Revision of Income Tax Regulations Under Sections 358, 367, 884, and 6038B Dealing With Statutory Mergers or Consolidations Under Section 368(a)(1)(A) Involving One or More Foreign Corporations, 749-767 [05-201]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 70, Number 3 (Wednesday, January 5, 2005)]
[Proposed Rules]
[Pages 749-767]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-201]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-125628-01]
RIN 1545-BA65


Revision of Income Tax Regulations Under Sections 358, 367, 884, 
and 6038B Dealing With Statutory Mergers or Consolidations Under 
Section 368(a)(1)(A) Involving One or More Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations amending the 
income tax regulations under various provisions of the Internal Revenue 
Code (Code) to account for statutory mergers and consolidations under 
section 368(a)(1)(A) (including reorganizations described in section 
368(a)(2)(D) and (E)) involving one or more foreign corporations. These 
proposed regulations are issued concurrently with proposed regulations 
(REG-117969-00) that would amend the definition of a reorganization 
under section 368(a)(1)(A) to include certain statutory mergers or 
consolidations effected pursuant to foreign law.

DATES: Written and electronic comments and requests to speak and 
outlines of topics to be discussed at the public hearing scheduled for 
May 19, 2005, at 10 a.m. must be received by April 28, 2005.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-125628-01), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
125628-01), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the IRS 
Internet site at: https://www.irs.gov/regs or via the Federal 
eRulemaking Portal at https://www.regulations.gov (IRS and REG-125628-
01). The public hearing will be held in the Auditorium, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Robert W. Lorence, Jr., (202) 622-3860; concerning submissions, the 
hearing, or placement on the building access list to attend the 
hearing, Guy Traynor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act (44 U.S.C. 
3507(d)). Comments on the collection of information should be sent to 
the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP 
Washington, DC 20224. Comments on the collection of information should 
be received no later than March 7, 2005. Comments are specifically 
requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information can be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in this proposed regulation is in 
Sec.  1.367(a)-3(d)(2)(vi)(B)(1)(ii). This information is required to 
inform the IRS of a domestic corporation that is claiming an exception 
from the application of section 367(a) and (d) to certain transfers of 
property to a foreign corporation that is re-transferred by the foreign 
corporation to a domestic corporation controlled by the foreign 
corporation. The information is in the form of a statement attached to 
the domestic corporation's U.S. income tax return for the year of the 
transfer certifying that if the foreign corporation disposes of the 
stock of the domestic controlled corporation with a tax avoidance 
purpose, the domestic corporation will file an income tax return (or 
amended return, as the case may be) reporting gain. The collection of

[[Page 750]]

information is mandatory. The likely respondents are domestic 
corporations.
    Estimated total annual reporting burden: 50 hours.
    Estimated average annual burden hours per respondent: 1 hour.
    Estimated number of respondents: 50.
    Estimated annual frequency of responses: on occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    Section 368(a)(1)(A) defines a reorganization to include a 
statutory merger or consolidation (A reorganization). For transactions 
completed before January 24, 2003, regulations under section 
368(a)(1)(A) provided that a reorganization was a merger or 
consolidation effected pursuant to the corporation law of the United 
States or a State or Territory or the District of Columbia. See 1.368-
2(b)(1), as in effect before January 24, 2003.
    On January 24, 2003, the IRS and the Treasury Department issued 
proposed regulations (REG-126485-01, 2003-9 I.R.B. 542, 66 FR 57400) 
and temporary regulations (TD 9038, 2003-9 I.R.B. 524, 68 FR 3384), 
revising the definition of a statutory merger or consolidation. The 
proposed and temporary regulations define a statutory merger or 
consolidation in a manner intended to ensure that those transactions 
are not divisive in nature. Accordingly, the regulations generally 
require that all the assets and liabilities of the merged corporation 
(other than assets distributed or liabilities discharged in the 
transaction) are transferred to the acquiring corporation and that the 
separate legal identity of the merged corporation ceases to exist in 
the transaction.
    Pursuant to a notice of proposed rulemaking (proposed section 368 
regulations) published contemporaneously with this document, the IRS 
and Treasury are proposing further revisions to the definition of a 
statutory merger or consolidation to take into account those 
transactions effected pursuant to foreign law. The proposed section 368 
regulations amend the 2003 proposed regulations and provide that an A 
reorganization may occur, if certain conditions are satisfied, pursuant 
to the laws of a foreign jurisdiction, including a U.S. possession.
    In light of this change, this document contains proposed amendments 
to the regulations under certain international Code provisions 
(sections 367, 884, and 6038B) to account for statutory mergers and 
consolidations involving one or more foreign corporations. Current 
international tax regulations are premised on an A reorganization being 
limited to a statutory merger or consolidation involving domestic 
corporations effected pursuant to domestic law. See, e.g., Rev. Rul. 
57-465 (1957-2 C.B. 250). As a result, conforming changes must be made 
to these international tax regulations to ensure that they apply 
appropriately to statutory mergers and consolidations effected pursuant 
to foreign law. The proposed regulations also modify the section 367(a) 
and (b) regulations to address several other related issues.

Explanation of Provisions

A. Basis and Holding Period Rules

    The proposed regulations provide basis and holding period rules for 
certain transactions involving foreign corporations with section 1248 
shareholders in order to preserve relevant section 1248 amounts. A 
section 1248 shareholder is a U.S. person that satisfies the ownership 
requirements of section 1248(a) with respect to a foreign corporation. 
Section 1248(a) applies to a U.S. person that owns stock (directly, 
indirectly, or constructively) with 10 percent or more of the voting 
power in the foreign corporation at any time during the 5-year period 
ending on the sale or exchange of the stock when the foreign 
corporation was a controlled foreign corporation (CFC). Gain recognized 
by a section 1248 shareholder on the sale or exchange of stock of the 
foreign corporation is included in gross income as a dividend to the 
extent of the earnings and profits of the foreign corporation that are 
attributable to the stock sold or exchanged and that were accumulated 
while the stock was held by the U.S. person when the foreign 
corporation was a CFC (the section 1248 amount).
    The IRS and Treasury believe that it is important to preserve 
section 1248 amounts in certain nonrecognition exchanges of foreign 
corporation stock. Preservation of section 1248 amounts is a function 
of the holding period and basis in the stock of the foreign corporation 
being exchanged. One of the underlying policies of section 367(b) is 
the preservation of the potential application of section 1248 in 
connection with certain nonrecognition exchanges. H. Rep. No. 94-658, 
94th Cong., 1st Sess., at 242 (Nov. 12, 1975). These proposed 
regulations provide basis and holding period rules to preserve section 
1248 amounts in the context of certain section 354 exchanges and 
certain triangular reorganizations.
    The basis and holding period rules of the proposed regulations also 
apply to a foreign corporate shareholder of a foreign corporation that 
is a party to the reorganization, provided that the foreign corporate 
shareholder has at least one U.S. person that is a section 1248 
shareholder with respect to the foreign corporate shareholder and to 
the foreign corporation. This rule is necessary to preserve application 
of section 964(e) to the foreign corporate shareholder with respect to 
lower-tier foreign corporations. Under section 964(e), if a CFC sells 
or exchanges stock in another foreign corporation, gain recognized on 
the sale or exchange is included in the income of the CFC as a dividend 
to the same extent that it would have been included under section 
1248(a) if the CFC were a U.S. person. Such dividend income may be 
treated as subpart F income that is included in the income of U.S. 
shareholders of the CFC.
1. Section 354 Exchanges
    The proposed regulations apply to certain section 354 exchanges 
involving foreign corporations, including exchanges of multiple blocks 
of stock. The proposed regulations preserve the bases and holding 
periods in different blocks of stock in certain foreign target 
corporations by requiring the exchanging shareholder to establish the 
particular shares of stock that were received in exchange for shares of 
a particular block of target stock. If the exchanging shareholder 
cannot establish the particular shares of target stock that were 
received for shares of a particular block of stock, then the 
shareholder must designate which shares of stock were received in 
exchange for shares of a particular block of stock, provided that the 
designation is consistent with the terms of the exchange. These tracing 
methods are used to determine the resulting tax consequences when stock 
received in a nonrecognition exchange is subsequently sold or otherwise 
exchanged. If the exchanging shareholder cannot establish, and does not 
designate, the particular shares received, the shareholder is treated 
as selling or otherwise exchanging a share received in a nonrecognition 
exchange

[[Page 751]]

for a share that was purchased or acquired at the earliest time.
    The IRS and Treasury recently published proposed section 358 
regulations (REG-116564-03) that determine the basis of stock or 
securities received in section 354 exchanges (proposed section 358 
regulations). The proposed section 358 regulations generally provide 
that the basis of each share of stock or security received in an 
exchange to which section 354, 355, or 356 applies will be the same as 
the basis of the share of stock or security exchanged therefor. For 
these purposes, the determination of which share of stock or security 
is received in exchange for a particular share of stock or security is 
made in accordance with the terms of the exchange or distribution.
    These proposed regulations apply the principles of the proposed 
section 358 regulations to certain exchanges of stock of a foreign 
corporation by either a section 1248 shareholder, or a foreign 
corporate shareholder where at least one U.S. person is a section 1248 
shareholder with respect to such foreign corporate shareholder and to 
the foreign corporation whose shares are exchanged (collectively and 
individually, section 367(b) shareholder), to ensure the preservation 
of section 1248 amounts. The proposed regulations also include specific 
guidance on the shareholder's holding period in the stock received in 
the section 354 exchange. The proposed regulations do not, however, 
apply to distributions described in section 355.
    Consistent with the proposed section 358 regulations, the proposed 
regulations hereunder would not apply to section 351 exchanges or to 
exchanges to which both section 351 and section 354 (or section 356) 
apply, if, in addition to stock being received, other property is 
received or liabilities are assumed. This limitation is intended to 
prevent a conflict between the rules for determining basis in a section 
351 exchange (including the application of section 357(c)) and the 
rules proposed in this document. The IRS and Treasury are considering 
approaches for the preservation of section 1248 amounts in section 351 
transactions in which liabilities are assumed or other property is 
received, and comments are requested in this regard.
    In addition, the IRS and Treasury are considering developing 
specific rules for situations in which stock of the foreign acquiring 
corporation is not issued in the exchange (for example, when the 
exchanging shareholder owns all the stock of the foreign acquiring 
corporation). One possible approach may be for each existing share of 
stock in that corporation to be divided into portions to account for 
the different basis and holding periods of the stock of the foreign 
acquiring corporation and the stock of the acquired corporation in 
order to preserve section 1248 amounts. Comments are requested 
regarding this approach or possible alternative approaches.
2. Triangular Reorganizations
    The proposed regulations provide special basis and holding period 
rules for triangular reorganizations where the merging or surviving 
corporation is a foreign corporation with a section 367(b) shareholder. 
These rules apply to reorganizations described in section 368(a)(1)(A) 
and (a)(2)(D) (forward triangular merger) and to parenthetical section 
368(a)(1)(C) reorganizations. In these transactions, the surviving 
corporation (S) acquires substantially all the assets of the acquired 
corporation (T), and the T shareholders exchange their T stock for 
stock of the corporation (P) that is in control (within the meaning of 
section 368(c)) of S. These rules also apply to reorganizations 
described in section 368(a)(1)(A) and (a)(2)(E) (reverse triangular 
merger). In a reverse triangular merger, S, a controlled subsidiary of 
P, merges into T, the surviving corporation, and the T shareholders 
exchange their T stock for stock of P.
    Under current regulations, in a forward triangular merger or a 
parenthetical C reorganization, P's basis in its S stock is adjusted as 
if P had acquired the T assets directly from T in a section 362(b) 
exchange and then had transferred the T assets to S in a transaction in 
which P's basis in S stock is determined under section 358. See Sec.  
1.358-6(c)(1) (commonly referred to as the ``over-the-top'' basis 
rules). Under current regulations, in a reverse triangular merger, P's 
basis in the T stock it receives immediately after the transaction is 
equal to its basis in its S stock immediately before the transaction 
adjusted as if T had merged into S in a forward triangular merger and 
the over-the-top basis rules had applied. See Sec.  1.358-6(c)(2). If a 
reverse triangular merger also qualifies as a section 351 transfer or a 
section 368(a)(1)(B) reorganization, P can determine its basis in its S 
stock either by using the over-the-top basis rules as described in the 
prior sentence or by treating P as if it had acquired the T stock from 
the former shareholders of T in a transaction in which basis is 
determined under section 362(b) (carryover stock basis).
    The IRS and Treasury are concerned that, in certain exchanges 
involving foreign corporations, application of the over-the-top basis 
rules would not properly preserve the section 1248 or 964(e) amounts 
with respect to the stock of S or T. The proposed regulations provide 
that, in determining the stock basis of the surviving corporation in 
certain triangular reorganizations, outside stock basis will be used 
instead of inside asset basis pursuant to Sec.  1.358-6(c). For 
example, in the case of a forward triangular merger (or a parenthetical 
C reorganization), where P is a domestic corporation, S is a foreign 
corporation, T is a foreign corporation, and T has a section 1248 
shareholder, the basis and holding period in the T stock, not the T 
assets, are used to determine P's basis in the S stock. The same rules 
apply to certain reverse triangular mergers, where S merges into T with 
T surviving. In that case, P's basis in the T stock immediately after 
the transaction would reflect the basis and holding period of the T 
stock instead of the T assets.
    Under this stock basis approach for triangular reorganizations, the 
proposed regulations provide for a divided basis and holding period in 
each share of stock in the surviving corporation to reflect the 
relevant section 1248 amounts in the S stock and T stock. In 
particular, each share of S stock in a forward triangular merger, and 
each share of T stock in a reverse triangular merger, where P is a 
section 367(b) shareholder immediately after the transaction, is 
divided into portions reflecting the basis and holding period of the S 
stock and the T stock before the transaction. However, the proposed 
regulations contain a de minimis exception to this rule. Under this 
exception, if the value of the S stock immediately before the 
transaction is de minimis (for example, where S is a corporation formed 
to facilitate the transaction), then each share of the surviving 
corporation is not divided; instead, the basis of the S stock is added 
to the basis of the stock of the surviving corporation held by P. The 
value of the S stock would be de minimis for this purpose if it is less 
than 1 percent of the value of the surviving corporation (S or T) 
immediately after the transaction.
    If there are two or more blocks of stock in T or S held by a 
section 367(b) shareholder immediately before the transaction, then 
each share of the surviving corporation (S or T) is further divided to 
account for each block of stock. If two or more blocks of stock are 
held by one or more shareholders that are not section 367(b) 
shareholders, then shares in these blocks are aggregated into one 
divided portion for basis purposes. If none of the S or T shareholders 
is a section 367(b)

[[Page 752]]

shareholder, then the over-the-top basis rules of Sec.  1.358-6 apply 
instead of the rules in these proposed regulations.
    The proposed regulations provide special rules when stock of the 
surviving corporation has a divided basis and holding period. Earnings 
and profits accumulated prior to the reorganization are attributed to a 
divided portion of a share of stock based on the block of stock whose 
basis and holding period the divided portion reflects. Post-
reorganization earnings and profits are attributed to each divided 
share of stock pursuant to section 1248 and the regulations thereunder. 
The amount of earnings and profits attributed to a divided share of 
stock pursuant to section 1248 are further attributed to a divided 
portion of such share of stock based on its fair market value in 
relation to the other divided portions. Finally, shares of stock are no 
longer divided into separate portions if section 1248 or 964(e) becomes 
inapplicable to a subsequent sale or exchange of the stock.
    The special basis rules in these proposed regulations apply to all 
triangular reorganizations where T has at least one section 367(b) 
shareholder, even if such shareholders own less than a controlling 
interest in T. The IRS and Treasury are considering whether the current 
basis rules of Sec.  1.358-6 should apply in cases where section 367(b) 
shareholders do not own a substantial percentage of the stock of T, or 
whether taxpayers should be permitted to elect to apply the current 
basis rules under Sec.  1.358-6 to determine P's basis in the stock of 
the surviving corporation (S or T), provided that all section 367(b) 
shareholders of T include in income the section 1248 amounts with 
respect to the stock exchanged. Comments are requested in this regard.
    The use of stock basis to determine P's basis in the surviving 
corporation also presents administrative concerns when a portion of the 
stock of T is widely held. In the case of a reorganization described in 
section 368(a)(1)(B), which presents similar issues, Rev. Proc. 81-70 
(1980-2 C.B. 729) provides that statistical sampling techniques, if 
appropriate, are permitted to determine the basis of stock received by 
the acquiring corporation. In this regard, the IRS and Treasury 
recently have requested comments whether Rev. Proc. 81-70 should be 
revised to reflect changes in the marketplace since its publication. 
See Notice 2004-44 (2004-28 I.R.B. 32). Comments are requested on 
expanding this guidance to apply under the proposed regulations, for 
example in cases where blocks of T stock are held by persons that are 
not section 367(b) shareholders and such shares are aggregated into a 
single divided portion for basis and holding period purposes.

B. Exceptions to the Application of Section 367(a)

    Under section 367(a), a U.S. person recognizes gain, but not loss, 
on the transfer of property to a foreign corporation in an exchange 
described in section 351, 354, 356, or 361, unless an exception 
applies. Section 367(a), however, does not apply to a section 354 
exchange by a U.S. person of: (1) Stock of a foreign corporation in a 
section 368(a)(1)(E) reorganization; or (2) stock of a domestic or 
foreign corporation for stock of a foreign corporation in an asset 
reorganization described in section 368(a)(1)(C), (D), or (F) that is 
not treated as an indirect stock transfer under Sec.  1.367(a)-3(a).
    The proposed regulations amend Sec.  1.367(a)-3(a) so that this 
exception to the application of section 367(a) also applies to A 
reorganizations (including forward and reverse triangular mergers). In 
addition, the proposed regulations clarify that Sec.  1.367(a)-3(a) 
applies to exchanges described in section 356, as well as in section 
354. Section 356 applies to an exchange that would qualify as a section 
354 exchange except for the fact that money or other property is 
received in the exchange.
    Taxpayers have questioned why the exception to the application of 
section 367(a) in Sec.  1.367(a)-3(a) includes exchanges of stock but 
not exchanges of securities in section 368(a)(1)(E) reorganizations and 
certain asset reorganizations. The IRS and Treasury believe that it is 
appropriate to provide comparable treatment for exchanges of securities 
in this context. Accordingly, Notice 2005-6 (2005-5 IRB), published 
contemporaneously with these proposed regulations, announces that the 
IRS and Treasury intend to amend Sec.  1.367(a)-3(a) to apply the 
exception from section 367(a) to exchanges of stock or securities. 
Notice 2005-6 provides that the applicable date of the amendment will 
be January 5, 2005.
    The proposed regulations also provide rules concerning the 
application of section 367(a) to reverse triangular mergers, where 
stock of P, a corporation that controls the merging corporation S, is 
treated as transferred (along with any other property of S) to the 
surviving corporation T in a section 361 transfer. If S is a domestic 
corporation and T is a foreign corporation, section 367(a) applies to 
the transfer by S of the P stock to T, unless an exception applies.
    The IRS and Treasury believe that, if the stock of P is provided to 
S pursuant to the plan of reorganization, the section 361 transfer of 
the P stock from S to T should not be subject to section 367(a), and 
the proposed regulations so provide. If P does not provide its stock to 
S pursuant to the plan of reorganization, then the P stock will be 
treated as property of S and the transfer of such stock will be subject 
to section 367(a).
    The IRS and Treasury intend to amend the regulations under section 
6038B to conform with the changes made in these regulations.

C. Concurrent Application of Section 367(a) and (b)

    The proposed regulations modify the current application of section 
367(a) and (b) to transactions that require the inclusion in income of 
the all earnings and profits amount under section 367(b). Section 
1.367(a)-3(b)(2) provides rules for the concurrent application of 
section 367(a) and (b) to transfers of stock of a foreign corporation. 
This may occur, for example, when a U.S. shareholder exchanges stock of 
a foreign corporation (foreign acquired corporation) for stock of 
another foreign corporation (foreign acquiring corporation). See Sec.  
1.367(a)-3(b)(1). It may also occur when an acquiring corporation 
(foreign or domestic) acquires the assets of a foreign acquired 
corporation, and the U.S. shareholder exchanges stock of the foreign 
acquired corporation for stock of the foreign parent of the acquiring 
corporation in a triangular reorganization.
    The U.S. person's exchange of stock of the foreign acquired 
corporation for stock of either the foreign acquiring corporation or 
the foreign parent is subject to section 367(a). See Sec.  1.367(a)-
3(b) and (d). If the exchanging U.S. shareholder owns 5 percent or more 
(by vote or value) of the stock of the foreign acquiring corporation or 
the foreign parent immediately after the exchange, the shareholder 
recognizes gain, if any, under section 367(a), unless the shareholder 
enters into a gain recognition agreement as provided in Sec.  1.367(a)-
8. If the exchanging shareholder is not a 5-percent shareholder, then 
the exchanging shareholder does not recognize gain, if any, on the 
exchange.
    The U.S. shareholder's exchange described above also may be subject 
to section 367(b). If the exchanging U.S. shareholder is a section 1248 
shareholder of the foreign acquired corporation, and the stock of the 
foreign acquiring corporation (or its foreign parent corporation) is 
not stock in a corporation that is a CFC as to which the U.S. 
shareholder is a section 1248

[[Page 753]]

shareholder immediately after the exchange, then the exchanging 
shareholder must include in income the section 1248 amount with respect 
to the stock exchanged. See Sec.  1.367(b)-4. If, instead, a domestic 
acquiring corporation acquires the assets of a foreign acquired 
corporation, and the U.S. shareholder exchanges stock of the foreign 
acquired corporation for stock of the foreign parent of the acquiring 
corporation in a triangular reorganization, then the exchanging 
shareholder must include in income the all earnings and profits amount 
with respect to the stock of the acquired corporation. See Sec.  
1.367(b)-3. Unlike the section 1248 amount, the all earnings and 
profits amount is not limited by the shareholder's gain inherent in the 
stock of the foreign acquired corporation.
    In cases where section 367(a) and (b) apply concurrently to a 
transaction, existing Sec.  1.367(a)-3(b)(2) provides that section 
367(b) will not apply if the transfer is taxable under section 367(a). 
If the transfer is taxable under section 367(a), the exchanging U.S. 
shareholder will recognize gain inherent in the exchanged stock 
(subject to recharacterization as dividend income under section 1248). 
If the transfer is not taxable under section 367(a), because the 
exchanging U.S. shareholder either is not a 5-percent shareholder or 
enters into a gain recognition agreement, then section 367(b) applies 
and the exchange is subject to either Sec.  1.367(b)-3 or 1.367(b)-4 at 
the shareholder level.
    Questions with respect to the concurrent application of section 
367(a) and (b) have arisen in situations that otherwise would require 
inclusion of the all earnings and profits amount under Sec.  1.367(b)-
3. If the all earnings and profits amount is greater than the section 
367(a) gain with respect to the stock of the foreign acquired 
corporation, under current law the exchanging shareholder effectively 
may elect to be taxed on the lesser amount of gain under section 367(a) 
simply by failing to file a gain recognition agreement. In that case, 
section 367(b) would not apply and the shareholder would avoid 
inclusion in income of the greater all earnings and profits amount.
    The ability to elect to recognize the lesser gain inherent in the 
stock exchanged in such cases is inconsistent with the policies of 
section 367(b) that apply to inbound transactions, including preventing 
conversion of tax deferral into tax forgiveness and ensuring that the 
domestic acquiring corporation's section 381 carryover basis reflects 
an after-tax amount. Accordingly, the IRS and Treasury believe that the 
all earnings and profits amount provisions under Sec.  1.367(b)-3 
should not operate electively in these cases. The proposed regulations 
require that, for exchanges subject to Sec.  1.367(b)-3 and section 
367(a), section 367(b) would apply before section 367(a). In that case, 
inclusion of the all earnings and profits amount would increase the 
exchanging shareholder's stock basis for purposes of computing the 
shareholder's gain under section 367(a). Thus, if the all earnings and 
profits amount exceeds the inherent gain in the exchanged stock, gain 
is not recognized under section 367(a). If the transaction does not 
involve inclusion of the all earnings and profits amount (for example, 
if Sec.  1.367(b)-4 applies), the existing ordering rules continue to 
apply.

D. Parenthetical Section 368(a)(1)(B) Reorganizations

    In a parenthetical reorganization under section 368(a)(1)(B), if a 
U.S. shareholder exchanges stock of an acquired corporation for voting 
stock of a foreign corporation that controls (within the meaning of 
section 368(c)) the acquiring corporation, the U.S. shareholder is 
treated as making an indirect transfer of stock of the acquired 
corporation to the foreign controlling corporation in a transfer 
subject to section 367(a). See Sec.  1.367(a)-3(d)(1)(iii). This result 
occurs even if the acquiring corporation is domestic. If the U.S. 
shareholder owns five percent or more (by vote or value) of the stock 
of the foreign controlling corporation, the shareholder must recognize 
gain inherent in the exchanged stock, unless a gain recognition 
agreement is filed. A gain recognition agreement filed with respect to 
the transfer may be triggered (and gain on the initial transfer of 
stock will be recognized) if the foreign controlling corporation 
disposes of the stock of the acquiring corporation, or the acquiring 
corporation disposes of the stock of the acquired corporation, within 5 
years of the initial transfer. See Sec.  1.367(a)-3(d)(2)(ii).
    The proposed regulations revise the indirect stock transfer rules 
to include triangular section 368(a)(1)(B) reorganizations in which a 
U.S. shareholder exchanges stock of the acquired corporation for voting 
stock of a domestic corporation that controls a foreign acquiring 
corporation. In such a case, the gain recognition agreement may be 
triggered if the domestic controlling corporation disposes of the stock 
of the foreign acquiring corporation, or the foreign acquiring 
corporation disposes of the stock of the acquired corporation, within 5 
years of the initial transfer.

E. Transfers of Assets Following Certain Asset Reorganizations

    If a U.S. shareholder exchanges stock or securities of an acquired 
corporation for stock or securities of a foreign acquiring corporation 
in a reorganization described in section 368(a)(1)(C), and the foreign 
acquiring corporation transfers all or part of the assets of the 
acquired corporation to a subsidiary controlled (within the meaning of 
section 368(c)) by the foreign acquiring corporation in a transaction 
described in section 368(a)(2)(C), the U.S. shareholder is treated, for 
purposes of section 367(a), as transferring the stock of the acquired 
corporation to the foreign acquiring corporation to the extent of the 
assets transferred to the controlled subsidiary. Sec.  1.367(a)-
3(d)(1)(v). Section 368(a)(2)(C) provides that a transaction otherwise 
qualifying as a reorganization under section 368(a)(1)(A), (B), (C), 
and (G) will not be disqualified because all or part of the assets or 
stock acquired in the transaction are transferred to a corporation 
controlled by the acquiring corporation.
    On August 16, 2004, the IRS and Treasury issued proposed 
regulations under Sec.  1.368-2(k) that permit assets or stock acquired 
in any reorganization under section 368(a)(1) to be transferred to a 
corporation controlled by the acquiring corporation without 
disqualifying the reorganization. Prior to these proposed regulations, 
the IRS and Treasury issued Rev. Rul. 2002-85 (2002-2 C.B. 986) which 
extended this treatment to section 368(a)(1)(D) reorganizations. Notice 
2002-77 (2002-2 C.B. 997) issued contemporaneously with Rev. Rul. 2002-
85, provided that Sec.  1.367(a)-3(d)(1)(v) would be amended to treat 
transactions described in Rev. Rul. 2002-85 as indirect stock 
transfers, if the transfer of assets by the acquiring corporation to 
its controlled subsidiary occurred pursuant to the plan of 
reorganization.
    The effect of the proposed regulations under Sec.  1.368-2(k) is to 
permit transfers of assets or stock to a controlled subsidiary in 
reorganizations not specifically identified or mentioned in section 
368(a)(2)(C) (section 368(a)(1)(D) and (F) reorganizations). The 
proposed regulations amend the indirect stock transfer rules to conform 
to the changes in the section 368 regulations. As a result, the 
proposed regulations provide that the transfer of assets to a 
controlled subsidiary subsequent to an asset reorganization under 
section 368(a)(1) would constitute an indirect transfer of

[[Page 754]]

stock, provided the transfer of assets by the foreign acquiring 
corporation to its controlled subsidiary occurs as part of the same 
transaction.

F. Indirect Transfers Involving a Change in Domestic or Foreign Status 
of Acquired Corporation

    As indicated above, under existing Sec.  1.367(a)-3(d)(1)(v), a 
U.S. shareholder of an acquired corporation is treated as transferring 
the stock of the acquired corporation to the foreign acquiring 
corporation to the extent of the assets transferred to the controlled 
subsidiary. Thus, if the acquired corporation is foreign, the U.S. 
shareholder is treated as transferring stock of a foreign corporation 
to the foreign acquiring corporation in a transaction that is subject 
to the Sec.  1.367(a)-3(b) stock transfer rules. If the acquired 
corporation is domestic, the U.S. shareholder is treated as 
transferring stock of a domestic corporation to the foreign acquiring 
corporation in a transaction that is subject to Sec.  1.367(a)-3(c). 
This deemed transfer of domestic stock prevails even if the controlled 
subsidiary is foreign. Similar rules apply to parenthetical C 
reorganizations.
    Some commentators have suggested that the determination of whether 
domestic or foreign stock is deemed transferred should be based on the 
status of the controlled subsidiary, rather than the status of the 
acquired corporation. Under this approach, if the acquired corporation 
were domestic and the controlled subsidiary were foreign, the U.S. 
shareholders would be deemed to transfer foreign corporation stock 
subject to Sec.  1.367(a)-3(b), rather than domestic corporation stock 
subject to Sec.  1.367(a)-3(c). The IRS and Treasury believe that, 
consistent with the framework of the current regulations, it is 
appropriate for the rules to continue to apply based on the stock that 
is owned and exchanged by the U.S. person in the transaction (rather 
than on the stock of the controlled subsidiary). The IRS and Treasury 
are considering the application of Sec. Sec.  1.367(a)-3(b), 1.367(a)-
3(c), and 1.367(a)-8 to situations where the foreign acquiring 
corporation transfers assets of the acquired corporation to multiple 
controlled subsidiaries (including both domestic and foreign 
subsidiaries), comments are requested in this regard.

G. Coordination of the Indirect Stock Transfer Rules and the Asset 
Transfer Rules

    In the case of an indirect stock transfer that also involves a 
transfer of assets by a domestic corporation to a foreign corporation, 
Sec.  1.367(a)-3(d)(2)(vi) generally provides that section 367(a) and 
(d) apply to the transfer of assets prior to application of the 
indirect stock transfer rules. However, section 367(a) does not apply 
to such transfers to the extent that the foreign acquiring corporation 
transfers the assets received in the asset transfer to a domestic 
corporation controlled (within the meaning of section 368(c)) by the 
foreign acquiring corporation in a transfer described in section 
368(a)(2)(C) or in a transfer described in section 351, provided the 
domestic transferee's basis in the assets is no greater than the basis 
that the domestic acquired corporation had in such assets. The initial 
asset transfer to the foreign corporation is not subject to section 
367(a) in such cases because the assets re-transferred to the domestic 
corporation remain subject to U.S. corporate tax.
    The IRS and Treasury are concerned that asset reorganizations 
subject to this coordination rule may be used to facilitate corporate 
inversion transactions. An inversion generally involves a U.S. 
multinational corporation reincorporating outside the United States for 
tax purposes (either as a foreign corporation or as a subsidiary of a 
new foreign corporation). The IRS and Treasury also are concerned that 
the coordination rule might be used to facilitate divisive 
transactions. The proposed regulations address both of these concerns 
by modifying the scope of the coordination rule.
    The revised coordination rule operates as follows. Section 367(a) 
and (d) generally apply to the transfer of assets to a foreign 
corporation even if the foreign corporation transfers all or part of 
the assets received to a controlled domestic corporation. This general 
rule, however, is subject to two exceptions which do not require income 
recognition under section 367(a) and (d) on the transfer of assets to 
the foreign corporation to the extent that assets are re-transferred to 
the domestic controlled corporation.
    The first exception applies if the domestic acquired corporation is 
controlled (within the meaning of section 368(c)) by 5 or fewer 
domestic corporations, appropriate basis adjustments as provided in 
section 367(a)(5) are made to the stock of the foreign acquiring 
corporation, and any other conditions provided in regulations under 
section 367(a)(5) are satisfied. Although there currently are no 
regulations under section 367(a)(5), this exception will incorporate 
any conditions or limitations in future regulations once published.
    In cases where the first exception does not apply, the second 
exception applies if the following two conditions are satisfied: (1) 
The indirect transfer of stock of the domestic acquired corporation 
satisfies the requirements of Sec.  1.367(a)-3(c)(1)(i), (ii), and 
(iv), and (c)(6); and (2) the domestic acquired corporation attaches a 
statement (described below) to its tax return for the taxable year of 
the transfer.
    The statement that the domestic acquired corporation files must 
certify that, if the foreign acquiring corporation disposes of any 
stock of the domestic controlled corporation with a principal purpose 
of avoiding U.S. tax that would have been imposed on the domestic 
acquired corporation had it disposed of the re-transferred assets, the 
domestic acquired corporation will amend its return for the year of the 
initial transaction and recognize gain (described below). The 
disposition of stock is presumed to have a principal purpose of tax 
avoidance if the disposition occurs within 2 years of the transfer. The 
presumption may be rebutted, however, if the domestic acquired 
corporation (or the foreign acquiring corporation on its behalf) 
demonstrates to the satisfaction of the Commissioner that the 
transaction did not have a principal purpose of tax avoidance.
    If the domestic acquired corporation recognizes gain pursuant to 
the statement, it is treated as if, immediately prior to the exchange, 
it had transferred the re-transferred assets, including any intangible 
assets, directly to a domestic corporation in exchange for stock of the 
corporation in a transaction that is treated as a section 351 exchange, 
and immediately sold the stock to an unrelated party at fair market 
value in a sale in which it recognizes gain, if any, but not loss. For 
purposes of this rule, the deemed transfer to a domestic corporation is 
treated as a section 351 exchange regardless of whether all the 
requirements for nonrecognition under section 351 are otherwise 
satisfied. Treating the domestic acquired corporation as recognizing 
gain on the disposition of stock, rather than assets, is intended to 
approximate the consequences that would have resulted had the domestic 
acquired corporation transferred the assets to a corporation and sold 
the stock received in such transfer prior to the outbound 
reorganization. In addition, this treatment is consistent with other 
provisions that address divisive transactions. See, e.g., section 
355(e) and Sec.  1.367(e)-(2)(b)(2)(iii).
    The basis that the foreign acquiring corporation has in the stock 
of the

[[Page 755]]

domestic controlled corporation is increased by the amount of gain 
recognized by the domestic acquired corporation under these rules 
immediately prior to its disposition; however, the basis of the re-
transferred assets held by the domestic controlled corporation will not 
be increased by such gain. Finally, the anti-abuse provision under 
Sec.  1.367(d)-1T(g)(6) will not apply to intangible property included 
in the re-transferred assets.

H. Application of Section 367(b) Regulations to Certain Triangular 
Reorganizations

    Section 367(b) applies to exchanges under sections 332, 351, 354, 
355, 356, and 361 (except to the extent described in section 367(a)(1)) 
in which the status of a foreign corporation as a corporation for tax 
purposes is necessary for application of the relevant nonrecognition 
provisions. Except as provided in regulations, under section 367(b) a 
foreign corporation that is a party to such an exchange is considered 
to be a corporation for tax purposes, and therefore the parties 
involved in the transaction are eligible for nonrecognition treatment.
    Section 1.367(b)-4 applies to acquisitions by a foreign corporation 
(the foreign acquiring corporation) of the stock or assets of another 
foreign corporation (the foreign acquired corporation) in certain 
nonrecognition exchanges (a section 367(b) exchange). Consistent with 
section 1248, Sec.  1.367(b)-4(b)(1)(i) addresses exchanges by a 
section 1248 shareholder (or, in certain cases, a CFC shareholder that 
has a section 1248 shareholder), and generally requires such a 
shareholder to include in income its section 1248 amount as a result of 
a section 367(b) exchange, if immediately after the exchange (i) the 
stock received in the exchange is not stock in a corporation that is a 
controlled foreign corporation as to which the section 1248 shareholder 
described above is a section 1248 shareholder, or (ii) the foreign 
acquiring corporation or the foreign acquired corporation (if any, such 
as in a transaction described in section 368(a)(1)(B) or 351), is not a 
controlled foreign corporation as to which the section 1248 shareholder 
described above is a section 1248 shareholder.
    Therefore, in a triangular reorganization (such as a triangular 
reorganization described in section 368(a)(1)(C)) that is within the 
scope of Sec.  1.367(b)-4, a section 367(b) shareholder must include in 
income the section 1248 amount if, for example, it receives stock of a 
domestic corporation in exchange for its stock in a controlled foreign 
corporation. This is the case because, immediately after the exchange, 
the section 367(b) shareholder does not hold stock in a corporation 
that is a controlled foreign corporation as to which such shareholder 
is a section 367(b) shareholder.
    Pursuant to the basis rules contained in this proposed regulation 
under Sec.  1.367(b)-13, the section 1248 amount with respect to the 
stock of the foreign acquired corporation that is exchanged can be 
properly preserved in the stock of a foreign corporation owned by a 
domestic corporation when the section 367(b) shareholder receives stock 
of the domestic corporation in a triangular reorganization. 
Consequently, the proposed regulations provide that a section 367(b) 
shareholder receiving stock of a domestic corporation in a triangular 
reorganization is not required to include in income the section 1248 
amount under Sec.  1.367(b)-4(b)(1)(i), provided that the domestic 
corporation, immediately after the exchange, is a section 1248 
shareholder of the surviving corporation (or in the case of a 
parenthetical section 368(a)(1)(B) reorganization, of the acquired 
corporation) that is itself a controlled foreign corporation.

I. Application of Section 367(b) Regulations to Certain Outbound 
Reorganizations

    If a domestic corporation is a section 1248 shareholder with 
respect to a foreign corporation and transfers the stock in such 
foreign corporation to another foreign corporation in a section 361 
transfer, the domestic corporation must include in income the section 
1248 amount, if any, with respect to the stock of the transferred 
foreign corporation. See section 1248(f)(1) and Sec.  1.367(b)-
4(b)(2)(ii), Example 4.
    Taxpayers have commented that this rule may result in income 
inclusions in some cases where the section 1248 amount could be 
preserved, such that a current inclusion may not be necessary or 
appropriate. The IRS and Treasury are considering the application of 
section 367(a)(5) and section 1248(f)(1) to such transactions, in 
conjunction with Sec.  1.367(b)-13 of these regulations, to preserve 
section 1248 amounts, and comments are requested in this regard. The 
IRS and Treasury also are considering, and request comments, on 
situations in which there are multiple shareholders (including minority 
shareholders) of the domestic corporation; multiple assets (including 
appreciated and depreciated assets being transferred as part of the 
section 361 transfer); and liabilities being assumed in connection with 
the transaction.

J. Nonrecognition Transactions Under the FIRPTA and PFIC Provisions

    Section 897(a) generally treats gain or loss from the disposition 
of a U.S. real property interest by a nonresident alien individual or a 
foreign corporation as gain or loss that is effectively connected with 
the conduct of a trade or business within the United States. Sections 
897(d) and (e) provide rules that apply section 897 in the context of 
distributions and nonrecognition exchanges of U.S. real property 
interests. Temporary regulations were issued under sections 897(d) and 
(e) providing guidance on the application of section 897 to certain 
corporate transactions involving U.S. real property interests. See 
Sec.  1.897-5T, 1.897-6T, and Notice 89-85 (1989-2 C.B. 403). These 
rules do not specifically address A reorganizations because such 
regulations were based on A reorganizations being limited to statutory 
mergers between domestic corporations. The IRS and Treasury intend to 
revise these regulations to reflect A reorganizations and welcome 
comments on revisions that are necessary to apply these regulations to 
A reorganizations, as well as comments on other issues under the 
regulations.
    Section 1291(f) provides authority to issue regulations concerning 
the exchange of stock in a passive foreign investment company (PFIC) in 
a nonrecognition transaction. Proposed regulations were published in 
the Federal Register (57 FR 11047) on April 1, 1992, providing rules 
for the disposition of PFIC stock by U.S. shareholders in 
nonrecognition exchanges. See Sec.  1.1291-6 of the proposed 
regulations. The application of these proposed regulations is based on 
A reorganizations being limited to statutory mergers between domestic 
corporations. The IRS and Treasury intend to revise these proposed 
regulations to reflect A reorganizations and welcome comments on 
revisions that are necessary in this regard, as well as comments on 
other issues under these regulations.

Proposed Effective Date

    Except as otherwise specified, these regulations are proposed to 
apply to transactions occurring after the date these regulations are 
published as final regulations in the Federal Register.

Special Analyses

    The IRS and the Treasury Department have determined that this 
notice of proposed rulemaking is not a significant

[[Page 756]]

regulatory action as defined in Executive Order 12866. Therefore, a 
regulatory assessment pursuant to that Order is not required. It has 
also been determined that section 553(b) of the Administrative 
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, 
and that because this regulation does not impose a collection of 
information on small entities, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply. Pursuant to section 7805(f) of the Code, 
this regulation will be submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. The IRS and Treasury Department specifically request 
comments on the clarity of the proposed regulations and on how they can 
be made easier to understand. All comments will be available for public 
inspection and copying.
    A public hearing has been scheduled for May 19, 2005, beginning at 
10 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Due to building security procedures, 
visitors must enter at the Constitution Avenue entrance. In addition, 
all visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT portion of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit written or electronic 
comments and an outline of the topics to be discussed and the time to 
be devoted to each topic (a signed original and eight (8) copies) by 
April 28, 2005. A period of 10 minutes will be allotted to each person 
for making comments. An agenda showing the scheduling of the speakers 
will be prepared after the deadline for receiving outlines has passed. 
Copies of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is Robert W. Lorence, 
Jr., of the Office of Associate Chief Counsel (International). However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes. Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read, 
in part, as follows:

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

    Par. 2. In section 1.358-1, paragraph (a) is amended by adding a 
sentence at the end of the paragraph to read as follows:


Sec.  1.358-1  Basis to distributes.

    (a) * * * In the case of certain section 354 or 356 exchanges of 
stock in a foreign corporation, Sec.  1.367(b)-13 applies instead of 
the rules of Sec.  1.358-2.
* * * * *
    Par. 3. In Sec.  1.358-6, paragraph (e) is amended by adding a 
sentence at the end of the paragraph to read as follows:


Sec.  1.358-6  Stock basis in certain triangular reorganizations.

* * * * *
    (e) * * * For certain triangular reorganizations where the 
surviving corporation (S or T) is foreign, see Sec.  1.367(b)-13.
* * * * *
    Par. 4. Section 1.367(a)-3 is amended as follows:
    1. In paragraph (a), remove the third and fourth sentences, and add 
five sentences in their place.
    2. Revise paragraph (b)(2)(i).
    3. Revise paragraph (c)(5)(vi).
    4. In paragraph (d)(1), introductory text, first sentence, add the 
parenthetical ``(or in a domestic corporation in control of a foreign 
acquiring corporation in a triangular section 368(a)(1)(B) 
reorganization)'' after the words ``for stock or securities in a 
foreign corporation''.
    5. In paragraph (d)(1), introductory text, remove the last sentence 
and add three sentences in its place.
    6. In paragraph (d)(1)(i), remove the last sentence and add a 
sentence in its place.
    7. In paragraph (d)(1)(ii), add a sentence at the end of the 
paragraph.
    8. Paragraph (d)(1)(iii) is revised.
    9. In paragraph (d)(1)(iv), remove the language ``Example 7'' and 
add ``Example 8'' in its place, and remove ``Example 11'' and add 
``Example 14'' in its place.
    10. Revise paragraph (d)(1)(v).
    11. Revise paragraphs (d)(2)(i) and (ii).
    12. In paragraph (d)(2)(iv), last sentence, remove the language 
``Example 4'' and add ``Examples 5 and 5A'' in its place.
    13. Revise paragraph (d)(2)(v)(C).
    14. Redesignate paragraph (d)(2)(v)(D) as paragraph (d)(2)(v)(F).
    15. Add new paragraphs (d)(2)(v)(D) and (E).
    16. Revise paragraph (d)(2)(vi).
    17. In paragraph (d)(3), redesignate the examples as follows and 
add the following new examples:

----------------------------------------------------------------------------------------------------------------
              Redesignate                             As                                   Add
----------------------------------------------------------------------------------------------------------------
Example 12............................  Example 16....................
---------------------------------------
                                                                        Example 15.
---------------------------------------
Examples 11 and 11A...................  Examples 14 and 14A...........
---------------------------------------
Examples 10 and 10A...................  Examples 13 and 13A...........
---------------------------------------
Example 9.............................  Example 12....................
---------------------------------------
                                                                        Examples 10 and 11.
---------------------------------------
Example 8.............................  Example 9.....................
---------------------------------------

[[Page 757]]

 
Examples 7, 7A, 7B, and 7C............  Examples 8, 8A, 8B, and 8C....
---------------------------------------
Examples 6 and 6A.....................  Examples 7 and 7A.............
---------------------------------------
Examples 5, 5A, and 5B................  Examples 6, 6A, and 6B........
---------------------------------------
                                                                        Examples 6C and 6D.
---------------------------------------
Example 4.............................  Example 5.....................
---------------------------------------
                                                                        Example 5A.
---------------------------------------
Example 3.............................  Example 4.....................
---------------------------------------
Example 2.............................  Example 3.....................
---------------------------------------
                                                                        Example 2.
----------------------------------------------------------------------------------------------------------------

    18. In paragraph (d)(3), newly designated Example 6A, paragraph 
(i), the first and last sentences are revised.
    19. In paragraph (d)(3), newly designated Example 6B and Example 9 
are revised.
    20. In paragraph (d)(3), for each of the newly designated Examples 
listed in the first column, replace the language in the second column 
with the language in the third column:

------------------------------------------------------------------------
     Redesignated examples             Remove                Add
------------------------------------------------------------------------
Example 6A, paragraph (i),       Example 5........  Example 6.
 first sentence.
--------------------------------
Example 7, paragraph (i).......  Example 5........  Example 6.
--------------------------------
Example 7A, paragraph (i) and    Example 6........  Example 7.
 paragraph (ii), penultimate
 sentence.
--------------------------------
Example 8, paragraph (i).......  Example 5........  Example 6.
--------------------------------
Example 8A, paragraph (i)......  Example 7........  Example 8.
--------------------------------
Example 8B, paragraph (i)......  Example 7........  Example 8.
--------------------------------
Example 8C, paragraph (i)......  Example 7........  Example 8.
--------------------------------
Example 12, paragraph (i),       Example 9........  Example 12.
 third sentence.
--------------------------------
Example 13A, paragraph (i) and   Example 10.......  Example 13.
 paragraph (ii), first sentence.
--------------------------------
Example 14A, paragraph (i).....  Example 11.......  Example 14.
------------------------------------------------------------------------

    22. In paragraph (e)(1), remove the first sentence and add two 
sentences in its place.
    The revisions and additions are as follows:


Sec.  1.367(a)-3  Treatment of transfers of stock or securities to 
foreign corporations.

* * * * *
    (a) * * * However, if, in an exchange described in section 354 or 
356, a U.S. person exchanges stock of a foreign corporation in a 
reorganization described in section 368(a)(1)(E), or a U.S. person 
exchanges stock of a domestic or foreign corporation for stock of a 
foreign corporation pursuant to an asset reorganization that is not 
treated as an indirect stock transfer under paragraph (d) of this 
section, such section 354 or 356 exchange is not a transfer to a 
foreign corporation subject to section 367(a). See paragraph (d)(3), 
Example 16, of this section. For purposes of this section, an asset 
reorganization is defined as a reorganization described in section 
368(a)(1) involving a transfer of assets under section 361. If, in a 
transfer described in section 361, a domestic merging corporation 
transfers stock of a controlling corporation to a foreign surviving 
corporation in a reorganization described in sections 368(a)(1)(A) and 
(a)(2)(E), such section 361 transfer is not subject to section 367(a) 
if the stock of the controlling corporation is provided to the merging 
corporation by the controlling corporation pursuant to the plan of 
reorganization; a section 361 transfer of other property, including 
stock of the controlling corporation not provided by the controlling 
corporation pursuant to the plan of reorganization, by the domestic 
merging corporation to the foreign surviving corporation pursuant to 
such a reorganization is subject to section 367(a). For special basis 
and holding period rules involving foreign corporations that are 
parties to certain reorganizations under section 368(a)(1), see Sec.  
1.367(b)-13. * * *
    (b) * * *
    (2) * * *
    (i) In general. A transfer of foreign stock or securities described 
in section 367(a) and the regulations thereunder as well as in section 
367(b) and the regulations thereunder shall be subject concurrently to 
sections 367(a) and (b) and the regulations thereunder, except as 
provided in paragraph (b)(2)(i)(A) or (B) of this section. See 
paragraph (d)(3), Example 11, of this section.
    (A) If a foreign corporation transfers assets to a domestic 
corporation in a transaction to which Sec.  1.367(b)-3(a) and

[[Page 758]]

(b) and the indirect stock transfer rules of paragraph (d) of this 
section apply, then the section 367(b) rules shall apply prior to the 
section 367(a) rules. See paragraph (d)(3), Example 15, of this 
section. This paragraph (b)(2)(i)(A) applies only to transactions 
occurring after the date these regulations are published as final 
regulations in the Federal Register.
    (B) Except as provided in paragraph (b)(2)(i)(A) of this section, 
section 367(b) and the regulations thereunder shall not apply if the 
foreign corporation is not treated as a corporation under section 
367(a)(1). See paragraph (d)(3), Example 14, of this section.
* * * * *
    (c) * * *
    (5) * * *
    (vi) Transferee foreign corporation. Except as provided in 
paragraph (d)(1)(iii)(B) of this section, the transferee foreign 
corporation shall be the foreign corporation that issues stock or 
securities to the U.S. person in the exchange.
* * * * *
    (d) * * *
    (1) * * * For examples of the concurrent application of the 
indirect stock transfer rules under section 367(a) and the rules of 
section 367(b), see paragraph (d)(3), Examples 14 and 15 of this 
section. For purposes of this paragraph (d), if a corporation acquiring 
assets in a reorganization described in section 368(a)(1) transfers all 
or a portion of such assets to a corporation controlled (within the 
meaning of section 368(c)) by the acquiring corporation as part of the 
same transaction, the subsequent transfer of assets to the controlled 
corporation will be referred to as a controlled asset transfer. See 
section 368(a)(2)(C).
    (i) * * * See paragraph (d)(3), Example 1 of this section for an 
example of a reorganization described in sections 368(a)(1)(A) and 
(a)(2)(D) involving domestic acquired and acquiring corporations, and 
see paragraph (d)(3), Example 10 of this section for an example 
involving a domestic acquired corporation and a foreign acquiring 
corporation.
    (ii) * * * See paragraph (d)(3), Example 2 of this section for an 
example of a reorganization described in sections 368(a)(1)(A) and 
(a)(2)(E) involving domestic acquired and acquiring corporations, and 
see paragraph (d)(3), Example 11 of this section for an example 
involving a domestic acquired corporation and a foreign acquiring 
corporation.
    (iii) Triangular reorganizations described in section 
368(a)(1)(B)--(A) A U.S. person exchanges stock of the acquired 
corporation for voting stock of a foreign corporation that is in 
control (as defined in section 368(c)) of the acquiring corporation in 
a reorganization described in section 368(a)(1)(B). See paragraph 
(d)(3), Example 5 of this section.
    (B) A U.S. person exchanges s