Guidance Under Section 355(e) Regarding Predecessors, Successors, and Limitation on Gain Recognition; Guidance Under Section 355(f), 69308-69326 [2019-27110]

Download as PDF 69308 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations (ii) Severe weather conditions make it impossible for you or your representative to travel to the hearing. (2) In determining whether good cause exists in circumstances other than those set out in paragraph (f)(1) of this section, the administrative law judge will consider your reason(s) for requesting the change, the facts supporting it, and the impact of the proposed change on the efficient administration of the hearing process. Factors affecting the impact of the change include, but are not limited to, the effect on the processing of other scheduled hearings, delays that might occur in rescheduling your hearing, and whether we previously granted you any changes in the time or place of your hearing. Examples of such other circumstances that you might give for requesting a change in the time or place of the hearing include, but are not limited to, the following: (i) You unsuccessfully attempted to obtain a representative and need additional time to secure representation; (ii) Your representative was appointed within 30 days of the scheduled hearing and needs additional time to prepare for the hearing; (iii) Your representative has a prior commitment to be in court or at another administrative hearing on the date scheduled for the hearing; (iv) A witness who will testify to facts material to your case would be unavailable to attend the scheduled hearing and the evidence cannot be otherwise obtained; (v) Transportation is not readily available for you to travel to the hearing; or (vi) You are unrepresented, and you are unable to respond to the notice of hearing because of any physical, mental, educational, or linguistic limitations (including any lack of facility with the English language) which you may have. ■ 10. Amend § 416.1438 by revising paragraphs (b)(3) and (5) and (c) and adding paragraph (d) to read as follows: § 416.1438 Notice of a hearing before an administrative law judge. khammond on DSKJM1Z7X2PROD with RULES * * * * * (b) * * * (3) How to request that we change the time or place of your hearing; * * * * * (5) Whether your appearance or that of any other party or witness is scheduled to be made by video teleconferencing, in person, or, when the circumstances described in § 416.1436(c)(2) exist, by telephone. If we have scheduled you to appear by video teleconferencing, the notice of hearing will tell you that the scheduled VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 place for the hearing is a video teleconferencing site and explain what it means to appear at your hearing by video teleconferencing; * * * * * (c) Acknowledging the notice of hearing. The notice of hearing will ask you to return a form to let us know that you received the notice. If you or your representative do not acknowledge receipt of the notice of hearing, we will attempt to contact you for an explanation. If you tell us that you did not receive the notice of hearing, an amended notice will be sent to you by certified mail. (d) Amended notice of hearing or notice of supplemental hearing. If we need to send you an amended notice of hearing, we will mail or serve the notice at least 20 days before the date of the hearing. Similarly, if we schedule a supplemental hearing, after the initial hearing was continued by the assigned administrative law judge, we will mail or serve a notice of hearing at least 20 days before the date of the hearing. ■ 11. Amend § 416.1450 by revising paragraphs (a) and (e) to read as follows: § 416.1450 Presenting evidence at a hearing before an administrative law judge. (a) The right to appear and present evidence. Any party to a hearing has a right to appear before the administrative law judge, either by video teleconferencing, in person, or, when the conditions in § 416.1436(c)(2) exist, by telephone, to present evidence and to state his or her position. A party may also make his or her appearance by means of a designated representative, who may make the appearance by video teleconferencing, in person, or, when the conditions in § 416.1436(c)(2) exist, by telephone. * * * * * (e) Witnesses at a hearing. Witnesses you call may appear at a hearing with you in the same manner in which you are scheduled to appear. If they are unable to appear with you in the same manner as you, they may appear as prescribed in § 416.1436(c)(4). Witnesses called by the administrative law judge will appear in the manner prescribed in § 416.1436(c)(4). They will testify under oath or affirmation unless the administrative law judge finds an important reason to excuse them from taking an oath or affirmation. The administrative law judge may ask the witness any questions material to the issues and will allow the parties or their designated representatives to do so. * * * * * ■ 12. Amend § 416.1476 by revising paragraph (b) to read as follows: PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 § 416.1476 Procedures before the Appeals Council on review. * * * * * (b) Oral argument. You may request to appear before the Appeals Council to present oral argument. The Appeals Council will grant your request if it decides that your case raises an important question of law or policy or that oral argument would help to reach a proper decision. If your request to appear is granted, the Appeals Council will tell you the time and place of the oral argument at least 10 business days before the scheduled date. You will appear before the Appeals Council by video teleconferencing or in person, or, when the circumstances described in § 416.1436(c)(2) exist, we may schedule you to appear by telephone. The Appeals Council will determine whether any other person relevant to the proceeding will appear by video teleconferencing, telephone, or in person as based on the circumstances described in § 416.1436(c)(4). [FR Doc. 2019–27172 Filed 12–17–19; 8:45 am] BILLING CODE 4191–02–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9888] RIN 1545–BN18 Guidance Under Section 355(e) Regarding Predecessors, Successors, and Limitation on Gain Recognition; Guidance Under Section 355(f) Internal Revenue Service (IRS), Treasury. ACTION: Final regulations and removal of temporary regulations. AGENCY: This document contains final regulations that provide guidance regarding the distribution by a distributing corporation of stock or securities of a controlled corporation without the recognition of income, gain, or loss. In particular, the final regulations provide guidance in determining whether a corporation is a predecessor or successor of a distributing or controlled corporation for purposes of the exception under section 355(e) of the Internal Revenue Code (Code) to the nonrecognition treatment afforded qualifying distributions. In addition, the final regulations provide certain limitations on the recognition of gain in certain cases involving a predecessor of a distributing corporation. The final SUMMARY: E:\FR\FM\18DER1.SGM 18DER1 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations Background the plan, stock or securities of Controlled are distributed in a Distribution. Section 361(c) generally provides that no gain or loss is recognized to Distributing upon a Distribution of qualified property in pursuance of a plan of reorganization. Section 361(c)(2)(B) defines ‘‘qualified property’’ as (i) any stock, right to acquire stock, or obligation (including a security) of Distributing, or (ii) any stock, right to acquire stock, or obligation (including a security) of Controlled received by Distributing as part of the divisive reorganization. If Distributing distributes property other than qualified property in a Distribution as part of a divisive reorganization and the fair market value of such property exceeds its adjusted basis, gain is recognized to Distributing as if the property were sold to the distributee at its fair market value. See section 361(c)(2)(A). I. Corporate Divisions Under Sections 355 and 368(a)(1)(D) Congress enacted section 355 ‘‘to permit the tax-free division of existing business arrangements among existing shareholders.’’ See S. Rep. No. 105–33, at 139 (1997) (Senate Report). Under section 355(a)(1), if certain requirements are met, a corporation (Distributing) may distribute stock, or stock and securities, of a controlled corporation (Controlled) to Distributing’s shareholders, or to its shareholders and security holders, without recognition of gain or loss to, or inclusion of any amount in income of, the distributees upon receipt (Distribution). Section 355(c) generally provides that no gain or loss is recognized to Distributing upon a Distribution of qualified property which is not in pursuance of a plan of reorganization. Section 355(c)(2)(B) refers to Controlled stock and Controlled securities as ‘‘qualified property.’’ If Distributing distributes property other than qualified property in a Distribution and the fair market value of such property exceeds its adjusted basis, gain is recognized to Distributing as if the property were sold to the distributee at its fair market value. See section 355(c)(2)(A). Taxpayers also may carry out a Distribution as part of a ‘‘divisive reorganization’’ under section 368(a)(1)(D). A divisive reorganization is a transfer by Distributing of part of its assets to Controlled if, immediately after the transfer, one or more of the shareholders of Distributing (including persons who were shareholders immediately before the transfer) have control, as defined in section 368(c), of Controlled, but only if, in pursuance of II. Section 355(e) Although a Distribution is generally tax-free under sections 355 and 361, Congress has determined that recognition of corporate-level gain by Distributing is appropriate ‘‘[i]n cases in which it is intended that new shareholders will acquire ownership of a business in connection with a [Distribution],’’ because the overall transaction ‘‘more closely resembles a corporate level disposition of the portion of the business that is acquired.’’ Senate Report at 139–140. Accordingly, the enactment of the Taxpayer Relief Act of 1997, Public Law 105–34 (111 Stat. 788 (1997)), added section 355(e) to the Code. Under section 355(e), stock or securities of Controlled generally will not be treated as qualified property for purposes of section 355(c)(2) or section 361(c)(2) if the stock or securities are distributed as part of a plan or series of related transactions (Plan) pursuant to which one or more persons acquire directly or indirectly stock representing a ‘‘50percent or greater interest’’ in the stock (Planned 50-percent Acquisition) of Distributing or Controlled. The term ‘‘50-percent or greater interest,’’ as defined in section 355(e)(4)(A) by reference to section 355(d)(4), means stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock. Section 1.355–7(b) provides detailed guidance regarding the meaning and determination of the existence of a Plan. Section 355(e)(4)(D) provides that, for purposes of section 355(e), ‘‘any reference to [Controlled] or khammond on DSKJM1Z7X2PROD with RULES regulations also provide rules regarding the extent to which section 355(f) causes a distributing corporation (and in certain cases its shareholders) to recognize income or gain on the distribution of stock or securities of a controlled corporation. These regulations affect corporations that distribute the stock or securities of a controlled corporation and the shareholders or security holders of those distributing corporations. DATES: Effective date: These final regulations are effective on December 16, 2019. Applicability dates: For dates of applicability, see § 1.355–8(i). FOR FURTHER INFORMATION CONTACT: W. Reid Thompson, (202) 317–5024, or Richard K. Passales, (202) 317–5024 (not toll-free numbers). SUPPLEMENTARY INFORMATION: VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 69309 [Distributing] shall include a reference to any predecessor or successor of such corporation.’’ However, Section 355(e) does not define the terms ‘‘predecessor’’ and ‘‘successor.’’ To provide definitions for the terms ‘‘predecessor’’ and ‘‘successor’’ for purposes of section 355(e), as well as guidance regarding their application, the Department of the Treasury (Treasury Department) and the IRS issued proposed regulations in 2004 (2004 Proposed Regulations) and temporary and proposed regulations in 2016 (2016 Regulations). III. The 2004 Proposed Regulations and the 2016 Regulations The general theory underlying the 2004 Proposed Regulations and the 2016 Regulations was that section 355(e) should apply if a Distribution is used to combine a tax-free division of the assets of a corporation other than Distributing or Controlled (Divided Corporation) with a Planned 50-percent Acquisition of the Divided Corporation. The Treasury Department and the IRS view this type of transaction as a ‘‘synthetic spin-off’’ of the assets that are transferred by the Divided Corporation to Distributing and then to Controlled. For example, a synthetic spin-off could be achieved through the following series of transactions occurring pursuant to a Plan (Base Case Example): (1) A corporation (P) merges into Distributing in a reorganization described in section 368(a)(1)(A), (2) Distributing contributes some (but not all) of P’s assets to Controlled in a reorganization described in section 368(a)(1)(D), and (3) Distributing distributes all of the stock of Controlled in a Distribution. In the Base Case Example, the Divided Corporation (that is, P) could have separated its assets in its own Distribution. In that case, the Divided Corporation would have been a Distributing itself, and section 355(e) clearly would have applied to the Distribution if it were combined with a Planned 50-percent Acquisition of the Divided Corporation. However, the Treasury Department and the IRS observed that if a Distribution by a Distributing is used as the vehicle for a synthetic spin-off by the Divided Corporation, the synthetic spin-off would not be subject to section 355(e) unless the Divided Corporation is treated as a predecessor of Distributing under section 355(e)(4)(D) (Predecessor of Distributing, or POD). Accordingly, the Treasury Department and the IRS issued the 2004 Proposed Regulations and the 2016 Regulations to treat the Divided Corporation in the Base Case Example as a POD. E:\FR\FM\18DER1.SGM 18DER1 69310 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations A. 2004 Proposed Regulations On November 22, 2004, the Treasury Department and the IRS published in the Federal Register (69 FR 67873) the 2004 Proposed Regulations (REG– 145535–02). In general, the 2004 Proposed Regulations would have defined a Predecessor of Distributing as any corporation the assets of which a Distributing has acquired in a transaction to which section 381(a) applies (Section 381 Transaction) and then divided tax-free through a Distribution. The 2004 Proposed Regulations referred to the Section 381 Transaction and the contribution to Controlled of some (but not all) of the assets of the POD prior to the Distribution as a ‘‘combining transfer’’ and a ‘‘separating transfer,’’ respectively. The Treasury Department and the IRS drafted the 2004 proposal primarily to address combining and separating transfers carried out to effect transactions similar to the Base Case Example (in other words, synthetic spin-offs effectuated through Section 381 Transactions). khammond on DSKJM1Z7X2PROD with RULES B. 2016 Regulations After considering all comments received regarding the 2004 Proposed Regulations, on December 19, 2016, the Treasury Department and the IRS published temporary regulations (TD 9805) in the Federal Register (81 FR 91738) (2016 Temporary Regulations), which adopted the 2004 Proposed Regulations with significant modifications. On the same day, the Treasury Department and the IRS published in the Federal Register (81 FR 91888) a notice of proposed rulemaking (REG–140328–15) (2016 Proposed Regulations), which crossreferenced the 2016 Temporary Regulations. A correction to the 2016 Temporary Regulations was published in the Federal Register (82 FR 8811) on January 31, 2017. (References to § 1.355–8T in this preamble refer to the text of the 2016 Temporary Regulations as contained in 26 CFR part 1 revised as of April 1, 2019.) Although the 2016 Regulations generally retained the synthetic spin-off theory underlying the 2004 Proposed Regulations, the Treasury Department and the IRS significantly broadened the scope of the POD definition (but also significantly narrowed its potential application, as described later in this part III.B). Commenters on the 2004 Proposed Regulations noted that a corporation could have been a POD only if the corporation transferred property to Distributing in a Section 381 Transaction (such as the merger in the VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 Base Case Example) and questioned whether that approach was underinclusive. In particular, one commenter explained that a taxpayer could structure a series of transactions to achieve many of the same tax and economic objectives as the Base Case Example without using a Section 381 Transaction. To illustrate that point, the commenter described the following series of transactions, all of which occur as part of the same Plan (2016 Preamble Example). First, Distributing (the common parent of a consolidated group) acquires all of the stock of P. P then contributes some (but not all) of its assets to a wholly owned subsidiary of Distributing (Internal Distributing) in a transaction to which section 351 applies. See § 1.1502–34. Thereafter, Internal Distributing (i) contributes one of the P assets to Controlled, and (ii) distributes all of the stock of Controlled to Distributing in a Distribution. Finally, Distributing distributes all of the stock of Controlled in a Distribution. In response to these comments, the Treasury Department and the IRS broadened the POD definition in the 2016 Regulations by removing the requirement of a Section 381 Transaction from the definition. Under the 2016 Regulations, no particular transactional form was required; rather, the 2016 Regulations focused on the taxfree division of the POD’s property (however effected). The Treasury Department and the IRS revised the POD definition in this manner to ensure that section 355(e) would apply to the Base Case Example, the 2016 Preamble Example, and more generally to any synthetic spin-off that is combined with a Planned 50-percent Acquisition of the Divided Corporation. Importantly, however, the 2016 Regulations significantly limited POD treatment to transactions in which all of the steps involved in the tax-free division of property of the POD occur as part of a Plan. See section 355(e)(2)(A)(ii). Because of these revisions to the 2004 Proposed Regulations, a variety of new transactional structures resulted in POD treatment under the 2016 Regulations. For instance, as illustrated in § 1.355– 8T(h), Example 5 (Example 5), a corporation was treated as a POD as a result of the following transactions, each of which occurs pursuant to the same Plan. First, P transfers some (but not all) of its assets to Distributing in exchange for 10 percent of the stock of Distributing in a transaction to which section 351 applies (leaving Distributing’s other shareholder, Y, with 90 percent of Distributing’s stock). Distributing then (i) contributes some PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 (but not all) of the P assets to Controlled in a reorganization described in section 368(a)(1)(D), and (ii) distributes all of the stock of Controlled to P and Y pro rata. Finally, individual Z acquires 51 percent of the P stock. Because the assets of P were divided tax-free as part of a Plan, the 2016 Regulations treated P as a POD. As described in part II of the Summary of Comments and Explanation of Revisions, in response to comments, the Treasury Department and the IRS have further limited the scope of the POD definition in the final regulations to ensure that P will not be treated as a POD in Example 5. In expanding the definition of a Predecessor of Distributing, the 2016 Regulations introduced the term ‘‘Potential Predecessor.’’ See § 1.355– 8T(b)(2)(ii). Under the POD definition in the 2016 Regulations, only a Potential Predecessor could be a POD. See § 1.355–8T(b)(1)(i). Thus, if a corporation were not a Potential Predecessor, it could not have been a POD under the 2016 Regulations. The 2016 Regulations defined a Potential Predecessor as any corporation other than Distributing or Controlled. See § 1.355–8T(b)(2)(ii). Summary of Comments and Explanation of Revisions Comments were received regarding the 2016 Regulations, but no public hearing was requested or held. After consideration of these comments, this Treasury decision adopts the 2016 Proposed Regulations with limited modifications, and it removes the 2016 Temporary Regulations. In general, the final regulations follow the approach of the 2016 Regulations while incorporating certain requested clarifications and minor revisions. I. Predecessor of Distributing Definition The Treasury Department and the IRS are promulgating the final regulations with the same goal as the 2004 Proposed Regulations and the 2016 Regulations: To ensure that section 355(e) applies properly to synthetic spin-offs of a Divided Corporation’s assets. As noted in part II of the Background, Congress has determined that corporate-level gain should be recognized by a Distributing ‘‘[i]n cases in which it is intended that new shareholders will acquire ownership of a business in connection with a [Distribution],’’ because the overall transaction ‘‘more closely resembles a corporate level disposition of the portion of the business that is acquired.’’ Senate Report at 139–140. Consistent with this policy, the final regulations provide that a corporation cannot qualify as a POD unless the E:\FR\FM\18DER1.SGM 18DER1 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES corporation’s assets are divided through a Distribution (that is, unless the corporation is a Divided Corporation). The Treasury Department and the IRS have determined that, by limiting POD treatment to Divided Corporations, the final regulations will further the policy of section 355(e) while continuing to permit tax-free divisions of existing business arrangements among existing shareholders. See Senate Report at 139. In particular, the Treasury Department and the IRS have sought to avoid definitions that would cause section 355(e) to apply to transactions that do not resemble sales. For example, starting with the 2004 Proposed Regulations, the Treasury Department and the IRS have rejected a POD definition that would include any corporation that, without more, transfers assets to a Distributing in a Section 381 Transaction. The following example illustrates how that rejected POD definition would have run contrary to the policies of section 355 and section 355(e). As part of a Plan, P merges tax-free into Distributing in a reorganization described in section 368(a)(1)(A), with the P shareholders receiving 40 percent of the stock of Distributing. Distributing then distributes all of the stock of Controlled (which holds none of the P assets) in a Distribution. If P were treated as a POD, the Distribution would result in gain recognition under section 355(e), because it occurred as part of the same Plan as an acquisition of a 50percent or greater interest in P (that is, a Planned 50-percent Acquisition). See section 355(e)(3)(B). However, the Treasury Department and the IRS have determined that the policy of section 355(e) does not warrant the recognition of gain in this case, because the assets of P have not been divided and neither Distributing nor Controlled has undergone a Planned 50-percent Acquisition. Rather, the Distribution effected a division of existing business arrangements among existing shareholders, and Congress intended section 355 to afford tax-free treatment to such a transaction. See Senate Report at 139. II. Scope of the Potential Predecessor Definition Commenters criticized the breadth of the POD definition in the 2016 Regulations. Although commenters generally supported the treatment of P as a POD in the 2016 Preamble Example, commenters questioned the policy of treating P as a POD in Example 5. See part III.B of the Background section (describing the 2016 Preamble Example and Example 5). After considering all comments received on this issue, and as VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 discussed further in the remainder of this part II, the Treasury Department and the IRS have determined that the series of transactions set forth in Example 5 should not be viewed as a synthetic spin-off, and that P therefore should not be treated as a POD in Example 5. A. Example 5 Reduces Neither the Total Value nor the Total Built-In Gain Inside P When a corporation distributes an appreciated asset with respect to its stock, the corporation disposes of the asset for no consideration, reducing both the total value and the total builtin gain inside the corporation. In this regard, the synthetic spin-off by P in the Base Case Example resembles an actual Distribution by P of stock of a controlled corporation holding the P assets actually held by Controlled. Both transactions reduce the total value and built-in gain of P (which, in the Base Case Example, becomes part of Distributing) by the value of, and built-in gain in, the P assets held by Controlled. By contrast, Example 5 involves a section 351 exchange by P, which reduces neither the total value nor the total built-in gain inside P. In the section 351 exchange, P exchanges assets for Distributing stock of equal value. Under section 358, P’s basis in this Distributing stock is determined by reference to P’s basis in the assets exchanged therefor, and is then allocated between P’s Distributing stock and the Controlled stock P receives in the Distribution. Therefore, upon the conclusion of Example 5, P holds Distributing stock and Controlled stock with an aggregate value and built-in gain equal to the aggregate value of, and built-in gain in, the assets P transferred to Distributing. Rather than disposing of an asset for no consideration (as is the case in an actual distribution of property with respect to a Distributing’s stock), P merely has exchanged one asset for another in Example 5. As a result, the Treasury Department and the IRS have determined that the series of transactions set forth in Example 5 does not resemble an actual Distribution by P and should not be viewed as a synthetic spin-off. B. Ease of Elimination of Built-In Gain in the 2016 Preamble Example The key distinction between the 2016 Preamble Example and Example 5 is the relative ease with which a subsequent restructuring could be undertaken to eliminate P’s substituted built-in gain in the 2016 Preamble Example. The 2016 Preamble Example, like Example 5, involves a section 351 exchange in PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 69311 which P exchanges assets for Internal Distributing stock with the same value and built-in gain. Unlike in Example 5, however, Distributing in the 2016 Preamble Example directly and indirectly owns 100 percent of the stock of both P and Internal Distributing. As a result, in the 2016 Preamble Example, Distributing could unilaterally eliminate the built-in gain preserved in P’s Internal Distributing stock through an internal restructuring. The occurrence of such an internal restructuring would make the 2016 Preamble Example difficult to distinguish from the Base Case Example. By contrast, upon the conclusion of Example 5, P owns only 10 percent of the stock of each of Distributing and Controlled, whereas corporation Y owns 90 percent. Although it may be theoretically possible for P to eliminate its built-in gain in this stock through certain transactions involving Distributing and Controlled, P lacks any meaningful control over either corporation. In addition, the Treasury Department and the IRS note that such built-in gain elimination transactions generally would carry significant nontax consequences. Therefore, it would be unreasonable to assume that such transactions would occur and that P’s built-in gain in the Distributing and Controlled stock would be eliminated after the Distribution. One commenter asserted that there is little opportunity for P to engage in a subsequent restructuring to eliminate its built-in gain in Distributing or Controlled stock in a case like Example 5 or the 2016 Preamble Example unless P is a member of Distributing’s affiliated group (as defined in section 1504 without regard to section 1504(b)) (Expanded Affiliated Group). The Treasury Department and the IRS agree with this comment. Based on the foregoing, the final regulations define the term Potential Predecessor as any corporation other than Distributing or Controlled, but only if either (i) as part of a Plan, the corporation transfers property to a Potential Predecessor, Distributing, or a member of the same Expanded Affiliated Group as Distributing in a Section 381 Transaction (as in the Base Case Example), or (ii) immediately after completion of the Plan, the corporation is a member of the same Expanded Affiliated Group as Distributing (as in the 2016 Preamble Example). Accordingly, under the final regulations, P in Example 5 is not a Potential Predecessor (and thus cannot be a POD). E:\FR\FM\18DER1.SGM 18DER1 69312 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations III. Pre-Distribution and PostDistribution Requirements Predecessor, on the other hand (Division of Relevant Property Requirement). A. Overview B. Relevant Property Requirement: Fluctuations in Value One commenter requested clarification of the Relevant Property Requirement’s application to a case in which (i) gain on Relevant Property is fully recognized at some point during the Plan Period, but (ii) the Relevant Property subsequently appreciates so that built-in gain exists at the time of the Distribution. The Treasury Department and the IRS did not intend for fluctuations in value to affect the determination of POD status under the 2016 Regulations. Consequently, the final regulations replace the requirement that gain on Relevant Property not be recognized in full ‘‘as part of a Plan’’ with the requirement that gain (if any) on Relevant Property not be recognized in full ‘‘at any point during the Plan Period.’’ Under the 2016 Regulations, a Potential Predecessor qualified as a POD only if two pre-Distribution requirements and one post-Distribution requirement were satisfied. The Treasury Department and the IRS intended that these requirements, taken together, (i) composed a technical description of a synthetic spin-off, and (ii) limited POD treatment to Potential Predecessors the assets of which are divided tax-free through a Distribution by Distributing. The following discussion summarizes these requirements. 1. First Pre-Distribution Requirement: Relevant Property To satisfy the first pre-Distribution requirement, any Controlled stock distributed in the Distribution must have been (i) Relevant Property, the gain on which was not recognized in full as part of a Plan, or (ii) acquired by Distributing for Relevant Property, the gain on which was not recognized in full as part of a Plan, and that was held by Controlled immediately before the Distribution (Relevant Property Requirement). The term ‘‘Relevant Property’’ generally referred to any property held by the Potential Predecessor at any point during the Plan Period (that is, the period that ends immediately after the Distribution and begins on the earliest date on which any part of the Plan is agreed to or understood, arranged, or substantially negotiated). See § 1.355–8T(b)(2)(iv). 2. Second Pre-Distribution Requirement: Controlled Stock Reflects Basis of Separated Property khammond on DSKJM1Z7X2PROD with RULES To satisfy the second pre-Distribution requirement, any Controlled stock distributed in the Distribution must have reflected the basis of any Separated Property (Reflection of Basis Requirement). In general, the 2016 Regulations defined the term ‘‘Separated Property’’ as any Relevant Property relied on to satisfy the Relevant Property Requirement. See § 1.355– 8T(b)(2)(vii). The 2016 Regulations did not define the phrase reflect the basis. 3. Post-Distribution Requirement: Division of Relevant Property To satisfy the post-Distribution requirement, immediately following the Distribution, ownership of Relevant Property must have been divided between Controlled, on the one hand, and Distributing or the Potential VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 C. Reflection of Basis Requirement The Treasury Department and the IRS have received numerous comments requesting clarification of the Reflection of Basis Requirement’s scope and purpose. These comments arose from the failure of the 2016 Regulations to define the phrase reflect the basis. To highlight the potential overbreadth of this undefined phrase, one commenter questioned whether P could qualify as a POD solely through a basis adjustment under § 1.1502–32. In the commenter’s example, P and unrelated Distributing (which is the common parent of a consolidated group) form corporation X in a section 351 exchange in which P contributes Asset 1 and Distributing contributes other assets in exchange for X stock, with Distributing receiving at least 80 percent of X’s stock by vote and value. Thereafter, Distributing contributes its X stock to Controlled in exchange for Controlled stock. Then, because of items relating to Asset 1, Distributing’s basis in its Controlled stock is adjusted under § 1.1502–32. Finally, Distributing distributes all of the stock of Controlled. Based on this illustrative example, the commenter expressed concern that the § 1.1502–32 basis adjustment could cause Distributing’s Controlled stock to reflect the basis of Asset 1, and the commenter asserted that treating P as a POD in this case would be inappropriate. The Treasury Department and the IRS did not intend the Reflection of Basis Requirement in the 2016 Regulations to be satisfied solely by a basis adjustment under § 1.1502–32. The Reflection of Basis Requirement served two related PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 purposes. First, the Treasury Department and the IRS intended the Reflection of Basis Requirement to ensure a connection between the gain in the POD’s property held by Controlled and the gain that Distributing must recognize under section 355(e). Second, the Treasury Department and the IRS intended this requirement to avoid improper duplication of gain if Controlled stock is distributed in multiple Distributions as part of the same Plan. See § 1.355–8T(h), Example 7 (concluding with respect to consecutive Distributions that, although P is a POD with respect to the first Distribution, P is not a POD with respect to the second Distribution because the C stock distributed in the second Distribution did not reflect the basis of any Separated Property). The Treasury Department and the IRS have addressed these concerns in the final regulations by clearly articulating the Reflection of Basis Requirement. The final regulations clarify that the Reflection of Basis Requirement is satisfied only if any Controlled stock that satisfies the Relevant Property Requirement had a basis prior to the Distribution that was determined, in whole or in part, by reference to the basis of Separated Property. The final regulations make the same clarification to the two other provisions that, under the 2016 Regulations, referred to a reflection of basis: § 1.355– 8T(b)(2)(vi)(B)(2) (regarding the treatment of Controlled stock as a Substitute Asset); and § 1.355– 8T(b)(2)(x) (providing a deemed exchange rule for purposes of the Relevant Property Requirement, the Reflection of Basis Requirement, and the Substitute Asset definition). In addition, the final regulations clarify that the Reflection of Basis Requirement is satisfied only if, during the Plan Period prior to the Distribution, any Controlled stock that satisfies the Relevant Property Requirement (and the first prong of the Reflection of Basis Requirement) was neither distributed in a section 355(e) distribution nor transferred in a transaction in which the gain (if any) on that Controlled stock was recognized in full. This clarification ensures that the final regulations cannot be interpreted in a manner that would give rise to improper duplication of gain, a policy objective of the Treasury Department and the IRS in issuing the 2016 Regulations. D. Treatment of Property Acquired Not Pursuant to a Plan One commenter requested that the Treasury Department and the IRS clarify that property acquired by a Potential E:\FR\FM\18DER1.SGM 18DER1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations Predecessor during the Plan Period would not be treated as Relevant Property if not acquired pursuant to a Plan. In particular, the commenter presented an example in which a Potential Predecessor becomes a member of Distributing’s consolidated group pursuant to a Plan. Prior to a Distribution, the Potential Predecessor acquires from other members of Distributing’s consolidated group property that had not been transferred directly or indirectly to Distributing pursuant to the Plan. The commenter requested clarification that this property is not Relevant Property. The commenter’s specific concern was already addressed by an exception to the Relevant Property definition in the 2016 Regulations (see § 1.355– 8T(b)(2)(iv)(B)), and the final regulations retain this exception. This exception provides that property held directly or indirectly by Distributing is Relevant Property of a Potential Predecessor only to the extent that the property (1) was transferred directly or indirectly to Distributing during the Plan Period, and (2) was Relevant Property of the Potential Predecessor before the direct or indirect transfers. This exception exempts the property in the commenter’s example from treatment as Relevant Property because the property was not transferred directly or indirectly to Distributing during the Plan Period. In addition, the final regulations include a Plan limitation in the Division of Relevant Property Requirement. Thus, the Division of Relevant Property Requirement will be satisfied only if ownership of a Potential Predecessor’s Relevant Property has been divided as part of a Plan. Both the preamble to the 2016 Regulations and the text of § 1.355–8T(a)(3) (summarizing the POD definition) described the Division of Relevant Property Requirement in the 2016 Regulations as including a Plan limitation, and the Treasury Department and the IRS had intended for § 1.355– 8T(b)(1)(iii) (the Division of Relevant Property Requirement) to include this limitation. The Treasury Department and the IRS intend that the Plan limitation in the Division of Relevant Property Requirement will ensure more generally that Relevant Property acquired by a Potential Predecessor during the Plan Period, but not pursuant to a Plan, will not result in an inappropriate application of section 355(e). E. Stock of Distributing as Relevant Property One commenter questioned whether a reference in § 1.355–8T(b)(2)(v) (limiting the circumstances under which VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 Distributing stock is treated as Relevant Property) to § 1.355–8T(b)(1)(ii) (the Relevant Property Requirement and the Reflection of Basis Requirement) was intended to refer instead to § 1.355– 8T(b)(1)(iii) (the Division of Relevant Property Requirement). The Treasury Department and the IRS intended for § 1.355–8T(b)(2)(v) to reference the Division of Relevant Property Requirement and have incorporated this revision into the final regulations. IV. Implicit Permission Although § 1.355–7 generally governs the determination of whether a Distribution and an acquisition of a 50percent or greater interest in a POD have occurred as part of the same Plan, the 2016 Regulations contained special rules in this regard. See § 1.355– 8T(a)(4)(ii). In general, references to Distributing in § 1.355–7 included references to a POD. However, any agreement, understanding, arrangement, or substantial negotiations regarding the acquisition of the stock of a POD were analyzed under § 1.355–7 with respect to the actions of officers or directors of Distributing or Controlled, controlling shareholders of Distributing or Controlled, or a person acting with permission of one of those persons. For that purpose, references in § 1.355–7 to Distributing did not include references to a POD. Therefore, the actions of officers, directors, or controlling shareholders of a POD, or of a person acting with the implicit or explicit permission of one of those persons, would not have been considered for this purpose unless those persons otherwise would have been treated as acting on behalf of Distributing or Controlled under § 1.355–7. The final regulations retain these rules. One commenter expressed concern regarding the potential scope of the ‘‘implicit permission’’ concept in § 1.355–7 given that the 2016 Regulations contemplated that actions on behalf of a Potential Predecessor may be taken into account if such actions were carried out with the implicit permission of Distributing. The Treasury Department and the IRS have not addressed this comment in the final regulations because the implicit permission concept is a component of § 1.355–7 and therefore is beyond the scope of this Treasury decision. V. Successors Under section 355(e)(4)(D), any reference to Controlled or Distributing includes a reference to any successor of such corporation (Successor). Like the 2004 Proposed Regulations, the 2016 Regulations limited the definition of the PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 69313 term Successor to a corporation to which Distributing or Controlled (as the case may be) transfers property in a Section 381 Transaction after the Distribution. A partnership cannot receive assets in a Section 381 Transaction. Accordingly, a partnership could not have been a Successor under either the 2004 Proposed Regulations or the 2016 Regulations. As noted later in this part V, the final regulations retain this approach. The 2004 Proposed Regulations and the 2016 Regulations also contained a deemed acquisition rule (see § 1.355– 8T(d)(2)). Under this rule, after a Section 381 Transaction, an acquisition of stock of the acquiring corporation is treated also as an acquisition of the stock of the distributor or transferor corporation in the Section 381 Transaction. Thus, if the assets of Distributing or any POD are acquired by another corporation in a Section 381 Transaction, then any subsequent acquisition of the stock of the acquiring corporation is treated also as an acquisition of the stock of Distributing or the POD, as the case may be. As a result of these rules, a corporation’s status as a Successor of Distributing or Controlled matters only insofar as an acquisition of its stock is treated as an acquisition of the stock of Distributing or Controlled, respectively, which could result in a Planned 50percent Acquisition of Distributing or Controlled. Therefore, the only significance of a Planned 50-percent Acquisition of a Successor is its treatment as a deemed Planned 50percent Acquisition of Distributing or Controlled (as the case may be). Accordingly, if any of the stock of Distributing or Controlled has been acquired in, or prior to, a Section 381 Transaction, the application of section 355(e) will turn on whether a Planned 50-percent Acquisition of Distributing or Controlled has occurred, taking into account acquisitions of the stock of Distributing or Controlled in, and prior to, the Section 381 Transaction, as well as any acquisitions of the stock of the Successor following the Section 381 Transaction. Commenters supported this approach, and the Treasury Department and the IRS have retained it in the final regulations. Thus, under the final regulations, a Successor of Distributing or of Controlled must be a corporation to which Distributing or Controlled, respectively, transfers property in a Section 381 Transaction after the Distribution. A partnership cannot be a Successor of Distributing or Controlled under the final regulations for purposes of section 355(e). Certain references in E:\FR\FM\18DER1.SGM 18DER1 69314 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES the 2016 Regulations to a Planned 50percent Acquisition of a Successor have been refined to clarify the significance of Successor status. VI. Gain Limitation Rules Taken together, sections 355(e), 355(c), and 361(c) generally require Distributing to recognize any gain in Controlled stock and securities distributed in a Distribution that is part of the same Plan as a Planned 50percent Acquisition of a POD, Distributing, or Controlled (the amount of such gain, Statutory Recognition Amount). However, the 2016 Regulations contained special rules that limited the amount of gain that section 355(e) causes Distributing to recognize in certain cases involving a POD. In cases involving a Planned 50-percent Acquisition of a POD, § 1.355–8T(e)(2) (POD Gain Limitation Rule) generally limited the amount of gain Distributing was required to recognize to any builtin gain in the POD’s Separated Property (generally, POD assets held by Controlled). Similarly, in cases involving a Planned 50-percent Acquisition of Distributing as the result of a transfer by a POD to Distributing in a Section 381 Transaction, § 1.355– 8T(e)(3) (Distributing Gain Limitation Rule) generally reduced the amount of gain Distributing was required to recognize by the built-in gain in the POD’s Separated Property. In addition, in cases involving multiple Planned 50percent Acquisitions, § 1.355–8T(e)(1) generally provided that the total gain limitation applicable under § 1.355– 8T(e) is determined by adding the Statutory Recognition Amount (subject to the POD Gain Limitation Rule and the Distributing Gain Limitation Rule) with respect to each Planned 50-percent Acquisition. Finally, § 1.355–8T(e)(4) provided that the amount required to be recognized by Distributing under section 355(e) with regard to a single Distribution will not exceed the Statutory Recognition Amount. Commenters questioned why the 2016 Regulations limited the Distributing Gain Limitation Rule to Section 381 Transactions, and recommended expanding the Distributing Gain Limitation Rule so that it applies to any Planned 50-Percent Acquisition of Distributing. In particular, one commenter asserted that the form of the transaction in which a Planned 50percent Acquisition of Distributing occurs should not be relevant to the application of the gain limitation rules. As discussed in the preamble to the 2016 Regulations, the Treasury Department and the IRS intended the Distributing Gain Limitation Rule to VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 minimize the Federal income tax impact of directionality between economically equivalent Section 381 Transactions. In other words, the Distributing Gain Limitation Rule was intended to ensure that the amount of gain required to be recognized under section 355(e) would be the same regardless of whether the smaller or the larger corporation in a Section 381 Transaction acts as the acquiring corporation. The Distributing Gain Limitation Rule was limited to Section 381 Transactions in the 2016 Regulations because the direction of other types of transactions (such as section 351 exchanges) generally cannot be reversed without changing the substance of the transaction, and thus generally do not implicate the policy of directional neutrality. However, upon further study, the Treasury Department and the IRS have determined that the policy underlying the Distributing Gain Limitation Rule should not be limited to directional neutrality. The POD definition is based on the theory that a Distribution that effects a tax-free division of the assets of a corporation other than Distributing (a POD) may be viewed as two separate Distributions: One by the POD (of a Controlled holding the Separated Property) (POD Distribution), and one by Distributing (of a Controlled holding all of the property held by Controlled in the actual Distribution other than the Separated Property) (Non-POD Distribution). Section 355(e) requires gain recognition when new shareholders acquire ownership of a business in connection with a spin-off. Thus, when a Planned 50-percent Acquisition of a POD occurs in connection with a POD Distribution, the final regulations require gain recognition under section 355(e). However, unless there is also a Planned 50-percent Acquisition of Distributing, the Non-POD Distribution represents a division of existing business arrangements among existing shareholders, to which Congress intended to afford tax-free treatment. See Senate Report at 139–140. Accordingly, the POD Gain Limitation Rule limits the amount of gain required to be recognized to the built-in gain on the Separated Property. The same policy goals justify the expansion of the Distributing Gain Limitation Rule so that it applies to any Planned 50-percent Acquisition of Distributing—however and by whomever effected. If a Distribution involves a POD and occurs in connection with a Planned 50-percent Acquisition of Distributing (but no Planned 50-percent Acquisition of the POD or Controlled), then the POD Distribution should not be subject to PO 00000 Frm 00020 Fmt 4700 Sfmt 4700 gain recognition because it represents a division of existing business arrangements among existing shareholders. Accordingly, the Distributing Gain Limitation Rule in the final regulations applies if there is a Planned 50-percent Acquisition of Distributing. However, consistent with the policy underlying the Distributing Gain Limitation Rule, a Distribution will benefit from the Distributing Gain Limitation Rule only if a POD exists and does not also undergo a Planned 50-percent Acquisition. If no POD exists, then the limitation under the Distributing Gain Limitation Rule will equal the Statutory Recognition Amount, because there is no Separated Property. If a POD exists but also undergoes a Planned 50-percent Acquisition, then Distributing must recognize the Statutory Recognition Amount with respect to the Planned 50percent Acquisition of the POD (subject to the POD Gain Limitation Rule) and the Planned 50-percent Acquisition of Distributing (subject to the Distributing Gain Limitation Rule). See § 1.355– 8(e)(1)(ii) of the final regulations (Multiple Planned 50-percent Acquisitions). Similarly, if there are Planned 50-percent Acquisitions of both Distributing and Controlled, Distributing must recognize the Statutory Recognition Amount with respect to the Planned 50-percent Acquisition of Controlled (which is not eligible for limitation under any gain limitation rule) and the Planned 50percent Acquisition of Distributing (subject to the Distributing Gain Limitation Rule). Although the multiple Planned 50-percent Acquisition rule just described may deny any benefit under the gain limitation rules, in no event will the final regulations require Distributing to recognize an amount that exceeds the Statutory Recognition Amount with regard to a single Distribution. See § 1.355–8(e)(4) of the final regulations (gain recognition limited to Statutory Recognition Amount). The Treasury Department and the IRS have clarified the gain limitation rules in the final regulations to make them easier to understand and apply. The Treasury Department and the IRS also have refined the calculation of the gain limitation under the Distributing Gain Limitation Rule to account for the possibility of more than one POD with respect to a single Distribution. In addition, to clarify that both built-in gain and built-in loss assets are taken into account in computing any applicable gain limitation, the Treasury Department and the IRS have refined the description of gain in the Relevant E:\FR\FM\18DER1.SGM 18DER1 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations Property Requirement by adding the parenthetical phrase ‘‘(if any),’’ and have added a similar clarification to the Separated Property definition. khammond on DSKJM1Z7X2PROD with RULES VII. Relevant Equity The 2016 Temporary Regulations used the defined term ‘‘Relevant Stock’’ (stock that is Relevant Property) in connection with the defined terms ‘‘Separated Property’’ and ‘‘Underlying Property’’ (property directly or indirectly held by a corporation that is the issuer of Relevant Stock). See § 1.355–8T(b)(2)(iv), (vii), and (viii). These terms were used to ensure that gain would not be duplicated in determining the applicable gain limitation amount (if any) if the Relevant Property held by Controlled included stock in a corporation. The potential for duplication existed because the gain limitation is calculated based on the built-in gain in Relevant Property held by Controlled, and the definition of ‘‘Relevant Property’’ included assets held directly or indirectly (and thus included both stock of a corporation and any assets held by the corporation). The Treasury Department and the IRS have determined that a similar risk of duplicated gain exists when Relevant Property includes an interest in a partnership. Accordingly, the final regulations replace the term ‘‘Relevant Stock’’ with the term ‘‘Relevant Equity,’’ which means Relevant Property that is an equity interest in a corporation or a partnership. This clarification relates only to the determination of the limitation on gain under § 1.355–8(e) of the final regulations (if any). VIII. Section 336(e) The 2016 Regulations prohibited a section 336(e) election if the amount of gain required to be recognized by Distributing with respect to the Distribution was less than the Statutory Recognition Amount due to the POD Gain Limitation Rule or the Distributing Gain Limitation Rule. This prohibition applied even if Distributing chose to recognize the Statutory Recognition Amount under § 1.355–8T(e)(4). One commenter criticized this prohibition as ‘‘inequitable as a policy matter and unnecessary as an administrative one.’’ Although the final regulations retain this prohibition, the Treasury Department and the IRS continue to study and request comments on the following issues: (1) Whether permitting a section 336(e) election in this context would be consistent with the policy of section 336(e), (2) whether permitting a section 336(e) election in this context could give rise to inappropriate VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 planning opportunities, (3) whether permitting a section 336(e) election in this context only if the Separated Property accounts for a certain minimum percentage of Controlled’s value or built-in gain would be appropriate, and (4) whether limiting the deemed asset disposition that results from a section 336(e) election in this context to a deemed disposition of the Separated Property would be appropriate. IX. Stock Deemed Acquired in a Section 381 Transaction Section 355(e)(3)(B) provides a special rule for certain asset acquisitions. For purposes of section 355(e), if the assets of Distributing or Controlled are acquired by a successor corporation in a transaction described in section 368(a)(1)(A), (C), or (D), or in any other transaction specified in regulations, the shareholders (immediately before the acquisition) of the successor corporation are treated as acquiring stock in Distributing or Controlled, respectively, except as otherwise provided in regulations. Similarly, the 2016 Regulations provided that any Section 381 Transaction is treated as an acquisition of stock in the distributor or transferor corporation by shareholders of the acquiring corporation. A commenter pointed out a mathematical error in the textual example that followed this rule (in § 1.355–8T(d)(1)). The final regulations correct this error and make minor clarifications to improve the readability of the operative rule. X. No Step Transaction Implications From Examples One commenter suggested that the Treasury Department and the IRS clarify that no inference should be drawn from the examples in § 1.355–8T(h) as to the intended application of the step transaction doctrine and other general Federal income tax principles. The Treasury Department and the IRS did not intend for any such inference to be drawn, and have added a specific disclaimer to this effect in the final regulations. XI. Transition Rule The 2016 Regulations generally applied to Distributions occurring after January 18, 2017. However, under a transition rule, the 2016 Regulations generally did not apply to a Distribution that was (A) made pursuant to a binding agreement in effect on or before December 16, 2016 and at all times thereafter; (B) described in a ruling request submitted to the IRS on or before December 16, 2016; or (C) PO 00000 Frm 00021 Fmt 4700 Sfmt 4700 69315 described on or before December 16, 2016 in a public announcement or in a filing with the Securities and Exchange Commission. For the transition rule to apply, the agreement, ruling request, public announcement, or filing described in the preceding sentence had to describe all steps relevant to the determination of POD status. See § 1.355–8T(i)(2)(ii). One commenter criticized the ‘‘all relevant steps’’ rule in § 1.355– 8T(i)(2)(ii) as ‘‘extremely narrow’’ and inappropriate for immediately effective regulations. This commenter contended that it is ‘‘unlikely that all such transactions would be described . . . until very late in the long and expensive process of a corporate separation, if at all.’’ The Treasury Department and the IRS note that the 2016 Regulations were not immediately applicable; they were published on December 19, 2016, but they generally applied only to Distributions that occurred after January 18, 2017. Moreover, the final regulations do not contain a transition rule, so the commenter’s concern is relevant only to transactions that were the subject of an agreement, ruling request, public announcement, or public filing that occurred in 2016 (or before). Finally, despite the commenter’s general concern, the Treasury Department and the IRS are unaware of any transactions that failed to qualify for the transition rule due to the ‘‘all relevant steps’’ rule in § 1.355–8T(i)(2)(ii). Accordingly, the Treasury Department and the IRS have determined that it is not necessary to reconsider the transition rule in the 2016 Regulations as part of this Treasury decision. XII. Additional Clarifications Commenters noted generally that certain aspects of the 2016 Regulations were complicated and difficult to understand. The Treasury Department and the IRS have refined and clarified certain aspects of the 2016 Regulations in the final regulations to make the rules easier to follow and understand. For instance, certain paragraphs in the 2016 Regulations that were long and contained multiple distinct rules have been subdivided in the final regulations. In addition, defined terms have been added for certain rules (such as the Relevant Property Requirement, the Reflection of Basis Requirement, and the Division of Relevant Property Requirement). These defined terms are intended to allow the reader to more intuitively grasp the meaning of the numerous provisions cross-referenced in the final regulations. E:\FR\FM\18DER1.SGM 18DER1 69316 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES Section 1.355–8T(c)(1) defined the term ‘‘Predecessor of Controlled’’ and provided certain rules relating to Predecessors of Controlled. One of these rules provided that, for purposes of § 1.355–8T(c)(1), a reference to Controlled included a reference to a Predecessor of Controlled. However, another provision in the 2016 Regulations (§ 1.355–8T(a)(4)(i)) provided more generally that, except as otherwise provided, any reference to Controlled included, as the context may have required, a reference to any Predecessor of Controlled. Accordingly, the rule in § 1.355–8T(c)(1) was unnecessary, and the Treasury Department and the IRS have omitted it in the final regulations. XIII. Examples The Treasury Department and the IRS have modified three of the examples contained in the 2016 Regulations (Examples 5, 7, and 8), and omitted one example (Example 6), for the reasons described in this part XIII. All of the retained examples have been updated to reflect modifications in the final regulations. For instance, the POD analyses in Examples 3 and 4 eliminate the statement that Controlled stock is Separated Property, because that fact is no longer relevant under the revised Reflection of Basis Requirement. In some of the examples, the analysis has been clarified to make it easier to follow and understand. The facts of Example 5 of the 2016 Regulations have been retained, but the consequences of the example have changed due to the modification the Treasury Department and the IRS have made to the Potential Predecessor definition. As a result of this modification, P in Example 5 is no longer a Potential Predecessor (and thus is not a POD for that reason). Example 6 of the 2016 Regulations has been omitted. This example illustrated a variation on Example 5 that used a forward triangular merger instead of a section 351 exchange. However, due to the modification to the Potential Predecessor definition, P in Example 6 is no longer a Potential Predecessor (and thus is not a POD for that reason), which eliminates the utility of this example. Example 7 of the 2016 Regulations has been incorporated into new Example 6 in the final regulations, which is based on the 2016 Preamble Example. Example 8 of the 2016 Regulations has been retained as Example 7 in the final regulations, but has been modified so that P1 and P2 are Potential Predecessors under the final regulations. In particular, the section 351 exchange VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 between P2 and D has been replaced by a Section 381 Transaction in which P2 merges into D. from the Treasury Department and the IRS participated in their development. Applicability Date Section 7805(b)(1)(A) and (B) of the Code generally provide that no temporary, proposed, or final regulation relating to the internal revenue laws may apply to any taxable period ending before the earliest of (A) the date on which such regulation is filed with the Federal Register, or (B) in the case of a final regulation, the date on which a proposed or temporary regulation to which the final regulation relates was filed with the Federal Register. In addition, section 7805(e) provides that any temporary regulation shall also be issued as a proposed regulation, and that such temporary regulation shall expire within 3 years after the date of issuance of the temporary regulation. The final regulations, the substance of which is generally the same as that of the 2016 Regulations, apply to Distributions that occur after December 15, 2019, the day before the expiration date of the 2016 Temporary Regulations. Income taxes, Reporting and recordkeeping requirements. Special Analyses This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Department of the Treasury and the Office of Management and Budget regarding review of tax regulations. Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these final regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations would primarily affect large corporations with a substantial number of shareholders, as well as corporations that are members of large corporate groups. Additionally, the Treasury Department and the IRS have determined that no additional burden will be associated with these final regulations. Therefore, a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the 2016 Proposed Regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses, and no comments were received. Drafting Information The principal author of these regulations is W. Reid Thompson of the Office of Associate Chief Counsel (Corporate). However, other personnel PO 00000 Frm 00022 Fmt 4700 Sfmt 4700 List of Subjects in 26 CFR Part 1 Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by removing the entry for § 1.355–8T and adding an entry in numerical order for § 1.355–8 to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * Section 1.355–8 also issued under 26 U.S.C. 336(e), 355(e)(3)(B), 355(e)(5), and 355(f). * * * * * Par. 2. Section 1.355–0 is amended by revising the introductory text, removing the entries for § 1.355–8T, and adding the entries for § 1.355–8 to read as follows: ■ § 1.355–0 Outline of sections. In order to facilitate the use of §§ 1.355–1 through 1.355–8, this section lists the major paragraphs in those sections as follows: * * * * * § 1.355–8 Definition of predecessor and successor and limitations on gain recognition under section 355(e) and section 355(f). (a) In general. (1) Scope. (2) Overview. (i) Purposes and conceptual overview. (ii) References to and definitions of terms used in this section. (iii) Special rules and examples. (3) Purposes of section; Predecessor of Distributing overview. (i) Purposes. (ii) Predecessor of Distributing overview. (A) Relevant Property transferred to Controlled. (B) Relevant Property includes Controlled Stock. (4) References. (i) References to Distributing or Controlled. (ii) References to Plan or Distribution. (iii) Plan Period. (5) List of definitions. (b) Predecessor of Distributing. (1) Definition. (i) In general. (ii) Pre-Distribution requirements. (A) Relevant Property requirement. (B) Reflection of basis requirement. (iii) Post-Distribution requirement. (2) Additional definitions and rules related to paragraph (b)(1) of this section. (i) References to Distributing and Controlled. (ii) Potential Predecessor. (A) Potential Predecessor definition. E:\FR\FM\18DER1.SGM 18DER1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations (B) Expanded Affiliated Group definition. (iii) Successors of Potential Predecessors. (iv) Relevant Property; Relevant Equity. (A) In general. (B) Property held by Distributing. (C) F reorganizations. (v) Stock of Distributing as Relevant Property. (A) In general. (B) Certain reorganizations. (vi) Substitute Asset. (A) In general. (B) Controlled stock received by Distributing. (1) In general. (2) Exception. (C) Treatment as Relevant Property. (vii) Separated Property. (viii) Underlying Property. (ix) Multiple Predecessors of Distributing. (x) Deemed exchanges. (c) Additional definitions. (1) Predecessor of Controlled. (2) Successors. (i) In general. (ii) Determination of Successor status. (3) Section 381 Transaction. (d) Special acquisition rules. (1) Deemed acquisitions of stock in Section 381 Transactions. (i) Rule. (ii) Example. (2) Deemed acquisitions of stock after Section 381 Transactions. (3) Separate counting for Distributing and each Predecessor of Distributing. (e) Special rules for limiting gain recognition. (1) Overview. (i) Gain limitation. (ii) Multiple Planned 50-percent Acquisitions. (iii) Statutory Recognition Amount limit; Section 336(e). (2) Planned 50-percent Acquisition of a Predecessor of Distributing. (i) In general. (ii) Operating rules. (A) Separated Property other than Controlled stock. (B) Controlled stock that is Separated Property. (C) Anti-duplication rule. (3) Planned 50-percent Acquisition of Distributing. (4) Gain recognition limited to Statutory Recognition Amount. (5) Section 336(e) election. (f) Predecessor or Successor as a member of the affiliated group. (g) Inapplicability of section 355(f) to certain intra-group Distributions. (1) In general. (2) Alternative application of section 355(f). (h) Examples. (i) Applicability date. § 1.355–8T ■ [Removed] Par. 3. Section 1.355–8T is removed. Par. 4. Section 1.355–8 is added to read as follows: ■ VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 § 1.355–8 Definition of predecessor and successor and limitations on gain recognition under section 355(e) and section 355(f). (a) In general—(1) Scope. For purposes of section 355(e), this section provides rules under section 355(e)(4)(D) to determine whether a corporation is treated as a predecessor or successor of a distributing corporation (Distributing) or a controlled corporation (Controlled) with respect to a distribution by Distributing of stock (or stock and securities) of Controlled that qualifies under section 355(a) (or so much of section 356 as relates to section 355) (Distribution). This section also provides rules limiting the amount of Distributing’s gain recognized under section 355(e) on a Distribution if section 355(e) applies to an acquisition by one or more persons, as part of a Plan, of stock that in the aggregate represents a 50-percent or greater interest (Planned 50-percent Acquisition) of a Predecessor of Distributing, or a Planned 50-percent Acquisition of Distributing. In addition, this section provides rules regarding the application of section 336(e) to a Distribution to which this section applies. This section also provides rules regarding the application of section 355(f) to a Distribution in certain cases. (2) Overview—(i) Purposes and conceptual overview. Paragraph (a)(3) of this section summarizes the two principal purposes of this section and sets forth a brief conceptual overview of the scenarios in which a corporation may be a Predecessor of Distributing. (ii) References to and definitions of terms used in this section. Paragraph (a)(4) of this section provides rules regarding references to the terms Distributing, Controlled, Distribution, Plan, and Plan Period for purposes of section 355(e), § 1.355–7, and this section. Paragraph (a)(5) of this section lists the terms used in this section and indicates where each term is defined. Paragraph (b) of this section defines the term Predecessor of Distributing and several related terms. Paragraph (c) of this section defines the terms Predecessor of Controlled, Successor (of Distributing or Controlled), and Section 381 Transaction. (iii) Special rules and examples. Paragraph (d) of this section provides guidance with regard to acquisitions and deemed acquisitions of stock if there is a Predecessor of Distributing or a Successor of either Distributing or Controlled. Paragraph (e) of this section provides two rules that may limit the amount of Distributing’s gain on a Distribution if there is a Predecessor of Distributing, as well as an overall gain PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 69317 limitation. Paragraph (e) of this section also provides guidance with respect to the application of section 336(e). Regardless of whether there is a Predecessor of Distributing, Predecessor of Controlled, or Successor of either Distributing or Controlled, paragraph (f) of this section provides a special rule relating to section 355(e)(2)(C), which provides that section 355(e) does not apply to certain transactions within an Expanded Affiliated Group. Paragraph (g) of this section provides rules coordinating the application of section 355(f) with the rules of this section. Paragraph (h) of this section contains examples that illustrate the rules of this section. (3) Purposes of section; Predecessor of Distributing overview—(i) Purposes. The rules in this section have two principal purposes. The first is to ensure that section 355(e) applies to a Distribution if, as part of a Plan, some of the assets of a Predecessor of Distributing are transferred directly or indirectly to Controlled without full recognition of gain, and the Distribution accomplishes a division of the assets of the Predecessor of Distributing. The second is to ensure that section 355(e) applies when there is a Planned 50-percent Acquisition of a Successor of Distributing or Successor of Controlled. The rules of this section must be interpreted and applied in a manner that is consistent with and reasonably carries out the purposes of this section. (ii) Predecessor of Distributing overview. The term Predecessor of Distributing is defined in paragraph (b) of this section. Only a Potential Predecessor can be a Predecessor of Distributing. See paragraph (b)(1)(i) of this section. A Potential Predecessor can be a Predecessor of Distributing only if, as part of a Plan, the Distribution accomplishes a division of the assets of the Potential Predecessor. See paragraph (b)(1)(iii) of this section. Accordingly, in the absence of that Plan, a Predecessor of Distributing cannot exist for purposes of section 355(e). The detailed rules set forth in paragraph (b) of this section provide that a Potential Predecessor the assets of which are divided as part of a Plan may be a Predecessor of Distributing in either of the following two scenarios: (A) Relevant Property transferred to Controlled. As part of the Plan, one or more of the Potential Predecessor’s assets were transferred to Controlled in one or more tax-deferred transactions prior to the Distribution. (B) Relevant Property includes Controlled Stock. The Potential Predecessor’s assets included Controlled stock that, as part of the Plan, was E:\FR\FM\18DER1.SGM 18DER1 khammond on DSKJM1Z7X2PROD with RULES 69318 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations transferred to Distributing in one or more tax-deferred transactions prior to the Distribution. (4) References—(i) References to Distributing or Controlled. For purposes of section 355(e), except as otherwise provided in this section, any reference to Distributing or Controlled includes, as the context may require, a reference to any Predecessor of Distributing or any Predecessor of Controlled, respectively, or any Successor of Distributing or Controlled, respectively. However, except as otherwise provided in this section, a reference to a Predecessor of Distributing or to a Successor of Distributing does not include a reference to Distributing, and a reference to a Predecessor of Controlled or to a Successor of Controlled does not include a reference to Controlled. (ii) References to Plan or Distribution. Except as otherwise provided in this section, references to a Plan in this section are references to a plan within the meaning of § 1.355–7. References to a distribution in § 1.355–7 include a reference to a Distribution and other related pre-Distribution transactions that together effect a division of the assets of a Predecessor of Distributing. In determining whether a Distribution and a Planned 50-percent Acquisition of a Predecessor of Distributing, Distributing (including any Successor thereof), or Controlled (including any Successor thereof) are part of a Plan, the rules of § 1.355–7 apply. In applying those rules, references to Distributing or Controlled in § 1.355–7 generally include references to any Predecessor of Distributing and any Successor of Distributing, or any Successor of Controlled, as appropriate. However, with regard to any possible Planned 50percent Acquisition of a Predecessor of Distributing, any agreement, understanding, arrangement, or substantial negotiations with regard to the acquisition of the stock of the Predecessor of Distributing is analyzed under § 1.355–7 with regard to the actions of officers or directors of Distributing or Controlled, controlling shareholders (as defined in § 1.355– 7(h)(3)) of Distributing or Controlled, or a person acting with permission of one of those parties. For purposes of the preceding sentence, references in § 1.355–7 to Distributing do not include references to a Predecessor of Distributing. Therefore, the actions of officers, directors, or controlling shareholders of a Predecessor of Distributing, or of a person acting with the implicit or explicit permission of one of those parties, are not considered unless those parties otherwise would be treated as acting on behalf of VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 Distributing or Controlled under § 1.355–7 (for example, if a Predecessor of Distributing is a controlling shareholder of Distributing). (iii) Plan Period. For purposes of this section, the term Plan Period means the period that ends immediately after the Distribution and begins on the earliest date on which any pre-Distribution step that is part of the Plan is agreed to or understood, arranged, or substantially negotiated by one or more officers or directors acting on behalf of Distributing or Controlled, by controlling shareholders of Distributing or Controlled, or by another person or persons with the implicit or explicit permission of one or more of such officers, directors, or controlling shareholders. For purposes of the preceding sentence, references to Distributing and Controlled do not include references to any Predecessor of Distributing, Predecessor of Controlled, or Successor of Distributing or Controlled. (5) List of definitions. This section uses the following terms, which are defined where indicated— (i) Acquiring Owner. Paragraph (d)(1)(i) of this section. (ii) Controlled. Paragraph (a)(1) of this section. (iii) Distributing. Paragraph (a)(1) of this section. (iv) Distributing Gain Limitation Rule. Paragraph (e)(1)(ii) of this section. (v) Distribution. Paragraph (a)(1) of this section. (vi) Division of Relevant Property Requirement. Paragraph (b)(1)(iii) of this section. (vii) Expanded Affiliated Group. Paragraph (b)(2)(ii)(B) of this section. (viii) Hypothetical Controlled. Paragraph (e)(2)(i) of this section. (ix) Hypothetical D/355(e) Reorganization. Paragraph (e)(2)(i) of this section. (x) Plan. Paragraph (a)(4)(ii) of this section. (xi) Plan Period. Paragraph (a)(4)(iii) of this section. (xii) Planned 50-percent Acquisition. Paragraph (a)(1) of this section. (xiii) POD Gain Limitation Rule. Paragraph (e)(1)(ii) of this section. (xiv) Potential Predecessor. Paragraph (b)(2)(ii)(A) of this section. (xv) Predecessor of Controlled. Paragraph (c)(1) of this section. (xvi) Predecessor of Distributing. Paragraph (b)(1) of this section. (xvii) Reflection of Basis Requirement. Paragraph (b)(1)(ii)(B) of this section. (xviii) Relevant Equity. Paragraph (b)(2)(iv)(A) of this section. (xix) Relevant Property. Paragraph (b)(2)(iv)(A) of this section. PO 00000 Frm 00024 Fmt 4700 Sfmt 4700 (xx) Relevant Property Requirement. Paragraph (b)(1)(ii)(A) of this section. (xxi) Section 381 Transaction. Paragraph (c)(3) of this section. (xxii) Separated Property. Paragraph (b)(2)(vii) of this section. (xxiii) Statutory Recognition Amount. Paragraph (e)(1)(i) of this section. (xxiv) Substitute Asset. Paragraph (b)(2)(vi)(A) of this section. (xxv) Successor. Paragraph (c)(2)(i) of this section. (xxvi) Successor Transaction. Paragraph (c)(2)(i) of this section. (xxvii) Underlying Property. Paragraph (b)(2)(viii) of this section. (b) Predecessor of Distributing—(1) Definition—(i) In general. For purposes of section 355(e), a Potential Predecessor is a predecessor of Distributing (Predecessor of Distributing) if, taking into account the special rules of paragraph (b)(2) of this section— (A) Both pre-Distribution requirements of paragraph (b)(1)(ii) of this section are satisfied; and (B) The post-Distribution requirement of paragraph (b)(1)(iii) of this section is satisfied. (ii) Pre-Distribution requirements— (A) Relevant Property requirement. The requirement set forth in this paragraph (b)(1)(ii)(A) (Relevant Property Requirement) is satisfied if, before the Distribution, and as part of a Plan, either— (1) Any Controlled stock distributed in the Distribution was directly or indirectly acquired (or deemed acquired under the rules set forth in paragraph (b)(2)(x) of this section) by Distributing in exchange for any direct or indirect interest in Relevant Property— (i) That is held directly or indirectly by Controlled immediately before the Distribution; and (ii) The gain on which (if any) was not recognized in full at any point during the Plan Period; or (2) Any Controlled stock that is distributed in the Distribution is Relevant Property of the Potential Predecessor. (B) Reflection of basis requirement. The requirement set forth in this paragraph (b)(1)(ii)(B) (Reflection of Basis Requirement) is satisfied if any Controlled stock that satisfies the Relevant Property Requirement— (1) Either— (i) Had a basis prior to the Distribution that was determined in whole or in part by reference to the basis of any Separated Property; or (ii) Is Relevant Property of the Potential Predecessor; and (2) During the Plan Period prior to the Distribution, was neither distributed in E:\FR\FM\18DER1.SGM 18DER1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations a distribution to which section 355(e) applied nor transferred in a transaction in which the gain (if any) on that Controlled stock was recognized in full. (iii) Post-Distribution requirement. The requirement set forth in this paragraph (b)(1)(iii) (Division of Relevant Property Requirement) is satisfied if, immediately after the Distribution, and as part of a Plan, direct or indirect ownership of the Potential Predecessor’s Relevant Property has been divided between Controlled on the one hand, and Distributing or the Potential Predecessor (or a successor to the Potential Predecessor) on the other hand. For purposes of this paragraph (b)(1)(iii), if Controlled stock that is distributed in the Distribution is Relevant Property of a Potential Predecessor, then Controlled is deemed to have received Relevant Property of the Potential Predecessor. (2) Additional definitions and rules related to paragraph (b)(1) of this section—(i) References to Distributing and Controlled. For purposes of the Relevant Property Requirement, the Reflection of Basis Requirement, and the Division of Relevant Property Requirement, references to Distributing and Controlled do not include references to any Predecessor of Distributing, Predecessor of Controlled, or Successor of Distributing or Controlled. (ii) Potential Predecessor—(A) Potential Predecessor definition. The term Potential Predecessor means a corporation, other than Distributing or Controlled, if— (1) As part of a Plan, the corporation transfers property to a Potential Predecessor, Distributing, or a member of the same Expanded Affiliated Group as Distributing in a Section 381 Transaction; or (2) Immediately after completion of the Plan, the corporation is a member of the same Expanded Affiliated Group as Distributing. (B) Expanded Affiliated Group definition. The term Expanded Affiliated Group means an affiliated group (as defined in section 1504 without regard to section 1504(b)). (iii) Successors of Potential Predecessors. For purposes of the Division of Relevant Property Requirement, if a Potential Predecessor transfers property in a Section 381 Transaction to a corporation (other than Distributing or Controlled) during the Plan Period, the corporation is a successor to the Potential Predecessor. (iv) Relevant Property; Relevant Equity—(A) In general. Except as otherwise provided in this paragraph (b)(2)(iv) or in paragraph (b)(2)(v) of this VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 section, the term Relevant Property means any property that was held, directly or indirectly, by the Potential Predecessor during the Plan Period. The term Relevant Equity means Relevant Property that is an equity interest in a corporation or a partnership. (B) Property held by Distributing. Except as provided in paragraph (b)(2)(iv)(C) of this section, property held directly or indirectly by Distributing (including Controlled stock) is Relevant Property of a Potential Predecessor only to the extent that the property was transferred directly or indirectly to Distributing during the Plan Period, and it was Relevant Property of the Potential Predecessor before the direct or indirect transfer(s). For example, if during the Plan Period a subsidiary corporation of a Potential Predecessor merges into Controlled in a reorganization under section 368(a)(1)(A) and (2)(D), and, as a result, the Potential Predecessor directly or indirectly owns Distributing stock received in the merger, the subsidiary’s assets held by Controlled are Relevant Property of that Potential Predecessor. (C) F reorganizations. For purposes of paragraph (b)(2)(iv)(B) of this section, the transferor and transferee in any reorganization described in section 368(a)(1)(F) (F reorganization) are treated as a single corporation. Therefore, for example, Relevant Property acquired during the Plan Period by a corporation that is a transferor (as to a later F reorganization) is treated as having been acquired directly (and from the same source) by the transferee (as to the later F reorganization) during the Plan Period. In addition, any transfer (or deemed transfer) of assets to Distributing in an F reorganization will not cause the transferred assets to be treated as Relevant Property. (v) Stock of Distributing as Relevant Property—(A) In general. For purposes of the Division of Relevant Property Requirement, except as provided in paragraph (b)(2)(v)(B) of this section, stock of Distributing is not Relevant Property (and thus is not Relevant Equity) to the extent that the Potential Predecessor becomes, as part of a Plan, the direct or indirect owner of that stock as the result of the transfer to Distributing of direct or indirect interests in the Potential Predecessor’s Relevant Property. For example, stock of Distributing is not Relevant Property if it is acquired by a Potential Predecessor as part of a Plan in an exchange to which section 351(a) applies. (B) Certain reorganizations. For purposes of the Division of Relevant Property Requirement, stock of PO 00000 Frm 00025 Fmt 4700 Sfmt 4700 69319 Distributing is Relevant Property (and thus Relevant Equity) to the extent that the Potential Predecessor becomes, as part of the Plan, the direct or indirect owner of that stock as the result of a transaction described in section 368(a)(1)(E). (vi) Substitute Asset—(A) In general. Subject to paragraph (b)(2)(vi)(B) of this section, the term Substitute Asset means any property that is held directly or indirectly by Distributing during the Plan Period and was received, during the Plan Period, in exchange for Relevant Property that was acquired directly or indirectly by Distributing if all gain on the transferred Relevant Property is not recognized on the exchange. For example, property received by Controlled in exchange for Relevant Property in a transaction qualifying under section 1031 is a Substitute Asset. In addition, stock received by Distributing in a distribution qualifying under section 305(a) or section 355(a) on Relevant Equity is a Substitute Asset. (B) Controlled stock received by Distributing—(1) In general. Except as provided in paragraph (b)(2)(vi)(B)(2) of this section, stock of Controlled received in exchange for a direct or indirect transfer of Relevant Property by Distributing is not a Substitute Asset. (2) Exception. If the basis in Controlled stock received or deemed received in an exchange described in paragraph (b)(2)(vi)(B)(1) of this section is determined in whole or in part by reference to the basis of Relevant Equity the issuer of which ceases to exist for Federal income tax purposes under the Plan, that Controlled stock constitutes a Substitute Asset. See paragraph (b)(2)(x) of this section. (C) Treatment as Relevant Property. For purposes of this section, a Substitute Asset is treated as Relevant Property with the same ownership and transfer history as the Relevant Property for which (or with respect to which) it was received. (vii) Separated Property. The term Separated Property means each item of Relevant Property that is described in the Relevant Property Requirement (regardless of whether the fair market value of the Relevant Property exceeds its adjusted basis). However, if Relevant Equity is Separated Property, Underlying Property associated with that Relevant Equity is not treated as Separated Property. In addition, if Distributing directly or indirectly acquires Relevant Equity in a transaction in which gain is recognized in full, Underlying Property associated with that Relevant Equity is not treated as Separated Property. E:\FR\FM\18DER1.SGM 18DER1 khammond on DSKJM1Z7X2PROD with RULES 69320 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations (viii) Underlying Property. The term Underlying Property means property directly or indirectly held by a corporation or partnership any equity interest in which is Relevant Equity. (ix) Multiple Predecessors of Distributing. If there are multiple Potential Predecessors that satisfy the pre-Distribution requirements and postDistribution requirement of paragraph (b)(1) of this section, each of those Potential Predecessors is a Predecessor of Distributing. For example, a Potential Predecessor that transfers property to a Predecessor of Distributing without full recognition of gain (and that otherwise meets the requirements of paragraph (b)(1) of this section) is also a Predecessor of Distributing if the applicable transfer occurred as part of a Plan that existed at the time of such transfer. (x) Deemed exchanges. For purposes of paragraph (b)(1)(ii) of this section (regarding the Relevant Property Requirement and the Reflection of Basis Requirement) and paragraph (b)(2)(vi) of this section (regarding Substitute Assets), Distributing is treated as acquiring Controlled stock in exchange for a direct or indirect interest in Relevant Property if the basis of Distributing in that Controlled stock, immediately after a transfer of the Relevant Property, is determined in whole or in part by reference to the basis of that Relevant Property immediately before the transfer. For example, if a corporation transfers Relevant Property to Controlled in exchange for Distributing stock in a transaction that qualifies as a reorganization under section 368(a)(1)(C), then, for purposes of paragraphs (b)(1)(ii) and (b)(2)(vi) of this section, Distributing is treated as acquiring Controlled stock in exchange for a direct or indirect interest in Relevant Property. See § 1.358–6(c)(1). (c) Additional definitions—(1) Predecessor of Controlled. Solely for purposes of applying paragraph (f) of this section, a corporation is a predecessor of Controlled (Predecessor of Controlled) if, before the Distribution, it transfers property to Controlled in a Section 381 Transaction as part of a Plan. Other than for the purpose described in the preceding sentence, no corporation can be a Predecessor of Controlled. If multiple corporations satisfy the requirements of this paragraph (c)(1), each of those corporations is a Predecessor of Controlled. For example, a corporation that transfers property to a Predecessor of Controlled in a Section 381 Transaction is also a Predecessor of Controlled if the Section 381 VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 Transaction occurred as part of a Plan that existed at the time of such transaction. (2) Successors—(i) In general. For purposes of section 355(e), a successor (Successor) of Distributing or of Controlled is a corporation to which Distributing or Controlled, respectively, transfers property in a Section 381 Transaction after the Distribution (Successor Transaction). (ii) Determination of Successor status. More than one corporation may be a Successor of Distributing or Controlled. For example, if Distributing transfers property to another corporation (X) in a Section 381 Transaction, and X transfers property to another corporation (Y) in a Section 381 Transaction, then each of X and Y is a Successor of Distributing. In this case, the determination of whether Y is a Successor of Distributing is made after the determination of whether X is a Successor of Distributing. (3) Section 381 Transaction. The term Section 381 Transaction means a transaction to which section 381 applies. (d) Special acquisition rules—(1) Deemed acquisitions of stock in Section 381 Transactions—(i) Rule. This paragraph (d)(1)(i) applies to each shareholder of the acquiring corporation immediately before a Section 381 Transaction (Acquiring Owner). Each Acquiring Owner is treated for purposes of this section as acquiring, in the Section 381 Transaction, stock representing an interest in the distributor or transferor corporation, to the extent that the Acquiring Owner’s interest in the acquiring corporation immediately after the Section 381 Transaction exceeds the Acquiring Owner’s direct or indirect interest in the distributor or transferor corporation immediately before the Section 381 Transaction. (ii) Example. The example set forth in this paragraph (d)(1)(ii) illustrates the application of the deemed acquisition rule in paragraph (d)(1)(i) of this section. Assume that A held all of the stock of Distributing, Distributing held a 25-percent interest in a Predecessor of Distributing, and A held no direct interest, or other indirect interest, in the Predecessor of Distributing immediately before a Section 381 Transaction in which the Predecessor of Distributing transfers its assets to Distributing. In the Section 381 Transaction, the Predecessor of Distributing’s shareholders (other than Distributing) collectively receive a 10-percent interest in Distributing (reducing A’s interest in Distributing to 90 percent). Under paragraph (d)(1)(i) of this section, A is treated as acquiring in the Section 381 PO 00000 Frm 00026 Fmt 4700 Sfmt 4700 Transaction stock representing a 65percent interest in the Predecessor of Distributing. This is because A’s 90percent interest in Distributing (the acquiring corporation in the Section 381 Transaction) immediately after the Section 381 Transaction exceeds A’s 25percent interest (held indirectly through Distributing) in the Predecessor of Distributing (the transferor corporation in the Section 381 Transaction) immediately before the Section 381 Transaction by 65 percent. Similarly, each Acquiring Owner of a Successor of Distributing is treated as acquiring, in the Successor Transaction, stock of Distributing, to the extent that the Acquiring Owner’s interest in the Successor of Distributing immediately after the Successor Transaction exceeds the Acquiring Owner’s direct or indirect interest in Distributing immediately before the Successor Transaction. (2) Deemed acquisitions of stock after Section 381 Transactions. For purposes of this section, after a Section 381 Transaction (including a Successor Transaction), an acquisition of stock of an acquiring corporation (including a deemed stock acquisition under paragraph (d)(1)(i) of this section) is treated also as an acquisition of an interest in the stock of the distributor or transferor corporation. For example, an acquisition of the stock of Distributing that occurs after a Section 381 Transaction is treated not only as an acquisition of the stock of Distributing, but also as an acquisition of the stock of any Predecessor of Distributing whose assets were acquired by Distributing in the prior Section 381 Transaction. Similarly, an acquisition of the stock of a Successor of Distributing that occurs after the Successor Transaction is treated not only as an acquisition of the stock of the Successor of Distributing, but also as an acquisition of the stock of Distributing. (3) Separate counting for Distributing and each Predecessor of Distributing. The measurement of whether one or more persons have acquired stock of any specific corporation in a Planned 50percent Acquisition is made separately from the measurement of any potential Planned 50-percent Acquisition of any other corporation. Therefore, there may be a Planned 50-percent Acquisition of a Predecessor of Distributing even if there is no Planned 50-percent Acquisition of Distributing. Similarly, there may be a Planned 50-percent Acquisition of Distributing even if there is no Planned 50-percent Acquisition of a Predecessor of Distributing. (e) Special rules for limiting gain recognition—(1) Overview—(i) Gain limitation. This paragraph (e) provides E:\FR\FM\18DER1.SGM 18DER1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations rules that limit the amount of gain that must be recognized by Distributing by reason of section 355(e) to an amount that is less than the amount that Distributing otherwise would be required to recognize under section 355(c)(2) or section 361(c)(2) (Statutory Recognition Amount) in certain cases involving one or more Predecessors of Distributing. (ii) Multiple Planned 50-percent Acquisitions. If there are Planned 50percent Acquisitions of multiple corporations (for example, two Predecessors of Distributing), Distributing must recognize the Statutory Recognition Amount with respect to each such corporation, subject to the limitations in paragraph (e)(2) of this section relating to a Planned 50percent Acquisition of a Predecessor of Distributing (POD Gain Limitation Rule) and paragraph (e)(3) of this section relating to a Planned 50-percent Acquisition of Distributing (Distributing Gain Limitation Rule), if applicable. The POD Gain Limitation Rule and the Distributing Gain Limitation Rule are applied separately to the Planned 50percent Acquisition of each such corporation to determine the amount of gain required to be recognized. (iii) Statutory Recognition Amount limit; Section 336(e). Paragraph (e)(4) of this section sets forth an overall gain limitation based on the Statutory Recognition Amount. Paragraph (e)(5) of this section clarifies the availability of an election under section 336(e) with regard to certain Distributions. (2) Planned 50-percent Acquisition of a Predecessor of Distributing—(i) In general. If there is a Planned 50-percent Acquisition of a Predecessor of Distributing, the amount of gain recognized by Distributing by reason of section 355(e) as a result of the Planned 50-percent Acquisition is limited to the amount of gain, if any, that Distributing would have recognized if, immediately before the Distribution, Distributing had engaged in the following transaction: Distributing transferred all Separated Property received from the Predecessor of Distributing to a newly formed corporation (Hypothetical Controlled) in exchange solely for stock of Hypothetical Controlled in a reorganization under section 368(a)(1)(D) and then distributed the stock of Hypothetical Controlled to the shareholders of Distributing in a transaction to which section 355(e) applied (Hypothetical D/355(e) Reorganization). The computation in this paragraph (e)(2)(i) is applied regardless of whether Distributing actually directly held the Separated Property. VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 (ii) Operating rules. For purposes of applying paragraph (e)(2)(i) of this section, the following rules apply: (A) Separated Property other than Controlled stock. Each of the basis and the fair market value of Separated Property other than stock of Controlled treated as transferred by Distributing to a Hypothetical Controlled in a Hypothetical D/355(e) Reorganization equals the basis and the fair market value, respectively, of such property in the hands of Controlled immediately before the Distribution. (B) Controlled stock that is Separated Property. Each of the basis and the fair market value of the stock of Controlled that is Separated Property treated as transferred by Distributing to a Hypothetical Controlled in a Hypothetical D/355(e) Reorganization equals the basis and the fair market value, respectively, of such stock in the hands of Distributing immediately before the Distribution. (C) Anti-duplication rule. A Predecessor of Distributing’s Separated Property is taken into account for purposes of applying this paragraph (e)(2) only to the extent such property was not taken into account by Distributing in a Hypothetical D/355(e) Reorganization with respect to another Predecessor of Distributing. Further, appropriate adjustments must be made to prevent other duplicative inclusions of section 355(e) gain under this paragraph (e) reflecting the same economic gain. (3) Planned 50-percent Acquisition of Distributing. This paragraph (e)(3) applies if there is a Planned 50-percent Acquisition of Distributing. In that case, the amount of gain recognized by Distributing by reason of section 355(e) as a result of the Planned 50-percent Acquisition is limited to the excess, if any, of the Statutory Recognition Amount over the amount of gain, if any, that Distributing would have been required to recognize under paragraphs (e)(1)(ii) and (e)(2) of this section if there had been a Planned 50-percent Acquisition of every Predecessor of Distributing, but not of Distributing or Controlled. For purposes of this paragraph (e)(3), references to Distributing are not references to a Predecessor of Distributing. (4) Gain recognition limited to Statutory Recognition Amount. The sum of the amounts required to be recognized by Distributing under section 355(e) (taking into account the POD Gain Limitation Rule and the Distributing Gain Limitation Rule) with regard to a single Distribution cannot exceed the Statutory Recognition Amount. In addition, Distributing may PO 00000 Frm 00027 Fmt 4700 Sfmt 4700 69321 choose not to apply the POD Gain Limitation Rule or the Distributing Gain Limitation Rule to a Distribution, and instead may recognize the Statutory Recognition Amount. Distributing indicates its choice to apply the preceding sentence by reporting the Statutory Recognition Amount on its original or amended Federal income tax return for the year of the Distribution. (5) Section 336(e) election. Distributing is not eligible to make a section 336(e) election (as defined in § 1.336–1(b)(11)) with respect to a Distribution to which this section applies unless Distributing would, absent the making of a section 336(e) election, recognize the Statutory Recognition Amount with respect to the Distribution (taking into account the POD Gain Limitation Rule and the Distributing Gain Limitation Rule) without regard to the final two sentences of paragraph (e)(4) of this section. See §§ 1.336–1 through 1.336– 5 for additional requirements with regard to a section 336(e) election. (f) Predecessor or Successor as a member of the affiliated group. For purposes of section 355(e)(2)(C), if a corporation transfers its assets to a member of the same Expanded Affiliated Group in a Section 381 Transaction, the transferor will be treated as continuing in existence within the same Expanded Affiliated Group. (g) Inapplicability of section 355(f) to certain intra-group Distributions—(1) In general. Section 355(f) does not apply to a Distribution if there is a Planned 50percent Acquisition of a Predecessor of Distributing (but not of Distributing, Controlled, or their Successors), except as provided in paragraph (g)(2) of this section. Therefore, except as provided in paragraph (g)(2) of this section, section 355 (or so much of section 356 as relates to section 355) and the regulations under sections 355 and 356, including the POD Gain Limitation Rule, apply, without regard to section 355(f), to a Distribution within an affiliated group (as defined in section 1504(a)) if the Distribution and the Planned 50-percent Acquisition of the Predecessor of Distributing are part of a Plan. For purposes of this paragraph (g)(1), references to a Distribution (and Distributing and Controlled) include references to a distribution (and Distributing and Controlled) to which section 355 would apply but for the application of section 355(f). (2) Alternative application of section 355(f). Distributing may choose not to apply paragraph (g)(1) of this section to each Distribution (that occurs under a Plan) to which section 355(f) would E:\FR\FM\18DER1.SGM 18DER1 69322 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES otherwise apply absent paragraph (g)(1) of this section. Instead, Distributing may apply section 355(f) to all such Distributions according to its terms, but only if all members of the same Expanded Affiliated Group report consistently the Federal income tax consequences of the Distributions that are part of the Plan (determined without regard to section 355(f)). In such a case, neither the POD Gain Limitation Rule nor the Distributing Gain Limitation Rule is available with regard to any applicable Distribution. Distributing indicates its choice to apply section 355(f) consistently to all applicable Distributions by reporting the Federal income tax consequences of each Distribution in accordance with section 355(f) on its Federal income tax return for the year of the Distribution. (h) Examples. The following examples illustrate the principles of this section. Unless the facts indicate otherwise, assume throughout these examples that: Distributing (D) owns all the stock of Controlled (C), and none of the shares of C held by D has a built-in loss; D distributes the stock of C in a Distribution to which section 355(d) does not apply; X, Y, and Z are individuals; each of D, D1, C, P, P1, P2, and R is a corporation having one class of stock outstanding, and none is a member of a consolidated group; and each transaction that is part of a Plan defined in this section is respected as a separate transaction under general Federal income tax principles. No inference should be drawn from any example concerning whether any requirements of section 355 are satisfied other than those of section 355(e) or whether any general Federal income tax principles (including the step transaction doctrine) are implicated by the example: (1) Example 1: Predecessor of D and Planned 50-Percent Acquisition of P—(i) Facts. X owns 100% of the stock of P, which holds multiple assets. Y owns 100% of the stock of D. The following steps occur as part of a Plan: P merges into D in a reorganization under section 368(a)(1)(A). Immediately after the merger, X and Y own 10% and 90%, respectively, of the stock of D. D then contributes to C one of the assets (Asset 1) acquired from P in the merger. At the time of the contribution, Asset 1 has a basis of $40x and a fair market value of $110x. In exchange for Asset 1, D receives additional C stock and $10x. D distributes the stock of C (but not the cash) to X and Y, pro rata. The contribution and Distribution constitute a reorganization under section 368(a)(1)(D), and D recognizes $10x of gain under section 361(b) on the contribution. Immediately before the Distribution, taking into account the $10x of gain recognized by D on the contribution, Asset 1 has an adjusted basis of $50x under section 362(b) and a fair market VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 value of $110x, and the stock of C held by D has a basis of $100x and a fair market value of $200x. (ii) Analysis—(A) P is a Predecessor of D. Under paragraph (b)(1) of this section, P is a Predecessor of D. First, P is a Potential Predecessor because, as part of a Plan, P transferred property to D in a Section 381 Transaction. See paragraph (b)(2)(ii)(A)(1) of this section. Second, both of the preDistribution requirements and the postDistribution requirement are satisfied. The Relevant Property Requirement is satisfied because, immediately before the Distribution and as part of a Plan, C holds P Relevant Property (Asset 1) the gain on which was not recognized in full at any point during the Plan Period, and some of the C stock distributed in the Distribution was acquired by D in exchange for Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The Reflection of Basis Requirement is satisfied because that C stock had a basis prior to the Distribution that was determined in whole or in part by reference to the basis of Separated Property (Asset 1), and was neither distributed in a distribution to which section 355(e) applied nor transferred in a transaction in which the gain on that C stock was recognized in full during the Plan Period prior to the Distribution. See paragraph (b)(1)(ii)(B) of this section. The Division of Relevant Property Requirement is satisfied because immediately after the Distribution, D continues to hold Relevant Property of P, and therefore, as part of a Plan, P’s Relevant Property has been divided between C and D. See paragraph (b)(1)(iii) of this section. (B) Planned 50-percent Acquisition of P. Under paragraph (d)(1)(i) of this section, Y is treated as acquiring stock representing 90% of the voting power and value of P as a result of the merger of P into D. Accordingly, there has been a Planned 50-percent Acquisition of P. (C) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $100x of gain ($200x of aggregate fair market value minus $100x of aggregate basis of the C stock held by D), the Statutory Recognition Amount described in section 361(c)(2). However, under the POD Gain Limitation Rule, D’s gain recognized by reason of the Planned 50percent Acquisition of P will not exceed $60x, an amount equal to the amount of gain D would have recognized had D transferred Asset 1 (Separated Property) to a newly formed corporation (C1) solely for C1 stock and distributed the C1 stock to D’s shareholders in a Hypothetical D/355(e) Reorganization. See paragraph (e)(2)(i) of this section. For purposes of the computation in this paragraph (h)(1)(ii)(C), the basis and fair market value of Asset 1 equal the basis and fair market value of Asset 1 in the hands of C immediately before the Distribution. See paragraph (e)(2)(ii)(A) of this section. Under section 361(c)(2), D would recognize $60x of gain, an amount equal to the gain in the hypothetical C1 stock (excess of the $110x fair market value over the $50x basis). Therefore, D recognizes $60x of gain (in addition to the $10x of gain recognized under section 361(b)). (iii) Plan not in existence at time of acquisition of Potential Predecessor’s PO 00000 Frm 00028 Fmt 4700 Sfmt 4700 property. The facts are the same as in paragraph (h)(1)(i) of this section (Example 1) except that the merger of P into D occurred before the existence of a Plan. Even though D transferred P property (Asset 1) to C, Asset 1 was not Relevant Property of P because P did not hold Asset 1 during the Plan Period. See paragraphs (b)(2)(iv) and (a)(4)(iii) of this section. Because Asset 1 is not Relevant Property, D did not receive C stock distributed in the Distribution in exchange for Relevant Property when it contributed Asset 1 to C, none of the distributed C stock had a basis prior to the Distribution that was determined in whole or in part by reference to the basis of Separated Property, and C did not hold Relevant Property immediately before the Distribution. Further, Relevant Property of P has not been divided. Therefore, P is not a Predecessor of D. (2) Example 2: Planned 50-percent Acquisition of D, but not Predecessor of D— (i) Facts. X owns 100% of the stock of P, which holds multiple assets. Y owns 100% of the stock of D. The following steps occur as part of a Plan: P merges into D in a reorganization under section 368(a)(1)(A). Immediately after the merger, X and Y own 90% and 10%, respectively, of the stock of D. D then contributes to C one of the assets (Asset 1) acquired from P in the merger. In exchange for Asset 1, D receives additional C stock. D distributes the stock of C to X and Y, pro rata. The contribution and Distribution constitute a reorganization under section 368(a)(1)(D). Immediately before the Distribution, Asset 1 has a basis of $50x and a fair market value of $110x, and the stock of C held by D has a basis of $120x and a fair market value of $200x. (ii) Analysis—(A) P is a Predecessor of D. Under paragraph (b)(1) of this section, P is a Predecessor of D. First, P is a Potential Predecessor because, as part of a Plan, P transferred property to D in a Section 381 Transaction. See paragraph (b)(2)(ii)(A)(1) of this section. Second, both of the preDistribution requirements and the postDistribution requirement are satisfied. The Relevant Property Requirement is satisfied because, immediately before the Distribution and as part of a Plan, C holds P Relevant Property (Asset 1) the gain on which was not recognized in full at any point during the Plan Period, and some of the C stock distributed in the Distribution was acquired by D in exchange for Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The Reflection of Basis Requirement is satisfied because that C stock had a basis prior to the Distribution that was determined in whole or in part by reference to the basis of Separated Property (Asset 1), and was neither distributed in a distribution to which section 355(e) applied nor transferred in a transaction in which the gain on that C stock was recognized in full during the Plan Period prior to the Distribution. See paragraph (b)(1)(ii)(B) of this section. The Division of Relevant Property Requirement is satisfied because immediately after the Distribution, D continues to hold Relevant Property of P, and therefore, as part of a Plan, P’s Relevant Property has been divided between C and D. See paragraph (b)(1)(iii) of this section. (B) Planned 50-percent Acquisition of D. Under paragraph (d)(1)(i) of this section, Y is E:\FR\FM\18DER1.SGM 18DER1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations treated as acquiring stock representing 10% of the voting power and value of P as a result of the merger of P into D. The 10% acquisition of P stock does not cause section 355(e) gain recognition or cause application of the POD Gain Limitation Rule because there has not been a Planned 50-percent Acquisition of P. X acquires 90% of the voting power and value of D as a result of the merger of P into D. Accordingly, there has been a Planned 50-percent Acquisition of D. This Planned 50-percent Acquisition implicates section 355(e) and results in gain recognition, subject to the rules of paragraph (e) of this section. (C) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $80x of gain ($200x of fair market value minus $120x of basis of the C stock held by D), the Statutory Recognition Amount described in section 361(c)(2). However, under the Distributing Gain Limitation Rule, D’s gain recognized by reason of the Planned 50-percent Acquisition of D will not exceed $20x, the excess of the Statutory Recognition Amount ($80x) over the amount of gain that D would have been required to recognize under the POD Gain Limitation Rule if there had been a Planned 50-percent Acquisition of P but not D or C ($60x). See paragraph (e)(3) of this section. The hypothetical gain limitation under the POD Gain Limitation Rule equals the amount D would have recognized had it transferred Asset 1 (Separated Property) to a newly formed corporation (C1) solely for stock and distributed the C1 stock in a Hypothetical D/ 355(e) Reorganization. See paragraph (e)(2)(i) of this section. Under section 361(c)(2), D would recognize $60x of gain, an amount equal to the gain in the hypothetical C1 stock (excess of the $110x fair market value over the $50x basis). Therefore, D recognizes $20x of gain ($80x¥$60x). (3) Example 3: Predecessor of D owns C stock—(i) Facts. X owns 100% of the stock of P, which holds multiple assets, including Asset 2. Y owns 100% of the stock of D. P owns 35% of the stock of C (Block 1), and D owns the remaining 65% of the C stock (Block 2). The following steps occur as part of a Plan: P merges into D in a reorganization under section 368(a)(1)(A), and D immediately thereafter distributes all of the C stock to X and Y pro rata. Immediately after the merger, X and Y own 10% and 90%, respectively, of the D stock, and, prior to the Distribution, D owns Block 1 with a basis of $30x and a fair market value of $35x, and Block 2 with a basis of $10x and a fair market value of $65x. D continues to hold Asset 2. (ii) Analysis—(A) P is a Predecessor of D. Under paragraph (b)(1) of this section, P is a Predecessor of D. First, P is a Potential Predecessor because, as part of a Plan, P transferred property to D in a Section 381 Transaction. See paragraph (b)(2)(ii)(A)(1) of this section. Second, both of the preDistribution requirements and the postDistribution requirement are satisfied. The Relevant Property Requirement is satisfied because some of the C stock distributed in the Distribution (Block 1) was Relevant Property of P. See paragraph (b)(1)(ii)(A)(2) of this section. The Reflection of Basis Requirement is satisfied because Block 1 of VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 the C stock is Relevant Property of P, and was neither distributed in a distribution to which section 355(e) applied nor transferred in a transaction in which the gain on that C stock was recognized in full during the Plan Period prior to the Distribution. See paragraph (b)(1)(ii)(B) of this section. The Division of Relevant Property Requirement is satisfied because some of the C stock distributed in the Distribution was Relevant Property of P, and therefore C is deemed to have received Relevant Property of P, and D continues to hold Relevant Property of P immediately after the Distribution. See paragraph (b)(1)(iii) of this section. Therefore, as part of a Plan, P’s Relevant Property has been divided between C and D. (B) Planned 50-percent Acquisition of P. Under paragraph (d)(1)(i) of this section, Y is treated as acquiring stock representing 90% of the voting power and value of P as a result of the merger of P into D. Accordingly, there has been a Planned 50-percent Acquisition of P. (C) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $60x of gain ($100x of fair market value minus $40x of basis of the C stock held by D), the Statutory Recognition Amount under section 355(c)(2). However, under the POD Gain Limitation Rule, D’s gain recognized by reason of the Planned 50-percent Acquisition of P will not exceed $5x, an amount equal to the amount D would have recognized had it transferred Block 1 of the C stock (Separated Property) to a newly formed corporation (C1) solely for stock and distributed the C1 stock to D shareholders in a Hypothetical D/355(e) Reorganization. See paragraph (e)(2)(i) of this section. Because Relevant Equity (Block 1 of the C stock) is Separated Property, Underlying Property associated with that Relevant Equity is not treated as Separated Property. See paragraph (b)(2)(vii) of this section. For purposes of the computation in this paragraph (h)(3)(ii)(C), the basis and fair market value of the Block 1 C stock equal its basis and fair market value in the hands of D immediately before the Distribution. See paragraph (e)(2)(ii)(A) of this section. Under section 361(c)(2), D would recognize $5x of gain, an amount equal to the gain in the hypothetical C1 stock ($35x fair market value¥$30x basis). Therefore, D recognizes $5x of gain. (4) Example 4: C stock as Substitute Asset—(i) Facts. X owns 100% of the stock of P, which owns multiple assets, including 100% of the stock of R and Asset 2. Y owns 100% of the stock of D. The following steps occur as part of a Plan: P merges into D in a reorganization under section 368(a)(1)(A) (P–D reorganization). Immediately after the merger, X and Y own 10% and 90%, respectively, of the stock of D. D then causes R to transfer all of its assets to C and liquidate in a reorganization under section 368(a)(1) (R–C reorganization). At the time of the P–D reorganization, the R stock has a basis of $40x and a fair market value of $110x. D distributes the stock of C to X and Y, pro rata. D continues to directly hold Asset 2. Immediately before the Distribution, the C stock held by D that was deemed received in the R–C reorganization (Block 1) PO 00000 Frm 00029 Fmt 4700 Sfmt 4700 69323 has a basis of $40x and a fair market value of $110x, and all of the stock of C held by D has a basis of $100x and a fair market value of $200x. (ii) Analysis—(A) P is a Predecessor of D. Under paragraph (b)(1) of this section, P is a Predecessor of D. First, P is a Potential Predecessor because, as part of a Plan, P transferred property to D in a Section 381 Transaction. See paragraph (b)(2)(ii)(A)(1) of this section. Second, both pre-Distribution requirements and the post-Distribution requirement are satisfied. The Relevant Property Requirement is satisfied because, for the following two reasons, some of the C stock distributed in the Distribution (Block 1) was Relevant Property of P. D is treated as acquiring Block 1 of the C stock in exchange for a direct or indirect interest in R stock (that is, Relevant Property) in the R–C reorganization because the basis of D in that C stock immediately after a transfer of the R stock (in the liquidation of R) is determined in whole or in part by reference to the basis of the R stock immediately before the transfer. See paragraph (b)(2)(x) of this section. Further, because the basis in Block 1 of the C stock is determined in whole or in part by reference to the basis of Relevant Equity (the R stock) the issuer of which ceases to exist for Federal income tax purposes under the Plan, Block 1 of the C stock is a Substitute Asset, and is therefore treated as Relevant Property with the same ownership and transfer history as the R stock. See paragraph (b)(2)(vi)(B)(2) of this section. The Reflection of Basis Requirement is satisfied because Block 1 of the C stock is Relevant Property of P, and was neither distributed in a distribution to which section 355(e) applied nor transferred in a transaction in which the gain on that C stock was recognized in full during the Plan Period prior to the Distribution. See paragraph (b)(1)(ii)(B) of this section. The Division of Relevant Property Requirement is satisfied because some of the C stock distributed in the Distribution was Relevant Property of P, and therefore C is deemed to have received Relevant Property of P, and immediately after the Distribution, D continues to hold Asset 2, which is Relevant Property of P. See paragraph (b)(1)(iii) of this section. Therefore, as part of a Plan, P’s Relevant Property has been divided between C and D. (B) Planned 50-percent Acquisition of P. Under paragraph (d)(1)(i) of this section, Y is treated as acquiring stock representing 90% of the voting power and value of P as a result of the P–D reorganization. Accordingly, there has been a Planned 50-percent Acquisition of P. (C) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $100x of gain ($200x of fair market value minus $100x of basis of all C stock held by D), the Statutory Recognition Amount described in section 355(c)(2). However, under the POD Gain Limitation Rule, D’s gain recognized by reason of the Planned 50-percent Acquisition of P will not exceed $70x, an amount equal to the amount D would have recognized had it transferred Block 1 of the C stock (Separated Property) to a newly formed corporation (C1) solely for stock and E:\FR\FM\18DER1.SGM 18DER1 khammond on DSKJM1Z7X2PROD with RULES 69324 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations distributed the C1 stock to D shareholders in a Hypothetical D/355(e) Reorganization. See paragraph (e)(2)(i) of this section. Because Relevant Equity (Block 1 of the C stock) is Separated Property, Underlying Property associated with that Relevant Equity is not treated as Separated Property. See paragraph (b)(2)(vii) of this section. Under section 361(c)(2), D would recognize $70x of gain, an amount equal to the gain in the hypothetical C1 stock (excess of the $110x fair market value over the $40x basis). Therefore, D recognizes $70x of gain. (5) Example 5: Section 351 transaction—(i) Facts. X owns 100% of the stock of P, which holds multiple assets, including Asset 1, Asset 2, and Asset 3. Y owns 100% of the stock of D. The following steps occur as part of a Plan: P transfers Asset 1 and Asset 2 to D and Y transfers property to D in an exchange qualifying under section 351. Immediately after the exchange, P and Y own 10% and 90%, respectively, of the stock of D. D then contributes Asset 1 to C in exchange for additional C stock. D distributes all of the stock of C to P and Y, pro rata. D continues to directly hold Asset 2, and P continues to directly hold Asset 3. The contribution and Distribution constitute a reorganization under section 368(a)(1)(D). Immediately before the Distribution, Asset 1 has a basis of $40x and a fair market value of $110x, and the stock of C held by D has a basis of $100x and a fair market value of $200x. Following the Distribution, and as part of the same Plan, Z acquires 51% of the P stock. (ii) Analysis—P is not a Predecessor of D. Under paragraph (b)(1) of this section, P is not a Predecessor of D. P is not a Potential Predecessor because P did not transfer property to a Potential Predecessor, D, or a member of the same Expanded Affiliated Group as D in a Section 381 Transaction and P is not a member of the same Expanded Affiliated Group as D immediately after completion of the Plan. See paragraph (b)(2)(ii) of this section. Thus, P cannot be a Predecessor of D. See paragraph (b)(1)(i) of this section. (6) Example 6: Section 351 transaction after an acquisition of P—(i) Facts. X owns 100% of the stock of P, which holds multiple assets, including Asset 1 and Asset 2. Y owns 100% of the stock of D, D owns 100% of the stock of D1, and D1 owns 100% of the stock of C. D files a consolidated return for the affiliated group of which it is the common parent. The following steps occur as part of a Plan: D acquires 100% of the stock of P from X. P transfers Asset 1 and Asset 2 to D1 for D1 stock in an exchange qualifying under section 351. See § 1.1502–34. D1 contributes Asset 1 to C in exchange for additional C stock. D1 distributes all of the stock of C to D in exchange for D1 stock (First Distribution). D then distributes all of the stock of C to Y (Second Distribution). D1 continues to directly hold Asset 2. Immediately before the First Distribution, Asset 1 has a basis of $10x and a fair market value of $60x, and the stock of C held by D1 has a basis of $100x and a fair market value of $200x. (ii) Analysis—(A) P is a Predecessor of D1. Under paragraph (b)(1) of this section, P is a VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 Predecessor of D1. First, P is a Potential Predecessor of D1 because P is a member of the same Expanded Affiliated Group as D1 immediately after completion of the Plan. See paragraph (b)(2)(ii)(A)(2) of this section. The Relevant Property Requirement is satisfied because, immediately before the First Distribution and as part of a Plan, C holds P Relevant Property (Asset 1) the gain on which was not recognized in full at any point during the Plan Period, and some of the C stock distributed in the First Distribution was acquired by D1 in exchange for Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The Reflection of Basis Requirement is satisfied because that C stock had a basis prior to the First Distribution that was determined in whole or in part by reference to the basis of Separated Property (Asset 1), and was neither distributed in a distribution to which section 355(e) applied nor transferred in a transaction in which the gain on that C stock was recognized in full prior to the First Distribution. See paragraph (b)(1)(ii)(B) of this section. The Division of Relevant Property Requirement is satisfied because immediately after the First Distribution, each of C, on the one hand, and P or D1, on the other hand, continues to hold Relevant Property of P, and therefore, as part of a Plan, P’s Relevant Property has been divided between C and D1. See paragraph (b)(1)(iii) of this section. (B) Planned 50-percent Acquisition of P. D has acquired stock representing 100% of the voting power and value of P. Accordingly, there has been a Planned 50-percent Acquisition of P. (C) Gain on First Distribution. Because there is a Planned 50-percent Acquisition of a Predecessor of Distributing (but not of Distributing, Controlled, or their Successors), section 355(f) will not apply to the First Distribution unless D and D1 choose to have section 355(f) apply. See paragraph (g) of this section. As a result, section 355, including the POD Gain Limitation Rule, will apply to the First Distribution. Under the POD Gain Limitation Rule, D1’s gain recognized by reason of the Planned 50-percent Acquisition of P will not exceed $50x, an amount equal to the amount D1 would have recognized had it transferred Asset 1 (Separated Property) to a newly formed corporation (C1) solely for stock and distributed the C1 stock to D1 shareholders in a Hypothetical D/355(e) Reorganization. See paragraph (e)(2)(i) of this section. Under section 361(c)(2), D1 would recognize $50x of gain, an amount equal to the gain in the hypothetical C1 stock (excess of the $60x fair market value over the $10x basis). Therefore, D1 recognizes $50x of gain. Under paragraph (g)(2) of this section, however, D and D1 may choose to apply section 355(f) to the First Distribution as an exception to the general application of paragraph (g)(1) of this section. By application of section 355(f), section 355 (including the POD Gain Limitation Rule) would not apply to the First Distribution. Therefore, D1 would be required to recognize $100x of gain (excess of the $200x fair market value over the $100x basis of C stock held by D1) under section 311(b), and D would be treated under section 302(d) as receiving a distribution of $200x to which section 301 applies. PO 00000 Frm 00030 Fmt 4700 Sfmt 4700 (D) P is not a Predecessor of D. Under paragraph (b)(1) of this section, P is not a Predecessor of D. First, P is a Potential Predecessor of D because P is a member of the same Expanded Affiliated Group as D immediately after completion of the Plan. See paragraph (b)(2)(ii)(A)(2) of this section. However, although the Relevant Property Requirement is satisfied, the Reflection of Basis Requirement is not satisfied. The Relevant Property Requirement is satisfied because, immediately before the Second Distribution and as part of a Plan, C holds P Relevant Property (Asset 1) the gain on which was not recognized in full at any point during the Plan Period, and some of the C stock distributed in the Second Distribution was indirectly acquired by D in exchange for Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. However, regardless of whether D and D1 choose under paragraph (g)(2) of this section to have section 355(f) apply to the First Distribution, the Reflection of Basis Requirement cannot be satisfied. If section 355(f) applies to the First Distribution, then all of the C stock will have been transferred in a transaction in which the gain on the C stock was recognized in full during the Plan Period prior to the Second Distribution. If section 355(f) does not apply to the First Distribution, then all of the C stock will have been transferred in a distribution to which section 355(e) applied during the Plan Period prior to the Second Distribution. Because not all of the pre-Distribution and postDistribution requirements are satisfied, P cannot be a Predecessor of D. (7) Example 7: Sequential Predecessors—(i) Facts. X owns 100% of P1, which holds multiple assets, including Asset 1 and Asset 2. Y owns 100% of P2, which holds Asset 3, and Z owns 100% of D. The following steps occur as part of a Plan: P1 merges into P2 in a reorganization under 368(a)(1)(A) (P1–P2 reorganization). Immediately after the merger, X and Y own 10% and 90%, respectively, of the stock of P2. P2 then merges into D in a reorganization under 368(a)(1)(A) (P2–D reorganization). Immediately after the merger, X, Y, and Z own 1%, 9%, and 90%, respectively, of the stock of D. D then contributes Asset 1 to C in exchange for additional C stock, and retains Asset 2 and Asset 3. D distributes all of the stock of C to X, Y, and Z, pro rata. Immediately before the Distribution, Asset 1 has a basis of $40x and a fair market value of $100x, and the stock of C held by D has a basis of $100x and a fair market value of $200x. (ii) Analysis—(A) P2 is a Predecessor of D. Under paragraph (b)(1) of this section, P2 is a Predecessor of D. First, P2 is a Potential Predecessor because, as part of a Plan, P2 transferred property to D in a Section 381 Transaction. See paragraph (b)(2)(ii)(A)(1) of this section. Second, both pre-Distribution requirements and the post-Distribution requirement are satisfied. The Relevant Property Requirement is satisfied because, immediately before the Distribution and as part of a Plan, C holds P2 Relevant Property (Asset 1) the gain on which was not recognized in full at any point during the Plan Period, and some of the C stock distributed in the Distribution was acquired E:\FR\FM\18DER1.SGM 18DER1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations by D in exchange for Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The Reflection of Basis Requirement is satisfied because that C stock had a basis prior to the Distribution that was determined in whole or in part by reference to the basis of Separated Property (Asset 1), and was neither distributed in a distribution to which section 355(e) applied nor transferred in a transaction in which the gain on that C stock was recognized in full during the Plan Period prior to the Distribution. See paragraph (b)(1)(ii)(B) of this section. The Division of Relevant Property Requirement is satisfied because immediately after the Distribution, D continues to hold P2 Relevant Property (Asset 2 and Asset 3), and therefore, as part of a Plan, P2’s Relevant Property has been divided between C and D. See paragraph (b)(1)(iii) of this section. (B) P1 is a Predecessor of D. Under paragraph (b)(1) of this section, P1 is a Predecessor of D. First, P1 is a Potential Predecessor because, as part of a Plan, P1 transferred property to a Potential Predecessor (P2) in a Section 381 Transaction. See paragraph (b)(2)(ii)(A)(1) of this section. Second, both pre-Distribution requirements and the post-Distribution requirement are satisfied. The Relevant Property Requirement is satisfied because, immediately before the Distribution and as part of a Plan, C holds P1 Relevant Property (Asset 1) the gain on which was not recognized in full at any point during the Plan Period, and some of the C stock distributed in the Distribution was acquired by D in exchange for Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The Reflection of Basis Requirement is satisfied because that C stock had a basis prior to the Distribution that was determined in whole or in part by reference to the basis of Separated Property (Asset 1), and was neither distributed in a distribution to which section 355(e) applied nor transferred in a transaction in which the gain on that C stock was recognized in full during the Plan Period prior to the Distribution. See paragraph (b)(1)(ii)(B) of this section. The Division of Relevant Property Requirement is satisfied because immediately after the Distribution, D continues to hold Relevant Property of P1 (Asset 2), and therefore, as part of a Plan, P1’s Relevant Property has been divided between C and D. See paragraph (b)(1)(iii) of this section. (C) Planned 50-percent Acquisitions of P1 and P2. Under paragraph (d)(1)(i) of this section, Y is treated as acquiring stock representing 90% of the voting power and value of P1 as a result of the P1–P2 merger. In addition, under paragraph (d)(1)(i) of this section, Z is treated as acquiring stock representing 90% of the voting power and value of P2 in the P2–D merger. Accordingly, there have been Planned 50-percent Acquisitions of P1 and P2. (D) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $100x of gain ($200x of aggregate fair market value minus $100x of aggregate basis of the C stock held by D), the Statutory Recognition Amount described in section 361(c)(2), because there have been Planned 50-percent Acquisitions VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 of P1 and P2, both Predecessors of D. However, under paragraph (e) of this section, D’s gain recognized by reason of the Planned 50-percent Acquisitions of P1 and P2 will not exceed $60x, an amount equal to the amount D would have recognized had it transferred Asset 1 (Separated Property) to a newly formed corporation (C1) solely for stock and distributed the C1 stock to D shareholders in a Hypothetical D/355(e) Reorganization. Under section 361(c)(2), D would recognize $60x, an amount equal to the gain in the hypothetical C1 stock (excess of the $100x fair market value over the $40x basis). Paragraph (e)(1)(ii) of this section provides that if there are Planned 50-percent Acquisitions of multiple corporations, Distributing must recognize the Statutory Recognition Amount with respect to each such corporation, subject to the POD Gain Limitation Rule and the Distributing Gain Limitation Rule, if applicable. In this case, the POD Gain Limitation Rule limits the amount of gain required to be recognized by D with respect to each of the Planned 50percent Acquisitions of P1 and P2 to $60x. See paragraph (e)(2)(i) of this section. Ordinarily, each $60x limitation would be added together, and the total gain limitation provided by paragraph (e) of this section would be $120x. However, the antiduplication rule set forth in paragraph (e)(2)(ii)(C) of this section provides that, for purposes of applying the POD Gain Limitation Rule, a Predecessor of Distributing’s Separated Property is taken into account only to the extent such property was not taken into account with respect to another Predecessor of Distributing. Thus, Asset 1 may not be taken into account more than once in determining the total gain limitation. Therefore, D recognizes $60x of gain. (8) Example 8: Multiple Predecessors of D—(i) Facts. X owns 100% of the stock of P1, which holds multiple assets, including Asset 1 and Asset 3. Y owns 100% of the stock of P2, which holds multiple assets, including Asset 2 and Asset 4. Z owns 100% of the stock of D. The following steps occur as part of a Plan: Each of P1 and P2 merges into D in a reorganization under section 368(a)(1)(A). Immediately after the mergers, each of X and Y owns 10%, and Z owns 80%, of the stock of D. D then contributes to C Asset 1 (acquired from P1), and Asset 2 (acquired from P2). In exchange for Asset 1 and Asset 2, D receives additional C stock. D distributes the stock of C to X, Y, and Z, pro rata. D’s contribution of Asset 1 and Asset 2 and the Distribution constitute a reorganization under section 368(a)(1)(D). D continues to hold Asset 3 and Asset 4. Immediately before the Distribution, Asset 1 has a basis of $50x and a fair market value of $110x, Asset 2 has a basis of $70x and a fair market value of $90x, and the stock of C held by D has a basis of $130x and a fair market value of $220x. (ii) Analysis—(A) P1 and P2 are Predecessors of D. Under paragraph (b)(1) of this section, each of P1 and P2 is a Predecessor of D. First, each of P1 and P2 is a Potential Predecessor because, as part of a Plan, each of P1 and P2 transferred property to D in a Section 381 Transaction. See PO 00000 Frm 00031 Fmt 4700 Sfmt 4700 69325 paragraph (b)(2)(ii)(A)(1) of this section. Second, both pre-Distribution requirements and the post-Distribution requirement are satisfied. The Relevant Property Requirement is satisfied because, immediately before the Distribution and as part of a Plan, C holds P1 Relevant Property (Asset 1) and P2 Relevant Property (Asset 2), the gain on each of which was not recognized in full at any point during the Plan Period, and some of the C stock distributed in the Distribution was acquired by D in exchange for each of Asset 1 and Asset 2. See paragraph (b)(1)(ii)(A)(1) of this section. The Reflection of Basis Requirement is satisfied because that C stock had a basis prior to the distribution that was determined in whole or in part by reference to the basis of Separated Property (Asset 1 and Asset 2, respectively), and was neither distributed in a distribution to which section 355(e) applied nor transferred in a transaction in which the gain on that C stock was recognized in full during the Plan Period prior to the Distribution. See paragraph (b)(1)(ii)(B) of this section. The Division of Relevant Property Requirement is satisfied because immediately after the Distribution, D continues to hold Relevant Property of P1 and P2, and therefore, as part of a Plan, each of P1’s and P2’s Relevant Property has been divided between C and D. See paragraph (b)(1)(iii) of this section. (B) Planned 50-percent Acquisitions of P1 and P2. Under paragraph (d)(1)(i) of this section, Z is treated as acquiring stock representing 80% of the voting power and value of each of P1 and P2 as a result of the mergers of P1 and P2 into D. Accordingly, there have been Planned 50-percent Acquisitions of P1 and P2. (C) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $90x of gain ($220x of fair market value minus $130x of basis of the C stock held by D), the Statutory Recognition Amount under section 361(c)(2). However, under the POD Gain Limitation Rule, D’s gain recognized by reason of the Planned 50-percent Acquisition of P1 will not exceed $60x ($110x fair market value minus $50x basis), an amount equal to the amount D would have recognized had it transferred Asset 1 (Separated Property) to a newly formed corporation (C1) solely for stock and distributed the C1 stock to D shareholders in a Hypothetical D/355(e) Reorganization. See paragraph (e)(2)(i) of this section. In addition, under the POD Gain Limitation Rule, D’s gain recognized by reason of the deemed acquisition of P2 stock will not exceed $20x ($90x fair market value minus $70x basis), an amount equal to the amount D would have recognized had it transferred Asset 2 (Separated Property) to a second newly formed corporation (C2) solely for stock and distributed the C2 stock to D shareholders in a Hypothetical D/355(e) Reorganization. See paragraph (e)(2)(i) of this section. Therefore, D recognizes $80x of gain ($60x + $20x). See paragraph (e)(1)(ii) of this section. (9) Example 9: Successor of C—(i) Facts. X owns 100% of the stock of each of D and R. The following steps occur as part of a Plan: D distributes all of its C stock to X. Immediately before the Distribution, D’s C E:\FR\FM\18DER1.SGM 18DER1 khammond on DSKJM1Z7X2PROD with RULES 69326 Federal Register / Vol. 84, No. 243 / Wednesday, December 18, 2019 / Rules and Regulations stock has a basis of $10x and a fair market value of $30x. C then merges into R in a reorganization under section 368(a)(1)(D). Immediately after the merger, X owns all of the R stock. As part of the same Plan, Z acquires 51% of the stock of R from X. (ii) Analysis—(A) R is a Successor of C. Under paragraph (c)(2)(i) of this section, R is a Successor of C because, after the Distribution, C transfers property to R in a Section 381 Transaction. (B) Planned 50-percent Acquisition of C. Under paragraph (d)(2) of this section, Z’s acquisition of stock of R is treated as an acquisition of stock of C. Therefore, Z is treated as acquiring 51% of the stock of C. Accordingly, there has been a Planned 50percent Acquisition of C. (C) Gain not limited. Section 355(e) applies to the Distribution because there has been a Planned 50-percent Acquisition of C. Neither the POD Gain Limitation Rule nor the Distributing Gain Limitation Rule applies because there has been no Planned 50percent Acquisition of a Predecessor of D, and no Planned 50-percent Acquisition of D. Therefore, D recognizes $20x of gain ($30x fair market value minus $10x basis of the C stock held by D) under section 355(c)(2). (10) Example 10: Multiple Successors—(i) Facts. X owns 100% of the stock of both D and R. Y owns 100% of the stock of S. The following steps occur as part of a Plan: D distributes all of the C stock to X. Immediately after the Distribution, D merges into R in a reorganization under section 368(a)(1)(A) (D–R merger). Following the D– R merger, R merges into S in a reorganization under section 368(a)(1)(A) (R–S merger). Immediately after the R–S merger, X and Y own 10% and 90%, respectively, of the S stock. Immediately before the Distribution, D’s C stock has a basis of $10x and a fair market value of $30x. (ii) Analysis—(A) R and S are Successors of D. Under paragraph (c)(2)(i) of this section, R is a Successor of D because, after the Distribution, D transfers property to R in a Section 381 Transaction. Under paragraph (c)(2)(ii) of this section, S is also a Successor of D because R (a Successor of D) transfers property to S in a Section 381 Transaction. (B) Planned 50-percent Acquisition of D. Under paragraph (d)(1)(i) of this section, there is no deemed acquisition of D stock as a result of the D–R merger because X wholly owns the stock of D before the merger and wholly owns the stock of R after the merger. Under paragraph (d)(1)(i) of this section, Y is treated as acquiring stock representing 90% of the voting power and value of R (a Successor of D) as a result of the R–S merger. Under paragraph (d)(2) of this section, an acquisition of R stock is also treated as an acquisition of D stock. Accordingly, there has been a Planned 50-percent Acquisition of D. (C) Gain not limited. Section 355(e) applies to the Distribution because there has been a Planned 50-percent Acquisition of D. The POD Gain Limitation Rule does not apply because there has been no Planned 50percent Acquisition of a Predecessor of D. The Distributing Gain Limitation Rule applies because there has been a Planned 50percent Acquisition of D. However, the gain limitation under the Distributing Gain VerDate Sep<11>2014 15:51 Dec 17, 2019 Jkt 250001 Limitation Rule equals the Statutory Recognition Amount, because there is no Predecessor of D (and thus no Separated Property). Therefore, D recognizes $20x of gain ($30x fair market value minus $10x basis of the C stock held by D) under section 355(c)(2). (i) Applicability date. This section applies to Distributions occurring after December 15, 2019. For Distributions occurring on or before December 15, 2019, see § 1.355–8T as contained in 26 CFR part 1 revised as of April 1, 2019. Douglas W. O’Donnell, Acting Deputy Commissioner for Services and Enforcement. Approved: December 9, 2019. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2019–27110 Filed 12–16–19; 4:15 pm] BILLING CODE 4830–01–P DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 165 [Docket Number USCG–2019–0953] RIN 1625–AA87 Security Zone; San Diego Bay, San Diego, CA Coast Guard, DHS. Temporary final rule. AGENCY: ACTION: The Coast Guard is establishing a temporary security zone for all navigable waters within a 100yard radius of berth four at the 10th Avenue Marine Terminal in San Diego, CA during the offload of narcotics from a military vessel. The security zone is needed to protect the military vessel and vessel’s personnel. Entry of vessels or persons into this zone is prohibited unless specifically authorized by the Captain of the Port San Diego. DATES: This rule is effective from 7 a.m. until noon on December 18, 2019. ADDRESSES: To view documents mentioned in this preamble as being available in the docket, go to https:// www.regulations.gov, type USCG–2019– 0953 in the ‘‘SEARCH’’ box and click ‘‘SEARCH.’’ Click on Open Docket Folder on the line associated with this rule. FOR FURTHER INFORMATION CONTACT: If you have questions on this rule, call or email Lieutenant Briana Biagas, Waterways Management, U.S. Coast Guard Sector San Diego, CA; telephone SUMMARY: PO 00000 Frm 00032 Fmt 4700 Sfmt 4700 619–278–7656, email D11MarineEventsSD@uscg.mil. SUPPLEMENTARY INFORMATION: I. Table of Abbreviations CFR Code of Federal Regulations DHS Department of Homeland Security FR Federal Register NPRM Notice of proposed rulemaking § Section U.S.C. United States Code II. Background Information and Regulatory History The Coast Guard is issuing this temporary rule without prior notice and opportunity to comment pursuant to authority under section 4(a) of the Administrative Procedure Act (APA) (5 U.S.C. 553(b)). This provision authorizes an agency to issue a rule without prior notice and opportunity to comment when the agency for good cause finds that those procedures are ‘‘impracticable, unnecessary, or contrary to the public interest.’’ Under 5 U.S.C. 553(b)(B), the Coast Guard finds that good cause exists for not publishing a notice of proposed rulemaking (NPRM) with respect to this rule because it is impractical. This urgent security zone is required to protect the military vessel, the surrounding waterway and the 10th Avenue Marine Terminal. It is impracticable to publish an NPRM because we must establish this security zone by December 18, 2019 and lack sufficient time to provide a reasonable comment period and then consider those comments before issuing the rule. Under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this rule effective less than 30 days after publication in the Federal Register. Delaying the effective date of this rule would be contrary to public interest because immediate action is needed to provide the security of the military vessel and the waterways and structures nearby. III. Legal Authority and Need for Rule The Coast Guard is issuing this rule under authority in 46 U.S.C. 70034 (previously 33 U.S.C. 1231). The Captain of the Port Sector San Diego (COTP) has determined that the presence of the military vessel loaded with narcotics presents a potential target for terrorist attack, sabotage, or other subversive acts, accidents, or other causes of similar nature. This rule is needed to protect military personnel, the public and the navigable waters in the vicinity of the 10th Avenue Marine Terminal. IV. Discussion of the Rule This rule establishes a security zone from 7 a.m. until noon on December 18, E:\FR\FM\18DER1.SGM 18DER1

Agencies

[Federal Register Volume 84, Number 243 (Wednesday, December 18, 2019)]
[Rules and Regulations]
[Pages 69308-69326]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27110]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9888]
RIN 1545-BN18


Guidance Under Section 355(e) Regarding Predecessors, Successors, 
and Limitation on Gain Recognition; Guidance Under Section 355(f)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations that provide guidance 
regarding the distribution by a distributing corporation of stock or 
securities of a controlled corporation without the recognition of 
income, gain, or loss. In particular, the final regulations provide 
guidance in determining whether a corporation is a predecessor or 
successor of a distributing or controlled corporation for purposes of 
the exception under section 355(e) of the Internal Revenue Code (Code) 
to the nonrecognition treatment afforded qualifying distributions. In 
addition, the final regulations provide certain limitations on the 
recognition of gain in certain cases involving a predecessor of a 
distributing corporation. The final

[[Page 69309]]

regulations also provide rules regarding the extent to which section 
355(f) causes a distributing corporation (and in certain cases its 
shareholders) to recognize income or gain on the distribution of stock 
or securities of a controlled corporation. These regulations affect 
corporations that distribute the stock or securities of a controlled 
corporation and the shareholders or security holders of those 
distributing corporations.

DATES: Effective date: These final regulations are effective on 
December 16, 2019.
    Applicability dates: For dates of applicability, see Sec.  1.355-
8(i).

FOR FURTHER INFORMATION CONTACT:  W. Reid Thompson, (202) 317-5024, or 
Richard K. Passales, (202) 317-5024 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

I. Corporate Divisions Under Sections 355 and 368(a)(1)(D)

    Congress enacted section 355 ``to permit the tax-free division of 
existing business arrangements among existing shareholders.'' See S. 
Rep. No. 105-33, at 139 (1997) (Senate Report). Under section 
355(a)(1), if certain requirements are met, a corporation 
(Distributing) may distribute stock, or stock and securities, of a 
controlled corporation (Controlled) to Distributing's shareholders, or 
to its shareholders and security holders, without recognition of gain 
or loss to, or inclusion of any amount in income of, the distributees 
upon receipt (Distribution). Section 355(c) generally provides that no 
gain or loss is recognized to Distributing upon a Distribution of 
qualified property which is not in pursuance of a plan of 
reorganization. Section 355(c)(2)(B) refers to Controlled stock and 
Controlled securities as ``qualified property.'' If Distributing 
distributes property other than qualified property in a Distribution 
and the fair market value of such property exceeds its adjusted basis, 
gain is recognized to Distributing as if the property were sold to the 
distributee at its fair market value. See section 355(c)(2)(A).
    Taxpayers also may carry out a Distribution as part of a ``divisive 
reorganization'' under section 368(a)(1)(D). A divisive reorganization 
is a transfer by Distributing of part of its assets to Controlled if, 
immediately after the transfer, one or more of the shareholders of 
Distributing (including persons who were shareholders immediately 
before the transfer) have control, as defined in section 368(c), of 
Controlled, but only if, in pursuance of the plan, stock or securities 
of Controlled are distributed in a Distribution. Section 361(c) 
generally provides that no gain or loss is recognized to Distributing 
upon a Distribution of qualified property in pursuance of a plan of 
reorganization. Section 361(c)(2)(B) defines ``qualified property'' as 
(i) any stock, right to acquire stock, or obligation (including a 
security) of Distributing, or (ii) any stock, right to acquire stock, 
or obligation (including a security) of Controlled received by 
Distributing as part of the divisive reorganization. If Distributing 
distributes property other than qualified property in a Distribution as 
part of a divisive reorganization and the fair market value of such 
property exceeds its adjusted basis, gain is recognized to Distributing 
as if the property were sold to the distributee at its fair market 
value. See section 361(c)(2)(A).

II. Section 355(e)

    Although a Distribution is generally tax-free under sections 355 
and 361, Congress has determined that recognition of corporate-level 
gain by Distributing is appropriate ``[i]n cases in which it is 
intended that new shareholders will acquire ownership of a business in 
connection with a [Distribution],'' because the overall transaction 
``more closely resembles a corporate level disposition of the portion 
of the business that is acquired.'' Senate Report at 139-140. 
Accordingly, the enactment of the Taxpayer Relief Act of 1997, Public 
Law 105-34 (111 Stat. 788 (1997)), added section 355(e) to the Code. 
Under section 355(e), stock or securities of Controlled generally will 
not be treated as qualified property for purposes of section 355(c)(2) 
or section 361(c)(2) if the stock or securities are distributed as part 
of a plan or series of related transactions (Plan) pursuant to which 
one or more persons acquire directly or indirectly stock representing a 
``50-percent or greater interest'' in the stock (Planned 50-percent 
Acquisition) of Distributing or Controlled. The term ``50-percent or 
greater interest,'' as defined in section 355(e)(4)(A) by reference to 
section 355(d)(4), means stock possessing at least 50 percent of the 
total combined voting power of all classes of stock entitled to vote or 
at least 50 percent of the total value of shares of all classes of 
stock. Section 1.355-7(b) provides detailed guidance regarding the 
meaning and determination of the existence of a Plan.
    Section 355(e)(4)(D) provides that, for purposes of section 355(e), 
``any reference to [Controlled] or [Distributing] shall include a 
reference to any predecessor or successor of such corporation.'' 
However, Section 355(e) does not define the terms ``predecessor'' and 
``successor.'' To provide definitions for the terms ``predecessor'' and 
``successor'' for purposes of section 355(e), as well as guidance 
regarding their application, the Department of the Treasury (Treasury 
Department) and the IRS issued proposed regulations in 2004 (2004 
Proposed Regulations) and temporary and proposed regulations in 2016 
(2016 Regulations).

III. The 2004 Proposed Regulations and the 2016 Regulations

    The general theory underlying the 2004 Proposed Regulations and the 
2016 Regulations was that section 355(e) should apply if a Distribution 
is used to combine a tax-free division of the assets of a corporation 
other than Distributing or Controlled (Divided Corporation) with a 
Planned 50-percent Acquisition of the Divided Corporation. The Treasury 
Department and the IRS view this type of transaction as a ``synthetic 
spin-off'' of the assets that are transferred by the Divided 
Corporation to Distributing and then to Controlled. For example, a 
synthetic spin-off could be achieved through the following series of 
transactions occurring pursuant to a Plan (Base Case Example): (1) A 
corporation (P) merges into Distributing in a reorganization described 
in section 368(a)(1)(A), (2) Distributing contributes some (but not 
all) of P's assets to Controlled in a reorganization described in 
section 368(a)(1)(D), and (3) Distributing distributes all of the stock 
of Controlled in a Distribution.
    In the Base Case Example, the Divided Corporation (that is, P) 
could have separated its assets in its own Distribution. In that case, 
the Divided Corporation would have been a Distributing itself, and 
section 355(e) clearly would have applied to the Distribution if it 
were combined with a Planned 50-percent Acquisition of the Divided 
Corporation. However, the Treasury Department and the IRS observed that 
if a Distribution by a Distributing is used as the vehicle for a 
synthetic spin-off by the Divided Corporation, the synthetic spin-off 
would not be subject to section 355(e) unless the Divided Corporation 
is treated as a predecessor of Distributing under section 355(e)(4)(D) 
(Predecessor of Distributing, or POD). Accordingly, the Treasury 
Department and the IRS issued the 2004 Proposed Regulations and the 
2016 Regulations to treat the Divided Corporation in the Base Case 
Example as a POD.

[[Page 69310]]

A. 2004 Proposed Regulations
    On November 22, 2004, the Treasury Department and the IRS published 
in the Federal Register (69 FR 67873) the 2004 Proposed Regulations 
(REG-145535-02). In general, the 2004 Proposed Regulations would have 
defined a Predecessor of Distributing as any corporation the assets of 
which a Distributing has acquired in a transaction to which section 
381(a) applies (Section 381 Transaction) and then divided tax-free 
through a Distribution. The 2004 Proposed Regulations referred to the 
Section 381 Transaction and the contribution to Controlled of some (but 
not all) of the assets of the POD prior to the Distribution as a 
``combining transfer'' and a ``separating transfer,'' respectively. The 
Treasury Department and the IRS drafted the 2004 proposal primarily to 
address combining and separating transfers carried out to effect 
transactions similar to the Base Case Example (in other words, 
synthetic spin-offs effectuated through Section 381 Transactions).
B. 2016 Regulations
    After considering all comments received regarding the 2004 Proposed 
Regulations, on December 19, 2016, the Treasury Department and the IRS 
published temporary regulations (TD 9805) in the Federal Register (81 
FR 91738) (2016 Temporary Regulations), which adopted the 2004 Proposed 
Regulations with significant modifications. On the same day, the 
Treasury Department and the IRS published in the Federal Register (81 
FR 91888) a notice of proposed rulemaking (REG-140328-15) (2016 
Proposed Regulations), which cross-referenced the 2016 Temporary 
Regulations. A correction to the 2016 Temporary Regulations was 
published in the Federal Register (82 FR 8811) on January 31, 2017. 
(References to Sec.  1.355-8T in this preamble refer to the text of the 
2016 Temporary Regulations as contained in 26 CFR part 1 revised as of 
April 1, 2019.)
    Although the 2016 Regulations generally retained the synthetic 
spin-off theory underlying the 2004 Proposed Regulations, the Treasury 
Department and the IRS significantly broadened the scope of the POD 
definition (but also significantly narrowed its potential application, 
as described later in this part III.B). Commenters on the 2004 Proposed 
Regulations noted that a corporation could have been a POD only if the 
corporation transferred property to Distributing in a Section 381 
Transaction (such as the merger in the Base Case Example) and 
questioned whether that approach was under-inclusive. In particular, 
one commenter explained that a taxpayer could structure a series of 
transactions to achieve many of the same tax and economic objectives as 
the Base Case Example without using a Section 381 Transaction.
    To illustrate that point, the commenter described the following 
series of transactions, all of which occur as part of the same Plan 
(2016 Preamble Example). First, Distributing (the common parent of a 
consolidated group) acquires all of the stock of P. P then contributes 
some (but not all) of its assets to a wholly owned subsidiary of 
Distributing (Internal Distributing) in a transaction to which section 
351 applies. See Sec.  1.1502-34. Thereafter, Internal Distributing (i) 
contributes one of the P assets to Controlled, and (ii) distributes all 
of the stock of Controlled to Distributing in a Distribution. Finally, 
Distributing distributes all of the stock of Controlled in a 
Distribution.
    In response to these comments, the Treasury Department and the IRS 
broadened the POD definition in the 2016 Regulations by removing the 
requirement of a Section 381 Transaction from the definition. Under the 
2016 Regulations, no particular transactional form was required; 
rather, the 2016 Regulations focused on the tax-free division of the 
POD's property (however effected). The Treasury Department and the IRS 
revised the POD definition in this manner to ensure that section 355(e) 
would apply to the Base Case Example, the 2016 Preamble Example, and 
more generally to any synthetic spin-off that is combined with a 
Planned 50-percent Acquisition of the Divided Corporation. Importantly, 
however, the 2016 Regulations significantly limited POD treatment to 
transactions in which all of the steps involved in the tax-free 
division of property of the POD occur as part of a Plan. See section 
355(e)(2)(A)(ii).
    Because of these revisions to the 2004 Proposed Regulations, a 
variety of new transactional structures resulted in POD treatment under 
the 2016 Regulations. For instance, as illustrated in Sec.  1.355-
8T(h), Example 5 (Example 5), a corporation was treated as a POD as a 
result of the following transactions, each of which occurs pursuant to 
the same Plan. First, P transfers some (but not all) of its assets to 
Distributing in exchange for 10 percent of the stock of Distributing in 
a transaction to which section 351 applies (leaving Distributing's 
other shareholder, Y, with 90 percent of Distributing's stock). 
Distributing then (i) contributes some (but not all) of the P assets to 
Controlled in a reorganization described in section 368(a)(1)(D), and 
(ii) distributes all of the stock of Controlled to P and Y pro rata. 
Finally, individual Z acquires 51 percent of the P stock. Because the 
assets of P were divided tax-free as part of a Plan, the 2016 
Regulations treated P as a POD. As described in part II of the Summary 
of Comments and Explanation of Revisions, in response to comments, the 
Treasury Department and the IRS have further limited the scope of the 
POD definition in the final regulations to ensure that P will not be 
treated as a POD in Example 5.
    In expanding the definition of a Predecessor of Distributing, the 
2016 Regulations introduced the term ``Potential Predecessor.'' See 
Sec.  1.355-8T(b)(2)(ii). Under the POD definition in the 2016 
Regulations, only a Potential Predecessor could be a POD. See Sec.  
1.355-8T(b)(1)(i). Thus, if a corporation were not a Potential 
Predecessor, it could not have been a POD under the 2016 Regulations. 
The 2016 Regulations defined a Potential Predecessor as any corporation 
other than Distributing or Controlled. See Sec.  1.355-8T(b)(2)(ii).

Summary of Comments and Explanation of Revisions

    Comments were received regarding the 2016 Regulations, but no 
public hearing was requested or held. After consideration of these 
comments, this Treasury decision adopts the 2016 Proposed Regulations 
with limited modifications, and it removes the 2016 Temporary 
Regulations. In general, the final regulations follow the approach of 
the 2016 Regulations while incorporating certain requested 
clarifications and minor revisions.

I. Predecessor of Distributing Definition

    The Treasury Department and the IRS are promulgating the final 
regulations with the same goal as the 2004 Proposed Regulations and the 
2016 Regulations: To ensure that section 355(e) applies properly to 
synthetic spin-offs of a Divided Corporation's assets. As noted in part 
II of the Background, Congress has determined that corporate-level gain 
should be recognized by a Distributing ``[i]n cases in which it is 
intended that new shareholders will acquire ownership of a business in 
connection with a [Distribution],'' because the overall transaction 
``more closely resembles a corporate level disposition of the portion 
of the business that is acquired.'' Senate Report at 139-140. 
Consistent with this policy, the final regulations provide that a 
corporation cannot qualify as a POD unless the

[[Page 69311]]

corporation's assets are divided through a Distribution (that is, 
unless the corporation is a Divided Corporation).
    The Treasury Department and the IRS have determined that, by 
limiting POD treatment to Divided Corporations, the final regulations 
will further the policy of section 355(e) while continuing to permit 
tax-free divisions of existing business arrangements among existing 
shareholders. See Senate Report at 139. In particular, the Treasury 
Department and the IRS have sought to avoid definitions that would 
cause section 355(e) to apply to transactions that do not resemble 
sales. For example, starting with the 2004 Proposed Regulations, the 
Treasury Department and the IRS have rejected a POD definition that 
would include any corporation that, without more, transfers assets to a 
Distributing in a Section 381 Transaction.
    The following example illustrates how that rejected POD definition 
would have run contrary to the policies of section 355 and section 
355(e). As part of a Plan, P merges tax-free into Distributing in a 
reorganization described in section 368(a)(1)(A), with the P 
shareholders receiving 40 percent of the stock of Distributing. 
Distributing then distributes all of the stock of Controlled (which 
holds none of the P assets) in a Distribution. If P were treated as a 
POD, the Distribution would result in gain recognition under section 
355(e), because it occurred as part of the same Plan as an acquisition 
of a 50-percent or greater interest in P (that is, a Planned 50-percent 
Acquisition). See section 355(e)(3)(B). However, the Treasury 
Department and the IRS have determined that the policy of section 
355(e) does not warrant the recognition of gain in this case, because 
the assets of P have not been divided and neither Distributing nor 
Controlled has undergone a Planned 50-percent Acquisition. Rather, the 
Distribution effected a division of existing business arrangements 
among existing shareholders, and Congress intended section 355 to 
afford tax-free treatment to such a transaction. See Senate Report at 
139.

II. Scope of the Potential Predecessor Definition

    Commenters criticized the breadth of the POD definition in the 2016 
Regulations. Although commenters generally supported the treatment of P 
as a POD in the 2016 Preamble Example, commenters questioned the policy 
of treating P as a POD in Example 5. See part III.B of the Background 
section (describing the 2016 Preamble Example and Example 5). After 
considering all comments received on this issue, and as discussed 
further in the remainder of this part II, the Treasury Department and 
the IRS have determined that the series of transactions set forth in 
Example 5 should not be viewed as a synthetic spin-off, and that P 
therefore should not be treated as a POD in Example 5.
A. Example 5 Reduces Neither the Total Value nor the Total Built-In 
Gain Inside P
    When a corporation distributes an appreciated asset with respect to 
its stock, the corporation disposes of the asset for no consideration, 
reducing both the total value and the total built-in gain inside the 
corporation. In this regard, the synthetic spin-off by P in the Base 
Case Example resembles an actual Distribution by P of stock of a 
controlled corporation holding the P assets actually held by 
Controlled. Both transactions reduce the total value and built-in gain 
of P (which, in the Base Case Example, becomes part of Distributing) by 
the value of, and built-in gain in, the P assets held by Controlled.
    By contrast, Example 5 involves a section 351 exchange by P, which 
reduces neither the total value nor the total built-in gain inside P. 
In the section 351 exchange, P exchanges assets for Distributing stock 
of equal value. Under section 358, P's basis in this Distributing stock 
is determined by reference to P's basis in the assets exchanged 
therefor, and is then allocated between P's Distributing stock and the 
Controlled stock P receives in the Distribution. Therefore, upon the 
conclusion of Example 5, P holds Distributing stock and Controlled 
stock with an aggregate value and built-in gain equal to the aggregate 
value of, and built-in gain in, the assets P transferred to 
Distributing. Rather than disposing of an asset for no consideration 
(as is the case in an actual distribution of property with respect to a 
Distributing's stock), P merely has exchanged one asset for another in 
Example 5. As a result, the Treasury Department and the IRS have 
determined that the series of transactions set forth in Example 5 does 
not resemble an actual Distribution by P and should not be viewed as a 
synthetic spin-off.
B. Ease of Elimination of Built-In Gain in the 2016 Preamble Example
    The key distinction between the 2016 Preamble Example and Example 5 
is the relative ease with which a subsequent restructuring could be 
undertaken to eliminate P's substituted built-in gain in the 2016 
Preamble Example. The 2016 Preamble Example, like Example 5, involves a 
section 351 exchange in which P exchanges assets for Internal 
Distributing stock with the same value and built-in gain. Unlike in 
Example 5, however, Distributing in the 2016 Preamble Example directly 
and indirectly owns 100 percent of the stock of both P and Internal 
Distributing. As a result, in the 2016 Preamble Example, Distributing 
could unilaterally eliminate the built-in gain preserved in P's 
Internal Distributing stock through an internal restructuring. The 
occurrence of such an internal restructuring would make the 2016 
Preamble Example difficult to distinguish from the Base Case Example.
    By contrast, upon the conclusion of Example 5, P owns only 10 
percent of the stock of each of Distributing and Controlled, whereas 
corporation Y owns 90 percent. Although it may be theoretically 
possible for P to eliminate its built-in gain in this stock through 
certain transactions involving Distributing and Controlled, P lacks any 
meaningful control over either corporation. In addition, the Treasury 
Department and the IRS note that such built-in gain elimination 
transactions generally would carry significant non-tax consequences. 
Therefore, it would be unreasonable to assume that such transactions 
would occur and that P's built-in gain in the Distributing and 
Controlled stock would be eliminated after the Distribution.
    One commenter asserted that there is little opportunity for P to 
engage in a subsequent restructuring to eliminate its built-in gain in 
Distributing or Controlled stock in a case like Example 5 or the 2016 
Preamble Example unless P is a member of Distributing's affiliated 
group (as defined in section 1504 without regard to section 1504(b)) 
(Expanded Affiliated Group). The Treasury Department and the IRS agree 
with this comment.
    Based on the foregoing, the final regulations define the term 
Potential Predecessor as any corporation other than Distributing or 
Controlled, but only if either (i) as part of a Plan, the corporation 
transfers property to a Potential Predecessor, Distributing, or a 
member of the same Expanded Affiliated Group as Distributing in a 
Section 381 Transaction (as in the Base Case Example), or (ii) 
immediately after completion of the Plan, the corporation is a member 
of the same Expanded Affiliated Group as Distributing (as in the 2016 
Preamble Example). Accordingly, under the final regulations, P in 
Example 5 is not a Potential Predecessor (and thus cannot be a POD).

[[Page 69312]]

III. Pre-Distribution and Post-Distribution Requirements

A. Overview
    Under the 2016 Regulations, a Potential Predecessor qualified as a 
POD only if two pre-Distribution requirements and one post-Distribution 
requirement were satisfied. The Treasury Department and the IRS 
intended that these requirements, taken together, (i) composed a 
technical description of a synthetic spin-off, and (ii) limited POD 
treatment to Potential Predecessors the assets of which are divided 
tax-free through a Distribution by Distributing. The following 
discussion summarizes these requirements.
1. First Pre-Distribution Requirement: Relevant Property
    To satisfy the first pre-Distribution requirement, any Controlled 
stock distributed in the Distribution must have been (i) Relevant 
Property, the gain on which was not recognized in full as part of a 
Plan, or (ii) acquired by Distributing for Relevant Property, the gain 
on which was not recognized in full as part of a Plan, and that was 
held by Controlled immediately before the Distribution (Relevant 
Property Requirement). The term ``Relevant Property'' generally 
referred to any property held by the Potential Predecessor at any point 
during the Plan Period (that is, the period that ends immediately after 
the Distribution and begins on the earliest date on which any part of 
the Plan is agreed to or understood, arranged, or substantially 
negotiated). See Sec.  1.355-8T(b)(2)(iv).
2. Second Pre-Distribution Requirement: Controlled Stock Reflects Basis 
of Separated Property
    To satisfy the second pre-Distribution requirement, any Controlled 
stock distributed in the Distribution must have reflected the basis of 
any Separated Property (Reflection of Basis Requirement). In general, 
the 2016 Regulations defined the term ``Separated Property'' as any 
Relevant Property relied on to satisfy the Relevant Property 
Requirement. See Sec.  1.355-8T(b)(2)(vii). The 2016 Regulations did 
not define the phrase reflect the basis.
3. Post-Distribution Requirement: Division of Relevant Property
    To satisfy the post-Distribution requirement, immediately following 
the Distribution, ownership of Relevant Property must have been divided 
between Controlled, on the one hand, and Distributing or the Potential 
Predecessor, on the other hand (Division of Relevant Property 
Requirement).
B. Relevant Property Requirement: Fluctuations in Value
    One commenter requested clarification of the Relevant Property 
Requirement's application to a case in which (i) gain on Relevant 
Property is fully recognized at some point during the Plan Period, but 
(ii) the Relevant Property subsequently appreciates so that built-in 
gain exists at the time of the Distribution. The Treasury Department 
and the IRS did not intend for fluctuations in value to affect the 
determination of POD status under the 2016 Regulations. Consequently, 
the final regulations replace the requirement that gain on Relevant 
Property not be recognized in full ``as part of a Plan'' with the 
requirement that gain (if any) on Relevant Property not be recognized 
in full ``at any point during the Plan Period.''
C. Reflection of Basis Requirement
    The Treasury Department and the IRS have received numerous comments 
requesting clarification of the Reflection of Basis Requirement's scope 
and purpose. These comments arose from the failure of the 2016 
Regulations to define the phrase reflect the basis.
    To highlight the potential overbreadth of this undefined phrase, 
one commenter questioned whether P could qualify as a POD solely 
through a basis adjustment under Sec.  1.1502-32. In the commenter's 
example, P and unrelated Distributing (which is the common parent of a 
consolidated group) form corporation X in a section 351 exchange in 
which P contributes Asset 1 and Distributing contributes other assets 
in exchange for X stock, with Distributing receiving at least 80 
percent of X's stock by vote and value. Thereafter, Distributing 
contributes its X stock to Controlled in exchange for Controlled stock. 
Then, because of items relating to Asset 1, Distributing's basis in its 
Controlled stock is adjusted under Sec.  1.1502-32. Finally, 
Distributing distributes all of the stock of Controlled. Based on this 
illustrative example, the commenter expressed concern that the Sec.  
1.1502-32 basis adjustment could cause Distributing's Controlled stock 
to reflect the basis of Asset 1, and the commenter asserted that 
treating P as a POD in this case would be inappropriate.
    The Treasury Department and the IRS did not intend the Reflection 
of Basis Requirement in the 2016 Regulations to be satisfied solely by 
a basis adjustment under Sec.  1.1502-32. The Reflection of Basis 
Requirement served two related purposes. First, the Treasury Department 
and the IRS intended the Reflection of Basis Requirement to ensure a 
connection between the gain in the POD's property held by Controlled 
and the gain that Distributing must recognize under section 355(e). 
Second, the Treasury Department and the IRS intended this requirement 
to avoid improper duplication of gain if Controlled stock is 
distributed in multiple Distributions as part of the same Plan. See 
Sec.  1.355-8T(h), Example 7 (concluding with respect to consecutive 
Distributions that, although P is a POD with respect to the first 
Distribution, P is not a POD with respect to the second Distribution 
because the C stock distributed in the second Distribution did not 
reflect the basis of any Separated Property).
    The Treasury Department and the IRS have addressed these concerns 
in the final regulations by clearly articulating the Reflection of 
Basis Requirement. The final regulations clarify that the Reflection of 
Basis Requirement is satisfied only if any Controlled stock that 
satisfies the Relevant Property Requirement had a basis prior to the 
Distribution that was determined, in whole or in part, by reference to 
the basis of Separated Property. The final regulations make the same 
clarification to the two other provisions that, under the 2016 
Regulations, referred to a reflection of basis: Sec.  1.355-
8T(b)(2)(vi)(B)(2) (regarding the treatment of Controlled stock as a 
Substitute Asset); and Sec.  1.355-8T(b)(2)(x) (providing a deemed 
exchange rule for purposes of the Relevant Property Requirement, the 
Reflection of Basis Requirement, and the Substitute Asset definition).
    In addition, the final regulations clarify that the Reflection of 
Basis Requirement is satisfied only if, during the Plan Period prior to 
the Distribution, any Controlled stock that satisfies the Relevant 
Property Requirement (and the first prong of the Reflection of Basis 
Requirement) was neither distributed in a section 355(e) distribution 
nor transferred in a transaction in which the gain (if any) on that 
Controlled stock was recognized in full. This clarification ensures 
that the final regulations cannot be interpreted in a manner that would 
give rise to improper duplication of gain, a policy objective of the 
Treasury Department and the IRS in issuing the 2016 Regulations.
D. Treatment of Property Acquired Not Pursuant to a Plan
    One commenter requested that the Treasury Department and the IRS 
clarify that property acquired by a Potential

[[Page 69313]]

Predecessor during the Plan Period would not be treated as Relevant 
Property if not acquired pursuant to a Plan. In particular, the 
commenter presented an example in which a Potential Predecessor becomes 
a member of Distributing's consolidated group pursuant to a Plan. Prior 
to a Distribution, the Potential Predecessor acquires from other 
members of Distributing's consolidated group property that had not been 
transferred directly or indirectly to Distributing pursuant to the 
Plan. The commenter requested clarification that this property is not 
Relevant Property.
    The commenter's specific concern was already addressed by an 
exception to the Relevant Property definition in the 2016 Regulations 
(see Sec.  1.355-8T(b)(2)(iv)(B)), and the final regulations retain 
this exception. This exception provides that property held directly or 
indirectly by Distributing is Relevant Property of a Potential 
Predecessor only to the extent that the property (1) was transferred 
directly or indirectly to Distributing during the Plan Period, and (2) 
was Relevant Property of the Potential Predecessor before the direct or 
indirect transfers. This exception exempts the property in the 
commenter's example from treatment as Relevant Property because the 
property was not transferred directly or indirectly to Distributing 
during the Plan Period.
    In addition, the final regulations include a Plan limitation in the 
Division of Relevant Property Requirement. Thus, the Division of 
Relevant Property Requirement will be satisfied only if ownership of a 
Potential Predecessor's Relevant Property has been divided as part of a 
Plan. Both the preamble to the 2016 Regulations and the text of Sec.  
1.355-8T(a)(3) (summarizing the POD definition) described the Division 
of Relevant Property Requirement in the 2016 Regulations as including a 
Plan limitation, and the Treasury Department and the IRS had intended 
for Sec.  1.355-8T(b)(1)(iii) (the Division of Relevant Property 
Requirement) to include this limitation. The Treasury Department and 
the IRS intend that the Plan limitation in the Division of Relevant 
Property Requirement will ensure more generally that Relevant Property 
acquired by a Potential Predecessor during the Plan Period, but not 
pursuant to a Plan, will not result in an inappropriate application of 
section 355(e).
E. Stock of Distributing as Relevant Property
    One commenter questioned whether a reference in Sec.  1.355-
8T(b)(2)(v) (limiting the circumstances under which Distributing stock 
is treated as Relevant Property) to Sec.  1.355-8T(b)(1)(ii) (the 
Relevant Property Requirement and the Reflection of Basis Requirement) 
was intended to refer instead to Sec.  1.355-8T(b)(1)(iii) (the 
Division of Relevant Property Requirement). The Treasury Department and 
the IRS intended for Sec.  1.355-8T(b)(2)(v) to reference the Division 
of Relevant Property Requirement and have incorporated this revision 
into the final regulations.

IV. Implicit Permission

    Although Sec.  1.355-7 generally governs the determination of 
whether a Distribution and an acquisition of a 50-percent or greater 
interest in a POD have occurred as part of the same Plan, the 2016 
Regulations contained special rules in this regard. See Sec.  1.355-
8T(a)(4)(ii). In general, references to Distributing in Sec.  1.355-7 
included references to a POD. However, any agreement, understanding, 
arrangement, or substantial negotiations regarding the acquisition of 
the stock of a POD were analyzed under Sec.  1.355-7 with respect to 
the actions of officers or directors of Distributing or Controlled, 
controlling shareholders of Distributing or Controlled, or a person 
acting with permission of one of those persons. For that purpose, 
references in Sec.  1.355-7 to Distributing did not include references 
to a POD. Therefore, the actions of officers, directors, or controlling 
shareholders of a POD, or of a person acting with the implicit or 
explicit permission of one of those persons, would not have been 
considered for this purpose unless those persons otherwise would have 
been treated as acting on behalf of Distributing or Controlled under 
Sec.  1.355-7. The final regulations retain these rules.
    One commenter expressed concern regarding the potential scope of 
the ``implicit permission'' concept in Sec.  1.355-7 given that the 
2016 Regulations contemplated that actions on behalf of a Potential 
Predecessor may be taken into account if such actions were carried out 
with the implicit permission of Distributing. The Treasury Department 
and the IRS have not addressed this comment in the final regulations 
because the implicit permission concept is a component of Sec.  1.355-7 
and therefore is beyond the scope of this Treasury decision.

V. Successors

    Under section 355(e)(4)(D), any reference to Controlled or 
Distributing includes a reference to any successor of such corporation 
(Successor). Like the 2004 Proposed Regulations, the 2016 Regulations 
limited the definition of the term Successor to a corporation to which 
Distributing or Controlled (as the case may be) transfers property in a 
Section 381 Transaction after the Distribution. A partnership cannot 
receive assets in a Section 381 Transaction. Accordingly, a partnership 
could not have been a Successor under either the 2004 Proposed 
Regulations or the 2016 Regulations. As noted later in this part V, the 
final regulations retain this approach.
    The 2004 Proposed Regulations and the 2016 Regulations also 
contained a deemed acquisition rule (see Sec.  1.355-8T(d)(2)). Under 
this rule, after a Section 381 Transaction, an acquisition of stock of 
the acquiring corporation is treated also as an acquisition of the 
stock of the distributor or transferor corporation in the Section 381 
Transaction. Thus, if the assets of Distributing or any POD are 
acquired by another corporation in a Section 381 Transaction, then any 
subsequent acquisition of the stock of the acquiring corporation is 
treated also as an acquisition of the stock of Distributing or the POD, 
as the case may be.
    As a result of these rules, a corporation's status as a Successor 
of Distributing or Controlled matters only insofar as an acquisition of 
its stock is treated as an acquisition of the stock of Distributing or 
Controlled, respectively, which could result in a Planned 50-percent 
Acquisition of Distributing or Controlled. Therefore, the only 
significance of a Planned 50-percent Acquisition of a Successor is its 
treatment as a deemed Planned 50-percent Acquisition of Distributing or 
Controlled (as the case may be). Accordingly, if any of the stock of 
Distributing or Controlled has been acquired in, or prior to, a Section 
381 Transaction, the application of section 355(e) will turn on whether 
a Planned 50-percent Acquisition of Distributing or Controlled has 
occurred, taking into account acquisitions of the stock of Distributing 
or Controlled in, and prior to, the Section 381 Transaction, as well as 
any acquisitions of the stock of the Successor following the Section 
381 Transaction.
    Commenters supported this approach, and the Treasury Department and 
the IRS have retained it in the final regulations. Thus, under the 
final regulations, a Successor of Distributing or of Controlled must be 
a corporation to which Distributing or Controlled, respectively, 
transfers property in a Section 381 Transaction after the Distribution. 
A partnership cannot be a Successor of Distributing or Controlled under 
the final regulations for purposes of section 355(e). Certain 
references in

[[Page 69314]]

the 2016 Regulations to a Planned 50-percent Acquisition of a Successor 
have been refined to clarify the significance of Successor status.

VI. Gain Limitation Rules

    Taken together, sections 355(e), 355(c), and 361(c) generally 
require Distributing to recognize any gain in Controlled stock and 
securities distributed in a Distribution that is part of the same Plan 
as a Planned 50-percent Acquisition of a POD, Distributing, or 
Controlled (the amount of such gain, Statutory Recognition Amount). 
However, the 2016 Regulations contained special rules that limited the 
amount of gain that section 355(e) causes Distributing to recognize in 
certain cases involving a POD. In cases involving a Planned 50-percent 
Acquisition of a POD, Sec.  1.355-8T(e)(2) (POD Gain Limitation Rule) 
generally limited the amount of gain Distributing was required to 
recognize to any built-in gain in the POD's Separated Property 
(generally, POD assets held by Controlled). Similarly, in cases 
involving a Planned 50-percent Acquisition of Distributing as the 
result of a transfer by a POD to Distributing in a Section 381 
Transaction, Sec.  1.355-8T(e)(3) (Distributing Gain Limitation Rule) 
generally reduced the amount of gain Distributing was required to 
recognize by the built-in gain in the POD's Separated Property. In 
addition, in cases involving multiple Planned 50-percent Acquisitions, 
Sec.  1.355-8T(e)(1) generally provided that the total gain limitation 
applicable under Sec.  1.355-8T(e) is determined by adding the 
Statutory Recognition Amount (subject to the POD Gain Limitation Rule 
and the Distributing Gain Limitation Rule) with respect to each Planned 
50-percent Acquisition. Finally, Sec.  1.355-8T(e)(4) provided that the 
amount required to be recognized by Distributing under section 355(e) 
with regard to a single Distribution will not exceed the Statutory 
Recognition Amount.
    Commenters questioned why the 2016 Regulations limited the 
Distributing Gain Limitation Rule to Section 381 Transactions, and 
recommended expanding the Distributing Gain Limitation Rule so that it 
applies to any Planned 50-Percent Acquisition of Distributing. In 
particular, one commenter asserted that the form of the transaction in 
which a Planned 50-percent Acquisition of Distributing occurs should 
not be relevant to the application of the gain limitation rules.
    As discussed in the preamble to the 2016 Regulations, the Treasury 
Department and the IRS intended the Distributing Gain Limitation Rule 
to minimize the Federal income tax impact of directionality between 
economically equivalent Section 381 Transactions. In other words, the 
Distributing Gain Limitation Rule was intended to ensure that the 
amount of gain required to be recognized under section 355(e) would be 
the same regardless of whether the smaller or the larger corporation in 
a Section 381 Transaction acts as the acquiring corporation. The 
Distributing Gain Limitation Rule was limited to Section 381 
Transactions in the 2016 Regulations because the direction of other 
types of transactions (such as section 351 exchanges) generally cannot 
be reversed without changing the substance of the transaction, and thus 
generally do not implicate the policy of directional neutrality. 
However, upon further study, the Treasury Department and the IRS have 
determined that the policy underlying the Distributing Gain Limitation 
Rule should not be limited to directional neutrality.
    The POD definition is based on the theory that a Distribution that 
effects a tax-free division of the assets of a corporation other than 
Distributing (a POD) may be viewed as two separate Distributions: One 
by the POD (of a Controlled holding the Separated Property) (POD 
Distribution), and one by Distributing (of a Controlled holding all of 
the property held by Controlled in the actual Distribution other than 
the Separated Property) (Non-POD Distribution). Section 355(e) requires 
gain recognition when new shareholders acquire ownership of a business 
in connection with a spin-off. Thus, when a Planned 50-percent 
Acquisition of a POD occurs in connection with a POD Distribution, the 
final regulations require gain recognition under section 355(e). 
However, unless there is also a Planned 50-percent Acquisition of 
Distributing, the Non-POD Distribution represents a division of 
existing business arrangements among existing shareholders, to which 
Congress intended to afford tax-free treatment. See Senate Report at 
139-140. Accordingly, the POD Gain Limitation Rule limits the amount of 
gain required to be recognized to the built-in gain on the Separated 
Property.
    The same policy goals justify the expansion of the Distributing 
Gain Limitation Rule so that it applies to any Planned 50-percent 
Acquisition of Distributing--however and by whomever effected. If a 
Distribution involves a POD and occurs in connection with a Planned 50-
percent Acquisition of Distributing (but no Planned 50-percent 
Acquisition of the POD or Controlled), then the POD Distribution should 
not be subject to gain recognition because it represents a division of 
existing business arrangements among existing shareholders.
    Accordingly, the Distributing Gain Limitation Rule in the final 
regulations applies if there is a Planned 50-percent Acquisition of 
Distributing. However, consistent with the policy underlying the 
Distributing Gain Limitation Rule, a Distribution will benefit from the 
Distributing Gain Limitation Rule only if a POD exists and does not 
also undergo a Planned 50-percent Acquisition. If no POD exists, then 
the limitation under the Distributing Gain Limitation Rule will equal 
the Statutory Recognition Amount, because there is no Separated 
Property. If a POD exists but also undergoes a Planned 50-percent 
Acquisition, then Distributing must recognize the Statutory Recognition 
Amount with respect to the Planned 50-percent Acquisition of the POD 
(subject to the POD Gain Limitation Rule) and the Planned 50-percent 
Acquisition of Distributing (subject to the Distributing Gain 
Limitation Rule). See Sec.  1.355-8(e)(1)(ii) of the final regulations 
(Multiple Planned 50-percent Acquisitions). Similarly, if there are 
Planned 50-percent Acquisitions of both Distributing and Controlled, 
Distributing must recognize the Statutory Recognition Amount with 
respect to the Planned 50-percent Acquisition of Controlled (which is 
not eligible for limitation under any gain limitation rule) and the 
Planned 50-percent Acquisition of Distributing (subject to the 
Distributing Gain Limitation Rule). Although the multiple Planned 50-
percent Acquisition rule just described may deny any benefit under the 
gain limitation rules, in no event will the final regulations require 
Distributing to recognize an amount that exceeds the Statutory 
Recognition Amount with regard to a single Distribution. See Sec.  
1.355-8(e)(4) of the final regulations (gain recognition limited to 
Statutory Recognition Amount).
    The Treasury Department and the IRS have clarified the gain 
limitation rules in the final regulations to make them easier to 
understand and apply. The Treasury Department and the IRS also have 
refined the calculation of the gain limitation under the Distributing 
Gain Limitation Rule to account for the possibility of more than one 
POD with respect to a single Distribution. In addition, to clarify that 
both built-in gain and built-in loss assets are taken into account in 
computing any applicable gain limitation, the Treasury Department and 
the IRS have refined the description of gain in the Relevant

[[Page 69315]]

Property Requirement by adding the parenthetical phrase ``(if any),'' 
and have added a similar clarification to the Separated Property 
definition.

VII. Relevant Equity

    The 2016 Temporary Regulations used the defined term ``Relevant 
Stock'' (stock that is Relevant Property) in connection with the 
defined terms ``Separated Property'' and ``Underlying Property'' 
(property directly or indirectly held by a corporation that is the 
issuer of Relevant Stock). See Sec.  1.355-8T(b)(2)(iv), (vii), and 
(viii). These terms were used to ensure that gain would not be 
duplicated in determining the applicable gain limitation amount (if 
any) if the Relevant Property held by Controlled included stock in a 
corporation. The potential for duplication existed because the gain 
limitation is calculated based on the built-in gain in Relevant 
Property held by Controlled, and the definition of ``Relevant 
Property'' included assets held directly or indirectly (and thus 
included both stock of a corporation and any assets held by the 
corporation).
    The Treasury Department and the IRS have determined that a similar 
risk of duplicated gain exists when Relevant Property includes an 
interest in a partnership. Accordingly, the final regulations replace 
the term ``Relevant Stock'' with the term ``Relevant Equity,'' which 
means Relevant Property that is an equity interest in a corporation or 
a partnership. This clarification relates only to the determination of 
the limitation on gain under Sec.  1.355-8(e) of the final regulations 
(if any).

VIII. Section 336(e)

    The 2016 Regulations prohibited a section 336(e) election if the 
amount of gain required to be recognized by Distributing with respect 
to the Distribution was less than the Statutory Recognition Amount due 
to the POD Gain Limitation Rule or the Distributing Gain Limitation 
Rule. This prohibition applied even if Distributing chose to recognize 
the Statutory Recognition Amount under Sec.  1.355-8T(e)(4). One 
commenter criticized this prohibition as ``inequitable as a policy 
matter and unnecessary as an administrative one.''
    Although the final regulations retain this prohibition, the 
Treasury Department and the IRS continue to study and request comments 
on the following issues: (1) Whether permitting a section 336(e) 
election in this context would be consistent with the policy of section 
336(e), (2) whether permitting a section 336(e) election in this 
context could give rise to inappropriate planning opportunities, (3) 
whether permitting a section 336(e) election in this context only if 
the Separated Property accounts for a certain minimum percentage of 
Controlled's value or built-in gain would be appropriate, and (4) 
whether limiting the deemed asset disposition that results from a 
section 336(e) election in this context to a deemed disposition of the 
Separated Property would be appropriate.

IX. Stock Deemed Acquired in a Section 381 Transaction

    Section 355(e)(3)(B) provides a special rule for certain asset 
acquisitions. For purposes of section 355(e), if the assets of 
Distributing or Controlled are acquired by a successor corporation in a 
transaction described in section 368(a)(1)(A), (C), or (D), or in any 
other transaction specified in regulations, the shareholders 
(immediately before the acquisition) of the successor corporation are 
treated as acquiring stock in Distributing or Controlled, respectively, 
except as otherwise provided in regulations. Similarly, the 2016 
Regulations provided that any Section 381 Transaction is treated as an 
acquisition of stock in the distributor or transferor corporation by 
shareholders of the acquiring corporation. A commenter pointed out a 
mathematical error in the textual example that followed this rule (in 
Sec.  1.355-8T(d)(1)). The final regulations correct this error and 
make minor clarifications to improve the readability of the operative 
rule.

X. No Step Transaction Implications From Examples

    One commenter suggested that the Treasury Department and the IRS 
clarify that no inference should be drawn from the examples in Sec.  
1.355-8T(h) as to the intended application of the step transaction 
doctrine and other general Federal income tax principles. The Treasury 
Department and the IRS did not intend for any such inference to be 
drawn, and have added a specific disclaimer to this effect in the final 
regulations.

XI. Transition Rule

    The 2016 Regulations generally applied to Distributions occurring 
after January 18, 2017. However, under a transition rule, the 2016 
Regulations generally did not apply to a Distribution that was (A) made 
pursuant to a binding agreement in effect on or before December 16, 
2016 and at all times thereafter; (B) described in a ruling request 
submitted to the IRS on or before December 16, 2016; or (C) described 
on or before December 16, 2016 in a public announcement or in a filing 
with the Securities and Exchange Commission. For the transition rule to 
apply, the agreement, ruling request, public announcement, or filing 
described in the preceding sentence had to describe all steps relevant 
to the determination of POD status. See Sec.  1.355-8T(i)(2)(ii).
    One commenter criticized the ``all relevant steps'' rule in Sec.  
1.355-8T(i)(2)(ii) as ``extremely narrow'' and inappropriate for 
immediately effective regulations. This commenter contended that it is 
``unlikely that all such transactions would be described . . . until 
very late in the long and expensive process of a corporate separation, 
if at all.''
    The Treasury Department and the IRS note that the 2016 Regulations 
were not immediately applicable; they were published on December 19, 
2016, but they generally applied only to Distributions that occurred 
after January 18, 2017. Moreover, the final regulations do not contain 
a transition rule, so the commenter's concern is relevant only to 
transactions that were the subject of an agreement, ruling request, 
public announcement, or public filing that occurred in 2016 (or 
before). Finally, despite the commenter's general concern, the Treasury 
Department and the IRS are unaware of any transactions that failed to 
qualify for the transition rule due to the ``all relevant steps'' rule 
in Sec.  1.355-8T(i)(2)(ii). Accordingly, the Treasury Department and 
the IRS have determined that it is not necessary to reconsider the 
transition rule in the 2016 Regulations as part of this Treasury 
decision.

XII. Additional Clarifications

    Commenters noted generally that certain aspects of the 2016 
Regulations were complicated and difficult to understand. The Treasury 
Department and the IRS have refined and clarified certain aspects of 
the 2016 Regulations in the final regulations to make the rules easier 
to follow and understand. For instance, certain paragraphs in the 2016 
Regulations that were long and contained multiple distinct rules have 
been subdivided in the final regulations. In addition, defined terms 
have been added for certain rules (such as the Relevant Property 
Requirement, the Reflection of Basis Requirement, and the Division of 
Relevant Property Requirement). These defined terms are intended to 
allow the reader to more intuitively grasp the meaning of the numerous 
provisions cross-referenced in the final regulations.

[[Page 69316]]

    Section 1.355-8T(c)(1) defined the term ``Predecessor of 
Controlled'' and provided certain rules relating to Predecessors of 
Controlled. One of these rules provided that, for purposes of Sec.  
1.355-8T(c)(1), a reference to Controlled included a reference to a 
Predecessor of Controlled. However, another provision in the 2016 
Regulations (Sec.  1.355-8T(a)(4)(i)) provided more generally that, 
except as otherwise provided, any reference to Controlled included, as 
the context may have required, a reference to any Predecessor of 
Controlled. Accordingly, the rule in Sec.  1.355-8T(c)(1) was 
unnecessary, and the Treasury Department and the IRS have omitted it in 
the final regulations.

XIII. Examples

    The Treasury Department and the IRS have modified three of the 
examples contained in the 2016 Regulations (Examples 5, 7, and 8), and 
omitted one example (Example 6), for the reasons described in this part 
XIII. All of the retained examples have been updated to reflect 
modifications in the final regulations. For instance, the POD analyses 
in Examples 3 and 4 eliminate the statement that Controlled stock is 
Separated Property, because that fact is no longer relevant under the 
revised Reflection of Basis Requirement. In some of the examples, the 
analysis has been clarified to make it easier to follow and understand.
    The facts of Example 5 of the 2016 Regulations have been retained, 
but the consequences of the example have changed due to the 
modification the Treasury Department and the IRS have made to the 
Potential Predecessor definition. As a result of this modification, P 
in Example 5 is no longer a Potential Predecessor (and thus is not a 
POD for that reason).
    Example 6 of the 2016 Regulations has been omitted. This example 
illustrated a variation on Example 5 that used a forward triangular 
merger instead of a section 351 exchange. However, due to the 
modification to the Potential Predecessor definition, P in Example 6 is 
no longer a Potential Predecessor (and thus is not a POD for that 
reason), which eliminates the utility of this example.
    Example 7 of the 2016 Regulations has been incorporated into new 
Example 6 in the final regulations, which is based on the 2016 Preamble 
Example.
    Example 8 of the 2016 Regulations has been retained as Example 7 in 
the final regulations, but has been modified so that P1 and P2 are 
Potential Predecessors under the final regulations. In particular, the 
section 351 exchange between P2 and D has been replaced by a Section 
381 Transaction in which P2 merges into D.

Applicability Date

    Section 7805(b)(1)(A) and (B) of the Code generally provide that no 
temporary, proposed, or final regulation relating to the internal 
revenue laws may apply to any taxable period ending before the earliest 
of (A) the date on which such regulation is filed with the Federal 
Register, or (B) in the case of a final regulation, the date on which a 
proposed or temporary regulation to which the final regulation relates 
was filed with the Federal Register. In addition, section 7805(e) 
provides that any temporary regulation shall also be issued as a 
proposed regulation, and that such temporary regulation shall expire 
within 3 years after the date of issuance of the temporary regulation.
    The final regulations, the substance of which is generally the same 
as that of the 2016 Regulations, apply to Distributions that occur 
after December 15, 2019, the day before the expiration date of the 2016 
Temporary Regulations.

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Department of the Treasury and the Office of 
Management and Budget regarding review of tax regulations.
    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that these final regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that these regulations would 
primarily affect large corporations with a substantial number of 
shareholders, as well as corporations that are members of large 
corporate groups. Additionally, the Treasury Department and the IRS 
have determined that no additional burden will be associated with these 
final regulations. Therefore, a regulatory flexibility analysis is not 
required.
    Pursuant to section 7805(f) of the Internal Revenue Code, the 2016 
Proposed Regulations were submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on their impact on 
small businesses, and no comments were received.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

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 is amended by removing 
the entry for Sec.  1.355-8T and adding an entry in numerical order for 
Sec.  1.355-8 to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.355-8 also issued under 26 U.S.C. 336(e), 
355(e)(3)(B), 355(e)(5), and 355(f).
* * * * *

0
Par. 2. Section 1.355-0 is amended by revising the introductory text, 
removing the entries for Sec.  1.355-8T, and adding the entries for 
Sec.  1.355-8 to read as follows:


Sec.  1.355-0   Outline of sections.

    In order to facilitate the use of Sec. Sec.  1.355-1 through 1.355-
8, this section lists the major paragraphs in those sections as 
follows:
* * * * *
Sec.  1.355-8 Definition of predecessor and successor and 
limitations on gain recognition under section 355(e) and section 
355(f).

    (a) In general.
    (1) Scope.
    (2) Overview.
    (i) Purposes and conceptual overview.
    (ii) References to and definitions of terms used in this 
section.
    (iii) Special rules and examples.
    (3) Purposes of section; Predecessor of Distributing overview.
    (i) Purposes.
    (ii) Predecessor of Distributing overview.
    (A) Relevant Property transferred to Controlled.
    (B) Relevant Property includes Controlled Stock.
    (4) References.
    (i) References to Distributing or Controlled.
    (ii) References to Plan or Distribution.
    (iii) Plan Period.
    (5) List of definitions.
    (b) Predecessor of Distributing.
    (1) Definition.
    (i) In general.
    (ii) Pre-Distribution requirements.
    (A) Relevant Property requirement.
    (B) Reflection of basis requirement.
    (iii) Post-Distribution requirement.
    (2) Additional definitions and rules related to paragraph (b)(1) 
of this section.
    (i) References to Distributing and Controlled.
    (ii) Potential Predecessor.
    (A) Potential Predecessor definition.

[[Page 69317]]

    (B) Expanded Affiliated Group definition.
    (iii) Successors of Potential Predecessors.
    (iv) Relevant Property; Relevant Equity.
    (A) In general.
    (B) Property held by Distributing.
    (C) F reorganizations.
    (v) Stock of Distributing as Relevant Property.
    (A) In general.
    (B) Certain reorganizations.
    (vi) Substitute Asset.
    (A) In general.
    (B) Controlled stock received by Distributing.
    (1) In general.
    (2) Exception.
    (C) Treatment as Relevant Property.
    (vii) Separated Property.
    (viii) Underlying Property.
    (ix) Multiple Predecessors of Distributing.
    (x) Deemed exchanges.
    (c) Additional definitions.
    (1) Predecessor of Controlled.
    (2) Successors.
    (i) In general.
    (ii) Determination of Successor status.
    (3) Section 381 Transaction.
    (d) Special acquisition rules.
    (1) Deemed acquisitions of stock in Section 381 Transactions.
    (i) Rule.
    (ii) Example.
    (2) Deemed acquisitions of stock after Section 381 Transactions.
    (3) Separate counting for Distributing and each Predecessor of 
Distributing.
    (e) Special rules for limiting gain recognition.
    (1) Overview.
    (i) Gain limitation.
    (ii) Multiple Planned 50-percent Acquisitions.
    (iii) Statutory Recognition Amount limit; Section 336(e).
    (2) Planned 50-percent Acquisition of a Predecessor of 
Distributing.
    (i) In general.
    (ii) Operating rules.
    (A) Separated Property other than Controlled stock.
    (B) Controlled stock that is Separated Property.
    (C) Anti-duplication rule.
    (3) Planned 50-percent Acquisition of Distributing.
    (4) Gain recognition limited to Statutory Recognition Amount.
    (5) Section 336(e) election.
    (f) Predecessor or Successor as a member of the affiliated 
group.
    (g) Inapplicability of section 355(f) to certain intra-group 
Distributions.
    (1) In general.
    (2) Alternative application of section 355(f).
    (h) Examples.
    (i) Applicability date.


Sec.  1.355-8T   [Removed]

0
Par. 3. Section 1.355-8T is removed.

0
Par. 4. Section 1.355-8 is added to read as follows:


Sec.  1.355-8   Definition of predecessor and successor and limitations 
on gain recognition under section 355(e) and section 355(f).

    (a) In general--(1) Scope. For purposes of section 355(e), this 
section provides rules under section 355(e)(4)(D) to determine whether 
a corporation is treated as a predecessor or successor of a 
distributing corporation (Distributing) or a controlled corporation 
(Controlled) with respect to a distribution by Distributing of stock 
(or stock and securities) of Controlled that qualifies under section 
355(a) (or so much of section 356 as relates to section 355) 
(Distribution). This section also provides rules limiting the amount of 
Distributing's gain recognized under section 355(e) on a Distribution 
if section 355(e) applies to an acquisition by one or more persons, as 
part of a Plan, of stock that in the aggregate represents a 50-percent 
or greater interest (Planned 50-percent Acquisition) of a Predecessor 
of Distributing, or a Planned 50-percent Acquisition of Distributing. 
In addition, this section provides rules regarding the application of 
section 336(e) to a Distribution to which this section applies. This 
section also provides rules regarding the application of section 355(f) 
to a Distribution in certain cases.
    (2) Overview--(i) Purposes and conceptual overview. Paragraph 
(a)(3) of this section summarizes the two principal purposes of this 
section and sets forth a brief conceptual overview of the scenarios in 
which a corporation may be a Predecessor of Distributing.
    (ii) References to and definitions of terms used in this section. 
Paragraph (a)(4) of this section provides rules regarding references to 
the terms Distributing, Controlled, Distribution, Plan, and Plan Period 
for purposes of section 355(e), Sec.  1.355-7, and this section. 
Paragraph (a)(5) of this section lists the terms used in this section 
and indicates where each term is defined. Paragraph (b) of this section 
defines the term Predecessor of Distributing and several related terms. 
Paragraph (c) of this section defines the terms Predecessor of 
Controlled, Successor (of Distributing or Controlled), and Section 381 
Transaction.
    (iii) Special rules and examples. Paragraph (d) of this section 
provides guidance with regard to acquisitions and deemed acquisitions 
of stock if there is a Predecessor of Distributing or a Successor of 
either Distributing or Controlled. Paragraph (e) of this section 
provides two rules that may limit the amount of Distributing's gain on 
a Distribution if there is a Predecessor of Distributing, as well as an 
overall gain limitation. Paragraph (e) of this section also provides 
guidance with respect to the application of section 336(e). Regardless 
of whether there is a Predecessor of Distributing, Predecessor of 
Controlled, or Successor of either Distributing or Controlled, 
paragraph (f) of this section provides a special rule relating to 
section 355(e)(2)(C), which provides that section 355(e) does not apply 
to certain transactions within an Expanded Affiliated Group. Paragraph 
(g) of this section provides rules coordinating the application of 
section 355(f) with the rules of this section. Paragraph (h) of this 
section contains examples that illustrate the rules of this section.
    (3) Purposes of section; Predecessor of Distributing overview--(i) 
Purposes. The rules in this section have two principal purposes. The 
first is to ensure that section 355(e) applies to a Distribution if, as 
part of a Plan, some of the assets of a Predecessor of Distributing are 
transferred directly or indirectly to Controlled without full 
recognition of gain, and the Distribution accomplishes a division of 
the assets of the Predecessor of Distributing. The second is to ensure 
that section 355(e) applies when there is a Planned 50-percent 
Acquisition of a Successor of Distributing or Successor of Controlled. 
The rules of this section must be interpreted and applied in a manner 
that is consistent with and reasonably carries out the purposes of this 
section.
    (ii) Predecessor of Distributing overview. The term Predecessor of 
Distributing is defined in paragraph (b) of this section. Only a 
Potential Predecessor can be a Predecessor of Distributing. See 
paragraph (b)(1)(i) of this section. A Potential Predecessor can be a 
Predecessor of Distributing only if, as part of a Plan, the 
Distribution accomplishes a division of the assets of the Potential 
Predecessor. See paragraph (b)(1)(iii) of this section. Accordingly, in 
the absence of that Plan, a Predecessor of Distributing cannot exist 
for purposes of section 355(e). The detailed rules set forth in 
paragraph (b) of this section provide that a Potential Predecessor the 
assets of which are divided as part of a Plan may be a Predecessor of 
Distributing in either of the following two scenarios:
    (A) Relevant Property transferred to Controlled. As part of the 
Plan, one or more of the Potential Predecessor's assets were 
transferred to Controlled in one or more tax-deferred transactions 
prior to the Distribution.
    (B) Relevant Property includes Controlled Stock. The Potential 
Predecessor's assets included Controlled stock that, as part of the 
Plan, was

[[Page 69318]]

transferred to Distributing in one or more tax-deferred transactions 
prior to the Distribution.
    (4) References--(i) References to Distributing or Controlled. For 
purposes of section 355(e), except as otherwise provided in this 
section, any reference to Distributing or Controlled includes, as the 
context may require, a reference to any Predecessor of Distributing or 
any Predecessor of Controlled, respectively, or any Successor of 
Distributing or Controlled, respectively. However, except as otherwise 
provided in this section, a reference to a Predecessor of Distributing 
or to a Successor of Distributing does not include a reference to 
Distributing, and a reference to a Predecessor of Controlled or to a 
Successor of Controlled does not include a reference to Controlled.
    (ii) References to Plan or Distribution. Except as otherwise 
provided in this section, references to a Plan in this section are 
references to a plan within the meaning of Sec.  1.355-7. References to 
a distribution in Sec.  1.355-7 include a reference to a Distribution 
and other related pre-Distribution transactions that together effect a 
division of the assets of a Predecessor of Distributing. In determining 
whether a Distribution and a Planned 50-percent Acquisition of a 
Predecessor of Distributing, Distributing (including any Successor 
thereof), or Controlled (including any Successor thereof) are part of a 
Plan, the rules of Sec.  1.355-7 apply. In applying those rules, 
references to Distributing or Controlled in Sec.  1.355-7 generally 
include references to any Predecessor of Distributing and any Successor 
of Distributing, or any Successor of Controlled, as appropriate. 
However, with regard to any possible Planned 50-percent Acquisition of 
a Predecessor of Distributing, any agreement, understanding, 
arrangement, or substantial negotiations with regard to the acquisition 
of the stock of the Predecessor of Distributing is analyzed under Sec.  
1.355-7 with regard to the actions of officers or directors of 
Distributing or Controlled, controlling shareholders (as defined in 
Sec.  1.355-7(h)(3)) of Distributing or Controlled, or a person acting 
with permission of one of those parties. For purposes of the preceding 
sentence, references in Sec.  1.355-7 to Distributing do not include 
references to a Predecessor of Distributing. Therefore, the actions of 
officers, directors, or controlling shareholders of a Predecessor of 
Distributing, or of a person acting with the implicit or explicit 
permission of one of those parties, are not considered unless those 
parties otherwise would be treated as acting on behalf of Distributing 
or Controlled under Sec.  1.355-7 (for example, if a Predecessor of 
Distributing is a controlling shareholder of Distributing).
    (iii) Plan Period. For purposes of this section, the term Plan 
Period means the period that ends immediately after the Distribution 
and begins on the earliest date on which any pre-Distribution step that 
is part of the Plan is agreed to or understood, arranged, or 
substantially negotiated by one or more officers or directors acting on 
behalf of Distributing or Controlled, by controlling shareholders of 
Distributing or Controlled, or by another person or persons with the 
implicit or explicit permission of one or more of such officers, 
directors, or controlling shareholders. For purposes of the preceding 
sentence, references to Distributing and Controlled do not include 
references to any Predecessor of Distributing, Predecessor of 
Controlled, or Successor of Distributing or Controlled.
    (5) List of definitions. This section uses the following terms, 
which are defined where indicated--
    (i) Acquiring Owner. Paragraph (d)(1)(i) of this section.
    (ii) Controlled. Paragraph (a)(1) of this section.
    (iii) Distributing. Paragraph (a)(1) of this section.
    (iv) Distributing Gain Limitation Rule. Paragraph (e)(1)(ii) of 
this section.
    (v) Distribution. Paragraph (a)(1) of this section.
    (vi) Division of Relevant Property Requirement. Paragraph 
(b)(1)(iii) of this section.
    (vii) Expanded Affiliated Group. Paragraph (b)(2)(ii)(B) of this 
section.
    (viii) Hypothetical Controlled. Paragraph (e)(2)(i) of this 
section.
    (ix) Hypothetical D/355(e) Reorganization. Paragraph (e)(2)(i) of 
this section.
    (x) Plan. Paragraph (a)(4)(ii) of this section.
    (xi) Plan Period. Paragraph (a)(4)(iii) of this section.
    (xii) Planned 50-percent Acquisition. Paragraph (a)(1) of this 
section.
    (xiii) POD Gain Limitation Rule. Paragraph (e)(1)(ii) of this 
section.
    (xiv) Potential Predecessor. Paragraph (b)(2)(ii)(A) of this 
section.
    (xv) Predecessor of Controlled. Paragraph (c)(1) of this section.
    (xvi) Predecessor of Distributing. Paragraph (b)(1) of this 
section.
    (xvii) Reflection of Basis Requirement. Paragraph (b)(1)(ii)(B) of 
this section.
    (xviii) Relevant Equity. Paragraph (b)(2)(iv)(A) of this section.
    (xix) Relevant Property. Paragraph (b)(2)(iv)(A) of this section.
    (xx) Relevant Property Requirement. Paragraph (b)(1)(ii)(A) of this 
section.
    (xxi) Section 381 Transaction. Paragraph (c)(3) of this section.
    (xxii) Separated Property. Paragraph (b)(2)(vii) of this section.
    (xxiii) Statutory Recognition Amount. Paragraph (e)(1)(i) of this 
section.
    (xxiv) Substitute Asset. Paragraph (b)(2)(vi)(A) of this section.
    (xxv) Successor. Paragraph (c)(2)(i) of this section.
    (xxvi) Successor Transaction. Paragraph (c)(2)(i) of this section.
    (xxvii) Underlying Property. Paragraph (b)(2)(viii) of this 
section.
    (b) Predecessor of Distributing--(1) Definition--(i) In general. 
For purposes of section 355(e), a Potential Predecessor is a 
predecessor of Distributing (Predecessor of Distributing) if, taking 
into account the special rules of paragraph (b)(2) of this section--
    (A) Both pre-Distribution requirements of paragraph (b)(1)(ii) of 
this section are satisfied; and
    (B) The post-Distribution requirement of paragraph (b)(1)(iii) of 
this section is satisfied.
    (ii) Pre-Distribution requirements--(A) Relevant Property 
requirement. The requirement set forth in this paragraph (b)(1)(ii)(A) 
(Relevant Property Requirement) is satisfied if, before the 
Distribution, and as part of a Plan, either--
    (1) Any Controlled stock distributed in the Distribution was 
directly or indirectly acquired (or deemed acquired under the rules set 
forth in paragraph (b)(2)(x) of this section) by Distributing in 
exchange for any direct or indirect interest in Relevant Property--
    (i) That is held directly or indirectly by Controlled immediately 
before the Distribution; and
    (ii) The gain on which (if any) was not recognized in full at any 
point during the Plan Period; or
    (2) Any Controlled stock that is distributed in the Distribution is 
Relevant Property of the Potential Predecessor.
    (B) Reflection of basis requirement. The requirement set forth in 
this paragraph (b)(1)(ii)(B) (Reflection of Basis Requirement) is 
satisfied if any Controlled stock that satisfies the Relevant Property 
Requirement--
    (1) Either--
    (i) Had a basis prior to the Distribution that was determined in 
whole or in part by reference to the basis of any Separated Property; 
or
    (ii) Is Relevant Property of the Potential Predecessor; and
    (2) During the Plan Period prior to the Distribution, was neither 
distributed in

[[Page 69319]]

a distribution to which section 355(e) applied nor transferred in a 
transaction in which the gain (if any) on that Controlled stock was 
recognized in full.
    (iii) Post-Distribution requirement. The requirement set forth in 
this paragraph (b)(1)(iii) (Division of Relevant Property Requirement) 
is satisfied if, immediately after the Distribution, and as part of a 
Plan, direct or indirect ownership of the Potential Predecessor's 
Relevant Property has been divided between Controlled on the one hand, 
and Distributing or the Potential Predecessor (or a successor to the 
Potential Predecessor) on the other hand. For purposes of this 
paragraph (b)(1)(iii), if Controlled stock that is distributed in the 
Distribution is Relevant Property of a Potential Predecessor, then 
Controlled is deemed to have received Relevant Property of the 
Potential Predecessor.
    (2) Additional definitions and rules related to paragraph (b)(1) of 
this section--(i) References to Distributing and Controlled. For 
purposes of the Relevant Property Requirement, the Reflection of Basis 
Requirement, and the Division of Relevant Property Requirement, 
references to Distributing and Controlled do not include references to 
any Predecessor of Distributing, Predecessor of Controlled, or 
Successor of Distributing or Controlled.
    (ii) Potential Predecessor--(A) Potential Predecessor definition. 
The term Potential Predecessor means a corporation, other than 
Distributing or Controlled, if--
    (1) As part of a Plan, the corporation transfers property to a 
Potential Predecessor, Distributing, or a member of the same Expanded 
Affiliated Group as Distributing in a Section 381 Transaction; or
    (2) Immediately after completion of the Plan, the corporation is a 
member of the same Expanded Affiliated Group as Distributing.
    (B) Expanded Affiliated Group definition. The term Expanded 
Affiliated Group means an affiliated group (as defined in section 1504 
without regard to section 1504(b)).
    (iii) Successors of Potential Predecessors. For purposes of the 
Division of Relevant Property Requirement, if a Potential Predecessor 
transfers property in a Section 381 Transaction to a corporation (other 
than Distributing or Controlled) during the Plan Period, the 
corporation is a successor to the Potential Predecessor.
    (iv) Relevant Property; Relevant Equity--(A) In general. Except as 
otherwise provided in this paragraph (b)(2)(iv) or in paragraph 
(b)(2)(v) of this section, the term Relevant Property means any 
property that was held, directly or indirectly, by the Potential 
Predecessor during the Plan Period. The term Relevant Equity means 
Relevant Property that is an equity interest in a corporation or a 
partnership.
    (B) Property held by Distributing. Except as provided in paragraph 
(b)(2)(iv)(C) of this section, property held directly or indirectly by 
Distributing (including Controlled stock) is Relevant Property of a 
Potential Predecessor only to the extent that the property was 
transferred directly or indirectly to Distributing during the Plan 
Period, and it was Relevant Property of the Potential Predecessor 
before the direct or indirect transfer(s). For example, if during the 
Plan Period a subsidiary corporation of a Potential Predecessor merges 
into Controlled in a reorganization under section 368(a)(1)(A) and 
(2)(D), and, as a result, the Potential Predecessor directly or 
indirectly owns Distributing stock received in the merger, the 
subsidiary's assets held by Controlled are Relevant Property of that 
Potential Predecessor.
    (C) F reorganizations. For purposes of paragraph (b)(2)(iv)(B) of 
this section, the transferor and transferee in any reorganization 
described in section 368(a)(1)(F) (F reorganization) are treated as a 
single corporation. Therefore, for example, Relevant Property acquired 
during the Plan Period by a corporation that is a transferor (as to a 
later F reorganization) is treated as having been acquired directly 
(and from the same source) by the transferee (as to the later F 
reorganization) during the Plan Period. In addition, any transfer (or 
deemed transfer) of assets to Distributing in an F reorganization will 
not cause the transferred assets to be treated as Relevant Property.
    (v) Stock of Distributing as Relevant Property--(A) In general. For 
purposes of the Division of Relevant Property Requirement, except as 
provided in paragraph (b)(2)(v)(B) of this section, stock of 
Distributing is not Relevant Property (and thus is not Relevant Equity) 
to the extent that the Potential Predecessor becomes, as part of a 
Plan, the direct or indirect owner of that stock as the result of the 
transfer to Distributing of direct or indirect interests in the 
Potential Predecessor's Relevant Property. For example, stock of 
Distributing is not Relevant Property if it is acquired by a Potential 
Predecessor as part of a Plan in an exchange to which section 351(a) 
applies.
    (B) Certain reorganizations. For purposes of the Division of 
Relevant Property Requirement, stock of Distributing is Relevant 
Property (and thus Relevant Equity) to the extent that the Potential 
Predecessor becomes, as part of the Plan, the direct or indirect owner 
of that stock as the result of a transaction described in section 
368(a)(1)(E).
    (vi) Substitute Asset--(A) In general. Subject to paragraph 
(b)(2)(vi)(B) of this section, the term Substitute Asset means any 
property that is held directly or indirectly by Distributing during the 
Plan Period and was received, during the Plan Period, in exchange for 
Relevant Property that was acquired directly or indirectly by 
Distributing if all gain on the transferred Relevant Property is not 
recognized on the exchange. For example, property received by 
Controlled in exchange for Relevant Property in a transaction 
qualifying under section 1031 is a Substitute Asset. In addition, stock 
received by Distributing in a distribution qualifying under section 
305(a) or section 355(a) on Relevant Equity is a Substitute Asset.
    (B) Controlled stock received by Distributing--(1) In general. 
Except as provided in paragraph (b)(2)(vi)(B)(2) of this section, stock 
of Controlled received in exchange for a direct or indirect transfer of 
Relevant Property by Distributing is not a Substitute Asset.
    (2) Exception. If the basis in Controlled stock received or deemed 
received in an exchange described in paragraph (b)(2)(vi)(B)(1) of this 
section is determined in whole or in part by reference to the basis of 
Relevant Equity the issuer of which ceases to exist for Federal income 
tax purposes under the Plan, that Controlled stock constitutes a 
Substitute Asset. See paragraph (b)(2)(x) of this section.
    (C) Treatment as Relevant Property. For purposes of this section, a 
Substitute Asset is treated as Relevant Property with the same 
ownership and transfer history as the Relevant Property for which (or 
with respect to which) it was received.
    (vii) Separated Property. The term Separated Property means each 
item of Relevant Property that is described in the Relevant Property 
Requirement (regardless of whether the fair market value of the 
Relevant Property exceeds its adjusted basis). However, if Relevant 
Equity is Separated Property, Underlying Property associated with that 
Relevant Equity is not treated as Separated Property. In addition, if 
Distributing directly or indirectly acquires Relevant Equity in a 
transaction in which gain is recognized in full, Underlying Property 
associated with that Relevant Equity is not treated as Separated 
Property.

[[Page 69320]]

    (viii) Underlying Property. The term Underlying Property means 
property directly or indirectly held by a corporation or partnership 
any equity interest in which is Relevant Equity.
    (ix) Multiple Predecessors of Distributing. If there are multiple 
Potential Predecessors that satisfy the pre-Distribution requirements 
and post-Distribution requirement of paragraph (b)(1) of this section, 
each of those Potential Predecessors is a Predecessor of Distributing. 
For example, a Potential Predecessor that transfers property to a 
Predecessor of Distributing without full recognition of gain (and that 
otherwise meets the requirements of paragraph (b)(1) of this section) 
is also a Predecessor of Distributing if the applicable transfer 
occurred as part of a Plan that existed at the time of such transfer.
    (x) Deemed exchanges. For purposes of paragraph (b)(1)(ii) of this 
section (regarding the Relevant Property Requirement and the Reflection 
of Basis Requirement) and paragraph (b)(2)(vi) of this section 
(regarding Substitute Assets), Distributing is treated as acquiring 
Controlled stock in exchange for a direct or indirect interest in 
Relevant Property if the basis of Distributing in that Controlled 
stock, immediately after a transfer of the Relevant Property, is 
determined in whole or in part by reference to the basis of that 
Relevant Property immediately before the transfer. For example, if a 
corporation transfers Relevant Property to Controlled in exchange for 
Distributing stock in a transaction that qualifies as a reorganization 
under section 368(a)(1)(C), then, for purposes of paragraphs (b)(1)(ii) 
and (b)(2)(vi) of this section, Distributing is treated as acquiring 
Controlled stock in exchange for a direct or indirect interest in 
Relevant Property. See Sec.  1.358-6(c)(1).
    (c) Additional definitions--(1) Predecessor of Controlled. Solely 
for purposes of applying paragraph (f) of this section, a corporation 
is a predecessor of Controlled (Predecessor of Controlled) if, before 
the Distribution, it transfers property to Controlled in a Section 381 
Transaction as part of a Plan. Other than for the purpose described in 
the preceding sentence, no corporation can be a Predecessor of 
Controlled. If multiple corporations satisfy the requirements of this 
paragraph (c)(1), each of those corporations is a Predecessor of 
Controlled. For example, a corporation that transfers property to a 
Predecessor of Controlled in a Section 381 Transaction is also a 
Predecessor of Controlled if the Section 381 Transaction occurred as 
part of a Plan that existed at the time of such transaction.
    (2) Successors--(i) In general. For purposes of section 355(e), a 
successor (Successor) of Distributing or of Controlled is a corporation 
to which Distributing or Controlled, respectively, transfers property 
in a Section 381 Transaction after the Distribution (Successor 
Transaction).
    (ii) Determination of Successor status. More than one corporation 
may be a Successor of Distributing or Controlled. For example, if 
Distributing transfers property to another corporation (X) in a Section 
381 Transaction, and X transfers property to another corporation (Y) in 
a Section 381 Transaction, then each of X and Y is a Successor of 
Distributing. In this case, the determination of whether Y is a 
Successor of Distributing is made after the determination of whether X 
is a Successor of Distributing.
    (3) Section 381 Transaction. The term Section 381 Transaction means 
a transaction to which section 381 applies.
    (d) Special acquisition rules--(1) Deemed acquisitions of stock in 
Section 381 Transactions--(i) Rule. This paragraph (d)(1)(i) applies to 
each shareholder of the acquiring corporation immediately before a 
Section 381 Transaction (Acquiring Owner). Each Acquiring Owner is 
treated for purposes of this section as acquiring, in the Section 381 
Transaction, stock representing an interest in the distributor or 
transferor corporation, to the extent that the Acquiring Owner's 
interest in the acquiring corporation immediately after the Section 381 
Transaction exceeds the Acquiring Owner's direct or indirect interest 
in the distributor or transferor corporation immediately before the 
Section 381 Transaction.
    (ii) Example. The example set forth in this paragraph (d)(1)(ii) 
illustrates the application of the deemed acquisition rule in paragraph 
(d)(1)(i) of this section. Assume that A held all of the stock of 
Distributing, Distributing held a 25-percent interest in a Predecessor 
of Distributing, and A held no direct interest, or other indirect 
interest, in the Predecessor of Distributing immediately before a 
Section 381 Transaction in which the Predecessor of Distributing 
transfers its assets to Distributing. In the Section 381 Transaction, 
the Predecessor of Distributing's shareholders (other than 
Distributing) collectively receive a 10-percent interest in 
Distributing (reducing A's interest in Distributing to 90 percent). 
Under paragraph (d)(1)(i) of this section, A is treated as acquiring in 
the Section 381 Transaction stock representing a 65-percent interest in 
the Predecessor of Distributing. This is because A's 90-percent 
interest in Distributing (the acquiring corporation in the Section 381 
Transaction) immediately after the Section 381 Transaction exceeds A's 
25-percent interest (held indirectly through Distributing) in the 
Predecessor of Distributing (the transferor corporation in the Section 
381 Transaction) immediately before the Section 381 Transaction by 65 
percent. Similarly, each Acquiring Owner of a Successor of Distributing 
is treated as acquiring, in the Successor Transaction, stock of 
Distributing, to the extent that the Acquiring Owner's interest in the 
Successor of Distributing immediately after the Successor Transaction 
exceeds the Acquiring Owner's direct or indirect interest in 
Distributing immediately before the Successor Transaction.
    (2) Deemed acquisitions of stock after Section 381 Transactions. 
For purposes of this section, after a Section 381 Transaction 
(including a Successor Transaction), an acquisition of stock of an 
acquiring corporation (including a deemed stock acquisition under 
paragraph (d)(1)(i) of this section) is treated also as an acquisition 
of an interest in the stock of the distributor or transferor 
corporation. For example, an acquisition of the stock of Distributing 
that occurs after a Section 381 Transaction is treated not only as an 
acquisition of the stock of Distributing, but also as an acquisition of 
the stock of any Predecessor of Distributing whose assets were acquired 
by Distributing in the prior Section 381 Transaction. Similarly, an 
acquisition of the stock of a Successor of Distributing that occurs 
after the Successor Transaction is treated not only as an acquisition 
of the stock of the Successor of Distributing, but also as an 
acquisition of the stock of Distributing.
    (3) Separate counting for Distributing and each Predecessor of 
Distributing. The measurement of whether one or more persons have 
acquired stock of any specific corporation in a Planned 50-percent 
Acquisition is made separately from the measurement of any potential 
Planned 50-percent Acquisition of any other corporation. Therefore, 
there may be a Planned 50-percent Acquisition of a Predecessor of 
Distributing even if there is no Planned 50-percent Acquisition of 
Distributing. Similarly, there may be a Planned 50-percent Acquisition 
of Distributing even if there is no Planned 50-percent Acquisition of a 
Predecessor of Distributing.
    (e) Special rules for limiting gain recognition--(1) Overview--(i) 
Gain limitation. This paragraph (e) provides

[[Page 69321]]

rules that limit the amount of gain that must be recognized by 
Distributing by reason of section 355(e) to an amount that is less than 
the amount that Distributing otherwise would be required to recognize 
under section 355(c)(2) or section 361(c)(2) (Statutory Recognition 
Amount) in certain cases involving one or more Predecessors of 
Distributing.
    (ii) Multiple Planned 50-percent Acquisitions. If there are Planned 
50-percent Acquisitions of multiple corporations (for example, two 
Predecessors of Distributing), Distributing must recognize the 
Statutory Recognition Amount with respect to each such corporation, 
subject to the limitations in paragraph (e)(2) of this section relating 
to a Planned 50-percent Acquisition of a Predecessor of Distributing 
(POD Gain Limitation Rule) and paragraph (e)(3) of this section 
relating to a Planned 50-percent Acquisition of Distributing 
(Distributing Gain Limitation Rule), if applicable. The POD Gain 
Limitation Rule and the Distributing Gain Limitation Rule are applied 
separately to the Planned 50-percent Acquisition of each such 
corporation to determine the amount of gain required to be recognized.
    (iii) Statutory Recognition Amount limit; Section 336(e). Paragraph 
(e)(4) of this section sets forth an overall gain limitation based on 
the Statutory Recognition Amount. Paragraph (e)(5) of this section 
clarifies the availability of an election under section 336(e) with 
regard to certain Distributions.
    (2) Planned 50-percent Acquisition of a Predecessor of 
Distributing--(i) In general. If there is a Planned 50-percent 
Acquisition of a Predecessor of Distributing, the amount of gain 
recognized by Distributing by reason of section 355(e) as a result of 
the Planned 50-percent Acquisition is limited to the amount of gain, if 
any, that Distributing would have recognized if, immediately before the 
Distribution, Distributing had engaged in the following transaction: 
Distributing transferred all Separated Property received from the 
Predecessor of Distributing to a newly formed corporation (Hypothetical 
Controlled) in exchange solely for stock of Hypothetical Controlled in 
a reorganization under section 368(a)(1)(D) and then distributed the 
stock of Hypothetical Controlled to the shareholders of Distributing in 
a transaction to which section 355(e) applied (Hypothetical D/355(e) 
Reorganization). The computation in this paragraph (e)(2)(i) is applied 
regardless of whether Distributing actually directly held the Separated 
Property.
    (ii) Operating rules. For purposes of applying paragraph (e)(2)(i) 
of this section, the following rules apply:
    (A) Separated Property other than Controlled stock. Each of the 
basis and the fair market value of Separated Property other than stock 
of Controlled treated as transferred by Distributing to a Hypothetical 
Controlled in a Hypothetical D/355(e) Reorganization equals the basis 
and the fair market value, respectively, of such property in the hands 
of Controlled immediately before the Distribution.
    (B) Controlled stock that is Separated Property. Each of the basis 
and the fair market value of the stock of Controlled that is Separated 
Property treated as transferred by Distributing to a Hypothetical 
Controlled in a Hypothetical D/355(e) Reorganization equals the basis 
and the fair market value, respectively, of such stock in the hands of 
Distributing immediately before the Distribution.
    (C) Anti-duplication rule. A Predecessor of Distributing's 
Separated Property is taken into account for purposes of applying this 
paragraph (e)(2) only to the extent such property was not taken into 
account by Distributing in a Hypothetical D/355(e) Reorganization with 
respect to another Predecessor of Distributing. Further, appropriate 
adjustments must be made to prevent other duplicative inclusions of 
section 355(e) gain under this paragraph (e) reflecting the same 
economic gain.
    (3) Planned 50-percent Acquisition of Distributing. This paragraph 
(e)(3) applies if there is a Planned 50-percent Acquisition of 
Distributing. In that case, the amount of gain recognized by 
Distributing by reason of section 355(e) as a result of the Planned 50-
percent Acquisition is limited to the excess, if any, of the Statutory 
Recognition Amount over the amount of gain, if any, that Distributing 
would have been required to recognize under paragraphs (e)(1)(ii) and 
(e)(2) of this section if there had been a Planned 50-percent 
Acquisition of every Predecessor of Distributing, but not of 
Distributing or Controlled. For purposes of this paragraph (e)(3), 
references to Distributing are not references to a Predecessor of 
Distributing.
    (4) Gain recognition limited to Statutory Recognition Amount. The 
sum of the amounts required to be recognized by Distributing under 
section 355(e) (taking into account the POD Gain Limitation Rule and 
the Distributing Gain Limitation Rule) with regard to a single 
Distribution cannot exceed the Statutory Recognition Amount. In 
addition, Distributing may choose not to apply the POD Gain Limitation 
Rule or the Distributing Gain Limitation Rule to a Distribution, and 
instead may recognize the Statutory Recognition Amount. Distributing 
indicates its choice to apply the preceding sentence by reporting the 
Statutory Recognition Amount on its original or amended Federal income 
tax return for the year of the Distribution.
    (5) Section 336(e) election. Distributing is not eligible to make a 
section 336(e) election (as defined in Sec.  1.336-1(b)(11)) with 
respect to a Distribution to which this section applies unless 
Distributing would, absent the making of a section 336(e) election, 
recognize the Statutory Recognition Amount with respect to the 
Distribution (taking into account the POD Gain Limitation Rule and the 
Distributing Gain Limitation Rule) without regard to the final two 
sentences of paragraph (e)(4) of this section. See Sec. Sec.  1.336-1 
through 1.336-5 for additional requirements with regard to a section 
336(e) election.
    (f) Predecessor or Successor as a member of the affiliated group. 
For purposes of section 355(e)(2)(C), if a corporation transfers its 
assets to a member of the same Expanded Affiliated Group in a Section 
381 Transaction, the transferor will be treated as continuing in 
existence within the same Expanded Affiliated Group.
    (g) Inapplicability of section 355(f) to certain intra-group 
Distributions--(1) In general. Section 355(f) does not apply to a 
Distribution if there is a Planned 50-percent Acquisition of a 
Predecessor of Distributing (but not of Distributing, Controlled, or 
their Successors), except as provided in paragraph (g)(2) of this 
section. Therefore, except as provided in paragraph (g)(2) of this 
section, section 355 (or so much of section 356 as relates to section 
355) and the regulations under sections 355 and 356, including the POD 
Gain Limitation Rule, apply, without regard to section 355(f), to a 
Distribution within an affiliated group (as defined in section 1504(a)) 
if the Distribution and the Planned 50-percent Acquisition of the 
Predecessor of Distributing are part of a Plan. For purposes of this 
paragraph (g)(1), references to a Distribution (and Distributing and 
Controlled) include references to a distribution (and Distributing and 
Controlled) to which section 355 would apply but for the application of 
section 355(f).
    (2) Alternative application of section 355(f). Distributing may 
choose not to apply paragraph (g)(1) of this section to each 
Distribution (that occurs under a Plan) to which section 355(f) would

[[Page 69322]]

otherwise apply absent paragraph (g)(1) of this section. Instead, 
Distributing may apply section 355(f) to all such Distributions 
according to its terms, but only if all members of the same Expanded 
Affiliated Group report consistently the Federal income tax 
consequences of the Distributions that are part of the Plan (determined 
without regard to section 355(f)). In such a case, neither the POD Gain 
Limitation Rule nor the Distributing Gain Limitation Rule is available 
with regard to any applicable Distribution. Distributing indicates its 
choice to apply section 355(f) consistently to all applicable 
Distributions by reporting the Federal income tax consequences of each 
Distribution in accordance with section 355(f) on its Federal income 
tax return for the year of the Distribution.
    (h) Examples. The following examples illustrate the principles of 
this section. Unless the facts indicate otherwise, assume throughout 
these examples that: Distributing (D) owns all the stock of Controlled 
(C), and none of the shares of C held by D has a built-in loss; D 
distributes the stock of C in a Distribution to which section 355(d) 
does not apply; X, Y, and Z are individuals; each of D, D1, C, P, P1, 
P2, and R is a corporation having one class of stock outstanding, and 
none is a member of a consolidated group; and each transaction that is 
part of a Plan defined in this section is respected as a separate 
transaction under general Federal income tax principles. No inference 
should be drawn from any example concerning whether any requirements of 
section 355 are satisfied other than those of section 355(e) or whether 
any general Federal income tax principles (including the step 
transaction doctrine) are implicated by the example:

    (1) Example 1: Predecessor of D and Planned 50-Percent 
Acquisition of P--(i) Facts. X owns 100% of the stock of P, which 
holds multiple assets. Y owns 100% of the stock of D. The following 
steps occur as part of a Plan: P merges into D in a reorganization 
under section 368(a)(1)(A). Immediately after the merger, X and Y 
own 10% and 90%, respectively, of the stock of D. D then contributes 
to C one of the assets (Asset 1) acquired from P in the merger. At 
the time of the contribution, Asset 1 has a basis of $40x and a fair 
market value of $110x. In exchange for Asset 1, D receives 
additional C stock and $10x. D distributes the stock of C (but not 
the cash) to X and Y, pro rata. The contribution and Distribution 
constitute a reorganization under section 368(a)(1)(D), and D 
recognizes $10x of gain under section 361(b) on the contribution. 
Immediately before the Distribution, taking into account the $10x of 
gain recognized by D on the contribution, Asset 1 has an adjusted 
basis of $50x under section 362(b) and a fair market value of $110x, 
and the stock of C held by D has a basis of $100x and a fair market 
value of $200x.
    (ii) Analysis--(A) P is a Predecessor of D. Under paragraph 
(b)(1) of this section, P is a Predecessor of D. First, P is a 
Potential Predecessor because, as part of a Plan, P transferred 
property to D in a Section 381 Transaction. See paragraph 
(b)(2)(ii)(A)(1) of this section. Second, both of the pre-
Distribution requirements and the post-Distribution requirement are 
satisfied. The Relevant Property Requirement is satisfied because, 
immediately before the Distribution and as part of a Plan, C holds P 
Relevant Property (Asset 1) the gain on which was not recognized in 
full at any point during the Plan Period, and some of the C stock 
distributed in the Distribution was acquired by D in exchange for 
Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The 
Reflection of Basis Requirement is satisfied because that C stock 
had a basis prior to the Distribution that was determined in whole 
or in part by reference to the basis of Separated Property (Asset 
1), and was neither distributed in a distribution to which section 
355(e) applied nor transferred in a transaction in which the gain on 
that C stock was recognized in full during the Plan Period prior to 
the Distribution. See paragraph (b)(1)(ii)(B) of this section. The 
Division of Relevant Property Requirement is satisfied because 
immediately after the Distribution, D continues to hold Relevant 
Property of P, and therefore, as part of a Plan, P's Relevant 
Property has been divided between C and D. See paragraph (b)(1)(iii) 
of this section.
    (B) Planned 50-percent Acquisition of P. Under paragraph 
(d)(1)(i) of this section, Y is treated as acquiring stock 
representing 90% of the voting power and value of P as a result of 
the merger of P into D. Accordingly, there has been a Planned 50-
percent Acquisition of P.
    (C) Gain limited. Without regard to the limitations in paragraph 
(e) of this section, D would be required to recognize $100x of gain 
($200x of aggregate fair market value minus $100x of aggregate basis 
of the C stock held by D), the Statutory Recognition Amount 
described in section 361(c)(2). However, under the POD Gain 
Limitation Rule, D's gain recognized by reason of the Planned 50-
percent Acquisition of P will not exceed $60x, an amount equal to 
the amount of gain D would have recognized had D transferred Asset 1 
(Separated Property) to a newly formed corporation (C1) solely for 
C1 stock and distributed the C1 stock to D's shareholders in a 
Hypothetical D/355(e) Reorganization. See paragraph (e)(2)(i) of 
this section. For purposes of the computation in this paragraph 
(h)(1)(ii)(C), the basis and fair market value of Asset 1 equal the 
basis and fair market value of Asset 1 in the hands of C immediately 
before the Distribution. See paragraph (e)(2)(ii)(A) of this 
section. Under section 361(c)(2), D would recognize $60x of gain, an 
amount equal to the gain in the hypothetical C1 stock (excess of the 
$110x fair market value over the $50x basis). Therefore, D 
recognizes $60x of gain (in addition to the $10x of gain recognized 
under section 361(b)).
    (iii) Plan not in existence at time of acquisition of Potential 
Predecessor's property. The facts are the same as in paragraph 
(h)(1)(i) of this section (Example 1) except that the merger of P 
into D occurred before the existence of a Plan. Even though D 
transferred P property (Asset 1) to C, Asset 1 was not Relevant 
Property of P because P did not hold Asset 1 during the Plan Period. 
See paragraphs (b)(2)(iv) and (a)(4)(iii) of this section. Because 
Asset 1 is not Relevant Property, D did not receive C stock 
distributed in the Distribution in exchange for Relevant Property 
when it contributed Asset 1 to C, none of the distributed C stock 
had a basis prior to the Distribution that was determined in whole 
or in part by reference to the basis of Separated Property, and C 
did not hold Relevant Property immediately before the Distribution. 
Further, Relevant Property of P has not been divided. Therefore, P 
is not a Predecessor of D.
    (2) Example 2: Planned 50-percent Acquisition of D, but not 
Predecessor of D--(i) Facts. X owns 100% of the stock of P, which 
holds multiple assets. Y owns 100% of the stock of D. The following 
steps occur as part of a Plan: P merges into D in a reorganization 
under section 368(a)(1)(A). Immediately after the merger, X and Y 
own 90% and 10%, respectively, of the stock of D. D then contributes 
to C one of the assets (Asset 1) acquired from P in the merger. In 
exchange for Asset 1, D receives additional C stock. D distributes 
the stock of C to X and Y, pro rata. The contribution and 
Distribution constitute a reorganization under section 368(a)(1)(D). 
Immediately before the Distribution, Asset 1 has a basis of $50x and 
a fair market value of $110x, and the stock of C held by D has a 
basis of $120x and a fair market value of $200x.
    (ii) Analysis--(A) P is a Predecessor of D. Under paragraph 
(b)(1) of this section, P is a Predecessor of D. First, P is a 
Potential Predecessor because, as part of a Plan, P transferred 
property to D in a Section 381 Transaction. See paragraph 
(b)(2)(ii)(A)(1) of this section. Second, both of the pre-
Distribution requirements and the post-Distribution requirement are 
satisfied. The Relevant Property Requirement is satisfied because, 
immediately before the Distribution and as part of a Plan, C holds P 
Relevant Property (Asset 1) the gain on which was not recognized in 
full at any point during the Plan Period, and some of the C stock 
distributed in the Distribution was acquired by D in exchange for 
Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The 
Reflection of Basis Requirement is satisfied because that C stock 
had a basis prior to the Distribution that was determined in whole 
or in part by reference to the basis of Separated Property (Asset 
1), and was neither distributed in a distribution to which section 
355(e) applied nor transferred in a transaction in which the gain on 
that C stock was recognized in full during the Plan Period prior to 
the Distribution. See paragraph (b)(1)(ii)(B) of this section. The 
Division of Relevant Property Requirement is satisfied because 
immediately after the Distribution, D continues to hold Relevant 
Property of P, and therefore, as part of a Plan, P's Relevant 
Property has been divided between C and D. See paragraph (b)(1)(iii) 
of this section.
    (B) Planned 50-percent Acquisition of D. Under paragraph 
(d)(1)(i) of this section, Y is

[[Page 69323]]

treated as acquiring stock representing 10% of the voting power and 
value of P as a result of the merger of P into D. The 10% 
acquisition of P stock does not cause section 355(e) gain 
recognition or cause application of the POD Gain Limitation Rule 
because there has not been a Planned 50-percent Acquisition of P. X 
acquires 90% of the voting power and value of D as a result of the 
merger of P into D. Accordingly, there has been a Planned 50-percent 
Acquisition of D. This Planned 50-percent Acquisition implicates 
section 355(e) and results in gain recognition, subject to the rules 
of paragraph (e) of this section.
    (C) Gain limited. Without regard to the limitations in paragraph 
(e) of this section, D would be required to recognize $80x of gain 
($200x of fair market value minus $120x of basis of the C stock held 
by D), the Statutory Recognition Amount described in section 
361(c)(2). However, under the Distributing Gain Limitation Rule, D's 
gain recognized by reason of the Planned 50-percent Acquisition of D 
will not exceed $20x, the excess of the Statutory Recognition Amount 
($80x) over the amount of gain that D would have been required to 
recognize under the POD Gain Limitation Rule if there had been a 
Planned 50-percent Acquisition of P but not D or C ($60x). See 
paragraph (e)(3) of this section. The hypothetical gain limitation 
under the POD Gain Limitation Rule equals the amount D would have 
recognized had it transferred Asset 1 (Separated Property) to a 
newly formed corporation (C1) solely for stock and distributed the 
C1 stock in a Hypothetical D/355(e) Reorganization. See paragraph 
(e)(2)(i) of this section. Under section 361(c)(2), D would 
recognize $60x of gain, an amount equal to the gain in the 
hypothetical C1 stock (excess of the $110x fair market value over 
the $50x basis). Therefore, D recognizes $20x of gain ($80x-$60x).
    (3) Example 3: Predecessor of D owns C stock--(i) Facts. X owns 
100% of the stock of P, which holds multiple assets, including Asset 
2. Y owns 100% of the stock of D. P owns 35% of the stock of C 
(Block 1), and D owns the remaining 65% of the C stock (Block 2). 
The following steps occur as part of a Plan: P merges into D in a 
reorganization under section 368(a)(1)(A), and D immediately 
thereafter distributes all of the C stock to X and Y pro rata. 
Immediately after the merger, X and Y own 10% and 90%, respectively, 
of the D stock, and, prior to the Distribution, D owns Block 1 with 
a basis of $30x and a fair market value of $35x, and Block 2 with a 
basis of $10x and a fair market value of $65x. D continues to hold 
Asset 2.
    (ii) Analysis--(A) P is a Predecessor of D. Under paragraph 
(b)(1) of this section, P is a Predecessor of D. First, P is a 
Potential Predecessor because, as part of a Plan, P transferred 
property to D in a Section 381 Transaction. See paragraph 
(b)(2)(ii)(A)(1) of this section. Second, both of the pre-
Distribution requirements and the post-Distribution requirement are 
satisfied. The Relevant Property Requirement is satisfied because 
some of the C stock distributed in the Distribution (Block 1) was 
Relevant Property of P. See paragraph (b)(1)(ii)(A)(2) of this 
section. The Reflection of Basis Requirement is satisfied because 
Block 1 of the C stock is Relevant Property of P, and was neither 
distributed in a distribution to which section 355(e) applied nor 
transferred in a transaction in which the gain on that C stock was 
recognized in full during the Plan Period prior to the Distribution. 
See paragraph (b)(1)(ii)(B) of this section. The Division of 
Relevant Property Requirement is satisfied because some of the C 
stock distributed in the Distribution was Relevant Property of P, 
and therefore C is deemed to have received Relevant Property of P, 
and D continues to hold Relevant Property of P immediately after the 
Distribution. See paragraph (b)(1)(iii) of this section. Therefore, 
as part of a Plan, P's Relevant Property has been divided between C 
and D.
    (B) Planned 50-percent Acquisition of P. Under paragraph 
(d)(1)(i) of this section, Y is treated as acquiring stock 
representing 90% of the voting power and value of P as a result of 
the merger of P into D. Accordingly, there has been a Planned 50-
percent Acquisition of P.
    (C) Gain limited. Without regard to the limitations in paragraph 
(e) of this section, D would be required to recognize $60x of gain 
($100x of fair market value minus $40x of basis of the C stock held 
by D), the Statutory Recognition Amount under section 355(c)(2). 
However, under the POD Gain Limitation Rule, D's gain recognized by 
reason of the Planned 50-percent Acquisition of P will not exceed 
$5x, an amount equal to the amount D would have recognized had it 
transferred Block 1 of the C stock (Separated Property) to a newly 
formed corporation (C1) solely for stock and distributed the C1 
stock to D shareholders in a Hypothetical D/355(e) Reorganization. 
See paragraph (e)(2)(i) of this section. Because Relevant Equity 
(Block 1 of the C stock) is Separated Property, Underlying Property 
associated with that Relevant Equity is not treated as Separated 
Property. See paragraph (b)(2)(vii) of this section. For purposes of 
the computation in this paragraph (h)(3)(ii)(C), the basis and fair 
market value of the Block 1 C stock equal its basis and fair market 
value in the hands of D immediately before the Distribution. See 
paragraph (e)(2)(ii)(A) of this section. Under section 361(c)(2), D 
would recognize $5x of gain, an amount equal to the gain in the 
hypothetical C1 stock ($35x fair market value-$30x basis). 
Therefore, D recognizes $5x of gain.
    (4) Example 4: C stock as Substitute Asset--(i) Facts. X owns 
100% of the stock of P, which owns multiple assets, including 100% 
of the stock of R and Asset 2. Y owns 100% of the stock of D. The 
following steps occur as part of a Plan: P merges into D in a 
reorganization under section 368(a)(1)(A) (P-D reorganization). 
Immediately after the merger, X and Y own 10% and 90%, respectively, 
of the stock of D. D then causes R to transfer all of its assets to 
C and liquidate in a reorganization under section 368(a)(1) (R-C 
reorganization). At the time of the P-D reorganization, the R stock 
has a basis of $40x and a fair market value of $110x. D distributes 
the stock of C to X and Y, pro rata. D continues to directly hold 
Asset 2. Immediately before the Distribution, the C stock held by D 
that was deemed received in the R-C reorganization (Block 1) has a 
basis of $40x and a fair market value of $110x, and all of the stock 
of C held by D has a basis of $100x and a fair market value of 
$200x.
    (ii) Analysis--(A) P is a Predecessor of D. Under paragraph 
(b)(1) of this section, P is a Predecessor of D. First, P is a 
Potential Predecessor because, as part of a Plan, P transferred 
property to D in a Section 381 Transaction. See paragraph 
(b)(2)(ii)(A)(1) of this section. Second, both pre-Distribution 
requirements and the post-Distribution requirement are satisfied. 
The Relevant Property Requirement is satisfied because, for the 
following two reasons, some of the C stock distributed in the 
Distribution (Block 1) was Relevant Property of P. D is treated as 
acquiring Block 1 of the C stock in exchange for a direct or 
indirect interest in R stock (that is, Relevant Property) in the R-C 
reorganization because the basis of D in that C stock immediately 
after a transfer of the R stock (in the liquidation of R) is 
determined in whole or in part by reference to the basis of the R 
stock immediately before the transfer. See paragraph (b)(2)(x) of 
this section. Further, because the basis in Block 1 of the C stock 
is determined in whole or in part by reference to the basis of 
Relevant Equity (the R stock) the issuer of which ceases to exist 
for Federal income tax purposes under the Plan, Block 1 of the C 
stock is a Substitute Asset, and is therefore treated as Relevant 
Property with the same ownership and transfer history as the R 
stock. See paragraph (b)(2)(vi)(B)(2) of this section. The 
Reflection of Basis Requirement is satisfied because Block 1 of the 
C stock is Relevant Property of P, and was neither distributed in a 
distribution to which section 355(e) applied nor transferred in a 
transaction in which the gain on that C stock was recognized in full 
during the Plan Period prior to the Distribution. See paragraph 
(b)(1)(ii)(B) of this section. The Division of Relevant Property 
Requirement is satisfied because some of the C stock distributed in 
the Distribution was Relevant Property of P, and therefore C is 
deemed to have received Relevant Property of P, and immediately 
after the Distribution, D continues to hold Asset 2, which is 
Relevant Property of P. See paragraph (b)(1)(iii) of this section. 
Therefore, as part of a Plan, P's Relevant Property has been divided 
between C and D.
    (B) Planned 50-percent Acquisition of P. Under paragraph 
(d)(1)(i) of this section, Y is treated as acquiring stock 
representing 90% of the voting power and value of P as a result of 
the P-D reorganization. Accordingly, there has been a Planned 50-
percent Acquisition of P.
    (C) Gain limited. Without regard to the limitations in paragraph 
(e) of this section, D would be required to recognize $100x of gain 
($200x of fair market value minus $100x of basis of all C stock held 
by D), the Statutory Recognition Amount described in section 
355(c)(2). However, under the POD Gain Limitation Rule, D's gain 
recognized by reason of the Planned 50-percent Acquisition of P will 
not exceed $70x, an amount equal to the amount D would have 
recognized had it transferred Block 1 of the C stock (Separated 
Property) to a newly formed corporation (C1) solely for stock and

[[Page 69324]]

distributed the C1 stock to D shareholders in a Hypothetical D/
355(e) Reorganization. See paragraph (e)(2)(i) of this section. 
Because Relevant Equity (Block 1 of the C stock) is Separated 
Property, Underlying Property associated with that Relevant Equity 
is not treated as Separated Property. See paragraph (b)(2)(vii) of 
this section. Under section 361(c)(2), D would recognize $70x of 
gain, an amount equal to the gain in the hypothetical C1 stock 
(excess of the $110x fair market value over the $40x basis). 
Therefore, D recognizes $70x of gain.
    (5) Example 5: Section 351 transaction--(i) Facts. X owns 100% 
of the stock of P, which holds multiple assets, including Asset 1, 
Asset 2, and Asset 3. Y owns 100% of the stock of D. The following 
steps occur as part of a Plan: P transfers Asset 1 and Asset 2 to D 
and Y transfers property to D in an exchange qualifying under 
section 351. Immediately after the exchange, P and Y own 10% and 
90%, respectively, of the stock of D. D then contributes Asset 1 to 
C in exchange for additional C stock. D distributes all of the stock 
of C to P and Y, pro rata. D continues to directly hold Asset 2, and 
P continues to directly hold Asset 3. The contribution and 
Distribution constitute a reorganization under section 368(a)(1)(D). 
Immediately before the Distribution, Asset 1 has a basis of $40x and 
a fair market value of $110x, and the stock of C held by D has a 
basis of $100x and a fair market value of $200x. Following the 
Distribution, and as part of the same Plan, Z acquires 51% of the P 
stock.
    (ii) Analysis--P is not a Predecessor of D. Under paragraph 
(b)(1) of this section, P is not a Predecessor of D. P is not a 
Potential Predecessor because P did not transfer property to a 
Potential Predecessor, D, or a member of the same Expanded 
Affiliated Group as D in a Section 381 Transaction and P is not a 
member of the same Expanded Affiliated Group as D immediately after 
completion of the Plan. See paragraph (b)(2)(ii) of this section. 
Thus, P cannot be a Predecessor of D. See paragraph (b)(1)(i) of 
this section.
    (6) Example 6: Section 351 transaction after an acquisition of 
P--(i) Facts. X owns 100% of the stock of P, which holds multiple 
assets, including Asset 1 and Asset 2. Y owns 100% of the stock of 
D, D owns 100% of the stock of D1, and D1 owns 100% of the stock of 
C. D files a consolidated return for the affiliated group of which 
it is the common parent. The following steps occur as part of a 
Plan: D acquires 100% of the stock of P from X. P transfers Asset 1 
and Asset 2 to D1 for D1 stock in an exchange qualifying under 
section 351. See Sec.  1.1502-34. D1 contributes Asset 1 to C in 
exchange for additional C stock. D1 distributes all of the stock of 
C to D in exchange for D1 stock (First Distribution). D then 
distributes all of the stock of C to Y (Second Distribution). D1 
continues to directly hold Asset 2. Immediately before the First 
Distribution, Asset 1 has a basis of $10x and a fair market value of 
$60x, and the stock of C held by D1 has a basis of $100x and a fair 
market value of $200x.
    (ii) Analysis--(A) P is a Predecessor of D1. Under paragraph 
(b)(1) of this section, P is a Predecessor of D1. First, P is a 
Potential Predecessor of D1 because P is a member of the same 
Expanded Affiliated Group as D1 immediately after completion of the 
Plan. See paragraph (b)(2)(ii)(A)(2) of this section. The Relevant 
Property Requirement is satisfied because, immediately before the 
First Distribution and as part of a Plan, C holds P Relevant 
Property (Asset 1) the gain on which was not recognized in full at 
any point during the Plan Period, and some of the C stock 
distributed in the First Distribution was acquired by D1 in exchange 
for Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The 
Reflection of Basis Requirement is satisfied because that C stock 
had a basis prior to the First Distribution that was determined in 
whole or in part by reference to the basis of Separated Property 
(Asset 1), and was neither distributed in a distribution to which 
section 355(e) applied nor transferred in a transaction in which the 
gain on that C stock was recognized in full prior to the First 
Distribution. See paragraph (b)(1)(ii)(B) of this section. The 
Division of Relevant Property Requirement is satisfied because 
immediately after the First Distribution, each of C, on the one 
hand, and P or D1, on the other hand, continues to hold Relevant 
Property of P, and therefore, as part of a Plan, P's Relevant 
Property has been divided between C and D1. See paragraph 
(b)(1)(iii) of this section.
    (B) Planned 50-percent Acquisition of P. D has acquired stock 
representing 100% of the voting power and value of P. Accordingly, 
there has been a Planned 50-percent Acquisition of P.
    (C) Gain on First Distribution. Because there is a Planned 50-
percent Acquisition of a Predecessor of Distributing (but not of 
Distributing, Controlled, or their Successors), section 355(f) will 
not apply to the First Distribution unless D and D1 choose to have 
section 355(f) apply. See paragraph (g) of this section. As a 
result, section 355, including the POD Gain Limitation Rule, will 
apply to the First Distribution. Under the POD Gain Limitation Rule, 
D1's gain recognized by reason of the Planned 50-percent Acquisition 
of P will not exceed $50x, an amount equal to the amount D1 would 
have recognized had it transferred Asset 1 (Separated Property) to a 
newly formed corporation (C1) solely for stock and distributed the 
C1 stock to D1 shareholders in a Hypothetical D/355(e) 
Reorganization. See paragraph (e)(2)(i) of this section. Under 
section 361(c)(2), D1 would recognize $50x of gain, an amount equal 
to the gain in the hypothetical C1 stock (excess of the $60x fair 
market value over the $10x basis). Therefore, D1 recognizes $50x of 
gain. Under paragraph (g)(2) of this section, however, D and D1 may 
choose to apply section 355(f) to the First Distribution as an 
exception to the general application of paragraph (g)(1) of this 
section. By application of section 355(f), section 355 (including 
the POD Gain Limitation Rule) would not apply to the First 
Distribution. Therefore, D1 would be required to recognize $100x of 
gain (excess of the $200x fair market value over the $100x basis of 
C stock held by D1) under section 311(b), and D would be treated 
under section 302(d) as receiving a distribution of $200x to which 
section 301 applies.
    (D) P is not a Predecessor of D. Under paragraph (b)(1) of this 
section, P is not a Predecessor of D. First, P is a Potential 
Predecessor of D because P is a member of the same Expanded 
Affiliated Group as D immediately after completion of the Plan. See 
paragraph (b)(2)(ii)(A)(2) of this section. However, although the 
Relevant Property Requirement is satisfied, the Reflection of Basis 
Requirement is not satisfied. The Relevant Property Requirement is 
satisfied because, immediately before the Second Distribution and as 
part of a Plan, C holds P Relevant Property (Asset 1) the gain on 
which was not recognized in full at any point during the Plan 
Period, and some of the C stock distributed in the Second 
Distribution was indirectly acquired by D in exchange for Asset 1. 
See paragraph (b)(1)(ii)(A)(1) of this section. However, regardless 
of whether D and D1 choose under paragraph (g)(2) of this section to 
have section 355(f) apply to the First Distribution, the Reflection 
of Basis Requirement cannot be satisfied. If section 355(f) applies 
to the First Distribution, then all of the C stock will have been 
transferred in a transaction in which the gain on the C stock was 
recognized in full during the Plan Period prior to the Second 
Distribution. If section 355(f) does not apply to the First 
Distribution, then all of the C stock will have been transferred in 
a distribution to which section 355(e) applied during the Plan 
Period prior to the Second Distribution. Because not all of the pre-
Distribution and post-Distribution requirements are satisfied, P 
cannot be a Predecessor of D.
    (7) Example 7: Sequential Predecessors--(i) Facts. X owns 100% 
of P1, which holds multiple assets, including Asset 1 and Asset 2. Y 
owns 100% of P2, which holds Asset 3, and Z owns 100% of D. The 
following steps occur as part of a Plan: P1 merges into P2 in a 
reorganization under 368(a)(1)(A) (P1-P2 reorganization). 
Immediately after the merger, X and Y own 10% and 90%, respectively, 
of the stock of P2. P2 then merges into D in a reorganization under 
368(a)(1)(A) (P2-D reorganization). Immediately after the merger, X, 
Y, and Z own 1%, 9%, and 90%, respectively, of the stock of D. D 
then contributes Asset 1 to C in exchange for additional C stock, 
and retains Asset 2 and Asset 3. D distributes all of the stock of C 
to X, Y, and Z, pro rata. Immediately before the Distribution, Asset 
1 has a basis of $40x and a fair market value of $100x, and the 
stock of C held by D has a basis of $100x and a fair market value of 
$200x.
    (ii) Analysis--(A) P2 is a Predecessor of D. Under paragraph 
(b)(1) of this section, P2 is a Predecessor of D. First, P2 is a 
Potential Predecessor because, as part of a Plan, P2 transferred 
property to D in a Section 381 Transaction. See paragraph 
(b)(2)(ii)(A)(1) of this section. Second, both pre-Distribution 
requirements and the post-Distribution requirement are satisfied. 
The Relevant Property Requirement is satisfied because, immediately 
before the Distribution and as part of a Plan, C holds P2 Relevant 
Property (Asset 1) the gain on which was not recognized in full at 
any point during the Plan Period, and some of the C stock 
distributed in the Distribution was acquired

[[Page 69325]]

by D in exchange for Asset 1. See paragraph (b)(1)(ii)(A)(1) of this 
section. The Reflection of Basis Requirement is satisfied because 
that C stock had a basis prior to the Distribution that was 
determined in whole or in part by reference to the basis of 
Separated Property (Asset 1), and was neither distributed in a 
distribution to which section 355(e) applied nor transferred in a 
transaction in which the gain on that C stock was recognized in full 
during the Plan Period prior to the Distribution. See paragraph 
(b)(1)(ii)(B) of this section. The Division of Relevant Property 
Requirement is satisfied because immediately after the Distribution, 
D continues to hold P2 Relevant Property (Asset 2 and Asset 3), and 
therefore, as part of a Plan, P2's Relevant Property has been 
divided between C and D. See paragraph (b)(1)(iii) of this section.
    (B) P1 is a Predecessor of D. Under paragraph (b)(1) of this 
section, P1 is a Predecessor of D. First, P1 is a Potential 
Predecessor because, as part of a Plan, P1 transferred property to a 
Potential Predecessor (P2) in a Section 381 Transaction. See 
paragraph (b)(2)(ii)(A)(1) of this section. Second, both pre-
Distribution requirements and the post-Distribution requirement are 
satisfied. The Relevant Property Requirement is satisfied because, 
immediately before the Distribution and as part of a Plan, C holds 
P1 Relevant Property (Asset 1) the gain on which was not recognized 
in full at any point during the Plan Period, and some of the C stock 
distributed in the Distribution was acquired by D in exchange for 
Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The 
Reflection of Basis Requirement is satisfied because that C stock 
had a basis prior to the Distribution that was determined in whole 
or in part by reference to the basis of Separated Property (Asset 
1), and was neither distributed in a distribution to which section 
355(e) applied nor transferred in a transaction in which the gain on 
that C stock was recognized in full during the Plan Period prior to 
the Distribution. See paragraph (b)(1)(ii)(B) of this section. The 
Division of Relevant Property Requirement is satisfied because 
immediately after the Distribution, D continues to hold Relevant 
Property of P1 (Asset 2), and therefore, as part of a Plan, P1's 
Relevant Property has been divided between C and D. See paragraph 
(b)(1)(iii) of this section.
    (C) Planned 50-percent Acquisitions of P1 and P2. Under 
paragraph (d)(1)(i) of this section, Y is treated as acquiring stock 
representing 90% of the voting power and value of P1 as a result of 
the P1-P2 merger. In addition, under paragraph (d)(1)(i) of this 
section, Z is treated as acquiring stock representing 90% of the 
voting power and value of P2 in the P2-D merger. Accordingly, there 
have been Planned 50-percent Acquisitions of P1 and P2.
    (D) Gain limited. Without regard to the limitations in paragraph 
(e) of this section, D would be required to recognize $100x of gain 
($200x of aggregate fair market value minus $100x of aggregate basis 
of the C stock held by D), the Statutory Recognition Amount 
described in section 361(c)(2), because there have been Planned 50-
percent Acquisitions of P1 and P2, both Predecessors of D. However, 
under paragraph (e) of this section, D's gain recognized by reason 
of the Planned 50-percent Acquisitions of P1 and P2 will not exceed 
$60x, an amount equal to the amount D would have recognized had it 
transferred Asset 1 (Separated Property) to a newly formed 
corporation (C1) solely for stock and distributed the C1 stock to D 
shareholders in a Hypothetical D/355(e) Reorganization. Under 
section 361(c)(2), D would recognize $60x, an amount equal to the 
gain in the hypothetical C1 stock (excess of the $100x fair market 
value over the $40x basis). Paragraph (e)(1)(ii) of this section 
provides that if there are Planned 50-percent Acquisitions of 
multiple corporations, Distributing must recognize the Statutory 
Recognition Amount with respect to each such corporation, subject to 
the POD Gain Limitation Rule and the Distributing Gain Limitation 
Rule, if applicable. In this case, the POD Gain Limitation Rule 
limits the amount of gain required to be recognized by D with 
respect to each of the Planned 50-percent Acquisitions of P1 and P2 
to $60x. See paragraph (e)(2)(i) of this section. Ordinarily, each 
$60x limitation would be added together, and the total gain 
limitation provided by paragraph (e) of this section would be $120x. 
However, the anti-duplication rule set forth in paragraph 
(e)(2)(ii)(C) of this section provides that, for purposes of 
applying the POD Gain Limitation Rule, a Predecessor of 
Distributing's Separated Property is taken into account only to the 
extent such property was not taken into account with respect to 
another Predecessor of Distributing. Thus, Asset 1 may not be taken 
into account more than once in determining the total gain 
limitation. Therefore, D recognizes $60x of gain.
    (8) Example 8: Multiple Predecessors of D--(i) Facts. X owns 
100% of the stock of P1, which holds multiple assets, including 
Asset 1 and Asset 3. Y owns 100% of the stock of P2, which holds 
multiple assets, including Asset 2 and Asset 4. Z owns 100% of the 
stock of D. The following steps occur as part of a Plan: Each of P1 
and P2 merges into D in a reorganization under section 368(a)(1)(A). 
Immediately after the mergers, each of X and Y owns 10%, and Z owns 
80%, of the stock of D. D then contributes to C Asset 1 (acquired 
from P1), and Asset 2 (acquired from P2). In exchange for Asset 1 
and Asset 2, D receives additional C stock. D distributes the stock 
of C to X, Y, and Z, pro rata. D's contribution of Asset 1 and Asset 
2 and the Distribution constitute a reorganization under section 
368(a)(1)(D). D continues to hold Asset 3 and Asset 4. Immediately 
before the Distribution, Asset 1 has a basis of $50x and a fair 
market value of $110x, Asset 2 has a basis of $70x and a fair market 
value of $90x, and the stock of C held by D has a basis of $130x and 
a fair market value of $220x.
    (ii) Analysis--(A) P1 and P2 are Predecessors of D. Under 
paragraph (b)(1) of this section, each of P1 and P2 is a Predecessor 
of D. First, each of P1 and P2 is a Potential Predecessor because, 
as part of a Plan, each of P1 and P2 transferred property to D in a 
Section 381 Transaction. See paragraph (b)(2)(ii)(A)(1) of this 
section. Second, both pre-Distribution requirements and the post-
Distribution requirement are satisfied. The Relevant Property 
Requirement is satisfied because, immediately before the 
Distribution and as part of a Plan, C holds P1 Relevant Property 
(Asset 1) and P2 Relevant Property (Asset 2), the gain on each of 
which was not recognized in full at any point during the Plan 
Period, and some of the C stock distributed in the Distribution was 
acquired by D in exchange for each of Asset 1 and Asset 2. See 
paragraph (b)(1)(ii)(A)(1) of this section. The Reflection of Basis 
Requirement is satisfied because that C stock had a basis prior to 
the distribution that was determined in whole or in part by 
reference to the basis of Separated Property (Asset 1 and Asset 2, 
respectively), and was neither distributed in a distribution to 
which section 355(e) applied nor transferred in a transaction in 
which the gain on that C stock was recognized in full during the 
Plan Period prior to the Distribution. See paragraph (b)(1)(ii)(B) 
of this section. The Division of Relevant Property Requirement is 
satisfied because immediately after the Distribution, D continues to 
hold Relevant Property of P1 and P2, and therefore, as part of a 
Plan, each of P1's and P2's Relevant Property has been divided 
between C and D. See paragraph (b)(1)(iii) of this section.
    (B) Planned 50-percent Acquisitions of P1 and P2. Under 
paragraph (d)(1)(i) of this section, Z is treated as acquiring stock 
representing 80% of the voting power and value of each of P1 and P2 
as a result of the mergers of P1 and P2 into D. Accordingly, there 
have been Planned 50-percent Acquisitions of P1 and P2.
    (C) Gain limited. Without regard to the limitations in paragraph 
(e) of this section, D would be required to recognize $90x of gain 
($220x of fair market value minus $130x of basis of the C stock held 
by D), the Statutory Recognition Amount under section 361(c)(2). 
However, under the POD Gain Limitation Rule, D's gain recognized by 
reason of the Planned 50-percent Acquisition of P1 will not exceed 
$60x ($110x fair market value minus $50x basis), an amount equal to 
the amount D would have recognized had it transferred Asset 1 
(Separated Property) to a newly formed corporation (C1) solely for 
stock and distributed the C1 stock to D shareholders in a 
Hypothetical D/355(e) Reorganization. See paragraph (e)(2)(i) of 
this section. In addition, under the POD Gain Limitation Rule, D's 
gain recognized by reason of the deemed acquisition of P2 stock will 
not exceed $20x ($90x fair market value minus $70x basis), an amount 
equal to the amount D would have recognized had it transferred Asset 
2 (Separated Property) to a second newly formed corporation (C2) 
solely for stock and distributed the C2 stock to D shareholders in a 
Hypothetical D/355(e) Reorganization. See paragraph (e)(2)(i) of 
this section. Therefore, D recognizes $80x of gain ($60x + $20x). 
See paragraph (e)(1)(ii) of this section.
    (9) Example 9: Successor of C--(i) Facts. X owns 100% of the 
stock of each of D and R. The following steps occur as part of a 
Plan: D distributes all of its C stock to X. Immediately before the 
Distribution, D's C

[[Page 69326]]

stock has a basis of $10x and a fair market value of $30x. C then 
merges into R in a reorganization under section 368(a)(1)(D). 
Immediately after the merger, X owns all of the R stock. As part of 
the same Plan, Z acquires 51% of the stock of R from X.
    (ii) Analysis--(A) R is a Successor of C. Under paragraph 
(c)(2)(i) of this section, R is a Successor of C because, after the 
Distribution, C transfers property to R in a Section 381 
Transaction.
    (B) Planned 50-percent Acquisition of C. Under paragraph (d)(2) 
of this section, Z's acquisition of stock of R is treated as an 
acquisition of stock of C. Therefore, Z is treated as acquiring 51% 
of the stock of C. Accordingly, there has been a Planned 50-percent 
Acquisition of C.
    (C) Gain not limited. Section 355(e) applies to the Distribution 
because there has been a Planned 50-percent Acquisition of C. 
Neither the POD Gain Limitation Rule nor the Distributing Gain 
Limitation Rule applies because there has been no Planned 50-percent 
Acquisition of a Predecessor of D, and no Planned 50-percent 
Acquisition of D. Therefore, D recognizes $20x of gain ($30x fair 
market value minus $10x basis of the C stock held by D) under 
section 355(c)(2).
    (10) Example 10: Multiple Successors--(i) Facts. X owns 100% of 
the stock of both D and R. Y owns 100% of the stock of S. The 
following steps occur as part of a Plan: D distributes all of the C 
stock to X. Immediately after the Distribution, D merges into R in a 
reorganization under section 368(a)(1)(A) (D-R merger). Following 
the D-R merger, R merges into S in a reorganization under section 
368(a)(1)(A) (R-S merger). Immediately after the R-S merger, X and Y 
own 10% and 90%, respectively, of the S stock. Immediately before 
the Distribution, D's C stock has a basis of $10x and a fair market 
value of $30x.
    (ii) Analysis--(A) R and S are Successors of D. Under paragraph 
(c)(2)(i) of this section, R is a Successor of D because, after the 
Distribution, D transfers property to R in a Section 381 
Transaction. Under paragraph (c)(2)(ii) of this section, S is also a 
Successor of D because R (a Successor of D) transfers property to S 
in a Section 381 Transaction.
    (B) Planned 50-percent Acquisition of D. Under paragraph 
(d)(1)(i) of this section, there is no deemed acquisition of D stock 
as a result of the D-R merger because X wholly owns the stock of D 
before the merger and wholly owns the stock of R after the merger. 
Under paragraph (d)(1)(i) of this section, Y is treated as acquiring 
stock representing 90% of the voting power and value of R (a 
Successor of D) as a result of the R-S merger. Under paragraph 
(d)(2) of this section, an acquisition of R stock is also treated as 
an acquisition of D stock. Accordingly, there has been a Planned 50-
percent Acquisition of D.
    (C) Gain not limited. Section 355(e) applies to the Distribution 
because there has been a Planned 50-percent Acquisition of D. The 
POD Gain Limitation Rule does not apply because there has been no 
Planned 50-percent Acquisition of a Predecessor of D. The 
Distributing Gain Limitation Rule applies because there has been a 
Planned 50-percent Acquisition of D. However, the gain limitation 
under the Distributing Gain Limitation Rule equals the Statutory 
Recognition Amount, because there is no Predecessor of D (and thus 
no Separated Property). Therefore, D recognizes $20x of gain ($30x 
fair market value minus $10x basis of the C stock held by D) under 
section 355(c)(2).

    (i) Applicability date. This section applies to Distributions 
occurring after December 15, 2019. For Distributions occurring on or 
before December 15, 2019, see Sec.  1.355-8T as contained in 26 CFR 
part 1 revised as of April 1, 2019.

Douglas W. O'Donnell,
Acting Deputy Commissioner for Services and Enforcement.

    Approved: December 9, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-27110 Filed 12-16-19; 4:15 pm]
 BILLING CODE 4830-01-P