Certain Transfers of Stock or Securities by U.S. Persons to Foreign Corporations, 5174-5197 [07-490]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 23 (Monday, February 5, 2007)]
[Rules and Regulations]
[Pages 5174-5197]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-490]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9311]
RIN 1545-BG10


Certain Transfers of Stock or Securities by U.S. Persons to 
Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations under 
section 367(a) of the Internal Revenue Code (Code) regarding gain 
recognition agreements. The final regulations are necessary to update 
cross-references in the current regulations. The temporary regulations 
are necessary to respond to comments requested in Notice 2005-74. The 
regulations primarily affect U.S. persons that transfer stock or 
securities to foreign corporations or corporations engaged in 
transactions that affect existing gain recognition agreements. The text 
of these temporary regulations also serves as the text of the proposed 
regulations (REG-147144-06) set forth in the notice of proposed 
rulemaking on this subject published elsewhere in this issue of the 
Federal Register.

DATES: Effective Date: These regulations are effective February 5, 
2007.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.367(a)-3T(f) and 1.367(a)-8T(h).

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-147144-06), room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m.

[[Page 5175]]

to CC:PA:LPD:PR (REG-147144-06), Courier's Desk, Internal Revenue 
Service, 1111 Constitution Avenue, NW., Washington, DC, or sent 
electronically, via the IRS Internet site at https://www.irs.gov/regs or 
via the Federal eRulemaking Portal at https://www.regulations.gov (IRS 
REG-147144-06).

FOR FURTHER INFORMATION CONTACT: Daniel McCall, (202) 622-3860 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These temporary regulations are being issued without prior notice 
and public procedure pursuant to the Administrative Procedure Act (5 
U.S.C. 553). For this reason, the collections of information contained 
in these regulations have been reviewed and pending receipt and 
evaluation of public comments, approved by the Office of Management and 
Budget in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)) under control number 1545-2056. Response to these 
collections of information is mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information, unless the collection of 
information displays a valid control number.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing the 
burden, please refer to the preamble to the cross-referencing notice of 
proposed rulemaking published elsewhere in the Proposed Rules section 
of this issue of the Federal Register.
    Books and records relating to these collections of information must 
be retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    Section 367(a)(1) provides that if, in connection with any exchange 
described in section 332, 351, 354, 356, or 361, a United States person 
(U.S. transferor) transfers property to a foreign corporation 
(transferee foreign corporation), such foreign corporation shall not, 
for purposes of determining the extent to which gain shall be 
recognized on such transfer, be considered to be a corporation. Section 
367(a)(2), (3) and (6) provides exceptions to this general rule and 
grants regulatory authority to provide additional exceptions and to 
limit the statutory exceptions.
    Exceptions to the general rule of section 367(a)(1) for certain 
transfers by a U.S. transferor of the stock or securities of a 
corporation (transferred corporation) to a transferee foreign 
corporation are provided in Sec.  1.367(a)-3 (initial transfer). In 
some cases, these exceptions require, among other things, that the U.S. 
transferor file a gain recognition agreement (GRA), as provided in 
Sec.  1.367(a)-8. Section 1.367(a)-3(b)(1)(ii) and (c)(1)(iii)(B). 
Pursuant to a GRA, the U.S. transferor agrees, among other things, to 
include in income the gain realized, but not recognized, on the initial 
transfer of the stock or securities, and pay any applicable interest, 
upon certain events (triggering events) that occur before the close of 
the fifth full taxable year following the year of the initial transfer. 
Section 1.367(a)-8(b)(1)(iii) and (3)(i).
    Section 1.367(a)-8(e)(1) and (2) provides that dispositions of the 
stock or securities of the transferred corporation are generally 
triggering events. Similarly, Sec.  1.367(a)-8(e)(3) provides that 
dispositions of substantially all (within the meaning of section 
368(a)(1)(C)) of the assets of the transferred corporation are 
generally treated as deemed dispositions of the stock or securities of 
the transferred corporation and therefore are also triggering events. 
Finally, dispositions of stock of the transferee foreign corporation 
can also be triggering events. See Sec.  1.367(a)-8(f)(2)(ii).
    Notwithstanding these rules, Sec.  1.367(a)-8 provides that various 
nonrecognition transactions are not triggering events if certain 
requirements are satisfied. For example, Sec.  1.367(a)-8(g) provides 
exceptions for certain transactions involving the U.S. transferor, the 
transferee foreign corporation, and the transferred corporation. 
Although these exceptions clearly contemplate some nonrecognition 
transactions, the current regulations are unclear whether, and if so 
how, the exceptions apply to various asset reorganizations involving 
section 361 exchanges by the U.S. transferor, the transferee foreign 
corporation, and the transferred corporation.
    Section 1.367(a)-8 also provides that certain nonrecognition 
transactions are not triggering events because the GRA is terminated 
without further effect. For example, Sec.  1.367(a)-8(h)(3) lists 
certain nonrecognition transactions that terminate the GRA, provided 
that immediately after the transaction the basis in the transferred 
stock is not greater than the U.S. transferor's basis in the stock 
that, immediately before the initial transfer, necessitated the GRA.
    On September 28, 2005, the IRS and the Treasury Department issued 
Notice 2005-74 (2005-42 IRB 726), see Sec.  601.601(d)(2), which 
announced the intention to amend the regulations under section 367(a) 
to address the effect on GRAs of certain asset reorganizations 
involving the U.S. transferor, the transferee foreign corporation, and 
the transferred corporation. The notice was issued in response to 
comments that the current regulations do not adequately address various 
asset reorganizations involving the U.S. transferor, the transferee 
foreign corporation, and the transferred corporation. Notice 2005-74 
addressed the most common of these reorganizations and requested 
comments on other transactions (for example, certain upstream and 
downstream reorganizations).
    Notice 2005-74 generally provided that, if particular requirements 
are satisfied, certain asset reorganizations of the U.S. transferor, 
the transferee foreign corporation, or the transferred corporation will 
not constitute triggering events. A key premise of the notice was that 
the covered transactions involved situations where the ability to 
collect tax is sufficiently preserved in the event of a subsequent 
trigger of the GRA (that is, the obligor under the GRA remains 
unchanged as a result of the asset reorganization). In light of 
taxpayer comments and further study, however, the IRS and Treasury 
Department have determined that there are additional instances where 
the ability to collect tax after these asset reorganizations and 
certain other nonrecognition transactions (as defined in section 
7701(a)(45)) is sufficiently preserved so that these transactions also 
should not constitute a triggering event if particular requirements are 
met. The IRS and Treasury Department also have concluded that other 
portions of the current section 367(a) regulations addressing GRAs 
should be revised.

Explanation of Provisions

A. Overview

    The temporary regulations adopt the rules announced in Notice 2005-
74, with a number of modifications discussed below. Notice 2005-74 only 
provided guidance on a particular range of transactions, namely certain 
asset reorganizations, that are insufficiently addressed in the current 
regulations. The temporary regulations respond to comments and provide 
guidance on the effect on GRAs of transactions that are

[[Page 5176]]

not addressed in the current regulation or Notice 2005-74. The 
temporary regulations also make additional changes to the existing 
regulations. For example, the temporary regulations modify and clarify 
procedural requirements attendant to entering into GRAs. Finally, the 
temporary regulations reorganize the current regulation so that 
distinct paragraphs address triggering events, exceptions to triggering 
events, and events that terminate a GRA. The IRS and Treasury 
Department continue to consider issuing additional public guidance that 
further revises Sec.  1.367(a)-8.

B. Effect of Certain Asset Reorganizations and Nontaxable Liquidations 
on Gain Recognition Agreements

1. Transfers of Transferee Foreign Corporation Stock by U.S. Transferor
(a) Asset Reorganizations
    Notice 2005-74 provided that if, in a section 361 transaction, a 
U.S. transferor transfers all or a portion of the stock or securities 
of the transferee foreign corporation to an acquiring domestic 
corporation (successor U.S. transferor) pursuant to certain asset 
reorganizations, the exchanges made pursuant to the asset 
reorganization will trigger the gain recognition agreement, unless 
various conditions are satisfied. These conditions are: (1) The U.S. 
transferor must have been a member of a consolidated group (original 
consolidated group) at the time of the initial transfer and the common 
parent of such group (original common parent) entered into the original 
GRA; (2) immediately after the asset reorganization, the successor U.S. 
transferor is a member of the original consolidated group 
(consolidation continuity requirement); and (3) the original common 
parent enters into a new GRA with respect to the transfer subject to 
the original GRA, modified by substituting the successor U.S. 
transferor for the original U.S. transferor. A notice of the asset 
reorganization also must be provided with the successor U.S. 
transferor's next annual certification.
    For this purpose, an asset reorganization is defined as a 
reorganization described in section 368(a)(1) involving the transfer of 
assets by a corporation to another corporation pursuant to section 361, 
except that such term shall include reorganizations described in 
section 368(a)(1)(D) or (G) only if the requirements of section 
354(b)(1)(A) and (B) are met.
    The IRS and Treasury Department received several comments that the 
consolidation continuity requirement was unduly restrictive because it 
focused on maintaining the same obligor for a GRA following the asset 
reorganization. Commentators asserted that an equal or better ability 
to collect the tax due as a result of a triggering event subsequent to 
such a reorganization may be preserved in certain instances where the 
consolidation continuity requirement would not be satisfied. However, 
these same commentators noted that if there were no consolidation 
continuity requirement, such that a U.S. transferor that is a member of 
a consolidated group at the time of the initial transfer could be 
acquired in a later asset reorganization by a corporation (successor 
corporation) that is not a member of such group without triggering the 
GRA, the actions of the successor corporation could inappropriately 
affect the liability of the original consolidated group under the GRA. 
As a result, the commentators requested that the consolidation 
continuity requirement be curtailed or eliminated, while at the same 
time not inappropriately exposing the original consolidated group to 
the liabilities arising from the actions of the successor corporation.
    The IRS and Treasury Department generally agree with these views. 
Therefore, the temporary regulations eliminate the consolidation 
continuity requirement and address concerns about the liability of a 
consolidated group that disposes of a U.S. transferor subject to a GRA.
    Specifically, the temporary regulations provide that when a U.S. 
transferor transfers all or a portion of the stock of the transferee 
foreign corporation to an acquiring corporation in an asset 
reorganization, the exchanges made pursuant to the reorganization will 
not be triggering events and the GRA will terminate without further 
effect, but only if certain requirements are satisfied. These 
requirements ensure that the ability to collect tax is sufficiently 
preserved and that the terms of the GRA are administrable.
    First, the acquiring corporation (successor U.S. transferor) must 
be a domestic corporation, and the successor U.S. transferor or the 
common parent of the consolidated group of which the successor U.S. 
transferor is a member (as applicable) must enter into a new GRA to 
recognize gain with respect to the initial transfer during the 
remaining term of the original GRA (with certain modifications).
    Second, with its next certification, the successor U.S. transferor 
must provide to the IRS the new GRA, notice of the transaction, and 
Form 8838 (Consent to Extend Time to Assess Tax Under Section 367) to 
extend the period of assessment of tax on the initial transfer.
    Third, unless the successor U.S. transferor is a member of the same 
consolidated group of which the U.S. transferor was a member 
immediately before the asset reorganization, the person entering into 
the new GRA must elect that, if the new GRA is triggered in whole or in 
part, the person will include the required amount in the year of the 
triggering event (as opposed to the year of the initial transfer). 
Requiring an inclusion in these circumstances only in the year of a 
subsequent triggering event when the U.S. transferor is no longer owned 
by the same consolidated group is necessary, among other reasons, 
because the successor U.S. transferor may not have existed in the year 
of the initial transfer. In such a case, the successor U.S. transferor 
would not be able to amend a return for the year of the initial 
transfer to include any tax due as a result of a subsequent triggering 
event. Moreover, the requirement is appropriate even if the successor 
U.S. transferor did exist in the year of the initial transfer because 
its tax year for the year of the initial transfer may be closed. In 
sum, this requirement assures the GRA rules are administrable and that 
the ability to collect tax is sufficiently preserved. If these 
requirements are met, the original GRA will terminate without further 
effect.
    The IRS and Treasury Department have decided to eliminate the 
consolidation continuity requirement because these three requirements 
adequately address the government's concern in this area by, among 
other things, preserving the ability to collect the tax due as a result 
of a triggering event subsequent to a covered asset reorganization. In 
many asset reorganizations, the successor U.S. transferor will have an 
equal or greater ability to pay the tax due in the case of a subsequent 
triggering event than would the original U.S. transferor. Furthermore, 
the current regulations generally do not impose any financial or other 
requirements on the ability of a U.S. transferor to enter into a GRA. 
But see Sec.  1.367(a)-8(d) (imposing a security requirement in certain 
situations). Consequently, the IRS and Treasury Department believe that 
even if in some circumstances an acquisition of a U.S. transferor may 
affect the ability to collect the tax due as a result of a subsequent 
triggering event (for example, the U.S. transferor is acquired from a 
consolidated group by another consolidated group whose value is less

[[Page 5177]]

than that of the original consolidated group), the requirements above 
nonetheless sufficiently preserve the ability to collect the tax that 
would be due if the new GRA were triggered and ensure that the terms of 
the GRA are administrable.
    As described in this section, the temporary regulations require 
that the acquirer be a domestic corporation because, among other 
reasons, the IRS and Treasury Department are concerned that if a 
foreign acquirer is allowed to enter into a new GRA, it may be 
difficult for the IRS to collect any tax due in the event of a 
subsequent trigger of the GRA. However, the IRS and Treasury Department 
continue to study whether it would be appropriate to allow a domestic 
corporate shareholder of the U.S. transferor to enter into a new GRA 
when a U.S. transferor is acquired by a foreign corporation in an asset 
reorganization under conditions similar to those provided in Sec.  
1.367(a)-3T(e). The IRS and Treasury Department welcome more detailed 
comments on specific approaches that could extend these rules to 
foreign acquisitions of the U.S. transferor.
(b) Nontaxable Liquidations
    The current regulations provide that, if a corporate U.S. 
transferor liquidates in a transaction that qualifies under sections 
332 and 337, the GRA is triggered unless (1) The U.S. transferor filed 
a consolidated income tax return with a U.S. parent corporation both in 
the year of the initial transfer and the year of the liquidation, and 
(2) the common parent enters into a new GRA, with certain 
modifications. Section 1.367(a)-8(f)(2)(ii).
    The temporary regulations provide a similar rule. However, the 
temporary regulations eliminate the consolidation continuity 
requirement, so the U.S. transferor is no longer required to be a 
member of the same consolidated group in the year of the initial 
transfer and the year of the liquidation. Consequently, the temporary 
regulations provide that where a U.S. transferor disposes of the stock 
of the foreign transferee corporation in a liquidation that qualifies 
under sections 332 and 337, the disposition will not constitute a 
triggering event provided that: (1) The distributee (successor U.S. 
transferor) is a domestic corporation described in section 332(b)(1); 
(2) the successor U.S. transferor or, if the successor U.S. transferor 
is a member of a consolidated group, the common parent of the successor 
U.S. transferor's group, enters into a new GRA covering the remaining 
term of the original GRA (with certain modifications); (3) where the 
successor U.S. transferor is not a member of the original consolidated 
group immediately after the liquidation, the person entering into the 
GRA agrees that if there is a subsequent triggering event, the taxpayer 
will recognize the gain in the year of the triggering event (as opposed 
to the year of the initial transfer); and (4) the successor U.S. 
transferor provides, with its next annual certification, Form 8838 to 
extend the period of assessment of the tax on the initial transfer. If 
these conditions are satisfied, the original GRA will terminate without 
further effect.
    For reasons similar to those discussed above in the context of 
asset reorganizations involving the U.S. transferor, the IRS and 
Treasury Department believe that the temporary regulations sufficiently 
address the government's concerns in this area, including preserving 
the ability to collect tax due as a result of a subsequent triggering 
event. As a result, it is not necessary for the U.S. transferor to be a 
member of the same consolidated group in the year of the transfer and 
the year of the liquidation. In addition, the IRS and Treasury 
Department believe that it is appropriate to require an inclusion in 
the year of a subsequent triggering event if the successor U.S. 
transferor was not a member of a consolidated group with the U.S. 
transferor immediately before the liquidation for reasons similar to 
those discussed regarding asset reorganizations involving the U.S. 
transferor.
2. Transfers of Transferred Corporation Stock or Securities by 
Transferee Foreign Corporation in an Asset Reorganization
    Notice 2005-74 provided that if, in a section 361 transaction, a 
transferee foreign corporation transfers stock or securities of a 
transferred corporation to a foreign acquiring corporation in an asset 
reorganization, the exchanges made pursuant to the reorganization will 
be a triggering event, unless certain conditions are met. These 
conditions require that the U.S. transferor, common parent, or new 
common parent corporation, as applicable, enter into a new GRA, with 
certain modifications. In addition, the U.S. transferor also is 
required to provide the new GRA and a notice of the asset 
reorganization with its next annual certification.
    For purposes of this rule, Notice 2005-74 retained the same 
definition of asset reorganization as used for the provision dealing 
with transfers of transferee corporation stock, with certain 
modifications. Specifically, Notice 2005-74 excludes the following 
asset reorganizations: (1) Triangular asset reorganizations described 
in Sec.  1.358-6(b); and (2) asset reorganizations where, after the 
reorganization, the same corporation is both the transferee foreign 
corporation (or successor transferee foreign corporation, as 
applicable) and the transferred corporation (or the successor 
transferred corporation, as applicable).
    The temporary regulations generally incorporate these rules and 
provide that if the above conditions are satisfied the original GRA 
will terminate without further effect. However, even if these 
conditions are satisfied, the temporary regulations provide specific 
gain recognition rules if the transferee foreign corporation transfers 
stock or securities of the transferred corporation in an asset 
reorganization and the U.S. transferor recognizes gain under section 
356(a)(1). See section C of this preamble.
    As noted in this preamble, Notice 2005-74 excluded from the 
definition of the term asset reorganization any triangular asset 
reorganizations of the transferee foreign corporation and transferred 
corporation and certain upstream and downstream reorganizations. In 
response to comments and upon further study by the IRS and Treasury 
Department, the temporary regulations address the treatment of 
triangular asset reorganizations of the transferee foreign corporation 
and certain upstream and downstream reorganizations. See sections G and 
H of this preamble.
3. Transfers of Substantially All of a Transferred Corporation's Assets
    Notice 2005-74 provides that if a transferred corporation transfers 
substantially all its assets in an asset reorganization, the exchanges 
made pursuant to the reorganization will be a triggering event, unless 
certain conditions are met. These conditions require that the U.S. 
transferor, U.S. parent corporation or new U.S. parent corporation, as 
applicable, enters into a new GRA, with certain modifications. The U.S. 
transferor also is required to provide the new GRA and the notice of 
the asset reorganization with its next annual certification. The 
definition of asset reorganization is the same as that used in asset 
reorganizations involving the transferee foreign corporation.
    The temporary regulations generally incorporate these rules and 
provide that if these conditions are met, the original GRA will 
terminate without further effect. However, even if these conditions are 
satisfied, the temporary regulations provide specific gain recognition 
rules (described in section C of this preamble)

[[Page 5178]]

if the transferred corporation transfers substantially all of its 
assets in an asset reorganization and the transferee foreign 
corporation recognizes gain under section 356(a)(1). In addition, 
although the definition of asset reorganization excludes triangular 
asset reorganizations and downstream mergers of the transferee foreign 
corporation, the temporary regulations address the tax treatment of 
these transactions. See sections G and H of this preamble.

C. Special Rules Regarding Nonrecognition Transactions Involving Money 
or Other Property

    The current regulations provide that certain nonrecognition 
transactions are not triggering events if particular requirements are 
satisfied. However, commentators have stated that the current 
regulations provide that certain nonrecognition transactions at the 
transferee foreign corporation or transferred corporation level in 
which any money or other property (as described in sections 351(b) or 
356(a)) is received in exchange are triggering events without 
exception. These commentators assert that it is not appropriate to 
trigger an entire GRA as a result of receiving a relatively minor 
amount of ``boot'' in the nonrecognition transaction. These 
commentators also note that the current regulations do not address 
clearly the treatment of transfers of transferee foreign corporation 
stock by a U.S. transferor in a nonrecognition transaction in which the 
U.S. transferor receives boot.
    The IRS and Treasury Department agree that the receipt of boot 
under section 351(b) or 356(a)(1) in connection with the disposition of 
transferred corporation stock or securities, or substantially all of a 
transferred corporation's assets, should not automatically trigger all 
the gain under a GRA. Accordingly, the temporary regulations provide 
that if certain conditions are met, the entire GRA will not be 
triggered when a transferee foreign corporation disposes of transferred 
corporation stock or securities in a nonrecognition transaction simply 
because the transferee foreign corporation receives boot.
    However, the IRS and Treasury Department believe that the GRA 
should be triggered to the extent that gain would be recognized in such 
a transaction by a transferee foreign corporation or a transferred 
corporation, before taking into account basis increases that may apply 
to the stock or securities disposed of as a result of triggering the 
GRA. The current, as well as the temporary regulations, provide that if 
a U.S. transferor is required to recognize gain because of a triggering 
event, then certain basis increases are allowed as of the date of the 
initial transfer. Therefore, in determining the amount of gain that is 
recognized under the GRA in such a transaction, the temporary 
regulations provide that the U.S. transferor first must recognize that 
amount of gain that the transferee foreign corporation or transferred 
corporation would have recognized under 351(b) or 356(a)(1), before 
taking into account the basis increases that are allowed under the 
regulations as of the date of the initial transfer. Second, if the U.S. 
transferor has not recognized all the gain realized, but not 
recognized, on the initial transfer, then its new GRA will reflect any 
remaining unrecognized gain on the initial transfer. Third, after the 
consequences of the transaction are determined under the temporary 
regulations, then the taxpayer must determine the amount of gain, if 
any, that the transferee foreign corporation or transferred corporation 
must recognize under 351(b) or 356(a)(1). In determining the amount to 
be recognized, the basis of the stock disposed of shall reflect the 
basis increase allowed as a result of the gain recognized under the GRA 
by the U.S. transferor.
    This special rule limiting recognition of gain in otherwise 
nonrecognition transactions involving boot applies only if the U.S. 
transferor complies with the otherwise applicable requirements of the 
exception to recognizing all of the gain subject to the GRA when there 
is a triggering event. This special rule is intended to require the 
U.S. transferor to recognize only an appropriate amount of income, 
without automatically triggering the entire GRA.
    The IRS and Treasury Department also believe that additional 
guidance is needed on the treatment of transfers of transferee foreign 
corporation stock by a U.S. transferor in a nonrecognition exchange in 
which the U.S. transferor receives boot. Therefore, the temporary 
regulations treat the disposition of transferee foreign corporation 
stock in a nonrecognition transaction by the U.S. transferor when the 
U.S. transferor receives money or other property as described in 
section 351(b) or 356(a) as a termination of the GRA in whole or in 
part. Consequently, if a new GRA is filed, then the U.S. transferor 
will recognize gain under the new GRA in the event of a subsequent 
triggering event in the amount of the gain realized, but not 
recognized, in the initial transfer less any gain recognized by the 
U.S. transferor under section 351(b) and 356(a)(1) in connection with 
the nonrecognition transaction. If, however, a new GRA is not filed in 
connection with the nonrecognition transaction, then the original GRA 
is triggered, and the U.S. transferor must recognize the gain that was 
realized, but not recognized, on the initial transfer less any gain 
recognized by the U.S. transferor under section 351(b) or 356(a)(1) in 
connection with the nonrecognition transaction.

D. Effect of Consolidation and Deconsolidation on Gain Recognition 
Agreements

    Commentators noted that the current regulation does not adequately 
address the effect on GRAs of certain transactions involving 
consolidated groups. For example, the commentators noted that it is not 
clear what effect a U.S. transferor becoming a member of a consolidated 
group has on an existing GRA. The current regulations do provide, 
however, that if a U.S. transferor is a member of a consolidated group 
at the time of the initial transfer and ceases to be a member of the 
group during the term of the GRA, the common parent of such group that 
entered into the GRA continues to be liable under the original GRA. 
Section 1.367(a)-8(b)(5)(ii). Several commentators have raised concerns 
that such a result is not appropriate because the actions of an 
acquirer could unilaterally affect the liability of the original 
consolidated group under the GRA.
    The IRS and Treasury Department agree that the effect of these 
transactions needs to be clarified and rationalized. Accordingly, in 
response to these concerns, the temporary regulations provide specific 
rules addressing these transactions. In particular, the IRS and 
Treasury Department believe that the U.S. parent corporation of a 
consolidated group should not continue to be liable under a GRA with 
respect to a U.S. transferor that is no longer a member of such group.
    The temporary regulations provide that when a U.S. transferor 
becomes a member of a consolidated group (including a transaction where 
it joins such a group after being a member of another consolidated 
group) the transaction is a triggering event unless certain conditions 
are met. If these conditions are satisfied, the original GRA is 
terminated without further effect. These conditions require the U.S. 
parent corporation of the consolidated group that the U.S. transferor 
joins (1) To enter into a new GRA for the remaining term of the 
original GRA and (2) to elect to recognize gain in the taxable year of 
any subsequent

[[Page 5179]]

triggering event (as opposed to the year of the initial transfer). A 
notice of the consolidation transaction must also be filed with the 
next annual certification. The IRS and Treasury Department believe that 
these requirements ensure that a GRA remains in effect after a U.S. 
transferor joins a consolidated group. These requirements are also 
consistent with Sec.  1.1502-77(a), which provides that the common 
parent is the sole agent for each member of the consolidated group.
    In addition, the temporary regulations also cover situations in 
which a U.S. transferor ceases to be a member of a consolidated group 
and does not become a member of a new consolidated group. In these 
cases, the transaction is a triggering event, unless certain conditions 
are met. If these conditions are satisfied, the original GRA is 
terminated without further effect. These conditions require the U.S. 
transferor (1) To enter into a new GRA for the remaining term of the 
original gain recognition agreement and (2) to elect that in the event 
of a subsequent triggering event the U.S. transferor will recognize 
gain in the year of the triggering event. The U.S. transferor must also 
provide notice of the deconsolidation with the next annual 
certification.

E. U.S. Transferor Goes Out of Existence in a Transaction Giving Rise 
to a Gain Recognition Agreement

    The current regulation provides that when a U.S. transferor goes 
out of existence in a transaction giving rise to a GRA, gain generally 
qualifies for nonrecognition treatment only if the U.S. transferor is 
owned by a single U.S. parent corporation, the U.S. transferor and its 
parent corporation file a consolidated Federal income tax return for 
the taxable year that includes the transfer, and the parent of the 
consolidated group enters into a GRA. Section 1.367(a)-8(f)(2)(i). The 
current regulation provides that a U.S. transferor that is controlled 
by five or fewer domestic corporations may request a ruling that the 
transaction qualifies for nonrecognition treatment. Section 1.367(a)-
8(f)(2)(i).
    Notice 2005-74, in turn, provides a rule that treats all members of 
the U.S. parent's consolidated group for the taxable year that includes 
the transfer as a single corporation for purposes of Sec.  1.367(a)-
8(f)(2)(i). Thus, a U.S. transferor that is not directly owned by a 
single U.S. parent corporation may still qualify for nonrecognition, 
without requesting a ruling, when the U.S. transferor goes out of 
existence in a transaction giving rise to a GRA, if it is indirectly 
wholly owned by members of a consolidated group.
    The IRS and Treasury Department believe it is necessary to provide 
additional guidance on how GRAs are entered into when a U.S. transferor 
is controlled by multiple corporate shareholders with which the U.S. 
transferor does not join in filing a consolidated return. Moreover, the 
IRS and Treasury Department believe that in this area a single rule 
should apply both in consolidated and nonconsolidated situations. As a 
result, the temporary regulations provide unified rules, replacing both 
the current regulations and Notice 2005-74, in situations in which a 
U.S. transferor goes out of existence in a transaction giving rise to a 
GRA.
    The temporary regulations generally provide that when a U.S. 
transferor goes out of existence in a transaction giving rise to a GRA, 
the gain may qualify for nonrecognition treatment if (1) The 
requirements of section 367(a)(5) and any regulations under that 
paragraph are satisfied such that five or fewer domestic corporations 
control the U.S. transferor and appropriate basis adjustments are made, 
(2) the requirements of Sec.  1.367(a)-3(c)(1) are satisfied if the 
transferred corporation is domestic, (3) all domestic corporate 
shareholders of the U.S. transferor that own at least five percent of 
either the total voting power or the total fair market value of the 
stock of the transferee foreign corporation immediately after the 
transaction enter into GRAs with respect to their pro rata share of the 
gain in the transferred stock or securities that designate such 
domestic corporate shareholders as U.S. transferors for purposes of 
Sec. Sec.  1.367(a)-3(b) and (c) and 1.367(a)-8T, and (4) all domestic 
corporate shareholders that enter into GRAs elect to recognize any gain 
upon a subsequent trigger of the GRA in the year of the triggering 
event.
    The temporary regulations eliminate the current regulation's option 
to request a private letter ruling because guidance is now provided on 
how GRAs are entered into by five or fewer domestic corporations that 
control a U.S. transferor satisfying section 367(a)(5). In addition, 
the temporary regulations clarify that the terms of section 367(a)(5) 
must be satisfied (along with other requirements) to avoid gain 
recognition on the U.S. transferor's section 361 transfer of stock or 
securities to a foreign acquiring corporation. Therefore, the rule in 
Notice 2005-74 treating consolidated group members as a single 
corporation is incorporated by reference to section 367(a)(5), which 
provides that all members of the same affiliated group are treated as 
one corporation. Lastly, because these rules address how gain 
recognition may be avoided under section 367(a)(1) on the initial 
transfer itself, rather than the effect of subsequent transactions on 
existing GRAs, these rules have been removed from Sec.  1.367(a)-8 and 
included instead in Sec.  1.367(a)-3T(e).

F. Transfers of Transferred Corporation's Assets

    Under the current regulations, dispositions of substantially all of 
the assets of the transferred corporation (within the meaning of 
section 368(a)(1)(C)) are generally treated as deemed dispositions of 
the stock or securities of the transferred corporation and therefore 
are triggering events. Section 1.367(a)-8(e)(3). In Revenue Ruling 57-
518 (1957-2 CB 253), see Sec.  601.601(d)(2), the IRS stated that what 
constitutes ``substantially all of the properties'' as the term is used 
in section 368(a)(1)(C) ``will depend upon the facts and circumstances 
in each case rather than upon any particular percentage.'' However, 
Revenue Procedure 77-37 (1977-2 CB 586), see Sec.  601.601(d)(2), 
provides that for ruling purposes, the transfer by a corporation of 70 
percent of its gross assets or 90 percent of its assets net of 
liabilities will generally be deemed to be a transfer of substantially 
all of the assets of a corporation.
    Commentators have noted that defining substantially all by 
reference to section 368(a)(1)(C) may not be appropriate in the context 
of the GRA rules. The IRS and Treasury Department, however, generally 
believe that defining ``substantially all'' for these purposes by 
reference to the definition of the term under section 368(a)(1)(C) is 
appropriate. Nonetheless, the IRS and Treasury Department believe that 
it is important to clarify the scope of the term ``substantially all,'' 
as used in the current regulation and the temporary regulations. One 
commentator suggested that if a transferred corporation disposes of 
less than 70 percent of its gross assets or 90 percent of its assets 
net of liabilities, the transfer will not be treated as a disposition 
of substantially all of the assets of the transferred corporation for 
purposes of Sec.  1.367(a)-8(e)(3), and thus, such a disposition would 
not trigger a GRA. This suggestion is not correct. If, upon considering 
the facts and circumstances, a transferred corporation has disposed of 
substantially all its assets, such a transaction is a triggering event, 
even if the transferred corporation disposes of less than 70

[[Page 5180]]

percent of a corporation's gross assets or 90 percent of its assets net 
of liabilities. The ``substantially all'' safe harbor provided in 
Revenue Procedure 77-37 is intentionally high so that the IRS does not 
need to engage in a factually detailed analysis before issuing a letter 
ruling. As a result, in the context of GRAs, the Revenue Procedure's 
threshold does not mean that a disposition of substantially all the 
assets does not occur upon the disposition of a lesser amount of 
assets. Therefore, the temporary regulations provide that whether a 
transferred corporation has disposed of substantially all of its assets 
is determined under all the facts and circumstances.

G. Transactions That Terminate the GRA

1. Taxable Dispositions of Transferee Foreign Corporation Stock
    Section 1.367(a)-8(h)(1) provides that a GRA will terminate, in 
whole or in part, as a result of certain taxable dispositions of the 
transferee foreign corporation stock by the U.S. transferor. A key 
premise for this termination rule is that the basis in the transferee 
foreign corporation stock received by the U.S. transferor in the 
initial transfer is assumed to reflect the basis in the transferred 
stock or securities.
    The IRS and Treasury Department continue to believe this 
termination rule is appropriate. As a result, the temporary regulations 
generally retain this rule. However, the temporary regulations modify 
the termination rule to ensure that a GRA terminates only when the 
transferee foreign corporation stock disposed of in fact reflects the 
basis of the transferred stock or securities. This termination rule 
only applies to transferee foreign corporation stock that is received 
(or deemed received) in the initial transfer. The IRS and Treasury 
Department understand that in some cases, taxpayers may take the 
position that the basis in the transferee foreign corporation stock 
does not reflect the basis of the transferred stock or securities. For 
example, taxpayers may take the position that the basis in such 
transferee foreign corporation stock received also reflects the basis 
of other property that had a built-in loss when it was transferred to 
the transferee foreign corporation. Thus, the termination rule in the 
temporary regulations will apply only when the basis of the transferee 
foreign corporation stock received (or deemed received) in the initial 
transfer properly reflects the sum of the aggregate basis of the 
transferred stock or securities immediately before the initial 
transfer, plus any increase in the basis of such stock or securities as 
a result of recognizing gain on the transfer. In addition, for purposes 
of this basis determination, basis increases to the transferee foreign 
corporation stock as a result of income inclusions (for example, 
pursuant to section 961) shall not be taken into account.
    In cases where the basis of the relevant transferee foreign 
corporation stock exceeds the basis of the transferred stock or 
securities, however, the temporary regulations allow the U.S. 
transferor to take advantage of this termination rule if it elects to 
reduce its basis in the transferee foreign corporation stock such that 
it does not exceed the basis it had in the transferred stock or 
securities. If the U.S. transferor makes this election, the basis 
reduction will be effective immediately before the taxable disposition 
that terminates the GRA. In addition, if the U.S. transferor makes this 
election, it may increase its basis in other stock of the transferee 
foreign corporation it holds, if any, by a corresponding amount but not 
above the fair market value of such stock.
    Similar rules apply in the case of partial dispositions of 
transferee foreign corporation stock and dispositions of transferee 
foreign corporation stock in nonrecognition transactions in which a 
portion of the realized gain is recognized.
2. Certain Inbound Distributions or Transfers of the Transferred Stock
    Section 1.367(a)-8(h)(3) provides that a distribution of the 
transferred stock in a transaction qualifying under section 355 or 
sections 332 and 337 will terminate the GRA if the U.S. transferor's 
basis in the transferred stock or securities that it receives in the 
section 355 or 332 and 337 transaction does not exceed the basis the 
U.S. transferor had in the transferred stock or securities immediately 
before the initial transfer. In response to comments, however, the 
temporary regulations allow the U.S. transferor to take advantage of 
this termination rule if it elects to reduce the basis of the 
transferred stock or securities if the basis exceeds the basis the U.S. 
transferor had in the transferred stock or securities immediately 
before the initial transfer. For purposes of this basis determination, 
basis increases to the transferred stock as a result of income 
inclusions (for example, pursuant to section 961) shall not be taken 
into account. If the U.S. transferor elects to reduce basis in the 
transferred stock or securities it receives, the U.S. transferor shall 
increase its basis in other transferee foreign corporation stock (if 
any) by a corresponding amount but not above the fair market value of 
such stock.
    Although the temporary regulations generally provide that a GRA 
terminates in certain section 332 liquidations of the transferee 
foreign corporation, the IRS and Treasury Department are studying to 
what extent this rule should apply when the transferee foreign 
corporation has a minority shareholder and therefore recognizes gain 
under section 336 in connection with the section 332 liquidation. As 
noted in the request for comments, although the IRS and Treasury 
Department generally believe it is appropriate to terminate entirely 
the GRA in a section 332 liquidation, in other circumstances it may not 
be appropriate. For example, if after an initial transfer, a wholly-
owned transferee foreign corporation issues a minority interest to a 
foreign shareholder, completely terminating the GRA upon a section 332 
liquidation of the transferee foreign corporation does not account for 
the fact that the U.S. transferor has indirectly disposed of up to 20 
percent of its interest in the transferred stock or securities. 
Therefore, when the temporary regulations are finalized, the IRS and 
Treasury Department may address the effect that section 336 gain has on 
a gain recognition agreement when a transferee foreign corporation with 
a minority shareholder liquidates under section 332.
    The temporary regulations expand the current rule to terminate GRAs 
when certain U.S. persons other than the original U.S. transferor 
receive the stock or securities that was transferred in the initial 
transfer. For example, if the transferred corporation is distributed to 
a domestic corporation or U.S. individual other than the U.S. 
transferor in a section 355 ``split off,'' the GRA would terminate if 
the domestic corporation or U.S. individual receives the transferred 
stock or securities with a basis that is not greater than the basis the 
U.S. transferor had in the transferred stock or securities immediately 
before the initial transfer.
    Finally, and in response to comments requested in Notice 2005-74, 
the temporary regulations also expand the current rule to provide that 
the GRA will terminate in additional transactions where the U.S. 
transferor or a domestic corporation receives the transferred stock or 
securities with a basis that is not greater than the basis the U.S. 
transferor had in the transferred stock or securities immediately 
before the initial transfer. These transactions are upstream asset 
reorganizations where the U.S. transferor acquires the assets of

[[Page 5181]]

the transferee foreign corporation, downstream asset reorganizations 
where the transferred corporation acquires the assets of the transferee 
foreign corporation, and certain other asset reorganizations where a 
domestic corporation acquires the assets of the transferee foreign 
corporation. Consequently, the temporary regulations generally provide 
that the GRA terminates in particular circumstances when the 
transferred stock or securities are held with the correct basis by 
certain U.S. persons, even if the U.S. person is not the original U.S. 
transferor.
    However, the IRS and Treasury Department believe that it is not 
appropriate for the GRA to terminate when the transferred stock or 
securities may then be disposed of, directly or indirectly, by a 
foreign shareholder without being subject to U.S. tax. Therefore, this 
termination rule is limited to section 332 liquidations, section 355 
distributions, and asset reorganizations where the domestic corporation 
that holds the transferred stock or securities after the transaction is 
either the U.S. transferor or a member of the same consolidated group 
of which the U.S. transferor is then a member. The IRS and Treasury 
Department continue to study whether it would be appropriate to expand 
the scope of the rule to transactions where the acquirer is not a 
member of the same consolidated group of which the U.S. transferor is 
then a member and request comments regarding such a rule.

H. Triangular Reorganizations of Transferee Foreign Corporation and 
Transferred Corporation

    Notice 2005-74 provides rules that allow a U.S. transferor to avoid 
gain recognition on certain asset reorganizations of the transferee 
foreign corporation and transferred corporation. However, Notice 2005-
74 restricts the definition of ``asset reorganization'' to exclude 
triangular asset reorganizations of the transferee foreign corporation 
and transferred corporation.
    In response to comments and after further study, the temporary 
regulations address the treatment of certain triangular asset 
reorganizations. Specifically, they provide that if the transferee 
foreign corporation or transferred corporation is acquired in a 
triangular asset reorganization, the exchanges made pursuant to the 
reorganization will not be triggering events if certain requirements 
are satisfied. For purposes of this rule, a triangular asset 
reorganization is limited to a transaction in which the acquiring 
subsidiary is foreign. The additional requirements are as follows. 
First, the U.S. transferor or common parent must enter into a new GRA 
to recognize gain with respect to the initial transfer during the 
remaining term of the original GRA, with certain modifications. In the 
case of a triangular asset reorganization of the transferee foreign 
corporation, the U.S. transferor also must make certain designations 
depending on whether the parent corporation of the foreign acquiring 
subsidiary is foreign or domestic and depending on the type of 
triangular asset reorganization. Finally, the U.S. transferor must 
provide notice of the transaction with its next annual certification.

I. Other Changes

    The current regulations refer to ``stock of the transferred 
corporation'' in some paragraphs but refer to ``stock or securities of 
the transferred corporation'' in other paragraphs. The temporary 
regulations refer to ``stock or securities of the transferred 
corporation'' because either stock or securities, or both, may be 
subject to a GRA when transferred to a transferee foreign corporation 
by a U.S. person. In contrast, the temporary regulations generally 
refer only to stock, and not securities, of the transferee foreign 
corporation. The rules applying to a disposition of the transferee 
foreign corporation are concerned primarily with transactions in which 
the U.S. transferor loses or decreases its control of the transferee 
foreign corporation, which does not occur when a U.S. transferor 
disposes of securities of the transferee foreign corporation.
    The current regulation provides a reasonable cause exception to 
triggering a GRA when the person required to file the GRA fails to 
comply in any material respect with the terms of a GRA, or when the 
person fails to meet the timeliness requirement for submitting a GRA. 
The temporary regulations retain this reasonable cause exception but 
provide additional guidance on how the person should submit a request 
for reasonable cause relief. The temporary regulations also provide 
that the Area Director or Director of Field Operations, as applicable, 
shall notify the person in writing within 120 days of the filing if the 
person will be granted reasonable cause relief or if additional time is 
required to make the determination. The 120-day period runs from the 
date that the IRS notifies the person that its request has been 
received. Once this period begins, the person shall be deemed to have 
established reasonable cause if it is not again notified within 120 
days.

Effective Dates

    With the exception of the special boot rules described in section C 
of this preamble, these temporary regulations apply to GRAs filed with 
respect to transfers of stock or securities occurring on or after March 
7, 2007. The boot rules described in section C of this preamble apply 
to GRAs filed with respect to transfers of stock or securities 
occurring on or after 180 days after February 5, 2007. However, GRAs 
that are filed after March 7, 2007 in connection with transactions 
entered into pursuant to a contract that was binding before February 5, 
2007 are not subject to these regulations, but taxpayers may elect to 
apply the rules of these regulations to such a GRA. For all open years, 
taxpayers may apply rules of these regulations that were not already 
effective under Sec.  1.367(a)-8 to GRAs filed before March 7, 2007. 
Similar effective date rules are provided for those transfers discussed 
in section E of this preamble (regarding a U.S. transferor that goes 
out of existence in a transaction giving rise to a GRA).

Special Analyses

    It has been determined that this Treasury Decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that 5 U.S.C. 553(b) and (d) do not apply to these 
regulations. For applicability of the Regulatory Flexibility Act, 
please refer to the cross-referenced notice of proposed rulemaking 
published elsewhere in this Federal Register. Pursuant to section 
7805(f) of the Internal Revenue Code, this regulation has been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Request for Comments

    The IRS and Treasury Department are considering issuing subsequent 
public guidance to address additional issues under section 367(a). 
Accordingly, comments are requested regarding the application of Sec.  
1.367(a)-8, including whether other transactions should be excepted 
from being treated as triggering events pursuant to rules similar to 
those contained in the temporary regulations. For example, comments are 
requested as to the most appropriate treatment of divisive 
reorganizations qualifying under section 368(a)(1)(D) or (G), involving 
the U.S. transferor corporation, the transferee foreign corporation, 
and the transferred corporation. Comments also are

[[Page 5182]]

requested on how a GRA is affected by a subsequent transaction to which 
section 304 applies involving transferee foreign corporation stock or 
transferred corporation stock. The IRS and Treasury Department believe 
that the rules in the temporary regulations generally deal with many 
transactions to which section 304 applies but request specific comments 
on any issues raised.
    In addition, the IRS and Treasury Department request comments on 
the rule in Sec.  1.367(a)-8T(b)(3)(iii), which imposes interest on the 
additional tax, if any, that is required to be paid as a result of a 
triggering event. Specifically, comments are requested on whether 
interest should be imposed even when no additional tax is ultimately 
due as a result of a triggering event because, for example, a taxpayer 
has sufficient net operating losses to offset the tax that would 
otherwise be due as a result of a triggering event. If an interest 
charge is not required in such a case, a taxpayer may be viewed as 
inappropriately benefiting from deferring the realized but unrecognized 
gain on the initial transfer until a later year. However, there are 
other instances where the current regulations clearly permit such a 
benefit (for example, under Sec.  1.367(a)-8(h)(1)(i) in certain 
taxable dispositions of the stock of the transferee foreign 
corporation).
    As described in section B.1.a of this preamble, comments are 
requested on whether a GRA should not be triggered, if certain 
conditions similar to those provided in Sec.  1.367(a)-3T(e) are met, 
when a U.S. transferor is acquired by a foreign corporation in an asset 
reorganization. Specifically, the IRS and Treasury Department request 
comments on how to reconcile the terms of the GRA that would be filed 
pursuant to Sec.  1.367(a)-3T(e) with the terms of a new GRA that would 
be filed to avoid triggering the original GRA. For example, the 
transferee foreign corporation under the outstanding GRA (and under the 
new GRA filed to avoid triggering the outstanding GRA) would be the 
transferred corporation with respect to the GRA filed pursuant to Sec.  
1.367(a)-3T(e).
    Finally, and as described in section G.2 of this preamble, the IRS 
and Treasury Department are studying to what extent the GRA termination 
rule should apply when the transferee foreign corporation liquidates in 
a transaction described in section 332 but also recognizes gain under 
section 336 because of a minority shareholder. Comments are requested 
on how the termination rule should address such a transaction, taking 
into consideration potentially different results depending on whether 
the minority shareholder is also subject to a GRA or is, for example, 
instead a foreign person who was issued transferee foreign corporation 
stock after the initial transfer.
    For information on how to submit comments or request a public 
heading, see the section ``Comments and Requests for a Public 
Hearing,'' set forth in the notice of proposed rulemaking published 
elsewhere in this issue of the Federal Register.

Drafting Information

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

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding new 
entries to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.367(a)-3T(e) also issued under 367(a) and (b).* * *
    Section 1.367(a)-8T also issued under 367(a) and (b).* * *


0
Par. 2. For each entry in the table in the ``Section'' column, remove 
the language in the ``Remove'' column and add the language in the 
``Add'' column in its place.

------------------------------------------------------------------------
           Section                   Remove                  Add
------------------------------------------------------------------------
1.367(a)-3(d)(3), Example     Sec.   1.367(a)-8(e)  Sec.   1.367(a)-
 1(ii), fourth sentence.                             8T(d)(1).
1.367(a)-3(d)(3), Example     Sec.   1.367(a)-      Sec.   1.367(a)-
 1(ii), fourth sentence.       8(b)(1)(vii).         8T(b)(1)(vii).
1.367(a)-3(d)(3), Example     Sec.   1.367(a)-      Sec.   1.367(a)-
 1(ii), fifth sentence.        8(b)(1)(vii).         8T(b)(1)(vii).
1.367(a)-3(d)(3), Example     Sec.   1.367(a)-      Sec.   1.367(a)-
 1A(ii), first sentence.       8(a)(3).              8T(a)(3).
1.367(a)-3(d)(3), Example     Sec.   1.367(a)-      Sec.   1.367(a)-
 4(i), first sentence.         8(e)(3)(i).           8T(d)(2).
1.367(a)-3(d)(3), Example     Sec.   1.367(a)-      Sec.   1.367(a)-
 4(ii), first sentence.        8(e)(3)(i).           8T(d)(2).
1.367(a)-3(d)(3), Example     Sec.   1.367(a)-      Sec.   1.367(a)-
 4(ii), second sentence.       8(h)(2), because A    8T(g)(2), because A
                               and W filed a         owned an amount of
                               consolidated          stock in W
                               Federal income tax    described in
                               return prior to the   section 1504(a)(2)
                               transaction.          immediately before
                                                     the transaction.
1.367(a)-3(d)(3), Example     Sec.   1.367(a)-      Sec.   1.367(a)-
 6(ii), last sentence.         8(e)(3)(i).           8T(d)(2).
1.367(a)-3(d)(3), Example     Sec.   1.367(a)-      Sec.   1.367(a)-
 7A(ii), last sentence.        8(b)(5).              8T(b)(5).
paragraph (d)(3), Example     and (e)(3)(i).......  and V satisfies the
 7A(ii), last sentence.                              requirements
                                                     contained in Sec.
                                                     1.367(a)-
                                                     8T(e)(1)(iii).
1.367(a)-3(d)(3), Example     Sec.   1.367(a)-      Sec.   1.367(a)-
 8(ii), second to last         8(e)(3)(i).           8T(d)(2).
 sentence.
1.367(a)-3(d)(3), Example     Sec.   1.367(a)-8(e)  Sec.   1.367(a)-
 11(ii), sixth sentence.                             8T(d)(1).
1.367(a)-3(d)(3), Example     Sec.   1.367(a)-      Sec.   1.367(a)-
 11(ii), sixth sentence.       8(b)(1)(vii).         8T(b)(1)(vii).
1.367(a)-3(e)(1)(A), first    (e).................  (g).
 sentence.
1.367(a)-3(e)(1)(F), third    (g).................  (j).
 sentence.
1.367(a)-3(e)(2), first       (e)(1) and (g)......  (g)(1) and (j).
 sentence.
1.367(a)-3(e)(2), second      (e)(2)..............  (g)(2).
 sentence.
1.367(a)-3(e)(2)(G), first    (e)(1)(G)...........  (g)(1)(G).
 sentence.
1.367(a)-3(g)(1), first       (g)(2)..............  (j)(2).
 sentence.
1.367(a)-3(g)(2)(i), first    (g)(2)(iii),          (j)(2)(iii),
 sentence.                     (g)(2)(iv).           (j)(2)(iv).
1.367(a)-3(g)(2)(ii), first   (g)(2)(iii) or (iv).  (j)(2)(iii) or (iv).
 sentence.
1.367(a)-3(g)(2)(ii), fourth  Sec.   1.367(a)-3(f)  Sec.   1.367(a)-
 sentence.                                           3(h).
1.367(a)-3(g)(2)(iii), first  (g)(2)(ii)..........  (j)(2)(ii).
 sentence.

[[Page 5183]]

 
1.367(a)-3(g)(2)(iv), first   (g)(2)(i) and (ii)..  (j)(2)(i) and (ii).
 sentence.
1.367(b)-4(b)(1)(iii),        Sec.   1.367(a)-      Sec.   1.367(a)-
 Example 4(i), last sentence.  8(f)(2).              3T(e).
------------------------------------------------------------------------


0
Par. 3. Section 1.367(a)-3 is amended as follows:
0
1. The second sentence of paragraph (a) is revised.
0
2. The first sentence of paragraph (d)(2)(iii) is revised.
0
3. Paragraph (d)(2)(iv) is revised.
0
4. The title and introductory text of paragraph (d)(2)(v) is revised.
0
5. The last two sentences of paragraph (d)(3), Example 1A(ii) are 
revised.
0
6. The last two sentences of paragraph (d)(3), Example 5A(ii) are 
revised.
0
7. The first and second sentences of paragraph (d)(3), Example 7(ii) 
are revised.
0
8. The third sentence of paragraph (d)(3), Example 7A(ii) is revised.
0
9. The last sentence of paragraph (d)(3), Example 9(ii) is revised.
0
10. The title of paragraph (d)(3), Example 10 is revised.
0
11. The third sentence of paragraph (d)(3), Example 12(ii) is revised.
0
12. Redesignating paragraphs (e), (f), and (g) as paragraphs (g), (h), 
and (j), respectively.
0
13. Adding new paragraphs (e) and (i).
    The revisions and addition read as follows:


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

    (a) * * * In general, a transfer of stock or securities by a U.S. 
person to a foreign corporation that is described in section 351, 354 
(including a reorganization described in section 368(a)(1)(B) and 
including an indirect stock transfer described in paragraph (d) of this 
section), 356 or section 361(a) or (b) is subject to section 367(a)(1) 
and, therefore, is treated as a taxable exchange, unless one of the 
exceptions set forth in paragraph (b) of this section (regarding 
transfers of foreign stock or securities), paragraph (c) of this 
section (regarding transfers of domestic stock or securities), or 
paragraph (e) of this section (regarding transfers of stock or 
securities in a section 361 exchange) applies. * * *
* * * * *
    (d) * * *
    (2)(iii) * * * For purposes of determining the amount of gain that 
a U.S. person is required to include in income as a result of a 
triggering event, see Sec.  1.367(a)-8T(b)(3)(i) and (d).
    (iv) * * * The U.S. transferor's agreement to recognize gain, as 
provided in Sec.  1.367(a)-8, shall include appropriate provisions 
consistent with the principles