Gain Recognition Agreements With Respect to Certain Transfers of Stock or Securities by United States Persons to Foreign Corporations, 6952-6976 [E9-1512]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 74, Number 27 (Wednesday, February 11, 2009)]
[Rules and Regulations]
[Pages 6952-6976]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-1512]



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Part II





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1 and 602



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Gain Recognition Agreements With Respect to Certain Transfers of Stock 
or Securities by United States Persons to Foreign Corporations; Final 
Rule

Federal Register / Vol. 74, No. 27 / Wednesday, February 11, 2009 / 
Rules and Regulations

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9446]
RIN 1545-BG09


Gain Recognition Agreements With Respect to Certain Transfers of 
Stock or Securities by United States Persons to Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations under section 367(a) 
of the Internal Revenue Code (Code) concerning gain recognition 
agreements filed by United States persons with respect to transfers of 
stock or securities to foreign corporations. The regulations finalize 
temporary regulations published on February 5, 2007 (TD 9311). The 
regulations primarily affect United States persons that transfer (or 
have transferred) stock or securities to foreign corporations and that 
will enter (or have entered) into a gain recognition agreement with 
respect to such a transfer.

DATES: Effective Date: These regulations are effective February 11, 
2009.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.367(a)-3(g) and 1.367(a)-8(r).

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-147144-06), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
147144-06), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at www.regulations.gov (IRS REG-147144-06).

FOR FURTHER INFORMATION CONTACT: S. James Hawes, (202) 622-3860 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information in these regulations have been 
reviewed and 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.
    The collections of information in these final regulations are in 
Sec.  1.367(a)-8(d), (g), (k), and (o). Responses to the collections of 
information are required to avoid recognizing gain under an existing 
gain recognition agreement and to facilitate electronic filing. The 
regulations also require the amount of any gain recognized under a gain 
recognition agreement and applicable interest due with respect to any 
additional tax due with respect to such gain to be reflected on a 
schedule included with the electronically-filed return of the taxpayer.
    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.
    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

    On February 5, 2007, the IRS and Treasury Department issued 
temporary and proposed regulations under section 367(a) concerning the 
terms and conditions for a gain recognition agreement (GRA) filed by a 
United States person (the U.S. transferor) in connection with a 
transfer of stock or securities to a foreign corporation (transferee 
foreign corporation) and the impact of certain transactions on an 
existing GRA (the 2007 regulations). 72 FR 5184 (T.D. 9311) (2007-10 
IRB 635). No public hearing on the 2007 regulations was requested or 
held; however, numerous comments were received. After considering the 
comments received, the IRS and Treasury Department adopt the 2007 
regulations, with modifications, as final regulations under section 
367(a). This Treasury decision also removes the temporary regulations 
and revises cross-references where appropriate to reflect the removal 
and replacement of the temporary regulations with final regulations.

Summary of Comments and Explanation of Revisions

A. Subsequent Nonrecognition Transfers--In General

    The 2007 regulations provide specific exceptions for certain 
dispositions or other events that would otherwise require gain to be 
recognized under an existing GRA (triggering event). The exceptions 
generally apply to dispositions that qualify for nonrecognition 
treatment under the Code and require the U.S. transferor to enter into 
a new GRA with respect to the initial transfer for the remaining term 
of the existing GRA.
    Several commentators asserted that the exceptions provided by the 
2007 regulations did not literally apply to various dispositions 
qualifying for nonrecognition treatment because the entity making the 
transfer is not described in the relevant exception, thus 
inappropriately resulting in gain recognition under a GRA. For example, 
assume that in year 1 a domestic corporation, USP, transfers stock of a 
foreign corporation, FS1, to another foreign corporation, FS2, pursuant 
to an exchange to which section 351 applies (the initial transfer). USP 
files a GRA with respect to the initial transfer. In year 2, FS2 
transfers the FS1 stock received from USP in year 1 to another foreign 
corporation, FS3, solely in exchange for stock of FS3 under section 
351. The year 2 transfer of the FS1 stock by FS2 would constitute a 
triggering event for purposes of the GRA filed by USP with respect to 
the initial transfer, but the transfer qualifies for an exception under 
the 2007 regulations. USP complies with the requirements of the 2007 
regulations with respect to the GRA filed for the initial transfer. In 
year 3, FS3 contributes the FS1 stock received from FS2 in year 2 to 
another foreign corporation, FS4, solely in exchange for stock of FS4 
under section 351. The year 3 transfer of the FS1 stock by FS3 is a 
triggering event with respect to the GRA entered into by USP in 
connection with the initial transfer.
    The 2007 regulations provide an exception for certain subsequent 
transfers of the transferred stock in a transaction to which section 
351 applies (section 351 exchange), but the exception does not clearly 
apply when the transferor in the section 351 exchange is not the 
transferee foreign corporation. Commentators expressed similar concerns 
with respect to other nonrecognition transactions, including 
liquidations described in section 332 (section 332 liquidation), 
transactions to which section 355 applies (section 355 transactions), 
and transactions involving partnerships. The commentators suggested 
various alternatives for avoiding the inappropriate triggering of a GRA 
in such cases.
    The IRS and Treasury Department agree that certain nonrecognition 
transactions that may not qualify for an exception under the 2007 
regulations should not trigger an existing GRA. Because specific 
exceptions provide certainty to the relevant transactions,

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the final regulations retain the exceptions of the 2007 regulations 
with modifications so that the exceptions apply to transactions 
involving one or more entities not clearly described in the 2007 
regulations. For example, under the final regulations the exception for 
a section 351 exchange of the transferred stock applies to any transfer 
of the transferred stock regardless of the identity of the transferor. 
The final regulations include additional specific exceptions and a 
general exception for certain transactions that cannot be adequately 
covered by a specific exception because of the myriad factual 
permutations.
    The general exception provided by the final regulations applies 
generally to any disposition or other event that would otherwise 
constitute a triggering event if the disposition is a nonrecognition 
transaction (as defined in section 7701(a)(45), but including an 
exchange described in section 351(b) or 356 even if all gain realized 
is recognized); a U.S. transferor retains a direct or indirect interest 
in the transferred stock or securities (or the assets of the 
transferred corporation, such as where the transferred corporation has 
liquidated in the interim); and the U.S. transferor that retains such 
direct or indirect interest enters into a new GRA with respect to the 
initial transfer. However, if, as a result of the disposition or other 
event, a foreign corporation acquires all or part of the transferred 
stock or securities (or substantially all the assets of the transferred 
corporation) the general exception shall apply only if the U.S. 
transferor owns at least five percent (applying the attribution rules 
of section 318, as modified by section 958(b)) of the total voting 
power and the total value of the outstanding stock of such foreign 
corporation immediately after the disposition or other event. This five 
percent ownership condition is intended to limit the application of the 
general exception in transactions where the U.S. transferor retains a 
minimal interest in the transferred stock or securities (or 
substantially all the assets of the transferred corporation). The final 
regulations include examples to illustrate the application of the 
general exception.
    A disposition or other event to which the general exception applies 
shall be subject to the provisions of the final regulations to the same 
extent and in the same manner as a disposition or event to which a 
specific exception applies. For example, even though a specific 
exception is generally available for a section 351 exchange of the 
transferred stock by the transferee foreign corporation, the U.S. 
transferor must still recognize gain under the existing GRA to the 
extent the transferee foreign corporation would otherwise recognize 
gain in the exchange under section 351(b). The U.S. transferor must 
therefore similarly recognize gain in connection with a disposition or 
other event to which the general exception applies to the extent that 
the transferee foreign corporation would otherwise recognize gain in 
the exchange under section 351(b).
    A new GRA filed under the general exception is generally subject to 
the same terms and conditions as the existing GRA, but must also 
describe the subsequent dispositions that would constitute triggering 
events (based on the principles of the final regulations, but not 
including any triggering event otherwise described in the final 
regulations) and include a statement that the U.S. transferor agrees to 
treat such dispositions as triggering events. In addition, the final 
regulations provide that, with respect to a new GRA filed under the 
general exception, a triggering event shall also include any other 
disposition or event that is inconsistent with the principles of the 
triggering event exceptions including, for example, an indirect 
disposition of the transferred stock or securities or of substantially 
all of the assets of the transferred corporation. This additional 
condition is similar to the condition applicable to a GRA filed in 
connection with an indirect stock transfer described in Sec.  1.367(a)-
3(d).
    One commentator requested that an exception be provided for a 
securities lending transaction to which section 1058 applies. The final 
regulations do not provide such an exception.

B. Dispositions Pursuant to an Intercompany Transaction

    Under the 2007 regulations, a complete or partial disposition by 
the U.S. transferor of the stock of the transferee foreign corporation 
received in the initial transfer generally requires the U.S. transferor 
to recognize gain under the GRA. Exceptions to this general rule are 
provided for certain nonrecognition transfers to which sections 351, 
354, or 721 applies. As described further in part D. of this Preamble, 
the 2007 regulations provide further that a GRA shall instead terminate 
(in whole or in part) if the U.S. transferor disposes of all or part of 
the stock of the transferee foreign corporation received in the initial 
transfer pursuant to a transaction in which all gain realized is 
recognized currently and included in taxable income as a result of the 
disposition, but only if the basis of the stock disposed of (excluding 
certain adjustments to such basis) is not greater than the basis in the 
transferred stock or securities at the time of the initial transfer.
    If the U.S. transferor disposes of stock of the transferee foreign 
corporation pursuant to an intercompany transaction (within the meaning 
of Sec.  1.1502-13) that is not described in section 351 or 354, the 
conditions for terminating the existing GRA (in whole or in part) are 
not satisfied because, under the provisions of Sec.  1.1502-13, the 
U.S. transferor generally defers taking into account any gain realized 
and recognized on the disposition. Thus, such a disposition would be a 
triggering event.
    Several commentators asserted that it is inappropriate to require 
the U.S. transferor to recognize gain under the GRA in such cases 
because the stock of the transferee foreign corporation remains within 
the consolidated group of which the U.S. transferor is a member. It is 
also inappropriate to terminate the GRA because the intercompany item 
has not been taken into account. Instead, the commentators recommended 
that the GRA remain in effect for its remaining term. The IRS and 
Treasury Department agree with this recommendation, and the final 
regulations provide a specific exception for dispositions of stock of 
the transferee foreign corporation pursuant to an intercompany 
transaction (intercompany transaction exception) to which a specific 
triggering event exception does not apply. If the intercompany 
transaction exception applies, the U.S. transferor remains subject to 
the existing GRA. But see the discussion below when the intercompany 
transaction is a nonrecognition transaction in which an amount of gain 
is recognized.
    The intercompany transaction exception is available if two 
conditions are satisfied. The first condition is that the basis of the 
stock of the transferee foreign corporation disposed of in the 
intercompany transaction is not greater than the sum of the aggregate 
basis in the transferred stock or securities at the time of the initial 
transfer, any increase to the basis of the transferred stock or 
securities by reason of gain recognized by the U.S. transferor in 
connection with the initial transfer, and any increase to the basis of 
the stock of the transferee foreign corporation by reason of income 
inclusions by the U.S. transferor (for example, pursuant to section 
961). To satisfy this basis condition, the U.S. transferor can elect to 
reduce the basis of the stock of the transferee foreign corporation, 
effective

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immediately before the intercompany transaction.
    The second condition is that the annual certification filed with 
respect to the existing GRA for the taxable year during which the 
intercompany transaction occurs includes a complete description of the 
intercompany transaction and a schedule illustrating how the basis 
condition is satisfied.
    Because the final regulations provide specific exceptions for 
certain nonrecognition transfers of stock of the transferee foreign 
corporation (for example, pursuant to a section 351 exchange), the new 
intercompany transaction exception applies only to the extent the 
intercompany transaction gives rise to an intercompany item (as defined 
in Sec.  1.1502-13(b)(2)). If the intercompany item is a gain, the 
existing GRA must be divided into two separate agreements--one that 
remains with the U.S. transferor (of an amount equal to the 
intercompany item) and another that moves to the acquiring member (of 
an amount equal to the remaining amount of the existing GRA amount). 
For example, assume the amount of the existing GRA is $100x, the 
intercompany transaction is described in section 351(b), and the U.S. 
transferor recognizes $20x gain (the intercompany item) in the 
intercompany transaction. The intercompany transaction exception 
applies to the extent of the $20x intercompany item, and the exception 
for section 351 exchanges applies to the remainder of the transfer. 
Thus, the U.S. transferor remains subject to a $20x GRA (to the extent 
of the $20x intercompany item), and the acquiring member becomes 
subject to an $80x GRA. This result is similar to that of a transfer of 
the stock of the transferee foreign corporation to a domestic acquiring 
corporation in a section 351 exchange that is not an intercompany 
transaction but in which the U.S. transferor recognizes gain under 
section 351(b). In such a case, the amount of the new GRA entered into 
by the domestic acquiring corporation is reduced by the amount of gain 
recognized by the U.S. transferor on the transfer under section 351(b). 
The U.S. transferor does not remain subject to a GRA because the gain 
recognized under section 351(b) is taken into account. By contrast, if 
the section 351 exchange were an intercompany transaction, the U.S. 
transferor must remain subject to a GRA in an amount equal to the gain 
recognized under section 351(b) because the gain has not been taken 
into account.
    If the intercompany item is a loss, however, the U.S. transferor 
shall remain subject to the entire GRA. In addition, in such a case, 
the termination rule that applies to dispositions of the stock of the 
transferee foreign corporation in which all realized gain is recognized 
and included in taxable income during the taxable year of the 
disposition shall not apply.
    The final regulations provide rules to coordinate the subsequent 
inclusion in taxable income of an intercompany item and an amount of 
gain recognized under the GRA. Generally, under the coordination rule, 
if subsequent to an intercompany transaction to which the intercompany 
transaction exception applies, a disposition or other event occurs that 
requires the U.S. transferor to take into account the intercompany item 
related to the intercompany transaction (under the provisions of Sec.  
1.1502-13), the disposition shall not constitute a triggering event. 
Instead the GRA shall terminate without further effect or the amount of 
gain subject to the GRA shall be reduced based on the principles of the 
termination rule that applies to certain dispositions of the stock of 
the transferee foreign corporation received in the initial transfer. 
The final regulations include an example illustrating this rule.

C. Divisive Reorganizations

    The preamble to the 2007 regulations requested comments concerning 
whether specific exceptions should be provided for divisive 
reorganizations involving the U.S. transferor, the transferee foreign 
corporation, or the transferred corporation. No comments were received. 
However, the final regulations provide a specific exception for 
divisive reorganizations involving a transfer of the stock of the 
transferee foreign corporation received in the initial transfer to a 
domestic corporation (domestic controlled corporation) before the 
distribution of the stock of the domestic controlled corporation. The 
specific exception applies if the domestic controlled corporation 
enters into a new GRA with respect to the initial transfer. The IRS and 
Treasury Department expect the general exception to apply to other 
divisive reorganizations, as appropriate. The final regulations include 
examples illustrating the application of the general exception to 
divisive reorganizations.

D. GRA Termination Events

    If certain conditions are met, under the 2007 regulations an 
existing GRA terminates without further effect (termination rule) if 
the U.S. transferor (or other specified United States persons) re-
acquires the transferred stock or securities, or the U.S. transferor 
disposes of the stock of the transferee foreign corporation received in 
the initial transfer. One condition for the application of the 
termination rule is that, with certain adjustments, the basis of the 
transferred stock or securities in the hands of the U.S. transferor (or 
other specified United States person) immediately following the 
acquisition or the basis of stock of the transferee foreign corporation 
disposed of by the U.S. transferor, as relevant, must not be greater 
than the basis of the transferred stock or securities at the time of 
the initial transfer. To satisfy this basis condition, the 2007 
regulations generally permit the U.S. transferor (or other United 
States person) to reduce the basis of the transferred stock or 
securities (or the stock of the transferee foreign corporation, as 
applicable). The 2007 regulations further permit an increase to basis 
of other stock or securities in the transferred corporation (or stock 
of the transferee foreign corporation, as applicable) by a 
corresponding amount, but not in excess of fair market value.
    The final regulations retain the termination rule and the 
conditions for its application, including the option to reduce basis. 
However, the IRS and Treasury Department have determined that it is 
inappropriate to permit the shifting of basis to other stock or 
securities in the case of an election to reduce the basis of stock or 
securities. The final regulations, therefore, do not permit the U.S. 
transferor (or other United States person) to increase the basis of 
other stock or securities of the transferred corporation (or stock of 
the transferee foreign corporation, as applicable). The general 
exception, however, may apply allowing the U.S. transferor (or other 
United States person) to enter into a new GRA in connection with a 
transaction in which the transferred stock or securities are re-
acquired in lieu of reducing the basis of the transferred stock or 
securities.
    One commentator questioned whether the termination rule applies in 
the case of a downstream asset reorganization of the transferee foreign 
corporation into the transferred corporation because the U.S. 
transferor receives newly-issued stock of the transferred corporation 
in the transaction and not the stock transferred in the initial 
transfer. The IRS and Treasury Department believe it is appropriate for 
the termination rule to apply in the case of such downstream asset 
reorganizations. Accordingly, by revising the location of a rule 
contained in the 2007 regulations, the final regulations clarify that 
the term transferred stock or securities includes any stock or 
securities of the transferred

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corporation with a basis determined, in whole or in part, by reference 
to the basis of the stock or securities transferred in the initial 
transfer. Thus, in the case of a downstream asset reorganization, for 
purposes of the termination rule, the newly-issued stock of the 
transferred corporation deemed distributed by the transferee foreign 
corporation to the U.S. transferor under section 361(c) is the stock 
transferred in the initial transfer.
    The 2007 regulations provide an exception for certain expropriation 
losses that would otherwise constitute triggering events. The final 
regulations modify the rule to provide instead that the amount of gain 
subject to a GRA is reduced to the extent a loss is sustained with 
respect to stock of the transferee foreign corporation, the transferred 
stock or securities, or substantially all the assets of the transferred 
corporation by reason of an expropriation of such property by the 
government of a foreign country, any political subdivision thereof, or 
any agency or instrumentality of the foregoing.

E. Transfers by U.S. Transferor Pursuant to an Outbound Asset 
Reorganization

    The 2007 regulations provide an exception for a transfer of stock 
of the transferee foreign corporation by the U.S. transferor to a 
domestic corporation pursuant to an asset reorganization described in 
section 368(a)(1). See Sec.  1.367(a)-8T(e)(3)(i). The preamble to the 
2007 regulations requested comments concerning whether an exception 
should also be provided for an outbound transfer of the stock of the 
transferee foreign corporation by the U.S. transferor to a foreign 
corporation pursuant to an asset reorganization described in section 
368(a)(1). No comments were received. However, after studying the issue 
further and considering the principles of the proposed regulations 
recently issued under sections 367(a)(5), 367(b), and 1248(f) (73 FR 
49278), the IRS and Treasury Department have determined that it is 
appropriate for an exception to apply to such an outbound transfer. The 
final regulations do not include a specific exception for such outbound 
transfers, but the IRS and Treasury Department expect the general 
exception provided by the final regulations to apply to such transfers, 
as appropriate. The final regulations include an example illustrating 
the application of the general exception to such a transfer.

F. Ordering Rule if Triggering Event Affects Multiple GRAs

    The final regulations provide an ordering rule to determine the 
amount of gain recognized under a GRA when a disposition or other event 
requires gain to be recognized under more than one GRA. The ordering 
rule adopts a ``first-in-time'' approach, providing that gain must 
first be recognized under the GRA that relates to the earliest initial 
transfer, then under the GRA that relates to the transfer immediately 
following the initial transfer, and so forth until the appropriate 
amount of gain under each GRA has been recognized. This ordering rule 
clarifies that the gain recognized under a GRA is determined after 
taking into account any increase to the basis of the transferred stock 
or securities resulting from gain recognized under another GRA that 
relates to an earlier initial transfer. The final regulations include 
an example to illustrate the ordering rule.

G. Section 301 Distributions

    The 2007 regulations define a disposition as any transfer that 
would constitute a disposition for any purpose of the Code and the 
regulations under the Code, but exclude a stock redemption described 
under section 302(d) (dividend equivalent redemption) to the extent 
section 301(c)(1) applies. One commentator requested that the final 
regulations clarify whether the rule for dividend equivalent 
redemptions applies to redemptions of stock of the transferee foreign 
corporation, the transferred corporation, or both. The commentator also 
requested that the final regulations confirm that a distribution of 
property to which section 301(c)(2) applies (including in the case of a 
dividend equivalent redemption) does not constitute a disposition of 
the relevant stock.
    The final regulations provide that a disposition generally does not 
include the receipt of a distribution of property with respect to stock 
to which section 301 applies, including by reason of section 302(d). 
The final regulations provide further that a dividend equivalent 
redemption shall constitute a disposition if the U.S. transferor does 
not enter into a new GRA that includes appropriate provisions to 
account for the redemption. The final regulations include an example 
illustrating this rule and describing the types of appropriate 
provisions that should be included in the new GRA. The provisions to be 
included in the GRA are necessary, for example, to account for a 
dividend equivalent redemption that occurs pursuant to a transaction to 
which section 304(a)(1) applies and in which the transferor does not 
retain a direct or indirect interest in the acquiring corporation. In 
such a case, the GRA would need to provide appropriate provisions to 
account for indirect dispositions of the transferred stock that should 
require gain to be recognized under the new GRA.
    The final regulations provide that the U.S. transferor must 
recognize gain under a GRA to the extent gain is recognized under 
section 301(c)(3) with respect to the transferred stock and that the 
amount of gain subject to the GRA is reduced to the extent the U.S. 
transferor recognizes gain under section 301(c)(3) with respect to the 
stock of the transferee foreign corporation received in the initial 
transfer.

H. Elections Under Section 338

    One commentator requested that the final regulations provide an 
exception for a deemed sale of the assets of the transferred 
corporation or the transferee foreign corporation by reason of an 
election under section 338(g). The commentator posited a fact pattern 
where the U.S. transferor entered into a GRA in connection with a 
transfer of less than 20 percent of the outstanding stock of the 
transferred corporation to the transferee foreign corporation, and, 
within the GRA term, the transferee foreign corporation acquires 
additional stock of the transferred corporation constituting a 
qualified stock purchase (within the meaning of section 338(d)(3)) and 
makes an election under section 338(g) with respect to such 
acquisition. The deemed asset sale that results from the section 338(g) 
election is a sale for all purposes of the Code (see Sec.  1.338-
2(c)(6)) and thus, under the 2007 regulations, would require the U.S. 
transferor to recognize the full amount of gain subject to the GRA. The 
commentator asserted that providing an exception for such a deemed 
asset sale was consistent with the policies of the GRA regime because 
the deemed asset sale is not a monetization of the assets or stock of 
the transferred corporation.
    The IRS and Treasury Department agree with the commentator, and the 
final regulations provide that a deemed sale of assets of the 
transferred corporation or the transferee foreign corporation by reason 
of an election under section 338(g) shall not constitute a triggering 
event for purposes of the GRA. However, the sale of stock of the target 
corporation pursuant to the qualified stock purchase shall be taken 
into account for purposes of a GRA. The sale of stock of the 
transferred or transferee foreign corporation by the

[[Page 6956]]

seller should either require gain to be recognized under a GRA or 
terminate the GRA without further effect if the conditions for the 
termination rule are satisfied, even if an election under section 
338(g) is made.
    By contrast, a deemed sale of assets of a domestic corporation by 
reason of an election under section 338(h)(10) shall continue to be 
taken into account for purposes of Sec.  1.367(a)-8. Thus, for example, 
if an election under section 338(h)(10) were made with respect to the 
U.S. transferor, the deemed sale of the stock of the transferee foreign 
corporation held by the U.S. transferor would constitute a disposition 
of such stock that either requires gain to be recognized under the GRA 
or terminates the GRA if the conditions for the termination rule are 
satisfied.
    On August 22, 2008, the IRS and Treasury Department issued proposed 
regulations under section 336(e) (REG-143544-04, 2008-42 IRB 947) that 
provide rules generally consistent with the rules that apply to 
elections under section 338(h)(10). The proposed regulations under 
section 336(e) shall be applicable to dispositions occurring on or 
after the proposed regulations are published as final regulations in 
the Federal Register. The proposed regulations do not apply if the 
selling corporation or the target corporation is foreign. When final 
regulations under section 336(e) are promulgated, the IRS and Treasury 
Department anticipate that a deemed asset sale pursuant to a section 
336(e) election with respect to a domestic corporation shall be taken 
into account for purposes of Sec.  1.367(a)-8, similar to a deemed 
asset sale pursuant to an election under section 338(h)(10). Comments 
are requested in this regard, including what special rules would be 
required with respect to an existing GRA if an election under section 
336(e) were permitted if the selling corporation or the target 
corporation were foreign.

I. Expatriation Under Section 877A

    The 2007 regulations provide that a GRA shall be triggered 
immediately before the date on which an individual U.S. transferor 
loses United States citizenship or ceases to be taxed as a lawful 
permanent resident (as defined in section 877(e)(2)). This rule applies 
even if the individual U.S. transferor would have recognized gain with 
respect to the stock of the transferee foreign corporation under 
section 877. The final regulations generally retain this rule, modified 
for the enactment of section 877A. Further, the final regulations make 
clear that the termination rule that applies in certain cases where the 
U.S. transferor disposes of the stock of the transferee foreign 
corporation is not applicable to an individual U.S. transferor that is 
subject to section 877A.

J. GRA Content

    Comments were received regarding whether the information required 
with a GRA could instead be made available by the U.S. transferor 
``upon request.'' The final regulations confirm that the information 
required with a GRA must be included with the GRA as filed with the tax 
return of the U.S. transferor.

K. Other Changes

    Under the 2007 regulations, certain dispositions that qualify for 
an exception nonetheless require the U.S. transferor to recognize gain 
under the existing GRA. For example, to the extent the transferee 
foreign corporation would be required to recognize gain under section 
351(b) or 356(a)(1) in connection with an exchange of the transferred 
stock, the U.S. transferor must recognize gain under the GRA 
notwithstanding that an exception applies to the exchange of the 
transferred stock. The final regulations retain this rule; however, the 
final regulations refer to any disposition or event that requires gain 
to be recognized under a GRA as a ``gain recognition event.'' A gain 
recognition event includes a triggering event, a disposition that would 
constitute a triggering event but for the application of an exception 
(such as the section 351(b) or 356 exchange described above), and a 
section 301 distribution that would require gain to be recognized under 
section 301(c)(3) with respect to the transferred stock.
    The final regulations clarify the amount of gain subject to a GRA 
that is filed by a domestic corporate shareholder of a domestic 
corporation (the U.S. transferor) that transfers stock or securities to 
the transferee foreign corporation pursuant to an outbound asset 
reorganization that is subject to section 367(a)(5) and the regulations 
under that section.
    The final regulations clarify that, if a GRA is entered into in 
connection with a transfer of a partnership interest, a complete or 
partial disposition of such partnership interest shall constitute a 
triggering event for purposes of the GRA.
    The 2007 regulations provide exceptions for certain dispositions of 
stock of the transferee foreign corporation or of substantially all the 
assets of the transferred corporation that are described in section 
351, 354 (but only in the case of a reorganization described in section 
368(a)(1)(B)), or 721, if, in addition to other requirements, the U.S. 
transferor complies with requirements similar to those for the 
exception that applies to similar dispositions of the transferred stock 
or securities. See Sec.  1.367(a)-8T(e)(1)(ii). In response to comments 
requesting certainty concerning the requirements that must be 
satisfied, the final regulations identify the specific requirements 
that must be satisfied with respect to such dispositions.
    The 2007 regulations provide that, if the transferred corporation 
is domestic and at the time of the initial transfer the U.S. transferor 
owned stock in the transferred corporation satisfying the requirements 
of section 1504(a)(2), the GRA shall terminate without further effect 
if the transferred corporation disposes of substantially all of its 
assets in a transaction in which all gain realized is recognized 
currently. The final regulations retain this termination rule but add, 
as an additional condition for its application, that the U.S. 
transferor and the transferred corporation were members of the same 
consolidated group on the date of the initial transfer. This change was 
made because the IRS and Treasury Department expect a lesser degree of 
inside and outside basis disparity within a consolidated group.
    The final regulations provide that, if the initial transfer and one 
or more dispositions or other events (even if an exception applies) 
that affect the GRA filed by the U.S. transferor with respect to the 
initial transfer occur within the same taxable year of such U.S. 
transferor, or if multiple dispositions or events that affect an 
existing GRA (even if an exception applies) occur in a taxable year of 
the U.S. transferor that does not include the initial transfer, the 
U.S. transferor is only required to enter into a single GRA for such 
taxable year. The GRA must describe the initial transfer and/or each 
subsequent disposition or other event that affects the GRA. This rule 
does not apply, however, if a disposition or other event requires a new 
GRA to be filed by a United States person that was not the U.S. 
transferor with respect to the existing GRA.
    The final regulations provide that the determination of whether a 
disposition of substantially all of the assets of the transferred 
corporation has occurred shall be made on the basis of one or more 
related transactions. The final regulations provide further that the 
determination shall be made without regard to a disposition of assets 
described in section 1221(a)(1) in the ordinary course of business.

[[Page 6957]]

Effective/Applicability Dates

    The final regulations generally apply to transfers of stock or 
securities occurring on or after March 13, 2009. The final regulations 
shall not apply to transfers of stock or securities occurring on or 
after March 13, 2009 that are entered into pursuant to a contract that 
was binding before February 11, 2009 (subject to customary conditions) 
and all times thereafter. However, taxpayers may apply the final 
regulations to such transfers provided the final regulations are 
applied consistently to all such transfers. Taxpayers may also apply 
the rules of the final regulations that were not already effective 
under Sec.  1.367(a)-8 (see 26 CFR part 1, revised April 1, 2006) and 
Sec.  1.367(a)-8T to any gain recognition agreement filed with respect 
to a transfer of stock or securities occurring on a date that is before 
March 13, 2009 and during a taxable year for which the period of 
limitations on assessments under section 6501(a) of the Code has not 
closed.

Availability of IRS Documents

    IRS documents cited in this preamble are made available by the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402.

Effect on Other Documents

    The following publication is obsolete as of February 11, 2009:
    Notice 2005-74 (2005-2 CB 726).

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 also has been 
determined that 5 U.S.C. 553(b) and (d) do not apply to these 
regulations.
    It is hereby certified that the collections of information 
contained in these regulations will not have a significant economic 
impact on a substantial number of small entities. Accordingly, a 
regulatory flexibility analysis is not required. These regulations 
primarily will affect United States persons that are large corporations 
engaged in cross-border corporate transactions. Thus, the number of 
affected small entities--in whichever of the three categories defined 
in the Regulatory Flexibility Act (small businesses, small 
organizations, and small governmental jurisdictions)--will not be 
substantial. The IRS and Treasury Department estimate that small 
organizations and small governmental jurisdictions are likely to be 
affected only insofar as they might hold a portfolio interest in stock 
or securities and in the unlikely event that they transfer such stock 
or securities to a foreign corporation. While a certain number of small 
entities may transfer stock or securities to a foreign corporation in 
connection with an acquisition or reorganization, the IRS and Treasury 
Department do not anticipate the number to be substantial. Furthermore, 
the IRS and Treasury Department estimate that those small entities that 
are affected by the regulations will likely face a burden of 
approximately two hours at an hourly rate of $200. Considering that the 
collections of information enable taxpayers to defer the current 
recognition of gain that is subject to a gain recognition agreement, 
the IRS and Treasury believe that $400 is not a significant economic 
impact. Pursuant to section 7805(f) of the Internal Revenue Code, this 
regulation was submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on its impact on small business.

Drafting Information

    The principal authors of these regulations are Daniel McCall, 
formerly of the Office of the Associate Chief Counsel (International), 
and S. James Hawes 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 removing 
the entries for Sec. Sec.  1.367(a)-3T(e) and 1.367(a)-8T to read in 
part as follows:

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


0
Par. 2. Section 1.338-1 is amended by adding a new sentence at the end 
of paragraph (a)(2), to read as follows:


Sec.  1.338-1.  General principles; status of old target and new 
target.

    (a) * * *
    (2) * * * See also Sec.  1.367(a)-8(k)(13) for a rule applicable to 
gain recognition agreements (filed under Sec. Sec.  1.367(a)-
3(b)(1)(ii) and 1.367(a)-8) and deemed asset sales as a result of an 
election under section 338(g).
* * * * *


Sec.  1.367(a)-3  [Amended]

0
Par. 3. 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(c)(3)(iii)(B)(1)(i)(A)..  1296(b)..............  1297(b).
1.367(a)-3(d)(2)(iii)..............  Sec.   1.367(a)-       Sec.   1.367(a)-8(c)(1)(i).
                                      8T(b)(3)(i) and (d).
1.367(a)-3(d)(2)(v)................  Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(2)(i).
                                      8T(d)(2).
1.367(a)-3(d)(3), Example 1(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(1).
 fourth sentence.                     8T(d)(1).
1.367(a)-3(d)(3), Example 1(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(c)(2)(vi).
 fourth sentence.                     8T(b)(1)(vii).
1.367(a)-3(d)(3), Example 1(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(c)(2)(vi).
 fifth sentence.                      8T(b)(1)(vii).
1.367(a)-3(d)(3), Example 1A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(d)(3) and (e)(1)(i).
 first sentence.                      8T(a)(3).
1.367(a)-3(d)(3), Example 1A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(5).
 second sentence.                     8T(d)(4).
1.367(a)-3(d)(3), Example 1A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(k)(10).
 second sentence.                     8T(e)(8).
1.367(a)-3(d)(3), Example 4(i),      Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(2)(i).
 first sentence.                      8T(d)(2).
1.367(a)-3(d)(3), Example 4(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(2).
 first sentence.                      8T(d)(2).
1.367(a)-3(d)(3), Example 4(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(o)(4).
 second sentence.                     8T(g)(2).
1.367(a)-3(d)(3), Example 5A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(o)(4).
 second to last sentence.             8T(g)(2).
1.367(a)-3(d)(3), Example 6(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(2)(i).
 last sentence.                       8T(d)(2).
1.367(a)-3(d)(3), Example 7(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(o)(4).
 second sentence.                     8T(g)(2).
1.367(a)-3(d)(3), Example 7(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(k)(4).
 third sentence.                      8T(e)(1)(iii).

[[Page 6958]]

 
1.367(a)-3(d)(3), Example 7A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(o)(4).
 fourth sentence.                     8T(g)(2).
1.367(a)-3(d)(3), Example 7A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(g).
 last sentence.                       8T(b)(5).
1.367(a)-3(d)(3), Example 7A(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(k)(4).
 last sentence.                       8T(e)(1)(iii).
1.367(a)-3(d)(3), Example 8(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(2)(i).
 second to last sentence.             8T(d)(2).
1.367(a)-3(d)(3), Example 9(ii),     Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(2)(i).
 last sentence.                       8T(d)(2).
1.367(a)-3(d)(3), Example 11(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(j)(1).
 sixth sentence.                      8T(d)(1).
1.367(a)-3(d)(3), Example 11(ii),    Sec.   1.367(a)-       Sec.   1.367(a)-8(c)(2)(vi).
 sixth sentence.                      8T(b)(1)(vii).
1.367(a)-3(d)(3), Example 12(ii),    Sec.   1.367(a)-3T(e)  Sec.   1.367(a)-3(e).
 third sentence.
1.367(b)-4(b)(1)(iii), Example       Sec.   1.367(a)-3T(e)  Sec.   1.367(a)-3(e).
 4(i), last sentence.
1.367(b)-13(a)(2)(iii).............  or (iii) or in         (iii), or (v).
                                      sections
                                      368(a)(1)(G) and
                                      (a)(2)(D).
----------------------------------------------------------------------------------------------------------------

0
Par. 4. For each entry in the table, redesignate the paragraph 
designated in the ``Old Paragraph'' column as the new paragraph 
designation in the ``New Paragraph'' column to read as follows:


Sec.  1.367(a)-3(g)  [Redesignated]

    Section 1.367(a)-3(g) is redesignated as follows:

------------------------------------------------------------------------
               Old paragraph                        New paragraph
------------------------------------------------------------------------
1.367(a)-3(g)(1)(A).......................  1.367(a)-3(g)(1)(i)
1.367(a)-3(g)(1)(B).......................  1.367(a)-3(g)(1)(ii)
1.367(a)-3(g)(1)(B)(1)....................  1.367(a)-3(g)(1)(ii)(A)
1.367(a)-3(g)(1)(B)(2)....................  1.367(a)-3(g)(1)(ii)(B)
1.367(a)-3(g)(1)(B)(3)....................  1.367(a)-3(g)(1)(ii)(C)
1.367(a)-3(g)(1)(B)(4)....................  1.367(a)-3(g)(1)(ii)(D)
1.367(a)-3(g)(1)(B)(5)....................  1.367(a)-3(g)(1)(ii)(E)
1.367(a)-3(g)(1)(B)(6)....................  1.367(a)-3(g)(1)(ii)(F)
1.367(a)-3(g)(1)(C).......................  1.367(a)-3(g)(1)(iii)
1.367(a)-3(g)(1)(D).......................  1.367(a)-3(g)(1)(iv)
1.367(a)-3(g)(1)(D)(1)....................  1.367(a)-3(g)(1)(iv)(A)
1.367(a)-3(g)(1)(D)(2)....................  1.367(a)-3(g)(1)(iv)(B)
1.367(a)-3(g)(1)(D)(3)....................  1.367(a)-3(g)(1)(iv)(C)
1.367(a)-3(g)(1)(E).......................  1.367(a)-3(g)(1)(v)
1.367(a)-3(g)(1)(F).......................  1.367(a)-3(g)(1)(vi)
1.367(a)-3(g)(2)(G).......................  1.367(a)-3(g)(1)(vii)
------------------------------------------------------------------------

0
Par. 5. Section 1.367(a)-3 is amended by:

0
1. In the first sentence of paragraph (b)(1), remove the words ``Except 
as provided in section 367(a)(5)'' and add ``Except as provided in 
section 367(a)(5) and paragraph (e) of this section'' in their place.
0
2. In the first sentence of paragraph (c)(1), remove the words ``Except 
as provided in section 367(a)(5)'' and add ``Except as provided in 
section 367(a)(5) and paragraph (e) of this section'' in their place.
0
3. Revising paragraphs (d)(2)(iv).
0
4. Revising the last sentence of paragraph (d)(3), Example 5(ii).
0
5. Removing the last sentence of paragraph (d)(3), Example 5A(ii).
0
6. Revising paragraph (e).
0
7. Removing and reserving paragraph (f).
0
8. Revising the heading for paragraph (g) and adding new paragraph 
(g)(1)(viii).
    The revisions and addition read as follows:


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

* * * * *
    (d) * * *
    (2) * * *
    (iv) Gain recognition agreements involving multiple parties. The 
U.S. person's agreement to recognize gain, as provided in Sec.  
1.367(a)-8, shall include appropriate provisions consistent with the 
principles of Sec.  1.367(a)-8. See Examples 5 and 5A of this section 
and Sec.  1.367(a)-8(j)(9).
* * * * *
    (3) * * *

    Example 5. * * *
    (ii) * * * Under Sec.  1.367(a)-8(j)(9), the gain recognition 
agreement would be triggered if F sold all or a portion of the stock 
of S.
* * * * *
    (e) Transfers by a domestic corporation to a foreign corporation in 
a section 361 exchange--(1) General rule. If a domestic corporation 
(U.S. transferor) transfers stock or securities to a foreign 
corporation (transferee foreign corporation) in an exchange described 
in section 361(a) or (b), or in an exchange described in section 351 
that is also described in section 361(a) or (b) (collectively, a 
section 361 exchange), such transfer shall be subject to section 
367(a)(1), unless the conditions of paragraphs (e)(1)(i) through (iv) 
of this section are satisfied.
    (i) The conditions set forth in section 367(a)(5) and any 
regulations under that section have been satisfied including that:
    (A) The U.S. transferor is controlled (within the meaning of 
section 368(c)) by five or fewer (but at least one) domestic 
corporations (control group members) at the time of the section 361 
exchange;
    (B) The U.S. transferor recognizes the amount of the gain realized 
in the section 361 exchange that is allocable to any shareholder that 
is not a control group member (based on the value of the ownership 
interest in the U.S. transferor held by the shareholder at the time of 
the section 361 exchange);
    (C) The U.S. transferor recognizes the amount of the gain realized 
in the section 361 exchange allocable to a control group member that 
cannot be preserved in the stock received by the control group member 
in the transaction; and
    (D) Appropriate adjustments are made to the basis of the stock 
received by each control group member in the transaction.
    (ii) If the stock or securities transferred in the section 361 
exchange are of a domestic corporation, the conditions in paragraphs 
(c)(1)(i), (ii), and (iv) of this section are satisfied.
    (iii) Each control group member that owns five percent or more 
(applying the attribution rules of section 318, as modified by section 
958(b)) of the total voting power or the total fair market value of the 
stock of the transferee foreign corporation immediately after the 
transaction enters into a gain recognition agreement as provided in 
Sec.  1.367(a)-8. The amount of gain subject to the gain recognition 
agreement shall equal the amount of the gain realized by the U.S. 
transferor on the transfer of the stock or securities in the section 
361 exchange that is allocable to such control group member (based on 
the ownership interest (by value) in the U.S. transferor held by the 
control group member at the time of the section 361 exchange) reduced 
by the amount of such allocable gain that is recognized by the U.S. 
transferor with respect to the control group member. The gain 
recognition agreement shall designate the control group member as the 
U.S. transferor for purposes of paragraphs (b) and (c) of this section 
and Sec.  1.367(a)-8.
    (iv) Each control group member that enters into a gain recognition 
agreement pursuant to paragraph (e)(1)(iii) of this section makes the 
election described in Sec.  1.367(a)-8(c)(2)(vi).
    (2) Certain triangular asset reorganizations. If a transfer of 
stock or securities described in paragraph (e)(1) of this section is 
pursuant to a triangular

[[Page 6959]]

asset reorganization described in Sec.  1.358-6(b)(2)(i) through (iii), 
the gain recognition agreement filed by a control group member pursuant 
to paragraph (e)(1)(iii) of this section shall include provisions 
consistent with the principles of Sec.  1.367(a)-8 to account for all 
the parties to the reorganization. See Sec.  1.367(a)-8(j)(9).
    (3) Examples. The following examples illustrate the provisions of 
paragraph (e)(1) of this section. Except as otherwise indicated, assume 
US1, US2, USP, and UST are domestic corporations; US1 and US2 are not 
related; CFC1, CFC2, FA, and FC are foreign corporations; the section 
1248 amount attributable to the stock of a foreign corporation is zero; 
and section 7874 does not apply to the transaction.

    Example 1. Outbound asset reorganization. (i) Facts. US1 and US2 
own 60% and 40%, respectively, of the outstanding stock of UST. UST 
wholly owns FC. The FC stock held by UST has a $20x basis and a 
$100x fair market value. UST merges with and into FC in an asset 
reorganization described in section 368(a)(1)(A). In the section 361 
exchange that is part of the reorganization, UST transfers all of 
its FC stock to FA. UST distributes the FA stock it received in the 
section 361 exchange to US1 and US2 pursuant to the plan of 
reorganization. The conditions set forth in the second sentence of 
section 367(a)(5) and the regulations under that section are 
satisfied, including adjusting the basis of the FA stock received by 
US1 and US2 in the reorganization, as appropriate. After the 
reorganization, US1 and US2 own 6% and 4%, respectively, of the 
outstanding stock of FA.
    (ii) Result. If the conditions of paragraph (e)(1)(i) through 
(iv) of this section are satisfied, the transfer of the FC stock by 
UST to FA in the section 361 exchange is not subject to section 
367(a)(1). Because US1 and US2 complied with the requirements of 
section 367(a)(5), the requirement of paragraph (e)(1)(i) of this 
section is satisfied. Paragraph (e)(1)(ii) of this section is not 
applicable because FC is a foreign corporation. Pursuant to 
paragraph (e)(1)(iii) of this section, US1 enters into a gain 
recognition agreement with respect to its share of the gain realized 
by UST on the transfer of the FC stock to FA in the section 361 
exchange ($48x, or 60% of $80x). The amount of gain subject to the 
gain recognition agreement is $48x because UST did not recognize any 
amount of such gain under section 367(a)(5) or the regulations under 
that section with respect to US1. US1 is designated as the U.S. 
transferor on the gain recognition agreement for purposes of 
paragraph (b) of this section and Sec.  1.367(a)-8. US1 makes the 
election described in Sec.  1.367(a)-8(c)(2)(vi) with respect to the 
gain recognition agreement. Because US2 owns less than 5% of the 
stock of FA after the reorganization, US2 is not required to enter 
into a gain recognition agreement with respect to its share of the 
gain realized by UST on the transfer of the FC stock to FA in the 
section 361 exchange.
    (iii) Alternate facts. The facts are the same as in paragraph 
(i) of this Example, except that, in year 4, FA disposes of 25% of 
the FC stock in a taxable exchange. Under Sec.  1.367(a)-8(c)(1)(i) 
and (j)(1), the partial disposition of the FC stock requires US1 to 
include in income 25% of the gain subject to the gain recognition 
agreement filed in year 1 ($12x, or 25% of $48x) and pay applicable 
interest on any additional tax due on such inclusion.
    (iv) Alternate facts. The facts are the same as in paragraph 
(iii) of this Example, except that US1 and US2 are members of a 
consolidated group of which USP is the common parent. Because US2 is 
considered to own at least 5% of the stock of FA following the 
reorganization by reason of the attribution rules of section 318, as 
modified by section 958(b), a gain recognition agreement must also 
be entered into on behalf of US2 with respect to the amount of the 
gain realized but not recognized by UST on the transfer of the FC 
stock to FA that is allocable to US2 ($32x, or 40% of $80x). Under 
Sec.  1.367(a)-8(d)(3) and Sec.  1.1502-77(a)(1), USP enters into 
the gain recognition agreements on behalf of US1 and US2. In year 4, 
US1 and US2 must include in income 25% of the amount of gain subject 
to their respective gain recognition agreement ($12x for US1 and $8x 
for US2) and pay applicable interest on any additional tax due on 
such inclusion.
    Example 2. Divisive reorganization. (i) Facts. US1 wholly owns 
UST. The UST stock has a $120x basis and $150x fair market value. 
UST wholly owns CFC2. The CFC2 stock has a $20x basis and a $50x 
fair market value. UST also owns Business A that has a fair market 
value of $100x. In a divisive reorganization that satisfies the 
requirements of section 368(a)(1)(D), UST transfers the CFC2 stock 
to CFC1, a newly-formed corporation, in exchange solely for CFC1 
stock. The transfer of the CFC2 stock to CFC1 is a section 361 
exchange. UST then distributes the CFC1 stock to US1 in a 
transaction that qualifies under section 355. Under section 358, the 
pre-exchange basis in the UST stock ($120x) is allocated between the 
UST stock and the CFC1 stock based on the relative fair market 
values of such stock. Therefore, immediately after the transaction, 
the basis of the UST stock is $80x ($120x multiplied by $100x/
$150x), and the basis of the CFC1 stock is $40x ($120x multiplied by 
$50x/$150x). The conditions set forth in section 367(a)(5) and the 
regulations under that section are satisfied, including reducing the 
basis of the CFC1 stock received by US1 in the transaction by $20x 
so that the $30x built-in gain in the CFC2 stock transferred in the 
section 361 exchange is preserved in the CFC1 stock received by US1 
in the transaction.
    (ii) Result. Because US1 complied with the requirements of 
section 367(a)(5) and regulations under that section, the 
requirement of paragraph (e)(1)(i) of this section is satisfied. 
Paragraph (e)(1)(ii) of this section is not applicable because CFC2 
is a foreign corporation. Pursuant to paragraph (e)(1)(iii) of this 
section, US1 enters into a gain recognition agreement with respect 
to its share of the gain realized by UST on the transfer of the CFC2 
stock to CFC1 in the section 361 exchange ($30x). The amount of gain 
subject to the gain recognition agreement is $30x because UST did 
not recognize any amount of such gain under section 367(a)(5) or the 
regulations under that section with respect to US1. US1 is 
designated as the U.S. transferor on the gain recognition agreement 
for purposes of paragraph (b) of this section and Sec.  1.367(a)-8. 
US1 makes the election described in Sec.  1.367(a)-8(c)(2)(vi) with 
respect to the gain recognition agreement.
    (4) Cross-references. For other examples that illustrate the 
application of this paragraph (e), see Sec.  1.367(a)-8(q)(2), Examples 
6 and 24. For rules relating to an acquisition of the stock of a 
foreign corporation by another foreign corporation in a section 361 
exchange, see Sec.  1.367(b)-4(b)(1)(iii), Example 4. For rules 
relating to certain distributions of stock of a foreign corporation by 
a domestic corporation, see section 1248(f) and the regulations under 
that section.
    (f) [Reserved].
    (g) Effective/applicability date--(1) * * *
    (viii)(A) Except as provided in this paragraph (g)(1)(viii), the 
rules of paragraph (e) of this section apply to transfers of stock or 
securities occurring on or after March 13, 2009. For matters covered in 
this section for periods before March 13, 2009, but on or after March 
7, 2007, the rules of Sec.  1.367(a)-3T(e) (see 26 CFR part 1, revised 
April 1, 2007) apply. For matters covered in this section for periods 
before March 7, 2007, but on or after July 20, 1998, the rule of Sec.  
1.367(a)-8(f)(2)(i) (see 26 CFR part 1, revised April 1, 2006) applies.
    (B) Taxpayers may apply the rules of Sec.  1.367(a)-3(e) to 
transfers occurring before March 13, 2009, and during a taxable year 
for which the period of limitations on assessments under section 
6501(a) has not closed, if done consistently to all such transfers 
occurring during each taxable year. A taxpayer applies the rules of 
Sec.  1.367(a)-3(e) to transfers occurring before March 13, 2009, and 
during a taxable year for which the period of limitations on 
assessments under section 6501(a) has not closed, by including the gain 
recognition agreement, annual certification, or other information 
filing, that is required as a result of the rules of Sec.  1.367(a)-
3(e) applying to such a transfer, with an amended tax return for the 
taxable year in which the transfer occurs that is filed on or before 
August 10, 2009. A taxpayer that wishes to apply the rules of Sec.  
1.367(a)-3(e) to transfers occurring before March 13, 2009, and during 
a taxable year for which the period of limitations on assessments under 
section 6501(a) has

[[Page 6960]]

not closed but that fails to meet the filing requirement described in 
the preceding sentence must request relief for reasonable cause for 
such failure as provided in Sec.  1.367(a)-8.
* * * * *


Sec.  1.367(a)-3T  [Removed]

0
Par. 6 Section 1.367(a)-3T is removed.
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Par. 7. Section 1.367(a)-8 is revised to read as follows:


Sec.  1.367(a)-8  Gain recognition agreement requirements.

    (a) Scope. This section provides the terms and conditions for a 
gain recognition agreement entered into by a United States person 
pursuant to Sec.  1.367(a)-3(b) through (e) in connection with a 
transfer of stock or securities to a foreign corporation pursuant to an 
exchange that would otherwise be subject to section 367(a)(1). 
Paragraph (b) of this section provides definitions and special rules. 
Paragraphs (c) through (h) of this section identify the form, content, 
and other conditions of a gain recognition agreement. Paragraph (i) of 
this section is reserved. Paragraph (j) of this section identifies 
certain events that may require gain to be recognized under a gain 
recognition agreement. Paragraph (k) of this section provides 
exceptions for certain events that would otherwise require gain to be 
recognized under a gain recognition agreement. Paragraph (l) of this 
section is reserved. Paragraph (m) of this section provides rules that 
require gain to be recognized under a gain recognition agreement in 
connection with certain events to which an exception under paragraph 
(k) of this section otherwise applies. Paragraph (n) of this section 
provides special rules in the case of a distribution of property with 
respect to stock to which section 301 applies. Paragraph (o) of this 
section provides rules for certain transactions that terminate or 
reduce the amount of gain subject to a gain recognition agreement. 
Paragraph (p) of this section provides relief for reasonable cause for 
certain failures to comply with the requirements of this section. 
Paragraph (q) of this section provides examples that illustrate the 
rules of the section. Paragraph (r) of this section provides effective 
dates for the provisions of this section.
    (b) Definitions and special rules. The following definitions and 
special rules apply for purposes of this section.
    (1) De