Section 1248 Attribution Principles, 41442-41450 [E7-14466]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 145 (Monday, July 30, 2007)]
[Rules and Regulations]
[Pages 41442-41450]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-14466]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9345]
RIN 1545-BA93


Section 1248 Attribution Principles

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under section 1248 of 
the Internal Revenue Code (Code) that provide guidance for determining 
the earnings and profits attributable to stock of controlled foreign 
corporations (or former controlled foreign corporations) that are 
(were) involved in certain nonrecognition transactions. The final 
regulations are necessary in order to supplement and clarify existing 
guidance in the regulations under section 1248. The final regulations 
affect persons subject to the regulations under section 1248, as well 
as persons to which regulations under other Code provisions, such as 
section 367(b), apply to the extent that those regulations incorporate 
the principles of the section

[[Page 41443]]

1248 regulations. In addition, the final regulations provide that with 
respect to the sale by a foreign partnership of the stock of a 
corporation, the partners in such foreign partnership shall be treated 
as selling or exchanging their proportionate share of the stock of such 
corporation for purposes of section 1248.

DATES: Effective Date: These regulations are effective on July 30, 
2007.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.1248-1(g) and 1.1248-8(d).

FOR FURTHER INFORMATION CONTACT: Michael Gilman at (202) 622-3850 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION

Background

    On June 2, 2006, proposed revisions to the regulations under 
section 1248(a) of the Code (REG-135866-02) were published in the 
Federal Register (71 FR 31985-01). On August 14, 2006, two corrections 
to those proposed regulations were published in the Federal Register 
(71 FR 46415 and 71 FR 46416). Two written comments were received. A 
public hearing was not requested and none was held. After consideration 
of the written comments and other comments, the June 2, 2006, proposed 
regulations are adopted as amended by this Treasury decision.

Summary of Comments and Explanation of Revisions

    With respect to attribution of earnings and profits to stock of an 
acquiring corporation held by a non-exchanging shareholder, Sec.  
1.1248-8(b)(4) of the proposed regulations provides a rule by cross-
reference to Sec.  1.1248-2 or Sec.  1.1248-3 (whichever is applicable) 
and Sec.  1.1248-8(b)(6) (as applicable). A commentator asserted that 
the proposed regulations did not adequately explain which earnings and 
profits were attributed to the stock of the non-exchanging shareholder. 
This commentator thought that the rule was better explained in the 
preamble to the proposed regulations, which states that generally the 
earnings and profits attributable to stock of an acquiring corporation 
held by a non-exchanging shareholder immediately prior to a 
restructuring transaction continue to be attributed to such stock, and 
the earnings and profits of the acquired corporation accumulated prior 
to the restructuring transaction attributable to the stock of an 
acquired corporation are not attributed to the non-exchanging 
shareholder's stock in the acquiring corporation. In order to clarify 
the regulations, this language from the preamble to the proposed 
regulations is included in Sec.  1.1248-8(b)(4) of the final 
regulations.
    Under Sec.  1.1248-1(a)(4) of the proposed regulations, the 
partners in a foreign partnership shall be treated as selling or 
exchanging their proportionate share of stock of a corporation sold or 
exchanged by the foreign partnership. The proposed regulations also 
apply section 1248(a) in cases where the stock in a corporation that is 
sold or exchanged is held through tiers of foreign partnerships. This 
treatment is necessary to reflect properly each partner's share of the 
corporation's earnings and profits as a dividend.
    A commentator noted that Sec.  1.1248-1(a)(4) of the proposed 
regulations could be read to apply to the sale by a partner of its 
interest in a partnership holding the stock of a corporation. The 
Treasury Department and the IRS did not intend that interpretation 
because it would be contrary to section 1248(g)(2)(B). An amount that 
is received by a partner in exchange for all or part of its partnership 
interest is treated as ordinary income under section 751(a) and (c) to 
the extent attributable to stock in a foreign corporation as described 
in section 1248. Section 1248(g)(2)(B) provides that section 1248 will 
not apply if any other provision of the Code treats an amount as 
ordinary income. Accordingly, Sec.  1.1248-1(a)(4) in the final 
regulations is revised to clarify that a foreign partnership is treated 
as an aggregate for this purpose only when a foreign partnership sells 
or exchanges stock of a corporation. Finally, a commentator requested 
that the final regulations allow a taxpayer to elect to apply the rule 
in Sec.  1.1248-1(a)(4) to taxable years ending before the effective 
date of the final regulations. The Treasury Department and the IRS 
regard this rule as a clarification of existing law, but recognize that 
some practitioners have expressed the view that prior law was not 
entirely clear. Accordingly, the final regulations allow taxpayers to 
apply the rule in Sec.  1.1248-1(a)(4) to open years provided that the 
taxpayer consistently applies the rule in all such years. A partner 
makes this election by treating its distributive share of gain 
attributable to a sale of shares in a controlled foreign corporation as 
gain recognized on a sale or exchange of stock in a foreign corporation 
within the meaning of section 1248(a).
    In order to clarify the application of Sec.  1.1248-8, the 
definition of controlled foreign corporation at Sec.  1.1248-
8(b)(1)(iii) has been revised to provide that a controlled foreign 
corporation includes corporations described in either section 
953(c)(1)(B) or section 957.
    A commentator requested the addition of an example to Sec.  
1.367(b)-4(d) to clarify that earnings and profits attributable to 
certain lower-tier subsidiaries are not taken into account in 
determining the all earnings and profits amount attributable to 
transactions described in Sec.  1.367(b)-3. In response to this 
comment, such an example is included in Sec.  1.367(b)-4(d) of the 
final regulations.

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 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 this regulation 
was submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small businesses.

Drafting Information

    The principal author of the final regulations is Michael I. Gilman 
of the Office of Associate Chief Counsel (International). However, 
other personnel from the Treasury Department and the IRS participated 
in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

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

    Authority: 26 U.S.C. 7805 * * *
    Sections 1.367(b)-2(c)(1) and (2) also issued under 26 U.S.C. 
367(b)(1) and (2). Section 1.367(b)-2(d)(3) also issued under 26 
U.S.C. 367(b)(1) and (2). * * * Section 1.367(b)-4(d) also issued 
under 26 U.S.C. 367(b)(1) and (2). * * * Sections 1.1248-1(a)(1), 
(4), and (5) also issued under 26 U.S.C. 1248(a) and (c)(1) and (2). 
* * *
    Section 1.1248-8 also issued under 26 U.S.C. 1248(a) and (c)(1) 
and (2). * * *

[[Page 41444]]

Sec.  1.367(b)-2  [Amended]

0
Par. 2. Section 1.367(b)-2 is amended by:
0
1. Removing the language ``, as modified by Sec.  1.367(b)-4(d) (as 
applicable).'' from the last sentence of paragraph (c)(1)(ii) and 
adding the language ``. See Sec.  1.1248-8.'' in its place.
0
2. Removing paragraphs (c)(2) Example 4 and (d)(3)(ii).
0
3. Removing the language ``, as modified by paragraph (d)(3)(ii) of 
this section and Sec.  1.367(b)-4(d) (as applicable).'' from the last 
sentence of paragraph (d)(3)(i)(B)(2) and adding the language ``. See 
Sec.  1.1248-8.'' in its place.
0
4. Redesignating paragraph (d)(3)(iii) as paragraph (d)(3)(ii).

0
Par. 3. Section 1.367(b)-4(d) is revised to read as follows:


Sec.  1.367(b)-4  Acquisition of foreign corporate stock or assets by a 
foreign corporation in certain nonrecognition transactions.

* * * * *
    (d) Rules for subsequent sales or exchanges--(1) Rule. If an 
exchanging shareholder (as defined in Sec.  1.1248-8(b)(1)(iv)) is not 
required to include in income as a deemed dividend the section 1248 
amount under paragraph (b) of this section in a section 367(b) exchange 
described in paragraph (a) of this section (non-inclusion exchange), 
then, for purposes of applying section 367(b) or section 1248 to 
subsequent sales or exchanges, and subject to the limitation of Sec.  
1.367(b)-2(d)(3)(ii) (in the case of a transaction described in Sec.  
1.367(b)-3), the determination of the earnings and profits attributable 
to the stock an exchanging shareholder receives in the non-inclusion 
exchange shall be determined pursuant to the rules of section 1248 and 
the regulations under that section.
    (2) Example. The following example illustrates the rules of this 
section. For purposes of the example, assume that--
    (i) There is no immediate gain recognition pursuant to section 
367(a)(1) and the regulations under that section (either through 
operation of the rules or because the appropriate parties have entered 
into a gain recognition agreement under Sec. Sec.  1.367(a)-3(b) and 
1.367(a)-8);
    (ii) References to earnings and profits are to earnings and profits 
that would be includible in income as a dividend under section 1248 and 
the regulations under that section if stock to which the earnings and 
profits are attributable were sold or exchanged by its shareholder;
    (iii) Each corporation has only a single class of stock outstanding 
and uses the calendar year as its taxable year; and
    (iv) Each transaction is unrelated to all other transactions.
    Example. Acquisition of the stock of a foreign corporation that 
controls a foreign acquiring corporation in a reorganization 
described in section 368(a)(1)(C). (i) Facts. DC1, a domestic 
corporation, has owned all the stock of CFC1, a controlled foreign 
corporation, since its formation on January 1, year 1. CFC1 has 
owned all the stock of CFC2, a controlled foreign corporation, since 
its formation on January 1, year 1. FC, a foreign corporation that 
is not a controlled foreign corporation, has owned all of the stock 
of FC2, a foreign corporation, since its formation on January 1, 
year 2. On December 31, year 3, pursuant to a restructuring 
transaction that was a triangular reorganization described in 
section 368(a)(1)(C), CFC1 transfers all of its assets, including 
the CFC2 stock, to FC2 in exchange for 80% of the voting stock of 
FC. CFC1 transfers the voting stock of FC to DC1 and the CFC1 stock 
is cancelled. Pursuant to section 1223(1), DC1 is considered to have 
held the stock of FC since January 1, year 1. Under section 1223(2), 
FC2 is considered to have held the stock of CFC2 since January 1, 
year 1. On December 31, year 3, CFC1 has $100 of earnings and 
profits. From January 1, year 4, until December 31, year 5, FC (a 
controlled foreign corporation after the restructuring transaction) 
accumulates an additional $50 of earnings and profits. FC2, a 
controlled foreign corporation after the restructuring transaction, 
accumulates $100 of earnings and profits from January 1, year 4, 
until December 31, year 5. On December 31, year 5, FC is liquidated 
into DC1 in a transaction described in section 332.
    (ii) Result. Generally, this paragraph (d) requires that DC1 
include in income the earnings and profits attributable to its stock 
in FC as determined under Sec.  1.1248-8. However, since the 
liquidation of FC into DC1 is a transaction described in Sec.  
1.367(b)-3, the earnings and profits attributable to the stock of FC 
are limited by Sec.  1.367(b)-2(d) (3)(ii) to that portion of the 
earnings and profits accumulated by FC itself before or after the 
restructuring transaction, and do not include the earnings and 
profits of FC's subsidiaries accumulated before or after the 
restructuring transaction. Thus, DC1 will include $40 of earnings 
and profits in income (80% of the $50 of earnings and profits 
accumulated by FC after the restructuring transaction).

0
Par. 4. Section 1.1248-1 is amended by:
0
1. Removing the language ``(or was considered as held by reason of the 
application of section 1223)'' from the first sentence of paragraph 
(a)(1) and adding the language ``(or was considered as held by reason 
of the application of section 1223, taking into account Sec.  1.1248-
8)'' in its place and adding a new third sentence.
0
2. Redesignating paragraph (a)(4) as paragraph (a)(5).
0
3. Adding new paragraphs (a)(4) and (g).
0
4. Adding Example 4 in newly-designated paragraph (a)(5).
    The additions read as follows:


Sec.  1.1248-1  Treatment of gain from certain sales or exchanges of 
stock in certain foreign corporations.

    (a) In general. (1) * * * See Sec.  1.1248-8 for additional rules 
regarding the attribution of earnings and profits to the stock of a 
foreign corporation following certain nonrecognition transactions. * * 
*
* * * * *
    (4) For purposes of paragraph (a)(1) of this section, if a foreign 
partnership sells or exchanges stock of a corporation, the partners in 
such foreign partnership shall be treated as selling or exchanging 
their proportionate share of the stock of such corporation. Stock which 
is considered to have been sold or exchanged by a partner by reason of 
the application of this paragraph (a)(4) shall for purposes of applying 
such sentence be treated as actually sold or exchanged by such partner.
    (5) * * *
    Example 4. (i) Facts. X, a domestic corporation, and Y, a 
foreign corporation that is not a controlled foreign corporation, 
are partners in foreign partnership Z. X has a 60% interest in Z, 
and Y has a 40% interest in Z. All parties are calendar year 
taxpayers. On January 1, year 1, Z forms foreign corporation H, a 
controlled foreign corporation that conducts a business in Country 
C. Z and H's functional currency is the United States dollar. In 
years 1 and 2, H did not earn subpart F income as defined in section 
952(a). On December 31, year 2, Z sells all of the H stock for $600 
when Z's adjusted basis in the stock is $100. Therefore, Z 
recognizes a gain of $500 on the sale, of which $300 is allocable to 
X as a 60% partner. At the time of the sale, H had $300 of earnings 
and profits, $180 of which (that is, 60% of $300) is attributable to 
X's 60% share of the H stock.
    (ii) Result. Pursuant to section 1248(a) and paragraphs (a)(1) 
and (4) of this section, X and Y are treated as selling 60% and 40%, 
respectively, of the H stock. X includes in its gross income as a 
dividend $180 of the gain recognized on the sale. Because Y is a 
foreign corporation that is not a CFC, neither section 1248 nor 
section 964 applies to the sale of Y's 40% share of the H stock.
    (iii) Alternative facts. If, instead, X owned its 60% interest 
in Z through another foreign partnership, the result would be the 
same.
* * * * *
    (g) Effective/applicability date. The third sentence in paragraph 
(a)(1), paragraph (a)(4), and paragraph (a)(5) Example 4 of this 
section apply to income inclusions that occur on or after July 30, 
2007. A taxpayer may elect to apply paragraph (a)(4) of this section to 
income inclusions in open taxable years provided that it consistently 
applies paragraph (a)(4) for income inclusions

[[Page 41445]]

in the first year for which the election is applicable and in all 
subsequent years.


Sec. Sec.  1.1248-2, 1.1248-3, 1.1248-7  [Amended]

0
Par. 5. In Sec. Sec.  1.1248-2, 1.1248-3, and 1.1248-7, for each entry 
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
------------------------------------------------------------------------
Sec.   1.1248-2(a)(1)...........  (or was considered  (or was considered
                                   to be held by       to be held by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-2(a)(2)(ii).......  (or is considered   (or is considered
                                   to have held by     to have held by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-2(a)(3)...........  (or is considered   (or is considered
                                   to have held by     to have held by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-2(c)(4)...........  (or is considered   (or is considered
                                   to have held by     to have held by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-2(e)(1),            (or is considered   (or is considered
 introductory text.                to have held by     to have held by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-2(e)(2)...........  (or is considered   (or is considered
                                   as held by reason   as held by reason
                                   of the              of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-2(e)(3)(i)........  (or is considered   (or is considered
                                   to have held by     to have held by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-3(a)(1)...........  (or was considered  (or was considered
                                   to be held by       to be held by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-3(c)(1)(ii).......  (or was considered  (or was considered
                                   to have held by     to have held by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-3(e)(2)(i)........  (during the period  (during the period
                                   such share, or      such share, or
                                   block, was          block, was
                                   considered to be    considered to be
                                   held by such        held by such
                                   person by reason    person by reason
                                   of the              of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-3(e)(3)...........  (during the period  (during the period
                                   such share, or      such share, or
                                   block, was          block, was
                                   considered to be    considered to be
                                   held by such        held by such
                                   person by reason    person by reason
                                   of the              of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-3(e)(5)...........  (or another person  (or another person
                                   who actually        who actually
                                   owned the stock     owned the stock
                                   during such         during such
                                   taxable year and    taxable year and
                                   whose holding of    whose holding of
                                   the stock is        the stock is
                                   attributed by       attributed by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223 to     section 1223,
                                   the person who      taking into
                                   sold or exchanged   account Sec.
                                   the stock).         1.1248-8, to the
                                                       person who sold
                                                       or exchanged the
                                                       stock).
Sec.   1.1248-3(e)(6), two        by reason of the    by reason of the
 places.                           application of      application of
                                   section 1223 to     section 1223 to
                                   such person.        such person,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8.
Sec.   1.1248-3(f)(2)(ii).......  (or was considered  (or was considered
                                   to have held by     to have held by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-3(f)(5)(ii).......  (during the period  (during the period
                                   such stock was      such stock was
                                   considered to be    considered to be
                                   held by such        held by such
                                   person by reason    person by reason
                                   of the              of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-3(f)(5)(iv).......  (during the period  (during the period
                                   such share (or      such share (or
                                   block) was          block) was
                                   considered to be    considered to be
                                   held by such        held by such
                                   person by reason    person by reason
                                   of the              of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-7(b)(3)(i)........  (or was considered  (or was considered
                                   to have held by     to have held by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-7(b)(3)(iii)......  (or is considered   (or is considered
                                   to have held by     to have held by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
Sec.   1.1248-7(b)(4)             (or was considered  (or was considered
 introductory text.                to have held by     to have held by
                                   reason of the       reason of the
                                   application of      application of
                                   section 1223).      section 1223,
                                                       taking into
                                                       account Sec.
                                                       1.1248-8).
------------------------------------------------------------------------


[[Page 41446]]

0
Par. 6. Section 1.1248-8 is added to read as follows:


Sec.  1.1248-8  Earnings and profits attributable to stock following 
certain non-recognition transactions.

    (a) Scope. This section sets forth rules for the attribution of 
earnings and profits for purposes of section 1248 and Sec.  1.1248-
1(a)(1) and to supplement the rules in Sec. Sec.  1.1248-2 and 1.1248-3 
with respect to--
    (1) Stock that an exchanging shareholder receives, or an acquiring 
corporation receives, in restructuring transactions. Except as 
otherwise provided in this paragraph (a), stock of a foreign 
corporation that an exchanging shareholder receives, or an acquiring 
corporation receives, pursuant to a restructuring transaction (as 
defined in paragraph (b)(1)(vii) of this section) in which the holding 
period of such stock is determined by application of section 1223(1) or 
1223(2), whichever is appropriate. This section shall not apply to an 
exchange otherwise described in this paragraph (a)(1) if, as a result 
of the exchange, the exchanging shareholder is required to include in 
income as a deemed dividend the section 1248 amount pursuant to Sec.  
1.367(b)-4(b). See paragraphs (b)(2) and (3) of this section;
    (2) Nonexchanging shareholders. Stock of a foreign corporation that 
participates in a restructuring transaction that is held by a non-
exchanging shareholder (as defined in paragraph (b)(1)(vi) of this 
section) in the restructuring transaction. See paragraph (b)(4) of this 
section;
    (3) Application of section 381. Stock of a foreign corporation that 
receives assets in a transfer to which section 361(a) applies in 
connection with a reorganization described in section 368(a)(1)(A), 
(C), (D), (F), or (G), or in a distribution to which section 332 
applies, and to which section 381(c)(2)(A) and Sec.  1.381(c)(2)-1(a) 
apply. See paragraph (b)(6) of this section; or
    (4) Section 332 liquidations. Stock of a foreign corporation that 
receives the assets and liabilities of a foreign corporation in a 
complete liquidation described in section 332 if the foreign 
distributee is a foreign corporate shareholder (as defined in paragraph 
(b)(1)(v) of this section) of the liquidating corporation. See 
paragraph (c) of this section.
    (b) Earnings and profits attributable to stock following a 
restructuring transaction--(1) Definitions. The following definitions 
apply for purposes of this section:
    (i) Acquired corporation is a corporation whose stock or assets are 
acquired in exchange for stock in (or stock in and other property of) 
either the acquiring corporation or a foreign corporation that 
controls, within the meaning of section 368(c), the acquiring 
corporation in a restructuring transaction.
    (ii) Acquiring corporation is a corporation that acquires the stock 
or assets of an acquired corporation in a restructuring transaction.
    (iii) Controlled foreign corporation is a corporation described in 
either section 953(c)(1)(B) or section 957.
    (iv) Exchanging shareholder is a person that exchanges--
    (A) In a restructuring transaction qualifying as a nonrecognition 
transaction within the meaning of section 7701(a)(45) and described in 
section 354, 356, or 361(a), stock in an acquired corporation for stock 
in either a foreign acquiring corporation or a foreign corporation that 
is in control, within the meaning of section 368(c), of an acquiring 
corporation (whether domestic or foreign); or
    (B) In a restructuring transaction qualifying as a nonrecognition 
transaction within the meaning of section 7701(a)(45) and described in 
section 351, property (including stock) for stock in a foreign 
acquiring corporation.
    (v) Foreign corporate shareholder is a foreign corporation that--
    (A) Owns stock of another foreign corporation; and
    (B) Has a section 1248 shareholder that is also a section 1248 
shareholder of the other foreign corporation.
    (vi) Non-exchanging shareholder is, at the time the acquiring 
corporation participates in a restructuring transaction, either a 
section 1248 shareholder or a foreign corporate shareholder of the 
acquiring corporation that is not an exchanging shareholder with 
respect to that corporation.
    (vii) Restructuring transaction is a transaction qualifying as a 
nonrecognition transaction within the meaning of section 7701(a)(45) 
and described in section 351, 354, 356, or 361.
    (viii) Section 1248 shareholder is any United States person that 
satisfies the ownership requirements of section 1248(a)(2) and Sec.  
1.1248-1(a)(2) with respect to a foreign corporation.
    (2) Earnings and profits attributable to stock that an exchanging 
shareholder receives in a restructuring transaction. Where, in a 
restructuring transaction, an exchanging shareholder receives stock in 
a foreign corporation, the holding period of which is determined under 
section 1223(1), and the exchanging shareholder is either a section 
1248 shareholder or a foreign corporate shareholder with respect to 
that foreign corporation immediately after the restructuring 
transaction, the earnings and profits attributable to the stock the 
exchanging shareholder receives shall be determined pursuant to the 
rules in paragraphs (b)(2)(i), (ii), and (iii) of this section.
    (i) Exchanging shareholder exchanges property that is not stock of 
a foreign acquired corporation with respect to which the exchanging 
shareholder is a section 1248 shareholder or a foreign corporate 
shareholder. Where the exchanging shareholder exchanges in a 
restructuring transaction property that is not stock of a foreign 
acquired corporation with respect to which the exchanging shareholder 
is a section 1248 shareholder or a foreign corporate shareholder 
immediately before such transaction, the earnings and profits 
attributable to the stock that the exchanging shareholder receives in 
the restructuring transaction shall be determined in accordance with 
Sec.  1.1248-2 or Sec.  1.1248-3, whichever is applicable, without 
regard to any portion of the section 1223(1) holding period in that 
stock that is prior to the restructuring transaction. See paragraph 
(b)(7) Example 1 of this section.
    (ii) Exchanging shareholder exchanges stock of a foreign 
corporation with respect to which the exchanging shareholder is either 
a section 1248 shareholder or a foreign corporate shareholder. Except 
as provided in paragraph (b)(2)(iii) of this section, where the 
exchanging shareholder exchanges in a restructuring transaction stock 
of a foreign acquired corporation with respect to which the exchanging 
shareholder is either a section 1248 shareholder or a foreign corporate 
shareholder immediately before such restructuring transaction, the 
earnings and profits attributable to the stock that the exchanging 
shareholder receives in the restructuring transaction shall be the sum 
of the earnings and profits attributable to--
    (A) The stock of the foreign acquired corporation exchanged 
(determined in accordance with Sec.  1.1248-2 or Sec.  1.1248-3, 
whichever is applicable, and this section, if applicable) that was 
accumulated before the restructuring transaction; and
    (B) The stock of the foreign corporation that the exchanging 
shareholder receives in the restructuring transaction (determined in 
accordance with Sec.  1.1248-2 or Sec.  1.1248-3, whichever is 
applicable, and this section, if applicable), without regard to any 
portion of the section 1223(1) holding period in that stock that is 
prior

[[Page 41447]]

to the restructuring transaction. See paragraph (b)(7) Example 2, 
Example 4, and Example 6 of this section.
    (iii) Exchanging shareholder receives stock in a foreign 
corporation that controls a domestic acquiring corporation. Where the 
acquiring corporation is a domestic corporation and the exchanging 
shareholder receives in a restructuring transaction stock in a foreign 
corporation that controls (within the meaning of section 368(c)) the 
domestic acquiring corporation, the earnings and profits attributable 
to the stock that the exchanging shareholder receives in the 
restructuring transaction shall consist solely of the amount of 
earnings and profits attributable to such stock (determined in 
accordance with Sec.  1.1248-2 or Sec.  1.1248-3, whichever is 
applicable, and this section, if applicable) without regard to any 
portion of the section 1223(1) holding period in that stock that is 
prior to the restructuring transaction. See paragraph (b)(7) Example 5 
of this section.
    (3) Earnings and profits attributable to stock in a foreign 
corporation certain acquiring corporations receive in a restructuring 
transaction. Where an acquiring corporation receives, in a 
restructuring transaction, stock in a foreign acquired corporation, the 
holding period of which is determined under section 1223(2), and the 
acquiring corporation is either a section 1248 shareholder or a foreign 
corporate shareholder with respect to that foreign acquired corporation 
immediately after the restructuring transaction, the earnings and 
profits attributable to the foreign acquired corporation stock that the 
acquiring corporation receives shall be determined pursuant to the 
rules in paragraphs (b)(3)(i) and (ii) of this section.
    (i) Stock of a foreign corporation with respect to which the 
exchanging shareholder is neither a section 1248 shareholder nor a 
foreign corporate shareholder. The earnings and profits attributable to 
the stock of the foreign acquired corporation that the acquiring 
corporation receives in a restructuring transaction where the 
exchanging shareholder is neither a section 1248 shareholder nor a 
foreign corporate shareholder with respect to that foreign acquired 
corporation immediately before the restructuring transaction shall be 
determined in accordance with Sec.  1.1248-2 or Sec.  1.1248-3, 
whichever is applicable, without regard to any portion of the section 
1223(2) holding period in that stock that is prior to the restructuring 
transaction.
    (ii) Stock of a foreign corporation with respect to which the 
exchanging shareholder is either a section 1248 shareholder or a 
foreign corporate shareholder. The earnings and profits attributable to 
the stock of a foreign acquired corporation that the acquiring 
corporation receives in the restructuring transaction where the 
exchanging shareholder is either a section 1248 shareholder or a 
foreign corporate shareholder with respect to that foreign corporation 
immediately before the restructuring transaction shall be determined in 
accordance with Sec.  1.1248-2 or Sec.  1.1248-3, whichever is 
applicable, with regard to the portion of the section 1223(2) holding 
period of the stock that the exchanging shareholder took into account 
for purposes of attributing earnings and profits to that stock 
(determined in accordance with this section). See paragraph (b)(7) 
Example 3, Example 5, and Example 7 of this section.
    (4) Earnings and profits attributable to stock held by a non-
exchanging shareholder in a foreign acquiring corporation. (i) Except 
to the extent paragraph (b)(4)(ii) of this section applies, the 
earnings and profits attributable to stock of a foreign acquiring 
corporation held by a non-exchanging shareholder immediately prior to a 
restructuring transaction continue to be attributed to such stock, and 
the earnings and profits of the acquired corporation accumulated prior 
to the restructuring transaction attributable to the stock of an 
acquired corporation are not attributed to the non-exchanging 
shareholder's stock in the foreign acquiring corporation. See Sec.  
1.1248-2 or Sec.  1.1248-3 (whichever is applicable) and, as 
applicable, paragraph (b)(6) of this section; see also paragraph (b)(7) 
Example 2 and Example 4 of this section.
    (ii) Where a non-exchanging shareholder holds stock in a foreign 
corporation that is also an exchanging shareholder and a foreign 
acquiring corporation in the same restructuring transaction--
    (A) The earnings and profits attributable to such stock shall be 
the sum of the earnings and profits attributable to the stock of such 
foreign corporation immediately before the restructuring transaction 
(including amounts attributed under section 1248(c)(2)) and the 
earnings and profits attributable to the stock of the foreign acquiring 
corporation accumulated after the restructuring transaction (including 
amounts attributed under section 1248(c)(2)); and
    (B) Paragraph (b)(6) of this section applies. See paragraph (b)(7) 
Example 8 of this section.
    (iii) Where the acquiring corporation is a foreign corporate 
shareholder with respect to stock of a foreign acquired corporation, 
paragraph (b)(3) of this section shall not apply for purposes of 
determining the earnings and profits attributable to stock in the 
foreign acquiring corporation owned by a non-exchanging shareholder 
thereof (see section 1248(c)(2)). See paragraph (b)(7) Example 6 of 
this section.
    (5) Reduction in earnings and profits attributable to stock to 
prevent multiple inclusions with respect to the same earnings and 
profits. To the extent consistent with the principles of section 1248, 
adjustments to earnings and profits attributable to stock shall be made 
such that section 1223(1) and (2) and this section are applied in a 
manner that results in earnings and profits being taken into account 
only once. Thus, for example, when a controlled foreign corporation 
sells or exchanges all or part of the stock of another foreign 
corporation to which earnings and profits are attributable pursuant to 
this paragraph (b) or paragraph (c) of this section, proportionate 
reductions shall be made to the earnings and profits attributed to the 
stock of the selling foreign corporate shareholder owned by a section 
1248 shareholder. See paragraph (b)(7) Example 7 of this section.
    (6) Special rule regarding section 381. Solely for purposes of 
determining the earnings and profits (or deficit in earnings and 
profits) attributable to stock pursuant to this paragraph (b), the 
earnings and profits of a corporation shall not include earnings and 
profits that are treated as received or incurred under section 
381(c)(2)(A) and Sec.  1.381(c)(2)-1(a). See paragraph (b)(7) Example 4 
of this section.
    (7) Examples. The application of this paragraph (b) is illustrated 
by the following examples. Unless otherwise indicated, in the following 
examples assume that--
    (i) There is no immediate gain recognition pursuant to section 
367(a)(1) and the regulations under that section (either through 
operation of the rules or because the appropriate parties have entered 
into a gain recognition agreement under Sec. Sec.  1.367(a)-3(b) and 
1.367(a)-8);
    (ii) There is no income inclusion required pursuant to section 
367(b) and the regulations under that section, and all reporting 
requirements in those regulations are complied with;
    (iii) References to earnings and profits are to earnings and 
profits that would be includible in income as a dividend under section 
1248 and the regulations under that section if stock to which the 
earnings and profits are attributable

[[Page 41448]]

were sold or exchanged by its shareholder;
    (iv) Each corporation has only a single class of stock outstanding 
and uses the calendar year as its taxable year; and
    (v) Each transaction is unrelated to all other transactions.
    Example 1. A section 351 exchange of property other than stock 
in a foreign corporation with respect to which the exchanging 
shareholder is either a section 1248 shareholder or a foreign 
corporate shareholder. (i) Facts. DC1, a domestic corporation, has 
owned all the stock of CFC, a foreign corporation, since CFC's 
formation on January 1, year 3. On December 31, year 5, DC2, a 
domestic corporation unrelated to DC1, contributes property it has 
held since January 1, year 1, to CFC in exchange for voting stock of 
CFC in a restructuring transaction that is an exchange under section 
351. The property that DC2 contributes is not stock in a foreign 
corporation with respect to which DC2 was either a section 1248 
shareholder or a foreign corporate shareholder. DC2 receives 80% of 
the voting stock of CFC in the restructuring transaction and its 
holding period in that CFC stock, determined pursuant to section 
1223(1), began on January 1, year 1. CFC has $100 of accumulated 
earnings and profits on December 31, year 5. On December 31, year 7, 
when the accumulated earnings and profits of CFC are $200, DC2, a 
section 1248 shareholder with respect to CFC, sells its CFC stock.
    (ii) Result. Under paragraph (b)(2)(i) of this section, the 
earnings and profits attributable to the CFC stock sold by DC2 are 
$80. This amount consists of none of the $100 of earnings and 
profits accumulated by CFC before the restructuring transaction, and 
80% of the $100 of earnings and profits of CFC accumulated after the 
restructuring transaction.
    Example 2. A section 351 exchange of controlled foreign 
corporation stock by a United States person for stock in a 
controlled foreign corporation in a restructuring transaction. (i) 
Facts. The facts are the same as in Example 1 except as follows. The 
property that DC2 contributes is 100% of the stock in CFC2, a 
foreign corporation. DC2 has owned all the stock of CFC2 since 
CFC2's formation on January 1, year 2, and CFC2 has $200 of earnings 
and profits as of December 31, year 5. CFC2 does not accumulate any 
additional earnings and profits from December 31, year 5, to 
December 31, year 7. On December 31, year 7, when the accumulated 
earnings and profits of CFC are $200, DC2, a section 1248 
shareholder with respect to CFC, sells its CFC stock. Also on that 
date, DC1 sells its CFC stock.
    (ii) Result. (A) DC2 sale. Pursuant to paragraph (b)(2)(ii) of 
this section, the earnings and profits attributable to the CFC stock 
sold by DC2 are $280. This amount consists of all of the $200 of 
earnings and profits of CFC2 accumulated before the restructuring 
transaction (see also section 1248(c)(2)), none of the $100 of 
earnings and profits accumulated by CFC before the restructuring 
transaction, and 80% of the $100 of earnings and profits of CFC 
accumulated after the restructuring transaction.
    (B) DC1 sale. Pursuant to paragraph (b)(4) of this section, the 
earnings and profits attributable to the CFC stock sold by DC1, a 
non-exchanging shareholder in the restructuring transaction, are 
$120. This amount consists of all of the $100 of earnings and 
profits of CFC accumulated before the restructuring transaction, 
none of the $200 of earnings and profits of CFC2 accumulated before 
the restructuring transaction, and 20% of the $100 of earnings and 
profits of CFC accumulated after the restructuring transaction.
    Example 3. A section 351 exchange of controlled foreign 
corporation stock by a United States person for stock in a domestic 
corporation in a restructuring transaction. (i) Facts. DC1, a 
domestic corporation, has owned all of the stock of CFC, a foreign 
corporation, since CFC's formation on January 1, year 1. DC1 has 
also owned all the stock of DC2, a domestic corporation, since DC2's 
formation on January 1, year 1. On December 31, year 2, DC1 
contributes the stock of CFC to DC2 in exchange for stock in DC2 in 
a restructuring transaction that is an exchange described in section 
351. On December 31, year 2, CFC has $100 of accumulated earnings 
and profits. DC2 has a basis in the CFC stock determined under 
section 362, and is considered to have held the CFC stock since 
January 1, year 1, pursuant to section 1223(2). On December 31, year 
4, when the accumulated earnings and profits of CFC are still $100, 
DC2 sells its CFC stock.
    (ii) Result. Under paragraph (b)(3)(ii) of this section, $100 of 
accumulated earnings and profits of CFC is attributable to the stock 
of CFC sold by DC2, even though DC2 did not hold the stock of CFC 
during the time CFC accumulated the earnings and profits.
    Example 4. Acquisition of a controlled foreign corporation by a 
controlled foreign corporation in a reorganization described in 
section 368(a)(1)(C) (or section 368(a)(1)(B)). (i) Facts. DC1, a 
domestic corporation, has owned all the stock of CFC1, a foreign 
corporation, since its formation on January 1, year 1. DC2, a 
domestic corporation unrelated to DC1, has owned all of the stock of 
CFC2, a foreign corporation, since its formation on January 1, year 
2. On December 31, year 3, pursuant to a restructuring transaction 
that is a reorganization described in section 368(a)(1)(C), CFC1 
transfers all of its assets to CFC2 in exchange for 25% of the 
voting stock of CFC2. CFC1 distributes the CFC2 stock to DC1 and the 
CFC1 stock is cancelled. DC1's holding period in the CFC2 stock, 
determined under section 1223(1), begins on January 1, year 1. On 
December 31, year 3, CFC1 has $100 of accumulated earnings and 
profits and CFC2 has $200 of accumulated earnings and profits. CFC2 
succeeds to the $100 of CFC1 accumulated earnings and profits in the 
reorganization under section 381. From January 1, year 4 to December 
31, year 5, CFC2 incurred a deficit in earnings and profits in the 
amount of ($200). On December 31, year 5, both DC1 and DC2 sell 
their stock in CFC2.
    (ii) Result. (A) DC1. Pursuant to paragraph (b)(2)(ii) of this 
section, $50 of earnings and profits is attributable to the CFC2 
stock sold by DC1. This amount consists of $100 of CFC1's earnings 
and profits accumulated before the restructuring transaction, 
reduced by 25% of CFC2's ($200) post-restructuring transaction 
deficit in earnings and profits. None of the $200 of CFC2's earnings 
and profits accumulated by CFC2 prior to the reorganization is 
attributed to the CFC2 stock sold by DC1. Also, none of the earnings 
and profits CFC2 succeeded to under section 381 is attributed to the 
CFC2 stock sold by DC1, pursuant to paragraph (b)(6) of this 
section.
    (B) DC2. Pursuant to paragraph (b)(4) of this section, there is 
$50 of accumulated earnings and profits attributable to the CFC2 
stock sold by DC2. This amount consists of all of the $200 of CFC2's 
earnings and profits accumulated by CFC2 prior to the 
reorganization, reduced by 75% of CFC2's deficit in earnings and 
profits in the amount of ($200) incurred after the restructuring 
transaction. None of the $100 of CFC1 accumulated earnings and 
profits succeeded to under section 381 is attributable to the CFC2 
stock sold by DC2, pursuant to paragraph (b)(6) of this section.
    (C) Section 368(a)(1)(B) reorganization. If, instead of DC1 
acquiring its 25% interest in CFC2 pursuant to a reorganization 
described in section 368(a)(1)(C), DC1 had transferred the stock of 
CFC1 to CFC2 in exchange for 25% of the voting stock of CFC2 in a 
reorganization described in section 368(a)(1)(B), the results would 
be the same as described in paragraphs (ii) (A) and (B) of this 
Example 4.
    Example 5. Acquisition of the stock of a foreign corporation 
that controls a domestic acquiring corporation in a triangular 
reorganization described in section 368(a)(1)(C). (i) Facts. DC1, a 
domestic corporation, has owned all the stock of CFC1, a foreign 
corporation, since its formation on January 1, year 1. CFC1 has 
owned all the stock of CFC2, a foreign corporation, since its 
formation on January 1, year 1. FC, a foreign corporation that is 
not a controlled foreign corporation, has owned all of the stock of 
DC2, a domestic corporation, since its formation on January 1, year 
2. On December 31, year 3, pursuant to a restructuring transaction 
that was a triangular reorganization described in section 
368(a)(1)(C), CFC1 transfers all of its assets, including the CFC2 
stock, to DC2 in exchange for 60% of the voting stock of FC. CFC1 
transfers the voting stock of FC to DC1 and the CFC1 stock is 
cancelled. Pursuant to section 1223(1), DC1 is considered to have 
held the stock of FC since January 1, year 1. Under section 1223(2), 
DC2 is considered to have held the stock of CFC2 since January 1, 
year 1. On December 31, year 3, CFC1 has $100 of earnings and 
profits, CFC2 has $300 of earnings and profits, and FC has $200 of 
earnings and profits. DC1 includes the $100 all earnings and profits 
amount attributable to its CFC1 stock in income as a deemed dividend 
under Sec.  1.367(b)-3 upon the exchange of CFC1 stock for FC stock. 
Pursuant to the lower-tier earnings exclusion of Sec.  1.367(b)-
2(d)(3)(ii), that amount does not include the $300 of earnings and 
profits of CFC2. From January 1, year 4, until December 31, year 5, 
FC (now a controlled

[[Page 41449]]

foreign corporation) accumulates an additional $50 of earnings and 
profits. From January 1, year 4 until December 31, year 5, CFC2 
accumulates an additional $100 of earnings and profits. On December 
31, year 5, DC1 sells its stock in FC and DC2 sells its stock in 
CFC2.
    (ii) Result. (A) DC1. Pursuant to paragraph (b)(2)(iii) of this 
section, there is $30 of earnings and profits attributable to the 
stock of FC sold by DC1. This amount consists of 60% of the $50 of 
earnings and profits accumulated by FC after the restructuring 
transaction, and none of the earnings and profits accumulated by 
CFC1, CFC2, or FC before the restructuring transaction.
    (B) DC2. Pursuant to paragraph (b)(3)(ii) of this section, there 
is $400 of earnings and profits attributable to the stock of CFC2 
sold by DC2. This amount consists of all of the earnings and profits 
accumulated by CFC2 during DC2's section 1223(2) holding period.
    Example 6. Acquisition of the stock of a foreign corporation 
that controls a foreign acquiring corporation in a reorganization 
described in section 368(a)(1)(C). (i) Facts. DC1, a domestic 
corporation, has owned all the stock of CFC1, a foreign corporation, 
since its formation on January 1, year 1. CFC1 has owned all the 
stock of CFC2, a foreign corporation, since its formation on January 
1, year 1. FC, a foreign corporation that is not a controlled 
foreign corporation, has owned all of the stock of FC2, a foreign 
corporation, since its formation on January 1, year 2. On December 
31, year 3, pursuant to a restructuring transaction that was a 
triangular reorganization described in section 368(a)(1)(C), CFC1 
transfers all of its assets, including the CFC2 stock, to FC2 in 
exchange for 60% of the voting stock of FC. CFC1 transfers the 
voting stock of FC to DC1 and the CFC1 stock is cancelled. Pursuant 
to section 1223(1), DC1 is considered to have held the stock of FC 
since January 1, year 1. Under section 1223(2), FC2 is considered to 
have held the stock of CFC2 since January 1, year 1. On December 31, 
year 3, CFC1 has $100 of earnings and profits, CFC2 has $300 of 
earnings and profits, FC has $200 of earnings and profits, and FC2 
has no earnings and profits. From January 1, year 4, until December 
31, year 5, FC (now a controlled foreign corporation) accumulates an 
additional $50 of earnings and profits. From January 1, year 4 until 
December 31, year 5, CFC2 accumulates an additional $100 of earnings 
and profits. FC2, a controlled foreign corporation after the 
restructuring transaction, accumulates $100 of earnings and profits 
from January 1, year 4, until December 31, year 5. On December 31, 
year 5, DC1 sells its stock in FC.
    (ii) Result. Pursuant to paragraphs (b)(2)(ii) and (b)(4)(iii) 
of this section, there is $550 of earnings and profits attributable 
to the stock of FC sold by DC1. This amount consists of all $400 of 
the CFC1 and CFC2 earnings and profits accumulated before the 
restructuring transaction (see also section 1248(c)(2)), and 60% of 
the $250 of the earnings and profits accumulated by FC, FC2, and 
CFC2 after the restructuring transaction.
    Example 7. Acquisition of controlled foreign corporation stock 
by a controlled foreign corporation in a reorganization described in 
section 368(a)(1)(B), followed by a sale of the acquired stock by 
the acquiring controlled foreign corporation. (i) Facts. DC1, a 
domestic corporation, has owned all of the outstanding stock of 
CFC1, a foreign corporation, since its formation on January 1, year 
1. CFC1 has owned all of the outstanding stock of CFC3, a foreign 
corporation, since its formation on January 1, year 1. DC2, a 
domestic corporation unrelated to DC1, has owned all of the 
outstanding stock of CFC2, a foreign corporation, since its 
formation on January 1, year 2. On December 31, year 3, pursuant to 
a restructuring transaction that is a reorganization described in 
section 368(a)(1)(B), CFC1 transfers all of the stock of CFC3 to 
CFC2 in exchange for 40% of CFC2's stock. On December 31, year 3, 
CFC2 and CFC3 have, respectively, $40 and $20 of earnings and 
profits. On December 31, year 5, when the accumulated earnings and 
profits of CFC3 are $50 ($20 of earnings and profits as of December 
31, year 3, plus $30 of earnings and profits generated from January 
1, year 4, through December 31, year 5), CFC2 sells the stock of 
CFC3 in a transaction to which section 964(e) applies.
    (ii) Result. (A) CFC2. Pursuant to paragraph (b)(3)(ii) of this 
section, there is $50 of earnings and profits attributable to the 
CFC3 stock sold by CFC2. This amount consists of the accumulated 
earnings and profits attributable to CFC2's entire section 1223(2) 
holding period in the CFC3 stock.
    (B) CFC1, DC2, and DC1. Under paragraph (b)(5) of this section, 
the earnings and profits attributable to the CFC2 stock held by CFC1 
and DC2, and the earnings and profits attributable to the CFC1 stock 
held by DC1, will be reduced (regardless of whether CFC2 recognizes 
gain on its sale of CFC3 stock).
    (1) CFC1. The earnings and profits attributable to the CFC2 
stock held by CFC1 will be reduced by $32, or the amount of earnings 
and profits as of December 31, year 5, that would have been 
attributable to the CFC2 stock held by CFC1 pursuant to paragraph 
(b)(2)(ii) of this section. This amount consists of all of the $20 
of earnings and profits accumulated by CFC3 before the restructuring 
transaction and 40% of the $30 of earnings and profits accumulated 
by CFC3 after the restructuring transaction (.40 x $30 = $12).
    (2) DC1. The earnings and profits attributable to the CFC1 stock 
held by DC1 will also be reduced by $32, or the amount of earnings 
and profits that would have been attributable to the CFC1 stock held 
by DC1 as of December 31, year 5.
    (3) DC2. The earnings and profits attributable to the CFC2 stock 
held by DC2 will be reduced by $18, or the amount of earnings and 
profits that would have been attributable to the CFC2 stock held by 
DC2 as of December 31, year 5, under paragraph (b)(4) of this 
section. This amount consists of 60% of the $30 (.60 x $30 = $18) of 
earnings and profits accumulated by CFC3 after the restructuring 
transaction.
    (C) Partial sale by CFC2. If, instead of selling 100% of the 
CFC3 stock, on December 31, year 5, CFC2 sells only 50% of its CFC3 
stock, paragraph (b)(5) of this section requires CFC1 to reduce the 
earnings and profits of CFC3 attributable to its CFC2 stock to $16. 
Similarly, DC1 would be required to reduce the earnings and profits 
of CFC3 attributable to its CFC1 stock by $16. Paragraph (b)(5) of 
this section also requires DC2 to reduce the CFC3 earnings and 
profits attributable to its CFC2 stock by $9. These reductions occur 
without regard to whether CFC2 recognizes gain on its sale of CFC3 
stock.
    Example 8. Acquisition of the assets of a lower-tier controlled 
foreign corporation by an upper-tier controlled foreign corporation 
in a restructuring transaction described in section 368(a)(1)(C). 
(i) Facts. DC, a domestic corporation, has owned all the stock of 
CFC1, a controlled foreign corporation, since its formation on 
January 1, year 1. CFC1 is a holding company that has owned 79% of 
the stock of CFC2, a controlled foreign corporation, since its 
formation on January 1, year 1. The other 21% of CFC2 stock is owned 
by X, an unrelated party. On December 31, year 1, CFC2 has $200 of 
earnings and profits. On December 31, year 1, CFC1 has no 
accumulated earnings and profits. On December 31, year 1, pursuant 
to a restructuring transaction described in section 368(a)(1)(C), 
CFC2 transfers all its properties to CFC1. In exchange, CFC1 assumes 
the liabilities of CFC2 and transfers to CFC2 voting stock 
representing 21% of the stock of CFC1. CFC2 distributes the voting 
stock to X and liquidates. The liabilities assumed do not exceed 20% 
of the value of the properties of CFC2. From January 1, year 2, to 
December 31, year 3, CFC1 accumulates $100 of earnings and profits. 
On December 31, year 3, DC sells its CFC1 stock.
    (ii) Result. Pursuant to paragraph (b)(4)(ii) of this section, 
there is $237 of earnings and profits attributable to DC's CFC1 
stock. This amount consists of 79% of CFC2's $200 of earnings and 
profits accumulated before the restructuring transaction (see 
section 1248(c)(2)), and 79% of CFC1's $100 of earnings and profits 
accumulated after the restructuring transaction. Pursuant to 
paragraph (b)(6) of this section, none of CFC2's $200 of earnings 
and profits to which CFC1 succeeded under section 381 would be 
attributable to DC's CFC1 stock.

    (c) Earnings and profits attributable to stock of a foreign 
distributee corporation that is a foreign corporate shareholder with 
respect to a foreign liquidating corporation--(1) General rule. If a 
foreign corporation (liquidating corporation) makes a distribution of 
property in complete liquidation under section 332 to a foreign 
corporation (distributee), and immediately before the liquidation the 
distributee was a foreign corporate shareholder with respect to the 
liquidating foreign corporation, the amount of earnings and profits 
attributable to the distributee stock upon its subsequent sale or 
exchange will be determined under this paragraph (c)(1). The earnings 
and profits attributable will be the sum of the earnings and profits 
attributable to the stock of the distributee immediately before the 
liquidation (including

[[Page 41450]]

amounts attributed under section 1248(c)(2)) and the earnings and 
profits attributable to the stock of the distributee accumulated after 
the liquidation (including amounts attributed under section 
1248(c)(2)).
    (2) Special rule regarding section 381. Solely for purposes of 
determining the earnings and profits (or deficit in earnings and 
profits) attributable to stock under this paragraph (c), the attributed 
earnings and profits of a corporation shall not include earnings and 
profits that are treated as received or incurred pursuant to section 
381(c)(2)(A) and Sec.  1.381(c)(2)-1(a).

    (3) Example. (i) Facts. DC, a domestic corporation, has owned 
all of the stock of CFC1, a foreign corporation, since its formation 
on January 1, year 1. CFC1 is an operating company that has owned 
all of the stock of CFC2, a foreign corporation, since its formation 
on January 1, year 1. On December 31, year 2, CFC1 has $200 of 
accumulated earnings and profits and CFC2 has a ($200) deficit in 
earnings and profits. On December 31, year 2, CFC2 distributes all 
of its assets and liabilities to CFC1 in a liquidation to which 
section 332 applies. From January 1, year 3, until December 31, year 
4, CFC1 accumulates no additional earnings and profits. On December 
31, year 4, DC sells its stock in CFC1.
    (ii) Result