Failure To File Gain Recognition Agreements or Satisfy Other Reporting Obligations, 68763-68774 [2014-27365]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 79, Number 223 (Wednesday, November 19, 2014)]
[Rules and Regulations]
[Pages 68763-68774]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-27365]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9704]
RIN 1545-BK65


Failure To File Gain Recognition Agreements or Satisfy Other 
Reporting Obligations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations, temporary regulations, and removal of 
temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
relating to the consequences to U.S. and foreign persons for failing to 
file gain recognition agreements (GRAs) or related documents, or to 
satisfy other reporting obligations, associated with certain transfers 
of property to foreign corporations in nonrecognition exchanges. The 
regulations are necessary to update and clarify the rules that apply 
when a U.S. or foreign person fails to file a GRA or related documents 
or to satisfy other reporting obligations. These regulations affect 
U.S. and foreign persons that transfer property to foreign corporations 
in nonrecognition exchanges.

DATES: These regulations are effective on November 19, 2014.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.367(a)-2(f)(4), 1.367(a)-3(g)(1)(x), 1.367(a)-3T(g)(1)(ix), 1.367(a)-
7(j), 1.367(a)-8(r)(1)(i) and

[[Page 68764]]

(r)(3), 1.367(e)-2(g), and 1.6038B-1(g)(6).

FOR FURTHER INFORMATION CONTACT: Shane M. McCarrick, (202) 317-6937 
(not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collections of information contained in the regulations have 
been reviewed and approved by the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) 
under control number 1545-1487.
    The collections of information are in Sec. Sec.  1.367(a)-2(f)(2), 
1.367(a)-3(f)(2), 1.367(a)-7(e)(2), 1.367(a)-8(p)(2), 1.367(e)-2(f)(2), 
1.6038B-1(c)(4)(ii), and 1.6038B-1(e)(4). The collections of 
information are mandatory. The likely respondents are domestic 
corporations.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number.
    Books and records relating to a collection of information must be 
retained as long as their contents might become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to 26 CFR part 1. On January 31, 
2013, the IRS and the Department of the Treasury (Treasury Department) 
published a notice of proposed rulemaking (REG-140649-11) in the 
Federal Register (78 FR 6772-01) under sections 367 and 6038B of the 
Internal Revenue Code (Code) (proposed regulations) relating to the 
consequences to U.S. and foreign persons for failing to file GRAs or 
related documents, or to satisfy other reporting obligations, 
associated with certain transfers of property to foreign corporations 
in nonrecognition exchanges. No public hearing was requested or held. 
The IRS and the Treasury Department received written comments on the 
proposed regulations, which are available at www.regulations.gov. After 
consideration of all the comments, the proposed regulations are adopted 
as amended by this Treasury decision. In addition, this Treasury 
decision amends and removes a portion of the temporary Sec. Sec.  
1.367(a)-3 and 1.367(a)-7 regulations that were published on March 19, 
2013 (T.D. 9615, 2013-1 C.B. 1026). The comments and revisions are 
discussed in this preamble.

Summary of Comments and Explanation of Revisions

1. Satisfaction of Section 6038B Reporting if a GRA Is Filed

    The proposed regulations under section 6038B require a U.S. person 
that transfers property (U.S. transferor) to file a Form 926, Return by 
a U.S. Transferor of Property to a Foreign Corporation, with respect to 
a transfer of stock or securities in all cases in which a GRA is filed 
in order to avoid penalties under section 6038B. However, the proposed 
regulations do not require the U.S. transferor to report on the Form 
926 any specific information regarding the transferred stock or 
securities. The IRS and the Treasury Department have determined that, 
similar to the information that must be provided for other types of 
transferred property, the U.S. transferor should report on the Form 926 
the fair market value, adjusted tax basis, and gain recognized with 
respect to the transferred stock or securities, as well as any other 
information that Form 926, its accompanying instructions, or other 
applicable guidance require to be submitted with respect to the 
transfer of the stock or securities. Section 1.6038B-1(b)(2)(iv) of 
these final regulations is thus modified accordingly.

2. Application to Previously Filed Requests

    The proposed regulations under Sec.  1.367(a)-8(p) only apply to 
requests for relief submitted on or after the date the proposed 
regulations are adopted as final regulations. One comment requested 
that these final regulations permit U.S. transferors to request relief 
under Sec.  1.367(a)-8(p) of the proposed regulations for certain 
failures to file a GRA document or comply with the GRA provisions that 
are the subject of requests for relief submitted before the date the 
proposed regulations are finalized. According to the commentator, not 
permitting U.S. transferors to do so could result in disparate 
treatment for similarly situated U.S. transferors.
    The IRS and the Treasury Department have determined that it is 
appropriate to provide relief for certain failures to file or to comply 
that were not willful and that were the subject of requests for relief 
submitted under Sec.  1.367(a)-8(p) of the existing final regulations 
(or submitted under Sec.  1.367(a)-8T(e)(10), as contained in 26 CFR 
part 1 revised as of April 1, 2008, or Sec.  1.367(a)-8(c)(2), as 
contained in 26 CFR part 1 revised as of April 1, 2006) before November 
19, 2014 (previously filed requests). Accordingly, Sec.  1.367(a)-
8(r)(3) of these final regulations provides a procedure under which 
U.S. transferors may resubmit certain previously filed requests 
(including requests that were denied). By submitting a previously filed 
request under this procedure, a U.S. transferor agrees that these final 
regulations under Sec.  1.6038B-1 will apply to any transfer that is 
the subject of the request. This is intended to provide parity between 
similarly situated U.S. transferors and promote the policies underlying 
the proposed regulations by ensuring that a U.S. transferor that 
establishes its failure was not willful under Sec.  1.367(a)-8(p) is 
still subject to penalties under section 6038B if its failure was not 
due to reasonable cause.

3. Promptly Filing an Amended Return as a Requirement to Seeking Relief

    One comment was received regarding the procedures described in 
Sec.  1.367(a)-8(p)(2) of the proposed regulations for establishing 
that failures to file GRA documents, or failures to comply, were not 
willful. The comment requested that these final regulations excuse 
Coordinated Industry Case (CIC) taxpayers from the requirement under 
Sec.  1.367(a)-8(p)(2) of filing an amended return promptly after 
discovering a failure to file or a failure to comply. Instead, the 
commentator suggested that these final regulations allow CIC taxpayers 
to submit the materials required under Sec.  1.367(a)-8(p)(2) when the 
taxpayers effect a ``qualified amended return'' under Rev. Proc. 94-69, 
1994-2 CB 804 (generally providing special procedures for certain 
taxpayers to show additional tax due or make adequate disclosure with 
respect to an item or position on a tax return prior to an audit).
    According to the commentator, it is possible that an amended return 
filed to correct the failure to file or failure to comply will differ 
from the return that is ultimately audited when the taxpayer effects a 
qualified amended return under Rev. Proc. 94-69. The commentator stated 
that this could result in an inefficient use of resources in situations 
in which a CIC taxpayer, when preparing the amended return, includes 
not only adjustments related to the failure to file or failure to 
comply, but also all other adjustments as to which the taxpayer is 
aware.
    The IRS and the Treasury Department decline to adopt this comment. 
The commentator's concerns exist in other international contexts (for 
example, Sec.  1.1503(d)-1(c)(2)), and it would be inappropriate to 
create differing

[[Page 68765]]

procedures for requesting relief under different provisions. However, 
the IRS and the Treasury Department intend to study the issue.

4. Modifying the Reported Fair Market Value of Transferred Stock

    One comment requested that these final regulations provide a 
mechanism under which taxpayers may modify the fair market value of 
transferred stock or securities reported on a previously filed GRA. 
According to the commentator, taxpayers often determine the fair market 
value of stock or securities before the date that the stock or 
securities are transferred to a foreign corporation; these 
determinations are based on projected financial information that may, 
in some cases, deviate from the actual financial information on the 
date of the transfer.
    The IRS and the Treasury Department decline to adopt the comment. 
The IRS and the Treasury Department have determined that the proposed 
regulations adequately address the commentator's concerns. First, 
because a GRA is filed when a taxpayer files its tax return (rather 
than at the time of an outbound transfer of stock or securities), a 
taxpayer has, not including extensions, at least two and a half months 
following a transfer to reconcile projected financial information with 
actual financial information. Furthermore, a taxpayer may file an 
extension if it needs additional time to comply with the requirements 
of Sec.  1.367(a)-8. Finally, a taxpayer that fails to materially 
comply with the requirements of Sec.  1.367(a)-8, including the 
requirement to include the fair market value of the transferred stock 
or securities in the GRA pursuant to Sec.  1.367(a)-8(c)(3)(i)(B), may 
be eligible to correct the GRA by seeking relief based on a claim that 
the failure was not willful.

5. Extension of Relief for Failures That Are Not Willful to Other 
Section 367(a) Reporting Obligations

    The IRS and the Treasury Department have determined that it is 
appropriate to extend the relief for failures that are not willful to 
certain other reporting obligations under section 367(a) that were not 
covered by the proposed regulations. This Treasury decision therefore 
revises Sec.  1.367(a)-2 (providing an exception to gain recognition 
under section 367(a)(1) for assets transferred outbound for use in the 
active conduct of a trade or business outside of the United States) and 
Sec.  1.367(a)-7 (regarding application of section 367(a) to an 
outbound transfer of assets by a domestic target corporation in an 
exchange described in section 361) so that a taxpayer may, solely for 
purposes of section 367(a), be deemed not to have failed to comply with 
reporting obligations under Sec. Sec.  1.367(a)-2 and 1.367(a)-7 by 
demonstrating that the failure was not willful. The temporary Sec.  
1.367(a)-7 regulations regarding reasonable cause relief are therefore 
removed. Because the cases in which relief is sought under Sec.  
1.367(a)-2 and many of the cases in which relief is sought under Sec.  
1.367(a)-7 are also subject to reporting under section 6038B and the 
regulations thereunder, the penalty imposed under section 6038B for 
failure to satisfy a reporting obligation should generally be 
sufficient to encourage proper reporting and compliance.

6. Withdrawal of GRA Directive

    On July 26, 2010, the Deputy Commissioner International (LMSB) 
issued directive LMSB-4-0510-017 (Directive). The Directive permits 
taxpayers to remedy, without having to demonstrate reasonable cause, 
unfiled or deficient GRA documents associated with a timely filed 
initial GRA or a timely filed document purporting to be an initial GRA. 
The Directive explained that the means to best ensure compliance with 
the GRA provisions was under study and that, pending the study, the 
Directive would be effective ``until further notice.'' Because this 
Treasury decision provides comprehensive guidance that is designed to 
ensure compliance with the GRA provisions, the Deputy Commissioner 
(International), Large Business & International will revoke the 
Directive effective on November 19, 2014.

7. Including an Original Form 8838 With a Request for Relief

    Under Sec.  1.367(a)-8(p)(2)(i) of the proposed regulations, a U.S. 
transferor who seeks relief for a failure to file or failure to comply 
with the GRA rules must, among other requirements, file an original 
Form 8838, Consent to Extend the Time to Assess Tax Under Section 367--
Gain Recognition Agreement, with an amended return. The Form 8838 must, 
with respect to the gain realized but not recognized on the initial 
transfer, extend the period of limitations on the assessment of tax to 
the period specified in Sec.  1.367(a)-8(p)(2)(i) of the proposed 
regulations. The IRS and the Treasury Department recognize that in 
certain cases (for example, certain cases in which a U.S. transferor 
seeks relief for an unfiled annual certification), the U.S. transferor 
will already have filed an original Form 8838 that extends the period 
of limitations through the required time period. These final 
regulations therefore provide that, in these cases, a U.S. transferor 
need not file another Form 8838 with the amended return; rather, the 
U.S. transferor must attach a copy of the previously filed Form 8838 to 
the amended return. A similar modification is made to these final 
regulations under Sec.  1.367(e)-2 concerning outbound liquidations and 
certain foreign-to-foreign liquidations described in section 332.

8. Failure To Comply and Extension of Period of Limitations

    Section 1.367(a)-8(j)(8) of the existing regulations provides that 
a failure to comply with the GRA provisions will extend the period of 
limitations on assessment of tax until the close of the third full 
taxable year ending after the date on which the Director of Field 
Operations or Area Director receives actual notice of the failure to 
comply from the U.S. transferor. The same provision is included in the 
proposed regulations. Section 1.367(e)-2(e)(4)(ii)(B) of the proposed 
regulations provides a similar rule with respect to a liquidation 
document.
    The IRS and the Treasury Department have determined that the 
running of the extended period of limitations arising under Sec. Sec.  
1.367(a)-8(j)(8) and 1.367(e)-2(e)(4)(ii)(B) should be based on when 
the taxpayer furnishes to the Director of Field Operations 
International, Large Business & International (or any successor to the 
roles and responsibilities of such person) the information that should 
have been provided under the Sec. Sec.  1.367(a)-8 or 1.367(e)-2 
regulations, as applicable. Thus, in these final regulations, 
Sec. Sec.  1.367(a)-8(j)(8) and 1.367(e)-2(e)(4)(ii)(B) are modified 
accordingly.
    In addition, Sec. Sec.  1.367(a)&8(c)(2)(iii), 1.367(e)-
2(b)(2)(i)(C)(1), and 1.367(e)-2(b)(2)(iii)(D) of these final 
regulations are revised to clarify that when a taxpayer files a GRA 
under Sec.  1.367(a)-8 or a liquidation document under Sec.  1.367(e)-
2, the taxpayer agrees to extend the period of limitations on 
assessment of tax, in the circumstances provided in Sec. Sec.  
1.367(a)-8(j)(8) and 1.367(e)-2(e)(4)(ii)(B), as applicable. This 
agreement is deemed consented to and signed by the Secretary for 
purposes of section 6501(c)(4).

9. Reporting Requirement in Sec.  1.367(a)-3(c)(6)(i)(F)(3)

    Section 1.367(a)-3(a) of the existing final regulations provides 
the general rule that a U.S. person must recognize gain on certain 
transfers of stock or

[[Page 68766]]

securities to a foreign corporation. In relevant part, Sec.  1.367(a)-
3(c) of the existing final regulations contains an exception for 
certain transfers of stock or securities of a domestic corporation. 
Specifically, Sec.  1.367(a)-3(c)(1) provides that, except as provided 
in Sec.  1.367(a)-3(e) (providing rules for transfers of stock or 
securities by a domestic corporation to a foreign corporation pursuant 
to an exchange described in section 361), a transfer of stock or 
securities of a domestic corporation by a U.S. person to a foreign 
corporation that would otherwise be subject to gain recognition under 
section 367(a)(1) pursuant to Sec.  1.367(a)-3(a) will not be subject 
to section 367(a)(1) if certain requirements are satisfied. In 
particular, the domestic corporation the stock or securities of which 
are transferred (referred to as the U.S. target company) must comply 
with each of the reporting requirements in Sec.  1.367(a)-3(c)(6) and 
each of the four conditions set forth in Sec.  1.367(a)-3(c)(1)(i) 
through (iv) must be satisfied. The condition set forth in Sec.  
1.367(a)-3(c)(1)(iv) requires that the active trade or business test 
(as defined in Sec.  1.367(a)-3(c)(3)) be satisfied. To satisfy the 
active trade or business test, the substantiality test (as defined in 
Sec.  1.367(a)-3(c)(3)(iii)) must be satisfied (among other 
requirements). The substantiality test is satisfied if, at the time of 
the transfer, the fair market value of the transferee foreign 
corporation is at least equal to the fair market value of the U.S. 
target company.
    Pursuant to the reporting requirement contained in Sec.  1.367(a)-
3(c)(6)(i)(F)(3), the U.S. target company must submit a statement 
demonstrating that the value of the transferee foreign corporation 
exceeds the value of the U.S. target company on the acquisition date. 
The standard that applies for purposes of the reporting requirement of 
Sec.  1.367(a)-3(c)(6)(i)(F)(3) is intended to be the same as the 
standard that applies for purposes of the substantiality test. 
Accordingly, this Treasury decision revises Sec.  1.367(a)-
3(c)(6)(i)(F)(3) so that the U.S. target company must submit a 
statement demonstrating that the value of the transferee foreign 
corporation equals or exceeds the value of the U.S. target company on 
the acquisition date.

Special Analyses

    It has been determined that this Treasury decision 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 also has been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these regulations. It is hereby certified that these 
regulations will not have a significant impact on a substantial number 
of small entities. This certification is based on the fact that these 
regulations merely provide for a change in the standard, or clarify or 
provide the standard, that will be used to determine whether a taxpayer 
that has failed to file a GRA or satisfy other reporting obligations 
under section 367 will be entitled to avoid full gain recognition under 
section 367(a)(1) or 367(e)(2), as applicable. 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, 
the notice of proposed rulemaking preceding this regulation was 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business, and no 
comments were received.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. Section 1.367(a)-2 is amended by adding new paragraph (f) to 
read as follows:


Sec.  1.367(a)-2  Exception for transfers of property for use in the 
active conduct of a trade or business.

* * * * *
    (f) Failure to comply with reporting requirements of section 
6038B--(1) Failure to comply. For purposes of the exception to the 
application of section 367(a)(1) provided in paragraph (a) of Sec.  
1.367(a)-2T, a failure to comply with the reporting requirements of 
section 6038B and the regulations thereunder (failure to comply) has 
the meaning set forth in Sec.  1.6038B-1(f)(2).
    (2) Relief for certain failures to comply that are not willful--(i) 
In general. A failure to comply described in paragraph (f)(1) of this 
section will be deemed not to have occurred for purposes of satisfying 
the requirements of this section if the taxpayer demonstrates that the 
failure was not willful using the procedure set forth in this paragraph 
(f)(2). For this purpose, willful is to be interpreted consistent with 
the meaning of that term in the context of other civil penalties, which 
would include a failure due to gross negligence, reckless disregard, or 
willful neglect. Whether a failure to comply was a willful failure will 
be determined by the Director of Field Operations International, Large 
Business & International (or any successor to the roles and 
responsibilities of such position, as appropriate) (Director) based on 
all the facts and circumstances. The taxpayer must submit a request for 
relief and an explanation as provided in paragraph (f)(2)(ii)(A) of 
this section. Although a taxpayer whose failure to comply is determined 
not to be willful will not be subject to gain recognition under this 
section, the taxpayer will be subject to a penalty under section 6038B 
if the taxpayer fails to demonstrate that the failure was due to 
reasonable cause and not willful neglect. See Sec.  1.6038B-1(b)(1) and 
(f). The determination of whether the failure to comply was willful 
under this section has no effect on any request for relief made under 
Sec.  1.6038B-1(f).
    (ii) Procedures for establishing that a failure to comply was not 
willful--(A) Time and manner of submission. A taxpayer's statement that 
the failure to comply was not willful will be considered only if, 
promptly after the taxpayer becomes aware of the failure, an amended 
return is filed for the taxable year to which the failure relates that 
includes the information that should have been included with the 
original return for such taxable year or that otherwise complies with 
the rules of this section, and that includes a written statement 
explaining the reasons for the failure to comply. The amended return 
must be filed with the Internal Revenue Service at the location where 
the taxpayer filed its original return. The taxpayer may submit a 
request for relief from the penalty under section 6038B as part of the 
same submission. See Sec.  1.6038B-1(f).
    (B) Notice requirement. In addition to the requirements of 
paragraph (f)(2)(ii)(A) of this section, the taxpayer must comply with 
the notice requirements of this paragraph (f)(2)(ii)(B). If any taxable 
year of the taxpayer is under examination when the amended return is 
filed, a copy of the

[[Page 68767]]

amended return and any information required to be included with such 
return must be delivered to the Internal Revenue Service personnel 
conducting the examination. If no taxable year of the taxpayer is under 
examination when the amended return is filed, a copy of the amended 
return and any information required to be included with such return 
must be delivered to the Director.
    (3) For illustrations of the application of the willfulness 
standard of this paragraph (f), see the examples in Sec.  1.367(a)-
8(p)(3).
    (4) Paragraph (f) applies to requests for relief submitted on or 
after November 19, 2014.

0
Par. 3. Section 1.367(a)-3 is amended:
0
1. In paragraphs (c)(6)(i)(F)(3)(i) and (c)(6)(i)(F)(3)(ii), by adding 
the language ``equals or'' before the word ``exceeds.''
0
2. By revising paragraph (c)(6)(ii).

0
3. By adding paragraph (f).

0
4. By adding paragraph (g)(1)(x).
    The additions and revisions read as follows:


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

* * * * *
    (c) * * *
    (6) * * *
    (ii) Except as provided in paragraph (f) of this section, for 
purposes of this paragraph (c)(6), a U.S. income tax return will be 
considered timely filed if it is filed on or before the last date 
prescribed for filing (taking into account any extensions of time 
therefor) for the taxable year in which the transfer occurs.
* * * * *
    (f) Failure to file statements--(1) Failure to file. For purposes 
of the exceptions to the application of section 367(a)(1) provided in 
paragraphs (c) and (d)(2)(vi)(B) of this section, there is a failure to 
file a statement described in paragraph (c)(6), (c)(7), or 
(d)(2)(vi)(C) of this section (failure to file) if the statement is not 
filed with a timely filed U.S. income tax return or is not completed in 
all material respects.
    (2) Relief for certain failures to file that are not willful--(i) 
In general. A failure to file described in paragraph (f)(1) of this 
section will be deemed not to have occurred for purposes of satisfying 
the requirements of the applicable regulation if the taxpayer 
demonstrates that the failure was not willful using the procedure set 
forth in this paragraph (f)(2). For this purpose, willful is to be 
interpreted consistent with the meaning of that term in the context of 
other civil penalties, which would include a failure due to gross 
negligence, reckless disregard, or willful neglect. Whether a failure 
to file was a willful failure will be determined by the Director of 
Field Operations International, Large Business & International (or any 
successor to the roles and responsibilities of such position, as 
appropriate) (Director) based on all the facts and circumstances. The 
taxpayer must submit a request for relief and an explanation as 
provided in paragraph (f)(2)(ii)(A) of this section. Although a 
taxpayer whose failure to file is determined not to be willful will not 
be subject to gain recognition under this section, the taxpayer will be 
subject to a penalty under section 6038B if the taxpayer fails to 
satisfy the reporting requirements, if any, under that section and does 
not demonstrate that the failure was due to reasonable cause and not 
willful neglect. See Sec.  1.6038B-1(b) and (f). The determination of 
whether the failure to file was willful under this section has no 
effect on any request for relief made under Sec.  1.6038B-1(f).
    (ii) Procedures for establishing that a failure to file was not 
willful--(A) Time and manner of submission. A taxpayer's statement that 
the failure to file was not willful will be considered only if, 
promptly after the taxpayer becomes aware of the failure, an amended 
return is filed for the taxable year to which the failure relates that 
includes the information that should have been included with the 
original return for such taxable year or that otherwise complies with 
the rules of this section, and that includes a written statement 
explaining the reasons for the failure to file. The amended return must 
be filed with the Internal Revenue Service at the location where the 
taxpayer filed its original return. The taxpayer may submit a request 
for relief from the penalty under section 6038B as part of the same 
submission. See Sec.  1.6038B-1(f).
    (B) Notice requirement. In addition to the requirements of 
paragraph (f)(2)(ii)(A) of this section, the taxpayer must comply with 
the notice requirements of this paragraph (f)(2)(ii)(B). If any taxable 
year of the taxpayer is under examination when the amended return is 
filed, a copy of the amended return and any information required to be 
included with such return must be delivered to the Internal Revenue 
Service personnel conducting the examination. If no taxable year of the 
taxpayer is under examination when the amended return is filed, a copy 
of the amended return and any information required to be included with 
such return must be delivered to the Director.
    (3) For illustrations of the application of the willfulness 
standard of this paragraph (f), see the examples in Sec.  1.367(a)-
8(p)(3).
    (g) * * *
    (1) * * *
    (x) Paragraphs (c)(6)(ii) and (f) of this section apply to 
statements that are required to be filed on or after November 19, 2014, 
as well as to requests for relief submitted on or after November 19, 
2014.
* * * * *

0
Par. 4. Section 1.367(a)-3T is amended:
0
1. In paragraph (d)(2)(vi)(B)(1)(ii), by removing the language ``its 
U.S. income tax return'' and adding the language ``its timely filed 
U.S. income tax return'' in its place.
0
2. In the first and second sentences of paragraph (g)(1)(ix), by 
removing the language ``(d)(2)(vi)(B)'' and adding the language 
``(d)(2)(vi)(B)(1)(i), (d)(2)(vi)(B)(1)(iii), and (d)(2)(vi)(B)(2),'' 
in its place.
0
3. By adding two new sentences at the end of paragraph (g)(1)(ix).
    The additions read as follows:


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

* * * * *
    (g) * * *
    (1) * * *
    (ix) * * * Paragraph (d)(2)(vi)(B)(1)(ii) of this section applies 
to statements that are required to be filed on or after November 19, 
2014. See paragraph (d)(2)(vi)(B)(1)(ii) of this section, as contained 
in 26 CFR part 1 revised as of April 1, 2014, for statements required 
to be filed on or after March 18, 2013, and before November 19, 2014.
* * * * *

0
Par. 5. Section 1.367(a)-7 is amended:
0
1. In paragraph (a), by removing the language ``reasonable cause'' and 
adding the language ``not willful'' in its place.
0
2. By revising paragraph (e)(2).
0
3. By revising paragraph (j).
    The revisions read as follows:


Sec.  1.367(a)-7  Outbound transfers of property described in section 
361(a) or (b).

* * * * *
    (e) * * *
    (2) Relief for certain failures to comply that are not willful--(i) 
In general. A control group member or U.S. transferor's failure to 
comply with any requirement of this section will be deemed not to have 
occurred for purposes of satisfying the requirements of this section if 
the control group member or U.S. transferor (or the foreign acquiring 
corporation on behalf of the U.S. transferor), as applicable,

[[Page 68768]]

demonstrates that the failure was not willful using the procedure set 
forth in paragraph (e)(2)(ii) of this section. For this purpose, 
willful is to be interpreted consistent with the meaning of that term 
in the context of other civil penalties, which would include a failure 
due to gross negligence, reckless disregard, or willful neglect. 
Whether the failure to comply was a willful failure will be determined 
by the Director of Field Operations International, Large Business & 
International (or any successor to the roles and responsibilities of 
such person) (Director) based on all the facts and circumstances. The 
control group member or U.S. transferor (or the foreign acquiring 
corporation on behalf of the U.S. transferor), as applicable, must 
submit a request for relief and an explanation as provided in paragraph 
(e)(2)(ii) of this section. Although a U.S transferor whose failure to 
comply is determined not to be willful will not be subject to gain 
recognition under this section, the U.S. transferor will be subject to 
a penalty under section 6038B if the U.S. transferor fails to 
demonstrate that the failure was due to reasonable cause and not 
willful neglect. See Sec.  1.6038B-1(b) and (f). The determination of 
whether the failure to comply was willful under this section has no 
effect on any request for relief made under Sec.  1.6038B-1(f).
    (ii) Procedures for establishing that a failure to comply was not 
willful--(A) Time and manner of submission. A control group member or 
U.S. transferor's statement that the failure to comply was not willful 
will be considered only if, promptly after the control group member or 
U.S. transferor, as applicable, becomes aware of the failure, an 
amended return is filed for the taxable year to which the failure 
relates that includes the information that should have been included 
with the original return for such taxable year or that otherwise 
complies with the rules of this section, and that includes a written 
statement explaining the reasons for the failure to comply. The amended 
return must be filed with the Internal Revenue Service at the location 
where the taxpayer filed its original return. The U.S. transferor may 
submit a request for relief from the penalty under section 6038B as 
part of the same submission. See Sec.  1.6038B-1(f).
    (B) Notice requirement. In addition to the requirements of 
paragraph (e)(2)(ii)(A) of this section, a control group member or U.S. 
transferor, as applicable, must comply with the notice requirements of 
this paragraph (e)(2)(ii)(B). If any taxable year of the control group 
member or U.S. transferor, as applicable, is under examination when the 
amended return is filed, a copy of the amended return and any 
information required to be included with such return must be delivered 
to the Internal Revenue Service personnel conducting the examination. 
If no taxable year of the control group member or U.S transferor, as 
applicable, is under examination when the amended return is filed, a 
copy of the amended return and any information required to be included 
with such return must be delivered to the Director.
    (iii) For illustrations of the application of the willfulness 
standard of this paragraph (e)(2), see the examples in Sec.  1.367(a)-
8(p)(3).
* * * * *
    (j) Effective/applicability dates. Except for paragraph (e)(2) of 
this section, this section applies to transfers occurring on or after 
April 18, 2013. Paragraph (e)(2) applies to requests for relief 
submitted on or after November 19, 2014. Paragraph (e)(2) of this 
section also applies to requests for relief submitted before November 
19, 2014 if the statute of limitations on the assessment of tax has not 
expired for any year to which the request relates and the control group 
member or U.S. transferor, as applicable, resubmits the request under 
paragraph (e)(2) of this section and notes, on the request, that the 
request is being submitted pursuant to the third sentence of this 
paragraph (j). See paragraph (e)(2) of this section, as contained in 26 
CFR part 1 revised as of April 1, 2014, for requests for relief 
submitted after April 17, 2013, and before November 19, 2014, that are 
not resubmitted under paragraph (e)(2) of this section.


Sec.  1.367(a)-7T  [Removed]

0
Par. 6. Section 1.367(a)-7T is removed.

0
Par. 7. Section 1.367(a)-8 is amended:
0
1. By revising the eleventh sentence of paragraph (a).
0
2. By redesignating paragraphs (b)(1)(v) through (xv) as (b)(1)(vii) 
through (xvii), respectively.
0
3. By redesignating paragraph (b)(1)(iv) as paragraph (b)(1)(v).
0
4. By adding new paragraphs (b)(1)(iv) and (vi).
0
5. By revising redesignated paragraphs (b)(1)(xiii), (xiv), and (xv).
0
6. By revising paragraph (c)(2)(iii).
0
7. By revising paragraph (d)(1).
0
8. By revising paragraph (j)(8).
0
9. By revising paragraph (p).
0
10. By adding a sentence at the end of paragraph (r)(1)(i).
0
11. By adding paragraph (r)(3).
    The revisions and additions read as follows:


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

    (a) Scope.* * * Paragraph (p) of this section provides relief for 
certain failures to file an initial gain recognition agreement (as 
defined in paragraph (b)(1)(vi) of this section) or to comply with the 
requirements of this section with respect to a gain recognition 
agreement (as described in paragraph (c) of this section).* * *
    (b) * * *
    (1) * * *
    (iv) A gain recognition agreement document means any agreement, 
statement, schedule, or form required to be filed under this section, 
including an initial gain recognition agreement (as defined in 
paragraph (b)(1)(vi) of this section), a new gain recognition agreement 
described in paragraph (c)(5) of this section, a Form 8838 extending 
the period of limitations on assessment of tax described in paragraph 
(f) of this section, and an annual certification described in paragraph 
(g) of this section.
* * * * *
    (vi) An initial gain recognition agreement means the gain 
recognition agreement entered into under paragraph (c) of this section 
with respect to the initial transfer.
* * * * *
    (xiii) A timely filed return means a Federal income tax return 
filed on or before the last date prescribed for filing (taking into 
account any extensions of time therefor) such return.
    (xiv) Transferee foreign corporation. Except as provided in this 
paragraph (b)(1)(xiv), the transferee foreign corporation is the 
foreign corporation to which the transferred stock or securities are 
transferred in an initial transfer. In the case of an indirect stock 
transfer, the transferee foreign corporation has the meaning set forth 
in Sec.  1.367(a)-3(d)(2)(i). The transferee foreign corporation also 
includes a corporation designated as the transferee foreign corporation 
in the case of a new gain recognition agreement entered into under this 
section.
    (xv) Transferred corporation. Except as provided in this paragraph 
(b)(1)(xv), the transferred corporation is the corporation the stock or 
securities of which are transferred in the initial transfer. In the 
case of an indirect stock transfer, the transferred corporation has the 
meaning set forth in Sec.  1.367(a)-3(d)(2)(ii). The transferred 
corporation also includes a corporation designated as the transferred 
corporation in the case of a new gain recognition

[[Page 68769]]

agreement entered into under this section.
* * * * *
    (c) * * *
    (2) * * *
    (iii) A statement that the U.S. transferor agrees to comply with 
all the conditions and requirements of this section, including to 
recognize gain under the gain recognition agreement in accordance with 
paragraph (c)(1)(i) of this section, to extend the period of 
limitations on assessment of tax as provided in paragraph (f) of this 
section, to file the certification described in paragraph (g) of this 
section, and, as provided in paragraph (j)(8) of this section, to treat 
a failure to comply (as described in paragraph (j)(8) of this section) 
as extending the period of limitations on assessment of tax for the 
taxable year in which gain is required to be reported.
* * * * *
    (d) Filing requirements--(1) General rule. An initial gain 
recognition agreement must be timely filed in order for the U.S. 
transferor to avoid recognizing gain under section 367(a)(1) with 
respect to the transferred stock or securities by reason of the 
applicable exceptions provided under Sec.  1.367(a)-3. Except as 
provided in paragraph (p) of this section, an initial gain recognition 
agreement is timely filed only if--
    (i) The initial gain recognition agreement and any other gain 
recognition agreement document required to be filed with the initial 
gain recognition agreement are included with a timely filed return of 
the U.S. transferor for the taxable year during which the initial 
transfer occurs; and
    (ii) Each gain recognition agreement document identified in 
paragraph (d)(1)(i) of this section is completed in all material 
respects.
* * * * *
    (j) * * *
    (8) Failure to comply. A U.S. transferor fails to comply in any 
material respect with any requirement of this section, or the terms of 
the gain recognition agreement as described in paragraph (c)(1) of this 
section. A failure to comply under this paragraph (j)(8) will extend 
the period of limitations on assessment of tax for the taxable year in 
which gain is required to be reported until the close of the third full 
taxable year ending after the date on which the U.S. transferor 
furnishes to the Director of Field Operations International, Large 
Business & International (or any successor to the roles and 
responsibilities of such person) (Director) the information that should 
have been provided under this section. Except as provided in paragraph 
(p) of this section, for purposes of this paragraph (j)(8), a failure 
to comply includes--
    (i) If there is a gain recognition event in a taxable year, a 
failure to report gain or pay any additional tax or interest due under 
the terms of the gain recognition agreement; and
    (ii) A failure to file a gain recognition agreement document, other 
than an initial gain recognition agreement or a document required to be 
filed with the initial gain recognition agreement. For this purpose, 
there is a failure to file a gain recognition agreement document if--
    (A) The gain recognition agreement document is not timely filed as 
required under this section, or
    (B) The gain recognition agreement document is not completed in all 
material respects.
* * * * *
    (p) Relief for certain failures to file or failures to comply that 
are not willful--(1) In general. This paragraph (p) provides relief if 
there is a failure to file an initial gain recognition agreement as 
required under paragraph (d)(1) of this section (failure to file), or a 
failure to comply that is a triggering event under paragraph (j)(8) of 
this section (failure to comply). A failure to file or failure to 
comply will be deemed not to have occurred for purposes of paragraph 
(d)(1) of this section or paragraph (j)(8) of this section if the U.S. 
transferor demonstrates that the failure was not willful using the 
procedure set forth in this paragraph (p). For this purpose, willful is 
to be interpreted consistent with the meaning of that term in the 
context of other civil penalties, which would include a failure due to 
gross negligence, reckless disregard, or willful neglect. Whether a 
failure to file or failure to comply was willful will be determined by 
the Director (as described in paragraph (j)(8) of this section) based 
on all the facts and circumstances. The U.S. transferor must submit a 
request for relief and an explanation as provided in paragraph 
(p)(2)(i) of this section. Although a U.S. transferor whose failure to 
file or failure to comply is determined not to be willful will not be 
subject to gain recognition under paragraph (b), (c), or (e) of Sec.  
1.367(a)-3 or paragraph (c)(1) of this section, as applicable, the U.S. 
transferor will be subject to a penalty under section 6038B if the U.S. 
transferor fails to satisfy the reporting requirements under that 
section and does not demonstrate that the failure was due to reasonable 
cause and not willful neglect. See Sec.  1.6038B-1(b)(2) and (f). The 
determination of whether the failure to file or failure to comply was 
willful under this section has no effect on any request for relief made 
under Sec.  1.6038B-1(f).
    (2) Procedures for establishing that a failure to file or failure 
to comply was not willful--(i) Time and manner of submission. A U.S. 
transferor's statement that a failure to file or failure to comply was 
not willful will be considered only if, promptly after the U.S. 
transferor becomes aware of the failure, an amended return is filed for 
the taxable year to which the failure relates that includes the 
information that should have been included with the original return for 
such taxable year or that otherwise complies with the rules of this 
section, and that includes a written statement explaining the reasons 
for the failure to file or failure to comply. The U.S. transferor must 
file, with the amended return, a Form 8838 extending the period of 
limitations on assessment of tax with respect to the gain realized but 
not recognized on the initial transfer to the later of: The close of 
the eighth full taxable year following the taxable year during which 
the initial transfer occurred (date one); or the close of the third 
full taxable year ending after the date on which the required 
information is provided to the Director (date two). However, the U.S. 
transferor is not required to file a Form 8838 with the amended return 
if both date one is later than date two and a Form 8838 was previously 
filed extending the period of limitations on assessment of tax with 
respect to the gain realized but not recognized on the initial transfer 
to date one. If a Form 8838 is not required to be filed with the 
amended return pursuant to the previous sentence, a copy of the 
previously filed Form 8838 must be filed with the amended return. The 
amended return and either a Form 8838 or a copy of the previously filed 
Form 8838, as the case may be, must be filed with the Internal Revenue 
Service at the location where the U.S. transferor filed its original 
return. The U.S. transferor may submit a request for relief from the 
penalty under section 6038B as part of the same submission. See Sec.  
1.6038B-1(f).
    (ii) Notice requirement. In addition to the requirements of 
paragraph (p)(2)(i) of this section, the U.S. transferor must comply 
with the notice requirements of this paragraph (p)(2)(ii). If any 
taxable year of the U.S. transferor is under examination when the 
amended return is filed, a copy of the amended return and any 
information required to be included with such return must be delivered 
to the Internal Revenue Service personnel conducting the examination. 
If no taxable year of the

[[Page 68770]]

U.S. transferor is under examination when the amended return is filed, 
a copy of the amended return and any information required to be 
included with such return must be delivered to the Director.
    (3) Examples. The following examples illustrate the application of 
this paragraph (p). All of the examples are based solely on the 
following facts and any additional facts stated in the particular 
example. DC, a domestic corporation, wholly owns FS and FA, each a 
foreign corporation. In Year 1, pursuant to a transaction qualifying 
both as an exchange under section 351 and a reorganization under 
section 368(a)(1)(B), DC transferred all the FS stock to FA solely in 
exchange for voting stock of FA (FS Transfer). The fair market value of 
the FS stock exceeded DC's tax basis in the stock at the time of the FS 
transfer. Absent the application of section 367 to the transaction, 
DC's exchange of the FS stock for the stock of FA qualified as a tax-
free exchange under sections 351(a) and section 354. Immediately after 
the transaction, both FA and FS were controlled foreign corporations 
(as defined in section 957). Furthermore, DC was a section 1248 
shareholder (as defined in Sec.  1.367(b)-2(b)) with respect to FA and 
FS, and a 5-percent shareholder with respect to FA for purposes of 
Sec.  1.367(a)-3(b)(ii). Thus, DC was required to recognize gain under 
section 367(a)(1) by reason of the FS Transfer unless DC timely filed 
an initial gain recognition agreement (GRA) as required by paragraph 
(d)(1) of this section and complies in all material respects with the 
requirements of this section throughout the term of the GRA. The 
application of section 6038B is not addressed in these examples. DC may 
be subject to a penalty under section 6038B even if DC demonstrates 
under this section that a failure to file or failure to comply was not 
willful. See Sec.  1.6038B-1(b) and (f) for the application of section 
6038B.

    Example 1. Taxpayer failed to file a GRA due to accidental 
oversight. (i) Facts. DC filed its tax return for the year of the FS 
Transfer, reporting no gain with respect to the exchange of the FS 
stock. DC, through its tax department, was aware of the requirement 
to file a GRA in order for DC to avoid recognizing gain with respect 
to the FS Transfer under section 367(a)(1), and had the experience 
and competency to properly prepare the GRA. DC had filed many GRAs 
over the years and had never failed to timely file a GRA. However, 
although DC prepared the GRA with respect to the FS Transfer, it was 
not filed with DC's tax return for the year of the FS Transfer due 
to an accidental oversight. During the preparation of the following 
year's tax return, DC discovered that the GRA was not filed. DC 
filed an amended return to file the GRA and complied with the 
procedures set forth under paragraph (p)(2) of this section promptly 
after it became aware of the failure.
    (ii) Result. Because DC failed to file a GRA with its timely 
filed tax return for the year of the FS Transfer, there is a failure 
to timely file the GRA as required by paragraph (d)(1) of this 
section. However, based on the facts of this Example 1, including 
that the failure to timely file the GRA was an isolated and 
accidental oversight, the failure to timely file is not a willful 
failure to file. Accordingly, the timely filed requirement of 
paragraph (d)(1) of this section is considered to be satisfied, and 
DC is not required to recognize the gain realized on the FS Transfer 
under section 367(a)(1).
    Example 2. Taxpayer's course of conduct is taken into account in 
determination. (i) Facts. DC filed its tax return for the year of 
the FS Transfer, reporting no gain with respect to the exchange of 
the FS stock, but failed to file a GRA. DC, through its tax 
department, was aware of the requirement to file a GRA in order for 
DC to avoid recognizing gain with respect to the FS Transfer under 
section 367(a)(1). DC had not consistently and in a timely manner 
filed GRAs in the past, and also had an established history of 
failing to timely file other tax and information returns for which 
it was subject to penalties. In a year subsequent to Year 1, DC 
transferred stock of another foreign subsidiary with respect to 
which DC had a built-in gain (FS2) to FA in a transaction that 
qualified as both a reorganization under section 368(a)(1)(B) and an 
exchange described under section 351 (FS2 Transfer). DC was required 
to recognize gain on the FS2 Transfer under section 367(a)(1) unless 
DC timely filed a GRA as required by paragraph (d)(1) of this 
section and complied with the requirements of this section during 
the term of the GRA. DC reported no gain on the FS2 Transfer on its 
tax return, but failed to file a GRA. At the time of the FS2 
Transfer, DC was already aware of its failure to file the GRA 
required for the prior FS Transfer, but had not implemented any 
safeguards to ensure that it would timely file GRAs for future 
transactions. DC filed an amended return to file the GRA for the FS2 
Transfer and complied with the procedures set forth under paragraph 
(p)(2) of this section promptly after it became aware of the 
failure. DC asserts that its failure to timely file a GRA with 
respect to the FS2 Transfer was due to an isolated oversight similar 
to the one that occurred with respect to the FS Transfer. At issue 
is DC's failure to timely file a GRA for the FS2 Transfer.
    (ii) Result. Because DC failed to file a GRA with its timely 
filed tax return for the year of the FS2 Transfer, there is a 
failure to timely file the GRA as required by paragraph (d)(1) of 
this section. DC's course of conduct is taken into account in 
determining whether its failure to timely file a GRA for the FS2 
Transfer was willful. Based on the facts of this Example 2, 
including DC's history of failing to file required tax and 
information returns in general and GRAs in particular, and its 
failure to implement safeguards to ensure that it would timely file 
GRAs, the failure to timely file a GRA with respect to the FS2 
Transfer rises to the level of a willful failure to timely file. 
Accordingly, DC is ineligible for relief under paragraph (p) of this 
section, the GRA is not considered timely filed for purposes of 
paragraph (d)(1) of this section, and DC must recognize the full 
amount of the gain realized on the FS2 Transfer.
    Example 3. GRA not completed in all material respects.  (i) 
Facts. DC timely filed its tax return for the year of the FS 
Transfer, reporting no gain with respect to the exchange of the FS 
stock. DC was aware of the requirement to file a GRA to avoid 
recognizing gain under section 367(a)(1), including the requirement 
to provide the basis and fair market value of the transferred stock. 
However, DC filed a purported GRA that did not contain the fair 
market value of the FS stock. Instead, the GRA was filed with the 
statement that the fair market value information was ``available 
upon request.'' Other than the omission of the fair market value of 
the FS stock, the GRA contained all other information required by 
this section.
    (ii) Result. Because DC omitted the fair market value of the FS 
stock from the GRA, the GRA was not completed in all material 
respects. Accordingly, there is a failure to timely file the GRA. 
Furthermore, because DC knowingly omitted such information, DC's 
omission is a willful failure to timely file a GRA. Accordingly, DC 
is ineligible for relief under paragraph (p) of this section, the 
GRA is not considered timely filed for purposes of paragraph (d)(1) 
of this section, and DC must recognize the full amount of the gain 
realized on the FS Transfer. The same result would arise if DC had 
included the fair market value of the FS stock, but knowingly 
omitted its tax basis from the GRA.
    Example 4. Taxpayer knew of GRA filing requirement, but 
intentionally chose not to file. (i) Facts. When DC filed its tax 
return for the tax year of the FS Transfer, it was aware of the 
requirement to file a GRA to avoid recognizing gain under section 
367(a)(1). However, because DC anticipated selling Business A in the 
following tax year, which was expected to produce a capital loss 
that could be carried back to fully offset the gain recognized on 
the FS Transfer, DC intentionally chose not to file a GRA. DC 
recognized the gain from the FS Transfer under section 367(a)(1) and 
reported the gain on its timely filed tax return. At the end of the 
following year, a large class action lawsuit was filed against 
Business A and, consequently, DC was unable to sell the business. As 
a result, DC did not realize the expected capital loss, and it was 
not able to offset the gain from the FS Transfer. DC now seeks to 
file a GRA for the FS Transfer.
    (ii) Result. Because DC failed to file a GRA with its timely 
filed tax return for the year of the FS Transfer, there is a failure 
to timely file the GRA as required by paragraph (d)(1) of this 
section. Furthermore, because DC intentionally chose not to file a 
GRA for the FS Transfer, its actions constitute a willful failure to 
timely file a GRA. Accordingly, DC is ineligible for relief under 
paragraph (p) of this section, the GRA is not considered timely 
filed for purposes of paragraph (d)(1) of this section, and DC must 
recognize the

[[Page 68771]]

full amount of the gain realized on the FS Transfer in Year 1.
* * * * *
    (r) Effective/applicability dates--(1) * * * (i) * * * The eleventh 
sentence of paragraph (a) and paragraphs (b)(1)(iv), (b)(1)(vi), 
(b)(1)(xiii), (d)(1), (j)(8), and (p) of this section will apply to 
gain recognition agreement documents that are required to be filed on 
or after November 19, 2014, as well as to requests for relief submitted 
on or after November 19, 2014.
* * * * *
    (3) Applicability to requests for relief submitted before November 
19, 2014. The eleventh sentence of paragraph (a) and paragraphs 
(b)(1)(iv), (b)(1)(vi), (b)(1)(xiii), (d)(1), (j)(8), and (p) of this 
section will apply to requests for relief submitted before November 19, 
2014 if--
    (i) The statute of limitations on the assessment of tax has not 
expired for any year to which the request relates; and
    (ii) The U.S. transferor resubmits the request under paragraph (p) 
of this section, notes on the request that the request is being 
submitted pursuant to this paragraph (r)(3), and acknowledges on the 
request that the last sentence of Sec.  1.6038B-1(g)(6) provides a 
special rule regarding the application of Sec.  1.6038B-1 to any 
transfer that is the subject of the request.

0
Par. 8. Section 1.367(e)-2 is amended:
0
1. By revising the ninth sentence and adding two new sentences before 
the last sentence of paragraph (a).
0
2. By revising paragraph (b)(1)(i).
0
3. In paragraph (b)(2)(i)(A)(2), by removing the language ``its U.S. 
income tax returns'' and adding the language ``its timely filed U.S. 
income tax returns'' in its place.
0
4. In paragraph (b)(2)(i)(A)(3), by removing the language ``its U.S. 
income tax return'' and adding the language ``its timely filed U.S. 
income tax return'' in its place.
0
5. By revising paragraph (b)(2)(i)(C)(1).
0
6. In the first sentence of paragraph (b)(2)(i)(E)(3), by removing the 
language ``its U.S. income tax return'' and adding the language ``its 
timely filed U.S. income tax return'' in its place.
0
7. In paragraph (b)(2)(i)(E)(4)(ii), by removing the language ``its 
U.S. income tax return'' and adding the language ``its timely filed 
U.S. income tax return'' in its place.
0
8. In paragraph (b)(2)(i)(E)(5)(ii), by removing the language ``its 
U.S. income tax return'' and adding the language ``its timely filed 
U.S. income tax return'' in its place.
0
9. In the first sentence of paragraph (b)(2)(iii)(A), by removing the 
language ``its U.S. income tax return'' and adding the language ``its 
timely filed U.S. income tax return'' in its place.
0
10. By adding a sentence at the end of paragraph (b)(2)(iii)(D).
0
11. In paragraph (c)(2)(i)(B)(3), by removing the language ``their U.S. 
income tax returns'' and adding the language ``their timely filed U.S. 
income tax returns'' in its place.
0
12. By revising paragraph (e).
0
13. By adding paragraphs (f) and (g).
    The revisions and additions read as follows:


Sec.  1.367(e)-2  Distributions described in section 367(e)(2).

    (a) Purpose and scope--(1) In general. * * * Paragraph (e) of this 
section provides rules regarding failures to file statements or other 
documents required under this section or failures to comply with the 
requirements of this section. Paragraph (f) of this section provides 
relief for certain failures to file or comply. Finally, paragraph (g) 
of this section specifies the effective/applicability dates for the 
rules of this section. * * *
* * * * *
    (b) Distribution by a domestic corporation--(1) General rule--(i) 
Recognition of gain and loss. If a domestic corporation (domestic 
liquidating corporation) makes a distribution of property in complete 
liquidation under section 332 to a foreign corporation (foreign 
distributee corporation) that meets the stock ownership requirements of 
section 332(b) with respect to stock in the domestic liquidating 
corporation, then--
    (A) Section 337(a) and (b)(1) will not apply; and
    (B) The domestic liquidating corporation will recognize gain or 
loss on the distribution of property to the foreign distributee 
corporation, except as provided in paragraph (b)(2) of this section.
* * * * *
    (2) * * *
    (i) * * *
    (C) * * *
    (1) A declaration that the distribution to the foreign distributee 
corporation is one to which the rules of this paragraph (b)(2)(i) apply 
and a certification that the domestic liquidating corporation and the 
foreign distributee corporation agree to comply with all the conditions 
and requirements of this section, including, as provided in paragraph 
(e)(4)(ii)(B) of this section, to treat a failure to comply (as 
described in paragraph (e)(4)(i) of this section) as extending the 
period of limitations on assessment of tax for the taxable year in 
which gain is required to be reported.
* * * * *
    (iii) * * *
    (D) * * * The required statement shall also state that the domestic 
liquidating corporation agrees, as provided in paragraph (e)(4)(ii)(B) 
of this section, to treat a failure to comply (as described in 
paragraph (e)(4)(i) of this section) as extending the period of 
limitations on assessment of tax for the taxable year in which gain is 
required to be reported.
* * * * *
    (e) Failures to file or failures to comply--(1) Scope. This 
paragraph (e) provides rules regarding a failure to file an initial 
liquidation document with respect to one or more liquidating 
distributions by a domestic liquidating corporation that, absent such 
failure, would qualify for nonrecognition treatment under paragraph 
(b)(2)(i) or (iii) of this section, or with respect to one or more 
liquidating distributions by a foreign liquidating corporation that, 
absent such failure, would qualify for nonrecognition treatment under 
paragraph (c)(2)(i)(B) of this section (failure to file). This 
paragraph (e) also provides rules regarding failures to comply in all 
material respects with the terms of this section with respect to one or 
more liquidating distributions for which nonrecognition treatment was 
initially claimed under paragraph (b)(2)(i), (b)(2)(iii), or 
(c)(2)(i)(B) of this section, as applicable (failure to comply).
    (2) Definitions. The following definitions apply for purposes of 
this section.
    (i) An initial liquidation document means any statement, schedule, 
or form required to be filed under this section in order for the 
domestic liquidating corporation or foreign liquidating corporation, as 
applicable, to initially qualify to claim nonrecognition treatment with 
respect to one or more liquidating distributions described in this 
section, including--
    (A) The statement and attachments described in paragraph 
(b)(2)(i)(C) of this section;
    (B) The statement described in paragraph (b)(2)(iii)(D) of this 
section; and
    (C) The statement and attachments described in paragraph 
(c)(2)(i)(C) of this section.
    (ii) A subsequent liquidation document means any statement, 
schedule, or form (other than an initial liquidation document) required 
to be filed under this section in order for the domestic liquidating 
corporation or

[[Page 68772]]

foreign liquidating corporation, as applicable, to continue to qualify 
for nonrecognition treatment with respect to one or more liquidating 
distributions described in this section, including--
    (A) The schedule described in paragraph (b)(2)(i)(E)(3) of this 
section;
    (B) The schedule described in paragraph (b)(2)(i)(E)(4)(ii) of this 
section; and
    (C) The statement and attachments described in paragraph 
(b)(2)(i)(E)(5) of this section.
    (iii) A timely filed U.S. income tax return means a Federal income 
tax return filed on or before the last date prescribed for filing 
(taking into account any extensions of time therefor) such return.
    (3) Failure to file--(i) General rule. For purposes of this section 
and except as provided in paragraph (b)(2)(i)(D) or (f) of this 
section, there is a failure to file an initial liquidation document 
if--
    (A) An initial liquidation document is not filed with the timely 
filed U.S. income tax return specified under this section, or
    (B) An initial liquidation document is not completed in all 
material respects.
    (ii) Consequences of a failure to file. If there is a failure to 
file an initial liquidation document, then nonrecognition treatment 
under paragraph (b)(2)(i), (b)(2)(iii), or (c)(2)(i)(B) of this section 
(as appropriate) will not apply.
    (4) Failure to comply--(i) General rule. For purpose of this 
section and except as provided in paragraph (b)(2)(i)(D) or (f) of this 
section, a failure to comply includes--
    (A) A failure to report gain, or pay any additional tax or interest 
due, in accordance with the requirements under this section; and
    (B) A failure to file a subsequent liquidation document, as 
determined by applying paragraph (e)(3)(i) of this section, but 
replacing the term ``initial liquidation document'' with the term 
``subsequent liquidation document.''
    (ii) Consequences of a failure to comply. If there is a failure to 
comply in any material respect with the terms of paragraph (b)(2)(i), 
(b)(2)(iii), or (c)(2)(i) of this section, as applicable, then--
    (A) Any gain (but not loss) that was not previously recognized by 
the domestic liquidating corporation or foreign liquidating 
corporation, as applicable, under paragraph (b)(2)(i), (b)(2)(iii), or 
(c)(2)(i)(B) of this section must be recognized; and
    (B) The period of limitations on assessment of tax for the taxable 
year in which gain is required to be reported will be extended until 
the close of the third full taxable year ending after the date on which 
the domestic liquidating corporation, foreign distributee corporation, 
or foreign liquidating corporation, as applicable, furnishes to the 
Director of Field Operations International, Large Business & 
International (or any successor to the roles and responsibilities of 
such position, as appropriate) (Director) the information that should 
have been provided under this section.
    (f) Relief for certain failures to file or failures to comply that 
are not willful--(1) In general. This paragraph (f) provides relief if 
there is a failure to file an initial liquidation document as described 
in paragraph (e)(3)(i) of this section (failure to file), or a failure 
to comply in any material respect with the terms of this section as 
described in paragraph (e)(4)(i) of this section (failure to comply). A 
failure to file or a failure to comply will be deemed not to have 
occurred for purposes of paragraph (e)(3)(ii) or (e)(4)(ii) of this 
section if the taxpayer demonstrates that the failure was not willful 
using the procedure set forth in this paragraph (f). For this purpose, 
willful is to be interpreted consistent with the meaning of that term 
in the context of other civil penalties, which would include a failure 
due to gross negligence, reckless disregard, or willful neglect. 
Whether a failure to file or failure to comply was willful will be 
determined by the Director (as described in paragraph (e)(4)(ii)(B) of 
this section) based on all the facts and circumstances. The taxpayer 
must submit a request for relief and an explanation as provided in 
paragraph (f)(2)(i) of this section. Although a taxpayer whose failure 
to file or failure to comply is determined not to be willful will not 
be subject to gain or loss recognition under this section, the taxpayer 
will be subject to a penalty under section 6038B if the taxpayer fails 
to satisfy the reporting requirements, if any, under that section and 
does not demonstrate that the failure was due to reasonable cause and 
not willful neglect. See Sec.  1.6038B-1(e)(4) and (f). The 
determination of whether the failure to file or failure to comply was 
willful under this section has no effect on any request for relief made 
under Sec.  1.6038B-1(f).
    (2) Procedures for establishing that a failure to file or failure 
to comply was not willful--(i) Time and manner of submission. A 
taxpayer's statement that a failure to file or failure to comply was 
not willful will be considered only if, promptly after the taxpayer 
becomes aware of the failure, an amended return is filed for the 
taxable year to which the failure relates that includes the information 
that should have been included with the original return for such 
taxable year or that otherwise complies with the rules of this section, 
and that includes a written statement explaining the reasons for the 
failure. In the case of a liquidating distribution described in 
paragraph (b)(2)(iii) of this section, the taxpayer must file, with the 
amended return, a Form 8838 extending the period of limitations on 
assessment of tax with respect to the gain realized but not recognized 
with respect to the liquidating distribution to the close of the third 
full taxable year ending after the date on which the required 
information is provided to the Director. In the case of a liquidating 
distribution described in paragraph (b)(2)(i) or (c)(2)(i)(B) of this 
section, the taxpayer must file, with the amended return, a Form 8838 
extending the period of limitations on the assessment of tax with 
respect to the gain realized but not recognized with respect to the 
liquidating distribution to the later of: the date provided in 
paragraph (b)(2)(i)(C)(5), taking into account paragraph (c)(2)(i)(C) 
and (D), as applicable (date one); or, the close of the third full 
taxable year ending after the date on which the required information is 
provided to the Director (date two). However, the taxpayer is not 
required to file a Form 8838 with the amended return if both date one 
is later than date two and a Form 8838 was previously filed extending 
the period of limitations on assessment of tax with respect to the gain 
realized but not recognized with respect to the liquidating 
distribution to date one. If a Form 8838 is not required to be filed 
pursuant to the previous sentence, a copy of the previously filed Form 
8838 must be filed with the amended return. The amended return and 
either a Form 8838 or a copy of the previously filed Form 8838, as the 
case may be, must be filed with the Internal Revenue Service at the 
location where the taxpayer filed its original return. The taxpayer may 
submit a request for relief from the penalty under section 6038B as 
part of the same submission. See Sec.  1.6038B-1(f).
    (ii) Notice requirement. In addition to the requirements of 
paragraph (f)(2)(i) of this section, the taxpayer must comply with the 
notice requirements of this paragraph (f)(2)(ii). If any taxable year 
of the taxpayer is under examination when the amended return is filed, 
a copy of the amended return and any information required to be 
included with such return must be delivered to the Internal Revenue 
Service personnel conducting the examination. If no taxable year of the 
taxpayer is under

[[Page 68773]]

examination when the amended return is filed, a copy of the amended 
return and any information required to be included with such return 
must be delivered to the Director.
    (3) For illustrations of the application of the willfulness 
standard of this paragraph (f), see the examples in Sec.  1.367(a)-
8(p)(3).
    (g) Effective/applicability dates. Except as otherwise provided, 
this section applies to distributions occurring on or after September 
7, 1999 or, if the taxpayer so elects, to distributions in taxable 
years ending after August 8, 1999. The ninth, tenth, and eleventh 
sentences of paragraph (a) of this section, and paragraphs (b)(1)(i), 
(b)(2)(i)(A)(2), (b)(2)(i)(A)(3), (b)(2)(i)(E)(3), (b)(2)(i)(E)(4)(ii), 
(b)(2)(i)(E)(5)(ii), (b)(2)(iii)(A), (c)(2)(i)(B)(3), (e), and (f) of 
this section will apply to liquidation documents that are required to 
be filed on or after November 19, 2014, as well as to requests for 
relief submitted on or after November 19, 2014.

0
Par. 9. Section 1.6038B-1 is amended:
0
1. By adding a sentence after the first sentence in paragraph 
(b)(1)(i).
0
2. By revising paragraph (b)(2)(i)(B)(1).
0
3. By adding paragraph (b)(2)(iii).
0
4. By adding paragraph (b)(2)(iv).
0
5. By revising paragraphs (c)(1) through (c)(5).
0
6. By revising paragraph (e)(4).
0
7. By removing paragraph (f)(1)(i).
0
8. By redesignating paragraphs (f)(1)(ii) and (f)(1)(iii) as paragraphs 
(f)(1)(i) and (f)(1)(ii), respectively.
0
9. By adding paragraph (f)(2)(iii).
0
10. By adding paragraph (f)(2)(iv).
0
11. In paragraph (g)(1), by removing the language ``(g)(5)'' and adding 
the language ``(g)(6)'' in its place.

0
12. By adding paragraph (g)(6).
    The revisions and additions read as follows:


Sec.  1.6038B-1  Reporting of certain transfers to foreign 
corporations.

* * * * *
    (b) * * * (1) * * * -(i) * * * In addition, if the U.S. person 
files a statement under Sec.  1.367(a)-3(d)(2)(vi)(C), a gain 
recognition agreement under Sec.  1.367(a)-8, or a liquidation document 
under Sec.  1.367(e)-2(b), such person must comply in all material 
respects with the requirements of such section pursuant to the terms of 
the statement, gain recognition agreement, or liquidation document, as 
applicable, in order to satisfy a reporting obligation under section 
6038B. * * *
* * * * *
    (2) * * *
    (i) * * *
    (B) * * *
    (1) Except as provided in paragraph (b)(2)(iii) of this section, 
the U.S. transferor (or one or more successors) filed an initial gain 
recognition agreement under Sec.  1.367(a)-8, and filed Form 926 in 
accordance with paragraph (b)(2)(iv) of this section; or
* * * * *
    (ii) * * *
    (iii) Timely filed initial gain recognition agreement. Paragraph 
(b)(2)(i)(B)(1) of this section will not apply unless the initial gain 
recognition agreement is timely filed as determined under Sec.  
1.367(a)-8(d)(1), but for purposes of this section, determined without 
regard to Sec.  1.367(a)-8(p). However, see paragraph (f)(3) of this 
section for certain relief that may be available.
    (iv) Satisfaction of section 6038B reporting if a gain recognition 
agreement is timely filed. If the U.S. transferor is described in 
paragraph (b)(2)(i)(B)(1) of this section and is not otherwise required 
to file a Form 926 with respect to a transfer of assets other than the 
stock or securities to the transferee foreign corporation, the 
requirements of this section are satisfied with respect to the transfer 
of the stock or securities by completing Part I and Part II of Form 
926, noting on the Form 926 that a gain recognition agreement is being 
filed pursuant to Sec.  1.367(a)-8; reporting on the Form 926 the fair 
market value, adjusted tax basis, and gain recognized with respect to 
the transferred stock or securities; submitting on the Form 926 any 
other information that Form 926, its accompanying instructions, or 
other applicable guidance require to be submitted with respect to the 
transfer of the stock or securities; and attaching a signed copy of the 
Form 926 to its timely filed U.S. income tax return (including 
extensions) for the year of the transfer. If the U.S. transferor is 
required to file Form 926 with respect to a transfer of assets in 
addition to the stock or securities, the requirements of this section 
are satisfied with respect to the transfer of the stock or securities 
by noting on the Form 926 that a gain recognition agreement is being 
filed pursuant to Sec.  1.367(a)-8; reporting on the Form 926 the fair 
market value, adjusted tax basis, and gain recognized with respect to 
the transferred stock or securities; and submitting on the Form 926 any 
other information that Form 926, its accompanying instructions, or 
other applicable guidance require to be submitted with respect to the 
transfer of the stock or securities.
* * * * *
    (c) * * *
    (1) through (4)(i) [Reserved]. For further guidance, see Sec.  
1.6038B-1T(c)(1) through (4)(i).
    (ii) Stock or securities. Describe any stock or securities that are 
transferred, including the adjusted tax basis and fair market value of 
the stock or securities, the class or type, amount, and characteristics 
of the stock or securities, and the name, address, place of 
incorporation, and general description of the corporation issuing the 
stock or securities. In addition, if any provision of Sec.  1.367(a)-3 
or Sec.  1.367(a)-3T applies to except the transfer of the stock or 
securities from section 367(a)(1), provide information supporting the 
claimed application of such provision. However, see paragraph (b)(2) of 
this section for certain exceptions and special rules for reporting 
transfers of stock or securities under section 367(a).
    (iii) through (5) [Reserved]. For further guidance, see Sec.  
1.6038B-1T(c)(4)(iii) through (5).
* * * * *
    (e) * * *
    (4) Reporting rules for section 367(e)(2) distributions by domestic 
liquidating corporations--(i) General rule. Except as provided in 
paragraph (e)(4)(ii) of this section, if the distributing corporation 
makes a distribution of property in complete liquidation under section 
332 to a foreign distributee corporation that meets the stock ownership 
requirements of section 332(b) with respect to the stock of the 
distributing corporation, then the distributing corporation must 
complete a Form 926 and attach a signed copy of such form to its timely 
filed U.S. income tax return (including extensions) for the taxable 
years that include one or more liquidating distributions. The property 
description contained in Part III of the Form 926 must contain a 
description, including the adjusted tax basis and fair market value, of 
all property distributed by the distributing corporation (regardless of 
whether the distribution of the property qualifies for nonrecognition 
treatment). The description must also identify the items of property 
for which nonrecognition treatment is claimed under Sec.  1.367(e)-
2(b)(2)(ii) or (iii), as applicable.
    (ii) Special rule. Except as provided in paragraph (e)(4)(iii) of 
this section, if the distributing corporation distributes items of 
property that will be used by the foreign distributee corporation in 
the conduct of a trade or business in the United States and the 
distributing corporation does not recognize gain or loss on such 
distribution under

[[Page 68774]]

Sec.  1.367(e)-2(b)(2)(i) with respect to such property, then the 
distributing corporation may satisfy the requirements of this section 
by completing Part I and Part II of Form 926, noting in Part III that 
the information required by Form 926 is contained in a statement 
required by Sec.  1.367(e)-2(b)(2)(i)(C)(2), and attaching a signed 
copy of Form 926 to its timely filed U.S. income tax return (including 
extensions) for each taxable year that includes one or more 
distributions in liquidation. In addition, if the distributing 
corporation distributes stock of a domestic subsidiary corporation and 
does not recognize gain or loss on such distribution under Sec.  
1.367(e)-2(b)(2)(iii) with respect to such stock, then the distributing 
corporation may satisfy the requirements of this section by completing 
Part I and Part II of Form 926, noting in Part III that the information 
required by Form 926 is contained in a statement required by Sec.  
1.367(e)-2(b)(2)(iii)(D), and attaching a signed copy of Form 926 to 
its timely filed U.S. income tax return (including extensions) for the 
taxable years that include one or more distributions of domestic 
subsidiary stock.
    (iii) Properly filed statement. Paragraph (e)(4)(ii) will not apply 
if there is a failure to file an initial liquidation document as 
determined under Sec.  1.367(e)-2(e)(3)(i), but for purposes of this 
section, determined without regard to Sec.  1.367(e)-2(f). However, see 
paragraph (f)(3) of this section for certain relief that may be 
available.
    (f) * * *
    (2) * * *
    (iii) With respect to an initial gain recognition agreement filed 
under Sec.  1.367(a)-8, a failure to comply as determined under Sec.  
1.367(a)-8(j)(8), but for purposes of this section, determined without 
regard to the application of Sec.  1.367(a)-8(p).
    (iv) With respect to an initial liquidation document filed under 
Sec.  1.367(e)-2(b)(2), a failure to comply as determined under Sec.  
1.367(e)-2(e)(4)(i), but for purposes of this section, determined 
without regard to the application of Sec.  1.367(e)-2(f).
* * * * *
    (g) * * *
    (6) The second sentence of paragraph (b)(1)(i) and paragraphs 
(b)(2)(i)(B)(1), (b)(2)(iii), (b)(2)(iv), (c), (e)(4), (f)(2)(iii), and 
(f)(2)(iv) of this section will apply to documents required to be filed 
on or after November 19, 2014, as well as to requests for relief 
submitted on or after November 19, 2014. The second sentence of 
paragraph (b)(1)(i) and paragraphs (b)(2)(i)(B)(1), (b)(2)(iii), 
(b)(2)(iv), (c), and (f)(2)(iii) of this section will also apply to any 
transfer that is the subject of a request for relief submitted pursuant 
to Sec.  1.367(a)-8(r)(3).

John Dalrymple,
Deputy Commissioner for Services and Enforcement.

    Approved: October 31, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-27365 Filed 11-18-14; 8:45 am]
BILLING CODE 4830-01-P