[Federal Register Volume 76, Number 97 (Thursday, May 19, 2011)]
[Rules and Regulations]
[Pages 28890-28895]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-12279]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9526]
RIN 1545-BG96
Treatment of Property Used To Acquire Parent Stock or Securities
in Certain Triangular Reorganizations Involving Foreign Corporations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations under section 367 of
the Internal Revenue Code (Code) relating to the treatment of property
used to acquire parent stock or securities in certain triangular
reorganizations involving foreign corporations. The regulations
finalize proposed regulations and withdraw temporary regulations
published on May 27, 2008 (TD 9400). The regulations affect
corporations that engage in certain triangular reorganizations
involving one or more foreign corporations.
DATES: Effective Date: These regulations are effective May 19, 2011.
Applicability Dates: For dates of applicability, see Sec. Sec.
1.367(a)-3(g)(1)(viii) and 1.367(b)-10(e).
FOR FURTHER INFORMATION CONTACT: Robert B. Williams, Jr., (202) 622-
3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On May 27, 2008, the IRS and Treasury Department published
temporary and proposed regulations under section 367(b) that apply to
certain triangular reorganizations in which a subsidiary (S) purchases,
in connection with the reorganization, stock of its parent corporation
(P) in exchange for property, and exchanges the P stock for the stock
or property of a target corporation (T), but only if P or S (or both)
is a foreign corporation (the temporary regulations or proposed
regulations, as applicable, and collectively, the 2008 regulations). 73
FR 30301 (TD 9400, 2008-24 IRB 1139). Because no requests to speak were
received, no public hearing was held; however, comments were received.
After consideration of the comments received, the IRS and Treasury
Department adopt the proposed regulations as final regulations with the
modifications described herein. Although the 2008 regulations were
numbered under Sec. 1.367(b)-14, the final regulations are renumbered
under Sec. 1.367(b)-10. The temporary regulations are withdrawn.
Summary of Comments and Explanation of Revisions
A. Scope of Regulations and Priority Rule
Section 367(a)(1) provides that if, in connection with any exchange
described in section 332, 351, 354, 356, or 361, a United States person
transfers property to a foreign corporation, such foreign corporation
shall not, for purposes of determining the extent to which gain is
recognized on such transfer, be considered to be a corporation. As a
result, the general rule is the United States person recognizes gain
(if any) on the transfer of such property, unless an exception to
section 367(a)(1) applies to the transfer. Furthermore, section
367(b)(1) provides that in the case of any exchange described in
section 332, 351, 354, 355, 356, or 361 in connection with which there
is no transfer of property described in section 367(a)(1), a foreign
corporation shall be considered to be a corporation except to the
extent provided in regulations. Thus, section 367(b)(1) will not apply
to an exchange if gain is recognized on that exchange under section
367(a)(1).
Section 367(a)(1) (and the regulations under that section) and the
2008 regulations could each potentially apply to certain triangular
reorganizations. For example, section 367(a)(1) and the 2008
regulations could each potentially apply to a triangular reorganization
described in section 368(a)(1)(B) if S acquires P stock for property,
each of P, S, and T are foreign corporations, the T stock is held by a
U.S. person, and the U.S. person realizes gain on the exchange of the T
stock. See Sec. 1.367(a)-3(d)(1)(iii)(A) (providing that there is an
indirect transfer by the U.S. person of the T stock to S).
The 2008 regulations include a priority rule that applies to
certain transactions described in section 367(a)(1) and the 2008
regulations. The priority rule generally provides that if the amount of
gain in the T stock that would otherwise be recognized under section
367(a)(1) (absent an exception) is less than the adjustment treated as
a dividend under the 2008 regulations, then the 2008 regulations, and
not section 367(a)(1), apply to the triangular reorganization.
One commentator noted that the priority rule applies simply based
on comparing the amount of gain that would be recognized under section
367(a)(1) with the amount of the dividend that would result under the
2008 regulations, without regard to the amount of resulting U.S. tax.
The commentator stated that in some cases it may be more appropriate
for the priority rule to take into account the amount of resulting U.S.
tax. The commentator cited, as an example, a case where P is foreign, S
and T are domestic, T is owned by a U.S. person, and any dividend
received by P from S under the 2008 regulations would not be subject to
U.S. tax as a result of an applicable treaty. The commentator noted
that if the dividend in such a case exceeds the amount of gain that
would otherwise be recognized under section 367(a)(1), it may not be
appropriate for the 2008 regulations to apply in lieu of section
367(a)(1) and Sec. 1.367(a)-3(c).
The IRS and Treasury Department recognize that in some cases it may
be appropriate for the priority rule to take into account the amount of
resulting U.S. tax. However, the IRS and Treasury Department do not
believe it would be administrable to take into account the resulting
U.S. tax in all cases, because this could require consideration of
[[Page 28891]]
numerous tax attributes of various parties, including P, S, and the
shareholders of T. To address this concern, the scope of the final
regulations is modified such that the final regulations do not apply in
two additional cases. First, the final regulations do not apply if P
and S are foreign corporations and neither P nor S is a controlled
foreign corporation (within the meaning of Sec. 1.367(b)-2(a))
immediately before or immediately after the triangular reorganization.
Second, the final regulations do not apply if: (1) P is a foreign
corporation; (2) S is a domestic corporation; (3) P's receipt of a
dividend from S would not be subject to U.S. tax under either section
881 (for example, by reason of an applicable treaty) or section 882;
and (4) P's stock in S is not a United States real property interest
(within the meaning of section 897(c)).
In addition, the final regulations modify the scope of the 2008
regulations to include the acquisition by S, in exchange for property,
of P securities that are used to acquire the stock, securities, or
property of T in the triangular reorganization, but only to the extent
the P securities are treated by T shareholders or securityholders as
``other property'' under section 356(d). The scope was expanded to
include P securities because the acquisition of P securities by S for
property presents the same repatriation concerns as the acquisition of
P stock by S for property. Furthermore, the scope of the 2008
regulations is modified to provide that the final regulations apply to
the acquisition by S, in exchange for property, of P stock to the
extent such P stock is received by T shareholders or securityholders in
an exchange to which section 354 or 356 applies.
Finally, the final regulations modify the priority rule contained
in the 2008 regulations in three ways. First, the priority rule is
modified to include exchanges of T securities as well as T stock.
Second, the priority rule is modified to compare the amount of gain
that would be recognized under section 367(a)(1) with not only the
amount of the deemed dividend but also the amount of any gain (applying
section 301(c)(1) and (3), respectively). Third, the priority rule is
modified to clarify its application by providing separate priority
rules in Sec. 1.367(a)-3(a) and Sec. 1.367(b)-10.
Thus, under the Sec. 1.367(a)-3(a) priority rule, as modified, if
the amount of gain in the T stock or securities that would otherwise be
recognized by the T shareholders or securityholders under section
367(a)(1) (without regard to any exceptions to section 367(a)(1)) is
less than the sum of the amount of deemed dividend and the amount of
gain (applying section 301(c)(1) and (3), respectively) under the final
regulations, section 367(a)(1) does not apply to the section 354 or 356
exchange by the T shareholders or securityholders of the T stock or
securities for P stock or securities. Under the Sec. 1.367(b)-10
priority rule, if the amount of gain recognized by the T shareholders
or securityholders under section 367(a)(1) (taking into account any
exception to section 367(a)(1) that is applied) on the section 354 or
356 exchange of T stock or securities exceeds the sum of the amount of
deemed dividend and the amount of gain (applying section 301(c)(1) and
(3), respectively) if the final regulations otherwise applied to the
triangular reorganization, then the final regulations do not apply.
B. Application If T Is Unrelated to P or S
The 2008 regulations apply regardless of whether T is related to P
or S. Some commentators asserted that the 2008 regulations should not
apply if T is unrelated to P or S because there is no reduction in S's
net worth (that is, S replaces its cash with an equal amount of P
stock). The commentators further stated that, unlike transactions in
which T is related to P or S, the consideration paid for an unrelated T
is delivered outside of the P group. The commentators also noted that
if T is unrelated to P and S, the transaction is distinguishable from a
transaction subject to section 304, the application of which may result
in a distribution even if the value of the distributing corporation is
not diminished as a result of the transaction.
The IRS and Treasury Department believe that transactions in which
T is unrelated to P and S present the same concerns, because S's
purchase of P stock (or P securities under the final regulations) in
the context of a reorganization allows for a transfer of property from
S to P that has the effect of a distribution regardless of whether T is
related to P or S prior to the transaction. Accordingly, the comment
was not adopted.
C. Adjustments Having the Effect of a Distribution or Contribution
If the 2008 regulations apply to a triangular reorganization,
adjustments are made under section 367(b) having the effect of a
distribution of property from S to P under section 301 (deemed
distribution). In certain cases, the 2008 regulations similarly provide
that adjustments are made under section 367(b) that have the effect of
a contribution of property by P to S (deemed contribution). The 2008
regulations also provide for collateral adjustments to be made to take
into account the deemed distribution and deemed contribution.
Some commentators questioned the extent to which these adjustments
should be made. In response to these comments, the final regulations
make clear that the adjustments are made based on a distribution or
contribution of a notional amount, and therefore without the
recognition of any built-in gain or loss on the distribution of such
notional amount. The notional amount is equal to the amount of money
transferred and liabilities assumed plus the fair market value of other
property transferred, in connection with the triangular reorganization,
by S in exchange for the P stock or securities used to acquire the
stock, securities or property of T. In addition, the final regulations
clarify that the adjustments that have the effect of a deemed
distribution or deemed contribution do not affect the characterization
of the actual transaction as provided under applicable tax provisions.
Thus, for example, if S uses property with a built-in gain to acquire P
stock from P, S's exchange of the property for P stock is not affected
by the regulations. Instead, the regulations require adjustments based
on a deemed distribution and deemed contribution of the notional amount
that occur apart from, and in addition to, S exchanging the built-in
gain property for the P stock. Accordingly, S would not recognize gain
under section 311(b) with respect to the notional amount. Furthermore,
S's exchange of the property would continue to be treated as an
exchange subject to section 1001 in which S recognizes the built-in
gain.
D. Timing Rules for Deemed Distributions
The 2008 regulations provide rules that address the timing of the
deemed distribution resulting from the application of the general rule.
The 2008 regulations contain separate timing rules for transactions
involving acquisitions of P stock from P and for acquisitions of P
stock from persons other than P. The IRS and Treasury Department do not
believe separate timing rules are necessary. Thus, the final
regulations combine the two timing rules set forth in the 2008
regulations into a single rule that applies regardless of the person
from whom the P stock or securities are acquired.
The 2008 regulations also contain a special timing rule if P does
not control
[[Page 28892]]
S at the time S purchases the P stock. The final regulations retain the
special timing rule contained in the 2008 regulations that applies if P
does not control S at the time S purchases the P stock or securities.
E. Other Modifications
1. Definition of Property
The definition of property in the 2008 regulations is modified in
the final regulations to include rights (for example, options) to
acquire S stock to the extent such rights are used by S to acquire P
stock or securities from a person other than P.
2. Deemed Contribution When S Acquires P Stock From P
The 2008 regulations contain a deemed contribution rule only where
S acquires P stock from persons other than P. The final regulations
provide a similar rule in cases where S acquires the P stock or
securities from P.
3. Section 1.367(a)-3(a)
In addition to including a priority rule in Sec. 1.367(a)-3(a),
the final regulations modify the format and organization of Sec.
1.367(a)-3(a). The final regulations also clarify Sec. 1.367(a)-3(a)
to provide that exchanges that are subject to section 367(a)(1) (absent
an applicable exception) result in the recognition of gain, as opposed
to being ``treated as a taxable exchange'' (as is provided in the
current regulations).
Effective/Applicability Dates
These final regulations apply to transactions occurring on or after
May 17, 2011. For transactions that occur prior to May 17, 2011, see
Sec. 1.367(b)-14T as contained in 26 CFR part 1 revised as of April 1,
2011.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required.
It is hereby certified that these regulations will not have a
significant economic impact on a substantial number of small entities.
Accordingly, a regulatory flexibility analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required. This
certification is based on the fact that the regulations will primarily
affect large multi-national corporations that engage in triangular
reorganizations subject to the regulations. The regulations apply to
triangular reorganizations, involving one or more foreign corporations,
to the extent that, in connection with the reorganization, the
acquiring corporation purchases, in exchange for property, all or a
portion of the stock or securities used to acquire the stock,
securities or property of the target corporation. Therefore, the IRS
and Treasury Department expect only a de minimis number of small
business entities to be subject to the regulations. Pursuant to section
7805(f) of the Code, this regulation has been submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business.
Drafting Information
The principal author of these regulations is Robert B. Williams,
Jr. of the Office of Associate Chief Counsel (International). However,
other personnel from the IRS and Treasury Department 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 removing
the entries for Sec. Sec. 1.367(a)-3T(b)(2)(i)(C) and 1.367(b)-14T,
revising the entry for Sec. 1.367(a)-3, and adding an entry for Sec.
1.367(b)-10 in numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *.
Section 1.367(a)-3 also issued under 26 U.S.C. 367(a). Section
1.367(b)-10 also issued under 26 U.S.C. 367(b). * * *
0
Par. 2. Section 1.367(a)-3 is amended by revising paragraph (a),
removing paragraph (g)(1)(vii), redesignating paragraph (g)(1)(viii) as
paragraph (g)(1)(vii) and adding new paragraph (g)(1)(viii) to read as
follows:
Sec. 1.367(a)-3 Treatment of transfers of stock or securities to
foreign corporations.
(a) In general--(1) Overview. This section provides rules
concerning the transfer of stock or securities by a U.S. person to a
foreign corporation in an exchange described in section 367(a)(1). In
general, a transfer of stock or securities (including an indirect stock
transfer described in paragraph (d) of this section) by a U.S. person
to a foreign corporation that is described in section 351, 354
(including a section 354 exchange pursuant to a reorganization
described in section 368(a)(1)(B)), 356, or section 361(a) or (b) is
subject to section 367(a)(1). Therefore, gain is recognized on such a
transfer unless one of the exceptions set forth in paragraph (a)(2) of
this section (regarding general exceptions for certain exchanges of
stock or securities), paragraph (b) of this section (regarding
transfers of foreign stock or securities), paragraph (c) of this
section (regarding transfers of domestic stock or securities), or
paragraph (e) of this section (regarding transfers of stock or
securities in a section 361 exchange) applies to the transfer. For
rules applicable when, pursuant to section 304(a)(1), a U.S. person is
treated as transferring stock of a domestic or foreign corporation to a
foreign corporation in exchange for stock of such foreign corporation
in a transaction to which section 351(a) applies, see Sec. 1.367(a)-
9T.
(2) Exceptions for certain exchanges of stock or securities. Unless
otherwise provided, the following exchanges are not subject to section
367(a)(1) and therefore gain is not recognized under section 367(a)(1).
(i) Section 368(a)(1)(E) reorganizations. In an exchange under
section 354 or 356, a U.S. person exchanges stock or securities of a
foreign corporation in a reorganization described in section
368(a)(1)(E).
(ii) Certain section 368(a)(1) asset reorganizations. In an
exchange under section 354 or 356, a U.S. person exchanges stock or
securities of a domestic or foreign corporation pursuant to an asset
reorganization that is not treated as an indirect stock transfer under
paragraph (d) of this section. See paragraph (d)(3) Example 16 of this
section. For purposes of this section, an asset reorganization is
defined as a reorganization described in section 368(a)(1) involving a
transfer of property under section 361.
(iii) Certain reorganizations described in sections 368(a)(1)(A)
and (a)(2)(E). If, in an exchange described in section 361, a domestic
merging corporation transfers stock of a controlling corporation to a
foreign surviving corporation in a reorganization described in section
368(a)(1)(A) and (a)(2)(E), the stock of the controlling corporation
transferred in such section 361 exchange is not subject to section
367(a)(1) if the stock of the controlling corporation is provided to
the merging corporation by the controlling corporation pursuant to the
plan of reorganization. However, a section 361 exchange of other
property, including stock of the controlling corporation not provided
by the controlling corporation pursuant to the plan of reorganization,
by the domestic merging corporation to
[[Page 28893]]
the foreign surviving corporation pursuant to such a reorganization is
described in section 367(a)(1) and therefore subject to section
367(a)(1) unless an exception to section 367(a)(1) applies.
(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.
1.358-6(b)(1)(iii)) 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) shall not apply to such U.S. persons with respect to the
exchange of the stock or securities of T if the condition specified in
this paragraph (iv) is satisfied. The condition specified in this
paragraph (iv) is that 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 treated
as a dividend under section 301(c)(1) and the amount of such deemed
distribution treated as gain from the sale or exchange of property
under section 301(c)(3). 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).
(3) Cross-references. For rules regarding other indirect or
constructive transfers of stock or securities subject to section
367(a)(1) (unless an exception applies) see Sec. 1.367(a)-1T(c). For
additional rules regarding a transfer of stock or securities in an
exchange described in section 361(a) or (b), see section 367(a)(5) and
any regulations under that section. For special basis and holding
period rules involving foreign corporations that are parties to certain
triangular reorganizations under section 368(a)(1), see Sec. 1.367(b)-
13. For additional rules relating to certain nonrecognition exchanges
involving a foreign corporation, see section 367(b) and the regulations
under that section. For rules regarding reporting requirements with
respect to transfers described under section 367(a), see section 6038B
and the regulations thereunder. For rules related to expatriated
entities, see section 7874 and the regulations thereunder.
* * * * *
(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.
* * * * *
Sec. 1.367(a)-3T [Removed]
0
Par. 3. Section 1.367(a)-3T is removed.
0
Par. 4. Section 1.367(b)-0 is amended by:
0
1. Revising the introductory text.
0
2. Removing the entry for Sec. 1.367(b)-2(d)(3)(ii), and redesignating
the entries for Sec. 1.367(b)-2(d)(3)(iii), (d)(3)(iii)(A), and
(d)(3)(iii)(B) as Sec. 1.367(b)-2(d)(3)(ii), (d)(3)(ii)(A), and
(d)(3)(ii)(B) respectively.
0
3. Revising the entry for Sec. 1.367(b)-4(b)(1)(i), redesignating the
entry for Sec. 1.367(b)-4(b)(1)(ii) as the entry for Sec. 1.367(b)-
4(b)(1)(iii), and adding a new entry for Sec. 1.367(b)-4(b)(1)(ii).
0
4. Revising the entries for Sec. 1.367(b)-4(d)(1) and (2), and
removing the entry for Sec. 1.367(b)-4(d)(3).
0
5. Adding entries for Sec. 1.367(b)-10.
0
6. Adding entries for Sec. 1.367(b)-13.
The revisions and additions read as follows:
Sec. 1.367(b)-0 Table of contents.
This section lists the paragraphs contained in Sec. Sec. 1.367(b)-
1 through 1.367(b)-13.
* * * * *
Sec. 1.367(b)-4 Acquisition of foreign corporate stock or assets by
a foreign corporation in certain nonrecognition transactions.
* * * * *
(b) * * *
(1) * * *
(i) General rule.
(ii) Exception.
* * * * *
(d) * * *
(1) Rule.
(2) Example.
Sec. 1.367(b)-10 Acquisition of parent stock or securities for
property in triangular reorganizations.
(a) In general.
(1) Scope.
(2) Exceptions.
(3) Definitions.
(b) General rules.
(1) Deemed distribution.
(2) Deemed contribution.
(3) Timing of deemed distribution and deemed contribution.
(4) Application of other provisions.
(5) Example.
(c) Collateral adjustments.
(1) Deemed distribution.
(2) Deemed contribution.
(d) Anti-abuse rule.
(e) Effective/applicability date.
Sec. 1.367(b)-13 Special rules for determining basis and holding
period.
(a) Scope and definitions.
(1) Scope.
(2) Definitions.
(b) Determination of basis for exchanges of foreign stock or
securities under section 354 or 356.
(c) Determination of basis and holding period for triangular
reorganizations.
(1) Application.
(2) Basis and holding period rules.
(i) Portions attributable to S stock.
(ii) Portions attributable to T stock.
(d) Special rules applicable to divided shares of stock.
(1) In general.
(2) Pre-exchange earnings and profits.
(3) Post-exchange earnings and profits.
(e) Examples.
(f) Effective date.
0
Par. 5. Section 1.367(b)-10 is added to read as follows:
Sec. 1.367(b)-10 Acquisition of parent stock or securities for
property in triangular reorganizations.
(a) In general--(1) Scope. Except as provided in paragraphs
(a)(2)(i) through (iii) of this section, this section applies to a
triangular reorganization if P or S (or both) is a foreign corporation
and, in connection with the reorganization, S acquires in exchange for
property all or a portion of the P stock or P securities (P
acquisition) that are used to acquire the stock, securities or property
of T in the triangular reorganization. This section applies to a
triangular reorganization regardless of whether P controls (within the
meaning of section 368(c)) S at the time of the P acquisition.
(2) Exceptions. This section shall not apply if--
(i) P and S are foreign corporations and neither P nor S is a
controlled foreign corporation (within the meaning of Sec. 1.367(b)-
2(a)) immediately before or immediately after the triangular
reorganization;
(ii) S is a domestic corporation, P's stock in S is not a United
States real property interest (within the meaning of section 897(c)),
and P would not be subject to U.S. tax on a dividend (as determined
under section 301(c)(1)) from S under either section 881 (for example,
by reason of an applicable treaty) 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 recognized by such U.S. persons under section
367(a)(1) is equal to or greater than the sum of the amount of the
deemed distribution that would be treated by P as a dividend under
section 301(c)(1) and the amount of such deemed distribution that would
be treated by P as gain from the sale or exchange of property under
section 301(c)(3) if this section would otherwise
[[Page 28894]]
apply to the triangular reorganization. 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) Definitions. For purposes of this section, the following
definitions apply:
(i) The terms P, S, and T have the meanings set forth in Sec.
1.358-6(b)(1)(i), (ii), and (iii), respectively.
(ii) The term property has the meaning set forth in section 317(a),
except that the term property also includes--
(A) A liability assumed by S to acquire the P stock or securities;
and
(B) S stock (or any rights to acquire S stock) to the extent such S
stock (or rights to acquire S stock) is used by S to acquire P stock or
securities from a person other than P.
(iii) The term security means an instrument that constitutes a
security for purposes of section 354 or 356.
(iv) The term triangular reorganization has the meaning set forth
in Sec. 1.358-6(b)(2).
(b) General rules--(1) Deemed distribution. If this section
applies, adjustments shall be made that have the effect of a
distribution of property (with no built-in gain or loss) from S to P
under section 301 (deemed distribution). The amount of the deemed
distribution shall equal the sum of the amount of money transferred by
S, the amount of any liabilities that are assumed by S and constitute
property, and the fair market value of other property transferred by S
in the P acquisition in exchange for the P stock or P securities
described in paragraph (i) or (ii), respectively, of this paragraph
(b)(1)--
(i) P stock received by T shareholders or securityholders in an
exchange to which section 354 or 356 applies.
(ii) P securities received by T shareholders or securityholders to
the extent such securities are ``other property'' (within the meaning
of section 356(d)).
(2) Deemed contribution. If this section applies, adjustments shall
be made that have the effect of a contribution of property (with no
built-in gain or loss) by P to S in an amount equal to the amount of
the deemed distribution from S to P under paragraph (b)(1) of this
section (deemed contribution).
(3) Timing of deemed distribution and deemed contribution. If P
controls (within the meaning of section 368(c)) S at the time of the P
acquisition, the adjustments described in paragraphs (b)(1) and (2) of
this section shall be made as if the deemed distribution and deemed
contribution, respectively, are separate transactions 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 paragraphs (b)(1) and (2) of this section
shall be made as if the deemed distribution and deemed contribution,
respectively, are separate transactions occurring immediately after P
acquires control of S, but prior to the triangular reorganization.
(4) Application of other provisions. Nothing in this section shall
prevent the application of other provisions of the Internal Revenue
Code from applying to the P acquisition. For example, section 304 may
apply to the P acquisition. Furthermore, section 1001 or 267 may apply
to S's transfer of property to acquire P stock or securities from P or
a person other than P. In addition, generally applicable provisions
that apply to triangular reorganizations, such as Sec. 1.358-6 and
Sec. 1.1032-2, shall apply to the triangular reorganization in a
manner consistent with S acquiring the P stock or securities in
exchange for property from P or a person other than P, as the case may
be.
(5) Example. The rules of this paragraph (b) are illustrated by the
following example:
(i) Facts. P, a publicly traded domestic corporation, owns all
of the outstanding stock of FS, a foreign corporation, and all of
the outstanding stock of US1, a domestic corporation that is a
member of the P consolidated group. US1 owns all of the outstanding
stock of FT, a foreign corporation, the fair market value of which
is $100x. US1's basis in the FT stock is $100x, such that there is a
no built-in gain or loss in the FT stock. FS has earnings and
profits in excess of $100x. FS purchases $100x of P stock from the
public on the open market in exchange for $100x of cash. Pursuant to
foreign law, FT merges with and into FS in a triangular
reorganization that qualifies under section 368(a)(1)(A) by reason
of section 368(a)(2)(D). In an exchange to which section 354
applies, US1 exchanges all the outstanding stock of FT for the $100x
of P stock purchased by FS on the open market.
(ii) Analysis. The triangular reorganization is described in
paragraph (a)(1) of this section. P is a domestic corporation and FS
is a foreign corporation. In connection with FS purchasing the $100x
of P stock in exchange for property (cash), FS uses the P stock to
acquire the FT property in a triangular reorganization, and US1
receives the P stock in an exchange to which section 354 applies.
Furthermore, none of the exceptions of paragraphs (a)(2)(i) through
(iii) of this section apply. Therefore, pursuant to paragraph (b)(1)
of this section, adjustments are made that have the effect of a
deemed distribution of property (with no built-in gain or loss) in
the amount of $100x from FS to P under section 301. Pursuant to
paragraph (b)(2) of this section, adjustments are made that have the
effect of a deemed contribution of property (with no built-in gain
or loss) in the amount of $100x by P to FS. Pursuant to paragraph
(b)(3) of this section, the adjustments described in paragraphs
(b)(1) and (2) of this section are made as if the deemed
distribution and deemed contribution, respectively, are separate
transactions occurring immediately before FS's purchase of the P
stock on the open market. Generally applicable provisions apply to
FS's purchase of the P stock on the open market (see, for example,
section 304) and in determining certain tax consequences to P and FS
as a result of the triangular reorganization (see, for example,
Sec. 1.358-6(d) and Sec. 1.1032-2(c)).
(c) Collateral adjustments. This paragraph (c) provides additional
rules that apply by reason of the deemed distribution and deemed
contribution described in paragraphs (b)(1) and (b)(2), respectively,
of this section.
(1) Deemed distribution. A deemed distribution described in
paragraph (b)(1) of this section shall be 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, sections 902 or 959 may apply to the deemed
distribution if S is a foreign corporation, and sections 881, 882, 897,
1442, or 1445 may apply to the deemed distribution if S is a domestic
corporation. Appropriate corresponding adjustments shall be made to S's
earnings and profits consistent with the principles of section 312.
(2) Deemed contribution. A deemed contribution described in
paragraph (b)(2) of this section shall be treated as occurring for all
purposes of the Internal Revenue Code. Thus, for example, appropriate
adjustments shall be made to P's basis in the S stock.
(d) Anti-abuse rule. Appropriate adjustments shall 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 a corporation related (within the meaning of section 267(b))
to P or S, the earnings and profits of S will be deemed to include the
earnings and profits of such related corporation for purposes of
determining the consequences of the adjustments provided in this
section, and appropriate corresponding adjustments will be made to
account for the application of this section to the earnings and profits
of such related corporation.
[[Page 28895]]
(e) Effective/applicability date. This section applies to
triangular reorganizations occurring on or after May 17, 2011. For
triangular reorganizations that occur prior to May 17, 2011, see Sec.
1.367(b)-14T as contained in 26 CFR part 1 revised as of April 1, 2011.
Sec. 1.367(b)-14T [Removed]
0
Par. 6. Section 1.367(b)-14T is removed.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: May 11, 2011.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-12279 Filed 5-17-11; 11:15 am]
BILLING CODE 4830-01-P