[Federal Register: February 5, 2007 (Volume 72, Number 23)]
[Rules and Regulations]
[Page 5174-5197]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05fe07-9]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9311]
RIN 1545-BG10
Certain Transfers of Stock or Securities by U.S. Persons to
Foreign Corporations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final and temporary regulations under
section 367(a) of the Internal Revenue Code (Code) regarding gain
recognition agreements. The final regulations are necessary to update
cross-references in the current regulations. The temporary regulations
are necessary to respond to comments requested in Notice 2005-74. The
regulations primarily affect U.S. persons that transfer stock or
securities to foreign corporations or corporations engaged in
transactions that affect existing gain recognition agreements. The text
of these temporary regulations also serves as the text of the proposed
regulations (REG-147144-06) set forth in the notice of proposed
rulemaking on this subject published elsewhere in this issue of the
Federal Register.
DATES: Effective Date: These regulations are effective February 5,
2007.
Applicability Dates: For dates of applicability, see Sec. Sec.
1.367(a)-3T(f) and 1.367(a)-8T(h).
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-147144-06), room
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m.
[[Page 5175]]
to CC:PA:LPD:PR (REG-147144-06), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC, or sent
electronically, via the IRS Internet site at http://www.irs.gov/regs or via the Federal eRulemaking Portal at http://www.regulations.gov (IRS
REG-147144-06).
FOR FURTHER INFORMATION CONTACT: Daniel McCall, (202) 622-3860 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These temporary regulations are being issued without prior notice
and public procedure pursuant to the Administrative Procedure Act (5
U.S.C. 553). For this reason, the collections of information contained
in these regulations have been reviewed and pending receipt and
evaluation of public comments, approved by the Office of Management and
Budget in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)) under control number 1545-2056. Response to these
collections of information is mandatory.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information, unless the collection of
information displays a valid control number.
For further information concerning this collection of information,
and where to submit comments on the collection of information and the
accuracy of the estimated burden, and suggestions for reducing the
burden, please refer to the preamble to the cross-referencing notice of
proposed rulemaking published elsewhere in the Proposed Rules section
of this issue of the Federal Register.
Books and records relating to these collections of information must
be retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
Section 367(a)(1) provides that if, in connection with any exchange
described in section 332, 351, 354, 356, or 361, a United States person
(U.S. transferor) transfers property to a foreign corporation
(transferee foreign corporation), such foreign corporation shall not,
for purposes of determining the extent to which gain shall be
recognized on such transfer, be considered to be a corporation. Section
367(a)(2), (3) and (6) provides exceptions to this general rule and
grants regulatory authority to provide additional exceptions and to
limit the statutory exceptions.
Exceptions to the general rule of section 367(a)(1) for certain
transfers by a U.S. transferor of the stock or securities of a
corporation (transferred corporation) to a transferee foreign
corporation are provided in Sec. 1.367(a)-3 (initial transfer). In
some cases, these exceptions require, among other things, that the U.S.
transferor file a gain recognition agreement (GRA), as provided in
Sec. 1.367(a)-8. Section 1.367(a)-3(b)(1)(ii) and (c)(1)(iii)(B).
Pursuant to a GRA, the U.S. transferor agrees, among other things, to
include in income the gain realized, but not recognized, on the initial
transfer of the stock or securities, and pay any applicable interest,
upon certain events (triggering events) that occur before the close of
the fifth full taxable year following the year of the initial transfer.
Section 1.367(a)-8(b)(1)(iii) and (3)(i).
Section 1.367(a)-8(e)(1) and (2) provides that dispositions of the
stock or securities of the transferred corporation are generally
triggering events. Similarly, Sec. 1.367(a)-8(e)(3) provides that
dispositions of substantially all (within the meaning of section
368(a)(1)(C)) of the assets of the transferred corporation are
generally treated as deemed dispositions of the stock or securities of
the transferred corporation and therefore are also triggering events.
Finally, dispositions of stock of the transferee foreign corporation
can also be triggering events. See Sec. 1.367(a)-8(f)(2)(ii).
Notwithstanding these rules, Sec. 1.367(a)-8 provides that various
nonrecognition transactions are not triggering events if certain
requirements are satisfied. For example, Sec. 1.367(a)-8(g) provides
exceptions for certain transactions involving the U.S. transferor, the
transferee foreign corporation, and the transferred corporation.
Although these exceptions clearly contemplate some nonrecognition
transactions, the current regulations are unclear whether, and if so
how, the exceptions apply to various asset reorganizations involving
section 361 exchanges by the U.S. transferor, the transferee foreign
corporation, and the transferred corporation.
Section 1.367(a)-8 also provides that certain nonrecognition
transactions are not triggering events because the GRA is terminated
without further effect. For example, Sec. 1.367(a)-8(h)(3) lists
certain nonrecognition transactions that terminate the GRA, provided
that immediately after the transaction the basis in the transferred
stock is not greater than the U.S. transferor's basis in the stock
that, immediately before the initial transfer, necessitated the GRA.
On September 28, 2005, the IRS and the Treasury Department issued
Notice 2005-74 (2005-42 IRB 726), see Sec. 601.601(d)(2), which
announced the intention to amend the regulations under section 367(a)
to address the effect on GRAs of certain asset reorganizations
involving the U.S. transferor, the transferee foreign corporation, and
the transferred corporation. The notice was issued in response to
comments that the current regulations do not adequately address various
asset reorganizations involving the U.S. transferor, the transferee
foreign corporation, and the transferred corporation. Notice 2005-74
addressed the most common of these reorganizations and requested
comments on other transactions (for example, certain upstream and
downstream reorganizations).
Notice 2005-74 generally provided that, if particular requirements
are satisfied, certain asset reorganizations of the U.S. transferor,
the transferee foreign corporation, or the transferred corporation will
not constitute triggering events. A key premise of the notice was that
the covered transactions involved situations where the ability to
collect tax is sufficiently preserved in the event of a subsequent
trigger of the GRA (that is, the obligor under the GRA remains
unchanged as a result of the asset reorganization). In light of
taxpayer comments and further study, however, the IRS and Treasury
Department have determined that there are additional instances where
the ability to collect tax after these asset reorganizations and
certain other nonrecognition transactions (as defined in section
7701(a)(45)) is sufficiently preserved so that these transactions also
should not constitute a triggering event if particular requirements are
met. The IRS and Treasury Department also have concluded that other
portions of the current section 367(a) regulations addressing GRAs
should be revised.
Explanation of Provisions
A. Overview
The temporary regulations adopt the rules announced in Notice 2005-
74, with a number of modifications discussed below. Notice 2005-74 only
provided guidance on a particular range of transactions, namely certain
asset reorganizations, that are insufficiently addressed in the current
regulations. The temporary regulations respond to comments and provide
guidance on the effect on GRAs of transactions that are
[[Page 5176]]
not addressed in the current regulation or Notice 2005-74. The
temporary regulations also make additional changes to the existing
regulations. For example, the temporary regulations modify and clarify
procedural requirements attendant to entering into GRAs. Finally, the
temporary regulations reorganize the current regulation so that
distinct paragraphs address triggering events, exceptions to triggering
events, and events that terminate a GRA. The IRS and Treasury
Department continue to consider issuing additional public guidance that
further revises Sec. 1.367(a)-8.
B. Effect of Certain Asset Reorganizations and Nontaxable Liquidations
on Gain Recognition Agreements
1. Transfers of Transferee Foreign Corporation Stock by U.S. Transferor
(a) Asset Reorganizations
Notice 2005-74 provided that if, in a section 361 transaction, a
U.S. transferor transfers all or a portion of the stock or securities
of the transferee foreign corporation to an acquiring domestic
corporation (successor U.S. transferor) pursuant to certain asset
reorganizations, the exchanges made pursuant to the asset
reorganization will trigger the gain recognition agreement, unless
various conditions are satisfied. These conditions are: (1) The U.S.
transferor must have been a member of a consolidated group (original
consolidated group) at the time of the initial transfer and the common
parent of such group (original common parent) entered into the original
GRA; (2) immediately after the asset reorganization, the successor U.S.
transferor is a member of the original consolidated group
(consolidation continuity requirement); and (3) the original common
parent enters into a new GRA with respect to the transfer subject to
the original GRA, modified by substituting the successor U.S.
transferor for the original U.S. transferor. A notice of the asset
reorganization also must be provided with the successor U.S.
transferor's next annual certification.
For this purpose, an asset reorganization is defined as a
reorganization described in section 368(a)(1) involving the transfer of
assets by a corporation to another corporation pursuant to section 361,
except that such term shall include reorganizations described in
section 368(a)(1)(D) or (G) only if the requirements of section
354(b)(1)(A) and (B) are met.
The IRS and Treasury Department received several comments that the
consolidation continuity requirement was unduly restrictive because it
focused on maintaining the same obligor for a GRA following the asset
reorganization. Commentators asserted that an equal or better ability
to collect the tax due as a result of a triggering event subsequent to
such a reorganization may be preserved in certain instances where the
consolidation continuity requirement would not be satisfied. However,
these same commentators noted that if there were no consolidation
continuity requirement, such that a U.S. transferor that is a member of
a consolidated group at the time of the initial transfer could be
acquired in a later asset reorganization by a corporation (successor
corporation) that is not a member of such group without triggering the
GRA, the actions of the successor corporation could inappropriately
affect the liability of the original consolidated group under the GRA.
As a result, the commentators requested that the consolidation
continuity requirement be curtailed or eliminated, while at the same
time not inappropriately exposing the original consolidated group to
the liabilities arising from the actions of the successor corporation.
The IRS and Treasury Department generally agree with these views.
Therefore, the temporary regulations eliminate the consolidation
continuity requirement and address concerns about the liability of a
consolidated group that disposes of a U.S. transferor subject to a GRA.
Specifically, the temporary regulations provide that when a U.S.
transferor transfers all or a portion of the stock of the transferee
foreign corporation to an acquiring corporation in an asset
reorganization, the exchanges made pursuant to the reorganization will
not be triggering events and the GRA will terminate without further
effect, but only if certain requirements are satisfied. These
requirements ensure that the ability to collect tax is sufficiently
preserved and that the terms of the GRA are administrable.
First, the acquiring corporation (successor U.S. transferor) must
be a domestic corporation, and the successor U.S. transferor or the
common parent of the consolidated group of which the successor U.S.
transferor is a member (as applicable) must enter into a new GRA to
recognize gain with respect to the initial transfer during the
remaining term of the original GRA (with certain modifications).
Second, with its next certification, the successor U.S. transferor
must provide to the IRS the new GRA, notice of the transaction, and
Form 8838 (Consent to Extend Time to Assess Tax Under Section 367) to
extend the period of assessment of tax on the initial transfer.
Third, unless the successor U.S. transferor is a member of the same
consolidated group of which the U.S. transferor was a member
immediately before the asset reorganization, the person entering into
the new GRA must elect that, if the new GRA is triggered in whole or in
part, the person will include the required amount in the year of the
triggering event (as opposed to the year of the initial transfer).
Requiring an inclusion in these circumstances only in the year of a
subsequent triggering event when the U.S. transferor is no longer owned
by the same consolidated group is necessary, among other reasons,
because the successor U.S. transferor may not have existed in the year
of the initial transfer. In such a case, the successor U.S. transferor
would not be able to amend a return for the year of the initial
transfer to include any tax due as a result of a subsequent triggering
event. Moreover, the requirement is appropriate even if the successor
U.S. transferor did exist in the year of the initial transfer because
its tax year for the year of the initial transfer may be closed. In
sum, this requirement assures the GRA rules are administrable and that
the ability to collect tax is sufficiently preserved. If these
requirements are met, the original GRA will terminate without further
effect.
The IRS and Treasury Department have decided to eliminate the
consolidation continuity requirement because these three requirements
adequately address the government's concern in this area by, among
other things, preserving the ability to collect the tax due as a result
of a triggering event subsequent to a covered asset reorganization. In
many asset reorganizations, the successor U.S. transferor will have an
equal or greater ability to pay the tax due in the case of a subsequent
triggering event than would the original U.S. transferor. Furthermore,
the current regulations generally do not impose any financial or other
requirements on the ability of a U.S. transferor to enter into a GRA.
But see Sec. 1.367(a)-8(d) (imposing a security requirement in certain
situations). Consequently, the IRS and Treasury Department believe that
even if in some circumstances an acquisition of a U.S. transferor may
affect the ability to collect the tax due as a result of a subsequent
triggering event (for example, the U.S. transferor is acquired from a
consolidated group by another consolidated group whose value is less
[[Page 5177]]
than that of the original consolidated group), the requirements above
nonetheless sufficiently preserve the ability to collect the tax that
would be due if the new GRA were triggered and ensure that the terms of
the GRA are administrable.
As described in this section, the temporary regulations require
that the acquirer be a domestic corporation because, among other
reasons, the IRS and Treasury Department are concerned that if a
foreign acquirer is allowed to enter into a new GRA, it may be
difficult for the IRS to collect any tax due in the event of a
subsequent trigger of the GRA. However, the IRS and Treasury Department
continue to study whether it would be appropriate to allow a domestic
corporate shareholder of the U.S. transferor to enter into a new GRA
when a U.S. transferor is acquired by a foreign corporation in an asset
reorganization under conditions similar to those provided in Sec.
1.367(a)-3T(e). The IRS and Treasury Department welcome more detailed
comments on specific approaches that could extend these rules to
foreign acquisitions of the U.S. transferor.
(b) Nontaxable Liquidations
The current regulations provide that, if a corporate U.S.
transferor liquidates in a transaction that qualifies under sections
332 and 337, the GRA is triggered unless (1) The U.S. transferor filed
a consolidated income tax return with a U.S. parent corporation both in
the year of the initial transfer and the year of the liquidation, and
(2) the common parent enters into a new GRA, with certain
modifications. Section 1.367(a)-8(f)(2)(ii).
The temporary regulations provide a similar rule. However, the
temporary regulations eliminate the consolidation continuity
requirement, so the U.S. transferor is no longer required to be a
member of the same consolidated group in the year of the initial
transfer and the year of the liquidation. Consequently, the temporary
regulations provide that where a U.S. transferor disposes of the stock
of the foreign transferee corporation in a liquidation that qualifies
under sections 332 and 337, the disposition will not constitute a
triggering event provided that: (1) The distributee (successor U.S.
transferor) is a domestic corporation described in section 332(b)(1);
(2) the successor U.S. transferor or, if the successor U.S. transferor
is a member of a consolidated group, the common parent of the successor
U.S. transferor's group, enters into a new GRA covering the remaining
term of the original GRA (with certain modifications); (3) where the
successor U.S. transferor is not a member of the original consolidated
group immediately after the liquidation, the person entering into the
GRA agrees that if there is a subsequent triggering event, the taxpayer
will recognize the gain in the year of the triggering event (as opposed
to the year of the initial transfer); and (4) the successor U.S.
transferor provides, with its next annual certification, Form 8838 to
extend the period of assessment of the tax on the initial transfer. If
these conditions are satisfied, the original GRA will terminate without
further effect.
For reasons similar to those discussed above in the context of
asset reorganizations involving the U.S. transferor, the IRS and
Treasury Department believe that the temporary regulations sufficiently
address the government's concerns in this area, including preserving
the ability to collect tax due as a result of a subsequent triggering
event. As a result, it is not necessary for the U.S. transferor to be a
member of the same consolidated group in the year of the transfer and
the year of the liquidation. In addition, the IRS and Treasury
Department believe that it is appropriate to require an inclusion in
the year of a subsequent triggering event if the successor U.S.
transferor was not a member of a consolidated group with the U.S.
transferor immediately before the liquidation for reasons similar to
those discussed regarding asset reorganizations involving the U.S.
transferor.
2. Transfers of Transferred Corporation Stock or Securities by
Transferee Foreign Corporation in an Asset Reorganization
Notice 2005-74 provided that if, in a section 361 transaction, a
transferee foreign corporation transfers stock or securities of a
transferred corporation to a foreign acquiring corporation in an asset
reorganization, the exchanges made pursuant to the reorganization will
be a triggering event, unless certain conditions are met. These
conditions require that the U.S. transferor, common parent, or new
common parent corporation, as applicable, enter into a new GRA, with
certain modifications. In addition, the U.S. transferor also is
required to provide the new GRA and a notice of the asset
reorganization with its next annual certification.
For purposes of this rule, Notice 2005-74 retained the same
definition of asset reorganization as used for the provision dealing
with transfers of transferee corporation stock, with certain
modifications. Specifically, Notice 2005-74 excludes the following
asset reorganizations: (1) Triangular asset reorganizations described
in Sec. 1.358-6(b); and (2) asset reorganizations where, after the
reorganization, the same corporation is both the transferee foreign
corporation (or successor transferee foreign corporation, as
applicable) and the transferred corporation (or the successor
transferred corporation, as applicable).
The temporary regulations generally incorporate these rules and
provide that if the above conditions are satisfied the original GRA
will terminate without further effect. However, even if these
conditions are satisfied, the temporary regulations provide specific
gain recognition rules if the transferee foreign corporation transfers
stock or securities of the transferred corporation in an asset
reorganization and the U.S. transferor recognizes gain under section
356(a)(1). See section C of this preamble.
As noted in this preamble, Notice 2005-74 excluded from the
definition of the term asset reorganization any triangular asset
reorganizations of the transferee foreign corporation and transferred
corporation and certain upstream and downstream reorganizations. In
response to comments and upon further study by the IRS and Treasury
Department, the temporary regulations address the treatment of
triangular asset reorganizations of the transferee foreign corporation
and certain upstream and downstream reorganizations. See sections G and
H of this preamble.
3. Transfers of Substantially All of a Transferred Corporation's Assets
Notice 2005-74 provides that if a transferred corporation transfers
substantially all its assets in an asset reorganization, the exchanges
made pursuant to the reorganization will be a triggering event, unless
certain conditions are met. These conditions require that the U.S.
transferor, U.S. parent corporation or new U.S. parent corporation, as
applicable, enters into a new GRA, with certain modifications. The U.S.
transferor also is required to provide the new GRA and the notice of
the asset reorganization with its next annual certification. The
definition of asset reorganization is the same as that used in asset
reorganizations involving the transferee foreign corporation.
The temporary regulations generally incorporate these rules and
provide that if these conditions are met, the original GRA will
terminate without further effect. However, even if these conditions are
satisfied, the temporary regulations provide specific gain recognition
rules (described in section C of this preamble)
[[Page 5178]]
if the transferred corporation transfers substantially all of its
assets in an asset reorganization and the transferee foreign
corporation recognizes gain under section 356(a)(1). In addition,
although the definition of asset reorganization excludes triangular
asset reorganizations and downstream mergers of the transferee foreign
corporation, the temporary regulations address the tax treatment of
these transactions. See sections G and H of this preamble.
C. Special Rules Regarding Nonrecognition Transactions Involving Money
or Other Property
The current regulations provide that certain nonrecognition
transactions are not triggering events if particular requirements are
satisfied. However, commentators have stated that the current
regulations provide that certain nonrecognition transactions at the
transferee foreign corporation or transferred corporation level in
which any money or other property (as described in sections 351(b) or
356(a)) is received in exchange are triggering events without
exception. These commentators assert that it is not appropriate to
trigger an entire GRA as a result of receiving a relatively minor
amount of ``boot'' in the nonrecognition transaction. These
commentators also note that the current regulations do not address
clearly the treatment of transfers of transferee foreign corporation
stock by a U.S. transferor in a nonrecognition transaction in which the
U.S. transferor receives boot.
The IRS and Treasury Department agree that the receipt of boot
under section 351(b) or 356(a)(1) in connection with the disposition of
transferred corporation stock or securities, or substantially all of a
transferred corporation's assets, should not automatically trigger all
the gain under a GRA. Accordingly, the temporary regulations provide
that if certain conditions are met, the entire GRA will not be
triggered when a transferee foreign corporation disposes of transferred
corporation stock or securities in a nonrecognition transaction simply
because the transferee foreign corporation receives boot.
However, the IRS and Treasury Department believe that the GRA
should be triggered to the extent that gain would be recognized in such
a transaction by a transferee foreign corporation or a transferred
corporation, before taking into account basis increases that may apply
to the stock or securities disposed of as a result of triggering the
GRA. The current, as well as the temporary regulations, provide that if
a U.S. transferor is required to recognize gain because of a triggering
event, then certain basis increases are allowed as of the date of the
initial transfer. Therefore, in determining the amount of gain that is
recognized under the GRA in such a transaction, the temporary
regulations provide that the U.S. transferor first must recognize that
amount of gain that the transferee foreign corporation or transferred
corporation would have recognized under 351(b) or 356(a)(1), before
taking into account the basis increases that are allowed under the
regulations as of the date of the initial transfer. Second, if the U.S.
transferor has not recognized all the gain realized, but not
recognized, on the initial transfer, then its new GRA will reflect any
remaining unrecognized gain on the initial transfer. Third, after the
consequences of the transaction are determined under the temporary
regulations, then the taxpayer must determine the amount of gain, if
any, that the transferee foreign corporation or transferred corporation
must recognize under 351(b) or 356(a)(1). In determining the amount to
be recognized, the basis of the stock disposed of shall reflect the
basis increase allowed as a result of the gain recognized under the GRA
by the U.S. transferor.
This special rule limiting recognition of gain in otherwise
nonrecognition transactions involving boot applies only if the U.S.
transferor complies with the otherwise applicable requirements of the
exception to recognizing all of the gain subject to the GRA when there
is a triggering event. This special rule is intended to require the
U.S. transferor to recognize only an appropriate amount of income,
without automatically triggering the entire GRA.
The IRS and Treasury Department also believe that additional
guidance is needed on the treatment of transfers of transferee foreign
corporation stock by a U.S. transferor in a nonrecognition exchange in
which the U.S. transferor receives boot. Therefore, the temporary
regulations treat the disposition of transferee foreign corporation
stock in a nonrecognition transaction by the U.S. transferor when the
U.S. transferor receives money or other property as described in
section 351(b) or 356(a) as a termination of the GRA in whole or in
part. Consequently, if a new GRA is filed, then the U.S. transferor
will recognize gain under the new GRA in the event of a subsequent
triggering event in the amount of the gain realized, but not
recognized, in the initial transfer less any gain recognized by the
U.S. transferor under section 351(b) and 356(a)(1) in connection with
the nonrecognition transaction. If, however, a new GRA is not filed in
connection with the nonrecognition transaction, then the original GRA
is triggered, and the U.S. transferor must recognize the gain that was
realized, but not recognized, on the initial transfer less any gain
recognized by the U.S. transferor under section 351(b) or 356(a)(1) in
connection with the nonrecognition transaction.
D. Effect of Consolidation and Deconsolidation on Gain Recognition
Agreements
Commentators noted that the current regulation does not adequately
address the effect on GRAs of certain transactions involving
consolidated groups. For example, the commentators noted that it is not
clear what effect a U.S. transferor becoming a member of a consolidated
group has on an existing GRA. The current regulations do provide,
however, that if a U.S. transferor is a member of a consolidated group
at the time of the initial transfer and ceases to be a member of the
group during the term of the GRA, the common parent of such group that
entered into the GRA continues to be liable under the original GRA.
Section 1.367(a)-8(b)(5)(ii). Several commentators have raised concerns
that such a result is not appropriate because the actions of an
acquirer could unilaterally affect the liability of the original
consolidated group under the GRA.
The IRS and Treasury Department agree that the effect of these
transactions needs to be clarified and rationalized. Accordingly, in
response to these concerns, the temporary regulations provide specific
rules addressing these transactions. In particular, the IRS and
Treasury Department believe that the U.S. parent corporation of a
consolidated group should not continue to be liable under a GRA with
respect to a U.S. transferor that is no longer a member of such group.
The temporary regulations provide that when a U.S. transferor
becomes a member of a consolidated group (including a transaction where
it joins such a group after being a member of another consolidated
group) the transaction is a triggering event unless certain conditions
are met. If these conditions are satisfied, the original GRA is
terminated without further effect. These conditions require the U.S.
parent corporation of the consolidated group that the U.S. transferor
joins (1) To enter into a new GRA for the remaining term of the
original GRA and (2) to elect to recognize gain in the taxable year of
any subsequent
[[Page 5179]]
triggering event (as opposed to the year of the initial transfer). A
notice of the consolidation transaction must also be filed with the
next annual certification. The IRS and Treasury Department believe that
these requirements ensure that a GRA remains in effect after a U.S.
transferor joins a consolidated group. These requirements are also
consistent with Sec. 1.1502-77(a), which provides that the common
parent is the sole agent for each member of the consolidated group.
In addition, the temporary regulations also cover situations in
which a U.S. transferor ceases to be a member of a consolidated group
and does not become a member of a new consolidated group. In these
cases, the transaction is a triggering event, unless certain conditions
are met. If these conditions are satisfied, the original GRA is
terminated without further effect. These conditions require the U.S.
transferor (1) To enter into a new GRA for the remaining term of the
original gain recognition agreement and (2) to elect that in the event
of a subsequent triggering event the U.S. transferor will recognize
gain in the year of the triggering event. The U.S. transferor must also
provide notice of the deconsolidation with the next annual
certification.
E. U.S. Transferor Goes Out of Existence in a Transaction Giving Rise
to a Gain Recognition Agreement
The current regulation provides that when a U.S. transferor goes
out of existence in a transaction giving rise to a GRA, gain generally
qualifies for nonrecognition treatment only if the U.S. transferor is
owned by a single U.S. parent corporation, the U.S. transferor and its
parent corporation file a consolidated Federal income tax return for
the taxable year that includes the transfer, and the parent of the
consolidated group enters into a GRA. Section 1.367(a)-8(f)(2)(i). The
current regulation provides that a U.S. transferor that is controlled
by five or fewer domestic corporations may request a ruling that the
transaction qualifies for nonrecognition treatment. Section 1.367(a)-
8(f)(2)(i).
Notice 2005-74, in turn, provides a rule that treats all members of
the U.S. parent's consolidated group for the taxable year that includes
the transfer as a single corporation for purposes of Sec. 1.367(a)-
8(f)(2)(i). Thus, a U.S. transferor that is not directly owned by a
single U.S. parent corporation may still qualify for nonrecognition,
without requesting a ruling, when the U.S. transferor goes out of
existence in a transaction giving rise to a GRA, if it is indirectly
wholly owned by members of a consolidated group.
The IRS and Treasury Department believe it is necessary to provide
additional guidance on how GRAs are entered into when a U.S. transferor
is controlled by multiple corporate shareholders with which the U.S.
transferor does not join in filing a consolidated return. Moreover, the
IRS and Treasury Department believe that in this area a single rule
should apply both in consolidated and nonconsolidated situations. As a
result, the temporary regulations provide unified rules, replacing both
the current regulations and Notice 2005-74, in situations in which a
U.S. transferor goes out of existence in a transaction giving rise to a
GRA.
The temporary regulations generally provide that when a U.S.
transferor goes out of existence in a transaction giving rise to a GRA,
the gain may qualify for nonrecognition treatment if (1) The
requirements of section 367(a)(5) and any regulations under that
paragraph are satisfied such that five or fewer domestic corporations
control the U.S. transferor and appropriate basis adjustments are made,
(2) the requirements of Sec. 1.367(a)-3(c)(1) are satisfied if the
transferred corporation is domestic, (3) all domestic corporate
shareholders of the U.S. transferor that own at least five percent of
either the total voting power or the total fair market value of the
stock of the transferee foreign corporation immediately after the
transaction enter into GRAs with respect to their pro rata share of the
gain in the transferred stock or securities that designate such
domestic corporate shareholders as U.S. transferors for purposes of
Sec. Sec. 1.367(a)-3(b) and (c) and 1.367(a)-8T, and (4) all domestic
corporate shareholders that enter into GRAs elect to recognize any gain
upon a subsequent trigger of the GRA in the year of the triggering
event.
The temporary regulations eliminate the current regulation's option
to request a private letter ruling because guidance is now provided on
how GRAs are entered into by five or fewer domestic corporations that
control a U.S. transferor satisfying section 367(a)(5). In addition,
the temporary regulations clarify that the terms of section 367(a)(5)
must be satisfied (along with other requirements) to avoid gain
recognition on the U.S. transferor's section 361 transfer of stock or
securities to a foreign acquiring corporation. Therefore, the rule in
Notice 2005-74 treating consolidated group members as a single
corporation is incorporated by reference to section 367(a)(5), which
provides that all members of the same affiliated group are treated as
one corporation. Lastly, because these rules address how gain
recognition may be avoided under section 367(a)(1) on the initial
transfer itself, rather than the effect of subsequent transactions on
existing GRAs, these rules have been removed from Sec. 1.367(a)-8 and
included instead in Sec. 1.367(a)-3T(e).
F. Transfers of Transferred Corporation's Assets
Under the current regulations, dispositions of substantially all of
the assets of the transferred corporation (within the meaning of
section 368(a)(1)(C)) are generally treated as deemed dispositions of
the stock or securities of the transferred corporation and therefore
are triggering events. Section 1.367(a)-8(e)(3). In Revenue Ruling 57-
518 (1957-2 CB 253), see Sec. 601.601(d)(2), the IRS stated that what
constitutes ``substantially all of the properties'' as the term is used
in section 368(a)(1)(C) ``will depend upon the facts and circumstances
in each case rather than upon any particular percentage.'' However,
Revenue Procedure 77-37 (1977-2 CB 586), see Sec. 601.601(d)(2),
provides that for ruling purposes, the transfer by a corporation of 70
percent of its gross assets or 90 percent of its assets net of
liabilities will generally be deemed to be a transfer of substantially
all of the assets of a corporation.
Commentators have noted that defining substantially all by
reference to section 368(a)(1)(C) may not be appropriate in the context
of the GRA rules. The IRS and Treasury Department, however, generally
believe that defining ``substantially all'' for these purposes by
reference to the definition of the term under section 368(a)(1)(C) is
appropriate. Nonetheless, the IRS and Treasury Department believe that
it is important to clarify the scope of the term ``substantially all,''
as used in the current regulation and the temporary regulations. One
commentator suggested that if a transferred corporation disposes of
less than 70 percent of its gross assets or 90 percent of its assets
net of liabilities, the transfer will not be treated as a disposition
of substantially all of the assets of the transferred corporation for
purposes of Sec. 1.367(a)-8(e)(3), and thus, such a disposition would
not trigger a GRA. This suggestion is not correct. If, upon considering
the facts and circumstances, a transferred corporation has disposed of
substantially all its assets, such a transaction is a triggering event,
even if the transferred corporation disposes of less than 70
[[Page 5180]]
percent of a corporation's gross assets or 90 percent of its assets net
of liabilities. The ``substantially all'' safe harbor provided in
Revenue Procedure 77-37 is intentionally high so that the IRS does not
need to engage in a factually detailed analysis before issuing a letter
ruling. As a result, in the context of GRAs, the Revenue Procedure's
threshold does not mean that a disposition of substantially all the
assets does not occur upon the disposition of a lesser amount of
assets. Therefore, the temporary regulations provide that whether a
transferred corporation has disposed of substantially all of its assets
is determined under all the facts and circumstances.
G. Transactions That Terminate the GRA
1. Taxable Dispositions of Transferee Foreign Corporation Stock
Section 1.367(a)-8(h)(1) provides that a GRA will terminate, in
whole or in part, as a result of certain taxable dispositions of the
transferee foreign corporation stock by the U.S. transferor. A key
premise for this termination rule is that the basis in the transferee
foreign corporation stock received by the U.S. transferor in the
initial transfer is assumed to reflect the basis in the transferred
stock or securities.
The IRS and Treasury Department continue to believe this
termination rule is appropriate. As a result, the temporary regulations
generally retain this rule. However, the temporary regulations modify
the termination rule to ensure that a GRA terminates only when the
transferee foreign corporation stock disposed of in fact reflects the
basis of the transferred stock or securities. This termination rule
only applies to transferee foreign corporation stock that is received
(or deemed received) in the initial transfer. The IRS and Treasury
Department understand that in some cases, taxpayers may take the
position that the basis in the transferee foreign corporation stock
does not reflect the basis of the transferred stock or securities. For
example, taxpayers may take the position that the basis in such
transferee foreign corporation stock received also reflects the basis
of other property that had a built-in loss when it was transferred to
the transferee foreign corporation. Thus, the termination rule in the
temporary regulations will apply only when the basis of the transferee
foreign corporation stock received (or deemed received) in the initial
transfer properly reflects the sum of the aggregate basis of the
transferred stock or securities immediately before the initial
transfer, plus any increase in the basis of such stock or securities as
a result of recognizing gain on the transfer. In addition, for purposes
of this basis determination, basis increases to the transferee foreign
corporation stock as a result of income inclusions (for example,
pursuant to section 961) shall not be taken into account.
In cases where the basis of the relevant transferee foreign
corporation stock exceeds the basis of the transferred stock or
securities, however, the temporary regulations allow the U.S.
transferor to take advantage of this termination rule if it elects to
reduce its basis in the transferee foreign corporation stock such that
it does not exceed the basis it had in the transferred stock or
securities. If the U.S. transferor makes this election, the basis
reduction will be effective immediately before the taxable disposition
that terminates the GRA. In addition, if the U.S. transferor makes this
election, it may increase its basis in other stock of the transferee
foreign corporation it holds, if any, by a corresponding amount but not
above the fair market value of such stock.
Similar rules apply in the case of partial dispositions of
transferee foreign corporation stock and dispositions of transferee
foreign corporation stock in nonrecognition transactions in which a
portion of the realized gain is recognized.
2. Certain Inbound Distributions or Transfers of the Transferred Stock
Section 1.367(a)-8(h)(3) provides that a distribution of the
transferred stock in a transaction qualifying under section 355 or
sections 332 and 337 will terminate the GRA if the U.S. transferor's
basis in the transferred stock or securities that it receives in the
section 355 or 332 and 337 transaction does not exceed the basis the
U.S. transferor had in the transferred stock or securities immediately
before the initial transfer. In response to comments, however, the
temporary regulations allow the U.S. transferor to take advantage of
this termination rule if it elects to reduce the basis of the
transferred stock or securities if the basis exceeds the basis the U.S.
transferor had in the transferred stock or securities immediately
before the initial transfer. For purposes of this basis determination,
basis increases to the transferred stock as a result of income
inclusions (for example, pursuant to section 961) shall not be taken
into account. If the U.S. transferor elects to reduce basis in the
transferred stock or securities it receives, the U.S. transferor shall
increase its basis in other transferee foreign corporation stock (if
any) by a corresponding amount but not above the fair market value of
such stock.
Although the temporary regulations generally provide that a GRA
terminates in certain section 332 liquidations of the transferee
foreign corporation, the IRS and Treasury Department are studying to
what extent this rule should apply when the transferee foreign
corporation has a minority shareholder and therefore recognizes gain
under section 336 in connection with the section 332 liquidation. As
noted in the request for comments, although the IRS and Treasury
Department generally believe it is appropriate to terminate entirely
the GRA in a section 332 liquidation, in other circumstances it may not
be appropriate. For example, if after an initial transfer, a wholly-
owned transferee foreign corporation issues a minority interest to a
foreign shareholder, completely terminating the GRA upon a section 332
liquidation of the transferee foreign corporation does not account for
the fact that the U.S. transferor has indirectly disposed of up to 20
percent of its interest in the transferred stock or securities.
Therefore, when the temporary regulations are finalized, the IRS and
Treasury Department may address the effect that section 336 gain has on
a gain recognition agreement when a transferee foreign corporation with
a minority shareholder liquidates under section 332.
The temporary regulations expand the current rule to terminate GRAs
when certain U.S. persons other than the original U.S. transferor
receive the stock or securities that was transferred in the initial
transfer. For example, if the transferred corporation is distributed to
a domestic corporation or U.S. individual other than the U.S.
transferor in a section 355 ``split off,'' the GRA would terminate if
the domestic corporation or U.S. individual receives the transferred
stock or securities with a basis that is not greater than the basis the
U.S. transferor had in the transferred stock or securities immediately
before the initial transfer.
Finally, and in response to comments requested in Notice 2005-74,
the temporary regulations also expand the current rule to provide that
the GRA will terminate in additional transactions where the U.S.
transferor or a domestic corporation receives the transferred stock or
securities with a basis that is not greater than the basis the U.S.
transferor had in the transferred stock or securities immediately
before the initial transfer. These transactions are upstream asset
reorganizations where the U.S. transferor acquires the assets of
[[Page 5181]]
the transferee foreign corporation, downstream asset reorganizations
where the transferred corporation acquires the assets of the transferee
foreign corporation, and certain other asset reorganizations where a
domestic corporation acquires the assets of the transferee foreign
corporation. Consequently, the temporary regulations generally provide
that the GRA terminates in particular circumstances when the
transferred stock or securities are held with the correct basis by
certain U.S. persons, even if the U.S. person is not the original U.S.
transferor.
However, the IRS and Treasury Department believe that it is not
appropriate for the GRA to terminate when the transferred stock or
securities may then be disposed of, directly or indirectly, by a
foreign shareholder without being subject to U.S. tax. Therefore, this
termination rule is limited to section 332 liquidations, section 355
distributions, and asset reorganizations where the domestic corporation
that holds the transferred stock or securities after the transaction is
either the U.S. transferor or a member of the same consolidated group
of which the U.S. transferor is then a member. The IRS and Treasury
Department continue to study whether it would be appropriate to expand
the scope of the rule to transactions where the acquirer is not a
member of the same consolidated group of which the U.S. transferor is
then a member and request comments regarding such a rule.
H. Triangular Reorganizations of Transferee Foreign Corporation and
Transferred Corporation
Notice 2005-74 provides rules that allow a U.S. transferor to avoid
gain recognition on certain asset reorganizations of the transferee
foreign corporation and transferred corporation. However, Notice 2005-
74 restricts the definition of ``asset reorganization'' to exclude
triangular asset reorganizations of the transferee foreign corporation
and transferred corporation.
In response to comments and after further study, the temporary
regulations address the treatment of certain triangular asset
reorganizations. Specifically, they provide that if the transferee
foreign corporation or transferred corporation is acquired in a
triangular asset reorganization, the exchanges made pursuant to the
reorganization will not be triggering events if certain requirements
are satisfied. For purposes of this rule, a triangular asset
reorganization is limited to a transaction in which the acquiring
subsidiary is foreign. The additional requirements are as follows.
First, the U.S. transferor or common parent must enter into a new GRA
to recognize gain with respect to the initial transfer during the
remaining term of the original GRA, with certain modifications. In the
case of a triangular asset reorganization of the transferee foreign
corporation, the U.S. transferor also must make certain designations
depending on whether the parent corporation of the foreign acquiring
subsidiary is foreign or domestic and depending on the type of
triangular asset reorganization. Finally, the U.S. transferor must
provide notice of the transaction with its next annual certification.
I. Other Changes
The current regulations refer to ``stock of the transferred
corporation'' in some paragraphs but refer to ``stock or securities of
the transferred corporation'' in other paragraphs. The temporary
regulations refer to ``stock or securities of the transferred
corporation'' because either stock or securities, or both, may be
subject to a GRA when transferred to a transferee foreign corporation
by a U.S. person. In contrast, the temporary regulations generally
refer only to stock, and not securities, of the transferee foreign
corporation. The rules applying to a disposition of the transferee
foreign corporation are concerned primarily with transactions in which
the U.S. transferor loses or decreases its control of the transferee
foreign corporation, which does not occur when a U.S. transferor
disposes of securities of the transferee foreign corporation.
The current regulation provides a reasonable cause exception to
triggering a GRA when the person required to file the GRA fails to
comply in any material respect with the terms of a GRA, or when the
person fails to meet the timeliness requirement for submitting a GRA.
The temporary regulations retain this reasonable cause exception but
provide additional guidance on how the person should submit a request
for reasonable cause relief. The temporary regulations also provide
that the Area Director or Director of Field Operations, as applicable,
shall notify the person in writing within 120 days of the filing if the
person will be granted reasonable cause relief or if additional time is
required to make the determination. The 120-day period runs from the
date that the IRS notifies the person that its request has been
received. Once this period begins, the person shall be deemed to have
established reasonable cause if it is not again notified within 120
days.
Effective Dates
With the exception of the special boot rules described in section C
of this preamble, these temporary regulations apply to GRAs filed with
respect to transfers of stock or securities occurring on or after March
7, 2007. The boot rules described in section C of this preamble apply
to GRAs filed with respect to transfers of stock or securities
occurring on or after 180 days after February 5, 2007. However, GRAs
that are filed after March 7, 2007 in connection with transactions
entered into pursuant to a contract that was binding before February 5,
2007 are not subject to these regulations, but taxpayers may elect to
apply the rules of these regulations to such a GRA. For all open years,
taxpayers may apply rules of these regulations that were not already
effective under Sec. 1.367(a)-8 to GRAs filed before March 7, 2007.
Similar effective date rules are provided for those transfers discussed
in section E of this preamble (regarding a U.S. transferor that goes
out of existence in a transaction giving rise to a GRA).
Special Analyses
It has been determined that this Treasury Decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that 5 U.S.C. 553(b) and (d) do not apply to these
regulations. For applicability of the Regulatory Flexibility Act,
please refer to the cross-referenced notice of proposed rulemaking
published elsewhere in this Federal Register. Pursuant to section
7805(f) of the Internal Revenue Code, this regulation has been
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Request for Comments
The IRS and Treasury Department are considering issuing subsequent
public guidance to address additional issues under section 367(a).
Accordingly, comments are requested regarding the application of Sec.
1.367(a)-8, including whether other transactions should be excepted
from being treated as triggering events pursuant to rules similar to
those contained in the temporary regulations. For example, comments are
requested as to the most appropriate treatment of divisive
reorganizations qualifying under section 368(a)(1)(D) or (G), involving
the U.S. transferor corporation, the transferee foreign corporation,
and the transferred corporation. Comments also are
[[Page 5182]]
requested on how a GRA is affected by a subsequent transaction to which
section 304 applies involving transferee foreign corporation stock or
transferred corporation stock. The IRS and Treasury Department believe
that the rules in the temporary regulations generally deal with many
transactions to which section 304 applies but request specific comments
on any issues raised.
In addition, the IRS and Treasury Department request comments on
the rule in Sec. 1.367(a)-8T(b)(3)(iii), which imposes interest on the
additional tax, if any, that is required to be paid as a result of a
triggering event. Specifically, comments are requested on whether
interest should be imposed even when no additional tax is ultimately
due as a result of a triggering event because, for example, a taxpayer
has sufficient net operating losses to offset the tax that would
otherwise be due as a result of a triggering event. If an interest
charge is not required in such a case, a taxpayer may be viewed as
inappropriately benefiting from deferring the realized but unrecognized
gain on the initial transfer until a later year. However, there are
other instances where the current regulations clearly permit such a
benefit (for example, under Sec. 1.367(a)-8(h)(1)(i) in certain
taxable dispositions of the stock of the transferee foreign
corporation).
As described in section B.1.a of this preamble, comments are
requested on whether a GRA should not be triggered, if certain
conditions similar to those provided in Sec. 1.367(a)-3T(e) are met,
when a U.S. transferor is acquired by a foreign corporation in an asset
reorganization. Specifically, the IRS and Treasury Department request
comments on how to reconcile the terms of the GRA that would be filed
pursuant to Sec. 1.367(a)-3T(e) with the terms of a new GRA that would
be filed to avoid triggering the original GRA. For example, the
transferee foreign corporation under the outstanding GRA (and under the
new GRA filed to avoid triggering the outstanding GRA) would be the
transferred corporation with respect to the GRA filed pursuant to Sec.
1.367(a)-3T(e).
Finally, and as described in section G.2 of this preamble, the IRS
and Treasury Department are studying to what extent the GRA termination
rule should apply when the transferee foreign corporation liquidates in
a transaction described in section 332 but also recognizes gain under
section 336 because of a minority shareholder. Comments are requested
on how the termination rule should address such a transaction, taking
into consideration potentially different results depending on whether
the minority shareholder is also subject to a GRA or is, for example,
instead a foreign person who was issued transferee foreign corporation
stock after the initial transfer.
For information on how to submit comments or request a public
heading, see the section ``Comments and Requests for a Public
Hearing,'' set forth in the notice of proposed rulemaking published
elsewhere in this issue of the Federal Register.
Drafting Information
The principal author of these temporary regulations is Daniel
McCall of the Office of Associate Chief Counsel (International).
However, other personnel from the IRS and the Treasury Department
participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding new
entries to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.367(a)-3T(e) also issued under 367(a) and (b).* * *
Section 1.367(a)-8T also issued under 367(a) and (b).* * *
0
Par. 2. For each entry in the table in the ``Section'' column, remove
the language in the ``Remove'' column and add the language in the
``Add'' column in its place.
------------------------------------------------------------------------
Section Remove Add
------------------------------------------------------------------------
1.367(a)-3(d)(3), Example Sec. 1.367(a)-8(e) Sec. 1.367(a)-
1(ii), fourth sentence. 8T(d)(1).
1.367(a)-3(d)(3), Example Sec. 1.367(a)- Sec. 1.367(a)-
1(ii), fourth sentence. 8(b)(1)(vii). 8T(b)(1)(vii).
1.367(a)-3(d)(3), Example Sec. 1.367(a)- Sec. 1.367(a)-
1(ii), fifth sentence. 8(b)(1)(vii). 8T(b)(1)(vii).
1.367(a)-3(d)(3), Example Sec. 1.367(a)- Sec. 1.367(a)-
1A(ii), first sentence. 8(a)(3). 8T(a)(3).
1.367(a)-3(d)(3), Example Sec. 1.367(a)- Sec. 1.367(a)-
4(i), first sentence. 8(e)(3)(i). 8T(d)(2).
1.367(a)-3(d)(3), Example Sec. 1.367(a)- Sec. 1.367(a)-
4(ii), first sentence. 8(e)(3)(i). 8T(d)(2).
1.367(a)-3(d)(3), Example Sec. 1.367(a)- Sec. 1.367(a)-
4(ii), second sentence. 8(h)(2), because A 8T(g)(2), because A
and W filed a owned an amount of
consolidated stock in W
Federal income tax described in
return prior to the section 1504(a)(2)
transaction. immediately before
the transaction.
1.367(a)-3(d)(3), Example Sec. 1.367(a)- Sec. 1.367(a)-
6(ii), last sentence. 8(e)(3)(i). 8T(d)(2).
1.367(a)-3(d)(3), Example Sec. 1.367(a)- Sec. 1.367(a)-
7A(ii), last sentence. 8(b)(5). 8T(b)(5).
paragraph (d)(3), Example and (e)(3)(i)....... and V satisfies the
7A(ii), last sentence. requirements
contained in Sec.
1.367(a)-
8T(e)(1)(iii).
1.367(a)-3(d)(3), Example Sec. 1.367(a)- Sec. 1.367(a)-
8(ii), second to last 8(e)(3)(i). 8T(d)(2).
sentence.
1.367(a)-3(d)(3), Example Sec. 1.367(a)-8(e) Sec. 1.367(a)-
11(ii), sixth sentence. 8T(d)(1).
1.367(a)-3(d)(3), Example Sec. 1.367(a)- Sec. 1.367(a)-
11(ii), sixth sentence. 8(b)(1)(vii). 8T(b)(1)(vii).
1.367(a)-3(e)(1)(A), first (e)................. (g).
sentence.
1.367(a)-3(e)(1)(F), third (g)................. (j).
sentence.
1.367(a)-3(e)(2), first (e)(1) and (g)...... (g)(1) and (j).
sentence.
1.367(a)-3(e)(2), second (e)(2).............. (g)(2).
sentence.
1.367(a)-3(e)(2)(G), first (e)(1)(G)........... (g)(1)(G).
sentence.
1.367(a)-3(g)(1), first (g)(2).............. (j)(2).
sentence.
1.367(a)-3(g)(2)(i), first (g)(2)(iii), (j)(2)(iii),
sentence. (g)(2)(iv). (j)(2)(iv).
1.367(a)-3(g)(2)(ii), first (g)(2)(iii) or (iv). (j)(2)(iii) or (iv).
sentence.
1.367(a)-3(g)(2)(ii), fourth Sec. 1.367(a)-3(f) Sec. 1.367(a)-
sentence. 3(h).
1.367(a)-3(g)(2)(iii), first (g)(2)(ii).......... (j)(2)(ii).
sentence.
[[Page 5183]]
1.367(a)-3(g)(2)(iv), first (g)(2)(i) and (ii).. (j)(2)(i) and (ii).
sentence.
1.367(b)-4(b)(1)(iii), Sec. 1.367(a)- Sec. 1.367(a)-
Example 4(i), last sentence. 8(f)(2). 3T(e).
------------------------------------------------------------------------
0
Par. 3. Section 1.367(a)-3 is amended as follows:
0
1. The second sentence of paragraph (a) is revised.
0
2. The first sentence of paragraph (d)(2)(iii) is revised.
0
3. Paragraph (d)(2)(iv) is revised.
0
4. The title and introductory text of paragraph (d)(2)(v) is revised.
0
5. The last two sentences of paragraph (d)(3), Example 1A(ii) are
revised.
0
6. The last two sentences of paragraph (d)(3), Example 5A(ii) are
revised.
0
7. The first and second sentences of paragraph (d)(3), Example 7(ii)
are revised.
0
8. The third sentence of paragraph (d)(3), Example 7A(ii) is revised.
0
9. The last sentence of paragraph (d)(3), Example 9(ii) is revised.
0
10. The title of paragraph (d)(3), Example 10 is revised.
0
11. The third sentence of paragraph (d)(3), Example 12(ii) is revised.
0
12. Redesignating paragraphs (e), (f), and (g) as paragraphs (g), (h),
and (j), respectively.
0
13. Adding new paragraphs (e) and (i).
The revisions and addition read as follows:
Sec. 1.367(a)-3 Treatment of transfers of stock or securities to
foreign corporations.
(a) * * * In general, a transfer of stock or securities by a U.S.
person to a foreign corporation that is described in section 351, 354
(including a reorganization described in section 368(a)(1)(B) and
including an indirect stock transfer described in paragraph (d) of this
section), 356 or section 361(a) or (b) is subject to section 367(a)(1)
and, therefore, is treated as a taxable exchange, unless one of the
exceptions set forth in paragraph (b) of this section (regarding
transfers of foreign stock or securities), paragraph (c) of this
section (regarding transfers of domestic stock or securities), or
paragraph (e) of this section (regarding transfers of stock or
securities in a section 361 exchange) applies. * * *
* * * * *
(d) * * *
(2)(iii) * * * For purposes of determining the amount of gain that
a U.S. person is required to include in income as a result of a
triggering event, see Sec. 1.367(a)-8T(b)(3)(i) and (d).
(iv) * * * The U.S. transferor's agreement to recognize gain, as
provided in Sec. 1.367(a)-8, shall include appropriate provisions
consistent with the principles of Sec. 1.367(a)-3 and Sec. 1.367(a)-
8, including, for example, as an additional triggering event an
indirect disposition of the transferred stock or securities. For
example, in the case of a triangular section 368(a)(1)(B)
reorganization described in paragraph (d)(1)(iii)(A) of this section, a
triggering event shall include an indirect disposition of the
transferred stock or securities by the transfer6ee foreign corporation,
such as a disposition of the stock of the acquiring corporation (either
foreign or domestic) by the transferee foreign corporation. In the case
of a triangular section 368(a)(1)(B) reorganization described in
paragraph (d)(1)(iii)(B) of this section, a disposition of the stock of
the acquiring corporation by the domestic issuing corporation in a
taxable transaction shall, for example, terminate the gain recognition
agreement if the principles of Sec. 1.367(a)-8T(g)(1)(i)(A) and (B)
are satisfied. See Examples 5 and 5A of this section.
(v) Determination of whether substantially all of the transferred
corporation's assets are disposed of. For purposes of applying Sec.
1.367(a)-8T(d)(2) to determine whether substantially all of the assets
of the transferred corporation have been disposed of, the following
assets shall be taken into account (but only if such assets are not
fully taxable under section 367 in the taxable year that includes the
indirect transfer)--
* * * * *
(3) * * *
Example 1A. * * *
(ii) * * * If A leaves the P group, the gain recognition
agreement would be triggered pursuant to Sec. 1.367(a)-8T(d)(4),
unless the exception provided under Sec. 1.367(a)-8T(e)(8) applies.
* * * * *
Example 5A * * *
(ii) * * * If Y sold substantially all of its assets (within the
meaning of section 368(a)(1)(C)), the gain recognition agreement
would be terminated because U owned an amount of stock in Y
described in section 1504(a)(2) immediately before the transaction
and Y is a domestic corporation. See Sec. 1.367(a)-8T(g)(2). In
addition, if F disposed of the stock of S in a taxable transaction
the gain recognition agreement would be terminated if the principles
of Sec. 1.367(a)-8T(g)(1)(i)(A) and (B) are satisfied.
* * * * *
Example 7. * * *
(ii) * * * The disposition by R, the transferred corporation, of
substantially all of its assets would terminate the gain recognition
agreement if the assets were disposed of in a taxable transaction
because V owned an amount of stock in Z described in section
1504(a)(2) immediately before the transaction, and R is a domestic
corporation. See Sec. 1.367(a)-8T(g)(2). Because the assets were
transferred in an exchange to which section 351 applies, such
transfer does not trigger the gain recognition agreement if V
complies with the requirements contained in Sec. 1.367(a)-
8T(e)(1)(iii). * * *
Example 7A. * * *
(ii) * * * Thus, the gain recognition agreement would terminate
because V owned an amount of stock in Z described in section
1504(a)(2) immediately before the transaction, and R is a domestic
corporation. See Sec. 1.367(a)-8T(g)(2).* * *
* * * * *
Example 9. * * *
(ii) * * * To determine whether there is a triggering event
under Sec. 1.367(a)-8T(d)(2), both the Business A assets in M and
the Business B assets in R must be considered.
Example 10. Concurrent application of asset transfer and
indirect stock transfer rules in section 368(a)(1)(A)/(a)(2)(D)
reorganization--(i) Facts. * * *
* * * * *
Example 12. * * *
(ii) * * * E's transfer of its N stock could qualify for
nonrecognition treatment if D satisfies the requirements in Sec.
1.367(a)-3T(e).* * *
* * * * *
(e) [Reserved] For further guidance, see Sec. 1.367(a)--3T(e).
(f) [Reserved] For further guidance, see Sec. 1.367(a)-3T(f).
* * * * *
(i) [Reserved].
* * * * *
0
Par. 4. Section 1.367(a)-3T is added to read as follows:
Sec. 1.367(a)-3T Treatment of transfers of stock or securities to
foreign corporations (temporary).
(a) through (d) [Reserved]. For further guidance, see Sec.
1.367(a)-3(a) through (d).
(e) Transfers by a domestic corporation to a foreign corporation in
a section 361 exchange--(1) General rule. Notwithstanding paragraphs
(b) and (c) of this section, if the U.S. transferor is a domestic
corporation that transfers stock or securities to a foreign corporation
in a section 361 exchange that would otherwise be subject to section
367(a)(1) under paragraph (a) of this section, such transfer shall not
be subject to section 367(a)(1) if--
(i) The conditions set forth in the second sentence of section
367(a)(5) and
[[Page 5184]]
any regulations under that section have been satisfied, such that, for
example, the U.S. transferor is controlled (within the meaning of
section 368(c)) by 5 or fewer domestic corporations and appropriate
basis adjustments are made;
(ii) In the case of transferred property that is stock or
securities of a domestic corporation, the conditions set forth in
paragraph (c) of this section are satisfied;
(iii) All domestic corporate shareholders of the U.S. transferor
immediately before the transaction that own 5 percent or more (applying
the attribution rules of section 318, as modified by section 958(b)) of
the total voting power or the total fair market value of the stock of
the transferee foreign corporation immediately after the transaction
enter into gain recognition agreements as provided in Sec. 1.367(a)-8T
with respect to their pro rata share (determined by the relative fair
market value of the U.S. transferor stock or securities owned) of the
gain that was realized but not recognized on the transfer of the stock
or securities of the transferred corporation that, in addition to the
terms of Sec. 1.367(a)-8T(b), designate such domestic corporate
shareholders as U.S. transferors for purposes of paragraphs (b) and (c)
of this section and Sec. 1.367(a)-8T; and
(iv) All domestic corporate shareholders that enter into gain
recognition agreements pursuant to paragraph (e)(1)(iii) of this
section make the election described in Sec. 1.367(a)-8T(b)(1)(vii).
(2) Certain triangular asset reorganizations. If a transaction
described in paragraph (e)(1) of this section qualifies as a triangular
asset reorganization described in Sec. 1.358-6(b)(2)(i) through (iii),
or in sections 368(a)(1)(G) and (a)(2)(D), the principles of Sec.
1.367(a)-3(d)(2)(iv) shall apply with respect to any gain recognition
agreements filed in connection with such transaction.
(3) Example. The provisions of paragraph (e)(1) of this section are
illustrated in the following example:
Example. (i) Facts. US1 and US2, domestic corporations, own 60%
and 40%, respectively, of the fair market value of UST, also a
domestic corporation. US1 and US2 are not members of the same
consolidated group and are unrelated. UST owns 100% of FC, a foreign
corporation. In year 1, UST transfers 100% of the stock of FC to FA,
a foreign corporation, in a reorganization described in section
368(a)(1)(A) after which US1 and US2 own 6% and 4%, respectively, of
the stock of FA. At the time of the initial transfer, the section
1248 amount with respect to the FC stock is $0. The notice
requirement under Sec. 1.367(b)-1(c) is satisfied. Section 7874
does not apply to FA's acquisition of the stock of FC. US1 and US2
satisfy the conditions set forth in the second sentence of section
367(a)(5), including making appropriate basis adjustments. Pursuant
to paragraph (e)(1) of this section, US1 enters into a gain
recognition agreement to recognize its pro rata share of the gain
realized but not recognized on UST's transfer of the stock of FC to
FA, designates itself as a U.S. transferor for purposes of paragraph
(b) of this section and Sec. 1.367(a)-8T, and makes the election
described in Sec. 1.367(a)-8T(b)(1)(vii). US2 does not enter into a
gain recognition agreement with respect to its pro rata share of the
gain realized but not recognized on UST's transfer of the stock of
FC to FA because US2 owns less than 5 percent of the stock of FA. In
year 4, FA sells 30% of the FC stock for cash.
(ii) Result. Because the requirements of paragraph (e)(1)(i)
through (iv) of this section are satisfied, the transfer of the FC
stock by UST to FA in the year 1 reorganization is not subject to
section 367(a)(1). In addition, because FA partially disposes of the
stock of FC in year 4, US1 must recognize 30% of its pro rata share
of the gain realized but not recognized on the initial transfer of
the FC stock to FA pursuant to Sec. 1.367(a)-8T(d)(1)(iii). The
proportion of gain recognized by US1 is determined by reference to
the relative fair market value of the UST stock owned by US1 at the
time of the initial transfer. Thus, US1 must include 18% of the gain
realized, but not recognized, on the initial transfer (the 30% of
the transferred property that was disposed of multiplied by the
amount of gain subject to the gain recognition agreement
(corresponding to the 60% of the fair market value of UST stock that
US1 held immediately before the initial transfer)), and pay any
applicable interest.
(iii) Alternate facts. The facts are the same as in paragraph
(i) of this Example, except that US1 and US2 are members of a
consolidated group in which USP is the common parent. US2 is also a
5-percent transferee shareholder as a result of applying the
attribution rules of section 318, as modified by section 958(b). The
result is the same as in paragraph (ii) of this Example, except that
under Sec. 1.367(a)-8T(a)(3)(i)(A) USP files gain recognition
agreements on behalf of both US1 and US2. Thus, US1 and US2 must
include in income in year 4 18% and 12%, respectively, of the gain
realized, but not recognized, on the initial transfer (the 30% of
the transferred property that was disposed of multiplied by the
amount of gain subject to the gain recognition agreement
(corresponding to the 60% and 40% of the fair market value of UST
stock that US1 and US2, respectively, held immediately before the
initial transfer)), and pay any applicable interest.
(f) Effective date--(1) General rule. The rules of this Sec.
1.367(a)-3T(e) apply to transfers of stock or securities occurring on
or after March 7, 2007. However, these rules do not apply to transfers
of stock or securities occurring on or after March 7, 2007, if such
transfer was entered into pursuant to a written agreement which was
(subject to customary conditions) binding before February 5, 2007, and
at all times thereafter. Solely for purposes of this paragraph (f), a
transfer described in the preceding sentence shall be deemed to be a
transfer occurring before March 7, 2007. For matters covered in this
section for periods before March 7, 2007 but on or after July 20, 1998,
the rule of Sec. 1.367(a)-8(f)(2)(i) (see 26 CFR part 1, revised April
1, 2006) applies.
(2) Transfers before effective date--(i) General rule. Taxpayers
may apply the rules of Sec. 1.367(a)-3T(e) to transfers before March
7, 2007 and after July 20, 1998, for all open taxable years ending on
or after July 20, 1998. This paragraph (f)(2)(i) applies only to rules
in Sec. 1.367(a)-3T(e) that were not already effective under the rules
of Sec. 1.367(a)-8(f)(2)(i).
(ii) Special filing rule. This paragraph (f)(2)(ii) provides the
time and manner in which taxpayers may apply paragraph (f)(2)(i) of
this section. Notwithstanding the rules provided in Sec. 1.367(a)-
8T(a)(2), all agreements, certifications, or other information related
to the gain recognition agreement that should have been filed on or
before March 7, 2007 with respect to a transfer shall be treated as
having been timely filed, provided they are attached to a Federal
income tax return amending the taxpayer's Federal income tax return for
the taxable year in which they should have been attached. The amended
return described in the preceding sentence must be filed before August
6, 2007. A taxpayer that wishes to apply paragraph (f)(2)(i) of this
section but that fails to meet the filing requirement described in the
preceding sentence must request reasonable cause relief as provided in
Sec. 1.367(a)-8T(e)(10).
(3) Expiration. The applicability of this section expires on or
before February 1, 2010.
* * * * *
0
Par. 5. Section 1.367(a)-8 is amended by revising paragraphs (a)
through (i) to read as follows:
Sec. 1.367(a)-8 Gain recognition agreement requirements.
(a) through (i) [Reserved]. For further guidance, see Sec.
1.367(a)-8T(a) through (h).
0
Par. 6. Section 1.367(a)-8T is added to read as follows:
Sec. 1.367(a)-8T Gain recognition agreement requirements (temporary).
(a) In general. This section specifies the terms and conditions for
an agreement to recognize gain entered into pursuant to Sec. Sec.
1.367(a)-3(b) through (d)
[[Page 5185]]
and 1.367(a)-3T(e) to qualify for nonrecognition treatment under
section 367(a).
(1) Definitions. The following definitions apply for purposes of
this section:
(i) Asset reorganization. Except as otherwise provided in this
paragraph (a)(1)(i), the term asset reorganization means a
reorganization described in section 368(a)(1) involving the transfer of
assets by a corporation to another corporation pursuant to section 361,
except that such term shall include reorganizations described in
section 368(a)(1)(D) or (G) only if the requirements of section
354(b)(1)(A) and (B) are met. For purposes of paragraphs (e)(3)(ii) and
(e)(3)(iii) of this section, the following reorganizations are excluded
from the term ``asset reorganization'':
(A) Triangular asset reorganizations described in Sec. 1.358-
6(b)(2)(i) through (iii) or in sections 368(a)(1)(G) and (a)(2)(D). For
rules applicable to triangular asset reorganizations described in Sec.
1.358-6(b)(2)(i) through (iii) or in sections 368(a)(1)(G) and
(a)(2)(D), see paragraph (e)(4) of this section.
(B) Asset reorganizations where, after the reorganization, the same
corporation is both the transferee foreign corporation (or successor
transferee foreign corporation, as applicable) and the transferred
corporation (or the successor transferred corporation, as applicable);
for example, the acquisition of the transferee foreign corporation's
assets by the transferred corporation in a reorganization described in
section 368(a)(1). For rules applicable to certain upstream and
downstream reorganizations involving the transferee foreign corporation
and transferred corporation, see paragraphs (e)(6) and (g)(3) of this
section.
(ii) The term common parent means a corporation that controls an
affiliated group of corporations that files its Federal income tax
returns on a consolidated basis.
(iii) The term consolidated group has the meaning set forth in
Sec. 1.1502-1(h).
(iv) The term disposition means any transfer that would constitute
a disposition for any purpose of the Internal Revenue Code and the
regulations thereunder. It also includes an indirect disposition of the
stock of the transferred corporation as described in Sec. 1.367(a)-
3(d). It does not, however, include a redemption of stock under section
302(d) to the extent the redemption is treated as a distribution to
which section 301(c)(1) applies.
(v) The term gain recognition agreement means an agreement
described in paragraph (b) of this section.
(vi) The term initial transfer means a transfer in connection with
which a gain recognition agreement is filed in connection with an
exchange described in Sec. Sec. 1.367(a)-3(b) through (d) and
1.367(a)-3T(e).
(vii) The term nonrecognition transaction means any disposition of
property in a transaction in which gain or loss is not recognized in
whole or in part for purposes of subtitle A.
(viii) The term transferee foreign corporation means the foreign
corporation the stock of which is received in an exchange described in
section 367(a) by a U.S. transferor.
(ix) Transferred corporation. Other than in the case of an indirect
stock transfer, the term transferred corporation means the corporation
the stock or securities of which are transferred by a U.S. transferor
to a foreign corporation in an exchange described in section 367(a)(1).
In the case of an indirect stock transfer, the term transferred
corporation has the meaning set forth in Sec. 1.367(a)-3(d)(2)(ii).
(x) The term triggering event means an event described in paragraph
(d) of this section, except as provided in paragraphs (e) (exceptions
to triggering events) and (g) (terminations of gain recognition
agreements) of this section.
(xi) The term U.S. transferor means a U.S. person (as defined in
Sec. 1.367(a)-1T(d)(1)) that transfers stock or securities of the
transferred corporation in exchange for stock or securities of the
transferee foreign corporation in an exchange described in section
367(a). For the application of the rules of this section to indirect
transfers involving partnerships and interests therein, see Sec.
1.367(a)-1T(c)(3).
(2) Filing requirements for gain recognition agreements. A U.S.
transferor's gain recognition agreement must be attached to, and filed
by the due date (including extensions) of, the U.S. transferor's income
tax return for the taxable year that includes the date of the initial
transfer, except that if the U.S. transferor is a member of a
consolidated group for the taxable year in which the transfer was made,
the agreement must be attached to the consolidated group's tax return.
If a new gain recognition agreement is entered into pursuant to an
exception in paragraph (e) of this section, the agreement must be
attached to, and filed by the due date (including extensions) of, the
applicable income tax return for the taxable year that includes the
date of the triggering event. If the timeliness requirement of this
paragraph (a)(2) is not satisfied, see paragraph (e)(10) of this
section.
(3) Who must sign--(i) General rule. The gain recognition agreement
must be signed under penalties of perjury by the appropriate party
corresponding to the following categories of U.S. transferor. A gain
recognition agreement may also be signed by an agent authorized to do
so under a general or specific power of attorney.
(A) In the case of a corporate U.S. transferor, a responsible
officer, except that if the U.S. transferor (or successor U.S.
transferor designated in a new gain recognition agreement entered into
under paragraph (e) of this section) is a member, but not the common
parent of a consolidated group for the taxable year in which the
transfer was made (or for the taxable year in which a new gain
recognition agreement is entered into under paragraph (e) of this
section) the agreement must be entered into by the common parent and
signed by a responsible officer of such common parent.
(B) In the case of an individual U.S. transferor (including a
partner who is treated as a U.S. transferor by virtue of Sec.
1.367(a)-1T(c)(3)), the individual.
(C) In the case of a trust or estate, a trustee, executor, or
equivalent fiduciary.
(D) In the case of a bankruptcy case under Title 11, United States
Code, a debtor in possession or trustee.
(ii) Signature requirement. When a gain recognition agreement,
certification, or other information is required under this section to
be attached to and filed by the due date (including extensions) of a
U.S. Federal income tax return and signed under penalties of perjury by
the person who signs the return, the attachment and filing of an
unsigned copy is considered to satisfy such requirement, provided the
taxpayer retains the original in its records in the manner specified by
Sec. 1.6001-1(e).
(b) Gain recognition agreement--(1) Contents. The gain recognition
agreement must set forth the following information, with the heading
``GAIN RECOGNITION AGREEMENT UNDER Sec. 1.367(a)-8T'' and with
paragraphs labeled to correspond with the numbers set forth as follows:
(i) A statement that the document submitted constitutes the U.S.
transferor's agreement to recognize gain in accordance with the
requirements of this section.
(ii) A description of the property transferred as described in
paragraph (b)(2) of this section.
[[Page 5186]]
(iii) The U.S. transferor's agreement to recognize gain, as
described in paragraph (b)(3) of this section.
(iv) A waiver of the period of limitations as described in
paragraph (b)(4) of this section.
(v) An agreement to file with the U.S. transferor's tax returns for
the five full taxable years following the year of the initial transfer
a certification as described in paragraph (b)(5) of this section.
(vi) A statement that arrangements have been made in connection
with the transferred property to ensure that the U.S. transferor will
be informed of any triggering events.
(vii) A statement as to whether, if all or a portion of the gain
recognition agreement is triggered under paragraph (d) of this section,
the taxpayer elects to include the required amount in the year of the
triggering event rather than in the year of the initial transfer.
(2) Description of property transferred. (i) The agreement shall
include a description of each property transferred by the U.S.
transferor, an estimate of the fair market value of the property as of
the date of the initial transfer, a statement of the cost or other
basis of the property and any adjustments thereto, and the date on
which the property was acquired by the U.S. transferor.
(ii) The U.S. transferor must provide the following information:
(A) The type or class, amount, and characteristics of the stock or
securities transferred, as well as the name, address, and place of
incorporation of the issuer of the stock or securities, and the
percentage (by voting power and value) that the stock (if any)
represents of the total stock outstanding of the transferred
corporation.
(B) The name, address and place of incorporation of the transferee
foreign corporation, and the percentage of stock (by voting power and
value) that the U.S. transferor received or will receive in the
transaction.
(C) If stock or securities are transferred pursuant to Sec.
1.367(a)-3T(e), a statement that the conditions set forth in the second
sentence of section 367(a)(5) and any regulations under that section
have been satisfied, and an explanation of any basis or other
adjustments made pursuant to section 367(a)(5) and any regulations
under that paragraph.
(D) If the transferred corporation is a domestic corporation, the
taxpayer identification number of the transferred corporation, together
with a statement describing whether, and if so, how, section 7874
applies to the transfer, and a statement that all of the requirements
of Sec. 1.367(a)-3(c)(1) are satisfied.
(E) If the transferred corporation is a foreign corporation, a
statement as to whether the U.S. transferor was a section 1248
shareholder, as defined in Sec. 1.367(b)-2(b), of the transferred
corporation immediately before the exchange, and, if so, a statement as
to whether the U.S. transferor is a section 1248 shareholder with
respect to the transferee foreign corporation stock received, and
whether any reporting requirements or other rules contained in
regulations under section 367(b) are applicable, and, if so, whether
they have been satisfied.
(F) If the transaction involved the transfer of assets other than
stock or securities and the transaction was subject to the indirect
stock transfer rules of Sec. 1.367(a)-3(d), a statement as to whether
the reporting requirements under section 6038B have been satisfied with
respect to the transfer of property other than stock or securities, and
an explanation of whether gain was recognized under section 367(a)(1)
and whether section 367(d) was applicable to the transfer of such
assets, or whether any tangible assets qualified for nonrecognition
treatment under section 367(a)(3) (as limited by section 367(a)(5) and
Sec. Sec. 1.367(a)-4T through 1.367(a)-6T).
(3) Terms of agreement--(i) General rule. If before the close of
the fifth full taxable year (not less than 60 months) following the
close of the taxable year of the initial transfer, there is a
triggering event, then, unless an election is made under paragraph
(b)(1)(vii) of this section, by the 90th day thereafter the U.S.
transferor must file an amended Federal income tax return for the year
of the initial transfer and recognize thereon the gain realized, but
not recognized, upon the initial transfer, with interest. If an
election under paragraph (b)(1)(vii) of this section was made, then, if
a triggering event occurs, the U.S. transferor must include the gain
realized, but not recognized, on the initial transfer in income on its
Federal income tax return for the taxable year that includes the date
of the triggering event. In accordance with paragraph (b)(3)(iii) of
this section, interest must be paid on any additional tax due. If a
taxpayer properly makes the election under paragraph (b)(1)(vii) of
this section but later fails to include in income the gain realized,
but not recognized, on the initial transfer, the Commissioner may, in
his discretion, include the gain in the taxpayer's income in the year
of the initial transfer.
(ii) Offsets. No special limitations apply with respect to net
operating losses, capital losses, credits against tax, or similar
items.
(iii) Reporting of interest and gain. If additional tax is required
to be paid pursuant to paragraph (b)(3)(i) of this section, then
interest must be paid on that amount at the rates determined under
section 6621 with respect to the period between the date that was
prescribed for filing the U.S. transferor's Federal income tax return
for the year of the initial transfer and the date on which the
additional tax for that year is paid. If the election in paragraph
(b)(1)(vii) of this section is made, a taxpayer should include the
amount of gain as taxable income on its Federal income tax return
(together with other income or loss items) and include the amount of
interest in its payment (or reduce the amount of any refund due by the
amount of the interest). A taxpayer must also attach to its Federal
income tax return a separate schedule with the heading ``Calculation of
Section 367 Tax and Interest,'' on which the amount of tax attributable
to the gain and the interest required to be paid under this section are
separately identified and calculated.
(iv) Basis adjustments--(A) Transferee foreign corporation. If a
U.S. transferor is required to recognize gain under this section as a
result of a triggering event, then the transferee foreign corporation's
basis in the transferred stock or securities shall be increased (as of
the date of the initial transfer) by the amount of gain required to be
recognized (but not by any tax or interest required to be paid on such
amount) by the U.S. transferor.
(B) U.S. transferor. If a U.S. transferor is required to recognize
gain as a result of a triggering event, then the U.S. transferor's
basis in the stock of the transferee foreign corporation received (or
deemed received) in the initial transfer shall be increased by the
amount of gain required to be recognized (as of the date of the initial
transfer) (but not by any tax or interest required to be paid on such
amount).
(C) Other adjustments. Other appropriate adjustments to basis that
are consistent with the principles of this paragraph (b)(3)(iv) may be
made if the U.S. transferor is required to recognize gain under this
section. In no case, however, shall the transferred corporation's net
asset basis be increased as a result of the U.S. transferor recognizing
gain under this section as a result of a triggering event.
(D) Example. The principles of this paragraph (b)(3) are
illustrated by the following example:
Example. (i) Facts. D, a domestic corporation owning 100 percent
of the stock
[[Page 5187]]
of S, a foreign corporation, transfers all of the S stock to F, a
foreign corporation, in an exchange described in section
368(a)(1)(B). The section 1248 amount with respect to the S stock at
the time of the transfer is $0. In the exchange, D receives 20
percent of the voting stock of F. The transaction is subject to both
sections 367(a) and (b). See Sec. Sec. 1.367(a)-3(b) and 1.367(b)-
1(a). All of the requirements of Sec. 1.367(a)-3(b)(1) are
satisfied, and D enters into a gain recognition agreement to qualify
for nonrecognition treatment and does not make the election
contained in paragraph (b)(1)(vii) of this section. Two years after
the initial transfer, F transfers all of the S stock to F1, a
foreign corporation, in an exchange to which section 351 applies,
and D complies with the requirements of paragraph (e)(1)(ii) of this
section. Four years after the initial transfer, D transfers its
entire 20 percent interest in F's voting stock to a domestic
partnership in exchange for an interest in the partnership and
complies with the requirements of paragraph (e)(1)(i) of this
section. D complies with the notice requirement under Sec.
1.367(b)-1(c) for each transaction subject to section 367(b).
Because D complies with the requirements of paragraph (e) for each
transaction that would otherwise be a triggering event, D is not
required to recognize the gain that was realized, but not
recognized, on the initial transfer. Five years after the initial
transfer, S disposes of substantially all (as described in paragraph
(d)(2) of this section) of its assets, and D is required by the
terms of the gain recognition agreement to recognize all the gain
that it realized on the initial transfer of the stock of S.
(ii) Result. As a result of the triggering event and paragraph
(b)(3)(iv) of this section, the amount of gain required to be
recognized as a result of S's disposition of substantially all its
assets (but not the tax or interest required to be paid on such
amount) is reflected by an increased basis (as of the date of the
initial transfer) in D's partnership interest, the partnership's
interest in the 20 percent voting stock of F, F's stock of F1, and
F1's stock of S. S, however, is not permitted to increase its basis
in its assets for purposes of determining the direct or indirect
U.S. tax results, if any, on the sale of its assets.
(4) Waiver of period of limitation. The U.S. transferor must file,
with the gain recognition agreement, a waiver of the period of
limitation on assessment of tax upon the gain realized on the initial
transfer. The waiver shall be executed on Form 8838 ``Consent to Extend
the Time to Assess Tax Under Section 367--Gain Recognition Agreement''
and shall extend the period for assessment of such tax to a date not
earlier than the eighth full taxable year following the taxable year of
the initial transfer. The waiver shall also contain such other terms
with respect to assessment as may be considered necessary by the
Commissioner to ensure the assessment and collection of the correct tax
liability for each year for which the waiver is required. The waiver
must be signed by a person who would be authorized to sign the
agreement pursuant to the provisions of paragraph (a)(3) of this
section.
(5) Annual certification. The U.S. transferor must file with its
income tax return for each of the five full taxable years following the
taxable year of the initial transfer a certification that there has not
been a triggering event, and a description of any exception under
paragraph (e) of this section if such an exception is relied upon for
the position that there has not been a triggering event. The U.S.
transferor must include with its annual certification a statement
describing any dispositions of assets by the transferred corporation
that are not made in the ordinary course of business. The annual
certification pursuant to this paragraph (b)(5) must be signed by a
person who would be authorized to sign the agreement pursuant to the
provisions of paragraph (a)(3) of this section.
(c) Use of security. The U.S. transferor may be required to furnish
a bond or other security that satisfies the requirements of Sec.
301.7101-1 of this chapter if the Area Director, Field Examination,
Small Business/Self Employed or the Director of Field Operations, Large
and Mid-Size Business (Director) determines that such security is
necessary to ensure the payment of any tax on the gain realized, but
not recognized, upon the initial transfer. Such bond or security
generally will be required only if the stock or securities transferred
are a principal asset of the U.S. transferor and the Director has
reason to believe that a disposition of the stock or securities may be
contemplated.
(d) Triggering events. If there is a triggering event described in
this paragraph (d) during the term of the gain recognition agreement,
the U.S. transferor must include in income the gain realized, but not
recognized, upon the initial transfer as provided in paragraph
(b)(3)(i) of this section. In addition, the U.S. transferor must pay
any interest required by paragraph (b)(3)(iii) of this section. See
Sec. 1.367(a)-3(d)(2)(iv) for additional triggering events when a gain
recognition agreement has been filed in connection with an indirect
stock transfer. Except to the extent provided in paragraphs (e) and (g)
of this section, if any of the following events occur during the term
of the gain recognition agreement, it shall constitute a triggering
event:
(1) Disposition of stock or securities of the transferred
corporation--(i) In general. A disposition, in whole or in part, by the
transferee foreign corporation (or any other person) of the transferred
stock or securities received by the transferee foreign corporation in
the initial transfer. For purposes of this section, a reference to
transferred stock or securities shall also include stock or securities
of the transferred corporation the basis of which is determined
(directly or indirectly) in whole or in part, by reference to the basis
of the stock or securities transferred in the initial transfer. A
disposition of all or a portion of the stock or securities of the
transferred corporation by installment sale is treated as a disposition
of the stock or securities in the year of the installment sale.
(ii) Example. The provisions of this paragraph (d)(1)(i) are
illustrated by the following example:
Example. Interaction between trigger of gain recognition
agreement and subpart F rules--(i) Facts. USP, a domestic
corporation, owns all of the stock of two foreign corporations, CFC1
and CFC2. USP's section 1248 amount with respect to CFC2 is $30. USP
has a basis of $50 in its stock of CFC2; the stock of CFC2 has a
fair market value of $100. In a transaction described in sections
351 and 368(a)(1)(B), USP transfers the stock of CFC2 to CFC1 in
exchange for additional stock of CFC1 with a basis of $50. The
transaction is subject to both sections 367(a) and (b). See
Sec. Sec. 1.367(a)-3(b) and 1.367(b)-1(a). To qualify for
nonrecognition treatment under section 367(a), USP enters into a
gain recognition agreement for $50 under this section. No election
under paragraph (b)(1)(vii) of this section is made. USP also
complies with the notice requirement under Sec. 1.367(b)-1(c). Two
years after the initial transfer, CFC1 sells the stock of CFC2 for
$120. At the time of the sale, the section 1248 amount with respect
to the CFC2 stock continues to be $30. The $70 of gain recognized on
the sale of CFC2 stock would give rise to a $70 subpart F inclusion
to USP under section 951(a)(1)(A).
(ii) Result--(A) Trigger of gain recognition agreement with no
election. CFC1's sale of CFC2 stock is a triggering event. As a
result, USP must amend its return for the year of the initial
transfer and include $50 in income (as well as pay any applicable
interest), $30 of which will be recharacterized as a dividend
pursuant to section 1248. Under paragraph (b)(3)(iv) of this
section, as of the date of the initial transfer, CFC1 has a basis of
$100 in its CFC2 stock, and USP has a basis in its CFC1 stock of
$100. As a result of the sale of CFC2 stock by CFC1, USP will have a
$20 subpart F inclusion under section 951(a)(1)(A).
(B) Trigger of gain recognition agreement with election. Assume
the same facts as in paragraph (i) of this Example, except that USP
elected under paragraph (b)(1)(vii) of this section to include the
amount of gain realized, but not recognized, on the initial
transfer, $50, in the year of the triggering event rather than in
the year of the initial transfer. The result is the same as above,
except that USP will include the $50 of gain on its tax return for
the year of the triggering event, together with interest. For
purposes of
[[Page 5188]]
determining the amount of the $50 gain characterized as a dividend
pursuant to section 1248, if any, of the $50 inclusion, USP will
take into account the section 1248 amount of CFC2 at the time of the
disposition in the year of the triggering event.
(iii) Partial dispositions. If the transferee foreign corporation
or any other person disposes of only a portion of the stock or
securities of the transferred corporation, then the U.S. transferor is
required to recognize only a proportionate amount of the gain realized,
but not recognized, upon the initial transfer. The proportion required
to be recognized shall be determined by reference to the fair market
value of the transferred stock or securities disposed of and the total
fair market value of the transferred stock or securities immediately
before the disposition.
(2) Disposition of substantially all of the transferred
corporation's assets. A disposition of substantially all of the
transferred corporation's assets (including stock in a subsidiary
corporation or an interest in a partnership) by the transferred
corporation or any other person. Solely for purposes of this section,
the term substantially all has the meaning provided under section
368(a)(1)(C). Accordingly, the determination of whether substantially
all of the transferred corporation's assets have been disposed of shall
be made under all the facts and circumstances. For purposes of this
paragraph (d)(2), dispositions of stock in connection with an asset
reorganization of a corporation all or a portion the stock of which is
owned by the transferred corporation, or a liquidation of a corporation
the stock of which is owned by the transferred corporation in an amount
satisfying the requirements of section 1504(a)(2) and to which sections
332 and 337 apply, shall not be taken into account. If the initial
transfer was an indirect stock transfer, see Sec. 1.367(a)-3(d)(2)(v).
If the transferred corporation is a domestic corporation, see paragraph
(g)(2) of this section. For an example of when a disposition of
substantially all the transferred corporation's assets by a person
other than the transferred corporation is a triggering event under this
paragraph (d)(2), see paragraph (e)(6)(ii) of this section.
(3) Disposition of the stock of the transferee foreign
corporation--(i) General rule. A disposition in whole or in part, by
the U.S. transferor of the stock of the transferee foreign corporation
that is received (or deemed received) in the initial transfer. For
purposes of this section, a reference to stock described in the
preceding sentence shall also include stock of the transferee foreign
corporation the basis of which is determined, directly or indirectly,
in whole or in part, by reference to the basis of the stock of the
transferee foreign corporation that is received (or deemed received) in
the initial transfer.
(ii) Partial dispositions. If the U.S. transferor disposes of only
a portion of the stock of the transferee foreign corporation that is
received (or deemed received) in the initial transfer, then the U.S.
transferor is required to recognize only a proportionate amount of the
gain realized, but not recognized, upon the initial transfer. The
proportion required to be recognized shall be determined by reference
to the fair market value of the transferee foreign corporation stock
disposed of and the total fair market value of the transferee foreign
corporation stock immediately before the disposition.
(4) Deconsolidation. A U.S. transferor that is a member of a
consolidated group ceases to be a member of the consolidated group,
other than by reason of an acquisition of the assets of the U.S.
transferor in a transaction to which section 381(a) applies, or by
reason of joining a new consolidated group as part of the same
transaction. However, in the case of a transaction to which section
381(a) applies, see paragraph (d)(3) of this section (providing that a
triggering event includes a disposition of the stock of the transferee
foreign corporation).
(5) Consolidation. A U.S. transferor becomes a member of a
consolidated group.
(6) Individual U.S. transferor becomes a non-citizen nonresident. A
U.S. transferor that is an individual loses U.S. citizenship, or a U.S.
transferor that is a long-term resident ceases to be taxed as a lawful
permanent resident (as defined in section 877(e)(2)). Immediately
before the date that the U.S. transferor loses U.S. citizenship or
ceases to be taxed as a long-term resident, the gain recognition
agreement will be triggered. No additional inclusion is required under
section 877 with respect to the transferred stock or securities, and a
gain recognition agreement under section 877 may not be used to avoid
taxation under section 367(a) resulting from the trigger of the section
367(a) gain recognition agreement.
(7) Death of an individual; trust or estate goes out of existence.
An individual U.S. transferor dies, or a U.S. transferor that is a
trust or estate goes out of existence.
(8) Failure to comply. The failure to comply in any material
respect with the requirements of this section or with the terms of a
gain recognition agreement (for example, a failure to file an annual
certification or Form 8838). Such a material failure to comply shall
extend the period for assessment of tax until three years after the
date on which the Director of Field Operations or Area Director
receives actual notice of the failure to comply.
(e) Exceptions. Notwithstanding paragraph (d) of this section, the
following events shall not constitute triggering events:
(1) Certain nonrecognition transactions--(i) Dispositions of stock
of the transferee foreign corporation by the U.S. transferor--(A)
Transfers to a corporation or partnership. Except to the extent
provided in paragraph (g)(1)(iv) of this section, a disposition of
stock of the transferee foreign corporation by the U.S. transferor in
an exchange to which section 351, 354 (but only in a reorganization
described in section 368(a)(1)(B)), or 721 applies, will not be a
triggering event under paragraph (d)(3) of this section, and the
original gain recognition agreement shall terminate without further
effect, if the U.S. transferor complies with requirements similar to
those contained in paragraph (e)(1)(ii) of this section, providing for
notice and an agreement to recognize gain in the case of a direct or
indirect disposition of the stock previously held by the U.S.
transferor. See paragraph (e)(3)(i) of this section for dispositions of
the transferee foreign corporation stock in certain asset
reorganizations.
(B) Liquidations of the U.S. transferor under sections 332 and 337.
The disposition of the transferee foreign corporation stock pursuant to
a liquidation of the U.S. transferor under sections 332 and 337 will
not be a triggering event under paragraph (d)(3) of this section, and
the original gain recognition agreement shall terminate without further
effect, if the following conditions are satisfied:
(1) The distributee is a domestic corporation described in section
332(b)(1).
(2) The domestic distributee corporation (successor U.S.
transferor) enters into a new gain recognition agreement pursuant to
which it agrees to recognize gain (during the remaining term of the
original gain recognition agreement), with respect to the initial
transfer, modified by substituting the successor U.S. transferor in
place of the original U.S. transferor, and agreeing to treat the
successor U.S. transferor as the original U.S. transferor for purposes
of this section. If, however, in connection with a liquidation
described in section 332, the U.S. transferor recognizes gain
[[Page 5189]]
under section 336 with respect to a portion of the stock of the
transferee foreign corporation, and the conditions described in
paragraph (g)(1) of this section are satisfied, the new gain
recognition agreement that the successor U.S. transferor enters into
shall reflect the gain realized, but not recognized, on the initial
transfer (subject to adjustment for prior partial dispositions) less
that proportion corresponding to gain recognized under section 336. The
proportion is determined by reference to the relative fair market
values of the transferee foreign corporation stock received (or deemed
received) in the initial transfer on which the U.S. transferor
recognized gain under section 336 and the total fair market value of
the transferee foreign corporation stock received (or deemed received)
by the U.S. transferor in the initial transfer that is distributed by
the U.S. transferor in the liquidation.
(3) The successor U.S. transferor makes the election described in
paragraph (b)(1)(vii) of this section. However, if the U.S. transferor
was a member of a consolidated group in the year of the initial
transfer, and the successor U.S. transferor is also a member of the
original consolidated group immediately after the liquidation, no such
election must be made.
(4) The successor U.S. transferor provides with its next annual
certification (described in paragraph (b)(5) of this section) the new
gain recognition agreement, a notice of the liquidation, and Form 8838
to extend the period for assessment of the tax on the initial transfer
to a date not earlier than the eighth full taxable year following the
taxable year of the initial transfer.
(ii) Transfers of stock or securities of the transferred
corporation by the transferee foreign corporation to a corporation or
partnership. Except to the extent provided in paragraph (f)(1)(i) of
this section, a disposition of stock or securities of the transferred
corporation by the transferee foreign corporation in an exchange to
which section 351, 354 (but only in a reorganization described in
section 368(a)(1)(B)), or 721 applies, will not be a triggering event
described in paragraph (d)(1) of this section, and the original gain
recognition agreement shall terminate without further effect, if the
following conditions are satisfied:
(A) The transferee foreign corporation receives (or is deemed to
receive) in exchange for the property disposed of, stock in a
corporation, or an interest in a partnership, that acquired the
transferred stock or securities (or receives stock in a corporation
that controls the corporation acquiring the transferred stock or
securities in the case of a triangular section 368(a)(1)(B)
reorganization).
(B) The U.S. transferor provides a notice of the transfer with its
next annual certification under paragraph (b)(5) of this section,
setting forth--
(1) A full description of the transfer;
(2) The applicable nonrecognition provision; and
(3) The name, address, and taxpayer identification number (if any)
of the new transferee of the transferred stock or securities.
(C) The U.S. transferor provides with its next annual certification
a new gain recognition agreement pursuant to which it agrees to
recognize gain (during the remaining term of the original gain
recognition agreement) with respect to the initial transfer, and in
which it agrees that any of the following events also constitutes a
triggering event:
(1) A disposition of the stock or securities or partnership
interest that the transferee foreign corporation received in exchange
for the transferred stock or securities (other than in a disposition
which itself qualifies under the rules of paragraph (e) of this
section).
(2) The corporation or partnership that acquired the transferred
stock or securities disposes of such property (other than in a
disposition which itself qualifies under the rules of paragraph (e) of
this section).
(3) Any other disposition that has the effect of an indirect
disposition of the transferred stock or securities.
(iii) Transfers of the transferred corporation's assets to a
corporation or partnership. Except to the extent provided in paragraph
(f)(1)(ii) of this section, a disposition of substantially all of the
transferred corporation's assets by the transferred corporation in an
exchange to which section 351, 354 (but only in a reorganization
described in section 368(a)(1)(B)--for example, where stock in a
subsidiary corporation comprises substantially all of the transferred
corporation's assets), or 721 applies, will not be a triggering event
under paragraph (d)(2) of this section, and the original gain
recognition agreement shall terminate without further effect, if the
transferred corporation receives (or is deemed to receive) in exchange
for all or a portion of its assets stock in a corporation or an
interest in a partnership that acquired the assets of the transferred
corporation (or receives stock in a corporation that controls the
corporation acquiring the assets) and the U.S. transferor complies with
requirements similar to those contained in paragraph (e)(1)(ii) of this
section, (providing for notice and an agreement to recognize gain in
the case of a direct or indirect disposition of the assets previously
held by the transferred corporation). See paragraph (e)(3)(iii) of this
section for dispositions of substantially all of the transferred
corporation's assets in certain asset reorganizations.
(2) Recapitalizations--(i) Transferred corporation. Except to the
extent provided in paragraph (f)(1) of this section, a transaction
described in section 368(a)(1)(E) of the transferred corporation will
not be a triggering event under paragraph (d)(1) of this section. The
description of this exception that is required to be filed with the
annual certification under paragraph (b)(5) of this section must
include a description of the type or class, amount, and characteristics
of the stock or securities that the transferred corporation issued in
the reorganization.
(ii) Transferee foreign corporation. A section 368(a)(1)(E)
reorganization of the transferee foreign corporation will not be a
triggering event under paragraph (d)(3) of this section. The
description of this exception that is required to be filed with the
annual certification under paragraph (b)(5) of this section must
include a description of the type or class, amount, and characteristics
of the stock or securities that the transferee foreign corporation
issued in the reorganization. See paragraph (g)(1) of this section for
rules regarding the recognition of gain by the U.S. transferor in
connection with nonrecognition exchanges.
(3) Certain asset reorganizations--(i) Transfers of transferee
foreign corporation's stock by U.S. transferor. Except to the extent
provided in paragraph (g)(1)(iv) of this section, if the U.S.
transferor transfers all or a portion of the stock of the transferee
foreign corporation to a domestic acquiring corporation (successor U.S.
transferor) pursuant to an asset reorganization, the exchanges made
pursuant to such asset reorganization will not be triggering events
described in paragraph (d)(3) of this section, and the original gain
recognition agreement shall terminate without further effect, if the
following conditions are satisfied:
(A) The common parent of the original consolidated group, successor
U.S. transferor, or new common parent, as applicable, enters into a new
gain recognition agreement pursuant to which the successor U.S.
transferor agrees to recognize gain (during the remaining term of the
original gain recognition agreement) with respect to the initial
transfer, modified by substituting the successor U.S. transferor in
place of the original U.S.
[[Page 5190]]
transferor and agreeing to treat the successor U.S. transferor as the
original U.S. transferor for purposes of this section.
(B) The successor U.S. transferor or new common parent, as
applicable, makes the election described in paragraph (b)(1)(vii) of
this section. However, if the U.S. transferor was a member of a
consolidated group in the year of the initial transfer, and the
successor U.S. transferor is also a member of the original consolidated
group immediately after the asset reorganization, no such election must
be made.
(C) The successor U.S. transferor provides with its next annual
certification (described in paragraph (b)(5) of this section)--
(1) The new gain recognition agreement;
(2) A notice of the transfer setting forth a full description of
the transfer (including the date of such transfer), and the successor
U.S. transferor's name, address, and taxpayer identification number;
and
(3) Form 8838 to extend the period for assessment of the tax on the
initial transfer to a date not earlier than the eighth full taxable
year following the taxable year of the initial transfer.
(ii) Transfers of transferred corporation stock or securities by a
transferee foreign corporation to a foreign acquiring corporation.
Except to the extent provided in paragraph (f)(1) of this section, if
the transferee foreign corporation transfers all or a portion of the
stock or securities of the transferred corporation to a foreign
acquiring corporation (successor transferee foreign corporation) in an
asset reorganization, the exchanges made pursuant to such
reorganization will not be triggering events described in paragraph
(d)(1) or (d)(3) of this section, and the original gain recognition
agreement shall terminate without further effect, if the following
conditions are satisfied:
(A) The U.S. transferor or common parent, as applicable, enters
into a new gain recognition agreement pursuant to which the U.S.
transferor agrees to recognize gain (during the remaining term of the
original gain recognition agreement), with respect to the initial
transfer, substituting the successor transferee foreign corporation in
place of the original transferee foreign corporation, and agreeing to
treat the successor transferee foreign corporation as the original
transferee foreign corporation for purposes of this section.
(B) The U.S. transferor provides with its next annual certification
(described in paragraph (b)(5) of this section) the new gain
recognition agreement and a notice of the transfer setting forth a full
description of the transfer (including the date of such transfer), and
the successor transferee foreign corporation's name, address, and
taxpayer identification number (if any).
(iii) Transfers of substantially all of the transferred
corporation's assets. Except to the extent provided in paragraph (f)(2)
of this section, if the transferred corporation transfers substantially
all of its assets to an acquiring corporation (successor transferred
corporation) pursuant to an asset reorganization, the exchanges made
pursuant to such asset reorganization will not be triggering events
under paragraph (d)(1) or (d)(2) of this section, and the original gain
recognition agreement shall terminate without further effect, if the
following conditions are satisfied:
(A) The U.S. transferor or common parent, as applicable, enters
into a new gain recognition agreement pursuant to which the U.S.
transferor agrees to recognize gain (during the remaining term of the
original gain recognition agreement), with respect to the initial
transfer, modified by--
(1) Substituting the successor transferred corporation in place of
the original transferred corporation and agreeing to treat the
successor transferred corporation as the original transferred
corporation for purposes of this section; and
(2) Treating only the assets acquired by the successor transferred
corporation from the original transferred corporation pursuant to the
asset reorganization as the assets subject to the triggering event
rules under paragraph (d)(2) of this section.
(B) The U.S. transferor provides with its next annual certification
(described in paragraph (b)(5) of this section) the new gain
recognition agreement and a notice of the transfer setting forth a full
description of the transfer (including the date of such transfer), and
the successor transferred corporation's name, address, and taxpayer
identification number (if any).
(iv) Example. The rules of paragraph (e)(3) of this section are
illustrated by the following examples:
Example 1. (i) Facts. UST, a domestic corporation incorporated
under the laws of State A, owns 100% of the stock of TFD, a foreign
corporation. In year 1, UST transfers all of the TFD stock to TFC, a
foreign corporation, in an exchange to which section 351 applies. In
the exchange, UST receives 100% of the stock of TFC. The transaction
is subject to both sections 367(a) and (b). See Sec. Sec. 1.367(a)-
3(b) and 1.367(b)-1(a). All of the requirements of Sec. 1.367(a)-
3(b)(1) are satisfied, and UST enters into a gain recognition
agreement. UST also complies with the notice requirement under Sec.
1.367(b)-1(c). In year 3, UST transfers its assets in a section
361(a) exchange to USA, a newly formed domestic corporation
incorporated under the laws of State B, in exchange for stock of
USA, and UST distributes such stock to its shareholders in a
transaction described in section 368(a)(1)(F).
(ii) Result. The transfer of the TFC stock by UST to USA
pursuant to the section 368(a)(1)(F) reorganization is a triggering
event under paragraph (d)(3) of this section. If, however, UST
complies with the requirements contained in paragraph (e)(3)(i) of
this section, the transfer will not be a triggering event.
(iii) Alternate facts. The facts are the same as in paragraph
(i) of this Example 1, except that the acquiring corporation is
foreign instead of domestic. Because paragraph (e)(3)(i) of this
section provides an exception to a triggering event under paragraph
(d)(3) of this section only if the acquiring corporation in the
asset reorganization is a domestic corporation, the section
368(a)(1)(F) reorganization is a triggering event without exception.
See also section 367(a)(5) and Sec. Sec. 1.367(a)-1T(f) and
1.367(a)-3T(e) (providing that certain corporate shareholders of a
U.S. transferor may enter into a gain recognition agreement when the
U.S. transferor goes out of existence in a section 361 initial
transfer).
Example 2. (i) Facts. UST, a domestic corporation, owns 100% of
the stock of three foreign corporations, FC1, FC2 and FC3. In year
1, USP transfers 100% of the stock of FC1 to FC2 in an exchange to
which section 351 applies. The transaction is subject to both
sections 367(a) and (b). See Sec. Sec. 1.367(a)-3(b) and 1.367(b)-
1(a). All of the requirements of Sec. 1.367(a)-3(b)(1) are
satisfied, and UST enters into a gain recognition agreement. UST
also complies with the notice requirement under Sec. 1.367(b)-1(c).
In year 4, in a reorganization described in section 368(a)(1)(D),
FC2 transfers all of its assets, including the stock of FC1, to FC3
in exchange for FC3 stock. FC2 transfers the FC3 stock to UST in
exchange for FC2 stock held by UST, and the FC2 stock is canceled.
(ii) Analysis. The transfer of FC1 stock to FC3 and the exchange
of FC2 stock for FC3 stock by UST pursuant to the reorganization
described in section 368(a)(1)(D) are triggering events under
paragraphs (d)(1) and (d)(3) of this section. If, however, UST
complies with the requirements contained in paragraph (e)(3)(ii) of
this section, the transfers will not be triggering events.
Example 3. (i) Facts. UST, a domestic corporation, owns 100% of
the stock of two foreign corporations, FC1 and FC2. In year 1, UST
transfers 100% of the stock of FC1 to FC2 in an exchange to which
section 351 applies. The transaction is subject to both sections
367(a) and (b). See Sec. Sec. 1.367(a)-3(b) and 1.367(b)-1(a). All
of the requirements of Sec. 1.367(a)-3(b)(1) are satisfied, and UST
enters into a gain recognition agreement. UST also complies with the
notice requirement under Sec. 1.367(b)-1(c). In year 4, in a
reorganization described in section
[[Page 5191]]
368(a)(1)(C), FC1 transfers all of its assets to FC3, an unrelated
foreign corporation, in exchange for FC3 stock. FC1 transfers the
FC3 stock to FC2 in exchange for the FC1 stock held by FC2 and the
FC1 stock is canceled.
(ii) Analysis. FC1's transfer of all of its assets to FC3 and
FC2's exchange of FC1 stock for FC3 stock pursuant to the
reorganization described in section 368(a)(1)(C) are triggering
events under paragraphs (d)(2) and (d)(1) of this section,
respectively. If, however, UST complies with the requirements
contained in paragraph (e)(3)(iii) of this section, the transfers
will not be triggering events.
(4) Certain triangular reorganizations--(i) Triangular asset
reorganizations of the transferee foreign corporation. For purposes of
this paragraph (e)(4), the term triangular asset reorganization means a
triangular reorganization described in Sec. 1.358-6(b)(2)(i) through
(iii) or in sections 368(a)(1)(G) and (a)(2)(D) where the acquiring
subsidiary is foreign. Except to the extent provided in paragraph
(f)(1) or (g)(1)(iv) of this section, the exchanges made pursuant to a
triangular asset reorganization of the transferee foreign corporation
will not be triggering events under paragraph (d)(1) or (d)(3) of this
section, and the original gain recognition agreement shall terminate
without further effect, if the following conditions are satisfied:
(A) The U.S. transferor or common parent, as applicable, enters
into a new gain recognition agreement pursuant to which the U.S.
transferor agrees to recognize gain (during the remaining term of the
original gain recognition agreement), with respect to the initial
transfer, and in which the U.S. transferor agrees to--
(1) If the parent corporation of the foreign acquiring subsidiary
is foreign, treat such foreign parent as the original transferee
foreign corporation for purposes of this section and treat as a
triggering event a disposition of the stock of the foreign acquiring
subsidiary, or, in the case of a reorganization described in section
368(a)(2)(E), the corporation originally identified as the transferee
foreign corporation; and
(2) If the parent corporation of the foreign acquiring subsidiary
is domestic, treat the foreign acquiring subsidiary as the original
transferee foreign corporation for purposes of this section, and apply
the principles of paragraph (g) of this section to taxable dispositions
by the domestic parent corporation of the foreign acquiring subsidiary
or, in the case of a reorganization described in section 368(a)(2)(E),
the corporation originally identified as the transferee foreign
corporation. In the case of a reorganization described in section
368(a)(2)(E) where the transferee foreign corporation is the merged
corporation, rather than the surviving corporation, then the surviving
corporation shall be treated as the transferee foreign corporation for
purposes of this section.
(B) The U.S. transferor provides with its next annual certification
(described in paragraph (b)(5) of this section) the new gain
recognition agreement and a notice of the transfer setting forth a full
description of the transfer (including the date of such transfer) and
the name, address, and taxpayer identification number (if any) for the
parent corporation of the foreign acquiring subsidiary.
(ii) Triangular asset reorganizations of the transferred
corporation. Except to the extent provided in paragraph (f)(1) or
(f)(2) of this section, the exchanges made pursuant to a triangular
asset reorganization of the transferred corporation will not be
triggering events in paragraph (d)(1) or (d)(2) of this section, and
the original gain recognition agreement shall terminate without further
effect, if the following conditions are satisfied:
(A) The U.S. transferor or common parent, as applicable, enters
into a new gain recognition agreement pursuant to which the U.S.
transferor agrees to recognize gain (during the remaining term of the
original gain recognition agreement), in accordance with the rules of
paragraph (b) of this section, with respect to the initial transfer,
and in which the U.S. transferor agrees to--
(1) Treat a disposition of the stock of the acquiring parent as a
triggering event;
(2) If the reorganization is a triangular C reorganization or a
reorganization described in section 368(a)(2)(D), treat a disposition
of the stock of the foreign acquiring subsidiary as a triggering event;
and
(3) If the reorganization is described in section 368(a)(2)(E) and
the merged corporation is the transferred corporation, treat a
disposition of the stock of the surviving corporation as a triggering
event.
(B) The U.S. transferor provides with its next annual certification
(described in paragraph (b)(5) of this section) the new gain
recognition agreement and a notice of the transfer setting forth a full
description of the transfer (including the date of such transfer) and
the name, address, and taxpayer identification number (if any) for the
parent corporation of the foreign acquiring subsidiary.
(5) Compulsory transfers. A compulsory transfer under Sec.
1.367(a)-4T(f)(2) that is not reasonably foreseeable by the U.S.
transferor is not a triggering event under paragraphs (d)(1) through
(d)(3) of this section.
(6) Certain liquidations and upstream reorganizations of the
transferred corporation into the transferee foreign corporation--(i)
General rule. A transfer of assets by the transferred corporation to
the transferee foreign corporation pursuant to a liquidation described
in section 332, where the transferee foreign corporation is described
in section 332(b)(1), or pursuant to a reorganization described in
section 368(a), and related exchanges of stock or securities of the
transferred corporation will not be triggering events under paragraph
(d)(1) or (d)(2) of this section. The description of this exception
that is required to be filed with the annual certification under
paragraph (b)(5) of this section must include a description of the
transaction. In such a case, the original gain recognition agreement
shall continue to apply during the remainder of its term. If, however,
in connection with a liquidation described in section 332, the
transferred corporation recognizes gain under section 336 with respect
to a portion of its assets, such assets shall be treated as disposed of
for purposes of paragraph (d)(2) of this section.
(ii) Example. The principles of this paragraph (e)(6) are
illustrated by the following example:
Example. (i) Facts. UST, a domestic corporation, owns 100
percent of the stock of TFD, a foreign corporation. UST transfers
all of the TFD stock to newly-formed TFC, a foreign corporation, in
an exchange to which section 351 applies. In the exchange, UST
receives 100 percent of the voting stock of TFC. The transaction is
subject to both sections 367(a) and (b). See Sec. Sec. 1.367(a)-
3(b) and 1.367(b)-1(a). All of the requirements of Sec. 1.367(a)-
3(b)(1) are satisfied, and UST enters into a gain recognition
agreement to qualify for nonrecognition treatment and does not make
the election described in paragraph (b)(1)(vii) of this section. UST
also complies with the notice requirement under Sec. 1.367(b)-1(c).
Two years after the initial transfer, TFD liquidates into TFC in a
transaction described in sections 332 and 337, and UST complies with
the requirements of this paragraph (e)(6). Four years after the
initial transfer, TFC disposes of substantially all of the assets
previously held by TFD.
(ii) Result. Because paragraph (d)(2) of this section provides
that a disposition of substantially all of the transferred
corporation's assets by any person is a triggering event, TFC's
disposition of substantially all of the assets previously held by
TFD is a triggering event. Under the terms of the gain recognition
agreement, UST must amend its return for the year of the initial
transfer and include in income the gain realized, but not
recognized, on the initial
[[Page 5192]]
transfer of the stock of TFD to TFC, and pay any interest charge.
(7) Death of an individual U.S. transferor. If the U.S. transferor
is an individual and such individual dies, the individual's death will
not be a triggering event under paragraph (d)(7) of this section, if--
(i) The person winding up the affairs of the U.S. transferor
retains, for the duration of the waiver of the statute of limitations
relating to the gain recognition agreement, assets to meet any possible
liability of the U.S. transferor under the duration of the gain
recognition agreement;
(ii) The person winding up the affairs of the U.S. transferor
provides security as provided under paragraph (c) of this section for
any possible liability of the U.S. transferor under the gain
recognition agreement; or
(iii) The person winding up the affairs of the U.S. transferor
obtains a ruling from the Internal Revenue Service providing for
successors to the U.S. transferor under the gain recognition agreement.
(8) Deconsolidation. A deconsolidation described in paragraph
(d)(4) of this section will not be a triggering event, and the original
gain recognition agreement shall terminate without further effect, if
the following conditions are satisfied:
(i) The U.S. transferor enters into a new gain recognition
agreement pursuant to which the U.S. transferor agrees to recognize
gain (during the remaining term of the original gain recognition
agreement) with respect to the initial transfer and makes the election
described in paragraph (b)(1)(vii) of this section.
(ii) The U.S. transferor provides with its next annual
certification (described in paragraph (b)(5) of this section) notice of
the deconsolidation.
(9) Consolidation. A consolidation described in paragraph (d)(5) of
this section will not be a triggering event, and the original gain
recognition agreement shall terminate without further effect, if the
following conditions are satisfied:
(i) The common parent of the consolidated group that includes the
U.S. transferor immediately after the consolidation enters into a new
gain recognition agreement pursuant to which the U.S. transferor agrees
to recognize gain (during the remaining term of the original gain
recognition agreement) with respect to the initial transfer and in
which it makes the election described in paragraph (b)(1)(vii) of this
section.
(ii) The U.S. transferor provides with its next annual
certification (described in paragraph (b)(5) of this section) a notice
of the consolidation.
(10) Reasonable cause exception for failure to comply--(i) Request
for relief. A failure to comply described in paragraph (d)(8) of this
section will not be a triggering event, and the timeliness requirement
with respect to a gain recognition agreement shall be considered
satisfied notwithstanding a failure to file the agreement in a timely
manner, if the person required to file the gain recognition agreement,
annual certification, or Form 8838 is able to demonstrate to the Area
Director, Field Examination, Small Business/Self Employed or the
Director of Field Operations, Large and Mid-Size Business (Director)
having jurisdiction of the taxpayer's tax return for the taxable year,
that such failure was due to reasonable cause and not willful neglect.
In determining whether the person has reasonable cause, the Director
shall consider whether the person acted reasonably and in good faith.
Whether the person acted reasonably and in good faith will be
determined after considering all the facts and circumstances. The
Director shall notify the person in writing within 120 days of the
filing if it is determined that the failure to comply was not due to
reasonable cause, or if additional time will be needed to make such
determination. For this purpose, the 120-day period shall begin to run
on the date the Service notifies the person in writing that the request
has been received and assigned for review. Once such period commences,
if the person is not again notified within 120 days, then the person
shall be deemed to have established reasonable cause. The reasonable
cause exception of this paragraph (e)(10) shall apply only if, once the
person becomes aware of the failure to file or comply with the
agreement, the person complies with the requirements of paragraph
(e)(10)(ii) of this section.
(ii) Requirements for reasonable cause relief--(A) Time of
submission. Requests for reasonable cause relief will only be
considered if once the person becomes aware of the failure to file or
comply with the agreement, the person attaches all the documents that
should have been filed, as well as a complete written statement setting
forth the reasons for the failure to timely comply, to an amended
return that amends the return to which the documents should have been
attached pursuant to the rules of section 367(a) and the regulations
under that paragraph.
(B) Notice requirement. In addition to the requirement of paragraph
(e)(10)(ii)(A) of this section, the person must provide a copy of the
amended return and all required attachments to the Director as follows:
(1) If the taxpayer is under examination for any taxable year when
the person requests relief, the taxpayer must provide a copy of the
amended return and attachments to the personnel conducting the
examination.
(2) If the taxpayer is not under examination for any taxable year
when the person requests relief, the taxpayer must provide a copy of
the amended return and attachments to the Director having jurisdiction
over the taxpayer's return.
(f) Gain recognized in connection with certain nonrecognition
transactions--(1) Dispositions of transferred stock or securities--(i)
General rule. If a disposition of the transferred stock or securities
occurs in connection with a nonrecognition transaction described in
paragraph (e)(1)(ii), (e)(2)(i), (e)(3)(ii), (e)(3)(iii), or (e)(4) of
this section and gain is recognized by the transferee foreign
corporation in connection with the transaction (for example, under
sections 351(b) or 356(a)(1)), the U.S. transferor must recognize gain
pursuant to the gain recognition agreement as determined under
paragraph (f)(1)(ii) of this section. This paragraph (f)(1)(i) shall
not apply to the extent that the gain recognized is treated as a
dividend under section 356(a)(2).
(ii) Method for determining amount of gain to be recognized. The
portion of the gain recognition agreement that must be recognized under
paragraph (f)(1)(i) of this section, if any, is the gain that would be
recognized by the transferee foreign corporation on such disposition
(but not in excess of the amount of the gain recognition agreement).
For purposes of this paragraph (f)(1)(ii), the gain that would be
recognized in the nonrecognition transactions listed in paragraph
(f)(1)(i) of this section by the transferee foreign corporation shall
be calculated before taking into account any basis increase that may
apply under paragraph (b)(3)(iv) of this section as a result of the
gain that the U.S. transferor is required to recognize. If the amount
of gain that the transferee foreign corporation would be required to
recognize is less than the amount of the gain subject to the gain
recognition agreement, then the new gain recognition agreement filed
pursuant to paragraph (e)(1)(ii), (e)(2)(i), (e)(3)(ii), (e)(3)(iii),
or (e)(4) of this section shall provide that the U.S. transferor shall
recognize the remaining portion of the gain that was realized, but not
recognized, on the initial transfer if a subsequent triggering event
occurs.
[[Page 5193]]
(iii) Example. The rule of this paragraph (f)(1) is illustrated by
the following example:
Example. (i) Facts. UST, a domestic corporation owning 100% of
the stock of TFD, a foreign corporation, transfers all of the TFD
stock to newly formed TFC, a foreign corporation, in an exchange to
which section 351 applies. In the exchange, UST receives 100% of the
stock of TFC. The transaction is subject to both sections 367(a) and
(b). See Sec. Sec. 1.367(a)-3(b) and 1.367(b)-1(a). All of the
requirements of Sec. 1.367(a)-3(b)(1) are satisfied, and UST enters
into a gain recognition agreement to qualify for nonrecognition
treatment and does not make the election contained in paragraph
(b)(1)(vii) of this section. UST also complies with the notice
requirement under Sec. 1.367(b)-1(c). At the time of the initial
transfer, UST has a basis of $50 in the stock of TFD, which has a
fair market value of $100. Thus, the amount of gain subject to the
gain recognition agreement is $50. Two years after the initial
transfer, TFC and X, an unrelated domestic corporation, form CFC, a
foreign corporation. TFC transfers the stock of TFD to CFC in an
exchange to which section 351 applies. UST also complies with the
notice requirement under Sec. 1.367(b)-1(c). At the time of the
transfer, TFC's basis in the TFD stock equals $50 and the fair
market value remains $100. In the exchange, TFC receives 25% of the
stock of CFC and $35 of cash. Before taking into account adjustments
made under paragraph (b)(3)(iv) of this section, TFC would recognize
$35 of gain under section 351(b). X transfers property to CFC in
exchange for the remaining 75% of the CFC stock. Under paragraph
(d)(1) of this section, TFC's disposition of the TFD stock is a
triggering event. However, UST complies with the requirements of
paragraph (e)(1)(ii) of this section providing for an exception to
the triggering event.
(ii) Result. Under paragraph (f)(1)(ii) of this section,
pursuant to the terms of the gain recognition agreement, UST must
recognize $35 of the $50 gain realized, but not recognized, on the
initial transfer. The new gain recognition agreement that UST files
pursuant to paragraph (e)(1)(ii)(C) of this section will reflect the
$15 that remains of the gain realized, but not recognized, on the
initial transfer. Under paragraph (b)(3)(iv)(A) of this section,
TFC's basis in the TFD stock is increased (as of the date of the
initial transfer) by $35 to $85. Under paragraph (b)(3)(iv)(B) of
this section, UST's basis in the TFC stock is also increased by $35.
Finally, after taking account of adjustments under paragraph
(b)(3)(iv) of this section, TFC must recognize $15 of gain under
section 351(b).
(2) Dispositions of substantially all of the transferred
corporation's assets. If a disposition of substantially all of the
assets of the transferred corporation occurs in connection with a
nonrecognition transaction described in paragraph (e)(1)(iii),
(e)(3)(iii), or (e)(4)(ii) of this section and gain is recognized on
such disposition (for example, under section 351(b) or 356(a)(1)), the
U.S. transferor must recognize gain pursuant to the gain recognition
agreement to the extent of such gain recognized (but not in excess of
the gain realized, but not recognized, on the initial transfer). This
paragraph (f)(2) shall not apply to the extent that recognized gain is
treated as a dividend under section 356(a)(2).
(g) Transactions that terminate the gain recognition agreement or
reduce the amount of gain required to be recognized pursuant to a gain
recognition agreement. Notwithstanding paragraph (d) of this section,
the following events shall not constitute triggering events and instead
shall either terminate the gain recognition agreement, or reduce the
amount of gain required to be recognized pursuant to a gain recognition
agreement:
(1) Taxable disposition of stock of the transferee foreign
corporation by U.S. transferor--(i) General rule. If the U.S.
transferor disposes of all the stock of the transferee foreign
corporation that is received (or deemed received) in the initial
transfer, then the gain recognition agreement shall terminate without
further effect if--
(A) Immediately before the disposition, the aggregate basis of the
transferee foreign corporation stock disposed of does not exceed the
sum of the aggregate basis of the transferred stock or securities
immediately before the initial transfer plus any increase in the basis
of such stock or securities as a result of the recognition of gain on
the initial transfer. For purposes of this paragraph (g)(1)(i)(A), an
increase in basis of the stock disposed of as a result of an income
inclusion with respect to such stock (for example, pursuant to section
961) shall not be taken into account; and
(B) All realized gain (if any) in the stock disposed of is
recognized currently and included in taxable income as a result of the
disposition.
(ii) Partial dispositions--(A) General rule. If the U.S. transferor
disposes of a portion of the stock of the transferee foreign
corporation that is received (or deemed received) in the initial
transfer in a transaction that satisfies the conditions described in
paragraphs (g)(1)(i)(A) and (B) of this section, such disposition will
not be a triggering event and the gain recognition shall remain in
effect. For purposes of determining whether the condition described in
paragraph (g)(1)(i)(A) of this section is satisfied, however, the
aggregate basis of the stock of the transferee foreign corporation
disposed of is compared to the aggregate basis of the transferred stock
or securities exchanged for such stock at the time of the initial
transfer.
(B) Subsequent triggering event. If the gain recognition agreement
is triggered after a disposition described in paragraph (g)(1)(ii)(A)
of this section, the U.S. transferor shall be required to recognize
only a proportionate amount of the gain subject to the gain recognition
agreement that otherwise would be required to be recognized on a
subsequent triggering event. Except as provided in paragraph (g)(1)(iv)
of this section, the proportion required to be recognized shall be
determined by reference to the percentage of stock (based on relative
fair market value) of the transferee foreign corporation received (or
deemed received) in the initial transfer that is retained by the U.S.
transferor.
(iii) The rule of paragraph (g)(1)(ii) of this section is
illustrated by the following example:
Example. (1) Facts. A, a United States citizen, owns 100% of the
outstanding stock of foreign corporation X. In a transaction to
which section 351 applies, A exchanges his stock in X (and other
assets) for 100% of the outstanding stock of foreign corporation Y.
The transaction is subject to both sections 367(a) and (b). See
Sec. Sec. 1.367(a)-3(b) and 1.367(b)-1(a). A enters into a gain
recognition agreement, makes the election contained in paragraph
(b)(1)(vii) of this section, and also complies with the notice
requirement under Sec. 1.367(b)-1(c). In the second year following
the initial transfer, A disposes of 60% of the fair market value of
the stock of Y, and the requirements of paragraphs (g)(1)(i)(A) and
(B) are met with respect to such disposition. In the fourth year
following the initial transfer, Y disposes of 50% of the fair market
value of the stock of X.
(ii) Result. The disposition of 60% of the stock of Y is not a
triggering event, and the gain recognition agreement continues in
effect. The disposition of X stock, however, is a triggering event
under paragraph (d)(1)(i) of this section. As a result of the
subsequent disposition of 50% of the stock of X, under paragraphs
(d)(1)(iii) and (g)(1)(ii)(B) of this section, A is required to
include in income in the year of such disposition 20% (40% of the
fair market value of Y multiplied by 50% of the fair market value of
X) of the gain that A realized but did not recognize on the initial
transfer of the X stock to Y, and pay any applicable interest.
(iv) Certain nonrecognition transactions. The rules described in
these paragraphs (g)(1)(iv)(A) through (C) apply if the U.S. transferor
disposes of all or a portion of the stock of the transferee foreign
corporation received (or deemed received) in the initial transfer
pursuant to a nonrecognition transaction described in paragraph
(e)(1)(i), (e)(2)(ii), (e)(3)(i), or (e)(3)(ii) of this section, the
condition described in paragraph (g)(1)(i)(A) of this section is
satisfied with respect to such disposition, and gain is recognized in
[[Page 5194]]
connection with the disposition (for example, under sections 351(b),
356(a)(1), or 336). If, however, only a portion of the stock of the
transferee corporation stock is disposed of pursuant to this paragraph
(g)(1)(iv), then for purposes of determining whether the condition
described in paragraph (g)(1)(i)(A) of this section is satisfied, the
aggregate basis of the stock disposed of is compared to the aggregate
basis of the transferred stock or securities exchanged for such stock
at the time of the initial transfer.
(A) U.S. transferor files new gain recognition agreement. This
paragraph (g)(1)(iv)(A) applies if the U.S. transferor (or successor
U.S. transferor, as applicable) enters into a new gain recognition
agreement as provided in paragraph (e)(1)(i), (e)(3)(i), or (e)(3)(ii)
of this section, as applicable. In such a case, the amount of gain
subject to the new gain recognition agreement shall equal the amount of
gain realized, but not recognized, on the initial transfer, less any
gain recognized by the U.S. transferor in connection with the
nonrecognition transaction. If the amount of gain recognized on the
transfer is equal to or greater than the amount of gain realized, but
not recognized, on the initial transfer, then the original gain
recognition agreement shall terminate without further effect.
(B) U.S. transferor does not file a new gain recognition agreement.
This paragraph (g)(1)(iv)(B) applies if the U.S. transferor (or
successor U.S. transferor, as applicable) fails to enter into a new
gain recognition agreement as provided in paragraph (e)(1)(i),
(e)(3)(i), or (e)(3)(ii) of this section, as applicable. In such a
case, the amount required to be recognized by the U.S. transferor
pursuant to the gain recognition agreement shall be the amount of gain
realized, but not recognized, on the initial transfer, less any gain
recognized by the U.S. transferor in connection with the nonrecognition
transaction.
(C) Special rule for recapitalizations. Because paragraph
(e)(2)(ii) of this section does not require the U.S. transferor to
enter into a new gain recognition agreement, the amount of gain subject
to the gain recognition agreement shall equal the amount of gain
realized, but not recognized, on the initial transfer, less any gain
recognized by the U.S. transferor in connection with the nonrecognition
transaction described in paragraph (e)(2)(ii) of this section.
(v) Election to reduce basis--(A) General rule. For purposes of
paragraphs (g)(1)(i), (ii) and (iv) of this section, the U.S.
transferor may elect to reduce its aggregate basis in the stock
disposed of effective immediately before the disposition such that the
condition described in paragraph (g)(1)(i)(A) is satisfied. If an
election is made pursuant to this paragraph (g)(1)(v), the U.S.
transferor may increase its basis in other stock of the transferee
foreign corporation it holds, if any, by a corresponding amount but not
above the fair market value of such stock.
(B) Election. The election pursuant to this paragraph (g)(1)(v) is
made by filing with the U.S. transferor's income tax return for the
taxable year in which the disposition of the transferee foreign
corporation stock occurs, a statement setting forth the following
information, with the heading ``Election to Reduce Stock Basis Under
Sec. 1.367(a)-8T(g)(1)(v)'':
(1) A description of the transferee foreign corporation stock that
the U.S. transferor has disposed of.
(2) An estimate of the fair market value of the stock as of the
date of the disposition.
(3) A comparison of the basis of the transferee foreign corporation
stock before and after the election that is made pursuant to this
paragraph (g)(1)(v).
(4) The date on which the transferee foreign corporation stock was
disposed of by the U.S. transferor.
(vi) The rules of paragraph (g)(1) of this section are illustrated
by the following examples:
Example 1. (i) Facts. USP, a domestic corporation, owns 100% of
the stock of two foreign corporations, FC1 and FC2. The basis and
fair market value of the FC1 stock is $100 and $90, respectively.
The basis and fair market value of the FC2 stock is $0 and $100,
respectively. USP also owns land that has a basis and fair market
value of $10. In year 1, USP transfers 100% of the stock of FC1 and
FC2 and the land to FC3, a newly formed foreign corporation, in
exchange for 20 shares of FC3 stock. The transfer of the stock of
FC1 and FC2 qualifies under section 351 and section 368(a)(1)(B).
The transfer of the land qualifies under section 351. The transfer
of the FC2 stock is subject to both section 367(a) and (b). See
Sec. Sec. 1.367(a)-3(b) and 1.367(b)-1(a). Pursuant to Sec.
1.367(a)-3(b)(1)(ii) and this section, USP enters into a gain
recognition agreement with respect to the $100 of gain in the FC2
stock and complies with the notice requirement under Sec. 1.367(b)-
1(c). USP takes the position that its basis in each of the 20 shares
of FC3 stock received in the transfer equals $5.5 (($100+$0+10)/20).
In year 3, USP sells 100% of its FC3 stock to an unrelated person
for cash.
(ii) Result. The disposition of the FC3 stock is a triggering
event described in paragraph (d)(3) of this section. The disposition
does not terminate the gain recognition agreement pursuant to
paragraph (g)(1)(i) of this section because USP takes the position
that the basis of each of the 10 shares of FC3 stock it received in
exchange for the FC2 stock in the initial transfer equals $5.5.
Thus, the total basis in the 10 shares received for the FC2 stock
equals $55, which exceeds the $0 basis USP had in the FC2 stock it
transferred to FC3 in the initial transfer. As a result, the
condition described in paragraph (g)(1)(i)(A) of this section is not
satisfied. USP may, however, elect to reduce its basis in 10 of the
FC3 shares it disposes of from $5.5 to $0, and increase its basis in
its remaining 10 shares of FC2 stock by $5.5, pursuant to paragraph
(g)(1)(v) of this section. As a result, the condition described in
paragraph (g)(1)(i)(A) of this section would be satisfied, the
disposition would not be a triggering event, and the gain
recognition would terminate without further effect.
Example 2. (i) Facts. USP, a domestic corporation, owns 100% of
the stock of FC1, a foreign corporation. The basis and fair market
value of the FC1 stock is $0 and $80, respectively. In year 1, USP
transfers 100% of the stock of FC1 to FC2, a newly formed foreign
corporation, in exchange for 20 shares of FC2 stock. The transfer of
the stock of FC1 qualifies under section 351 and section
368(a)(1)(B). The transfer of the FC1 stock is subject to both
section 367(a) and (b). See Sec. Sec. 1.367(a)-3(b) and 1.367(b)-
1(a). Pursuant to Sec. 1.367(a)-3(b)(1)(ii) and this section, USP
enters into a gain recognition agreement with respect to the $80 of
gain in the FC1 stock and complies with the notice requirement under
Sec. 1.367(b)-1(c). USP's basis and fair market value in the FC2
stock it receives at the time of the transfer is $0 and $80,
respectively. In year 3, when the fair market value of the FC2 stock
continues to equal $80, USP transfers land that has a basis and fair
market value of $20 to FC2 in a transfer that qualifies under
section 351, but does not receive additional shares of FC2 in
connection with such transfer. In year 5, USP sells 100% of its FC2
stock to an unrelated person for cash.
(ii) Result. The disposition of the FC3 stock is a triggering
event described in paragraph (d)(3) of this section. The disposition
would not terminate the gain recognition agreement pursuant to
paragraph (g)(1)(i) of this section if the basis in each of the 20
FC2 shares that USP sells equals $1 ($20/20 shares) because
immediately before the disposition the basis in the FC2 shares
received for the FC1 shares exceeds the basis of the FC1 shares at
the time of the initial transfer. As a result, the condition
described in paragraph (g)(1)(i)(A) of this section would not be
satisfied. USP may, however, elect to adjust its basis in its FC2
shares such that 16 of the shares have zero basis (reflecting the
basis of the FC1 stock) and 4 of the shares have $20 of basis
(reflecting the basis of the land). In such a case, the condition
described in paragraph (g)(1)(i)(A) of this section would be
satisfied, the disposition would not be a triggering event, and the
gain recognition agreement would terminate without further effect.
(2) Certain dispositions by a domestic transferred corporation of
substantially all of its assets. If, immediately before the initial
transfer, the U.S. transferor owned an amount of stock in the
transferred corporation described in
[[Page 5195]]
section 1504(a)(2), and the transferred corporation is domestic, then
the gain recognition agreement shall terminate without further effect
if the transferred corporation disposes of substantially all of its
assets in a transaction in which all realized gain is recognized
currently. If an indirect stock transfer necessitated the filing of the
gain recognition agreement, such agreement shall terminate if,
immediately before the indirect transfer, the U.S. transferor owned an
amount of stock in the acquired corporation described in section
1504(a)(2) (or, in the case of a section 368(a)(1)(A) and (a)(2)(E)
reorganization described in Sec. 1.367(a)-3(d)(1)(ii), the U.S.
transferor owned an amount of stock in the acquiring corporation
described in section 1504(a)(2)) and the transferred corporation
disposes of substantially all of its assets (taking into account Sec.
1.367(a)-3(d)(2)(v)) in a transaction in which all realized gain is
recognized currently.
(3) Distribution or transfer by transferee foreign corporation of
stock or securities of transferred corporation under section 337, 355
or 361--(i) Scope. This paragraph (g)(3) applies if the transferee
foreign corporation distributes or transfers the stock or securities
that initially necessitated the filing of the gain recognition
agreement (and any additional stock received after the initial
transfer) pursuant to any of the following transactions:
(A) A liquidating distribution to the U.S. transferor or a domestic
corporation that is a member of the same consolidated group of which
the U.S. transferor is then a member and that qualifies under sections
332 and 337, if such domestic distributee corporation is described in
section 332(b)(1).
(B) A distribution to the U.S. transferor, a domestic corporation
that is a member of the same consolidated group of which the U.S.
transferor is a member, or an individual that is a United States
person, that qualifies under section 355.
(C) A transfer to the U.S. transferor or a domestic corporation
that is a member of the same consolidated group of which the U.S.
transferor is then a member and to which section 361 applies (but, if
in connection with a reorganization described in section 368(a)(1)(D)
or (G), only if the requirements of section 354(b)(1)(A) and (B) are
met).
(ii) General rule. If a distribution or transfer is described in
paragraph (g)(3)(i) of this section, the gain recognition agreement
shall terminate without further effect, provided that immediately after
such distribution or transfer the basis in the transferred stock or
securities in the hands of the domestic corporation or individual, as
applicable, does not exceed the basis that the U.S. transferor had in
the transferred stock or securities immediately before the initial
transfer. For purposes of this paragraph (g)(3)(ii), only the basis in
the stock or securities transferred shall be taken into account, and
increases to stock basis as a result of income inclusions with respect
to stock (for example, pursuant to section 961) shall not be taken into
account. In the case of a transaction described in paragraph
(g)(3)(i)(B) of this section, any reductions or redistributions of
stock basis under Sec. 1.367(b)-5(c)(2) or (4), respectively, shall be
made before applying the rules of this paragraph (g)(3)(ii).
(iii) Election to reduce basis in stock or securities of
transferred corporation. For purposes of paragraph (g)(3)(ii) of this
section, the domestic corporation or individual, as applicable, may
elect to reduce the basis in the stock or securities transferred to
equal the basis the U.S. transferor had in the corresponding
transferred stock or securities immediately before the initial
transfer, such that the gain recognition agreement shall terminate
without further effect. If such an election is made, the domestic
corporation or individual may increase its basis in other stock of the
transferred corporation it holds, if any, by a corresponding amount but
not above the fair market value of such stock.
(iv) Election. The election pursuant to paragraph (g)(3)(iii) of
this section is made by filing with the domestic corporation's or
individual's income tax return for the taxable year in which the
distribution or transfer occurs, a statement setting forth the
following information, with the heading ``Election to Reduce Stock
Basis Under Sec. 1.367(a)-8T(g)(3)(iii)'':
(1) A description of the stock or securities received.
(2) An estimate of the fair market value of the stock or securities
as of the date of their receipt.
(3) A statement comparing the basis of the stock or securities
before and after the election.
(4) The date on which the stock or securities were received.
(v) Examples. The rules of paragraph (g)(3) of this section are
illustrated by the following examples:
Example 1. (i) Facts. USP, a domestic corporation, owns 100% of
the stock of two foreign corporations, FC1 and FC2. FC1 has 10
shares of stock issued and outstanding. In year 1, when the basis
and fair market value of the FC1 stock is $0 and $90, respectively,
USP transfers its 10 shares of FC1 stock to FC2 in an exchange to
which section 351 applies. The transaction is subject to both
sections 367(a) and (b). See Sec. Sec. 1.367(a)-3(b) and 1.367(b)-
1(a). Pursuant to Sec. 1.367(a)-3(b)(1)(ii) and this section, USP
enters into a gain recognition agreement with respect to such
transfer. USP also complies with the notice requirement under Sec.
1.367(b)-1(c). In year 2, FC2 transfers land with a basis and fair
market value of $10 to FC1 in exchange for one newly issued share of
FC1 stock. In year 4, FC2 distributes all of its FC1 stock to USP in
a liquidating distribution that qualifies under sections 332 and
337.
(ii) Result. In determining whether the gain recognition
agreement entered into by USP is terminated under paragraph (g)(3)
of this section, or in the alternative triggered under paragraph
(d)(1) of this section, only the stock of FC1 transferred by USP to
FC2 in year 1 is considered. Thus, the basis in the one share of FC1
stock issued to FC2 in year 2 in exchange for land is not taken into
account. If instead of FC1 actually issuing another share of stock
to FC2 in exchange for the land, FC1 was deemed to issue stock to
FC2 in such exchange, then the gain recognition agreement would
terminate only if USP elects to adjust the basis in its FC1 shares
such that nine of the shares have zero basis and one of the shares
has $10 of basis.
Example 2. (i) Facts. USP, a domestic corporation, owns 100% of
the stock of two foreign corporations, FC and FD. In year 1, USP
transfers 100% of the stock of FC to FD in an exchange to which
section 351 applies. The transaction is subject to both sections
367(a) and (b). See Sec. Sec. 1.367(a)-3(b) and 1.367(b)-1(a). At
the time of the initial transfer, USP has a basis of $80 in its
stock of FC; the stock of FC has a fair market value of $100. USP's
basis in its stock of FD, and the fair market value of the FD stock,
are both $100. Pursuant to Sec. 1.367(a)-3(b)(1)(ii) and this
section, USP enters into a gain recognition agreement with respect
to the initial transfer. USP also complies with the notice
requirement under Sec. 1.367(b)-1(c). In year 4, FD distributes all
of the stock of FC to USP in a pro rata distribution to which
section 355 applies. At the time of the distribution, the fair
market value of the FC stock has increased to $200, while the fair
market value of the FD stock has remained $100. Under section 358,
USP allocates its $180 predistribution basis in its FD stock between
the FD stock and FC stock according to the stock blocks' relative
fair market values, yielding a $60 basis in the FD stock and a $120
basis in the FC stock. Immediately before the distribution, USP's
section 1248 amount with respect to FC and FD is zero.
(ii) Result. The distribution of FC stock is a triggering event
under paragraph (d)(1) of this section. The distribution does not
terminate the gain recognition agreement under paragraph (g)(3) of
this section because after the distribution, USP's basis of $120 in
the FC stock exceeds the $80 basis that USP had in the FC stock at
the time of the initial transfer. If, however, USP elects to reduce
its basis in the FC stock it receives to $80, then the condition
described in paragraph (g)(3) of this section will be satisfied, and
the gain
[[Page 5196]]
recognition agreement will terminate without further effect. In
addition, the $40 of basis that USP elected to reduce is
redistributed to the stock of FD, the result of which is that USP
has a basis of $100 in its FD stock.
(h) Effective date--(1) General rule--(i) Gain recognition
agreements filed for transfers on or after effective date. With the
exception of paragraph (f) of this section, the rules of this section
apply to gain recognition agreements filed with respect to transfers of
stock or securities under Treas. Reg. Sec. Sec. 1.367(a)-3(b) through
(d) and 1.367(a)-3T(e) occurring on or after March 7, 2007. The rules
of paragraph (f) of this section apply to gain recognition agreements
filed with respect to transfers of stock or securities under Treas.
Reg. Sec. Sec. 1.367(a)-3(b) through (d) and 1.367(a)-3T(e) occurring
on or after August 6, 2007. However, the rules of this section do not
apply to gain recognition agreements filed with respect to such a
transfer of stock or securities occurring on or after March 7, 2007, if
such transfer was entered into pursuant to a written agreement which
was (subject to customary conditions) binding before February 5, 2007,
and at all times thereafter. Solely for purposes of this paragraph (h),
a transfer described in the preceding sentence shall be deemed to be a
transfer occurring before March 7, 2007 to which the rules of Sec.
1.367(a)-8 (see 26 CFR part 1, revised April 1, 2006) apply. See
paragraph (h)(2)(iii) of this section for the ability to apply the
rules of this section with respect to gain recognition agreements filed
before March 7, 2007.
(ii) Gain recognition agreements filed for transfers before
effective date. For matters covered in this section for periods before
March 7, 2007 but on or after July 20, 1998, the corresponding rules of
Sec. 1.367(a)-8 (see 26 CFR part 1, revised April 1, 2006) apply. For
matters covered in this section for periods before July 20, 1998, the
corresponding rules of Sec. 1.367(a)-3T(g) (see 26 CFR part 1, revised
April 1, 1998) and Notice 87-85 ((1987-2 CB 395); see Sec.
601.601(d)(2)(ii) of this chapter) apply. In addition, if a U.S.
transferor entered into a gain recognition agreement for transfers
before July 20, 1998, then the rules of Sec. 1.367(a)-3T(g) (see 26
CFR part 1, revised April 1, 1998) continue to apply in lieu of this
section in the event of any direct or indirect nonrecognition transfer
of the same property. See also, Sec. 1.367(a)-3(h).
(2) Applicability to gain recognition agreements filed before
effective date--(i) General rule. This paragraph (h)(2)(i) applies only
to rules in this regulation Sec. 1.367(a)-8T that were not already
effective under the rules of Sec. 1.367(a)-8 (see 26 CFR part 1,
revised April 1, 2006). Taxpayers may apply all or part of these
regulations to gain recognition agreements filed with respect to
transfers of stock or securities, for all open years, on or after July
20, 1998. If a taxpayer failed to file a gain recognition agreement
with respect to a transfer of stock or securities on or after July 20,
1998 and before March 7, 2007, the taxpayer must first obtain
reasonable cause relief under Sec. 1.367(a)-8(c)(2) to file the gain
recognition agreement before the taxpayer may apply this paragraph
(h)(2)(i).
(ii) Special filing rule for tax year ending before effective date.
This paragraph (h)(2)(ii) provides the time and manner in which
taxpayers may apply paragraph (h)(2)(i) of this section.
Notwithstanding the rules provided in Sec. 1.367(a)-8T(a)(2), all
agreements, certifications, or other information related to such gain
recognition agreement that should have been filed on or before March 7,
2007 shall be treated as having been timely filed, provided they are
attached to a Federal income tax return amending the taxpayer's Federal
income tax return for the taxable year in which they should have been
attached. The amended return described in the preceding sentence must
be filed before August 6, 2007. A taxpayer that wishes to apply
paragraph (h)(2)(i) of this section but that fails to meet the filing
requirement described in the preceding sentence must request reasonable
cause relief as provided in paragraph (e)(10) of this section.
(iii) Tax year ending after effective date. A taxpayer that entered
into a gain recognition agreement to which Sec. 1.367(a)-8 (see 26 CFR
part 1, revised April 1, 2006) applies may apply the rules of this
section in a tax year ending on or after March 7, 2007 by attaching the
agreement, certification, or other information related to such gain
recognition agreement that the rules of this section require in
accordance with the rules of this section and with the time and manner
rules provided in Sec. 1.367(a)-8T(a)(2).
(iv) Examples. The rules of paragraph (h)(2) of this section are
illustrated by the following examples:
Example 1. (i) Facts. USP, a domestic corporation, owns 100% of
the stock of two foreign corporations, FC and FD. In 2003, USP
transfers 100% of the stock of FC to FD in an exchange to which
section 351 applies. The transaction is subject to both sections
367(a) and (b). See Sec. Sec. 1.367(a)-3(b) and 1.367(b)-1(a).
Pursuant to Sec. 1.367(a)-3(b)(1)(ii) and this section, USP enters
into a gain recognition agreement with respect to the initial
transfer. USP also complies with the notice requirement under Sec.
1.367(b)-1(c). In 2005, FD distributes all of the stock of FC to USP
in a pro rata distribution to which section 355 applies. Under
section 358, USP's basis in its FC stock exceeds the basis that USP
had in FC immediately before the initial transfer.
(ii) Result. Under paragraph (h)(1)(ii) of this section, the
rules of Sec. 1.367(a)-8 apply because the gain recognition
agreement was filed before March 7, 2007. As a result of the year
2005 transaction, under Sec. 1.367(a)-8(e)(1), USP is required to
recognize all of the gain subject to the gain recognition agreement,
and pay any applicable interest. The gain recognition agreement does
not terminate under Sec. 1.367(a)-8(h)(3) because USP's basis in
its FC stock immediately after the section 355 distribution exceeds
the basis USP had in the FC stock immediately before the initial
transfer. However, paragraph (g)(3)(iii) of this section provides a
rule that would allow USP to elect to reduce its basis in the FC
stock such that the conditions in paragraph (g)(3) of this section
would be satisfied and the gain recognition agreement would
terminate without further effect. Under paragraph (h)(2)(i) of this
section, USP may apply paragraph (g)(3)(iii) of this section to the
2005 transaction, if 2005 is an open year, because the rule provided
in paragraph (g)(3)(iii) of this section was not already effective
under Sec. 1.367(a)-8. Under paragraph (h)(2)(ii) of this section,
USP must submit the documents required under paragraph (g)(3)(iii)
of this section to a Federal income tax return amending its 2005
Federal income tax return before August 6, 2007.
Example 2. (i) Facts. UST, a domestic corporation, owns 100% of
the stock of two foreign corporations, TFC and TFD. In 2003, USP
transfers 100% of the stock of TFD to TFC in an exchange to which
section 351 applies. The transaction is subject to both sections
367(a) and (b). See Sec. Sec. 1.367(a)-3(b) and 1.367(b)-1(a). All
of the requirements of Sec. 1.367(a)-3(b)(1) are satisfied, and UST
enters into a gain recognition agreement. UST also complies with the
notice requirement under Sec. 1.367(b)-1(c). In 2005, TFC transfers
its TFD stock to F1, also a foreign corporation, in an exchange to
which section 351 applies. UST does not file a new gain recognition
agreement under Sec. 1.367(a)-8(g)(2).
(ii) Result. Under paragraph (h)(1)(ii) of this section, the
rules of Sec. 1.367(a)-8 apply because the gain recognition
agreement was filed before March 7, 2007. Under Sec. 1.367(a)-8(e),
UST must recognize the gain realized, but not recognized, on its
initial transfer of TFD stock. Paragraph (h)(2)(i) of this section
does not apply because the rule in paragraph (e)(1)(ii) of this
section was already effective under Sec. 1.367(a)-8(g)(2).
Therefore, UST's only recourse from recognizing the gain subject to
the gain recognition agreement is the reasonable cause exception
provided in Sec. 1.367(a)-8(c)(2).
(3) Expiration. The applicability of this section expires on or
before February 1, 2010.
[[Page 5197]]
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
0
Par. 7. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
0
Par. 8. In Sec. 602.101, paragraph (b) is revised by adding an entry
for Sec. 1.367(a)-8T in numerical order to the table to read as
follows:
Sec. 602.101 OMB Control numbers.
* * * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.367(a)-8T................................................ 1545-2056
* * * * *
------------------------------------------------------------------------
Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
Approved: January 31, 2007.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 07-490 Filed 2-1-07; 8:52 am]
BILLING CODE 4830-01-P