Guidance Under Section 367(b) Related to Certain Triangular Reorganizations and Inbound Nonrecognition Transactions, 58275-58286 [2024-15232]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 89, Number 138 (Thursday, July 18, 2024)]
[Rules and Regulations]
[Pages 58275-58286]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-15232]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10004]
RIN 1545-BM19


Guidance Under Section 367(b) Related to Certain Triangular 
Reorganizations and Inbound Nonrecognition Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations regarding the 
treatment of property used to acquire parent stock or securities in 
connection with certain triangular reorganizations involving one or 
more foreign corporations; the consequences to persons that receive 
parent stock or securities pursuant to such reorganizations; and the 
treatment of certain subsequent inbound nonrecognition transactions 
following such reorganizations and certain other transactions. The 
final regulations affect corporations engaged in certain triangular 
reorganizations involving one or more foreign corporations, certain 
shareholders of foreign corporations acquired in such reorganizations, 
and foreign corporations that participate in certain inbound 
nonrecognition transactions.

DATES: 
    Effective date: These regulations are effective on July 17, 2024.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.367(a)-3(g)(1)(viii), 1.367(b)-3(g)(7)(i), 1.367(b)-4(i), 1.367(b)-
6(a)(1)(v) and (vi), 1.367(b)-10(e)(2), (3), and (5), and 1.1411-10(i).

FOR FURTHER INFORMATION CONTACT: Brady Plastaras at (202) 317-6937 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On October 6, 2023, the Department of the Treasury (Treasury 
Department) and the IRS published proposed regulations (REG-117614-14) 
in the Federal Register (88 FR 69559) under section 367(b) of the 
Internal Revenue Code (the ``Proposed Regulations'') that would 
implement the regulations announced and described in Notice 2014-32 
(2014-20 IRB 1006) and Notice 2016-73 (2016-52 IRB 908), with 
modifications. This document finalizes the Proposed Regulations without 
substantive change. Terms used but not defined in this preamble have 
the

[[Page 58276]]

meaning provided in the Proposed Regulations.
    In response to a request for comments in the Proposed Regulations, 
one comment was received and is discussed in the Summary of Comment and 
Explanation of Revisions. This comment is available at https://www.regulations.gov or upon request. No public hearing was held on the 
Proposed Regulations because there were no requests to speak.

Summary of Comment and Explanation of Revisions

I. Sec.  1.367(b)-10(d) Anti-Abuse Rule

    As the preamble to the Proposed Regulations explained, the existing 
regulations in Sec.  1.367(b)-10 (the ``2011 Final Regulations'') 
contain an anti-abuse rule under which ``appropriate adjustments'' are 
made if, ``in connection with a triangular reorganization, a 
transaction is engaged in with a view to avoid the purpose'' of the 
2011 Final Regulations. See Sec.  1.367(b)-10(d). The anti-abuse rule 
contains an example illustrating that the earnings and profits of S 
may, under certain circumstances, be deemed to include the earnings and 
profits of a corporation related to P or S for purposes of determining 
the consequences of the adjustments provided for in the 2011 Final 
Regulations.
    Notice 2014-32 described certain clarifications with respect to the 
scope of the anti-abuse rule and illustrated certain of those 
clarifications with an additional example. See Notice 2014-32, sections 
4.03 and 4.04. The Proposed Regulations proposed to implement those 
clarifications along with two new examples that further illustrate the 
broad scope of the anti-abuse rule. See proposed Sec.  1.367(b)-
10(d)(3) (Example 2) (relating to a downstream property transfer) and 
(d)(4) (Example 3) (relating to a taxable debt exchange). The Proposed 
Regulations did not propose to alter the anti-abuse rule's operative 
text, which remains unchanged from the 2011 Final Regulations. Because 
Examples 2 and 3 (as well as Example 1, which was described in Notice 
2014-32) merely illustrate applications of the same operative rule 
finalized in the 2011 Final Regulations, the adjustments described in 
those examples reflect adjustments that would be made under the 2011 
Final Regulations. That is, these examples illustrate fact patterns to 
which the anti-abuse rule already applies, independent of the inclusion 
of the examples in the Proposed Regulations. The additional language 
that was proposed to be added to Sec.  1.367(b)-10(d)(1) similarly 
clarifies potential situations to which the anti-abuse rule applies, 
and therefore also reflects adjustments that would be made under the 
2011 Final Regulations, notwithstanding that that language was first 
described in Notice 2014-32.
    The comment asserted that Examples 2 and 3 are an expansion of the 
operative anti-abuse rule because they involve fact patterns and impose 
corrective adjustments that were not described in prior guidance and 
implicate concerns that were not present when the 2011 Final 
Regulations were issued. The comment claimed that the anti-abuse rule 
has a narrow application that is limited to scenarios described by the 
one example in Sec.  1.367(b)-10(d) of the 2011 Final Regulations. In 
that example, S's earnings and profits are increased where S is 
``created, organized, or funded to avoid the application of [the 2011 
Final Regulations] with respect to the earnings and profits of [a 
related corporation].'' As the comment correctly observed, this 
adjustment increases the likelihood that the 2011 Final Regulations 
will apply to treat the P acquisition as a deemed distribution. The 
comment also argued, however, that the only type of adjustments 
permitted under the anti-abuse rule are adjustments that increase S's 
earnings and profits and, moreover, that the anti-abuse rule may impose 
those adjustments only if they bear on the P acquisition, because the P 
acquisition is the only type of transaction that can be ``in connection 
with'' an applicable triangular reorganization.
    The comment contended that Example 3 effectively introduces a new 
rule by, for the first time, applying the anti-abuse rule to 
``override'' the Sec.  1.367(b)-10(a)(2)(iii) priority rule, which in 
the example would otherwise prevent the P acquisition from being 
treated as a deemed distribution. The comment also argued that Example 
3 further expands the scope of the anti-abuse rule by applying it ``in 
connection with'' a transaction that occurs after the applicable 
triangular reorganization rather than in connection with the P 
acquisition itself. The comment similarly asserted that Example 2 
presents a fact pattern that is not within the purview of the anti-
abuse rule because that example references a regulation that was issued 
after the TCJA, and as such cannot reflect an abuse that the 2011 Final 
Regulations contemplate. Therefore, the comment recommended that 
Examples 2 and 3 should either be eliminated from the final regulations 
or made to apply only prospectively as of October 5, 2023, the date the 
Proposed Regulations were filed with the Federal Register.
    The Treasury Department and the IRS maintain that Examples 2 and 3 
are simply illustrations of the same operative anti-abuse rule--
unchanged since it was published in the 2011 Final Regulations--and 
therefore decline to adopt the comment's recommendation. The comment 
misunderstands the nature and purpose of the anti-abuse rule, which is 
intended to serve as a backstop to Sec.  1.367(b)-10 in cases where 
taxpayers purposely attempt to structure around the application of 
those regulations. That structuring may take many forms and implicate 
other technical provisions in ways that are not foreseeable, including 
by taking advantage of changes in law that create novel planning 
opportunities. The anti-abuse rule is designed to be adaptable to such 
changing or unforeseen circumstances and, as such, is not limited to a 
particular type of avoidance transaction.
    This adaptability is reflected in the wording of the anti-abuse 
rule, which, as described above, applies (i) ``if, in connection with a 
triangular reorganization,'' (ii) ``a transaction is engaged in with a 
view to avoid the purpose'' of Sec.  1.367(b)-10. Neither of those two 
elements limit the anti-abuse rule to a specific form of avoidance 
transaction, as doing so would undercut the adaptability that is 
essential to the proper functioning of the rule. Moreover, the preamble 
to temporary regulations issued in 2008 (TD 9400, 73 FR 30301), the 
predecessor regulations to the 2011 Final Regulations in Sec.  
1.367(b)-10, explains that the phrase ``in connection with'' is ``a 
broad standard that includes any transaction related to the 
reorganization even if the transaction is not part of the plan of 
reorganization'' (73 FR 30302). The P acquisition is not the exclusive 
type of transaction that may implicate the anti-abuse rule, nor is 
there any requirement that such transaction precede the applicable 
triangular reorganization.
    Once the anti-abuse rule applies, ``appropriate'' adjustments may 
be made. The types of corrective adjustments that may be appropriate 
are not circumscribed to a particular set of adjustments for the same 
reason that the anti-abuse rule is not limited to a particular form of 
avoidance transaction. That is, the anti-abuse rule naturally 
accommodates a range of adjustments because the nature of the 
corrective adjustment will depend on the form of the abusive 
transaction. These adjustments necessarily include adjustments that may 
have the effect of

[[Page 58277]]

modifying the application of technical rules, including the priority 
rule, as almost any avoidance transaction involves the exploitation of 
some technical provision. The Treasury Department and the IRS have long 
maintained that the anti-abuse rule is not defined by the one example 
described in the 2011 Final Regulations, which uses the phrase ``for 
example'' to indicate explicitly that the example is just one possible 
illustration of the rule and not, as the comment argues, the only 
possible illustration. See Notice 2014-32, section 3 (expressing the 
concern that taxpayers ``may be interpreting the anti-abuse rule too 
narrowly . . . .'').
    These final regulations do, however, make a minor change to the 
facts of Example 3. As described in the Proposed Regulations, that 
example stated that USP did not satisfy the holding period requirement 
with respect to section 245A because ``USP has held its stock in FP for 
fewer than 365 days.'' The Treasury Department and the IRS did not 
intend for that statement to create any inference as to how the holding 
period requirement could be satisfied and accordingly revise the 
example's facts to provide that USP simply ``will not'' satisfy the 
holding period requirement.
    The comment also questioned why the clarifications to the 
application of the anti-abuse rule that were described in Notice 2014-
32, such as Example 1, were not included among the rules listed in 
proposed Sec.  1.367(b)-10(e)(2) as having an April 25, 2014, 
applicability date. Section 1.367(b)-10(e)(2) does not explicitly 
reference those clarifications because, as noted above, they simply 
clarify potential situations to which the anti-abuse rule applies. On 
the other hand, the other changes described in Notice 2014-32 modify 
substantive rules and are therefore listed under Sec.  1.367(b)-
10(e)(2) as having an April 25, 2014, applicability date.

II. Definition of ``Foreign Subsidiary''

    Under the Proposed Regulations, the excess asset basis (``EAB'') 
rules create a deemed distribution of specified earnings to the foreign 
acquired corporation from foreign subsidiaries, with specified earnings 
drawn from each subsidiary on a pro rata basis. See proposed Sec.  
1.367(b)-3(g)(1) and (3). A ``foreign subsidiary'' is defined by 
reference to the ownership requirements of section 1248(c)(2)(B). 
Section 1248(c)(2)(B) describes a 10-percent ownership threshold, 
taking into account the constructive ownership rules in section 958(b). 
Under that definition, therefore, a foreign subsidiary could include a 
foreign corporation that the foreign acquired corporation is treated as 
owning solely through constructive ownership and in which it has no 
direct or indirect ownership interest. These final regulations make a 
minor change to Sec.  1.367(b)-3(g)(1) to clarify that possible result. 
See Sec.  1.367(b)-3(g)(1), fourth sentence (``the distribution is 
treated as being made through any intermediate owners, or directly from 
any constructively owned foreign subsidiaries, where applicable'') 
(emphasis added).
    The Treasury Department and the IRS believe this rule appropriately 
balances the need for a comprehensive mechanism to correct a foreign 
acquired corporation's basis imbalance with administrability concerns. 
For example, while in many cases the basis imbalance could be corrected 
by taking into account the earnings and profits of the particular 
subsidiary that participated in an applicable triangular 
reorganization, that subsidiary may no longer be identifiable or exist 
when the EAB rules are applied to the foreign acquired corporation. 
Thus, sourcing specified earnings on a pro rata basis from related 
foreign corporations provides an administrable rule while reducing the 
possibility that the basis imbalance goes uncorrected.

Effect on Other Documents

    The following publications are obsoleted as of July 17, 2024:

Notice 2014-32 (2014-20 IRB 1006)
Notice 2016-73 (2016-52 IRB 908)

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
requires that a Federal agency obtain the approval of the Office of 
Management and Budget (OMB) before collecting information from the 
public, whether such collection of information is mandatory, voluntary, 
or required to obtain or retain a benefit. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a valid control number assigned by the 
OMB.
    The collections of information in Sec.  1.367(b)-1(c)(4)(viii) and 
(ix) apply to taxpayers that engage in transactions described in Sec.  
1.367(b)-3(g) or Sec.  1.367(b)-10. These reporting requirements are 
necessary for the IRS's audit and examination purposes, and in 
particular to identify transactions that should be subject to these 
final regulations.
    The information collection is a statement by corporations attached 
to their timely filed Federal tax returns (or Form 5471, as applicable) 
that describes certain transactions and computations, as described in 
Sec. Sec.  1.367(b)-3(g) and 1.367(b)-10, that are relevant to these 
final regulations. Any collection burden will be accounted for in OMB 
control number 1545-0123.
    Taxpayers should keep copies of their filed returns and associated 
documentation as required by section 6001 of the Internal Revenue Code 
(the Code). These general tax records are already approved by the OMB 
under control number 1545-0123. Books or records relating to a 
collection of information must be retained as long as their contents 
may become material in the administration of any internal revenue law. 
Generally, tax returns and tax return information are confidential, as 
required by section 6103 of the Code.

III. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that this rulemaking will not have a significant 
economic impact on a substantial number of small entities within the 
meaning of section 601(6) of the Regulatory Flexibility Act. As 
discussed in the preamble to the Proposed Regulations, this 
certification is based on the expectation that the taxpayers affected 
by these final regulations will generally be domestic and foreign 
corporations that participate in certain triangular reorganizations. 
The triangular reorganizations at issue represent a narrow set of 
abusive transactions that have typically been engaged in by large, 
publicly traded corporations. Such transactions are highly 
sophisticated and are thus unlikely to involve small domestic entities.

IV. Section 7805(f)

    Pursuant to section 7805(f) of the Internal Revenue Code, the 
proposed regulations (REG-117614-14) preceding these final regulations 
were submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on the impact on small

[[Page 58278]]

business, and no comments were received.

V. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. These final regulations do not include any Federal mandate 
that may result in expenditures by State, local, or Tribal governments, 
or by the private sector in excess of that threshold.

VI. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These final regulations do not have 
federalism implications, do not impose substantial direct compliance 
costs on State and local governments, and do not preempt State law 
within the meaning of the Executive order.

Statement of Availability of IRS Documents

    Any IRS Revenue Procedure, Revenue Ruling, Notice, or other 
guidance cited in this document is published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry for Sec.  1.1411-10 in numerical order to read in part as 
follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.1411-10 also issued under 26 U.S.C. 367.
* * * * *

0
Par. 2. Section 1.367(a)-3 is amended by revising paragraphs (a)(2)(iv) 
and (g)(1)(viii) to read as follows:


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

    (a) * * *
    (2) * * *
    (iv) Certain triangular reorganizations described in Sec.  
1.367(b)-10. If, in an exchange under section 354 or 356, one or more 
U.S. persons exchange stock or securities of T (as defined in Sec.  
1.367(b)-10(a)(3)(i)) in connection with a transaction described in 
Sec.  1.367(b)-10 (applying to certain acquisitions of parent stock or 
securities for property in triangular reorganizations), section 
367(a)(1) does not apply to such U.S. persons with respect to the 
exchange of the stock or securities of T if the condition in paragraph 
(a)(2)(iv)(A) or (B) of this section is satisfied. See Sec.  1.367(b)-
10(a)(2)(iii) (providing a similar rule that excludes certain 
transactions from the application of Sec.  1.367(b)-10).
    (A) The amount of gain in the T stock or securities that would 
otherwise be recognized under section 367(a)(1) (without regard to any 
exceptions thereto) pursuant to the indirect stock transfer rules of 
paragraph (d) of this section is less than the sum of the amount of the 
deemed distribution under Sec.  1.367(b)-10 that would be treated and 
subject to U.S. tax as a dividend under section 301(c)(1) (or would 
give rise to an inclusion under section 951(a)(1)(A) or 951A(a) that 
would be subject to U.S. tax) and the amount of such deemed 
distribution that would be treated and subject to U.S. tax as gain from 
the sale or exchange of property under section 301(c)(3) (or would give 
rise to an inclusion under section 951(a)(1)(A) or 951A(a) that would 
be subject to U.S. tax) if Sec.  1.367(b)-10 would otherwise apply to 
the triangular reorganization.
    (B) T is a foreign corporation, but only to the extent that the 
stock or securities of T are exchanged for stock or securities of P 
that were acquired by S in exchange for property in the P acquisition 
(as the terms P, S, property, and P acquisition are defined in Sec.  
1.367(b)-10(a)). Such exchange of T stock or securities is subject to 
the rules under Sec.  1.367(b)-4(g). Section 367(a) applies to the 
exchange of T stock or securities to the extent that such stock or 
securities are exchanged for P stock or securities that were not 
acquired by S in exchange for property in the P acquisition.
* * * * *
    (g) * * *
    (1) * * *
    (viii) Except as provided in this paragraph (g)(1)(viii), paragraph 
(a)(2)(iv) of this section applies to exchanges occurring on or after 
May 17, 2011. For exchanges that occur prior to May 17, 2011, see Sec.  
1.367(a)-3T(b)(2)(i)(C) as contained in 26 CFR part 1 revised as of 
April 1, 2011. Paragraph (a)(2)(iv)(A) of this section, to the extent 
it relates to amounts that would be subject to U.S. tax or give rise to 
an inclusion under section 951(a)(1)(A) that would be subject to U.S. 
tax, applies to triangular reorganizations that are completed on or 
after April 25, 2014, unless T was not related to P or S (within the 
meaning of section 267(b)) immediately before the triangular 
reorganization; the triangular reorganization was entered into either 
pursuant to a written agreement that was (subject to customary 
conditions) binding before April 25, 2014, and at all times afterwards, 
or pursuant to a tender offer announced before April 25, 2014, that is 
subject to section 14(d) of the Securities and Exchange Act of 1934 (15 
U.S.C. 78n(d)(1)) and Regulation 14(D) (17 CFR 240.14d-1 through 
240.14d-101) or that is subject to comparable foreign laws; and to the 
extent the P acquisition that occurs pursuant to the plan of 
reorganization is not completed before April 25, 2014, the P 
acquisition was included as part of the plan before April 25, 2014. 
Paragraph (a)(2)(iv)(B) of this section applies to transactions 
completed on or after December 2, 2016. Paragraph (a)(2)(iv)(A) of this 
section, to the extent it relates to amounts that would give rise to an 
inclusion under section 951A(a) that would be subject to U.S. tax, 
applies to triangular reorganizations that are completed on or after 
October 5, 2023.
* * * * *

0
Par. 3. Section 1.367(b)-1 is amended by:
0
1. Removing the language ``and'' at the end of paragraph (c)(2)(iv)(B);
0
2. Removing the period at the end of paragraph (c)(2)(v) and adding the 
language ``; and'' in its place;
0
3. Adding paragraph (c)(2)(vi);
0
4. In paragraph (c)(3)(ii)(A), removing the language ``paragraph 
(c)(2)(i) or (v)'' and adding in its place the language ``paragraph 
(c)(2)(i), (v), or (vi)'';

[[Page 58279]]

0
5. Revising paragraph (c)(4)(v);
0
6. Removing the language ``and'' at the end of paragraph (c)(4)(vi);
0
7. Removing the period at the end of paragraph (c)(4)(vii)(B) and 
adding a semicolon in its place; and
0
8. Adding paragraphs (c)(4)(viii) and (ix).
    The additions and revision read as follows:


Sec.  1.367(b)-1   Other transfers.

* * * * *
    (c) * * *
    (2) * * *
    (vi) A domestic or foreign corporation (S) that acquires stock or 
securities of another corporation (P) in a transaction described in 
Sec.  1.367(b)-10(a)(1), without regard to the exceptions in Sec.  
1.367(b)-10(a)(2).
* * * * *
    (4) * * *
    (v) Any information that is or would be required to be furnished 
with a Federal income tax return pursuant to regulations or other 
guidance under section 332, 351, 354, 355, 356, 361, 368, or 381 
(whether or not a Federal income tax return is required to be filed), 
if such information has not otherwise been provided by the person 
filing the section 367(b) notice;
* * * * *
    (viii) In the case of a corporation (S) described in paragraph 
(c)(2)(vi) of this section, the rules of this paragraph (c)(4) apply by 
treating the acquisition of the stock or securities of P in exchange 
for property as the section 367(b) exchange referred to in paragraph 
(a) of this section. The section 367(b) notice must also include a 
complete description of the acquisition of the stock or securities of P 
in exchange for property, including a description of the property 
provided in exchange for the stock or securities and any related 
transactions involving the acquisition of the stock or securities. The 
section 367(b) notice must describe any adjustments made pursuant to 
Sec.  1.367(b)-10 or, if no adjustments are made, explain why no such 
adjustments were made; and
    (ix) In the case of an exchange to which Sec.  1.367(b)-3(g) 
applies, a statement describing how any excess asset basis (as defined 
in Sec.  1.367(b)-3(g)(2)(i)) arose, the amount of excess asset basis, 
and a description of the computation of the amount of excess asset 
basis.
* * * * *

0
Par. 4. Section 1.367(b)-2 is amended by:
0
1. In paragraph (c)(1), adding a sentence after the current first 
sentence;
0
2. Adding a sentence to the end of paragraph (d)(2)(ii);
0
3. In paragraph (d)(3)(ii), removing the language ``subsidiaries of'' 
and adding in its place the language ``corporations owned by'';
0
4. Adding a sentence to the end of paragraph (d)(3)(ii);
0
5. In paragraph (e)(4) (Example 2), removing the language ``foreign 
subsidiary'' and adding in its place the language ``foreign 
corporation''; and
0
6. In paragraphs (j)(2)(i) and (ii), removing the language ``is 
required to include in income either the all earnings and profits 
amount or the section 1248 amount under the provisions of Sec.  
1.367(b)-3 or 1.367(b)-4'' and adding in its place the language 
``exchanges stock pursuant to a transaction described in Sec.  
1.367(b)-3 or Sec.  1.367(b)-4(b)(1)(i), (b)(2)(i), (b)(3), (e), or 
(g)''.
    The additions read as follows:


Sec.  1.367(b)-2   Definitions and special rules.

* * * * *
    (c) * * *
    (1) * * * But see Sec.  1.1411-10(c)(3)(ii), which for certain 
exchanges modifies the section 1248 amount for purposes of section 
1411. * * *
* * * * *
    (d) * * *
    (2) * * *
    (ii) * * * But see Sec.  1.1411-10(c)(3)(ii), which for certain 
exchanges modifies the all earnings and profits amount for purposes of 
section 1411.
* * * * *
    (3) * * *
    (ii) * * * But see Sec.  1.367(b)-3(g)(1), which adjusts the all 
earnings and profits amount through a deemed distribution of certain 
earnings and profits of foreign subsidiaries owned by the foreign 
acquired corporation.
* * * * *

0
Par. 5. Section 1.367(b)-3 is amended by adding paragraph (g) to read 
as follows:


Sec.  1.367(b)-3   Repatriation of foreign corporate assets in certain 
nonrecognition transactions.

* * * * *
    (g) All earnings and profits amount adjusted for excess asset 
basis--(1) General rule. If there is excess asset basis with respect to 
a foreign acquired corporation and the condition described in paragraph 
(g)(1)(i) or (ii) of this section is satisfied, then, except as 
provided in paragraph (g)(5) of this section, an exchanging shareholder 
to which paragraph (b)(3)(i) of this section applies must compute the 
all earnings and profits amount with respect to its stock in the 
foreign acquired corporation as if, immediately before the inbound 
nonrecognition transaction, the foreign acquired corporation had 
received a distribution of property from a foreign subsidiary under 
section 301 in an amount equal to the specified earnings. In addition, 
the deemed distribution described in the preceding sentence is treated 
as occurring for all purposes of the Internal Revenue Code. For 
purposes of this paragraph (g)(1), the amount of the distribution from 
a foreign subsidiary is equal to the amount of earnings and profits of 
that foreign subsidiary that is designated as specified earnings under 
paragraph (g)(3) of this section. In the case of a foreign subsidiary 
the stock of which is not held directly by the foreign acquired 
corporation, the distribution is treated as being made through any 
intermediate owners, or directly from any constructively owned foreign 
subsidiaries, where applicable. For purposes of this paragraph (g)(1), 
references to the foreign acquired corporation, S, and a foreign 
subsidiary include any predecessor corporation.
    (i) S previously acquired in exchange for property stock or 
securities of the foreign acquired corporation in connection with a 
triangular reorganization described in Sec.  1.358-6(b)(2), and the 
foreign acquired corporation and S did not make adjustments that have 
the effect of a distribution of property from S to the foreign acquired 
corporation under Sec.  1.367(b)-10(b)(1).
    (ii) The excess asset basis is attributable, directly or 
indirectly, to property previously provided by a foreign subsidiary of 
the foreign acquired corporation in connection with a transaction not 
described in paragraph (g)(1)(i) of this section and undertaken with a 
principal purpose to create such excess asset basis.
    (2) Definitions. The following definitions apply for purposes of 
this paragraph (g).
    (i) Excess asset basis. The term excess asset basis means, with 
respect to a foreign acquired corporation, the amount by which the 
inside asset basis of that corporation exceeds the sum of the following 
amounts:
    (A) The earnings and profits of the foreign acquired corporation 
attributable to its outstanding stock. For purposes of this paragraph 
(g)(2)(i)(A), such earnings and profits are determined under the 
principles of Sec.  1.367(b)-2(d) but without regard to whether the 
exchanging shareholder is described in paragraph (b)(1) of this section 
or whether the exchanging shareholder is a U.S. person or a foreign 
person. Such earnings and profits include amounts described in section 
1248(d)(3) or (4).

[[Page 58280]]

    (B) The aggregate basis in the outstanding stock of the foreign 
acquired corporation determined immediately before the nonrecognition 
transaction described in paragraph (a) of this section (the inbound 
nonrecognition transaction) and therefore without regard to any basis 
increase described in Sec.  1.367(b)-2(e)(3)(ii) resulting from such 
inbound nonrecognition transaction.
    (C) The aggregate amount of liabilities of the foreign acquired 
corporation that are assumed (determined under the principles of 
section 357(d)) by the domestic acquiring corporation in the inbound 
nonrecognition transaction.
    (ii) Foreign subsidiary. The term foreign subsidiary means, with 
respect to a foreign acquired corporation, a foreign corporation with 
respect to which the foreign acquired corporation satisfies the 
ownership requirements of section 1248(c)(2)(B) but for this purpose 
treating the foreign acquired corporation as the United States person 
referred to in section 1248(c)(2)(B).
    (iii) Inbound nonrecognition transaction. The term inbound 
nonrecognition transaction has the meaning set forth in paragraph 
(g)(2)(i)(B) of this section.
    (iv) Inside asset basis. The term inside asset basis means, with 
respect to a foreign acquired corporation, the aggregate of the 
adjusted basis of all the assets of that corporation in the hands of 
the domestic acquiring corporation determined immediately after the 
inbound nonrecognition transaction.
    (v) Lower-tier earnings. The term lower-tier earnings means, with 
respect to a foreign acquired corporation, the sum of the earnings and 
profits (including deficits) of each foreign subsidiary.
    (vi) Property. The term property has the same meaning as in Sec.  
1.367(b)-10(a)(3)(ii).
    (vii) S. The term S has the same meaning as in Sec.  1.367(b)-
10(a)(3)(i).
    (viii) Specified earnings. The term specified earnings means, with 
respect to a foreign acquired corporation, the lesser of the following 
amounts:
    (A) Lower-tier earnings; and
    (B) The excess asset basis of the foreign acquired corporation.
    (3) Designation of specified earnings. If lower-tier earnings 
exceed specified earnings, then the portion of lower-tier earnings that 
is designated as specified earnings is determined by reference to the 
earnings and profits of each foreign subsidiary on a pro rata basis in 
proportion to each foreign subsidiary's share of lower-tier earnings.
    (4) Anti-abuse rule. Appropriate adjustments are made pursuant to 
this section if a transaction is engaged in with a view to avoid the 
purposes of this paragraph (g). For example, if a transaction is 
engaged in with a view to reduce excess asset basis, including by 
increasing the basis in the stock of the foreign acquired corporation 
without a corresponding increase in the basis of the assets of the 
foreign acquired corporation, that increase in the basis in the stock 
of the foreign acquired corporation will be disregarded for purposes of 
computing excess asset basis.
    (5) Prohibition against affirmative use. This paragraph (g) does 
not apply to an inbound nonrecognition transaction if a transaction 
described in paragraph (g)(1) of this section was entered into with a 
principal purpose of subjecting the inbound nonrecognition transaction 
to this paragraph (g). For example, this paragraph (g) will not apply 
to an inbound nonrecognition transaction if a taxpayer engaged in a 
transaction described in paragraph (g)(1) of this section with a 
principal purpose of accessing tax attributes of lower-tier foreign 
subsidiaries by reason of a deemed distribution of lower-tier earnings 
of the foreign acquired corporation.
    (6) Examples. The application of this paragraph (g) is illustrated 
by the examples in this paragraph (g)(6). In each example, all 
corporations have a calendar year-end and use the United States dollar 
as their functional currency.
    (i) Example 1: Excess asset basis from triangular reorganization--
(A) Facts. USP, a domestic corporation, owns all of the stock of USS, 
also a domestic corporation, and 80 percent of the stock of FP, a 
foreign corporation. USS owns the remaining 20 percent of the stock of 
FP. FP owns all of the stock of FS1, which in turn owns all of the 
stock of FS2. Both FS1 and FS2 are foreign corporations. In a 
reorganization described in section 368(a)(1)(F) (F reorganization), US 
Newco, a newly formed domestic corporation, acquires all of the assets 
of FP solely in exchange for stock of US Newco, which FP distributes to 
USP and USS in liquidation. Immediately before the F reorganization, 
the stock of FP owned by USP has a fair market value of $80x and an 
adjusted basis of $4x. The stock of FP owned by USS has a fair market 
value of $20x and an adjusted basis of $1x. The all earnings and 
profits amounts with respect to USP's stock of FP and USS's stock of 
FP, determined before any adjustments required by paragraph (g)(1) of 
this section, are $32x and $8x, respectively. FP holds assets with an 
adjusted basis of $95x, has no liabilities, and has $40x of earnings 
and profits attributable to its outstanding stock. FS1 and FS2 have 
$30x and $70x of earnings and profits, respectively, all of which are 
described in section 959(c)(3). Dividends paid by FS2 to FS1, and by 
FS1 to FP, would qualify for the exception to foreign personal holding 
company income under section 954(c)(6). Before the applicability date 
described in paragraph (g)(7)(i) of this section, and separate from the 
F reorganization, FS1 provided property to FP in exchange for stock of 
FP in connection with a triangular reorganization described in Sec.  
1.358-6(b)(2), and neither FP nor FS1 made adjustments that had the 
effect of a distribution of property from FS1 to FP under Sec.  
1.367(b)-10(b)(1).
    (B) Analysis--(1) All earnings and profits amount. The F 
reorganization is an asset acquisition described in section 368(a)(1) 
and is thus subject to section 367(b) and this section. Under paragraph 
(b)(3) of this section, USP and USS each must include in income as a 
deemed dividend the all earnings and profits amount with respect to 
their stock of FP. Because there is excess asset basis with respect to 
FP (as determined in paragraph (g)(6)(i)(B)(2) of this section), USP 
and USS must compute the all earnings and profits amounts attributable 
to their stock of FP as if FP had received a distribution of specified 
earnings, immediately before the F reorganization. See paragraph (g)(1) 
of this section. Because the stock of FS2 is indirectly owned by FP, to 
the extent the specified earnings are determined by reference to the 
earnings and profits of FS2, FS2 is treated as making a distribution to 
FS1 under section 301, and FS1 is then treated as making a distribution 
to FP under section 301 in an amount equal to the sum of the amount of 
specified earnings determined by reference to the earnings and profits 
of FS1 (determined without regard to the deemed distribution from FS2) 
and the amount of the deemed distribution received from FS2. See id.
    (2) Excess asset basis. The amount of excess asset basis is $50x, 
calculated as the amount by which FP's inside asset basis ($95x) 
exceeds the sum of FP's earnings and profits ($40x), the aggregate 
basis in the outstanding stock of FP ($5x), and the amount of 
liabilities of FP assumed by US Newco in the F reorganization ($0). See 
paragraph (g)(2)(i) of this section.
    (3) Deemed distribution of specified earnings. The amount of 
specified earnings equals $50x, the lesser of the following amounts: 
the sum of the earnings and profits of FS1 and FS2 ($100x); and the 
amount of excess asset

[[Page 58281]]

basis with respect to FP ($50x). See paragraph (g)(2)(viii) of this 
section. FP is accordingly treated as receiving a distribution of $50x 
from FS1. See paragraph (g)(1) of this section. Under paragraph (g)(3) 
of this section, $15x ($50x x ($30x/$100x)) of FS1's earnings and 
profits and $35x ($50x x ($70x/$100x)) of FS2's earnings and profits 
are designated as specified earnings. FS2 is treated as distributing 
$35x to FS1. See paragraph (g)(1) of this section. Under sections 
301(c)(1) and 954(c)(6), the $35x deemed distribution from FS2 to FS1 
is treated as a dividend that does not give rise to foreign personal 
holding company income. FS1 must accordingly increase its earnings and 
profits described in section 959(c)(3) by $35x to $65x, and FS2 must 
decrease its earnings and profits described in section 959(c)(3) by the 
same amount. FS1 is then treated as making a distribution of $50x to 
FP. See paragraph (g)(1) of this section. Under sections 301(c)(1) and 
954(c)(6), the $50x deemed distribution is also treated as a dividend 
that does not give rise to foreign personal holding company income. FP 
must accordingly increase its earnings and profits described in section 
959(c)(3) by $50x to $90x, and FS1 must decrease its earnings and 
profits described in section 959(c)(3) by the same amount.
    (4) Adjusted all earnings and profits amount attributable to USP's 
FP stock. USP must compute the all earnings and profits amount 
attributable to its stock of FP after taking into account the $50x 
increase to FP's earnings and profits that resulted from the deemed 
distribution of specified earnings. See paragraph (g)(1) of this 
section. Because USP owns 80% of the stock of FP, $40x (calculated as 
80% of $50x) of the specified earnings are attributable to USP's stock 
of FP and are included in the all earnings and profits amount 
attributable to USP's stock of FP. The all earnings and profits amount 
that USP must include in income as a deemed dividend is therefore $72x 
($32x + $40x).
    (5) Adjusted all earnings and profits amount attributable to USS's 
FP stock. USS must compute the all earnings and profits amount 
attributable to its stock of FP after taking into account the $50x 
increase to FP's earnings and profits that resulted from the deemed 
distribution of specified earnings. See paragraph (g)(1) of this 
section. Because USS owns 20% of the stock of FP, $10x (calculated as 
20% of $50x) of the specified earnings are attributable to USS's stock 
of FP and are included in the all earnings and profits amount 
attributable to USS's stock of FP. The all earnings and profits amount 
that USS must include in income as a deemed divided is therefore $18x 
($8x + $10x).
    (ii) Example 2: Principal purpose of creating excess asset basis--
(A) Facts. USP, a domestic corporation, owns all of the stock of FP, 
which in turn owns all of the stock of FS. Both FP and FS are foreign 
corporations. The all earnings and profits amount with respect to USP's 
stock of FP, determined before any adjustments required by paragraph 
(g)(1) of this section, is $50x. FP has no other earnings and profits 
other than the $50x that reflect USP's all earnings and profits amount. 
FS has $200x of earnings and profits, all of which are earnings and 
profits described in section 959(c)(2) (PTEP) because those earnings 
and profits gave rise to an earlier income inclusion under section 951 
with respect to USP. Increases in stock basis were made under section 
961 by reason of USP's section 951 inclusion. FP has excess asset basis 
of $100x as a result of a previous transaction that was undertaken with 
a principal purpose of creating excess asset basis in which FS provided 
$100x of property to FP. At the time of that transaction, FP did not 
also have a principal purpose of subjecting an inbound nonrecognition 
transaction to this paragraph (g) and thus paragraph (g)(5) of this 
section is not applicable. Subsequently, in a liquidation described in 
section 332, FP distributes all of its assets to USP and the stock of 
FP is cancelled (the FP liquidation).
    (B) Analysis--(1) All earnings and profits amount. The FP 
liquidation is subject to section 367(b) and this section. Under 
paragraph (b)(3) of this section, USP must include in income as a 
deemed dividend the all earnings and profits amount with respect to its 
stock of FP. Because there is excess asset basis with respect to FP, 
USP must compute the all earnings and profits amount attributable to 
its stock of FP as if FP had received a distribution of specified 
earnings immediately before the FP liquidation. See paragraph (g)(1) of 
this section.
    (2) Deemed distribution of specified earnings. The amount of 
specified earnings equals $100x, the lesser of the following amounts: 
the earnings and profits of FS ($200); and the amount of excess asset 
basis with respect to FP ($100x). See paragraph (g)(2)(viii) of this 
section. FS is accordingly treated as making a distribution of $100x to 
FP. See paragraph (g)(1) of this section. Under sections 301(c)(1) and 
959(b), the $100x deemed distribution from FS to FP is treated as a 
distribution of PTEP that is not included in the gross income of FP for 
purposes of section 951. The distribution reduces FS's earnings and 
profits and PTEP with respect to USP by $100x and increases FP's 
earnings and profits and PTEP with respect to USP by $100x. 
Furthermore, appropriate adjustments are made under section 961 for the 
distribution of PTEP.
    (3) Adjusted all earnings and profits amount attributable to USP's 
stock of FP. USP must compute the all earnings and profits amount 
attributable to its stock of FP after taking into account the $100x 
increase to FP's earnings and profits that resulted from the deemed 
distribution of specified earnings. See paragraph (g)(1) of this 
section. Because the deemed distribution consisted entirely of PTEP 
with respect to USP, the deemed distribution does not affect USP's all 
earnings and profits amount of $50x. See Sec.  1.367(b)-2(d)(2)(ii). 
USP must therefore include $50x in income as a deemed dividend under 
this section. USP must also recognize any foreign currency gain or loss 
under section 986(c) with respect to the $100x of PTEP of FP. See Sec.  
1.367(b)-2(j)(2).
    (7) Applicability date--(i) In general. This paragraph (g) (other 
than paragraphs (g)(2)(viii), (g)(3) and (5) of this section) applies 
to transactions completed on or after December 2, 2016, and to any 
transactions treated as completed before December 2, 2016, as a result 
of an entity classification election made under Sec.  301.7701-3 of 
this chapter that is filed on or after December 2, 2016. Paragraphs 
(g)(2)(viii), (g)(3) and (5) of this section apply to transactions 
completed on or after October 5, 2023.
    (ii) Transactions completed (or elections made) on or after 
December 2, 2016, and before October 5, 2023. Except as provided in 
paragraph (g)(7)(iii) of this section, the following definitions (in 
lieu of the corresponding definitions or in addition to the definitions 
in paragraph (g)(2) of this section) and rules apply with respect to 
transactions completed on or after December 2, 2016, and to any 
transactions treated as completed before December 2, 2016, as a result 
of an entity classification election made under Sec.  301.7701-3 of 
this chapter that is filed on or after December 2, 2016, but before 
October 5, 2023:
    (A) The term specified earnings means, with respect to the stock of 
a foreign acquired corporation that is exchanged by an exchanging 
shareholder, the lesser of the following amounts (but not below zero):
    (1) The sum of the earnings and profits (including a deficit) with 
respect to each foreign subsidiary of the foreign acquired corporation 
that are attributable under section 1248(c)(2) to the stock of the 
foreign acquired

[[Page 58282]]

corporation exchanged (lower-tier earnings). For purposes of the 
preceding sentence, the modifications described in Sec.  1.367(b)-
2(d)(2) and (d)(3)(i) apply. Thus, for example, the amount of the 
earnings and profits of a foreign subsidiary that are attributable to 
stock of the foreign acquired corporation is determined without regard 
to whether the foreign subsidiary was a controlled foreign corporation 
at any time during the five years preceding the inbound nonrecognition 
transaction.
    (2) The product of the excess asset basis of the foreign acquired 
corporation, multiplied by the exchanging shareholder's specified 
percentage.
    (3) The amount of gain that would be realized by the exchanging 
shareholder if, immediately before the inbound nonrecognition 
transaction, the exchanging shareholder had sold the stock of the 
foreign acquired corporation for fair market value, reduced by the 
exchanging shareholder's all earnings and profits amount (for this 
purpose, determined without regard to the modifications described in 
this paragraph (g)) (specified stock gain).
    (B) The term specified percentage means, with respect to an 
exchanging shareholder, a fraction (expressed as a percentage), the 
numerator of which is the sum of the aggregate of the specified stock 
gain with respect to all exchanging shareholders to which paragraph 
(b)(3) of this section applies and the aggregate of the gain realized 
(regardless of whether such gain is recognized) with respect to the 
stock exchanged by all other exchanging shareholders.
    (C) If there is excess asset basis with respect to a foreign 
acquired corporation, as determined under paragraph (g)(2)(i) of this 
section, a taxpayer may reduce the excess asset basis to the extent 
that the excess asset basis is not attributable, directly or 
indirectly, to property provided by a foreign subsidiary of the foreign 
acquired corporation. For example, if there was a transfer of property 
to the foreign acquired corporation described in section 362(e)(2), and 
the election described in section 362(e)(2)(C) was made to limit the 
basis in the stock received in the foreign acquired corporation to its 
fair market value, then, for purposes of determining excess asset 
basis, the basis in the stock of the foreign acquiring corporation may 
be determined without regard to the application of section 362(e)(2).
    (iii) Early application. A taxpayer and its related parties (within 
the meaning of sections 267(b) and 707(b)(1)) may choose to apply 
paragraphs (g)(1) through (6) of this section to all open taxable years 
beginning before July 17, 2024, provided that the taxpayer and its 
related parties consistently apply paragraphs (g)(1) through (6) of 
this section and Sec.  1.367(b)-1(c)(4)(ix) for such years.

0
Par. 6. Section 1.367(b)-4 is amended by:
0
1. In paragraph (a), adding a sentence after the fifth sentence;
0
2. In paragraph (a), removing the language ``paragraph (g)'' in the 
current sixth sentence and adding in its place the language ``paragraph 
(h)'' and removing the language ``paragraph (h)'' in the current 
seventh sentence and adding in its place the language ``paragraph 
(i)'';
0
3. In paragraph (e)(5) Example 2 (ii)(B), removing the language 
``paragraph (g)(1)'' wherever it appears and adding in its place the 
language ``paragraph (h)(1)'';
0
4. In paragraph (f)(3) Example 2 (ii), removing the language 
``paragraph (g)(1)'' wherever it appears and adding in its place the 
language ``paragraph (h)(1)'';
0
5. Redesignating paragraphs (g) and (h) as paragraphs (h) and (i), 
respectively;
0
6. Adding a new paragraph (g);
0
7. In newly redesignated paragraph (i), adding a sentence after the 
sixth sentence; and
0
8. In newly redesignated paragraph (i), removing the language 
``paragraph (h), paragraphs (a), (b) introductory text, (b)(1)(i)(C), 
(d)(1), (e), (f), and (g)'' and adding in its place the language 
``paragraph (i), paragraphs (a), (b) introductory text, (b)(1)(i)(C), 
(d)(1), (e), (f), and (h)'', and removing the language ``paragraphs (f) 
and (g)(5)'' and adding in its place the language ``paragraphs (f) and 
(h)(5)''.
    The additions read as follows:


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

    (a) * * * Paragraph (g) of this section provides rules regarding 
exchanges that occur pursuant to a transaction described in Sec.  
1.367(b)-10(a)(1), without regard to the exceptions in Sec.  1.367(b)-
10(a)(2). * * *
* * * * *
    (g) Income inclusion and gain recognition in exchanges occurring in 
connection with certain triangular reorganizations--(1) Rule. If, in an 
exchange under section 354 or 356 that occurs in connection with a 
transaction described in Sec.  1.367(b)-10, an exchanging shareholder 
exchanges stock or securities of a foreign acquired corporation, then, 
to the extent that the exchanging shareholder receives stock or 
securities of P acquired by S in exchange for property in the P 
acquisition, the shareholder must--
    (i) Include in income as a deemed dividend the section 1248 amount 
attributable to the stock that the shareholder exchanges; and
    (ii) After taking into account the increase in basis in the stock 
provided in Sec.  1.367(b)-2(e)(3)(ii) resulting from the deemed 
dividend (if any), recognize all realized gain with respect to the 
stock or securities that would not otherwise be recognized.
    (2) Special rules and definitions. For the purposes of this 
paragraph (g), an exchanging shareholder means a United States person 
or foreign person that exchanges stock of a foreign acquired 
corporation in a prescribed exchange, regardless of whether such United 
States person is a section 1248 shareholder or such foreign person is a 
foreign corporation in which a United States person is a section 1248 
shareholder. As used in this paragraph (g), the terms P, S, property, 
and P acquisition have the meanings provided in Sec.  1.367(b)-10(a), 
and the term foreign person means a person that is not a United States 
person.
    (3) Example. The following example illustrates the rules of this 
paragraph (g):
    (i) Facts. USP, a domestic corporation, owns all of the stock of FP 
and USS. FP is a foreign corporation that owns all of the stock of FS, 
a foreign corporation. USS is a domestic corporation that owns all of 
the stock of FT, a foreign corporation. USS owns 100 shares of stock of 
FT, which constitutes a single block of stock with a fair market value 
of $100x, an adjusted basis of $20x, and a section 1248 amount of $50x. 
FS has earnings and profits of $60x. A dividend from FS to FP would 
qualify for the exception to foreign personal holding company income 
under section 954(c)(6). FP issues 100 shares of voting stock with a 
fair market value of $100x to FS, $40x of which (the 40-percent FP 
block) is issued in exchange for $40x of newly issued common stock of 
FS and $60x of which (the 60-percent FP block) is issued in exchange 
for $60x of cash. FS acquires all of the stock of FT held by USS solely 
in exchange for the $100x of voting stock of FP (that is, FS exchanges 
both the 40-percent FP block and the 60-percent FP block) in a 
triangular reorganization described in section 368(a)(1)(B) (triangular 
B reorganization).
    (ii) Analysis--(A) Application of Sec.  1.367(b)-10. The triangular 
B reorganization is described in Sec.  1.367(b)-10, and the $60x of 
cash constitutes property under Sec.  1.367(b)-

[[Page 58283]]

10(a)(3)(ii). Pursuant to Sec.  1.367(b)-10(b)(1), adjustments must be 
made that have the effect of a distribution of property in the amount 
of $60x from FS to FP under section 301. The $60x deemed distribution 
is treated as separate from, and occurring immediately before, FS's 
acquisition of the 60-percent FP block used in the triangular B 
reorganization. The $60x deemed distribution from FS to FP results in 
$60x of dividend income to FP under section 301(c)(1) that is not 
foreign personal holding company income under section 954(c)(6).
    (B) Application of paragraph (g) of this section. Pursuant to Sec.  
1.367(a)-3(a)(2)(iv)(B), this paragraph (g) applies to $60x of the 
stock of FT (the 60-percent FT block) exchanged for the 60-percent FP 
block. Thus, under paragraph (g)(1)(i) of this section, USS must 
include in income a $30x deemed dividend (representing 60 percent of 
USS's $50x section 1248 amount) with respect to the 60-percent FT block 
exchanged for the 60-percent FP block. In addition, under paragraph 
(g)(1)(ii) of this section, USS must recognize its realized gain that 
would not otherwise be recognized with respect to the 60-percent FT 
block. USS's fair market value and adjusted basis in the 60-percent FT 
block are $60x (60 percent of the $100x fair market value of the stock 
of FT) and $12x (60 percent of the $20x adjusted basis of the stock of 
FT), respectively. USS's initial built-in gain with respect to the 60-
percent FT block is accordingly $48x ($60x fair market value less $12x 
adjusted basis). The $30x deemed dividend increases USS's basis in the 
60-percent FT block to $42 ($12x + $30x), leaving $18x ($60x-$42x) of 
built-in gain. USS must therefore recognize the remaining $18x of gain 
with respect to the 60-percent FT block.
    (C) Application of paragraph (b) of this section and regulations 
under section 367(a). USS has $32x of built-in gain in the remaining 
$40x of stock of FT (the 40-percent FT block) that USS exchanged for 
the 40-percent FP block, calculated as USS's initial $80 of built-in 
gain in all of its stock of FT less the $48x of initial built-in gain 
attributable to the 60-percent FT block. USS's section 1248 amount in 
the 40-percent FT block is $20x, calculated as 40 percent of USS's $50x 
section 1248 amount. USS does not recognize a deemed dividend of the 
$20x section 1248 amount under paragraph (b) of this section because FT 
remains a controlled foreign corporation with respect to which USS is a 
section 1248 shareholder immediately after the triangular B 
reorganization. Unless USS properly files a gain recognition agreement 
pursuant to Sec. Sec.  1.367(a)-3(b) and 1.367(a)-8, USS recognizes the 
$32x of built-in gain under section 367(a)(1) with respect to the 40-
percent FT block.
* * * * *
    (i) * * * Paragraph (g) of this section applies to transactions 
completed on or after December 2, 2016. * * *

0
Par. 7. Section 1.367(b)-6 is amended by adding paragraphs (a)(1)(v) 
and (vi) to read as follows:


Sec.  1.367(b)-6   Effective/applicability dates and coordination 
rules.

    (a) * * *
    (1) * * *
    (v) Section 1.367(b)-2(j)(2) applies to transactions completed on 
or after October 5, 2023, and to any transactions treated as completed 
before October 5, 2023, as a result of an entity classification 
election made under Sec.  301.7701-3 of this chapter that is filed on 
or after October 5, 2023.
    (vi) Section 1.367(b)-1(c)(2)(vi), (c)(4)(viii), and (c)(4)(ix) 
apply to taxable years ending on or after October 5, 2023. However, a 
taxpayer and its related parties (within the meaning of sections 267(b) 
and 707(b)(1)) may choose to apply the rules referred to in the 
preceding sentence to all open taxable years ending before October 5, 
2023, provided that the taxpayer and its related parties consistently 
apply such rules and Sec.  1.367(b)-3(g) for such years.
* * * * *

0
Par. 8. Section 1.367(b)-10 is amended by:
0
1. Adding two sentences to the end of paragraph (a)(1);
0
2. Revising paragraphs (a)(2)(ii) and (iii);
0
3. Removing the language ``and'' at the end of paragraph (a)(3)(ii)(A);
0
4. Removing the period at the end of paragraph (a)(3)(ii)(B) and adding 
the language ``; and'' in its place;
0
5. Adding paragraph (a)(3)(ii)(C);
0
6. Removing paragraph (b)(2);
0
7. Redesignating paragraphs (b)(3), (4), and (5) as paragraphs (b)(2), 
(3), and (4), respectively;
0
8. Revising newly redesignated paragraph (b)(2);
0
9. Adding two sentences to the end of newly redesignated paragraph 
(b)(3);
0
10. In newly redesignated paragraph (b)(4)(ii), removing the sixth 
sentence, revising the current seventh sentence, and adding two 
sentences at the end of the paragraph; and
0
11. Revising paragraphs (c), (d), and (e).
    The revisions and additions read as follows:


Sec.  1.367(b)-10   Acquisition of parent stock or securities for 
property in triangular reorganizations.

    (a) * * *
    (1) * * * See Sec.  1.367(b)-3(g) for the treatment of certain 
inbound nonrecognition transactions following transactions described in 
this section. See Sec.  1.367(b)-4(g) for rules applicable to certain 
exchanging shareholders that exchange stock of T in connection with a 
transaction described in this section.
    (2) * * *
    (ii) S is a domestic corporation, P is not a controlled foreign 
corporation (within the meaning of Sec.  1.367(b)-2(a)), P's stock in S 
is not a United States real property interest (within the meaning of 
section 897(c)), and the deemed distribution that would result from the 
application of this section would not be treated as a dividend under 
section 301(c)(1) that would be subject to U.S. tax under either 
section 881 (for example, by reason of an applicable treaty or by 
reason of an absence of earnings and profits) or section 882; or
    (iii) In an exchange under section 354 or 356, one or more U.S. 
persons exchange stock or securities of T and the amount of gain in the 
T stock or securities that would otherwise be recognized under section 
367(a)(1) is equal to or greater than the sum of the amount of the 
deemed distribution under this section that would be treated and 
subject to U.S. tax as a dividend under section 301(c)(1) (or would 
give rise to an inclusion under section 951(a)(1)(A) or 951A(a) that 
would be subject to U.S. tax) and the amount of such deemed 
distribution that would be treated and subject to U.S. tax as gain from 
the sale or exchange of property under section 301(c)(3) (or would give 
rise to an inclusion under section 951(a)(1)(A) or 951A(a) that would 
be subject to U.S. tax) if this section would otherwise apply to the 
triangular reorganization. The exception provided in this paragraph 
(a)(2)(iii) does not apply if T is a foreign corporation. See Sec.  
1.367(a)-3(a)(2)(iv) (providing a similar rule that excludes certain 
transactions from the application of section 367(a)(1)).
    (3) * * *
    (ii) * * *
    (C) Stock of S that is nonqualified preferred stock (as defined in 
section 351(g)(2)).
* * * * *
    (b) * * *
    (2) Timing of deemed distribution. If P controls (within the 
meaning of section 368(c)) S at the time of the P acquisition, the 
adjustments described in paragraph (b)(1) of this section are made as 
if the deemed distribution is a

[[Page 58284]]

separate transaction occurring immediately before the P acquisition. If 
P does not control (within the meaning of section 368(c)) S at the time 
of the P acquisition, the adjustments described in paragraph (b)(1) of 
this section are made as if the deemed distribution is a separate 
transaction occurring immediately after P acquires control of S, but 
before the reorganization.
    (3) * * * Thus, P's adjustment to the basis in its S stock under 
Sec.  1.358-6 is determined as if P provided the P stock or securities 
pursuant to the plan of reorganization, notwithstanding that S acquired 
the P stock or securities in exchange for property in the P 
acquisition. See also Sec.  1.367(b)-13.
    (4) * * *
    (ii) * * * Pursuant to paragraph (b)(2) of this section, the 
adjustments described in paragraph (b)(1) of this section are made as 
if the deemed distribution is a separate transaction occurring 
immediately before FS's purchase of the P stock on the open market. * * 
* US1's transfer of its FT stock in exchange for P stock is subject to 
Sec.  1.367(b)-4(g). If, contrary to the facts in this paragraph 
(b)(4), US1 had built-in gain with respect to its FT stock, then such 
gain would be recognized in accordance with Sec.  1.367(b)-4(g).
    (c) Collateral adjustments. This paragraph (c) provides additional 
rules that apply by reason of the deemed distribution described in 
paragraph (b)(1) of this section. A deemed distribution described in 
paragraph (b)(1) of this section is treated as occurring for all 
purposes of the Internal Revenue Code. Thus, for example, the ordering 
rules of section 301(c) apply to characterize the deemed distribution 
to P as a dividend from the earnings and profits of S, return of stock 
basis, or gain from the sale or exchange of property, as the case may 
be. Furthermore, section 959 may apply to the deemed distribution if S 
is a foreign corporation, and section 881, 882, 897, 1442, or 1445 may 
apply to the deemed distribution if S is a domestic corporation. 
Appropriate corresponding adjustments must be made to S's earnings and 
profits consistent with the principles of section 312.
    (d) Anti-abuse rule--(1) Rule. Appropriate adjustments must be made 
pursuant to this section if, in connection with a triangular 
reorganization, a transaction is engaged in with a view to avoid the 
purpose of this section. For example, if S is created, organized, or 
funded to avoid the application of this section with respect to the 
earnings and profits of another corporation, the earnings and profits 
of S (or any successor corporation) may be deemed to include the 
earnings and profits of such other corporation (or any successor 
corporation) for purposes of determining the consequences of the 
adjustments provided in this section, and appropriate corresponding 
adjustments may be made to account for the application of this section 
to the earnings and profits of such other corporation (or any successor 
corporation). Adjustments may be made under this paragraph (d) whether 
S is funded before or after a triangular reorganization, and such 
funding may include capital contributions, loans, and distributions. 
The following examples illustrate the application of this paragraph 
(d), the application of which is not limited to the particular 
situations described in the examples.
    (2) Example 1: Deemed increase to S's earnings and profits--(i) 
Facts. FP is a foreign corporation that owns all of the stock of USS, a 
domestic corporation. USS has no assets, liabilities, or earnings and 
profits. FP issues $10x of voting stock to USS in exchange for $10x of 
newly issued stock of USS, and FP also issues $90x of voting stock to 
USS in exchange for a note newly issued by USS with a fair market value 
of $90x (USS note). FP would be subject to U.S. tax under section 881 
on a distribution from USS if, contrary to the facts, USS had earnings 
and profits for purposes of applying section 301(c) to the 
distribution. USS acquires all the stock of UST, a domestic corporation 
that is unrelated to FP and USS, from a foreign person in exchange for 
the $100x of voting stock of FP in a triangular reorganization 
described in section 368(a)(1)(B) (triangular B reorganization). UST 
has $100x of earnings and profits. USS's purchase of the $90x of stock 
of FP in exchange for the USS note in connection with the triangular B 
reorganization is engaged in with a view to avoid the purpose of this 
section.
    (ii) Analysis. Because USS's purchase of the $90x of stock of FP in 
exchange for the USS note is engaged in with a view to avoid the 
purpose of this section, the anti-abuse rule applies and appropriate 
adjustments are made. In particular, for purposes of determining the 
consequences of the deemed distribution provided for in paragraph 
(b)(1) of this section, the earnings and profits of USS are deemed to 
include the earnings and profits of UST. USS is therefore treated as 
having made a deemed distribution equal to $90x, which reflects the 
portion of the stock of FP that USS acquired in exchange for property 
(the USS note). Because USS is deemed to have $100x of earnings and 
profits, the entire $90x deemed distribution is treated as a dividend 
under section 301(c)(1). The deemed distribution is treated as separate 
from, and occurring immediately before, USS's acquisition of the stock 
of FP used in the triangular B reorganization. No adjustments are made 
by FP to the basis in its stock of USS except as provided in Sec.  
1.358-6. Under paragraph (b)(3) of this section, FP's adjustment to the 
basis in its stock of USS under Sec.  1.358-6 is determined as if FP 
provided all $100x of the stock of FP pursuant to the plan of 
reorganization.
    (3) Example 2: Downstream property transfer--(i) Facts. USP is a 
domestic corporation that owns all of the stock of FS1, a foreign 
corporation, FS1 holds a note receivable issued by USP with a fair 
market value of $100x (USP note), and FS1 has more than $100x of 
earnings and profits. USP has no income inclusion under section 
951(a)(1)(B) with respect to the USP note after the application of 
Sec.  1.956-1(a)(2). FS1 forms USS Newco, a domestic corporation, to 
which it transfers the USP note in exchange for voting stock of USS 
Newco. USS Newco then forms FS2 Newco, a foreign corporation, and FS1 
transfers all of its remaining assets (except for its stock in USS 
Newco) to FS2 Newco in exchange for additional voting stock of USS 
Newco in a transaction intended to qualify as a triangular 
reorganization described in section 368(a)(1)(C) (triangular C 
reorganization). FS1 liquidates into USP pursuant to the triangular C 
reorganization, and USP receives the stock of USS Newco held by FS1. 
FS1's transfer of the USP note to USS Newco in connection with the 
intended triangular C reorganization is engaged in with a view to avoid 
the purpose of this section.
    (ii) Analysis. Because FS1's transfer of the USP note to USS Newco 
is in connection with a triangular reorganization and is engaged in 
with a view to avoid the purpose of this section, the anti-abuse rule 
applies and appropriate adjustments are made. FS1's formation of USS 
Newco and transfer of the USP note to USS Newco, together with the 
distribution of the shares of USS Newco pursuant to the liquidation of 
FS1, is treated under the anti-abuse rule as a distribution of $100x, 
consistent with its substance. Accordingly, adjustments are made 
consistent with there having been such a distribution. Because FS1 has 
more than $100x of earnings and profits, the adjustments made are 
consistent with USS Newco having received a $100x dividend from FS1 
separate from, and immediately before, the triangular C reorganization. 
USS Newco must

[[Page 58285]]

therefore include $100x in gross income as if it had received that 
amount as a dividend and increase its earnings and profits by the same 
amount. FS1 must decrease its earnings and profits by $100x. For 
purposes of determining USS Newco's basis in its stock of FS2 Newco, 
Sec.  1.367(b)-13 applies by treating USS Newco as P (within the 
meaning of Sec.  1.367(b)-13(a)(2)(ii)). Under paragraph (b)(3) of this 
section, USS Newco's adjustment to the basis in its FS2 Newco stock 
under Sec.  1.367(b)-13 is determined as if USS Newco provided the 
stock of USS Newco stock pursuant to the plan of reorganization.
    (4) Example 3: Taxable debt exchange--(i) Facts. USP is a domestic 
corporation that owns all of the stock of FP, a foreign corporation, 
and USS, a domestic corporation. Furthermore, FP owns all of the stock 
of FS, a foreign corporation, and USS owns all of the stock of UST, a 
domestic corporation. FP has no earnings and profits, and FS has more 
than $100x of earnings and profits. USP will not satisfy the 
requirements of sections 245A and 246(c) with respect to dividends 
received from FP. FS transfers a note issued by FS with a fair market 
value of $100x (FS note) to FP in exchange for $100x of voting stock of 
FP, and FS then uses the stock of FP to acquire all of the stock of UST 
held by USS in a triangular reorganization described in section 
368(a)(1)(B) (triangular B reorganization). Because a dividend from FS 
to FP would not constitute foreign personal holding company income 
under section 954(c)(6), the taxpayer asserts that the exception in 
paragraph (a)(2)(iii) of this section applies and therefore does not 
make any adjustments pursuant to this section. FP then transfers the FS 
note to USP in exchange for a note issued by USP with a fair market 
value of $100x (USP note). The USP note constitutes United States 
property within the meaning of section 956(c), and USP would otherwise 
have an inclusion under section 951(a)(1)(B) and Sec.  1.956-1(a)(2) if 
FP had earnings and profits. FS's transfer of the FS note to FP, and 
FP's subsequent transfer of the FS note to USP in connection with the 
triangular B reorganization, are engaged in with a view to avoid the 
purpose of this section.
    (ii) Analysis. Because the transfers of the FS note are in 
connection with a triangular reorganization and are engaged in with a 
view to avoid the purpose of this section, the anti-abuse rule applies 
and appropriate adjustments are made. FS is therefore treated as having 
made a distribution to FP of $100x, reflecting the value of the stock 
of FP that FS acquired in exchange for property (the FS note). The 
deemed distribution is treated as separate from, and occurring 
immediately before, FS's acquisition of the stock of FP stock used in 
the triangular B reorganization. Because FS has more than $100x of 
earnings and profits, the entire deemed distribution is treated as a 
dividend under section 301(c)(1). The deemed dividend causes FP to 
increase its earnings and profits by $100x but does not constitute 
foreign personal holding company income to FP under section 954(c)(6). 
FP thus has $100x of earnings and profits available to support 
inclusions under section 951(a)(1)(B) in connection with FP's 
subsequent acquisition of the USP note. No adjustments are made by FP 
to the basis in its stock of FS except as provided in Sec.  1.358-6. 
Under paragraph (b)(3) of this section, FP's adjustment to the basis in 
its stock of FS under Sec.  1.358-6 is determined as if FP provided the 
stock of FP pursuant to the plan of reorganization.
    (e) Applicability dates--(1) General rule. This section applies to 
triangular reorganizations occurring on or after May 17, 2011. For 
triangular reorganizations that occur before May 17, 2011, see Sec.  
1.367(b)-14T as contained in 26 CFR part 1 revised as of April 1, 2011.
    (2) Triangular reorganizations completed on or after April 25, 
2014. The following paragraphs apply to triangular reorganizations that 
are completed on or after April 25, 2014, unless T was not related to P 
or S (within the meaning of section 267(b)) immediately before the 
triangular reorganization; the triangular reorganization was entered 
into either pursuant to a written agreement that was (subject to 
customary conditions) binding before April 25, 2014, and at all times 
afterwards, or pursuant to a tender offer announced before April 25, 
2014, that is subject to section 14(d) of the Securities and Exchange 
Act of 1934 (15 U.S.C. 78n(d)(1)) and Regulation 14(D) (17 CFR 240.14d-
1 through 240.14d-101) or that is subject to comparable foreign laws; 
and to the extent the P acquisition that occurs pursuant to the plan of 
reorganization is not completed before April 25, 2014, the P 
acquisition was included as part of the plan before April 25, 2014:
    (i) Paragraph (a)(2)(ii) of this section, to the extent it does not 
apply where P is a controlled foreign corporation, and to the extent it 
relates to dividends that would be subject to U.S. tax;
    (ii) Paragraph (a)(2)(iii) of this section, to the extent it 
relates to amounts that would be subject to U.S. tax or give rise to an 
inclusion under section 951(a)(1)(A) that would be subject to U.S. tax;
    (iii) Paragraph (b)(3) of this section, to the extent it relates to 
P's provision of its stock or securities pursuant to the plan of 
reorganization; and
    (iv) Paragraphs (b) and (c) of this section, to the extent they do 
not reference the rule described in former paragraph (b)(2) of this 
section (relating to the deemed contribution), as contained in 26 CFR 
part 1 revised as of April 1, 2021.
    (3) Transactions completed on or after December 2, 2016. The 
following paragraphs apply to transactions completed on or after 
December 2, 2016:
    (i) Paragraph (a)(2)(iii) of this section, to the extent it does 
not apply where T is a foreign corporation; and
    (ii) Paragraph (a)(3)(ii)(C) of this section.
    (4) Deemed distributions that occurred in taxable years ending 
before November 2, 2020. Former paragraph (c)(1) of this section, as 
contained in 26 CFR part 1 revised as of April 1, 2021, to the extent 
it references section 902, applies to deemed distributions that occur 
in taxable years ending before November 2, 2020.
    (5) Triangular reorganizations completed on or after October 5, 
2023. Paragraph (a)(2)(iii) of this section, to the extent it relates 
to amounts that would give rise to an inclusion under section 951A(a) 
that would be subject to U.S. tax, applies to triangular 
reorganizations that are completed on or after October 5, 2023.

0
Par. 9. Section 1.1248-1 is amended by adding a sentence to the end of 
paragraph (a)(1) to read as follows:


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

    (a) * * *
    (1) * * * See Sec.  1.1411-10(c)(3) for additional rules concerning 
the application of section 1248 for purposes of section 1411.
* * * * *

0
Par. 10. Section 1.1411-10 is amended by:
0
1. In paragraph (c)(3), revising the paragraph heading and removing the 
language ``With respect to stock of a CFC'' and adding in its place 
``With respect to stock of a foreign corporation that is a CFC (or that 
was a CFC at any time during the 5-year period ending on the date of 
sale or exchange)'';
0
2. Revising paragraph (c)(3)(i) and the introductory text of paragraph 
(c)(3)(ii); and
0
3. Adding paragraph (d)(5) and adding a sentence to the end of 
paragraph (i).

[[Page 58286]]

    The revisions and additions read as follows:


Sec.  1.1411-10   Controlled foreign corporations and passive foreign 
investment companies.

* * * * *
    (c) * * *
    (3) Application of sections 1248 and 367(b). * * *
    (i) In determining the amount of gain recognized on the sale or 
exchange of stock of a foreign corporation under section 1248(a) or the 
amount of gain realized on the exchange of stock of a foreign 
corporation under Sec.  1.367(b)-4 or 1.367(b)-5, basis is determined 
in accordance with the provisions of paragraph (d) of this section; and
    (ii) Section 1248(a), and Sec.  1.367(b)-2(c)(1) and (d)(2)(ii) 
apply without regard to the exclusions for certain earnings and profits 
under section 1248(d)(1) and (6), except that those exclusions will 
apply with respect to the earnings and profits of a foreign corporation 
that are attributable to:
* * * * *
    (d) * * *
    (5) Basis adjustments under section 367(b). With respect to stock 
of a foreign corporation that is exchanged in a transaction subject to 
section 367(b), the portion of the basis increase provided by Sec.  
1.367(b)-2(e)(3)(ii) by reason of paragraph (c)(3)(ii) of this section 
is made solely for purposes of section 1411.
* * * * *
    (i) * * * Paragraph (c)(3) of this section, to the extent it 
references regulations issued under section 367(b), and paragraph 
(d)(5) of this section, apply to transactions completed on or after 
October 5, 2023, and to any transactions treated as completed before 
October 5, 2023, as a result of an entity classification election made 
under Sec.  301.7701-3 of this chapter that is filed on or after 
October 5, 2023.

Douglas W. O'Donnell,
Deputy Commissioner.

    Approved: June 26, 2024.
Aviva R. Aron-Dine,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-15232 Filed 7-17-24; 8:45 am]
BILLING CODE 4830-01-P