpayers should have ready access to
the requested information as the
proposed regulations would not require
taxpayers to report or maintain records
on information that is not, in the
aggregate, already required to be
reported and maintained under the
current regulations. Accordingly, a
Regulatory Flexibility Analysis under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Code, this notice
of proposed rulemaking has been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written comments (a signed original and
eight (8) copies) or electronic comments
that are timely submitted to the IRS.
Alternatively, taxpayers may submit
comments electronically via the Federal
e-Rulemaking Portal at
www.regulations.gov (IRS REG–161948–
05). The IRS and the Treasury
Department request comments on all
aspects of the proposed regulations.
Comments are specifically requested on
the appropriate treatment of
transactions subject to both section
367(b) and either section 334(b)(1)(B) or
362(e)(1). Comments are also
specifically requested on what effect a
basis reduction required under section
334(b)(1)(B) or section 362(e)(1) may
have on earnings and profits and any
inclusion required under § 1.367(b)–3.
All comments that are submitted by
public will be available for public
inspection and copying at
www.regulations.gov or upon request. A
public hearing may be scheduled if
requested in writing by any person who
timely submits comments. If a public
hearing is scheduled, notice of the date,

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time, and place of the hearing will be
published in the Federal Register.
Drafting Information
The principal author of these
regulations is John P. Stemwedel of the
Office of Associate Chief Counsel
(Corporate), IRS. However, other
personnel from the IRS and the Treasury
Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
to read in part as follows:

■

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

Par. 2. Section 1.332–6 is amended by
revising paragraph (a)(3) and adding a
new sentence at the end of paragraph (e)
to read as follows:

■

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§ 1.332–6 Records to be kept and
information to be filed with return.

(a) * * *
(3) The fair market value and basis of
assets of the liquidating corporation that
have been or will be transferred to any
recipient corporation, aggregated as
follows:
(i) Importation property distributed in
a loss importation transaction, as
defined in § 1.362–3(c)(2) and (c)(3)
(except that ‘‘section 332 liquidation’’ is
substituted for ‘‘section 362
transaction’’), respectively;
(ii) Property with respect to which
gain or loss was recognized on the
distribution;
(iii) Property not described in
paragraph (a)(3)(i) or paragraph (a)(3)(ii)
of this section;
*
*
*
*
*
(e) Effective/applicability date. * * *
Paragraph (a)(3) of this section applies
to any taxable year beginning on or after
these regulations are published as final
regulations in the Federal Register,
unless effected pursuant to a binding
agreement that was in effect prior to that
date and at all times thereafter.
■ Par. 3. Section 1.332–7 is amended by
adding a new sentence after the first
sentence of the paragraph to read as
follows:
§ 1.332–7
parent.

Indebtedness of subsidiary to

* * * See section 337(b)(1) (for any
taxable year beginning on or after these

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regulations are published as final
regulations in the Federal Register).
* * *
■ Par. 4. Section 1.334–1 is revised to
read as follows:
§ 1.334–1 Basis of property received in
liquidations.

(a) In general. Section 334 sets forth
rules for determining a distributee’s
basis in property received in a
distribution in complete liquidation of a
corporation. The general rule is set forth
in section 334(a) and provides that, if
property is received in a distribution in
complete liquidation of a corporation
and if gain or loss is recognized on the
receipt of the property, then the
distributee’s basis in the property is the
fair market value of the property at the
time of the distribution. However, if
property is received in a complete
liquidation to which section 332
applies, including property received in
satisfaction of an indebtedness
described in section 337(b)(1), see
section 334(b)(1) and paragraph (b) of
this section.
(b) Liquidations under section 332—
(1) General rule. Except as otherwise
provided in paragraph (b)(2) or (b)(3) of
this section, if a corporation (P) meeting
the ownership requirements of section
332(b)(1) receives property from a
subsidiary (S) in a complete liquidation
to which section 332 applies (section
332 liquidation), including property
received in a transfer in satisfaction of
indebtedness that satisfies the
requirements of section 337(b)(1), P’s
basis in the property received is the
same as S’s basis in the property
immediately before the property was
distributed. However, see § 1.460–
4(k)(3)(iv)(B)(2) for rules relating to
adjustments to the basis of certain
contracts accounted for using a longterm contract method of accounting that
are acquired in a section 332
liquidation.
(2) Basis in property with respect to
which gain or loss was recognized.
Except as otherwise provided in the
Internal Revenue Code and regulations,
if S recognizes gain or loss on the
distribution of property to P in a section
332 liquidation, P’s basis in that
property is the fair market value of the
property at the time of the distribution.
Section 334(b)(1)(A) (certain tax-exempt
distributions under section 337(b)(2));
see also, for example, § 1.367(e)–
2(b)(3)(i).
(3) Basis in importation property
received in loss importation
transaction—(i) Purpose. The purpose
of section 334(b)(1)(B) and this
paragraph (b)(3) is to prevent P from
importing a net built-in loss in a

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transaction described in section 332.
See paragraph (b)(3)(iii)(A) of this
section for definitions of terms used in
this paragraph (b)(3).
(ii) Determination of basis.
Notwithstanding paragraph (b)(1) of this
section, if a section 332 liquidation is a
loss importation transaction, P’s basis in
each importation property received from
S in the liquidation is an amount that
is equal to the value of the property. The
basis of property received in a section
332 liquidation that is not importation
property received in a loss importation
transaction is determined under
generally applicable basis rules without
regard to whether the liquidation also
involves the receipt of importation
property in a loss importation
transaction.
(iii) Operating rules—(A) In general.
For purposes of section 334(b)(1)(B) and
this paragraph (b)(3), the provisions of
§ 1.362–3 (basis of importation property
received in a loss importation
transaction) apply, adjusted as
appropriate to apply to section 332
liquidations. Thus, when used in this
paragraph (b)(3), the terms ‘‘importation
property,’’ ‘‘loss importation
transaction,’’ and ‘‘value’’ have the same
meaning as in § 1.362–3(c)(2), (c)(3) and
(c)(4), respectively, except that ‘‘section
332 liquidation’’ is substituted for
‘‘section 362 transaction.’’ Similarly,
when gain or loss on property would be
owned or treated as owned by multiple
persons, the provisions of § 1.362–
3(d)(2) apply to tentatively divide the
property in applying this section,
substituting ‘‘section 332 liquidation’’
for ‘‘section 362 transaction’’ and
making such other adjustments as
necessary.
(B) Time for making determinations.
For purposes of section 334(b)(1)(B) and
this paragraph (b)(3)—
(1) P’s basis in distributed property.
P’s basis in each property S distributes
to P in the section 332 liquidation is
determined immediately after S
distributes each such property;
(2) Value of distributed property. The
value of each property S distributes to
P in the section 332 liquidation is
determined immediately after S
distributes the property;
(3) Importation property. The
determination of whether each property
distributed by S is importation property
is made as of the time S distributes each
such property;
(4) Loss importation transaction. The
determination of whether a section 332
liquidation is a loss importation
transaction is made immediately after S
makes the final liquidating distribution
to P.

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(iv) Examples. The examples in this
paragraph (b)(3)(iv) illustrate the
application of section 334(b)(1)(B) and
the provisions of this paragraph (b)(3).
Unless the facts indicate otherwise, the
examples use the following
nomenclature and assumptions: USP is
a domestic corporation that has not
elected to be an S corporation within
the meaning of section 1361(a)(1); FC,
CFC1, and CFC2 are controlled foreign
corporations within the meaning of
section 957(a), which are not engaged in
a U.S. trade or business, have no U.S.
real property interests, and have no
other relationships, activities, or
interests that would cause their property
to be subject to Federal income taxation;
there is no applicable income tax treaty;
and all persons and transactions are
unrelated. All other relevant facts are set
forth in the examples:
Example 1. Basic application of this
paragraph (b)(3). (i) Distribution of
importation property in a loss importation
transaction. (A) Facts. USP owns the sole
outstanding share of FC stock. FC owns three
assets, A1 (basis $40, value $50), A2 (basis
$120, value $30), and A3 (basis $140, value
$20). On Date 1, FC distributes A1, A2, and
A3 to USP in a complete liquidation that
qualifies under section 332.
(B) Importation property. Under § 1.362–
3(d)(2), the fact that any gain or loss
recognized by a CFC may affect an income
inclusion under section 951(a) does not alone
cause gain or loss recognized by the CFC to
be treated as taken into account in
determining a Federal income tax liability for
purposes of this section. Thus, if FC had sold
either A1, A2, or A3 immediately before the
transaction, no gain or loss recognized on the
sale would have been taken into account in
determining a Federal income tax liability.
Further, if USP had sold A1, A2, or A3
immediately after the transaction, USP would
take into account any gain or loss recognized
on the sale in determining its Federal income
tax liability. Therefore, A1, A2, and A3 are
all importation properties. See paragraph
(b)(3)(iii)(A) of this section and § 1.362–
3(c)(2).
(C) Loss importation transaction.
Immediately after the distribution, USP’s
aggregate basis in the importation properties,
A1, A2, and A3, would, but for section
334(b)(1)(B) and this section, be $300 ($40 +
$120 + $140) and the properties’ aggregate
value would be $100 ($50 + $30 + $20).
Therefore, the importation properties’
aggregate basis would exceed their aggregate
value and the distribution is a loss
importation transaction. See paragraph
(b)(3)(iii)(A) of this section and § 1.362–
3(c)(3).
(D) Basis of importation property
distributed in loss importation transaction.
Because the importation properties, A1, A2,
and A3, were transferred in a loss
importation transaction, the basis in each of
the importation properties received is equal
to its value immediately after FC distributes
the property. Accordingly, USP’s basis in A1

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is $50; USP’s basis in A2 is $30; and USP’s
basis in A3 is $20.
(ii) Distribution of both importation and
non-importation property in a loss
importation transaction. (A) Facts. The facts
are the same as in paragraph (i)(A) of this
Example 1 except that FC is engaged in a
U.S. trade or business and A3 is used in that
U.S. trade or business.
(B) Importation property. A1 and A2 are
importation properties for the reasons set
forth in paragraph (i)(B) of this Example 1.
However, if FC had sold A3 immediately
before the transaction, FC would take into
account any gain or loss recognized on the
sale in determining its Federal income tax
liability. Therefore, A3 is not importation
property. See paragraph (b)(3)(iii)(A) of this
section and § 1.362–3(c)(2).
(C) Loss importation transaction.
Immediately after the distribution, USP’s
aggregate basis in the importation properties,
A1 and A2, would, but for section
334(b)(1)(B) and this section, be $160 ($40 +
$120). Further, the properties’ aggregate
value would be $80 ($50 + $30). Therefore,
the importation properties’ aggregate basis
would exceed their aggregate value and the
distribution is a loss importation transaction.
See paragraph (b)(3)(iii)(A) of this section
and § 1.362–3(c)(3).
(D) Basis of importation property
distributed in loss importation transaction.
Because the importation properties, A1 and
A2, were transferred in a loss importation
transaction, the basis in each of the
importation properties received is equal to its
value immediately after FC distributes the
property. Accordingly, USP’s basis in A1 is
$50 and USP’s basis in A2 is $30.
(E) Basis of other property. Because A3 is
not importation property distributed in a loss
importation transaction, USP’s basis in A3 is
determined under generally applicable basis
rules. Accordingly, USP’s basis in A3 is $140,
the adjusted basis that FC had in the property
immediately before the distribution. See
section 334(b)(1).
(iii) FC not wholly owned. The facts are the
same as in paragraph (i)(A) of this Example
1 except that USP owns only 80% of the sole
outstanding class of FC stock and the
remaining 20% is owned by individual X.
Further, on Date 1 and pursuant to the plan
of liquidation, FC distributes A1 and A2 to
USP and A3 to X. A1 and A2 are importation
properties, the distribution to USP is a loss
importation transaction, and USP’s bases in
A1 and A2 are equal to their value ($50 and
$30, respectively) for the reasons set forth in
paragraphs (ii)(C) and (ii)(D) of this Example
1. Under section 334(a), X’s basis in A3 is
$20.
(iv) Importation property, no net built in
loss. (A) Facts. The facts are the same as in
paragraph (i)(A) of this Example 1 except that
the value of A2 is $230.
(B) Importation property. A1, A2, and A3,
are importation properties for the reasons set
forth in (i)(B) of this Example 1.
(C) Loss importation transaction.
Immediately after the distribution, USP’s
aggregate basis in the importation properties,
A1, A2, and A3, would, but for section
334(b)(1)(B) and this section, be $300 ($40 +
$120 + $140). However, the properties’

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aggregate value would also be $300 ($50 +
$230 + $20). Therefore, the importation
properties’ aggregate basis would not exceed
their aggregate value and the distribution is
not a loss importation transaction. See
paragraph (b)(3)(iii)(A) of this section and
§ 1.362–3(c)(3).
(D) Basis of importation property not
distributed in loss importation transaction.
Because the importation properties, A1, A2,
and A3, were not distributed in a loss
importation transaction, the basis of each of
the importation properties is determined
under the generally applicable basis rules.
Accordingly, immediately after the
distribution, USP’s basis in A1 is $40, USP’s
basis in A2 is $120, and USP’s basis in A3
is $140, the adjusted bases that FC had in the
properties immediately before the
distribution. See section 334(b)(1).
(v) CFC stock as importation property
distributed in loss importation transaction.
(A) Facts. USP owns the sole outstanding
share of FC stock. FC owns the sole
outstanding share of CFC1 stock (basis $80,
value $100) and the sole outstanding share of
CFC2 stock (basis $100, value $5). On Date
1, FC distributes its shares of CFC1 and CFC2
stock to USP in a complete liquidation that
qualifies under section 332.
(B) Importation property. No special rule
applies to the treatment of property that is
the stock of a CFC. Thus, if FC had sold
either the CFC1 share or the CFC2 share
immediately before the transaction, no gain
or loss recognized on the sale would have
been taken into account in determining a
Federal income tax liability. Further, if USP
had sold either the CFC1 share or the CFC2
share immediately after the transaction, USP
would take into account any gain or loss
recognized on the sale in determining its
Federal income tax liability. Thus, the CFC1
share and the CFC2 share are importation
property. See paragraph (b)(3)(iii)(A) of this
section and § 1.362–3(c)(2).
(C) Loss importation transaction.
Immediately after the distribution, USP’s
aggregate basis in importation property (the
CFC1 share and the CFC2 share) would, but
for section 334(b)(1)(B) and this section, be
$180 ($80 + $100) and the shares’ aggregate
value is $105 ($100 + $5). Therefore, the
importation property’s aggregate basis would
exceed their aggregate value and the
distribution is a loss importation transaction.
See paragraph (b)(3)(iii)(A) of this section
and § 1.362–3(c)(3).
(D) Basis of importation property
distributed in loss importation transaction.
Because the importation property (the CFC1
share and the CFC2 share) was transferred in
a loss importation transaction, USP’s basis in
each of the shares received is equal to its
value immediately after FC distributes the
shares. Accordingly, USP’s basis in the CFC1
share is $100 and USP’s basis in the CFC2
share is $5.
Example 2. Multiple step liquidation. (i)
Facts. USP owns the sole outstanding share
of FC stock. On January 1 of year 1, FC
adopts a plan of liquidation. FC makes the
following distributions to USP in a
transaction that qualifies as a complete
liquidation under section 332. In year 1, FC
distributes A1 and, immediately before the

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distribution, FC’s basis in A1 is $100 and
A1’s value is $120. In Year 2, FC distributes
A2, and, immediately before the distribution,
FC’s basis in A2 is $100 and A2’s value is
$120. In year 3, in its final liquidating
distribution, FC distributes A3 and,
immediately before the distribution, FC’s
basis in A3 is $100 and A3’s value is $120.
As of the time of the final distribution, USP
had depreciated the bases of A1 and A2 to
$90 and $95, respectively; the value of A1
had appreciated to $160; and, the value of A2
has declined to $0.
(ii) Importation property. If FC had sold
either A1, A2, or A3 immediately before it
was distributed, no gain or loss recognized
on the sale would have been taken into
account in determining a Federal income tax
liability. Further, if USP had sold either A1,
A2, or A3 immediately after it was
distributed, USP would take into account any
gain or loss recognized on the sale in
determining its Federal income tax liability.
Therefore, A1, A2, and A3 are all importation
properties. See paragraph (b)(3)(iii)(A) of this
section and § 1.362–3(c)(2).
(iii) Loss importation transaction.
Immediately after it was distributed, USP’s
basis in each of the importation properties,
A1, A2, and A3, would, but for section
334(b)(1)(B) and this section, have been $100.
Further, immediately after each such
property was distributed, its value was $120.
Thus, the properties’ aggregate basis, $300,
would not have exceeded the properties’
aggregate value, $360. Accordingly, the
distribution is not a loss importation
transaction irrespective of the fact that, when
the liquidation was completed, the
properties’ aggregate basis was $285 and the
properties’ aggregate value was $280. See
paragraph (b)(3)(iii)(B) of this section and
§ 1.362–3(c)(3).
(iv) Basis of importation property not
distributed in loss importation transaction.
Because the importation properties, A1, A2,
and A3, were not distributed in a loss
importation transaction, the basis of each of
the importation properties is determined
under the generally applicable basis rules.
Accordingly, USP takes each of the
properties with a basis of $100 and,
immediately after the final distribution, has
an adjusted basis of $90 in A1 (USP’s $100
basis less the $10 depreciation), $95 in A2
(USP’s $100 basis less the $5 depreciation),
and $100 in A3. See section 334(b).

(c) Effective/applicability date. This
section applies to any taxable year
beginning on or after these regulations
are published as final regulations in the
Federal Register, unless effected
pursuant to a binding agreement that
was in effect prior to that date and at all
times thereafter. However, taxpayers
may apply this section to transactions
occurring after October 22, 2004.
■ Par. 5. Section 1.337–1 is added to
read as follows:
§ 1.337–1 Nonrecognition for property
distributed to parent in complete liquidation
of subsidiary.

(a) General rule. If section 332(a) is
applicable to the receipt of a

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subsidiary‘s property in complete
liquidation, no gain or loss is recognized
to the liquidating subsidiary with
respect to such property (including
property distributed with respect to
indebtedness, see section 337(b)(1) and
§ 1.332–7), except as provided in section
337(b)(2) (distributions to certain taxexempt distributees), section 367(e)(2)
(distributions to foreign corporations),
and section 897(d) (distributions of U.S.
real property interests by foreign
corporations).
(b) Effective/applicability date. This
section applies to any taxable year
beginning on or after these regulations
are published as final regulations in the
Federal Register.
■ Par. 6. Section 1.351–3 is amended by
revising paragraphs (a)(3) and (b)(3), and
adding a sentence at the end of
paragraph (f) to read as follows:
§ 1.351–3 Records to be kept and
information to be filed.

(a) * * *
(3) The fair market value and basis of
the property transferred by such
transferor in the exchange, determined
immediately before the transfer and
aggregated as follows:
(i) Importation property transferred in
a loss importation transaction, as
defined in § 1.362–3(c)(2) and § 1.362–
3(c)(3), respectively;
(ii) Loss duplication property as
defined in § 1.362–4(c)(1);
(iii) Property with respect to which
any gain or loss was recognized on the
transfer (without regard to whether such
property is also identified in paragraph
(a)(3)(i) or (ii) of this section); and
(iv) Property not described in
paragraphs (a)(3)(i), (a)(3)(ii), or
(a)(3)(iii) of this section.
*
*
*
*
*
(b) * * *
(3) The fair market value and basis of
property received in the exchange,
determined immediately before the
transfer and aggregated as follows:
(i) Importation property transferred in
a loss importation transaction, as
defined in § 1.362–3(c)(2) and § 1.362–
3(3), respectively;
(ii) Loss duplication property as
defined in § 1.362–4(c)(1);
(iii) Property with respect to which
any gain or loss was recognized on the
transfer (without regard to whether such
property is also identified in paragraph
(b)(3)(ii) of this section);
(iv) Property not described in
paragraphs (b)(3)(i), (b)(3)(ii), or
(b)(3)(iii) of this section; and
*
*
*
*
*
(f) Effective/applicability date. * * *
Paragraphs (a)(3) and (b)(3) of this
section apply to any taxable year

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beginning on or after these regulations
are published as final regulations in the
Federal Register, unless effected
pursuant to a binding agreement that
was in effect prior to that date and at all
times thereafter.
■ Par. 7. Section 1.358–6 is amended by
revising paragraphs (c)(1)(i)(A),
(c)(2)(ii)(B), (c)(3)(i), (c)(3)(ii), (c)(4), (e),
(f)(1), and the first sentence of paragraph
(f)(3), and adding new paragraph (f)(4)
to read as follows:
§ 1.358–6 Stock basis in certain triangular
reorganizations.

*

*
*
*
*
(c) * * *
(1) * * *
(i) * * *
(A) P acquired the T assets acquired
by S in the reorganization (and P
assumed any liabilities which S
assumed or to which the T assets
acquired by S were subject) directly
from T in a transaction in which P’s
basis in the T assets was determined
under section 362(b) (taking into
account the provisions of section
362(e)(1)); and
*
*
*
*
*
(2) * * *
(ii) * * *
(B) Determine the basis in the T stock
acquired as if P acquired such stock
from the former T shareholders in a
transaction in which P’s basis in the T
stock was determined under section
362(b) (taking into account the
provisions of section 362(e)(1) and, to
the extent the transfer is a transaction
described in section 362(a), the
provisions of section 362(e)(2)).
(3) * * *
(i) P acquired the T stock acquired by
S in the reorganization directly from the
T shareholders in a transaction in which
P’s basis in the T stock was determined
under section 362(b) (taking into
account the provisions of section
362(e)(1)); and
(ii) P transferred the T stock to S in
a transaction in which P’s basis in its S
stock was determined under section 358
(taking into account the provisions of
section 362(e)(2) to the extent the
transfer is a transaction described in
section 362(a)).
(4) Examples. The rules of this
paragraph (c) are illustrated by the
following examples. For purposes of
these examples, P, S, and T are domestic
corporations, the property transferred is
not importation property within the
meaning of § 1.362–3(c)(2) or loss
duplication property within the
meaning of § 1.362–4(c)(2), P and S do
not file consolidated returns, P owns all
of the shares of the only class of S stock,
the P stock exchanged in the transaction

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satisfies the requirements of the
applicable triangular reorganization
provisions, and the facts set forth the
only corporate activity.
*
*
*
*
*
(e) Cross-references—(1) Triangular
reorganizations involving members of a
consolidated group. For rules relating to
stock basis adjustments made as a result
of a triangular reorganization in which
P and S, or P and T, as applicable, are,
or become, members of a consolidated
group, see § 1.1502–30. However, if a
transaction is a group structure change,
stock basis adjustments are determined
under § 1.1502–31 and not under
§ 1.1502–30, even if the transaction also
qualifies as a reorganization otherwise
subject to § 1.1502–30.
(2) Transfers of importation property
in loss importation transaction and
transfers of loss duplication property.
For rules relating to stock basis
adjustments made as a result of a
triangular reorganization in which the
property treated as acquired by P would
be importation property received in a
loss importation transaction, see
§ 1.362–3. For rules relating to
adjustments made as a result of a
triangular reorganization that also
qualifies under section 362(a), see
§ 1.362–4.
(3) Triangular reorganizations
involving certain foreign corporations.
For rules relating to stock basis
adjustments made as a result of
triangular reorganizations involving
certain foreign corporations, see
§§ 1.367(b)–4(b), 1.367(b)–10, and
1.367(b)–13.
(f) * * * (1) General rule. In general,
this section applies to triangular
reorganizations occurring on or after
December 23, 1994. However,
paragraphs (c)(1)(i)(A), (c)(2)(ii)(B),
(c)(3)(i), and (c)(3)(ii) of this section
apply to triangular reorganizations
occurring on or after the date these
regulations are published as final
regulations in the Federal Register.
*
*
*
*
*
(3) * * * Paragraphs (b)(2)(v) and
(e)(1) of this section shall apply to
triangular reorganizations occurring on
or after September 17, 2008. * * *
(4) Triangular reorganizations
involving importation property acquired
in loss importation transaction or loss
duplication transaction; triangular
reorganizations involving certain foreign
corporations. Paragraphs (e)(2) and
(e)(3) of this section shall apply to
triangular reorganizations occurring on
or after the date these regulations are
published as final regulations in the
Federal Register.

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Par. 8. Section 1.362–3 is added to
read as follows:

■

§ 1.362–3 Basis of importation property
acquired in loss importation transaction.

(a) Purpose. The purpose of section
362(e)(1) and this section is to prevent
a corporation (Acquiring) from
importing a net built-in loss in a
transaction described in either section
362(a) (section 351 transfers,
contributions to capital, or paid-in
surplus) or section 362(b)
(reorganizations). See paragraph (c) of
this section for definitions of terms used
in this section.
(b) Basis determinations under this
section—(1) Basis of importation
property received in loss importation
transaction. Notwithstanding any other
provision of law, Acquiring’s basis in
importation property (as defined in
paragraph (c)(2) of this section) acquired
in a loss importation transaction (as
defined in paragraph (c)(3) of this
section) is equal to the value of the
property immediately after the
transaction.
(2) Adjustment to basis of subsidiary
stock in triangular reorganizations. If a
corporation (P) computes its basis in
stock of a subsidiary (whether S or T)
under § 1.358–6 (stock basis in certain
triangular reorganizations), P’s basis in
property treated as acquired by P in
§ 1.358–6(c) is determined under section
362(e)(1) and this section to the extent
such property, if actually acquired by P,
would be importation property acquired
in a loss importation transaction. See
§ 1.358–6(c)(1)(i)(A), paragraphs
(c)(2)(ii)(B), and (c)(3)(i). The
subsidiary’s basis in the property
actually acquired in the transaction is
determined under applicable law
(including this section), without regard
to the amount of any adjustment to P’s
basis in the subsidiary’s stock. Thus, the
basis of the property in S’s or T’s hands
may differ from the amount of the
adjustment to P’s basis in its stock of S
or T.
(3) Acquiring’s basis in other property
transferred. In general, Acquiring’s basis
in property received in a section 362
transaction (as defined in paragraph
(c)(1) of this section) that is not
determined under section 362(e)(1) and
this section is determined under section
362(a) or section 362(b). However, if the
transaction is described in section
362(a) (without regard to whether it is
also described in any other section),
further adjustment may be required
under section 362(e)(2). See § 1.362–4.
(c) Definitions. For purposes of this
section, the following definitions apply:
(1) Section 362 transaction. The term
section 362 transaction means any

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transaction described in section 362(a)
or in section 362(b).
(2) Importation property.—(i) General
rule. The term importation property
means any property (including separate
portions of property tentatively divided
under paragraph (e)(2) of this section)
with respect to which—
(A) Any gain or loss that would be
recognized on its sale by the transferor
immediately before the transaction (the
transferor’s hypothetical sale) would not
be subject to tax imposed under any
provision of subtitle A of the Internal
Revenue Code (Federal income tax)
(taking into account the provisions of
paragraph (d) of this section); and
(B) Any gain or loss that would be
recognized on its sale by Acquiring
immediately after the transaction
(Acquiring’s hypothetical sale) would be
subject to Federal income tax (taking
into account the provisions of paragraph
(d) of this section)
(ii) Special rules for applying this
paragraph (c)(2). See paragraph (d) of
this section for rules for determining
whether gain or loss on a hypothetical
sale would be taken into account in
determining a Federal income tax
liability and paragraph (e) of this section
for rules applicable when more than one
person would take such gain or loss into
account.
(3) Loss importation transaction. The
term loss importation transaction means
any section 362 transaction in which
Acquiring’s aggregate basis in all
importation property received from all
transferors in the transaction would
exceed the aggregate value of such
property immediately after the
transaction. For this purpose,
Acquiring’s basis in property received is
determined without regard to this
section or section 362(e)(2).
(4) Value—(i) General rule. The term
value means fair market value.
(ii) Special rule for transfers of
partnership interests. Notwithstanding
the general rule in paragraph (c)(4)(i) of
this section, when referring to a
partnership interest, for purposes of this
section, the term value means the sum
of the cash that Acquiring would receive
for the interest, assuming an exchange
between a willing buyer and a willing
seller (neither being under any
compulsion to buy or sell and both
having reasonable knowledge of
relevant facts), increased by any
§ 1.752–1 liabilities (as defined in
§ 1.752–1(a)(4)) of the partnership
allocated to Acquiring with regard to
such transferred interest under section
752 immediately after the transfer to
Acquiring. See § 1.743–1 regarding the
application of section 743(b) following a
section 362(e) basis reduction.

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(d) Rules for determining whether
gain or loss would be taken into account
in determining a Federal income tax
liability—(1) General rule. In general,
any gain or loss that would be
recognized on a hypothetical sale
described in either paragraph (c)(2)(i) or
paragraph (c)(2)(ii) of this section is
considered to be subject to Federal
income tax if, taking into account all
relevant facts and circumstances, such
gain or loss would affect or be taken into
account in determining the Federal
income tax liability of the transferor or
Acquiring, respectively. This
determination is made without regard to
whether such person has or would have
any actual Federal income tax liability
for the taxable year of the transaction.
(2) Look-through rule in the case of
certain pass-through entities.
Notwithstanding the general rule in
paragraph (d)(1) of this section, the
determination of whether any gain or
loss on a hypothetical sale would be
treated as subject to Federal income tax
is made by reference to the person that
would be required to include such gain
or loss in its taxable income if the
hypothetical seller is—
(i) A trust treated as owned by its
grantors or others (see section 671);
(ii) A partnership (see section 701); or
(iii) An S corporation (see sections
1363 and 1366).
(3) Controlled foreign corporations
(CFC), passive foreign investment
companies (PFIC). For purposes of this
section, gain or loss that would be
recognized by a CFC (as defined in
section 957(a)) or a PFIC (as defined in
section 1297(a)) is not deemed taken
into account in determining a Federal
income tax liability solely because it
could affect an inclusion under section
951(a) or section 1293(a).
(4) Look-through treatment in the case
of certain avoidance transactions. (i)
Application of section. This paragraph
(d)(4) applies if—
(A) The transferor is a domestic entity
that is a trust, estate, regulated
investment company (RIC) (as defined
in section 851(a)), a real estate
investment trust (REIT) (as defined in
section 856(a)), or a cooperative (see
section 1381); and
(B) The transferor transfers, directly or
indirectly, property that was transferred
to or acquired by it as part of a plan
(whether of transferor, Acquiring, or any
other person) to avoid the application of
section 362(e)(1) and this section to a
section 362 transaction.
(ii) Effect of application of section.
Notwithstanding paragraph (d)(1) of this
section, if a transferor is described in
both paragraphs (d)(4)(ii)(A) and
(d)(4)(ii)(B) of this section—

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(A) The transferor is treated as though
it distributes the proceeds of the
hypothetical sale (which, for this
purpose, are presumed to be an amount
greater than zero);
(B) To the fullest extent possible
under the transferor’s organizing
instrument, taking into account the
beneficiaries or owners of interests (as
applicable) in the transferor, the deemed
distribution is treated as made to a
distributee or distributees that would
not take distributions from the
transferor into account in determining a
Federal income tax liability; and
(C) The determination of whether the
gain or loss on the hypothetical sale is
treated as subject to Federal income tax
is made by reference to the deemed
distributee or distributees.
(iii) Tiered entities. If a deemed
distributee is an entity described in
paragraph (d)(4)(i)(A) of this section, the
determination of whether gain or loss on
the hypothetical sale is taken into
account in determining a Federal
income tax liability is made by treating
the deemed distributee, and any
successive such deemed distributees, as
a transferor and applying the rules in
paragraphs (d)(4)(i) and (d)(4)(ii) of this
section to its deemed distribution (and
to all successive deemed distributions),
until no deemed distributee or
successive deemed distributee is an
entity described in paragraph
(d)(4)(i)(A) of this section.
(e) Special rules for gain or loss that
would be taken into account by multiple
persons—(1) In general. If gain or loss
from a disposition of property would be
includible in income by more than one
person, the property is treated as
tentatively divided into separate
portions in proportion to the amount of
gain or loss recognized with respect to
the property that would be allocated to
each such person. If an entity’s
organizing instrument specially
allocates gain and loss, the tentative
division of property under this
paragraph (e) must reflect the manner in
which gain or loss on the disposition of
such property would be allocated under
the terms of the organizing instrument,
taking into account the net gain or loss
actually recognized by the entity in that
tax year.
(2) Application of section. The rules
of this section apply independently to
each tentatively divided portion to
determine if the portion is importation
property. Each tentatively divided
portion that is determined to be
importation property is included with
all other importation property in the
determination of whether the
transaction is a loss importation
transaction.

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(3) Acquiring’s basis in property
tentatively divided into separate
portions. Immediately after the
application of section 362(e)(1) and this
section and before the application of
section 362(e)(2), each property treated
as tentatively divided into separate
portions for purposes of applying
section 362(e)(1) and this section ceases
to be treated as tentatively divided and
Acquiring has a single, undivided basis
in such property that is equal to the sum
of—
(i) The value of each tentatively
divided portion that is importation
property, if the transaction is a loss
importation transaction; and
(ii) Acquiring’s basis in each
tentatively divided portion that is not
importation property received in a loss
importation transaction, as determined
under section 362(a) or section 362(b),
as applicable, and without regard to any
potential application of section
362(e)(2).
(f) Examples. The examples in this
paragraph (f) illustrate the application of
section 362(e)(1) and the provisions of
this section. Unless otherwise indicated,
the examples use the following
nomenclature and assumptions: A and B
are U.S. citizens. DC, DC1, and P are
domestic corporations that have not
elected to be S corporations within the
meaning of section 1361(a)(1) and that
are not members of a consolidated
group. F is a foreign individual. FP is a
foreign partnership. FC, FC1, and FC2
are foreign corporations. Unless the
facts indicate otherwise, the foreign
individuals, corporations, and
partnerships are not engaged in a U.S.
trade or business, have no U.S. real
property interests, and have no other
relationships, activities, or interests that
would cause them, their shareholders,
their partners, or their property to be
subject to Federal income taxation.
There is no applicable income tax
treaty, and all persons and transactions
are unrelated unless the facts indicate
otherwise.
Example 1. Basic application of section. (i)
Section 351 transfer of importation property
in a loss importation transaction. (A) Facts.
FC owns three assets, A1 (basis $40, value
$150), A2 (basis $120, value $30), and A3
(basis $140, value $20). On Date 1, FC
transfers A1, A2, and A3 to DC in a
transaction to which section 351 applies.
(B) Importation property. If FC had sold
A1, A2, or A3 immediately before the
transaction, no gain or loss recognized on the
sale would have been taken into account in
determining a Federal income tax liability.
Further, if DC had sold A1, A2, or A3
immediately after the transaction, DC would
take into account any gain or loss recognized
on the sale in determining its Federal income
tax liability. Therefore, A1, A2, and A3 are

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all importation properties. See paragraph
(c)(2) of this section.
(C) Loss importation transaction. FC’s
transfer of A1, A2, and A3 is a section 362
transaction. Furthermore, but for section
362(e)(1) and this section and section
362(e)(2), DC’s aggregate basis in the
importation properties, A1, A2, and A3,
would be $300 ($40 + $120 + $140) under
section 362(a) and the properties’ aggregate
value would be $200 ($150 + $30 + $20).
Therefore, the importation properties’
aggregate basis would exceed their aggregate
value and the transaction is a loss
importation transaction. See paragraph (c)(3)
of this section.
(D) Application of section 362(e)(1) and
this section to importation property received
in loss importation transaction. Because the
importation properties, A1, A2, and A3, were
transferred in a loss importation transaction,
paragraph (b)(1) of this section applies and
DC’s basis in A1, A2, and A3 will each be
equal to the property’s value ($150, $30, and
$20, respectively) immediately after the
transfer.
(E) Basis of property received in
transaction. Following the application of
section 362(e)(1) and this section, the
provisions of section 362(e)(2) must be taken
into account because the transfer is a section
362(a) transaction. Taking into account the
application of section 362(e)(1) and this
section, DC’s aggregate basis in the
transferred properties would not exceed their
aggregate value immediately after the
transfer. Therefore, FC does not have a net
built-in loss, FC’s transfer is not a loss
duplication transaction, and section 362(e)(2)
does not apply to this transaction. DC’s bases
in A1, A2, and A3, as determined under
paragraph (i)(D) of this Example 1, are $150,
$30, and $20, respectively. Under section
358(a), FC receives the DC stock with a basis
of $300 (the sum of FC’s bases in A1, A2, and
A3 immediately before the exchange).
(ii) Reorganization. The facts are the same
as in paragraph (i)(A) of this Example 1
except that, instead of transferring property
to DC in a section 351 exchange, FC merges
with and into DC in a transaction described
in section 368(a)(1)(A). The analysis and
results are the same as set forth in paragraphs
(i)(B), (i)(C), (i)(D), and (i)(E) of this Example
1, except that, under section 358(a), FC’s
shareholders will take the DC stock with a
basis determined by reference to their FC
stock basis.
(iii) FC’s property used in U.S. trade or
business. (A) Facts. The facts are the same as
in paragraph (i)(A) of this Example 1, except
that FC is engaged in a U.S. trade or business
and uses all the properties in that U.S. trade
or business. In this case, none of the
properties would be importation property
because FC would take any gain or loss on
the disposition of the properties into account
in determining its Federal income tax
liability. Accordingly, this section does not
apply to the transaction.
(B) Basis of property received in
transaction. Following the application of
section 362(e)(1) and this section, the
provisions of section 362(e)(2) must be taken
into account because the transfer is a section
362(a) transaction. Taking into account the

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application of section 362(e)(1) and this
section but without taking into account the
provisions of section 362(e)(2), DC’s
aggregate basis in the transferred properties
would be $300 ($40 + $120 + $140) under
section 362(a) and the properties’ aggregate
value immediately after the transfer would be
$200 ($150 + $30 + $20). Therefore, FC has
a net built-in loss and FC’s transfer of A1, A2,
and A3 is a loss duplication transaction.
Accordingly, under the general rule of
section 362(e)(2), FC’s $100 net built-in loss
($300 aggregate basis over $200 aggregate
value) would be allocated proportionately (by
the amount of built-in loss in each property)
to reduce DC’s basis in the loss properties,
A2 and A3. See § 1.362–4. As a result, DC’s
basis in A2 would be $77.14 ($120 basis
under section 362(a) reduced by $42.86, A2’s
proportionate share of FC’s net built-in loss,
computed as $90/$210 × $100) and DC’s basis
in A3 would be $82.86 ($140 basis under
section 362(a) reduced by $57.14, A3’s
proportionate share of FC’s net built-in loss,
computed as $120/$210 × $100). However, if
FC and DC were to elect under section
362(e)(2)(C) to apply the $100 basis reduction
to FC’s basis in the DC stock received in the
transaction, DC’s bases in A2 and A3 would
remain their section 362(a) bases of $120 and
$140, respectively. Under section 362(a),
DC’s basis in A1 is $40 (irrespective of
whether the section 362(e)(2)(C) election is
made). If FC and DC do not make a section
362(e)(2)(C) election, FC’s basis in the DC
stock received in the exchange will be $300;
if FC and DC do make the election, FC’s basis
in the DC stock will be $200 ($300–$100 net
built-in loss). See § 1.362–4(b).
Example 2. Multiple transferors. (i) Facts.
The facts are the same as in paragraph (i)(A)
of Example 1, except that FC only owns A1
(basis $40, value $150) and A2 (basis $120,
value $30) and F owns A3 (basis $140, value
$20). On Date 1, FC transfers A1 and A2, and
F transfers A3, to DC in a single transaction
described in section 351.
(ii) Importation property. A1 and A2 are
importation properties for the reasons set
forth in paragraph (i)(B) of Example 1. A3 is
also an importation property because, if F
had sold A3 immediately before the
transaction, no gain or loss recognized on the
sale would have been taken into account in
determining a Federal income tax liability,
and, further, if DC had sold A3 immediately
after the transaction, DC would take into
account any gain or loss recognized on the
sale in determining its Federal income tax
liability.
(iii) Loss importation transaction. The
transfers by FC and F are a section 362
transaction. The transaction is a loss
importation transaction for the reasons set
forth in paragraph (i)(C) of Example 1
(notwithstanding that one of the transferors,
FC, did not transfer a net built-in loss). See
paragraph (c)(3) of this section.
(iv) Application of section 362(e)(1) and
this section to importation property received
in loss importation transaction. Because the
importation properties, A1, A2, and A3, were
transferred in a loss importation transaction,
paragraph (b)(1) of this section applies and
DC’s basis in A1, A2, and A3 will each be
equal to the property’s value ($150, $30, and

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54981

$20, respectively) immediately after the
transfer.
(v) Basis of property received in
transaction. Following the application of
section 362(e)(1) and this section, the
provisions of section 362(e)(2) must be taken
into account because the transfer is a section
362(a) transaction. The application of section
362(e)(2) is determined separately for each
transferor. See § 1.362–4(b). Taking into
account the application of section 362(e)(1)
and this section, neither DC’s aggregate basis
in FC’s properties nor DC’s basis in F’s
property would exceed the properties’
respective values immediately after the
transaction. Therefore neither FC nor F has
a net built-in loss, neither transfer is a loss
duplication transaction, and section 362(e)(2)
does not apply to either transfer. DC’s bases
in A1, A2, and A3, as determined under
paragraph (iv) of this Example 2, are $150,
$30, and $20, respectively. Under section
358(a), FC’s basis in the DC stock received is
$160 ($40 + $120) and F’s basis in the DC
stock received in the exchange is $140.
Example 3. Transfer of importation and
non-importation property. (i) Facts. As in
paragraph (i) of Example 2, FC owns A1
(basis $40, value $150) and A2 (basis $120,
value $30), and F owns A3 (basis $140, value
$20). In addition, A2 is a U.S. real property
interest as defined in section 897(c)(1). On
Date 1, FC transfers A1 and A2, and F
transfers A3, to DC in a single transaction
described in section 351.
(ii) Importation property. A1 and A3 are
importation properties for the reasons set
forth in paragraph (i)(B) of Example 1 and
paragraph (i) of Example 2, respectively.
However, A2 is not importation property
because, if FC had sold A2 immediately
before the transaction, FC would take into
account any gain or loss recognized on the
sale in determining its Federal income tax
liability.
(iii) Loss importation transaction. FC’s
transfer is a section 362 transaction.
Furthermore, but for section 362(e)(1) and
this section and section 362(e)(2), DC’s
aggregate basis in the importation properties,
A1 and A3, would be $180 ($40 + $140) and
the properties’ aggregate value would be $170
($150 + $20) immediately after the
transaction. Therefore, the importation
properties’ aggregate basis would exceed
their aggregate value immediately after the
transaction, and the transfer is a loss
importation transaction.
(iv) Application of section 362(e)(1) and
this section to importation property received
in loss importation transaction. Because the
importation properties, A1 and A3, were
transferred in a loss importation transaction,
paragraph (b)(1) of this section applies and
DC’s basis in A1 and in A3 will each be equal
to the property’s value ($150 and $20,
respectively) immediately after the transfer.
(v) Basis of property received in
transaction. Following the application of
section 362(e)(1) and this section, the
provisions of section 362(e)(2) must be taken
into account because the transfer is a section
362(a) transaction. The application of section
362(e)(2) is determined separately for each
transferor. See § 1.362–4(b).
(A) FC’s transfer. Taking into account the
application of section 362(e)(1) and this

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section but without taking into account the
provisions of section 362(e)(2), DC would
have an aggregate basis of $270 in the
transferred properties ($150 in A1, as
determined under paragraph (iv) of this
Example 3, plus $120 in A2, determined
under section 362(a)), and the properties
would have an aggregate value of $180 ($150
+ $30) immediately after the transfer.
Therefore, FC has a net built-in loss and FC’s
transfer of A1 and A2 is a loss duplication
transaction. Accordingly, under the general
rule of section 362(e)(2), FC’s $90 net builtin loss ($270 aggregate basis to DC over $180
aggregate value) would be allocated
proportionately to reduce DC’s basis in the
loss property transferred by FC. As a result,
FC’s entire net built-in loss would be
allocated to A2, the only loss property
transferred by FC, and DC’s basis in A2
would be $30 ($120 basis under section
362(a) reduced by $90 net built-in loss).
However, if FC and DC were to elect under
section 362(e)(2)(C) to apply the $90 basis
reduction to FC’s basis in the DC stock
received in the transaction, DC’s basis in A2
would remain its section 362(a) basis of $120.
DC’s basis in A1 is $150 as determined under
paragraph (iv) of this Example 3 (irrespective
of whether the section 362(e)(2)(C) election is
made). If FC and DC do not make a section
362(e)(2)(C) election, FC’s basis in the DC
stock received in the exchange will be $270;
if FC and DC do make the election, FC’s basis
in the DC stock will be $180 ($270–$90 net
built-in loss). See § 1.362–4.
(B) F’s transfer of A3. Taking into account
the application of section 362(e)(1) and this
section, DC’s basis in A3, the property
transferred by F, would not exceed its value
immediately after the transfer. Therefore, F
does not have a built-in loss, F’s transfer is
not a loss duplication transaction, and
section 362(e)(2) does not apply to F’s
transfer. DC’s basis in A3, as determined
under paragraph (iv) of this Example 3, is
$20. Under section 358(a), F receives the DC
stock with a basis of $140.
Example 4. Multiple transferors of nonimportation properties. (i) Facts. DC1 owns
A1 (basis $40, value $150). In addition, as in
Example 3, FC owns A2 (basis $120, value
$30), a U.S. real property interest as defined
in section 897(c)(1), and F owns A3 (basis
$140, value $20). On Date 1, DC1 transfers
A1, FC transfers A2, and F transfers A3, to
DC in a single transaction described in
section 351.
(ii) Importation property. A2 is not
importation property and A3 is importation
property for the reasons set forth in
paragraph (ii) of Example 3 and paragraph
(i)(B) of Example 1, respectively. A1 is not
importation property because, if DC1 had
sold A2 immediately before the transaction,
DC1 would take into account any gain or loss
recognized on the sale in determining its
Federal income tax liability.
(iii) Loss importation transaction. The
transfer of A1, A2, and A3 is a section 362
transaction. Furthermore, but for section
362(e)(1) and this section and section
362(e)(2), DC’s basis in importation property,
A3, would be $140 and the value of the
property would be $20 immediately after the
transaction. Therefore, the importation

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property’s basis would exceed value and the
transfer is a loss importation transaction.
(iv) Application of section 362(e)(1) and
this section to importation property received
in loss importation transaction. Because the
importation property, A3, was transferred in
a loss importation transaction, section
362(e)(1) and paragraph (b)(1) of this section
applies and DC’s basis in A3 will be equal
to A3’s $20 value immediately after the
transfer.
(v) Basis of property received in
transaction. Following the application of
section 362(e)(1) and this section, the
provisions of section 362(e)(2) must be taken
into account because the transfer is a section
362(a) transaction. The application of section
362(e)(2) is determined separately for each
transferor. See § 1.362–4.
(A) DC1’s transfer. Taking into account the
application of section 362(e)(1) and this
section, DC’s basis in A1 ($40 under section
362(a)) would not exceed its value
immediately after the transfer. Therefore,
DC1 does not have a net built-in loss, DC1’s
transfer is not a loss duplication transaction,
and section 362(e)(2) does not apply to DC1’s
transfer. DC’s basis in A1, determined under
section 362(a), is $40. Under section 358(a),
DC1 receives the DC stock with a basis of
$40.
(B) FC’s transfer. Taking into account the
application of section 362(e)(1) and this
section, but without taking into account the
provisions of section 362(e)(2), DC would
have a section 362(a) basis of $120 in A2,
which would exceed A2’s $30 value
immediately after the transfer. Therefore, FC
has a net built-in loss and FC’s transfer of A2
is a loss duplication transaction.
Accordingly, under the general rule of
section 362(e)(2), FC’s $90 net built-in loss
(DC’s $120 basis in A2 over A2’s $30 value)
would be applied to reduce DC’s basis in A2,
the only loss property transferred by FC. As
a result, DC’s basis in A2 would be $30 ($120
basis under section 362(a), reduced by the
$90 net built-in loss). However, if FC and DC
were to elect under section 362(e)(2)(C) to
apply the $90 basis reduction to FC’s basis
in the DC stock received in the transaction,
DC’s basis in A2 would be its $120 basis
determined under section 362(a). If FC and
DC do not make a section 362(e)(2)(C)
election, FC’s basis in the DC stock received
in the exchange will be $120; if FC and DC
do make the election, FC’s basis in the DC
stock will be $30 ($120–$90). See § 1.362–4.
(C) F’s transfer. F’s transfer of A3 is a
transaction described in section 362(a).
However, taking into account the application
of section 362(e)(1) and this section, DC’s
basis in A3 ($20) would not exceed its value
immediately after the transfer. Therefore, F
does not have a built-in loss, F’s transfer is
not a loss duplication transaction, and
section 362(e)(2) does not apply to F’s
transfer. DC’s basis in A3, as determined
under paragraph (iv) of this Example 4, is
$20. Under section 358(a), FC receives the DC
stock with a basis of $140.
Example 5. Partnership transactions. (i)
Transfer by foreign partnership, foreign and
domestic partners. (A) Facts. A and F are
equal partners in FP. FP owns A1 (basis
$100, value $70). Under the terms of the FP

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partnership agreement, FP’s items of income,
gain, deduction, and loss are allocated
equally between A and F. FP transfers A1 to
DC in a transfer to which section 351 applies.
No election is made under section
362(e)(2)(C).
(B) Importation property. If FP had sold A1
immediately before the transaction, any gain
or loss recognized on the sale would be
allocated to and includible by A and F
equally under the partnership agreement.
Thus, A1 is treated as tentatively divided
into two equal portions, one treated as owned
by A and one treated as owned by F. If FP
had sold A1 immediately before the
transaction, any gain or loss recognized on
the portion treated as owned by A would
have been taken into account in determining
a Federal income tax liability (A’s); thus A’s
tentatively divided portion of A1 is not
importation property. However, no gain or
loss recognized on the tentatively divided
portion treated as owned by F would have
been taken into account in determining a
Federal income tax liability. Further, if DC
had sold A1 immediately after the
transaction, any gain or loss recognized on
the sale would have been taken into account
in determining a Federal income tax liability
(DC’s); thus, F’s tentatively divided portion
of A1 is importation property.
(C) Loss importation transaction. FP’s
transfer of A1 is a section 362 transaction.
Furthermore, but for section 362(e)(1) and
this section and section 362(e)(2), DC’s basis
in the importation property, F’s portion of
A1, would be $50 under section 362(a) and
the property’s value would be $35
immediately after the transaction. Therefore,
the importation property’s basis would
exceed its value and the transfer is a loss
importation transaction.
(D) Application of section 362(e)(1) and
this section to importation property received
in loss importation transaction. Because the
importation property, F’s tentatively divided
portion of A1, was transferred in a loss
importation transaction, section 362(e)(1) and
paragraph (b)(1) of this section applies and
DC’s basis in F’s portion of A1 will be equal
to its $35 value.
(E) Basis of property received in
transaction. Following the application of
section 362(e)(1) and this section, the
provisions of section 362(e)(2) must be taken
into account because the transfer is a section
362(a) transaction. Taking into account the
application of section 362(e)(1) and this
section but without taking into account the
provisions of section 362(e)(2), DC’s
aggregate basis in A1 would be $85 (the sum
of the $35 basis in F’s tentatively divided
portion of A1, as determined under
paragraph (i)(D) of this Example 5, and the
$50 basis in A’s tentatively divided portion
of A1, determined under section 362(a), see
paragraph (d)(2) of this section) and A1’s
value immediately after the transfer would be
$70. Therefore, FP has a net built-in loss and
FP’s transfer of A1 is a loss duplication
transaction. Accordingly, under the general
rule of section 362(e)(2), FP’s $15 net builtin loss ($85 basis over $70 value) would be
allocated to reduce DC’s basis in the loss
asset, A1, the only loss property transferred
by FP. As a result, DC’s basis in A1 would

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be $70 ($85 basis under section 362(a) and
this section, reduced by the $15 net built-in
loss). Under section 358, FP’s basis in the DC
stock received in the exchange will be $100.
See § 1.362–4.
(ii) Transfer with election to apply section
362(e)(2)(C). The facts are the same as in
paragraph (i)(A) of this Example 5, except
that FP and DC elect to apply section
362(e)(2)(C) to reduce FP’s basis in the DC
stock received in the exchange. The analysis
and results are the same as in paragraphs
(i)(B), (i)(C), (i)(D), and (i)(E) of this Example
5, except that the $15 reduction to DC’s basis
in A1 is not made and, as a result, DC’s basis
in A1 remains $85, and FP’s basis in the DC
stock received in the exchange is reduced
from $100 to $85. The $15 reduction to FP’s
basis in DC stock reduces A’s basis in its FP
interest under section 705(a)(2)(B). See
§ 1.362–4(f)(1).
(iii) Transfer by domestic partnership. The
facts are the same as in paragraph (i)(A) of
this Example 5 except that FP is a domestic
partnership. The analysis and results are the
same as in paragraphs (i)(B), (i)(C), (i)(D), and
(i)(E) of this Example 5.
(iv) Transfer of interest in partnership with
liability. (A) Facts. F and two other
individuals are equal partners in FP. F’s basis
in its partnership interest is $247. F’s share
of FP’s § 1.752–1 liabilities (as defined in
§ 1.752–1(a)(4)) is $150. F transfers his
partnership interest to DC in a transaction to
which section 351 applies. FP has no section
754 election in effect. If DC were to sell the
FP interest immediately after the transfer, DC
would receive $100 in cash or other property.
In addition, taking into account the rules
under § 1.752–4, DC’s share of FP’s § 1.152–
1 liabilities (as defined in § 1.752–1(a)(4)) is
$145 immediately after the transfer.
(B) Importation property. If F had sold his
partnership interest immediately before the
transaction, no gain or loss recognized on the
sale would have been taken into account in
determining a Federal income tax liability.
Further, if DC had sold the partnership
interest immediately after the transaction,
any gain or loss recognized on the sale would
have been taken into account in determining
a Federal income tax liability. Therefore, F’s
partnership interest is importation property.
(C) Loss importation transaction. F’s
transfer is a section 362 transaction.
However, but for section 362(e)(1) and this
section and section 362(e)(2), DC’s basis in
the importation property, the partnership
interest, determined under section 362(a) and
taking into account the rules under section
752, would be $242 (F’s $247 basis reduced
by F’s $150 share of PRS liabilities and
increased by DC’s $145 share of PRS
liabilities) and, under § 1.362–4(c)(12)(ii), the
value of the PRS interest would be $245 (the
sum of $100, the cash DC would receive if
DC immediately sold the partnership interest,
and $145, DC’s share of the § 1.752–1
liabilities (as defined in § 1.752–1(a)(4))
under section 752 immediately after the
transfer to DC). Therefore, the importation
property’s basis ($242) would not exceed its
value ($245), and the transfer is not a loss
importation transaction.
(D) Basis in property received in
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section 362(e)(1) and this section, the
provisions of section 362(e)(2) must be taken
into account because the transfer is a section
362(a) transaction. As described in paragraph
(iv)(C) of this Example 5, taking into account
the application of section 362(e)(1) and this
section, DC’s basis in the partnership interest
would not exceed its value. Therefore, under
§ 1.362–4, F does not have a net built-in loss,
the transfer is not a loss duplication
transaction, and section 362(e)(2) does not
apply to the transfer. DC’s basis in F’s
partnership interest is $242, determined
under sections 362(a) and 752. Under section
358, taking into account the rules under
section 752, F’s basis in the DC stock
received in the exchange is $97 ($247
reduced by F’s $150 share of FP liabilities).
Example 6. Transactions involving taxexempt entities. (i) Exempt transferor. (A)
Facts. InsCo is a benevolent life insurance
association of a purely local character exempt
from Federal income tax under section 501(a)
because it is described in section 501(c)(12).
InsCo owns shares of stock of DC1 (basis
$100, value $70) for investment purposes,
which are not debt-financed property (as
defined in section 514). On December 31,
Year 1, InsCo transfers the DC1 stock to DC
in a transaction to which section 351 applies.
No election is made under section
362(e)(2)(C).
(B) Importation property. If InsCo had sold
the DC1 stock immediately before the
transaction, any gain or loss realized would
be excluded from unrelated business taxable
income (UBTI) under section 512(b)(5), and
thus no gain or loss recognized on the sale
would have been taken into account in
determining Federal income tax liability.
Further, if DC had sold the DC1 stock
immediately after the transaction, any gain or
loss recognized on the sale would have been
taken into account in determining Federal
income tax liability. Therefore, the DC1 stock
is importation property.
(C) Loss importation transaction. InsCo’s
transfer is a section 362 transaction.
Furthermore, but for section 362(e)(1) and
this section and section 362(e)(2), DC’s basis
in importation property, the DC1 stock,
would be $100, and the stock’s value would
be $70 immediately after the transaction.
Therefore, the importation property’s basis
would exceed its value and the transfer is a
loss importation transaction.
(D) Application of section 362(e)(1) and
this section to importation property received
in loss importation transaction. Because the
importation property, the DC1 stock, was
transferred in a loss importation transaction,
paragraph (b)(1) of this section applies and
DC’s basis in the stock will be equal to its $70
value.
(E) Basis of property received in
transaction. Following the application of
section 362(e)(1) and this section, the
provisions of section 362(e)(2) must be taken
into account because the transfer is a section
362(a) transaction. Taking into account the
application of section 362(e)(1) and this
section, DC’s basis in the DC1 stock would
not exceed its value immediately after the
transaction. Therefore, InsCo does not have a
net built-in loss, InsCo’s transfer is not a loss
duplication transaction, and section 362(e)(2)

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has no application to the transaction. DC’s
basis in the DC1 stock, as determined under
paragraph (i)(D) of this Example 6, is $70.
Under section 358, InsCo’s basis in the DC
stock received in the exchange will be $100.
(ii) Transferor loses tax-exempt status. (A)
Facts. The facts are the same as in paragraph
(i)(A) of this Example 6 except that InsCo
fails to be described in section 501(c)(12) in
Year 1.
(B) Importation property. If InsCo had sold
the DC1 stock immediately before the
transaction, any gain or loss recognized on
the sale would have been taken into account
in determining a Federal income tax liability.
Therefore, the DC1 stock is not importation
property and this section does not apply to
the transaction.
(C) Basis of property received in
transaction. Following the application of
section 362(e)(1) and this section, the
provisions of section 362(e)(2) must be taken
into account because the transfer is a section
362(a) transaction. Taking into account the
application of section 362(e)(1) and this
section but without taking into account the
provisions of section 362(e)(2), DC would
have a section 362(a) basis of $100 in the
stock, which would exceed its value of $70
immediately after the transfer. Therefore,
InsCo has a net built-in loss and InsCo’s
transfer of the DC1 stock is a loss duplication
transaction. Accordingly, under the general
rule of section 362(e)(2), InsCo’s $30 net
built-in loss ($100 basis over $70 value)
would be allocated to reduce DC’s basis in
the loss asset, the DC1 stock, the only loss
property transferred by InsCo. As a result,
DC’s basis in the DC1 stock would be $70
($100 basis under section 362(a), reduced by
the $30 net built-in loss). Under section 358,
InsCo’s basis in the DC stock received in the
exchange will be $100.
(iii) Transfer of property that is subject to
unrelated business tax. (A) Facts. The facts
are the same as in paragraph (i)(A) of this
Example 6 except that, on December 31, Year
1, instead of the DC1 stock, InsCo transfers
A1 (basis $200, value $150) to DC. A1 is an
office building that InsCo owned from
January 1 to December 31 of Year 1. During
the entirety of this period, A1 constitutes
debt-financed property (as defined in section
514). Pursuant to sections 512 and 514, InsCo
would be required to include in UBTI a
portion of the gains or losses from a sale of
A1 at the end of Year 1. DC does not take the
property subject to the debt.
(B) Importation property. If InsCo had sold
A1 immediately before the transaction, the
gain or loss recognized on the sale would
have been taken into account in determining
a Federal income tax liability, even though at
a lesser rate of inclusion. Therefore, A1 is not
importation property and this section does
not apply to the transaction.
(C) Basis of property received in
transaction. The analysis and results are the
same as in paragraph (ii)(C) of this Example
6.
Example 7. Transactions involving CFCs.
(i) Transfer by CFC. (A) Facts. FC is a CFC
with 100 shares of stock outstanding. A owns
60 of the shares and F owns the remaining
40 shares. FC owns two assets, A1 (basis $70,
value $100), which is used in the conduct of

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a U.S. trade or business, and A2 (basis $100,
value $75), which is not used in the conduct
of a U.S. trade or business. FC transfers both
assets to DC in a transaction to which section
351 applies.
(B) Importation property. If FC had sold A1
immediately before the transaction, any gain
or loss recognized on the sale would have
been taken into account in determining a
Federal income tax liability (FC’s). See
section 882(a). Therefore, A1 is not
importation property. If FC had sold A2
immediately before the transaction, FC
would not take the gain or loss recognized
into account in determining its Federal
income tax liability, but the gain or loss
could be taken into account in determining
a section 951 inclusion to FC’s U.S.
shareholders. However, under paragraph
(d)(3) of this section, gain or loss is not
deemed taken into account in determining a
Federal income tax liability solely because it
could affect an inclusion under section
951(a). Further, if DC had sold A2
immediately after the transaction, any gain or
loss recognized on the sale would have been
taken into account in determining a Federal
income tax liability. Therefore, A2 is
importation property.
(C) Loss importation transaction. FC’s
transfer is a section 362 transaction.
Furthermore, but for section 362(e)(1) and
this section and section 362(e)(2), DC’s basis
in the importation property, A2, would be
$100 and the property’s value would be $75
immediately after the transaction. Therefore,
the importation property’s basis would
exceed its value and the transfer is a loss
importation transaction.
(D) Application of section 362(e)(1) and
this section to importation property received
in loss importation transaction. Because the
importation property, A2, was transferred in
a loss importation transaction, paragraph
(b)(1) of this section applies and DC’s basis
in A2 will be equal to A2’s $75 value
immediately after the transfer.
(E) Basis of property received in
transaction. Following the application of
section 362(e)(1) and this section, the
provisions of section 362(e)(2) must be taken
into account because the transfer is a section
362(a) transaction. Taking into account the
application of section 362(e)(1) and this
section but without taking into account the
provisions of section 362(e)(2), DC would
have an aggregate basis of $145 in the
transferred properties ($70 in A1, determined
under section 362(a), plus $75 in A2,
determined under this section) and the
properties would have an aggregate value of
$175 ($100 + $75) immediately after the
transfer. Therefore, FC does not have a net
built-in loss, FC’s transfer is not a loss
duplication transaction, and section 362(e)(2)
does not apply to the transaction. DC’s basis
in A1 will be $70, determined under section
362(a), and DC’s basis in A2 will be $75, as
determined under paragraph (i)(D) of this
Example 7. Under the general rule in section
358(a), FC receives the DC stock with a basis
of $170 ($70 attributable to A1 plus $100
attributable to A2).
(ii) Transfer of CFC stock. (A) Facts. The
facts are the same as in paragraph (i)(A) of
this Example 7, except that A transfers its 60

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shares of FC stock (basis $80, value $105) and
F transfers its 40 shares of FC stock (basis
$100, value $70) to DC in an exchange that
qualifies under section 351.
(B) Importation property. If A had sold its
FC shares immediately before the transaction,
any gain or loss recognized on the sale would
have been taken into account in determining
a Federal income tax liability (A’s).
Therefore, A’s FC shares are not importation
property. However, if F had sold its FC
shares immediately before the transaction, no
gain or loss recognized on the sale would
have been taken into account in determining
a Federal income tax liability. Further, if DC
had sold F’s FC shares immediately after the
transaction, any gain or loss recognized on
the sale would have been taken into account
in determining a Federal income tax liability.
Therefore, F’s FC shares are importation
property.
(C) Loss importation transaction. The
transfer of the FC shares is a section 362
transaction. Furthermore, but for section
362(e)(1) and this section and section
362(e)(2), DC’s aggregate basis in the
importation property, F’s shares of FC stock,
would be $100 under section 362(a) and the
shares’ aggregate value would be $70.
Therefore, the importation property’s
aggregate basis would exceed its aggregate
value, and the transfer is a loss importation
transaction.
(D) Application of section 362(e)(1) and
this section to importation property received
in loss importation transaction. Because the
importation property, F’s shares of FC stock,
was transferred in a loss importation
transaction, paragraph (b)(1) of this section
applies and DC’s aggregate basis in the shares
will be equal to their $70 aggregate value
immediately after the transfer.
(E) Basis of property received in
transaction. Following the application of
section 362(e)(1) and this section, the
provisions of section 362(e)(2) must be taken
into account because the transfer is a section
362(a) transaction. The application of section
362(e)(2) is determined separately for each
transferor. See § 1.362–4(b).
(1) A’s transfer. Taking into account the
application of section 362(e)(1) and this
section, DC’s aggregate basis in the shares
($80 under section 362(a)) would not exceed
the shares’ value ($105) immediately after the
transaction. Therefore A does not have a
built-in loss, A’s transfer is not a loss
duplication transaction, and section 362(e)(2)
does not apply to A’s transfer. DC’s aggregate
basis in A’s shares, determined under section
362(a), is $80. Under section 358(a), A
receives the DC stock with a basis of $80.
(2) F’s transfer. Taking into account the
application of section 362(e)(1) and this
section, DC’s aggregate basis in the shares
would not exceed their value immediately
after the transaction. Therefore, F does not
have a built-in loss, F’s transfer is not a loss
duplication transaction, and section 362(e)(2)
does not apply to F’s transfer. DC’s aggregate
basis in F’s shares, as determined under
paragraph (ii)(D) of this Example 7, is $70.
Under section 358(a), F receives the DC stock
with a basis of $100.
Example 8. Property subject to withholding
tax. (i) Facts. FC owns a share of DC1 stock

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(basis $100, value $70) as an investment. FC
receives dividends on the share that are
subject to Federal withholding tax of 30
percent of the amount received under section
881(a); under section 1442(a), DC1 must
withhold tax on the dividends paid. FC
transfers the DC1 share to DC in a transaction
to which section 351 applies.
(ii) Importation property. Although any
dividends received with respect to the DC1
stock were subject to withholding tax, if FC
had sold the share of stock of DC1, no gain
or loss recognized on the sale would have
been taken into account in determining a
Federal income tax liability. See section
865(a)(2). Further, if DC had sold the share
of DC1 stock immediately after the
transaction, any gain or loss recognized on
the sale would be taken into account in
determining Federal income tax liability.
Therefore, the share of DC1 stock is
importation property.
(iii) Loss importation transaction. FC’s
transfer is a section 362 transaction.
Furthermore, but for section 362(e)(1) and
this section and section 362(e)(2), DC’s basis
in the importation property, the share of DC1
stock, would be $100 and the share’s value
would be $70 immediately after the
transaction. Therefore, the share’s basis
would exceed its value and the transfer is a
loss importation transaction.
(iv) Application of section 362(e)(1) and
this section to importation property received
in loss importation transaction. Because the
importation property, the DC1 share, was
transferred in a loss importation transaction,
paragraph (b)(1) of this section applies and
DC’s basis in the share will be equal to the
share’s $70 value.
(v) Basis of property received in
transaction. Following the application of
section 362(e)(1) and this section, the
provisions of section 362(e)(2) must be taken
into account because the transfer is a section
362(a) transaction. Taking into account the
application of section 362(e)(1) and this
section, DC’s basis in the DC1 share would
not exceed the share’s value immediately
after the transaction. Therefore, FC does not
have a net built-in loss, FC’s transfer is not
a loss duplication transaction, and section
362(e)(2) does not apply to the transaction.
DC’s basis in the DC1 share, as determined
under paragraph (iv) of this Example 8, is
$70. Under section 358, FC’s basis in the DC
stock received in the exchange will be $100.
Example 9. Property transferred in
triangular reorganization. (i) Foreign
subsidiary. (A) Facts. P owns the sole
outstanding share of stock of FC (basis $1),
FC1 owns the sole outstanding share of FC2
(basis $100), and FC2 owns one asset, A1
(basis $100, value $20). In a forward
triangular merger described in § 1.358–
6(b)(2)(i), FC2 merges with and into FC, and
FC1 receives shares of P stock in exchange
for its FC2 stock. The forward triangular
merger is a transaction described in section
368(a)(2)(D) and, therefore, in section 362(b).
(B) Determining P’s basis in its FC share.
Pursuant to § 1.358–6, for purposes of
determining the adjustment to P’s basis in its
FC shares, P is treated as though it first
received A1 in a transaction in which its
basis in A1 would be determined under

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Federal Register / Vol. 78, No. 174 / Monday, September 9, 2013 / Proposed Rules
section 362(b) and then it transferred A1 to
FC in a transaction in which P’s basis in its
FC stock would be determined under section
358.
(1) P’s deemed acquisition and transfer of
A1. If FC2 had sold A1 for its value
immediately before the deemed transaction,
no gain or loss recognized on the sale would
have been taken into account in determining
a Federal income tax liability. If P had sold
A1 immediately after the deemed transaction,
any gain or loss recognized on the sale would
have been taken into account in determining
a Federal income tax liability (P’s). Therefore,
with respect to P’s deemed acquisition, A1 is
importation property. Furthermore,
immediately after the deemed transaction, P’s
basis in A1, but for section 362(e)(1) and this
section and section 362(e)(2), would be $100
and A1’s value is $20. Therefore, the
importation property’s basis would exceed its
value and the transfer is a loss importation
transaction. Accordingly, P’s deemed basis in
A1 will be equal to A1’s $20 value.
(2) P’s FC stock basis. As a result of P’s
deemed transfer of A1 to FC (and applying
the principles of § 1.367(b)–13), P’s basis in
its FC stock is increased by its $20 deemed
basis in A1. Accordingly, following the
transaction, P’s basis in its share of FC stock
will be $21 (the sum of its original $1 basis
and the $20 adjustment for the deemed
transfer of A1).
(C) FC’s basis in A1. FC’s basis in A1 is
determined under the rules of this section
without regard to the determination of P’s
adjustment to its basis in FC stock. If FC2 had
sold A1 for its value immediately before the
transaction, no gain or loss recognized on the
sale would have been taken into account in
determining a Federal income tax liability.
However, if FC had sold A1 immediately
after the transaction, no gain or loss
recognized on the sale would have been
taken into account in determining a Federal
income tax liability, so A1 is not importation
property. Accordingly, this section will not
apply to the transaction. Although there is a
net built-in loss in A1, the transaction is not
described in section 362(a), and so section
362(e)(2) and § 1.362–4 will not apply to the
transaction. Thus, under section 362(b), FC’s
basis in A1 will be $100.
(D) FC1’s basis in P stock. Under section
358, FC1’s basis in the P stock it receives in
the exchange will be $100.
(ii) Property transferred to U.S. subsidiary
in triangular reorganization. (A) Facts. The
facts are the same as in paragraph (i)(A) of
this Example 9, except that P also owns the
sole outstanding share of DC (basis $1) and,
instead of merging into FC, FC2 merged into
DC.
(B) Determining P’s basis in its DC share.
As determined under paragraph (i)(B)(2) of
this Example 9, P’s basis in its DC share is
$21, the sum of its original $1 basis plus the
$20 adjustment for the deemed transfer of
A1.
(C) DC’s basis in A1. If FC2 had sold A1
for its value immediately before the
transaction, no gain or loss recognized on the
sale would have been taken into account in
determining a Federal income tax liability.
However, if DC had sold A1 immediately
after the transaction, any gain or loss

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recognized on the sale would have been
taken into account in determining a Federal
income tax liability, so A1 is importation
property with respect to DC. Furthermore,
immediately after the transaction, DC’s basis
in A1, but for section 362(e)(1) and this
section and section 362(e)(2), would be $100
and A1’s value is $20. Therefore, the
importation property’s basis would exceed its
value and the transfer is a loss importation
transaction. Accordingly, DC’s basis in A1
will be $20, A1’s value immediately after the
transaction.

(D) FC1’s basis in P stock. Under
section 358, FC1’s basis in the P stock
it receives in the exchange is $100.
(g) Effective/applicability date. This
section applies to any transaction
occurring on or after the date these
regulations are published as final
regulations in the Federal Register,
unless effected pursuant to a binding
agreement that was in effect prior to that
date and at all times thereafter.
However, taxpayers may apply this
section to transactions occurring after
October 22, 2004.
■ Par. 9. Section 1.362–4 is amended
by:
■ 1. Revising the introductory text in
paragraph (h).
■ 2. Revising paragraph (h) Example 11.
■ 3. Adding a new sentence to the end
of paragraph (j).
The revisions and addition read as
follows:
§ 1.362–4

Basis of loss duplication.

*

*
*
*
*
(h) * * * The examples in this
paragraph (h) illustrate the application
of section 362(e)(2) and the provisions
of this section. Unless the facts
otherwise indicate, the examples use the
following nomenclature and
assumptions: X, Y, P, S, S1, and S2 are
domestic corporations; A and B are U.S.
individuals; FC1 and FC2 are foreign
corporations and are not engaged in a
U.S. trade or business, have no U.S. real
property interests, and have no other
relationships, activities, or interests that
would cause them, their shareholders,
or their property to be subject to Federal
income taxation; there is no applicable
income tax treaty; PRS is a domestic
partnership; no election is made under
section 362(e)(2)(C); and the transferred
property is not importation property (as
defined in § 1.362–3(c)(2)) and the
transfers are not loss importation
transactions (as defined in § 1.362–
3(c)(3)), so that the basis of no property
is determined under section 362(e)(1).
All persons and transactions are
unrelated unless the facts indicate
otherwise, and all other relevant facts
are set forth in the examples. See
§ 1.362–3(f) for additional examples
illustrating the application of section

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54985

362(e)(2) and this section, including to
transactions that are subject to section
362(e)(2), and section 362(e)(1).
*
*
*
*
*
Example 11. Transfers of importation
property with non-importation property. (i)
Single transferor, loss importation
transaction. (A) Facts. FC1 transfers Asset 1
(basis $80, value $50) and Asset 2 (basis
$120, value $110) to DC in a transaction to
which section 351 applies. Asset 1 is not
importation property within the meaning of
§ 1.362–3(c)(2). Asset 2 is importation
property within the meaning of § 1.362–
3(c)(2).
(B) Application of section 362(e)(1).
Immediately after the transfer, and without
regard to section 362(e)(1) or section
362(e)(2) and this section, DC’s aggregate
basis in importation property (Asset 2) would
be $120. The aggregate value of the
importation property immediately after the
transfer is $110. Accordingly, the transaction
is a loss importation transaction within the
meaning of § 1.362–3(c)(3) and, under section
362(e)(1), DC’s basis in Asset 2 would equal
its value, $110.
(C) Application of section 362(e)(2) and
this section. (1) Analysis. (i) Loss duplication
transaction. FC1’s transfer of Asset 1 and
Asset 2 is a transaction described in section
362(a). But for section 362(e)(2) and this
section, DC’s aggregate basis in those assets
would be $190 ($80 under section 362(a) +
$110 under section 362(e)(1)), which would
exceed the aggregate value of the assets $160
($50 + $110) immediately after the
transaction. Accordingly, the transfer is a loss
duplication transaction and FC1 has a net
built-in loss of $30 ($190—$160).
(ii) Identifying loss duplication property.
But for section 362(e)(2) and this section,
DC’s basis in Asset 1 would be $80, which
would exceed Asset 1’s $50 value
immediately after the transaction.
Accordingly, Asset 1 is loss duplication
property. But for section 362(e)(2) and this
section, DC’s basis in Asset 2 would be $110,
which would not exceed Asset 2’s $110 value
immediately after the transaction.
Accordingly, Asset 2 is not loss duplication
property.
(C) Basis in loss duplication property. DC’s
basis in Asset 1 is $50, computed as its $80
basis under section 362(a) reduced by FC1’s
$30 net built-in loss.
(D) Basis in other property. Under section
362(e)(1), DC’s basis in Asset 2 is $110.
Under section 358(a), FC1 has an exchanged
basis of $200 in the DC stock it receives in
the transaction.
(ii) Multiple transferors, no importation of
loss. (A) Facts. The facts are the same as
paragraph (i)(A) of this Example 11, except
that, in addition, FC2 transfers Asset 3 (basis
$100, value $150) to DC as part of the same
transaction. Asset 3 is importation property
within the meaning of § 1.362–3(c)(2).
(B) Application of section 362(e)(1).
Immediately after the transfer, and without
regard to section 362(e)(1) or section
362(e)(2) and this section, DC’s aggregate
basis in importation property (Asset 2 and
Asset 3) would be $220 ($120 + $100). The
aggregate value of the importation property
immediately after the transfer is $260 ($110

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+ $150). Accordingly, the transaction is not
a loss importation transaction within the
meaning of § 1.362–3(c)(3) and DC’s bases in
the importation property is not determined
under section 362(e)(1).
(C) Application of section 362(e)(2) and
this section: FC1. Notwithstanding that the
transfers by FC1 and FC2 are pursuant to a
single plan forming one transaction, section
362(e)(2) and this section apply to each
transferor separately.
(1) Analysis. (i) Loss duplication
transaction. FC1’s transfer of Asset 1 and
Asset 2 is a transaction described in section
362(a). But for section 362(e)(2) and this
section, DC’s aggregate basis in those assets
would be $200 ($80 + $120), which would
exceed the aggregate value of the assets $160
($50 + $110) immediately after the
transaction. Accordingly, the transfer is a loss
duplication transaction and FC1 has a net
built-in loss of $40 ($200—$160).
(ii) Identifying loss duplication property.
But for section 362(e)(2) and this section,
DC’s basis in Asset 1 would be $80, which
would exceed Asset 1’s $50 value
immediately after the transaction.
Accordingly, Asset 1 is loss duplication
property. But for section 362(e)(2) and this
section, DC’s basis in Asset 2 would be $120,
which would exceed Asset 2’s $110 value
immediately after the transaction.
Accordingly, Asset 2 is also loss duplication
property.
(2) Basis in loss duplication property. DC’s
basis in Asset 1 is $50, computed as its $80
basis under section 362(a) reduced by $30, its
allocable portion of FC1’s $40 net built-in
loss ($80/$200 × $40). DC’s basis in Asset 2
is $110, computed as its $120 basis under
section 362(a) reduced by $10, its allocable
portion of FC1’s $40 net built-in loss ($120/
$200 × $40).
(3) Basis in other property. Under section
358(a), FC1 has an exchanged basis of $200
in the DC stock it receives in the transaction.
(D) Application of section: FC2. FC2’s
transfer of Asset 3 is not a loss duplication
transaction because Asset 3’s value exceeds
its basis immediately after the transaction.
Accordingly, under section 362(a), DC’s basis
in Asset 3 is $100.

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*

*
*
*
*
(j) * * * The introductory text and
Example 11 of paragraph (h) of this
section apply to transactions on or after
the date these regulations are published
as final regulations in the Federal
Register unless effected pursuant to a
binding agreement that was in effect
prior to that date and at all times
thereafter; however, taxpayers may
apply such provisions to transactions
occurring after October 22, 2004.
■ Par. 10. Section 1.368–3 is amended
by revising paragraphs (a)(3), (b)(3) and
adding a sentence to the end of
paragraph (e) to read as follows:
§ 1.368–3 Records to be kept and
information to be filed with returns.

(a) * * *
(3) The value and basis of the assets,
stock or securities of the target

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corporation transferred in the
transaction, determined immediately
before the transfer and aggregated as
follows—
(i) Importation property transferred in
a loss importation transaction, as
defined in §§ 1.362–3(c)(2) and 1.362–
3(c)(3), respectively;
(ii) Loss duplication property as
defined in § 1.362–4(c)(1);
(iii) Property with respect to which
any gain or loss was recognized on the
transfer (without regard to whether such
property is also identified in paragraph
(a)(3)(i) or (a)(3)(ii) of this section);
(iv) Property not described in
paragraphs (a)(3)(i), (a)(3)(ii) or (a)(3)(iii)
of this section; and
*
*
*
*
*
(b) * * *
(3) The value and basis of all the stock
or securities of the target corporation
held by the significant holder that is
transferred in the transaction and such
holder’s basis in that stock or securities,
determined immediately before the
transfer and aggregated as follows—
(i) Stock and securities with respect to
which an election is made under section
362(e)(2)(C); and
(ii) Stock and securities not described
in paragraph (b)(3)(i) of this section.
*
*
*
*
*
(e) Effective/applicability date. * * *
Paragraphs (a)(3) and (b)(3) of this
section apply to any taxable year
beginning on or after these regulations
are published as final regulations in the
Federal Register, unless effected
pursuant to a binding agreement that
was in effect prior to that date and at all
times thereafter.
Beth Tucker,
Deputy Commissioner for Operations
Support.
[FR Doc. 2013–21662 Filed 9–6–13; 8:45 am]
BILLING CODE 4830–01–P

guidance to providers of minimum
essential health coverage that are subject
to the information reporting
requirements of section 6055 of the
Internal Revenue Code (Code), enacted
by the Affordable Care Act. Health
insurance issuers, certain employers,
and others that provide minimum
essential coverage to individuals must
report to the IRS information about the
type and period of coverage and furnish
related statements to covered
individuals. These proposed regulations
affect health insurance issuers,
employers, governments, and other
persons that provide minimum essential
coverage to individuals.
DATES: Written or electronic comments
must be received by November 8, 2013.
Requests to speak and outlines of topics
to be discussed at the public hearing
scheduled for November 19, 2013, at 10
a.m., must be received by November 8,
2013.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–132455–11), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–132455–
11), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically
via the Federal eRulemaking Portal at
http://www.regulations.gov (IRS REG–
132455–11).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Andrew Braden, (202) 622–4960;
concerning the submission of comments
and/or to be placed on the building
access list to attend the public hearing,
Oluwafunmilayo (Funmi) Taylor, (202)
622–7180 (not toll-free calls).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[REG–132455–11]
RIN 1545–BL31

Information Reporting of Minimum
Essential Coverage
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
AGENCY:

This document contains
proposed regulations providing

SUMMARY:

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The collection of information
contained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)). Comments on the collection of
information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of
information should be received by

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