Revision of Income Tax Regulations Under Sections 367, 884, and 6038B Dealing With Statutory Mergers or Consolidations Under Section 368(a)(1)(A) Involving One or More Foreign Corporations, and Guidance Necessary To Facilitate Business Electronic Filing Under Section 6038B, 4276-4294 [06-587]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 17 (Thursday, January 26, 2006)]
[Rules and Regulations]
[Pages 4276-4294]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-587]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9243]
RIN 1545-BA65


Revision of Income Tax Regulations Under Sections 367, 884, and 
6038B Dealing With Statutory Mergers or Consolidations Under Section 
368(a)(1)(A) Involving One or More Foreign Corporations, and Guidance 
Necessary To Facilitate Business Electronic Filing Under Section 6038B

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final 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 such reorganizations described in 
section 368(a)(2)(D) or (E)) involving one or more foreign 
corporations. These final regulations are issued concurrently with 
final regulations (TD 9242) that define a reorganization under section 
368(a)(1)(A) to include certain statutory mergers or consolidations 
effected pursuant to foreign law. This document also contains final 
regulations under section 6038B which facilitate the electronic filing 
of Form 926 ``Return by a U.S. Transferor of Property to a Foreign 
Corporation.''

DATES: Effective Date: These regulations are effective on January 23, 
2006.
    Applicability Dates: For dates of applicability, see Sec.  
1.367(a)-3(e); Sec.  1.367(b)-6(a)(1); Sec.  1.367(b)-13(f); Sec.  
1.884-2(g); and Sec.  1.6038B-1(b)(1)(i) and (g).

FOR FURTHER INFORMATION CONTACT: Robert W. Lorence, Jr., (202) 622-3918 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507(d)) 
under control numbers 1545-1478 and 1545-1617.
    The collection of information in these final regulations is in 
Sec.  1.367(a)-3(d)(2)(vi)(B)(1)(ii) and Sec.  1.6038B-1(b)(1)(i). The 
information under Sec.  1.367(a)-3(d)(2)(vi)(B)(1)(ii) is required to 
inform the IRS of a domestic corporation (domestic acquired 
corporation) that is claiming an exception from the application of 
section 367(a) and (d) for 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 (domestic 
controlled corporation). The information is in the form of a statement 
attached to the domestic acquired 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 acquired corporation will file an 
income tax return (or amended return, as the case may be) reporting 
gain. The collection of information is mandatory.
    The information under Sec.  1.6038B-1(b)(1)(i) is required to 
inform the IRS of transfers described in section 6038B(a)(1)(A) or 
section 367(d) or (e) by filing Form 926 ``Return by a U.S. Transferor 
of Property to a Foreign Corporation'' and any information attached to 
the form with the U.S. transferor's income tax return for the taxable 
year of the transfer. The collection 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 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

    On January 24, 2003, the IRS and Treasury issued proposed 
regulations (REG-126485-01, 2003-1 C.B. 542, 68 FR 3477) and temporary 
regulations (TD 9038, 2003-1 C.B. 524, 68 FR 3384), that would revise 
the definition of a statutory merger or consolidation under section 
368(a)(1)(A). On January 5, 2005, the IRS and Treasury issued proposed 
regulations (REG-117969-00, 2005-7 I.R.B. 533, 70 FR 746) that would 
revise the definition of a section 368(a)(1)(A) reorganization to 
include transactions effected pursuant to foreign law and transactions 
involving entities organized under foreign law. Final regulations 
incorporating the temporary regulations and both sets of proposed 
regulations, as modified to reflect comments, are being published 
concurrently with this document.
    On January 5, 2005, the IRS and Treasury also issued proposed 
regulations under sections 358, 367 and 884 (the 2005 proposed 
regulations) that would account for section 368(a)(1)(A) 
reorganizations involving one or more foreign corporations. The 
regulations also proposed changes to other aspects of the section 
367(a) and (b) regulations that would address additional issues. This 
document contains final regulations that incorporate the 2005 proposed 
regulations amending sections 358, 367, and 884.
    The public hearing with respect to the 2005 proposed regulations 
was cancelled because no request to speak was received. However, the 
IRS and Treasury received several written comments, which are discussed 
below.
    On December 19, 2003, the IRS and Treasury issued temporary and 
final regulations (TD 9100, 2004-1 C.B. 297, 68 FR 70701) modifying 
regulations under section 6038B to eliminate regulatory impediments to 
the electronic submission of Form 926 ``Return by a U.S. Transferor of 
Property to a Foreign Corporation.'' In the same issue of the Federal 
Register, the IRS and Treasury issued a notice of proposed rulemaking 
(REG-116664-01, 2004-1 C.B. 319, 68 FR 70747) cross-referencing the 
temporary regulations under section 6038B. This document contains final 
regulations incorporating certain provisions of the temporary 
regulations under section 6038B. No public hearing regarding the notice 
of proposed rulemaking was requested or held and no comments were 
received.

[[Page 4277]]

Summary of Comments and Explanation of Provisions

A. Basis and Holding Period Rules

1. Section 354 Exchanges
    On May 3, 2004, the IRS and Treasury published a notice of proposed 
rulemaking (REG-116564-03) in the Federal Register (69 FR 24107) that 
included regulations under section 358 that would provide guidance 
regarding the determination of the basis of stock or securities 
received in either a reorganization described in section 368 (e.g., in 
a section 354 exchange) or a distribution to which section 355 applies. 
The proposed section 358 regulations would adopt a tracing regime for 
determining the basis of each share of stock or security received in an 
exchange under section 354 (or section 356). Related provisions in the 
2005 proposed regulations followed that general tracing regime, with 
modifications. See Prop. Treas. Reg. Sec.  1.367(b)-13(b). Comments 
were received in response to the proposed regulations under section 
358. The IRS and Treasury have issued final regulations under section 
358 that adopted the section 358 proposed regulations, with 
modifications to reflect the comments received. See TD 9244.
    The final section 358 regulations retained the general tracing 
regime for determining basis in an exchange under section 354 (or 
section 356). This tracing regime is consistent with the policies and 
requirements underlying the international provisions of the Code, 
including those under section 1248. As a result, these final 
regulations do not include the rules set forth in Sec.  1.367(b)-13(b) 
of the 2005 proposed regulations that would determine the basis and 
holding period in stock as a result of certain exchanges under section 
354 (or section 356) involving foreign corporations. Instead, the final 
regulations cross-reference the regulations under section 358 to 
determine the exchanging shareholder's basis in stock or securities 
received in an exchange under section 354 (and section 356). Special 
rules for certain triangular reorganizations are discussed below.
2. Triangular Asset Reorganizations
    In contrast to the above, the application of the stock basis rules 
of Sec.  1.358-6 in certain triangular asset reorganizations involving 
foreign corporations does not accurately preserve a shareholder's 
section 1248 amount (within the meaning of Sec.  1.367(b)-2(c)). 
Therefore, the 2005 proposed regulations would provide special basis 
and holding period rules for certain triangular asset reorganizations 
involving foreign corporations that have section 1248 shareholders 
(within the meaning of Sec.  1.367(b)-2(b)). See Prop. Treas. Reg. 
Sec.  1.367(b)-13(c) through (e). These rules would apply to certain 
reorganizations described in section 368(a)(1)(A) and (a)(2)(D) 
(forward triangular merger), triangular reorganizations described in 
section 368(a)(1)(C), and reorganizations described in section 
368(a)(1)(A) and (a)(2)(E) (reverse triangular merger).
    The 2005 proposed regulations would provide that, in determining 
the stock basis of the surviving corporation in certain triangular 
asset reorganizations, the exchanging shareholder's basis in the stock 
of the target corporation will be taken into account, rather than 
target corporation's basis in its assets. Further, where applicable, 
the 2005 proposed regulations would provide for a divided basis and 
holding period in each share of stock in the surviving corporation to 
reflect the relevant section 1248 amounts, if any, in the stock of the 
target corporation and the surviving corporation. If there are two or 
more blocks of stock in the target corporation with section 1248 
amounts, then each share of the surviving corporation would be 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 1248 
shareholders, then shares in these blocks would be aggregated into one 
divided portion for basis purposes. If none of the shareholders is a 
section 1248 shareholder, then the asset basis rules of Sec.  1.358-6 
would apply.
    Commentators stated that the application of the special basis rules 
would cause unjustified complexity. One commentator stated that such 
complexity arises in cases where the shares of the target corporation 
are widely held or where section 1248 shareholders hold less than 50 
percent of the target corporation. The commentator recommended that if 
the special basis rules are retained, Sec.  1.358-6 should continue to 
apply where section 1248 shareholders hold less than 50 percent of the 
stock of the target corporation. The commentator further recommended 
that the controlling corporation be allowed to elect to apply the rules 
under Sec.  1.358-6 in return for all exchanging section 1248 
shareholders including in income the section 1248 amounts with respect 
to their stock. The IRS and Treasury have considered these comments. On 
balance, the IRS and Treasury have concluded that creating exceptions 
to the application of the special basis rules (e.g., by election) would 
create significant uncertainty for the IRS and would not meaningfully 
reduce administrative complexity. While the IRS and Treasury recognize 
the complexity of the rules, the IRS and Treasury nevertheless believe 
it is important to preserve section 1248 amounts and avoid unnecessary 
income inclusions that might otherwise be required. As a result, the 
final regulations do not adopt this recommendation. However, the IRS 
and Treasury will continue to study alternative methods for preserving 
the section 1248 amounts in such transactions.
    One commentator suggested that the IRS and Treasury consider 
applying the special basis rules to section 368(a) asset 
reorganizations followed by asset transfers to a corporation controlled 
(within the meaning of section 368(c)) by the acquiring corporation 
pursuant to the same transaction (controlled asset transfer), because 
these transactions are similar to triangular reorganizations under 
section 368(a)(1)(C) and section 368(a)(1)(A) and (a)(2)(D). If this 
suggestion were adopted, the basis in the stock of the controlled 
subsidiary would reflect the basis in the stock of the target 
corporation and not the basis of the contributed assets. Because the 
IRS and Treasury are continuing to study the application of section 358 
to such transactions, and because such controlled asset transfers may 
involve only a portion of the acquired assets, this comment is not 
adopted at this time.
    Finally, commentators noted that the special basis rules of Sec.  
1.367(b)-13(c) of the 2005 proposed regulations would not apply, by 
their terms, to a forward triangular merger or a triangular section 
368(a)(1)(C) reorganization where no shareholder of the target 
corporation is a section 1248 shareholder, but the parent of the 
acquiring corporation is either a domestic corporation that is a 
section 1248 shareholder of the acquiring corporation or a foreign 
corporation that has a section 1248 shareholder that is also a section 
1248 shareholder of the acquiring corporation. This result was not 
intended, as illustrated by Example 3 of Sec.  1.367(b)-13(e) of the 
2005 proposed regulations, which applies the special basis rules of 
Sec.  1.367(b)-13(c) of the 2005 proposed regulations to such a 
transaction. As a result, the text of the final regulations has been 
modified to apply the special basis rules to this type of transaction.

[[Page 4278]]

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

1. Exchanges of Stock or Securities in Certain Triangular Asset 
Reorganizations
    A U.S. person recognizes gain under section 367(a) on the transfer 
of property to a foreign corporation in an exchange described in 
section 351, 354, 356, or 361, unless an exception applies. Under Sec.  
1.367(a)-3(a), section 367(a) does not apply if, pursuant to a section 
354 exchange, a U.S. person transfers stock of a domestic or foreign 
corporation ``for stock of a foreign corporation'' in an asset 
reorganization described in section 368(a)(1) that is not treated as an 
indirect stock transfer.
    Notwithstanding the language in the current regulations, this 
exception is intended to apply to any section 354 (or section 356) 
exchange made pursuant to an asset reorganization under section 
368(a)(1) that is not treated as an indirect stock transfer under Sec.  
1.367(a)-3(d). However, commentators noted that in certain triangular 
asset reorganizations where a U.S. person transfers stock of a foreign 
acquired corporation to such foreign corporation in a section 354 (or 
section 356) exchange, but receives stock of the domestic parent of the 
foreign acquiring corporation pursuant to such exchange, the transfer 
by the U.S. person might be subject to section 367(a). This would be 
the case because, under Sec.  1.367(a)-3(a), the U.S. person does not 
receive ``stock of a foreign corporation.'' This result was not 
intended. Accordingly, the final regulations clarify the application of 
this rule by removing the phrase ``for stock of a foreign 
corporation.'' Thus, section 367(a) will not apply to any section 354 
(or section 356) exchange of stock or securities of a domestic or 
foreign corporation pursuant to an asset reorganization under section 
368(a)(1), unless the exchange is considered an indirect stock transfer 
pursuant to Sec.  1.367(a)-3(d). A conforming change also is made to 
the section 6038B reporting rules (see part J. of this preamble).
2. Exchanges of Securities in Certain Recapitalizations and Other 
Reorganizations
    Prior to the issuance of the 2005 proposed regulations, several 
commentators noted that the exception to the application of section 
367(a) contained in Sec.  1.367(a)-3(a) applied to exchanges of stock, 
but not exchanges of securities, in section 368(a)(1)(E) 
reorganizations and certain asset reorganizations. In response, the IRS 
and Treasury issued Notice 2005-6 (2005-5 I.R.B. 448) concurrently with 
the 2005 proposed regulations, and announced the plan to amend Sec.  
1.367(a)-3(a) to apply the exception to exchanges of stock or 
securities. These final regulations incorporate the rule announced in 
Notice 2005-6, including the dates of applicability as discussed below 
in part K.3. of this preamble.
    Consistent with these changes, these final regulations also amend 
the indirect stock transfer rules of Sec.  1.367(a)-3(d) to provide 
that exchanges by a U.S. person of stock or securities of an acquired 
corporation for stock or securities of the corporation that controls 
the acquiring corporation in a triangular section 368(a)(1)(B) 
reorganization will be treated as an indirect transfer of such stock or 
securities subject to the rules of section 367(a). This amendment 
conforms the treatment of triangular section 368(a)(1)(B) 
reorganizations with the other indirect stock transfers described in 
Sec.  1.367(a)-3(d). Although this amendment has a prospective 
effective date, no inference is intended as to the application of 
current law to such exchanges.
    Other provisions of the section 367 regulations also contain 
references to exchanges of stock but not to securities. See, e.g., 
Sec.  1.367(a)-8(e)(1)(i). The IRS and Treasury are studying these 
references and intend to amend these provisions if these omissions are 
not appropriate.

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

    The 2005 proposed regulations would modify the concurrent 
application of section 367(a) and (b) to exchanges that require the 
inclusion in income of the exchanging United States shareholder's all 
earnings and profits amount under section 367(b). The 2005 proposed 
regulations would provide that the rules of section 367(b), and not 
section 367(a), apply to such exchanges in cases where the all earnings 
and profits amount attributable to the stock of an exchanging 
shareholder is greater than the amount of gain in such stock subject to 
section 367(a) pursuant to the indirect stock transfer rules. In such a 
case, the shareholder would be required to include in income as a 
deemed dividend the all earnings and profits amount pursuant to Sec.  
1.367(b)-3, without regard to whether the exchanging shareholder files 
a gain recognition agreement as provided under Sec. Sec.  1.367(a)-3(b) 
and 1.367(a)-8. This change was proposed because the IRS and Treasury 
determined that it was contrary to the policy of section 367(b) to 
allow a shareholder effectively to elect to be taxed on the lesser 
amount of gain under section 367(a) simply by failing to file a gain 
recognition agreement.
    Two comments were received with respect to this overlap rule. One 
commentator questioned, as a general matter, the application of Sec.  
1.367(b)-3 and the all earnings and profits rule to inbound asset 
acquisitions and, more specifically, the broadening of the 
circumstances under the 2005 proposed regulations where a taxpayer 
would be required to include in income as a deemed dividend the all 
earnings and profits amount. The commentator suggested an alternative 
means to taxing the earnings and profits of the foreign acquired 
corporation, such as reducing the basis of assets brought into the 
United States to the extent of any previously untaxed earnings and 
profits. The IRS and Treasury, at this time, do not believe that a 
comprehensive revision of the all earnings and profits rule is 
necessary or appropriate. Alternative approaches to the all earnings 
and profits rule are beyond the scope of this regulation project, 
because, for example, any such revision would have to take into account 
recently enacted section 362(e). As a result, this comment is not 
adopted.
    The second comment stated that the overlap rule adds unnecessary 
complexity to the section 367 regulations, because it is unlikely that 
a transaction will occur that would invoke the rule (i.e., where a 
foreign acquired corporation transfers its assets to a domestic 
subsidiary of a foreign parent corporation in a triangular 
reorganization). The overlap rule in the 2005 proposed regulations was 
intended to address cases that are affected by this rule. The IRS and 
Treasury continue to believe that the rule is necessary to preserve the 
policies of section 367(b), and that the rule as applied in these 
contexts does not create undue complexity. For this reason, the comment 
is not adopted.

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

    In a triangular section 368(a)(1)(B) reorganization, if a U.S. 
person 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. person 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). Sec.  1.367(a)-3(d)(1)(iii). The current regulations do not, 
however, treat as an indirect stock transfer a triangular section 
368(a)(1)(B) reorganization where the acquiring

[[Page 4279]]

corporation is foreign and the controlling corporation is domestic. The 
2005 proposed regulations would extend the indirect stock transfer 
rules to include triangular section 368(a)(1)(B) reorganizations in 
which a U.S. person exchanges stock of the acquired corporation for 
voting stock of a domestic corporation that controls the foreign 
acquiring corporation. In such a case, the 2005 proposed regulations 
would provide that a gain recognition agreement filed pursuant to such 
transaction is 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.
    Commentators stated that because any built-in gain in the stock of 
the acquired corporation is reflected in the stock of the foreign 
acquiring corporation held by the domestic controlling corporation 
under Sec.  1.358-6(c)(3), a gain recognition agreement should not be 
triggered if the domestic controlling corporation disposes of the stock 
of the foreign acquiring corporation. The IRS and Treasury agree, in 
part, with this comment. Accordingly, the final regulations provide 
that, in certain cases, the disposition of the stock of the foreign 
acquiring corporation is not a triggering event. For example, the gain 
recognition agreement terminates in such a case if the domestic 
controlling corporation disposes of the stock of the foreign acquiring 
corporation in a taxable exchange. See Sec.  1.367(a)-8(h)(1).

E. Identifying the Stock Transferred in Indirect Stock Transfers 
Involving a Change in Domestic or Foreign Status of the Acquired 
Corporation

    Under the current section 367(a) regulations, if a U.S. person 
exchanges stock or securities of an acquired corporation for stock or 
securities of a foreign acquiring corporation in, for example, a 
section 368(a)(1)(C) reorganization, and the foreign acquiring 
corporation transfers all or part of the assets of the acquired 
corporation to a corporation in a controlled asset transfer, the U.S. 
person is treated, for purposes of section 367(a), as transferring the 
stock or securities 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); see also Sec.  
1.367(a)-3(d)(3), Example 5A.
    A commentator stated that the indirect stock transfer rules should 
apply to such a transaction 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, U.S. persons that exchange stock or 
securities of the domestic acquired corporation would be treated as 
having made an indirect stock transfer of stock or securities of a 
foreign corporation to a foreign corporation subject to Sec.  1.367(a)-
3(b), rather than of stock or securities of a domestic corporation that 
would be subject to the more restrictive rules of Sec.  1.367(a)-3(c).
    The IRS and Treasury agree, in part, with this comment and believe 
that Sec.  1.367(a)-3(c) should not apply to certain indirect stock 
transfers that occur by reason of transactions involving a subsidiary 
member of a consolidated group to the extent that the assets of the 
domestic acquired corporation are ultimately transferred to a foreign 
corporation. Accordingly, the final regulations provide that where a 
subsidiary member of a consolidated group transfers its assets to a 
foreign corporation pursuant to an asset reorganization, and an 
indirect stock transfer described in Sec.  1.367(a)-3(d)(1)(i) (mergers 
described in section 368(a)(1)(A) and (a)(2)(D) and reorganizations 
described in section 368(a)(1)(G) and (a)(2)(D)), (iv) (triangular 
reorganizations described in section 368(a)(1)(C)), or (v) (asset 
reorganizations followed by a controlled asset transfer) occurs in 
connection with such transfer, the U.S. persons that exchange stock or 
securities in the domestic acquired corporation pursuant to section 354 
(or section 356) will be treated for purposes of Sec.  1.367(a)-3 as 
having made an indirect transfer of foreign stock or securities subject 
to the rules of Sec.  1.367(a)-3(b) (and not domestic stock or 
securities subject to Sec.  1.367(a)-3(c)). In the case where the 
foreign acquiring corporation transfers assets in a controlled asset 
transfer to a foreign corporation, the exception applies only to the 
extent of the assets transferred to the foreign corporation. Further, 
the exception does not apply to the extent that the assets of the 
domestic acquired corporation are ultimately transferred in one or more 
successive controlled asset transfers to a domestic corporation. Thus, 
in such a case, the indirect stock transfer remains subject to Sec.  
1.367(a)-3(c). The rules relating to foreign acquired corporations 
remain the same as under current law (that is, the indirect stock 
transfer rules are based on the status of the foreign acquired 
corporation).
    The IRS and Treasury are studying in a separate project the 
interaction of section 7874 and Sec.  1.367(a)-3(c). In connection with 
this study, the IRS and Treasury will continue to examine whether the 
recommended change should also apply to other transactions. The results 
of this study may be addressed in a future regulations project. At this 
time, however, the final regulation will continue to apply to other 
transactions based on the stock that is owned and exchanged by the U.S. 
person in the transaction (rather than based on stock of the 
corporation in which the assets of the acquired corporation are 
ultimately transferred). Comments are requested as to whether the 
exception, described above, should be expanded to other ownership 
structures (e.g., where the domestic target corporation is an 
affiliated but not consolidated group member).

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

    Under the current regulations, when an indirect stock transfer also 
involves a transfer of assets by a domestic corporation to a foreign 
corporation, section 367(a) and (d) apply to the domestic corporation's 
transfer of assets prior to the application of the indirect stock 
transfer rules. However, section 367(a) and (d) do not apply to the 
domestic corporation's transfer to the extent that the foreign 
acquiring corporation re-transfers the assets received in the asset 
transfer to a controlled domestic corporation, provided that the 
controlled domestic corporation's basis in the assets is no greater 
than the basis that the domestic acquired corporation had in such 
assets.
    The 2005 proposed regulations would modify the scope of the 
coordination rule as it applies to asset reorganizations such that 
section 367(a) and (d) generally would apply to the domestic 
corporation's transfer of assets to the foreign corporation, even if 
the foreign corporation re-transfers all or part of the assets received 
to a domestic corporation in a controlled asset transfer. However, the 
2005 proposed regulations would provide two exceptions to this general 
rule. The first exception generally would apply 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 as provided 
in regulations under section 367(a)(5) are satisfied.
    The second exception would apply if the controlled domestic 
corporation's basis in the assets is no greater than the domestic 
acquired corporation's basis in such assets and the following two

[[Page 4280]]

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 to its tax return for the 
taxable year of the transfer. The statement must certify that the 
domestic acquired corporation will recognize gain (as described below) 
if the foreign acquiring corporation disposes of any stock of the 
domestic controlled corporation with a principal purpose of avoiding 
the U.S. tax that would have been imposed on the domestic acquired 
corporation had it disposed of the re-transferred assets. The 2005 
proposed regulations contain a rebuttable presumption that the 
disposition of stock has a principal purpose of tax avoidance if the 
disposition occurs within 2 years of the transfer.
    When applicable, under this second exception, the domestic acquired 
corporation would be required to recognize gain as if, immediately 
prior to the exchange, it had transferred the re-transferred assets, 
including any intangible assets, directly to a domestic corporation in 
an exchange qualifying under section 351, and immediately sold the 
stock to an unrelated party for its fair market value in a transaction 
in which it recognizes gain, if any (but not loss). The 2005 proposed 
regulations would provide that the basis that the foreign acquiring 
corporation has in the stock of the domestic controlled corporation is 
increased immediately prior to its disposition by the amount of gain 
recognized by the domestic acquired corporation. However, the basis of 
the re-transferred assets held by the domestic controlled corporation 
would not be increased by such gain.
    Several comments were received with respect to the second 
exception. Commentators stated that the final regulations should 
provide that the amount of gain recognized by the domestic acquired 
corporation under the second exception should also increase the basis 
of the re-transferred assets held by the domestic controlled 
corporation. As stated in the preamble to the 2005 proposed 
regulations, the IRS and Treasury believe that the concerns raised by 
the construct that results from a controlled asset transfer to a 
domestic subsidiary after an outbound asset transfer are analogous to 
the concerns raised in other divisive transactions where gain is 
recognized on the stock of a corporation without a corresponding 
increase in the basis of the assets of such corporation. See section 
355(e) and Sec.  1.367(e)-2(b)(2)(iii). The tax consequences set forth 
in the final regulations are intended to be consistent with the tax 
consequences that result in these other transactions. As a result, the 
final regulations do not adopt this comment.
    Commentators also questioned whether the proposed modification to 
the coordination rule is necessary in light of the enactment of section 
7874 and whether any new limitations to the rule should await an 
analysis of how section 7874 affects the rules of Sec.  1.367(a)-3(c). 
Because of the divisive concerns present in these types of 
transactions, the IRS and Treasury believe that the modifications to 
the coordination rule continue to be necessary and therefore are 
retained. Nevertheless, the IRS and Treasury are studying the effect of 
section 7874 on the coordination rule, as well as the direct and 
indirect transfer of domestic stock under Sec.  1.367(a)-3(c). The 
results of this study may be addressed in a future regulation project.
    Finally, in light of the enactment of section 7874, Example 6D of 
Sec.  1.367(a)-3(d)(3) of the 2005 proposed regulations has not been 
retained. Compare Sec.  1.367(a)-3(d)(3) Example 6B.

G. Treatment of a Controlled Asset Transfer Following a Section 
368(a)(1)(F) Reorganization as an Indirect Stock Transfer

    The 2005 proposed regulations would revise Sec.  1.367(a)-
3(d)(1)(v) so that any non-triangular asset reorganization followed by 
a controlled asset transfer will be considered an indirect stock 
transfer under Sec.  1.367(a)-3(d)(1).
    Commentators stated, however, that a section 368(a)(1)(F) 
reorganization followed by a controlled asset transfer should not be 
treated as an indirect stock transfer. According to the commentators, 
because a section 368(a)(1)(F) reorganization involves only a 
``single'' corporation, it should be treated in effect as a ``non-
event'' for purposes of the indirect stock transfer rules. As a result, 
the commentators believe that the transaction should be treated as a 
mere section 351 transfer of assets to the controlled subsidiary and 
not as an indirect stock transfer.
    In response to this comment, the final regulations exclude from the 
application of the indirect stock transfer rules same-country 
368(a)(1)(F) reorganizations followed by controlled asset transfers. 
For this purpose, a same-country section 368(a)(1)(F) reorganization is 
a reorganization described in section 368(a)(1)(F) in which both the 
acquired corporation and the acquiring corporation are foreign 
corporations and are created or organized under the laws of the same 
foreign country. This would include, for example, situations where the 
foreign corporation changes its name, changes its location within the 
foreign country, or changes its form within the foreign country. The 
IRS and Treasury will continue to examine whether other foreign-to-
foreign section 368(a)(1)(F) reorganizations followed by controlled 
asset transfers should be treated as indirect stock transfers, however, 
as the general treatment of section 368(a)(1)(F) reorganizations is 
further considered. Outbound reorganizations under section 368(a)(1)(F) 
followed by controlled asset transfers are treated as indirect stock 
transfers under the final regulations. See Sec.  1.367(a)-1T(f).

H. Treatment of Reorganizations Described in Section 368(a)(1)(G) and 
(a)(2)(D) as Indirect Stock Transfers

    Section 368(a)(2)(D) provides that the acquisition by one 
corporation, in exchange for stock of a corporation which is in control 
of the acquiring corporation, of substantially all the properties of 
another corporation does not disqualify a transaction from qualifying 
as a reorganization under section 368(a)(1)(A) or 368(a)(1)(G), 
provided certain conditions are satisfied.
    Section 1.367(a)-3(d)(1)(i) and (iv) of the 2005 proposed 
regulations would treat certain reorganizations described in section 
368(a)(1)(A) and (a)(2)(D), and certain triangular reorganizations 
described in section 368(a)(1)(C), respectively, as indirect stock 
transfers. Moreover, section 1.367(a)-3(d)(1)(v) of the 2005 proposed 
regulations would include certain reorganizations described in section 
368(a)(1)(G), followed by controlled asset transfers, as indirect stock 
transfers. The 2005 proposed regulations would not explicitly treat 
reorganizations described in section 368(a)(1)(G) and (a)(2)(D) as 
indirect stock transfers, even though they have the same effect as 
these other reorganizations. As a result, the final regulations modify 
Sec.  1.367(a)-3(d)(1)(i), and related provisions, to include as 
indirect stock transfers certain reorganizations described in section 
368(a)(1)(G) and (a)(2)(D). Similar modifications are made in other 
sections of the final regulations to take into account reorganizations 
described in section 368(a)(1)(G) and (a)(2)(D).

I. General Operation of Section 367 Regulations and the Effect of 
Section 7874

    Comments were received regarding the scope of certain portions of 
the section 367 regulations in light of the enactment of section 7874. 
In response

[[Page 4281]]

to the potential overlap of these two provisions, the IRS and Treasury 
are considering possible changes to Sec.  1.367(a)-3(c). Comments are 
requested as to the interaction of section 7874 and Sec.  1.367(a)-
3(c), as well as to other aspects of the section 367 regulations.

J. Section 6038B Reporting

    Section 6038B provides for reporting by U.S. persons that transfer 
property to foreign corporations in an exchange described in section 
332, 351, 354, 355, 356, or 361. Temporary regulations under section 
6038B provide an exception from reporting for certain transactions 
described in Sec.  1.367(a)-3(a). Section 1.367(a)-3(a) provides an 
exception to section 367(a) for certain exchanges under section 354 or 
356 of stock or securities in section 368(a)(1)(E) reorganizations or 
in asset reorganizations that are not indirect stock transfers. These 
exceptions from reporting under section 6038B have been amended to 
conform to the amendments to Sec.  1.367(a)-3(a). These exceptions are 
incorporated in the final regulations. See Part B. of this preamble.
    Section 6038B and the regulations thereunder provide for reporting 
by filing Form 926 ``Return by a U.S. Transferor of Property to a 
Foreign Corporation'' and any attachments with the income tax return 
for the year of the transfer. Temporary regulations under section 6038B 
eliminate the requirement to sign Form 926, thus permitting the 
electronic filing of the form with the U.S. transferor's federal income 
tax return. The temporary regulations provide that Form 926 and any 
attachments are verified by signing the income tax return with which 
the form and attachments are filed. These temporary regulations are 
incorporated in these final regulations, except with respect to certain 
filings by corporations which will be addressed as part of a larger 
final regulation dealing with electronic filing.

K. Effective Dates

1. General Rule
    Except as provided below, the final regulations apply to 
transactions occurring on or after January 23, 2006.
2. Retroactive Application of Sec.  1.367(b)-4(b)(1)(ii) of the 
Proposed Regulations
    Under Sec.  1.367(b)-4(b), certain shareholders of a foreign 
acquired corporation are required to include in income as a deemed 
dividend the section 1248 amount with respect to the stock of the 
foreign acquired corporation if such exchange results in the loss of 
section 1248 shareholder status. This may occur, for example, if the 
exchanging shareholder receives domestic stock in exchange for the 
stock of an acquired foreign corporation in a triangular reorganization 
where a domestic issuing corporation controls the foreign acquiring 
corporation.
    The current regulations consider the section 1248 shareholder 
status to be lost in this case because the domestic acquiring 
corporation's basis in the foreign acquiring corporation is generally 
determined by reference to the assets of the foreign acquired 
corporation, rather than by reference to the stock of the foreign 
acquired corporation. See Sec.  1.358-6. Under the 2005 proposed 
regulations, however, such an exchanging shareholder would not be 
required to include in income as a deemed dividend the section 1248 
amount under Sec.  1.367(b)-4(b), provided that the domestic issuing 
corporation, immediately after the exchange, is a section 1248 
shareholder of the acquired corporation (in the case of a triangular 
section 368(a)(1)(B) reorganization) or the surviving corporation (in 
the case of a triangular section 368(a)(1)(C) reorganization, a forward 
triangular merger, a reorganization described in section 368(a)(1)(G) 
and (a)(2)(D), or a reverse triangular merger) and such acquired or 
surviving corporation is a controlled foreign corporation. This change 
was made in the case of triangular asset reorganizations because the 
special basis rules in Sec.  1.367(b)-13(c) of the 2005 proposed 
regulations would preserve the section 1248 amounts attributable to the 
stock of the foreign acquired corporation in the stock of the foreign 
acquiring (or surviving) corporation held by the domestic issuing 
corporation. The special basis rules would not apply to triangular 
reorganizations under section 368(a)(1)(B). The special basis rules are 
not needed for these transactions because section 1248 amounts are 
preserved under the general rules of Sec.  1.358-6.
    Commentators requested that the modification to Sec.  1.367(b)-4 
relating to triangular section 368(a)(1)(B) reorganizations be made 
retroactive to February 23, 2000, the date on which Sec.  1.367(b)-4 
was promulgated, because the basis rules of Sec.  1.358-6 were in 
effect at that time and the transactions never raised concerns about 
preserving section 1248 amounts. The IRS and Treasury agree with this 
comment and therefore the final regulations allow taxpayers to apply 
the modification to Sec.  1.367(b)-4 to a triangular section 
368(a)(1)(B) reorganization occurring on or after February 23, 2000, 
and during any taxable year which is not closed by the period of 
limitations. Taxpayers applying this rule, however, must do so 
consistently with respect to all such transactions.
    Commentators also requested that the modification to Sec.  
1.367(b)-4 apply to other triangular reorganizations on a retroactive 
basis, on the condition that taxpayers also apply the special basis 
rules of Sec.  1.367(b)-13(c) of the 2005 proposed regulations 
retroactively to these transactions. The IRS and Treasury only intend 
for the Sec.  1.367(b)-13(c) basis rules to apply on a prospective 
basis. Elective application of these rules to prior years would be 
complex and difficult to administer. Accordingly, the IRS and Treasury 
have not adopted this comment for other triangular reorganizations.
3. Exchanges of Securities in Certain Recapitalizations and 
Reorganizations
    As stated above in part B.2. of this preamble, the final 
regulations provide an exception to the application of section 367(a) 
to transfers of securities by U.S. persons in a section 354 or 356 
exchange pursuant to a section 368(a)(1)(E) reorganization, or a 
section 368(a)(1) asset reorganization that is not treated as an 
indirect stock transfer. This rule applies to transfers occurring after 
January 5, 2005, although taxpayers may apply the rule to transfers of 
securities occurring on or after July 20, 1998, and on or before 
January 5, 2005, if done consistently to all transactions.
4. Asset Reorganizations Followed by Controlled Asset Transfers
    Commentators stated that because the 2005 proposed regulations did 
not provide an effective date for the rule that treats a section 
368(a)(1)(F) reorganization followed by a controlled asset transfer as 
an indirect stock transfer, such rule could be interpreted as applying 
to transactions occurring on or after July 20, 1998, which is the 
general effective date of Sec.  1.367(a)-3(d). The final regulations 
clarify that a section 368(a)(1)(F) reorganization followed by a 
controlled asset transfer is treated as an indirect stock transfer 
subject to section 367(a) only if the reorganization occurs on or after 
January 23, 2006.
    In general, section 368(a)(1)(D) reorganizations followed by 
controlled asset transfers are treated as indirect stock transfers 
subject to section 367(a) if the reorganization occurs after December 
9, 2002. However, see Rev. Rul. 2002-85 (2002-2 C.B. 986), for special 
retroactive applicability dates.

[[Page 4282]]

5. Electronic Filing Under Section 6038B
    These final regulations provide that Form 926 and any attachments 
will be verified by signing the income tax return with which the form 
and attachments are filed, in order to facilitate the electronic filing 
of Form 926 with the transferor's income tax return. This rule applies 
to taxable years beginning after December 31, 2002. For taxable years 
beginning before January 1, 2003, Form 926 must be signed under 
penalties of perjury declaring that the information submitted is true, 
correct and complete to the best of the transferor's knowledge and 
belief.

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 section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because the 
regulations do 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, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

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

Adoption of 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 continues to read, in 
part, as follows:

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

    Sec.  1.367(a)-3(b) also issued under 26 U.S.C. 367(a) * * *
    Sec.  1.367(b)-13 also issued under 26 U.S.C. 367(b) * * *


0
Par. 2. 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.
* * * * *

0
Par. 3. Section 1.367(a)-3 is amended as follows:
0
1. In paragraph (a), remove the third and fourth sentences, and add 
five sentences in their place.
0
2. In paragraph (a), add a sentence at the end of the paragraph.
0
3. Revise paragraph (b)(2)(i).
0
4. Revise paragraph (c)(5)(vi).
0
5. Revise paragraph (d)(1), introductory text.
0
6. Revise paragraph (d)(1)(i).
0
7. In paragraph (d)(1)(ii), add a sentence at the end of the paragraph.
0
8. Revise paragraph (d)(1)(iii).
0
9. In paragraph (d)(1)(iv), remove the language ``Example 5'' and add 
``Example 6'' in its place, remove ``Example 7'' and add ``Example 8'' 
in its place, and remove ``Example 11'' and add ``Example 14'' in its 
place.
0
10. Revise paragraph (d)(1)(v).
0
11. In paragraph (d)(1)(vi), remove the language ``Example 10 and 
Example 10A'' and add ``Example 13 and Example 13A'' in its place.
0
12. Revise paragraphs (d)(2)(i), (ii), and (iv).
0
13. Revise paragraph (d)(2)(v)(A) and (C).
0
14. Redesignate paragraph (d)(2)(v)(D) as paragraph (d)(2)(v)(F).
0
15. Add new paragraphs (d)(2)(v)(D) and (E).
0
16. Revise paragraph (d)(2)(vi).
0
17. Add new paragraph (d)(2)(vii).
0
18. In paragraph (d)(3), remove the first sentence, and add two 
sentences in its place.
0
19. 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.
Examples 7, 7A, 7B, and 7C......  Examples 8, 8A,
                                   8B, and 8C.
Examples 6 and 6A...............  Examples 7 and
                                   7A.
                                  .................  Example 6C.
Examples 5, 5A, and 5B..........  Examples 6, 6A,
                                   and 6B.
                                  .................  Example 5A.
Example 4.......................  Example 5.
Example 3.......................  Example 4.
Example 2.......................  Example 3.
                                  .................  Example 2.
------------------------------------------------------------------------

0
20. In paragraph (d)(3), newly designated Example 3, the heading and 
paragraph (i) are revised.
0
21. In paragraph (d)(3), newly designated Example 5, paragraph (i), 
remove the language ``paragraph (d)(1)(iii)'' and add ``paragraph 
(d)(1)(iii)(A)'' in its place.
0
22. In paragraph (d)(3), newly designated Example 5, paragraph (ii), 
last sentence, remove the language ``, or if S sold all or a portion of 
the stock of Y''.
0
23. In paragraph (d)(3), newly designated Example 6A, paragraph (i), 
the first and last sentences, and paragraph (ii), the first, fourth, 
and fifth sentences are revised.
0
24. In paragraph (d)(3), newly designated Example 6B is revised.
0
25. In paragraph (d)(3), newly designated Example 8, paragraph (ii), 
the fourth sentence is revised.
0
26. In paragraph (d)(3), newly designated Example 9 is revised.
0
27. In paragraph (d)(3), newly designated Example 12, paragraph (ii), 
the fifth sentence is revised.
0
28. In paragraph (d)(3), revise newly designated Example 16.
0
29. 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 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.

[[Page 4283]]

 
Example 8B, paragraph (i).......  Example 7.........  Example 8.
Example 8C, paragraph (i).......  Example 7.........  Example 8.
Example 12, paragraph (i), third  Example 9.........  Example 12.
 sentence.
Example 13A, paragraph (i) and    Example 10........  Example 13.
 paragraph (ii), first sentence.
Example 14A, paragraph (i)......  Example 11........  Example 14.
------------------------------------------------------------------------

0
30. Paragraph (e)(1) is revised.
    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 or securities of a foreign 
corporation in a reorganization described in section 368(a)(1)(E), or a 
U.S. person exchanges stock or securities of a domestic or 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 triangular reorganizations under section 368(a)(1), see Sec.  
1.367(b)-13. * * * For rules related to expatriated entities, see 
section 7874 and the regulations thereunder.
    (b) * * *
    (2) * * *
    (i) In general. A transfer of foreign stock or securities described 
in section 367(a) or the regulations thereunder as well as in section 
367(b) or 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) Examples 11 and 14 of this section.
    (A) Section 367(b) and the regulations thereunder shall not apply 
if a foreign corporation is not treated as a corporation under section 
367(a)(1). See the example in paragraph (b)(2)(ii) of this section and 
paragraph (d)(3) Example 14 of this section.
    (B) If a foreign corporation transfers assets to a domestic 
corporation in a transaction to which Sec.  1.367(b)-3(a) and (b) and 
the indirect stock transfer rules of paragraph (d) of this section 
apply, and all the earnings and profits amount attributable to the 
stock of an exchanging shareholder under Sec.  1.367(b)-3(b) is greater 
than the amount of gain in such stock subject to section 367(a) 
pursuant to the indirect stock transfer rules of paragraph (d) of this 
section, then the rules of section 367(b), and not the rules of section 
367(a), shall apply to the exchange. See paragraph (d)(3) Example 15 of 
this section.
* * * * *
    (c) * * *
    (5) * * *
    (vi) Transferee foreign corporation. Except as provided in 
paragraph (d)(2)(i)(B) of this section, a transferee foreign 
corporation is the foreign corporation whose stock is received in the 
exchange by U.S. persons.
* * * * *
    (d) * * *
    (1) In general. For purposes of this section, a U.S. person who 
exchanges, under section 354 (or section 356) stock or securities in a 
domestic or foreign corporation for stock or securities in a foreign 
corporation (or in a domestic corporation in control of a foreign 
acquiring corporation in a triangular section 368(a)(1)(B) 
reorganization) in connection with a transaction described in 
paragraphs (d)(1)(i) through (v) of this section (or who is deemed to 
make such an exchange under paragraph (d)(1)(vi) of this section) 
shall, except as provided in paragraph (d)(2)(vii) of this section, be 
treated as having made an indirect transfer of such stock or securities 
to a foreign corporation that is subject to the rules of this section, 
including, for example, the requirement, where applicable, that the 
U.S. transferor enter into a gain recognition agreement to preserve 
nonrecognition treatment under section 367(a). If the U.S. person 
exchanges stock or securities of a foreign corporation, see also 
section 367(b) and the regulations thereunder. 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 an asset reorganization 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) Mergers described in sections 368(a)(1)(A) and (a)(2)(D) and 
reorganizations described in sections 368(a)(1)(G) and (a)(2)(D). A 
U.S. person exchanges stock or securities of a corporation (the 
acquired corporation) for stock or securities of a foreign corporation 
that controls the acquiring corporation in a reorganization described 
in either sections 368(a)(1)(A) and (a)(2)(D), or in sections 
368(a)(1)(G) and (a)(2)(D). 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 or securities of the 
acquired corporation for voting stock or securities 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.

[[Page 4284]]

    (B) A U.S. person exchanges stock or securities of the acquired 
corporation for voting stock or securities of a domestic corporation 
that is in control (as defined in section 368(c)) of a foreign 
acquiring corporation in a reorganization described in section 
368(a)(1)(B). See paragraph (d)(3) Example 5A of this section.
* * * * *
    (v) Transfers of assets to subsidiaries in certain section 
368(a)(1) reorganizations. A U.S. person exchanges stock or securities 
of a corporation (the acquired corporation) for stock or securities of 
a foreign acquiring corporation in an asset reorganization (other than 
a triangular section 368(a)(1)(C) reorganization described in paragraph 
(d)(1)(iv) of this section, a reorganization described in sections 
368(a)(1)(A) and (a)(2)(D) or sections 368(a)(1)(G) and (a)(2)(D) 
described in paragraph (d)(1)(i) of this section, a reorganization 
described in sections 368(a)(1)(A) and (a)(2)(E) described in paragraph 
(d)(1)(ii) of this section, or a same-country section 368(a)(1)(F) 
reorganization) that is followed by a controlled asset transfer. For 
purposes of this section, a same-country section 368(a)(1)(F) 
reorganization is a reorganization described in section 368(a)(1)(F) in 
which both the acquired corporation and the acquiring corporation are 
foreign corporations and are created or organized under the laws of the 
same foreign country. In the case of a transaction described in this 
paragraph (d)(1)(v) in which some but not all of the assets of the 
acquired corporation are transferred in a controlled asset transfer, 
the transaction shall be considered to be an indirect transfer of stock 
or securities subject to this paragraph (d) only to the extent of the 
assets so transferred. The remaining assets shall be treated as having 
been transferred by the acquired corporation in an asset transfer 
rather than an indirect stock transfer, and, if the acquired 
corporation is a domestic corporation, such asset transfer shall be 
subject to the other provisions of section 367, including sections 
367(a)(1), (3), and (5), and (d). See paragraph (d)(3) Examples 6A and 
6B of this section.
* * * * *
    (2) * * *
    (i) Transferee foreign corporation--(A) General rule. Except as 
provided in paragraph (d)(2)(i)(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.
    (B) Special rule for triangular reorganizations described in 
paragraph (d)(1)(iii)(B) of this section. In the case of a triangular 
reorganization described in paragraph (d)(1)(iii)(B) of this section, 
the transferee foreign corporation shall be the foreign acquiring 
corporation. See paragraph (d)(3) Example 5A of this section.
    (ii) Transferred corporation. The transferred corporation shall be 
the acquiring corporation, except as provided in this paragraph 
(d)(2)(ii). In the case of a triangular section 368(a)(1)(B) 
reorganization described in paragraph (d)(1)(iii) of this section, the 
transferred corporation shall be the acquired corporation. In the case 
of an indirect stock transfer described in paragraph (d)(1)(i), (ii), 
or (iv) of this section followed by a controlled asset transfer, or an 
indirect stock transfer described in paragraph (d)(1)(v) of this 
section, the transferred corporation shall be the controlled 
corporation to which the assets are transferred. In the case of 
successive section 351 transfers described in paragraph (d)(1)(vi) of 
this section, the transferred corporation shall be the corporation to 
which the assets are transferred in the final section 351 transfer. The 
transferred property shall be the stock or securities of the 
transferred corporation, as appropriate under the circumstances.
* * * * *
    (iv) Gain recognition agreements involving multiple parties. 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 these rules, including a requirement that the transferor 
recognize gain in the event of a direct or indirect disposition of the 
stock or assets of the transferred corporation. 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 disposition of the 
transferred stock or securities requiring the U.S. transferor to 
recognize gain shall include a direct or indirect disposition of such 
stock or securities by the transferee foreign corporation, such as a 
disposition of such stock or securities by a foreign acquiring 
corporation or 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 
transferred stock or securities requiring the U.S. transferor to 
recognize gain shall occur, for example, upon the disposition of such 
stock or securities by the acquiring corporation. Moreover, 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. See Sec.  1.367(a)-8(h)(1) 
and paragraph (d)(3) Examples 5 and 5A of this section.
    (v) * * *
    (A) In the case of a reorganization described in paragraph 
(d)(1)(i) of this section (a reorganization described in sections 
368(a)(1)(A) and (a)(2)(D) or sections 368(a)(1)(G) and (a)(2)(D)) or a 
reorganization described in section (d)(1)(iv) of this section (a 
triangular section 368(a)(1)(C) reorganization), the assets of the 
acquired corporation;
* * * * *
    (C) In the case of an asset reorganization followed by a controlled 
asset transfer, as described in paragraph (d)(1)(v) of this section, 
the assets of the acquired corporation that are transferred to the 
corporation controlled by the acquiring corporation;
    (D) In the case of a triangular reorganization described in section 
368(a)(1)(C) followed by a controlled asset transfer, a reorganization 
described in sections 368(a)(1)(A) and (a)(2)(D) followed by a 
controlled asset transfer, or a reorganization described in sections 
368(a)(1)(G) and (a)(2)(D) followed by a controlled asset transfer, the 
assets of the acquired corporation including those transferr