Limitations on the Importation of Net Built-In Losses, 54971-54986 [2013-21662]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 78, Number 174 (Monday, September 9, 2013)]
[Proposed Rules]
[Pages 54971-54986]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-21662]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-161948-05]
RIN 1545-BF43


Limitations on the Importation of Net Built-In Losses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations under sections 
334(b)(1)(B) and 362(e)(1) of the Internal Revenue Code of 1986 (Code). 
The proposed regulations apply to certain nonrecognition transfers of 
loss property to corporations that are subject to Federal income tax. 
The proposed regulations affect the corporations receiving the loss 
property. This document also invites comments from the public regarding 
these proposed regulations.

DATES: Written or electronic comments and a request for a public 
hearing must be received by December 9, 2013.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG 161948-05), 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-
161948-05), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at www.regulations.gov (IRSREG-161948-05).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
John P. Stemwedel (202) 622-7790 or Theresa A. Abell (202) 622-7000, 
and, concerning submissions of comments and requests for a public 
hearing, Oluwafunmilayo (Funmi) Taylor at (202) 622-7180 (not toll free 
numbers).

SUPPLEMENTARY INFORMATION: 

[[Page 54972]]

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking revises a collection of information 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 1545-2019. Comments on 
the revised collection of information should be sent to the Office of 
Management and Budget, Attn: Desk Officer for the Department of the 
Treasury, Office of Information and Regulatory Affairs, Washington, DC 
20503, with copies to the Internal Revenue Service, Attn: IRS Reports 
Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments 
on the collection of information should be received by November 8, 
2013. Comments are specifically requested concerning:
    Whether the proposed revised collection of information is necessary 
for the proper performance of the functions of the Internal Revenue 
Service, including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The revised collection of information in these proposed regulations 
is in Sec. Sec.  1.332-6, 1.351-3, and 1.368-3. By requiring that 
taxpayers separately report the fair market value and basis of property 
(including stock) described in section 362(e)(1)(B) and in 362(e)(2)(A) 
that is transferred in a tax-free transaction, this revised collection 
of information aides in identifying transactions within the scope of 
sections 334(b)(1)(B), 362(e)(1), and 362(e)(2) and thereby facilitates 
the IRS' verification that taxpayers are complying with sections 
334(b)(1)(B), 362(e)(1), and 362(e)(2). The respondents will be 
corporations and their shareholders.
    Revised estimated total annual reporting burden: 375,000 hours.
    Revised estimated average annual burden hours per respondent: 1.25 
hours.
    Estimated number of respondents: 225,000 (of the originally 
estimated 350,000; original 0.75 hour estimate unchanged for the 
remaining 125,000 respondents).
    Estimated frequency of responses: once.
    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 or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by section 6103.

Background

    Sections 334(b)(1)(B) and 362(e)(1) (the anti-loss importation 
provisions) were enacted in the American Jobs Creation Act of 2004 
(Pub. L. 108-357, 188 Stat. 1418 (2004)) to prevent erosion of the 
corporate tax base through the importation of loss in nonrecognition 
transfers. This notice of proposed rulemaking proposes regulations 
under both of these anti-loss importation provisions.

Explanation of Provisions

1. The Anti-Loss Importation Provisions: Sections 334(b)(1)(B) and 
362(e)(1)

    Section 334(b)(1)(B) applies to corporate acquisitions of loss 
property in liquidations described in section 332 (complete liquidation 
of subsidiary). Section 362(e)(1) applies to corporate acquisitions of 
loss property in transactions described in section 362(a) (transactions 
to which section 351 applies and acquisitions of property as paid-in 
surplus or contributions to capital, each a section 362(a) transaction) 
and in transactions described in section 362(b) (reorganizations). The 
application and effect of the anti-loss importation provisions are 
materially identical, and so the proposed regulations use the same 
nomenclature and operating rules for both anti-loss importation 
provisions.
    The anti-loss importation provisions apply when a corporation 
acquires property that is described in section 362(e)(1)(B) in a 
transaction described in section 332, 362(a), or 362(b), and, under the 
generally applicable basis rules (other than the anti-loss duplication 
rule in section 362(e)(2)), the acquiring corporation (Acquiring) would 
take the property with an aggregate basis in excess of ``value'' 
(generally equal to fair market value under the proposed regulations; 
see paragraph 1.b.ii. of this preamble). When an anti-loss importation 
rule applies, Acquiring's basis in each such property is equal to the 
property's value. To the extent Acquiring receives property in the 
transaction that is not subject to the anti-loss importation rules, 
Acquiring's basis in the property is determined under generally 
applicable basis rules, including section 362(e)(2).
    Property is described in section 362(e)(1)(B) (designated 
``importation property'' in the proposed regulations) if two conditions 
are satisfied. First, any gain or loss recognized on a disposition of 
the property would not be subject to Federal income tax in the hands of 
the transferor immediately before the transfer. Section 
362(e)(1)(B)(i). Second, any gain or loss recognized on a disposition 
of the property would be subject to Federal income tax in the hands of 
the transferee immediately after the transfer. Section 
362(e)(1)(B)(ii).
    Since the enactment of the anti-loss importation provisions, a 
number of questions have arisen concerning their application. The 
principal concern has been the determination of whether property is 
importation property, but various other questions (discussed 
subsequently in this preamble) have also been raised regarding the 
application of the anti-loss importation provisions and their 
interaction with other rules of law. To address these issues, the 
proposed regulations provide a framework for identifying importation 
property and determining whether the transfer of the property is a 
transaction subject to the anti-loss importation provisions (designated 
a ``loss importation transaction'' under the proposed regulations).
a. Importation Property
    The proposed regulations use a hypothetical sale analysis to 
identify importation property. Under this approach, the actual tax 
treatment of any gain or loss that would be recognized on a sale of the 
property, first by the transferor immediately before and then by 
Acquiring immediately after the transfer, determines whether an 
individual property is importation property. If any gain or loss that 
would be recognized on a hypothetical sale of the property by the 
transferor immediately before the transfer would not be subject to 
Federal income tax in the hands of the transferor, the first condition 
for classification as importation property is satisfied. If any gain or 
loss that would be recognized on a hypothetical sale of the property by 
Acquiring immediately

[[Page 54973]]

after the transfer would be subject to Federal income tax in the hands 
of Acquiring, the second condition for classification as importation 
property is satisfied. Property is importation property only if both 
conditions are satisfied.
    In general, the determination is made by reference to the tax 
treatment of the hypothetical seller of the transferred or acquired 
property, that is, whether the hypothetical seller would take the gain 
or loss into account in determining its Federal income tax liability. 
This determination must take into account all relevant facts and 
circumstances. The proposed regulations include a number of examples 
illustrating this approach. Thus, in one example, a tax-exempt entity 
transfers property to a taxable domestic corporation, and the 
determination takes into account whether the transferor, though 
generally tax-exempt, would nevertheless be required to include the 
amount of the gain or loss in unrelated business taxable income under 
sections 511 through 514 of the Code. In other examples, a foreign 
corporation transfers property to a taxable domestic corporation and 
the determination takes into account whether the foreign corporation 
would be required to include the amount of gain or loss under section 
864 or 897 as income effectively connected with, or treated as 
effectively connected with, the conduct of a U.S. trade or business. 
Although the examples assume there is no applicable income tax treaty, 
in the case of an applicable income tax treaty, the determination of 
whether property is importation property would take into account 
whether the transferor would be taxable under the business profits 
article or gains article of the income tax treaty.
i. Partnerships, S Corporations, Grantor Trusts as Hypothetical Seller
    Although the general rule in the proposed regulations looks solely 
to the tax treatment of the hypothetical seller, a modified rule 
applies if a hypothetical seller is a partnership, a small business 
corporation that has elected under section 1362(a) to be an S 
corporation, or a grantor trust. In these cases, the determination is 
made by reference to the tax treatment of the gain or loss as taken 
into account by the partners, shareholders, or owners of the entities. 
The modified rule recognizes that, in these cases, the Code provides 
that the gain or loss on the hypothetical sale would be included by the 
partner, shareholder, or owner, and would not be taxable to the 
hypothetical seller, irrespective of whether any amount is actually 
distributed to such other person. See section 701 (partnership not 
subject to tax), flush language in section 362(e)(1)(B) (partners 
treated as owning partnership property); sections 1363 and 1366 (S 
corporation's income generally taxable to shareholders, not S 
corporation); section 671 (grantor or other person treated as owning 
trust property).
    If an organizing instrument assigns gain and loss to partners or 
beneficiaries in different amounts, including by reason of a special 
allocation under a partnership agreement, the proposed regulations make 
clear that the hypothetical sale model makes the determination of 
whether gain or loss is subject to Federal income tax by reference to 
the person to whom, under the terms of the instrument, the hypothetical 
gain or loss would actually be allocated, taking into account the 
entity's net gain or loss actually recognized in the tax period in 
which the transaction occurs.
ii. Other Pass-Through Entities: Anti-Avoidance Rule
    In certain circumstances, the Code permits distributions to effect 
a similar shifting of tax consequences. For example, under sections 651 
and 652, and sections 661 and 662, distributions made by a trust are 
deducted from the trust's income and included in the beneficiary's (or 
beneficiaries') income. Certain domestic corporations are also able to 
shift tax consequences by distributing income or gain from a property 
sale. These corporations include regulated investment companies (RICs, 
as defined in section 851(a)), real estate investment trusts (REITs, as 
defined in section 856(a)), and domestic corporations taxable as 
cooperatives (see section 1381).
    The IRS and the Treasury Department are concerned that disregarding 
the effects of this shifting of tax liability would in certain 
circumstances undermine the anti-importation provisions. However, the 
IRS and the Treasury Department are also concerned that applying a 
look-through rule in all such cases would present a significant 
administrative burden.
    Accordingly, the proposed regulations contain an anti-avoidance 
rule that applies to domestic trusts, estates, RICs, REITs, and 
cooperatives that directly or indirectly transfer property (including 
through other such entities) in a section 362 transaction, if the 
property had been directly or indirectly transferred to or acquired by 
the entity as part of a plan to avoid the application of the anti-
importation provisions. For purposes of this rule, it is immaterial who 
had the plan to avoid the anti-importation provisions. When the anti-
avoidance rule applies, the domestic entity, which, absent application 
of the anti-avoidance rule, would be treated under these regulations as 
subject to Federal income tax, is treated as subject to a look-through 
rule. Under the look-through rule, the entity is presumed to distribute 
the proceeds of the hypothetical sale (which, for this purpose, are 
presumed to be an amount greater than zero), and, to the fullest extent 
permitted by the terms of its organizing instrument, it is presumed to 
make the distributions to persons that would not take distributions 
from the entity into account in determining a Federal income tax 
liability. If an interest in such an entity is held indirectly through 
one or more other such entities, the principles of this rule apply to 
look to the ultimate owners of the interest. The determination of 
whether the property is importation property is then made by reference 
to the deemed distributees or, in the case of tiered entities, to the 
ultimate deemed distributees.
    To illustrate, assume 90 percent of a REIT's shares are owned by 
persons that would not take into account any gain or loss in 
determining a Federal income tax liability and that each share has an 
equal right to any distribution by the REIT. The REIT holds property 
that was transferred to the REIT as part of a plan to avoid the 
application of the anti-importation rule to a section 362 transaction. 
At a time when the acquired property has a built-in loss, the REIT 
transfers the property to a domestic corporation in a section 362 
transaction. In this case, the anti-avoidance rule would apply. Thus, 
the REIT is presumed to distribute all the proceeds of the hypothetical 
sale of the property transferred in the section 362 transaction, and 
the determination of whether any gain or loss on that hypothetical sale 
would be taken into account in determining a Federal income tax 
liability is made by reference to the distributee REIT shareholders. 
Thus, 90 percent of the property transferred in the section 362 
transaction would be importation property. Alternatively, assume that 
the property was originally acquired (as part of a plan to avoid the 
application of the anti-importation rule to a section 362 transaction) 
by a trust whose trustee has discretion to distribute all or a portion 
of the trust's gain or loss to a person that would not take any amount 
of such distribution into account in determining a Federal income tax 
liability and, when the property has a built-in loss, the trust 
transfers the property to a domestic corporation in a section 362 
transaction.

[[Page 54974]]

In this case, all of the property transferred in the section 362 
transaction would be importation property because the trustee could 
distribute all of the proceeds from the hypothetical sale to a person 
that would not take the distribution into account in determining a 
Federal income tax liability.
    The IRS and the Treasury Department continue to study whether a 
look-through approach should be generally applied to trusts and request 
comments on the need for, and potential scope of, such a rule.
iii. Gain or Loss Affecting Certain Income Inclusions
    Practitioners have raised numerous questions regarding the 
treatment of property held by or transferred to controlled foreign 
corporations (CFC), as defined in section 957 (taking into account 
section 953(c)). Because the general rule looks to the tax treatment of 
the hypothetical seller, and no exception applies for CFCs, the general 
operation of the proposed regulations would not treat such amounts as 
subject to Federal income tax. Nevertheless, because the 
characterization of gain or loss that would be taken into account in 
determining a potential income inclusion under section 951(a) has 
generated some concern among practitioners, the proposed regulations 
include an express provision stating that gain or loss recognized by a 
CFC is not considered subject to Federal income tax solely by reason of 
an income inclusion under section 951(a). The proposed regulations 
include a similar provision to clarify that gain or loss recognized by 
a passive foreign investment company, as defined in section 1297(a), is 
also considered not subject to Federal income tax notwithstanding that 
it could affect an inclusion under section 1293(a). Comments are 
specifically requested on this approach.
iv. Gain or Loss Taxed to More Than One Person
    If any gain or loss realized on a hypothetical sale would be 
includible in income by more than one person, the proposed regulations 
treat such property as tentatively divided into separate portions in 
proportion to the allocation of gain or loss to each person. 
Tentatively divided portions are treated and analyzed in the same 
manner as any other property for purposes of applying the anti-
importation provisions. (See paragraph c. of this preamble for an 
illustration of the application of this rule.) Thus, the generally 
applicable rules determine whether a portion of tentatively divided 
property is importation property, and, if the tentatively divided 
portion is importation property, it is taken into account (as described 
subsequently in this preamble) with all other importation property to 
determine whether the transaction is a loss importation transaction.
b. Loss Importation Transaction
    Once the importation property has been identified, Acquiring 
determines the aggregate basis that it would have in all importation 
property acquired in the transaction (including the tentatively divided 
portions of transferred property), without regard to the anti-loss 
importation provisions or section 362(e)(2). If the aggregate basis of 
the importation property exceeds such property's aggregate value, the 
transaction is a loss importation transaction and subject to the anti-
loss importation provisions. If the aggregate basis of importation 
property does not exceed such property's value, the anti-loss 
importation provisions have no further application.
i. Aggregate, Not Transferor-by-Transferor, Approach
    Under section 362(e)(1) and the proposed regulations, the 
determination of whether a section 362 transaction is a loss 
importation transaction is made by reference to the net amount of 
built-in gain and built-in loss in all importation property acquired 
from all transferors in the transaction. This approach differs from the 
transferor-by-transferor approach of section 362(e)(2), which expressly 
focusses on the net built-in loss transferred by a particular 
transferor in a section 362(a) transaction.
ii. Valuing Partnership Interests
    In general, the anti-loss importation rules do not take liabilities 
into account in determining the value of transferred property and, 
thus, whether the transfer of such property is a transfer of loss 
property.
    However, in both informal inquiries and written comments, 
practitioners have raised concerns about the effect of this rule when 
the property transferred is an interest in a partnership with 
liabilities. In particular, practitioners are concerned that the 
inclusion of a partner's share of partnership liabilities in outside 
basis may create the appearance of a built-in loss because partnership 
liabilities do not correspondingly increase the value of the interest. 
The amount of cash at which the partnership interest would change hands 
between a willing buyer and willing seller, neither being under any 
compulsion to buy or sell and both having reasonable knowledge of 
relevant facts, should reflect the appropriate measure of fair market 
value. When a partnership interest is sold, the amount realized may 
include a share of partnership liabilities from which the transferor is 
discharged, which is generally equal to the amount of liabilities 
included in the transferor's outside basis. As such, the sale of a 
partnership interest properly accounts for the transferee partner's 
share of partnership liabilities and therefore, reflects the value of 
that partnership interest.
    To address this issue, the proposed regulations generally adopt the 
approach proposed by commentators and modify the definition of 
``value'' (generally, fair market value) to take liabilities into 
account when determining whether a partnership interest is a loss 
asset. However, because there can be differences between Transferor's 
share of partnership liabilities and Acquiring's share of partnership 
liabilities, the proposed regulations provide that the value of a 
partnership interest is the sum of cash that Acquiring would receive 
for such interest, increased by any Sec.  1.752-1 liabilities (as 
defined in Sec.  1.752-1(a)(4)) of the partnership that are allocated 
to Acquiring with regard to such transferred interest under section 
752. The proposed regulations include an example that illustrates the 
application and effect of this rule. The proposed regulations also 
clarify that any section 743(b) adjustment to be made as a result of 
the transaction is made after any section 362(e) basis adjustment.
c. Acquiring's Basis in Acquired Property
    If a transaction is a loss importation transaction, Acquiring's 
basis in each importation property received (including the tentatively 
divided portions of property determined to be importation property) is 
an amount equal to value, notwithstanding the general rules in sections 
334(b)(1)(B), 362(a), and 362(b). This rule applies to all importation 
property, regardless of whether the property's value is greater or less 
than its basis prior to the loss importation transaction.
    Immediately following the application of the anti-loss importation 
provisions (and prior to any application of section 362(e)(2)), any 
property that was treated as tentatively divided for purposes of 
applying these provisions ceases to be treated as divided and is 
treated as one undivided property (re-constituted property) with a 
basis equal to the sum

[[Page 54975]]

of the bases of the portions determined under the anti-importation 
provision and the bases of all other portions determined under 
generally applicable provisions (other than section 362(e)(2)). For 
example, assume that property is transferred in a section 362(a) 
transaction and the property is treated as tentatively divided for 
purposes of applying section 362(e)(1) (see paragraph a.iv. of this 
preamble). Further assume that one tentatively divided portion (basis 
$125, value $100) is determined to be importation property and the 
other (basis $125, value $100) is not. Finally, assume that, the 
aggregate basis of all importation property transferred in the 
transaction (including the $125 basis of the tentatively divided 
portion) is $900 and the aggregate value of all importation property 
(including the $100 value of the tentatively divided portion) is only 
$800. Thus, the importation property has a net loss, the transaction is 
a loss importation transaction, and the basis of each importation 
property is equal to its value. Accordingly, immediately after the 
application of section 362(e)(1), the tentatively divided property is 
treated as one single property with a basis of $225 ($100 basis in the 
importation portion plus $125 basis in the non-importation portion).
    If the transaction is described in section 362(a), the transferred 
property (including the re-constituted property that was tentatively 
divided for purposes of applying section 362(e)(1)) is then aggregated 
on a transferor-by-transferor basis to determine whether further 
adjustment will be required to the bases of loss property under section 
362(e)(2). Therefore in the example in the preceding paragraph, after 
the application of section 362(e)(1), the provisions of section 
362(e)(2) may apply to adjust the basis of the property further because 
the transfer is a section 362(a) transaction. The proposed regulations 
include a cross-reference to section 362(e)(2) as well as examples 
illustrating the application of both sections 362(e)(1) and section 
362(e)(2) to situations involving multiple transferors and multiple 
properties that are not all importation properties. Because section 
362(e)(2) only applies to transactions described in section 362(a), 
section 362(e)(2) has no application to liquidations or to 
reorganizations that do not include a transaction described in section 
362(a). The proposed regulations include examples illustrating the 
interaction of these provisions.

2. Filing Requirements

    To facilitate the administration of both the anti-loss importation 
provisions and the anti-duplication provisions in section 362(e)(2), 
the proposed regulations modify the reporting requirements applicable 
in all affected transactions (section 332 liquidations and transactions 
described in section 362(a) or section 362(b)) to require taxpayers to 
identify the basis and value of property subject to those sections.

3. Modifications to Liquidation Regulations

    The proposed regulations also include several modifications to the 
regulations applicable to corporate liquidations. These modifications 
are not changes to current substantive law; they are intended solely to 
update the regulations to reflect certain statutory changes. The 
statutory changes reflected in these modifications include the repeal 
of the General Utilities doctrine (reflected in the modification of 
sections 334(a) and 337(a), and the repeal of sections 333 and 334(c)), 
the removal of former section 334(b)(2) (replaced by section 338), and 
the relocation of former section 332(c) (subsidiary indebtedness) to 
current section 337(b). In response to certain regulatory changes, the 
proposed regulations also add several cross-references to regulations 
under section 367 and 897 to highlight the treatment of certain 
transfers between foreign corporations.
    The proposed regulations do not address the regulations under 
section 346 and no inference should be drawn from the omission of a 
proposal under that section.

Effective/Applicability Date

    These regulations are generally proposed to apply to transactions 
occurring on or after the date the regulations are published as final 
regulations in the Federal Register, unless completed pursuant to a 
binding agreement that was in effect immediately before the date such 
final regulations are published and all times afterwards. It is also 
proposed that taxpayers would be permitted to apply the final 
regulations (when published) to transactions occurring after October 
22, 2004.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13563. Therefore, a 
regulatory assessment is not required. It has also been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations. Further, it is hereby certified 
that these proposed regulations will not have a significant economic 
impact on a substantial number of small entities. This certification is 
based on the fact that the collection of information requirement in 
these regulations modifies an existing collection of information by 
requiring that certain information be reported separately instead of in 
the aggregate. Although there may be an increase in reporting burden, 
the increased burden is expected to be minimal because taxpayers should 
have ready access to the requested information as the proposed 
regulations would not require taxpayers to report or maintain records 
on information that is not, in the aggregate, already required to be 
reported and maintained under the current regulations. Accordingly, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Code, this notice of proposed rulemaking has been submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are timely submitted 
to the IRS. Alternatively, taxpayers may submit comments electronically 
via the Federal e-Rulemaking Portal at www.regulations.gov (IRS REG-
161948-05). The IRS and the Treasury Department request comments on all 
aspects of the proposed regulations. Comments are specifically 
requested on the appropriate treatment of transactions subject to both 
section 367(b) and either section 334(b)(1)(B) or 362(e)(1). Comments 
are also specifically requested on what effect a basis reduction 
required under section 334(b)(1)(B) or section 362(e)(1) may have on 
earnings and profits and any inclusion required under Sec.  1.367(b)-3. 
All comments that are submitted by public will be available for public 
inspection and copying at www.regulations.gov or upon request. A public 
hearing may be scheduled if requested in writing by any person who 
timely submits comments. If a public hearing is scheduled, notice of 
the date,

[[Page 54976]]

time, and place of the hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these regulations is John P. Stemwedel of 
the Office of Associate Chief Counsel (Corporate), IRS. However, other 
personnel from the IRS and the Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

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

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

0
Par. 2. Section 1.332-6 is amended by revising paragraph (a)(3) and 
adding a new sentence at the end of paragraph (e) to read as follows:


Sec.  1.332-6  Records to be kept and information to be filed with 
return.

    (a) * * *
    (3) The fair market value and basis of assets of the liquidating 
corporation that have been or will be transferred to any recipient 
corporation, aggregated as follows:
    (i) Importation property distributed in a loss importation 
transaction, as defined in Sec.  1.362-3(c)(2) and (c)(3) (except that 
``section 332 liquidation'' is substituted for ``section 362 
transaction''), respectively;
    (ii) Property with respect to which gain or loss was recognized on 
the distribution;
    (iii) Property not described in paragraph (a)(3)(i) or paragraph 
(a)(3)(ii) of this section;
* * * * *
    (e) Effective/applicability date. * * * Paragraph (a)(3) of this 
section applies to any taxable year beginning on or after these 
regulations are published as final regulations in the Federal Register, 
unless effected pursuant to a binding agreement that was in effect 
prior to that date and at all times thereafter.
0
Par. 3. Section 1.332-7 is amended by adding a new sentence after the 
first sentence of the paragraph to read as follows:


Sec.  1.332-7  Indebtedness of subsidiary to parent.

    * * * See section 337(b)(1) (for any taxable year beginning on or 
after these regulations are published as final regulations in the 
Federal Register). * * *
0
Par. 4. Section 1.334-1 is revised to read as follows:


Sec.  1.334-1  Basis of property received in liquidations.

    (a) In general. Section 334 sets forth rules for determining a 
distributee's basis in property received in a distribution in complete 
liquidation of a corporation. The general rule is set forth in section 
334(a) and provides that, if property is received in a distribution in 
complete liquidation of a corporation and if gain or loss is recognized 
on the receipt of the property, then the distributee's basis in the 
property is the fair market value of the property at the time of the 
distribution. However, if property is received in a complete 
liquidation to which section 332 applies, including property received 
in satisfaction of an indebtedness described in section 337(b)(1), see 
section 334(b)(1) and paragraph (b) of this section.
    (b) Liquidations under section 332--(1) General rule. Except as 
otherwise provided in paragraph (b)(2) or (b)(3) of this section, if a 
corporation (P) meeting the ownership requirements of section 332(b)(1) 
receives property from a subsidiary (S) in a complete liquidation to 
which section 332 applies (section 332 liquidation), including property 
received in a transfer in satisfaction of indebtedness that satisfies 
the requirements of section 337(b)(1), P's basis in the property 
received is the same as S's basis in the property immediately before 
the property was distributed. However, see Sec.  1.460-
4(k)(3)(iv)(B)(2) for rules relating to adjustments to the basis of 
certain contracts accounted for using a long-term contract method of 
accounting that are acquired in a section 332 liquidation.
    (2) Basis in property with respect to which gain or loss was 
recognized. Except as otherwise provided in the Internal Revenue Code 
and regulations, if S recognizes gain or loss on the distribution of 
property to P in a section 332 liquidation, P's basis in that property 
is the fair market value of the property at the time of the 
distribution. Section 334(b)(1)(A) (certain tax-exempt distributions 
under section 337(b)(2)); see also, for example, Sec.  1.367(e)-
2(b)(3)(i).
    (3) Basis in importation property received in loss importation 
transaction--(i) Purpose. The purpose of section 334(b)(1)(B) and this 
paragraph (b)(3) is to prevent P from importing a net built-in loss in 
a transaction described in section 332. See paragraph (b)(3)(iii)(A) of 
this section for definitions of terms used in this paragraph (b)(3).
    (ii) Determination of basis. Notwithstanding paragraph (b)(1) of 
this section, if a section 332 liquidation is a loss importation 
transaction, P's basis in each importation property received from S in 
the liquidation is an amount that is equal to the value of the 
property. The basis of property received in a section 332 liquidation 
that is not importation property received in a loss importation 
transaction is determined under generally applicable basis rules 
without regard to whether the liquidation also involves the receipt of 
importation property in a loss importation transaction.
    (iii) Operating rules--(A) In general. For purposes of section 
334(b)(1)(B) and this paragraph (b)(3), the provisions of Sec.  1.362-3 
(basis of importation property received in a loss importation 
transaction) apply, adjusted as appropriate to apply to section 332 
liquidations. Thus, when used in this paragraph (b)(3), the terms 
``importation property,'' ``loss importation transaction,'' and 
``value'' have the same meaning as in Sec.  1.362-3(c)(2), (c)(3) and 
(c)(4), respectively, except that ``section 332 liquidation'' is 
substituted for ``section 362 transaction.'' Similarly, when gain or 
loss on property would be owned or treated as owned by multiple 
persons, the provisions of Sec.  1.362-3(d)(2) apply to tentatively 
divide the property in applying this section, substituting ``section 
332 liquidation'' for ``section 362 transaction'' and making such other 
adjustments as necessary.
    (B) Time for making determinations. For purposes of section 
334(b)(1)(B) and this paragraph (b)(3)--
    (1) P's basis in distributed property. P's basis in each property S 
distributes to P in the section 332 liquidation is determined 
immediately after S distributes each such property;
    (2) Value of distributed property. The value of each property S 
distributes to P in the section 332 liquidation is determined 
immediately after S distributes the property;
    (3) Importation property. The determination of whether each 
property distributed by S is importation property is made as of the 
time S distributes each such property;
    (4) Loss importation transaction. The determination of whether a 
section 332 liquidation is a loss importation transaction is made 
immediately after S makes the final liquidating distribution to P.

[[Page 54977]]

    (iv) Examples. The examples in this paragraph (b)(3)(iv) illustrate 
the application of section 334(b)(1)(B) and the provisions of this 
paragraph (b)(3). Unless the facts indicate otherwise, the examples use 
the following nomenclature and assumptions: USP is a domestic 
corporation that has not elected to be an S corporation within the 
meaning of section 1361(a)(1); FC, CFC1, and CFC2 are controlled 
foreign corporations within the meaning of section 957(a), which are 
not engaged in a U.S. trade or business, have no U.S. real property 
interests, and have no other relationships, activities, or interests 
that would cause their property to be subject to Federal income 
taxation; there is no applicable income tax treaty; and all persons and 
transactions are unrelated. All other relevant facts are set forth in 
the examples:

    Example 1. Basic application of this paragraph (b)(3). (i) 
Distribution of importation property in a loss importation 
transaction. (A) Facts. USP owns the sole outstanding share of FC 
stock. FC owns three assets, A1 (basis $40, value $50), A2 (basis 
$120, value $30), and A3 (basis $140, value $20). On Date 1, FC 
distributes A1, A2, and A3 to USP in a complete liquidation that 
qualifies under section 332.
    (B) Importation property. Under Sec.  1.362-3(d)(2), the fact 
that any gain or loss recognized by a CFC may affect an income 
inclusion under section 951(a) does not alone cause gain or loss 
recognized by the CFC to be treated as taken into account in 
determining a Federal income tax liability for purposes of this 
section. Thus, if FC had sold either A1, A2, or A3 immediately 
before the transaction, no gain or loss recognized on the sale would 
have been taken into account in determining a Federal income tax 
liability. Further, if USP had sold A1, A2, or A3 immediately after 
the transaction, USP would take into account any gain or loss 
recognized on the sale in determining its Federal income tax 
liability. Therefore, A1, A2, and A3 are all importation properties. 
See paragraph (b)(3)(iii)(A) of this section and Sec.  1.362-
3(c)(2).
    (C) Loss importation transaction. Immediately after the 
distribution, USP's aggregate basis in the importation properties, 
A1, A2, and A3, would, but for section 334(b)(1)(B) and this 
section, be $300 ($40 + $120 + $140) and the properties' aggregate 
value would be $100 ($50 + $30 + $20). Therefore, the importation 
properties' aggregate basis would exceed their aggregate value and 
the distribution is a loss importation transaction. See paragraph 
(b)(3)(iii)(A) of this section and Sec.  1.362-3(c)(3).
    (D) Basis of importation property distributed in loss 
importation transaction. Because the importation properties, A1, A2, 
and A3, were transferred in a loss importation transaction, the 
basis in each of the importation properties received is equal to its 
value immediately after FC distributes the property. Accordingly, 
USP's basis in A1 is $50; USP's basis in A2 is $30; and USP's basis 
in A3 is $20.
    (ii) Distribution of both importation and non-importation 
property in a loss importation transaction. (A) Facts. The facts are 
the same as in paragraph (i)(A) of this Example 1 except that FC is 
engaged in a U.S. trade or business and A3 is used in that U.S. 
trade or business.
    (B) Importation property. A1 and A2 are importation properties 
for the reasons set forth in paragraph (i)(B) of this Example 1. 
However, if FC had sold A3 immediately before the transaction, FC 
would take into account any gain or loss recognized on the sale in 
determining its Federal income tax liability. Therefore, A3 is not 
importation property. See paragraph (b)(3)(iii)(A) of this section 
and Sec.  1.362-3(c)(2).
    (C) Loss importation transaction. Immediately after the 
distribution, USP's aggregate basis in the importation properties, 
A1 and A2, would, but for section 334(b)(1)(B) and this section, be 
$160 ($40 + $120). Further, the properties' aggregate value would be 
$80 ($50 + $30). Therefore, the importation properties' aggregate 
basis would exceed their aggregate value and the distribution is a 
loss importation transaction. See paragraph (b)(3)(iii)(A) of this 
section and Sec.  1.362-3(c)(3).
    (D) Basis of importation property distributed in loss 
importation transaction. Because the importation properties, A1 and 
A2, were transferred in a loss importation transaction, the basis in 
each of the importation properties received is equal to its value 
immediately after FC distributes the property. Accordingly, USP's 
basis in A1 is $50 and USP's basis in A2 is $30.
    (E) Basis of other property. Because A3 is not importation 
property distributed in a loss importation transaction, USP's basis 
in A3 is determined under generally applicable basis rules. 
Accordingly, USP's basis in A3 is $140, the adjusted basis that FC 
had in the property immediately before the distribution. See section 
334(b)(1).
    (iii) FC not wholly owned. The facts are the same as in 
paragraph (i)(A) of this Example 1 except that USP owns only 80% of 
the sole outstanding class of FC stock and the remaining 20% is 
owned by individual X. Further, on Date 1 and pursuant to the plan 
of liquidation, FC distributes A1 and A2 to USP and A3 to X. A1 and 
A2 are importation properties, the distribution to USP is a loss 
importation transaction, and USP's bases in A1 and A2 are equal to 
their value ($50 and $30, respectively) for the reasons set forth in 
paragraphs (ii)(C) and (ii)(D) of this Example 1. Under section 
334(a), X's basis in A3 is $20.
    (iv) Importation property, no net built in loss. (A) Facts. The 
facts are the same as in paragraph (i)(A) of this Example 1 except 
that the value of A2 is $230.
    (B) Importation property. A1, A2, and A3, are importation 
properties for the reasons set forth in (i)(B) of this Example 1.
    (C) Loss importation transaction. Immediately after the 
distribution, USP's aggregate basis in the importation properties, 
A1, A2, and A3, would, but for section 334(b)(1)(B) and this 
section, be $300 ($40 + $120 + $140). However, the properties' 
aggregate value would also be $300 ($50 + $230 + $20). Therefore, 
the importation properties' aggregate basis would not exceed their 
aggregate value and the distribution is not a loss importation 
transaction. See paragraph (b)(3)(iii)(A) of this section and Sec.  
1.362-3(c)(3).
    (D) Basis of importation property not distributed in loss 
importation transaction. Because the importation properties, A1, A2, 
and A3, were not distributed in a loss importation transaction, the 
basis of each of the importation properties is determined under the 
generally applicable basis rules. Accordingly, immediately after the 
distribution, USP's basis in A1 is $40, USP's basis in A2 is $120, 
and USP's basis in A3 is $140, the adjusted bases that FC had in the 
properties immediately before the distribution. See section 
334(b)(1).
    (v) CFC stock as importation property distributed in loss 
importation transaction. (A) Facts. USP owns the sole outstanding 
share of FC stock. FC owns the sole outstanding share of CFC1 stock 
(basis $80, value $100) and the sole outstanding share of CFC2 stock 
(basis $100, value $5). On Date 1, FC distributes its shares of CFC1 
and CFC2 stock to USP in a complete liquidation that qualifies under 
section 332.
    (B) Importation property. No special rule applies to the 
treatment of property that is the stock of a CFC. Thus, if FC had 
sold either the CFC1 share or the CFC2 share immediately before the 
transaction, no gain or loss recognized on the sale would have been 
taken into account in determining a Federal income tax liability. 
Further, if USP had sold either the CFC1 share or the CFC2 share 
immediately after the transaction, USP would take into account any 
gain or loss recognized on the sale in determining its Federal 
income tax liability. Thus, the CFC1 share and the CFC2 share are 
importation property. See paragraph (b)(3)(iii)(A) of this section 
and Sec.  1.362-3(c)(2).
    (C) Loss importation transaction. Immediately after the 
distribution, USP's aggregate basis in importation property (the 
CFC1 share and the CFC2 share) would, but for section 334(b)(1)(B) 
and this section, be $180 ($80 + $100) and the shares' aggregate 
value is $105 ($100 + $5). Therefore, the importation property's 
aggregate basis would exceed their aggregate value and the 
distribution is a loss importation transaction. See paragraph 
(b)(3)(iii)(A) of this section and Sec.  1.362-3(c)(3).
    (D) Basis of importation property distributed in loss 
importation transaction. Because the importation property (the CFC1 
share and the CFC2 share) was transferred in a loss importation 
transaction, USP's basis in each of the shares received is equal to 
its value immediately after FC distributes the shares. Accordingly, 
USP's basis in the CFC1 share is $100 and USP's basis in the CFC2 
share is $5.

    Example 2. Multiple step liquidation. (i) Facts. USP owns the 
sole outstanding share of FC stock. On January 1 of year 1, FC 
adopts a plan of liquidation. FC makes the following distributions 
to USP in a transaction that qualifies as a complete liquidation 
under section 332. In year 1, FC distributes A1 and, immediately 
before the

[[Page 54978]]

distribution, FC's basis in A1 is $100 and A1's value is $120. In 
Year 2, FC distributes A2, and, immediately before the distribution, 
FC's basis in A2 is $100 and A2's value is $120. In year 3, in its 
final liquidating distribution, FC distributes A3 and, immediately 
before the distribution, FC's basis in A3 is $100 and A3's value is 
$120. As of the time of the final distribution, USP had depreciated 
the bases of A1 and A2 to $90 and $95, respectively; the value of A1 
had appreciated to $160; and, the value of A2 has declined to $0.
    (ii) Importation property. If FC had sold either A1, A2, or A3 
immediately before it was distributed, no gain or loss recognized on 
the sale would have been taken into account in determining a Federal 
income tax liability. Further, if USP had sold either A1, A2, or A3 
immediately after it was distributed, USP would take into account 
any gain or loss recognized on the sale in determining its Federal 
income tax liability. Therefore, A1, A2, and A3 are all importation 
properties. See paragraph (b)(3)(iii)(A) of this section and Sec.  
1.362-3(c)(2).
    (iii) Loss importation transaction. Immediately after it was 
distributed, USP's basis in each of the importation properties, A1, 
A2, and A3, would, but for section 334(b)(1)(B) and this section, 
have been $100. Further, immediately after each such property was 
distributed, its value was $120. Thus, the properties' aggregate 
basis, $300, would not have exceeded the properties' aggregate 
value, $360. Accordingly, the distribution is not a loss importation 
transaction irrespective of the fact that, when the liquidation was 
completed, the properties' aggregate basis was $285 and the 
properties' aggregate value was $280. See paragraph (b)(3)(iii)(B) 
of this section and Sec.  1.362-3(c)(3).
    (iv) Basis of importation property not distributed in loss 
importation transaction. Because the importation properties, A1, A2, 
and A3, were not distributed in a loss importation transaction, the 
basis of each of the importation properties is determined under the 
generally applicable basis rules. Accordingly, USP takes each of the 
properties with a basis of $100 and, immediately after the final 
distribution, has an adjusted basis of $90 in A1 (USP's $100 basis 
less the $10 depreciation), $95 in A2 (USP's $100 basis less the $5 
depreciation), and $100 in A3. See section 334(b).

    (c) Effective/applicability date. This section applies to any 
taxable year beginning on or after these regulations are published as 
final regulations in the Federal Register, unless effected pursuant to 
a binding agreement that was in effect prior to that date and at all 
times thereafter. However, taxpayers may apply this section to 
transactions occurring after October 22, 2004.
0
Par. 5. Section 1.337-1 is added to read as follows:


Sec.  1.337-1  Nonrecognition for property distributed to parent in 
complete liquidation of subsidiary.

    (a) General rule. If section 332(a) is applicable to the receipt of 
a subsidiary`s property in complete liquidation, no gain or loss is 
recognized to the liquidating subsidiary with respect to such property 
(including property distributed with respect to indebtedness, see 
section 337(b)(1) and Sec.  1.332-7), except as provided in section 
337(b)(2) (distributions to certain tax-exempt distributees), section 
367(e)(2) (distributions to foreign corporations), and section 897(d) 
(distributions of U.S. real property interests by foreign 
corporations).
    (b) Effective/applicability date. This section applies to any 
taxable year beginning on or after these regulations are published as 
final regulations in the Federal Register.
0
Par. 6. Section 1.351-3 is amended by revising paragraphs (a)(3) and 
(b)(3), and adding a sentence at the end of paragraph (f) to read as 
follows:


Sec.  1.351-3  Records to be kept and information to be filed.

    (a) * * *
    (3) The fair market value and basis of the property transferred by 
such transferor in the exchange, determined immediately before the 
transfer and aggregated as follows:
    (i) Importation property transferred in a loss importation 
transaction, as defined in Sec.  1.362-3(c)(2) and Sec.  1.362-3(c)(3), 
respectively;
    (ii) Loss duplication property as defined in Sec.  1.362-4(c)(1);
    (iii) Property with respect to which any gain or loss was 
recognized on the transfer (without regard to whether such property is 
also identified in paragraph (a)(3)(i) or (ii) of this section); and
    (iv) Property not described in paragraphs (a)(3)(i), (a)(3)(ii), or 
(a)(3)(iii) of this section.
* * * * *
    (b) * * *
    (3) The fair market value and basis of property received in the 
exchange, determined immediately before the transfer and aggregated as 
follows:
    (i) Importation property transferred in a loss importation 
transaction, as defined in Sec.  1.362-3(c)(2) and Sec.  1.362-3(3), 
respectively;
    (ii) Loss duplication property as defined in Sec.  1.362-4(c)(1);
    (iii) Property with respect to which any gain or loss was 
recognized on the transfer (without regard to whether such property is 
also identified in paragraph (b)(3)(ii) of this section);
    (iv) Property not described in paragraphs (b)(3)(i), (b)(3)(ii), or 
(b)(3)(iii) of this section; and
* * * * *
    (f) Effective/applicability date. * * * Paragraphs (a)(3) and 
(b)(3) of this section apply to any taxable year beginning on or after 
these regulations are published as final regulations in the Federal 
Register, unless effected pursuant to a binding agreement that was in 
effect prior to that date and at all times thereafter.
0
Par. 7. Section 1.358-6 is amended by revising paragraphs (c)(1)(i)(A), 
(c)(2)(ii)(B), (c)(3)(i), (c)(3)(ii), (c)(4), (e), (f)(1), and the 
first sentence of paragraph (f)(3), and adding new paragraph (f)(4) to 
read as follows:


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

* * * * *
    (c) * * *
    (1) * * *
    (i) * * *
    (A) P acquired the T assets acquired by S in the reorganization 
(and P assumed any liabilities which S assumed or to which the T assets 
acquired by S were subject) directly from T in a transaction in which 
P's basis in the T assets was determined under section 362(b) (taking 
into account the provisions of section 362(e)(1)); and
* * * * *
    (2) * * *
    (ii) * * *
    (B) Determine the basis in the T stock acquired as if P acquired 
such stock from the former T shareholders in a transaction in which P's 
basis in the T stock was determined under section 362(b) (taking into 
account the provisions of section 362(e)(1) and, to the extent the 
transfer is a transaction described in section 362(a), the provisions 
of section 362(e)(2)).
    (3) * * *
    (i) P acquired the T stock acquired by S in the reorganization 
directly from the T shareholders in a transaction in which P's basis in 
the T stock was determined under section 362(b) (taking into account 
the provisions of section 362(e)(1)); and
    (ii) P transferred the T stock to S in a transaction in which P's 
basis in its S stock was determined under section 358 (taking into 
account the provisions of section 362(e)(2) to the extent the transfer 
is a transaction described in section 362(a)).
    (4) Examples. The rules of this paragraph (c) are illustrated by 
the following examples. For purposes of these examples, P, S, and T are 
domestic corporations, the property transferred is not importation 
property within the meaning of Sec.  1.362-3(c)(2) or loss duplication 
property within the meaning of Sec.  1.362-4(c)(2), P and S do not file 
consolidated returns, P owns all of the shares of the only class of S 
stock, the P stock exchanged in the transaction

[[Page 54979]]

satisfies the requirements of the applicable triangular reorganization 
provisions, and the facts set forth the only corporate activity.
* * * * *
    (e) Cross-references--(1) Triangular reorganizations involving 
members of a consolidated group. For rules relating to stock basis 
adjustments made as a result of a triangular reorganization in which P 
and S, or P and T, as applicable, are, or become, members of a 
consolidated group, see Sec.  1.1502-30. However, if a transaction is a 
group structure change, stock basis adjustments are determined under 
Sec.  1.1502-31 and not under Sec.  1.1502-30, even if the transaction 
also qualifies as a reorganization otherwise subject to Sec.  1.1502-
30.
    (2) Transfers of importation property in loss importation 
transaction and transfers of loss duplication property. For rules 
relating to stock basis adjustments made as a result of a triangular 
reorganization in which the property treated as acquired by P would be 
importation property received in a loss importation transaction, see 
Sec.  1.362-3. For rules relating to adjustments made as a result of a 
triangular reorganization that also qualifies under section 362(a), see 
Sec.  1.362-4.
    (3) Triangular reorganizations involving certain foreign 
corporations. For rules relating to stock basis adjustments made as a 
result of triangular reorganizations involving certain foreign 
corporations, see Sec. Sec.  1.367(b)-4(b), 1.367(b)-10, and 1.367(b)-
13.
    (f) * * * (1) General rule. In general, this section applies to 
triangular reorganizations occurring on or after December 23, 1994. 
However, paragraphs (c)(1)(i)(A), (c)(2)(ii)(B), (c)(3)(i), and 
(c)(3)(ii) of this section apply to triangular reorganizations 
occurring on or after the date these regulations are published as final 
regulations in the Federal Register.
* * * * *
    (3) * * * Paragraphs (b)(2)(v) and (e)(1) of this section shall 
apply to triangular reorganizations occurring on or after September 17, 
2008. * * *
    (4) Triangular reorganizations involving importation property 
acquired in loss importation transaction or loss duplication 
transaction; triangular reorganizations involving certain foreign 
corporations. Paragraphs (e)(2) and (e)(3) of this section shall apply 
to triangular reorganizations occurring on or after the date these 
regulations are published as final regulations in the Federal Register.
0
Par. 8. Section 1.362-3 is added to read as follows:


Sec.  1.362-3  Basis of importation property acquired in loss 
importation transaction.

    (a) Purpose. The purpose of section 362(e)(1) and this section is 
to prevent a corporation (Acquiring) from importing a net built-in loss 
in a transaction described in either section 362(a) (section 351 
transfers, contributions to capital, or paid-in surplus) or section 
362(b) (reorganizations). See paragraph (c) of this section for 
definitions of terms used in this section.
    (b) Basis determinations under this section--(1) Basis of 
importation property received in loss importation transaction. 
Notwithstanding any other provision of law, Acquiring's basis in 
importation property (as defined in paragraph (c)(2) of this section) 
acquired in a loss importation transaction (as defined in paragraph 
(c)(3) of this section) is equal to the value of the property 
immediately after the transaction.
    (2) Adjustment to basis of subsidiary stock in triangular 
reorganizations. If a corporation (P) computes its basis in stock of a 
subsidiary (whether S or T) under Sec.  1.358-6 (stock basis in certain 
triangular reorganizations), P's basis in property treated as acquired 
by P in Sec.  1.358-6(c) is determined under section 362(e)(1) and this 
section to the extent such property, if actually acquired by P, would 
be importation property acquired in a loss importation transaction. See 
Sec.  1.358-6(c)(1)(i)(A), paragraphs (c)(2)(ii)(B), and (c)(3)(i). The 
subsidiary's basis in the property actually acquired in the transaction 
is determined under applicable law (including this section), without 
regard to the amount of any adjustment to P's basis in the subsidiary's 
stock. Thus, the basis of the property in S's or T's hands may differ 
from the amount of the adjustment to P's basis in its stock of S or T.
    (3) Acquiring's basis in other property transferred. In general, 
Acquiring's basis in property received in a section 362 transaction (as 
defined in paragraph (c)(1) of this section) that is not determined 
under section 362(e)(1) and this section is determined under section 
362(a) or section 362(b). However, if the transaction is described in 
section 362(a) (without regard to whether it is also described in any 
other section), further adjustment may be required under section 
362(e)(2). See Sec.  1.362-4.
    (c) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Section 362 transaction. The term section 362 transaction means 
any transaction described in section 362(a) or in section 362(b).
    (2) Importation property.--(i) General rule. The term importation 
property means any property (including separate portions of property 
tentatively divided under paragraph (e)(2) of this section) with 
respect to which--
    (A) Any gain or loss that would be recognized on its sale by the 
transferor immediately before the transaction (the transferor's 
hypothetical sale) would not be subject to tax imposed under any 
provision of subtitle A of the Internal Revenue Code (Federal income 
tax) (taking into account the provisions of paragraph (d) of this 
section); and
    (B) Any gain or loss that would be recognized on its sale by 
Acquiring immediately after the transaction (Acquiring's hypothetical 
sale) would be subject to Federal income tax (taking into account the 
provisions of paragraph (d) of this section)
    (ii) Special rules for applying this paragraph (c)(2). See 
paragraph (d) of this section for rules for determining whether gain or 
loss on a hypothetical sale would be taken into account in determining 
a Federal income tax liability and paragraph (e) of this section for 
rules applicable when more than one person would take such gain or loss 
into account.
    (3) Loss importation transaction. The term loss importation 
transaction means any section 362 transaction in which Acquiring's 
aggregate basis in all importation property received from all 
transferors in the transaction would exceed the aggregate value of such 
property immediately after the transaction. For this purpose, 
Acquiring's basis in property received is determined without regard to 
this section or section 362(e)(2).
    (4) Value--(i) General rule. The term value means fair market 
value.
    (ii) Special rule for transfers of partnership interests. 
Notwithstanding the general rule in paragraph (c)(4)(i) of this 
section, when referring to a partnership interest, for purposes of this 
section, the term value means the sum of the cash that Acquiring would 
receive for the interest, assuming an exchange between a willing buyer 
and a willing seller (neither being under any compulsion to buy or sell 
and both having reasonable knowledge of relevant facts), increased by 
any Sec.  1.752-1 liabilities (as defined in Sec.  1.752-1(a)(4)) of 
the partnership allocated to Acquiring with regard to such transferred 
interest under section 752 immediately after the transfer to Acquiring. 
See Sec.  1.743-1 regarding the application of section 743(b) following 
a section 362(e) basis reduction.

[[Page 54980]]

    (d) Rules for determining whether gain or loss would be taken into 
account in determining a Federal income tax liability--(1) General 
rule. In general, any gain or loss that would be recognized on a 
hypothetical sale described in either paragraph (c)(2)(i) or paragraph 
(c)(2)(ii) of this section is considered to be subject to Federal 
income tax if, taking into account all relevant facts and 
circumstances, such gain or loss would affect or be taken into account 
in determining the Federal income tax liability of the transferor or 
Acquiring, respectively. This determination is made without regard to 
whether such person has or would have any actual Federal income tax 
liability for the taxable year of the transaction.
    (2) Look-through rule in the case of certain pass-through entities. 
Notwithstanding the general rule in paragraph (d)(1) of this section, 
the determination of whether any gain or loss on a hypothetical sale 
would be treated as subject to Federal income tax is made by reference 
to the person that would be required to include such gain or loss in 
its taxable income if the hypothetical seller is--
    (i) A trust treated as owned by its grantors or others (see section 
671);
    (ii) A partnership (see section 701); or
    (iii) An S corporation (see sections 1363 and 1366).
    (3) Controlled foreign corporations (CFC), passive foreign 
investment companies (PFIC). For purposes of this section, gain or loss 
that would be recognized by a CFC (as defined in section 957(a)) or a 
PFIC (as defined in section 1297(a)) is not deemed taken into account 
in determining a Federal income tax liability solely because it could 
affect an inclusion under section 951(a) or section 1293(a).
    (4) Look-through treatment in the case of certain avoidance 
transactions. (i) Application of section. This paragraph (d)(4) applies 
if--
    (A) The transferor is a domestic entity that is a trust, estate, 
regulated investment company (RIC) (as defined in section 851(a)), a 
real estate investment trust (REIT) (as defined in section 856(a)), or 
a cooperative (see section 1381); and
    (B) The transferor transfers, directly or indirectly, property that 
was transferred to or acquired by it as part of a plan (whether of 
transferor, Acquiring, or any other person) to avoid the application of 
section 362(e)(1) and this section to a section 362 transaction.
    (ii) Effect of application of section. Notwithstanding paragraph 
(d)(1) of this section, if a transferor is described in both paragraphs 
(d)(4)(ii)(A) and (d)(4)(ii)(B) of this section--
    (A) The transferor is treated as though it distributes the proceeds 
of the hypothetical sale (which, for this purpose, are presumed to be 
an amount greater than zero);
    (B) To the fullest extent possible under the transferor's 
organizing instrument, taking into account the beneficiaries or owners 
of interests (as applicable) in the transferor, the deemed distribution 
is treated as made to a distributee or distributees that would not take 
distributions from the transferor into account in determining a Federal 
income tax liability; and
    (C) The determination of whether the gain or loss on the 
hypothetical sale is treated as subject to Federal income tax is made 
by reference to the deemed distributee or distributees.
    (iii) Tiered entities. If a deemed distributee is an entity 
described in paragraph (d)(4)(i)(A) of this section, the determination 
of whether gain or loss on the hypothetical sale is taken into account 
in determining a Federal income tax liability is made by treating the 
deemed distributee, and any successive such deemed distributees, as a 
transferor and applying the rules in paragraphs (d)(4)(i) and 
(d)(4)(ii) of this section to its deemed distribution (and to all 
successive deemed distributions), until no deemed distributee or 
successive deemed distributee is an entity described in paragraph 
(d)(4)(i)(A) of this section.
    (e) Special rules for gain or loss that would be taken into account 
by multiple persons--(1) In general. If gain or loss from a disposition 
of property would be includible in income by more than one person, the 
property is treated as tentatively divided into separate portions in 
proportion to the amount of gain or loss recognized with respect to the 
property that would be allocated to each such person. If an entity's 
organizing instrument specially allocates gain and loss, the tentative 
division of property under this paragraph (e) must reflect the manner 
in which gain or loss on the disposition of such property would be 
allocated under the terms of the organizing instrument, taking into 
account the net gain or loss actually recognized by the entity in that 
tax year.
    (2) Application of section. The rules of this section apply 
independently to each tentatively divided portion to determine if the 
portion is importation property. Each tentatively divided portion that 
is determined to be importation property is included with all other 
importation property in the determination of whether the transaction is 
a loss importation transaction.
    (3) Acquiring's basis in property tentatively divided into separate 
portions. Immediately after the application of section 362(e)(1) and 
this section and before the application of section 362(e)(2), each 
property treated as tentatively divided into separate portions for 
purposes of applying section 362(e)(1) and this section ceases to be 
treated as tentatively divided and Acquiring has a single, undivided 
basis in such property that is equal to the sum of--
    (i) The value of each tentatively divided portion that is 
importation property, if the transaction is a loss importation 
transaction; and
    (ii) Acquiring's basis in each tentatively divided portion that is 
not importation property received in a loss importation transaction, as 
determined under section 362(a) or section 362(b), as applicable, and 
without regard to any potential application of section 362(e)(2).
    (f) Examples. The examples in this paragraph (f) illustrate the 
application of section 362(e)(1) and the provisions of this section. 
Unless otherwise indicated, the examples use the following nomenclature 
and assumptions: A and B are U.S. citizens. DC, DC1, and P are domestic 
corporations that have not elected to be S corporations within the 
meaning of section 1361(a)(1) and that are not members of a 
consolidated group. F is a foreign individual. FP is a foreign 
partnership. FC, FC1, and FC2 are foreign corporations. Unless the 
facts indicate otherwise, the foreign individuals, corporations, and 
partnerships are not engaged in a U.S. trade or business, have no U.S. 
real property interests, and have no other relationships, activities, 
or interests that would cause them, their shareholders, their partners, 
or their property to be subject to Federal income taxation. There is no 
applicable income tax treaty, and all persons and transactions are 
unrelated unless the facts indicate otherwise.

    Example 1. Basic application of section. (i) Section 351 
transfer of importation property in a loss importation transaction. 
(A) Facts. FC owns three assets, A1 (basis $40, value $150), A2 
(basis $120, value $30), and A3 (basis $140, value $20). On Date 1, 
FC transfers A1, A2, and A3 to DC in a transaction to which section 
351 applies.
    (B) Importation property. If FC had sold A1, A2, or A3 
immediately before the transaction, no gain or loss recognized on 
the sale would have been taken into account in determining a Federal 
income tax liability. Further, if DC had sold A1, A2, or A3 
immediately after the transaction, DC would take into account any 
gain or loss recognized on the sale in determining its Federal 
income tax liability. Therefore, A1, A2, and A3 are

[[Page 54981]]

all importation properties. See paragraph (c)(2) of this section.
    (C) Loss importation transaction. FC's transfer of A1, A2, and 
A3 is a section 362 transaction. Furthermore, but for section 
362(e)(1) and this section and section 362(e)(2), DC's aggregate 
basis in the importation properties, A1, A2, and A3, would be $300 
($40 + $120 + $140) under section 362(a) and the properties' 
aggregate value would be $200 ($150 + $30 + $20). Therefore, the 
importation properties' aggregate basis would exceed their aggregate 
value and the transaction is a loss importation transaction. See 
paragraph (c)(3) of this section.
    (D) Application of section 362(e)(1) and this section to 
importation property received in loss importation transaction. 
Because the importation properties, A1, A2, and A3, were transferred 
in a loss importation transaction, paragraph (b)(1) of this section 
applies and DC's basis in A1, A2, and A3 will each be equal to the 
property's value ($150, $30, and $20, respectively) immediately 
after the transfer.
    (E) Basis of property received in transaction. Following the 
application of section 362(e)(1) and this section, the provisions of 
section 362(e)(2) must be taken into account because the transfer is 
a section 362(a) transaction. Taking into account the application of 
section 362(e)(1) and this section, DC's aggregate basis in the 
transferred properties would not exceed their aggregate value 
immediately after the transfer. Therefore, FC does not have a net 
built-in loss, FC's transfer is not a loss duplication transaction, 
and section 362(e)(2) does not apply to this transaction. DC's bases 
in A1, A2, and A3, as determined under paragraph (i)(D) of this 
Example 1, are $150, $30, and $20, respectively. Under section 
358(a), FC receives the DC stock with a basis of $300 (the sum of 
FC's bases in A1, A2, and A3 immediately before the exchange).
    (ii) Reorganization. The facts are the same as in paragraph 
(i)(A) of this Example 1 except that, instead of transferring 
property to DC in a section 351 exchange, FC merges with and into DC 
in a transaction described in section 368(a)(1)(A). The analysis and 
results are the same as set forth in paragraphs (i)(B), (i)(C), 
(i)(D), and (i)(E) of this Example 1, except that, under section 
358(a), FC's shareholders will take the DC stock with a basis 
determined by reference to their FC stock basis.
    (iii) FC's property used in U.S. trade or business. (A) Facts. 
The facts are the same as in paragraph (i)(A) of this Example 1, 
except that FC is engaged in a U.S. trade or business and uses all 
the properties in that U.S. trade or business. In this case, none of 
the properties would be importation property because FC would take 
any gain or loss on the disposition of the properties into account 
in determining its Federal income tax liability. Accordingly, this 
section does not apply to the transaction.
    (B) Basis of property received in transaction. Following the 
application of section 362(e)(1) and this section, the provisions of 
section 362(e)(2) must be taken into account because the transfer is 
a section 362(a) transaction. Taking into account the application of 
section 362(e)(1) and this section but without taking into account 
the provisions of section 362(e)(2), DC's aggregate basis in the 
transferred properties would be $300 ($40 + $120 + $140) under 
section 362(a) and the properties' aggregate value immediately after 
the transfer would be $200 ($150 + $30 + $20). Therefore, FC has a 
net built-in loss and FC's transfer of A1, A2, and A3 is a loss 
duplication transaction. Accordingly, under the general rule of 
section 362(e)(2), FC's $100 net built-in loss ($300 aggregate basis 
over $200 aggregate value) would be allocated proportionately (by 
the amount of built-in loss in each property) to reduce DC's basis 
in the loss properties, A2 and A3. See Sec.  1.362-4. As a result, 
DC's basis in A2 would be $77.14 ($120 basis under section 362(a) 
reduced by $42.86, A2's proportionate share of FC's net built-in 
loss, computed as $90/$210 x $100) and DC's basis in A3 would be 
$82.86 ($140 basis under section 362(a) reduced by $57.14, A3's 
proportionate share of FC's net built-in loss, computed as $120/$210 
x $100). However, if FC and DC were to elect under section 
362(e)(2)(C) to apply the $100 basis reduction to FC's basis in the 
DC stock received in the transaction, DC's bases in A2 and A3 would 
remain their section 362(a) bases of $120 and $140, respectively. 
Under section 362(a), DC's basis in A1 is $40 (irrespective of 
whether the section 362(e)(2)(C) election is made). If FC and DC do 
not make a section 362(e)(2)(C) election, FC's basis in the DC stock 
received in the exchange will be $300; if FC and DC do make the 
election, FC's basis in the DC stock will be $200 ($300-$100 net 
built-in loss). See Sec.  1.362-4(b).

    Example 2. Multiple transferors. (i) Facts. The facts are the 
same as in paragraph (i)(A) of Example 1, except that FC only owns 
A1 (basis $40, value $150) and A2 (basis $120, value $30) and F owns 
A3 (basis $140, value $20). On Date 1, FC transfers A1 and A2, and F 
transfers A3, to DC in a single transaction described in section 
351.
    (ii) Importation property. A1 and A2 are importation properties 
for the reasons set forth in paragraph (i)(B) of Example 1. A3 is 
also an importation property because, if F had sold A3 immediately 
before the transaction, no gain or loss recognized on the sale would 
have been taken into account in determining a Federal income tax 
liability, and, further, if DC had sold A3 immediately after the 
transaction, DC would take into account any gain or loss recognized 
on the sale in determining its Federal income tax liability.
    (iii) Loss importation transaction. The transfers by FC and F 
are a section 362 transaction. The transaction is a loss importation 
transaction for the reasons set forth in paragraph (i)(C) of Example 
1 (notwithstanding that one of the transferors, FC, did not transfer 
a net built-in loss). See paragraph (c)(3) of this section.
    (iv) Application of section 362(e)(1) and this section to 
importation property received in loss importation transaction. 
Because the importation properties, A1, A2, and A3, were transferred 
in a loss importation transaction, paragraph (b)(1) of this section 
applies and DC's basis in A1, A2, and A3 will each be equal to the 
property's value ($150, $30, and $20, respectively) immediately 
after the transfer.
    (v) Basis of property received in transaction. Following the 
application of section 362(e)(1) and this section, the provisions of 
section 362(e)(2) must be taken into account because the transfer is 
a section 362(a) transaction. The application of section 362(e)(2) 
is determined separately for each transferor. See Sec.  1.362-4(b). 
Taking into account the application of section 362(e)(1) and this 
section, neither DC's aggregate basis in FC's properties nor DC's 
basis in F's property would exceed the properties' respective values 
immediately after the transaction. Therefore neither FC nor F has a 
net built-in loss, neither transfer is a loss duplication 
transaction, and section 362(e)(2) does not apply to either 
transfer. DC's bases in A1, A2, and A3, as determined under 
paragraph (iv) of this Example 2, are $150, $30, and $20, 
respectively. Under section 358(a), FC's basis in the DC stock 
received is $160 ($40 + $120) and F's basis in the DC stock received 
in the exchange is $140.

    Example 3. Transfer of importation and non-importation property. 
 (i) Facts. As in paragraph (i) of Example 2, FC owns A1 (basis $40, 
value $150) and A2 (basis $120, value $30), and F owns A3 (basis 
$140, value $20). In addition, A2 is a U.S. real property interest 
as defined in section 897(c)(1). On Date 1, FC transfers A1 and A2, 
and F transfers A3, to DC in a single transaction described in 
section 351.
    (ii) Importation property. A1 and A3 are importation properties 
for the reasons set forth in paragraph (i)(B) of Example 1 and 
paragraph (i) of Example 2, respectively. However, A2 is not 
importation property because, if FC had sold A2 immediately before 
the transaction, FC would take into account any gain or loss 
recognized on the sale in determining its Federal income tax 
liability.
    (iii) Loss importation transaction. FC's transfer is a section 
362 transaction. Furthermore, but for section 362(e)(1) and this 
section and section 362(e)(2), DC's aggregate basis in the 
importation properties, A1 and A3, would be $180 ($40 + $140) and 
the properties' aggregate value would be $170 ($150 + $20) 
immediately after the transaction. Therefore, the importation 
properties' aggregate basis would exceed their aggregate value 
immediately after the transaction, and the transfer is a loss 
importation transaction.
    (iv) Application of section 362(e)(1) and this section to 
importation property received in loss importation transaction. 
Because the importation properties, A1 and A3, were transferred in a 
loss importation transaction, paragraph (b)(1) of this section 
applies and DC's basis in A1 and in A3 will each be equal to the 
property's value ($150 and $20, respectively) immediately after the 
transfer.
    (v) Basis of property received in transaction. Following the 
application of section 362(e)(1) and this section, the provisions of 
section 362(e)(2) must be taken into account because the transfer is 
a section 362(a) transaction. The application of section 362(e)(2) 
is determined separately for each transferor. See Sec.  1.362-4(b).
    (A) FC's transfer. Taking into account the application of 
section 362(e)(1) and this

[[Page 54982]]

section but without taking into account the provisions of section 
362(e)(2), DC would have an aggregate basis of $270 in the 
transferred properties ($150 in A1, as determined under paragraph 
(iv) of this Example 3, plus $120 in A2, determined under section 
362(a)), and the properties would have an aggregate value of $180 
($150 + $30) immediately after the transfer. Therefore, FC has a net 
built-in loss and FC's transfer of A1 and A2 is a loss duplication 
transaction. Accordingly, under the general rule of section 
362(e)(2), FC's $90 net built-in loss ($270 aggregate basis to DC 
over $180 aggregate value) would be allocated proportionately to 
reduce DC's basis in the loss property transferred by FC. As a 
result, FC's entire net built-in loss would be allocated to A2, the 
only loss property transferred by FC, and DC's basis in A2 would be 
$30 ($120 basis under section 362(a) reduced by $90 net built-in 
loss). However, if FC and DC were to elect under section 
362(e)(2)(C) to apply the $90 basis reduction to FC's basis in the 
DC stock received in the transaction, DC's basis in A2 would remain 
its section 362(a) basis of $120. DC's basis in A1 is $150 as 
determined under paragraph (iv) of this Example 3 (irrespective of 
whether the section 362(e)(2)(C) election is made). If FC and DC do 
not make a section 362(e)(2)(C) election, FC's basis in the DC stock 
received in the exchange will be $270; if FC and DC do make the 
election, FC's basis in the DC stock will be $180 ($270-$90 net 
built-in loss). See Sec.  1.362-4.
    (B) F's transfer of A3. Taking into account the application of 
section 362(e)(1) and this section, DC's basis in A3, the property 
transferred by F, would not exceed its value immediately after the 
transfer. Therefore, F does not have a built-in loss, F's transfer 
is not a loss duplication transaction, and section 362(e)(2) does 
not apply to F's transfer. DC's basis in A3, as determined under 
paragraph (iv) of this Example 3, is $20. Under section 358(a), F 
receives the DC stock with a basis of $140.

    Example 4. Multiple transferors of non-importation properties. 
(i) Facts. DC1 owns A1 (basis $40, value $150). In addition, as in 
Example 3, FC owns A2 (basis $120, value $30), a U.S. real property 
interest as defined in section 897(c)(1), and F owns A3 (basis $140, 
value $20). On Date 1, DC1 transfers A1, FC transfers A2, and F 
transfers A3, to DC in a single transaction described in section 
351.
    (ii) Importation property. A2 is not importation property and A3 
is importation property for the reasons set forth in paragraph (ii) 
of Example 3 and paragraph (i)(B) of Example 1, respectively. A1 is 
not importation property because, if DC1 had sold A2 immediately 
before the transaction, DC1 would take into account any gain or loss 
recognized on the sale in determining its Federal income tax 
liability.
    (iii) Loss importation transaction. The transfer of A1, A2, and 
A3 is a section 362 transaction. Furthermore, but for section 
362(e)(1) and this section and section 362(e)(2), DC's basis in 
importation property, A3, would be $140 and the value of the 
property would be $20 immediately after the transaction. Therefore, 
the importation property's basis would exceed value and the transfer 
is a loss importation transaction.
    (iv) Application of section 362(e)(1) and this section to 
importation property received in loss importation transaction. 
Because the importation property, A3, was transferred in a loss 
importation transaction, section 362(e)(1) and paragraph (b)(1) of 
this section applies and DC's basis in A3 will be equal to A3's $20 
value immediately after the transfer.
    (v) Basis of property received in transaction. Following the 
application of section 362(e)(1) and this section, the provisions of 
section 362(e)(2) must be taken into account because the transfer is 
a section 362(a) transaction. The application of section 362(e)(2) 
is determined separately for each transferor. See Sec.  1.362-4.
    (A) DC1's transfer. Taking into account the application of 
section 362(e)(1) and this section, DC's basis in A1 ($40 under 
section 362(a)) would not exceed its value immediately after the 
transfer. Therefore, DC1 does not have a net built-in loss, DC1's 
transfer is not a loss duplication transaction, and section 
362(e)(2) does not apply to DC1's transfer. DC's basis in A1, 
determined under section 362(a), is $40. Under section 358(a), DC1 
receives the DC stock with a basis of $40.
    (B) FC's transfer. Taking into account the application of 
section 362(e)(1) and this section, but without taking into account 
the provisions of section 362(e)(2), DC would have a section 362(a) 
basis of $120 in A2, which would exceed A2's $30 value immediately 
after the transfer. Therefore, FC has a net built-in loss and FC's 
transfer of A2 is a loss duplication transaction. Accordingly, under 
the general rule of section 362(e)(2), FC's $90 net built-in loss 
(DC's $120 basis in A2 over A2's $30 value) would be applied to 
reduce DC's basis in A2, the only loss property transferred by FC. 
As a result, DC's basis in A2 would be $30 ($120 basis under section 
362(a), reduced by the $90 net built-in loss). However, if FC and DC 
were to elect under section 362(e)(2)(C) to apply the $90 basis 
reduction to FC's basis in the DC stock received in the transaction, 
DC's basis in A2 would be its $120 basis determined under section 
362(a). If FC and DC do not make a section 362(e)(2)(C) election, 
FC's basis in the DC stock received in the exchange will be $120; if 
FC and DC do make the election, FC's basis in the DC stock will be 
$30 ($120-$90). See Sec.  1.362-4.
    (C) F's transfer. F's transfer of A3 is a transaction described 
in section 362(a). However, taking into account the application of 
section 362(e)(1) and this section, DC's basis in A3 ($20) would not 
exceed its value immediately after the transfer. Therefore, F does 
not have a built-in loss, F's transfer is not a loss duplication 
transaction, and section 362(e)(2) does not apply to F's transfer. 
DC's basis in A3, as determined under paragraph (iv) of this Example 
4, is $20. Under section 358(a), FC receives the DC stock with a 
basis of $140.

    Example 5. Partnership transactions.  (i) Transfer by foreign 
partnership, foreign and domestic partners. (A) Facts. A and F are 
equal partners in FP. FP owns A1 (basis $100, value $70). Under the 
terms of the FP partnership agreement, FP's items of income, gain, 
deduction, and loss are allocated equally between A and F. FP 
transfers A1 to DC in a transfer to which section 351 applies. No 
election is made under section 362(e)(2)(C).
    (B) Importation property. If FP had sold A1 immediately before 
the transaction, any gain or loss recognized on the sale would be 
allocated to and includible by A and F equally under the partnership 
agreement. Thus, A1 is treated as tentatively divided into two equal 
portions, one treated as owned by A and one treated as owned by F. 
If FP had sold A1 immediately before the transaction, any gain or 
loss recognized on the portion treated as owned by A would have been 
taken into account in determining a Federal income tax liability 
(A's); thus A's tentatively divided portion of A1 is not importation 
property. However, no gain or loss recognized on the tentatively 
divided portion treated as owned by F would have been taken into 
account in determining a Federal income tax liability. Further, if 
DC had sold A1 immediately after the transaction, any gain or loss 
recognized on the sale would have been taken into account in 
determining a Federal income tax liability (DC's); thus, F's 
tentatively divided portion of A1 is importation property.
    (C) Loss importation transaction. FP's transfer of A1 is a 
section 362 transaction. Furthermore, but for section 362(e)(1) and 
this section and section 362(e)(2), DC's basis in the importation 
property, F's portion of A1, would be $50 under section 362(a) and 
the property's value would be $35 immediately after the transaction. 
Therefore, the importation property's basis would exceed its value 
and the transfer is a loss importation transaction.
    (D) Application of section 362(e)(1) and this section to 
importation property received in loss importation transaction. 
Because the importation property, F's tentatively divided portion of 
A1, was transferred in a loss importation transaction, section 
362(e)(1) and paragraph (b)(1) of this section applies and DC's 
basis in F's portion of A1 will be equal to its $35 value.
    (E) Basis of property received in transaction. Following the 
application of section 362(e)(1) and this section, the provisions of 
section 362(e)(2) must be taken into account because the transfer is 
a section 362(a) transaction. Taking into account the application of 
section 362(e)(1) and this section but without taking into account 
the provisions of section 362(e)(2), DC's aggregate basis in A1 
would be $85 (the sum of the $35 basis in F's tentatively divided 
portion of A1, as determined under paragraph (i)(D) of this Example 
5, and the $50 basis in A's tentatively divided portion of A1, 
determined under section 362(a), see paragraph (d)(2) of this 
section) and A1's value immediately after the transfer would be $70. 
Therefore, FP has a net built-in loss and FP's transfer of A1 is a 
loss duplication transaction. Accordingly, under the general rule of 
section 362(e)(2), FP's $15 net built-in loss ($85 basis over $70 
value) would be allocated to reduce DC's basis in the loss asset, 
A1, the only loss property transferred by FP. As a result, DC's 
basis in A1 would

[[Page 54983]]

be $70 ($85 basis under section 362(a) and this section, reduced by 
the $15 net built-in loss). Under section 358, FP's basis in the DC 
stock received in the exchange will be $100. See Sec.  1.362-4.
    (ii) Transfer with election to apply section 362(e)(2)(C). The 
facts are the same as in paragraph (i)(A) of this Example 5, except 
that FP and DC elect to apply section 362(e)(2)(C) to reduce FP's 
basis in the DC stock received in the exchange. The analysis and 
results are the same as in paragraphs (i)(B), (i)(C), (i)(D), and 
(i)(E) of this Example 5, except that the $15 reduction to DC's 
basis in A1 is not made and, as a result, DC's basis in A1 remains 
$85, and FP's basis in the DC stock received in the exchange is 
reduced from $100 to $85. The $15 reduction to FP's basis in DC 
stock reduces A's basis in its FP interest under section 
705(a)(2)(B). See Sec.  1.362-4(f)(1).
    (iii) Transfer by domestic partnership. The facts are the same 
as in paragraph (i)(A) of this Example 5 except that FP is a 
domestic partnership. The analysis and results are the same as in 
paragraphs (i)(B), (i)(C), (i)(D), and (i)(E) of this Example 5.
    (iv) Transfer of interest in partnership with liability. (A) 
Facts. F and two other individuals are equal partners in FP. F's 
basis in its partnership interest is $247. F's share of FP's Sec.  
1.752-1 liabilities (as defined in Sec.  1.752-1(a)(4)) is $150. F 
transfers his partnership interest to DC in a transaction to which 
section 351 applies. FP has no section 754 election in effect. If DC 
were to sell the FP interest immediately after the transfer, DC 
would receive $100 in cash or other property. In addition, taking 
into account the rules under Sec.  1.752-4, DC's share of FP's Sec.  
1.152-1 liabilities (as defined in Sec.  1.752-1(a)(4)) is $145 
immediately after the transfer.
    (B) Importation property. If F had sold his partnership interest 
immediately before the transaction, no gain or loss recognized on 
the sale would have been taken into account in determining a Federal 
income tax liability. Further, if DC had sold the partnership 
interest immediately after the transaction, any gain or loss 
recognized on the sale would have been taken into account in 
determining a Federal income tax liability. Therefore, F's 
partnership interest is importation property.
    (C) Loss importation transaction. F's transfer is a section 362 
transaction. However, but for section 362(e)(1) and this section and 
section 362(e)(2), DC's basis in the importation property, the 
partnership interest, determined under section 362(a) and taking 
into account the rules under section 752, would be $242 (F's $247 
basis reduced by F's $150 share of PRS liabilities and increased by 
DC's $145 share of PRS liabilities) and, under Sec.  1.362-
4(c)(12)(ii), the value of the PRS interest would be $245 (the sum 
of $100, the cash DC would receive if DC immediately sold the 
partnership interest, and $145, DC's share of the Sec.  1.752-1 
liabilities (as defined in Sec.  1.752-1(a)(4)) under section 752 
immediately after the transfer to DC). Therefore, the importation 
property's basis ($242) would not exceed its value ($245), and the 
transfer is not a loss importation transaction.
    (D) Basis in property received in transaction. Following the 
application of section 362(e)(1) and this section, the provisions of 
section 362(e)(2) must be taken into account because the transfer is 
a section 362(a) transaction. As described in paragraph (iv)(C) of 
this Example 5, taking into account the application of section 
362(e)(1) and this section, DC's basis in the partnership interest 
would not exceed its value. Therefore, under Sec.  1.362-4, F does 
not have a net built-in loss, the transfer is not a loss duplication 
transaction, and section 362(e)(2) does not apply to the transfer. 
DC's basis in F's partnership interest is $242, determined under 
sections 362(a) and 752. Under section 358, taking into account the 
rules under section 752, F's basis in the DC stock received in the 
exchange is $97 ($247 reduced by F's $150 share of FP liabilities).

    Example 6. Transactions involving tax-exempt entities.  (i) 
Exempt transferor. (A) Facts. InsCo is a benevolent life insurance 
association of a purely local character exempt from Federal income 
tax under section 501(a) because it is described in section 
501(c)(12). InsCo owns shares of stock of DC1 (basis $100, value 
$70) for investment purposes, which are not debt-financed property 
(as defined in section 514). On December 31, Year 1, InsCo transfers 
the DC1 stock to DC in a transaction to which section 351 applies. 
No election is made under section 362(e)(2)(C).
    (B) Importation property. If InsCo had sold the DC1 stock 
immediately before the transaction, any gain or loss realized would 
be excluded from unrelated business taxable income (UBTI) under 
section 512(b)(5), and thus no gain or loss recognized on the sale 
would have been taken into account in determining Federal income tax 
liability. Further, if DC had sold the DC1 stock immediately after 
the transaction, any gain or loss recognized on the sale would have 
been taken into account in determining Federal income tax liability. 
Therefore, the DC1 stock is importation property.
    (C) Loss importation transaction. InsCo's transfer is a section 
362 transaction. Furthermore, but for section 362(e)(1) and this 
section and section 362(e)(2), DC's basis in importation property, 
the DC1 stock, would be $100, and the stock's value would be $70 
immediately after the transaction. Therefore, the importation 
property's basis would exceed its value and the transfer is a loss 
importation transaction.
    (D) Application of section 362(e)(1) and this section to 
importation property received in loss importation transaction. 
Because the importation property, the DC1 stock, was transferred in 
a loss importation transaction, paragraph (b)(1) of this section 
applies and DC's basis in the stock will be equal to its $70 value.
    (E) Basis of property received in transaction. Following the 
application of section 362(e)(1) and this section, the provisions of 
section 362(e)(2) must be taken into account because the transfer is 
a section 362(a) transaction. Taking into account the application of 
section 362(e)(1) and this section, DC's basis in the DC1 stock 
would not exceed its value immediately after the transaction. 
Therefore, InsCo does not have a net built-in loss, InsCo's transfer 
is not a loss duplication transaction, and section 362(e)(2) has no 
application to the transaction. DC's basis in the DC1 stock, as 
determined under paragraph (i)(D) of this Example 6, is $70. Under 
section 358, InsCo's basis in the DC stock received in the exchange 
will be $100.
    (ii) Transferor loses tax-exempt status. (A) Facts. The facts 
are the same as in paragraph (i)(A) of this Example 6 except that 
InsCo fails to be described in section 501(c)(12) in Year 1.
    (B) Importation property. If InsCo had sold the DC1 stock 
immediately before the transaction, any gain or loss recognized on 
the sale would have been taken into account in determining a Federal 
income tax liability. Therefore, the DC1 stock is not importation 
property and this section does not apply to the transaction.
    (C) Basis of property received in transaction. Following the 
application of section 362(e)(1) and this section, the provisions of 
section 362(e)(2) must be taken into account because the transfer is 
a section 362(a) transaction. Taking into account the application of 
section 362(e)(1) and this section but without taking into account 
the provisions of section 362(e)(2), DC would have a section 362(a) 
basis of $100 in the stock, which would exceed its value of $70 
immediately after the transfer. Therefore, InsCo has a net built-in 
loss and InsCo's transfer of the DC1 stock is a loss duplication 
transaction. Accordingly, under the general rule of section 
362(e)(2), InsCo's $30 net built-in loss ($100 basis over $70 value) 
would be allocated to reduce DC's basis in the loss asset, the DC1 
stock, the only loss property transferred by InsCo. As a result, 
DC's basis in the DC1 stock would be $70 ($100 basis under section 
362(a), reduced by the $30 net built-in loss). Under section 358, 
InsCo's basis in the DC stock received in the exchange will be $100.
    (iii) Transfer of property that is subject to unrelated business 
tax. (A) Facts. The facts are the same as in paragraph (i)(A) of 
this Example 6 except that, on December 31, Year 1, instead of the 
DC1 stock, InsCo transfers A1 (basis $200, value $150) to DC. A1 is 
an office building that InsCo owned from January 1 to December 31 of 
Year 1. During the entirety of this period, A1 constitutes debt-
financed property (as defined in section 514). Pursuant to sections 
512 and 514, InsCo would be required to include in UBTI a portion of 
the gains or losses from a sale of A1 at the end of Year 1. DC does 
not take the property subject to the debt.
    (B) Importation property. If InsCo had sold A1 immediately 
before the transaction, the gain or loss recognized on the sale 
would have been taken into account in determining a Federal income 
tax liability, even though at a lesser rate of inclusion. Therefore, 
A1 is not importation property and this section does not apply to 
the transaction.
    (C) Basis of property received in transaction. The analysis and 
results are the same as in paragraph (ii)(C) of this Example 6.

    Example 7. Transactions involving CFCs.  (i) Transfer by CFC. 
(A) Facts. FC is a CFC with 100 shares of stock outstanding. A owns 
60 of the shares and F owns the remaining 40 shares. FC owns two 
assets, A1 (basis $70, value $100), which is used in the conduct of

[[Page 54984]]

a U.S. trade or business, and A2 (basis $100, value $75), which is 
not used in the conduct of a U.S. trade or business. FC transfers 
both assets to DC in a transaction to which section 351 applies.
    (B) Importation property. If FC had sold A1 immediately before 
the transaction, any gain or loss recognized on the sale would have 
been taken into account in determining a Federal income tax 
liability (FC's). See section 882(a). Therefore, A1 is not 
importation property. If FC had sold A2 immediately before the 
transaction, FC would not take the gain or loss recognized into 
account in determining its Federal income tax liability, but the 
gain or loss could be taken into account in determining a section 
951 inclusion to FC's U.S. shareholders. However, under paragraph 
(d)(3) of this section, gain or loss is not deemed taken into 
account in determining a Federal income tax liability solely because 
it could affect an inclusion under section 951(a). Further, if DC 
had sold A2 immediately after the transaction, any gain or loss 
recognized on the sale would have been taken into account in 
determining a Federal income tax liability. Therefore, A2 is 
importation property.
    (C) Loss importation transaction. FC's transfer is a section 362 
transaction. Furthermore, but for section 362(e)(1) and this section 
and section 362(e)(2), DC's basis in the importation property, A2, 
would be $100 and the property's value would be $75 immediately 
after the transaction. Therefore, the importation property's basis 
would exceed its value and the transfer is a loss importation 
transaction.
    (D) Application of section 362(e)(1) and this section to 
importation property received in loss importation transaction. 
Because the importation property, A2, was transferred in a loss 
importation transaction, paragraph (b)(1) of this section applies 
and DC's basis in A2 will be equal to A2's $75 value immediately 
after the transfer.
    (E) Basis of property received in transaction. Following the 
application of section 362(e)(1) and this section, the provisions of 
section 362(e)(2) must be taken into account because the transfer is 
a section 362(a) transaction. Taking into account the application of 
section 362(e)(1) and this section but without taking into account 
the provisions of section 362(e)(2), DC would have an aggregate 
basis of $145 in the transferred properties ($70 in A1, determined 
under section 362(a), plus $75 in A2, determined under this section) 
and the properties would have an aggregate value of $175 ($100 + 
$75) immediately after the transfer. Therefore, FC does not have a 
net built-in loss, FC's transfer is not a loss duplication 
transaction, and section 362(e)(2) does not apply to the 
transaction. DC's basis in A1 will be $70, determined under section 
362(a), and DC's basis in A2 will be $75, as determined under 
paragraph (i)(D) of this Example 7. Under the general rule in 
section 358(a), FC receives the DC stock with a basis of $170 ($70 
attributable to A1 plus $100 attributable to A2).
    (ii) Transfer of CFC stock. (A) Facts. The facts are the same as 
in paragraph (i)(A) of this Example 7, except that A transfers its 
60 shares of FC stock (basis $80, value $105) and F transfers its 40 
shares of FC stock (basis $100, value $70) to DC in an exchange that 
qualifies under section 351.
    (B) Importation property. If A had sold its FC shares 
immediately before the transaction, any gain or loss recognized on 
the sale would have been taken into account in determining a Federal 
income tax liability (A's). Therefore, A's FC shares are not 
importation property. However, if F had sold its FC shares 
immediately before the transaction, no gain or loss recognized on 
the sale would have been taken into account in determining a Federal 
income tax liability. Further, if DC had sold F's FC shares 
immediately after the transaction, any gain or loss recognized on 
the sale would have been taken into account in determining a Federal 
income tax liability. Therefore, F's FC shares are importation 
property.
    (C) Loss importation transaction. The transfer of the FC shares 
is a section 362 transaction. Furthermore, but for section 362(e)(1) 
and this section and section 362(e)(2), DC's aggregate basis in the 
importation property, F's shares of FC stock, would be $100 under 
section 362(a) and the shares' aggregate value would be $70. 
Therefore, the importation property's aggregate basis would exceed 
its aggregate value, and the transfer is a loss importation 
transaction.
    (D) Application of section 362(e)(1) and this section to 
importation property received in loss importation transaction. 
Because the importation property, F's shares of FC stock, was 
transferred in a loss importation transaction, paragraph (b)(1) of 
this section applies and DC's aggregate basis in the shares will be 
equal to their $70 aggregate value immediately after the transfer.
    (E) Basis of property received in transaction. Following the 
application of section 362(e)(1) and this section, the provisions of 
section 362(e)(2) must be taken into account because the transfer is 
a section 362(a) transaction. The application of section 362(e)(2) 
is determined separately for each transferor. See Sec.  1.362-4(b).
    (1) A's transfer. Taking into account the application of section 
362(e)(1) and this section, DC's aggregate basis in the shares ($80 
under section 362(a)) would not exceed the shares' value ($105) 
immediately after the transaction. Therefore A does not have a 
built-in loss, A's transfer is not a loss duplication transaction, 
and section 362(e)(2) does not apply to A's transfer. DC's aggregate 
basis in A's shares, determined under section 362(a), is $80. Under 
section 358(a), A receives the DC stock with a basis of $80.
    (2) F's transfer. Taking into account the application of section 
362(e)(1) and this section, DC's aggregate basis in the shares would 
not exceed their value immediately after the transaction. Therefore, 
F does not have a built-in loss, F's transfer is not a loss 
duplication transaction, and section 362(e)(2) does not apply to F's 
transfer. DC's aggregate basis in F's shares, as determined under 
paragraph (ii)(D) of this Example 7, is $70. Under section 358(a), F 
receives the DC stock with a basis of $100.

    Example 8. Property subject to withholding tax.  (i) Facts. FC 
owns a share of DC1 stock (basis $100, value $70) as an investment. 
FC receives dividends on the share that are subject to Federal 
withholding tax of 30 percent of the amount received under section 
881(a); under section 1442(a), DC1 must withhold tax on the 
dividends paid. FC transfers the DC1 share to DC in a transaction to 
which section 351 applies.
    (ii) Importation property. Although any dividends received with 
respect to the DC1 stock were subject to withholding tax, if FC had 
sold the share of stock of DC1, no gain or loss recognized on the 
sale would have been taken into account in determining a Federal 
income tax liability. See section 865(a)(2). Further, if DC had sold 
the share of DC1 stock immediately after the transaction, any gain 
or loss recognized on the sale would be taken into account in 
determining Federal income tax liability. Therefore, the share of 
DC1 stock is importation property.
    (iii) Loss importation transaction. FC's transfer is a section 
362 transaction. Furthermore, but for section 362(e)(1) and this 
section and section 362(e)(2), DC's basis in the importation 
property, the share of DC1 stock, would be $100 and the share's 
value would be $70 immediately after the transaction. Therefore, the 
share's basis would exceed its value and the transfer is a loss 
importation transaction.
    (iv) Application of section 362(e)(1) and this section to 
importation property received in loss importation transaction. 
Because the importation property, the DC1 share, was transferred in 
a loss importation transaction, paragraph (b)(1) of this section 
applies and DC's basis in the share will be equal to the share's $70 
value.
    (v) Basis of property received in transaction. Following the 
application of section 362(e)(1) and this section, the provisions of 
section 362(e)(2) must be taken into account because the transfer is 
a section 362(a) transaction. Taking into account the application of 
section 362(e)(1) and this section, DC's basis in the DC1 share 
would not exceed the share's value immediately after the 
transaction. Therefore, FC does not have a net built-in loss, FC's 
transfer is not a loss duplication transaction, and section 
362(e)(2) does not apply to the transaction. DC's basis in the DC1 
share, as determined under paragraph (iv) of this Example 8, is $70. 
Under section 358, FC's basis in the DC stock received in the 
exchange will be $100.
    Example 9. Property transferred in triangular reorganization.  
(i) Foreign subsidiary. (A) Facts. P owns the sole outstanding share 
of stock of FC (basis $1), FC1 owns the sole outstanding share of 
FC2 (basis $100), and FC2 owns one asset, A1 (basis $100, value 
$20). In a forward triangular merger described in Sec.  1.358-
6(b)(2)(i), FC2 merges with and into FC, and FC1 receives shares of 
P stock in exchange for its FC2 stock. The forward triangular merger 
is a transaction described in section 368(a)(2)(D) and, therefore, 
in section 362(b).
    (B) Determining P's basis in its FC share. Pursuant to Sec.  
1.358-6, for purposes of determining the adjustment to P's basis in 
its FC shares, P is treated as though it first received A1 in a 
transaction in which its basis in A1 would be determined under

[[Page 54985]]

section 362(b) and then it transferred A1 to FC in a transaction in 
which P's basis in its FC stock would be determined under section 
358.
    (1) P's deemed acquisition and transfer of A1. If FC2 had sold 
A1 for its value immediately before the deemed transaction, no gain 
or loss recognized on the sale would have been taken into account in 
determining a Federal income tax liability. If P had sold A1 
immediately after the deemed transaction, any gain or loss 
recognized on the sale would have been taken into account in 
determining a Federal income tax liability (P's). Therefore, with 
respect to P's deemed acquisition, A1 is importation property. 
Furthermore, immediately after the deemed transaction, P's basis in 
A1, but for section 362(e)(1) and this section and section 
362(e)(2), would be $100 and A1's value is $20. Therefore, the 
importation property's basis would exceed its value and the transfer 
is a loss importation transaction. Accordingly, P's deemed basis in 
A1 will be equal to A1's $20 value.
    (2) P's FC stock basis. As a result of P's deemed transfer of A1 
to FC (and applying the principles of Sec.  1.367(b)-13), P's basis 
in its FC stock is increased by its $20 deemed basis in A1. 
Accordingly, following the transaction, P's basis in its share of FC 
stock will be $21 (the sum of its original $1 basis and the $20 
adjustment for the deemed transfer of A1).
    (C) FC's basis in A1. FC's basis in A1 is determined under the 
rules of this section without regard to the determination of P's 
adjustment to its basis in FC stock. If FC2 had sold A1 for its 
value immediately before the transaction, no gain or loss recognized 
on the sale would have been taken into account in determining a 
Federal income tax liability. However, if FC had sold A1 immediately 
after the transaction, no gain or loss recognized on the sale would 
have been taken into account in determining a Federal income tax 
liability, so A1 is not importation property. Accordingly, this 
section will not apply to the transaction. Although there is a net 
built-in loss in A1, the transaction is not described in section 
362(a), and so section 362(e)(2) and Sec.  1.362-4 will not apply to 
the transaction. Thus, under section 362(b), FC's basis in A1 will 
be $100.
    (D) FC1's basis in P stock. Under section 358, FC1's basis in 
the P stock it receives in the exchange will be $100.
    (ii) Property transferred to U.S. subsidiary in triangular 
reorganization. (A) Facts. The facts are the same as in paragraph 
(i)(A) of this Example 9, except that P also owns the sole 
outstanding share of DC (basis $1) and, instead of merging into FC, 
FC2 merged into DC.
    (B) Determining P's basis in its DC share. As determined under 
paragraph (i)(B)(2) of this Example 9, P's basis in its DC share is 
$21, the sum of its original $1 basis plus the $20 adjustment for 
the deemed transfer of A1.
    (C) DC's basis in A1. If FC2 had sold A1 for its value 
immediately before the transaction, no gain or loss recognized on 
the sale would have been taken into account in determining a Federal 
income tax liability. However, if DC had sold A1 immediately after 
the transaction, any gain or loss recognized on the sale would have 
been taken into account in determining a Federal income tax 
liability, so A1 is importation property with respect to DC. 
Furthermore, immediately after the transaction, DC's basis in A1, 
but for section 362(e)(1) and this section and section 362(e)(2), 
would be $100 and A1's value is $20. Therefore, the importation 
property's basis would exceed its value and the transfer is a loss 
importation transaction. Accordingly, DC's basis in A1 will be $20, 
A1's value immediately after the transaction.
    (D) FC1's basis in P stock. Under section 358, FC1's basis in the P 
stock it receives in the exchange is $100.
    (g) Effective/applicability date. This section applies to any 
transaction occurring on or after the date these regulations are 
published as final regulations in the Federal Register, unless effected 
pursuant to a binding agreement that was in effect prior to that date 
and at all times thereafter. However, taxpayers may apply this section 
to transactions occurring after October 22, 2004.
0
Par. 9. Section 1.362-4 is amended by:
0
1. Revising the introductory text in paragraph (h).
0
2. Revising paragraph (h) Example 11.
0
3. Adding a new sentence to the end of paragraph (j).
    The revisions and addition read as follows:


Sec.  1.362-4  Basis of loss duplication.

* * * * *
    (h) * * * The examples in this paragraph (h) illustrate the 
application of section 362(e)(2) and the provisions of this section. 
Unless the facts otherwise indicate, the examples use the following 
nomenclature and assumptions: X, Y, P, S, S1, and S2 are domestic 
corporations; A and B are U.S. individuals; FC1 and FC2 are foreign 
corporations and are not engaged in a U.S. trade or business, have no 
U.S. real property interests, and have no other relationships, 
activities, or interests that would cause them, their shareholders, or 
their property to be subject to Federal income taxation; there is no 
applicable income tax treaty; PRS is a domestic partnership; no 
election is made under section 362(e)(2)(C); and the transferred 
property is not importation property (as defined in Sec.  1.362-
3(c)(2)) and the transfers are not loss importation transactions (as 
defined in Sec.  1.362-3(c)(3)), so that the basis of no property is 
determined under section 362(e)(1). All persons and transactions are 
unrelated unless the facts indicate otherwise, and all other relevant 
facts are set forth in the examples. See Sec.  1.362-3(f) for 
additional examples illustrating the application of section 362(e)(2) 
and this section, including to transactions that are subject to section 
362(e)(2), and section 362(e)(1).
* * * * *
    Example 11. Transfers of importation property with non-
importation property.  (i) Single transferor, loss importation 
transaction. (A) Facts. FC1 transfers Asset 1 (basis $80, value $50) 
and Asset 2 (basis $120, value $110) to DC in a transaction to which 
section 351 applies. Asset 1 is not importation property within the 
meaning of Sec.  1.362-3(c)(2). Asset 2 is importation property 
within the meaning of Sec.  1.362-3(c)(2).
    (B) Application of section 362(e)(1). Immediately after the 
transfer, and without regard to section 362(e)(1) or section 
362(e)(2) and this section, DC's aggregate basis in importation 
property (Asset 2) would be $120. The aggregate value of the 
importation property immediately after the transfer is $110. 
Accordingly, the transaction is a loss importation transaction 
within the meaning of Sec.  1.362-3(c)(3) and, under section 
362(e)(1), DC's basis in Asset 2 would equal its value, $110.
    (C) Application of section 362(e)(2) and this section. (1) 
Analysis. (i) Loss duplication transaction. FC1's transfer of Asset 
1 and Asset 2 is a transaction described in section 362(a). But for 
section 362(e)(2) and this section, DC's aggregate basis in those 
assets would be $190 ($80 under section 362(a) + $110 under section 
362(e)(1)), which would exceed the aggregate value of the assets 
$160 ($50 + $110) immediately after the transaction. Accordingly, 
the transfer is a loss duplication transaction and FC1 has a net 
built-in loss of $30 ($190--$160).
    (ii) Identifying loss duplication property. But for section 
362(e)(2) and this section, DC's basis in Asset 1 would be $80, 
which would exceed Asset 1's $50 value immediately after the 
transaction. Accordingly, Asset 1 is loss duplication property. But 
for section 362(e)(2) and this section, DC's basis in Asset 2 would 
be $110, which would not exceed Asset 2's $110 value immediately 
after the transaction. Accordingly, Asset 2 is not loss duplication 
property.
    (C) Basis in loss duplication property. DC's basis in Asset 1 is 
$50, computed as its $80 basis under section 362(a) reduced by FC1's 
$30 net built-in loss.
    (D) Basis in other property. Under section 362(e)(1), DC's basis 
in Asset 2 is $110. Under section 358(a), FC1 has an exchanged basis 
of $200 in the DC stock it receives in the transaction.
    (ii) Multiple transferors, no importation of loss. (A) Facts. 
The facts are the same as paragraph (i)(A) of this Example 11, 
except that, in addition, FC2 transfers Asset 3 (basis $100, value 
$150) to DC as part of the same transaction. Asset 3 is importation 
property within the meaning of Sec.  1.362-3(c)(2).
    (B) Application of section 362(e)(1). Immediately after the 
transfer, and without regard to section 362(e)(1) or section 
362(e)(2) and this section, DC's aggregate basis in importation 
property (Asset 2 and Asset 3) would be $220 ($120 + $100). The 
aggregate value of the importation property immediately after the 
transfer is $260 ($110

[[Page 54986]]

+ $150). Accordingly, the transaction is not a loss importation 
transaction within the meaning of Sec.  1.362-3(c)(3) and DC's bases 
in the importation property is not determined under section 
362(e)(1).
    (C) Application of section 362(e)(2) and this section: FC1. 
Notwithstanding that the transfers by FC1 and FC2 are pursuant to a 
single plan forming one transaction, section 362(e)(2) and this 
section apply to each transferor separately.
    (1) Analysis. (i) Loss duplication transaction. FC1's transfer 
of Asset 1 and Asset 2 is a transaction described in section 362(a). 
But for section 362(e)(2) and this section, DC's aggregate basis in 
those assets would be $200 ($80 + $120), which would exceed the 
aggregate value of the assets $160 ($50 + $110) immediately after 
the transaction. Accordingly, the transfer is a loss duplication 
transaction and FC1 has a net built-in loss of $40 ($200--$160).
    (ii) Identifying loss duplication property. But for section 
362(e)(2) and this section, DC's basis in Asset 1 would be $80, 
which would exceed Asset 1's $50 value immediately after the 
transaction. Accordingly, Asset 1 is loss duplication property. But 
for section 362(e)(2) and this section, DC's basis in Asset 2 would 
be $120, which would exceed Asset 2's $110 value immediately after 
the transaction. Accordingly, Asset 2 is also loss duplication 
property.
    (2) Basis in loss duplication property. DC's basis in Asset 1 is 
$50, computed as its $80 basis under section 362(a) reduced by $30, 
its allocable portion of FC1's $40 net built-in loss ($80/$200 x 
$40). DC's basis in Asset 2 is $110, computed as its $120 basis 
under section 362(a) reduced by $10, its allocable portion of FC1's 
$40 net built-in loss ($120/$200 x $40).
    (3) Basis in other property. Under section 358(a), FC1 has an 
exchanged basis of $200 in the DC stock it receives in the 
transaction.
    (D) Application of section: FC2. FC2's transfer of Asset 3 is 
not a loss duplication transaction because Asset 3's value exceeds 
its basis immediately after the transaction. Accordingly, under 
section 362(a), DC's basis in Asset 3 is $100.
* * * * *
    (j) * * * The introductory text and Example 11 of paragraph (h) of 
this section apply to transactions on or after the date these 
regulations are published as final regulations in the Federal Register 
unless effected pursuant to a binding agreement that was in effect 
prior to that date and at all times thereafter; however, taxpayers may 
apply such provisions to transactions occurring after October 22, 2004.
0
Par. 10. Section 1.368-3 is amended by revising paragraphs (a)(3), 
(b)(3) and adding a sentence to the end of paragraph (e) to read as 
follows:


Sec.  1.368-3  Records to be kept and information to be filed with 
returns.

    (a) * * *
    (3) The value and basis of the assets, stock or securities of the 
target corporation transferred in the transaction, determined 
immediately before the transfer and aggregated as follows--
    (i) Importation property transferred in a loss importation 
transaction, as defined in Sec. Sec.  1.362-3(c)(2) and 1.362-3(c)(3), 
respectively;
    (ii) Loss duplication property as defined in Sec.  1.362-4(c)(1);
    (iii) Property with respect to which any gain or loss was 
recognized on the transfer (without regard to whether such property is 
also identified in paragraph (a)(3)(i) or (a)(3)(ii) of this section);
    (iv) Property not described in paragraphs (a)(3)(i), (a)(3)(ii) or 
(a)(3)(iii) of this section; and
* * * * *
    (b) * * *
    (3) The value and basis of all the stock or securities of the 
target corporation held by the significant holder that is transferred 
in the transaction and such holder's basis in that stock or securities, 
determined immediately before the transfer and aggregated as follows--
    (i) Stock and securities with respect to which an election is made 
under section 362(e)(2)(C); and
    (ii) Stock and securities not described in paragraph (b)(3)(i) of 
this section.
* * * * *
    (e) Effective/applicability date. * * * Paragraphs (a)(3) and 
(b)(3) of this section apply to any taxable year beginning on or after 
these regulations are published as final regulations in the Federal 
Register, unless effected pursuant to a binding agreement that was in 
effect prior to that date and at all times thereafter.

Beth Tucker,
Deputy Commissioner for Operations Support.
[FR Doc. 2013-21662 Filed 9-6-13; 8:45 am]
BILLING CODE 4830-01-P