Td 9760

Federal Register / Vol. 81, No. 55 / Tuesday, March 22, 2016 / Rules and Regulations
(A) Identification of the applicable
presently effective rate schedules, when
no additional tariff filings will be
required, or
(B) When changes are required in
applicant’s presently effective tariff, or
if applicant has no tariff, pro forma
copies of appropriate changes in or
additions to the effective tariff or a pro
forma copy of the new gas tariff
proposed, or
(C) When a new rate is proposed, a
statement explaining the basis used in
arriving at the proposed rate. Such
statement shall clearly show whether
such rate results from negotiation, costof-service determination, competitive
factors or others, and shall give the
nature of any studies which have been
made in connection therewith.
(ii) When new rates or changes in
present rates are proposed or when the
proposed facilities will result in a
material change in applicant’s average
cost of service, such statement shall be
accompanied by supporting data
showing:
(A) System cost of service for the first
calendar year of operation after the
proposed facilities are placed in service.
(B) An allocation of such costs to each
particular service classification, with
the basis for each allocation clearly
stated.
(C) The proposed rate base and rate of
return.
(D) Gas operating expenses,
segregated functionally by accounts.
(E) Depletion and depreciation.
(F) Taxes with the basis upon which
computed.
*
*
*
*
*
[FR Doc. 2016–06288 Filed 3–21–16; 8:45 am]
BILLING CODE 6717–01–P

DEPARTMENT OF HOMELAND
SECURITY
U.S. Customs and Border Protection
19 CFR Part 113
[CBP Dec. 15–15, USCBP–2006–0013]
RIN 1515–AD56 [Formerly 1505–AB54]

U.S. Customs and Border
Protection, Department of Homeland
Security.
ACTION: Final rule; correction.

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U.S. Customs and Border
Protection (CBP) published in the
Federal Register of November 13, 2015,
a final rule amending CBP’s bond
regulations. In that rule, CBP amended

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Effective on March 22, 2016.

Kara
Welty, Revenue Division, Office of
Administration, Customs and Border
Protection, Tel. (317) 614–4614.

FOR FURTHER INFORMATION CONTACT:

On
November 13, 2015, U.S. Customs and
Border Protection (CBP) published in
the Federal Register (80 FR 70154), as
CBP Dec. 15–15, a final rule amending
title 19 of the Code of Federal
Regulations (19 CFR) regarding CBP’s
bond regulations. In that document, CBP
amended 19 CFR 113.26(a), which
pertains to when bonds and riders must
be filed prior to their effective date, to
provide that ‘‘A continuous bond, and
any associated application required by
§ 113.11 or a rider, must be filed at least
60 days prior to the effective date
requested for the continuous bond or
rider.’’
Prior to the amendments effectuated
by CBP Dec. 15–15, § 113.26(a)
permitted filing of a bond or rider up to
30 days before the bond’s effective date.
CBP’s intent, as stated in the preamble
to CBP Dec. 15–15 at pages 70156 and
70160 of the November 13, 2015,
Federal Register document, was to
liberalize § 113.26(a) to allow the filing
of bonds and riders up to 60 days prior
to the bond’s effective date. This
document corrects 19 CFR 113.26(a) to
clarify that bonds and riders may be
filed up to 60 days prior to the effective
date requested for the continuous bond
or rider.

SUPPLEMENTARY INFORMATION:

Bonds, Copyrights, Counterfeit goods,
Customs duties and inspection, Imports,
Reporting and recordkeeping
requirements, Restricted merchandise,
Seizures and forfeitures.

AGENCY:

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DATES:

List of Subjects in 19 CFR Part 113

Customs and Border Protection’s
Bond Program; Correction

SUMMARY:

the regulation prescribing bond and
rider filing requirements and stated, in
the preamble, that the agency’s intent
was to provide additional time for the
filing of these documents prior to their
effective date. Due to a drafting error,
one of the provisions inadvertently
provides for a more restrictive time
frame for filing a continuous bond,
associated application, or rider prior to
their effective date. This document
corrects that provision to conform it to
CBP’s stated intent to liberalize the
bond and rider filing process.

Amendment to CBP Regulations
For reasons discussed in the
preamble, CBP amends 19 CFR part 113
with the following correcting
amendment:

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15159

PART 113—CBP BONDS
1. The authority citation for part 113
continues, in part, to read as follows:

■

Authority: 6 U.S.C. 101, et seq.; 19 U.S.C.
66, 1623, 1624.

2. In § 113.26, revise paragraph (a) to
read as follows:

■

§ 113.26
riders.

Effective dates of bonds and

(a) General. A continuous bond, and
any associated application required by
§ 113.11, or rider, may be filed up to 60
days prior to the effective date requested
for the continuous bond or rider.
*
*
*
*
*
Alice A. Kipel,
Executive Director, Regulations and Rulings,
Office of International Trade, U.S. Customs
and Border Protection.
Approved: March 15, 2016.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 2016–06323 Filed 3–21–16; 8:45 am]
BILLING CODE 9111–14–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9760]
RIN 1545–BJ74

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

This document contains final
regulations under sections 367, 1248,
and 6038B of the Internal Revenue Code
(Code). These regulations finalize the
elimination of one of two exceptions to
the coordination rule between asset
transfers and indirect stock transfers for
certain outbound asset reorganizations.
The regulations also finalize
modifications to the exception to the
coordination rule for section 351
exchanges so that it is consistent with
the remaining asset reorganization
exception. In addition, the regulations
finalize modifications to the procedures
for obtaining relief for failures to satisfy
certain reporting requirements. Finally,
the regulations finalize certain changes
with respect to transfers of stock or
securities by a domestic corporation to
a foreign corporation in a section 361

SUMMARY:

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exchange. These regulations primarily
affect domestic corporations that
transfer property to foreign corporations
in certain outbound nonrecognition
exchanges.
DATES: Effective Date: These regulations
are effective on March 22, 2016.
Applicability Dates: For dates of
applicability, see §§ 1.367(a)–
3(g)(1)(vii), 1.367(a)–3(g)(1)(ix),
1.367(a)–6(e)(4), 1.1248(f)–3(b)(1), and
1.6038B–1(g)(5).
FOR FURTHER INFORMATION CONTACT:
Joshua G. Rabon at (202) 317–6937 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
On August 20, 2008, the Department
of the Treasury (Treasury Department)
and the IRS published proposed
regulations (REG–209006–89) under
sections 367, 1248, and 6038B of the
Code (2008 proposed regulations) in the
Federal Register (73 FR 49278)
concerning transfers of property by a
domestic corporation to a foreign
corporation in an exchange described in
section 361(a) or (b) and certain
nonrecognition distributions of stock of
a foreign corporation by a domestic
corporation. The 2008 proposed
regulations were substantially finalized
on March 19, 2013, when the Treasury
Department and the IRS published final
regulations (TD 9614) in the Federal
Register (78 FR 17024). However, the
Treasury Department and the IRS
simultaneously published the temporary
regulations (TD 9615) in the Federal
Register on March 19, 2013 (78 FR
17,053) (2013 temporary regulations)
eliminating one of the two exceptions to
the coordination rule between asset
transfers and indirect stock transfers for
certain outbound asset reorganizations,
as well as modifying the one exception
to the coordination rule for section 351
exchanges so that it is consistent with
the remaining outbound asset
reorganization exception. The 2013
temporary regulations also addressed
the transfer of stock or securities by a
domestic corporation to a foreign
corporation in a section 361 exchange,
as well as modified, in various contexts,
procedures for obtaining relief for
failures to satisfy certain reporting
requirements. A notice of proposed
rulemaking (REG–132702–10) crossreferencing the 2013 temporary
regulations and incorporating the text of
the 2013 temporary regulations was also
published in the Federal Register on
March 19, 2013 (78 FR 17066). A
portion of the 2013 temporary
regulations modifying the procedures

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for obtaining relief for failures to satisfy
certain reporting requirements was
amended and removed by final
regulations (TD 9704) that were
published in the Federal Register on
November 19, 2014 (79 FR 68763). No
requests for a public hearing were
received regarding the 2013 temporary
regulations, and accordingly no hearing
was held. The text of these regulations
is substantially identical to to the 2013
temporary regulations.
The Treasury Department and the IRS
received one comment regarding the
remaining exceptions to the
coordination rule. In general, the
coordination rule provides that if, in
connection with an indirect stock
transfer, a U.S. person (U.S. transferor)
transfers assets to a foreign corporation
(foreign acquiring corporation) in an
exchange described in section 351 or
361, section 367 applies first to the asset
transfer and then to the indirect stock
transfer. Pursuant to the exceptions to
the coordination rule, sections 367(a)
and (d) will not apply to the outbound
transfer of assets by the U.S. transferor
to the foreign acquiring corporation to
the extent those assets (re-transferred
assets) are transferred by the foreign
acquiring corporation to a domestic
corporation in certain nonrecognition
transactions, provided certain
conditions are satisfied. Both of the
remaining exceptions require that the
transferee domestic corporation’s
adjusted basis in the re-transferred
assets not be greater than the U.S.
transferor’s adjusted basis in those
assets, disregarding any basis increase
attributable to gain or income
recognized by the U.S. transferor on the
outbound asset transfer (basis
comparison test).
The commenter first inquired whether
the remaining coordination rule
exceptions apply on a transaction-bytransaction basis such that the
conditions of an exception, including
the basis comparison test, must be
satisfied with respect to all the retransferred assets, or, alternatively,
whether the exceptions apply on an
asset-by-asset basis such that the
conditions of an exception may be
satisfied with respect to a portion of the
re-transferred assets. The Treasury
Department and the IRS have
determined that the regulations clearly
provide that the coordination rule
exceptions apply to a transaction in its
entirety and not on an asset-by-asset
basis. See, for example, paragraph (d)(3)
of Example 6C of the 2013 temporary
regulations, illustrating the application
of the coordination rule and the relevant
exception using a transaction-based
analysis. Thus, the 2013 temporary

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regulations are not clarified in response
to this comment.
Given this transaction-based
treatment, the commenter then
requested a modification to the aspect of
the basis comparison test that disregards
an increase in basis in the re-transferred
assets in the hands of the transferee
domestic corporation that is attributable
to gain or income recognized by the U.S.
transferor on the outbound transfer of
the re-transferred assets to the foreign
acquiring corporation. The comment
requested that the rule be extended to
disregard a basis increase in the retransferred assets that is attributable to
gain or income recognized by the
foreign acquiring corporation on the
transfer of the re-transferred assets to
the transferee domestic corporation
when that gain or income is subject to
U.S. tax (such as gain recognized by the
foreign acquiring corporation with
respect to U.S. real property that is
subject to U.S. tax under section 897).
These regulations do not provide for
such an extension.
The coordination rule exceptions
were first introduced in proposed
regulations (INTL–54–91) published in
the Federal Register on August 26, 1991
(56 FR 41993). The basis comparison
test was introduced later, in final
regulations (TD 8770) published in the
Federal Register on June 19, 1998 (63
FR 33550). Proposed regulations (REG–
125628–01) published in the Federal
Register on January 5, 2005 (70 FR 746)
proposed further revisions to the
coordination rule exceptions in
response to concerns ‘‘that asset
reorganizations subject to this
coordination rule may be used to
facilitate corporate inversion
transactions.’’ Those 2005 proposed
regulations were finalized on January
26, 2006, when the Treasury
Department and the IRS published final
regulations (TD 9243) in the Federal
Register (71 FR 4276). Although the
2008 proposed regulations included a
proposal to further refine one of the
coordination rule exceptions in
response to transactions utilizing that
exception to inappropriately repatriate
earnings and profits of foreign
corporations, the proposed refinement
was not included in the final regulations
published on March 19, 2013. Instead,
the 2013 temporary regulations
eliminated this particular exception to
the coordination rule and noted that the
‘‘Treasury Department and the IRS have,
over time, clarified and modified the
coordination rule exceptions to address
various transactions that give rise to
policy concerns.’’
The Treasury Department and the IRS
remain concerned that the coordination

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rule exceptions may be utilized to
inappropriately reduce U.S. tax, and
therefore decline to liberalize the basis
comparison test. The basis comparison
test ensures preservation of the gain
realized but not recognized by a U.S.
transferor in re-transferred assets in the
hands of a transferee domestic
corporation by ensuring that the assets
re-transferred into U.S. corporate
solution retain identical tax attributes to
the assets transferred to the foreign
acquiring corporation. To the extent
such assets do not have the same basis
in the hands of the transferee domestic
corporation and the basis adjustment is
not attributable to gain recognized by
the U.S. transferor, then the basis
adjustment presumably results from
transactions occurring in foreign
corporate solution (including gain
recognized under section 897). The
Treasury Department and the IRS
believe the coordination rule exceptions
should not permit shifting of gain or
income to a foreign corporation (even
when the gain or income is subject to
U.S. tax) as it may permit the U.S.
transferor to inappropriately utilize the
foreign corporation’s favorable tax
attributes available to offset the gain or
income.
Accordingly, the text of the 2013
temporary regulations is adopted
without substantive revision. The text is
updated where appropriate for
ministerial purposes. For example, the
appropriate title for the LB&I officer
responsible for determining whether a
failure to comply with the reporting
requirements was due to reasonable
cause and not willful neglect is
‘‘Director of Field Operations, Cross
Border Activities Practice Area of Large
Business & International.’’ It is expected
that future guidance projects will
update titles in other sections of the
existing regulations as appropriate. The
corresponding 2013 temporary
regulations are removed.
Special Analyses
Certain IRS regulations, including this
one, are exempt from the requirements
of Executive Order 12866, as
supplemented and reaffirmed by
Executive Order 13563. Therefore, a
regulatory assessment is not required. It
is hereby certified that the collections of
information contained in these
regulations will not have a significant
economic impact on a substantial
number of small entities. Accordingly, a
regulatory flexibility analysis is not
required. These regulations primarily
will affect United States persons that are
large corporations engaged in corporate
transactions among their controlled
corporations. Thus, the number of

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affected small entities—in any of the
three categories defined in the
Regulatory Flexibility Act (small
businesses, small organizations, and
small governmental jurisdictions)—will
not be substantial. The Treasury
Department and the IRS estimate that
small organizations and small
governmental jurisdictions are likely to
be affected only insofar as they transfer
the stock of a controlled corporation to
a related corporation. While a certain
number of small entities may engage in
such transactions, the Treasury
Department and the IRS do not
anticipate the number to be substantial.
Pursuant to section 7805(f) of the Code,
the NPRM preceding this regulation was
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
Drafting Information
The principal author of these
regulations is Joshua G. Rabon 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 in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as
follows:

■

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

*

*
*
*
*
Par. 2. Section 1.367(a)–3 is amended
by:
■ 1. Revising paragraph (d)(2)(vi)(B).
■ 2. Revising paragraph (d)(3), Examples
6B, 6C, and 9.
■ 3. Revising paragraph (e).
■ 4. Revising paragraph (g)(1)(vii)(A).
■ 5. Adding paragraph (g)(1)(ix).
The revisions and addition read as
follows:
■

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

*

*
*
*
*
(d) * * *
(2) * * *
(vi) * * *
(B) Exceptions—(1) If a transaction is
described in paragraph (d)(2)(vi)(A) of

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15161

this section, section 367(a) and (d) will
not apply to the extent a domestic
corporation (domestic acquired
corporation) transfers assets to a foreign
corporation (foreign acquiring
corporation) in an asset reorganization,
and those assets (re-transferred assets)
are transferred to a domestic corporation
(domestic controlled corporation) in a
controlled asset transfer, provided that
each of the following conditions is
satisfied:
(i) The domestic controlled
corporation’s adjusted basis in the retransferred assets is not greater than the
domestic acquired corporation’s
adjusted basis in those assets. For this
purpose, any increase in basis in the retransferred assets that results because
the domestic acquired corporation
recognized gain or income with respect
to the re-transferred assets in the
transaction is not taken into account.
(ii) The domestic acquired corporation
includes a statement described in
paragraph (d)(2)(vi)(C) of this section
with its timely filed U.S. income tax
return for the taxable year of the
transfer; and
(iii) The requirements of paragraphs
(c)(1)(i), (ii), and (iv) and (c)(6) of this
section are satisfied with respect to the
indirect transfer of stock in the domestic
acquired corporation.
(2) Sections 367(a) and (d) shall not
apply to transfers described in
paragraph (d)(1)(vi) of this section if a
U.S. person transfers assets to a foreign
corporation in a section 351 exchange,
to the extent that such assets are
transferred by such foreign corporation
to a domestic corporation in another
section 351 exchange, but only if the
domestic transferee’s adjusted basis in
the assets is not greater than the
adjusted basis that the U.S. person had
in such assets. Any increase in adjusted
basis in the assets that results because
the U.S. person recognized gain or
income with respect to such assets in
the initial section 351 exchange is not
taken into account for purposes of
determining whether the domestic
transferee’s adjusted basis in the assets
is not greater than the U.S. person’s
adjusted basis in such assets. This
paragraph (d)(2)(vi)(B)(2) will not,
however, apply to an exchange
described in section 351 that is also an
exchange described in section 361(a) or
(b). An exchange described in section
351 that is also an exchange described
in section 361(a) or (b) is only eligible
for the exception in paragraph
(d)(2)(vi)(B)(1) of this section.
*
*
*
*
*
(3) * * *
Example 6B. Section 368(a)(1)(C)
reorganization followed by a controlled asset

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transfer to a domestic controlled
corporation—(i) Facts. The facts are the same
as in paragraph (d)(3), Example 6A, of this
section, except that R is a domestic
corporation.
(ii) Result. As in paragraph (d)(3), Example
6A, of this section, the outbound transfer of
the Business A assets to F is not affected by
the rules of § 1.367–3(d) and is subject to the
general rules under section 367. Subject to
the conditions and requirements of section
367(a)(5) and § 1.367(a)–7(c), the Business A
assets qualify for the section 367(a)(3) active
trade or business exception and are not
subject to section 367(a)(1). The Business B
and C assets are part of an indirect stock
transfer under § 1.367–3(d), but must first be
tested under section 367(a) and (d). The
Business B assets qualify for the active trade
or business exception under section
367(a)(3); the Business C assets do not.
However, pursuant to paragraph
(d)(2)(vi)(B)(1) of this section, the Business B
and C assets are not subject to section 367(a)
or (d), provided that the basis of the Business
B and C assets in the hands of R is not greater
than the basis of the assets in the hands of
Z, the requirements of paragraphs (c)(1)(i),
(ii), and (iv) and (c)(6) of this section are
satisfied, and Z attaches a statement
described in paragraphs (d)(2)(vi)(C) of this
section to its U.S. income tax return for the
taxable year of the transfer. V also is deemed
to make an indirect transfer of Z stock under
the rules of paragraph (d) of this section to
the extent the assets are transferred to R. To
preserve non-recognition treatment, and
assuming the other requirements of
paragraph (c) of this section are satisfied, V
must enter into a gain recognition agreement
in the amount of $50, which equals the
aggregate gain in the Business B and C assets,
because the transfer of those assets by Z was
not taxable under section 367(a)(1) and
constitute an indirect stock transfer.
Example 6C. Section 368(a)(1)(C)
reorganization followed by a controlled asset
transfer to a domestic controlled
corporation—(i) Facts. The facts are the same
as in paragraph (d)(3), Example 6B, of this
section, except that Z is owned by U.S.
individuals, none of whom qualify as fivepercent target shareholders with respect to Z
within the meaning of paragraph (c)(5)(iii) of
this section. The following additional facts
are present. No U.S. persons that are either
officers or directors of Z own any stock of F
immediately after the transfer. F is engaged
in an active trade or business outside the
United States that satisfies the test set forth
in paragraph (c)(3) of this section.
(ii) Result. The Business A assets
transferred to F are not re-transferred to R
and therefore Z’s transfer of these assets is
not subject to the rules of paragraph (d) of
this section. However, gain must be
recognized on the transfer of those assets
under section 367(a)(1) because the section
367(a)(3) active trade or business exception is
inapplicable pursuant to section 367(a)(5)
and § 1.367(a)–7(b). The Business B and C
assets are part of an indirect stock transfer
under paragraph (d) of this section, but must
first be tested with respect to Z under section
367(a) and (d), as provided in paragraph
(d)(2)(vi) of this section. The transfer of the

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Business B assets (which otherwise would
satisfy the section 367(a)(3) active trade or
business exception) generally is subject to
section 367(a)(1) pursuant to section
367(a)(5) and § 1.367(a)–7(b). The transfer of
the Business C assets generally is subject to
section 367(a)(1) because these assets do not
qualify for the active trade or business
exception under section 367(a)(3). However,
pursuant to paragraph (d)(2)(vi)(B) of this
section, the transfer of the Business B and C
assets is not subject to sections 367(a)(1) and
(d), provided the basis of the Business B and
C assets in the hands of R is no greater than
the basis in the hands of Z and certain other
requirements are satisfied. Z may avoid
immediate gain recognition under section
367(a) and (d) on the transfers of the Business
B and Business C assets to F if, pursuant to
paragraph (d)(2)(vi)(B) of this section, the
indirect transfer of Z stock satisfies the
requirements of paragraphs (c)(1)(i), (ii), and
(iv) and (c)(6) of this section, and Z attaches
a statement described in paragraph
(d)(2)(vi)(C) of this section to its U.S. income
tax return for the taxable year of the transfer.
In general, the statement must contain a
certification that, if F disposes of the stock
of R (in a recognition or nonrecognition
transaction) and a principal purpose of the
transfer is the avoidance of U.S. tax that
would have been imposed on Z on the
disposition of the Business B and C assets
transferred to R, then Z (or F on behalf of Z)
will file a return (or amended return as the
case may be) recognizing gain ($50), as if,
immediately prior to the reorganization, Z
transferred the Business B and C assets to a
domestic corporation in exchange for stock in
a transaction treated as a section 351
exchange and immediately sold such stock to
an unrelated party for its fair market value.
A transaction is deemed to have a principal
purpose of U.S. tax avoidance if F disposes
of R stock within two years of the transfer,
unless Z (or F on behalf of Z) can rebut the
presumption to the satisfaction of the
Commissioner. See paragraph (d)(2)(vi)(D)(2)
of this section. With respect to the indirect
transfer of Z stock, assume the requirements
of paragraphs (c)(1)(i), (ii), and (iv) of this
section are satisfied. Thus, assuming Z
attaches the statement described in paragraph
(d)(2)(vi)(C) of this section to its U.S. income
tax return and satisfies the reporting
requirements of paragraph (c)(6) of this
section, the transfer of Business B and C
assets is not subject to immediate gain
recognition under section 367(a) or (d).

*

*

*

*

*

Example 9. Indirect stock transfer by
reason of a controlled asset transfer—(i)
Facts. The facts are the same as in paragraph
(d)(3), Example 8, of this section, except that
R transfers the Business A assets to M, a
wholly owned domestic subsidiary of R, in
a controlled asset transfer. In addition, V’s
basis in its Z stock is $90.
(ii) Result. Pursuant to paragraph
(d)(2)(vi)(B) of this section, sections 367(a)
and (d) do not apply to Z’s transfer of the
Business A assets to R if M’s basis in the
Business A assets is not greater than the basis
of the assets in the hands of Z, the
requirements of paragraphs (c)(1)(i), (ii), and
(iv) and (c)(6) of this section are satisfied, and

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Z includes a statement described in
paragraph (d)(2)(vi)(C) of this section with its
U.S. income tax return for the taxable year of
the transfer. Subject to the conditions and
requirements of section 367(a)(5) and
§ 1.367(a)–7(c), Z’s transfer of the Business B
assets to R (which are not re-transferred to M)
qualifies for the active trade or business
exception under section 367(a)(3). Pursuant
to paragraphs (d)(1) and (d)(2)(vii)(A)(1) of
this section, V is generally deemed to transfer
the stock of a foreign corporation to F in a
section 354 exchange subject to the rules of
paragraphs (b) and (d) of this section,
including the requirement that V enter into
a gain recognition agreement and comply
with the requirements of § 1.367(a)–8.
However, pursuant to paragraph (d)(2)(vii)(B)
of this section, paragraph (d)(2)(vii)(A) of this
section does not apply to the extent of the
transfer of business A assets by R to M, a
domestic corporation. As a result, to the
extent of the business A assets transferred by
R to M, V is deemed to transfer the stock of
Z (a domestic corporation) to F in a section
354 exchange subject to the rules of
paragraphs (c) and (d) of this section. Thus,
with respect to V’s indirect transfer of stock
of a domestic corporation to F, such transfer
is not subject to gain recognition under
section 367(a)(1) if the requirements of
paragraph (c) of this section are satisfied,
including the requirement that V enter into
a gain recognition agreement (separate from
the gain recognition agreement described
above with respect to the deemed transfer of
stock of a foreign corporation to F) and
comply with the requirements of § 1.367(a)–
8. Under paragraphs (d)(2)(i) and (ii) of this
section, the transferee foreign corporation is
F and the transferred corporation is R (with
respect to the transfer of stock of a foreign
corporation) and M (with respect to the
transfer of stock of a domestic corporation).
Pursuant to paragraph (d)(2)(iv) of this
section, a disposition by F of the stock of R
would trigger both gain recognition
agreements. In addition, a disposition by R of
the stock of M would trigger the gain
recognition agreement filed with respect to
the transfer of the stock of a domestic
corporation. To determine whether there is a
triggering event under § 1.367(a)–8(j)(2)(i) for
the gain recognition agreement filed with
respect to the transfer of stock of the
domestic corporation, the Business A assets
in M must be considered. To determine
whether there is such a triggering event for
the gain recognition agreement filed with
respect to the transfer of stock of the foreign
corporation, the Business B assets in R must
be considered.

*

*
*
*
*
(e) Transfers of stock or securities by
a domestic corporation to a foreign
corporation in a section 361 exchange—
(1) Overview—(i) Scope and definitions.
This paragraph (e) applies to a domestic
corporation (U.S. transferor) that
transfers stock or securities of a
domestic or foreign corporation
(transferred stock or securities) to a
foreign corporation (foreign acquiring
corporation) in a section 361 exchange.
Except as otherwise provided in this

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

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

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

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shareholder as the U.S. transferor for
purposes of § 1.367(a)–8.
(iv) If the transfer of the transferred
stock or securities in the section 361
exchange is pursuant to a triangular
asset reorganization, the gain
recognition agreement shall include
appropriate provisions that are
consistent with the principles of
§ 1.367(a)–8 for gain recognition
agreements involving multiple parties.
See § 1.367(a)–8(j)(9).
(v) The gain recognition agreement
shall not be eligible for termination
upon a taxable disposition pursuant to
§ 1.367(a)–8(o)(1) unless the value of the
stock or securities received by the U.S.
transferor shareholder in exchange for
the stock or securities of the U.S.
transferor under section 354 or 356 is at
least equal to the amount of gain subject
to the gain recognition agreement filed
by such U.S. transferor shareholder.
(vi) Except as otherwise provided in
this paragraph (e)(6)(vi), if gain is
subsequently recognized by the U.S.
transferor shareholder under the terms
of the gain recognition agreement
pursuant to § 1.367(a)–8(c)(1)(i), the
increase in stock basis provided under
§ 1.367(a)–8(c)(4)(i) with respect to the
stock received by the U.S. transferor
shareholder shall not exceed the amount
of the stock basis adjustment made
pursuant to § 1.367(a)–7(c)(3) with
respect to the stock received by the U.S.
transferor shareholder. This paragraph
(e)(6)(vi) shall not apply if the U.S.
transferor shareholder and the U.S.
transferor are members of the same
consolidated group at the time of the
reorganization.
(vii) For purposes of this section, a
qualified U.S. person means a U.S.
person, as defined in § 1.367(a)–
1T(d)(1), but for this purpose does not
include domestic partnerships,
regulated investment companies (as
defined in section 851(a)), real estate
investment trusts (as defined in section
856(a)), and S corporations (as defined
in section 1361(a)).
(7) Gain subject to section 1248(a). If
the U.S. transferor recognizes gain
under paragraphs (e)(3)(iii)(B) or (C) of
this section with respect to transferred
stock that is stock in a foreign
corporation to which section 1248(a)
applies, then the portion of such gain
treated as a deemed dividend under
section 1248(a) is the product of the
amount of the gain multiplied by the
section 1248(a) ratio. The section
1248(a) ratio is the ratio of the amount
that would be treated as a deemed
dividend under section 1248(a) if all the
gain in the transferred stock were
recognized to the amount of gain
realized in all the transferred stock.

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

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

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

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

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

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this paragraph (e), and this paragraph (e)
applies to the transfer of the CFC1 stock and
CFC2 stock prior to the application of any
other provision of section 367 to such
transfer. See paragraphs (e)(1)(i) and (ii) of
this section. Pursuant to the general rule of
paragraph (e)(2) of this section, UST must
recognize the gain realized of $20x on the
transfer of the CFC1 stock (the excess of $40x
fair market value over $20x basis) and the
gain realized of $130x on the transfer of the
CFC2 stock (the excess of $160x fair market
value over $30x basis), subject to the
application of section 1248(a), unless the
requirements for the exception provided in
paragraph (e)(3) of this section are satisfied.
In this case, the requirement of paragraph
(e)(3)(i) of this section is satisfied because the
control requirement of § 1.367(a)–7(c)(1) is
satisfied, and a stated assumption is that the
requirements of § 1.367(a)–7(c)(2) through (5)
will be satisfied. The control requirement is
satisfied because US1 and US2, each a
control group member, own in the aggregate
80% of the UST stock immediately before the
reorganization. The requirement of paragraph
(e)(3)(ii) of this section is not applicable
because paragraph (e)(3)(ii) applies to the
transfer of stock of a domestic corporation,
and CFC1 and CFC2 are foreign corporations.
UST owns 5% or more of the total voting
power or value of the stock of FA (60%, or
60 of the 100 shares of FA stock outstanding)
immediately after the transfer of the CFC1
stock and CFC2 stock in the section 361
exchange, but prior to and without taking
into account UST’s distribution of the FA
stock under section 361(c)(1). As a result,
paragraph (e)(3)(iii) of this section is
applicable to the section 361 exchange of the
CFC1 stock and CFC2 stock. US1, US2, and
X each own (applying the attribution rules of
section 318, as modified by section 958(b))
5% or more of the total voting power or value
of the FA stock immediately after the
reorganization, or 30%, 18%, and 12%,
respectively. Accordingly, in order to meet
the requirements of paragraph (e)(3)(iii)(A) of
this section, US1 and US2 must enter into
gain recognition agreements with respect to
the CFC1 stock and CFC2 stock that satisfy
the requirements of paragraph (e)(6) of this
section and § 1.367(a)–8. X is not required to
enter into a gain recognition agreement
because the amount of gain that would be
subject to the gain recognition agreement is
zero. See paragraph (ii)(J) of this Example 3
for the computation of the amount of gain
subject to each gain recognition agreement.
Assuming US1 and US2 enter into the gain
recognitions agreements described above, the
requirements of paragraph (e)(3) of this
section are satisfied and accordingly, UST
does not recognize the gain realized of $20x
in the stock of CFC1 or the gain realized of
$130x in the stock of CFC2 pursuant to this
section.
(B) UST’s transfer of the CFC1 stock and
CFC2 stock to FA pursuant to the section 361
exchange is subject to § 1.367(b)–4(b)(1)(i),
which applies prior to the application of
§ 1.367(a)–7(c). See paragraph (e)(1) of this
section. UST (the exchanging shareholder) is
a U.S. person and a section 1248 shareholder
with respect to CFC1 and CFC2 (each a
foreign acquired corporation). However, UST

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

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

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

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shares). Similarly, US2’s hypothetical section
1248 amount with respect to the CFC1 stock
is $6x ($20x multiplied by 30%, reduced by
$0x), and the attributable share amount is
also $.33x ($6x/18 shares). Finally, US2’s
hypothetical section 1248 amount with
respect to the CFC2 stock is $39x ($130x
multiplied by 30%, reduced by $0x), and the
attributable share amount is also $2.17x
($39x/18 shares). Thus, the sum of the
portion of the section 1248(f) amount with
respect to the CFC1 stock and CFC2 stock
attributable to shares of stock of FA
distributed to US1 and US2 is $120x ($10x
plus $65x plus $6x plus $39x).
(2) If the shares of FA stock are divided
into portions, § 1.1248(f)–2(d)(2) applies to
attribute the attributable share amount to
portions of shares of FA stock distributed to
US1 and US2. Under § 1.1248(f)–2(c)(2) each
share of FA stock received by US1 (30 shares)
and US2 (18 shares) is divided into three
portions, one attributable to the single block
of stock of CFC1, one attributable to the
single block of stock of CFC2, and one
attributable to Asset A. Thus, the attributable
share amount of $.33x with respect to the
CFC1 stock is attributed to the portion of
each of the 30 shares and 18 shares of FA
stock received by US1 and US2, respectively,
that relates to the CFC1 stock. Similarly, the
attributable share amount of $2.17x with
respect to the CFC2 stock is attributed to the
portion of each of the 30 shares and 18 shares
of FA stock received by US1 and US2,
respectively, that relates to the CFC2 stock.
(3) The total section 1248(f) amount
($120x) that UST is otherwise required to
include in gross income as a dividend under
§ 1.1248(f)–1(b)(3) is reduced by $120x, the
sum of the portions of the section 1248(f)
amount with respect to the CFC1 stock and
CFC2 stock that are attributable to the shares
of FA stock distributed to US1 and US2.
Thus, the amount DC is required to include
in gross income as a dividend under
§ 1.1248(f)–1(b)(3) is $0x ($120x reduced by
$120x).
(H) As stated in paragraph (ii)(G)(2) of this
Example 3, under § 1.1248(f)–2(c)(2) each
share of FA stock received by US1 (30 shares)
and US2 (18 shares) is divided into three
portions, one attributable to the CFC1 stock,
one attributable to the CFC2 stock, and one
attributable to Asset A. Under § 1.1248(f)–
2(c)(4)(i), the basis of each portion is the
product of US1’s and US2’s section 358 basis
in the share of FA stock multiplied by the
ratio of the section 362 basis of the property
(CFC1 stock, CFC2 stock, or Asset A, as
applicable) received by FA in the section 361
exchange to which the portion relates, to the
aggregate section 362 basis of all property
received by FA in the section 361 exchange.
Under § 1.1248(f)–2(c)(4)(ii), the fair market
value of each portion is the product of the
fair market value of the share of FA stock
multiplied by the ratio of the fair market
value of the property (CFC1 stock, CFC2
stock, or Asset A, as applicable) to which the
portion relates, to the aggregate fair market
value of all property received by FA in the
section 361 exchange. The section 362 basis
of the CFC1 stock, CFC2 stock, and Asset A
is $24x, $56x, and $48x, respectively, for an
aggregate section 362 basis of $128x. See

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

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

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

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($0x with respect to the CFC1 stock, and $0x
with respect to the CFC2 stock). X is not
required to enter into a gain recognition
agreement because the amount of gain that
would be subject to the gain recognition
agreement is $0x with respect to the CFC1
stock, and $0x with respect to the CFC2
stock, computed as X’s ownership percentage
(20%) multiplied by the gain realized in the
stock of CFC1 ($20x multiplied by 20%, or
$4x) and CFC2 ($130x multiplied by 20%, or
$26x), reduced by the amount of gain
recognized by UST with respect to the stock
of CFC1 and CFC2 that is attributable to X
pursuant to § 1.367(a)–7(c)(2) ($4x and $26x,
respectively, as determined in paragraph
(ii)(C) of this Example 3). Pursuant to
paragraph (e)(6)(ii) of this section, each gain
recognition agreement must include the
election described in § 1.367(a)–8(c)(2)(vi).
Furthermore, pursuant to paragraph (e)(6)(iii)
of this section, US1 and US2 must be
designated as the U.S. transferor on their
respective gain recognition agreements for
purposes of § 1.367(a)–8.

(9) Illustration of rules. For rules
relating to certain distributions of stock
of a foreign corporation by a domestic
corporation, see section 1248(f) and
§§ 1.1248(f)–1 through 1.1248(f)–3.
*
*
*
*
*
(g) * * *
(1) * * *
(vii) * * *
(A) Except as provided in this
paragraph (g)(1)(vii), the rules of
paragraph (e) of this section apply to
transfers of stock or securities occurring
on or after April 17, 2013. For matters
covered in this section for periods
before April 17, 2013, but on or after
March 13, 2009, see § 1.367(a)–3(e) as
contained in 26 CFR part 1 revised as of
April 1, 2012. For matters covered in
this section for periods before March 13,
2009, but on or after March 7, 2007, see
§ 1.367(a)–3T(e) as contained in 26 CFR
part 1 revised as of April 1, 2007. For
matters covered in this section for
periods before March 7, 2007, but on or
after July 20, 1998, see § 1.367(a)–
8(f)(2)(i) as contained in 26 CFR part 1
revised as of April 1, 2006.
*
*
*
*
*
(ix) Paragraphs (d)(2)(vi)(B)(1)(i) and
(iii), (d)(2)(vi)(B)(2), and (d)(3),
Examples 6B, 6C, and 9 of this section
apply to transfers that occur on or after
March 18, 2013. See paragraphs
(d)(2)(vi)(B)(1)(i) and (iii),
(d)(2)(vi)(B)(2), and (d)(3), Examples 6B,
6C, and 9 of this section, as contained
in 26 CFR part 1 revised as of April 1,
2012, for transfers that occur on or after
January 23, 2006, and before March 18,
2013. Paragraph (d)(2)(vi)(B)(1)(ii) of
this section applies to statements that
are required to be filed on or after
November 19, 2014. See paragraph
(d)(2)(vi)(B)(1)(ii) of this section, as

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Federal Register / Vol. 81, No. 55 / Tuesday, March 22, 2016 / Rules and Regulations
contained in 26 CFR part 1 revised as of
April 1, 2014, for statements required to
be filed on or after March 18, 2013, and
before November 19, 2014.
*
*
*
*
*
§ 1.367(a)–3T

[Removed]

Par. 3. Section 1.367(a)–3T is
removed.
■ Par. 4. Section 1.367(a)–6 is added to
read as follows:
■

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

(a) through (e)(3) [Reserved]. For
further guidance, see § 1.367(a)–6T(a)
through (e)(3).
(4) Gain recognized under section
367(a). The previously deducted branch
losses shall be reduced by any gain
recognized pursuant to section 367(a)(1)
(other than by reason of the provisions
of this section) upon the transfer of the
assets of the foreign branch to the
foreign corporation. For transactions
occurring on or after April 17, 2013,
notwithstanding the prior sentence, this
paragraph (e)(4) shall apply before the
rules of § 1.367(a)–7(c).
(e)(5) through (i) [Reserved]. For
further guidance, see § 1.367(a)–6T(e)(5)
through (i).
§ 1.367(a)–6T

[Amended]

Par. 5. Section 1.367(a)–6T is
amended by removing and reserving
paragraph (e)(4) and removing
paragraph (j).
■ Par. 6. Section 1.1248(f)–3 is revised
by adding paragraph (a) and adding a
sentence at the end of paragraph (b)(1)
to read as follows:
■

asabaliauskas on DSK3SPTVN1PROD with RULES

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

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

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(2) Procedures for establishing that a
failure to timely comply was due to
reasonable cause and not willful
neglect—(i) Time of submission. A
reporting person’s statement that the
failure to timely comply was due to
reasonable cause and not willful neglect
will be considered only if, promptly
after the reporting person becomes
aware of the failure, an amended return
is filed for the taxable year to which the
failure relates that includes the
information that should have been
included with the original return for
such taxable year or that otherwise
complies with the rules of this section,
and that includes a written statement
explaining the reasons for the failure to
timely comply.
(ii) Notice requirement. In addition to
the requirements of paragraph (a)(2)(i) of
this section, the reporting person must
comply with the notice requirements of
this paragraph (a)(2)(ii). If any taxable
year of the reporting person is under
examination when the amended return
is filed, a copy of the amended return
and any information required to be
included with such return must be
delivered to the Internal Revenue
Service personnel conducting the
examination. If no taxable year of the
reporting person is under examination
when the amended return is filed, a
copy of the amended return and any
information required to be included
with such return must be delivered to
the Director.
(b) * * *
(1) * * * The provisions of
§ 1.1248(f)–3(a) apply to distributions
occurring on or after April 17, 2013.
*
*
*
*
*
§ 1.1248(f)–3T

[Removed]

Par. 7. Section 1.1248(f)–3T is
removed.
■ Par. 8. Section 1.6038B–1 is amended
by:
■ 1. Removing ‘‘or § 1.367(a)–3T’’ from
paragraph (c)(4)(ii).
■ 2. Revising paragraph (f)(3).
The revision reads as follows:
■

§ 1.6038B–1 Reporting of certain transfers
to foreign corporations.

*

*
*
*
*
(f) * * *
(3) Reasonable cause for failure to
comply—(i) Request for relief. If the U.S.
transferor fails to comply with any
requirement of section 6038B and this
section, the failure shall be deemed not
to have occurred if the U.S. transferor is
able to demonstrate that the failure was

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15169

due to reasonable cause and not willful
neglect using the procedure set forth in
paragraph (f)(3)(ii) of this section.
Whether the failure to timely comply
was due to reasonable cause and not
willful neglect will be determined by
the Director of Field Operations, Cross
Border Activities Practice Area of Large
Business & International (Director)
based on all the facts and
circumstances.
(ii) Procedures for establishing that a
failure to timely comply was due to
reasonable cause and not willful
neglect—(A) Time of submission. A U.S.
transferor’s statement that the failure to
timely comply was due to reasonable
cause and not willful neglect will be
considered only if, promptly after the
U.S. transferor becomes aware of the
failure, an amended return is filed for
the taxable year to which the failure
relates that includes the information
that should have been included with the
original return for such taxable year or
that otherwise complies with the rules
of this section, and that includes a
written statement explaining the reasons
for the failure to timely comply.
(B) Notice requirement. In addition to
the requirements of paragraph
(f)(3)(ii)(A) of this section, the U.S.
transferor must comply with the notice
requirements of this paragraph
(f)(3)(ii)(B). If any taxable year of the
U.S. transferor is under examination
when the amended return is filed, a
copy of the amended return and any
information required to be included
with such return must be delivered to
the Internal Revenue Service personnel
conducting the examination. If no
taxable year of the U.S. transferor is
under examination when the amended
return is filed, a copy of the amended
return and any information required to
be included with such return must be
delivered to the Director.
*
*
*
*
*
§ 1.6038B–1T

[Amended]

Par. 9. Section 1.6038B–1T is
amended by removing and reserving
paragraphs (c)(4)(ii)(B) and (f)(3).

■

§§ 1.367(a)–2T, 1.367(a)–3, 1.367(a)–4T,
1.367(a)–7, 1.367(a)-8, 1.367(b)–4, 1.367(e)–
1, 1.1248(f)–1, 1.1248(f)–2, 1.6038B–1,
1.6038B–1T [Amended]

Par. 10. For each section listed in the
table, remove the language in the
‘‘Remove’’ column and add in its place
the language in the ‘‘Add’’ column as set
forth below:

■

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asabaliauskas on DSK3SPTVN1PROD with RULES

15170

Federal Register / Vol. 81, No. 55 / Tuesday, March 22, 2016 / Rules and Regulations
Section

Remove

Add

§ 1.367(a)–2T(a)(2), fourth sentence ...........................
§ 1.367(a)–3(d)(3), Example 12(ii), third sentence ......
§ 1.367(a)–4T(d), first sentence ...................................
§ 1.367(a)–7(c) introductory text, second sentence ....
§ 1.367(a)–7(c)(2)(i)(A), first sentence .........................
§ 1.367(a)–7(c)(2)(ii)(A)(1), first sentence ....................
§ 1.367(a)–7(c)(3)(v), first sentence .............................
§ 1.367(a)–7(c)(4)(ii), first sentence .............................
§ 1.367(a)–7(e)(1), third sentence ...............................
§ 1.367(a)–7(e)(1), fourth sentence .............................
§ 1.367(a)–7(e)(4)(i), paragraph heading .....................
§ 1.367(a)–7(e)(4)(i), first sentence .............................
§ 1.367(a)–7(e)(4)(i), first sentence .............................
§ 1.367(a)–7(e)(4)(i), last sentence ..............................
§ 1.367(a)–7(e)(4)(ii), first sentence .............................
§ 1.367(a)–7(e)(4)(ii), last sentence .............................
§ 1.367(a)–7(e)(4)(ii), last sentence .............................
§ 1.367(a)–7(e)(5)(i), paragraph heading .....................
§ 1.367(a)–7(e)(5)(i), first sentence .............................
§ 1.367(a)–7(e)(5)(i), first sentence .............................
§ 1.367(a)–7(e)(5)(i), last sentence ..............................
§ 1.367(a)–7(e)(5)(ii), first sentence .............................
§ 1.367(a)–7(e)(5)(ii), first sentence .............................
§ 1.367(a)–7(f)(4), last sentence ..................................
§ 1.367(a)–7(f)(4)(i), first sentence ..............................
§ 1.367(a)–7(f)(4)(ii), first sentence ..............................
§ 1.367(a)–7(f)(4)(iii), first sentence .............................
§ 1.367(a)–7(g) introductory text, second sentence ....
§ 1.367(a)–7(h), second sentence ...............................
§ 1.367(a)–8(c)(6), first sentence .................................
§ 1.367(a)–8(j)(9), first sentence ..................................
§ 1.367(b)–4(b)(1)(iii) Example 4(i), ninth sentence ....
§ 1.367(b)–4(b)(1)(iii), Example 4(i), tenth sentence ...
§ 1.367(b)–4(b)(1)(iii), Example 5(i), penultimate sentence.
§ 1.367(b)–4(b)(1)(iii) Example 5(i), last sentence ......
§ 1.367(e)–1(e), first sentence .....................................
§ 1.1248(f)–1(c)(4)(i), first sentence .............................
§ 1.1248(f)–2(e) introductory text, second sentence ...
§ 1.1248(f)–2(e), Example 2(i), last sentence ..............
§ 1.1248(f)–2(e), Example 2(i), last sentence ..............
§ 1.1248(f)–2(e), Example 2(ii)(A), first sentence ........
§ 1.1248(f)–2(e), Example 2(ii)(A), first sentence ........
§ 1.1248(f)–2(e), Example 2(ii)(A), second sentence ..
§ 1.1248(f)–2(e), Example 2(ii)(A), third sentence .......
§ 1.1248(f)–2(e), Example 2(ii)(A), fourth sentence ....
§ 1.1248(f)–2(e), Example 2(ii)(A), fourth sentence ....
§ 1.1248(f)–2(e), Example 3(i), penultimate sentence
§ 1.1248(f)–2(e), Example 3(ii)(A), first sentence ........
§ 1.1248(f)–2(e), Example 3(ii)(A), first sentence ........
§ 1.1248(f)–2(e), Example 3(ii)(A), second sentence ..
§ 1.1248(f)–2(e), Example 3(ii)(A), third sentence .......
§ 1.1248(f)–2(e), Example 3(ii)(A), fourth sentence ....
§ 1.1248(f)–2(e), Example 3(ii)(A), fourth sentence ....
§ 1.1248(f)–2(e), Example 3(ii)(G), first sentence .......
§ 1.1248(f)–2(e), Example 3(ii)(G), first sentence .......
§ 1.1248(f)–2(f), third sentence ....................................
§ 1.6038B–1T(c)(4)(ii)(A), second sentence ................
§ 1.6038B–1T(c)(4)(ii)(A), second sentence ................

§ 1.367(a)–3T ..............................................................
§ 1.367(a)–3T(e)(3) .....................................................
§ 1.367(a)–3T ..............................................................
§ 1.367(a)–3T ..............................................................
§ 1.367(a)–3T(e)(3)(iii)(B) ............................................
§ 1.367(a)–3T(e)(3)(iii)(C) ............................................
§ 1.367(a)–3T(e)(8) .....................................................
§ 1.367(a)–3T(e) ..........................................................
§ 1.367(a)–3T(e) ..........................................................
§ 1.367(a)–3T(e)(3)(iii)(B) ............................................
§ 1.367(a)–3T(e)(3)(iii)(A) ............................................
§ 1.367(a)–3T(e)(3)(iii)(B) ............................................
§ 1.367(a)–3T(e)(3)(iii)(A) ............................................
§ 1.367(a)–3T(e)(3)(iii)(A) ............................................
§ 1.367(a)–3T(e)(3)(iii)(B) ............................................
§ 1.367(a)–3T(e)(7) .....................................................
§ 1.367(a)–3T(e)(3)(iii)(B) ............................................
§ 1.367(a)–3T(e)(3)(iii)(A) ............................................
§ 1.367(a)–3T(e)(3)(iii)(B) ............................................
§ 1.367(a)–3T(e)(3)(iii)(A) ............................................
§ 1.367(a)–3T(e)(3)(iii)(A) ............................................
§ 1.367(a)–3T(e)(3)(iii)(B) ............................................
§ 1.367(a)–3T(e)(7) .....................................................
§ 1.367(a)–3T(e)(3)(iii)(B) ............................................
§ 1.367(a)–3T(e)(3)(iii)(B) ............................................
§ 1.367(a)–3T(e)(3)(iii)(A) ............................................
§ 1.367(a)–3T(e)(3)(iii)(A) ............................................
§ 1.367(a)–3T(e)(8) .....................................................
§ 1.367(a)–3T(e) ..........................................................
§ 1.367(a)–3T(e)(6) .....................................................
§ 1.367(a)–3T(e)(6)(iv) ................................................
§ 1.367(a)–3T(e)(6) .....................................................
§ 1.367(a)–3T(e) ..........................................................
§ 1.367(a)–3T(e)(6) .....................................................

§ 1.367(a)–3.
§ 1.367(a)–3(e)(3).
§ 1.367(a)–3.
§ 1.367(a)–3.
§ 1.367(a)–3(e)(3)(iii)(B).
§ 1.367(a)–3(e)(3)(iii)(C).
§ 1.367(a)–3(e)(8).
§ 1.367(a)–3(e).
§ 1.367(a)–3(e).
§ 1.367(a)–3(e)(3)(iii)(B).
§ 1.367(a)–3(e)(3)(iii)(A).
§ 1.367(a)–3(e)(3)(iii)(B).
§ 1.367(a)–3(e)(3)(iii)(A).
§ 1.367(a)–3(e)(3)(iii)(A).
§ 1.367(a)–3(e)(3)(iii)(B).
§ 1.367(a)–3(e)(7).
§ 1.367(a)–3(e)(3)(iii)(B).
§ 1.367(a)–3(e)(3)(iii)(A).
§ 1.367(a)–3(e)(3)(iii)(B).
§ 1.367(a)–3(e)(3)(iii)(A).
§ 1.367(a)–3(e)(3)(iii)(A).
§ 1.367(a)–3(e)(3)(iii)(B).
§ 1.367(a)–3(e)(7).
§ 1.367(a)–3(e)(3)(iii)(B).
§ 1.367(a)–3(e)(3)(iii)(B).
§ 1.367(a)–3(e)(3)(iii)(A).
§ 1.367(a)–3(e)(3)(iii)(A).
§ 1.367(a)–3(e)(8).
§ 1.367(a)–3(e).
§ 1.367(a)–3(e)(6).
§ 1.367(a)–3(e)(6)(iv).
§ 1.367(a)–3(e)(6).
§ 1.367(a)–3(e).
§ 1.367(a)–3(e)(6).

§ 1.367(a)–3T(e) ..........................................................
§ 1.367(a)–3T(e) ..........................................................
§ 1.367(a)–3T(e)(3)(iii)(A) ............................................
§ 1.367(a)–3T(e)(8), Example 3 ..................................
§ 1.367(a)–3T(e)(3)(iii)(A) ............................................
§ 1.367(a)–3T(e)(6) .....................................................
§ 1.367(a)–3T(e)(2) .....................................................
§ 1.367(a)–3T(e)(3)(i) ..................................................
§ 1.367(a)–3T(e)(3)(i) ..................................................
§ 1.367(a)–3T(e)(3)(ii) .................................................
§ 1.367(a)–3T(e)(3)(iii) .................................................
§ 1.367(a)–3T(e)(6) .....................................................
§ 1.367(a)–3T(e)(6) .....................................................
§ 1.367(a)–3T(e)(2) .....................................................
§ 1.367(a)–3T(e)(3)(i) ..................................................
§ 1.367(a)–3T(e)(3)(i) ..................................................
§ 1.367(a)–3T(e)(3)(ii) .................................................
§ 1.367(a)–3T(e)(3)(iii) .................................................
§ 1.367(a)–3T(e)(6) .....................................................
§ 1.367(a)–3T(e)(6) .....................................................
§ 1.367(a)–3T(e)(6)(i)(A) .............................................
§ 1.367(a)–3T(e) ..........................................................
§ 1.367(a)–3T(d)(2) .....................................................
§ 1.367(a)–3T(d)(2) .....................................................

§ 1.367(a)–3(e).
§ 1.367(a)–3(e).
§ 1.367(a)–3(e)(3)(iii)(A).
§ 1.367(a)–3(e)(8), Example 3.
§ 1.367(a)–3(e)(3)(iii)(A).
§ 1.367(a)–3(e)(6).
§ 1.367(a)–3(e)(2).
§ 1.367(a)–3(e)(3)(i).
§ 1.367(a)–3(e)(3)(i).
§ 1.367(a)–3(e)(3)(ii).
§ 1.367(a)–3(e)(3)(iii).
§ 1.367(a)–3(e)(6).
§ 1.367(a)–3(e)(6).
§ 1.367(a)–3(e)(2).
§ 1.367(a)–3(e)(3)(i).
§ 1.367(a)–3(e)(3)(i).
§ 1.367(a)–3(e)(3)(ii).
§ 1.367(a)–3(e)(3)(iii).
§ 1.367(a)–3(e)(6).
§ 1.367(a)–3(e)(6).
§ 1.367(a)–3(e)(6)(i)(A).
§ 1.367(a)–3(e).
§ 1.367(a)–3(d)(2).
§ 1.367(a)–3(d)(2).

John Dalrymple,
Deputy Commissioner for Services and
Enforcement.
Dated: March 11, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2016–06404 Filed 3–18–16; 4:15 pm]
BILLING CODE 4830–01–P

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