TD 9614 (Final)

Vol. 78

Tuesday,

No. 53

March 19, 2013

Part III

Department of the Treasury

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Internal Revenue Service
26 CFR Parts 1 and 602
Certain Outbound Property Transfers by Domestic Corporations; Certain
Stock Distributions by Domestic Corporations; Indirect Stock Transfers and
the Coordination Rule Exceptions; Transfers of Stock or Securities in
Outbound Asset Reorganizations; Final Rules and Proposed Rule

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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9614]
RIN 1545–AM97

Certain Outbound Property Transfers
by Domestic Corporations; Certain
Stock Distributions by Domestic
Corporations
Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
AGENCY:

This document contains final
and temporary regulations that apply to
transfers of certain property by a
domestic corporation to a foreign
corporation in certain nonrecognition
exchanges, or to distributions of stock of
certain foreign corporations by a
domestic corporation in certain
nonrecognition distributions. The final
regulations also establish reporting
requirements for property transfers and
stock distributions to which the final
regulations apply. The regulations affect
domestic corporations that transfer
property to foreign corporations in
certain nonrecognition transactions, or
that distribute the stock of certain
foreign corporations in certain
nonrecognition distributions, and
certain domestic shareholders of those
domestic corporations.
DATES: Effective date: These regulations
are effective on March 19, 2013.
Applicability dates: For dates of
applicability, see §§ 1.367(a)–1(g),
1.367(a)–3(g), 1.367(a)–7(j), 1.367(b)–6,
1.1248–1(g), 1.1248–6(e), 1.1248–8(d),
1.1248(f)–3(b), and 1.6038B–1(g).
FOR FURTHER INFORMATION CONTACT:
Robert B. Williams, Jr., (202) 622–3860
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
SUMMARY:

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Paperwork Reduction Act
The collections of information
contained in the regulations have been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545–2183.
The collections of information are in
§§ 1.367(a)–7(c) and (e)(2), 1.367(a)–8(c),
1.1248(f)–2(a)(3), (b)(1) and (c)(1), and
1.6038B–1(c)(6). The collections of
information are mandatory. The likely
respondents are domestic corporations.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information

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unless it displays a valid control
number.
Books and records relating to a
collection of information must be
retained as long as their contents might
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
On August 20, 2008, the Department
of the Treasury (Treasury Department)
and the Internal Revenue Service (IRS)
issued proposed regulations under
sections 367, 1248, and 6038B of the
Internal Revenue Code (Code) (2008
proposed regulations) concerning
transfers of property by a domestic
corporation to a foreign corporation in
an exchange described in section 361(a)
or (b) (section 361 exchange), and
certain nonrecognition distributions of
stock of a foreign corporation by a
domestic corporation (REG–209006–89;
73 FR 49278, 2008–41 IRB 867). A
correction to the 2008 proposed
regulations was published in the
Federal Register on September 26, 2008
(73 FR 56535; 2008–41 IRB 867). No
public hearing on the 2008 proposed
regulations was requested or held;
however, comments were received.
Based, in part, on comments received,
the Treasury Department and the IRS
adopt the 2008 proposed regulations,
with modifications, as final regulations.
As discussed in paragraph G. of this
preamble, a portion of the 2008
proposed regulations is adopted, with
modifications, in temporary regulations
published elsewhere in this issue of the
Federal Register. Those temporary
regulations also modify final regulations
under section 367(a) concerning
transfers of stock or securities by a
domestic corporation to a foreign
corporation in a section 361 exchange.
All comments will be available at
www.regulations.gov or upon request.
Summary of Comments and
Explanation of Revisions
A. Regulations Under Section 367(a)(5)
1. Overview
In general, section 367(a)(5) provides
that the exceptions to section 367(a)(1)
in section 367(a)(2) and (a)(3) do not
apply in the case of a section 361
exchange in which a domestic
corporation (U.S. transferor) transfers
assets to a foreign corporation, unless
the U.S. transferor is controlled (within
the meaning of section 368(c)) by five or
fewer (but at least one) domestic
corporations (each a control group
member, and together the control group)

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and basis adjustments and other
conditions as provided in regulations
are satisfied. The policy underlying
section 367(a)(5) is the protection of
corporate-level gain on appreciated
property following the repeal of the
General Utilities doctrine. See H.R. Rep.
No 795, 100th Cong., 2d Sess. 60 (1988).
The 2008 proposed regulations would
implement section 367(a)(5) by
providing that, as a general rule, the
exceptions to section 367(a)(1) do not
apply to a transfer of certain property by
the U.S. transferor to a foreign acquiring
corporation in a section 361 exchange.
An exception to the general rule is
provided, at the election of the U.S.
transferor and members of the control
group (elective exception), subject to
conditions that are intended, in part, to
ensure that the net gain (if any) realized
by the U.S. transferor in connection
with the transfer of property subject to
section 367(a) (defined as inside gain)
is, in the aggregate, recognized currently
by the U.S. transferor or, to the extent
permitted, preserved in the stock
received in the reorganization by certain
domestic corporate shareholders of the
U.S. transferor.
Section 337(d) provides that the
Secretary shall prescribe such
regulations as may be necessary or
appropriate to carry out the purposes of
the amendments made by subtitle D of
title VI of the Tax Reform Act of 1986
(concerning the repeal of the General
Utilities doctrine), including regulations
providing for appropriate coordination
of the provisions of section 337 with the
provisions of the Code relating to
taxation of foreign corporations and
their shareholders.
2. Calculation of Inside Gain
In addition to the adjusted basis of
certain transferred property, for
purposes of computing inside gain, the
2008 proposed regulations take into
account certain liabilities of the U.S.
transferor that would give rise to a
deduction when paid (deductible
liabilities). Under the 2008 proposed
regulations, a deductible liability would
be defined as a liability assumed in the
section 361 exchange or satisfied in
connection with the reorganization
(within the meaning of section
361(c)(3)), but only if payment of the
liability would give rise to a deduction.
Section 361(c)(3) provides that the U.S.
transferor recognizes no gain or loss on
the satisfaction of a liability with stock
received in connection with the
reorganization, but does not prevent the
U.S. transferor from obtaining a
deduction on payment of the liability
with the stock received. The policy for
allowing a deductible liability to reduce

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inside gain is that the U.S. transferor has
not received a tax benefit for such
liability but the liability reduces the
value of the stock received.
Accordingly, under the final
regulations, a deductible liability is
limited to a liability that is assumed in
the section 361 exchange if payment of
the liability would give rise to a
deduction.
Several comments suggested that
other tax attributes of the U.S. transferor
should also be taken into account in
computing inside gain (in particular, net
operating losses and foreign tax credits)
because those other tax attributes are
similar to the adjusted basis of the
transferred property and deductible
liabilities. Recognizing the complexity
that would result if other tax attributes
were taken into account, other
comments suggested that the final
regulations permit the U.S. transferor to
elect to recognize an amount of gain
sufficient to utilize all or a portion of
any additional tax attributes. Another
comment, however, considered this
recommendation to be inconsistent with
the basic approach of section 367(a)(1),
which only takes into account the
adjusted basis of the transferred
property in determining the amount of
gain required to be recognized by the
U.S. transferor.
The Treasury Department and the IRS
believe that taking into account other
tax attributes of the U.S. transferor in
determining inside gain would
substantially increase the complexity of
the final regulations and IRS
examinations of these transactions. In
addition, a U.S. transferor can utilize
any other available tax attributes by not
electing to apply the elective exception.
Accordingly, the comment was not
adopted.
3. Built-In Loss in Stock of the U.S.
Transferor Corporation
To qualify for the elective exception
under the 2008 proposed regulations,
each control group member must reduce
its adjusted basis (as determined under
section 358) in the stock received in the
reorganization by the amount (if any)
that its portion of the inside gain
exceeds the gain (or loss) in that stock
(outside gain) but for the application of
section 367(a)(5). In certain cases, the
required basis adjustment will convert
built-in loss stock into built-in gain
stock. For example, assume that prior to
the application of the elective exception
the control group member has a $150x
adjusted basis (as determined under
section 358) in stock received that has
a fair market value of $100x (that is,
there is a $50x built-in loss in the stock).
If the control group member’s share of

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inside gain is $30x, its adjusted basis in
the stock received must be reduced to
$70x, resulting in $30x of built-in gain
in the stock and eliminating the $50x
pre-existing built-in loss.
Several comments suggested that
reducing the adjusted basis of built-in
loss stock to this extent is inappropriate
and recommended that final regulations
treat a reduction to an existing built-in
loss the same as a reduction to basis that
would increase built-in gain. For
example, under the previous assumed
facts, the approach in these comments
would reduce the adjusted basis of the
stock by $30x (the control group
member’s share of inside gain), reducing
the built-in loss to $20x.
Another comment recommended that
the provisions be modified to preserve
both the domestic corporate
shareholder’s share of inside gain as
well as the built-in gain (or loss)
existing in the stock received before any
required basis adjustment. Specifically,
the comment suggested that any outside
built-in gain (loss) should be treated as
a deferred gain (loss) that would be
taken into account based on principles
similar to those of section 267(a)(1).
Consistent with the legislative history
to section 367(a)(5), the Treasury
Department and the IRS believe that the
amount of outside built-in gain or loss
should not affect the required reduction
to the adjusted basis of the stock
received in the transaction. That is, the
basis must be reduced to an amount
such that the gain in the stock
corresponds to the proportionate
amount of inside gain. See S. Rep. No.
445, 100th Cong., 2d Sess. 62–3 (1988).
Therefore, the final regulations do not
adopt these recommendations. The final
regulations do, however, clarify that if a
U.S. transferor does not have inside
gain, that is, there is no net built-in gain
in the U.S. transferor’s assets, stock
basis adjustments are not required to be
made by control group members, even if
the outside stock loss of a control group
member is greater than the net built-in
loss attributable to the control group
member.
4. Disposition of a Significant Amount
of Section 367(a) Property
The 2008 proposed regulations would
deny the application of the elective
exception if, with a principal purpose of
avoiding U.S. tax, the foreign acquiring
corporation disposes of a significant
amount of the property received from
the U.S. transferor (disposition rule).
Several comments recommended that
the disposition rule be conformed to the
provisions of § 1.367(a)–8 concerning
gain recognition agreements.
Specifically, one comment

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recommended that a defined period be
set for the reach of the disposition rule.
In this regard, the gain recognition
agreement provisions generally require
gain recognition only if a triggering
event occurs during the term of the gain
recognition agreement, which is the
period ending with the close of the fifth
full taxable year (not less than 60
months) following the year in which the
transfer requiring the gain recognition
agreement occurred.
Another comment recommended that
the final regulations include provisions
similar to those of the gain recognition
provisions in § 1.367(a)–8(k)(14) to
address nonrecognition transfers of
property. Those provisions generally
provide that a transfer of assets subject
to a gain recognition agreement during
the term of the gain recognition
agreement in certain nonrecognition
transactions will not be triggering events
if specified conditions are satisfied.
Other comments suggested that this
disposition rule is not necessary
because § 1.367(a)–2T(c)(1) denies the
exception under section 367(a)(3) in
certain cases when the transferred
property is re-transferred to another
person as part of the same transaction.
The Treasury Department and the IRS
believe that safeguards in addition to
§ 1.367(a)–2T(c)(1) are needed in the
case of outbound reorganizations that
qualify for the elective exception, but
agree that adopting certain aspects of
the gain recognition agreement
provisions is appropriate. Accordingly,
the final regulations deny the elective
exception only if, with a principal
purpose of avoiding U.S. tax, the foreign
acquiring corporation disposes of a
significant amount of the property
received from the U.S. transferor during
the 60-month period that begins on the
date of distribution or transfer (within
the meaning of § 1.381(b)–1(b)), which
generally is the date on which the
transfer of property by the U.S.
transferor to the foreign acquiring
corporation is completed.
Furthermore, the final regulations
provide that property that is
subsequently transferred pursuant to a
nonrecognition provision is not treated
as disposed of for purposes of the
disposition rule, provided such transfer
satisfies, and is treated in a manner
consistent with the principles
underlying § 1.367(a)–8(k) (concerning
non-triggering events with respect to
gain recognition agreements) and more
generally the provisions of § 1.367(a)–8
concerning gain recognition agreements.
Finally, one comment suggested that
dispositions of property in the ordinary
course of business should not deny the
application of the elective exception,

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even if the disposition occurs within the
two-year ‘‘presumption of tax
avoidance’’ period following the
reorganization. The Treasury
Department and the IRS agree with this
comment. Accordingly, the final
regulations provide an exception for
dispositions of property occurring in the
ordinary course of business.

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5. Definitions of Section 367(a) Property
and Section 367(d) Property
Subject to a special rule, the 2008
proposed regulations define section
367(a) property as any property other
than section 367(d) property. The 2008
proposed regulations define section
367(d) property as property to which
section 367(d) applies.
In response to a comment, the final
regulations clarify that section 367(d)
property is property described in
section 936(h)(3)(B). Section 367(d)(1)
provides that, except as provided in
regulations, if a United States person
transfers any intangible property (within
the meaning of section 936(h)(3)(B)) to
a foreign corporation in an exchange
described in section 351 or 361, section
367(d) (and not section 367(a)) applies
to such transfer. Accordingly, income or
gain attributable to the transfer of
property by a U.S. person to a foreign
corporation in a section 351 exchange or
section 361 exchange is taken into
account either in accordance with
section 367(d)(2)(A)(ii)(I) or
(d)(2)(A)(ii)(II), or in accordance with
section 367(a) and the regulations
thereunder in the case of a section 361
exchange subject to section 367(a)(5).
For guidance concerning transfers of
section 367(d) property in outbound
asset reorganizations, see Notice 2012–
39 (IRB 2012–31) (see
§ 601.601(d)(2)(ii)(b) of this chapter).
6. Treatment of a RIC, REIT, or S
Corporation
One comment suggested that if the
policy of section 367(a)(5) is to preserve
U.S. taxing jurisdiction over corporatelevel gain, then section 367(a)(5) should
not generally apply to a regulated
investment company (RIC), real estate
investment trust (REIT), or S
corporation (collectively, special
corporate entities), because those
entities generally are not subject to
corporate-level tax. The comment
further suggested that to the extent those
special corporate entities are subject to
corporate-level tax, the final regulations
should incorporate a targeted gain
recognition rule to address those limited
situations. In contrast, another comment
noted that exempting special corporate
entities from the application of section
367(a)(5) could facilitate the use of

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special corporate entities to avoid U.S.
tax. A third comment asserted that, at a
minimum, even though special
corporate entities may not generally be
subject to corporate-level tax, special
corporate entities should be permitted
to be members of the control group,
because the amount of inside gain
preserved in stock received by special
corporate entities could, when
recognized, be wholly or partly subject
to U.S. tax in the hands of shareholders
of the special corporate entities.
The Treasury Department and the IRS
remain concerned about exempting
special corporate entities from the
application of section 367(a)(5). Section
367(a)(1) addresses transfers of certain
appreciated property by a United States
person to a foreign corporation in
certain nonrecognition exchanges
described in subchapter C of the Code.
This general rule applies equally to
special corporate entities, as it does to
any U.S. person, including any domestic
corporation. Although special corporate
entities are generally not subject to
entity-level tax, the underlying income
(including built-in gain in assets) flows
through to their owners. Because the
owners of special corporate entities
generally receive a basis determined
under section 358 in the shares of the
foreign acquiring corporation,
preservation of corporate-level tax on
the inside gain is not assured.
The Treasury Department and the IRS
also remain concerned about allowing
special corporate entities to be members
of the control group. If a special
corporate entity was allowed to be a
member of the control group, whether
the inside gain preserved in the hands
of a special corporate entity is ever
subject to U.S. corporate tax would
depend on the extent of the domestic
corporate ownership of the special
corporate entity at the time the gain is
recognized. The domestic corporate
ownership at the time the gain is
recognized may decrease or increase
from the time the reorganization
occurred.
Accordingly, the final regulations do
not adopt the recommendations to
provide relief from the application of
section 367(a)(5) to special corporate
entities, or allow special corporate
entities to be control group members.
7. Indirect Stock Ownership
Several comments recommended that
the final regulations permit indirect
ownership of the U.S. transferor through
partnerships or foreign corporations to
be taken into account for purposes of
satisfying the control requirement of
section 367(a)(5). Section 367(a)(5),
however, incorporates the control

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requirement of section 368(c), which
requires the direct ownership of stock.
Furthermore, there is no indication in
the legislative history to section
367(a)(5) that indirect stock ownership
should also be considered for this
purpose. In addition, as noted in the
preamble to the 2008 proposed
regulations, the Treasury Department
and the IRS are concerned with the
additional complexity that would result
if indirect ownership were taken into
account. Thus, the final regulations do
not adopt this recommendation.
8. Treatment of Affiliated Group
Members as a Single Corporation
The 2008 proposed regulations
provide that members of an affiliated
group of corporations (within the
meaning of section 1504) are treated as
a single corporation for purposes of the
control requirement of section 367(a)(5).
Several comments stated that the
wording of this aggregation rule could
be read to suggest that the affiliated
group members are also treated as a
single corporation for other purposes,
including, for example, to determine the
amount of any required stock basis
adjustments. The final regulations revise
the aggregation rule to clarify that
affiliated group members are treated as
a single corporation only for purposes of
the control requirement.
9. Transfers Described in Other
Nonrecognition Provisions
The 2008 proposed regulations clarify
that section 367(a)(5) applies to a
transfer of property described in section
351 if the transfer is also described in
section 361(a) or (b). This clarification
ensures that the policies underlying
section 367(a)(5) are not undermined by
transfers described in section 361(a) or
(b) that also qualify for nonrecognition
under section 351.
One comment suggested that transfers
described in section 361(a) or (b) could
also be described in nonrecognition
provisions other than section 351, such
as section 354. In response to this
comment, the general rule in the final
regulations is modified to provide that,
unless an exception applies, the U.S.
transferor recognizes any gain realized
with respect to section 367(a) property.
Thus, for purposes of recognizing gain
under the general rule it is irrelevant
whether, in addition to section 361(a) or
(b), the transfer is also eligible for
nonrecognition treatment under other
exchanges enumerated in section
367(a)(1). Moreover, the general rule is
issued under regulatory authority
granted under both section 367(a)(5) and
section 337(d). Accordingly, if a transfer
of items of property that is described in

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section 361(a) or (b) is also described in
a nonrecognition provision that is not
enumerated in section 367(a)(1) (such as
section 1036), the U.S. transferor
recognizes gain or loss realized on the
transfer of such items of property, but
the amount of loss recognized on the
property shall not exceed the amount of
gain recognized on the property. The
Treasury Department and the IRS
believe that permitting the recognition
of losses to the extent of gains in such
a case is consistent with the repeal of
the General Utilities doctrine. See
section 337(d). However, losses
described in the prior sentence may be
subject to other limitations, including,
for example, section 267(f).
10. Other Clarifications and
Modifications
The 2008 proposed regulations
provide for various determinations to be
made ‘‘at the time of the section 361
exchange,’’ and therefore do not take
into account the possibility that the
property of the U.S. transferor may not
be transferred on a single date to the
foreign acquiring corporation.
Accordingly, the final regulations no
longer use the phrase ‘‘at the time of the
section 361 exchange’’ as the time for
making certain determinations required
under the regulations. For example,
under the final regulations the
determination as to whether the control
requirement is satisfied is instead made
immediately before the reorganization.
Under the final regulations, the
computation of a shareholder’s
ownership interest percentage in the
U.S. transferor for purposes of various
calculations also generally must be
made immediately before the
reorganization. However, the final
regulations further revise the
computation of the ownership interest
percentage to take into account certain
distributions by the U.S. transferor of a
portion of its property. Specifically,
under the final regulations, the
ownership interest percentage is
determined after taking into account any
distribution by the U.S. transferor of
money or other property not received
from the foreign acquiring corporation
in exchange for property of the U.S.
transferor acquired in the section 361
exchange.
The final regulations remove
references in the 2008 proposed
regulations to stock that is deemed
received because references to stock
received necessarily include stock that
is deemed received. No substantive
change is intended by the removal of
references to stock that is deemed
received. Similarly, in describing a
control group member’s stock basis

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adjustments, the final regulations
remove references to blocks of stock
because such references are not
necessary to the determination of which
basis in stock is reduced. No substantive
change is intended by this modification.
The 2008 proposed regulations
contain a reasonable cause relief
provision in § 1.367(a)–7(e)(2), pursuant
to which a control group member’s
failure to timely comply with any
requirement of § 1.367(a)–7 will be
deemed not to have occurred if the
failure was due to reasonable cause and
not willful neglect. The reasonable
cause relief provision includes a
provision that the control group member
will be deemed to have established that
the failure to comply was due to
reasonable cause and not willful neglect
if the control group member requesting
relief is not notified by the IRS within
120 days of IRS acknowledgement of
receipt of the request. As discussed in
the preamble to temporary regulation
published elsewhere in this issue of the
Federal Register, the Treasury
Department and the IRS believe it is
appropriate to eliminate the 120-day
provision from the reasonable cause
relief provision of § 1.367(a)–7(e)(2).
Other than the elimination of the 120day provision, the reasonable cause
relief provision is retained in the
temporary regulations.
Other modifications to § 1.367(a)–7
are generally intended to coordinate the
rules with other provisions, such as
§§ 1.367(a)–3T(e), 1.367(b)–4, 1.1248(f)–
1, and 1.1248(f)–2, when the property
transferred in the section 361 exchange
is stock or securities.
B. Other Regulations Under Section
367(a)
The 2008 proposed regulations would
modify § 1.367(a)–1T(b)(4)(i)(B) to
provide that an increase in basis under
section 362 for gain recognized by the
U.S. transferor under section 367(a) is
allocated among the transferred
property with respect to which gain is
recognized in proportion to the gain
realized by the U.S. transferor.
The final regulations clarify this rule
to provide that if gain is recognized
under section 367 with respect to a
particular item of property, the foreign
transferee corporation increases its basis
in that item of property for such gain.
The final regulations further clarify that
any gain recognized that is not with
respect to a particular item of property
(for example, gain recognized under the
branch loss recapture rules) is then
allocated in proportion to the gain
realized by the U.S. transferor with
respect to all items of property
transferred, but for this purpose the gain

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realized is determined after taking into
account gain recognized under other
provisions of section 367 that apply
with respect to particular items of
property.
C. Regulations Under Section 367(b)
1. Modified Example 4 of § 1.367(b)–
4(b)(1)
Final regulations issued under section
367(b) on January 24, 2000, provide that
if a U.S. transferor that is a section 1248
shareholder of a foreign acquired
corporation transfers the stock of such
corporation to a foreign acquiring
corporation in a section 361 exchange,
the U.S. transferor must include in
income the section 1248 amount
attributable to the stock of the foreign
acquired corporation. As part of the
analysis, the final regulations state that
immediately after the exchange, the U.S.
transferor is not a section 1248
shareholder because the stock of the
U.S. transferor is cancelled. This is the
case even if the foreign acquiring
corporation and the foreign acquired
corporation are controlled foreign
corporations (within the meaning of
§ 1.367(b)–2(a)). See § 1.367(b)–
4(b)(1)(iii), Example 4. The 2008
proposed regulations would modify
§ 1.367(b)–4(b)(1)(iii), Example 4, to
provide that the requirements in
§ 1.367(b)–4(b)(1)(i)(B) are applied
immediately after the section 361
exchange (and before the distribution of
the foreign stock under section
361(c)(1)).
One comment requested that the
analysis in Example 4, as revised by the
2008 proposed regulations, be clarified
to address the fact that the stock of the
foreign corporation received in the
transaction is immediately distributed
by the U.S. transferor. That is, the
comment questioned whether the
analysis has the effect of respecting the
transitory ownership of stock for
purposes of applying § 1.367(b)–4. The
comment further noted that Revenue
Ruling 83–23 (1983–1 CB 82) disregards
transitory ownership of stock for
purposes of applying the section 367(b)
regulations then in effect.
Unless otherwise provided, judicial
doctrines and principles, such as
substance-over-form and the steptransaction doctrine, apply in
determining whether the conditions for
an income inclusion under § 1.367(b)–
4(b)(1) are satisfied, just as such
principles and doctrines apply for
purposes of determining the appropriate
treatment of a transaction under any
provision of section 367 (and more
generally, section 1248). Thus, for
example, an issuance of stock by the

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foreign acquiring corporation in
connection with the exchange being
tested under § 1.367(b)–4 would be
taken into account in determining
whether an income inclusion under
§ 1.367(b)–4(b)(1) is required.
Nevertheless, for purposes of applying
§ 1.367(b)–4(b)(1), the Treasury
Department and the IRS believe it is
appropriate to respect the ownership of
stock by the U.S. transferor in the
context of outbound section 361
exchanges (such as the transaction
addressed in Example 4). This treatment
is appropriate because the section 1248
amount in the stock of the foreign
acquired corporation will, in the
aggregate, either be preserved in the
hands of certain domestic corporate
shareholders of the U.S. transferor
pursuant to § 1.1248(f)–2(c), or be
included in the gross income of the U.S.
transferor as a result of the distribution
of such stock under section 361(c)
pursuant to § 1.1248(f)–1(b)(3).
Accordingly, the final regulations
provide that in the case of an outbound
transfer of stock of a foreign corporation
in a section 361 exchange, the
requirements of § 1.367(b)–4(b)(1)(ii)(B)
apply after the section 361 exchange,
but prior to and without taking into
account the U.S. transferor’s
distribution under section 361(c)(1).
2. Other Modifications to § 1.367(b)–4
The final regulations modify
§ 1.367(b)–4(b)(1) by expanding the type
of exchanges for which an income
inclusion is not required to include a
section 361 exchange of foreign stock by
a foreign target that is itself acquired in
a triangular asset reorganization
involving stock of a domestic
controlling (parent) corporation.
Furthermore, the final regulations
modify the format and organization of
§ 1.367(b)–4(a) and (b)(1) to clarify its
application.

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D. Section 1248(f) Regulations and
Section 1.1248–8
1. Section 337 Distributions
The 2008 proposed regulations under
section 1248(f) would provide
exceptions to the operative rule of
section 1248(f)(1) that requires a
domestic corporation (distributing
corporation) that distributes stock of
certain foreign corporations under
sections 337, 355(c)(1), or 361(c)(1) to
include in income the section 1248
amount (if any) in the foreign stock
distributed. Except in the case of a
section 337 distribution, the exceptions
apply only if an affirmative election is
made (assuming the requirements for
making the election are satisfied). The

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requirements for the election include
making adjustments to the basis and
holding period of the stock in the hands
of the distributee to the extent necessary
to preserve the section 1248 amount in
the foreign stock in the hands of the
distributee. In the case of a section 337
distribution, the exception applies if
certain conditions are satisfied without
the need to make adjustments to the
basis or holding period of the
distributed stock, which should
generally be the case. However, the
Treasury Department and the IRS
believe that taxpayers should be
permitted to elect to make any necessary
basis and holding period adjustments to
avoid a section 1248 inclusion for
section 337 distributions. The final
regulations are modified accordingly.
2. Section 361(c)(1) Distributions of
Stock Involving Section 361 Exchanges
(a) Interaction With Regulations Under
Section 367(a)
Application of the 2008 proposed
regulations under section 1248(f), in
combination with the 2008 proposed
regulations under § 1.367(a)–7, could in
certain cases result in aggregate basis
adjustments and gain recognition (or
deemed dividend inclusions) that
exceed the built-in gain in the property
transferred by the U.S. transferor in the
section 361 exchange. The final
regulations are modified to address this
result.
(b) Allocation of Section 358 Basis to
Portions of a Share
If in a section 361 exchange the U.S.
transferor transfers property, other than
a single block of stock of a foreign
corporation with respect to which the
U.S. transferor is a section 1248
shareholder, each share of stock of the
foreign distributed corporation is
required to be divided into portions.
The 2008 proposed regulations would
provide that for purposes of computing
basis in a portion of a share of stock of
the foreign distributed corporation, the
distributee section 1248 shareholder’s
section 358 basis in that share is
allocated to a portion of a share pro rata
based on the fair market value of the
property to which the portion relates
relative to the aggregate fair market
value of all property received by the
foreign distributed corporation.
The final regulations modify this rule,
providing that the distributee’s section
358 basis in a share of the distributed
foreign corporation is allocated to a
portion of a share pro rata based on the
basis of the property to which the
portion relates relative to the aggregate
basis of all property received by the

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foreign distributed corporation. As a
result of this modification, the aggregate
built-in gain in the respective portion of
all shares to which a block of foreign
stock transferred with a section 1248
amount relates will more closely match
the built-in gain in such foreign stock
transferred. Because the section 1248
amount is limited to the built-in gain in
the stock, the modification will
minimize basis reductions to portions of
shares that may otherwise be required to
preserve the section 1248 amount in
foreign stock transferred.
(c) Preservation of the Section 1248(f)
Amount
The 2008 proposed regulations would
provide that if the section 1248(f)
amount attributable to a portion of a
share of stock (including a whole share,
if appropriate) of the foreign distributed
corporation received by a distributee
section 1248 shareholder in the
distribution exceeds the distributee
section 1248 shareholder’s
postdistribution amount in the portion
(excess amount), then the distributee
section 1248 shareholder’s section 358
basis in the portion is reduced by the
excess amount.
The final regulations modify the 2008
proposed regulations to provide that the
section 358 basis in the portion is not
reduced below zero, and therefore to the
extent the excess amount exceeds the
section 358 basis in the portion, the
domestic distributing corporation must
include that portion of the section
1248(f) amount attributable to the
portion of the share in gross income as
a dividend. The excess amount can
exceed the section 358 basis in the
portion, for example, where the section
1248(f) amount attributable to the
control group member exceeds the
inside gain attributable to the control
group member.
The Treasury Department and the IRS
considered whether a distributee
required to decrease basis in a portion
of a share should be allowed to increase
the basis in another portion of the same
share or in another share (or portion
thereof). Due to additional complexities
that would arise from such rules, such
as ensuring that the basis increase does
not decrease the section 1248(f) amount
in another portion or create (or increase)
a built-in loss in another portion, the
Treasury Department and the IRS
decline to provide such rules. However,
the modification made by the final
regulations providing that the section
358 basis in a share of stock is allocated
among portions of such share of stock
based on the basis (rather than the fair
market value) of the property transferred
to the foreign distributed corporation in
the section 361 exchange will, in many

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cases, minimize the amount of basis
decreases.

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(d) Multiple Classes of Stock
The 2008 proposed regulations did
not provide rules for situations in which
multiple classes of stock of the foreign
distributed corporation are received.
The final regulations provide that if
multiple classes of stock are received by
a control group member, the section
1248(f) amount ‘‘traced’’ to such control
group member is attributed to a share
(or portion of a share) of stock received
by the control group member based on
the ratio of the fair market value of such
share to the fair market value of all
shares received by the control group
member. Furthermore, the final
regulations make consistent
modifications to the regulations under
§ 1.1248–8 (concerning the attribution of
section 1248 earnings and profits of
stock of a foreign corporation
transferred in a section 361 exchange to
a share or portion of a share of stock of
the foreign distributed corporation
received by a section 1248 shareholder).
3. Other Modifications to the Section
1248(f) Regulations
The final regulations clarify that if the
domestic distributing corporation
distributes stock of the foreign
distributed corporation that it did not
receive in a section 361 exchange
(existing stock) in addition to stock of
the foreign distributed corporation that
it did receive in the section 361
exchange (new stock), then certain rules
apply to the existing stock and another
set of rules apply to the new stock. This
could occur, for example, if the
domestic distributing corporation owns
an existing foreign subsidiary and as
part of the plan that includes a
distribution of that stock that qualifies
under section 355, the domestic
distributing corporation contributes
additional property to the foreign
subsidiary in exchange for additional
stock of the foreign subsidiary.
The final regulations refer to a
distribution of stock that is not received
in a section 361 exchange as an
‘‘existing stock distribution,’’ and a
distribution of stock received in a
section 361 exchange as a ‘‘new stock
distribution.’’
The 2008 proposed regulations
contain a reasonable cause relief
provision in § 1.1248(f)–3, pursuant to
which a reporting person’s failure to
timely comply with any requirement of
§ 1.1248(f)–2 will be deemed not to have
occurred if the failure was due to
reasonable cause and not willful
neglect. The reasonable cause relief
provision includes a provision that the

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reporting person will be deemed to have
established that the failure to comply
was due to reasonable cause and not
willful neglect if the control group
member requesting relief is not notified
by the IRS within 120 days of IRS
acknowledgement of receipt of the
request. As discussed in the preamble to
temporary regulation published
elsewhere in this issue of the Federal
Register, the Treasury Department and
the IRS believe it is appropriate to
eliminate the 120-day provision from
the reasonable cause relief provision of
§ 1.1248(f)–3. Other than the
elimination of the 120-day provision,
the reasonable cause relief provision is
retained in the temporary regulations.
E. Definition of ‘‘Sale or Exchange’’ for
Purposes of Section 1248
The 2008 proposed regulations
amended § 1.1248–1(b) to clarify the
definition of the term ‘‘sale or
exchange’’ to include gain recognized
under section 301(c)(3). No changes to
§ 1.1248–1(b) are included as part of
these final regulations because after
issuance of the 2008 proposed
regulations a temporary regulation was
issued that included this amendment.
See § 1.1248–1T(b), issued in TD 9444
(February 10, 2009), and changes
finalized by TD 9585 (April 24, 2012).
F. Regulations Under Section 6038B
The 2008 proposed regulations
contain various reporting requirements.
For example, the 2008 regulations under
section 6038B describe how the U.S.
transferor makes the election under
§ 1.367(a)–7(c), including requiring the
U.S. transferor to file a statement
containing specified information. The
final regulations identify certain
additional items of information that
must be included with the statement
making the election. The 2008
regulations also require the U.S.
transferor to file a statement agreeing to
file an amended return in certain cases
if the foreign acquiring corporation
subsequently disposes of a significant
amount of section 367(a) property
acquired in the section 361 exchange.
The final regulations modify the
disposition rules to provide that certain
dispositions of section 367(a) property
are not dispositions for this purpose.
Finally, as discussed in the preamble
to temporary regulation published
elsewhere in this issue of the Federal
Register, the Treasury Department and
the IRS believe it is appropriate to
eliminate the 120-day provision from
the reasonable cause relief procedures of
§ 1.6038B–1(f)(3). Other than the
elimination of the 120-day provision,

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17029

the reasonable cause relief provision is
retained in the temporary regulations.
G. Elimination of Coordination Rule
Exception in § 1.367(a)–
3(d)(2)(vi)(B)(1)(i)
Section 1.367(a)–3(d)(2)(vi)(A)
(coordination rule) provides that if in
connection with an indirect stock
transfer, as defined in § 1.367(a)–3(d)(1),
a U.S. person transfers assets to a
foreign corporation (direct asset
transfer) in an exchange described in
sections 351 or 361, the rules of section
367 and the regulations under that
section apply first to the direct asset
transfer and then to the indirect stock
transfer. However, the regulations
provide two exceptions to the
coordination rule for asset
reorganizations to the extent the foreign
acquiring corporation re-transfers the
transferred assets to a controlled
domestic corporation, but only if such
domestic corporation’s basis in the retransferred assets is not greater than the
U.S. transferor corporation’s basis in the
assets and the conditions in either
paragraph § 1.367(a)–3(d)(2)(vi)(B)(1)(i)
or (d)(2)(vi)(b)(1)(ii) are satisfied. The
2008 proposed regulations would
modify the exceptions to the
coordination rule exceptions, including
clarifications described in Notice 2008–
10 (2008–1 CB 277).
As discussed in the preamble to
temporary regulations published
elsewhere in this issue of the Federal
Register, the Treasury Department and
the IRS believe it is appropriate to
eliminate the coordination rule
exception under § 1.367(a)–
3(d)(2)(vi)(B)(1)(i). The coordination
rule exception in § 1.367(a)–
3(d)(2)(vi)(B)(1)(ii) is retained in the
temporary regulations.
H. Effective/Applicability Dates
1. Regulations Under Sections 367(a)
and 6038B
Section 1.367(a)–7 and the revisions
to §§ 1.367(a)–1 and 1.6038B–1 apply to
transfers occurring on or after April 18,
2013.
2. Regulations Under Sections 367(b)
and 1248
The 2008 proposed regulations
provide that the rules under sections
367(b) and 1248(f), including the
modification to Example 4 of § 1.367(b)–
4(b)(1)(iii), apply to distributions or
exchanges, respectively, occurring on or
after the date that is 30 days after the
date the regulations are published as
final regulations in the Federal Register.
Comments requested that taxpayers be
allowed to rely on the modifications to

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Example 4 of § 1.367(b)–4(b)(1)(iii) and
§ 1.1248–8, and the regulations under
section 1248(f) for all open tax years.
Other comments requested that these
regulations be effective on the date the
regulations are published as final
regulations in the Federal Register,
rather than 30 days after such date.
The Treasury Department and the IRS
do not believe that taxpayers should be
able to rely on the modifications to
Example 4 of § 1.367(b)–4(b)(1)(iii) and
§ 1.1248–8, and the regulations under
section 1248(f) prior to the effective
date. Taxpayers must apply section
1248(f), which does not include the
exceptions provided in § 1.1248(f)–2 for
such prior periods. Accordingly,
distributions described in section
1248(f)(1) during such period result in
an inclusion unless the exception
described in section 1248(f)(2) applies.
Similarly, taxpayers must take into
account Example 4 of § 1.367(b)–
4(b)(1)(iii) (before amendment by these
final regulations) for such prior periods.
The Treasury Department and the IRS
also believe, because the regulations
under sections 367(b) and 1248(f)
operate together with the rules of
§ 1.367(a)–7, the provisions should be
subject to consistent effective dates.
Therefore, the final regulations retain
the 30-day delay in the effective date for
these rules.
Modifications to § 1.1248–6 apply to a
sale, exchange, or other disposition of
the stock of a domestic corporation on
or after September 21, 1987.
Subject to rules implementing the
effective dates announced in Notice 87–
64 (1987–2 CB 375), the final
regulations under section 1248(f) are
applicable as of the date that is 30 days
following the issuance of the final
regulations.

It is hereby certified that the
collection of information contained in
this regulation will not have a
significant economic impact on a
substantial number of small entities.
Accordingly, a regulatory flexibility
analysis is not required. These
regulations primarily will affect large
domestic corporations that transfer
property to a foreign corporation in
certain corporate reorganizations. Thus,
the number of affected small entities
will not be substantial. Small domestic
corporations could be shareholders of a
larger domestic corporation involved in
a transaction subject to the regulations,
and the small domestic corporations
could be required to make certain
adjustments to basis and holding period
under the regulations. However, the
exceptions requiring the adjustments are
elective and, moreover, the Treasury
Department and the IRS do not
anticipate the number of these
shareholders to be substantial.
Furthermore, the Treasury Department
and the IRS estimate that any small
entities that are affected by the
regulations will likely face a burden of
approximately ten hours (at an hourly
rate of $200) from the adjustments made
to the basis of the stock received in the
reorganization. Considering that the
collections of information enable
taxpayers to defer or avoid the
recognition of potentially large amounts
of gain, the Treasury Department and
the IRS believe that $2,000 is not a
significant economic impact. Pursuant
to section 7805(f), the notice of
proposed rule making preceding this
regulation was submitted to the
Administrator of the Small Business
Administration for comment on its
impact on small business.

Availability of IRS Documents

Drafting Information

IRS notices cited in this preamble are
made available by the Superintendent of
Documents, U.S. Government Printing
Office, Washington, DC 20402.
Effect on Other Documents
The following publication is obsolete
as of April 18, 2013:
Notice 87–64 (1987–2 CB 375).

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Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required.
Section 553(b) of the Administrative
Procedure Act (5 U.S.C. Chapter 5) and
the Regulatory Flexibility Act (5 U.S.C.
Chapter 6) apply to these regulations.

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The principal authors of these
regulations are Robert B. Williams, Jr. of
the Office of Associate Chief Counsel
(International) and Sean W. Mullaney,
formerly of the Office of Associate Chief
Counsel (International); however, other
personnel from the Treasury
Department and the IRS participated in
their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.

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Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
in numerical order to read in part as
follows:

■

Authority: 26 U.S.C. 7805 * * *
Section 1.367(a)–1 also issued under 26
U.S.C. 367(a).
Section 1.367(a)–1T also issued under 26
U.S.C. 367(a).
Section 1.367(a)–3 also issued under 26
U.S.C. 367(a).
Section 1.367(a)–7 also issued under 26
U.S.C. 367(a), (b), (c), and 337(d).
Section 1.367(a)–8 also issued under 26
U.S.C. 367(a).
Section 1.367(b)–0 also issued under 26
U.S.C. 367(b).
Section 1.367(b)–4(b)(1) also issued under
26 U.S.C. 367(b).
Section 1.367(b)–6 also issued under 26
U.S.C. 367(b).
Section 1.367(e)–1(a) also issued under 26
U.S.C. 367(e).
Section 1.1248–1 also issued under 26
U.S.C. 1248(a)
Section 1.1248–6 also issued under 26
U.S.C. 1248(e).
Section 1.1248–8(b)(2)(iv) also issued
under 26 U.S.C. 367(b), 1248(a), (c), and (f).
Section 1.1248(f)–1 also issued under 26
U.S.C. 367(b) and 1248(f).
Section 1.1248(f)–2 also issued under 26
U.S.C. 367(b) and 1248(f).
Section 1.1248(f)–3 also issued under 26
U.S.C. 367(b) and 1248(f).
Section 1.6038B–1 also issued under 26
U.S.C. 6038B.

Par. 2. Section 1.367(a)–1 is amended
by:
■ 1. Adding paragraphs (b)(4)(i)(B) and
(C).
■ 2. Adding paragraph (g)(4).
The additions read as follows:
■

§ 1.367(a)–1 Transfers to foreign
corporations subject to section 367(a): In
general.

(a) through (b)(4)(i)(A) [Reserved]. For
further guidance see § 1.367(a)–1T(a)
through (b)(4)(i)(A).
(B) Appropriate adjustments to
earnings and profits, basis, and other
affected items will be made according to
otherwise applicable rules, taking into
account the gain recognized under
section 367(a)(1). For purposes of
applying section 362, the foreign
corporation’s basis in the property
received is increased by the amount of
gain recognized by the U.S. transferor
under section 367(a) and the regulations
issued pursuant to that section. To the
extent the regulations provide that the
U.S. transferor recognizes gain with

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respect to a particular item of property,
the foreign corporation increases its
basis in that item of property by the
amount of such gain recognized. For
example, §§ 1.367(a)–3, 1.367(a)–4T,
and 1.367(a)–5T provide that gain is
recognized with respect to particular
items of property. To the extent the
regulations do not provide that gain
recognized by the U.S. transferor is with
respect to a particular item of property,
such gain is treated as recognized with
respect to items of property subject to
section 367(a) in proportion to the U.S.
transferor’s gain realized in such
property, after taking into account gain
recognized with respect to particular
items of property transferred under any
other provision of section 367(a). For
example, § 1.367(a)–6T provides that
branch losses must be recaptured by the
recognition of gain realized on the
transfer but does not associate the gain
with particular items of property. See
also § 1.367(a)–1T(c)(3) for rules
concerning transfers by partnerships or
of partnership interests.
(C) The transfer will not be
recharacterized for U.S. Federal tax
purposes solely because the U.S. person
recognizes gain in connection with the
transfer under section 367(a)(1). For
example, if a U.S. person transfers
appreciated stock or securities to a
foreign corporation in an exchange
described in section 351, the transfer is
not recharacterized as other than an
exchange described in section 351
solely because the U.S. person
recognizes gain in the transfer under
section 367(a)(1).
(b)(4)(ii) through (d)(2) [Reserved]. For
further guidance see § 1.367(a)–
1T(b)(4)(ii) through (d)(2).
*
*
*
*
*
(d)(4) through (g)(3) [Reserved]. For
further guidance see § 1.367(a)–1T(d)(4)
through (g)(3).
(4) The rules in paragraphs (b)(4)(i)(B)
and (b)(4)(i)(C) of this section apply to
transfers occurring on or after April 18,
2013. For guidance with respect to
paragraph (b)(4)(i)(B) of this section
before April 18, 2013, see 26 CFR part
1 revised as of April 1, 2012.
■ Par. 3. Section 1.367(a)–1T is
amended by revising paragraph
(b)(4)(i)(B) and adding paragraphs
(b)(4)(i)(C) and (g)(4) to read as follows:
§ 1.367(a)–1T Transfers to foreign
corporations subject to section 367(a): In
general (temporary).

*

*
*
*
*
(b) * * *
(4) * * *
(i) * * *
(B) [Reserved]. For further guidance
see § 1.367(a)–1(b)(4)(i)(B).

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17031

(C) [Reserved]. For further guidance
see § 1.367(a)–1(b)(4)(i)(C).
*
*
*
*
*
(g) * * *
(4) [Reserved]. For further guidance
see § 1.367(a)–1(g)(4).

which are transferred (referred to as the
U.S. target company) complies with the
reporting requirements in paragraph
(c)(6) of this section and if each of the
following four conditions is met:

Par. 4. Section 1.367(a)–3 is amended
by:
■ 1. Revising the second sentence of
paragraph (a)(3).
■ 2. Revising paragraphs (b)(1) and
(c)(1).
■ 3. Adding a sentence at the end of
paragraph (d)(2)(vi)(D)(2).
■ 4. Revising paragraph (d)(3), Example
6A (ii).
■ 5. Adding a sentence between the
second and third sentences of paragraph
(d)(3), Example 8 (ii).
■ 6. Revising the first sentence of
paragraph (d)(3), Example 8B (ii).
■ 7. Revising the first sentence of
paragraph (d)(3), Example 8C (ii).
■ 8. Revising the third sentence of
paragraph (d)(3), Example 10 (ii).
■ 9. Revising paragraph (d)(3), Example
11 (ii).
■ 10. Revising the second and third
sentences of paragraph (d)(3), Example
12 (ii), and removing the last sentence.
■ 11. Revising paragraph (d)(3),
Example 16 (ii).
■ 12. Revising the paragraph (g) subject
heading.
■ 13. Revising paragraph (g)(1)(v)(A)
and (B).
The revisions and additions to read as
follows:

(d) * * *
(2) * * *
(vi) * * *
(D) * * *
(2) * * * For this purpose, a disposition by
the foreign acquiring corporation of stock of
the domestic controlled corporation more
than 5 years after completion of the transfer
described in paragraph (d)(2)(vi)(A) of this
section is deemed to not have a principal
purpose of tax avoidance.

■

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

(a) * * *
(3) * * * For additional rules
regarding a transfer of stock or securities
in an exchange described in section
361(a) or (b), see § 1.367(a)–7. * * *
(b) Transfers of stock or securities of
foreign corporations —(1) General rule.
Except as provided in paragraph (e) of
this section, a transfer of stock or
securities of a foreign corporation by a
U.S. person to a foreign corporation that
would otherwise be subject to section
367(a)(1) under paragraph (a) of this
section will not be subject to section
367(a)(1) if either—
*
*
*
*
*
(c) Transfers of stock or securities of
domestic corporations—(1) General
rule. Except as provided in paragraph (e)
of this section, a transfer of stock or
securities of a domestic corporation by
a U.S. person to a foreign corporation
that would otherwise be subject to
section 367(a)(1) under paragraph (a) of
this section will not be subject to
section 367(a)(1) if the domestic
corporation the stock or securities of

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*

*

*

*

*

*

*

*

*

*

(3) * * *
Example 6A. * * *
(ii) Result. The transfer of the Business A
assets by Z to F does not constitute an
indirect stock transfer under paragraph (d) of
this section, and, subject to the conditions
and requirements of section 367(a)(5) and
§ 1.367(a)–7(c), the Business A assets qualify
for the section 367(a)(3) active trade or
business exception and are not subject to
section 367(a)(1). The transfer of the Business
B and C assets by Z to F must first be tested
under sections 367(a)(1), (a)(3), and (a)(5). Z
recognizes $20 of gain on the outbound
transfer of the Business C assets, as those
assets do not qualify for an exception to
section 367(a)(1). Subject to the conditions
and requirements of section 367(a)(5) and
§ 1.367(a)–7(c), the Business B assets qualify
for the active trade or business exception
under section 367(a)(3). Pursuant to
paragraphs (d)(1) and (d)(2)(vii)(A)(2) of this
section, V is deemed to transfer the stock of
a foreign corporation to F in a section 354
exchange subject to the rules of paragraphs
(b) and (d) of this section. V must enter into
the gain recognition agreement in the amount
of $30 to preserve Z’s nonrecognition
treatment with respect to its transfer of
Business B assets. Under paragraphs (d)(2)(i)
and (d)(2)(ii) of this section, F is the
transferee foreign corporation and R is the
transferred corporation.

*

*

*

*

*

Example 8. * * *
(ii) * * * Subject to the conditions and
requirements of section 367(a)(5) and
§ 1.367(a)–7(c), the Business B assets qualify
for the active trade or business exception
under section 367(a)(3). * * *

*

*

*

*

*

Example 8B. * * *
(ii) * * * Under section 367(a)(5) and
§ 1.367(a)–7(b), the active trade or business
exception under section 367(a)(3) does not
apply to Z’s transfer of assets to R. * * *
Example 8C. * * *
(ii) * * * Under section 367(a)(5) and
§ 1.367(a)–7(b), the active trade or business
exception under section 367(a)(3) does not
apply to Z’s transfer of assets to R. * * *

*

*

*

*

*

Example 10. * * *
(ii) * * * Subject to the conditions and
requirements of section 367(a)(5) and
§ 1.367(a)–7(c), the Business B assets qualify

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for the active trade or business exception
under section 367(a)(3). * * *
Example 11. * * *
(ii) Result. Under paragraph (d)(1)(ii) of
this section, V is treated as indirectly
transferring Z stock to F. V must recognize
gain on its indirect transfer of Z stock to F
under section 367(a) (and section 1248 will
be applicable) if V does not enter into a gain
recognition agreement with respect to the
indirect stock transfer in accordance with
§ 1.367(a)–8. Under paragraph (b)(2) of this
section, if V enters into a gain recognition
agreement with respect to the indirect stock
transfer, the exchange will be subject to the
provisions of section 367(b) and the
regulations pursuant to such section as well
as section 367(a). Under § 1.367(b)–4(b),
however, no income inclusion is required
because, immediately after the exchange, F
and Z are controlled foreign corporations
with respect to which V is a section 1248
shareholder. Under paragraphs (d)(2)(i) and
(d)(2)(ii) of this section, the transferee foreign
corporation is F, and the transferred
corporation is Z (the acquiring corporation).
If F disposes (within the meaning of
§ 1.367(a)–8(j)(1)) of all (or a portion) of Z
stock within the term of the gain recognition
agreement, V must either file an amended
return for the year of the indirect stock
transfer and include in income, with interest,
the gain realized but not recognized on the
initial exchange or if a valid election under
§ 1.367(a)–8(c)(2)(vi) was made, currently
recognize the gain and pay the related
interest. Under paragraph (d)(2)(v)(B) of this
section, to determine whether, for purposes
of the gain recognition agreement, Z (the
transferred corporation) disposes of
substantially all of its assets, only the assets
held by Z immediately before the transaction
are taken into account. Because D is wholly
owned by F, a foreign corporation, the
control requirement of section 367(a)(5) and
§ 1.367(a)–7(c)(1) cannot be satisfied.
Therefore, section 367(a)(5) and § 1.367(a)–
7(b) preclude the application of the active
trade or business exception under section
367(a)(3) to any property transferred by D to
Z. Thus, under section 367(a)(1), D must
recognize the gross amount of gain in each
asset transferred to Z, or $40.
Example 12. * * *
(ii) * * * Subject to the conditions and
requirements of section 367(a)(5) and
§ 1.367(a)–7(c), the active trade or business
exception under section 367(a)(3) applies to
E’s transfer of Business X assets. E’s transfer
of its N stock could qualify for
nonrecognition treatment if D satisfies the
requirements in § 1.367(a)–3T(e)(3). * * *

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*

*

*

*

*

Example 16. * * *
(ii) Result. The section 368(a)(1)(D)
reorganization is not an indirect stock
transfer described in paragraph (d) of this
section. Moreover, the section 354 exchange
by D of F1 stock for F2 stock is not an
exchange described under section 367(a). See
paragraph (a)(2)(ii) of this section.

*

*

*

*

*

(g) Effective/applicability dates.
(1) * * *
(v) * * *

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(A) Except as provided in paragraphs
(g)(1)(v)(B) of this section and
§ 1.367(a)–3T(g)(1)(ix), the rules of
paragraph (d)(2)(vi) of this section apply
only to transactions occurring on or
after January 23, 2006. See § 1.367(a)–
3(d)(2)(vi), as contained in 26 CFR part
1 revised as of April 1, 2005, for
transactions occurring on or after July
20, 1998, and before January 23, 2006.
(B)(1) For purposes of paragraph
(d)(2)(vi)(B)(1) of this section as
contained in 26 CFR part 1 revised as of
April 1, 2007, except as provided in
paragraph (g)(1)(v)(B)(3) of this section,
the following conditions must be
satisfied for transactions occurring on or
after December 28, 2007, and before
March 18, 2013: The conditions and
requirements of section 367(a)(5) and
paragraph (g)(1)(v)(B)(2) of this section
must be satisfied with respect to the
domestic acquired corporation’s transfer
of assets to the foreign acquiring
corporation and those conditions and
requirements apply before the
application of the exception under
paragraph (d)(2)(vi)(B)(1) of this section
as contained in 26 CFR part 1 revised as
of April 1, 2007.
(2) The domestic acquired corporation
is controlled (within the meaning of
section 368(c)) by five or fewer (but at
least one) domestic corporations
(controlling domestic corporations)
immediately before the reorganization,
appropriate basis adjustments under
section 367(a)(5) are made to the stock
received by the controlling domestic
corporations in the reorganization, and
any other conditions as provided in
regulations under section 367(a)(5) are
satisfied. For purposes of determining
whether the domestic acquired
corporation is controlled by five or
fewer domestic corporations, all
members of the same affiliated group
within the meaning of section 1504 are
treated as one corporation. Any
adjustments to stock basis required
under section 367(a)(5) must be made to
the stock received by the controlling
domestic corporation in the
reorganization so the appropriate
amount of built-in gain in the property
transferred by the domestic acquired
corporation to the foreign acquiring
corporation in the section 361 exchange
is reflected in the stock received. The
basis adjustment requirement cannot be
satisfied by adjusting the basis in stock
of the foreign acquiring corporation held
by the controlling domestic corporation
before the reorganization. To the extent
the appropriate amount of built-in gain
in the property transferred by the
domestic acquired corporation to the
foreign acquiring corporation in the
section 361 exchange cannot be

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preserved in the stock received by the
controlling domestic corporation in the
reorganization, the domestic acquired
corporation’s transfer of property to the
foreign acquiring corporation is subject
to section 367(a) and (d).
(3) For transactions occurring on or
after August 19, 2008, and before March
18, 2013, the following condition also
applies: To the extent any of the retransferred assets constitute property to
which section 367(d) applies, the
exception under paragraph
(d)(2)(iv)(B)(1) of this section, as
contained in 26 CFR part 1 revised as of
April 1, 2007, applies only if the
property to which section 367(d) applies
is treated as property subject to section
367(a) for purposes of satisfying the
conditions and requirements of section
367(a)(5).
*
*
*
*
*
■ Par. 5. Section 1.367(a)–7 is added to
read as follows:
§ 1.367(a)–7 Outbound transfers of
property described in section 361(a) or (b).

(a) Scope and purpose. This section
provides rules under section 367(a)(5)
that apply to the transfer of certain
property (including stock or securities)
by a domestic corporation (U.S.
transferor) to a foreign corporation
(foreign acquiring corporation) in a
section 361 exchange. This section
applies only to the transfer of section
367(a) property. See section 367(d) for
rules applicable to transfers of section
367(d) property. Paragraph (b) of this
section provides the general rule
requiring the recognition of gain on the
transfer of section 367(a) property,
while paragraph (c) of this section
provides an elective exception to the
general rule that is available if certain
requirements are satisfied. Paragraph (d)
of this section provides rules for
applying the elective exception to a
section 361 exchange followed by
successive distributions to which
section 355 applies. Paragraph (e) of this
section provides rules for recognizing
gain on section 367(a) property,
reasonable cause relief provisions, an
anti-abuse rule, and special rules that
take into account income inclusions
under § 1.367(b)–4 and gain recognition
under § 1.367(a)–6T. Paragraph (f) of
this section provides definitions, and
paragraph (g) of this section provides
examples. Paragraph (h) of this section
provides applicable cross-references,
paragraph (i) of this section is reserved,
and paragraph (j) of this section
provides effective/applicability dates.
(b) General rule—(1) Nonrecognition
exchanges enumerated in section
367(a)(1). Except to the extent provided
in paragraphs (b)(2) and (c) of this

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section, the exceptions to section
367(a)(1) provided in section 367(a) and
the regulations under that section do not
apply to a transfer of section 367(a)
property by a U.S. transferor to a foreign
acquiring corporation in a section 361
exchange, and the U.S. transferor shall
recognize any gain (but not loss)
realized with respect to the section
367(a) property under section 367(a)(1).
Realized gain is recognized pursuant to
the prior sentence notwithstanding the
application of any other nonrecognition
provision enumerated in section
367(a)(1) to the transfer (such as section
351 or 354).
(2) Nonrecognition exchanges not
enumerated in section 367(a)(1). To the
extent a transfer of items of property
described in paragraph (b)(1) of this
section also qualifies for nonrecognition
under a provision that is not
enumerated in section 367(a)(1) (such as
section 1036), the U.S. transferor
recognizes gain or loss realized on the
transfer of such items of property, but
the amount of loss recognized on the
property shall not exceed the amount of
gain recognized on the property. See
section 337(d).
(c) Elective exception. Except to the
extent provided in paragraph (d) of this
section, paragraph (b) of this section
does not apply to the transfer of section
367(a) property by a U.S. transferor to a
foreign acquiring corporation in a
section 361 exchange if the conditions
of paragraphs (c)(1), (c)(2), (c)(3), and
(c)(4) of this section are satisfied, and an
election to apply the exception provided
by this paragraph (c) is made in the
manner provided by paragraph (c)(5) of
this section. If this paragraph (c) applies
to the section 361 exchange, see, for
example, §§ 1.367(a)–2T, 1.367(a)–3T,
1.367(a)–4T, 1.367(a)–5T, or 1.367(a)–
6T, as applicable, for additional
requirements that must be satisfied in
order for the U.S. transferor to not
recognize gain under section 367(a)(1)
on the transfer of section 367(a)
property in the section 361 exchange.
Nothing in this section provides for the
nonrecognition of gain not otherwise
permitted under another provision of
the Internal Revenue Code (Code) or the
regulations.
(1) Control. Immediately before the
reorganization, the U.S. transferor is
controlled (within the meaning of
section 368(c)) by five or fewer, but at
least one, control group members. For
illustrations of this rule, see paragraph
(g) of this section, Example 4 and
Example 5.
(2) Gain recognition—(i) Non-control
group members. The U.S. transferor
recognizes gain equal to the product of
the inside gain multiplied by the

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aggregate ownership interest percentage
of all non-control group members,
reduced (but not below zero) by the sum
of the amounts described in paragraphs
(c)(2)(i)(A), (c)(2)(i)(B), and (c)(2)(i)(C) of
this section.
(A) Gain recognized with respect to
stock or securities under § 1.367(a)–
3T(e)(3)(iii)(B) (including any portion
treated as a deemed dividend under
section 1248(a));
(B) Gain recognized with respect to
stock or securities under § 1.367(a)–6T
(including any portion treated as a
deemed dividend under section 1248(a))
attributable to non-control group
members (as determined pursuant to
§ 1.367(a)–7(e)(5)); and
(C) A deemed dividend included in
income under § 1.367(b)–4 attributable
to non-control group members (as
determined pursuant to § 1.367(a)–
7(e)(4)).
(ii) Control group members. With
respect to each control group member,
the U.S. transferor recognizes gain equal
to the amount, if any, by which the
amount described in paragraph
(c)(2)(ii)(A) of this section exceeds the
amount described in paragraph
(c)(2)(ii)(B) of this section.
(A) The product of the inside gain
multiplied by such control group
member’s ownership interest
percentage, reduced (but not below
zero) by the sum of the amounts
described in paragraphs (c)(2)(ii)(A)(1),
(c)(2)(ii)(A)(2), and (c)(2)(ii)(A)(3) of this
section (attributable inside gain).
(1) Gain recognized with respect to
stock or securities under § 1.367(a)–
3T(e)(3)(iii)(C) (including any portion
treated as a deemed dividend under
section 1248(a)) attributable to the
control group member;
(2) Gain recognized with respect to
stock or securities under § 1.367(a)–6T
(including any portion treated as a
deemed dividend under section 1248(a))
attributable to the control group member
(as determined pursuant to § 1.367(a)–
7(e)(5)); and
(3) A deemed dividend included in
income under § 1.367(b)–4 attributable
to the control group member (as
determined pursuant to § 1.367(a)–
7(e)(4)).
(B) The product of the section 367(a)
percentage multiplied by the fair market
value of the stock received by the U.S.
transferor in the section 361 exchange
and distributed to the control group
member under section 354, 355, or 356.
(iii) Illustration of rules. For an
illustration of gain recognition under
paragraph (c)(2)(i) of this section, see
paragraph (g) of this section, Example 1.
For an illustration of gain recognition
under paragraph (c)(2)(ii) of this section,

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17033

see paragraph (g) of this section,
Example 2.
(3) Basis adjustments required for
control group members—(i) General
rule. Except as provided in paragraph
(c)(3)(iv) of this section, if there is any
attributable inside gain (determined
under paragraph (c)(2)(ii)(A) of this
section) with respect to a control group
member, then such control group
member’s aggregate basis in the stock
received in exchange for (or with
respect to, as applicable) stock or
securities of the U.S. transferor under
section 354, 355, or 356, as determined
under section 358 and the regulations
under that section (section 358 basis), is
reduced by the amount in paragraph
(c)(3)(i)(A), (c)(3)(i)(B), or (c)(3)(i)(C) of
this section, as applicable.
(A) If the control group member has
outside gain, the amount, if any, by
which the attributable inside gain,
reduced by any gain recognized by the
U.S. transferor with respect to the
control group member under paragraph
(c)(2)(ii) of this section, exceeds the
control group member’s outside gain.
(B) If the control group member has
outside loss, the amount, if any, by
which the attributable inside gain,
reduced by any gain recognized by the
U.S. transferor with respect to the
control group member under paragraph
(c)(2)(ii) of this section, exceeds the
control group member’s outside loss (for
this purpose, treating the outside loss as
a negative amount).
(C) If the control group member has
no outside gain or outside loss, the
amount of the attributable inside gain,
reduced by any gain recognized by the
U.S. transferor with respect to the
control group member under paragraph
(c)(2)(ii) of this section.
(ii) Stock received in the section 361
exchange. This paragraph (c)(3) applies
only to stock received by the U.S.
transferor in the section 361 exchange
and distributed to the control group
member in exchange for (or with respect
to, as applicable) stock or securities of
the U.S. transferor.
(iii) Pro rata adjustments. The section
358 basis of each share of stock received
by the control group member must be
reduced pro rata based on the relative
section 358 basis of all shares of stock
received by the control group member.
(iv) Successive distributions to which
section 355 applies. Paragraph (c)(3) of
this section does not apply to a control
group member that distributes the stock
of a foreign acquiring corporation
received from the U.S. transferor in a
distribution satisfying the requirements
of section 355 (section 355 distribution)
that is in connection with a transaction
described in paragraph (d) of this

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section (relating to successive section
355 distributions). If paragraph (c)(3) of
this section does not apply to a control
group member pursuant to this
paragraph (c)(3)(iv), then paragraph
(c)(3) of this section shall apply to the
final distributee (as defined in
paragraph (d) of this section) that
receives the stock of the foreign
acquiring corporation in the final
section 355 distribution described in
paragraph (d) of this section.
(v) Illustration of rules. For
illustrations of the adjustment to stock
basis under paragraph (c)(3)(i) of this
section, see paragraph (g) of this section,
Example 1 and Example 2, § 1.367(a)–
3T(e)(8), Example 3, and § 1.1248(f)–
2(e), Example 3. For an illustration of
the adjustment to stock basis under
paragraph (c)(3)(iii) of this section, see
paragraph (g) of this section, Example 3.
(4) Agreement to amend or file a U.S.
income tax return—(i) General rule.
Except as provided in paragraph
(c)(4)(ii) of this section, the U.S.
transferor complies with the
requirements of § 1.6038B–1(c)(6)(iii),
relating to the requirement to report
gain that was not recognized by the U.S.
transferor upon certain subsequent
dispositions by the foreign acquiring
corporation of section 367(a) property
received from the U.S. transferor in the
section 361 exchange.
(ii) Exception. To the extent section
367(a) property transferred in the
section 361 exchange is subject to
§ 1.367(a)–3T(e) (relating to transfers of
stock or securities by a domestic
corporation to a foreign corporation in
a section 361 exchange), § 1.6038B–
1(c)(6)(iii) does not apply with respect
to the transfer of that property.
(5) Election and reporting
requirements—(i) General rule. The U.S.
transferor and each control group
member elect to apply the provisions of
paragraph (c) of this section in the
manner provided under paragraph
(c)(5)(ii) or (c)(5)(iii) of this section, as
applicable, and by entering into a
written agreement described in
paragraph (c)(5)(iv) of this section. If a
control group member distributes the
stock of the foreign acquiring
corporation received from the U.S.
transferor in a section 355 distribution
that is in connection with a transaction
described in paragraph (d) of this
section, the final distributee that
receives that stock in the final section
355 distribution elects to apply the
provisions of this paragraph (c) and
enters into the written agreement
instead of the control group member.
For this purpose, the term control group
member will be replaced by the term
final distributee, as appropriate.

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(ii) Control group member—(A) Time
and manner of making election. Each
control group member elects to apply
the provisions of paragraph (c) of this
section by including a statement (in the
form and with the content specified in
paragraph (c)(5)(ii)(B) of this section) on
or with a timely filed return for the
taxable year in which the reorganization
occurs. If the control group member is
a member of a consolidated group but is
not the common parent of the
consolidated group, the common parent
makes the election on behalf of the
control group member.
(B) Form and content of election
statement. The statement must be
entitled, ‘‘ELECTION TO APPLY
EXCEPTION UNDER § 1.367(a)–7(c),’’
and set forth:
(1) The name and taxpayer
identification number (if any) of the
control group member, the U.S.
transferor, the foreign acquiring
corporation and, in the case of a
triangular reorganization (within the
meaning of § 1.358–6(b)(2)), the
corporation that controls the foreign
acquiring corporation; the control group
member’s ownership interest percentage
in the U.S. transferor; and the
percentage of voting stock and nonvoting stock of the U.S. transferor
owned by the control group member for
purposes of satisfying the control
requirement of paragraph (c)(1) of this
section;
(2) If the control group member is a
member of a consolidated group but is
not the common parent, the name and
taxpayer identification number of the
common parent;
(3) The amount of the adjustment (if
any) to stock basis required under
paragraph (c)(3) of this section, the
resulting adjusted basis in the stock, and
the fair market value of the stock, or if
no stock was received, indicate no stock
was received; and
(4) The date on which the written
agreement described in paragraph
(c)(5)(iv) of this section was entered
into.
(iii) Statement by U.S. transferor. The
U.S. transferor elects to apply the
provisions of paragraph (c) of this
section in the form and manner set forth
in § 1.6038B–1(c)(6)(ii).
(iv) Written agreement. The U.S.
transferor and each control group
member must enter into a written
agreement satisfying the conditions of
this paragraph on or before the due date
(including extensions) for the U.S.
transferor’s tax return for the taxable
year in which the reorganization occurs.
Each party to the agreement must retain
the original or a copy of the agreement
in the manner specified by § 1.6001–

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1(e). Each party to the agreement must
provide a copy of the agreement to the
Internal Revenue Service within 30 days
of the receipt of a request for the copy
of the agreement. The written agreement
must—
(A) State the document constitutes an
agreement entered into pursuant to
paragraph (c)(5) of this section;
(B) Identify the U.S. transferor, the
foreign acquiring corporation, the
corporation that controls the foreign
acquiring corporation (in the case of a
triangular reorganization within the
meaning of § 1.358–6(b)(2)), and each
control group member, and provide the
taxpayer identification number (if any)
for each corporation;
(C) State the amount of gain (if any)
recognized by the U.S. transferor under
paragraph (c)(2) of this section; and
(D) With respect to each control group
member, state the amount of the
adjustment (if any) to stock basis
required under paragraph (c)(3) of this
section, the resulting adjusted basis in
the stock, and the fair market value of
the stock. Alternatively, if a control
group member did not receive any
stock, indicate that no stock was
received.
(d) Section 361 exchange followed by
successive distributions to which section
355 applies. If the U.S. transferor
distributes stock of the foreign acquiring
corporation received in the section 361
exchange to a control group member in
a section 355 distribution and, as part of
a plan or series of related transactions,
that stock is further distributed in one
or more successive section 355
distributions, paragraph (c) of this
section can apply to the section 361
exchange only to the extent each
subsequent section 355 distribution is to
a member of the affiliated group (within
the meaning of section 1504) that
includes the U.S. transferor immediately
before the reorganization. In that case,
each affiliated group member that
receives stock of the foreign acquiring
corporation in the final section 355
distribution (final distributee) is subject
to the requirements of paragraphs (c)(3)
and (c)(5) of this section. If this
paragraph (d) applies, then for purposes
of applying paragraphs (c)(3), (c)(5) or
(e)(2) of this section the term control
group member is replaced by the term
final distributee, as appropriate.
(e) Other rules—(1) Section 367(a)
property with respect to which gain is
recognized. Except as otherwise
provided in this paragraph (e)(1), gain
recognized by the U.S. transferor
pursuant to paragraph (c)(2) of this
section will be treated as recognized
with respect to the section 367(a)
property transferred in the section 361

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exchange in proportion to the amount of
gain realized by the U.S. transferor on
the transfer of each item of section
367(a) property. This paragraph (e)(1)
will be applied after taking into account
any gain or deemed dividends
(including any deemed dividends under
section 1248(a)) recognized by the U.S.
transferor on the transfer of the section
367(a) property in the section 361
exchange pursuant to all other
provisions of sections 367(a) and (b) and
the regulations under that section. See,
for example, §§ 1.367(a)–2T, 1.367(a)–
3T(e), 1.367(a)–4T, 1.367(a)–5T,
1.367(a)–6T, and 1.367(b)–4. If the U.S.
transferor recognizes gain (including
gain treated as a deemed dividend
under section 1248(a)) pursuant to
§ 1.367(a)–3T(e)(3)(iii)(B) or (e)(3)(iii)(C)
with respect to stock or securities
transferred in the section 361 exchange,
the realized gain in such stock or
securities shall not be taken into
account for purposes of applying this
paragraph (e)(1) to gain recognized
under paragraph (c)(2) of this section
attributable to U.S. transferor
shareholders described in § 1.367(a)–
3T(e)(3)(iii)(B) or (e)(3)(iii)(C).
Accordingly, gain recognized under
paragraph (c)(2) attributable to such U.S.
transferor shareholders shall not be
treated as recognized with respect to
such stock or securities under this
paragraph. Furthermore, to the extent
gain recognized by the U.S. transferor
under paragraph (c)(2) is treated as
recognized with respect to stock in a
foreign corporation transferred in the
section 361 exchange to which section
1248(a) applies, the portion of such gain
treated as a deemed dividend under
section 1248(a) is the product of the
amount of the gain multiplied by the
ratio of the amount that would be
treated as a deemed dividend under
section 1248(a) if all gain in the
transferred stock were recognized under
§ 1.367(a)–7(b) and the amount of gain
realized in the transferred stock. See
§ 1.367(a)–1T(b)(4) and § 1.367(a)–
1(b)(4)(i)(B) for additional rules on the
character, source, and adjustments
relating to gain recognized under
section 367(a)(1), and § 1.367(b)–2(e) for
rules on the timing, treatment, and
effect of amounts included in income as
deemed dividends pursuant to
regulations under section 367(b).
(2) [Reserved]. For further guidance
see § 1.367(a)–7T(e)(2).
(3) Anti-abuse rule. Any property of
the U.S. transferor acquired with a
principal purpose of affecting any
determination under this section
(including, for example, the section
367(a) percentage, inside gain, or inside
basis) shall not be taken in account for

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purposes of any determination under
this section. Nothing in this paragraph
(e)(3) constitutes a limitation on or
modification to judicial doctrines,
including step-transaction or substanceover-form.
(4) Certain income inclusions under
§ 1.367(b)–4—(i) Income inclusion
attributable to U.S. transferor
shareholder described in § 1.367(a)–
3T(e)(3)(iii)(A). If pursuant to § 1.367(a)–
3T(e)(3)(iii)(B) or (e)(3)(iii)(C) the U.S.
transferor is required to recognize gain
on the transfer of foreign stock (all or a
portion of which is treated as a deemed
dividend under section 1248(a)), and if
pursuant to § 1.367(b)–4(b)(1)(i) the U.S.
transferor is also required to include in
income as a deemed dividend the
section 1248 amount (within the
meaning of § 1.367(b)–2(c)) in the
foreign stock, then the section 1248
amount included in income under
§ 1.367(b)–4(b)(1)(i) is attributable to
each U.S. transferor shareholder
described in § 1.367(a)–3T(e)(3)(iii)(A)
pursuant to this paragraph (e)(4)(i). The
portion of the section 1248 amount
attributable to each U.S. transferor
shareholder described in § 1.367(a)–
3T(e)(3)(iii)(A) is the portion of the
section 1248 amount that bears the same
ratio as such U.S. transferor
shareholder’s ownership interest
percentage bears to the aggregate
ownership interest percentage of all U.S.
transferor shareholders described in
§ 1.367(a)–3T(e)(3)(iii)(A).
(ii) Ordering rules for determining
section 1248 amount. The section 1248
amount (within the meaning of
§ 1.367(b)–2(c)) included in income as a
deemed dividend under § 1.367(b)–
4(b)(1)(i) is determined after taking into
account any gain recognized under
§§ 1.367(a)–3T(e)(3)(iii)(B) or
(e)(3)(iii)(C) or 1.367(a)–6T that is
treated as a deemed dividend under
section 1248(a). See § 1.367(a)–3T(e)(7)
and paragraph (e)(5)(ii) of this section
for rules to determine the amount of
gain recognized under §§ 1.367(a)–
3T(e)(3)(iii)(B) or (e)(3)(iii)(C) or
1.367(a)–6T, respectively, that is treated
as a deemed dividend under section
1248(a).
(5) Certain gain under § 1.367(a)–6T—
(i) Gain attributable to U.S. transferor
shareholder described in § 1.367(a)–
3T(e)(3)(iii)(A). If pursuant to § 1.367(a)–
3T(e)(3)(iii)(B) or (e)(3)(iii)(C), the U.S.
transferor is required to recognize gain
on the transfer of stock or securities, and
if pursuant to § 1.367(a)–6T the U.S.
transferor is also required to recognize
gain, then gain recognized under
§ 1.367(a)–6T (including any portion
treated as a deemed dividend under
section 1248(a)) to the extent treated as

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17035

recognized with respect to the stock or
securities, is attributable to each U.S.
transferor shareholder described in
§ 1.367(a)–3T(e)(3)(iii)(A) pursuant to
this paragraph (e)(5)(i). The portion of
the gain (including any portion treated
as a deemed dividend under section
1248(a)) that is attributable to each U.S.
transferor shareholder described in
§ 1.367(a)–3T(e)(3)(iii)(A) is the portion
of the gain that bears the same ratio as
such U.S. transferor shareholder’s
ownership interest percentage bears to
the aggregate ownership interest
percentage of all U.S. transferor
shareholders described in § 1.367(a)–
3T(e)(3)(iii)(A).
(ii) Gain subject to section 1248(a). If
the U.S. transferor recognizes gain
under § 1.367(a)–6T with respect to
transferred stock that is stock in a
foreign corporation to which section
1248(a) applies, the portion of such gain
treated as a deemed dividend under
section 1248(a) is determined after
taking into account any gain recognized
under § 1.367(a)–3T(e)(3)(iii)(B) or
(e)(3)(iii)(C) and the amount of such
gain treated as a deemed dividend
under section 1248(a) pursuant to
§ 1.367(a)–3T(e)(7).
(f) Definitions. The following
definitions apply for purposes of this
section:
(1) Control group, control group
member, and non-control group
member—(i) General rule. Except as
provided in paragraph (f)(1)(ii) of this
section, the control group is the group
of five or fewer, but at least one,
domestic corporations that controls
(within the meaning of section 368(c))
the U.S. transferor immediately before
the reorganization. If the U.S. transferor
is owned directly by more than five
domestic corporations immediately
before the reorganization, but some
combination of five or fewer domestic
corporations controls the U.S.
transferor, the U.S. transferor must
designate the five or fewer domestic
corporations that comprise the control
group on Form 926, ‘‘Return by a U.S.
Transferor of Property to a Foreign
Corporation.’’ For purposes of
identifying the control group, members
of an affiliated group (within the
meaning of section 1504) are treated as
a single corporation. Except as provided
in paragraph (f)(1)(ii) of this section, a
control group member is a domestic
corporation that is part of the control
group. A non-control group member is
a shareholder of the U.S. transferor
immediately before the reorganization
that is not a control group member.
(ii) Exception for certain entities.
Regulated investment companies (as
defined in section 851(a)), real estate

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investment trusts (as defined in section
856(a)), and S corporations (as defined
in section 1361(a)) cannot be control
group members.
(2) Deductible liability is any liability
of the U.S. transferor that is assumed in
the section 361 exchange if payment of
the liability would give rise to a
deduction.
(3) Fair market value is the fair market
value determined without regard to
mortgages, liens, pledges, or other
liabilities. For this purpose, the fair
market value of any property subject to
a nonrecourse indebtedness shall be
treated as being not less than the
amount of any nonrecourse
indebtedness to which such property is
subject.
(4) Inside basis is the aggregate basis
of the section 367(a) property
transferred by the U.S. transferor in the
section 361 exchange and, except as
otherwise provided in this paragraph
(f)(4), increased by any gain recognized
or any deemed dividend included in
income by the U.S. transferor under
section 367 on the transfer of the section
367(a) property in the section 361
exchange, but not including any gain
recognized under paragraph (c)(2) of
this section. If the U.S. transferor
transfers stock or securities and
recognizes gain under § 1.367(a)–
3T(e)(3)(iii)(B) or (e)(3)(iii)(C) with
respect to such stock or securities, then
inside basis is not increased for gain
recognized or deemed dividends
included in income that are described in
paragraph (f)(4)(i), (f)(4)(ii), or (f)(4)(iii)
of this section.
(i) Gain recognized under § 1.367(a)–
3T(e)(3)(iii)(B) or (e)(3)(iii)(C) (including
any portion treated as a deemed
dividend under section 1248(a));
(ii) Gain recognized under § 1.367(a)–
6T (including any portion treated as a
deemed dividend under section 1248(a))
attributable to U.S. transferor
shareholders described in § 1.367(a)–
3T(e)(3)(iii)(A) (as determined pursuant
to § 1.367(a)–7(e)(5));
(iii) A deemed dividend included in
income under § 1.367(b)–4(b)
attributable to U.S. transferor
shareholders described in § 1.367(a)–
3T(e)(3)(iii)(A) (as determined pursuant
to § 1.367(a)–7(e)(4)).
(5) Inside gain is the amount (but not
below zero) by which the aggregate fair
market value of the section 367(a)
property transferred in the section 361
exchange exceeds the sum of:
(i) The inside basis; and
(ii) The product of the section 367(a)
percentage multiplied by the aggregate
deductible liabilities of the U.S.
transferor.

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(6) Outside gain or loss is the product
of the section 367(a) percentage
multiplied by the difference between—
(i) The aggregate fair market value of
the stock received by a control group
member in exchange for (or with respect
to, as applicable) stock or securities of
the U.S. transferor under section 354,
355, or 356, and
(ii) The control group member’s
aggregate section 358 basis (as defined
in paragraph (c)(3) of this section) in
such stock received, determined
without regard to any adjustment to that
basis under paragraph (c)(3) of this
section.
(7) Ownership interest percentage is
the ratio of the fair market value of the
stock in the U.S. transferor owned by a
shareholder to the fair market value of
all of the outstanding stock of the U.S.
transferor. Except as provided in this
paragraph (f)(7), the ownership interest
percentage of a shareholder is
determined immediately before the
reorganization. For purposes of
determining the ownership interest
percentage with respect to each
shareholder, however, the numerator
and denominator of the fraction are first
reduced as described in this paragraph
(f)(7). The numerator is reduced (but not
below zero) by any distributions by the
U.S. transferor of money or other
property (within the meaning of section
356) to such shareholder pursuant to the
plan of reorganization, but only to the
extent such money or other property is
not provided by the foreign acquiring
corporation in exchange for property of
the U.S. transferor acquired in the
section 361 exchange. Furthermore, the
denominator of the fraction is reduced
(but not below zero) by all such
distributions by the U.S. transferor to all
shareholders. For illustrations of this
definition, see paragraph (g) of this
section, Example 4 and Example 5.
(8) Section 361 exchange is an
exchange described in section 361(a) or
(b).
(9) Section 367(a) percentage is the
ratio of the aggregate fair market value
of the section 367(a) property
transferred by the U.S. transferor in the
section 361 exchange to the aggregate
fair market value of all property
transferred by the U.S. transferor in the
section 361 exchange.
(10) Section 367(a) property. Except
as provided in paragraph (e)(3) of this
section, section 367(a) property is any
property, as defined in § 1.367(a)–
1T(d)(4), other than section 367(d)
property.
(11) Section 367(d) property is
property described in section
936(h)(3)(B).

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(12) Timely filed return is a U.S.
income tax return filed on or before the
due date set forth in section 6072(b),
including any extensions of time to file
the return granted under section 6081.
(13) U.S. transferor shareholder is a
person that is either a control group
member or a non-control group member.
(g) Examples. The rules of this section
are illustrated by the examples set forth
in this paragraph (g). See also
§ 1.367(a)–3T(e)(8), Example 2 and
Example 3. The analysis of the
following examples is limited to a
discussion of issues under this section.
Unless otherwise indicated, for
purposes of the following examples:
DP1, DP2, and DC are domestic
corporations that do not join in the
filing of a consolidated return and none
of which is a regulated investment
company, a real estate investment trust,
or an S corporation; FP and FA are
foreign corporations created or
organized under the laws of Country B
and are unrelated to DP1, DP2, and DC;
each corporation has a single class of
stock outstanding; each share of stock of
DC owned by a shareholder of DC has
an identical stock basis; Business A
consists solely of section 367(a)
property whose fair market value
exceeds its basis and that, but for the
application of this section, would
qualify for the active foreign trade or
business exception under § 1.367(a)–2T;
the fair market value of any FA stock
received in a reorganization is equal to
the fair market value of property
exchanged therefor; FA is not a
surrogate foreign corporation for
purposes of section 7874 because one or
more of the conditions of section
7874(a)(2)(B) is not satisfied; DC has no
liabilities; DP1 and DP2 satisfy the
requirements of paragraph (c)(5) of this
section, and DC satisfies the
requirements of § 1.6038B–1(c)(6)(ii).
Example 1. Tainted assets and non-control
group ownership.
(i) Facts. DP1, DP2, and FP own 50%, 30%,
and 20%, respectively, of the outstanding
stock of DC. DP1 and DP2 are members of the
same affiliated group within the meaning of
section 1504. DP1’s DC stock has a $120x
basis and $100x fair market value. DP2’s DC
stock has a $50x basis and $60x fair market
value. DC owns inventory with a $40x basis
and a $100x fair market value. DC also owns
Business A (excluding the inventory) with a
$10x basis and $100x fair market value. In a
reorganization described in section
368(a)(1)(F), DC transfers the inventory and
Business A to FA, a newly formed
corporation, in exchange for all of the
outstanding stock of FA. DC’s transfer of the
inventory and Business A to FA qualifies as
a section 361 exchange. DP1, DP2, and FP
exchange the DC stock for a proportionate
amount of FA stock pursuant to section 354.

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(ii) Result. (A) Under section
367(a)(3)(B)(i), DC must recognize $60x gain
($100x fair market value less $40x basis) on
the transfer of the inventory to FA. The basis
of the inventory in the hands of FA is
increased by the gain recognized of $60x
(that is, increased from $40x to $100x). See
§ 1.367(a)–1(b)(4)(i)(B). Under section
367(a)(5) and paragraph (b) of this section,
DC’s transfer of Business A to FA is subject
to the general rule of section 367(a)(1). As a
result, DC must also generally recognize $90x
gain ($100x fair market value less $10x basis)
on the transfer of Business A to FA
notwithstanding the application of section
361 (or any other nonrecognition provision
enumerated in section 367(a)(1)). However, if
the conditions and requirements of paragraph
(c) of this section are met, DC’s transfer of
Business A to FA would qualify for the active
foreign trade or business exception provided
by section 367(a)(3) and § 1.367(a)–2T.
(B) The requirement of paragraph (c)(1) of
this section is satisfied because DC is
controlled (within the meaning of section
368(c)) by five or fewer domestic
corporations immediately before the
reorganization (in this case, by a single
domestic corporation because DP1 and DP2
together own 80% of the stock of DC). DP1
and DP2 are treated as a single domestic
corporation for this purpose under paragraph
(f)(1)(i) of this section because DP1 and DP2
are members of the same affiliated group.
(C) Paragraph (c)(2)(i) of this section would
be satisfied only if DC recognizes $18x gain
on the transfer of Business A, which is the
amount of inside gain attributable to FP, a
non-control group member. The $18x gain
equals the product of the inside gain ($90x)
multiplied by FP’s ownership interest
percentage (20%) in DC, reduced by $0x (the
sum of the amounts described in paragraphs
(c)(2)(i)(A) through (c)(2)(i)(C) of this
section). Under paragraph (f)(5) of this
section, the $90x inside gain is the amount
by which the aggregate fair market value
($200x) of the section 367(a) property
(inventory and Business A) exceeds $110x,
the sum of the inside basis of $110x and the
product of the section 367(a) percentage
(100%) multiplied by the deductible
liabilities of DC ($0x). Under paragraph (f)(4)
of this section, the inside basis equals the
$50x aggregate basis of the section 367(a)
property transferred in the section 361
exchange, increased by the $60x gain
recognized by DC on the transfer of the
inventory to FA, but not by the $18x gain
recognized by DC under paragraph (c)(2)(i) of
this section attributable to FP. The section
367(a) percentage is 100% because the only
assets transferred are the inventory and
Business A, which are section 367(a)
property. Under paragraph (e)(1) of this
section, the $18x gain recognized under
paragraph (c)(2)(i) of this section is treated as
recognized with respect to Business A. FA’s
basis in Business A as determined under
section 362 is increased for the $18x gain
recognized. See § 1.367(a)–1(b)(4)(i)(B).
(D) Paragraph (c)(2)(ii) of this section is not
applicable with respect to either DP1 or DP2
because the attributable inside gain with
respect to each such shareholder can be
preserved in the FA stock received. As stated

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in paragraph (ii)(C) of this Example 1, the
amount of the inside gain is $90x. The
attributable inside gain with respect to DP1
of $45x (equal to the product of $90x inside
gain multiplied by DP1’s 50% ownership
interest percentage, reduced by $0x (the sum
of the amounts described in paragraphs
(c)(2)(ii)(A)(1) through (c)(2)(ii)(A)(3) of this
section)) does not exceed $100x (equal to the
product of the section 367(a) percentage of
100% multiplied by $100x fair market value
of FA stock received by DP1). Similarly, the
attributable inside gain with respect to DP2
of $27x (equal to the product of $90x inside
gain multiplied by DP2’s 30% ownership
interest percentage, reduced by $0x (the sum
of the amounts described in paragraphs
(c)(2)(ii)(A)(1) through (c)(2)(ii)(A)(3) of this
section)) does not exceed $60x (equal to the
product of the section 367(a) percentage of
100% multiplied by $60x fair market value
of FA stock received by DP2).
(E) Each control group member (DP1 and
DP2) separately computes any required
adjustment to stock basis under paragraph
(c)(3) of this section. DP1’s section 358 basis
in the FA stock received of $120x (the
amount of DP1’s basis in the DC stock
exchanged) is reduced to preserve the
attributable inside gain with respect to DP1,
less any gain recognized with respect to DP1
under paragraph (c)(2)(ii) of this section.
Because DC does not recognize gain on the
section 361 exchange with respect to DP1
under paragraph (c)(2)(ii) of this section (as
determined in paragraph (ii)(D) of this
Example 1), the attributable inside gain of
$45x with respect to DP1 is not reduced
under paragraph (c)(3)(i)(B) of this section.
DP1’s outside loss in the FA stock is $20x,
the product of the section 367(a) percentage
of 100% multiplied by $20x loss (equal to the
difference between $100x fair market value
and $120x section 358 basis in FA stock).
Thus, DP1’s $120x section 358 basis in the
FA stock must be reduced by $65x (excess of
$45x, reduced by $0x, over $20x outside loss)
to $55x.
(F) DP2’s aggregate section 358 basis in the
FA stock received of $50x (the amount of
DP2’s basis in the DC stock exchanged) is
reduced to preserve the attributable inside
gain with respect to DP2, less any gain
recognized with respect to DP2 under
paragraph (c)(2)(ii) of this section. Because
DC does not recognize gain on the section
361 exchange with respect to DP2 (as
determined in paragraph (ii)(D) of this
Example 1), the attributable inside gain of
$27x with respect to DP2 is not reduced
under paragraph (c)(3)(i)(A) of this section.
DP2’s outside gain in the FA stock is $10x,
the product of the section 367(a) percentage
of 100% multiplied by $10x gain (equal to
the difference between $60x fair market value
and $50x section 358 basis in FA stock).
Thus, DP2’s $50x section 358 basis in the FA
stock must be reduced by $17x (excess of
$27x, reduced by $0x, over the $10x outside
gain) to $33x.
(G) Paragraph (c)(4) of this section would
be satisfied only if DC complies with the
requirements of § 1.6038B–1(c)(6)(iii),
including filing with its timely filed return
for the year of the reorganization a statement
agreeing to file an amended return reporting

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the gain realized but not recognized on the
section 361 exchange in certain cases if a
significant amount of the section 367(a)
property received in the section 361
exchange is disposed of, directly or
indirectly, in one or more related
transactions within the prescribed 60-month
period.
Example 2. Triangular reorganization
involving an exchange of section 367(a)
property for foreign stock and cash.
(i) Facts. (A) DP1 wholly owns DC. DP1
and DC file a consolidated return. DP1’s DC
stock has a $170x basis and $200x fair market
value. DC owns Business A, which has a
$10x basis and $200x fair market value. FP
wholly owns FA.
(B) In a triangular reorganization described
in section 368(a)(1)(A) by reason of section
368(a)(2)(D), DC transfers Business A to FA
in exchange for $180x of FP stock and $20x
cash. DC’s transfer of Business A to FA
qualifies as a section 361 exchange. DP1
exchanges its DC stock for $180x of FP stock
and $20x cash pursuant to section 356. The
triangular reorganization constitutes an
indirect stock transfer under § 1.367(a)–
3(d)(1)(i), and DP1 properly files a gain
recognition agreement under § 1.367(a)–8
with respect to the transfer. See also
§ 1.367(a)–3(d)(2)(vii).
(ii) Result. (A) Under section 367(a)(5) and
paragraph (b) of this section, DC’s transfer of
Business A to FA is subject to the general
rule of section 367(a)(1). As a result, DC must
generally recognize $190x gain ($200x fair
market value less $10x basis) on the transfer
of Business A to FA notwithstanding the
application of section 361 (or any other
nonrecognition exchange enumerated in
section 367(a)(1)). However, if the
requirements of paragraph (c) of this section
are satisfied, DC’s transfer of Business A to
FA would qualify for the active foreign trade
or business exception provided in section
367(a)(3) and § 1.367(a)–2T.
(B) The requirement of paragraph (c)(1) of
this section is satisfied because DC is
controlled (within the meaning of section
368(c)) by five or fewer domestic
corporations immediately before the
reorganization (in this case, by a single
domestic corporation, DP1).
(C) DC is not required to recognize gain
under paragraph (c)(2)(i) of this section
because, immediately before the
reorganization, DC is wholly owned by DP1,
a control group member. In addition, DP1’s
ownership interest percentage is 100%.
Paragraph (c)(2)(ii) of this section would be
satisfied only if DC recognizes $10x gain,
computed as the amount by which the
attributable inside gain with respect to DP1
of $190x (the product of $190x inside gain
multiplied by DP1’s ownership interest
percentage of 100%, reduced by $0x (the sum
of the amounts in paragraphs (c)(2)(ii)(A)(1)
through (c)(2)(ii)(A)(3) of this section))
exceeds $180x (the product of the section
367(a) percentage of 100% multiplied by
$180x fair market value of FP stock received
by DP1). Under paragraph (f)(5) of this
section, the $190x inside gain is the amount
by which the $200x aggregate fair market
value of Business A exceeds $10x (the sum
of the inside basis of $10x and the product

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of the section 367(a) percentage (100%)
multiplied by the deductible liabilities of DC
($0x)). Under paragraph (f)(4) of this section,
the inside basis equals the $10x aggregate
basis of the section 367(a) property
transferred in the section 361 exchange (not
increased by the $10x gain recognized by DC
under paragraph (c)(2)(ii) of this section). The
section 367(a) percentage is 100% because
the only asset transferred is Business A,
which is section 367(a) property. Under
§ 1.1502–32(b)(2), DP1 increases the basis of
its DC stock by the $10x gain recognized, that
is, from $170x to $180x. Under paragraph
(e)(1) of this section, the $10x gain
recognized under paragraph (c)(2)(ii) of this
section is treated as recognized with respect
to Business A. FA’s basis in Business A as
determined under section 362 is increased
for the $10x gain recognized. See § 1.367(a)–
1(b)(4)(i)(B).
(D) Paragraph (c)(3) of this section would
be satisfied only if DP1’s section 358 basis in
the FP stock is reduced by the amount by
which the attributable inside gain with
respect to DP1, reduced by any gain
recognized by DC with respect to DP1 under
paragraph (c)(2)(ii) of this section, exceeds
DP1’s outside gain in the FP stock. DP1’s
section 358 basis in the FP stock is $180x,
computed as $180x basis in DC stock, as
determined in paragraph (ii)(C) of this
Example 2, decreased by $20x cash received
and increased by $20x gain recognized under
section 356 (such amount equal to the lesser
of the $20x cash received and the $20x gain
in the DC stock, computed as $200x fair
market value less $180x basis). Because DC
recognizes $10x gain on the section 361
exchange with respect to DP1 under
paragraph (c)(2)(ii) of this section as
determined in paragraph (ii)(C) of this
Example 2, the $190x attributable inside gain
with respect to DP1 is reduced by $10x to
$180x under paragraph (c)(3)(i)(C) of this
section. DP1’s outside gain in the FP stock is
$0x, the product of the section 367(a)
percentage of 100% multiplied by $0x gain
(the difference between $180x fair market
value and $180x section 358 basis in FP
stock). Thus, DP1’s section 358 basis in the
FP stock ($180x) must be reduced by $180x
($190x attributable inside gain reduced by
$10x) to $0x.
(E) Paragraph (c)(4)(i) of this section would
be satisfied only if DC complies with the
requirements of § 1.6038B–1(c)(6)(iii),
including filing with its tax return for the
year of the reorganization a statement
agreeing to file an amended return reporting
the gain on the section 361 exchange in
certain cases if a significant amount of the
section 367(a) property received in the
section 361 exchange is disposed of, directly
or indirectly, in one or more related
transactions within the prescribed 60-month
period.
Example 3. Adjustment to basis of multiple
blocks of stock; transfer of section 367(d)
property.
(i) Facts. (A) DP1 wholly owns DC. One
half of DP1’s shares of stock in DC, each with
an identical basis, has an aggregate basis of
$60x and fair market value of $100x (Block
1). The other one half of DP’s shares of stock
in DC, each with an identical basis, has an

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aggregate basis of $120x and fair market
value of $100x (Block 2). DC owns Business
A ($15x basis and $150x fair market value)
(excluding the patent) and a patent ($0x basis
and $50x fair market value). The patent is
section 367(d) property.
(B) In a reorganization described in section
368(a)(1)(F), DC transfers Business A and the
patent to FA, a newly formed corporation, in
exchange for 2 shares of FA stock. DC’s
transfer of Business A and the patent to FA
qualifies as a section 361 exchange. DP1
exchanges Block 1 and Block 2 for the two
shares of FA stock pursuant to section 354.
Pursuant to § 1.358–2(a)(2)(i), one share of
the FA stock corresponds to Block 1 (Share
1) and the other share of FA stock
corresponds to Block 2 (Share 2). The basis
of Share 1 and Share 2 correspond to the
basis of Block 1 and Block 2, respectively.
(ii) Result. (A) Under section 367(a)(5) and
paragraph (b) of this section, DC’s transfer of
Business A to FA is subject to the general
rule of section 367(a)(1). As a result, DC must
generally recognize $135x of gain on the
transfer of Business A to FA notwithstanding
the application of section 361 (or any other
nonrecognition exchange described in
section 367(a)(1)). However, if the
requirements of paragraph (c) of this section
are met, DC’s transfer of Business A to FA
would qualify for the active foreign trade or
business exception provided in section
367(a)(3). For rules applicable to DC’s
transfer of the patent to FA, see section
367(d).
(B) The requirement of paragraph (c)(1) of
this section is satisfied because DC is
controlled (within the meaning of section
368(c)) by five or fewer domestic
corporations immediately before the
reorganization (in this case, by a single
domestic corporation, DP1).
(C) Paragraph (c)(2)(i) of this section is not
applicable because, immediately before the
reorganization, DC is wholly owned by DP1,
a control group member. In addition, DP1’s
ownership interest percentage is 100%.
Paragraph (c)(2)(ii) of this section is not
applicable because the attributable inside
gain with respect to DP1 can be preserved in
the FA stock received. The attributable inside
gain with respect to DP1 of $135x (equal to
the product of $135x inside gain multiplied
by DP1’s 100% ownership interest
percentage, reduced by $0x (the sum of the
amounts in paragraphs (c)(2)(ii)(A)(1)
through (c)(2)(ii)(A)(3) of this section)) does
not exceed $150x (equal to the product of the
section 367(a) percentage of 75% multiplied
by $200x fair market value of FA stock
received by DP1). Under paragraph (f)(5) of
this section, the $135x inside gain is the
amount by which the aggregate fair market
value of Business A ($150x) exceeds $15x,
the sum of the inside basis of Business A
($15x) and the product of the section 367(a)
percentage (75%) multiplied by the
deductible liabilities of DC ($0x). Under
paragraph (f)(4) of this section, the inside
basis equals the $15x aggregate basis of the
section 367(a) property transferred in the
exchange. The section 367(a) percentage of
75% is equal to the ratio of the fair market
value of the section 367(a) property ($150x
for Business A) to the fair market value of all

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the property transferred ($200x, the sum of
$150x for Business A and $50x for the
patent).
(D) Under paragraph (c)(3) of this section,
DP1’s aggregate section 358 basis of $180x in
the stock of FA (computed as the sum of $60x
basis in Share 1 and $120x basis in Share 2)
is reduced by the amount by which the
attributable inside gain with respect to DP1,
reduced by any gain recognized by DC with
respect to DP1 under paragraph (c)(2)(ii) of
this section, exceeds DP1’s outside gain in
the FP stock received. Because DC recognizes
no gain on the section 361 exchange with
respect to DP1 under paragraph (c)(2)(ii) of
this section as determined in paragraph
(ii)(C) of this Example 3, the $135x
attributable inside gain with respect to DP1
is not reduced under paragraph (c)(3)(i)(A) of
this section. DP1’s outside gain in Share 1
and Share 2 in the aggregate is $15x, the
product of the section 367(a) percentage of
75% multiplied by $20x (the difference
between $200x aggregate fair market value
and $180x aggregate section 358 basis in the
FA stock received by DP1). Thus, DP1’s
section 358 basis in the FA stock ($180x)
must be reduced by $120x (the excess of
$135x attributable inside gain, reduced by
$0x, over $15x outside gain) to $60x.
(E) Under paragraph (c)(3)(iii) of this
section, the $120x reduction to basis is
allocated between Share 1 and Share 2 based
on the relative section 358 basis of each
share. Therefore, the basis in Share 1 is
reduced by $40x ($120x multiplied by $60x/
$180x). As adjusted, DP1’s basis in Share 1
is $20x ($60x less $40x). The basis in Share
2 is reduced by $80x ($120x multiplied by
$120x/$180x). As adjusted, DP1’s basis in
Share 2 is $40x ($120x less $80x).
(F) Paragraph (c)(4)(i) of this section would
be satisfied only if DC complies with the
requirements of § 1.6038B–1(c)(6)(iii),
including filing with its tax return for the
year of the reorganization, a statement
agreeing to file an amended return reporting
the gain realized but not recognized on the
section 361 exchange in certain cases if a
significant amount of the section 367(a)
property received in the section 361
exchange is disposed of, directly or
indirectly, in one or more related
transactions within the prescribed 60-month
period.
Example 4. Control requirement and
ownership interest percentage; non-qualified
property provided by foreign acquiring
corporation.
(i) Facts. DP1 and FP own 80% and 20%,
respectively, of the outstanding stock of DC.
DC owns Business A with a basis of $0x and
$100x fair market value. DP1’s DC stock has
a fair market value of $80x, and FP’s DC
stock has a fair market value of $20x. In a
reorganization described in section
368(a)(1)(D), DC transfers Business A to FA
in exchange for $80x of FA stock and $20x
cash. DC’s transfer of Business A to FA
qualifies as a section 361 exchange. DP1
exchanges its $80x of DC stock for $60x of
FA stock and $20x cash, and FP exchanges
its $20x of DC stock for $20x of FA stock.
(ii) Result. (A) The requirement of
paragraph (c)(1) of this section is satisfied
because DC is controlled (within the meaning

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of section 368(c)) by five or fewer domestic
corporations immediately before the
reorganization (in this case, by a single
domestic corporation, DP1). The fact that the
$20x cash is distributed solely to DP1 does
not change the analysis of the control
requirement. The control requirement is
determined immediately before the
reorganization and is not affected by
distributions of property.
(B) Pursuant to paragraph (f)(7) of this
section, the ownership interest percentages of
DP1 and FP immediately before the
reorganization are 80% ($80x/($80x + $20x))
and 20% ($20x/($80x + $20x)), respectively.
The fact that the $20x of cash is distributed
solely to DP1 does not change this result. The
distribution of the $20x of cash is not taken
into account for purposes of the ownership
interest percentage computation because the
$20x of cash distributed by DC is provided
by FA to DC in the section 361 exchange.
Example 5. Control requirement and
ownership interest percentage; non-qualified
property provided by U.S. transferor. (i)
Facts. The facts are the same as in Example
4, except as follows. Business A has a fair
market value of $80x (and not $100x) and DC
also owns inventory with a basis of $0x and
fair market value of $20x. DC transfers
Business A, but not the inventory, to FA in
exchange for $80x of FA stock. DP1
exchanges its $80x of DC stock for $60x of
FA stock and the $20x of inventory, and FP
exchanges its $20x of DC stock for $20x of
FA stock.
(ii) Result. (A) The requirement of
paragraph (c)(1) of this section is satisfied
because DC is controlled (within the meaning
of section 368(c)) by five or fewer domestic
corporations immediately before the
reorganization (in this case, by a single
domestic corporation, DP1). The fact that the
$20x of inventory is not transferred to FA,
but is instead distributed solely to DP1, does
not change the analysis of the control
requirement. The control requirement is
determined immediately before the
reorganization, and is not affected by
distributions of property.
(B) Pursuant to the general rule of
paragraph (f)(7) of this section, the ownership
interest percentages of DP1 and FP
immediately before the reorganization would
be 80% ($80x/($80x + $20x)) and 20% ($20x/
($80x + $20x)), respectively. In this case,
however, the distribution of the $20x
inventory to DP1 is taken into account for
purposes of computing the ownership
interest percentage of DP1 and FP because
the inventory is not provided by FA to DC
in the section 361 exchange. With respect to
DP1, the numerator of the ownership interest
percentage computation is $60x, computed as
the fair market value of DC stock owned by
DP1 immediately before the reorganization
but reduced by the fair market value of the
inventory distributed to DP1 ($80x less
$20x). With respect to FP, the numerator of
the ownership interest percentage
computation is $20x, the fair market value of
the DC stock owned by FP immediately
before the reorganization. With respect to
both DP1 and FP, the denominator of the
ownership interest percentage computation is
$80x, computed as the fair market value of

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all DC stock immediately before the
reorganization, but reduced by the fair
market value of the inventory distributed to
DP1 ($100x, less $20x). Accordingly, the
ownership interest percentage of DP1 is 75%
($60x/$80x), and the ownership interest
percentage of FP is 25% ($20x/$80x).

(h) Applicable cross-references. For
rules relating to the character, source,
and adjustments resulting from gain
recognized by a U.S. transferor under
section 367(a), see § 1.367(a)–
1(b)(4)(i)(B) and § 1.367(a)–1T(b)(4). For
rules relating to transfers of stock or
securities in a section 361 exchange, see
§ 1.367(a)–3T(e). For rules relating to the
acquisition of the stock or assets of a
foreign corporation by another foreign
corporation, see § 1.367(b)–4. For rules
relating to transfers of section 367(d)
property by a U.S. transferor to a foreign
corporation, see section 367(d). For
rules relating to distributions of stock of
a foreign corporation by a domestic
corporation under section 355 or 361,
see §§ 1.367(b)–5, 1.367(e)–1, and
1.1248(f)–1 through 1.1248(f)–3. For
additional rules relating to certain
reporting requirements of a U.S.
transferor, see § 1.6038B–1. For rules
regarding expatriated entities, see
section 7874 and the regulations under
that section.
(i) [Reserved].
(j) Effective/applicability date. This
section applies to transfers occurring on
or after April 18, 2013.
■ Par. 6. Section 1.367(a)–8 is amended
by:
■ 1. Adding paragraph (c)(6).
■ 2. Revising the first sentence of
paragraph (j)(9).
The addition and revision read as
follows:
§ 1.367(a)–8 Gain recognition agreement
requirements.

*

*
*
*
*
(c) * * *
(6) Cross-reference. For gain
recognition agreements entered into
pursuant to certain outbound asset
reorganizations, see § 1.367(a)–3T(e)(6).
*
*
*
*
*
(j) * * *
(9) Gain recognition agreement filed
in connection with indirect stock
transfers and certain triangular asset
reorganizations. With respect to a gain
recognition agreement entered into in
connection with an indirect stock
transfer (as defined in § 1.367(a)–3(d)),
or a triangular asset reorganization
described in § 1.367(a)–3T(e)(6)(iv), an
indirect disposition of the transferred
stock or securities. * * *
*
*
*
*
*
■ Par. 7. Section 1.367(b)–0 is amended
by:

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17039

1. Revising the entry for § 1.367(b)–
4(b)(1)(ii).
■ 2. Revising the heading for § 1.367(b)–
6.
■ 3. Revising the entry for § 1.367(b)–
6(a).
The revisions read as follows:
■

§ 1.367(b)–0

*

*

Table of contents.

*

*

*

§ 1.367(b)–4 Acquisition of foreign
corporate stock or assets by a foreign
corporation in certain nonrecognition
transactions.

*

*
*
*
(b) * * *
(1) * * *
(ii) Special Rules
*
*
*
*

*

*

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

(a) Effective/applicability dates
*
*
*
*
■ Par. 8. Section 1.367(b)–4 is amended
by:
■ 1. Revising paragraph (a).
■ 2. Revising paragraphs (b)(1)(i)(B)(2),
(b)(1)(ii), and (b)(1)(iii), Example 4.
■ 3. Adding paragraph (b)(1)(iii),
Example 5.
The revisions and addition read as
follows:
*

§ 1.367(b)–4 Acquisition of foreign
corporate stock or assets by a foreign
corporation in certain nonrecognition
transactions.

(a) Scope. This section applies to an
acquisition by a foreign corporation (the
foreign acquiring corporation) of the
stock of a foreign corporation in an
exchange described in section 351 or of
the stock or assets of a foreign
corporation in a reorganization
described in section 368(a)(1) (in either
case, the foreign acquired corporation).
For rules applicable when, pursuant to
section 304(a)(1), a foreign acquiring
corporation is treated as acquiring the
stock of a foreign acquired corporation
in a transaction to which section 351(a)
applies, see § 1.367(b)–4T(e). For
purposes of this section, the term
triangular reorganization means a
reorganization described in § 1.358–
6(b)(2)(i) through (b)(2)(v) (forward
triangular merger, triangular C
reorganization, reverse triangular
merger, triangular B reorganization, and
triangular G reorganization,
respectively). In the case of a triangular
reorganization other than a reverse
triangular merger, the surviving
corporation is the foreign acquiring
corporation that acquires the assets or
stock of the foreign acquired
corporation, and the reference to
controlling corporation (foreign or

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domestic) is to the corporation that
controls the surviving corporation. In
the case of a reverse triangular merger,
the surviving corporation is the entity
that survives the merger, and the
controlling corporation (foreign or
domestic) is the corporation that before
the merger controls the merged
corporation. In the case of a reverse
triangular merger, this section applies if
stock of the foreign surviving
corporation is exchanged for stock of a
foreign corporation in control of the
merging corporation; in such a case, the
foreign surviving corporation is treated
as a foreign acquired corporation for
purposes of this section. A foreign
corporation that undergoes a
reorganization described in section
368(a)(1)(E) is treated as both the foreign
acquired corporation and the foreign
acquiring corporation for purposes of
this section. See § 1.367(a)–3(b)(2) for
transactions subject to the concurrent
application of sections 367(a) and (b).
(b) * * *
(1) * * *
(i) * * *
(B) * * *
(2) Immediately after the exchange,
the foreign acquiring corporation or the
foreign acquired corporation (in the case
of the acquisition of the stock of a
foreign acquired corporation) is not a
controlled foreign corporation as to
which the United States person
described in paragraph (b)(1)(i)(A) of
this section is a section 1248
shareholder.
(ii) Special rules—(A) Receipt of
foreign stock in an exchange to which
§ 1.367(a)–7(c) applies. If an exchanging
shareholder is a domestic corporation
that transfers stock of a foreign acquired
corporation in an exchange under
section 361(a) or (b) (section 361
exchange) to which the exception to
section 367(a)(5) in § 1.367(a)–7(c)
applies, and the exchanging shareholder
receives stock in either the foreign
acquiring corporation or foreign
controlling corporation (in the case of a
triangular reorganization), such
exchange will not be described in
paragraph (b)(1)(i) of this section only if
immediately after the exchanging
shareholder’s receipt of the foreign stock
in the section 361 exchange, but prior
to, and without taking into account, the
exchanging shareholder’s distribution of
the foreign stock under section
361(c)(1), the foreign acquired
corporation, foreign acquiring
corporation, and foreign controlling
corporation (in the case of a triangular
reorganization) are controlled foreign
corporations as to which the exchanging
shareholder is a section 1248
shareholder. See paragraph (b)(1)(iii) of

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this section, Example 4, for an
illustration of this rule. If an exchange
is not described in paragraph (b)(1)(i) of
this section as a result of the application
of this paragraph, see §§ 1.1248(f)–
1(b)(3) and 1.1248(f)–2(c), as applicable.
For adjustments to the basis of stock of
the foreign surviving corporation in
certain triangular reorganizations, see
paragraph (b)(1)(ii)(B)(2)(i) of this
section.
(B) Special rules for certain triangular
reorganizations—(1) Receipt of domestic
stock. In the case of a triangular
reorganization in which the stock
received in the exchange is stock of a
domestic controlling corporation, such
exchange is not described in paragraph
(b)(1)(i) of this section if immediately
after the exchange the following foreign
corporations are controlled foreign
corporations as to which the domestic
controlling corporation is a section 1248
shareholder—
(i) The foreign acquired corporation
and foreign surviving corporation, in the
case of a section 354 exchange of the
stock of the foreign acquired corporation
pursuant to a triangular B
reorganization.
(ii) The foreign surviving corporation,
in the case of a section 354 or section
356 exchange of the stock of the foreign
acquired corporation pursuant to a
forward triangular merger, triangular C
reorganization, reverse triangular
merger, or triangular G reorganization.
See paragraph (b)(1)(iii) of this section,
Example 3B for an illustration of this
rule.
(iii) The foreign acquired corporation
and foreign surviving corporation, in the
case of a section 361 exchange of the
stock of the foreign acquired corporation
by an exchanging shareholder that is a
foreign corporation described in
paragraph (b)(1)(i)(A)(2) of this section
and that is a foreign acquired
corporation the assets of which are
acquired in a triangular reorganization
described in paragraph (b)(1)(ii)(B)(1)(ii)
of this section.
(iv) The foreign acquired corporation
and foreign surviving corporation, in the
case of a section 361 exchange of the
stock of the foreign acquired corporation
by an exchanging shareholder that is a
domestic corporation described in
paragraph (b)(1)(i)(A)(1) of this section
and that is acquired in a triangular
reorganization to which the exception to
section 367(a)(5) in § 1.367(a)–7(c)
applies. See paragraph (b)(1)(iii) of this
section, Example 5 for an illustration of
this rule.
(2) Adjustments to basis of stock of
foreign surviving corporation—(i)
Section 361 exchanges to which
§ 1.367(a)–7(c) applies. If stock of the

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foreign acquired corporation is acquired
by the foreign surviving corporation in
a section 361 exchange by reason of
triangular reorganization (other than a
triangular B reorganization) to which
the exception to section 367(a)(5)
provided in § 1.367(a)–7(c) applies, and
if paragraph (b)(1)(i) of this section does
not apply to the section 361 exchange
by reason of (b)(1)(ii)(A) of this section
(if the stock received is stock of a
foreign controlling corporation) or by
reason of (b)(1)(ii)(B)(1)(iv) of this
section (if the stock received is stock of
a domestic controlling corporation),
then the controlling corporation (foreign
or domestic) must apply the principles
of § 1.367(b)–13 to adjust the basis of the
stock of the foreign surviving
corporation so that the section 1248
amount in the stock of the foreign
acquired corporation (determined when
the foreign surviving corporation
acquires such stock) is reflected in the
stock of the foreign surviving
corporation immediately after the
exchange. See paragraph (b)(1)(iii) of
this section, Example 5, for an
illustration of this rule.
(ii) Other exchanges. See § 1.367(b)–
13 for rules regarding the adjustment to
the basis of the stock of the foreign
surviving corporation in exchanges
pursuant to triangular reorganizations
that are not subject to paragraph
(b)(1)(ii)(B)(2)(i) of this section.
(iii) * * *
Example 4. (i) Facts. DC1, a domestic
corporation, owns all of the outstanding
stock of DC2, a domestic corporation. DC2
owns various assets, including all of the
outstanding stock of FC2, a foreign
corporation. The stock of FC2 has a value of
$100, and DC2 has a basis of $30 in the stock.
The section 1248 earnings and profits
attributable to the FC2 stock held by DC2 is
$20. DC2 does not own any stock other than
the FC2 stock. FC1 is a foreign corporation
that is unrelated to DC1, DC2, and FC2. In
a reorganization described in section
368(a)(1)(C), FC1 acquires all of the assets of
DC2 in exchange for the assumption of DC2’s
liabilities and voting stock of FC1 that
represents 20% of the outstanding voting
stock of FC1. DC2 distributes the FC1 stock
to DC1 under section 361(c)(1), and the DC2
stock held by DC1 is canceled. The exception
to section 367(a)(5) provided in § 1.367(a)–
7(c) applies to the section 361 exchange. DC1
properly files a gain recognition agreement
that satisfies the conditions of §§ 1.367(a)–
3T(e)(6) and 1.367(a)–8 to qualify for
nonrecognition treatment under section
367(a) with respect to DC2’s transfer of the
FC2 stock to FC1. See § 1.367(a)–3T(e). FC1
is not a surrogate foreign corporation (within
the meaning of section 7874) because DC1
does not hold at least 60% of the stock of FC1
by reason of holding stock of DC2.
(ii) Result. DC2, the exchanging
shareholder, is a U.S. person and a section
1248 shareholder with respect to FC2, the

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foreign acquired corporation. Whether DC2 is
required to include in income the section
1248 amount attributable to the FC2 stock
under paragraph (b)(1)(i) of this section
depends on whether, immediately after DC2’s
section 361 exchange of the FC2 stock for
FC1 stock (and before the distribution of the
FC1 stock to DC1 under section 361(c)(1)),
FC1 and FC2 are controlled foreign
corporations as to which DC2 is a section
1248 shareholder. See paragraph (b)(1)(ii)(A)
of this section. If, immediately after the
section 361 exchange (and before the
distribution of the FC1 stock to DC1 under
section 361(c)(1)), FC1 and FC2 are both
controlled foreign corporations as to which
DC2 is a section 1248 shareholder, then DC2
is not required to include in income the
section 1248 amount attributable to the FC2
stock under paragraph (b)(1)(i) of this section
because neither condition in paragraph
(b)(1)(i)(B) of this section is satisfied.
Alternatively, if immediately after the section
361 exchange (and before the distribution of
the FC1 stock to DC1 under section 361(c)(1))
either FC1 or FC2 is not a controlled foreign
corporation as to which DC2 is a section 1248
shareholder, then, pursuant to paragraph
(b)(1)(i) of this section, DC2 must include in
income the section 1248 amount attributable
to the FC2 stock. For the treatment of DC2’s
transfer of assets other than the FC2 stock to
FC1, see section 367(a)(1) and (a)(3) and the
regulations under that section. Furthermore,
because DC2’s transfer of any other assets to
FC1 is pursuant to a section 361 exchange,
see section 367(a)(5) and § 1.367(a)–7. If any
of the assets transferred are intangible assets
for purposes of section 367(d), see section
367(d). With respect to DC2’s distribution of
the FC1 stock to DC1 under section 361(c)(1),
see section 1248(f)(1), and §§ 1.1248(f)–1 and
1.1248(f)–2.
Example 5. (i) Facts. DC1, a domestic
corporation, wholly owns DC2, a domestic
corporation. The DC2 stock has a $100x fair
market value, and DC1 has a basis of $30x
in the stock. DC2’s only asset is all of the
outstanding stock of FC2, a foreign
corporation. The FC2 stock has a $100x fair
market value, and DC2 has a basis of $30x
in the stock. There are $20x of earnings and
profits attributable to the FC2 stock for
purposes of section 1248. USP, a domestic
corporation unrelated to DC1, DC2, and FC2,
wholly owns FC1, a foreign corporation. In
a triangular reorganization described in
section 368(a)(1)(C), DC2 transfers all the FC2
stock to FC1 in exchange solely for voting
stock of USP, and distributes the USP stock
to DC1 under section 361(c)(1). DC1
exchanges its DC2 stock for the USP stock
under section 354. DC2’s transfer of the FC2
stock to FC1 is described in section 361(a)
and therefore, under section 367(a)(5) and
§ 1.367(a)–7, is generally subject to section
367(a)(1). However, the exception to section
367(a)(5) provided in § 1.367(a)–7(c) applies
to the section 361 exchange. In addition, DC1
is not required to adjust the basis of its USP
stock (determined under section 358) under
section 367(a)(5) and § 1.367(a)–7(c)(3). DC1
properly files a gain recognition agreement
that satisfies the conditions of §§ 1.367(a)–
3T(e)(6) and 1.367(a)–8 to qualify for
nonrecognition treatment under section

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367(a) with respect to DC2’s transfer of the
FC2 stock to FC1. See § 1.367(a)–3T(e).
(ii) Result. Immediately after the exchange,
FC1 and FC2 are controlled foreign
corporations as to which USP is a section
1248 shareholder because USP directly and
indirectly owns all the FC1 stock and FC2
stock, respectively. Because DC2 receives
stock of a domestic corporation (USP) in
exchange for the FC2 stock and, immediately
after the exchange, FC1 and FC2 are
controlled foreign corporations as to which
USP is a section 1248 shareholder, DC2’s
exchange of the FC2 stock for the USP stock
is not described in paragraph (b)(1)(i) of this
section. See paragraph (b)(1)(ii)(B)(1)(iv) of
this section. Therefore, DC2 is not required
to include in income the section 1248
amount in the FC2 stock. Under paragraph
(b)(1)(ii)(B)(2)(i) of this section, USP must
apply the principles of § 1.367(b)–13 to
adjust the basis of its FC1 stock to preserve
the section 1248 amount ($20x) in the FC2
stock. Under the principles of § 1.367(b)–13,
each share of FC1 stock held by USP after the
exchange must be divided into portions, one
portion attributable to the FC1 stock owned
before the exchange and one portion
attributable to the FC2 stock received in the
exchange. The $30x basis in the FC2 stock
and the $20x earnings and profits attributable
to the FC2 stock before the exchange are
attributable to the divided portions of the
FC1 stock to which the FC2 stock relates.

*

*
*
*
*
Par. 9. Section 1.367(b)–6 is amended
by revising the section heading and
paragraph (a)(1) to read as follows:

■

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

(a) Effective/applicability dates—(1)
In general. (i) Except as otherwise
provided in this paragraph (a)(1) and
paragraph (a)(2) of this section,
§§ 1.367(b)–1 through 1.367(b)–5, and
this section, apply to section 367(b)
exchanges that occur on or after
February 23, 2000.
(ii) The rules of §§ 1.367(b)–3 and
1.367(b)–4, as they apply to
reorganizations described in section
368(a)(1)(A) (including reorganizations
described in section 368(a)(2)(D) or
(a)(2)(E)) involving a foreign acquiring
or foreign acquired corporation, apply
only to transfers occurring on or after
January 23, 2006.
(iii) The second sentence of paragraph
§ 1.367(b)–4(a) applies to section
304(a)(1) transactions occurring on or
after February 23, 2006; however,
taxpayers may rely on this sentence for
all section 304(a)(1) transactions
occurring in open taxable years.
(iv) Section 1.367(b)–1(c)(2)(v),
(c)(3)(ii)(A), (c)(4)(iv), (c)(4)(v),
§ 1.367(b)–2(j)(1)(i) and (l), and
§ 1.367(b)–3(e) and (f), apply to section
367(b) exchanges that occur on or after
November 6, 2006. For guidance with
respect to § 1.367(b)–1(c)(3)(ii)(A),

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17041

(c)(4)(iv), and (c)(4)(v) and § 1.367(b)–
2(j)(1)(i) for exchanges that occur before
November 6, 2006, see 26 CFR part 1
revised as of April 1, 2006.
(v) Section 1.367(b)–4(a), § 1.367(b)–
4(b)(1)(i)(B)(2), § 1.367(b)–4(b)(1)(ii),
§ 1.367(b)–4(b)(1)(iii), Example 4 and
Example 5 apply to section 367(b)
exchanges that occur on or after April
18, 2013. For guidance with respect to
§ 1.367(b)–4(a), § 1.367(b)–
4(b)(1)(i)(B)(2), § 1.367(b)–4(b)(1)(ii) and
§ 1.367(b)–4(b)(1)(iii), Example 4, for
exchanges that occur before April 18,
2013, see 26 CFR part 1 revised as of
April 1, 2012.
*
*
*
*
*
■ Par. 10. Section 1.367(e)–1 is
amended by:
■ 1. Revising the fifth sentence of
paragraph (a).
■ 2. Revising paragraph (e).
■ 3. Revising the paragraph (f) subject
heading.
■ The revisions read as follows:
§ 1.367(e)–1 Distributions described in
section 367(e)(1).

(a) Purpose and scope. * * *
Paragraph (e) of this section provides
cross-references. * * *
*
*
*
*
*
(e) Cross-references. For additional
rules relating to the distribution of the
stock of a foreign corporation by a
domestic corporation, see §§ 1.367(a)–
3T(e), 1.367(a)–7, 1.367(b)–5, and
1.1248(f)–1 through 1.1248(f)–3. See the
regulations under section 6038B for
reporting requirements for distributions
under this section.
(f) Effective/applicability date. * * *
*
*
*
*
*
■ Par. 11–12. In § 1.1248–1, for each
entry in the table below in the ‘‘Section’’
column, remove the language in the
‘‘Remove’’ column and add the language
in the ‘‘Add’’ column in its place, and:
■ 1. Revise paragraphs (c) and (e).
■ 2. Add paragraph (g)(3).
Section

Remove

Add

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

1248(f) ..

1248(g).

1248(g)

1248(h).

1.1248–
4.
1.1248–
7.
1248(g)

1.1248–
2.
1.1248–
8.
1248(h).

§ 1.1248–1 Treatment of gain from certain
sales or exchanges of stock in certain
foreign corporations.

*

*
*
*
*
(c) Gain recognized. Section 1248(a)
applies to a sale or exchange of stock in

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a foreign corporation only if gain is
recognized in whole or in part upon the
sale or exchange. Thus, for example, if
a United States person exchanges stock
in a foreign corporation and no gain is
recognized on the exchange under
section 332, 351, 354, 355, 356, or 361,
taking into account the application of
section 367, then no amount is
includible in the gross income of the
person as a dividend under section
1248(a). But see §§ 1.1248(f)–1 and
1.1248(f)–2, providing that a domestic
distributing corporation must include in
gross income amounts under section
1248(f) as a result of certain foreign
stock distributed pursuant to section
337, 355(c)(1), or 361(c)(1) (in certain
cases without regard to the amount of
gain realized by the domestic
distributing corporation in the
distribution).
*
*
*
*
*
(e) Exceptions. Under section 1248(g),
this section and §§ 1.1248–2 through
1.1248–8 do not apply to:
(1) Distributions to which section 303
(relating to distributions in redemption
of stock to pay death taxes) applies; or
(2) Any amount to the extent that the
amount is, under any other provision of
the Internal Revenue Code (Code),
treated as—
(i) A dividend;
(ii) Gain from the sale of an asset
which is not a capital asset; or
(iii) Gain from the sale of an asset
held for not more than 1 year.
*
*
*
*
*
(g) Effective/applicability date. * * *
(3) Paragraphs (c) and (e) of this
section apply to transactions occurring
on or after April 18, 2013.
■ Par. 13. Section 1.1248–6 is amended
by:
■ 1. Adding a sentence at the end of
paragraph (a).
■ 2. Adding paragraphs (d) and (e).
The additions read as follows:

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§ 1.1248–6 Sale or exchange of stock in
certain domestic corporations.

(a) * * * See paragraph (d) of this
section for a rule suspending the
application of this section in certain
circumstances.
*
*
*
*
*
(d) Temporary suspension of section
1248(e). Section 1248(e) and the rules of
this section do not apply to a sale,
exchange, or other disposition of the
stock of a domestic corporation during
a period when capital gains are taxed at
a rate that equals or exceeds the rate at
which ordinary income is taxed.
(e) Effective/applicability date.
Paragraph (d) of this section applies to
a sale, exchange, or other disposition of

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the stock of a domestic corporation on
or after September 21, 1987.
■ Par. 14. Section 1.1248–8 is amended
by:
■ 1. Revising paragraphs (a)(3),
(b)(1)(iv)(A), and (b)(2)(i).
■ 2. Adding paragraph (b)(2)(iv).
■ 3. Revising paragraph (d).
The revisions and addition read as
follows:
§ 1.1248–8 Earnings and profits
attributable to stock following certain nonrecognition transactions.

(a) * * *
(3) Section 381 transactions. Stock of
a foreign corporation that receives assets
in a transfer to which section 361(a) or
(b) applies in connection with a
reorganization described in section
368(a)(1)(A), (C), (D), (F), or (G), or in a
distribution to which section 332
applies, and to which section
381(c)(2)(A) and § 1.381(c)(2)–1(a)
apply. See paragraph (b)(6) of this
section; or
*
*
*
*
*
(b) * * *
(1) * * *
(iv) * * *
(A) In a restructuring transaction
qualifying as a nonrecognition
transaction within the meaning of
section 7701(a)(45) and described in
section 354, 356, or 361(a) or (b), stock
in an acquired corporation for stock in
either a foreign acquiring corporation or
a foreign corporation that is in control,
within the meaning of section 368(c), of
an acquiring corporation (whether
domestic or foreign); or
*
*
*
*
*
(2) * * *
(i) Exchanging shareholder exchanges
property that is not stock of a foreign
acquired corporation with respect to
which the exchanging shareholder is a
section 1248 shareholder or a foreign
corporate shareholder. Except as
provided in paragraph (b)(2)(iv) of this
section, where the exchanging
shareholder exchanges in a restructuring
transaction property that is not stock of
a foreign acquired corporation with
respect to which the exchanging
shareholder is a section 1248
shareholder or a foreign corporate
shareholder immediately before the
transaction, the earnings and profits
attributable to the stock that the
exchanging shareholder receives in the
restructuring transaction will be
determined in accordance with
§ 1.1248–2 or § 1.1248–3, whichever is
applicable, without regard to any
portion of the section 1223(1) holding
period in that stock that is before the

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restructuring transaction. See paragraph
(b)(7), Example 1 of this section.
*
*
*
*
*
(iv) Exchanging shareholder
exchanges stock of a domestic acquired
corporation for stock of a foreign
corporation with respect to which the
exchanging shareholder is a section
1248 shareholder after the exchange. If
there is a restructuring transaction
described in § 1.1248(f)–1(b)(3) to which
the exception provided by § 1.1248(f)–
2(c) applies with respect to a
distribution by a domestic acquired
corporation of stock of a foreign
corporation to one or more exchanging
shareholders, the earnings and profits
attributable to a portion of a share of
stock as provided under § 1.1248(f)–
2(c)(2) (or a whole share, if no division
is required) will be determined pursuant
to paragraphs (b)(2)(iv)(A) and
(b)(2)(iv)(B) of this section.
(A) The earnings and profits
attributable to a portion of a share of
stock as provided under § 1.1248(f)–
2(c)(2)(i) (or a whole share, if no
division is required) will be determined
in accordance with § 1.1248–2 or
§ 1.1248–3 (and this section, as
applicable), without regard to any
portion of the section 1223(1) holding
period in that portion of a share (or
whole share) that is before the
restructuring transaction.
(B) The earnings and profits
attributable to a portion of a share of
stock as provided under § 1.1248(f)–
2(c)(2)(ii) (or whole share, if no division
is required) is the amount in paragraph
(b)(2)(iv)(B)(1) of this section, increased
by the amounts described in paragraph
(b)(2)(iv)(B)(2) of this section.
(1) The amount equal to the product
of the ratio of the value of the share of
stock to the value of all shares of stock
received by the exchanging shareholder
multiplied by the amount in paragraph
(b)(2)(iv)(B)(1)(i) of this section, reduced
by the amount in paragraph
(b)(2)(iv)(B)(1)(ii) of this section.
(i) The amount equal to the product of
the exchanging shareholder’s ownership
interest percentage (within the meaning
of § 1.367(a)–7(f)(7)) in the domestic
acquired corporation multiplied by the
earnings and profits attributable to the
block of stock of the foreign corporation
transferred in the section 361 exchange
that relates to the portion (or whole
share), determined in accordance with
§ 1.1248–2 or § 1.1248–3 (and this
section, as applicable) immediately
before the restructuring transaction (and
without taking into account the
application of sections 367 and 1248 to
the transfer of the stock of the foreign
corporation in the section 361
exchange).

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Federal Register / Vol. 78, No. 53 / Tuesday, March 19, 2013 / Rules and Regulations
(ii) The amount of any dividend
included in the domestic acquiring
corporation’s gross income under
section 1248(a) on the transfer of the
block of stock of the foreign corporation,
which relates to the portion or whole
share, in the section 361 exchange by
reason of gain recognized under
§§ 1.367(a)–6T or 1.367(a)–7(c)(2)
attributable to the exchanging
shareholder.
(2) The earnings and profits
determined in accordance with
§ 1.1248–2 or § 1.1248–3 (and this
section, as applicable), without regard to
any portion of the section 1223(1)
holding period in that stock that is
before the restructuring transaction. See
§ 1.1248(f)–2(e), Example 2 and
Example 3.
*
*
*
*
*
(d) Effective/applicability dates—(1)
General rule. Except as provided in
paragraph (d)(2) of this section, this
section applies to income inclusions
that occur on or after July 30, 2007.
(2) Exception. Paragraph (b)(2)(iv) of
this section applies to restructuring
transactions occurring on or after April
18, 2013.
■ Par. 15. Section 1.1248(f)–1 is added
to read as follows:

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§ 1.1248(f)–1 Certain nonrecognition
distributions.

(a) Scope and purpose. This section
and §§ 1.1248(f)–2 and 1.1248(f)–3
provide rules under section 1248(f) that
apply when a domestic corporation
(domestic distributing corporation)
distributes stock of a foreign corporation
(foreign distributed corporation) in a
distribution to which section 337,
355(c)(1), or 361(c)(1) applies. Paragraph
(b) of this section provides the general
rule that requires the domestic
distributing corporation, depending on
the type of distribution, to include in
gross income either the section 1248
amount or the total section 1248(f)
amount. Paragraph (c) of this section
provides definitions that apply for
purposes of this section and
§§ 1.1248(f)–2 and 1.1248(f)–3. Section
1.1248(f)–2 provides exceptions to the
general rule contained in paragraph (b)
of this section that apply, depending on
the type of distribution. Section
1.1248(f)–3 provides reasonable cause
relief procedures for failures to timely
comply with certain filing requirements
and effective/applicability dates.
(b) General rule—(1) Section 337
distribution. This paragraph (b)(1)
applies if a domestic distributing
corporation that is a section 1248
shareholder of a foreign distributed
corporation distributes stock of the
foreign distributed corporation in a

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distribution to which section 337
applies (section 337 distribution).
Except as provided in § 1.1248(f)–2(a),
the domestic distributing corporation
must, notwithstanding any other
provision of subtitle A of the Internal
Revenue Code (Code), include in gross
income as a dividend the section 1248
amount with respect to the stock of the
foreign distributed corporation. This
paragraph (b)(1) applies only to the
extent the domestic distributing
corporation does not recognize gain
with respect to the stock of the foreign
distributed corporation as a result of the
section 337 distribution under another
provision of subtitle A of the Code.
(2) Existing stock distribution under
section 355 or 361. This paragraph (b)(2)
applies to the extent a domestic
distributing corporation distributes
stock of the foreign distributed
corporation that is not received in a
section 361 exchange that is part of the
plan of distribution, provided the
distribution is described in section
355(c)(1) or section 361(c)(1) (existing
stock distribution). Except as provided
in § 1.1248(f)–2(b), the domestic
distributing corporation must,
notwithstanding any other provision of
subtitle A of the Code, include in gross
income as a dividend the section 1248
amount with respect to the stock of the
foreign distributed corporation. This
paragraph (b)(2) only applies to the
extent the domestic distributing
corporation does not recognize gain
with respect to the stock of the foreign
distributed corporation as a result of the
existing stock distribution under
another provision of subtitle A of the
Code.
(3) New stock distribution under
section 361. This paragraph (b)(3)
applies to the extent a domestic
distributing corporation distributes
stock of the foreign distributed
corporation that is received in a section
361 exchange that is part of the plan of
distribution (and, to the extent
applicable, also distributes any cash or
other property), provided the
distribution is described in section
361(c)(1) (new stock distribution).
Except as provided in § 1.1248(f)–2(c),
the domestic distributing corporation
must, notwithstanding any other
provision of subtitle A of the Code,
include in gross income as a dividend
the total section 1248(f) amount with
respect to the stock of each foreign
corporation transferred in the section
361 exchange. This paragraph (b)(3)
applies without regard to the amount of
gain realized by the domestic
distributing corporation in the new
stock distribution.

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17043

(c) Definitions. Except as otherwise
provided, the following definitions
apply for purposes of this section and
§§ 1.1248(f)–2 and 1.1248(f)–3:
(1) 80-percent distributee is a
corporation described in section 337(c).
(2) Block of stock has the meaning
provided in § 1.1248–2(b).
(3) Distributee is a shareholder of the
domestic distributing corporation that
receives one or more shares of stock of
a foreign distributed corporation in an
existing stock distribution (as defined in
paragraph (b)(2) of this section) or a new
stock distribution (as defined in
paragraph (b)(3) of this section).
(4) Hypothetical section 1248 amount
is, with respect to each distributee or
non-stock distributee, the amount in
paragraph (c)(4)(i) of this section,
reduced by the amount in paragraph
(c)(4)(ii) of this section computed with
respect to the stock of each foreign
corporation transferred in the section
361 exchange by the domestic
distributing corporation for which there
is not an income inclusion under
§ 1.367(b)–4(b)(1)(i).
(i) The amount that the domestic
distributing corporation would have
included in income as a deemed
dividend under § 1.367(b)–4(b)(1)(i) if
the requirements of § 1.367(b)–
4(b)(1)(ii)(A) (involving the receipt of
foreign stock in an exchange to which
§ 1.367(a)–7(c) applies) had not been
satisfied and that would have been
attributable to such distributee or nonstock distributee under § 1.367(a)–
7(e)(4) (providing rules to attribute
deemed income inclusions under
§ 1.367(b)–4 to persons described in
§ 1.367(a)–3T(e)(3)(iii)(A)).
(ii) The amount of gain recognized by
the domestic distributing corporation
under § 1.367(a)–7(c)(2) attributable to
such distributee or non-stock distributee
and allocable to the stock of such
foreign corporation under § 1.367(a)–
7(e)(1), but only to the extent such gain
is treated as a dividend under section
1248(a).
(5) Non-stock distributee is a
shareholder of the domestic distributing
corporation that receives cash or other
property but no shares of stock of the
foreign distributed corporation in a new
stock distribution (as defined in
paragraph (b)(3) of this section).
(6) Postdistribution amount is the
section 1248 amount with respect to the
stock (or a portion of a share of stock)
of the foreign distributed corporation
received by a distributee, computed
immediately after the distribution, but
without taking into account any
adjustments to the basis of the stock
under § 1.1248(f)–2(b)(3) (in the case of
an existing stock distribution) or

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adjustments to the basis of stock or
income inclusions under § 1.1248(f)–
2(c)(3) (in the case of a new stock
distribution). The postdistribution
amount in the stock of a foreign
distributed corporation received in an
existing stock distribution is determined
based on the distributee’s holding
period in the stock as adjusted under
§ 1.1248(f)–2(b)(2). The postdistribution
amount in the stock (or a portion of a
share of stock, as applicable) of a foreign
distributed corporation received in a
new stock distribution is determined
after applying the rules in §§ 1.1248–
8(b)(2)(iv) and 1.1248(f)–2(c)(2).
(7) Section 358 basis is the basis in
stock as determined under section 358.
(8) Section 361 exchange is an
exchange described in section 361(a) or
(b).
(9) Section 1248 amount is the net
positive earnings and profits (if any)
attributable to the stock of the foreign
distributed corporation, determined in
accordance with § 1.1248–2 or § 1.1248–
3 (taking into account § 1.1248–8, if
applicable), and that would be included
in gross income as a dividend under
section 1248(a) if the stock were sold by
the domestic distributing corporation in
a transaction in which all realized gain
is recognized.
(10) Section 1248(f) amount is the
amount in paragraph (c)(10)(i) of this
section, reduced by the amount in
paragraph (c)(10)(ii) of this section
computed with respect to the stock of
each foreign corporation transferred in
the section 361 exchange by the
domestic distributing corporation for
which the domestic distributing
corporation does not have an income
inclusion under § 1.367(b)–4(b)(1)(i).
(i) The amount that the domestic
distributing corporation would have
included in income as a dividend under
§ 1.367(b)–4(b)(1)(i) if the requirements
of § 1.367(b)–4(b)(1)(ii)(A) (involving the
receipt of foreign stock in an exchange
to which § 1.367(a)–7(c) applies) had
not been satisfied.
(ii) The amount of gain recognized by
the domestic distributing corporation
under § 1.367(a)–7(c)(2) and allocable to
the stock of such foreign corporation
under § 1.367(a)–7(e)(1), but only to the
extent such gain is treated as a dividend
under section 1248(a).
(11) Section 1248(f) block amount is
the portion of the section 1248(f)
amount, as defined in paragraph (c)(10)
of this section, that relates to a block of
stock of the foreign corporation if more
than a single block of stock of the
foreign corporation is transferred in the
section 361 exchange.
(12) Section 1248 shareholder is a
domestic corporation that satisfies the

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ownership requirements of section
1248(a)(2) with respect to a foreign
corporation, except that a domestic
corporation, other than a domestic
distributing corporation, that is a
regulated investment company (as
defined in section 851(a)), a real estate
investment trust (as defined in section
856(a)), or an S corporation (as defined
in section 1361(a)) cannot be a section
1248 shareholder.
(13) Timely filed return is a U.S.
income tax return filed on or before the
due date set forth in section 6072(b),
including any extensions of time to file
the return granted under section 6081.
(14) Total section 1248(f) amount is
the sum of each section 1248(f) amount
(as defined in paragraph (c)(10) of this
section).
■ Par. 16. Section 1.1248(f)–2 is added
to read as follows:
§ 1.1248(f)–2 Exceptions for certain
distributions and attribution rules.

(a) Section 337 stock distribution—(1)
General exception. In the case of a
section 337 distribution (as defined in
§ 1.1248–1(b)(1)), § 1.1248(f)–1(b)(1)
shall not apply to the distribution of
stock of the foreign distributed
corporation to the 80-percent distributee
if the conditions of paragraphs (a)(1)(i),
(a)(1)(ii) and (a)(1)(iii) of this section are
satisfied.
(i) 80-percent distributee is a section
1248 shareholder. Immediately after the
section 337 distribution, the 80-percent
distributee is a section 1248 shareholder
with respect to the foreign distributed
corporation.
(ii) Holding period. The 80-percent
distributee is treated as holding the
stock of the foreign distributed
corporation received in the section 337
distribution for the period during which
the stock was held by the domestic
distributing corporation.
(iii) Basis. The 80-percent
distributee’s basis in the stock of the
foreign distributed corporation received
in the section 337 distribution does not
exceed the domestic distributing
corporation’s basis in such stock at the
time of the section 337 distribution.
(2) Elective exception. If the
conditions of paragraph (a)(1)(ii) or
(a)(1)(iii) of this section are not
otherwise satisfied, the domestic
distributing corporation and the 80percent distributee may elect to make
adjustments to the 80-percent
distributee’s holding period or basis in
the stock of the foreign distributed
corporation, as appropriate, such that
the conditions described in paragraphs
(a)(1)(ii) and (iii) of this section are
satisfied. The conditions and
procedures for making the election are

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described in paragraph (a)(3) of this
section. See paragraphs (a)(4) and (5) of
this section for adjustments that are
required as a result of making the
election.
(3) Election and reporting—(i)
Statement required by domestic
distributing corporation and 80-percent
distributee—(A) In general. The
domestic distributing corporation and
the 80-percent distributee make the
election described in paragraph (a)(2) of
this section by each including a
statement, described in paragraph
(a)(3)(i)(B) of this section, with a timely
filed return for the taxable year during
which the section 337 distribution
occurs, and by entering into a written
agreement described in paragraph
(a)(3)(ii) of this section. If the domestic
distributing corporation or the 80percent distributee are members of a
consolidated group at the time of the
section 337 distribution but not the
common parent, the common parent of
the consolidated group makes the
election on behalf of the domestic
distributing corporation or the 80percent distributee. The election
described in paragraph (a)(2) of this
section and made pursuant to this
paragraph (a)(3) is irrevocable.
(B) Form and content. The statement
of election must be entitled,
‘‘STATEMENT TO ELECT TO APPLY
EXCEPTION UNDER § 1.1248(f)–
2(a)(2),’’ state that the domestic
distributing corporation and the 80percent distributee have entered into a
written agreement described in
paragraph (a)(3)(ii) of this section, set
forth the date of the agreement and the
names of the parties to the agreement,
and the adjustments to the 80-percent
distributee’s holding period and/or basis
determined under section 334 in the
stock of the foreign distributed
corporation received in the section 337
distribution required under paragraphs
(a)(4) and (a)(5) of this section.
(ii) Written agreement. The domestic
distributing corporation and the 80percent distributee must enter into a
written agreement described in this
paragraph (a)(3)(ii) on or before the due
date (including extensions) of the
domestic distributing corporation’s U.S.
income tax return for the taxable year
during which the section 337
distribution occurs. Both the domestic
distributing corporation and the 80percent distributee must retain the
original or a copy of the agreement as
part of its records in the manner
specified by § 1.6001–1(e). Both the
domestic distributing corporation and
the 80-percent distributee must provide
a copy of the agreement to the Internal
Revenue Service within 30 days of the

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receipt of a request for the agreement in
connection with an examination of the
taxable year during which the section
337 distribution occurs. The written
agreement must—
(A) State the document is an
agreement under paragraph (a)(3)(ii) of
this section;
(B) Provide the name and taxpayer
identification number (if any) of the
domestic distributing corporation, the
80-percent distribute, and the foreign
distributed corporation;
(C) With respect to the 80-percent
distributee, state the holding period in
the stock of the foreign distributed
corporation received in the section 337
distribution as adjusted under
paragraph (a)(4) of this section; and
(D) With respect to the 80-percent
distributee, identify the basis as
determined under section 334 of the
stock of the foreign distributed
corporation received in the section 337
distribution and the adjustment (if any)
to such basis under paragraph (a)(5) of
this section.
(4) Holding period adjustment. For
purposes of section 1248, immediately
after the section 337 distribution, the
80-percent distributee’s holding period
in the stock of the foreign distributed
corporation received in the section 337
distribution shall equal the domestic
distributing corporation’s holding
period in such stock at the time of the
section 337 distribution.
(5) Basis adjustments. If the domestic
distributing corporation’s section 1248
amount with respect to the stock of the
foreign distributed corporation received
by the 80-percent distributee in the
section 337 distribution exceeds the 80percent distributee’s postdistribution
amount with respect to such stock
(excess amount), the 80-percent
distributee’s basis as determined under
section 334 in such stock shall be
reduced by the excess amount.
(b) Existing stock distribution under
sections 355 or 361. In the case of an
existing stock distribution (as defined in
§ 1.1248(f)–1(b)(2)), § 1.1248(f)–1(b)(2)
shall not apply to the distribution of
stock of the foreign distributed
corporation to a distributee that is a
section 1248 shareholder with respect to
the foreign distributed corporation
immediately after the distribution if the
domestic distributing corporation and
all distributees that are section 1248
shareholders elect to apply the
provisions of this paragraph (b) in
accordance with paragraph (b)(1) of this
section. See paragraphs (b)(2) and (3) of
this section for adjustments that may be
required if an election is made to apply
the provisions of this paragraph (b).

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(1) Election and reporting—(i)
Statement required by domestic
distributing corporation and section
1248 shareholders—(A) In general. The
domestic distributing corporation and
all distributees that are section 1248
shareholders elect to apply the
provisions of paragraph (b) of this
section by each including a statement,
described in paragraph (b)(1)(i)(B) of
this section, with a timely filed return
for the taxable year during which the
existing stock distribution occurs and by
entering into a written agreement
described in paragraph (b)(1)(ii) of this
section. If the domestic distributing
corporation or a section 1248
shareholder is a member of a
consolidated group but not the common
parent, the common parent of the
consolidated group makes the election
on behalf of the domestic distributing
corporation or section 1248 shareholder.
The election made under this paragraph
(b)(1) is irrevocable.
(B) Form and content. The statement
of election must be entitled,
‘‘ELECTION TO APPLY EXCEPTION
UNDER § 1.1248(f)–2(b),’’ state that the
domestic distributing corporation and
all distributees that are section 1248
shareholders have entered into a written
agreement described in paragraph
(b)(1)(ii) of this section, the date of the
agreement and the names of the parties
to the agreement, and set forth any
required adjustment to each section
1248 shareholder’s holding period or
section 358 basis (if any) in the stock of
the foreign distributed corporation
received in the existing stock
distribution under paragraph (b)(2) or
(b)(3) of this section, respectively.
(ii) Written agreement. The domestic
distributing corporation and the section
1248 shareholders must enter into a
written agreement described in this
paragraph (b)(1)(ii) on or before the due
date (including extensions) of the
domestic distributing corporation’s U.S.
income tax return for the taxable year
during which the existing stock
distribution occurs. Each party to the
agreement must retain the original or a
copy of the agreement as part of its
records in the manner specified by
§ 1.6001–1(e). Each party to the
agreement must provide a copy of the
agreement to the Internal Revenue
Service within 30 days of the receipt of
a request for the agreement in
connection with an examination of the
taxable year during which the existing
stock distribution occurs. The written
agreement must—
(A) State the document is an
agreement under paragraph (b)(1)(ii) of
this section;

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17045

(B) Provide the name and taxpayer
identification number (if any) of the
domestic distributing corporation, the
foreign distributed corporation, and
each section 1248 shareholder;
(C) With respect to each section 1248
shareholder, state the holding period in
the stock of the foreign distributed
corporation received in the existing
stock distribution as adjusted under
paragraph (b)(2) of this section; and
(D) With respect to each section 1248
shareholder, identify the basis under
section 358 of the stock of the foreign
distributed corporation received in the
existing stock distribution and the
adjustment (if any) to the basis under
paragraph (b)(3) of this section.
(2) Holding period adjustments. For
purposes of section 1248, immediately
after the existing stock distribution,
each section 1248 shareholder’s holding
period in each share of stock of the
foreign distributed corporation received
in the existing stock distribution will be
equal to the domestic distributing
corporation’s holding period in the
share of stock at the time of the existing
stock distribution.
(3) Basis adjustments. If the domestic
distributing corporation’s section 1248
amount with respect to a share of stock
of the foreign distributed corporation
received by a section 1248 shareholder
in the existing stock distribution
exceeds the section 1248 shareholder’s
postdistribution amount with respect to
the share of stock (excess amount), the
section 1248 shareholder’s section 358
basis in the share of stock is reduced by
the excess amount. For an illustration of
the rule in this paragraph (b)(3), see
paragraph (e) of this section, Example 1
and Example 3.
(c) New stock distribution under
section 361. In the case of a new stock
distribution (as defined in § 1.1248(f)–
1(b)(3)), the amount that the domestic
distributing corporation is required to
include in gross income as a dividend
under § 1.1248(f)–1(b)(3) (total section
1248(f) amount) is reduced by the sum
of the portions of any section 1248(f)
amount attributable under paragraph (d)
of this section to stock of the foreign
distributed corporation distributed to
distributees that are section 1248
shareholders, but only if the domestic
distributing corporation and all the
distributees that are section 1248
shareholders elect to apply the
provisions of this paragraph (c) in
accordance with paragraph (c)(1) of this
section. See paragraphs (c)(2), (c)(3), and
(c)(4) of this section for adjustments or
income inclusions that are required if an
election is made to apply the provisions
of this paragraph (c). The adjustments or
income inclusions provided in

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paragraphs (c)(2), (c)(3), and (c)(4) of
this section apply after any adjustments
required under section 367(a)(5) and
§ 1.367(a)–7(c). For illustrations of this
exception, see paragraph (e) of this
section, Example 2 and Example 3 and
§ 1.367(a)–3(e)(8), Example 3.
(1) Election and reporting—(i)
Statement required by domestic
distributing corporation and section
1248 shareholders—(A) In general. The
domestic distributing corporation and
all distributees that are section 1248
shareholders elect to apply the
provisions of paragraph (c) of this
section by each including a statement,
in the form and containing the
information listed in paragraph
(c)(1)(i)(B) of this section, with a timely
filed return for the taxable year during
which the new stock distribution occurs
and by entering into a written agreement
described in paragraph (c)(1)(ii) of this
section. If the domestic distributing
corporation or a section 1248
shareholder is a member of a
consolidated group at the time of the
new stock distribution but is not the
common parent, the common parent of
the consolidated group makes the
election on behalf of the domestic
distributing corporation or section 1248
shareholder. The election made under
this paragraph (c)(1) is irrevocable.
(B) Form and content. The statement
of election must be entitled,
‘‘ELECTION TO APPLY EXCEPTION
UNDER § 1.1248(f)–2(c),’’ state that the
domestic distributing corporation and
each distributee that is a section 1248
shareholder have entered into a written
agreement described in paragraph
(c)(1)(ii) of this section, the date of the
agreement and the names of the parties
to the agreement, and describe, with
respect to each section 1248
shareholder, the extent to which the
shares of stock of the foreign distributed
corporation received in the new stock
distribution are divided into portions
under paragraph (c)(2) of this section,
any adjustments to the section 358 basis
of the stock under paragraph (c)(3) of
this section, and the amount the
domestic distributing corporation must
include in gross income as a dividend
under paragraph (c)(3) of this section.
(ii) Written agreement. The domestic
distributing corporation and all
distributees that are section 1248
shareholders must enter into a written
agreement described in this paragraph
(c)(1)(ii) on or before the due date
(including extensions) of the domestic
distributing corporation’s U.S. income
tax return for the taxable year during
which the new stock distribution
occurs. Each party to the agreement
must retain the original or a copy of the

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agreement as part of its records in the
manner specified by § 1.6001–1(e). Each
party to the agreement must provide a
copy of the agreement to the Internal
Revenue Service within 30 days of the
receipt of a request for the agreement in
connection with an examination of the
taxable year during which the new stock
distribution occurs. The written
agreement must—
(A) State the document is an
agreement under paragraph (c)(1)(ii) of
this section;
(B) Provide the name and taxpayer
identification number (if any) of the
domestic distributing corporation, the
foreign distributed corporation, and
each section 1248 shareholder;
(C) With respect to each section 1248
shareholder, describe the extent to
which the shares of stock of the foreign
distributed corporation are divided into
portions under paragraph (c)(2) of this
section;
(D) With respect to each section 1248
shareholder, state the amount of
earnings and profits attributable to the
stock (or each block of stock, as
applicable) of each foreign corporation
transferred in the section 361 exchange
that is attributable under § 1.1248–
8(b)(2)(iv) to the stock of the foreign
distributed corporation received in the
new stock distribution;
(E) With respect to each section 1248
shareholder, state the amount of the
section 1248(f) amount with respect to
the stock (or each block of stock, as
applicable) of each foreign corporation
transferred in the section 361 exchange
that is attributable under § 1.1248(f)–
2(d) to the stock of the foreign
distributed corporation received in the
new stock distribution;
(F) With respect to each section 1248
shareholder, state the amount of the
adjustment to the section 358 basis of
the stock of the foreign distributed
corporation under paragraph (c)(3) of
this section; and
(G) With respect to each section 1248
shareholder, state the amount the
domestic distributing corporation must
include in gross income as a dividend
under paragraph (c)(3) of this section.
(2) Portions. If the domestic
distributing corporation transfers
property, other than a single block of
stock of a foreign corporation with
respect to which the domestic
distributing corporation is a section
1248 shareholder immediately before
the section 361 exchange, to the foreign
distributed corporation in the section
361 exchange that precedes the new
stock distribution, then each share of
stock of the foreign distributed
corporation received by a distributee

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that is a section 1248 shareholder must
be divided into portions as follows:
(i) One portion attributable to all
property transferred in the section 361
exchange, other than property that is
stock of a foreign corporation with
respect to which the domestic
distributing corporation is a section
1248 shareholder immediately before
the section 361 exchange; and
(ii) One portion attributable to each
block of stock of each foreign
corporation transferred in the section
361 exchange with respect to which the
domestic distributing corporation is a
section 1248 shareholder immediately
before the section 361 exchange. For the
determination of the earnings and
profits attributable to the stock (or block
of stock, as applicable) of each foreign
corporation transferred in the section
361 exchange that are attributable to a
portion of a share of stock of the foreign
distributed corporation, see § 1.1248–
8(b)(2)(iv). For the determination of the
section 1248(f) amount with respect to
the stock (or block of stock, as
applicable) of each foreign corporation
transferred in the section 361 exchange
that is attributable to a portion of a share
of stock of the foreign distributed
corporation, see paragraph (d)(2) of this
section.
(3) Basis adjustments and income
inclusions. If the section 1248(f) amount
attributable to a portion of a share of
stock (or whole share, if no division is
required) (as determined under
paragraph (d) of this section) of the
foreign distributed corporation received
by a distributee that is a section 1248
shareholder in the new stock
distribution exceeds the section 1248
shareholder’s postdistribution amount
in the portion (or whole share, if no
division is required) (excess amount),
then the section 1248 shareholder’s
section 358 basis in the portion as
determined under paragraph (c)(4) of
this section (or whole share, if no
division is required), as adjusted under
§ 1.367(a)–7(c)(3), is reduced by the
excess amount, but not below zero. To
the extent the excess amount exceeds
the section 358 basis in the portion (or
whole share, if no division is required),
the domestic distributing corporation
must include that portion of the section
1248(f) amount attributable to the
portion of the share (or whole share, if
no division is required) in gross income
as a dividend. For an illustration of this
rule, see paragraph (e) of this section,
Example 2, and § 1.367(a)–3(e)(8),
Example 3.
(4) Divided shares of stock—(i) Basis.
The basis of a portion of a share of stock
of the foreign distributed corporation
created under paragraph (c)(2) of this

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section is the product of the section
1248 shareholder’s section 358 basis, as
adjusted under § 1.367(a)–7(c)(3), in the
share of stock multiplied by the ratio of
the basis determined under section 362
(taking into account any gain or deemed
dividends recognized under section
367) of the property (section 362 basis)
to which the portion relates, to the
aggregate section 362 basis of all
property received by the foreign
distributed corporation in the section
361 exchange. For illustrations of this
rule, see paragraph (e) of this section,
Example 2, and § 1.367(a)–3(e)(8),
Example 3.
(ii) Fair market value. The fair market
value of a portion of a share of stock of
the foreign distributed corporation
created under paragraph (c)(2) of this
section is the product of the fair market
value of the share of stock multiplied by
the ratio of the fair market value of the
property to which the portion relates to
the aggregate fair market value of all
property received by the foreign
distributed corporation in the section
361 exchange. For illustrations of this
rule, see paragraph (e) of this section,
Example 2, and § 1.367(a)–3(e)(8),
Example 3.
(iii) Subsequent exchanges. For
purposes of determining the gain
realized on the sale or exchange of a
share of stock of the foreign distributed
corporation that has divided portions
under paragraph (c)(2) of this section,
the amount realized on the sale or
exchange of the share will be allocated
to each divided portion based on the
relative fair market value of the property
to which the portion relates as
determined at the time of the
reorganization.
(iv) Duration of divided shares. Shares
of stock of the foreign distributed
corporation that are divided into
portions under paragraph (c)(2) of this
section must be divided so long as
section 1248(a) would apply to a sale or
exchange of the shares.
(d) Attribution of all or a portion of
section 1248(f) amount to certain stock
of the foreign distributed corporation.
This paragraph (d) applies if there is a
new stock distribution for which an
election under § 1.1248(f)–2(c)(1) is
made. This paragraph (d) provides rules
for attributing all or a portion, as
applicable, of the section 1248(f)
amount with respect to the stock of each
foreign corporation transferred in the
section 361 exchange by the domestic
distributing corporation to shares of
stock, or to portions of shares of stock,
as applicable, received in the foreign
distributed corporation and distributed
to one or more distributees that are
section 1248 shareholders with respect

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to the foreign distributed corporation.
Paragraph (d)(1) of this section provides
rules to attribute the applicable section
1248(f) amount among shares of stock of
the foreign distributed corporation
received by one or more distributees
that are section 1248 shareholders. If
shares of stock are divided into portions
under paragraph (c)(2) of this section,
paragraph (d)(2) of this section provides
additional rules to attribute the
applicable section 1248 amount to
portions of shares of stock received by
one or more distributees that are section
1248 shareholders.
(1) Attribution of all or a portion of
section 1248(f) amount among shares of
stock. With respect to one or more
shares of stock of the foreign distributed
corporation distributed to a distributee
that is a section 1248 shareholder, the
portion of the section 1248(f) amount
with respect to the stock of the foreign
corporation transferred in the section
361 exchange that is equal to the
distributee’s hypothetical section 1248
amount is attributed among those shares
of stock of the foreign distributed
corporation based on the ratio of the
value of a share distributed to the
distributee to the value of all shares of
stock distributed to the distributee
(attributable share amount).
(2) Attribution of all or a portion of
section 1248(f) amount to portions of a
share of stock—(i) Single block of stock.
If a single block of stock of the foreign
corporation is transferred in the section
361 exchange, the attributable share
amount (as determined under paragraph
(d)(1) of this section) is attributed to the
portion of the share that relates to the
single block of stock of the foreign
corporation.
(ii) Multiple blocks of stock. If
multiple blocks of stock of the foreign
corporation are transferred in the
section 361 exchange, the attributable
share amount (as determined under
paragraph (d)(1) of the section) is
attributed among the portions of the
share that relate to such multiple blocks
of stock of the foreign corporation. The
portion of the attributable share amount
that is attributable to a portion to which
a block of stock relates is that amount
that bears the same ratio that the section
1248(f) block amount with respect to
that block of stock bears to the section
1248(f) amount with respect to the stock
of the foreign corporation.
(e) Examples. The rules of this section
are illustrated by the following
examples. See also § 1.367(a)–3T(e)(8),
Example 3. For purposes of the
examples, unless otherwise indicated:
DP and DC are domestic corporations; X
is a United States citizen; FP is a foreign
corporation; CFC1, CFC2, and FA are

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17047

controlled foreign corporations; each
corporation has a single class of stock
outstanding and uses the calendar year
as its taxable year; each shareholder of
a corporation owns a single block of
stock in the corporation; DC owns
Business A, which consists solely of
property whose fair market value
exceeds its basis and could satisfy the
requirements of the active foreign trade
or business exception under section
367(a)(3) and § 1.367(a)–2T; DC owns no
other assets and has no liabilities; the
requirements in § 1.367(a)–7(c)(5) are
satisfied; no earnings and profits of a
foreign corporation are described in
section 1248(d); and none of the foreign
corporations in the examples is a
surrogate foreign corporation (within
the meaning of section 7874) as a result
of the transactions described in the
examples because one or more of the
conditions of section 7874(a)(2)(B) is not
satisfied.
Example 1. Existing stock distribution
under section 355(c)(1); gain recognition and
adjustment to stock basis. (i) Facts. DP, FP,
and X own 80%, 10%, and 10%,
respectively, of the outstanding stock of DC.
DP’s DC stock has a $140x basis, $160x fair
market value, and a 2-year holding period.
DC wholly owns CFC1. DC’s CFC1 stock has
a $50x basis, $100x fair market value
(therefore a gain of $50x), $25x of earnings
and profits attributable to it for purposes of
section 1248, and a $25x section 1248
amount (computed as the lesser of $50x gain
in the CFC1 stock and $25x of section 1248
earnings and profits), and a 3-year holding
period. On December 31, year 3, DC
distributes all of the CFC1 stock to DP, FP,
and X on a pro-rata basis in a distribution to
which section 355 applies. The fair market
value of the CFC1 stock received by DP, FP,
and X is $80x, $10x, and $10x, respectively.
After the distribution, DP’s stock in DC has
a fair market value of $80x and DP’s section
358 basis in the CFC1 stock is $70x (a pro
rata portion, or 50%, of DP’s $140x basis in
the DC stock immediately before the
distribution). See § 1.358–2(a)(iv).
(ii) Result. (A) Under § 1.367(e)–1(b)(1), DC
must recognize $5x gain on the distribution
of CFC1 stock to FP (10% of the $50x gain
in the CFC1 stock). Under § 1.367(b)–
5(b)(1)(ii), DC must also recognize $5x gain
on the distribution of CFC1 stock to X (10%
of the $50x gain in the CFC1 stock). Of the
aggregate $10x gain recognized by DC, $5x is
recharacterized as a dividend under section
1248(a), computed as 20% of the $25x
section 1248 amount with respect to the
CFC1 stock. See § 1.1248–1 for additional
consequences.
(B) DC’s distribution of CFC1 stock to DP
is described in section 1248(f)(1) and
§ 1.1248(f)–1(b)(2) because the distribution is
pursuant to section 355(c)(1) (an existing
stock distribution). As a result, the general
rule is that DC must include in gross income
as a dividend the section 1248 amount with
respect to the CFC1 stock distributed to DP,
or $20x (computed as 80% of the $25x

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section 1248 amount). However, if DP and
DC make the election under paragraph (b)(1)
of this section, § 1.1248(f)–1(b)(2) will not
apply to DC’s distribution of CFC1 stock to
DP. If DP and DC make the election, then:
(1) Under paragraph (b)(2) of this section,
for purposes of section 1248, immediately
after the distribution DP will have a 3-year
holding period in the CFC1 stock, the same
holding period DC had in the CFC1 stock at
the time of the distribution.
(2) Under paragraph (b)(3) of this section,
DP’s section 358 basis in the CFC1 stock
($70x) is reduced by $10x, the amount by
which DC’s section 1248 amount with
respect to the CFC1 stock ($20x) distributed
to DP exceeds DP’s postdistribution amount
with respect to the CFC1 stock ($10x). Under
§ 1.1248(f)–1(c)(6), DP’s postdistribution
amount equals the amount that DP would
include in gross income as a dividend under
section 1248(a) if DP sold the CFC1 stock
immediately after the distribution, or $10x,
which is computed as the lesser of the $10x
gain in the CFC1 stock ($80x fair market
value, less $70x basis) and $20x of section
1248 earnings and profits attributable to the
CFC1 stock, taking into account DP’s 3-year
holding period in the stock as required by
paragraph (b)(2) of this section. As adjusted
under paragraph (b)(3) of this section, DP’s
basis in the CFC1 stock is $60x ($70x basis,
less $10x required basis reduction).
Example 2. New stock distribution under
section 361(c)(1); adjustment to stock basis.
(i) Facts. DP wholly owns DC. DP’s DC stock
has a $180x basis and $200x fair market
value. DC wholly owns CFC1 and CFC2. DC’s
CFC1 stock has a $70x basis, $100x fair
market value (therefore a gain of $30x), $40x
of earnings and profits attributable to it for
purposes of section 1248, and a section 1248
amount of $30x (computed as the lesser of
the $30x gain in CFC1 stock and $40x section
1248 earnings and profits). DC’s CFC2 stock
has a $130x basis, $100x fair market value
(therefore a loss of $30x), $80x of earnings
and profits attributable to it for purposes of
section 1248, and a section 1248 amount of
$0x (computed as the lesser of the $0x gain
and $80x section 1248 earnings and profits).
On December 31, Year 1, in a reorganization
described in section 368(a)(1)(F), DC transfers
the CFC1 stock and the CFC2 stock to FA, a
newly formed corporation, in exchange for
100 shares of FA stock. DC distributes the
100 shares of FA stock to DP. DC’s transfer
of the CFC1 stock and CFC2 stock to FA in
exchange for FA stock qualifies as a section
361 exchange, and DC’s distribution of the
100 shares of FA stock to DP is pursuant to
section 361(c)(1). DP exchanges its DC stock
for the 100 shares of FA stock pursuant to
section 354. Immediately after the
transaction, DP wholly owns FA. DP and DC
elect to apply the provisions of § 1.367(a)–
7(c) in accordance with § 1.367(a)–7(c)(5).
Pursuant to § 1.367(a)–3T(e)(3)(iii)(A), DP
properly files a gain recognition agreement
with respect to the CFC1 stock that satisfies
the conditions of §§ 1.367(a)–3T(e)(6) and
1.367(a)–8.
(ii) Result. (A) DC does not recognize gain
under § 1.367(a)–3T(e)(2) with respect to the
transfer of the CFC1 stock to FA because the
three conditions in § 1.367(a)–3T(e)(3)(i),

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(e)(3)(ii), and (e)(3)(iii) are satisfied. First,
§ 1.367(a)–3T(e)(3)(i) is satisfied because the
requirements of § 1.367(a)–7(c) are satisfied,
including that an election is made to apply
§ 1.367(a)–7(c). Second, the requirements
under § 1.367(a)–3T(e)(3)(ii) related to
transfers of domestic stock are not applicable
because CFC1 is a foreign corporation. Third,
because DC owns all the stock of FA
immediately after DC’s receipt of the FA
stock in the section 361 exchange but prior
to, and without taking into account, DC’s
distribution of the FA stock to DP, for
purposes of satisfying the requirements of
§ 1.367(a)–3T(e)(3)(iii), DP properly files a
gain recognition agreement with respect to
the CFC1 stock that satisfies the conditions
of §§ 1.367(a)–3T(e)(6) and 1.367(a)–8.
Furthermore, DC is not required to recognize
gain under § 1.367(a)–7(c)(2)(ii), and DP is
not required to reduce its $180x section 358
basis in the FA stock under § 1.367(a)–7(c)(3),
because the inside gain (within the meaning
of § 1.367(a)–7(f)(5)) is $0x ($200x aggregate
fair market value of CFC1 stock and CFC2
stock, less $200x aggregate basis of CFC1
stock and CFC2 stock). In addition, DC is not
required to include in income as a deemed
dividend the $30x section 1248 amount with
respect to the CFC1 stock under § 1.367(b)–
4(b)(1)(i) because immediately after DC’s
receipt of the FA stock in the section 361
exchange but prior to, and without taking
into account, DC’s distribution of the FA
stock to DP, CFC1 and FA are controlled
foreign corporations as to which DC is a
section 1248 shareholder. See § 1.367(b)–
4(b)(1)(ii)(A). With respect to the transfer of
the CFC2 stock to FA, DC’s section 1248
amount with respect to the CFC2 stock is
$0x; therefore, § 1.367(b)–4(b)(1)(i) has no
application.
(B) Under § 1.1248(f)–1(b)(3), as a result of
the section 361(c)(1) distribution of the FA
stock to DP (a new stock distribution), the
general rule is that DC must include in gross
income as a dividend the total section 1248(f)
amount (defined in § 1.1248(f)–1(c)(14)). The
total section 1248(f) amount is $30x, the sum
of the section 1248(f) amount (defined in
§ 1.1248(f)–1(c)(10)) with respect to the CFC1
stock ($30x) and CFC2 stock ($0x). The
section 1248(f) amount with respect to the
CFC1 stock is the amount that DC would
have included in income as a deemed
dividend under § 1.367(b)–4(b)(1)(i) with
respect to the CFC1 stock if the requirements
under § 1.367(b)–4(b)(1)(ii)(A) had not been
satisfied ($30x), less the amount of gain
recognized by DC under § 1.367(a)–7(c)(2)
that is allocable to the CFC1 stock under
§ 1.367(a)–7(e)(1) and treated as a dividend
under section 1248(a) ($0x). Similarly, the
section 1248(f) amount with respect to the
CFC2 stock is the amount that DC would
have included in income as a deemed
dividend under § 1.367(b)–4(b)(1)(i) with
respect to the CFC2 stock if the requirements
under § 1.367(b)–4(b)(1)(ii)(A) had not been
satisfied ($0x), less the amount of gain
recognized by DC under § 1.367(a)–7(c)(2)
that is allocable to the CFC2 stock under
§ 1.367(a)–7(e)(1) and treated as a dividend
under section 1248(a) ($0x).
(C) If, however, DP and DC make the
election provided in paragraph (c)(1) of this

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section, the amount that DC is required to
include in gross income as a dividend under
§ 1.1248(f)–1(b)(3) (the total section 1248(f)
amount of $30x) is reduced to the extent the
section 1248(f) amount with respect to the
CFC1 stock ($30x) and CFC2 stock ($0x) is
attributable under paragraph (d) of this
section to the shares of FA stock distributed
to one or more distributees that are section
1248 shareholders of FA. The only
distributee is DP, and DP is a section 1248
shareholder with respect to FA. If DP and DC
elect to apply paragraph (c) of this section,
then:
(1) Under paragraph (d)(1) of this section,
the portion of the section 1248(f) amount
with respect to the CFC1 stock that is
attributed to the shares of FA stock
distributed to DP is equal to DP’s
hypothetical section 1248 amount (as defined
in § 1.1248(f)–1(c)(4)) with respect to the
CFC1 stock. Because DP is the only
shareholder of DC, DP’s hypothetical section
1248 amount equals the section 1248(f)
amount with respect to the CFC1 stock
($30x). The $30x hypothetical section 1248
amount is attributed pro rata (based on
relative values) among the 100 shares of FA
stock distributed to DP, and the attributable
share amount (as defined in paragraph (d)(1)
of this section) is $.30x. Paragraph (d)(1) of
this section has no application with respect
to the CFC2 stock because there is no section
1248(f) amount with respect to the CFC2
stock.
(2) If the shares of FA stock are divided
into portions, the rules of paragraph (d)(2) of
this section apply to attribute the attributable
share amount ($.30x) to portions of shares of
FA stock distributed to DP. Under paragraph
(c)(2)(ii) of this section, the 100 shares of FA
stock are divided into two portions, one
portion related to the single block of CFC1
stock and one portion related to the single
block of CFC2 stock. Under paragraph
(d)(2)(i) of this section, the attributable share
amount of $.30x is attributed to the portion
of the 100 shares of FA stock that relates to
the single block of CFC1 stock. Thus, all of
the $30x section 1248(f) amount with respect
to the CFC1 stock is attributable to the 100
shares of FA stock.
(3) Because the election under paragraph
(c)(1) of this section is made, the total section
1248(f) amount ($30x) that DC is otherwise
required to include in gross income as a
dividend under § 1.1248(f)–1(b)(3) is reduced
by $30x, the portion of the section 1248(f)
amount with respect to the CFC1 stock that
is attributable under paragraph (d) of this
section to the shares of FA stock distributed
to DP. Thus, the amount DC is required to
include in gross income as a dividend under
§ 1.1248(f)–1(b)(3) is $0x ($30x less $30x).
(4) Under paragraph (c)(4)(i) of this section,
the basis of each portion is the product of
DP’s section 358 basis in the share of FA
stock multiplied by the ratio of the section
362 basis of the property (CFC1 stock or
CFC2 stock, as applicable) to which the
portion relates, to the aggregate section 362
basis of all property (CFC1 stock and CFC2
stock) received by FA in the section 361
exchange. Under paragraph (c)(4)(ii) of this
section, the fair market value of each portion
is the product of the fair market value of the

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share of FA stock multiplied by the ratio of
the fair market value of the property (CFC1
stock or CFC2 stock, as applicable) to which
the portion relates, to the aggregate fair
market value of all property (CFC1 stock and
CFC2 stock) received by FA in the section
361 exchange. The section 362 basis of the
CFC1 stock and CFC2 stock is $70x and
$130x, respectively, for a total section 362
basis of $200x. The CFC1 stock and CFC2
stock each has a fair market value of $100x,
for a total fair market value of $200x.
Therefore, the portions attributable to the
CFC1 stock have an aggregate basis of $63x
($180x multiplied by $70x/$200x) and fair
market value of $100x ($200x multiplied by
$100x/$200x), resulting in aggregate gain in
such portions of $37x (or $.37x per portion
in each of the 100 shares). The portions
attributable to the CFC2 stock have an
aggregate basis of $117x ($180x multiplied by
$130x/$200x) and fair market value of $100x
($200x multiplied by $100x/$200x), resulting
in aggregate losses in such portions of $17x
(or $.17x per portion in each of the 100
shares).
(5) Under § 1.1248–8(b)(2)(iv), the $40x
earnings and profits attributable to the single
block of CFC1 stock are attributed to the
portions of the 100 shares of FA stock that
relate to the CFC1 stock. Similarly, the $80x
of earnings and profits attributable to the
single block of CFC2 stock are attributed to
the portions of the 100 shares of the FA stock
that relate to the CFC2 stock. Thus, DP’s
postdistribution amount (defined in
§ 1.1248(f)–1(c)(6)) with respect to the
portions of the shares of FA attributable to
the CFC1 stock is $37x, the lesser of the
aggregate gain in the portions attributable to
the CFC1 stock of $37x (computed in
paragraph (ii)(C)(4) of this Example 2) and
the $40x earnings and profits attributable to
such portions. Furthermore, DP’s
postdistribution amount with respect to the
portions of the shares of FA attributable to
the CFC2 stock is $0x, the lesser of the
aggregate gain in the portions attributable to
the CFC2 stock of $0x (computed in
paragraph (ii)(C)(4) of this Example 2 to be
an aggregate loss of $17x) and the $80x
earnings and profits attributable to such
portions.
(6) Under paragraph (c)(3) of this section,
DP’s section 358 basis in the portions of the
100 shares of FA stock attributable to the
CFC1 stock ($63x, computed in paragraph
(ii)(C)(4) of this Example 2) is reduced by the
amount (if any) by which the section 1248(f)
amount attributable to such portions under
paragraph (d) of this section ($30x, as
computed in paragraph (ii)(C)(2) of this
Example 2) exceeds DP’s postdistribution
amount with respect to such portions ($37x,
computed in paragraph (ii)(C)(5) of this
Example 2). Thus, there is no basis reduction
in the portions of the 100 shares of FA stock
attributable to the CFC1 stock. DP’s section
358 basis in the portions of the 100 shares
of FA stock attributable to the CFC2 stock is
not reduced because the section 1248(f)
amount attributable to such portions under
paragraph (d) of this section is $0x
(computed in paragraph (ii)(C)(2) of this
Example 2), which equals DP’s
postdistribution amount with respect to such

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portions of $0x (as computed in paragraph
(ii)(C)(5) of this Example 2).
Example 3. Combined existing stock
distribution and new stock distribution under
sections 355(c)(1) and 361(c)(1). (i) Facts. DP
owns all 100 outstanding shares of stock of
DC. DP’s DC stock has a $180x basis (each
of the 100 shares having a basis of $18),
$200x fair market value, and 2-year holding
period. DC owns all 60 shares of the
outstanding stock of CFC1; all such shares
constitute a single block of stock. DC’s CFC1
stock has a $50x basis, $60x fair market
value, $30x of earnings and profits
attributable to it for purposes of section 1248,
a $10x section 1248 amount (computed as the
lesser of $10x gain and $30x of section 1248
earnings and profits), and a 3-year holding
period. DC also owns all 40 shares of the
outstanding stock of CFC2; all such shares
constitute a single block of stock. DC’s CFC2
stock has a $30x basis, $40x fair market
value, $20x of earnings and profits
attributable to it for purposes of section 1248,
and a $10x section 1248 amount (computed
as the lesser of $10x gain and $20x of section
1248 earnings and profits). DC also owns
Business A, which has a fair market value of
$100x. On December 31, year 4, in a divisive
reorganization described in section
368(a)(1)(D), DC transfers the CFC2 stock to
CFC1 in exchange for 40 shares of newly
issued CFC1 stock. DC’s transfer of the CFC2
stock to CFC1 qualifies as a section 361
exchange. DC then distributes the 100 shares
of CFC1 stock (60 shares held prior to the
transaction and 40 shares received in the
section 361 exchange) to DP in a transaction
that qualifies under section 355. DP properly
files a gain recognition agreement with
respect to the CFC2 stock that satisfies the
conditions of §§ 1.367(a)–3T(e)(6) and
1.367(a)–8. DP and DC properly make the
elections provided in § 1.367(a)–7(c)(5) and
paragraphs (b) and (c) of this section.
(ii) Result. (A) DC does not recognize gain
under § 1.367(a)–3T(e)(2) with respect to the
transfer of the CFC2 stock to CFC1 because
the three conditions in § 1.367(a)–3T(e)(3)(i),
(e)(3)(ii), and (e)(3)(iii) are satisfied. First,
§ 1.367(a)–3T(e)(3)(i) is satisfied because the
requirements of § 1.367(a)–7(c) are satisfied,
including that an election is made to apply
§ 1.367(a)–7(c). Second, the requirements
under § 1.367(a)–3T(e)(3)(ii) related to
transfers of domestic stock are not applicable
because CFC2 is a foreign corporation. Third,
because DC and DP own all the stock of CFC1
for purposes of satisfying the requirements of
§ 1.367(a)–3T(e)(3)(iii), DP properly files a
gain recognition agreement with respect to
the CFC2 stock that satisfies the conditions
of §§ 1.367(a)–3T(e)(6) and 1.367(a)–8. See
paragraph (ii)(G) of this example for the
computation of the amount of gain subject to
the gain recognition agreement. In addition,
DC is not required to include in income as
a dividend the $10x section 1248 amount
with respect to the CFC2 stock under
§ 1.367(b)–4(b)(1)(i) because immediately
after DC’s receipt of the CFC1 stock in the
section 361 exchange but prior to, and
without taking into account, DC’s
distribution of the CFC1 stock to DP, CFC1
and CFC2 are controlled foreign corporations
as to which DC is a section 1248 shareholder.
See § 1.367(b)–4(b)(1)(ii)(A).

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(B) DC is not required to recognize gain
under § 1.367(a)–7(c)(2)(i) because DP, a
control group member (as defined in
§ 1.367(a)–7(f)(1)), owns 100% of DC. DC is
not required to recognize gain under
§ 1.367(a)–7(c)(2)(ii) because the amount
described in § 1.367(a)–7(c)(2)(ii)(A) ($10x)
does not exceed the amount described in
§ 1.367(a)–7(c)(2)(ii)(B) ($40x). The $10x
described in § 1.367(a)–7(c)(2)(ii)(A) equals
the product of the inside gain (as defined in
§ 1.367(a)–7(f)) ($10x) multiplied by DP’s
ownership interest percentage (as defined in
§ 1.367(a)–7(f)) (100%), reduced by the sum
of the amounts in § 1.367(a)–7(c)(2)(ii)(A)(1),
(c)(2)(ii)(A)(2), and (c)(2)(ii)(A)(3) ($0x).
Under § 1.367(a)–7(f)(5), the $10x of inside
gain is the amount by which the aggregate
fair market value of the section 367(a)
property (CFC2 stock with a fair market value
of $40x) exceeds the sum of the inside basis
($30x) of such property, and $0x (the product
of the section 367(a) percentage (100%)
multiplied by DC’s deductible liabilities
assumed by CFC1 ($0x)). Under § 1.367(a)–
7(f)(4), the $30x inside basis equals the
aggregate basis of the section 367(a) property
transferred in the section 361 exchange
($30x), increased by any gain or deemed
dividends recognized by DC with respect to
the section 367(a) property under section 367
($0x). The $40x described in § 1.367(a)–
7(c)(2)(ii)(B) is the product of the section
367(a) percentage (100%) multiplied by the
fair market value of the 40 shares of CFC1
stock received by DC in the section 361
exchange and distributed to DP ($40x).
(C) Under section 358, DP must allocate the
$180x basis in its 100 shares of DC stock
between the 100 shares of DC stock (fair
market value of $100x) and the 100 shares of
CFC1 stock (fair market value of $100x) held
after the distribution based on the relative
fair market values of the shares. Accordingly,
after the allocation of the basis under section
358, but prior to the application of
§ 1.367(a)–7(c)(3), the basis of DP’s DC stock
is $90x and the basis of DP’s CFC1 stock is
$90x. With respect to the $90x basis in the
100 shares of CFC1 stock, $36x is attributable
to the 40 shares of CFC1 stock received by
DC in the section 361 exchange ($90x
multiplied by 40/100), and $54x is
attributable to the 60 shares of CFC1 stock
owned by DC prior to the section 361
exchange ($90x multiplied by 60/100). See
§ 1.358–2(a)(2)(iv).
(D) Pursuant to § 1.367(a)–7(c)(3)(ii), any
adjustment to DP’s basis in the CFC1 stock
required under § 1.367(a)–7(c)(3)(i) can only
be made with respect to the 40 shares of
CFC1 stock received by DC in the section 361
exchange. Under § 1.367(a)–7(c)(3)(i)(A), DP
must reduce its section 358 basis ($36x) in
the 40 shares of CFC1 stock by $6x, the
amount by which DP’s attributable inside
gain ($10x), reduced by the sum of the
amounts in § 1.367(a)–7(c)(2)(ii)(A)(1),
(c)(2)(ii)(A)(2), and (c)(2)(ii)(A)(3) ($0x) (as
computed in paragraph (ii)(B) of this
Example 3) exceeds DP’s outside gain (as
defined in § 1.367(a)–7(f)) ($4x). DP’s $4x
outside gain equals the product of the section
367(a) percentage (as defined in § 1.367(a)–
7(f)) (100%) multiplied by the amount by
which the fair market value ($40x) of the 40

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shares of CFC1 stock is greater than DP’s
section 358 basis in the stock ($36x). After
the $6x reduction to stock basis required
under § 1.367(a)–7(c)(3), but before the
application of § 1.1248(f)–2(c)(3), DP’s basis
in the 40 shares of CFC1 stock is $30x.
(E) DC’s distribution of the 40 shares of
newly issued CFC1 stock is subject to
§ 1.1248(f)–1(b)(3) (a new stock distribution).
Except as provided in § 1.1248(f)–2(c), under
§ 1.1248(f)–1(b)(3) DC must include in gross
income as a dividend the total section 1248(f)
amount (as defined in § 1.1248(f)–1(c)(14)).
The total section 1248(f) amount is $10x, the
sum of the section 1248(f) amount (as defined
in § 1.1248(f)–1(c)(10)) with respect to the
stock of each foreign corporation transferred
in the section 361 exchange. Only the CFC2
stock is transferred in the section 361
exchange; therefore, the total section 1248(f)
amount is equal to the section 1248(f)
amount with respect to the CFC2 stock
($10x). The $10x section 1248(f) amount with
respect to the CFC2 stock is the amount that
DC would have included in income as a
deemed dividend under § 1.367(b)–4(b)(1)(i)
with respect to the CFC2 stock if the
requirements of § 1.367(b)–4(b)(1)(ii)(A) had
not been satisfied ($10x), reduced by the
amount of gain recognized by DC under
§ 1.367(a)–7(c)(2) allocable to the CFC2 stock
and treated as a dividend under section
1248(a) (in this case, $0x, as described in
paragraph (ii)(B) of this Example 3).
(F) However, because DC and DP (a section
1248 shareholder of CFC1 immediately after
the distribution) elect to apply the provisions
of § 1.1248(f)–2(c) (as provided in
§ 1.1248(f)–2(c)(1)), the amount that DC is
required to include in income as a dividend
under § 1.1248(f)–1(b)(3) ($10x total section
1248(f) amount as computed in paragraph
(ii)(E) of this Example 3) is reduced by the
sum of the portions of the section 1248(f)
amount with respect to the CFC2 stock that
is attributable (under the rules of § 1.1248(f)–
2(d)) to the 40 shares of CFC1 stock
distributed to DP. As stated in the facts, the
election is made to apply § 1.1248(f)–2(c).
(1) Under paragraph (d)(1) of this section,
the portion of the section 1248(f) amount
with respect to the CFC2 stock that is
attributed to the 40 shares of CFC1 stock
distributed to DP is equal to DP’s
hypothetical section 1248 amount (as defined
in § 1.1248(f)–1(c)(4)) with respect to the
CFC2 stock. Because DP is the only
shareholder of DC, DP’s hypothetical section
1248 amount equals the section 1248(f)
amount with respect to the CFC2 stock
($10x). The $10x hypothetical section 1248
amount is attributed pro rata (based on
relative values) among the 40 shares of CFC1
stock distributed to DP, and the attributable
share amount (as defined in paragraph (d)(1)
of this section) is $.25x.
(2) The 40 shares of CFC1 stock are not
divided into portions under paragraph (c)(2)
of this section because the only property
transferred by DC to CFC1 is a single block
of stock of CFC2. If the 40 shares of CFC1
stock were required to be divided into
portions, however, the rules of paragraph
(d)(2) of this section apply to attribute the
attributable share amount ($.25x) to portions
of shares of CFC1 stock distributed to DP.

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(3) Because the election under paragraph
(c)(1) of this section is made, the total section
1248(f) amount ($10x) that DC is otherwise
required to include in gross income as a
dividend under § 1.1248(f)–1(b)(3) is reduced
by $10x, the portion of the section 1248(f)
amount with respect to the CFC2 stock that
is attributable under paragraph (d) of this
section to the 40 shares of CFC1 stock
distributed to DP. Thus, the amount DC is
required to include in gross income as a
dividend under § 1.1248(f)–1(b)(3) is $0x
($30x less $30x).
(4) Under § 1.1248–8(b)(2)(iv), the $20x
earnings and profits attributable to the single
block of CFC2 stock are attributed pro rata to
the 40 shares of CFC1 stock. Thus, DP’s
postdistribution amount (defined in
§ 1.1248(f)–1(c)(6)) with respect to the 40
shares of CFC1 stock attributable to the CFC2
stock is $10x, the lesser of the aggregate gain
in the 40 shares of CFC1 stock of $10x ($40x
fair market value, less $30x section 358 basis,
as described in paragraph (ii)(D) of this
Example 3) and the $20x earnings and profits
attributable to such shares.
(5) Under paragraph (c)(3) of this section,
DP’s section 358 basis in the 40 shares of
CFC1 stock ($30x) is reduced by the amount
(if any) by which the section 1248(f) amount
attributable to such shares under paragraph
(d) of this section ($10x, as computed in
paragraph (ii)(E) of this Example 3) exceeds
DP’s postdistribution amount with respect to
such shares ($10x). Thus, there is no basis
reduction in the 40 shares of CFC1 stock.
(G) Pursuant § 1.367(a)–3T(e)(6), the
amount of gain subject to the gain recognition
agreement entered into by DP with respect to
the CFC2 stock is $10x, which is the product
of DP’s ownership interest percentage (100%)
multiplied by the gain realized by DC in the
361 exchange prior to taking into account the
application of any other provision of section
367 ($10x), reduced by the sum of the
amounts described in § 1.367(a)–
3T(e)(6)(i)(A), (e)(6)(i)(B), (e)(6)(i)(C), and
(e)(6)(i)(D) ($0x).
(H) DC’s distribution of the 60 shares of
CFC1 stock it held before the section 361
exchange is subject to § 1.1248(f)–1(b)(2) (an
existing stock distribution); however, because
DC and DP make the election provided in
paragraph (b)(1) of this section, § 1.1248(f)–
1(b)(2) does not apply to the distribution.
(1) Under paragraph (b)(2) of this section,
for purposes of section 1248, DP will have a
3-year holding period in the 60 shares of
CFC1 stock received, the same holding
period that DC had in the 60 shares of CFC1
stock.
(2) Under paragraph (b)(3) of this section,
DP’s section 358 basis in the 60 shares of
CFC1 stock received ($54x, as computed in
paragraph (ii)(C) of this Example 3) is
reduced by $4x, the amount by which DC’s
section 1248 amount ($10x) with respect to
the 60 shares of CFC1 stock exceeds DP’s
postdistribution amount ($6x) with respect to
the 60 shares of CFC1 stock. Under
§ 1.1248(f)–1(c)(6), DP’s postdistribution
amount with respect to the 60 shares of CFC1
stock equals the amount that DP would
include in gross income as a dividend under
section 1248(a) if DP sold the 60 shares of
CFC1 stock immediately after the

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distribution, or $6x, which is computed as
the lesser of the $6x gain in the such shares
of CFC1 stock ($60x fair market value, less
$54x basis) and $30x of section 1248 earnings
and profits attributable to the CFC1 stock,
taking into account DP’s 3-year holding
period in the stock as required by paragraph
(b)(2) of this section. As adjusted under
paragraph (b)(3) of this section, DP’s basis in
the 60 shares of CFC1 stock is $50x ($54x
basis, less $4x basis reduction).

(f) Applicable cross-references. For
rules relating to the attribution of
earnings and profits to the stock of a
foreign corporation following certain
nonrecognition transactions, see
§ 1.1248–8. For rules relating to a
transfer of property by a domestic
corporation to a foreign corporation in
a section 361 exchange that precedes a
new stock distribution, see § 1.367(a)–7.
If the property transferred includes
stock of a corporation, see also
§§ 1.367(a)–3T(e) and 1.367(b)–4. For
other rules that may apply if a domestic
corporation distributes the stock of a
foreign corporation in a new stock
distribution or an existing stock
distribution satisfying the requirements
of section 355, see §§ 1.367(b)–5(b)(1)
and 1.367(e)–1.
Par. 17. Section 1.1248(f)–3 is added
to read as follows:

■

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

(a) Reasonable cause for failure to
comply [Reserved]. For further
guidance, see § 1.1248(f)–3T(a).
(b) Effective/applicability date—(1)
General rule. Except as provided in
paragraph (b)(2)(ii) of this section,
§§ 1.1248(f)–1 and 1.1248(f)–2 apply to
distributions occurring on or after April
18, 2013.
(2) Transactions described in Notice
87–64—(i) Gain not otherwise
recognized. For distributions occurring
on or after September 21, 1987, and
before April 18, 2013, section 1248(f)(1)
shall not apply to the extent the
domestic distributing corporation
recognizes gain with respect to the stock
of the foreign distributed corporation as
a result of the distribution under
another provision of subtitle A of the
Internal Revenue Code.
(ii) Section 355 distributions.
Taxpayers may apply the provisions of
§ 1.1248(f)–2(b) to distributions
occurring on or after September 21,
1987.
■ Par. 18. Section 1.6038B–1 is
amended by:
■ 1. Revising paragraph (c)(6).
■ 2. Revising paragraph (f)(3).
■ 3. Revising the paragraph heading and
the first sentence of paragraph (g)(1).
■ 4. Adding paragraph (g)(5).

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Federal Register / Vol. 78, No. 53 / Tuesday, March 19, 2013 / Rules and Regulations
The addition and revisions read as
follows:
§ 1.6038B–1 Reporting of certain transfers
to foreign corporations.

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(c) * * *
(6) Transfers subject to section
367(a)(5)—(i) In general. This paragraph
(c)(6) applies to a domestic corporation
(U.S. transferor) that transfers section
367(a) property (as defined in
§ 1.367(a)–7(f)(10)) to a foreign
corporation in a section 361 exchange
(as defined in § 1.367(a)–7(f)(8)) and to
which the provisions of § 1.367(a)–7(c)
apply. Paragraph (c)(6)(ii) of this section
establishes the time and manner for the
U.S. transferor to elect to apply the
provisions of § 1.367(a)–7(c). Paragraph
(c)(6)(iii) of this section establishes the
manner for the U.S. transferor to satisfy
the requirement of § 1.367(a)–7(c)(4).
(ii) Election. The U.S. transferor elects
to apply the provisions of § 1.367(a)–
7(c) by including a statement entitled,
‘‘ELECTION TO APPLY EXCEPTION
UNDER § 1.367(a)–7(c),’’ with its timely
filed return (within the meaning of
§ 1.367(a)–7(f)(12)) for the taxable year
during which the reorganization occurs
and that includes the information
described in paragraphs (c)(6)(ii)(A),
(c)(6)(ii)(B), (c)(6)(ii)(C), (c)(6)(ii)(D),
(c)(6)(ii)(E), (c)(6)(ii)(F), (c)(6)(ii)(G), and
(c)(6)(ii)(H) of this section. See
§ 1.367(a)–7(c)(5)(ii) for the statement
required to be filed by a control group
member (as defined in § 1.367(a)–7(f)(1))
or final distributee (as defined in
§ 1.367(a)–7(d)).
(A) The name and taxpayer
identification number (if any) of each
control group member and final
distributee (if any), the foreign acquiring
corporation, and in the case of a
triangular reorganization (within the
meaning of § 1.358–6(b)(2)) the
corporation that controls the foreign
acquiring corporation, and the
ownership interest percentage (as
defined in § 1.367(a)–7(f)(7)) in the U.S.
transferor of each control group
member.
(B) A calculation of the gain
recognized (if any) by the U.S. transferor
under § 1.367(a)–7(c)(2)(i) and (c)(2)(ii),
and the basis adjustments (if any)
required to be made by each control
group member under § 1.367(a)–7(c)(3).
(C) The date on which the U.S.
transferor and each control group
member or final distributee entered into
the written agreement described in
§ 1.367(a)–7(c)(5)(iv).
(D) The amount of any deductible
liability (as defined by § 1.367(a)–
7(f)(2)).

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(E) The fair market value (as defined
by § 1.367(a)–7(f)(3)) of property
transferred to the foreign acquiring
corporation in the section 361 exchange.
(F) The inside basis (as defined by
§ 1.367(a)–7(f)(4)).
(G) The inside gain (as defined by
§ 1.367(a)–7(f)(5)).
(H) The section 367(a) percentage (as
defined by § 1.367(a)–7(f)(9)).
(iii) Agreement to amend U.S.
transferor’s tax return. The U.S.
transferor complies with the
requirement of § 1.367(a)–7(c)(4)(i) by
attaching a statement to its timely filed
return (within the meaning of
§ 1.367(a)–7(f)(12)) for the taxable year
in which the reorganization occurs,
entitled ‘‘STATEMENT UNDER
§ 1.367(a)–7(c)(4) FOR TRANSFERS OF
ASSETS TO A FOREIGN
CORPORATION IN A SECTION 361
EXCHANGE.’’ The statement must
certify that if a significant amount of the
section 367(a) property received by the
foreign acquiring corporation from the
U.S. transferor in the section 361
exchange is disposed of, directly or
indirectly, in one or more related
transactions described in paragraph
(c)(6)(iii)(B) of this section occurring
within the sixty (60) month period that
begins on the date of distribution or
transfer (within the meaning of
§ 1.381(b)–1(b)), then the exception
provided in § 1.367(a)–7(c) will not
apply to the section 361 exchange.
Accordingly, the U.S. transferor will
recognize the gain realized but not
recognized in the section 361 exchange,
computed as if the exception provided
in § 1.367(a)–7(c) had never applied. A
U.S. income tax return (or amended U.S.
income tax return, as the case may be)
for the year in which the reorganization
occurred reporting the gain must be
filed. If the section 361 exchange occurs
in connection with a triangular
reorganization (within the meaning of
§ 1.358–6(b)(2)) and the corporation that
controls the foreign acquiring
corporation is foreign, an indirect
disposition of the section 367(a)
property includes the disposition by
such controlling foreign corporation of
the stock of the foreign acquiring
corporation.
(A) Disposition of a significant
amount—(1) General rule. Except as
provided in paragraphs (c)(6)(iii)(A)(2)
and (c)(6)(iii)(A)(3) of this section, for
purposes of this paragraph (c)(6)(iii), a
disposition of a significant amount
occurs if, in one or more related
transactions, the foreign acquiring
corporation disposes of an amount of
the section 367(a) property received
from the U.S. transferor in the section
361 exchange that is greater than 40

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17051

percent of the fair market value of all of
the section 367(a) property transferred
in the section 361 exchange.
(2) Exception for certain
nonrecognition exchanges. Section
367(a) property that is subsequently
transferred (retransferred property)
pursuant to a nonrecognition provision
is not treated as disposed of for
purposes of paragraph (c)(6)(iii)(A)(1) of
this section, provided such transfer
satisfies, and is treated in a manner
consistent with the principles
underlying § 1.367(a)–8(k). Thus, for
example, if section 367(a) property is
subsequently transferred to a foreign
corporation in exchange solely for stock
in a transaction described in section
351, such retransferred property is not
treated as disposed of for purposes of
paragraph (c)(6)(iii)(A)(1) of this section;
in such a case, however, a subsequent
disposition of either the retransferred
property by the transferee foreign
corporation, or of the stock of the
transferee foreign corporation received
in exchange for the retransferred
property, is subject to the provisions of
paragraph (c)(6)(iii)(A)(1) of this section.
(3) Exception for dispositions
occurring in the ordinary course of
business. Dispositions of section 367(a)
property described in section 1221(a)(2)
occurring in the ordinary course of
business of the foreign acquiring
corporation are not treated as disposed
of for purposes of paragraph
(c)(6)(iii)(A)(1) of this section.
(B) Gain recognition transaction—(1)
General rule. A transaction is described
in this paragraph (c)(6)(iii)(B) if the
transaction is entered into with a
principal purpose of avoiding the U.S.
tax that would have been imposed on
the U.S. transferor on the disposition of
the property transferred to the foreign
acquiring corporation in the section 361
exchange. A disposition may have a
principal purpose of tax avoidance even
if the tax avoidance purpose is
outweighed by other purposes when
taken together.
(2) Presumptive tax avoidance. For
purposes of this paragraph (c)(6)(iii)(B),
the principal purpose of the foreign
acquiring corporation’s disposition of a
significant amount of the section 367(a)
property within the two-year period that
begins on the date of distribution or
transfer (within the meaning of
§ 1.381(b)–1(b)) (whether in a
recognition or nonrecognition
transaction) will be presumed to be the
avoidance of the U.S. tax that would
have been imposed on the U.S.
transferor on the disposition of the
property transferred to the foreign
acquiring corporation in the section 361
exchange. However, this presumption

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will not apply if it is demonstrated to
the satisfaction of the Director of Field
Operations, Large Business &
International (or any successor to the
roles and responsibilities of such person
(Director) that the avoidance of U.S. tax
was not a principal purpose of the
disposition.
(3) Interest. If additional tax is
required to be paid as a result of a
transaction described in paragraph
(c)(6)(iii)(B) of this section, then interest
must be paid on that amount at rates
determined under section 6621 with
respect to the period between the date
prescribed for filing the U.S. transferor’s
income tax return for the year in which
the reorganization occurs and the date
on which the additional tax for that year
is paid.
*
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(f) * * *
(3) Reasonable cause for failure to
comply [Reserved]. For further
guidance, see § 1.6038B–1T(f)(3).
*
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(g) Effective/applicability dates. (1)
Except as provided in paragraphs (g)(2)
through (g)(5) of this section, this
section applies to transfers occurring on
or after July 20, 1998, except for

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transfers of cash made in tax years
beginning on or before February 5, 1999
(which are not required to be reported
under section 6038B), and except for
transfers described in paragraph (e) of
this section, which applies to transfers
that are subject to §§ 1.367(e)–1(f) and
1.367(e)–2(e). * * *
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(5) Paragraphs (c)(6) and (f)(3) of this
section apply to transfers occurring on
or after April 18, 2013. For guidance
with respect to paragraphs (c)(6) and
(f)(3) of this section before April 18,
2013, see 26 CFR part 1 revised as of
April 1, 2012.
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 19. The authority citation for part
602 continues to read as follows:

■

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

Par. 20. In § 602.101, the following
entries are added in numerical order to
the table in paragraph (b) to read as
follows:

■

§ 602.101

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OMB Control numbers.

*

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(b) * * *

CFR part or section where
identified and described

Current OMB
control No.

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1.367(a)–7 ............................

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1545–2183

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1.367(a)–8 ............................

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1545–2183

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1.1248(f)–2 ...........................

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1545–2183

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1.6038B–1 ............................

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1545–2183

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Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Approved: February 15, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2013–05700 Filed 3–18–13; 8:45 am]
BILLING CODE 4830–01–P

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