[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2018 Edition]
[From the U.S. Government Publishing Office]
[[Page i]]
Title 26
Internal Revenue
________________________
Part 1 (Sec. Sec. 1.301 to 1.400)
Revised as of April 1, 2018
Containing a codification of documents of general
applicability and future effect
As of April 1, 2018
Published by the Office of the Federal Register
National Archives and Records Administration as a
Special Edition of the Federal Register
[[Page ii]]
U.S. GOVERNMENT OFFICIAL EDITION NOTICE
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[[Page iii]]
Table of Contents
Page
Explanation................................................. v
Title 26:
Chapter I--Internal Revenue Service, Department of
the Treasury (Continued) 3
Finding Aids:
Table of CFR Titles and Chapters........................ 821
Alphabetical List of Agencies Appearing in the CFR...... 841
Table of OMB Control Numbers............................ 851
List of CFR Sections Affected........................... 869
[[Page iv]]
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 26 CFR 1.301-1
refers to title 26, part
1, section 301-1.
----------------------------
[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
into 50 titles which represent broad areas subject to Federal
regulation. Each title is divided into chapters which usually bear the
name of the issuing agency. Each chapter is further subdivided into
parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
volume.
LEGAL STATUS
The contents of the Federal Register are required to be judicially
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie
evidence of the text of the original documents (44 U.S.C. 1510).
HOW TO USE THE CODE OF FEDERAL REGULATIONS
The Code of Federal Regulations is kept up to date by the individual
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together to determine the latest version of any given rule.
To determine whether a Code volume has been amended since its
revision date (in this case, April 1, 2018), consult the ``List of CFR
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative
List of Parts Affected,'' which appears in the Reader Aids section of
the daily Federal Register. These two lists will identify the Federal
Register page number of the latest amendment of any given rule.
EFFECTIVE AND EXPIRATION DATES
Each volume of the Code contains amendments published in the Federal
Register since the last revision of that volume of the Code. Source
citations for the regulations are referred to by volume number and page
number of the Federal Register and date of publication. Publication
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Code a note has been inserted to reflect the future effective date. In
those instances where a regulation published in the Federal Register
states a date certain for expiration, an appropriate note will be
inserted following the text.
OMB CONTROL NUMBERS
The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires
Federal agencies to display an OMB control number with their information
collection request.
[[Page vi]]
Many agencies have begun publishing numerous OMB control numbers as
amendments to existing regulations in the CFR. These OMB numbers are
placed as close as possible to the applicable recordkeeping or reporting
requirements.
PAST PROVISIONS OF THE CODE
Provisions of the Code that are no longer in force and effect as of
the revision date stated on the cover of each volume are not carried.
Code users may find the text of provisions in effect on any given date
in the past by using the appropriate List of CFR Sections Affected
(LSA). For the convenience of the reader, a ``List of CFR Sections
Affected'' is published at the end of each CFR volume. For changes to
the Code prior to the LSA listings at the end of the volume, consult
previous annual editions of the LSA. For changes to the Code prior to
2001, consult the List of CFR Sections Affected compilations, published
for 1949-1963, 1964-1972, 1973-1985, and 1986-2000.
``[RESERVED]'' TERMINOLOGY
The term ``[Reserved]'' is used as a place holder within the Code of
Federal Regulations. An agency may add regulatory information at a
``[Reserved]'' location at any time. Occasionally ``[Reserved]'' is used
editorially to indicate that a portion of the CFR was left vacant and
not accidentally dropped due to a printing or computer error.
INCORPORATION BY REFERENCE
What is incorporation by reference? Incorporation by reference was
established by statute and allows Federal agencies to meet the
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to materials already published elsewhere. For an incorporation to be
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This material, like any other properly issued regulation, has the force
of law.
What is a proper incorporation by reference? The Director of the
Federal Register will approve an incorporation by reference only when
the requirements of 1 CFR part 51 are met. Some of the elements on which
approval is based are:
(a) The incorporation will substantially reduce the volume of
material published in the Federal Register.
(b) The matter incorporated is in fact available to the extent
necessary to afford fairness and uniformity in the administrative
process.
(c) The incorporating document is drafted and submitted for
publication in accordance with 1 CFR part 51.
What if the material incorporated by reference cannot be found? If
you have any problem locating or obtaining a copy of material listed as
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CFR INDEXES AND TABULAR GUIDES
A subject index to the Code of Federal Regulations is contained in a
separate volume, revised annually as of January 1, entitled CFR Index
and Finding Aids. This volume contains the Parallel Table of Authorities
and Rules. A list of CFR titles, chapters, subchapters, and parts and an
alphabetical list of agencies publishing in the CFR are also included in
this volume.
[[Page vii]]
An index to the text of ``Title 3--The President'' is carried within
that volume.
The Federal Register Index is issued monthly in cumulative form.
This index is based on a consolidation of the ``Contents'' entries in
the daily Federal Register.
A List of CFR Sections Affected (LSA) is published monthly, keyed to
the revision dates of the 50 CFR titles.
REPUBLICATION OF MATERIAL
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INQUIRIES
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The e-CFR is a regularly updated, unofficial editorial compilation
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of the Federal Register and the Government Publishing Office. It is
available at www.ecfr.gov.
Oliver A. Potts,
Director,
Office of the Federal Register
April 1, 2018
[[Page ix]]
THIS TITLE
Title 26--Internal Revenue is composed of twenty-two volumes. The
contents of these volumes represent all current regulations issued by
the Internal Revenue Service, Department of the Treasury, as of April 1,
2018. The first fifteen volumes comprise part 1 (Subchapter A--Income
Tax) and are arranged by sections as follows: Sec. Sec. 1.0-1.60;
Sec. Sec. 1.61-1.139; Sec. Sec. 1.140-1.169; Sec. Sec. 1.170-1.300;
Sec. Sec. 1.301-1.400; Sec. Sec. 1.401-1.409; Sec. Sec. 1.410-1.440;
Sec. Sec. 1.441-1.500; Sec. Sec. 1.501-1.640; Sec. Sec. 1.641-1.850;
Sec. Sec. 1.851-1.907; Sec. Sec. 1.908-1.1000; Sec. Sec. 1.1001-
1.1400; Sec. Sec. 1.1401-1.1550; and Sec. 1.1551 to end of part 1. The
sixteenth volume containing parts 2-29, includes the remainder of
subchapter A and all of Subchapter B--Estate and Gift Taxes. The last
six volumes contain parts 30-39 (Subchapter C--Employment Taxes and
Collection of Income Tax at Source); parts 40-49; parts 50-299
(Subchapter D--Miscellaneous Excise Taxes); parts 300-499 (Subchapter
F--Procedure and Administration); parts 500-599 (Subchapter G--
Regulations under Tax Conventions); and part 600 to end (Subchapter H--
Internal Revenue Practice).
The OMB control numbers for Title 26 appear in Sec. 602.101 of this
chapter. For the convenience of the user, Sec. 602.101 appears in the
Finding Aids section of the volumes containing parts 1 to 599.
For this volume, Gabrielle E. Burns was Chief Editor. The Code of
Federal Regulations publication program is under the direction of John
Hyrum Martinez, assisted by Stephen J. Frattini.
[[Page 1]]
TITLE 26--INTERNAL REVENUE
(This book contains part 1, Sec. Sec. 1.301 to 1.400)
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Part
chapter i--Internal Revenue Service, Department of the
Treasury (Continued)...................................... 1
[[Page 3]]
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
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Editorial Note: IRS published a document at 45 FR 6088, Jan. 25, 1980,
deleting statutory sections from their regulations. In chapter I cross
references to the deleted material have been changed to the
corresponding sections of the IRS Code of 1954 or to the appropriate
regulations sections. When either such change produced a redundancy, the
cross reference has been deleted. For further explanation, see 45 FR
20795, Mar. 31, 1980.
SUBCHAPTER A--INCOME TAX (CONTINUED)
Part Page
1 Income taxes (Continued).................... 5
Supplementary Publications: Internal Revenue Service Looseleaf
Regulations System.
Additional supplementary publications are issued covering Alcohol and
Tobacco Tax Regulations, and Regulations Under Tax Conventions.
[[Page 5]]
SUBCHAPTER A_INCOME TAX (CONTINUED)
PART 1_INCOME TAXES (CONTINUED)--Table of Contents
Normal Taxes and Surtaxes (Continued)
CORPORATE DISTRIBUTIONS AND ADJUSTMENTS
DISTRIBUTIONS BY CORPORATIONS
Effects on Recipients
Sec.
1.301-1 Rules applicable with respect to distributions of money and
other property.
1.302-1 General.
1.302-2 Redemptions not taxable as dividends.
1.302-3 Substantially disproportionate redemption.
1.302-4 Termination of shareholder's interest.
1.303-1 General.
1.303-2 Requirements.
1.303-3 Application of other sections.
1.304-1 General.
1.304-2 Acquisition by related corporation (other than subsidiary).
1.304-3 Acquisition by a subsidiary.
1.304-4 Special rules for the use of related corporations to avoid the
application of section 304.
1.304-5 Control.
1.304-6 Amount constituting a dividend. [Reserved]
1.304-7T Certain acquisitions by foreign acquiring corporations
(temporary).
1.305-1 Stock dividends.
1.305-2 Distributions in lieu of money.
1.305-3 Disproportionate distributions.
1.305-4 Distributions of common and preferred stock.
1.305-5 Distributions on preferred stock.
1.305-6 Distributions of convertible preferred.
1.305-7 Certain transactions treated as distributions.
1.305-8 Effective dates.
1.306-1 General
1.306-2 Exception
1.306-3 Section 306 stock defined.
1.306-4 Effective/applicability date.
1.307-1 General.
1.307-2 Exception.
effects on corporation
1.312-1 Adjustment to earnings and profits reflecting distributions by
corporations.
1.312-2 Distribution of inventory assets.
1.312-3 Liabilities.
1.312-4 Examples of adjustments provided in section 312(c).
1.312-5 Special rule for partial liquidations and certain redemptions.
1.312-6 Earnings and profits.
1.312-7 Effect on earnings and profits of gain or loss realized after
February 28, 1913.
1.312-8 Effect on earnings and profits of receipt of tax-free
distributions requiring adjustment or allocation of basis of
stock.
1.312-9 Adjustments to earnings and profits reflecting increase in value
accrued before March 1, 1913.
1.312-10 Allocation of earnings in certain corporate separations.
1.312-11 Effect on earnings and profits of certain other tax-free
exchanges, tax-free distributions, and tax-free transfers from
one corporation to another.
1.312-12 Distributions of proceeds of loans guaranteed by the United
States.
1.312-15 Effect of depreciation on earnings and profits.
definitions; constructive ownership of stock
1.316-1 Dividends.
1.316-2 Sources of distribution in general.
1.317-1 Property defined.
1.318-1 Constructive ownership of stock; introduction.
1.318-2 Application of general rules.
1.318-3 Estates, trusts, and options.
1.318-4 Constructive ownership as actual ownership; exceptions.
Corporate Liquidations
effects on recipients
1.331-1 Corporate liquidations.
1.332-1 Distributions in liquidation of subsidiary corporation; general.
1.332-2 Requirements for nonrecognition of gain or loss.
1.332-3 Liquidations completed within one taxable year.
1.332-4 Liquidations covering more than one taxable year.
1.332-5 Distributions in liquidation as affecting minority interests.
1.332-6 Records to be kept and information to be filed with return.
1.332-7 Indebtedness of subsidiary to parent.
1.334-1 Basis of property received in liquidations.
1.336-0 Table of contents.
1.336-1 General principles, nomenclature, and definitions for a section
336(e) election.
1.336-2 Availability, mechanics, and consequences of section 336(e)
election.
1.336-3 Aggregate deemed asset disposition price; various aspects of
taxation of the deemed asset disposition.
1.336-4 Adjusted grossed-up basis.
[[Page 6]]
1.336-5 Effective/applicability dates.
effects on corporation
1.337-1 Nonrecognition for property distributed to parent in complete
liquidation of subsidiary.
1.337(d)-1 Transitional loss limitation rule.
1.337(d)-1T [Reserved]
1.337(d)-2 Loss limitation window period.
1.337(d)-2T Loss limitation window period (temporary).
1.337(d)-3T Gain recognition upon certain partnership transactions
involving a partner's stock (temporary).
1.337(d)-4 Taxable to tax-exempt.
1.337(d)-5 Old transitional rules imposing tax on property owned by a C
corporation that becomes property of a RIC or REIT .
1.337(d)-6 New transitional rules imposing tax on property owned by a C
corporation that becomes property of a RIC or REIT.
1.337(d)-7 Tax on property owned by a C corporation that becomes
property of a RIC or REIT.
1.337(d)-7T Tax on property owned by a C corporation that becomes
property of a RIC or REIT.
1.338-0 Outline of topics.
1.338-1 General principles; status of old target and new target.
1.338-2 Nomenclature and definitions; mechanics of the section 338
election.
1.338-3 Qualification for the section 338 election.
1.338-4 Aggregate deemed sale price; various aspects of taxation of the
deemed asset sale.
1.338-5 Adjusted grossed-up basis.
1.338-6 Allocation of ADSP and AGUB among target assets.
1.338-7 Allocation of redetermined ADSP and AGUB among target assets.
1.338-8 Asset and stock consistency.
1.338-9 International aspects of section 338.
1.338-10 Filing of returns.
1.338-11 Effect of section 338 election on insurance company targets.
1.338(h)(10)-1 Deemed asset sale and liquidation.
1.338(i)-1 Effective/applicability date.
Collapsible Corporations; Foreign Personal Holding Companies
1.341-1 Collapsible corporations; in general.
1.341-2 Definitions.
1.341-3 Presumptions.
1.341-4 Limitations on application of section.
1.341-5 Application of section.
1.341-6 Exceptions to application of section.
1.341-7 Certain sales of stock of consenting corporations.
definition
1.346-1 Partial liquidation.
1.346-2 Treatment of certain redemptions.
1.346-3 Effect of certain sales.
Corporate Organizations and Reorganizations
corporate organizations
1.351-1 Transfer to corporation controlled by transferor.
1.351-2 Receipt of property.
1.351-3 Records to be kept and information to be filed.
effects on shareholders and security holders
1.354-1 Exchanges of stock and securities in certain reorganizations.
1.355-0 Table of contents.
1.355-1 Distribution of stock and securities of controlled corporation.
1.355-2 Limitations.
1.355-3 Active conduct of a trade or business.
1.355-4 Non pro rata distributions, etc.
1.355-5 Records to be kept and information to be filed.
1.355-6 Recognition of gain on certain distributions of stock or
securities in controlled corporation.
1.355-7 Recognition of gain on certain distributions of stock or
securities in connection with an acquisition.
1.356-1 Receipt of additional consideration in connection with an
exchange.
1.356-2 Receipt of additional consideration not in connection with an
exchange.
1.356-3 Rules for treatment of securities as ``other property''.
1.356-4 Exchanges for section 306 stock.
1.356-5 Transactions involving gift or compensation.
1.356-6 Rules for treatment of nonqualified preferred stock as other
property.
1.356-7 Rules for treatment of nonqualified preferred stock and other
preferred stock received in certain transactions.
1.357-1 Assumption of liability.
1.357-2 Liabilities in excess of basis.
1.358-1 Basis to distributees.
1.358-2 Allocation of basis among nonrecognition property.
1.358-3 Treatment of assumption of liabilities.
1.358-4 Exceptions.
1.358-5 Special rules for assumption of liabilities.
1.358-6 Stock basis in certain triangular reorganizations.
1.358-7 Transfers by partners and partnerships to corporations.
effects on corporation
1.361-0 Table of contents.
1.361-1 Nonrecognition of gain or loss to corporations.
1.362-1 Basis to corporations.
[[Page 7]]
1.362-2 Certain contributions to capital.
1.362-3 Basis of importation property acquired in loss importation
transaction.
1.362-4 Basis of loss duplication property.
1.367(a)-1 Transfers to foreign corporations subject to section 367(a):
In general.
1.367(a)-1T Transfers to foreign corporations subject to section 367(a):
In general (temporary).
1.367(a)-2 Exception for transfers of property for use in the active
conduct of a trade or business.
1.367(a)-3 Treatment of transfers of stock or securities to foreign
corporations.
1.367(a)-3T Treatment of transfers of stock or securities to foreign
corporations. (temporary).
1.367(a)-4 Special rule applicable to U.S. depreciated property.
1.367(a)-5 [Reserved]
1.367(a)-6 Transfer of foreign branch with previously deducted losses.
1.367(a)-6T Transfer of foreign branch with previously deducted losses
(temporary).
1.367(a)-7 Outbound transfers of property described in section 361(a) or
(b).
1.367(a)-7T Outbound transfers of property described in section 361(a)
or (b).
1.367(a)-8 Gain recognition agreement requirements.
1.367(a)-9T Treatment of deemed section 351 exchanges pursuant to
section 304(a)(1) (temporary).
1.367(b)-0 Table of contents.
1.367(b)-1 Other transfers.
1.367(b)-2 Definitions and special rules.
1.367(b)-3 Repatriation of foreign corporate assets in certain
nonrecognition transactions.
1.367(b)-3T Repatriation of foreign corporate assets in certain
nonrecognition transactions (temporary).
1.367(b)-4 Acquisition of foreign corporate stock or assets by a foreign
corporation in certain nonrecognition transactions.
1.367(b)-4T Acquisition of foreign corporate stock or assets by a
foreign corporation in certain nonrecognition transactions
(temporary).
1.367(b)-5 Distributions of stock described in section 355.
1.367(b)-6 Effective/applicability dates and coordination rules.
1.367(b)-7 Carryover of earnings and profits and foreign income taxes in
certain foreign-to-foreign nonrecognition transactions.
1.367(b)-8 Allocation of earnings and profits and foreign income taxes
in certain foreign corporate separations. [Reserved]
1.367(b)-9 Special rule for F reorganizations and similar transactions.
1.367(b)-10 Acquisition of parent stock or securities for property in
triangular reorganizations.
1.367(b)-12 Subsequent treatment of amounts attributed or included in
income.
1.367(b)-13 Special rules for determining basis and holding period.
1.367(d)-1 Transfers of intangible property to foreign corporations.
1.367(d)-1T Transfers of intangible property to foreign corporations
(temporary).
1.367(e)-0 Outline of Sec. Sec. 1.367(e)-1 and 1.367(e)-2.
1.367(e)-1 Distributions described in section 367(e)(1).
1.367(e)-2 Distributions described in section 367(e)(2).
special rule; definitions
1.368-1 Purpose and scope of exception of reorganization exchanges.
1.368-2 Definition of terms.
1.368-3 Records to be kept and information to be filed with returns.
Insolvency Reorganizations
Carryovers
1.381(a)-1 General rule relating to carryovers in certain corporate
acquisitions.
1.381(b)-1 Operating rules applicable to carryovers in certain corporate
acquisitions.
1.381(c)(1)-1 Net operating loss carryovers in certain corporate
acquisitions.
1.381(c)(1)-2 Net operating loss carryovers; two or more dates of
distribution or transfer in the taxable year.
1.381(c)(2)-1 Earnings and profits.
1.381(c)(3)-1 Capital loss carryovers.
1.381(c)(4)-1 Method of accounting.
1.381(c)(5)-1 Inventory method.
1.381(c)(6)-1 Depreciation method.
1.381(c)(8)-1 Installment method.
1.381(c)(9)-1 Amortization of bond discount or premium.
1.381(c)(10)-1 Deferred exploration and development expenditures.
1.381(c)(11)-1 Contributions to pension plan, employees' annuity plans,
and stock bonus and profit-sharing plans.
1.381(c)(12)-1 Recovery of bad debts, prior taxes, or delinquency
amounts.
1.381(c)(13)-1 Involuntary conversions.
1.381(c)(14)-1 Dividend carryover to personal holding company.
1.381(c)(15)-1 Indebtedness of certain personal holding companies.
1.381(c)(16)-1 Obligations of distributor or transferor corporation.
1.381(c)(17)-1 Deficiency dividend of personal holding company.
1.381(c)(18)-1 Depletion on extraction of ores or minerals from the
waste or residue of prior mining.
1.381(c)(19)-1 Charitable contribution carryovers in certain
acquisitions.
[[Page 8]]
1.381(c)(21)-1 Pre-1954 adjustments resulting from change in method of
accounting.
1.381(c)(22)-1 Successor life insurance company.
1.381(c)(23)-1 Investment credit carryovers in certain corporate
acquisitions.
1.381(c)(24)-1 Work incentive program credit carryovers in certain
corporate acquisitions.
1.381(c)(25)-1 Deficiency dividend of a qualified investment entity.
1.381(c)(26)-1 Credit for employment of certain new employees.
1.381(d)-1 Operations loss carryovers of life insurance companies.
1.382-1 Table of contents.
1.382-1T Table of contents (temporary).
1.382-2 General rules for ownership change.
1.382-2T Definition of ownership change under section 382, as amended by
the Tax Reform Act of 1986 (temporary).
1.382-3 Definitions and rules relating to a 5-percent shareholder.
1.382-4 Constructive ownership of stock.
1.382-5 Section 382 limitation. [Reserved]
1.382-6 Allocation of income and loss to periods before and after the
change date for purposes of section 382.
1.382-7 Built-in gains and losses.
1.382-8 Controlled groups.
1.382-9 Special rules under section 382 for corporations under the
jurisdiction of a court in a title 11 or similar case.
1.382-10 Special rules for determining time and manner of acquisition of
an interest in a loss corporation.
1.382-11 Reporting requirements.
1.382-12 Determination of adjusted Federal long-term rate.
1.383-0 Effective date.
1.383-1 Special limitations on certain capital losses and excess
credits.
1.383-2 Limitations on certain capital losses and excess credits in
computing alternative minimum tax. [Reserved]
1.385-1 General provisions.
1.385-2 Treatment of certain interests between members of an expanded
group.
1.385-3 Transactions in which debt proceeds are distributed or that have
a similar effect.
1.385-3T Certain distributions of debt instruments and similar
transactions (temporary).
1.385-4T Treatment of consolidated groups.
Authority: 26 U.S.C. 7805, unless otherwise noted.
Section 1.301-1 also issued under 26 U.S.C. 357(d)(3).
Section 1.301-1T also issued under 26 U.S.C. 357(d)(3).
Section 1.304-5 also issued under 26 U.S.C. 304.
Section 1.304-7T also issued under 26 U.S.C. 304(b)(5)(C).
Section 1.305-3 also issued under 26 U.S.C. 305.
Section 1.305-5 also issued under 26 U.S.C. 305.
Section 1.305-7 also issued under 26 U.S.C. 305.
Section 1.334-1 also issued under 26 U.S.C. 367(b).
Section 1.336-2 is also issued under 26 U.S.C. 336.
Section 1.336-3 is also issued under 26 U.S.C. 336.
Section 1.336-4 is also issued under 26 U.S.C. 336.
Section 1.336-5 is also issued under 26 U.S.C. 336.
Section 1.337(d)-1 also issued under 26 U.S.C. 337(d).
Section 1.337(d)-2 also issued under 26 U.S.C. 337(d).
Section 1.337(d)-3T also issued under 26 U.S.C. 337(d).
Section 1.337(d)-4 also issued under 26 U.S.C. 337.
Section 1.337(d)-5 also issued under 26 U.S.C. 337.
Section 1.337(d)-6 also issued under 26 U.S.C. 337.
Section 1.337(d)-7 also issued under 26 U.S.C. 337.
Section 1.338-1 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-2 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-3 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-4 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-5 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-6 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-7 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-8 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-9 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-10 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-11 also issued under 26 U.S.C. 338.
Section 1.338-11T also issued under 26 U.S.C. 338.
Section 1.338(h)(10)-1 also issued under 26 U.S.C. 337(d), 338, and
1502.
Section 1.338(h)(10)-1T also issued under 26 U.S.C. 337(d), 338 and
1502.
Section 1.338(i)-1 also issued under 26 U.S.C. 337(d), 338, and
1502.
Section 1.351-1 also issued under 26 U.S.C. 351.
Section 1.351-2 also issued under 26 U.S.C. 351(g)(4).
Section 1.354-1 also issued under 26 U.S.C. 351(g)(4).
Section 1.355-1 also issued under 26 U.S.C. 351(g)(4).
[[Page 9]]
Section 1.355-2(g) and (i) also issued under 26 U.S.C. 355(b)(3)(D).
Section 1.355-2T(g) and (i) are also issued under 26 U.S.C.
355(b)(3)(D).
Section 1.355-6 also issued under 26 U.S.C. 355(d)(9).
Section 1.355-7 also issued under 26 U.S.C. 355(e)(5).
Section 1.355-8T also issued under 26 U.S.C. 336(e) and 355(e)(5).
Section 1.356-6 also issued under 26 U.S.C. 351(g)(4).
Section 1.356-7 also issued under 26 U.S.C. 351(g)(4).
Section 1.358-2 also issued under 26 U.S.C. 358(b)(1).
Section 1.358-5 also issued under 26 U.S.C. 358(h)(2).
Section 1.358-5T also issued under 26 U.S.C. 358(h)(2).
Section 1.358-7 also issued under Public Law 106-554, 114 Stat.
2763, 2763A-638 (2001).
Section 1.337(d)-7T also issued under 26 U.S.C. 337(d) and 355(h).
Section 1.362-3 also issued under 26 U.S.C. 367(b).
Section 1.362-4 also issued under 26 U.S.C. 362(e)(2)(C)(ii).
Section 1.367(a)-1 also issued under 26 U.S.C. 367(a).
Section 1.367(a)-1T also issued under 26 U.S.C. 367(a).
Section 1.367(a)-3 also issued under 26 U.S.C. 367(a).
Section 1.367(a)-3T also issued under 26 U.S.C. 367(a).
Section 1.367(a)-7 also issued under 26 U.S.C. 367(a), (b), (c), and
337(d).
Section 1.367(a)-8 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(a)-9T also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-0 also issued under 26 U.S.C. 367(b).
Section 1.367(b)-1 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-2 also issued under 26 U.S.C. 367(a) and (b).
Sections 1.367(b)-2(c)(1) and (2) also issued under 26 U.S.C.
367(b)(1) and (2).
Section 1.367(b)-2(d)(3) also issued under 26 U.S.C. 367(b)(1) and
(2).
Section 1.367(b)-3 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-3T also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-4 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-4T also issued under 26 U.S.C. 367(b) and
954(c)(6)(A).
Section 1.367(b)-4(b)(1) also issued under 26 U.S.C. 367(b).
Section 1.367(b)-4(d) also issued under 26 U.S.C. 367(b)(1) and (2).
Section 1.367(b)-4T also issued under 26 U.S.C. 367(b).
Section 1.367(b)-6 also issued under 26 U.S.C. 367(b).
Section 1.367(b)-7 also issued under 26 U.S.C. 367(a) and (b), 26
U.S.C. 902, and 26 U.S.C. 904.
Section 1.367(b)-8 also issued under 26 U.S.C. 367(b).
Section 1.367(b)-9 also issued under 26 U.S.C. 367(a) and (b), 26
U.S.C. 902, and 26 U.S.C. 904.
Section 1.367(b)-10 also issued under 26 U.S.C. 367(b).
Section 1.367(b)-12 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-13 also issued under 26 U.S.C. 367(b).
Section 1.367(d)-1 also issued under 26 U.S.C. 367(d).
Section 1.367(e)-1 also issued under 26 U.S.C. 367(e)(1).
Section 1.367(e)-1(a) also issued under 26 U.S.C. 367(e).
Section 1.367(e)-2 also issued under 26 U.S.C. 367(e)(2).
Section 1.382-2 also issued under 26 U.S.C. 382(k)(1), (l)(3), (m),
and 26 U.S.C. 383.
Section 1.382-2T also issued under 26 U.S.C. 382(g)(4)(C), (i),
(k)(1) and (6), (l)(3), (m), and 26 U.S.C. 383.
Section 1.382-3 also issued under 26 U.S.C. 382(g)(4)(C) and 26
U.S.C. 382(m).
Section 1.382-4 also issued under 26 U.S.C. 382(l)(3) and 382(m).
Section 1.382-5 also issued under 26 U.S.C. 382(m).
Section 1.382-5T also issued under 26 U.S.C. 382(m).
Section 1.382-6 also issued under 26 U.S.C. 382(b)(3)(A), 26
U.S.C.(d)(1), 26 U.S.C. 382(m), and 26 U.S.C.383(d).
Section 1.382-7 also issued under 26 U.S.C 382(m).
Section 1.382-7T also issued under 26 U.S.C. 382(m).
Section 1.382-8 also issued under 26 U.S.C. 382(m).
Section 1.382-9 also issued under 26 U.S.C. 382(l)(3) and (m).
Section 1.382-10 also issued under 26 U.S.C 382(m).
Section 1.382-10T is also issued under 26 U.S.C. 382(m).
Section 1.382-12 also issued under 26 U.S.C. 382(f) and 26 U.S.C.
382(m).
Section 1.383-1 also issued under 26 U.S.C. 383.
Section 1.383-2 also issued under 26 U.S.C. 383.
Section 1.385-1 also issued under 26 U.S.C. 385.
Section 1.385-2 also issued under 26 U.S.C. 385, 6001, 6011, and
7701(l).
Section 1.385-3 also issued under 26 U.S.C. 385, 701, 1502,
1504(a)(5)(A), and 7701(l).
Section 1.385-3T also issued under 26 U.S.C. 385, 701,
1504(a)(5)(A), and 7701(l).
[[Page 10]]
Section 1.385-4T also issued under 26 U.S.C. 385 and 1502.
Source: T.D. 6500, 25 FR 11607, Nov. 26, 1960; 25 FR 14021, Dec. 31,
1960, unless otherwise noted.
CORPORATE DISTRIBUTIONS AND ADJUSTMENTS
DISTRIBUTIONS BY CORPORATIONS
Effects on Recipients
Sec. 1.301-1 Rules applicable with respect to distributions of money
and other property.
(a) General. Section 301 provides the general rule for treatment of
distributions on or after June 22, 1954, of property by a corporation to
a shareholder with respect to its stock. The term property is defined in
section 317(a). Such distributions, except as otherwise provided in this
chapter, shall be treated as provided in section 301(c). Under section
301(c), distributions may be included in gross income, applied against
and reduce the adjusted basis of the stock, treated as gain from the
sale or exchange of property, or (in the case of certain distributions
out of increase in value accrued before March 1, 1913) may be exempt
from tax. The amount of the distributions to which section 301 applies
is determined in accordance with the provisions of section 301(b). The
basis of property received in a distribution to which section 301
applies is determined in accordance with the provisions of section
301(d). Accordingly, except as otherwise provided in this chapter, a
distribution on or after June 22, 1954, of property by a corporation to
a shareholder with respect to its stock shall be included in gross
income to the extent the amount distributed is considered a dividend
under section 316. For examples of distributions treated otherwise, see
sections 116, 301(c)(2), 301(c)(3)(B), 301(e), 302(b), 303, and 305. See
also part II (relating to distributions in partial or complete
liquidation), part III (relating to corporate organizations and
reorganizations), and part IV (relating to insolvency reorganizations),
subchapter C, chapter 1 of the Code.
(b) Time of inclusion in gross income and of determination of fair
market value. A distribution made by a corporation to its shareholders
shall be included in the gross income of the distributees when the cash
or other property is unqualifiedly made subject to their demands.
However, if such distribution is a distribution other than in cash, the
fair market value of the property shall be determined as of the date of
distribution without regard to whether such date is the same as that on
which the distribution is includible in gross income. For example, if a
corporation distributes a taxable dividend in property (the adjusted
basis of which exceeds its fair market value on December 31, 1955) on
December 31, 1955, which is received by, or unqualifiedly made subject
to the demand of, its shareholders on January 2, 1956, the amount to be
included in the gross income of the shareholders will be the fair market
value of such property on December 31, 1955, although such amount will
not be includible in the gross income of the shareholders until January
2, 1956.
(c) Application of section to shareholders. Section 301 is not
applicable to an amount paid by a corporation to a shareholder unless
the amount is paid to the shareholder in his capacity as such.
(d) Distributions to corporate shareholders. (1) If the shareholder
is a corporation, the amount of any distribution to be taken into
account under section 301(c) shall be:
(i) The amount of money distributed,
(ii) An amount equal to the fair market value of any property
distributed which consists of any obligations of the distributing
corporation, stock of the distributing corporation treated as property
under section 305(b), or rights to acquire such stock treated as
property under section 305(b), plus
(iii) In the case of a distribution not described in subdivision
(iv) of this subparagraph, an amount equal to (a) the fair market value
of any other property distributed or, if lesser, (b) the adjusted basis
of such other property in the hands of the distributing corporation
(determined immediately before the distribution and increased for any
gain recognized to the distributing corporation under section 311 (b),
(c), or (d), or under section 341(f), 617(d), 1245(a), 1250(a), 1251(c),
1252(a), or 1254(a)), or
[[Page 11]]
(iv) In the case of a distribution made after November 8, 1971, to a
shareholder which is a foreign corporation, an amount equal to the fair
market value of any other property distributed, but only if the
distribution received by such shareholder is not effectively connected
for the taxable year with the conduct of a trade or business in the
United States by such shareholder.
(2) In the case of a distribution the amount of which is determined
by reference to the adjusted basis described in subparagraph (1)(iii)(b)
of this paragraph:
(i) That portion of the distribution which is a dividend under
section 301(c)(1) may not exceed such adjusted basis, or
(ii) If the distribution is not out of earnings and profits, the
amount of the reduction in basis of the shareholder's stock, and the
amount of any gain resulting from such distribution, are to be
determined by reference to such adjusted basis of the property which is
distributed.
(3) Notwithstanding paragraph (d)(1)(iii), if a distribution of
property described in such paragraph is made after December 31, 1962, by
a foreign corporation to a shareholder which is a corporation, the
amount of the distribution to be taken into account under section 301(c)
shall be determined under section 301(b)(1)(C) and paragraph (n) of this
section.
(e) Adjusted basis. In determining the adjusted basis of property
distributed in the hands of the distributing corporation immediately
before the distribution for purposes of section 301(b)(1)(B)(ii),
(b)(1)(C)(i), and (d)(2)(B), the basis to be used shall be the basis for
determining gain upon a sale or exchange.
(f) Examples. The application of this section (except paragraph (n))
may be illustrated by the following examples:
Example 1. On January 1, 1955, A, an individual owned all of the
stock of Corporation M with an adjusted basis of $2,000. During 1955, A
received distributions from Corporation M totaling $30,000, consisting
of $10,000 in cash and listed securities having a basis in the hands of
Corporation M and a fair market value on the date distributed of
$20,000. Corporation M's taxable year is the calendar year. As of
December 31, 1954, Corporation M had earnings and profits accumulated
after February 28, 1913, in the amount of $26,000, and it had no
earnings and profits and no deficit for 1955. Of the $30,000 received by
A, $26,000 will be treated as an ordinary dividend; the remaining $4,000
will be applied against the adjusted basis of his stock; the $2,000 in
excess of the adjusted basis of his stock will either be treated as gain
from the sale or exchange of property (under section 301(c)(3)(A)) or,
if out of increase in value accrued before March 1, 1913, will (under
section 301(c)(3)(B)) be exempt from tax. If A subsequently sells his
stock in Corporation M, the basis for determining gain or loss on the
sale will be zero.
Example 2. The facts are the same as in Example 1 with the
exceptions that the shareholder of Corporation M is Corporation W and
that the securities which were distributed had an adjusted basis to
Corporation M of $15,000. The distribution received by Corporation W
totals $25,000 consisting of $10,000 in cash and securities with an
adjusted basis of $15,000. The total $25,000 will be treated as a
dividend to Corporation W since the earnings and profits of Corporation
M ($26,000) are in excess of the amount of the distribution.
Example 3. Corporation X owns timber land which it acquired prior to
March 1, 1913, at a cost of $50,000 with $5,000 allocated as the
separate cost of the land. On March 1, 1913, this property had a fair
market value of $150,000 of which $135,000 was attributable to the
timber and $15,000 to the land. All of the timber was cut prior to 1955
and the full appreciation in the value thereof, $90,000 ($135,000-
$45,000), realized through depletion allowances based on March 1, 1913,
value. None of this surplus from realized appreciation had been
distributed. In 1955, Corporation X sold the land for $20,000 thereby
realizing a gain of $15,000. Of this gain, $10,000 is due to realized
appreciation in value which accrued before March 1, 1913 ($15,000-
$5,000). Of the gain of $15,000, $5,000 is taxable. Therefore, at
December 31, 1955, Corporation X had a surplus from realized
appreciation in the amount of $100,000. It had no accumulated earnings
and profits and no deficit at January 1, 1955. The net earnings for 1955
(including the $5,000 gain on the sale of the land) were $20,000. During
1955, Corporation X distributed $75,000 to its stockholders. Of this
amount, $20,000 will be treated as a dividend. The remaining $55,000,
which is a distribution of realized appreciation, will be applied
against and reduce the adjusted basis of the shareholders' stock. If any
part of the $55,000 is in excess of the adjusted basis of a
shareholder's stock, such part will be exempt from tax.
(g) Reduction for liabilities--(1) General rule. For the purpose of
section 301, no reduction shall be made for the amount of any liability,
unless the liability is
[[Page 12]]
assumed by the shareholder within the meaning of section 357(d).
(2) No reduction below zero. Any reduction pursuant to paragraph
(g)(1) of this section shall not cause the amount of the distribution to
be reduced below zero.
(3) Effective dates--(i) In general. This paragraph (g) applies to
distributions occurring after January 4, 2001.
(ii) Retroactive application. This paragraph (g) also applies to
distributions made on or before January 4, 2001, if the distribution is
made as part of a transaction described in, or substantially similar to,
the transaction in Notice 99-59 (1999-2 C.B. 761), including
transactions designed to reduce gain (see Sec. 601.601(d)(2) of this
chapter). For rules for distributions on or before January 4, 2001
(other than distributions on or before that date to which this paragraph
(g) applies), see rules in effect on January 4, 2001 (see Sec. 1.301-
1(g) as contained in 26 CFR part 1 revised April 1, 2001).
(h) Basis. The basis of property received in the distribution to
which section 301 applies shall be--
(1) If the shareholder is not a corporation, the fair market value
of such property;
(2) If the shareholder is a corporation--
(i) In the case of a distribution of the obligations of the
distributing corporation or of the stock of such corporation or rights
to acquire such stock (if such stock or rights are treated as property
under section 305(b)), the fair market value of such obligations, stock,
or rights;
(ii) In the case of the distribution of any other property, except
as provided in subdivision (iii) (relating to certain distributions by a
foreign corporation) or subdivision (iv) (relating to certain
distributions to foreign corporate distributees) of this subparagraph,
whichever of the following is the lesser--
(a) The fair market value of such property; or
(b) The adjusted basis (in the hands of the distributing corporation
immediately before the distribution) of such property increased in the
amount of gain to the distributing corporation which is recognized under
section 311(b) (relating to distributions of LIFO inventory), section
311(c) (relating to distributions of property subject to liabilities in
excess of basis), section 311(d) (relating to appreciated proterty used
to redeem stock), section 341(f) (relating to certain sales of stock of
consenting corporations), section 617(d) (relating to gain from
dispositions of certain mining property), section 1245(a) or 1250(a)
(relating to gain from dispositions of certain depreciable property),
section 1251(c) (relating to gain from disposition of farm recapture
property), section 1252(a) (relating to gain from disposition of farm
land), or 1254(a) (relating to gain from disposition of interest in
natural resource recapture property);
(iii) In the case of the distribution by a foreign corporation of
any other property after December 31, 1962, in a distribution not
described in subdivision (iv) of this subparagraph, the amount
determined under paragraph (n) of this section;
(iv) In the case of the distribution of any other property made
after November 8, 1971, to a shareholder which is a foreign corporation,
the fair market value of such property, but only if the distribution
received by such shareholder is not effectively connected for the
taxable year with the conduct of a trade or business in the United
States by such shareholder.
(i) [Reserved]
(j) Transfers for less than fair market value. If property is
transferred by a corporation to a shareholder which is not a corporation
for an amount less than its fair market value in a sale or exchange,
such shareholder shall be treated as having received a distribution to
which section 301 applies. In such case, the amount of the distribution
shall be the difference between the amount paid for the property and its
fair market value. If property is transferred in a sale or exchange by a
corporation to a shareholder which is a corporation, for an amount less
than its fair market value and also less than its adjusted basis, such
shareholder shall be treated as having received a distribution to which
section 301 applies, and--
[[Page 13]]
(1) Where the fair market value of the property equals or exceeds
its adjusted basis in the hands of the distributing corporation the
amount of the distribution shall be the excess of the adjusted basis
(increased by the amount of gain recognized under section 311 (b), (c),
or (d), or under section 341(f), 617(d), 1245(a), 1250(a), 1251(c),
1252(a), or 1254(a) to the distributing corporation) over the amount
paid for the property;
(2) Where the fair market value of the property is less than its
adjusted basis in the hands of the distributing corporation, the amount
of the distribution shall be the excess of such fair market value over
the amount paid for the property. If property is transferred in a sale
or exchange after December 31, 1962, by a foreign corporation to a
shareholder which is a corporation for an amount less than the amount
which would have been computed under paragraph (n) of this section if
such property had been received in a distribution to which section 301
applied, such shareholder shall be treated as having received a
distribution to which section 301 applies, and the amount of the
distribution shall be the excess of the amount which would have been
computed under paragraph (n) of this section with respect to such
property over the amount paid for the property. In all cases, the
earnings and profits of the distributing corporation shall be decreased
by the excess of the basis of the property in the hands of the
distributing corporation over the amount received therefor. In computing
gain or loss from the subsequent sale of such property, its basis shall
be the amount paid for the property increased by the amount of the
distribution.
If property is transferred in a sale or exchange after December 31,
1962, by a foreign corporation to a shareholder which is a corporation
for an amount less than the amount which would have been computed under
paragraph (n) of this section if such property had been received in a
distribution to which section 301 applied, such shareholder shall be
treated as having received a distribution to which section 301 applies,
and the amount of the distribution shall be the excess of the amount
which would have been computed under paragraph (n) of this section with
respect to such property over the amount paid for the property.
Notwithstanding the preceding provisions of this paragraph, if property
is transferred in a sale or exchange after November 8, 1971, by a
corporation to a shareholder which is a foreign corporation, for an
amount less than its fair market value, and if paragraph (d)(1)(iv) of
this section would apply if such property were received in a
distribution to which section 301 applies, such shareholder shall be
treated as having received a distribution to which section 301 applies
and the amount of the distribution shall be the difference between the
amount paid for the property and its fair market value. In all cases,
the earnings and profits of the distributing corporation shall be
decreased by the excess of the basis of the property in the hands of the
distributing corporation over the amount received therefor. In computing
gain or loss from the subsequent sale of such property, its basis shall
be the amount paid for the property increased by the amount of the
distribution.
(k) Application of rule respecting transfers for less than fair
market value. The application of paragraph (j) of this section may be
illustrated by the following examples:
Example 1. On January 1, 1955, A, an individual shareholder of
corporation X, purchased property from that corporation for $20. The
fair market value of such property was $100, and its basis in the hands
of corporation X was $25. The amount of the distribution determined
under section 301(b) is $80. If A were a corporation, the amount of the
distribution would be $5 (assuming that sections 311 (b) and (c),
1245(a), and 1250(a) do not apply), the excess of the basis of the
property in the hands of corporation X over the amount received
therefor. The basis of such property to corporation A would be $25. If
the basis of the property in the hands of corporation X were $10, the
corporate shareholder, A, would not receive a distribution. The basis of
such property to corporation A would be $20. Whether or not A is a
corporation, the excess of the amount paid over the basis of the
property in the hands of corporation X ($20 over $10) would be a taxable
gain to corporation X.
Example 2. On January 1, 1963, corporation A, which is a shareholder
of corporation B (a foreign corporation engaged in business within the
United States), purchased one
[[Page 14]]
share of corporation X stock from B for $20. The fair market value of
the share was $100, and its adjusted basis in the hands of B was $25.
Assume that if the share of corporation X stock had been received by A
in a distribution to which section 301 applied, the amount of the
distribution under paragraph (n) of this section would have been $55.
The amount of the distribution under section 301 is $35, i.e., $55
(amount computed under paragraph (n) of this section) minus $20 (amount
paid for the property). The basis of such property to A is $55.
(l) Transactions treated as distributions. A distribution to
shareholders with respect to their stock is within the terms of section
301 although it takes place at the same time as another transaction if
the distribution is in substance a separate transaction whether or not
connected in a formal sense. This is most likely to occur in the case of
a recapitalization, a reincorporation, or a merger of a corporation with
a newly organized corporation having substantially no property. For
example, if a corporation having only common stock outstanding,
exchanges one share of newly issued common stock and one bond in the
principal amount of $10 for each share of outstanding common stock, the
distribution of the bonds will be a distribution of property (to the
extent of their fair market value) to which section 301 applies, even
though the exchange of common stock for common stock may be pursuant to
a plan of reorganization under the terms of section 368(a)(1)(E)
(recapitalization) and even though the exchange of common stock for
common stock may be tax free by virtue of section 354.
(m) Cancellation of indebtedness. The cancellation of indebtedness
of a shareholder by a corporation shall be treated as a distribution of
property.
(n) [Reserved]
(o) Distributions of certain property by DISC's to corporate
shareholders. See Sec. 1.997-1 for the rule that if a corporation which
is a DISC or former DISC (as defined in section 992(a)(1) or (3) as the
case may be) makes a distribution of property (other than money and
other than the obligations of the DISC or former DISC) out of
accumulated DISC income (as defined in section 996(f)(1)) or previously
taxed income (as defined in section 996(f)(2)), such distribution of
property shall be treated as if it were made to an individual and that
the basis of the property distributed, in the hands of the recipient
corporation, shall be determined as if such property were distributed to
an individual.
(p) Cross references. For certain rules relating to adjustments to
earnings and profits and for determining the extent to which a
distribution is a dividend, see sections 312 and 316 and regulations
thereunder.
(q) Split-dollar and other life insurance arrangements--(1) Split-
dollar life insurance arrangements--(i) Distribution of economic
benefits. The provision by a corporation to its shareholder pursuant to
a split-dollar life insurance arrangement, as defined in Sec. 1.61-
22(b)(1) or (2), of economic benefits described in Sec. 1.61-22(d) or
of amounts described in Sec. 1.61-22(e) is treated as a distribution of
property, the amount of which is determined under Sec. 1.61-22(d) and
(e), respectively.
(ii) Distribution of entire contract or undivided interest therein.
A transfer (within the meaning of Sec. 1.61-22(c)(3)) of the ownership
of a life insurance contract (or an undivided interest therein) that is
part of a split-dollar life insurance arrangement is a distribution of
property, the amount of which is determined pursuant to Sec. 1.61-
22(g)(1) and (2).
(2) Other life insurance arrangements. A payment by a corporation on
behalf of a shareholder of premiums on a life insurance contract or an
undivided interest therein that is owned by the shareholder constitutes
a distribution of property, even if such payment is not part of a split-
dollar life insurance arrangement under Sec. 1.61-22(b).
(3) When distribution is made--(i) In general. Except as provided in
paragraph (q)(3)(ii) of this section, paragraph (b) of this section
shall apply to determine when a distribution described in paragraph
(q)(1) or (2) of this section is taken into account by a shareholder.
(ii) Exception. Notwithstanding paragraph (b) of this section, a
distribution described in paragraph (q)(1)(ii) of this section shall be
treated as made by a corporation to its shareholder at the time that the
life insurance contract, or an undivided interest therein, is
[[Page 15]]
transferred (within the meaning of Sec. 1.61-22(c)(3)) to the
shareholder.
(4) Effective date--(i) General rule. This paragraph (q) applies to
split-dollar and other life insurance arrangements entered into after
September 17, 2003. For purposes of this paragraph (q)(4), a split-
dollar life insurance arrangement is entered into as determined under
Sec. 1.61-22(j)(1)(ii).
(ii) Modified arrangements treated as new arrangements. If a split-
dollar life insurance arrangement entered into on or before September
17, 2003 is materially modified (within the meaning of Sec. 1.61-
22(j)(2)) after September 17, 2003, the arrangement is treated as a new
arrangement entered into on the date of the modification.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960]
Editorial Note: For Federal Register citations affecting Sec.
1.301-1, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
Sec. 1.302-1 General.
(a) Under section 302(d), unless otherwise provided in subchapter C,
chapter 1 of the Code, a distribution in redemption of stock shall be
treated as a distribution of property to which section 301 applies if
the distribution is not within any of the provisions of section 302(b).
A distribution in redemption of stock shall be considered a distribution
in part or full payment in exchange for the stock under section 302(a)
provided paragraph (1), (2), (3), or (4) of section 302(b) applies.
Section 318(a) (relating to constructive ownership of stock) applies to
all redemptions under section 302 except that in the termination of a
shareholder's interest certain limitations are placed on the application
of section 318(a)(1) by section 302(c)(2). The term redemption of stock
is defined in section 317(b). Section 302 does not apply to that portion
of any distribution which qualifies as a distribution in partial
liquidation under section 346. For special rules relating to redemption
of stock to pay death taxes see section 303. For special rules relating
to redemption of section 306 stock see section 306. For special rules
relating to redemption of stock in partial or complete liquidation see
section 331.
(b) If, in connection with a partial liquidation under the terms of
section 346, stock is redeemed in an amount in excess of the amount
specified by section 331(a)(2), section 302(b) shall first apply as to
each shareholder to which it is applicable without limitation because of
section 331(a)(2). That portion of the total distribution which is used
in all redemptions from specific shareholders which are within the terms
of section 302(a) shall be excluded in determining the application of
sections 346 and 331(a)(2). For example, Corporation X has $50,000 which
is attributable to the sale of one of two active businesses and which,
if distributed in redemption of stock, would qualify as a partial
liquidation under the terms of section 346(b). Corporation X distributes
$60,000 to its shareholders in redemption of stock, $20,000 of which is
in redemption of all of the stock of shareholder A within the meaning of
section 302(b)(3). The $20,000 distributed in redemption of the stock of
shareholder A will be excluded in determining the application of
sections 346 and 331(a)(2). The entire $60,000 will be treated as in
part or full payment for stock ($20,000 qualifying under section 302(a)
and $40,000 qualifying under sections 346 and 331(a)(2)).
Sec. 1.302-2 Redemptions not taxable as dividends.
(a) In general. The fact that a redemption fails to meet the
requirements of paragraph (2), (3) or (4) of section 302(b) shall not be
taken into account in determining whether the redemption is not
essentially equivalent to a dividend under section 302(b)(1). See,
however, paragraph (b) of this section. For example, if a shareholder
owns only nonvoting stock of a corporation which is not section 306
stock and which is limited and preferred as to dividends and in
liquidation, and one-half of such stock is redeemed, the distribution
will ordinarily meet the requirements of paragraph (1) of section 302(b)
but will not meet the requirements of paragraph (2), (3) or (4) of such
section. The determination of whether or not a distribution is within
the phrase ``essentially equivalent to a
[[Page 16]]
dividend'' (that is, having the same effect as a distribution without
any redemption of stock) shall be made without regard to the earnings
and profits of the corporation at the time of the distribution. For
example, if A owns all the stock of a corporation and the corporation
redeems part of his stock at a time when it has no earnings and profits,
the distribution shall be treated as a distribution under section 301
pursuant to section 302(d).
(b) Redemption not essentially equivalent to a dividend--(1) In
general. The question whether a distribution in redemption of stock of a
shareholder is not essentially equivalent to a dividend under section
302(b)(1) depends upon the facts and circumstances of each case. One of
the facts to be considered in making this determination is the
constructive stock ownership of such shareholder under section 318(a).
All distributions in pro rata redemptions of a part of the stock of a
corporation generally will be treated as distributions under section 301
if the corporation has only one class of stock outstanding. However, for
distributions in partial liquidation, see section 302(e). The redemption
of all of one class of stock (except section 306 stock) either at one
time or in a series of redemptions generally will be considered as a
distribution under section 301 if all classes of stock outstanding at
the time of the redemption are held in the same proportion.
Distributions in redemption of stock may be treated as distributions
under section 301 regardless of the provisions of the stock certificate
and regardless of whether all stock being redeemed was acquired by the
stockholders from whom the stock was redeemed by purchase or otherwise.
(2) Statement. Unless Sec. 1.331-1(d) applies, every significant
holder that transfers stock to the issuing corporation in exchange for
property from such corporation must include on or with such holder's
return for the taxable year of such exchange a statement entitled,
``STATEMENT PURSUANT TO Sec. 1.302-2(b)(2) BY [INSERT NAME AND TAXPAYER
IDENTIFICATION NUMBER (IF ANY) OF TAXPAYER], A SIGNIFICANT HOLDER OF THE
STOCK OF [INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER (IF ANY) OF
ISSUING CORPORATION].'' If a significant holder is a controlled foreign
corporation (within the meaning of section 957), each United States
shareholder (within the meaning of section 951(b)) with respect thereto
must include this statement on or with its return. The statement must
include--
(i) The fair market value and basis of the stock transferred by the
significant holder to the issuing corporation; and
(ii) A description of the property received by the significant
holder from the issuing corporation.
(3) Definitions. For purposes of this section:
(i) Significant holder means any person that, immediately before the
exchange--
(A) Owned at least five percent (by vote or value) of the total
outstanding stock of the issuing corporation if the stock owned by such
person is publicly traded; or
(B) Owned at least one percent (by vote or value) of the total
outstanding stock of the issuing corporation if the stock owned by such
person is not publicly traded.
(ii) Publicly traded stock means stock that is listed on--
(A) A national securities exchange registered under section 6 of the
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
(B) An interdealer quotation system sponsored by a national
securities association registered under section 15A of the Securities
Exchange Act of 1934 (15 U.S.C. 78o-3).
(iii) Issuing corporation means the corporation that issued the
shares of stock, some or all of which were transferred by a significant
holder to such corporation in the exchange described in paragraph (b)(2)
of this section.
(4) Cross reference. See section 6043 of the Internal Revenue Code
for requirements relating to a return by a liquidating corporation.
(c) Basis adjustments. In any case in which an amount received in
redemption of stock is treated as a distribution of a dividend, proper
adjustment of the basis of the remaining stock will
[[Page 17]]
be made with respect to the stock redeemed. (For adjustments to basis
required for certain redemptions of corporate shareholders that are
treated as extraordinary dividends, see section 1059 and the regulations
thereunder.) The following examples illustrate the application of this
rule:
Example 1. A, an individual, purchased all of the stock of
Corporation X for $100,000. In 1955 the corporation redeems half of the
stock for $150,000, and it is determined that this amount constitutes a
dividend. The remaining stock of Corporation X held by A has a basis of
$100,000.
Example 2. H and W, husband and wife, each own half of the stock of
Corporation X. All of the stock was purchased by H for $100,000 cash. In
1950 H gave one-half of the stock to W, the stock transferred having a
value in excess of $50,000. In 1955 all of the stock of H is redeemed
for $150,000, and it is determined that the distribution to H in
redemption of his shares constitutes the distribution of a dividend.
Immediately after the transaction, W holds the remaining stock of
Corporation X with a basis of $100,000.
Example 3. The facts are the same as in Example (2) with the
additional facts that the outstanding stock of Corporation X consists of
1,000 shares and all but 10 shares of the stock of H is redeemed.
Immediately after the transaction, H holds 10 shares of the stock of
Corporation X with a basis of $50,000, and W holds 500 shares with a
basis of $50,000.
(d) Effective/applicability date. Paragraphs (b)(2), (b)(3) and
(b)(4) of this section apply to any taxable year beginning on or after
May 30, 2006. However, taxpayers may apply paragraphs (b)(2), (b)(3) and
(b)(4) of this section to any original Federal income tax return
(including any amended return filed on or before the due date (including
extensions) of such original return) timely filed on or after May 30,
2006. For taxable years beginning before May 30, 2006, see Sec. 1.302-2
as contained in 26 CFR part 1 in effect on April 1, 2006.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 8724, 62 FR
38028, July 26, 1997; T.D. 9264, 71 FR 30593, May 30, 2006; T.D. 9329,
72 FR 32796, June 14, 2007]
Sec. 1.302-3 Substantially disproportionate redemption.
(a) Section 302(b)(2) provides for the treatment of an amount
received in redemption of stock as an amount received in exchange for
such stock if--
(1) Immediately after the redemption the shareholder owns less than
50 percent of the total combined voting power of all classes of stock as
provided in section 302(b)(2)(B),
(2) The redemption is a substantially disproportionate redemption
within the meaning of section 302(b)(2)(C), and
(3) The redemption is not pursuant to a plan described in section
302(b)(2)(D).
Section 318(a) (relating to constructive ownership of stock) shall apply
both in making the disproportionate redemption test and in determining
the percentage of stock ownership after the redemption. The requirements
under section 302(b)(2) shall be applied to each shareholder separately
and shall be applied only with respect to stock which is issued and
outstanding in the hands of the shareholders. Section 302(b)(2) only
applies to a redemption of voting stock or to a redemption of both
voting stock and other stock. Section 302(b)(2) does not apply to the
redemption solely of nonvoting stock (common or preferred). However, if
a redemption is treated as an exchange to a particular shareholder under
the terms of section 302(b)(2), such section will apply to the
simultaneous redemption of nonvoting preferred stock (which is not
section 306 stock) owned by such shareholder and such redemption will
also be treated as an exchange. Generally, for purposes of this section,
stock which does not have voting rights until the happening of an event,
such as a default in the payment of dividends on preferred stock, is not
voting stock until the happening of the specified event. Subsection
302(b)(2)(D) provides that a redemption will not be treated as
substantially disproportionate if made pursuant to a plan the purpose or
effect of which is a series of redemptions which result in the aggregate
in a distribution which is not substantially disproportionate. Whether
or not such a plan exists will be determined from all the facts and
circumstances.
(b) The application of paragraph (a) of this section is illustrated
by the following example:
Example. Corporation M has outstanding 400 shares of common stock of
which A, B, C and D each own 100 shares or 25 percent. No stock is
considered constructively owned by
[[Page 18]]
A, B, C or D under section 318. Corporation M redeems 55 shares from A,
25 shares from B, and 20 shares from C. For the redemption to be
disproportionate as to any shareholder, such shareholder must own after
the redemptions less than 20 percent (80 percent of 25 percent) of the
300 shares of stock then outstanding. After the redemptions, A owns 45
shares (15 percent), B owns 75 shares (25 percent), and C owns 80 shares
(26\2/3\ percent). The distribution is disproportionate only with
respect to A.
Sec. 1.302-4 Termination of shareholder's interest.
Section 302(b)(3) provides that a distribution in redemption of all
of the stock of the corporation owned by a shareholder shall be treated
as a distribution in part or full payment in exchange for the stock of
such shareholder. In determining whether all of the stock of the
shareholder has been redeemed, the general rule of section 302(c)(1)
requires that the rules of constructive ownership provided in section
318(a) shall apply. Section 302(c)(2), however, provides that section
318(a)(1) (relating to constructive ownership of stock owned by members
of a family) shall not apply where the specific requirements of section
302(c)(2) are met. The following rules shall be applicable in
determining whether the specific requirements of section 302(c)(2) are
met:
(a) Statement. The agreement specified in section 302(c)(2)(A)(iii)
shall be in the form of a statement entitled, ``STATEMENT PURSUANT TO
SECTION 302(c)(2)(A)(iii) BY [INSERT NAME AND TAXPAYER IDENTIFICATION
NUMBER (IF ANY) OF TAXPAYER OR RELATED PERSON, AS THE CASE MAY BE], A
DISTRIBUTEE (OR RELATED PERSON) OF [INSERT NAME AND EMPLOYER
IDENTIFICATION NUMBER (IF ANY) OF DISTRIBUTING CORPORATION].'' The
distributee must include such statement on or with the distributee's
first return for the taxable year in which the distribution described in
section 302(b)(3) occurs. If the distributee is a controlled foreign
corporation (within the meaning of section 957), each United States
shareholder (within the meaning of section 951(b)) with respect thereto
must include this statement on or with its return. The distributee must
represent in the statement--
(1) THE DISTRIBUTEE (OR RELATED PERSON) HAS NOT ACQUIRED, OTHER THAN
BY BEQUEST OR INHERITANCE, ANY INTEREST IN THE CORPORATION (AS DESCRIBED
IN SECTION 302(c)(2)(A)(i)) SINCE THE DISTRIBUTION; and
(2) THE DISTRIBUTEE (OR RELATED PERSON) WILL NOTIFY THE INTERNAL
REVENUE SERVICE OF ANY ACQUISITION, OTHER THAN BY BEQUEST OR
INHERITANCE, OF SUCH AN INTEREST IN THE CORPORATION WITHIN 30 DAYS AFTER
THE ACQUISITION, IF THE ACQUISITION OCCURS WITHIN 10 YEARS FROM THE DATE
OF THE DISTRIBUTION.
(b) Substantiation information. The distributee who files an
agreement under section 302(c)(2)(A)(iii) shall retain copies of income
tax returns and any other records indicating fully the amount of tax
which would have been payable had the redemption been treated as a
distribution subject to section 301.
(c) Stock of parent, subsidiary or successor corporation redeemed.
If stock of a parent corporation is redeemed, section 302(c)(2)(A),
relating to acquisition of an interest in the corporation within 10
years after termination shall be applied with reference to an interest
both in the parent corporation and any subsidiary of such parent
corporation. If stock of a parent corporation is sold to a subsidiary in
a transaction described in section 304, section 302(c)(2)(A) shall be
applicable to the acquisition of an interest in such subsidiary
corporation or in the parent corporation. If stock of a subsidiary
corporation is redeemed, section 302(c)(2)(A) shall be applied with
reference to an interest both in such subsidiary corporation and its
parent. Section 302(c)(2)(A) shall also be applied with respect to an
interest in a corporation which is a successor corporation to the
corporation the interest in which has been terminated.
(d) Redeemed shareholder as creditor. For the purpose of section
302(c)(2)(A)(i), a person will be considered to be a creditor only if
the rights of such person with respect to the corporation are not
greater or broader in scope than necessary for the enforcement of his
claim. Such claim must not
[[Page 19]]
in any sense be proprietary and must not be subordinate to the claims of
general creditors. An obligation in the form of a debt may thus
constitute a proprietary interest. For example, if under the terms of
the instrument the corporation may discharge the principal amount of its
obligation to a person by payments, the amount or certainty of which are
dependent upon the earnings of the corporation, such a person is not a
creditor of the corporation. Furthermore, if under the terms of the
instrument the rate of purported interest is dependent upon earnings,
the holder of such instrument may not, in some cases, be a creditor.
(e) Acquisition of assets pursuant to creditor's rights. In the case
of a distributee to whom section 302(b)(3) is applicable, who is a
creditor after such transaction, the acquisition of the assets of the
corporation in the enforcement of the rights of such creditor shall not
be considered an acquisition of an interest in the corporation for
purposes of section 302(c)(2) unless stock of the corporation, its
parent corporation, or, in the case of a redemption of stock of a parent
corporation, of a subsidiary of such corporation is acquired.
(f) Constructive ownership rules applicable. In determining whether
an entire interest in the corporation has been terminated under section
302(b)(3), under all circumstances paragraphs (2), (3), (4), and (5) of
section 318(a) (relating to constructive ownership of stock) shall be
applicable.
(g) Avoidance of Federal income tax. Section 302(c)(2)(B) provides
that section 302(c)(2)(A) shall not apply--
(1) If any portion of the stock redeemed was acquired directly or
indirectly within the 10-year period ending on the date of the
distribution by the distributee from a person, the ownership of whose
stock would (at the time of distribution) be attributable to the
distributee under section 318(a), or
(2) If any person owns (at the time of the distribution) stock, the
ownership of which is attributable to the distributee under section
318(a), such person acquired any stock in the corporation directly or
indirectly from the distributee within the 10-year period ending on the
date of the distribution, and such stock so acquired from the
distributee is not redeemed in the same transaction,unless the
acquisition (described in subparagraph (1) of this paragraph) or the
disposition by the distributee (described in subparagraph (2) of this
paragraph) did not have as one of its principal purposes the avoidance
of Federal income tax. A transfer of stock by the transferor, within the
10-year period ending on the date of the distribution, to a person whose
stock would be attributable to the transferor shall not be deemed to
have as one of its principal purposes the avoidance of Federal income
tax merely because the transferee is in a lower income tax bracket than
the transferor.
(h) Effective/applicability date. Paragraph (a) of this section
applies to any taxable year beginning on or after May 30, 2006. However,
taxpayers may apply paragraph (a) of this section to any original
Federal income tax return (including any amended return filed on or
before the due date (including extensions) of such original return)
timely filed on or after May 30, 2006. For taxable years beginning
before May 30, 2006, see Sec. 1.302-4 as contained in 26 CFR part 1 in
effect on April 1, 2006.
(Sec. 302(c)(2)(A)(iii) (68A Stat. 87; 26 U.S.C. 302 (c)(2)(A)(iii)))
[T.D. 7535, 43 FR 10686, Mar. 15, 1978, as amended by T.D. 9264, 71 FR
30594, 30607, May 30, 2006; T.D. 9329, 72 FR 32796, 32808, June 14,
2007]
Sec. 1.303-1 General.
Section 303 provides that in certain cases a distribution in
redemption of stock, the value of which is included in determining the
value of the gross estate of a decedent, shall be treated as a
distribution in full payment in exchange for the stock so redeemed.
Sec. 1.303-2 Requirements.
(a) Section 303 applies only where the distribution is with respect
to stock of a corporation the value of whose stock in the gross estate
of the decedent for Federal estate tax purposes is an amount in excess
of (1) 35 percent of the value of the gross estate of such decedent, or
(2) 50 percent of the taxable estate of such decedent. For the purposes
of such 35 percent and 50 percent requirements, stock of two or more
[[Page 20]]
corporations shall be treated as the stock of a single corporation if
more than 75 percent in value of the outstanding stock of each such
corporation is included in determining the value of the decedent's gross
estate. For the purpose of the 75 percent requirement, stock which, at
the decedent's death, represents the surviving spouse's interest in
community property shall be considered as having been included in
determining the value of the decedent's gross estate.
(b) For the purpose of section 303(b)(2)(A)(i), the term gross
estate means the gross estate as computed in accordance with section
2031 (or, in the case of the estate of a decedent nonresident not a
citizen of the United States, in accordance with section 2103). For the
purpose of section 303(b)(2)(A)(ii), the term taxable estate means the
taxable estate as computed in accordance with section 2051 (or, in the
case of the estate of a decedent nonresident not a citizen of the United
States, in accordance with section 2106). In case the value of an estate
is determined for Federal estate tax purposes under section 2032
(relating to alternate valuation), then, for purposes of section
303(b)(2), the value of the gross estate, the taxable estate, and the
stock shall each be determined on the applicable date prescribed in
section 2032.
(c)(1) In determining whether the estate of the decedent is
comprised of stock of a corporation of sufficient value to satisfy the
percentage requirements of section 303(b)(2)(A) and section
303(b)(2)(B), the total value, in the aggregate, of all classes of stock
of the corporation includible in determining the value of the gross
estate is taken into account. A distribution under section 303(a) may be
in redemption of the stock of the corporation includible in determining
the value of the gross estate, without regard to the class of such
stock.
(2) The above may be illustrated by the following example:
Example. The gross estate of the decedent has a value of $1,000,000,
the taxable estate is $700,000, and the sum of the death taxes and
funeral and administration expenses is $275,000. Included in determining
the gross estate of the decedent is stock of three corporations which,
for Federal estate tax purposes, is valued as follows:
Corporation A:
Common stock............................................... $100,000
Preferred stock............................................ 100,000
Corporation B:
Common stock............................................... 50,000
Preferred stock............................................ 350,000
Corporation C: Common stock.................................. 200,000
The stock of Corporation A and Corporation C included in the estate of
the decedent constitutes all of the outstanding stock of both
corporations. The stock of Corporation A and the stock of Corporation C,
treated as the stock of a single corporation under section 303(b)(2)(B),
has a value in excess of $350,000 (35 percent of the gross estate or 50
percent of the taxable estate). Likewise, the stock of Corporation B has
a value in excess of $350,000. The distribution by one or more of the
above corporations, within the period prescribed in section 303(b)(1),
of amounts not exceeding, in the aggregate, $275,000, in redemption of
preferred stock or common stock of such corporation or corporations,
will be treated as in full payment in exchange for the stock so
redeemed.
(d) If stock includible in determining the value of the gross estate
of a decedent is exchanged for new stock, the basis of which is
determined by reference to the basis of the old stock, the redemption of
the new stock will be treated the same under section 303 as the
redemption of the old stock would have been. Thus section 303 shall
apply with respect to a distribution in redemption of stock received by
the estate of a decedent (1) in connection with a reorganization under
section 368, (2) in a distribution or exchange under section 355 (or so
much of section 356 as relates to section 355), (3) in an exchange under
section 1036 or (4) in a distribution to which section 305(a) applies.
Similarly, a distribution in redemption of stock will qualify under
section 303, notwithstanding the fact that the stock redeemed is section
306 stock to the extent that the conditions of section 303 are met.
(e) Section 303 applies to distributions made after the death of the
decedent and (1) before the expiration of the 3-year period of
limitations for the assessment of estate tax provided in section 6501(a)
(determined without the application of any provisions of law extending
or suspending the running of such period of limitations), or within 90
[[Page 21]]
days after the expiration of such period, or (2) if a petition for
redetermination of a deficiency in such estate tax has been filed with
the Tax Court within the time prescribed in section 6213, at any time
before the expiration of 60 days after the decision of the Tax Court
becomes final. The extension of the period of distribution provided in
section 303(b)(1)(B) has reference solely to bona fide contests in the
Tax Court and will not apply in the case of a petition for
redetermination of a deficiency which is initiated solely for the
purpose of extending the period within which section 303 would otherwise
be applicable.
(f) While section 303 will most frequently have application in the
case where stock is redeemed from the executor or administrator of an
estate, the section is also applicable to distributions in redemption of
stock included in the decedent's gross estate and held at the time of
the redemption by any person who acquired the stock by any of the means
comprehended by part III, subchapter A, chapter 11 of the Code,
including the heir, legatee, or donee of the decedent, a surviving joint
tenant, surviving spouse, appointee, or taker in default of appointment,
or a trustee of a trust created by the decedent. Thus section 303 may
apply with respect to a distribution in redemption of stock from a donee
to whom the decedent has transferred stock in contemplation of death
where the value of such stock is included in the decedent's gross estate
under section 2035. Similarly, section 303 may apply to the redemption
of stock from a beneficiary of the estate to whom an executor has
distributed the stock pursuant to the terms of the will of the decedent.
However, section 303 is not applicable to the case where stock is
redeemed from a stockholder who has acquired the stock by gift or
purchase from any person to whom such stock has passed from the
decedent. Nor is section 303 applicable to the case where stock is
redeemed from a stockholder who has acquired the stock from the executor
in satisfaction of a specific monetary bequest.
(g)(1) The total amount of the distributions to which section 303
may apply with respect to redemptions of stock included in the gross
estate of a decedent may not exceed the sum of the estate, inheritance,
legacy, and succession taxes (including any interest collected as a part
of such taxes) imposed because of the decedent's death and the amount of
funeral and administration expenses allowable as deductions to the
estate. Where there is more than one distribution in redemption of stock
described in section 303(b)(2) during the period of time prescribed in
section 303(b)(1), the distributions shall be applied against the total
amount which qualifies for treatment under section 303 in the order in
which the distributions are made. For this purpose, all distributions in
redemption of such stock shall be taken into account, including
distributions which under another provision of the Code are treated as
in part or full payment in exchange for the stock redeemed.
(2) Subparagraph (1) of this paragraph may be illustrated by the
following example:
Example. (i) The gross estate of the decedent has a value of
$800,000, the taxable estate is $500,000, and the sum of the death taxes
and funeral and administrative expenses is $225,000. Included in
determining the gross estate of the decedent is the stock of a
corporation which for Federal estate tax purposes is valued at $450,000.
During the first year of administration, one-third of such stock is
distributed to a legatee and shortly thereafter this stock is redeemed
by the corporation for $150,000. During the second year of
administration, another one-third of such stock includible in the estate
is redeemed for $150,000.
(ii) The first distribution of $150,000 is applied against the
$225,000 amount that qualifies for treatment under section 303,
regardless of whether the first distribution was treated as in payment
in exchange for stock under section 302(a). Thus, only $75,000 of the
second distribution may be treated as in full payment in exchange for
stock under section 303. The tax treatment of the remaining $75,000
would be determined under other provisions of the Code.
(h) For the purpose of section 303, the estate tax or any other
estate, inheritance, legacy, or succession tax shall be ascertained
after the allowance of any
[[Page 22]]
credit, relief, discount, refund, remission or reduction of tax.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6724, 29 FR
5343, Apr. 21, 1964; T.D. 7346, 40 FR 10669, Mar. 7, 1975]
Sec. 1.303-3 Application of other sections.
(a) The sole effect of section 303 is to exempt from tax as a
dividend a distribution to which such section is applicable when made in
redemption of stock includible in a decedent's gross estate. Such
section does not, however, in any other manner affect the principles set
forth in sections 302 and 306. Thus, if stock of a corporation is owned
equally by A, B, and the C Estate, and the corporation redeems one-half
of the stock of each shareholder, the determination of whether the
distributions to A and B are essentially equivalent to dividends shall
be made without regard to the effect which section 303 may have upon the
taxability of the distribution to the C Estate.
(b) See section 304 relative to redemption of stock through the use
of related corporations.
Sec. 1.304-1 General.
(a) Except as provided in paragraph (b) of this section, section 304
is applicable where a shareholder sells stock of one corporation to a
related corporation as defined in section 304. Sales to which section
304 is applicable shall be treated as redemptions subject to sections
302 and 303.
(b) In the case of--
(1) Any acquisition of stock described in section 304 which occurred
before June 22, 1954, and
(2) Any acquisition of stock described in section 304 which occurred
on or after June 22, 1954, and on or before December 31, 1958, pursuant
to a contract entered into before June 22, 1954.
The extent to which the property received in return for such acquisition
shall be treated as a dividend shall be determined as if the Internal
Revenue Code of 1939 continued to apply in respect of such acquisition
and as if the Internal Revenue Code of 1954 had not been enacted. See
section 391. In cases to which this paragraph applies, the basis of the
stock received by the acquiring corporation shall be determined as if
the Internal Revenue Code of 1939 continued to apply in respect of such
acquisition and as if the Internal Revenue Code of 1954 had not been
enacted.
[T.D. 6533, 26 FR 401, Jan. 19, 1961]
Sec. 1.304-2 Acquisition by related corporation
(other than subsidiary).
(a) If a corporation, in return for property, acquires stock of
another corporation from one or more persons, and the person or persons
from whom the stock was acquired were in control of both such
corporations before the acquisition, then such property shall be treated
as received in redemption of stock of the acquiring corporation. The
stock received by the acquiring corporation shall be treated as a
contribution to the capital of such corporation. See section 362(a) for
determination of the basis of such stock. The transferor's basis for his
stock in the acquiring corporation shall be increased by the basis of
the stock surrendered by him. (But see below in this paragraph for
subsequent reductions of basis in certain cases.) As to each person
transferring stock, the amount received shall be treated as a
distribution of property under section 302(d), unless as to such person
such amount is to be treated as received in exchange for the stock under
the terms of section 302(a) or section 303. In applying section 302(b),
reference shall be had to the shareholder's ownership of stock in the
issuing corporation and not to his ownership of stock in the acquiring
corporation (except for purposes of applying section 318(a)). In
determining control and applying section 302(b), section 318(a)
(relating to the constructive ownership of stock) shall be applied
without regard to the 50-percent limitation contained in section
318(a)(2)(C) and (3)(C). A series of redemptions referred to in section
302(b)(2)(D) shall include acquisitions by either of the corporations of
stock of the other and stock redemptions by both corporations. If
section 302(d) applies to the surrender of stock by a shareholder, his
basis for his stock in the acquiring corporation after the transaction
(increased as stated above in this paragraph) shall not be decreased
except as provided in section 301. If section 302(d) does not apply, the
property received
[[Page 23]]
shall be treated as received in a distribution in payment in exchange
for stock of the acquiring corporation under section 302(a), which stock
has a basis equal to the amount by which the shareholder's basis for his
stock in the acquiring corporation was increased on account of the
contribution to capital as provided for above in this paragraph.
Accordingly, such amount shall be applied in reduction of the
shareholder's basis for his stock in the acquiring corporation. Thus,
the basis of each share of the shareholder's stock in the acquiring
corporation will be the same as the basis of such share before the
entire transaction. The holding period of the stock which is considered
to have been redeemed shall be the same as the holding period of the
stock actually surrendered.
(b) In any case in which two or more persons, in the aggregate,
control two corporations, section 304(a)(1) will apply to sales by such
persons of stock in either corporation to the other (whether or not made
simultaneously) provided the sales by each of such persons are related
to each other. The determination of whether the sales are related to
each other shall be dependent upon the facts and circumstances
surrounding all of the sales. For this purpose, the fact that the sales
may occur during a period of one or more years (such as in the case of a
series of sales by persons who together control each of such
corporations immediately prior to the first of such sales and
immediately subsequent to the last of such sales) shall be disregarded,
provided the other facts and circumstances indicate related
transactions.
(c) The application of section 304(a)(1) may be illustrated by the
following examples:
Example 1. Corporation X and corporation Y each have outstanding 200
shares of common stock. One-half of the stock of each corporation is
owned by an individual, A, and one-half by another individual, B, who is
unrelated to A. On or after August 31, 1964, A sells 30 shares of
corporation X stock to corporation Y for $50,000, such stock having an
adjusted basis of $10,000 to A. After the sale, A is considered as
owning corporation X stock as follows: (i) 70 shares directly, and (ii)
15 shares constructively, since by virtue of his 50-percent ownership of
Y he constructively owns 50 percent of the 30 shares owned directly by
Y. Since A's percentage of ownership of X's voting stock after the sale
(85 out of 200 shares, or 42.5%) is not less than 80 percent of his
percentage of ownership of X's voting stock before the sale (100 out of
200 shares, or 50%), the transfer is not ``substantially
disproportionate'' as to him as provided in section 302(b)(2). Under
these facts, and assuming that section 302(b)(1) is not applicable, the
entire $50,000 is treated as a dividend to A to the extent of the
earnings and profits of corporation Y. The basis of the corporation X
stock to corporation Y is $10,000, its adjusted basis to A. The amount
of $10,000 is added to the basis of the stock of corporation Y in the
hands of A.
Example 2. The facts are the same as in Example (1) except that A
sells 80 shares of corporation X stock to corporation Y, and the sale
occurs before August 31, 1964. After the sale, A is considered as owning
corporation X stock as follows: (i) 20 shares directly, and (ii) 90
shares indirectly, since by virtue of his 50-percent ownership of Y he
constructively owns 50 percent of the 80 shares owned directly by Y and
50 percent of the 100 shares attributed to Y because they are owned by
Y's stockholder, B. Since after the sale A owns a total of more than 50
percent of the voting power of all of the outstanding stock of X (110
out of 200 shares, or 55%), the transfer is not ``substantially
disproportionate'' as to him as provided in section 302(b)(2).
Example 3. Corporation X and corporation Y each have outstanding 100
shares of common stock. A, an individual, owns one-half the stock of
corporation X, and C owns one-half the stock of corporation Y. A, B, and
C are unrelated. A sells 30 shares of the stock of corporation X to
corporation Y for $50,000, such stock having an adjusted basis of
$10,000 to him. After the sale, A is considered as owning 35 shares of
the stock of corporation X (20 shares directly and 15 constructively
because one-half of the 30 shares owned by corporation Y are attributed
to him). Since before the sale he owned 50 percent of the stock of
corporation X and after the sale he owned directly and constructively
only 35 percent of such stock, the redemption is substantially
disproportionate as to him pursuant to the provisions of section
302(b)(2). He, therefore, realizes a gain of $40,000 ($50,000 minus
$10,000). If the stock surrendered is a capital asset, such gain is
long-term or short-term capital gain depending on the period of time
that such stock was held. The basis to A for the stock of corporation Y
is not changed as a result of the entire transaction. The basis to
corporation Y for the stock of corporation X is $50,000, i.e., the basis
of the transferor ($10,000), increased in the amount of gain recognized
to the transferor ($40,000) on the transfer.
[[Page 24]]
Example 4. Corporation X and corporation Y each have outstanding 100
shares of common stock. H, an individual, W, his wife, S, his son, and
G, his grandson, each own 25 shares of stock of each corporation. H
sells all of his 25 shares of stock of corporation X to corporation Y.
Since both before and after the transaction H owned directly and
constructively 100 percent of the stock of corporation X, and assuming
that section 302(b)(1) is not applicable, the amount received by him for
his stock of corporation X is treated as a dividend to him to the extent
of the earnings and profits of corporation Y.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6969, 33 FR
11997, Aug. 23, 1968]
Sec. 1.304-3 Acquisition by a subsidiary.
(a) If a subsidiary acquires stock of its parent corporation from a
shareholder of the parent corporation, the acquisition of such stock
shall be treated as though the parent corporation had redeemed its own
stock. For the purpose of this section, a corporation is a parent
corporation if it meets the 50 percent ownership requirements of section
304(c). The determination whether the amount received shall be treated
as an amount received in payment in exchange for the stock shall be made
by applying section 303, or by applying section 302(b) with reference to
the stock of the issuing parent corporation. If such distribution would
have been treated as a distribution of property (pursuant to section
302(d)) under section 301, the entire amount of the selling price of the
stock shall be treated as a dividend to the seller to the extent of the
earnings and profits of the parent corporation determined as if the
distribution had been made to it of the property that the subsidiary
exchanged for the stock. In such cases, the transferor's basis for his
remaining stock in the parent corporation will be determined by
including the amount of the basis of the stock of the parent corporation
sold to the subsidiary.
(b) Section 304(a)(2) may be illustrated by the following example:
Example. Corporation M has outstanding 100 shares of common stock
which are owned as follows: B, 75 shares, C, son of B, 20 shares, and D,
daughter of B, 5 shares. Corporation M owns the stock of Corporation X.
B sells his 75 shares of Corporation M stock to Corporation X. Under
section 302(b)(3) this is a termination of B's entire interest in
Corporation M and the full amount received from the sale of his stock
will be treated as payment in exchange for this stock, provided he
fulfills the requirements of section 302(c)(2) (relating to an
acquisition of an interest in the corporations).
Sec. 1.304-4 Special rules for the use of related corporations
to avoid the application of section 304.
(a) Scope and purpose. This section applies to determine the amount
of a property distribution constituting a dividend (and the source
thereof) under section 304(b)(2), for certain transactions involving
controlled corporations. The purpose of this section is to prevent the
avoidance of the application of section 304 to a controlled corporation.
(b) Amount and source of dividend. For purposes of determining the
amount constituting a dividend (and source thereof) under section
304(b)(2), the following rules shall apply:
(1) Deemed acquiring corporation. A corporation (deemed acquiring
corporation) shall be treated as acquiring for property the stock of a
corporation (issuing corporation) acquired for property by another
corporation (acquiring corporation) that is controlled by the deemed
acquiring corporation, if a principal purpose for creating, organizing,
or funding the acquiring corporation by any means (including through
capital contributions or debt) is to avoid the application of section
304 to the deemed acquiring corporation. See paragraph (c) Example 1 of
this section for an illustration of this paragraph.
(2) Deemed issuing corporation. The acquiring corporation shall be
treated as acquiring for property the stock of a corporation (deemed
issuing corporation) controlled by the issuing corporation if, in
connection with the acquisition for property of stock of the issuing
corporation by the acquiring corporation, the issuing corporation
acquired stock of the deemed issuing corporation with a principal
purpose of avoiding the application of section 304 to the deemed issuing
corporation. See paragraph (c) Example 2 of this section for an
illustration of this paragraph.
(c) Examples. The rules of this section are illustrated by the
following examples:
[[Page 25]]
Example 1. (i) Facts. P, a domestic corporation, wholly owns CFC1, a
controlled foreign corporation with substantial accumulated earnings and
profits. CFC1 is organized in Country X, which imposes a high rate of
tax on the income of CFC1. P also wholly owns CFC2, a controlled foreign
corporation with accumulated earnings and profits of $200x. CFC2 is
organized in Country Y, which imposes a low rate of tax on the income of
CFC2. P wishes to own all of its foreign corporations in a direct chain
and to repatriate the cash of CFC2. In order to avoid having to obtain
Country X approval for the acquisition of CFC1 (a Country X corporation)
by CFC2 (a Country Y corporation) and to avoid the dividend distribution
from CFC2 to P that would result if CFC2 were the acquiring corporation,
P causes CFC2 to form CFC3 in Country X and to contribute $100x to CFC3.
CFC3 then acquires all of the stock of CFC1 from P for $100x.
(ii) Result. Because a principal purpose for creating, organizing,
or funding CFC3 (acquiring corporation) is to avoid the application of
section 304 to CFC2 (deemed acquiring corporation), under paragraph
(b)(1) of this section, for purposes of determining the amount of the
$100x distribution constituting a dividend (and source thereof) under
section 304(b)(2), CFC2 shall be treated as acquiring the stock of CFC1
(issuing corporation) from P for $100x. As a result, P receives a $100x
distribution out of the earnings and profits of CFC2 to which section
301(c)(1) applies.
Example 2. (i) Facts. P, a domestic corporation, wholly owns CFC1, a
controlled foreign corporation with substantial accumulated earnings and
profits. The CFC1 stock has a basis of $100x. CFC1 is organized in
Country X. P also wholly owns CFC2, a controlled foreign corporation
with zero accumulated earnings and profits. CFC2 is organized in Country
Y. P wishes to own all of its foreign corporations in a direct chain and
to repatriate the cash of CFC2. In order to avoid having to obtain
Country X approval for the acquisition of CFC1 (a Country X corporation)
by CFC2 (a Country Y corporation) and to avoid a dividend distribution
from CFC1 to P, P forms a new corporation (CFC3) in Country X and
transfers the stock of CFC1 to CFC3 in exchange for CFC3 stock. P then
transfers the stock of CFC3 to CFC2 in exchange for $100x.
(ii) Result. Because a principal purpose for the transfer of the
stock of CFC1 (deemed issuing corporation) by P to CFC3 (issuing
corporation) is to avoid the application of section 304 to CFC1, under
paragraph (b)(2) of this section, for purposes of determining the amount
of the $100x distribution constituting a dividend (and source thereof)
under section 304(b)(2), CFC2 (acquiring corporation) shall be treated
as acquiring the stock of CFC1 from P for $100x . As a result, P
receives a $100x distribution out of the earnings and profits of CFC1 to
which section 301(c)(1) applies.
(d) Effective/applicability date. This section applies to
acquisitions of stock occurring on or after December 29, 2009.
[T.D. 9606, 77 FR 75845, Dec. 26, 2012]
Sec. 1.304-5 Control.
(a) Control requirement in general. Section 304(c)(1) provides that,
for purposes of section 304, control means the ownership of stock
possessing at least 50 percent of the total combined voting power of all
classes of stock entitled to vote or at least 50 percent of the total
value of shares of all classes of stock. Section 304(c)(3) makes section
318(a) (relating to constructive ownership of stock), as modified by
section 304(c)(3)(B), applicable to section 304 for purposes of
determining control under section 304(c)(1).
(b) Effect of section 304(c)(2)(B)--(1) In general. In determining
whether the control test with respect to both the issuing and acquiring
corporations is satisfied, section 304(a)(1) considers only the person
or persons that--
(i) Control the issuing corporation before the transaction;
(ii) Transfer issuing corporation stock to the acquiring corporation
for property; and
(iii) Control the acquiring corporation thereafter.
(2) Application. Section 317 defines property to include money,
securities, and any other property except stock (or stock rights) in the
distributing corporation. However, section 304(c)(2)(B) provides a
special rule to extend the relevant group of persons to be tested for
control of both the issuing and acquiring corporations to include the
person or persons that do not acquire property, but rather solely stock
from the acquiring corporation in the transaction. Section 304(c)(2)(B)
provides that if two or more persons in control of the issuing
corporation transfer stock of such corporation to the acquiring
corporation, and if the transferors are in control of the acquiring
corporation after the transfer, the person or persons in control of each
corporation include each of those
[[Page 26]]
transferors. Because the purpose of section 304(c)(2)(B) is to include
in the relevant control group the person or persons that retain or
acquire acquiring corporation stock in the transaction, only the person
or persons transferring stock of the issuing corporation that retain or
acquire any proprietary interest in the acquiring corporation are taken
into account for purposes of applying section 304(c)(2)(B).
(3) Example. This section may be illustrated by the following
example.
Example. (a) A, the owner of 20% of T's only class of stock,
transfers that stock to P solely in exchange for all of the P stock.
Pursuant to the same transaction, P, solely in exchange for cash,
acquires the remaining 80% of the T stock from T's other shareholder, B,
who is unrelated to A and P.
(b) Although A and B together were in control of T (the issuing
corporation) before the transaction and A and B each transferred T stock
to P (the acquiring corporation), sections 304(a)(1) and (c)(2)(B) do
not apply to B because B did not retain or acquire any proprietary
interest in P in the transaction. Section 304(a)(1) also does not apply
to A because A (or any control group of which A was a member) did not
control T before the transaction and P after the transaction.
(c) Effective date. This section is effective on January 20, 1994.
[T.D. 8515, 59 FR 2960, Jan. 20, 1994]
Sec. 1.304-6 Amount constituting a dividend. [Reserved]
Sec. 1.304-7T Certain acquisitions by foreign acquiring corporations
(temporary).
(a) Scope. This section provides rules regarding the application of
section 304(b)(5)(B) to an acquisition of stock described in section 304
by an acquiring corporation that is foreign (foreign acquiring
corporation). Paragraph (b) of this section provides the rule for
determining which earnings and profits are taken into account for
purposes of applying section 304(b)(5)(B). Paragraph (c) of this section
provides rules addressing the use of a partnership, option (or similar
interest), or other arrangement. Paragraph (d) of this section provides
examples that illustrate the rules of this section. Paragraph (e) of
this section provides the applicability date, and paragraph (f) of this
section provides the date of expiration.
(b) Earnings and profits taken into account. For purposes of
applying section 304(b)(5)(B), only the earnings and profits of the
foreign acquiring corporation are taken into account in determining
whether more than 50 percent of the dividends arising from the
acquisition (determined without regard to section 304(b)(5)(B)) would
neither be subject to tax under chapter 1 of subtitle A of the Internal
Revenue Code for the taxable year in which the dividends arise (subject
to tax) nor be includible in the earnings and profits of a controlled
foreign corporation, as defined in section 957 and without regard to
section 953(c) (includible by a controlled foreign corporation).
(c) Use of a partnership, option (or similar interest), or other
arrangement. If a partnership, option (or similar interest), or other
arrangement, is used with a principal purpose of avoiding the
application of this section (for example, to treat a transferor as a
controlled foreign corporation), then the partnership, option (or
similar interest), or other arrangement will be disregarded for purposes
of applying this section.
(d) Examples. The following examples illustrate the rules of this
section. For purposes of the examples, assume the following facts in
addition to the facts stated in the examples:
(1) FA is a foreign corporation that is not a controlled foreign
corporation;
(2) FA wholly owns DT, a domestic corporation;
(3) DT wholly owns FS1, a controlled foreign corporation; and
(4) No portion of a dividend from FS1 would be treated as from
sources within the United States under section 861.
Example 1-- (i) Facts. DT has earnings and profits of $51x, and FS1
has earnings and profits of $49x. FA transfers DT stock with a fair
market value of $100x to FS1 in exchange for $100x of cash.
(ii) Analysis. Under section 304(a)(2), the $100x of cash is treated
as a distribution in redemption of the stock of DT. The redemption of
the DT stock is treated as a distribution to which section 301 applies
pursuant to section 302(d), which ordinarily would be sourced first from
FS1 under section 304(b)(2)(A). Without regard to the application of
section 304(b)(5)(B), more than 50 percent of the dividend arising from
the acquisition, taking into account only the earnings and profits of
FS1 pursuant to paragraph (b)
[[Page 27]]
of this section, would neither be subject to tax nor includible by a
controlled foreign corporation. In particular, no portion of a dividend
from FS1 would be subject to tax or includible by a controlled foreign
corporation. Accordingly, section 304(b)(5)(B) and paragraph (b) of this
section apply to the transaction, and no portion of the distribution of
$100x is treated under section 301(c)(1) as a dividend out of the
earnings and profits of FS1. Furthermore, the $100x of cash is treated
as a dividend to the extent of the earnings and profits of DT ($51x).
Example 2-- (i) Facts. FA and DT own 40 percent and 60 percent,
respectively, of the capital and profits interests of PRS, a foreign
partnership. PRS wholly owns FS2, a controlled foreign corporation. The
FS2 stock has a fair market value of $100x. FS1 has earnings and profits
of $150x. PRS transfers all of its FS2 stock to FS1 in exchange for
$100x of cash. DT enters into a gain recognition agreement that complies
with the requirements set forth in section 4.01 of Notice 2012-15, 2012-
9 I.R.B 424, with respect to the portion (60 percent) of the FS2 stock
that DT is deemed to transfer to FS1 in an exchange described in section
367(a)(1). See Sec. 1.367(a)-1T(c)(3)(i)(A).
(ii) Analysis. Under section 304(a)(1), PRS and FS1 are treated as
if PRS transferred its FS2 stock to FS1 in an exchange described in
section 351(a) solely for FS1 stock, and, in turn, FS1 redeemed such FS1
stock in exchange for $100x of cash. The redemption of the FS1 stock is
treated as a distribution to which section 301 applies pursuant to
section 302(d). Without regard to the application of section
304(b)(5)(B), more than 50 percent of a dividend arising from the
acquisition, taking into account only the earnings and profits of FS1
pursuant to paragraph (b) of this section, would be subject to tax. In
particular, 60 percent of a dividend from FS1 would be included in DT's
distributive share of PRS's partnership income and therefore would be
subject to tax. Accordingly, section 304(b)(5)(B) does not apply, and
the entire distribution of $100x is treated under section 301(c)(1) as a
dividend out of the earnings and profits of FS1.
(e) Applicability date. This section applies to acquisitions that
are completed on or after September 22, 2014.
(f) Expiration date. This section expires on or before April 4,
2019.
[T.D. 9761, 81 FR 20882, Apr. 8, 2016, as amended at 81 FR 40810, June
23, 2016]
Sec. 1.305-1 Stock dividends.
(a) In general. Under section 305, a distribution made by a
corporation to its shareholders in its stock or in rights to acquire its
stock is not included in gross income except as provided in section
305(b) and the regulations promulgated under the authority of section
305(c). A distribution made by a corporation to its shareholders in its
stock or rights to acquire its stock which would not otherwise be
included in gross income by reason of section 305 shall not be so
included merely because such distribution was made out of Treasury stock
or consisted of rights to acquire Treasury stock. See section 307 for
rules as to basis of stock and stock rights acquired in a distribution.
(b) Amount of distribution. (1) In general, where a distribution of
stock or rights to acquire stock of a corporation is treated as a
distribution of property to which section 301 applies by reason of
section 305(b), the amount of the distribution, in accordance with
section 301(b) and Sec. 1.301-1, is the fair market value of such stock
or rights on the date of distribution. See Example (1) of Sec. 1.305-
2(b).
(2) Where a corporation which regularly distributes its earnings and
profits, such as a regulated investment company, declares a dividend
pursuant to which the shareholders may elect to receive either money or
stock of the distributing corporation of equivalent value, the amount of
the distribution of the stock received by any shareholder electing to
receive stock will be considered to equal the amount of the money which
could have been received instead. See Example (2) of Sec. 1.305-2(b).
(3) For rules for determining the amount of the distribution where
certain transactions, such as changes in conversion ratios or periodic
redemptions, are treated as distributions under section 305(c), see
Examples (6), (8), (9), and (15) of Sec. 1.305-3(e).
(c) Adjustment in purchase price. A transfer of stock (or rights to
acquire stock) or an increase or decrease in the conversion ratio or
redemption price of stock which represents an adjustment of the price to
be paid by the distributing corporation in acquiring property (within
the meaning of section 317(a)) is not within the purview of section 305
because it is not a distribution with respect to its stock. For example,
assume that on January 1, 1970, pursuant to a reorganization,
corporation X acquires all the stock of corporation Y
[[Page 28]]
solely in exchange for its convertible preferred class B stock. Under
the terms of the class B stock, its conversion ratio is to be adjusted
in 1976 under a formula based upon the earnings of corporation Y over
the 6-year period ending on December 31, 1975. Such an adjustment in
1976 is not covered by section 305.
(d) Definitions. (1) For purposes of this section and Sec. Sec.
1.305-2 through 1.305-7, the term stock includes rights or warrants to
acquire such stock.
(2) For purposes of Sec. Sec. 1.305-2 through 1.305-7, the term
shareholder includes a holder of rights or warrants or a holder of
convertible securities.
[T.D. 7281, 38 FR 18532, July 12, 1973; 38 FR 19910, July 25, 1973]
Sec. 1.305-2 Distributions in lieu of money.
(a) In general. Under section 305(b)(1), if any shareholder has the
right to an election or option with respect to whether a distribution
shall be made either in money or any other property, or in stock or
rights to acquire stock of the distributing corporation, then, with
respect to all shareholders, the distribution of stock or rights to
acquire stock is treated as a distribution of property to which section
301 applies regardless of--
(1) Whether the distribution is actually made in whole or in part in
stock or in stock rights;
(2) Whether the election or option is exercised or exercisable
before or after the declaration of the distribution;
(3) Whether the declaration of the distribution provides that the
distribution will be made in one medium unless the shareholder
specifically requests payment in the other;
(4) Whether the election governing the nature of the distribution is
provided in the declaration of the distribution or in the corporate
charter or arises from the circumstances of the distribution; or
(5) Whether all or part of the shareholders have the election.
(b) Examples. The application of section 305(b)(1) may be
illustrated by the following examples:
Example 1. (i) Corporation X declared a dividend payable in
additional shares of its common stock to the holders of its outstanding
common stock on the basis of two additional shares for each share held
on the record date but with the provision that, at the election of any
shareholder made within a specified period prior to the distribution
date, he may receive one additional share for each share held on the
record date plus $12 principal amount of securities of corporation Y
owned by corporation X. The fair market value of the stock of
corporation X on the distribution date was $10 per share. The fair
market value of $12 principal amount of securities of corporation Y on
the distribution date was $11 but such securities had a cost basis to
corporation X of $9.
(ii) The distribution to all shareholders of one additional share of
stock of corporation X (with respect to which no election applies) for
each share outstanding is not a distribution to which section 301
applies.
(iii) The distribution of the second share of stock of corporation X
to those shareholders who do not elect to receive securities of
corporation Y is a distribution of property to which section 301
applies, whether such shareholders are individuals or corporations. The
amount of the distribution to which section 301 applies is $10 per share
of stock of corporation X held on the record date (the fair market value
of the stock of corporation X on the distribution date).
(iv) The distribution of securities of corporation Y in lieu of the
second share of stock of corporation X to the shareholders of
corporation X whether individuals or corporations, who elect to receive
such securities, is also a distribution of property to which section 301
applies.
(v) In the case of the individual shareholders of corporation X who
elects to receive such securities, the amount of the distribution to
which section 301 applies is $11 per share of stock of corporation X
held on the record date (the fair market value of the $12 principal
amount of securities of corporation Y on the distribution date).
(vi) In the case of the corporate shareholders of corporation X
electing to receive such securities, the amount of the distribution to
which section 301 applies is $9 per share of stock of corporation X held
on the record date (the basis of the securities of corporation Y in the
hands of corporation X).
Example 2. On January 10, 1970, corporation X, a regulated
investment company, declared a dividend of $1 per share on its common
stock payable on February 11, 1970, in cash or in stock of corporation X
of equivalent value determined as of January 22, 1970, at the election
of the shareholder made on or before January 22, 1970. The amount of the
distribution to which section 301 applies is $1 per share whether the
shareholder elects to take cash or stock and whether the shareholder is
an individual or a corporation. Such amount will also be used in
determining the dividend
[[Page 29]]
paid deduction of corporation X and the reduction in earnings and
profits of corporation X.
[T.D. 7281, 38 FR 18532, July 12, 1973]
Sec. 1.305-3 Disproportionate distributions.
(a) In general. Under section 305(b)(2), a distribution (including a
deemed distribution) by a corporation of its stock or rights to acquire
its stock is treated as a distribution of property to which section 301
applies if the distribution (or a series of distributions of which such
distribution is one) has the result of (1) the receipt of money or other
property by some shareholders, and (2) an increase in the proportionate
interests of other shareholders in the assets or earnings and profits of
the corporation. Thus, if a corporation has two classes of common stock
outstanding and cash dividends are paid on one class and stock dividends
are paid on the other class, the stock dividends are treated as
distributions to which section 301 applies.
(b) Special rules. (1) As used in section 305(b)(2), the term a
series of distributions encompasses all distributions of stock made or
deemed made by a corporation which have the result of the receipt of
cash or property by some shareholders and an increase in the
proportionate interests of other shareholders.
(2) In order for a distribution of stock to be considered as one of
a series of distributions it is not necessary that such distribution be
pursuant to a plan to distribute cash or property to some shareholders
and to increase the proportionate interests of other shareholders. It is
sufficient if there is an actual or deemed distribution of stock (of
which such distribution is one) and as a result of such distribution or
distributions some shareholders receive cash or property and other
shareholders increase their proportionate interests. For example, if a
corporation pays quarterly stock dividends to one class of common
shareholders and annual cash dividends to another class of common
shareholders the quarterly stock dividends constitute a series of
distributions of stock having the result of the receipt of cash or
property by some shareholders and an increase in the proportionate
interests of other shareholders. This is so whether or not the stock
distributions and the cash distributions are steps in an overall plan or
are independent and unrelated. Accordingly, all the quarterly stock
dividends are distributions to which section 301 applies.
(3) There is no requirement that both elements of section 305(b)(2)
(i.e., receipt of cash or property by some shareholders and an increase
in proportionate interests of other shareholders) occur in the form of a
distribution or series of distributions as long as the result of a
distribution or distributions of stock is that some shareholders'
proportionate interests increase and other shareholders in fact receive
cash or property. Thus, there is no requirement that the shareholders
receiving cash or property acquire the cash or property by way of a
corporate distribution with respect to their shares, so long as they
receive such cash or property in their capacity as shareholders, if
there is a stock distribution which results in a change in the
proportionate interests of some shareholders and other shareholders
receive cash or property. However, in order for a distribution of
property to meet the requirement of section 305(b)(2), such distribution
must be made to a shareholder in his capacity as a shareholder, and must
be a distribution to which section 301, 356(a)(2), 871(a)(1)(A),
881(a)(1), 852(b), or 857(b) applies. (Under section 305(d)(2), the
payment of interest to a holder of a convertible debenture is treated as
a distribution of property to a shareholder for purposes of section
305(b)(2).) For example if a corporation makes a stock distribution to
its shareholders and, pursuant to a prearranged plan with such
corporation, a related corporation purchases such stock from those
shareholders who want cash, in a transaction to which section 301
applies by virtue of section 304, the requirements of section 305(b)(2)
are satisfied. In addition, a distribution of property incident to an
isolated redemption of stock (for example, pursuant to a tender offer)
will not cause section 305(b)(2) to apply even though the redemption
distribution is treated as a distribution of property to
[[Page 30]]
which section 301, 871(a)(1)(A), 881(a)(1), or 356(a)(2) applies.
(4) Where the receipt of cash or property occurs more than 36 months
following a distribution or series of distributions of stock, or where a
distribution or series of distributions of stock is made more than 36
months following the receipt of cash or property, such distribution or
distributions will be presumed not to result in the receipt of cash or
property by some shareholders and an increase in the proportionate
interest of other shareholders, unless the receipt of cash or property
and the distribution or series of distributions of stock are made
pursuant to a plan. For example, if, pursuant to a plan, a corporation
pays cash dividends to some shareholders on January 1, 1971 and
increases the proportionate interests of other shareholders on March 1,
1974, such increases in proportionate interests are distributions to
which section 301 applies.
(5) In determining whether a distribution or a series of
distributions has the result of a disproportionate distribution, there
shall be treated as outstanding stock of the distributing corporation
(i) any right to acquire such stock (whether or not exercisable during
the taxable year), and (ii) any security convertible into stock of the
distributing corporation (whether or not convertible during the taxable
year).
(6) In cases where there is more than one class of stock
outstanding, each class of stock is to be considered separately in
determining whether a shareholder has increased his proportionate
interest in the assets or earnings and profits of a corporation. The
individual shareholders of a class of stock will be deemed to have an
increased interest if the class of stock as a whole has an increased
interest in the corporation.
(c) Distributions of cash in lieu of fractional shares. (1) Section
305(b)(2) will not apply if--
(i) A corporation declares a dividend payable in stock of the
corporation and distributes cash in lieu of fractional shares to which
shareholders would otherwise be entitled, or
(ii) Upon a conversion of convertible stock or securities a
corporation distributes cash in lieu of fractional shares to which
shareholders would otherwise be entitled.
Provided the purpose of the distribution of cash is to save the
corporation the trouble, expense, and inconvenience of issuing and
transferring fractional shares (or scrip representing fractional
shares), or issuing full shares representing the sum of fractional
shares, and not to give any particular group of shareholders an
increased interest in the assets or earnings and profits of the
corporation. For purposes of paragraph (c)(1)(i) of this section, if the
total amount of cash distributed in lieu of fractional shares is 5
percent or less of the total fair market value of the stock distributed
(determined as of the date of declaration), the distribution shall be
considered to be for such valid purpose.
(2) In a case to which subparagraph (1) of this paragraph applies,
the transaction will be treated as though the fractional shares were
distributed as part of the stock distribution and then were redeemed by
the corporation. The treatment of the cash received by a shareholder
will be determined under section 302.
(d) Adjustment in conversion ratio. (1)(i) Except as provided in
subparagraph (2) of this paragraph, if a corporation has convertible
stock or convertible securities outstanding (upon which it pays or is
deemed to pay dividends or interest in money or other property) and
distributes a stock dividend (or rights to acquire such stock) with
respect to the stock into which the convertible stock or securities are
convertible, an increase in proportionate interest in the assets or
earnings and profits of the corporation by reason of such stock dividend
shall be considered to have occurred unless a full adjustment in the
conversion ratio or conversion price to reflect such stock dividend is
made. Under certain circumstances, however, the application of an
adjustment formula which in effect provides for a ``credit'' where stock
is issued for consideration in excess of the conversion price may not
satisfy the requirement for a ``full adjustment.'' Thus, if under a
``conversion price'' antidilution formula the formula provides for a
``credit'' where
[[Page 31]]
stock is issued for consideration in excess of the conversion price (in
effect as an offset against any decrease in the conversion price which
would otherwise be required when stock is subsequently issued for
consideration below the conversion price) there may still be an increase
in proportionate interest by reason of a stock dividend after
application of the formula, since any downward adjustment of the
conversion price that would otherwise be required to reflect the stock
dividend may be offset, in whole or in part, by the effect of prior
sales made at prices above the conversion price. On the other hand, if
there were no prior sales of stock above the conversion price then a
full adjustment would occur upon the application of such an adjustment
formula and there would be no change in proportionate interest.
Similarly, if consideration is to be received in connection with the
issuance of stock, such as in the case of a rights offering or a
distribution of warrants, the fact that such consideration is taken into
account in making the antidilution adjustment will not preclude a full
adjustment. See paragraph (b) of the example in this subparagraph for a
case where the application of an adjustment formula with a cumulative
feature does not result in a full adjustment and where a change in
proportionate interest therefore occurs. See paragraph (c) for a case
where the application of an adjustment formula with a cumulative feature
does result in a full adjustment and where no change in proportionate
interest therefore occurs. See paragraph (d) for an application of an
antidilution formula in the case of a rights offering. See paragraph (e)
for a case where the application of a noncumulative type adjustment
formula will in all cases prevent a change in proportionate interest
from occurring in the case of a stock dividend, because of the omission
of the cumulative feature.
(ii) The principles of this subparagraph may be illustrated by the
following example.
Example. (a) Corporation S has two classes of securities
outstanding, convertible debentures and common stock. At the time of
issuance of the debentures the corporation had 100 shares of common
stock outstanding. Each debenture is interest-paying and is convertible
into common stock at a conversion price of $2. The debenture's
conversion price is subject to reduction pursuant to the following
formula:
(Number of common shares outstanding at date of issue of debentures
times initial conversion price) plus (Consideration received upon
issuance of additional common shares) divided by (Number of common
shares outstanding at date of issue of debentures) plus (Number of
additional common shares issued)
Under the formula, common stock dividends are treated as an issue of
common stock for zero consideration. If the computation results in a
figure which is less than the existing conversion price the conversion
price is reduced. However, under the formula, the existing conversion
price is never increased. The formula works upon a cumulative basis
since the numerator includes the consideration received upon the
issuance of all common shares subsequent to the issuance of the
debentures, and the reduction effected by the formula because of a sale
or issuance of common stock below the existing conversion price is thus
limited by any prior sales made above the existing conversion price.
(b) In 1972 corporation S sells 100 common shares at $3 per share.
In 1973 the corporation declares a stock dividend of 20 shares to all
holders of common stock. Under the antidilution formula no adjustment
will be made to the conversion price of the debentures to reflect the
stock dividend to common stockholders since the prior sale of common
stock in excess of the conversion price in 1972 offsets the reduction in
the conversion price which would otherwise result, as follows:
100 x $2 + $300 / 100 + 120 = $500 / 220 = $2.27
Since $2.27 is greater than the existing conversion price of $2 no
adjustment is required. As a result, there is an increase in
proportionate interest of the common stockholders by reason of the stock
dividend and the additional shares of common stock will be treated,
pursuant to section 305(b)(2), as a distribution of property to which
section 301 applies.
(c) Assume the same facts as above, but instead of selling 100
common shares at $3 per share in 1972, assume corporation S sold no
shares. Application of the antidilution formula would give rise to an
adjustment in the conversion price as follows:
100 x $2 + $0 / 100 + 20 = $200 / 120 = $1.67
The conversion price, being reduced from $2 to $1.67, fully reflects the
stock dividend distributed to the common stockholders. Hence, the
distribution of common stock is not treated under section 305(b)(2) as
one to which section 301 applies because the distribution does not
increase the proportionate
[[Page 32]]
interests of the common shareholders as a class.
(d) Corporation S distributes to its shareholders rights entitling
the shareholders to purchase a total of 20 shares at $1 per share.
Application of the antidilution formula would produce an adjustment in
the conversion price as follows:
100 x $2 + 20 x $1 / 100 + 20 = $220 / 120 = $1.83
The conversion price, being reduced from $2 to $1.83, fully reflects the
distribution of rights to purchase stock at a price lower than the
conversion price. Hence, the distribution of the rights is not treated
under section 305(b)(2) as one to which section 301 applies because the
distribution does not increase the proportionate interests of the common
shareholders as a class.
(e) Assume the same facts as in (b) above, but instead of using a
``conversion price'' antidilution formula which operates on a cumulative
basis, assume corporation S has employed a formula which operates as
follows with respect to all stock dividends: The conversion price in
effect at the opening of business on the day following the dividend
record date is reduced by multiplying such conversion price by a
fraction the numerator of which is the number of shares of common stock
outstanding at the close of business on the record date and the
denominator of which is the sum of such shares so outstanding and the
number of shares constituting the stock dividend. Under such a formula
the following adjustment would be made to the conversion price upon the
declaration of a stock dividend of 20 shares in 1973:
200 / 200 + 20 = 200 / 220 x $2 = $1.82
The conversion price, being reduced from $2 to $1.82, fully reflects the
stock dividend distributed to the common stockholders. Hence, the
distribution of common stock is not treated under section 305(b)(2) as
one to which section 301 applies because the distribution does not
increase the proportionate interests of the common shareholders as a
class.
(2)(i) A distributing corporation either must make the adjustment
required by subparagraph (1) of this paragraph as of the date of the
distribution of the stock dividend, or must elect (in the manner
provided in subdivision (iii) of this subparagraph) to make such
adjustment within the time provided in subdivision (ii) of this
subparagraph.
(ii) If the distributing corporation elects to make such adjustment,
such adjustment must be made no later than the earlier of (a) 3 years
after the date of the stock dividend, or (b) that date as of which the
aggregate stock dividends for which adjustment of the conversion ratio
has not previously been made total at least 3 percent of the issued and
outstanding stock with respect to which such stock dividends were
distributed.
(iii) The election provided by subdivision (ii) of this subparagraph
shall be made by filing with the income tax return for the taxable year
during which the stock dividend is distributed--
(a) A statement that an adjustment will be made as provided by that
subdivision, and
(b) A description of the antidilution provisions under which the
adjustment will be made.
(3) Notwithstanding the preceding subparagraph, if a distribution
has been made before July 12, 1973, and the adjustment required by
subparagraph (1) or the election to make such adjustment was not made
before such date, the adjustment or the election to make such
adjustment, as the case may be, shall be considered valid if made no
later than 15 days following the date of the first annual meeting of the
shareholders after July 12, 1973, or July 12, 1974, whichever is
earlier. If the election is made within such period, and, if the income
tax return has been filed before the time of such election, the
statement of adjustment and the description of the antidilution
provisions required by subparagraph (2)(iii) shall be filed with the
Internal Revenue Service Center with which the income tax return was
filed.
(4) See Sec. 1.305-7(b) for a discussion of antidilution
adjustments in connection with the application of section 305(c) in
conjunction with section 305(b).
(e) Examples. The application of section 305(b)(2) to distributions
of stock and section 305(c) to deemed distributions of stock may be
illustrated by the following examples:
Example 1. Corporation X is organized with two classes of common
stock, class A and class B. Each share of stock is entitled to share
equally in the assets and earnings and profits of the corporation.
Dividends may be paid in stock or in cash on either class of stock
without regard to the medium of payment of dividends on the other class.
A dividend is declared on the class A stock payable in additional shares
of class A stock and a dividend is declared on class B stock payable in
cash. Since the class A shareholders as a
[[Page 33]]
class will have increased their proportionate interests in the assets
and earnings and profits of the corporation and the class B shareholders
will have received cash, the additional shares of class A stock are
distributions of property to which section 301 applies. This is true
even with respect to those shareholders who may own class A stock and
class B stock in the same proportion.
Example 2. Corporation Y is organized with two classes of stock,
class A common, and class B, which is nonconvertible and limited and
preferred as to dividends. A dividend is declared upon the class A stock
payable in additional shares of class A stock and a dividend is declared
on the class B stock payable in cash. The distribution of class A stock
is not one to which section 301 applies because the distribution does
not increase the proportionate interests of the class A shareholders as
a class.
Example 3. Corporation K is organized with two classes of stock,
class A common, and class B, which is nonconvertible preferred stock. A
dividend is declared upon the class A stock payable in shares of class B
stock and a dividend is declared on the class B stock payable in cash.
Since the class A shareholders as a class have an increased interest in
the assets and earnings and profits of the corporation, the stock
distribution is treated as a distribution to which section 301 applies.
If, however, a dividend were declared upon the class A stock payable in
a new class of preferred stock that is subordinated in all respects to
the class B stock, the distribution would not increase the proportionate
interests of the class A shareholders in the assets or earnings and
profits of the corporation and would not be treated as a distribution to
which section 301 applies.
Example 4. (i) Corporation W has one class of stock outstanding,
class A common. The corporation also has outstanding interest paying
securities convertible into class A common stock which have a fixed
conversion ratio that is not subject to full adjustment in the event
stock dividends or rights are distributed to the class A shareholders.
Corporation W distributes to the class A shareholders rights to acquire
additional shares of class A stock. During the year, interest is paid on
the convertible securities.
(ii) The stock rights and convertible securities are considered to
be outstanding stock of the corporation and the distribution increases
the proportionate interests of the class A shareholders in the assets
and earnings and profits of the corporation. Therefore, the distribution
is treated as a distribution to which section 301 applies. The same
result would follow if, instead of convertible securities, the
corporation had outstanding convertible stock. If, however, the
conversion ratio of the securities or stock were fully adjusted to
reflect the distribution of rights to the class A shareholders, the
rights to acquire class A stock would not increase the proportionate
interests of the class A shareholders in the assets and earnings and
profits of the corporation and would not be treated as a distribution to
which section 301 applies.
Example 5. (i) Corporation S is organized with two classes of stock,
class A common and class B convertible preferred. The class B is fully
protected against dilution in the event of a stock dividend or stock
split with respect to the class A stock; however, no adjustment in the
conversion ratio is required to be made until the stock dividends equal
3 percent of the common stock issued and outstanding on the date of the
first such stock dividend except that such adjustment must be made no
later than 3 years after the date of the stock dividend. Cash dividends
are paid annually on the class B stock.
(ii) Corporation S pays a 1 percent stock dividend on the class A
stock in 1970. In 1971, another 1 percent stock dividend is paid and in
1972 another 1 percent stock dividend is paid. The conversion ratio of
the class B stock is increased in 1972 to reflect the three stock
dividends paid on the class A stock. The distributions of class A stock
are not distributions to which section 301 applies because they do not
increase the proportionate interests of the class A shareholders in the
assets and earnings and profits of the corporation.
Example 6. (i) Corporation M is organized with two classes of stock
outstanding, class A and class B. Each class B share may be converted,
at the option of the holder, into class A shares. During the first year,
the conversion ratio is one share of class A stock for each share of
class B stock. At the beginning of each subsequent year, the conversion
ratio is increased by 0.05 share of class A stock for each share of
class B stock. Thus, during the second year, the conversion ratio would
be 1.05 shares of class A stock for each share of class B stock, during
the third year, the ratio would be 1.10 shares, etc.
(ii) M pays an annual cash dividend on the class A stock. At the
beginning of the second year, when the conversion ratio is increased to
1.05 shares of class A stock for each share of class B stock, a
distribution of 0.05 shares of class A stock is deemed made under
section 305(c) with respect to each share of class B stock, since the
proportionate interests of the class B shareholders in the assets or
earnings and profits of M are increased and the transaction has the
effect described in section 305(b)(2). Accordingly, sections 305(b)(2)
and 301 apply to the transaction.
Example 7. (i) Corporation N has two classes of stock outstanding,
class A and class B. Each class B share is convertible into class A
stock. However, in accordance with a specified formula, the conversion
ratio is decreased each time a cash dividend is paid on the class B
stock to reflect the amount of
[[Page 34]]
the cash dividend. The conversion ratio is also adjusted in the event
that cash dividends are paid on the class A stock to increase the number
of class A shares into which the class B shares are convertible to
compensate the class B shareholders for the cash dividend paid on the
class A stock.
(ii) In 1972, a $1 cash dividend per share is declared and paid on
the class B stock. On the date of payment, the conversion ratio of the
class B stock is decreased. A distribution of stock is deemed made under
section 305(c) to the class A shareholders, since the proportionate
interest of the class A shareholders in the assets or earnings and
profits of the corporation is increased and the transaction has the
effect described in section 305(b)(2). Accordingly, sections 305(b)(2)
and 301 apply to the transaction.
(iii) In the following year a cash dividend is paid on the class A
stock and none is paid on the class B stock. The increase in conversion
rights of the class B shares is deemed to be a distribution under
section 305(c) to the class B shareholders since their proportionate
interest in the assets or earnings and profits of the corporation is
increased and since the transaction has the effect described in section
305(b)(2). Accordingly, sections 305(b)(2) and 301 apply to the
transaction.
Example 8. Corporation T has 1,000 shares of stock outstanding. C
owns 100 shares. Nine other shareholders each owns 100 shares. Pursuant
to a plan for periodic redemptions, T redeems up to 5 percent of each
shareholder's stock each year. During the year, each of the nine other
shareholders has 5 shares of his stock redeemed for cash. Thus, C's
proportionate interest in the assets and earnings and profits of T is
increased. Assuming that the cash received by the nine other
shareholders is taxable under section 301, C is deemed under section
305(c) to have received a distribution under section 305(b)(2) of 5.25
shares of T stock to which section 301 applies. The amount of C's
distribution is measured by the fair market value of the number of
shares which would have been distributed to C had the corporation sought
to increase his interest by 0.47 percentage points (C owned 10 percent
of the T stock immediately before the redemption and 10.47 percent
immediately thereafter) and the other shareholders continued to hold 900
shares (i.e.,
(a) 100 / 955 = 10.47% (percent of C's ownership after redemption)
(b) 100 + x / 1000 + x = 10.47%; x = 5.25 (additional shares
considered to be distributed to C)).
Since in computing the amount of additional shares deemed to be
distributed to C the redemption of shares is disregarded, the redemption
of shares will be similarly disregarded in determining the value of the
stock of the corporation which is deemed to be distributed. Thus, in the
example, 1,005.25 shares of stock are considered as outstanding after
the redemption. The value of each share deemed to be distributed to C is
then determined by dividing the 1,005.25 shares into the aggregate fair
market value of the actual shares outstanding (955) after the
redemption.
Example 9. (i) Corporation O has a stock redemption program under
which, instead of paying out earnings and profits to its shareholders in
the form of dividends, it redeems the stock of its shareholders up to a
stated amount which is determined by the earnings and profits of the
corporation. If the stock tendered for redemption exceeds the stated
amount, the corporation redeems the stock on a pro rata basis up to the
stated amount.
(ii) During the year corporation O offers to distribute $10,000 in
redemption of its stock. At the time of the offering, corporation O has
1,000 shares outstanding of which E and F each owns 150 shares and G and
H each owns 350 shares. The corporation redeems 15 shares from E and 35
shares from G. F and H continue to hold all of their stock.
(iii) F and H have increased their proportionate interests in the
assets and earnings and profits of the corporation. Assuming that the
cash E and G receive is taxable under section 301, F will be deemed
under section 305(c) to have received a distribution under section
305(b)(2) of 16.66 shares of stock to which section 301 applies and H
will be deemed under section 305(c) to have received a distribution
under section 305(b)(2) of 38.86 shares of stock to which section 301
applies. The amount of the distribution to F and H is measured by the
number of shares which would have been distributed to F and H had the
corporation sought to increase the interest of F by 0.79 percentage
points (F owned 15 percent of the stock immediately before the
redemption and 15.79 percent immediately thereafter) and the interest of
H by 1.84 percentage points (H owned 35 percent of the stock immediately
before the redemption and 36.84 percent immediately thereafter) and E
and G had continued to hold 150 shares and 350 shares, respectively
(i.e.,
(a) 150 / 950 + 350 / 950 = 52.63% (percent of F and H's ownership
after redemption)
(b) 500 + y / 1000 + y = 52.63%; y = 55.52 (additional shares
considered to be distributed to F and H)
(c)(1) 150 / 500 x 55.52 = 16.66 (shares considered to be
distributed to F)
(2) 350 / 500 x 55.52 = 38.86 (shares considered to be distributed
to H)).
Since in computing the amount of additional shares deemed to be
distributed to F and H the redemption of shares is disregarded, the
redemption of shares will be similarly disregarded in determining the
value of the stock of the corporation which is deemed to be distributed.
Thus, in the example, 1,055.52 shares of stock are considered as
outstanding after the redemption. The value of each
[[Page 35]]
share deemed to be distributed to F and H is then determined by dividing
the 1,055.52 shares into the aggregate fair market value of the actual
shares outstanding (950) after the redemption.
Example 10. Corporation P has 1,000 shares of stock outstanding. T
owns 700 shares of the P stock and G owns 300 shares of the P stock. In
a single and isolated redemption to which section 301 applies, the
corporation redeems 150 shares of T's stock. Since this is an isolated
redemption and is not a part of a periodic redemption plan, G is not
treated as having received a deemed distribution under section 305(c) to
which sections 305(b)(2) and 301 apply even though he has an increased
proportionate interest in the assets and earnings and profits of the
corporation.
Example 11. Corporation Q is a large corporation whose sole class of
stock is widely held. However, the four largest shareholders are
officers of the corporation and each owns 8 percent of the outstanding
stock. In 1974, in a distribution to which section 301 applies, the
corporation redeems 1.5 percent of the stock from each of the four
largest shareholders in preparation for their retirement. From 1970
through 1974, the corporation distributes annual stock dividends to its
shareholders. No other distributions were made to these shareholders.
Since the 1974 redemptions are isolated and are not part of a plan for
periodically redeeming the stock of the corporation, the shareholders
receiving stock dividends will not be treated as having received a
distribution under section 305(b)(2) even though they have an increased
proportionate interest in the assets and earnings and profits of the
corporation and whether or not the redemptions are treated as
distributions to which section 301 applies.
Example 12. Corporation R has 2,000 shares of class A stock
outstanding. Five shareholders own 300 shares each and five shareholders
own 100 shares each. In preparation for the retirement of the five major
shareholders, corporation R, in a single and isolated transaction, has a
recapitalization in which each share of class A stock may be exchanged
either for five shares of new class B nonconvertible preferred stock
plus 0.4 share of new class C common stock, or for two shares of new
class C common stock. As a result of the exchanges, each of the five
major shareholders receives 1,500 shares of class B nonconvertible
preferred stock and 120 shares of class C common stock. The remaining
shareholders each receives 200 shares of class C common stock. None of
the exchanges are within the purview of section 305.
Example 13. Corporation P is a widely-held company whose shares are
listed for trading on a stock exchange. P distributes annual cash
dividends to its shareholders. P purchases shares of its common stock
directly from small stockholders (holders of record of 100 shares or
less) or through brokers where the holders may not be known at the time
of purchase. Where such purchases are made through brokers, they are
pursuant to the rules and regulations of the Securities and Exchange
Commission. The shares are purchased for the purpose of issuance to
employee stock investment plans, to holders of convertible stock or
debt, to holders of stock options, or for future acquisitions. Provided
the purchases are not pursuant to a plan to increase the proportionate
interest of some shareholders and distribute property to other
shareholders, the remaining shareholders of P are not treated as having
received a deemed distribution under section 305(c) to which section
305(b)(2) and 301 apply, even though they have an increased
proportionate interest in the assets and earnings and profits of the
corporation.
Example 14. Corporation U is a large manufacturing company whose
products are sold through independent dealers. In order to assist
individuals who lack capital to become dealers, the corporation has an
established investment plan under which it provides 75 percent of the
capital necessary to form a dealership corporation and the individual
dealer provides the remaining 25 percent. Corporation U receives class A
stock and a note representing its 75 percent interest. The individual
dealer receives class B stock representing his 25 percent interest. The
class B stock is nonvoting until all the class A shares are redeemed. At
least 70 percent of the earnings and profits of the dealership
corporation must be used each year to retire the note and to redeem the
class A stock. The class A stock is redeemed at a fixed price. The
individual dealer has no control over the redemption of stock and has no
right to have his stock redeemed during the period the plan is in
existence. U's investment is thus systematically eliminated and the
individual becomes the sole owner of the dealership corporation. Since
this type of plan is akin to a security arrangement, the redemptions of
the class A stock will not be deemed under section 305(c) as
distributions taxable under sections 305(b)(2) and 301 during the years
in which the class A stock is redeemed.
Example 15. (i) Facts. Corporation V is organized with two classes
of stock, class A common and class B convertible preferred. The class B
stock is issued for $100 per share and is convertible at the holder's
option into class A at a fixed ratio that is not subject to full
adjustment in the event stock dividends or rights are distributed to the
class A shareholders. The class B stock pays no dividends but it is
mandatorily redeemable in 10 years for $200. Under sections 305(c) and
305(b)(4), the entire redemption premium (i.e., the excess of the
redemption price over the issue
[[Page 36]]
price) is deemed to be a distribution of preferred stock on preferred
stock which is taxable as a distribution of property under section 301.
This amount is considered to be distributed over the 10-year period
under principles similar to the principles of section 1272(a). During
the year, the corporation declares a dividend on the class A stock
payable in additional shares of class A stock.
(ii) Analysis. The distribution on the class A stock is a
distribution to which sections 305(b)(2) and 301 apply since it
increases the proportionate interests of the class A shareholders in the
assets and earnings and profits of the corporation and the class B
shareholders have received property (i.e., the constructive distribution
described above). If, however, the conversion ratio of the class B stock
were subject to full adjustment to reflect the distribution of stock to
class A shareholders, the distribution of stock dividends on the class A
stock would not increase the proportionate interest of the class A
shareholders in the assets and earnings and profits of the corporation
and such distribution would not be a distribution to which section 301
applies.
(iii) Effective date. This Example 15 applies to stock issued on or
after December 20, 1995. For previously issued stock, see Sec. 1.305-
3(e) Example (15) (as contained in the 26 CFR part 1 edition revised
April 1, 1995).
[T.D. 7281, 38 FR 18532, July 12, 1973; 38 FR 19910, 19911, July 25,
1973, as amended by T.D. 7329, 39 FR 36860, Oct. 15, 1974; T.D. 8643, 60
FR 66136, Dec. 21, 1995]
Sec. 1.305-4 Distributions of common and preferred stock.
(a) In general. Under section 305(b)(3), a distribution (or a series
of distributions) by a corporation which results in the receipt of
preferred stock whether or not convertible into common stock) by some
common shareholders and the receipt of common stock by other common
shareholders is treated as a distribution of property to which section
301 applies. For the meaning of the term a series of distribution, see
subparagraphs (1) through (6) of Sec. 1.305-3(b).
(b) Examples. The application of section 305(b)(3) may be
illustrated by the following examples:
Example 1. Corporation X is organized with two classes of common
stock, class A and class B. Dividends may be paid in stock or in cash on
either class of stock without regard to the medium of payment of
dividends on the other class. A dividend is declared on the class A
stock payable in additional shares of class A stock and a dividend is
declared on class B stock payable in newly authorized class C stock
which is nonconvertible and limited and preferred as to dividends. Both
the distribution of class A shares and the distribution of new class C
shares are distributions to which section 301 applies.
Example 2. Corporation Y is organized with one class of stock, class
A common. During the year the corporation declares a dividend on the
class A stock payable in newly authorized class B preferred stock which
is convertible into class A stock no later than 6 months from the date
of distribution at a price that is only slightly higher than the market
price of class A stock on the date of distribution. Taking into account
the dividend rate, redemption provisions, the marketability of the
convertible stock, and the conversion price, it is reasonable to
anticipate that within a relatively short period of time some
shareholders will exercise their conversion rights and some will not.
Since the distribution can reasonably be expected to result in the
receipt of preferred stock by some common shareholders and the receipt
of common stock by other common shareholders, the distribution is a
distribution of property to which section 301 applies.
[T.D. 7281, 38 FR 18536, July 12, 1973]
Sec. 1.305-5 Distributions on preferred stock.
(a) In general. Under section 305(b)(4), a distribution by a
corporation of its stock (or rights to acquire its stock) made (or
deemed made under section 305(c)) with respect to its preferred stock is
treated as a distribution of property to which section 301 applies
unless the distribution is made with respect to convertible preferred
stock to take into account a stock dividend, stock split, or any similar
event (such as the sale of stock at less than the fair market value
pursuant to a rights offering) which would otherwise result in the
dilution of the conversion right. For purposes of the preceding
sentence, an adjustment in the conversion ratio of convertible preferred
stock made solely to take into account the distribution by a closed end
regulated investment company of a capital gain dividend with respect to
the stock into which such stock is convertible shall not be considered a
``similar event.'' The term preferred stock generally refers to stock
which, in relation to other classes of stock outstanding, enjoys certain
limited rights and privileges (generally associated with specified
dividend and liquidation priorities)
[[Page 37]]
but does not participate in corporate growth to any significant extent.
The distinguishing feature of preferred stock for the purposes of
section 305(b)(4) is not its privileged position as such, but that such
privileged position is limited, and that such stock does not participate
in corporate growth to any significant extent. However, a right to
participate which lacks substance will not prevent a class of stock from
being treated as preferred stock. Thus, stock which enjoys a priority as
to dividends and on liquidation but which is entitled to participate,
over and above such priority, with another less privileged class of
stock in earnings and profits and upon liquidation, may nevertheless be
treated as preferred stock for purposes of section 305 if, taking into
account all the facts and circumstances, it is reasonable to anticipate
at the time a distribution is made (or is deemed to have been made) with
respect to such stock that there is little or no likelihood of such
stock actually participating in current and anticipated earnings and
upon liquidation beyond its preferred interest. Among the facts and
circumstances to be considered are the prior and anticipated earnings
per share, the cash dividends per share, the book value per share, the
extent of preference and of participation of each class, both absolutely
and relative to each other, and any other facts which indicate whether
or not the stock has a real and meaningful probability of actually
participating in the earnings and growth of the corporation. The
determination of whether stock is preferred for purposes of section 305
shall be made without regard to any right to convert such stock into
another class of stock of the corporation. The term preferred stock,
however, does not include convertible debentures.
(b) Redemption premium--(1) In general. If a corporation issues
preferred stock that may be redeemed under the circumstances described
in this paragraph (b) at a price higher than the issue price, the
difference (the redemption premium) is treated under section 305(c) as a
constructive distribution (or series of constructive distributions) of
additional stock on preferred stock that is taken into account under
principles similar to the principles of section 1272(a). However,
constructive distribution treatment does not result under this paragraph
(b) if the redemption premium does not exceed a de minimis amount, as
determined under the principles of section 1273(a)(3). For purposes of
this paragraph (b), preferred stock that may be acquired by a person
other than the issuer (the third person) is deemed to be redeemable
under the circumstances described in this paragraph (b), and references
to the issuer include the third person, if--
(i) This paragraph (b) would apply to the stock if the third person
were the issuer; and
(ii) Either--
(A) The acquisition of the stock by the third person would be
treated as a redemption for federal income tax purposes (under section
304 or otherwise); or
(B) The third person and the issuer are members of the same
affiliated group (having the meaning for this purpose given the term by
section 1504(a), except that section 1504(b) shall not apply) and a
principal purpose of the arrangement for the third person to acquire the
stock is to avoid the application of section 305 and paragraph (b)(1) of
this section.
(2) Mandatory redemption or holder put. Paragraph (b)(1) of this
section applies to stock if the issuer is required to redeem the stock
at a specified time or the holder has the option (whether or not
currently exercisable) to require the issuer to redeem the stock.
However, paragraph (b)(1) of this section will not apply if the issuer's
obligation to redeem or the holder's ability to require the issuer to
redeem is subject to a contingency that is beyond the legal or practical
control of either the holder or the holders as a group (or through a
related party within the meaning of section 267(b) or 707(b)), and that,
based on all of the facts and circumstances as of the issue date,
renders remote the likelihood of redemption. For purposes of this
paragraph, a contingency does not include the possibility of default,
insolvency, or similar circumstances, or that a redemption may be
precluded by applicable law which requires that the issuer have a
particular level of capital, surplus, or similar items. A
[[Page 38]]
contingency also does not include an issuer's option to require earlier
redemption of the stock. For rules applicable if stock may be redeemed
at more than one time, see paragraph (b)(4) of this section.
(3) Issuer call--(i) In general. Paragraph (b)(1) of this section
applies to stock by reason of the issuer's right to redeem the stock
(even if the right is immediately exercisable), but only if, based on
all of the facts and circumstances as of the issue date, redemption
pursuant to that right is more likely than not to occur. However, even
if redemption is more likely than not to occur, paragraph (b)(1) of this
section does not apply if the redemption premium is solely in the nature
of a penalty for premature redemption. A redemption premium is not a
penalty for premature redemption unless it is a premium paid as a result
of changes in economic or market conditions over which neither the
issuer nor the holder has legal or practical control.
(ii) Safe harbor. For purposes of this paragraph (b)(3), redemption
pursuant to an issuer's right to redeem is not treated as more likely
than not to occur if--
(A) The issuer and the holder are not related within the meaning of
section 267(b) or 707(b) (for purposes of applying sections 267(b) and
707(b) (including section 267(f)(1)), the phrase ``20 percent'' shall be
substituted for the phrase ``50 percent'');
(B) There are no plans, arrangements, or agreements that effectively
require or are intended to compel the issuer to redeem the stock
(disregarding, for this purpose, a separate mandatory redemption
obligation described in paragraph (b)(2) of this section); and
(C) Exercise of the right to redeem would not reduce the yield of
the stock, as determined under principles similar to the principles of
section 1272(a) and the regulations under sections 1271 through 1275.
(iii) Effect of not satisfying safe harbor. The fact that a
redemption right is not described in paragraph (b)(3)(ii) of this
section does not affect the determination of whether a redemption
pursuant to the right to redeem is more likely than not to occur.
(4) Coordination of multiple redemption provisions. If stock may be
redeemed at more than one time, the time and price at which redemption
is most likely to occur must be determined based on all of the facts and
circumstances as of the issue date. Any constructive distribution under
paragraph (b)(1) of this section will result only with respect to the
time and price identified in the preceding sentence. However, if
redemption does not occur at that identified time, the amount of any
additional premium payable on any later redemption date, to the extent
not previously treated as distributed, is treated as a constructive
distribution over the period from the missed call or put date to that
later date, to the extent required under the principles of this
paragraph (b).
(5) Consistency. The issuer's determination as to whether there is a
constructive distribution under this paragraph (b) is binding on all
holders of the stock, other than a holder that explicitly discloses that
its determination as to whether there is a constructive distribution
under this paragraph (b) differs from that of the issuer. Unless
otherwise prescribed by the Commissioner, the disclosure must be made on
a statement attached to the holder's timely filed federal income tax
return for the taxable year that includes the date the holder acquired
the stock. The issuer must provide the relevant information to the
holder in a reasonable manner. For example, the issuer may provide the
name or title and either the address or telephone number of a
representative of the issuer who will make available to holders upon
request the information required for holders to comply with this
provision of this paragraph (b).
(c) Cross reference. For rules for applying sections 305(b)(4) and
305(c) to recapitalizations, see Sec. 1.305-7(c).
(d) Examples. The application of sections 305(b)(4) and 305(c) may
be illustrated by the following examples:
Example 1. (i) Corporation T has outstanding 1,000 shares of $100
par 5-percent cumulative preferred stock and 10,000 shares of no-par
common stock. The corporation is 4 years in arrears on dividends to the
preferred
[[Page 39]]
shareholders. The issue price of the preferred stock is $100 per share.
Pursuant to a recapitalization under section 368(a)(1)(E), the preferred
shareholders exchange their preferred stock, including the right to
dividend arrearages, on the basis of one old preferred share for 1.20
newly authorized class A preferred shares. Immediately following the
recapitalization, the new class A shares are traded at $100 per share.
The class A shares are entitled to a liquidation preference of $100. The
preferred shareholders have increased their proportionate interest in
the assets or earnings and profits of corporation T since the fair
market value of 1.20 shares of class A preferred stock ($120) exceeds
the issue price of the old preferred stock ($100). Accordingly, the
preferred shareholders are deemed under section 305(c) to receive a
distribution in the amount of $20 on each share of old preferred stock
and the distribution is one to which sections 305(b)(4) and 301 apply.
(ii) The same result would occur if the fair market value of the
common stock immediately following the recapitalization were $20 per
share and each share of preferred stock were exchanged for one share of
the new class A preferred stock and one share of common stock.
Example 2. Corporation A, a publicly held company whose stock is
traded on a securities exchange (or in the over-the-counter market) has
two classes of stock outstanding, common and cumulative preferred. Each
share of preferred stock is convertible into .75 shares of common stock.
There are no dividend arrearages. At the time of issue of the preferred
stock, there was no plan or prearrangement by which it was to be
exchanged for common stock. The issue price of the preferred stock is
$100 per share. In order to retire the preferred stock, corporation A
recapitalizes in a transaction to which section 368(a)(1)(E) applies and
each share of preferred stock is exchanged for one share of common
stock. Immediately after the recapitalization the common stock has a
fair market value of $110 per share. Notwithstanding the fact that the
fair market value of the common stock received in the exchange
(determined immediately following the recapitalization) exceeds the
issue price of the preferred stock surrendered, the recapitalization is
not deemed under section 305(c) to result in a distribution to which
sections 305(b)(4) and 301 apply since the recapitalization is not
pursuant to a plan to periodically increase a shareholder's
proportionate interest in the assets or earnings and profits and does
not involve dividend arrearages.
Example 3. Corporation V is organized with two classes of stock,
1,000 shares of class A common and 1,000 shares of class B convertible
preferred. Each share of class B stock may be converted into two shares
of class A stock. Pursuant to a recapitalization under section
368(a)(1)(E), the 1,000 shares of class A stock are surrendered in
exchange for 500 shares of new class A common and 500 shares of newly
authorized class C common. The conversion right of class B stock is
changed to one share of class A stock and one share of class C stock for
each share of class B stock. The change in the conversion right is not
deemed under section 305(c) to be a distribution on preferred stock to
which sections 305(b)(4) and 301 apply.
Example 4. (i) Facts. Corporation X is a domestic corporation with
only common stock outstanding. In connection with its acquisition of
Corporation T, X issues 100 shares of its 4% preferred stock to the
shareholders of T, who are unrelated to X both before and after the
transaction. The issue price of the preferred stock is $40 per share.
Each share of preferred stock is convertible at the shareholder's
election into three shares of X common stock. At the time the preferred
stock is issued, the X common stock has a value of $10 per share. The
preferred stock does not provide for its mandatory redemption or for
redemption at the option of the holder. It is callable at the option of
X at any time beginning three years from the date of issuance for $100
per share. There are no other plans, arrangements, or agreements that
effectively require or are intended to compel X to redeem the stock.
(ii) Analysis. The preferred stock is described in the safe harbor
rule of paragraph (b)(3)(ii) of this section because X and the former
shareholders of T are unrelated, there are no plans, arrangements, or
agreements that effectively require or are intended to compel X to
redeem the stock, and calling the stock for $100 per share would not
reduce the yield of the preferred stock. Therefore, the $60 per share
call premium is not treated as a constructive distribution to the
shareholders of the preferred stock under paragraph (b) of this section.
Example 5. (i) Facts--(A) Corporation Y is a domestic corporation
with only common stock outstanding. On January 1, 1996, Y issues 100
shares of its 10% preferred stock to a holder. The holder is unrelated
to Y both before and after the stock issuance. The issue price of the
preferred stock is $100 per share. The preferred stock is--
(1) Callable at the option of Y on or before January 1, 2001, at a
price of $105 per share plus any accrued but unpaid dividends; and
(2) Mandatorily redeemable on January 1, 2006, at a price of $100
per share plus any accrued but unpaid dividends.
(B) The preferred stock provides that if Y fails to exercise its
option to call the preferred stock on or before January 1, 2001, the
holder will be entitled to appoint a majority of Y's directors. Based on
all of the facts and circumstances as of the issue date, Y is likely to
have the legal and financial capacity to exercise its right to redeem.
There are no
[[Page 40]]
other facts and circumstances as of the issue date that would affect
whether Y will call the preferred stock on or before January 1, 2001.
(ii) Analysis. Under paragraph (b)(3)(i) of this section, paragraph
(b)(1) of this section applies because, by virtue of the change of
control provision and the absence of any contrary facts, it is more
likely than not that Y will exercise its option to call the preferred
stock on or before January 1, 2001. The safe harbor rule of paragraph
(b)(3)(ii) of this section does not apply because the provision that
failure to call will cause the holder to gain control of the corporation
is a plan, arrangement, or agreement that effectively requires or is
intended to compel Y to redeem the preferred stock. Under paragraph
(b)(4) of this section, the constructive distribution occurs over the
period ending on January 1, 2001. Redemption is most likely to occur on
that date, because that is the date on which the corporation minimizes
the rate of return to the holder while preventing the holder from
gaining control. The de minimis exception of paragraph (b)(1) of this
section does not apply because the $5 per share difference between the
redemption price and the issue price exceeds the amount determined under
the principles of section 1273(a)(3) (5 x .0025 x $105 = $1.31).
Accordingly, $5 per share, the difference between the redemption price
and the issue price, is treated as a constructive distribution received
by the holder on an economic accrual basis over the five-year period
ending on January 1, 2001, under principles similar to the principles of
section 1272(a).
Example 6. Corporation A, a publicly held company whose stock is
traded on a securities exchange (or in the over-the-counter market) has
two classes of stock outstanding, common and preferred. The preferred
stock is nonvoting and nonconvertible, limited and preferred as to
dividends, and has a fixed liquidation preference. There are no dividend
arrearages. At the time of issue of the preferred stock, there was no
plan or prearrangement by which it was to be exchanged for common stock.
In order to retire the preferred stock, corporation A recapitalizes in a
transaction to which section 368(a)(1)(E) applies and the preferred
stock is exchanged for common stock. The transaction is not deemed to be
a distribution under section 305(c) and sections 305(b) and 301 do not
apply to the transaction. The same result would follow if the preferred
stock was exchanged in any reorganization described in section 368(a)(1)
for a new preferred stock having substantially the same market value and
having no greater call price or liquidation preference than the old
preferred stock, whether the new preferred stock has voting rights or is
convertible into common stock of corporation A at a fixed ratio subject
to change solely to take account of stock dividends, stock splits, or
similar transactions with respect to the stock into which the preferred
stock is convertible.
Example 7. (i) Facts--(A) Corporation Z is a domestic corporation
with only common stock outstanding. On January 1, 1996, Z issues 100
shares of its 10% preferred stock to C, an individual unrelated to Z
both before and after the stock issuance. The issue price of the
preferred stock is $100 per share. The preferred stock is--
(1) Not callable for a period of 5 years from the issue date;
(2) Callable at the option of Z on January 1, 2001, at a price of
$110 per share plus any accrued but unpaid dividends;
(3) Callable at the option of Z on July 1, 2002, at a price of $120
per share plus any accrued but unpaid dividends; and
(4) Mandatorily redeemable on January 1, 2004, at a price of $150
per share plus any accrued but unpaid dividends.
(B) There are no other plans, arrangements, or agreements between Z
and C concerning redemption of the stock. Moreover, there are no other
facts and circumstances as of the issue date that would affect whether Z
will call the preferred stock on either January 1, 2001, or July 1,
2002.
(ii) Analysis. This stock is described in paragraph (b)(2) of this
section because it is mandatorily redeemable. It is also potentially
described in paragraph (b)(3)(i) of this section because it is callable
at the option of the issuer. The safe harbor rule of paragraph
(b)(3)(ii) of this section does not apply to the option to call on
January 1, 2001, because the call would reduce the yield of the stock
when compared to the yield produced by the January 1, 2004, mandatory
redemption feature. Moreover, absent any other facts indicating a
contrary result, the fact that redemption on January 1, 2001, would
produce the lowest yield indicates that redemption is most likely to
occur on that date. Under paragraph (b)(4) of this section, paragraph
(b)(1) of this section applies with respect to the issuer's right to
call on January 1, 2001, because redemption is most likely to occur on
January 1, 2001, for $110 per share. The de minimis exception of
paragraph (b)(1) of this section does not apply because the $10 per
share difference between the redemption price payable in 2001 and the
issue price exceeds the amount determined under the principles of
section 1273(a)(3) (5 x .0025 x $110 = $1.38). Accordingly, $10 per
share, the difference between the redemption price and the issue price,
is treated as a constructive distribution received by the holder on an
economic accrual basis over the five-year period ending January 1, 2001,
under principles similar to the principles of section 1272(a).
(iii) Coordination rules--(A) If Z does not exercise its option to
call the preferred stock on January 1, 2001, paragraph (b)(4) of this
[[Page 41]]
section provides that the principles of paragraph (b) of this section
must be applied to determine if any remaining constructive distribution
occurs. Under paragraphs (b)(3)(i) and (b)(4) of this section, paragraph
(b)(1) of this section applies because, absent any other facts
indicating a contrary result, the fact that redemption on July 1, 2002,
would produce a lower yield than the yield produced by the mandatory
redemption feature indicates that redemption on that date is most likely
to occur. The safe harbor rule of paragraph (b)(3)(ii) of this section
does not apply to the option to call on July 1, 2002, because, as of
January 1, 2001, a call by Z on July 1, 2002, for $120 would reduce the
yield of the stock. The de minimis exception of paragraph (b)(1) of this
section does not apply because the $10 per share difference between the
redemption price and the issue price (revised as of the missed call date
as provided by paragraph (b)(4) of this section) exceeds the amount
determined under the principles of section 1273(a)(3) (1 x .0025 x $120
= $.30). Accordingly, the $10 per share of additional redemption premium
that is payable on July 1, 2002, is treated as a constructive
distribution received by the holder on an economic accrual basis over
the period between January 1, 2001, and July 1, 2002, under principles
similar to the principles of section 1272(a).
(B) If Z does not exercise its second option to call the preferred
stock on July 1, 2002, then the $30 additional redemption premium that
is payable on January 1, 2004, is treated as a constructive distribution
under paragraphs (b)(2) and (b)(1) of this section. The de minimis
exception of paragraph (b)(1) of this section does not apply because the
$30 per share difference between the redemption price and the issue
price (revised as of the second missed call date) exceeds the amount
determined under the principles of section 1273(a)(3) (1 x .0025 x $150
= $.38). The holder is treated as receiving the constructive
distribution on an economic accrual basis over the period between July
1, 2002, and January 1, 2004, under principles similar to the principles
of section 1272(a).
Example 8. (i) Facts. The facts are the same as in paragraph (i) of
Example 7, except that, based on all of the facts and circumstances as
of the issue date (including an expected lack of funds on the part of
Z), it is unlikely that Z will exercise the right to redeem on either
January 1, 2001, or July 1, 2002.
(ii) Analysis. The safe harbor rule of paragraph (b)(3)(ii) of this
section does not apply to the option to call on either January 1, 2001,
or July 1, 2002, because each call would reduce the yield of the stock.
Under paragraph (b)(3)(i) of this section, neither option to call is
more likely than not to occur, because, based on all of the facts and
circumstances as of the issue date (including an expected lack of funds
on the part of Z), it is not more likely than not that Z will exercise
either option. However, the $50 per share redemption premium that is
payable on January 1, 2004, is treated as a constructive distribution
under paragraphs (b)(1) and (2) of this section, regardless of whether Z
is anticipated to have sufficient funds to redeem on that date, because
Z is required to redeem the stock on that date. The de minimis exception
of paragraph (b)(1) of this section does not apply because the $50 per
share difference between the redemption price and the issue price
exceeds the amount determined under the principles of section
1273(a)(3)(8 x .0025 x $150 = $3).
Example 9. Corporation Q is organized with 10,000 shares of class A
stock and 1,000 shares of class B stock. The terms of the class B stock
require that the class B have a preference of $5 per share with respect
to dividends and $100 per share with respect to liquidation. In
addition, upon a distribution of $10 per share to the class A stock,
class B participates equally in any additional dividends. The terms also
provide that upon liquidation the class B stock participates equally
after the class A stock receives $100 per share. Corporation Q has no
accumulated earnings and profits. In 1971 it earned $10,000, the highest
earnings in its history. The corporation is in an industry in which it
is reasonable to anticipate a growth in earnings of 5 percent per year.
In 1971 the book value of corporation Q's assets totalled $100,000. In
that year the corporation paid a dividend of $5 per share to the class B
stock and $.50 per share to the class A. In 1972 the corporation had no
earnings and in lieu of a $5 dividend distributed one share of class B
stock for each outstanding share of class B. No distribution was made to
the class A stock. Since, in 1972, it was not reasonable to anticipate
that the class B stock would participate in the current and anticipated
earnings and growth of the corporation beyond its preferred interest,
the class B stock is preferred stock and the distribution of class B
shares to the class B shareholders is a distribution to which sections
305(b)(4) and 301 apply.
Example 10. Corporation P is organized with 10,000 shares of class A
stock and 1,000 shares of class B stock. The terms of the class B stock
require that the class B have a preference of $5 per share with respect
to dividends and $100 per share with respect to liquidation. In
addition, upon a distribution of $5 per share to the class A stock,
class B participates equally in any additional dividends. The terms also
provide that upon liquidation the class B stock participates equally
after the class A receives $100 per share. Corporation P has accumulated
earnings and profits of $100,000. In 1971 it earned $75,000. The
corporation is in an industry in which it is reasonable to anticipate a
growth in earnings of 10 percent per year. In 1971 the book value of
corporation P's assets totalled
[[Page 42]]
$5 million. In that year the corporation paid a dividend of $5 per share
to the class B stock, $5 per share to the class A stock, and it
distributed an additional $1 per share to both class A and class B
stock. In 1972 the corporation had earnings of $82,500. In that year it
paid a dividend of $5 per share to the class B stock and $5 per share to
the class A stock. In addition, the corporation declared stock dividends
of one share of class B stock for every 10 outstanding shares of class B
and one share of class A stock for every 10 outstanding shares of class
A. Since, in 1972, it was reasonable to anticipate that both the class B
stock and the class A stock would participate in the current and
anticipated earnings and growth of the corporation beyond their
preferred interests, neither class is preferred stock and the stock
dividends are not distributions to which section 305(b)(4) applies.
(e) Effective date. The rules of paragraph (b) of this section and
Examples 4, 5, 7, and 8 of paragraph (d) of this section apply to stock
issued on or after December 20, 1995. For rules applicable to previously
issued stock, see Sec. 1.305-5 (b) and (d) Examples (4), (5), and (7)
(as contained in the 26 CFR part 1 edition revised April 1, 1995).
Although the rules of paragraph (b) of this section and the revised
examples do not apply to stock issued before December 20, 1995, the
rules of sections 305(c)(1), (2), and (3) apply to stock described
therein issued on or after October 10, 1990, except as provided in
section 11322(b)(2) of the Revenue Reconciliation Act of 1990 (Public
Law 101-508 Stat.). Moreover, except as provided in section 11322(b)(2)
of the Revenue Reconciliation Act of 1990 (Public Law 101-508 Stat.),
with respect to stock issued on or after October 10, 1990, and issued
before December 20, 1995, the economic accrual rule of section 305(c)(3)
will apply to the entire call premium on stock that is not described in
paragraph (b)(2) of this section if the premium is considered to be
unreasonable under the principles of Sec. 1.305-5(b) (as contained in
the 26 CFR part 1 edition revised April 1, 1995). A call premium
described in the preceding sentence will be accrued over the period of
time during which the preferred stock cannot be called for redemption.
[T.D. 7281, 38 FR 18536, July 12, 1973, as amended by T.D. 7329, 39 FR
36860, Oct. 15, 1974; T.D. 8643, 60 FR 66136, Dec. 21, 1995]
Sec. 1.305-6 Distributions of convertible preferred.
(a) In general. (1) Under section 305(b)(5), a distribution by a
corporation of its convertible preferred stock or rights to acquire such
stock made or considered as made with respect to its stock is treated as
a distribution of property to which section 301 applies unless the
corporation establishes that such distribution will not result in a
disproportionate distribution as described in Sec. 1.305-3.
(2) The distribution of convertible preferred stock is likely to
result in a disproportionate distribution when both of the following
conditions exist: (i) The conversion right must be exercised within a
relatively short period of time after the date of distribution of the
stock; and (ii) taking into account such factors as the dividend rate,
the redemption provisions, the marketability of the convertible stock,
and the conversion price, it may be anticipated that some shareholders
will exercise their conversion rights and some will not. On the other
hand, where the conversion right may be exercised over a period of many
years and the dividend rate is consistent with market conditions at the
time of distribution of the stock, there is no basis for predicting at
what time and the extent to which the stock will be converted and it is
unlikely that a disproportionate distribution will result.
(b) Examples. The application of section 305(b)(5) may be
illustrated by the following examples:
Example 1. Corporation Z is organized with one class of stock, class
A common. During the year the corporation declares a dividend on the
class A stock payable in newly authorized class B preferred stock which
is convertible into class A stock for a period of 20 years from the date
of issuance. Assuming dividend rates are normal in light of existing
conditions so that there is no basis for predicting the extent to which
the stock will be converted, the circumstances will ordinarily be
sufficient to establish that a disproportionate distribution will not
result since it is impossible to predict the extent to which the class B
stock will be converted into class A stock. Accordingly, the
distribution of class B stock is not one to which section 301 applies.
Example 2. Corporation X is organized with one class of stock, class
A common. During the year the corporation declares a dividend
[[Page 43]]
on the class A stock payable in newly authorized redeemable class C
preferred stock which is convertible into class A common stock no later
than 4 months from the date of distribution at a price slightly higher
than the market price of class A stock on the date of distribution. By
prearrangement with corporation X, corporation Y, an insurance company,
agrees to purchase class C stock from any shareholder who does not wish
to convert. By reason of this prearrangement, it is anticipated that the
shareholders will either sell the class C stock to the insurance company
(which expects to retain the shares for investment purposes) or will
convert. As a result, some of the shareholders exercise their conversion
privilege and receive additional shares of class A stock, while other
shareholders sell their class C stock to corporation Y and receive cash.
The distribution is a distribution to which section 301 applies since it
results in the receipt of property by some shareholders and an increase
in the proportionate interests of other shareholders.
[T.D. 7281, 38 FR 18538, July 12, 1973]
Sec. 1.305-7 Certain transactions treated as distributions.
(a) In general. Under section 305(c), a change in conversion ratio,
a change in redemption price, a difference between redemption price and
issue price, a redemption which is treated as a distribution to which
section 301 applies, or any transaction (including a recapitalization)
having a similar effect on the interest of any shareholder may be
treated as a distribution with respect to any shareholder whose
proportionate interest in the earnings and profits or assets of the
corporation is increased by such change, difference, redemption, or
similar transaction. In general, such change, difference, redemption, or
similar transaction will be treated as a distribution to which sections
305(b) and 301 apply where--
(1) The proportionate interest of any shareholder in the earnings
and profits or assets of the corporation deemed to have made such
distribution is increased by such change, difference, redemption, or
similar transaction; and
(2) Such distribution has the result described in paragraph (2),
(3), (4), or (5) of section 305(b).
Where such change, difference, redemption, or similar transaction is
treated as a distribution under the provisions of this section, such
distribution will be deemed made with respect to any shareholder whose
interest in the earnings and profits or assets of the distributing
corporation is increased thereby. Such distribution will be deemed to be
a distribution of the stock of such corporation made by the corporation
to such shareholder with respect to his stock. Depending upon the facts
presented, the distribution may be deemed to be made in common or
preferred stock. For example, where a redemption premium exists with
respect to a class of preferred stock under the circumstances described
in Sec. 1.305-5(b) and the other requirements of this section are also
met, the distribution will be deemed made with respect to such preferred
stock, in stock of the same class. Accordingly, the preferred
shareholders are considered under sections 305(b)(4) and 305(c) to have
received a distribution of preferred stock to which section 301 applies.
See the examples in Sec. Sec. 1.305-3(e) and 1.305-5(d) for further
illustrations of the application of section 305(c).
(b) Antidilution provisions. (1) For purposes of applying section
305(c) in conjunction with section 305(b), a change in the conversion
ratio or conversion price of convertible preferred stock (or
securities), or in the exercise price of rights or warrants, made
pursuant to a bona fide, reasonable, adjustment formula (including, but
not limited to, either the so-called ``market price'' or ``conversion
price'' type of formulas) which has the effect of preventing dilution of
the interest of the holders of such stock (or securities) will not be
considered to result in a deemed distribution of stock. An adjustment in
the conversion ratio or price to compensate for cash or property
distributions to other shareholders that are taxable under section 301,
356(a)(2), 871(a)(1)(A), 881(a)(1), 852(b), or 857(b) will not be
considered as made pursuant to a bona fide adjustment formula.
(2) The principles of this paragraph may be illustrated by the
following example:
Example. (i) Corporation U has two classes of stock outstanding,
class A and class B. Each class B share is convertible into class A
stock. In accordance with a bonafide, reasonable, antidilution
provision, the conversion price is adjusted if the corporation transfers
[[Page 44]]
class A stock to anyone for a consideration that is below the conversion
price.
(ii) The corporation sells class A stock to the public at the
current market price but below the conversion price. Pursuant to the
antidilution provision, the conversion price is adjusted downward. Such
a change in conversion price will not be deemed to be a distribution
under section 305(c) for the purposes of section 305(b).
(c) Recapitalizations. (1) A recapitalization (whether or not an
isolated transaction) will be deemed to result in a distribution to
which section 305(c) and this section apply if--
(i) It is pursuant to a plan to periodically increase a
shareholder's proportionate interest in the assets or earnings and
profits of the corporation, or
(ii) A shareholder owning preferred stock with dividends in arrears
exchanges his stock for other stock and, as a result, increases his
proportionate interest in the assets or earnings and profits of the
corporation. An increase in a preferred shareholder's proportionate
interest occurs in any case where the fair market value or the
liquidation preference, whichever is greater, of the stock received in
the exchange (determined immediately following the recapitalization),
exceeds the issue price of the preferred stock surrendered.
(2) In a case to which subparagraph (1)(ii) of this paragraph
applies, the amount of the distribution deemed under section 305(c) to
result from the recapitalization is the lesser of (i) the amount by
which the fair market value or the liquidation preference, whichever is
greater, of the stock received in the exchange (determined immediately
following the recapitalization) exceeds the issue price of the preferred
stock surrendered, or (ii) the amount of the dividends in arrears.
(3) For purposes of applying subparagraphs (1) and (2) of this
paragraph with respect to stock issued before July 12, 1973, the term
issue price of the preferred stock surrendered shall mean the greater of
the issue price or the liquidation preference (not including dividends
in arrears) of the stock surrendered.
(4) For an illustration of the application of this paragraph, see
Example (12) of Sec. 1.305-3(e) and Examples (1), (2), (3), and (6) of
Sec. 1.305-5(d).
(5) For rules relating to redemption premiums on preferred stock,
see Sec. 1.305-5(b).
[T.D. 7281, 38 FR 18538, July 12, 1973, as amended by T.D. 8643, 60 FR
66138, Dec. 21, 1995]
Sec. 1.305-8 Effective dates.
(a) In general. Section 421(b) of the Tax Reform Act of 1969 (83
Stat. 615) provides as follows:
(b) Effective dates. (1) Except as otherwise provided in this
subsection, the amendment made by subsection (a) shall apply with
respect to distributions (or deemed distributions) made after January
10, 1969, in taxable years ending after such date.
(2)(A) Section 305(b)(2) of the Internal Revenue Code of 1954 (as
added by subsection (a) shall not apply to a distribution (or deemed
distribution) of stock made before January 1, 1991, with respect to
stock (i) outstanding on January 10, 1969, (ii) issued pursuant to a
contract binding on January 10, 1969, on the distributing corporation,
(iii) which is additional stock of that class of stock which (as of
January 10, 1969) had the largest fair market value of all classes of
stock of the corporation (taking into account only stock outstanding on
January 10, 1969, or issued pursuant to a contract binding on January
10, 1969), (iv) described in subparagraph (c)(iii), or (v) issued in a
prior distribution described in clause (i), (ii), (iii), or (iv).
(B) Subparagraph (A) shall apply only if--
(i) The stock as to which there is a receipt of property was
outstanding on January 10, 1969 (or was issued pursuant to a contract
binding on January 10, 1969, on the distributing corporation), and
(ii) If such stock and any stock described in subparagraph (A)(i)
were also outstanding on January 10, 1968, a distribution of property
was made on or before January 10, 1969, with respect to such stock, and
a distribution of stock was made on or before January 10, 1969, with
respect to such stock described in subparagraph (A)(i).
(C) Subparagraph (A) shall cease to apply when at any time after
October 9, 1969, the distributing corporation issues any of its stock
(other than in a distribution of stock with respect to stock of the same
class) which is not--
(i) Nonconvertible preferred stock,
(ii) Additional stock of that class of stock which meets the
requirements of subparagraph (A)(iii), or
(iii) Preferred stock which is convertible into stock which meets
the requirements of subparagraph (A)(iii) at a fixed conversion ratio
which takes account of all stock dividends and stock splits with respect
to the
[[Page 45]]
stock into which such convertible stock is convertible.
(D) For purposes of this paragraph, the term stock includes rights
to acquire such stock.
(3) In cases to which Treasury Decision 6990 (promulgated January
10, 1969) would not have applied, in applying paragraphs (1) and (2)
April 22, 1969, shall be substituted for January 10, 1969.
(4) Section 305(b)(4) of the Internal Revenue Code of 1954 (as added
by subsection (a)) shall not apply to any distribution (or deemed
distribution) with respect to preferred stock (including any increase in
the conversation ratio of convertible stock) made before January 1,
1991, pursuant to the terms relating to the issuance of such stock which
were in effect on January 10, 1969.
(5) With respect to distributions made or considered as made after
January 10, 1969, in taxable years ending after such date, to the extent
that the amendment made by subsection (a) does not apply by reason of
paragraph (2), (3), or (4) of this subsection, section 305 of the
Internal Revenue Code of 1954 (as in effect before the amendment made by
subsection (a)) shall continue to apply.
(b) Rules of application. (1) The rules contained in section
421(b)(2) of the Tax Reform Act of 1969 (83 Stat. 615), hereinafter
called ``the Act'', shall apply with respect to the application of
section 305(b)(2), section 305(b)(3), and section 305(b)(5). Thus, for
example, section 305(b)(5) of the Code will not apply to a distribution
of convertible preferred stock made before January 1, 1991, with respect
to stock outstanding on January 10, 1969 (or which was issued pursuant
to a contract binding on the distributing corporation on January 10,
1969), provided the distribution is pursuant to the terms relating to
the issuance of such stock which were in effect on January 10, 1969.
(2)(i) For purposes of section 421(b)(2)(A), (B)(i), and (C) of the
Act, stock is considered as outstanding on January 10, 1969, if it could
be acquired on such date or some future date by the exercise of a right
or conversion privilege in existence on such date (including a right or
conversion privilege with respect to stock issued pursuant to a contract
binding, on January 10, 1969, on the distributing corporation). Thus, if
on January 10, 1969, corporation X has outstanding 1,000 shares of class
A common stock and 3,000 shares of class B common stock which are
convertible on a one-to-one basis into class A stock, corporation X is
considered for purposes of section 421(b)(2)(A), (B)(i), and (C) of the
Act to have outstanding on January 10, 1969, 4,000 shares of class A
stock (1,000 shares actually outstanding and 3,000 shares that could be
acquired by the exercise of the conversion privilege contained in the
class B stock) and 3,000 shares of class B stock.
(ii) For the purposes of section 421(b)(2)(A) (other than for the
purpose of determining under section 421(b)(2)(A)(iii) that class of
stock which as of January 10, 1969, had the largest fair market value of
all classes of stock of the corporation), (B)(i), and (C) of the Act,
stock will be considered as outstanding on January 10, 1969, if it is
issued pursuant to a conversion privilege contained in stock issued,
mediately or immediately, as a stock dividend with respect to stock
outstanding on January 10, 1969.
(3) If, after applying subparagraph (2) of this paragraph, the class
of stock which as of January 10, 1969, had the largest fair market value
of all classes of stock of the corporation is a class of stock which is
convertible into another class of nonconvertible stock, then for
purposes of section 421(b)(2)(C)(ii) of the Act stock issued upon
conversion of any such convertible stock (whether or not outstanding on
January 10, 1969) into stock of such other class shall be deemed to be
stock which meets the requirements of section 421(b)(2)(A)(iii) of the
Act.
(4) For purposes of section 421(b) of the Act, stock of a
corporation held in its treasury will not be considered as outstanding
and a distribution of such stock will be considered to be an issuance of
such stock on the date of distribution. Stock of a parent corporation
held by its subsidiary is not considered treasury stock.
(5) The following stock shall not be taken into account for purposes
of applying section 421(b)(2)(B)(i) of the Act: (i) Stock issued after
January 10, 1969, and before October 10, 1969 (other than stock which
was issued pursuant to a contract binding on January 10, 1969, on the
distributing corporation); (ii) stock described in section
421(b)(2)(C)(i), (ii), or (iii) of the Act;
[[Page 46]]
and (iii) stock issued, mediately or immediately, as a stock dividend
with respect to stock of the same class outstanding on January 10, 1969.
For example, if on June 1, 1970, corporation Y issues additional stock
of that class of stock which as of January 10, 1969, had the largest
fair market value of all classes of stock of the corporation, such
additional stock will not be taken into account for the purpose of
meeting the requirement under section 421(b)(2)(B)(i) of the Act that
the stock as to which there is a receipt of property must have been
outstanding on January 10, 1969, and thus subparagraph (A) of section
421(b)(2) of the Act will not, where otherwise applicable, cease to
apply.
(6) Section 421(b)(2)(A) of the Act, if otherwise applicable, will
not cease to apply if the distributing corporation issues after October
9, 1969, securities which are convertible into stock that meets the
requirements of section 421(b)(2)(A)(iii) of the Act at a fixed
conversion ratio which takes account of all stock dividends and stock
splits with respect to the stock into which the securities are
convertible.
(7) Under section 421(b)(4) of the Act, section 305(b)(4) does not
apply to any distribution (or deemed distribution) by a corporation with
respect to preferred stock made before January 1, 1991, if such
distribution is pursuant to the terms relating to the issuance of such
stock which were in effect on January 10, 1969. For example, if as of
January 10, 1969, a corporation had followed the practice of paying
stock dividends on preferred stock (or of periodically increasing the
conversion ratio of convertible preferred stock) or if the preferred
stock provided for a redemption price in excess of the issue price, then
section 305(b)(4) would not apply to any distribution of stock made (or
which would be considered made if section 305(b)(4) applied) before
January 1, 1991, pursuant to such practice.
(8) If section 421(b)(2) is not applicable and, for that reason, a
distribution (or deemed distribution) is treated as a distribution to
which section 301 applies by virtue of the application of section
305(b)(2), (b)(3), or (b)(5), it is irrelevant that, by reason of the
application of section 421(b)(4) of such Act, section 305(b)(4) is not
applicable to the distribution.
[T.D. 7281, 38 FR 18539, July 12, 1973]
Sec. 1.306-1 General.
(a) Section 306 provides, in general, that the proceeds from the
sale or redemption of certain stock (referred to as ``section 306
stock'') shall be treated either as ordinary income or as a distribution
of property to which section 301 applies. Section 306 stock is defined
in section 306(c) and is usually preferred stock received either as a
nontaxable dividend or in a transaction in which no gain or loss is
recognized. Section 306(b) lists certain circumstances in which the
special rules of section 306(a) shall not apply.
(b)(1) If a shareholder sells or otherwise disposes of section 306
stock (other than by redemption or within the exceptions listed in
section 306(b)), the entire proceeds received from such disposition
shall be treated as ordinary income to the extent that the fair market
value of the stock sold, on the date distributed to the shareholder,
would have been a dividend to such shareholder had the distributing
corporation distributed cash in lieu of stock. Any excess of the amount
received over the sum of the amount treated as ordinary income plus the
adjusted basis of the stock disposed of, shall be treated as gain from
the sale of a capital asset or noncapital asset as the case may be. No
loss shall be recognized. No reduction of earnings and profits results
from any disposition of stock other than a redemption. The term
disposition under section 306(a)(1) includes, among other things,
pledges of stock under certain circumstances, particularly where the
pledgee can look only to the stock itself as its security.
(2) Section 306(a)(1) may be illustrated by the following examples:
Example 1. On December 15, 1954, A and B owned equally all of the
stock of Corporation X which files its income tax return on a calendar
year basis. On that date Corporation X distributed pro rata 100 shares
of preferred stock as a dividend on its outstanding common stock. On
December 15, 1954, the preferred stock had a fair market value of
$10,000. On December 31, 1954, the earnings and profits of Corporation X
were $20,000.
[[Page 47]]
The 50 shares of preferred stock so distributed to A had an allocated
basis to him of $10 per share or a total of $500 for the 50 shares. Such
shares had a fair market value of $5,000 when issued. A sold the 50
shares of preferred stock on July 1, 1955, for $6,000. Of this amount
$5,000 will be treated as ordinary income; $500 ($6,000 minus $5,500)
will be treated as gain from the sale of a capital or noncapital asset
as the case may be.
Example 2. The facts are the same as in Example 1 except that A sold
his 50 shares of preferred stock for $5,100. Of this amount $5,000 will
be treated as ordinary income. No loss will be allowed. There will be
added back to the basis of the common stock of Corporation X with
respect to which the preferred stock was distributed, $400, the
allocated basis of $500 reduced by the $100 received.
Example 3. The facts are the same as in Example 1 except that A sold
25 of his shares of preferred stock for $2,600. Of this amount $2,500
will be treated as ordinary income. No loss will be allowed. There will
be added back to the basis of the common stock of Corporation X with
respect to which the preferred stock was distributed, $150, the
allocated basis of $250 reduced by the $100 received.
(c) The entire amount received by a shareholder from the redemption
of section 306 stock shall be treated as a distribution of property
under section 301. See also section 303 (relating to distribution in
redemption of stock to pay death taxes).
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7556, 43 FR
34128, Aug. 3, 1978]
Sec. 1.306-2 Exception.
(a) If a shareholder terminates his entire stock interest in a
corporation--
(1) By a sale or other disposition within the requirements of
section 306(b)(1)(A), or
(2) By redemption under section 302(b)(3) (through the application
of section 306(b)(1)(B)),
the amount received from such disposition shall be treated as an amount
received in part or full payment for the stock sold or redeemed. In the
case of a sale, only the stock interest need be terminated. In
determining whether an entire stock interest has been terminated under
section 306(b)(1)(A), all of the provisions of section 318(a) (relating
to constructive ownership of stock) shall be applicable. In determining
whether a shareholder has terminated his entire interest in a
corporation by a redemption of his stock under section 302(b)(3), all of
the provisions of section 318(a) shall be applicable unless the
shareholder meets the requirements of section 302(c)(2) (relating to
termination of all interest in the corporation). If the requirements of
section 302(c)(2) are met, section 318(a)(1) (relating to members of a
family) shall be inapplicable. Under all circumstances paragraphs (2),
(3), (4), and (5) of section 318(a) shall be applicable.
(b) Section 306(a) does not apply to--
(1) Redemptions of section 306 stock pursuant to a partial or
complete liquidation of a corporation to which part II (section 331 and
following), subchapter C, chapter 1 of the Code applies,
(2) Exchanges of section 306 stock solely for stock in connection
with a reorganization or in an exchange under section 351, 355, or
section 1036 (relating to exchanges of stock for stock in the same
corporation) to the extent that gain or loss is not recognized to the
shareholder as the result of the exchange of the stock (see paragraph
(d) of Sec. 1.306-3 relative to the receipt of other property), and
(3) A disposition or redemption, if it is established to the
satisfaction of the Commissioner that the distribution, and the
disposition or redemption, was not in pursuance of a plan having as one
of its principal purposes the avoidance of Federal income tax. However,
in the case of a prior or simultaneous disposition (or redemption) of
the stock with respect to which the section 306 stock disposed of (or
redeemed) was issued, it is not necessary to establish that the
distribution was not in pursuance of such a plan. For example, in the
absence of such a plan and of any other facts the first sentence of this
subparagraph would be applicable to the case of dividends and isolated
dispositions of section 306 stock by minority shareholders. Similarly,
in the absence of such a plan and of any other facts, if a shareholder
received a distribution of 100 shares of section 306 stock on his
holdings of 100 shares of voting common stock in a corporation and sells
his voting common stock before he disposes of his section 306 stock, the
subsequent disposition of his
[[Page 48]]
section 306 stock would not ordinarily be considered a disposition one
of the principal purposes of which is the avoidance of Federal income
tax.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6969, 33 FR
11998, Aug. 23, 1968]
Sec. 1.306-3 Section 306 stock defined.
(a) For the purpose of subchapter C, chapter 1 of the code, the term
section 306 stock means stock which meets the requirements of section
306(c)(1). Any class of stock distributed to a shareholder in a
transaction in which no amount is includible in the income of the
shareholder or no gain or loss is recognized may be section 306 stock,
if a distribution of money by the distributing corporation in lieu of
such stock would have been a dividend in whole or in part. However,
except as provided in section 306(g), if no part of a distribution of
money by the distributing corporation in lieu of such stock would have
been a dividend, the stock distributed will not constitute section 306
stock.
(b) For the purpose of section 306, rights to acquire stock shall be
treated as stock. Such rights shall not be section 306 stock if no part
of the distribution would have been a dividend if money had been
distributed in lieu of the rights. When stock is acquired by the
exercise of rights which are treated at section 306 stock, the stock
acquired is section 306 stock. Upon the disposition of such stock (other
than by redemption or within the exceptions listed in section 306(b)),
the proceeds received from the disposition shall be treated as ordinary
income to the extent that the fair market value of the stock rights, on
the date distributed to the shareholder, would have been a dividend to
the shareholder had the distributing corporation distributed cash in
lieu of stock rights. Any excess of the amount realized over the sum of
the amount treated as ordinary income plus the adjusted basis of the
stock, shall be treated as gain from the sale of the stock.
(c) Section 306(c)(1)(A) provides that section 306 stock is any
stock (other than common issued with respect to common) distributed to
the shareholder selling or otherwise disposing thereof if, under section
305(a) (relating to distributions of stock and stock rights) any part of
the distribution was not included in the gross income of the
distributee.
(d) Section 306(c)(1)(B) includes in the definition of section 306
stock any stock except common stock, which is received by a shareholder
in connection with a reorganization under section 368 or in a
distribution or exchange under section 355 (or so much of section 356 as
relates to section 355) provided the effect of the transaction is
substantially the same as the receipt of a stock dividend, or the stock
is received in exchange for section 306 stock. If, in a transaction to
which section 356 is applicable, a shareholder exchanges section 306
stock for stock and money or other property, the entire amount of such
money and of the fair market value of the other property (not limited to
the gain recognized) shall be treated as a distribution of property to
which section 301 applies. Common stock received in exchange for section
306 stock in a recapitalization shall not be considered section 306
stock. Ordinarily, section 306 stock includes stock which is not common
stock received in pursuance of a plan of reorganization (within the
meaning of section 368(a)) or received in a distribution or exchange to
which section 355 (or so much of section 356 as relates to section 355)
applies if cash received in lieu of such stock would have been treated
as a dividend under section 356(a)(2) or would have been treated as a
distribution to which section 301 applies by virtue of section 356(b) or
section 302(d). The application of the preceding sentence is illustrated
by the following examples:
Example 1. Corporation A, having only common stock outstanding, is
merged in a statutory merger (qualifying as a reorganization under
section 368(a)) with Corporation B. Pursuant to such merger, the
shareholders of Corporation A received both common and preferred stock
in Corporation B. The preferred stock received by such shareholders is
section 306 stock.
Example 2. X and Y each own one-half of the 2,000 outstanding shares
of preferred stock and one-half of the 2,000 outstanding shares of
common stock of Corporation C. Pursuant to a reorganization within the
[[Page 49]]
meaning of section 368(a)(1)(E) (recapitalization) each shareholder
exchanges his preferred stock for preferred stock of a new issue which
is not substantially different from the preferred stock previously held.
Unless the preferred stock exchanged was itself section 306 stock the
preferred stock received is not section 306 stock.
(e) Section 306(c)(1)(C) includes in the definition of section 306
stock any stock (except as provided in section 306(c)(1)(B)) the basis
of which in the hands of the person disposing of such stock, is
determined by reference to section 306 stock held by such shareholder or
any other person. Under this paragraph common stock can be section 306
stock. Thus, if a person owning section 306 stock in Corporation A
transfers it to Corporation B which is controlled by him in exchange for
common stock of Corporation B in a transaction to which section 351 is
applicable, the common stock so received by him would be section 306
stock and subject to the provisions of section 306(a) on its
disposition. In addition, the section 306 stock transferred is section
306 stock in the hands of Corporation B, the transferee. Section 306
stock transferred by gift remains section 306 stock in the hands of the
donee. Stock received in exchange for section 306 stock under section
1036(a) (relating to exchange of stock for stock in the same
corporation) or under so much of section 1031(b) as relates to section
1036(a) becomes section 306 stock and acquires, for purposes of section
306, the characteristics of the section 306 stock exchanged. The entire
amount of the fair market value of the other property received in such
transaction shall be considered as received upon a disposition (other
than a redemption) to which section 306(a) applies. Section 306 stock
ceases to be so classified if the basis of such stock is determined by
reference to its fair market value on the date of the decedent-
stockholder's death under section 1014 or the optional valuation date
under section 2032. Section 306 stock continues to be so classified if
the basis of such stock is determined under section 1022.
(f) If section 306 stock which was distributed with respect to
common stock is exchanged for common stock in the same corporation
(whether or not such exchange is pursuant to a conversion privilege
contained in section 306 stock), such common stock shall not be section
306 stock. This paragraph applies to exchanges not coming within the
purview of section 306(c)(1)(B). Common stock which is convertible into
stock other than common stock or into property, shall not be considered
common stock. It is immaterial whether the conversion privilege is
contained in the stock or in some type of collateral agreement.
(g) If there is a substantial change in the terms and conditions of
any stock, then, for the purpose of this section--
(1) The fair market value of such stock shall be the fair market
value at the time of distribution or the fair market value at the time
of such change, whichever is higher;
(2) Such stock's ratable share of the amount which would have been a
dividend if money had been distributed in lieu of stock shall be
determined by reference to the time of distribution or by reference to
the time of such change, whichever ratable share is higher; and
(3) Section 306(c)(2) shall be inapplicable if there would have been
a dividend to any extent if money had been distributed in lieu of the
stock either at the time of the distribution or at the time of such
change.
(h) When section 306 stock is disposed of, the amount treated under
section 306(a)(1)(A) as ordinary income, for the purposes of part I,
subchapter N, chapter 1 of the Code, be treated as derived from the same
source as would have been the source if money had been received from the
corporation as a dividend at the time of the distribution of such stock.
If the amount is determined to be derived from sources within the United
States, the amount shall be considered to be fixed or determinable
annual or periodic gains, profits, and income within the meaning of
section 871(a) or section 881(a), relating, respectively, to the tax on
nonresident alien individuals and on foreign corporations not engaged in
business in the United States.
(i) Section 306 shall be inapplicable to stock received before June
22, 1954, and to stock received on or after June 22, 1954, in
transactions subject to the
[[Page 50]]
provisions of the Internal Revenue Code of 1939.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7281, 38 FR
18540, July 12, 1973; T.D. 7556, 43 FR 34128, Aug. 3, 1978; T.D. 9811,
82 FR 6237, Jan. 19, 2017]
Sec. 1.306-4 Effective/applicability date.
The provisions of Sec. Sec. 1.306-1 through 1.306-3 are applicable
on or after June 22, 1954. The provisions of Sec. 1.306-3 relating to
section 1022 are effective on and after January 19, 2017.
[T.D. 9811, 82 FR 6237, Jan. 19, 2017]
Sec. 1.307-1 General.
(a) If a shareholder receives stock or stock rights as a
distribution on stock previously held and under section 305 such
distribution is not includible in gross income then, except as provided
in section 307(b) and Sec. 1.307-2, the basis of the stock with respect
to which the distribution was made shall be allocated between the old
and new stocks or rights in proportion to the fair market values of each
on the date of distribution. If a shareholder receives stock or stock
rights as a distribution on stock previously held and pursuant to
section 305 part of the distribution is not includible in gross income,
then (except as provided in section 307(b) and Sec. 1.307-2) the basis
of the stock with respect to which the distribution is made shall be
allocated between (1) the old stock and (2) that part of the new stock
or rights which is not includible in gross income, in proportion to the
fair market values of each on the date of distribution. The date of
distribution in each case shall be the date the stock or the rights are
distributed to the stockholder and not the record date. The general rule
will apply with respect to stock rights only if such rights are
exercised or sold.
(b) The application of paragraph (a) of this section is illustrated
by the following example:
Example. A taxpayer in 1947 purchased 100 shares of common stock at
$100 per share and in 1954 by reason of the ownership of such stock
acquired 100 rights entitling him to subscribe to 100 additional shares
of such stock at $90 a share. Immediately after the issuance of the
rights, each of the shares of stock in respect of which the rights were
acquired had a fair market value, ex-rights, of $110 and the rights had
a fair market value of $19 each. The basis of the rights and the common
stock for the purpose of determining the basis for gain or loss on a
subsequent sale or exercise of the rights or a sale of the old stock is
computed as follows:
100 (shares) x $100 = $10,000, cost of old stock (stock in respect of
which the rights were acquired).
100 (shares) x $110 = $11,000, market value of old stock.
100 (rights) x $19 = $1,900, market value of rights.
11,000/12,900 of $10,000 = $8,527.13, cost of old stock apportioned to
such stock.
1,900/12,900 of $10,000 = $1,472.87, cost of old stock apportioned to
rights.
If the rights are sold, the basis for determining gain or loss will be
$14.7287 per right. If the rights are exercised, the basis of the new
stock acquired will be the subscription price paid therefor ($90) plus
the basis of the rights exercised ($14.7287 each) or $104.7287 per
share. The remaining basis of the old stock for the purpose of
determining gain or loss on a subsequent sale will be $85.2713 per
share.
Sec. 1.307-2 Exception.
The basis of rights to buy stock which are excluded from gross
income under section 305(a), shall be zero if the fair market value of
such rights on the date of distribution is less than 15 percent of the
fair market value of the old stock on that date, unless the shareholder
elects to allocate part of the basis of the old stock to the rights as
provided in paragraph (a) of Sec. 1.307-1. The election shall be made
by a shareholder with respect to all the rights received by him in a
particular distribution in respect of all the stock of the same class
owned by him in the issuing corporation at the time of such
distribution. Such election to allocate basis to rights shall be in the
form of a statement attached to the shareholder's return for the year in
which the rights are received. This election, once made, shall be
irrevocable with respect to the rights for which the election was made.
Any shareholder making such an election shall retain a copy of the
election and of the tax return with which it was filed, in order to
substantiate the use of an allocated basis upon a subsequent disposition
of the stock acquired by exercise.
[[Page 51]]
effects on corporation
Sec. 1.312-1 Adjustment to earnings and profits reflecting
distributions by corporations.
(a) In general, on the distribution of property by a corporation
with respect to its stock, its earnings, and profits (to the extent
thereof) shall be decreased by--
(1) The amount of money,
(2) The principal amount of the obligations of such corporation
issued in such distribution, and
(3) The adjusted basis of other property.
For special rule with respect to distributions to which section 312(e)
applies, see Sec. 1.312-5.
(b) The adjustment provided in section 312(a)(3) and paragraph
(a)(3) of this section with respect to a distribution of property (other
than money or its own obligations) shall be made notwithstanding the
fact that such property has appreciated or depreciated in value since
acquisition.
(c) The application of paragraphs (a) and (b) of this section may be
illustrated by the following examples:
Example 1. Corporation A distributes to its sole shareholder
property with a value of $10,000 and a basis of $5,000. It has $12,500
in earnings and profits. The reduction in earnings and profits by reason
of such distribution is $5,000. Such is the reduction even though the
amount of $10,000 is includible in the income of the shareholder (other
than a corporation) as a dividend.
Example 2. The facts are the same as in Example (1) above except
that the property has a basis of $15,000 and the earnings and profits of
the corporation are $20,000. The reduction in earnings and profits is
$15,000. Such is the reduction even though only the amount of $10,000 is
includible in the income of the shareholder as a dividend.
(d) In the case of a distribution of stock or rights to acquire
stock a portion of which is includible in income by reason of section
305(b), the earnings and profits shall be reduced by the fair market
value of such portion. No reduction shall be made if a distribution of
stock or rights to acquire stock is not includible in income under the
provisions of section 305.
(e) No adjustment shall be made in the amount of the earnings and
profits of the issuing corporation upon a disposition of section 306
stock unless such disposition is a redemption.
Sec. 1.312-2 Distribution of inventory assets.
Section 312(b) provides for the increase and the decrease of the
earnings and profits of a corporation which distributes, with respect to
its stock, inventory assets as defined in section 312(b)(2), where the
fair market value of such assets exceeds their adjusted basis. The rules
provided in section 312(b) (relating to distributions of certain
inventory assets) shall be applicable without regard to the method used
in computing inventories for the purpose of the computation of taxable
income. Section 312(b) does not apply to distributions described in
section 312(e).
Sec. 1.312-3 Liabilities.
The amount of any reductions in earnings and profits described in
section 312 (a) or (b) shall be (a) reduced by the amount of any
liability to which the property distributed was subject and by the
amount of any other liability of the corporation assumed by the
shareholder in connection with such distribution, and (b) increased by
the amount of gain recognized to the corporation under section 311 (b),
(c), or (d), or under section 341(f), 617(d), 1245(a), 1250(a), 1251(c),
1252(a), or 1254(a).
[T.D. 7209, 37 FR 20804, Oct. 5, 1972, as amended by T.D. 8586, 60 FR
2500, Jan. 10, 1995]
Sec. 1.312-4 Examples of adjustments provided in section 312(c).
The adjustments provided in section 312(c) may be illustrated by the
following examples:
Example 1. On December 2, 1954, Corporation X distributed to its
sole shareholder, A, an individual, as a dividend in kind a vacant lot
which was not an inventory asset. On that date, the lot had a fair
market value of $5,000 and was subject to a mortgage of $2,000. The
adjusted basis of the lot was $3,100. The amount of the earnings and
profits was $10,000. The amount of the dividend received by A is $3,000
($5,000, the fair market value, less $2,000, the amount of the mortgage)
and the reduction in the earnings and profits of Corporation X is $1,100
($3,100, the basis, less $2,000, the amount of mortgage).
[[Page 52]]
Example 2. The facts are the same as in Example (1) above with the
exception that the amount of the mortgage to which the property was
subject was $4,000. The amount of the dividend received by A is $1,000,
and there is no reduction in the earnings and profits of the corporation
as a result of the distribution (disregarding such reduction as may
result from an increase in tax to Corporation X because, of gain
resulting from the distribution). There is a gain of $900 recognized to
Corporation X, the difference between the basis of the property ($3,100)
and the amount of the mortgage ($4,000), under section 311(c) and an
increase in earnings and profits of $900.
Example 3. Corporation A, having accumulated earnings and profits of
$100,000, distributed in kind to its shareholders, not in liquidation,
inventory assets which had a basis to it on the ``Lifo'' method (section
472) of $46,000 and on the basis of cost or market (section 471) of
$50,000. The inventory had a fair market value of $55,000 and was
subject to a liability of $35,000. This distribution results in a net
decrease in earnings and profits of Corporation A of $11,000, (without
regard to any tax on Corporation A) computed as follows:
``Fifo'' basis of inventory.......................... $50,000
Less: ``Lifo'' basis of inventory.................... 46,000
----------
Gain recognized--addition to earnings and profits (section $4,000
311(b)).......................................................
Adjustment to earnings and profits required by
section 312(b)(1)(A):
Fair market value of inventory..................... $55,000
Less: ``Lifo'' basis plus adjustment under section 50,000 5,000
311(b)............................................
------------------
Total increase in earnings and profits........................ 9,000
Decrease in earnings and profits--under section $55,000
312(b)(1)(B)(i).....................................
Less: Liability assumed.............................. 35,000
----------
Net amount of distribution (decrease in earnings).............. 20,000
-----------
Net decrease in earnings and profits.......................... 11,000
Sec. 1.312-5 Special rule for partial liquidations and certain
redemptions.
The part of the distribution properly chargeable to capital account
within the provisions of section 312(e) shall not be considered a
distribution of earnings and profits within the meaning of section 301
for the purpose of determining taxability of subsequent distributions by
the corporation.
Sec. 1.312-6 Earnings and profits.
(a) In determining the amount of earnings and profits (whether of
the taxable year, or accumulated since February 28, 1913, or accumulated
before March 1, 1913) due consideration must be given to the facts, and,
while mere bookkeeping entries increasing or decreasing surplus will not
be conclusive, the amount of the earnings and profits in any case will
be dependent upon the method of accounting properly employed in
computing taxable income (or net income, as the case may be). For
instance, a corporation keeping its books and filing its income tax
returns under subchapter E, chapter 1 of the Code, on the cash receipts
and disbursements basis may not use the accrual basis in determining
earnings and profits; a corporation computing income on the installment
basis as provided in section 453 shall, with respect to the installment
transactions, compute earnings and profits on such basis; and an
insurance company subject to taxation under section 831 shall exclude
from earnings and profits that portion of any premium which is unearned
under the provisions of section 832(b)(4) and which is segregated
accordingly in the unearned premium reserve.
(b) Among the items entering into the computation of corporate
earnings and profits for a particular period are all income exempted by
statute, income not taxable by the Federal Government under the
Constitution, as well as all items includible in gross income under
section 61 or corresponding provisions of prior revenue acts. Gains and
losses within the purview of section 1002 or corresponding provisions of
prior revenue acts are brought into the earnings and profits at the time
and to the extent such gains and losses are recognized under that
section. Interest on State bonds and certain other obligations, although
not taxable when received by a corporation, is taxable to the same
extent as other dividends when distributed to shareholders in the form
of dividends.
(c)(1) In the case of a corporation in which depletion or
depreciation is a factor in the determination of income, the only
depletion or depreciation deductions to be considered in the computation
of the total earnings and profits are those based on cost or other basis
without regard to March 1, 1913, value. In computing the earnings and
profits for any period beginning after February 28, 1913, the only
depletion or
[[Page 53]]
depreciation deductions to be considered are those based on (i) cost or
other basis, if the depletable or depreciable asset was acquired
subsequent to February 28, 1913, or (ii) adjusted cost or March 1, 1913,
value, whichever is higher, if acquired before March 1, 1913. Thus,
discovery or percentage depletion under all revenue acts for mines and
oil and gas wells is not to be taken into consideration in computing the
earnings and profits of a corporation. Similarly, where the basis of
property in the hands of a corporation is a substituted basis, such
basis, and not the fair market value of the property at the time of the
acquisition by the corporation, is the basis for computing depletion and
depreciation for the purpose of determining earnings and profits of the
corporation.
(2) The application of subparagraph (1) of this paragraph may be
illustrated by the following example:
Example. Oil producing property which A had acquired in 1949 at a
cost of $28,000 was transferred to Corporation Y in December 1951, in
exchange for all of its capital stock. The fair market value of the
stock and of the property as of the date of the transfer was $247,000.
Corporation Y, after four years' operation, effected in 1955 a cash
distribution to A in the amount of $165,000. In determining the extent
to which the earnings and profits of Corporation Y available for
dividend distributions have been increased as the result of production
and sale of oil, the depletion to be taken into account is to be
computed upon the basis of $28,000 established in the nontaxable
exchange in 1951 regardless of the fair market value of the property or
of the stock issued in exchange therefor.
(d) A loss sustained for a year before the taxable year does not
affect the earnings and profits of the taxable year. However, in
determining the earnings and profits accumulated since February 28,
1913, the excess of a loss sustained for a year subsequent to February
28, 1913, over the undistributed earnings and profits accumulated since
February 28, 1913, and before the year for which the loss was sustained,
reduces surplus as of March 1, 1913, to the extent of such excess. If
the surplus as of March 1, 1913, was sufficient to absorb such excess,
distributions to shareholders after the year of the loss are out of
earnings and profits accumulated since the year of the loss to the
extent of such earnings.
(e) With respect to the effect on the earnings and profits
accumulated since February 28, 1913, of distributions made on or after
January 1, 1916, and before August 6, 1917, out of earnings or profits
accumulated before March 1, 1913, which distributions were specifically
declared to be out of earnings and profits accumulated before March 1,
1913, see section 31(b) of the Revenue Act of 1916, as added by section
1211 of the Revenue Act of 1917 (40 Stat. 336).
Sec. 1.312-7 Effect on earnings and profits of gain or loss realized
after February 28, 1913.
(a) In order to determine the effect on earnings and profits of gain
or loss realized from the sale or other disposition (after February 28,
1913) of property by a corporation, section 312(f)(1) prescribed certain
rules for--
(1) The computation of the total earnings and profits of the
corporation of most frequent application in determining invested
capital; and
(2) The computation of earnings and profits of the corporation for
any period beginning after February 28, 1913, of most frequent
application in determining the source of dividend distributions.
Such rules are applicable whenever under any provision of subtitle A of
the Code it is necessary to compute either the total earnings and
profits of the corporation or the earnings and profits for any period
beginning after February 28, 1913. For example, since the earnings and
profits accumulated after February 28, 1913, or the earnings and profits
of the taxable year, are earnings and profits for a period beginning
after February 28, 1913, the determination of either must be in
accordance with the regulations prescribed by this section for the
ascertainment of earnings and profits for any period beginning after
February 28, 1913. Under subparagraph (1) of this paragraph, such gain
or loss is determined by using the adjusted basis (under the law
applicable to the year in which the sale or other disposition was made)
for determining gain, but disregarding value as of March 1, 1913. Under
subparagraph (2) of this paragraph, there is used such
[[Page 54]]
adjusted basis for determining gain, giving effect to the value as of
March 1, 1913, whenever applicable. In both cases the rules are the same
as those governing depreciation and depletion in computing earnings and
profits (see Sec. 1.312-6). Under both subparagraphs (1) and (2) of
this paragraph, the adjusted basis is subject to the limitations of the
third sentence of section 312(f)(1) requiring the use of adjustments
proper in determining earnings and profits. The proper adjustments may
differ under section 312(f)(1)(A) and (B) depending upon the basis to
which the adjustments are to be made. If the application of section
312(f)(1)(B) results in a loss and if the application of section
312(f)(1)(A) to the same transaction reaches a different result, then
the loss under section 312(f)(1)(B) will be subject to the adjustment
thereto required by section 312(g)(2). (See Sec. 1.312-9.)
(b)(1) The gain or loss so realized increases or decreases the
earnings and profits to, but not beyond, the extent to which such gain
or loss was recognized in computing taxable income (or net income, as
the case may be) under the law applicable to the year in which such sale
or disposition was made. As used in this paragraph, the term
``recognized'' has reference to that kind of realized gain or loss which
is recognized for income tax purposes by the statute applicable to the
year in which the gain or loss was realized. For example, see section
356. A loss (other than a wash sale loss with respect to which a
deduction is disallowed under the provisions of section 1091 or
corresponding provisions of prior revenue laws) may be recognized though
not allowed as a deduction (by reason, for example, of the operation of
sections 267 and 1211 and corresponding provisions of prior revenue
laws) but the mere fact that it is not allowed does not prevent decrease
in earnings and profits by the amount of such disallowed loss. Wash sale
losses, however, disallowed under section 1091 and corresponding
provisions of prior revenue laws, are deemed nonrecognized losses and do
not reduce earnings or profits. The recognized gain or loss for the
purpose of computing earnings and profits is determined by applying the
recognition provisions to the realized gain or loss computed under the
provisions of section 312(f)(1) as distinguished from the realized gain
or loss used in computing taxable income (or net income, as the case may
be).
(2) The application of subparagraph (1) of this paragraph may be
illustrated by the following examples:
Example 1. Corporation X on January 1, 1952, owned stock in
Corporation Y which it had acquired from Corporation Y in December 1951,
in an exchange transaction in which no gain or loss was recognized. The
adjusted basis to Corporation X of the property exchanged by it for the
stock in Corporation Y was $30,000. The fair market value of the stock
in Corporation Y when received by Corporation X was $930,000. On April
9, 1955, Corporation X made a cash distribution of $900,000 and, except
for the possible effect of the transaction in 1951, had no earnings or
profits accumulated after February 28, 1913, and had no earnings or
profits for the taxable year. The amount of $900,000 representing the
excess of the fair market value of the stock of Corporation Y over the
adjusted basis of the property exchanged therefor was not recognized
gain to Corporation X under the provisions of section 112 of the
Internal Revenue Code of 1939. Accordingly, the earnings and profits of
Corporation X are not increased by $900,000, the amount of the gain
realized but not recognized in the exchange, and the distribution was
not a taxable dividend. The basis in the hands of Corporation Y of the
property acquired by it from Corporation X is $30,000. If such property
is thereafter sold by Corporation Y, gain or loss will be computed on
such basis of $30,000, and earnings and profits will be increased or
decreased accordingly.
Example 2. On January 2, 1910, Corporation M acquired nondepreciable
property at a cost of $1,000. On March 1, 1913, the fair market value of
such property in the hands of Corporation M was $2,200. On December 31,
1952, Corporation M transfers such property to Corporation N in exchange
for $1,900 in cash and all Corporation N's stock, which has a fair
market value of $1,100. For the purpose of computing the total earnings
and profits of Corporation M, the gain on such transaction is $2,000
(the sum of $1,900 in cash and stock worth $1,100 minus $1,000, the
adjusted basis for computing gain, determined without regard to March 1,
1913, value), $1,900 of which is recognized under section 356, since
this was the amount of money received, although for the purpose of
computing net income the gain is only $800 (the sum of $1,900 in cash
and stock worth $1,100, minus $2,200, the adjusted basis for computing
gain determined by giving effect to March 1, 1913, value). Such earnings
and profits will therefore be increased by only $800 as a reputing
[[Page 55]]
the earnings and profits of Corporation M for any period beginning after
February 28, 1913, however, the gain arising from the transaction, like
the taxable gain, is only $800, all of which is recognized under section
112(c) of the Internal Revenue Code of 1939, the money received being in
excess of such amount. Such earnings and profits will therefore be
increased by only $800 as a result of the transaction. For increase in
that part of the earnings and profits consisting of increase in value of
property accrued before, but realized on or after March 1, 1913, see
Sec. 1.312-9.
Example 3. On July 31, 1955, Corporation R owned oil-producing
property acquired after February 28, 1913, at a cost of $200,000, but
having an adjusted basis (by reason of taking percentage depletion) of
$100,000 for determining gain. However, the adjusted basis of such
property to be used in computing gain or loss for the purpose of
earnings and profits is, because of the provisions of the third sentence
of section 312(f)(1), $150,000. On such day Corporation R transferred
such property to Corporation S in exchange for $25,000 in cash and all
of the stock of Corporation S, which had a fair market value of
$100,000. For the purpose of computing taxable income, Corporation R has
realized a gain of $25,000 as a result of this transaction, all of which
is recognized under section 356. For the purpose of computing earnings
and profits, however, Corporation R has realized a loss of $25,000, none
of which is recognized owing to the provisions of section 356(c). The
earnings and profits of Corporation R are therefore neither increased
nor decreased as a result of the transaction. The adjusted basis of the
Corporation S stock in the hands of Corporation R for purposes of
computing earnings and profits, however, will be $125,000 (though only
$100,000 for the purpose of computing taxable income), computed as
follows:
Basis of property transferred................................ $200,000
Less money received on exchange.............................. 25,000
Plus gain or minus loss recognized on exchange............... None
----------
Basis of stock.............................................. 175,000
Less adjustments (same as those used in determining adjusted 50,000
basis of property transferred)..............................
----------
Adjusted basis of stock..................................... 125,000
If, therefore, Corporation R should subsequently sell the Corporation S
stock for $100,000, a loss of $25,000 will again be realized for the
purpose of computing earnings and profits, all of which will be
recognized and will be applied to decrease the earnings and profits of
Corporation R.
(c)(1) The third sentence of section 312(f)(1) provides for cases in
which the adjustments, prescribed in section 1016, to the basis
indicated in section 312(f)(1)(A) or (B), as the case may be, differ
from the adjustments to such basis proper for the purpose of determining
earnings or profits. The adjustments provided by such third sentence
reflect the treatment provided by Sec. Sec. 1.312-6 and 1.312-15
relative to cases where the deductions for depletion and depreciation in
computing taxable income (or net income, as the case may be) differ from
the deductions proper for the purpose of computing earnings and profits.
(2) The effect of the third sentence of section 312(f)(1) may be
illustrated by the following examples:
Example 1. Corporation X purchased on January 2, 1931, an oil lease
at a cost of $10,000. The lease was operated only for the years 1931 and
1932. The deduction for depletion in each of the years 1931 and 1932
amounted to $2,750, of which amount $1,750 represented percentage
depletion in excess of depletion based on cost. The lease was sold in
1955 for $15,000. Under section 1016(a)(2), in determining the gain or
loss from the sale of the property, the basis must be adjusted for cost
depletion of $1,000 in 1931 and percentage depletion of $2,750 in 1932.
However, the adjustment of such basis, proper for the determination of
earnings and profits, is $1,000 for each year, or $2,000. Hence, the
cost is to be adjusted only to the extent of $2,000, leaving an adjusted
basis of $8,000 and the earnings and profits will be increased by
$7,000, and not by $8,750. The difference of $1,750 is equal to the
amount by which the percentage depletion for the year 1932 ($2,750)
exceeds the depletion on cost for that year ($1,000) and has already
been applied in the computation of earnings and profits for the year
1932 by taking into account only $1,000 instead of $2,750 for depletion
in the computation of such earnings and profits. (See Sec. 1.316-1.)
Example 2. If, in Example (1), above, the property, instead of being
sold, is exchanged in a transaction described in section 1031 for like
property having a fair market value of $7,750 and cash of $7,250, then
the increase in earnings and profits amounts to $7,000, that is, $15,000
($7,750 plus $7,250) minus the basis of $8,000. However, in computing
taxable income of Corporation X, the gain is $8,750, that is, $15,000
minus $6,250 ($10,000 less depletion of $3,750), of which only $7,250 is
recognized because the recognized gain cannot exceed the sum of money
received in the transaction. See section 1031(b) and the corresponding
provisions of prior revenue laws. If, however, the cash received was
only $2,250 and the value of the property received was $12,750, then the
increase in earnings and profits would be $2,250, that amount being the
gain recognized under section 1031.
Example 3. On January 1, 1973, corporation X purchased for $10,000 a
depreciable asset with an estimated useful life of 20 years and
[[Page 56]]
no salvage value. In computing depreciation on the asset, corporation X
used the declining balance method with a rate twice the straight line
rate. On December 31, 1976, the asset was sold for $9,000. Under section
1016(a)(2), the basis of the asset is adjusted for depreciation allowed
for the years 1973 through 1976, or a total of $3,439. Thus, X realizes
a gain of $2,439 (the excess of the amount realized, $9,000, over the
adjusted basis, $6,561). However, the proper adjustment to basis for the
purpose of determining earnings and profits is only $2,000, i.e., the
total amount which, under Sec. 1.312-15, was applied in the computation
of earnings and profits for the years 1973-76. Hence, upon sale of the
asset, earnings and profits are increased by only $1,000, i.e., the
excess of the amount realized, $9,000, over the adjusted basis for
earnings and profits purposes, $8,000.
(d) For adjustment and allocation of the earnings and profits of the
transferor as between the transferor and the transferee in cases where
the transfer of property by one corporation to another corporation
results in the nonrecognition in whole or in part of gain or loss, see
Sec. 1.312-10; and see section 381 for earnings and profits of
successor corporations in certain transactions.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7221, 37 FR
24746, Nov. 21, 1972]
Sec. 1.312-8 Effect on earnings and profits of receipt of tax-free
distributions requiring adjustment or allocation of basis of stock.
(a) In order to determine the effect on earnings and profits, where
a corporation receives (after February 28, 1913) from a second
corporation a distribution which (under the law applicable to the year
in which the distribution was made) was not a taxable dividend to the
shareholders of the second corporation, section 312(f) prescribes
certain rules. It provides that the amount of such distribution shall
not increase the earnings and profits of the first or receiving
corporation in the following cases: (1) No such increase shall be made
in respect of the part of such distribution which (under the law
applicable to the year in which the distribution was made) is directly
applied in reduction of the basis of the stock in respect of which the
distribution was made and (2) no such increase shall be made if (under
the law applicable to the year in which the distribution was made) the
distribution causes the basis of the stock in respect of which the
distribution was made to be allocated between such stock and the
property received (or such basis would but for section 307(b) be so
allocated). Where, therefore, the law (applicable to the year in which
the distribution was made, as, for example, a distribution in 1934 from
earnings and profits accumulated before March 1, 1913) requires that the
amount of such distribution shall be applied against and reduce the
basis of the stock with respect to which the distribution was made,
there is no increase in the earnings and profits by reason of the
receipt of such distribution. Similarly, where there is received by a
corporation a distribution from another corporation in the form of a
stock dividend and the law applicable to the year in which such
distribution was made requires the allocation, as between the old stock
and the stock received as a dividend, of the basis of the old stock (or
such basis would but for section 307(b) be so allocated), then there is
no increase in the earnings and profits by reason of the receipt of such
stock dividend even though such stock dividend constitutes income within
the meaning of the sixteenth amendment to the Constitution.
(b) The principles set forth in paragraph (a) of this section may be
illustrated by the following examples:
Example 1. Corporation X in 1955 distributed to Corporation Y, one
of its shareholders, $10,000 which was out of earnings or profits
accumulated before March 1, 1913, and did not exceed the adjusted basis
of the stock in respect of which the distribution was made. This amount
of $10,000 was, therefore, a tax-free distribution and under the
provisions of section 301(c)(2) must be applied against and reduce the
adjusted basis of the stock in respect of which the distribution was
made. The earnings and profits of Corporation Y are not increased by
reason of the receipt of this distribution.
Example 2. Corporation Z in 1955 had outstanding common and
preferred stock of which Corporation Y held 100 shares of the common and
no preferred. The stock had a cost basis to Corporation Y of $100 per
share, or a total cost of $10,000. In December of that year it received
a dividend of 100 shares of the preferred stock of Corporation Z. Such
distribution is a stock dividend which, under
[[Page 57]]
section 305, was not taxable and was accordingly not included in the
gross income of Corporation Y. The original cost of $10,000 is allocated
to the 200 shares of Corporation Z none of which has been sold or
otherwise disposed of by Corporation Y. See section 307 and Sec. 1.307-
1. The earnings and profits of Corporation Y are not increased by reason
of the receipt of such stock dividend.
Sec. 1.312-9 Adjustments to earnings and profits reflecting increase
in value accrued before March 1, 1913.
(a) In order to determine, for the purpose of ascertaining the
source of dividend distributions, that part of the earnings and profits
which is represented by increase in value of property accrued before,
but realized on or after, March 1, 1913, section 312(g) prescribes
certain rules.
(b)(1) Section 312(g)(1) sets forth the general rule with respect to
computing the increase to be made in that part of the earnings and
profits consisting of increase in value of property accrued before, but
realized on or after, March 1, 1913.
(2) The effect of section 312(g)(1) may be illustrated by the
following examples:
Example 1. Corporation X acquired nondepreciable property before
March 1, 1913, at a cost of $10,000. Its fair market value as of March
1, 1913, was $12,000 and it was sold in 1955 for $15,000. The increase
in earnings and profits based on the value as of March 1, 1913,
representing earnings and profits accumulated since February 28, 1913,
is $3,000. If the basis is determined without regard to the value as of
March 1, 1913, there would be an increase in earnings and profits of
$5,000. The difference of $2,000 ($5,000 minus $3,000) represents the
increase to be made in that part of the earnings and profits of
Corporation X consisting of the increase in value of property accrued
before, but realized on or after, March 1, 1913.
Example 2. Corporation Y acquired depreciable property in 1908 at a
cost of $100,000. Assuming no additions or betterments, and that the
depreciation sustained before March 1, 1913, was $10,000, the adjusted
cost as of that date was $90,000. Its fair market value as of March 1,
1913, was $94,000 and on February 28, 1955, it was sold for $25,000. For
the purpose of determining gain from the sale, the basis of the property
is the fair market value of $94,000 as of March 1, 1913, adjusted for
depreciation for the period subsequent to February 28, 1913, computed on
such fair market value. If the amount of the depreciation deduction
allowed after February 28, 1913, and properly allowable for each of such
years to the date of the sale in 1955 is the aggregate sum of $81,467,
the adjusted basis for determining gain in 1955 ($94,000 less $81,467)
is $12,533 and the gain would be $12,467 ($25,000 less $12,533). The
increase in earnings and profits accumulated since February 28, 1913, by
reason of the sale, based on the value as of March 1, 1913, adjusted for
depreciation is $12,467. If the depreciation since February 28, 1913,
had been based on the adjusted cost of $90,000 ($100,000 less $10,000)
instead of the March 1, 1913, value of $94,000, the depreciation
sustained from that date to the date of sale would have been $78,000
instead of $81,467 and the actual gain on the sale based on the cost of
$100,000 adjusted by depreciation on such cost to $12,000 ($100,000
reduced by the sum of $10,000 and $78,000) would be $13,000 ($25,000
less $12,000). If the adjusted basis of the property was determined
without regard to the value as of March 1, 1913, there would be an
increase in earnings and profits of $13,000. The difference of $533
($13,000 minus $12,467) represents the increase to be made in that part
of the earnings and profits of Corporation Y consisting of the increase
in value of property accrued before, but realized on or after, March 1,
1913 (assuming that the proper increase in such surplus had been made
each year for the difference between depreciation based on cost and the
depreciation based on March 1, 1913, value). Thus, the total increase in
that part of earnings and profits consisting of the increase in value of
property accrued before, but realized on or after, March 1, 1913, is
$4,000 ($94,000 less $90,000).
(c)(1) Section 312(g)(2) is an exception to the general rule in
section 312(g)(1) and also operates as a limitation on the application
of section 312(f). It provides that, if the application of section
312(f)(1)(B) to a sale or other disposition after February 28, 1913,
results in a loss which is to be applied in decrease of earnings and
profits for any period beginning after February 28, 1913, then,
notwithstanding section 312(f) and in lieu of the rule provided in
section 312(g)(1), the amount of such loss so to be applied shall be
reduced by the amount, if any, by which the adjusted basis of the
property used in determining the loss, exceeds the adjusted basis
computed without regard to the fair market value of the property on
March 1, 1913. If the amount so applied in reduction of the loss exceeds
such loss, the excess over such loss shall increase that part of the
earnings and profits consisting of increase in value
[[Page 58]]
of property accrued before, but realized on or after March 1, 1913.
(2) The application of section 312(g)(2) may be illustrated by the
following examples:
Example 1. Corporation Y acquired nondepreciable property before
March 1, 1913, at a cost of $8,000. Its fair market value as of March 1,
1913, was $13,000, and it was sold in 1955 for $10,000. Under section
312(f)(1)(B) the adjusted basis would be $13,000 and there would be a
loss of $3,000. The application of section 312(f)(1)(B) would result in
a loss from the sale in 1955 to be applied in decrease of earnings and
profits for that year. Section 312(g)(2), however, applies and the loss
of $3,000 is reduced by the amount by which the adjusted basis of
$13,000 exceeds the cost of $8,000 (the adjusted basis computed without
regard to the value on March 1, 1913), namely $5,000. The amount of the
loss is, accordingly, reduced from $3,000 to zero and there is no
decrease in earnings and profits of Corporation Y for the year 1955 as a
result of the sale. The amount applied in reduction of the decrease,
namely, $5,000, exceeds $3,000. Accordingly, as a result of the sale the
excess of $2,000 increases that part of the earnings and profits of
Corporation Y consisting of increase in value of property accrued
before, but realized on or after March 1, 1913.
Example 2. Corporation Z acquired nondepreciable property before
March 1, 1913, at a cost of $10,000. Its fair market value as of March
1, 1913, was $12,000, and it was sold in 1955 for $8,000. Under section
312(f)(1)(B) the adjusted basis would be $12,000 and there would be a
loss of $4,000. The application of section 312(f)(1)(B) would result in
a loss from the sale in 1955 to be applied in decrease of earnings and
profits for that year. Section 312(g)(2), however, applies and the loss
of $4,000 is reduced by the amount by which the adjusted basis of
$12,000 exceeds the cost of $10,000 (the adjusted basis computed without
regard to the value on March 1, 1913), namely, $2,000. The amount of the
loss is, accordingly, reduced from $4,000 to $2,000 and the decrease in
earnings and profits of Corporation Z for the year 1955 as a result of
the sale is $2,000 instead of $4,000. The amount applied in reduction of
the decrease, namely, $2,000, does not exceed $4,000. Accordingly, as a
result of the sale there is no increase in that part of the earnings and
profits of Corporation Z consisting of increase in value of property
accrued before, but realized on or after, March 1, 1913.
Sec. 1.312-10 Allocation of earnings in certain corporate separations.
(a) If one corporation transfers part of its assets constituting an
active trade or business to another corporation in a transaction to
which section 368(a)(1)(4) applies and immediately thereafter the stock
and securities of the controlled corporation are distributed in a
distribution or exchange to which section 355 (or so much of section 356
as relates to section 355) applies, the earnings and profits of the
distributing corporation immediately before the transaction shall be
allocated between the distributing corporation and the controlled
corporation. In the case of a newly created controlled corporation, such
allocation generally shall be made in proportion to the fair market
value of the business or businesses (and interests in any other
properties) retained by the distributing corporation and the business or
businesses (and interests in any other properties) of the controlled
corporation immediately after the transaction. In a proper case,
allocation shall be made between the distributing corporation and the
controlled corporation in proportion to the net basis of the assets
transferred and of the assets retained or by such other method as may be
appropriate under the facts and circumstances of the case. The term net
basis means the basis of the assets less liabilities assumed or
liabilities to which such assets are subject. The part of the earnings
and profits of the taxable year of the distributing corporation in which
the transaction occurs allocable to the controlled corporation shall be
included in the computation of the earnings and profits of the first
taxable year of the controlled corporation ending after the date of the
transaction.
(b) If a distribution or exchange to which section 355 applies (or
so much of section 356 as relates to section 355) is not in pursuance of
a plan meeting the requirements of a reorganization as defined in
section 368(a)(1)(D), the earnings and profits of the distributing
corporation shall be decreased by the lesser of the following amounts:
(1) The amount by which the earnings and profits of the distributing
corporation would have been decreased if it had transferred the stock of
the controlled corporation to a new corporation in a reorganization to
which section 368(a)(1)(D) applied and immediately thereafter
distributed the stock of such new corporation or,
[[Page 59]]
(2) The net worth of the controlled corporation. (For this purpose
the term net worth means the sum of the basis of all of the properties
plus cash minus all liabilities.)
If the earnings and profits of the controlled corporation immediately
before the transaction are less than the amount of the decrease in
earnings and profits of the distributing corporation (including a case
in which the controlled corporation has a deficit) the earnings and
profits of the controlled corporation, after the transaction, shall be
equal to the amount of such decrease. If the earnings and profits of the
controlled corporation immediately before the transaction are more than
the amount of the decrease in the earnings and profits of the
distributing corporation, they shall remain unchanged.
(c) In no case shall any part of a deficit of a distributing
corporation within the meaning of section 355 be allocated to a
controlled corporation.
Sec. 1.312-11 Effect on earnings and profits of certain other tax-
free exchanges, tax-free distributions, and tax-free transfers from
one corporation to another.
(a) In a transfer described in section 381(a), the acquiring
corporation, as defined in Sec. 1.381(a)-1(b)(2), and only that
corporation, succeeds to the earnings and profits of the distributor or
transferor corporation (within the meaning of Sec. 1.381(a)-1(a)).
Except as provided in Sec. 1.312-10, in all other cases in which
property is transferred from one corporation to another, no allocation
of the earnings and profits of the transferor is made to the transferee.
(b) The general rule provided in section 316 that every distribution
is made out of earnings or profits to the extent thereof and from the
most recently accumulated earnings or profits does not apply to:
(1) The distribution, in pursuance of a plan of reorganization, by
or on behalf of a corporation a party to the reorganization, or in a
transaction subject to section 355, to its shareholders--
(i) Of stock or securities in such corporation or in another
corporation a party to the reorganization in any taxable year beginning
before January 1, 1934, without the surrender by the distributees of
stock or securities in such corporation (see section 112(g) of the
Revenue Act of 1932 (47 Stat. 197)); or
(ii) Of stock (other than preferred stock) in another corporation
which is a party to the reorganization without the surrender by the
distributees of stock in the distributing corporation if the
distribution occurs after October 20, 1951, and is subject to section
112(b)(11) of the Internal Revenue Code of 1939; or
(iii) Of stock or securities in such corporation or in another
corporation a party to the reorganization in any taxable year beginning
before January 1, 1939, or on or after such date, in exchange for its
stock or securities in a transaction to which section 112(b)(3) of the
Internal Revenue Code of 1939 was applicable; or
(iv) Of stock or securities in such corporation or in another
corporation in exchange for its stock or securities in a transaction
subject to section 354 or 355,
if no gain to the distributees from the receipt of such stock or
securities was recognized by law.
(2) The distribution in any taxable year (beginning before January
1, 1939, or on or after such date) of stock or securities, or other
property or money, to a corporation in complete liquidation of another
corporation, under the circumstances described in section 112(b)(6) of
the Revenue Act of 1936 (49 Stat. 1679), the Revenue Act of 1938 (52
Stat. 485), of the Internal Revenue Code of 1939, or section 332 of the
Internal Revenue Code of 1954.
(3) The distribution in any taxable year (beginning after December
31, 1938), of stock or securities, or other property or money, in the
case of an exchange or distribution described in section 371 of the
Internal Revenue Code of 1939 or in section 1081 of the Internal Revenue
Code of 1954 (relating to exchanges and distributions in obedience to
orders of the Securities and Exchange Commission), if no gain to the
distributee from the receipt of such stock, securities, or other
property or money was recognized by law.
[[Page 60]]
(4) A stock dividend which was not subject to tax in the hands of
the distributee because either it did not constitute income to him
within the meaning of the sixteenth amendment to the Constitution or
because exempt to him under section 115(f) of the Revenue Act of 1934
(48 Stat. 712) or a corresponding provision of a prior Revenue Act, or
section 305 of the Code.
(5) The distribution, in a taxable year of the distributee beginning
after December 31, 1931, by or on behalf of an insolvent corporation, in
connection with a section 112(b)(10) reorganization under the Internal
Revenue Code of 1939, or in a transaction subject to section 371 of the
Internal Revenue Code of 1954, of stock or securities in a corporation
organized or made use of to effectuate the plan of reorganization, if
under section 112(e) of the Internal Revenue Code of 1939 or section 371
of the Internal Revenue Code of 1954 no gain to the distributee from the
receipt of such stock or securities was recognized by law.
(c) A distribution described in paragraph (b) of this section does
not diminish the earnings or profits of any corporation. In such cases,
the earnings or profits remain intact and available for distribution as
dividends by the corporation making such distribution, or by another
corporation to which the earnings or profits are transferred upon such
reorganization or other exchange. In the case, however, of amounts
distributed in liquidation (other than a taxfree liquidation or
reorganization described in paragraph (b)(1), (2), (3), or (5) of this
section) the earnings or profits of the corporation making the
distribution are diminished by the portion of such distribution properly
chargeable to earnings or profits accumulated after February 28, 1913,
after first deducting from the amount of such distribution the portion
thereof allocable to capital account.
(d) For the purposes of this section, the terms reorganization and
party to the reorganization shall, for any taxable year beginning before
January 1, 1934, have the meanings assigned to such terms in section 112
of the Revenue Act of 1932 (47 Stat. 196); for any taxable year
beginning after December 31, 1933, and before January 1, 1936, have the
meanings assigned to such terms in section 112 of the Revenue Act of
1934 (48 Stat. 704); for any taxable year beginning after December 31,
1935, and before January 1, 1938, have the meanings assigned to such
terms in section 112 of the Revenue Act of 1936 (49 Stat. 1678); for any
taxable year beginning after December 31, 1937, and before January 1,
1939, have the meanings assigned to such terms in section 112 of the
Revenue Act of 1938 (52 Stat. 485); and for any taxable year beginning
after December 31, 1938, and ending before June 22, 1954, providing no
election is made under section 393(b)(2) of the Internal Revenue Code of
1954, have the meanings assigned to such terms in section 112(g)(1) of
the Internal Revenue Code of 1939.
(e) Effective/applicability date. Paragraph (a) of this section
applies to transactions occurring on or after November 10, 2014.
[ T.D. 6500, 25 FR 11607, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 9700, 79 FR 66617, Nov. 10, 2014]
Sec. 1.312-12 Distributions of proceeds of loans guaranteed by the
United States.
(a) The provisions of section 312(j) are applicable with respect to
a loan, any portion of which is guaranteed by an agency of the United
States Government without regard to the percentage of such loan subject
to such guarantee.
(b) The application of section 312(j) is illustrated by the
following example:
Example. Corporation A borrowed $1,000,000 for the purpose of
construction of an apartment house, the cost and adjusted basis of which
was $900,000. This loan was guaranteed by an agency of the United States
Government. One year after such loan was made and after the completion
of construction of the building (but before such corporation had
received any income) it distributed $100,000 cash to its shareholders.
The earnings and profits of the taxable year of such corporation are
increased (pursuant to section 312(j)) by $100,000 immediately prior to
such distribution and are decreased by $100,000 immediately after such
distribution. Such decrease, however, does not reduce the earnings and
profits below zero. Two years later, it has no accumulated earnings and
has earnings of the taxable year of $100,000. Before it has made any
payments on the loan, it distributes $200,000 to its shareholders. The
[[Page 61]]
earnings and profits of the taxable year of the corporation ($100,000)
are increased by $100,000, the excess of the amount of the guaranteed
loan over the adjusted basis of the apartment house (calculated without
adjustment for depreciation). The entire amount of each distribution is
treated as a distribution out of earnings and profits and, accordingly,
as a taxable dividend.
Sec. 1.312-15 Effect of depreciation on earnings and profits.
(a) Depreciation for taxable years beginning after June 30, 1972--
(1) In general. Except as provided in subparagraph (2) of this paragraph
and paragraph (c) of this section, for purposes of computing the
earnings and profits of a corporation (including a real estate
investment trust as defined in section 856) for any taxable year
beginning after June 30, 1972, the allowance for depreciation (and
amortization, if any) shall be deemed to be the amount which would be
allowable for such year if the straight line method of depreciation had
been used for all property for which depreciation is allowable for each
taxable year beginning after June 30, 1972. Thus, for taxable years
beginning after June 30, 1972, in determining the earnings and profits
of a corporation, depreciation must be computed under the straight line
method, notwithstanding that in determining taxable income the
corporation uses an accelerated method of depreciation described in
subparagraph (A), (B), or (C) of section 312(m)(2) or elects to amortize
the basis of property under section 169, 184, 187, or 188, or any
similar provision. See Sec. 1.168(k)-1(f)(7) with respect to the
treatment of the additional first year depreciation deduction allowable
under section 168(k) for qualified property or 50-percent bonus
depreciation property, and Sec. 1.1400L(b)-1(f)(7) with respect to the
treatment of the additional first year depreciation deduction allowable
under section 1400L(b) for qualified New York Liberty Zone property, for
purposes of computing the earnings and profits of a corporation.
(2) Exception. (i) If, for any taxable year beginning after June 30,
1972, a method of depreciation is used by a corporation in computing
taxable income which the Secretary or his delegate has determined
results in a reasonable allowance under section 167(a) and which is not
a declining balance method of depreciation (described in Sec. 1.167(b)-
2), the sum of the years-digits method (described in Sec. 1.167(b)-3),
or any other method allowed solely by reason of the application of
subsection (b)(4) or (j)(1)(C) of section 167, then the adjustment to
earnings and profits for depreciation for such year shall be determined
under the method so used (in lieu of the straight line method).
(ii) The Commissioner has determined that the ``unit of production''
(see Sec. 1.167(b)-0(b)), and the ``machine hour'' methods of
depreciation, when properly used under appropriate circumstances, meet
the requirements of subdivision (i) of this subparagraph. Thus, the
adjustment to earnings and profits for depreciation (for the taxable
year for which either of such methods is properly used under appropriate
circumstances) shall be determined under whichever of such methods is
used to compute taxable income.
(3) Determinations under straight line method. (i) In the case of
property with respect to which an allowance for depreciation is claimed
in computing taxable income, the determination of the amount which would
be allowable under the straight line method shall be based on the manner
in which the corporation computes depreciation in determining taxable
income. Thus, if an election under Sec. 1.167(a)-11 is in effect with
respect to the property, the amount of depreciation which would be
allowable under the straight line method shall be determined under Sec.
1.167(a)-11(g)(3). On the other hand, if property is not depreciated
under the provisions of Sec. 1.167(a)-11, the amount of depreciation
which would be allowable under the straight line method shall be
determined under Sec. 1.167(b)-1. Any election made under section
167(f), with respect to reducing the amount of salvage value taken into
account in computing the depreciation allowance for certain property, or
any convention adopted under Sec. 1.167(a)-10(b) or Sec. 1.167(a)-
11(c)(2), with respect to additions and retirements from multiple asset
accounts, which is used in computing depreciation for taxable income
shall be used in computing depreciation for earnings and profits
purposes.
[[Page 62]]
(ii) In the case of property with respect to which an election to
amortize is in effect under section 169, 184, 187, or 188, or any
similar provision, the amount which would be allowable under the
straight line method of depreciation shall be determined under the
provisions of Sec. 1.167(b)-1. Thus, the cost or other basis of the
property, less its estimated salvage value, is to be deducted in equal
annual amounts over the period of the estimated useful life of the
property. In computing the amount of depreciation for earnings and
profits purposes, a taxpayer may utilize the provisions of section
167(f) (relating to the reduction in the amount of salvage value taken
into account in computing the depreciation allowance for certain
property) and any convention which could have been adopted for such
property under Sec. 1.167(a)-10(b) (relating to additions and
retirements from multiple asset accounts).
(b) Transitional rules--(1) Depreciation. If, for the taxable year
which includes June 30, 1972, (i) the allowance for depreciation of any
property is computed under a method other than the straight line method
or a method described in paragraph (a)(2) of this section, and (ii)
paragraph (a)(1) of this section applies to such property for the first
taxable year beginning after June 30, 1972, then adjustments to earnings
and profits for depreciation of such property for taxable years
beginning after June 30, 1972, shall be determined as if the corporation
changed to the straight line method with respect to such property as of
the first day of the first taxable year beginning after June 30, 1972.
Thus, if an election under Sec. 1.167 (a)-11 is in effect with respect
to the property, the change shall be made under the provisions of Sec.
1.167(a)-11(c)(1)(iii), except that no statement setting forth the
vintage accounts for which the change is made shall be furnished with
the income tax return of the year of change if the change is only for
purposes of computing earnings and profits. In all other cases, the
unrecovered cost or other basis of the property (less a reasonable
estimate for salvage) as of such first day shall be recovered through
equal annual allowances over the estimated remaining useful life
determined in accordance with the circumstances existing at that time.
See paragraph (a)(3)(i) of this section for rules relating to the
applicability of section 167(f) in determining salvage value.
(2) Amortization. If, for the taxable year which includes June 30,
1972, the basis of any property is amortized under section 169, 184,
187, or 188, or any similar provision, then adjustments to earnings and
profits for depreciation or amortization of such property for taxable
years beginning after June 30, 1972, shall be determined as if the
unrecovered cost or other basis of the property (less a reasonable
estimate for salvage) as of the first day of the first taxable year
beginning after June 30, 1972, were recovered through equal annual
allowances over the estimated remaining useful life of the property
determined in accordance with the circumstances existing at that time.
See paragraph (a)(3)(ii) of this section for rules relating to the
applicability of section 167(f).
(c) Certain foreign corporations. Paragraphs (a) and (b) of this
section shall not apply in computing the earnings and profits of a
foreign corporation for any taxable year for which less than 20 percent
of the gross income from all sources of such corporation is derived from
sources within the United States.
(d) Books and records. Wherever different methods of depreciation
are used for taxable income and earnings and profits purposes, records
shall be maintained which show the depreciation taken for earnings and
profits purposes each year and which will allow computation of the
adjusted basis of the property in each account using the depreciation
taken for earnings and profits purposes.
[T.D. 7221, 37 FR 24746, Nov. 21, 1972, as amended by T.D. 9283, 71 FR
51746, Aug. 31, 2006]
definitions; constructive ownership of stock
Sec. 1.316-1 Dividends.
(a)(1) The term dividend for the purpose of subtitle A of the Code
(except when used in subchapter L, chapter 1 of
[[Page 63]]
the Code, in any case where the reference is to dividends and similar
distributions of insurance companies paid to policyholders as such)
comprises any distribution of property as defined in section 317 in the
ordinary course of business, even though extraordinary in amount, made
by a domestic or foreign corporation to its shareholders out of either--
(i) Earnings and profits accumulated since February 28, 1913, or
(ii) Earnings and profits of the taxable year computed without
regard to the amount of the earnings and profits (whether of such year
or accumulated since February 28, 1913) at the time the distribution was
made.
The earnings and profits of the taxable year shall be computed as of the
close of such year, without diminution by reason of any distributions
made during the taxable year. For the purpose of determining whether a
distribution constitutes a dividend, it is unnecessary to ascertain the
amount of the earnings and profits accumulated since February 28, 1913,
if the earnings and profits of the taxable year are equal to or in
excess of the total amount of the distributions made within such year.
(2) Where a corporation distributes property to its shareholders on
or after June 22, 1954, the amount of the distribution which is a
dividend to them may not exceed the earnings and profits of the
distributing corporation.
(3) The rule of (2) above may be illustrated by the following
example:
Example. X and Y, individuals, each own one-half of the stock of
Corporation A which has earnings and profits of $10,000. Corporation A
distributes property having a basis of $6,000 and a fair market value of
$16,000 to its shareholders, each shareholder receiving property with a
basis of $3,000 and with a fair market value of $8,000 in a distribution
to which section 301 applies. The amount taxable to each shareholder as
a dividend under section 301(c) is $5,000.
(b)(1) In the case of a corporation which, under the law applicable
to the taxable year in which a distribution is made, is a personal
holding company or which, for the taxable year in respect of which a
distribution is made under section 563 (relating to dividends paid
within 2\1/2\ months after the close of the taxable year), or section
547 (relating to deficiency dividends), or corresponding provisions of a
prior income tax law, was under the applicable law a personal holding
company, the term dividend, in addition to the meaning set forth in the
first sentence of section 316, also means a distribution to its
shareholders as follows: A distribution within a taxable year of the
corporation, or of a shareholder, is a dividend to the extent of the
corporation's undistributed personal holding company income (determined
under section 545 without regard to distributions under section
316(b)(2)) for the taxable year in which, or, in the case of a
distribution under section 563 or section 547, the taxable year in
respect of which, the distribution was made. This subparagraph does not
apply to distributions in partial or complete liquidation of a personal
holding company. In the case of certain complete liquidations of a
personal holding company see subparagraph (2) of this paragraph.
(2) In the case of a corporation which, under the law applicable to
the taxable year in which a distribution is made, is a personal holding
company or which, for the taxable year in respect of which a
distribution is made under section 563, or section 547, or corresponding
provisions of a prior income tax law, was under the applicable law a
personal holding company, the term dividend, in addition to the meaning
set forth in the first sentence of section 316, also means, in the case
of a complete liquidation occurring within 24 months after the adoption
of a plan of liquidation, a distribution of property to its shareholders
within such period, but--
(i) Only to the extent of the amounts distributed to distributees
other than corporate shareholders, and
(ii) Only to the extent that the corporation designates such amounts
as a dividend distribution and duly notifies such distributees in
accordance with subparagraph (5) of this paragraph, but
(iii) Not in excess of the sum of such distributees' allocable share
of the undistributed personal holding company income for such year
(determined under section 545 without regard to sections 562(b) and
316(b)(2)(B)).
Section 316(b)(2)(B) and this subparagraph apply only to distributions
made in any taxable year of the distributing
[[Page 64]]
corporation beginning after December 31, 1963. The amount designated
with respect to a noncorporate distributee may not exceed the amount
actually distributed to such distributee. For purposes of determining a
noncorporate distributee's gain or loss on liquidation, amounts
distributed in complete liquidation to such distributee during a taxable
year are reduced by the amounts designated as a dividend with respect to
such distributee for such year. For purposes of section 333(e)(1), a
shareholder's ratable share of the earnings and profits of the
corporation accumulated after February 28, 1913, shall be reduced by the
amounts designated as a dividend with respect to such shareholder (even
though such designated amounts are distributed during the 1-month period
referred to in section 333).
(3) For purposes of subparagraph (2)(iii) of this paragraph--
(i) Except as provided in subdivision (ii) of this subparagraph, the
sum of the noncorporate distributees' allocable share of undistributed
personal holding company income for the taxable year in which, or in
respect of which, the distribution was made (computed without regard to
sections 562(b) and 316(b)(2)(B)) shall be determined by multiplying
such undistributed personal holding company income by the ratio which
the aggregate value of the stock held by all noncorporate shareholders
immediately before the record date of the last liquidating distribution
in such year bears to the total value of all stock outstanding on such
date. For rules applicable in a case where the distributing corporation
has more than one class of stock, see subdivision (iii) of this
subparagraph.
(ii) If more than one liquidating distribution was made during the
year, and if, after the record date of the first distribution but before
the record date of the last distribution, there was a change in the
relative shareholdings as between noncorporate shareholders and
corporate shareholders, then the sum of the noncorporate distributees'
allocable share of undistributed personal holding company income for the
taxable year in which, or in respect of which, the distributions were
made (computed without regard to sections 562(b) and 316(b)(2)(B)) shall
be determined as follows:
(a) First, allocate the corporation's undistributed personal holding
company income among the distributions made during the taxable year by
reference to the ratio which the aggregate amount of each distribution
bears to the total amount of all distributions during such year;
(b) Second, determine the noncorporate distributees' allocable share
of the corporation's undistributed personal holding company income for
each distribution by multiplying the amount determined under (a) of this
subdivision (ii) for each distribution by the ratio which the aggregate
value of the stock held by all noncorporate shareholders immediately
before the record date of such distribution bears to the total value of
all stock outstanding on such date; and
(c) Last, determine the sum of the noncorporate distributees'
allocable share of the corporation's undistributed personal holding
company income for all such distributions.
For rules applicable in a case where the distributing corporation has
more than one class of stock, see subdivision (iii) of this
subparagraph.
(iii) Where the distributing corporation has more than one class of
stock--
(a) The undistributed personal holding company income for the
taxable year in which, or in respect of which the distribution was made
shall be treated as a fund from which dividends may properly be paid and
shall be allocated between or among the classes of stock in a manner
consistent with the dividend rights of such classes under local law and
the pertinent governing instruments, such as, for example, the
distributing corporation's articles or certificate of incorporation and
bylaws;
(b) The noncorporate distributees' allocable share of the
undistributed personal holding company income for each class of stock
shall be determined separately in accordance with the rules set forth in
subdivisions (i) or (ii) of this subparagraph, as if each class of stock
were the only class of stock outstanding; and
(c) The sum of the noncorporate distributees' allocable share of the
undistributed personal holding company
[[Page 65]]
income for the taxable year in which, or in respect of which, the
distribution was made shall be the sum of the noncorporate distributees'
allocable share of the undistributed personal holding company income for
all classes of stock.
(iv) For purposes of this subparagraph, in any case where the record
date of a liquidating distribution cannot be ascertained, the record
date of the distribution shall be the date on which the liquidating
distribution was actually made.
(4) The amount designated as a dividend to a noncorporate
distributee for any taxable year of the distributing corporation may not
exceed an amount equal to the sum of the noncorporate distributees'
allocable share of undistributed personal holding company income (as
determined under subparagraph (3) of this paragraph) for such year
multiplied by the ratio which the aggregate value of the stock held by
such distributee immediately before the record date of the liquidating
distribution or, if the record date cannot be ascertained, immediately
before the date on which the liquidating distribution was actually made,
bears to the aggregate value of stock outstanding held by all
noncorporate distributees on such date. In any case where more than one
liquidating distribution is made during the taxable year, the aggregate
amount which may be designated as a dividend to a noncorporate
distributee for such year may not exceed the aggregate of the amounts
determined by applying the principle of the preceding sentence to the
amounts determined under subparagraphs (3)(ii)(a) and (b) of this
paragraph for each distribution. Where the distributing corporation has
more than one class of stock, the limitation on the amount which may be
designated as a dividend to a noncorporate distributee for any taxable
year shall be determined by applying the rules of this subparagraph
separately with respect to the noncorporate distributees' allocable
share of the undistributed personal holding company income for each
class of stock (as determined under subparagraphs (3)(iii)(a) and (b) of
this paragraph).
(5) A corporation may designate as a dividend to a shareholder all
or part of a distribution in complete liquidation described in section
316(b)(2)(B) of this paragraph by:
(i) Claiming a dividends paid deduction for such amount in its
return for the year in which, or in respect of which, the distribution
is made,
(ii) Including such amount as a dividend in Form 1099 filed in
respect of such shareholder pursuant to section 6042(a) and the
regulations thereunder and in a written statement of dividend payments
furnished to such shareholder pursuant to section 6042(c) and Sec.
1.6042-4, and
(iii) Indicating on the written statement of dividend payments
furnished to such shareholder the amount included in such statement
which is designated as a dividend under section 316(b)(2)(B) and this
paragraph.
If a corporation complies with the procedure prescribed in the preceding
sentence, it satisfies both the designation and notification
requirements of section 316(b)(2)(B)(ii) and paragraph (b)(2)(ii) of
this section. An amount designated as a dividend shall not be included
as a distribution in liquidation on Form 1099L filed pursuant to Sec.
1.6043-2 (relating to returns of information respecting distributions in
liquidation). If a corporation designates a dividend in accordance with
this subparagraph, it shall attach to the return in which it claims a
deduction for such designated dividend a schedule indicating all facts
necessary to determine the sum of the noncorporate distributees'
allocable share of undistributed personal holding company income
(determined in accordance with subparagraph (3) of this paragraph) for
the year in which, or in respect of which, the distribution is made.
(c) Except as provided in section 316(b)(1), the term dividend
includes any distribution of property to shareholders to the extent made
out of accumulated or current earnings and profits. See, however,
section 331 (relating to distributions in complete or partial
liquidation), section 301(e) (relating to distributions by personal
service corporations), section 302(b) (relating to redemptions treated
as amounts received from the sale or exchange of
[[Page 66]]
stock), and section 303 (relating to distributions in redemption of
stock to pay death taxes). See also section 305(b) for certain
distributions of stock or stock rights treated as distributions of
property.
(d) In the case of a corporation which, under the law applicable to
the taxable year in respect of which a distribution is made under
section 860 (relating to deficiency dividends), was a regulated
investment company (within the meaning of section 851), or a real estate
investment trust (within the meaning of section 856), the term dividend,
in addition to the meaning set forth in paragraphs (a) and (b) of
section 316, means a distribution of property to its shareholders which
constitutes a ``deficiency dividend'' as defined in section 860(f).
(e) The application of section 316 may be illustrated by the
following examples:
Example 1. At the beginning of the calendar year 1955, Corporation M
had an operating deficit of $200,000 and the earnings and profits for
the year amounted to $100,000. Beginning on March 16, 1955, the
corporation made quarterly distributions of $25,000 during the taxable
year to its shareholders. Each distribution is a taxable dividend in
full, irrespective of the actual or the pro rata amount of the earnings
and profits on hand at any of the dates of distribution, since the total
distributions made during the year ($100,000) did not exceed the total
earnings and profits of the year ($100,000).
Example 2. At the beginning of the calendar year 1955, Corporation
N, a personal holding company, had no accumulated earnings and profits.
During that year it made no earnings and profits but, due to the
disallowance of certain deductions, its undistributed personal holding
company income (determined under section 545 without regard to
distributions under section 316(b)(2)) was $16,000. It distributed to
shareholders on December 15, 1955, $15,000, and on February 1, 1956,
$1,000, the latter amount being claimed as a deduction under section 563
in its personal holding company schedule for 1955 filed with its return
for 1955 on March 15, 1956. Both distributions are taxable dividends in
full, since they do not exceed the undistributed personal holding
company income (determined without regard to such distributions) for
1955, the taxable year in which the distribution of $15,000 was made and
with respect to which the distribution of $1,000 was made. It is
immaterial whether Corporation N is a personal holding company for the
taxable year 1956 or whether it had any income for that year.
Example 3. In 1959, a deficiency in personal holding company tax was
established against Corporation O for the taxable year 1955 in the
amount of $35,500 based on an undistributed personal holding company
income of $42,000. Corporation O complied with the provisions of section
547 and in December 1959 distributed $42,000 to its stockholders as
``deficiency dividends.'' The distribution of $42,000 is a taxable
dividend since it does not exceed $42,000 (the undistributed personal
holding company income for 1955, the taxable year with respect to which
the distribution was made). It is immaterial whether Corporation O is a
personal holding company for the taxable year 1959 or whether it had any
income for that year.
Example 4. At the beginning of the taxable year 1955, Corporation P,
a personal holding company, had a deficit in earnings and profits of
$200,000. During that year it made earnings and profits of $90,000. For
that year, however, it had an undistributed personal holding income
(determined under section 545 without regard to distributions under
section 316(b)(2)) of $80,000. During such taxable year it distributed
to its shareholders $100,000. The distribution of $100,000 is a taxable
dividend to the extent of $90,000 since its earnings and profits for
that year, $90,000, exceed $80,000, the undistributed personal holding
company income determined without regard to such distribution.
Example 5. Corporation O, a calendar year taxpayer, is completely
liquidated on December 31, 1964, pursuant to a plan of liquidation
adopted July 1, 1964. No distributions in liquidation were made pursuant
to the plan of liquidation adopted July 1, 1964, until the distribution
in complete liquidation on December 31, 1964. Corporation O has
undistributed personal holding company income of $300,000 for the year
1964 (computed without regard to section 562(b) or section
316(b)(2)(B)). On December 31, 1964, immediately before the record date
of the distribution in complete liquidation, individual A owns 200
shares of Corporation O's outstanding stock and Corporation P owns the
remaining 100 shares of outstanding stock. All shares are equal in
value. The noncorporate distributees' allocable share of undistributed
personal holding company income for 1964 is $200,000
200 shares / 300 shares x $300,000.
If at least $200,000 is distributed to A in the liquidation, then
Corporation O may designate $200,000 to A as a dividend in accordance
with paragraph (b)(5) of this section, and, if such amount is
designated, then A must treat $200,000 as a dividend to which section
301 applies. For an example of the treatment of the distribution to
Corporation P see paragraph (b)(2)(iii) of Sec. 1.562-1.
[[Page 67]]
Example 6. Corporation Q, a calendar year taxpayer, is completely
liquidated on December 31, 1964, pursuant to a plan of liquidation
adopted July 1, 1964. No distributions in liquidation were made pursuant
to the plan of liquidation adopted July 1, 1964, until the distribution
in complete liquidation on December 31, 1964. Corporation Q has
undistributed personal holding company income of $40,000 for the year
1964 (computed without regard to section 562(b) or section
316(b)(2)(B)). On December 31, 1964, immediately before the record date
of the distribution in complete liquidation, Corporation Q has
outstanding 300 shares of common stock and 100 shares of noncumulative
preferred stock. Corporation Q's articles of incorporation provide that
the preferred stock is entitled to dividends of $10 per share per year.
Of Corporation Q's stock, individual B owns 200 shares of the common
stock and 50 shares of the preferred stock, and Corporation R owns all
remaining shares. All of the common shares are equal in value, and all
of the preferred shares are equal in value. No dividends had been paid
on the preferred stock during the year 1964. Of the $40,000 of
undistributed personal holding company income, $1,000 must be allocated
to the preferred stock because of the rights of the holders of such
stock, under Q's articles of incorporation, to receive that amount in
dividends for the year 1964. The noncorporate distributees' allocable
share of undistributed personal holding company income for 1964 is
$26,500.
50 preferred shares / 100 preferred shares x $1,000 + 200 common shares
/ 300 common shares x $39,000
If at least $26,500 is distributed to B in the liquidation, then
corporation Q may designate $26,500 to B as a dividend in accordance
with paragraph (b)(5) of this section, and, if such amount is
designated, then B must treat $26,500 as a dividend to which section 301
applies.
Example 7. In 1979, a deficiency of $46,000 in the tax on real
estate investment trust taxable income is established against
corporation R for the taxable year 1977, based on an increase in real
estate investment trust taxable income of $100,000. Corporation R
complied with the provisions of section 860 and in December 1979
distributed to its stockholders $100,000, which qualified as
``deficiency dividends'' under section 860. The distribution of $100,000
is a taxable dividend. It is immaterial whether corporation R is a real
estate investment trust for the taxable year 1979 or whether it had
accumulated or current earnings and profits in 1979. See section
316(b)(3).
(Sec. 860(l) (92 Stat. 2849, 26 U.S.C. 860(l)); sec. 860(g) (92 Stat.
2850, 26 U.S.C. 860(g)); and sec. 7805 (68A Stat. 917, 26 U.S.C. 7805))
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6625, 27 FR
12541, Dec. 19, 1962; T.D. 6949, 33 FR 5519, Apr. 9, 1968; T.D. 7767, 46
FR 11264, Feb. 6, 1981; T.D. 7936, 49 FR 2105, Jan. 18, 1984]
Sec. 1.316-2 Sources of distribution in general.
(a) For the purpose of income taxation every distribution made by a
corporation is made out of earnings and profits to the extent thereof
and from the most recently accumulated earnings and profits. In
determining the source of a distribution, consideration should be given
first, to the earnings and profits of the taxable year; second, to the
earnings and profits accumulated since February 28, 1913, only in the
case where, and to the extent that, the distributions made during the
taxable year are not regarded as out of the earnings and profits of that
year; third, to the earnings and profits accumulated before March 1,
1913, only after all the earnings and profits of the taxable year and
all the earnings and profits accumulated since February 28, 1913, have
been distributed; and, fourth, to sources other than earnings and
profits only after the earnings and profits have been distributed.
(b) If the earnings and profits of the taxable year (computed as of
the close of the year without diminution by reason of any distributions
made during the year and without regard to the amount of earnings and
profits at the time of the distribution) are sufficient in amount to
cover all the distributions made during that year, then each
distribution is a taxable dividend. See Sec. 1.316-1. If the
distributions made during the taxable year consist only of money and
exceed the earnings and profits of such year, then that proportion of
each distribution which the total of the earnings and profits of the
year bears to the total distributions made during the year shall be
regarded as out of the earnings and profits of that year. The portion of
each such distribution which is not regarded as out of earnings and
profits of the taxable
[[Page 68]]
year shall be considered a taxable dividend to the extent of the
earnings and profits accumulated since February 28, 1913, and available
on the date of the distribution. In any case in which it is necessary to
determine the amount of earnings and profits accumulated since February
28, 1913, and the actual earnings and profits to the date of a
distribution within any taxable year (whether beginning before January
1, 1936, or, in the case of an operating deficit, on or after that date)
cannot be shown, the earnings and profits for the year (or accounting
period, if less than a year) in which the distribution was made shall be
prorated to the date of the distribution not counting the date on which
the distribution was made.
(c) The provisions of the section may be illustrated by the
following example:
Example. At the beginning of the calendar year 1955, Corporation M
had $12,000 in earnings and profits accumulated since February 28, 1913.
Its earnings and profits for 1955 amounted to $30,000. During the year
it made quarterly cash distributions of $15,000 each. Of each of the
four distributions made, $7,500 (that portion of $15,000 which the
amount of $30,000, the total earnings and profits of the taxable year,
bears to $60,000, the total distributions made during the year) was paid
out of the earnings and profits of the taxable year; and of the first
and second distributions, $7,500 and $4,500, respectively, were paid out
of the earnings and profits accumulated after February 28, 1913, and
before the taxable year, as follows:
----------------------------------------------------------------------------------------------------------------
Distributions during 1955 Portion Portion out
---------------------------------------------------------------------------- out of of earnings
earnings accumulated
and since Feb. Taxable amt.
profits 28, 1913, of each
Date Amount of the and before distribution
taxable the taxable
year year
----------------------------------------------------------------------------------------------------------------
March 10......................................................... $15,000 $7,500 $7,500 $15,000
June 10.......................................................... 15,000 7,500 4,500 12,000
September 10..................................................... 15,000 7,500 ........... 7,500
December 10...................................................... 15,000 7,500 ........... 7,500
----------------------------------------------
Total amount taxable as dividends.............................. ........ ........ ........... 42,000
----------------------------------------------------------------------------------------------------------------
(d) Any distribution by a corporation out of earnings and profits
accumulated before March 1, 1913, or out of increase in value of
property accrued before March 1, 1913 (whether or not realized by sale
or other disposition, and, if realized, whether before, on, or after
March 1, 1913), is not a dividend within the meaning of subtitle A of
the Code.
(e) A reserve set up out of gross income by a corporation and
maintained for the purpose of making good any loss of capital assets on
account of depletion or depreciation is not a part of surplus out of
which ordinary dividends may be paid. A distribution made from a
depletion or a depreciation reserve based upon the cost or other basis
of the property will not be considered as having been paid out of
earnings and profits, but the amount thereof shall be applied against
and reduce the cost or other basis of the stock upon which declared. If
such a distribution is in excess of the basis, the excess shall be taxed
as a gain from the sale or other disposition of property as provided in
section 301(c)(3)(A). A distribution from a depletion reserve based upon
discovery value to the extent that such reserve represents the excess of
the discovery value over the cost or other basis for determining gain or
loss, is, when received by the shareholders, taxable as an ordinary
dividend. The amount by which a corporation's percentage depletion
allowance for any year exceeds depletion sustained on cost or other
basis, that is, determined without regard to discovery or percentage
depletion allowances for the year of distribution or prior years,
constitutes a part of the corporation's ``earnings and profits
accumulated after February 28, 1913,'' within the meaning of section
316, and, upon distribution to shareholders, is taxable to them as a
dividend. A distribution made from that portion of a depletion reserve
based upon a valuation as of March 1, 1913, which is in excess of the
depletion reserve based upon cost, will not be considered as having been
paid out of earnings and profits, but the amount of the distribution
shall be applied against and reduce the cost or other basis of the stock
upon which declared. See section 301. No distribution, however, can be
made from such a reserve until all the earnings and profits of the
corporation have first been distributed.
[[Page 69]]
Sec. 1.317-1 Property defined.
The term property, for purposes of part 1, subchapter C, chapter 1
of the Code, means any property (including money, securities, and
indebtedness to the corporation) other than stock, or rights to acquire
stock, in the corporation making the distribution.
Sec. 1.318-1 Constructive ownership of stock; introduction.
(a) For the purposes of certain provisions of chapter 1 of the Code,
section 318(a) provides that stock owned by a taxpayer includes stock
constructively owned by such taxpayer under the rules set forth in such
section. An individual is considered to own the stock owned, directly or
indirectly, by or for his spouse (other than a spouse who is legally
separated from the individual under a decree of divorce or separate
maintenance), and by or for his children, grandchildren, and parents.
Under section 318(a)(2) and (3), constructive ownership rules are
established for partnerships and partners, estates and beneficiaries,
trusts and beneficiaries, and corporations and stockholders. If any
person has an option to acquire stock, such stock is considered as owned
by such person. The term option includes an option to acquire such an
option and each of a series of such options.
(b) In applying section 318(a) to determine the stock ownership of
any person for any one purpose--
(1) A corporation shall not be considered to own its own stock by
reason of section 318(a)(3)(C);
(2) In any case in which an amount of stock owned by any person may
be included in the computation more than one time, such stock shall be
included only once, in the manner in which it will impute to the person
concerned the largest total stock ownership; and
(3) In determining the 50-percent requirement of section
318(a)(2)(C) and (3)(C), all of the stock owned actually and
constructively by the person concerned shall be aggregated.
[T.D. 6969, 33 FR 11999, Aug. 23, 1968]
Sec. 1.318-2 Application of general rules.
(a) The application of paragraph (b) of Sec. 1.318-1 may be
illustrated by the following examples:
Example 1. H, an individual, owns all of the stock of corporation A.
Corporation A is not considered to own the stock owned by H in
corporation A.
Example 2. H, an individual, his wife, W, and his son, S, each own
one-third of the stock of the Green Corporation. For purposes of
determining the amount of stock owned by H, W, or S for purposes of
section 318(a)(2)(C) and (3)(C), the amount of stock held by the other
members of the family shall be added pursuant to paragraph (b)(3) of
Sec. 1.318-1 in applying the 50-percent requirement of such section. H,
W, or S, as the case may be, is for this purpose deemed to own 100
percent of the stock of the Green Corporation.
(b) The application of section 318(a)(1), relating to members of a
family, may be illustrated by the following example:
Example. An individual, H, his wife, W, his son, S, and his grandson
(S's son), G, own the 100 outstanding shares of stock of a corporation,
each owning 25 shares. H, W, and S are each considered as owning 100
shares. G is considered as owning only 50 shares, that is, his own and
his father's.
(c) The application of section 318(a)(2) and (3), relating to
partnerships, trusts and corporations, may be illustrated by the
following examples:
Example 1. A, an individual, has a 50 percent interest in a
partnership. The partnership owns 50 of the 100 outstanding shares of
stock of a corporation, the remaining 50 shares being owned by A. The
partnership is considered as owning 100 shares. A is considered as
owning 75 shares.
Example 2. A testamentary trust owns 25 of the outstanding 100
shares of stock of a corporation. A, an individual, who holds a vested
remainder in the trust having a value, computed actuarially equal to 4
percent of the value of the trust property, owns the remaining 75
shares. Since the interest of A in the trust is a vested interest rather
than a contingent interest (whether or not remote), the trust is
considered as owning 100 shares. A is considered as owning 76 shares.
Example 3. The facts are the same as in (2), above, except that A's
interest in the trust is a contingent remainder. A is considered as
owning 76 shares. However, since A's interest in the trust is a remote
contingent interest, the trust is not considered as owning any of the
shares owned by A.
[[Page 70]]
Example 4. A and B, unrelated individuals, own 70 percent and 30
percent, respectively, in value of the stock of Corporation M.
Corporation M owns 50 of the 100 outstanding shares of stock of
Corporation O, the remaining 50 shares being owned by A. Corporation M
is considered as owning 100 shares of Corporation O, and A is considered
as owning 85 shares.
Example 5. A and B, unrelated individuals, own 70 percent and 30
percent, respectively, of the stock of corporation M. A, B, and
corporation M all own stock of corporation O. Since B owns less than 50
percent in value of the stock of corporation M, neither B nor
corporation M constructively owns the stock of corporation O owned by
the other. However, for purposes of certain sections of the Code, such
as sections 304 and 856(d), the 50-percent limitation of section
318(a)(2)(C) and (3)(C) is disregarded or is reduced to less than 30
percent. For such purposes, B constructively owns his proportionate
share of the stock of corporation O owned directly by corporation M, and
corporation M constructively owns the stock of corporation O owned by B.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6969, 33 FR
11999, Aug. 23, 1968]
Sec. 1.318-3 Estates, trusts, and options.
(a) For the purpose of applying section 318(a), relating to estates,
property of a decedent shall be considered as owned by his estate if
such property is subject to administration by the executor or
administrator for the purpose of paying claims against the estate and
expenses of administration notwithstanding that, under local law, legal
title to such property vests in the decedent's heirs, legatees or
devisees immediately upon death. The term beneficiary includes any
person entitled to receive property of a decedent pursuant to a will or
pursuant to laws of descent and distribution. A person shall no longer
be considered a beneficiary of an estate when all the property to which
he is entitled has been received by him, when he no longer has a claim
against the estate arising out of having been a beneficiary, and when
there is only a remote possibility that it will be necessary for the
estate to seek the return of property or to seek payment from him by
contribution or otherwise to satisfy claims against the estate or
expenses of administration. When, pursuant to the preceding sentence, a
person ceases to be a beneficiary, stock owned by him shall not
thereafter be considered owned by the estate, and stock owned by the
estate shall not thereafter be considered owned by him. The application
of section 318(a) relating to estates may be illustrated by the
following examples:
Example 1. (a) A decedent's estate owns 50 of the 100 outstanding
shares of stock of corporation X. The remaining shares are owned by
three unrelated individuals, A, B, and C, who together own the entire
interest in the estate. A owns 12 shares of stock of corporation X
directly and is entitled to 50 percent of the estate. B owns 18 shares
directly and has a life estate in the remaining 50 percent of the
estate. C owns 20 shares directly and also owns the remainder interest
after B's life estate.
(b) If section 318(a)(5)(C) applies (see paragraph (c)(3) of Sec.
1.318-4), the stock of corporation X is considered to be owned as
follows: the estate is considered as owning 80 shares, 50 shares
directly, 12 shares constructively through A, and 18 shares
constructively through B; A is considered as owning 37 shares, 12 shares
directly, and 25 shares constructively (50 percent of the 50 shares
owned directly by the estate); B is considered as owning 43 shares, 18
shares directly and 25 shares constructively (50 percent of the 50
shares owned directly by the estate); C is considered as owning 20
shares directly and no shares constructively. C is not considered a
beneficiary of the estate under section 318(a) since he has no direct
present interest in the property held by the estate nor in the income
produced by such property.
(c) If section 318(a)(5)(C) does not apply, A is considered as
owning nine additional shares (50 percent of the 18 shares owned
constructively by the estate through B), and B is considered as owning
six additional shares (50 percent of the 12 shares owned constructively
by the estate through A).
Example 2. Under the will of A, Blackacre is left to B for life,
remainder to C, an unrelated individual. The residue of the estate
consisting of stock of a corporation is left to D. B and D are
beneficiaries of the estate under section 318(a). C is not considered a
beneficiary since he has no direct present interest in Blackacre nor in
the income produced by such property. The stock owned by the estate is
considered as owned proportionately by B and D.
(b) For the purpose of section 318(a)(2)(B) stock owned by a trust
will be considered as being owned by its beneficiaries only to the
extent of the interest of such beneficiaries in the trust. Accordingly,
the interest of income beneficiaries, remainder beneficiaries, and other
beneficiaries will be
[[Page 71]]
computed on an actuarial basis. Thus, if a trust owns 100 percent of the
stock of Corporation A, and if, on an actuarial basis, W's life interest
in the trust is 15 percent, Y's life interest is 25 percent, and Z's
remainder interest is 60 percent, under this provision W will be
considered to be the owner of 15 percent of the stock of Corporation A,
Y will be considered to be the owner of 25 percent of such stock, and Z
will be considered to be the owner of 60 percent of such stock. The
factors and methods prescribed in Sec. 20.2031-7 of this chapter
(Estate Tax Regulations) for use in ascertaining the value of an
interest in property for estate tax purposes shall be used in
determining a beneficiary's actuarial interest in a trust for purposes
of this section. See Sec. 20.2031-7 of this chapter (Estate Tax
Regulations) for examples illustrating the use of these factors and
methods.
(c) The application of section 318(a) relating to options may be
illustrated by the following example:
Example. A and B, unrelated individuals, own all of the 100
outstanding shares of stock of a corporation, each owning 50 shares. A
has an option to acquire 25 of B's shares and has an option to acquire a
further option to acquire the remaining 25 of B's shares. A is
considered as owning the entire 100 shares of stock of the corporation.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6969, 33 FR
11999, Aug. 23, 1968]
Sec. 1.318-4 Constructive ownership as actual ownership; exceptions.
(a) In general. Section 318(a)(5)(A) provides that, except as
provided in section 318(a)(5) (B) and (C), stock constructively owned by
a person by reason of the application of section 318(a) (1), (2), (3),
or (4) shall be considered as actually owned by such person for purposes
of applying section 318(a) (1), (2), (3), and (4). For example, if a
trust owns 50 percent of the stock of corporation X, stock of
corporation Y owned by corporation X which is attributed to the trust
may be further attributed to the beneficiaries of the trust.
(b) Constructive family ownership. Section 318(a)(5)(B) provides
that stock constructively owned by an individual by reason of ownership
by a member of his family shall not be considered as owned by him for
purposes of making another family member the constructive owner of such
stock under section 318(a)(1). For example, if F and his two sons, A and
B, each own one-third of the stock of a corporation, under section
318(a)(1), A is treated as owning constructively the stock owned by his
father but is not treated as owning the stock owned by B. Section
318(a)(5)(B) prevents the attribution of the stock of one brother
through the father to the other brother, an attribution beyond the scope
of section 318(a)(1) directly.
(c) Reattribution. (1) Section 318(a)(5)(C) provides that stock
constructively owned by a partnership, estate, trust, or corporation by
reason of the application of section 318(a)(3) shall not be considered
as owned by it for purposes of applying section 318(a)(2) in order to
make another the constructive owner of such stock. For example, if two
unrelated individuals are beneficiaries of the same trust, stock held by
one which is attributed to the trust under section 318(a)(3) is not
reattributed from the trust to the other beneficiary. However, stock
constructively owned by reason of section 318(a)(2) may be reattributed
under section 318(a)(3). Thus, for example, if all the stock of
corporations X and Y is owned by A, stock of corporation Z held by X is
attributed to Y through A.
(2) Section 318(a)(5)(C) does not prevent reattribution under
section 318(a)(2) of stock constructively owned by an entity under
section 318(a)(3) if the stock is also constructively owned by the
entity under section 318(a)(4). For example, if individuals A and B are
beneficiaries of a trust and the trust has an option to buy stock from
A, B is considered under section 318(a)(2)(B) as owning a proportionate
part of such stock.
(3) Section 318(a)(5)(C) is effective on and after August 31, 1964,
except that for purposes of sections 302 and 304 it does not apply with
respect to distributions in payment for stock acquisitions or
redemptions if such acquisitions or redemptions occurred before August
31, 1964.
[T.D. 6969, 33 FR 11999, Aug. 23, 1968]
[[Page 72]]
Corporate Liquidations
effects on recipients
Sec. 1.331-1 Corporate liquidations.
(a) In general. Section 331 contains rules governing the extent to
which gain or loss is recognized to a shareholder receiving a
distribution in complete or partial liquidation of a corporation. Under
section 331(a)(1), it is provided that amounts distributed in complete
liquidation of a corporation shall be treated as in full payment in
exchange for the stock. Under section 331(a)(2), it is provided that
amounts distributed in partial liquidation of a corporation shall be
treated as in full or part payment in exchange for the stock. For this
purpose, the term partial liquidation shall have the meaning ascribed in
section 346. If section 331 is applicable to the distribution of
property by a corporation, section 301 (relating to the effects on a
shareholder of distributions of property) has no application other than
to a distribution in complete liquidation to which section 316(b)(2)(B)
applies. See paragraph (b)(2) of Sec. 1.316-1.
(b) Gain or loss. The gain or loss to a shareholder from a
distribution in partial or complete liquidation is to be determined
under section 1001 by comparing the amount of the distribution with the
cost or other basis of the stock. The gain or loss will be recognized to
the extent provided in section 1002 and will be subject to the
provisions of parts I, II, and III (section 1201 and following),
subchapter P, chapter 1 of the Code.
(c) Recharacterization. A liquidation which is followed by a
transfer to another corporation of all or part of the assets of the
liquidating corporation or which is preceded by such a transfer may,
however, have the effect of the distribution of a dividend or of a
transaction in which no loss is recognized and gain is recognized only
to the extent of ``other property.'' See sections 301 and 356.
(d) Reporting requirement--(1) General rule. Every significant
holder that transfers stock to the issuing corporation in exchange for
property from such corporation must include on or with such holder's
return for the year of such exchange the statement described in
paragraph (d)(2) of this section unless--
(i) The property is part of a distribution made pursuant to a
corporate resolution reciting that the distribution is made in complete
liquidation of the corporation; and
(ii) The issuing corporation is completely liquidated and dissolved
within one year after the distribution.
(2) Statement. If required by paragraph (d)(1) of this section, a
significant holder must include on or with such holder's return a
statement entitled, ``STATEMENT PURSUANT TO Sec. 1.331-1(d) BY [INSERT
NAME AND TAXPAYER IDENTIFICATION NUMBER (IF ANY) OF TAXPAYER], A
SIGNIFICANT HOLDER OF THE STOCK OF [INSERT NAME AND EMPLOYER
IDENTIFICATION NUMBER (IF ANY) OF ISSUING CORPORATION].'' If a
significant holder is a controlled foreign corporation (within the
meaning of section 957), each United States shareholder (within the
meaning of section 951(b)) with respect thereto must include this
statement on or with its return. The statement must include--
(i) The fair market value and basis of the stock transferred by the
significant holder to the issuing corporation; and
(ii) A description of the property received by the significant
holder from the issuing corporation.
(3) Definitions. For purposes of this section:
(i) Significant holder means any person that, immediately before the
exchange--
(A) Owned at least five percent (by vote or value) of the total
outstanding stock of the issuing corporation if the stock owned by such
person is publicly traded; or
(B) Owned at least one percent (by vote or value) of the total
outstanding stock of the issuing corporation if the stock owned by such
person is not publicly traded.
(ii) Publicly traded stock means stock that is listed on--
(A) A national securities exchange registered under section 6 of the
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
[[Page 73]]
(B) An interdealer quotation system sponsored by a national
securities association registered under section 15A of the Securities
Exchange Act of 1934 (15 U.S.C. 78o-3).
(iii) Issuing corporation means the corporation that issued the
shares of stock, some or all of which were transferred by a significant
holder to such corporation in the exchange described in paragraph (d)(1)
of this section.
(4) Cross reference. See section 6043 of the Code for requirements
relating to a return by a liquidating corporation.
(e) Example. The provisions of this section may be illustrated by
the following example:
Example. A, an individual who makes his income tax returns on the
calendar year basis, owns 20 shares of stock of the P Corporation, a
domestic corporation, 10 shares of which were acquired in 1951 at a cost
of $1,500 and the remainder of 10 shares in December 1954 at a cost of
$2,900. He receives in April 1955 a distribution of $250 per share in
complete liquidation, or $2,500 on the 10 shares acquired in 1951, and
$2,500 on the 10 shares acquired in December 1954. The gain of $1,000 on
the shares acquired in 1951 is a long-term capital gain to be treated as
provided in parts I, II, and III (section 1201 and following),
subchapter P, chapter 1 of the Code. The loss of $400 on the shares
acquired in 1954 is a short-term capital loss to be treated as provided
in parts I, II, and III (section 1201 and following), subchapter P,
chapter 1 of the Code.
(f) Effective/applicability date. Paragraph (d) of this section
applies to any taxable year beginning on or after May 30, 2006. However,
taxpayers may apply paragraph (d) of this section to any original
Federal income tax return (including any amended return filed on or
before the due date (including extensions) of such original return)
timely filed on or after May 30, 2006. For taxable years beginning
before May 30, 2006, see Sec. 1.331-1 as contained in 26 CFR part 1 in
effect on April 1, 2006.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6949, 33 FR
5521, Apr. 9, 1968; T.D. 9264, 71 FR 30594, May 30, 2006; T.D. 9329, 72
FR 32797, June 14, 2007]
Sec. 1.332-1 Distributions in liquidation of subsidiary corporation;
general.
Under the general rule prescribed by section 331 for the treatment
of distributions in liquidation of a corporation, amounts received by
one corporation in complete liquidation of another corporation are
treated as in full payment in exchange for stock in such other
corporation, and gain or loss from the receipt of such amounts is to be
determined as provided in section 1001. Section 332 excepts from the
general rule property received, under certain specifically described
circumstances, by one corporation as a distribution in complete
liquidation of the stock of another corporation and provides for the
nonrecognition of gain or loss in those cases which meet the statutory
requirements. Section 367 places a limitation on the application of
section 332 in the case of foreign corporations. See section 334(b) for
the basis for determining gain or loss from the subsequent sale of
property received upon complete liquidations such as described in this
section. See section 453(d)(4)(A) relative to distribution of
installment obligations by subsidiary.
Sec. 1.332-2 Requirements for nonrecognition of gain or loss.
(a) The nonrecognition of gain or loss under section 332 is limited
to the receipt of property by a corporation that is the actual owner of
stock (in the liquidating corporation) meeting the requirements of
section 1504(a)(2). The recipient corporation must have been the owner
of the specified amount of such stock on the date of the adoption of the
plan of liquidation and have continued so to be at all times until the
receipt of the property. If the recipient corporation does not continue
qualified with respect to the ownership of stock of the liquidating
corporation and if the failure to continue qualified occurs at any time
prior to the completion of the transfer of all the property, the
provisions for the nonrecognition of gain or loss do not apply to any
distribution received under the plan.
(b) Section 332 applies only to those cases in which the recipient
corporation receives at least partial payment for the stock which it
owns in the liquidating corporation. If section 332 is not applicable,
see section 165(g) relative to allowance of losses on worthless
securities.
(c) To constitute a distribution in complete liquidation within the
meaning of section 332, the distribution
[[Page 74]]
must be (1) made by the liquidating corporation in complete cancellation
or redemption of all of its stock in accordance with a plan of
liquidation, or (2) one of a series of distributions in complete
cancellation or redemption of all its stock in accordance with a plan of
liquidation. Where there is more than one distribution, it is essential
that a status of liquidation exist at the time the first distribution is
made under the plan and that such status continue until the liquidation
is completed. Liquidation is completed when the liquidating corporation
and the receiver or trustees in liquidation are finally divested of all
the property (both tangible and intangible). A status of liquidation
exists when the corporation ceases to be a going concern and its
activities are merely for the purpose of winding up its affairs, paying
its debts, and distributing any remaining balance to its shareholders. A
liquidation may be completed prior to the actual dissolution of the
liquidating corporation. However, legal dissolution of the corporation
is not required. Nor will the mere retention of a nominal amount of
assets for the sole purpose of preserving the corporation's legal
existence disqualify the transaction. (See 26 CFR (1939) 39.22(a)-20
(Regulations 118).)
(d) If a transaction constitutes a distribution in complete
liquidation within the meaning of the Internal Revenue Code of 1954 and
satisfies the requirements of section 332, it is not material that it is
otherwise described under the local law. If a liquidating corporation
distributes all of its property in complete liquidation and if pursuant
to the plan for such complete liquidation a corporation owning the
specified amount of stock in the liquidating corporation receives
property constituting amounts distributed in complete liquidation within
the meaning of the Code and also receives other property attributable to
shares not owned by it, the transfer of the property to the recipient
corporation shall not be treated, by reason of the receipt of such other
property, as not being a distribution (or one of a series of
distributions) in complete cancellation or redemption of all of the
stock of the liquidating corporation within the meaning of section 332,
even though for purposes of those provisions relating to corporate
reorganizations the amount received by the recipient corporation in
excess of its ratable share is regarded as acquired upon the issuance of
its stock or securities in a tax-free exchange as described in section
361 and the cancellation or redemption of the stock not owned by the
recipient corporation is treated as occurring as a result of a taxfree
exchange described in section 354.
(e) The application of these rules may be illustrated by the
following example:
Example. On September 1, 1954, the M Corporation had outstanding
capital stock consisting of 3,000 shares of common stock, par value $100
a share, and 1,000 shares of preferred stock, par value $100 a share,
which preferred stock was limited and preferred as to dividends and had
no voting rights. On that date, and thereafter until the date of
dissolution of the M Corporation, the O Corporation owned 2,500 shares
of common stock of the M Corporation. By statutory merger consummated on
October 1, 1954, pursuant to a plan of liquidation adopted on September
1, 1954, the M Corporation was merged into the O Corporation, the O
Corporation under the plan issuing stock which was received by the other
holders of the stock of the M Corporation. The receipt by the O
Corporation of the properties of the M Corporation is a distribution
received by the O Corporation in complete liquidation of the M
Corporation within the meaning of section 332, and no gain or loss is
recognized as the result of the receipt of such properties.
(f) Applicability date. The first sentence of paragraph (a) of this
section applies to plans of complete liquidation adopted after March 28,
1985, except as specified in section 1804(e)(6)(B)(ii) and (iii) of
Pubic Law 99-514.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 9759, 81 FR 17071, Mar. 28, 2016]
Sec. 1.332-3 Liquidations completed within one taxable year.
If in a liquidation completed within one taxable year pursuant to a
plan of complete liquidation, distributions in complete liquidation are
received by a corporation which owns the specified amount of stock in
the liquidating corporation and which continues qualified with respect
to the ownership of such
[[Page 75]]
stock until the transfer of all the property within such year is
completed (see paragraph (a) of Sec. 1.332-2), then no gain or loss
shall be recognized with respect to the distributions received by the
recipient corporation. In such case no waiver or bond is required of the
recipient corporation under section 332.
Sec. 1.332-4 Liquidations covering more than one taxable year.
(a) If the plan of liquidation is consummated by a series of
distributions extending over a period of more than one taxable year, the
nonrecognition of gain or loss with respect to the distributions in
liquidation shall, in addition to the requirements of Sec. 1.332-2, be
subject to the following requirements:
(1) In order for the distribution in liquidation to be brought
within the exception provided in section 332 to the general rule for
computing gain or loss with respect to amounts received in liquidation
of a corporation, the entire property of the corporation shall be
transferred in accordance with a plan of liquidation, which plan shall
include a statement showing the period within which the transfer of the
property of the liquidating corporation to the recipient corporation is
to be completed. The transfer of all the property under the liquidation
must be completed within three years from the close of the taxable year
during which is made the first of the series of distributions under the
plan.
(2) For each of the taxable years which falls wholly or partly
within the period of liquidation, the recipient corporation shall, at
the time of filing its return, file with the district director of
internal revenue a waiver of the statute of limitations on assessment.
The waiver shall be executed on such form as may be prescribed by the
Commissioner and shall extend the period of assessment of all income and
profits taxes for each such year to a date not earlier than one year
after the last date of the period for assessment of such taxes for the
last taxable year in which the transfer of the property of such
liquidating corporation to the controlling corporation may be completed
in accordance with section 332. Such waiver shall also contain such
other terms with respect to assessment as may be considered by the
Commissioner to be necessary to insure the assessment and collection of
the correct tax liability for each year within the period of
liquidation.
(3) For each of the taxable years which falls wholly or partly
within the period of liquidation, the recipient corporation may be
required to file a bond, the amount of which shall be fixed by the
district director. The bond shall contain all terms specified by the
Commissioner, including provisions unequivocally assuring prompt payment
of the excess of income and profits taxes (plus penalty, if any, and
interest) as computed by the district director without regard to the
provisions of sections 332 and 334(b) over such taxes computed with
regard to such provisions, regardless of whether such excess may or may
not be made the subject of a notice of deficiency under section 6212 and
regardless of whether it may or may not be assessed. Any bond required
under section 332 shall have such surety or sureties as the Commissioner
may require. However, see 6 U.S.C. 15, providing that where a bond is
required by law or regulations, in lieu of surety or sureties there may
be deposited bonds or notes of the United States. Only surety companies
holding certificates of authority from the Secretary as acceptable
sureties on Federal bonds will be approved as sureties. The bonds shall
be executed in triplicate so that the Commissioner, the taxpayer, and
the surety or the depositary may each have a copy. On and after
September 1, 1953, the functions of the Commissioner with respect to
such bonds shall be performed by the district director for the internal
revenue district in which the return was filed and any bond filed on or
after such date shall be filed with such district director.
(b) Pending the completion of the liquidation, if there is a
compliance with paragraph (a) (1), (2), and (3) of this section and
Sec. 1.332-2 with respect to the nonrecognition of gain or loss, the
income and profits tax liability of the recipient corporation for each
of the years covered in whole or in part by the liquidation shall be
determined without the recognition of any gain or loss on account of the
receipt of the
[[Page 76]]
distributions in liquidation. In such determination, the basis of the
property or properties received by the recipient corporation shall be
determined in accordance with section 334(b). However, if the transfer
of the property is not completed within the three-year period allowed by
section 332 or if the recipient corporation does not continue qualified
with respect to the ownership of stock of the liquidating corporation as
required by that section, gain or loss shall be recognized with respect
to each distribution and the tax liability for each of the years covered
in whole or in part by the liquidation shall be recomputed without
regard to the provisions of section 332 or section 334(b) and the amount
of any additional tax due upon such recomputation shall be promptly
paid.
Sec. 1.332-5 Distributions in liquidation as affecting minority
interests.
Upon the liquidation of a corporation in pursuance of a plan of
complete liquidation, the gain or loss of minority shareholders shall be
determined without regard to section 332, since it does not apply to
that part of distributions in liquidation received by minority
shareholders.
Sec. 1.332-6 Records to be kept and information to be filed with
return.
(a) Statement filed by recipient corporation. If any recipient
corporation received a liquidating distribution from the liquidating
corporation pursuant to a plan (whether or not that recipient
corporation has received or will receive other such distributions from
the liquidating corporation in other tax years as part of the same plan)
during the current tax year, such recipient corporation must include a
statement entitled, ``STATEMENT PURSUANT TO SECTION 332 BY [INSERT NAME
AND EMPLOYER IDENTIFICATION NUMBER (IF ANY) OF TAXPAYER], A CORPORATION
RECEIVING A LIQUIDATING DISTRIBUTION,'' on or with its return for such
year. If any recipient corporation is a controlled foreign corporation
(within the meaning of section 957), each United States shareholder
(within the meaning of section 951(b)) with respect thereto must include
this statement on or with its return. The statement must include--
(1) The name and employer identification number (if any) of the
liquidating corporation;
(2) The date(s) of all distribution(s) (whether or not pursuant to
the plan) by the liquidating corporation during the current tax year;
(3) The fair market value and basis of assets of the liquidating
corporation that have been or will be transferred to any recipient
corporation, aggregated as follows:
(i) Importation property distributed in a loss importation
transaction, as defined in Sec. 1.362-3(c)(2) and (3) (except that
``section 332 liquidation'' is substituted for ``section 362
transaction''), respectively;
(ii) Property with respect to which gain or loss was recognized on
the distribution;
(iii) Property not described in paragraph (a)(3)(i) or (ii) of this
section;
(4) The date and control number of any private letter ruling(s)
issued by the Internal Revenue Service in connection with the
liquidation;
(5) The following representation: THE PLAN OF COMPLETE LIQUIDATION
WAS ADOPTED ON [INSERT DATE (mm/dd/yyyy)]; and
(6) A representation by such recipient corporation either that--
(i) THE LIQUIDATION WAS COMPLETED ON [INSERT DATE (mm/dd/yyyy)]; or
(ii) THE LIQUIDATION IS NOT COMPLETE AND THE TAXPAYER HAS TIMELY
FILED [INSERT EITHER FORM 952, ``Consent To Extend the Time to Assess
Tax Under Section 332(b),'' OR NUMBER AND NAME OF THE SUCCESSOR FORM].
(b) Filings by the liquidating corporation. The liquidating
corporation must timely file Form 966, ``Corporate Dissolution or
Liquidation,'' (or its successor form) and its final Federal corporate
income tax return. See also section 6043 of the Code.
(c) Definitions. For purposes of this section:
(1) Plan means the plan of complete liquidation within the meaning
of section 332.
[[Page 77]]
(2) Recipient corporation means the corporation described in section
332(b)(1).
(3) Liquidating corporation means the corporation that makes a
distribution of property to a recipient corporation pursuant to the
plan.
(4) Liquidating distribution means a distribution of property made
by the liquidating corporation to a recipient corporation pursuant to
the plan.
(d) Substantiation information. Under Sec. 1.6001-1(e), taxpayers
are required to retain their permanent records and make such records
available to any authorized Internal Revenue Service officers and
employees. In connection with a liquidation described in this section,
these records should specifically include information regarding the
amount, basis, and fair market value of all distributed property, and
relevant facts regarding any liabilities assumed or extinguished as part
of such liquidation.
(e) Effective/applicability date. This section applies to any
taxable year beginning on or after May 30, 2006. However, taxpayers may
apply this section to any original Federal income tax return (including
any amended return filed on or before the due date (including
extensions) of such original return) timely filed on or after May 30,
2006. For taxable years beginning before May 30, 2006, see Sec. 1.332-6
as contained in 26 CFR part 1 in effect on April 1, 2006. Paragraph
(a)(3) of this section applies with respect to liquidations under
section 332 occurring on or after March 28, 2016, and also with respect
to liquidations under section 332 occurring before such date as a result
of an entity classification election under Sec. 301.7701-3 of this
chapter filed on or after March 28, 2016, unless such liquidation is
pursuant to a binding agreement that was in effect prior to March 28,
2016 and at all times thereafter.
[T.D. 9329, 72 FR 32797, June 14, 2007, as amended by T.D. 9759, 81 FR
17071, Mar. 28, 2016]
Sec. 1.332-7 Indebtedness of subsidiary to parent.
If section 332(a) is applicable to the receipt of the subsidiary's
property in complete liquidation, then no gain or loss shall be
recognized to the subsidiary upon the transfer of such properties even
though some of the properties are transferred in satisfaction of the
subsidiary's indebtedness to its parent. See section 337(b)(1). However,
any gain or loss realized by the parent corporation on such satisfaction
of indebtedness, shall be recognized to the parent corporation at the
time of the liquidation. For example, if the parent corporation
purchased its subsidiary's bonds at a discount and upon liquidation of
the subsidiary the parent corporation receives payment for the face
amount of such bonds, gain shall be recognized to the parent
corporation. Such gain shall be measured by the difference between the
cost or other basis of the bonds to the parent and the amount received
in payment of the bonds.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 9759, 81 FR 17071, Mar. 28, 2016]
Sec. 1.334-1 Basis of property received in liquidations.
(a) In general. Section 334 sets forth rules for determining a
distributee's basis in property received in a distribution in complete
liquidation of a corporation. The general rule is set forth in section
334(a) and provides that, if property is received in a distribution in
complete liquidation of a corporation and if gain or loss is recognized
on the receipt of the property, then the distributee's basis in the
property is the fair market value of the property at the time of the
distribution. However, if property is received in a complete liquidation
to which section 332 applies, including property received in
satisfaction of an indebtedness described in section 337(b)(1), see
section 334(b)(1) and paragraph (b) of this section.
(b) Liquidations under section 332--(1) General rule. Except as
otherwise provided in paragraph (b)(2) or (3) of this section, if a
corporation (P) meeting the ownership requirements of section 332(b)(1)
receives property from a subsidiary (S) in a complete liquidation to
which section 332 applies (section 332 liquidation), including property
received in a transfer in satisfaction of
[[Page 78]]
indebtedness that satisfies the requirements of section 337(b)(1), P's
basis in the property received is the same as S's basis in the property
immediately before the property was distributed. However, see Sec.
1.460-4(k)(3)(iv)(B)(2) for rules relating to adjustments to the basis
of certain contracts accounted for using a long-term contract method of
accounting that are acquired in a section 332 liquidation.
(2) Basis in property with respect to which gain or loss was
recognized. Except as otherwise provided in Subtitle A of the Internal
Revenue Code (Code) and this subchapter of the Income Tax Regulations,
if S recognizes gain or loss on the distribution of property to P in a
section 332 liquidation, P's basis in that property is the fair market
value of the property at the time of the distribution. Section
334(b)(1)(A) (certain tax-exempt distributions under section 337(b)(2));
see also, for example, Sec. 1.367(e)-2(b)(3)(i).
(3) Basis in importation property received in loss importation
transaction--(i) Purpose. The purpose of section 334(b)(1)(B) and this
paragraph (b)(3) is to modify the application of this section to prevent
P from importing a net built-in loss in a transaction described in
section 332. See paragraph (b)(3)(iii)(A) of this section for
definitions of terms used in this paragraph (b)(3).
(ii) Determination of basis. Notwithstanding paragraph (b)(1) of
this section, if a section 332 liquidation is a loss importation
transaction, P's basis in each importation property received from S in
the liquidation is an amount that is equal to the value of the property.
The basis of property received in a section 332 liquidation that is not
importation property received in a loss importation transaction is
determined under generally applicable basis rules without regard to
whether the liquidation also involves the receipt of importation
property in a loss importation transaction.
(iii) Operating rules--(A) In general. For purposes of section
334(b)(1)(B) and this paragraph (b)(3), the provisions of Sec. 1.362-3
(basis of importation property received in a loss importation
transaction) apply, adjusted as appropriate to apply to section 332
liquidations. Thus, when used in this paragraph (b)(3), the terms
``importation property,'' ``loss importation transaction,'' and
``value'' have the same meaning as in Sec. 1.362-3(c)(2), (3), and (4),
respectively, except that ``the section 332(b)(1) distributee
corporation'' is substituted for ``Acquiring'' and ``section 332
liquidation'' is substituted for ``section 362 transaction.'' Similarly,
when gain or loss on property would be owned or treated as owned by
multiple persons, the provisions of Sec. 1.362-3(d)(2) apply to
tentatively divide the property in applying this section, substituting
``section 332 liquidation'' for ``section 362 transaction'' and making
such other adjustments as necessary.
(B) Time for making determinations. For purposes of section
334(b)(1)(B) and this paragraph (b)(3)--
(1) P's basis in distributed property. P's basis in each property S
distributes to P in the section 332 liquidation is determined
immediately after S distributes each such property;
(2) Value of distributed property. The value of each property S
distributes to P in the section 332 liquidation is determined
immediately after S distributes the property;
(3) Importation property. The determination of whether each property
distributed by S is importation property is made as of the time S
distributes each such property;
(4) Loss importation transaction. The determination of whether a
section 332 liquidation is a loss importation transaction is made
immediately after S makes the final liquidating distribution to P.
(C) Effect of basis determination under this paragraph (b)(3)--(1)
Determination by reference to transferor's basis. A determination of
basis under section 334(b)(1)(B) and this paragraph (b)(3) is a
determination by reference to the transferor's basis, including for
purposes of sections 1223(2) and 7701(a)(43). However, solely for
purposes of applying section 755, a determination of basis under this
paragraph (b)(3) is treated as a determination not by reference to the
transferor's basis.
(2) Not tax-exempt income or noncapital, nondeductible expense. The
application of this paragraph (b)(3) does not
[[Page 79]]
give rise to an item treated as tax-exempt income under Sec. 1.1502-
32(b)(2)(ii) or as a noncapital, nondeductible expense under Sec.
1.1502-32(b)(2)(iii).
(3) No effect on earnings and profits. Any determination of basis
under this paragraph (b)(3) does not reduce or otherwise affect the
calculation of the all earnings and profits amount provided in Sec.
1.367(b)-2(d).
(iv) Examples. The examples in this paragraph (b)(3)(iv) illustrate
the application of section 334(b)(1)(B) and the provisions of this
paragraph (b)(3). Unless the facts indicate otherwise, the examples use
the following nomenclature and assumptions: USP is a domestic
corporation that has not elected to be an S corporation within the
meaning of section 1361(a)(1); FC, CFC1, and CFC2 are controlled foreign
corporations within the meaning of section 957(a), which are not engaged
in a U.S. trade or business, have no U.S. real property interests, and
have no other relationships, activities, or interests that would cause
their property to be subject to any tax imposed under subtitle A of the
Code (federal income tax); there is no applicable income tax treaty; and
all persons and transactions are unrelated. All other relevant facts are
set forth in the examples:
Example 1. Basic application of this paragraph (b)(3). (i)
Distribution of importation property in a loss importation transaction.
(A) Facts. USP owns the sole outstanding share of FC stock. FC owns
three assets, A1 (basis $40, value $50), A2 (basis $120, value $30), and
A3 (basis $140, value $20). On Date 1, FC distributes A1, A2, and A3 to
USP in a complete liquidation that qualifies under section 332.
(B) Importation property. Under Sec. 1.362-3(d)(2), the fact that
any gain or loss recognized by a CFC may affect an income inclusion
under section 951(a) does not alone cause gain or loss recognized by the
CFC to be treated as taken into account in determining a federal income
tax liability for purposes of this section. Thus, if FC had sold either
A1, A2, or A3 immediately before the transaction, no gain or loss
recognized on the sale would have been taken into account in determining
a federal income tax liability. Further, if USP had sold A1, A2, or A3
immediately after the transaction, USP would take into account any gain
or loss recognized on the sale in determining its federal income tax
liability. Therefore, A1, A2, and A3 are all importation properties. See
paragraph (b)(3)(iii)(A) of this section and Sec. 1.362-3(c)(2).
(C) Loss importation transaction. Immediately after the
distribution, USP's aggregate basis in the importation properties, A1,
A2, and A3, would, but for section 334(b)(1)(B) and this section, be
$300 ($40 + $120 + $140) and the properties' aggregate value would be
$100 ($50 + $30 + $20). Therefore, the importation properties' aggregate
basis would exceed their aggregate value and the distribution is a loss
importation transaction. See paragraph (b)(3)(iii)(A) of this section
and Sec. 1.362-3(c)(3).
(D) Basis of importation property distributed in loss importation
transaction. Because the importation properties, A1, A2, and A3, were
transferred in a loss importation transaction, the basis in each of the
importation properties received is equal to its value immediately after
FC distributes the property. Accordingly, USP's basis in A1 is $50;
USP's basis in A2 is $30; and USP's basis in A3 is $20.
(ii) Distribution of both importation and non-importation property
in a loss importation transaction. (A) Facts. The facts are the same as
in paragraph (i)(A) of this Example 1 except that FC is engaged in a
U.S. trade or business and A3 is used in that U.S. trade or business.
(B) Importation property. A1 and A2 are importation properties for
the reasons set forth in paragraph (i)(B) of this Example 1. However, if
FC had sold A3 immediately before the transaction, FC would take into
account any gain or loss recognized on the sale in determining its
federal income tax liability. Therefore, A3 is not importation property.
See paragraph (b)(3)(iii)(A) of this section and Sec. 1.362-3(c)(2).
(C) Loss importation transaction. Immediately after the
distribution, USP's aggregate basis in the importation properties, A1
and A2, would, but for section 334(b)(1)(B) and this section, be $160
($40 + $120). Further, the properties' aggregate value would be $80 ($50
+ $30). Therefore, the importation properties' aggregate basis would
exceed their aggregate value and the distribution is a loss importation
transaction. See paragraph (b)(3)(iii)(A) of this section and Sec.
1.362-3(c)(3).
(D) Basis of importation property distributed in loss importation
transaction. Because the importation properties, A1 and A2, were
transferred in a loss importation transaction, the basis in each of the
importation properties received is equal to its value immediately after
FC distributes the property. Accordingly, USP's basis in A1 is $50 and
USP's basis in A2 is $30.
(E) Basis of other property. Because A3 is not importation property
distributed in a loss importation transaction, USP's basis in A3 is
determined under generally applicable basis rules. Accordingly, USP's
basis in A3 is $140, the adjusted basis that FC had in the
[[Page 80]]
property immediately before the distribution. See section 334(b)(1).
(iii) FC not wholly owned. The facts are the same as in paragraph
(i)(A) of this Example 1 except that USP owns only 80% of the sole
outstanding class of FC stock and the remaining 20% is owned by
individual X. Further, on Date 1 and pursuant to the plan of
liquidation, FC distributes A1 and A2 to USP and A3 to X. A1 and A2 are
importation properties, the distribution to USP is a loss importation
transaction, and USP's bases in A1 and A2 are equal to their value ($50
and $30, respectively) for the reasons set forth in paragraphs (ii)(C)
and (D) of this Example 1. Under section 334(a), X's basis in A3 is $20.
(iv) Importation property, no net built in loss. (A) Facts. The
facts are the same as in paragraph (i)(A) of this Example 1 except that
the value of A2 is $230.
(B) Importation property. A1, A2, and A3, are importation properties
for the reasons set forth in paragraph (i)(B) of this Example 1.
(C) Loss importation transaction. Immediately after the
distribution, USP's aggregate basis in the importation properties, A1,
A2, and A3, would, but for section 334(b)(1)(B) and this section, be
$300 ($40 + $120 + $140). However, the properties' aggregate value would
also be $300 ($50 + $230 + $20). Therefore, the importation properties'
aggregate basis would not exceed their aggregate value and the
distribution is not a loss importation transaction. See paragraph
(b)(3)(iii)(A) of this section and Sec. 1.362-3(c)(3).
(D) Basis of importation property not distributed in loss
importation transaction. Because the importation properties, A1, A2, and
A3, were not distributed in a loss importation transaction, the basis of
each of the importation properties is determined under the generally
applicable basis rules. Accordingly, immediately after the distribution,
USP's basis in A1 is $40, USP's basis in A2 is $120, and USP's basis in
A3 is $140, the adjusted bases that FC had in the properties immediately
before the distribution. See section 334(b)(1).
(v) CFC stock as importation property distributed in loss
importation transaction. (A) Facts. USP owns the sole outstanding share
of FC stock. FC owns the sole outstanding share of CFC1 stock (basis
$80, value $100) and the sole outstanding share of CFC2 stock (basis
$100, value $5). On Date 1, FC distributes its shares of CFC1 and CFC2
stock to USP in a complete liquidation that qualifies under section 332.
(B) Importation property. No special rule applies to the treatment
of property that is the stock of a CFC. Thus, if FC had sold either the
CFC1 share or the CFC2 share immediately before the transaction, no gain
or loss recognized on the sale would have been taken into account in
determining a federal income tax liability. Further, if USP had sold
either the CFC1 share or the CFC2 share immediately after the
transaction, USP would take into account any gain or loss recognized on
the sale in determining its federal income tax liability. Thus, the CFC1
share and the CFC2 share are importation property. See paragraph
(b)(3)(iii)(A) of this section and Sec. 1.362-3(c)(2).
(C) Loss importation transaction. Immediately after the
distribution, USP's aggregate basis in importation property (the CFC1
share and the CFC2 share) would, but for section 334(b)(1)(B) and this
section, be $180 ($80 + $100) and the shares' aggregate value is $105
($100 + $5). Therefore, the importation property's aggregate basis would
exceed their aggregate value and the distribution is a loss importation
transaction. See paragraph (b)(3)(iii)(A) of this section and Sec.
1.362-3(c)(3).
(D) Basis of importation property distributed in loss importation
transaction. Because the importation property (the CFC1 share and the
CFC2 share) was transferred in a loss importation transaction, USP's
basis in each of the shares received is equal to its value immediately
after FC distributes the shares. Accordingly, USP's basis in the CFC1
share is $100 and USP's basis in the CFC2 share is $5.
Example 2. Multiple step liquidation. (i) Facts. USP owns the sole
outstanding share of FC stock. On January 1 of year 1, FC adopts a plan
of liquidation. FC makes the following distributions to USP in a
transaction that qualifies as a complete liquidation under section 332.
In year 1, FC distributes A1 and, immediately before the distribution,
FC's basis in A1 is $100 and A1's value is $120. In Year 2, FC
distributes A2, and, immediately before the distribution, FC's basis in
A2 is $100 and A2's value is $120. In year 3, in its final liquidating
distribution, FC distributes A3 and, immediately before the
distribution, FC's basis in A3 is $100 and A3's value is $120. As of the
time of the final distribution, USP had depreciated the bases of A1 and
A2 to $90 and $95, respectively; the value of A1 had appreciated to
$160; and, the value of A2 has declined to $0.
(ii) Importation property. If FC had sold either A1, A2, or A3
immediately before it was distributed, no gain or loss recognized on the
sale would have been taken into account in determining a federal income
tax liability. Further, if USP had sold either A1, A2, or A3 immediately
after it was distributed, USP would take into account any gain or loss
recognized on the sale in determining its federal income tax liability.
Therefore, A1, A2, and A3 are all importation properties. See paragraph
(b)(3)(iii)(A) of this section and Sec. 1.362-3(c)(2).
(iii) Loss importation transaction. Immediately after it was
distributed, USP's basis in each of the importation properties, A1, A2,
and A3, would, but for section 334(b)(1)(B)
[[Page 81]]
and this section, have been $100. Further, immediately after each such
property was distributed, its value was $120. Thus, the properties'
aggregate basis, $300, would not have exceeded the properties' aggregate
value, $360. Accordingly, the distribution is not a loss importation
transaction irrespective of the fact that, when the liquidation was
completed, the properties' aggregate basis was $285 and the properties'
aggregate value was $280. See paragraph (b)(3)(iii)(B) of this section
and Sec. 1.362-3(c)(3).
(iv) Basis of importation property not distributed in loss
importation transaction. Because the importation properties, A1, A2, and
A3, were not distributed in a loss importation transaction, the basis of
each of the importation properties is determined under the generally
applicable basis rules. Accordingly, USP takes each of the properties
with a basis of $100 and, immediately after the final distribution, has
an adjusted basis of $90 in A1 (USP's $100 basis less the $10
depreciation), $95 in A2 (USP's $100 basis less the $5 depreciation),
and $100 in A3. See section 334(b).
(c) Applicability date. This section applies with respect to
liquidations occurring on or after March 28, 2016, and also with respect
to liquidations occurring before such date as a result of an entity
classification election under Sec. 301.7701-3 of this chapter filed on
or after March 28, 2016, unless such liquidation is pursuant to a
binding agreement that was in effect prior to March 28, 2016 and at all
times thereafter. In addition, taxpayers may apply this section to any
section 332 liquidation occurring after October 22, 2004.
[T.D. 9759, 81 FR 17071, Mar. 28, 2016]
Sec. 1.336-0 Table of contents.
This section lists captions contained in Sec. Sec. 1.336-1, 1.336-
2, 1.336-3, 1.336-4, and 1.336-5.
Sec. 1.336-1 General principles, nomenclature, and definitions for a
section 336(e) election.
(a) Overview.
(1) In general.
(2) Consistency rules.
(b) Definitions.
(1) Seller.
(2) Purchaser.
(3) Target; S corporation target; old target; new target.
(4) S corporation shareholders.
(5) Disposed of; disposition.
(i) In general.
(ii) Exception for disposition of stock in certain section 355
transactions.
(iii) Transactions with related persons.
(iv) No consideration paid.
(v) Disposed of stock reacquired by certain persons.
(6) Qualified stock disposition.
(i) In general.
(ii) Overlap with qualified stock purchase.
(A) In general.
(B) Exception.
(7) 12-month disposition period.
(8) Disposition date.
(9) Disposition date assets.
(10) Domestic corporation.
(11) Section 336(e) election.
(12) Related persons.
(13) Liquidation.
(14) Deemed asset disposition.
(15) Deemed disposition tax consequences.
(16) 80-percent purchaser.
(17) Recently disposed stock.
(18) Nonrecently disposed stock.
(c) Nomenclature.
Sec. 1.336-2 Availability, mechanics, and consequences of section
336(e) election.
(a) Availability of election.
(b) Deemed transaction.
(1) Dispositions not described in section 355(d)(2) or (e)(2).
(i) Old target--deemed asset disposition.
(A) In general.
(B) Gains and losses.
(1) Gains.
(2) Losses.
(i) In general.
(ii) Stock distributions.
(iii) Amount and allocation of disallowed loss.
(iv) Tiered targets.
(3) Examples.
(C) Tiered targets.
(ii) New target--deemed purchase.
(iii) Old target and seller--deemed liquidation.
(A) In general.
(B) Tiered targets.
(iv) Seller--distribution of target stock.
(v) Seller--retention of target stock.
(2) Dispositions described in section 355(d)(2) or (e)(2).
(i) Old target--deemed asset disposition.
(A) In general.
(1) Old target not deemed to liquidate.
(2) Exception.
(B) Gains and losses.
(1) Gains.
(2) Losses.
(i) In general.
(ii) Stock distributions.
(iii) Amount and allocation of disallowed loss.
(iv) Tiered targets.
(3) Examples.
(C) Tiered targets.
(ii) Old target--deemed purchase.
(A) In general.
(B) Tiered targets.
[[Page 82]]
(C) Application of section 197(f)(9), section 1091, and other
provisions to old target.
(iii) Seller--distribution of target stock.
(A) In general.
(B) Tiered targets.
(iv) Seller--retention of target stock.
(v) Qualification under section 355.
(vi) Earnings and profits.
(c) Purchaser.
(d) Minority shareholders.
(1) In general.
(2) Sale, exchange, or distribution of target stock by a minority
shareholder.
(3) Retention of target stock by a minority shareholder.
(e) Treatment consistent with an actual asset disposition.
(f) Treatment of target under other provisions of the Internal
Revenue Code.
(g) Special rules.
(1) Target as two corporations.
(2) Treatment of members of a consolidated group.
(3) International provisions.
(i) Source and foreign tax credit.
(ii) Allocation of foreign taxes.
(A) General rule.
(B) Taxes imposed on partnerships and disregarded entities.
(iii) Disallowance of foreign tax credits under section 901(m).
(h) Making the section 336(e) election.
(1) Consolidated group.
(2) Non-consolidated/non-S corporation target.
(3) S corporation target.
(4) Tiered targets.
(5) Section 336(e) election statement.
(i) In general.
(ii) Target subsidiaries.
(6) Contents of section 336(e) election statement.
(7) Asset Allocation Statement.
(8) Examples.
(i) [Reserved]
(j) Protective section 336(e) election.
(k) Examples.
Sec. 1.336-3 Aggregate deemed asset disposition price; various aspects
of taxation of the deemed asset disposition.
(a) Scope.
(b) Determination of ADADP.
(1) General rule.
(2) Time and amount of ADADP.
(i) Original determination.
(ii) Redetermination of ADADP.
(c) Grossed-up amount realized on the disposition of recently
disposed stock of target.
(1) Determination of amount.
(2) Example.
(d) Liabilities of old target.
(1) In general.
(2) Time and amount of liabilities.
(e) Deemed disposition tax consequences.
(f) Other rules apply in determining ADADP.
(g) Examples.
Sec. 1.336-4 Adjusted grossed-up basis.
(a) Scope.
(b) Modifications to the principles in Sec. 1.338-5.
(1) Purchasing corporation; purchaser.
(2) Acquisition date; disposition date.
(3) Section 338 election; section 338(h)(10) election; section
336(e) election.
(4) New target; old target.
(5) Recently purchased stock; recently disposed stock.
(6) Nonrecently purchased stock; nonrecently disposed stock.
(c) Gain recognition election.
(1) In general.
(2) 80-percent purchaser.
(3) Non-80-percent purchaser.
(4) Gain recognition election statement.
(d) Examples.
Sec. 1.336-5 Effective/applicability date.
[T.D. 9619, 78 FR 28474, May 15, 2013]
Sec. 1.336-1 General principles, nomenclature, and definitions
for a section 336(e) election.
(a) Overview--(1) In general. Section 336(e) authorizes the
promulgation of regulations under which, in certain circumstances, a
sale, exchange, or distribution of the stock of a corporation may be
treated as an asset sale. This section and Sec. Sec. 1.336-2 through
1.336-5 provide the rules for and consequences of making such election.
This section provides the definitions and nomenclature. Generally,
except to the extent inconsistent with section 336(e), the results of
section 336(e) should coincide with those of section 338(h)(10).
Accordingly, to the extent not inconsistent with section 336(e) or these
regulations, the principles of section 338 and the regulations under
section 338 apply for purposes of these regulations. For example, Sec.
1.338(h)(10)-1(d)(8), concerning the availability of the section 453
installment method, may apply with respect to section 336(e).
(2) Consistency rules. In general, the principles of Sec. 1.338-8,
concerning asset and stock consistency, apply with respect to section
336(e). However, for this purpose, the application of Sec. 1.338-
8(b)(1) is modified such that Sec. 1.338-8(b)(1)(iii) applies to an
asset if the asset is owned, immediately after its acquisition and on
the disposition date, by a person or by a related person (as
[[Page 83]]
defined in Sec. 1.336-1(b)(12)) to a person that acquires, by sale,
exchange, distribution, or any combination thereof, five percent or
more, by value, of the stock of target in the qualified stock
disposition.
(b) Definitions. For purposes of Sec. Sec. 1.336-1 through 1.336-5
(except as otherwise provided):
(1) Seller. The term seller means any domestic corporation that
makes a qualified stock disposition of stock of another corporation.
Seller includes both a transferor and a distributor of target stock.
Generally, all members of a consolidated group that dispose of target
stock are treated as a single seller. See Sec. 1.336-2(g)(2).
(2) Purchaser. The term purchaser means one or more persons that
acquire or receive the stock of another corporation in a qualified stock
disposition. A purchaser includes both a transferee and a distributee of
target stock.
(3) Target; S corporation target; old target; new target. The term
target means any domestic corporation the stock of which is sold,
exchanged, or distributed in a qualified stock disposition. An S
corporation target is a target that is an S corporation immediately
before the disposition date; any other target is a non-S corporation
target. Except as the context otherwise requires, a reference to target
includes a reference to an S corporation target. In the case of a
transaction not described in section 355(d)(2) or (e)(2), old target
refers to target for periods ending on or before the close of target's
disposition date and new target refers to target for subsequent periods.
In the case of a transaction described in section 355(d)(2) or (e)(2),
old target refers to target for periods ending on or before the
disposition date as well as for subsequent periods.
(4) S corporation shareholders. S corporation shareholders are the S
corporation target's shareholders. Unless otherwise provided, a
reference to S corporation shareholders refers both to S corporation
shareholders who dispose of and those who do not dispose of their S
corporation target stock.
(5) Disposed of; disposition--(i) In general. The term disposed of
refers to a transfer of stock in a disposition. The term disposition
means any sale, exchange, or distribution of stock, but only if--
(A) The basis of the stock in the hands of the purchaser is not
determined in whole or in part by reference to the adjusted basis of
such stock in the hands of the person from whom the stock is acquired,
is not determined under section 1014(a) (relating to property acquired
from a decedent), or is not determined under section 1022 (relating to
the basis of property acquired from certain decedents who died in 2010);
(B) Except as provided in paragraph (b)(5)(ii) of this section, the
stock is not sold, exchanged, or distributed in a transaction to which
section 351, 354, 355, or 356 applies and is not sold, exchanged, or
distributed in any transaction described in regulations in which the
transferor does not recognize the entire amount of the gain or loss
realized in the transaction; and
(C) The stock is not sold, exchanged, or distributed to a related
person.
(ii) Exception for disposition of stock in certain section 355
transactions. Notwithstanding paragraph (b)(5)(i)(B) of this section, a
distribution of stock to a person who is not a related person in a
transaction in which the full amount of stock gain would be recognized
pursuant to section 355(d)(2) or (e)(2) shall be considered a
disposition.
(iii) Transactions with related persons. In determining whether
stock is sold, exchanged, or distributed to a related person, the
principles of section 338(h)(3)(C) and Sec. 1.338-3(b)(3) shall apply.
(iv) No consideration paid. Stock in target may be considered
disposed of if, under general principles of tax law, seller is
considered to sell, exchange, or distribute stock of target
notwithstanding that no amount may be paid for (or allocated to) the
stock.
(v) Disposed of stock reacquired by certain persons. Stock disposed
of by seller to another person under this section that is reacquired by
seller or a member of seller's consolidated group during the 12-month
disposition period shall not be considered as disposed of. Similarly,
stock disposed of by an S corporation shareholder to another
[[Page 84]]
person under this section that is reacquired by the S corporation
shareholder or by a person related (within the meaning of paragraph
(b)(12) of this section) to the S corporation shareholder during the 12-
month disposition period shall not be considered as disposed of.
(6) Qualified stock disposition--(i) In general. The term qualified
stock disposition means any transaction or series of transactions in
which stock meeting the requirements of section 1504(a)(2) of a domestic
corporation is either sold, exchanged, or distributed, or any
combination thereof, by another domestic corporation or by the S
corporation shareholders in a disposition, within the meaning of
paragraph (b)(5) of this section, during the 12-month disposition
period.
(ii) Overlap with qualified stock purchase--(A) In general. Except
as provided in paragraph (b)(6)(ii)(B) of this section, a transaction
satisfying the definition of a qualified stock disposition under
paragraph (b)(6)(i) of this section, which also qualifies as a qualified
stock purchase (as defined in section 338(d)(3)), will not be treated as
a qualified stock disposition.
(B) Exception. If, as a result of the deemed sale of old target's
assets pursuant to a section 336(e) election, there would be, but for
paragraph (b)(6)(ii)(A) of this section, a qualified stock disposition
of the stock of a subsidiary of target, then paragraph (b)(6)(ii)(A)
shall not apply to the disposition of the stock of the subsidiary.
(7) 12-month disposition period. The term 12-month disposition
period means the 12-month period beginning with the date of the first
sale, exchange, or distribution of stock included in a qualified stock
disposition.
(8) Disposition date. The term disposition date means, with respect
to any corporation, the first day on which there is a qualified stock
disposition with respect to the stock of such corporation.
(9) Disposition date assets. Disposition date assets are the assets
of target held at the beginning of the day after the disposition date
(but see Sec. 1.338-1(d) (regarding certain transactions on the
disposition date)).
(10) Domestic corporation. The term domestic corporation has the
same meaning as in Sec. 1.338-2(c)(9).
(11) Section 336(e) election. A section 336(e) election is an
election to apply section 336(e) to target. A section 336(e) election is
made by making an election for target under Sec. 1.336-2(h).
(12) Related persons. Two persons are related if stock of a
corporation owned by one of the persons would be attributed under
section 318(a), other than section 318(a)(4), to the other. However,
neither section 318(a)(2)(A) nor section 318(a)(3)(A) apply to attribute
stock ownership from a partnership to a partner, or from a partner to a
partnership, if such partner owns, directly or indirectly, interests
representing less than five percent of the value of the partnership.
(13) Liquidation. Any reference to a liquidation is treated as a
reference to the transfer described in Sec. 1.336-2(b)(1)(iii)
notwithstanding its ultimate characterization for Federal income tax
purposes.
(14) Deemed asset disposition. The deemed sale of old target's
assets is, without regard to its characterization for Federal income tax
purposes, referred to as the deemed asset disposition.
(15) Deemed disposition tax consequences. Deemed disposition tax
consequences refers to, in the aggregate, the Federal income tax
consequences (generally, the income, gain, deduction, and loss) of the
deemed asset disposition. Deemed disposition tax consequences also
refers to the Federal income tax consequences of the transfer of a
particular asset in the deemed asset disposition.
(16) 80-percent purchaser. An 80-percent purchaser is any purchaser
that, after application of the attribution rules of section 318(a),
other than section 318(a)(4), owns 80 percent or more of the voting
power or value of target stock.
(17) Recently disposed stock. The term recently disposed stock means
any stock in target that is not held by seller, a member of seller's
consolidated group, or an S corporation shareholder immediately after
the close of the disposition date and that was disposed of by
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seller, a member of seller's consolidated group, or an S corporation
shareholder during the 12-month disposition period.
(18) Nonrecently disposed stock. The term nonrecently disposed stock
means stock in target that is held on the disposition date by a
purchaser or a person related (as described in Sec. 1.336-1(b)(12)) to
the purchaser who owns, on the disposition date, with the application of
section 318(a), other than section 318(a)(4), at least 10 percent of the
total voting power or value of the stock of target and that is not
recently disposed stock.
(c) Nomenclature. For purposes of Sec. Sec. 1.336-1 through 1.336-
5, except as otherwise provided, Parent, Seller, Target, Sub, S
Corporation Target, and Target Subsidiary are domestic corporations and
A, B, C, and D are individuals, none of whom are related to Parent,
Seller, Target, Sub, S Corporation Target, Target Subsidiary, or each
other.
[T.D. 9619, 78 FR 28474, May 15, 2013, as amended by T.D. 9811, 82 FR
6237, Jan. 19, 2017]
Sec. 1.336-2 Availability, mechanics, and consequences of section
336(e) election.
(a) Availability of election. A section 336(e) election is available
if seller or S corporation shareholder(s) dispose of stock of another
corporation (target) in a qualified stock disposition (as defined in
Sec. 1.336-1(b)(6)). A section 336(e) election is irrevocable. A
section 336(e) election is not available for transactions described in
section 336(e) that do not constitute qualified stock dispositions.
(b) Deemed transaction--(1) Dispositions not described in section
355(d)(2) or (e)(2)--(i) Old target--deemed asset disposition--(A) In
general. This paragraph (b)(1) provides the Federal income tax
consequences of a section 336(e) election made with respect to a
qualified stock disposition not described, in whole or in part, in
section 355(d)(2) or (e)(2). For the Federal income tax consequences of
a section 336(e) election made with respect to a qualified stock
disposition described, in whole or in part, in section 355(d)(2) or
(e)(2), see paragraph (b)(2) of this section. In general, if a section
336(e) election is made, seller (or S corporation shareholders) are
treated as not having sold, exchanged, or distributed the stock disposed
of in the qualified stock disposition. Instead, old target is treated as
selling its assets to an unrelated person in a single transaction at the
close of the disposition date (but before the deemed liquidation
described in paragraph (b)(1)(iii) of this section) in exchange for the
aggregate deemed asset disposition price (ADADP) as determined under
Sec. 1.336-3. ADADP is allocated among the disposition date assets in
the same manner as the aggregate deemed sale price (ADSP) is allocated
under Sec. Sec. 1.338-6 and 1.338-7 in order to determine the amount
realized from each of the sold assets. Old target realizes the deemed
disposition tax consequences from the deemed asset disposition before
the close of the disposition date while old target is owned by seller or
the S corporation shareholders. If old target is an S corporation
target, old target's S election continues in effect through the close of
the disposition date (including the time of the deemed asset disposition
and the deemed liquidation) notwithstanding section 1362(d)(2)(B). Also,
if old target is an S corporation target (but not a qualified subchapter
S subsidiary), any direct or indirect subsidiaries of old target that
old target has elected to treat as qualified subchapter S subsidiaries
under section 1361(b)(3) remain qualified subchapter S subsidiaries
through the close of the disposition date.
(B) Gains and losses--(1) Gains. Except as provided in Sec.
1.338(h)(10)-1(d)(8) (regarding the installment method), old target
shall recognize all of the gains realized on the deemed asset
disposition.
(2) Losses--(i) In general. Except as provided in paragraphs
(b)(1)(i)(B)(2)(ii), (iii), and (iv) of this section, old target shall
recognize all of the losses realized on the deemed asset disposition.
(ii) Stock distributions. Notwithstanding paragraphs (b)(1)(i)(A)
and (b)(1)(iii)(A) of this section, for purposes of determining the
amount of target's losses that are disallowed on the deemed asset
disposition, seller is still treated as selling, exchanging, or
distributing its target stock disposed
[[Page 86]]
of in the 12-month disposition period. If target's losses realized on
the deemed sale of all of its assets exceed target's gains realized (a
net loss), the portion of such net loss attributable to a distribution
of target stock during the 12-month disposition period is disallowed.
The total amount of disallowed loss and the allocation of disallowed
loss is determined in the manner provided in paragraphs
(b)(1)(i)(B)(2)(iii) and (iv) of this section.
(iii) Amount and allocation of disallowed loss. The total disallowed
loss pursuant to paragraph (b)(1)(i)(B)(2)(ii) of this section shall be
determined by multiplying the net loss realized on the deemed asset
disposition by the disallowed loss fraction. The numerator of the
disallowed loss fraction is the value of target stock, determined on the
disposition date, distributed by seller during the 12-month disposition
period, whether or not a part of the qualified stock disposition (for
example, stock distributed to a related person), and the denominator of
the disallowed loss fraction is the sum of the value of target stock,
determined on the disposition date, disposed of by sale or exchange in
the qualified stock disposition during the 12-month disposition period
and the value of target stock, determined on the disposition date,
distributed by seller during the 12-month disposition period, whether or
not a part of the qualified stock disposition. The amount of the
disallowed loss allocated to each asset disposed of in the deemed asset
disposition is determined by multiplying the total amount of the
disallowed loss by the loss allocation fraction. The numerator of the
loss allocation fraction is the amount of loss realized with respect to
the asset and the denominator of the loss allocation fraction is the sum
of the amount of losses realized with respect to each loss asset
disposed of in the deemed asset disposition. To the extent old target's
losses from the deemed asset disposition are not disallowed under this
paragraph, such losses may be disallowed under other provisions of the
Internal Revenue Code or general principles of tax law, in the same
manner as if such assets were actually sold to an unrelated person.
(iv) Tiered targets. If an asset of target is the stock of a
subsidiary corporation of target for which a section 336(e) election is
made, any gain or loss realized on the deemed sale of the stock of the
subsidiary corporation is disregarded in determining the amount of
disallowed loss. For purposes of determining the amount of disallowed
loss on the deemed asset disposition by a subsidiary of target for which
a section 336(e) election is made, the amount of subsidiary stock deemed
sold in the deemed asset disposition of target's assets multiplied by
the disallowed loss fraction with respect to the corporation that is
deemed to have disposed of stock of the subsidiary is considered to have
been distributed. In determining the disallowed loss fraction with
respect to the deemed asset disposition of any subsidiary of target,
disregard any sale, exchange, or distribution of its stock that was made
after the disposition date if such stock was included in the deemed
asset disposition of the corporation deemed to have disposed of the
subsidiary stock.
(3) Examples. The following examples illustrate this paragraph
(b)(1)(i)(B).
Example 1. (i) Facts. Parent owns 60 of the 100 outstanding shares
of the common stock of Seller, Seller's only class of stock outstanding.
The remaining 40 shares of the common stock of Seller are held by
shareholders unrelated to Seller or each other. Seller owns 95 of the
100 outstanding shares of Target common stock, and all 100 shares of
Target preferred stock that is described in section 1504(a)(4). The
remaining 5 shares of Target common stock are owned by A. On January 1
of Year 1, Seller sells 72 shares of Target common stock to B for
$3,520. On July 1 of Year 1, Seller distributes 12 shares of Target
common stock to Parent and 8 shares to its unrelated shareholders in a
distribution described in section 301. Seller retains 3 shares of Target
common stock and all 100 shares of Target preferred stock immediately
after July 1. The value of Target common stock on July 1 is $60 per
share. The value of Target preferred stock on July 1 is $36 per share.
Target has three assets, Asset 1, a Class IV asset, with a basis of
$1,776 and a fair market value of $2,000, Asset 2, a Class V asset, with
a basis of $2,600 and a fair market value of $2,750, and Asset 3, a
Class V asset, with a basis of $3,900 and a fair market value of $3,850.
Seller incurred no selling costs on the sale of the 72 shares of Target
common stock to B. Target has no liabilities. A section 336(e) election
is made.
[[Page 87]]
(ii) Consequences--Deemed Asset Sale. Because at least 80 percent
((72 + 8)/100) of Target stock, other than stock described in section
1504(a)(4), was disposed of (within the meaning of Sec. 1.336-1(b)(5))
by Seller during the 12-month disposition period, a qualified stock
disposition occurred. July 1 of Year 1, the first day on which there was
a qualified stock disposition with respect to Target stock, is the
disposition date. Accordingly, pursuant to the section 336(e) election,
for Federal income tax purposes, Seller generally is not treated as
selling the 72 shares of Target common stock sold to B or distributing
the 8 shares of Target common stock distributed to its unrelated
shareholders. However, Seller is still treated as distributing the 12
shares of Target common stock distributed to Parent because Seller and
Parent are related persons within the meaning of Sec. 1.336-1(b)(12)
and accordingly the 12 shares are not part of the qualified stock
disposition. Target is treated as if, on July 1, it sold all of its
assets to an unrelated person in exchange for the ADADP, $8,000, which
is allocated $2,000 to Asset 1, $2,500 to Asset 2, and $3,500 to Asset 3
(see Example 1 of Sec. 1.336-3(g) for the determination and allocation
of ADADP).
(iii) Consequences--Amount and Allocation of Disallowed Loss. Old
Target realized a net loss of $276 on the deemed asset disposition ($224
gain realized on Asset 1, $100 loss realized on Asset 2, and $400 loss
realized on Asset 3). However, 20 shares of Target common stock were
distributed by Seller during the 12-month disposition period (8 shares
distributed to Seller's unrelated shareholders in the qualified stock
disposition plus 12 shares distributed to Parent that were not part of
the qualified stock disposition). Therefore, because there was a net
loss realized on the deemed asset disposition and a portion of the stock
of Target was distributed during the 12-month disposition period, a
portion of the loss on the deemed sale of each of Target's loss assets
is disallowed. The total amount of disallowed loss equals $60 ($276 net
loss realized on the deemed disposition of Assets 1, 2, and 3 multiplied
by the disallowed loss fraction, the numerator of which is $1,200, the
value on July 1, the disposition date, of the 20 shares of Target common
stock distributed during the 12-month disposition period, and the
denominator of which is $5,520, the sum of $4,320, the value on July 1
of the 72 shares of Target common stock sold to B and $1,200, the value
on July 1 of the 20 shares of Target common stock distributed during the
12-month disposition period). The portion of the disallowed loss
allocated to Asset 2 is $12 ($60 total disallowed loss multiplied by the
loss allocation fraction, the numerator of which is $100, the loss
realized on the deemed disposition of Asset 2 and the denominator of
which is $500, the sum of the losses realized on the deemed disposition
of Assets 2 and 3). The portion of the disallowed loss allocated to
Asset 3 is $48 ($60 total disallowed loss multiplied by the loss
allocation fraction, the numerator of which is $400, the loss realized
on the deemed disposition of Asset 3 and the denominator of which is
$500, the sum of the losses realized on the deemed disposition of Assets
2 and 3). Accordingly, Old Target recognizes $224 of gain on Asset 1,
recognizes $88 of loss on Asset 2 (realized loss of $100 less allocated
disallowed loss of $12), and recognizes $352 of loss on Asset 3
(realized loss of $400 less allocated disallowed loss of $48) or a
recognized net loss of $216 on the deemed asset disposition.
Example 2. (i) Facts. The facts are the same as in Example 1 except
that Asset 2 is the stock of Target Subsidiary, a corporation of which
Target owns 100 of the 110 shares of common stock, the only outstanding
class of Target Subsidiary stock. The remaining 10 shares of Target
Subsidiary stock are owned by D. The value of Target Subsidiary stock on
July 1 is $27.50 per share. Target Subsidiary has two assets, Asset 4, a
Class IV asset, with a basis of $800 and a fair market value of $1,000,
and Asset 5, a Class IV asset, with a basis of $2,200 and a fair market
value of $2,025. Target Subsidiary has no liabilities. A section 336(e)
election with respect to Target Subsidiary is also made.
(ii) Consequences--Target. The ADADP on the deemed sale of Target's
assets is determined and allocated in the same manner as in Example 1.
However, Target's loss realized on the deemed sale of Target Subsidiary
is disregarded in determining the amount of disallowed loss on the
deemed asset disposition of Target's assets. Thus, the net loss is only
$176 ($224 gain realized on Asset 1 and $400 loss realized on Asset 3),
and the amount of disallowed loss equals $38.26 ($176 net loss
multiplied by the disallowed loss fraction with respect to Target stock,
$1,200/$5,520). The entire disallowed loss is allocated to Asset 3.
(iii) Consequences--Target Subsidiary. The deemed sale of the stock
of Target Subsidiary is disregarded and instead Target Subsidiary is
deemed to sell all of its assets to an unrelated person. The ADADP on
the deemed asset disposition of Target Subsidiary is $2,750, which is
allocated $909 to Asset 4 and $1,841 to Asset 5 (see Example 2 of Sec.
1.336-3(g) for the determination and allocation of ADADP). Old Target
Subsidiary realized $109 of gain on Asset 4 and realized $359 of loss on
Asset 5 in the deemed asset disposition. Although Old Target Subsidiary
realized a net loss of $250 on the deemed asset disposition ($109 gain
on Asset 4 and $359 loss on Asset 5), a portion of this net loss is
disallowed because a portion of Target stock was distributed during the
12-month disposition period. For purposes of determining the amount of
disallowed loss on the deemed sale
[[Page 88]]
of the assets of Target Subsidiary, the portion of the 100 shares of
Target Subsidiary stock deemed sold by Target pursuant to the section
336(e) election for Target Subsidiary multiplied by the disallowed loss
fraction with respect to Target stock is treated as having been
distributed. Thus, for purposes of determining the amount of disallowed
loss on the deemed asset disposition of Target Subsidiary's assets,
21.74 shares of Target Subsidiary stock (100 shares of Target Subsidiary
stock owned by Target multiplied by the disallowed loss fraction with
respect to Target stock, $1,200/$5,520) are treated as having been
distributed by Target during the 12-month disposition period. The total
amount of disallowed loss with respect to the deemed asset disposition
of Target Subsidiary's assets equals $54 ($250 net loss realized on the
deemed disposition of Assets 4 and 5 multiplied by the disallowed loss
fraction with respect to Target Subsidiary, the numerator of which is
$598, the value on July 1, the disposition date, of the 21.74 shares of
Target Subsidiary stock deemed distributed during the 12-month
disposition period (21.74 shares x $27.50) and the denominator of which
is $2,750 (the sum of $2,152, the value on July 1 of the 78.26 shares of
Target Subsidiary stock deemed sold in the qualified stock disposition
pursuant to the section 336(e) election for Target Subsidiary (78.26
shares x $27.50) and $598, the value on July 1 of the 21.74 shares of
Target Subsidiary stock deemed distributed during the 12-month
disposition period)). (The 10 shares of Target Subsidiary owned by D are
not part of the qualified stock disposition and therefore are not
included in the denominator of the disallowed loss fraction.) All of the
disallowed loss is allocated to Asset 5, the only loss asset.
Accordingly, Old Target Subsidiary recognizes $109 of gain on Asset 4
and recognizes $305 of loss on Asset 5 (realized loss of $359 less
disallowed loss of $54) or a net loss of $196 on the deemed asset
disposition.
Example 3. (i) Facts. The facts are the same as in Example 2 except
that on August 1 of Year 1, Target sells 50 of its shares of Target
Subsidiary stock and distributes the remaining 50 shares.
(ii) Consequences. Because the 100 shares of Target Subsidiary stock
that were sold and distributed on August 1 were deemed disposed of on
July 1 in the deemed asset disposition of Target, the August 1 sale and
distribution of Target Subsidiary stock are disregarded in determining
the amount of disallowed loss. Accordingly, the consequences are the
same as in Example 2.
(C) Tiered targets. In the case of parent-subsidiary chains of
corporations making section 336(e) elections, the deemed asset
disposition of a higher-tier subsidiary is considered to precede the
deemed asset disposition of a lower-subsidiary.
(ii) New target--deemed purchase. New target is treated as acquiring
all of its assets from an unrelated person in a single transaction at
the close of the disposition date (but before the deemed liquidation) in
exchange for an amount equal to the adjusted grossed-up basis (AGUB) as
determined under Sec. 1.336-4. New target allocates the consideration
deemed paid in the transaction in the same manner as new target would
under Sec. Sec. 1.338-6 and 1.338-7 in order to determine the basis in
each of the purchased assets. If new target qualifies as a small
business corporation within the meaning of section 1361(b) and wants to
be an S corporation, a new election under section 1362(a) must be made.
Notwithstanding paragraph (b)(1)(iii) of this section (deemed
liquidation of old target), new target remains liable for the tax
liabilities of old target (including the tax liability for the deemed
disposition tax consequences). For example, new target remains liable
for the tax liabilities of the members of any consolidated group that
are attributable to taxable years in which those corporations and old
target joined in the same consolidated return. See Sec. 1.1502-6(a).
(iii) Old target and seller--deemed liquidation--(A) In general. If
old target is an S corporation, S corporation shareholders (whether or
not they sell or exchange their stock) take their pro rata share of the
deemed disposition tax consequences into account under section 1366 and
increase or decrease their basis in target stock under section 1367. Old
target and seller (or S corporation shareholders) are treated as if,
before the close of the disposition date, after the deemed asset
disposition described in paragraph (b)(1)(i)(A) of this section, and
while target is owned by seller or S corporation shareholders, old
target transferred all of the consideration deemed received from new
target in the deemed asset disposition to seller or S corporation
shareholders, any S corporation election for old target terminated, and
old target ceased to exist. The transfer from old target to seller or S
corporation shareholders is characterized for Federal income tax
purposes in the same manner as if the
[[Page 89]]
parties had actually engaged in the transactions deemed to occur because
of this section and taking into account other transactions that actually
occurred or are deemed to occur. For example, the transfer may be
treated as a distribution in pursuance of a plan of reorganization, a
distribution in complete cancellation or redemption of all of its stock,
one of a series of distributions in complete cancellation or redemption
of all of its stock in accordance with a plan of liquidation, or part of
a circular flow of cash. In most cases, the transfer will be treated as
a distribution in complete liquidation to which sections 331 or 332 and
sections 336 or 337 apply.
(B) Tiered targets. In the case of parent-subsidiary chains of
corporations making section 336(e) elections, the deemed liquidation of
a lower-tier subsidiary corporation is considered to precede the deemed
liquidation of a higher-tier subsidiary.
(iv) Seller--distribution of target stock. In the case of a
distribution of target stock in a qualified stock disposition, seller
(the distributor) is deemed to purchase from an unrelated person, on the
disposition date, immediately after the deemed liquidation of old
target, the amount of stock distributed in the qualified stock
disposition (new target stock) and to have distributed such new target
stock to its shareholders. Seller recognizes no gain or loss on the
distribution of such stock.
(v) Seller--retention of target stock. If seller or an S corporation
shareholder retains any target stock after the disposition date, seller
or the S corporation shareholder is treated as purchasing the stock so
retained from an unrelated person (new target stock) on the day after
the disposition date for its fair market value. The holding period for
the retained stock starts on the day after the disposition date. For
purposes of this paragraph (b)(1)(v), the fair market value of all of
the target stock equals the grossed-up amount realized on the sale,
exchange, or distribution of recently disposed stock of target (see
Sec. 1.336-3(c)).
(2) Dispositions described in section 355(d)(2) or (e)(2)--(i) Old
target--deemed asset disposition--(A) In general. This paragraph (b)(2)
provides the Federal income tax consequences of a section 336(e)
election made with respect to a qualified stock disposition resulting,
in whole or in part, from a disposition described in section 355(d)(2)
or (e)(2). Old target is treated as selling its assets to an unrelated
person in a single transaction at the close of the disposition date in
exchange for the ADADP as determined under Sec. 1.336-3. ADADP is
allocated among the disposition date assets in the same manner as ADSP
is allocated under Sec. Sec. 1.338-6 and 1.338-7 in order to determine
the amount realized from each of the sold assets. Old target realizes
the deemed disposition tax consequences from the deemed asset
disposition before the close of the disposition date while old target is
owned by seller.
(1) Old target not deemed to liquidate. In general, unlike a section
338(h)(10) election or a section 336(e) election made with respect to a
qualified stock disposition not described, in whole or in part, in
section 355(d)(2) or (e)(2), old target is not deemed to liquidate after
the deemed asset disposition.
(2) Exception. If an election is made under Sec. 1.1502-
13(f)(5)(ii)(E), then solely for purposes of Sec. 1.1502-
13(f)(5)(ii)(C), immediately after the deemed asset disposition of old
target, old target is deemed to liquidate into seller.
(B) Gains and losses--(1) Gains. Except as provided in Sec.
1.338(h)(10)-1(d)(8) (regarding the installment method), old target
shall recognize all of the gains realized on the deemed asset
disposition.
(2) Losses--(i) In general. Except as provided in paragraphs
(b)(2)(i)(B)(2)(ii), (iii), and (iv) of this section, old target shall
recognize all of the losses realized on the deemed asset disposition.
(ii) Stock distributions. If target's losses realized on the deemed
sale of all of its assets exceed target's gains realized (a net loss),
the portion of such net loss attributable to a distribution of target
stock during the 12-month disposition period is disallowed. The total
amount of disallowed loss and the allocation of disallowed loss is
determined in the manner provided in paragraphs (b)(2)(i)(B)(2)(iii) and
(iv) of this section.
(iii) Amount and allocation of disallowed loss. The total disallowed
loss pursuant to paragraph (b)(2)(i)(B)(2)(ii)
[[Page 90]]
of this section shall be determined by multiplying the net loss realized
on the deemed asset disposition by the disallowed loss fraction. The
numerator of the disallowed loss fraction is the value of target stock,
determined on the disposition date, distributed by seller during the 12-
month disposition period, whether or not a part of the qualified stock
disposition (for example, stock distributed to a related person), and
the denominator of the disallowed loss fraction is the sum of the value
of target stock, determined on the disposition date, disposed of by sale
or exchange in the qualified stock disposition during the 12-month
disposition period and the value of target stock, determined on the
disposition date, distributed by seller during the 12-month disposition
period, whether or not a part of the qualified stock disposition. The
amount of the disallowed loss allocated to each asset disposed of in the
deemed asset disposition is determined by multiplying the total amount
of the disallowed loss by the loss allocation fraction. The numerator of
the loss allocation fraction is the amount of loss realized with respect
to the asset and the denominator of the loss allocation fraction is the
sum of the amount of losses realized with respect to each loss asset
disposed of in the deemed asset disposition. To the extent old target's
losses from the deemed asset disposition are not disallowed under this
paragraph, such losses may be disallowed under other provisions of the
Internal Revenue Code or general principles of tax law, in the same
manner as if such assets were actually sold to an unrelated person.
(iv) Tiered targets. If an asset of target is the stock of a
subsidiary corporation of target for which a section 336(e) election is
made, any gain or loss realized on the deemed sale of the stock of the
subsidiary corporation is disregarded in determining the amount of
disallowed loss. For purposes of determining the amount of disallowed
loss on the deemed asset disposition by a subsidiary of target for which
a section 336(e) election is made, see paragraph (b)(1)(i)(B)(2) of this
section.
(3) Examples. The following examples illustrate this paragraph
(b)(2)(i)(B).
Example 1. (i) Facts. Seller owns 90 of the 100 outstanding shares
of Target common stock, the only class of Target stock outstanding. The
remaining 10 shares of Target common stock are owned by C. On January 1
of Year 1, Seller sells 10 shares of Target common stock to D for $910.
On July 1, in an unrelated transaction, Seller distributes its remaining
80 shares of Target common stock to its unrelated shareholders in a
distribution described in section 355(d)(2) or (e)(2). On July 1, the
value of Target common stock is $100 per share. Target has three assets,
Asset 1 with a basis of $1,220, Asset 2 with a basis of $3,675, and
Asset 3 with a basis of $5,725. Seller incurred no selling costs on the
sale of the 10 shares of Target common stock to D. Target has no
liabilities. A section 336(e) election is made.
(ii) Consequences. Because at least 80 percent of Target stock ((10
+ 80)/100) was disposed of (within the meaning of Sec. 1.336-1(b)(5))
by Seller during the 12-month disposition period, a qualified stock
disposition occurred. July 1 of Year 1, the first day on which there was
a qualified stock disposition with respect to Target, is the disposition
date. Accordingly, pursuant to the section 336(e) election, for Federal
income tax purposes, Target is treated as if, on July 1, it sold all of
its assets to an unrelated person in exchange for the ADADP, $9,900, as
determined under Sec. 1.336-3. Assume that the ADADP is allocated
$2,000 to Asset 1, $3,300 to Asset 2, and $4,600 to Asset 3 under Sec.
1.336-3. Old Target realized a net loss of $720 on the deemed asset
disposition ($780 gain realized on Asset 1, $375 loss realized on Asset
2, and $1,125 loss realized on Asset 3). However, because a portion of
Target stock was distributed during the 12-month disposition period and
there was a net loss on the deemed asset disposition, a portion of the
loss on each of the loss assets is disallowed. The total amount of
disallowed loss equals $640 ($720 net loss realized on the deemed
disposition of Assets 1, 2, and 3 multiplied by the disallowed loss
fraction, the numerator of which is $8,000, the value on July 1, the
disposition date, of the 80 shares of Target common stock distributed by
Seller during the 12-month disposition period, and the denominator of
which is $9,000, the sum of $1,000, the value on July 1 of the 10 shares
of Target common stock sold to D, and $8,000, the value on July 1 of the
80 shares of Target common stock distributed by Seller during the 12-
month disposition period). The portion of the disallowed loss allocated
to Asset 2 is $160 ($640 total disallowed loss on the deemed asset
disposition multiplied by the loss allocation fraction, the numerator of
which is $375, the loss realized on the deemed disposition of Asset 2,
and the denominator of which is $1,500, the sum of the losses realized
on the deemed disposition of Assets 2 and 3). The portion of the
disallowed loss allocated
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to Asset 3 is $480 ($640 total disallowed loss on the deemed asset
disposition multiplied by the loss allocation fraction, the numerator of
which is $1,125, the loss realized on the deemed disposition of Asset 3,
and the denominator of which is $1,500, the sum of the losses realized
on the deemed disposition of Assets 2 and 3). Accordingly, Old Target
recognizes $780 of gain on Asset 1, recognizes $215 of loss on Asset 2
(realized loss of $375 less allocated disallowed loss of $160), and
recognizes $645 of loss on Asset 3 (realized loss of $1,125 less
allocated disallowed loss of $480) or a recognized net loss of $80 on
the deemed asset disposition.
Example 2. (i) Facts. The facts are the same as in Example 1 except
that Asset 2 is 100 shares of common stock of Target Subsidiary, a
wholly-owned subsidiary of Target. The value of Target Subsidiary common
stock on July 1 is $40 per share. Target Subsidiary has two assets,
Asset 4 with a basis of $500 and Asset 5 with a basis of $3,000. Target
Subsidiary has no liabilities. A section 336(e) election is also made
with respect to Target Subsidiary.
(ii) Consequences--Target. The ADADP on the deemed sale of Target's
assets is determined and allocated in the same manner as in Example 1.
However, Old Target's loss realized on the deemed sale of Target
Subsidiary is disregarded in determining the amount of the disallowed
loss on the deemed asset disposition of Old Target's assets. Thus, the
realized net loss is only $345 ($780 gain on Asset 1 and $1,125 loss on
Asset 3), and the amount of disallowed loss equals $307, the $345
realized net loss multiplied by the disallowed loss fraction with
respect to Target stock, $8,000/$9,000. The entire disallowed loss is
allocated to Asset 3. Accordingly, Old Target recognizes $780 of gain on
Asset 1 and recognizes $818 of loss on Asset 3 (realized loss of $1,125
less allocated disallowed loss of $307) or a recognized net loss of $38
on the deemed asset disposition.
(iii) Consequences--Target Subsidiary. Because the deemed sale of
Target Subsidiary is not a transaction described in section 355(d)(2) or
(e)(2), the tax consequences of the deemed sale of Target Subsidiary are
determined under paragraph (b)(1) of this section and not this paragraph
(b)(2). The deemed sale of the stock of Target Subsidiary is disregarded
and instead Target Subsidiary is deemed to sell all of its assets to an
unrelated person. The ADADP on the deemed asset disposition of Target
Subsidiary as determined under Sec. 1.336-3 is $3,300. Assume that the
ADADP is allocated $900 to Asset 4 and $2,400 to Asset 5 under Sec.
1.336-3. Old Target Subsidiary realized a net loss of $200 on the deemed
asset disposition ($400 gain realized on Asset 4 and $600 loss realized
on Asset 5). However, because a portion of Target stock was distributed
during the 12-month disposition period, for purposes of determining the
amount of disallowed loss on the deemed sale of the assets of Target
Subsidiary, the portion of the 100 shares of Target Subsidiary stock
deemed sold pursuant to the section 336(e) election for Target
Subsidiary multiplied by the disallowed loss fraction with respect to
Target stock are treated as having been distributed. Thus, for purposes
of determining the amount of disallowed loss on the deemed asset
disposition of Target Subsidiary's assets, 88.89 shares of Target
Subsidiary common stock (100 shares owned by Target multiplied by the
disallowed loss fraction with respect to Target stock, $8,000/$9,000)
are treated as distributed during the 12-month disposition period. The
total amount of disallowed loss with respect to the deemed asset
disposition of Target Subsidiary's assets equals $177.78 ($200 net loss
realized on the deemed disposition of Assets 4 and 5 multiplied by the
disallowed loss fraction with respect to Target Subsidiary, the
numerator of which is $3,556, the value on July 1, the disposition date,
of the 88.89 shares of Target Subsidiary common stock deemed distributed
during the 12-month disposition period (88.89 shares x $40) and the
denominator of which is $4,000 (the sum of $444, the value on July 1 of
the 11.11 shares of Target Subsidiary common stock deemed sold in the
qualified stock disposition pursuant to the section 336(e) election for
Target Subsidiary (11.11 shares x $40) and $3,556, the value on July 1
of the 88.89 shares of Target Subsidiary common stock deemed distributed
during the 12-month disposition period)). All of the disallowed loss is
allocated to Asset 5, the only loss asset. Accordingly, Old Target
Subsidiary recognizes $400 of gain on Asset 4 and recognizes $422.22 of
loss on Asset 5 (realized loss of $600 less allocated disallowed loss of
$177.78) or a recognized net loss of $22.22 on the deemed asset
disposition.
(C) Tiered targets. In the case of parent-subsidiary chains of
corporations making section 336(e) elections, the deemed asset
disposition of a higher-tier subsidiary is considered to precede the
deemed asset disposition of a lower-tier subsidiary.
(ii) Old target--deemed purchase--(A) In general. Immediately after
the deemed asset disposition described in paragraph (b)(2)(i)(A) of this
section, old target is treated as acquiring all of its assets from an
unrelated person in a single, separate transaction at the close of the
disposition date (but before the distribution described in paragraph
(b)(2)(iii)(A) of this section) in exchange for an amount equal to the
AGUB as determined under Sec. 1.336-4. Old target allocates the
consideration deemed paid in the transaction in the
[[Page 92]]
same manner as new target would under Sec. Sec. 1.338-6 and 1.338-7 in
order to determine the basis in each of the purchased assets.
(B) Tiered targets. In the case of parent-subsidiary chains of
corporations making section 336(e) elections with respect to a qualified
stock disposition described, in whole or in part, in section 355(d)(2)
or (e)(2), old target's deemed purchase of all its assets is considered
to precede the deemed asset disposition of a lower-tier subsidiary.
(C) Application of section 197(f)(9), section 1091, and other
provisions to old target. Solely for purposes of section 197(f)(9),
section 1091, and any other provision designated in the Internal Revenue
Bulletin by the Internal Revenue Service (see Sec. 601.601(d)(2)(ii) of
this chapter), old target, in its capacity as seller of assets in the
deemed asset disposition described in paragraph (b)(2)(i)(A) of this
section, shall be treated as a separate and distinct taxpayer from, and
unrelated to, old target in its capacity as acquirer of assets in the
deemed purchase described in paragraph (b)(2)(ii)(A) of this section and
for subsequent periods.
(iii) Seller--distribution of target stock--(A) In general.
Immediately after old target's deemed purchase of its assets described
in paragraph (b)(2)(ii) of this section, seller is treated as
distributing the stock of old target actually distributed to its
shareholders in the qualified stock disposition. No gain or loss is
recognized by seller on the distribution. Additionally, if stock of
target is sold, exchanged, or distributed outside of the section 355
transaction but still as part of a qualified stock disposition
described, in whole or in part, in section 355(d)(2) or (e)(2), no gain
or loss is recognized by seller on such sale, exchange, or distribution.
(B) Tiered targets. In the case of parent-subsidiary chains of
corporations making section 336(e) elections with respect to a qualified
stock disposition described, in whole or in part, in section 355(d)(2)
or (e)(2), the Federal income tax consequences of the section 336(e)
election for a subsidiary of target shall be determined under paragraph
(b)(1) of this section unless the stock of the subsidiary of target is
actually disposed of in a qualified stock disposition described, in
whole or in part, in section 355(d)(2) or (e)(2). The deemed liquidation
of a lower-tier subsidiary pursuant to paragraph (b)(1)(iii) of this
section is considered to precede the deemed liquidation of a higher-tier
subsidiary. The deemed liquidation of the highest tier subsidiary of
target is considered to precede the distribution of old target stock
described in paragraph (b)(2)(iii)(A) of this section.
(iv) Seller--retention of target stock. If seller retains any target
stock after the disposition date, seller is treated as having disposed
of the old target stock so retained, on the disposition date, in a
transaction in which no gain or loss is recognized, and then, on the day
after the disposition date, purchasing the stock so retained from an
unrelated person for its fair market value. The holding period for the
retained stock starts on the day after the disposition date. For
purposes of this paragraph (b)(2)(iv), the fair market value of all of
the target stock equals the grossed-up amount realized on the sale,
exchange, or distribution of recently disposed stock of target (see
Sec. 1.336-3(c)).
(v) Qualification under section 355. Old target's deemed sale of all
its assets to an unrelated person and old target's deemed purchase of
all its assets from an unrelated person will not cause the distribution
of old target to fail to satisfy the requirements of section 355.
Similarly, any deemed transactions under paragraph (b)(1) or (b)(2) of
this section that a subsidiary of target is treated as engaging in will
not cause the distribution of old target to fail to satisfy the
requirements of section 355. For purposes of applying section
355(a)(1)(D), seller is treated as having disposed of any stock disposed
of in the qualified stock disposition on the date seller actually sold,
exchanged, or distributed such stock. Further, seller's deemed
disposition of retained old target stock under paragraph (b)(2)(iv) of
this section is disregarded for purposes of applying section
355(a)(1)(D).
(vi) Earnings and profits. The earnings and profits of seller and
target shall be determined pursuant to Sec. 1.312-10 and, if
applicable, Sec. 1.1502-33(e). For this purpose, target will not be
treated as a newly created controlled corporation
[[Page 93]]
and any increase or decrease in target's earnings and profits pursuant
to the deemed asset disposition will increase or decrease, as the case
may be, target's earnings and profits immediately before the allocation
described in Sec. 1.312-10.
(c) Purchaser. Generally, the making of a section 336(e) election
will not affect the Federal income tax consequences to which purchaser
would have been subject with respect to the acquisition of target stock
if a section 336(e) election was not made. Thus, notwithstanding
Sec. Sec. 1.336-2(b)(1)(i)(A), 1.336-2(b)(1)(iv), and 1.336-
2(b)(2)(iii)(A), purchaser will still be treated as having purchased,
received in an exchange, or received in a distribution, the stock of
target so acquired on the date actually acquired. However, see section
1223(1)(B) with respect to the holding period for stock acquired
pursuant to a distribution qualifying under section 355 (or so much of
section 356 that relates to section 355). The Federal income tax
consequences of the deemed asset disposition and liquidation of target
may affect purchaser's consequences. For example, if seller distributes
the stock of target to its shareholders in a qualified stock disposition
for which a section 336(e) election is made, any increase in seller's
earnings and profits as a result of old target's deemed asset
disposition and liquidation into seller may increase the amount of a
distribution to the shareholders constituting a dividend under section
301(c)(1).
(d) Minority shareholders--(1) In general. This paragraph (d)
describes the treatment of shareholders of old target other than seller,
a member of seller's consolidated group, and S corporation shareholders
(whether or not they sell or exchange their stock of target). A
shareholder to which this paragraph (d) applies is referred to as a
minority shareholder.
(2) Sale, exchange, or distribution of target stock by a minority
shareholder. A minority shareholder recognizes gain or loss (as
permitted under the general principles of tax law) on its sale,
exchange, or distribution of target stock.
(3) Retention of target stock by a minority shareholder. A minority
shareholder who retains its target stock does not recognize gain or loss
under this section with respect to its shares of target stock. The
minority shareholder's basis and holding period for that target stock
are not affected by the section 336(e) election. Notwithstanding this
treatment of the minority shareholder, if a section 336(e) election is
made, target will still be treated as disposing of all of its assets in
the deemed asset disposition.
(e) Treatment consistent with an actual asset disposition. Except as
otherwise provided, no provision in this section shall produce a Federal
income tax result under subtitle A of the Internal Revenue Code that
would not occur if the parties had actually engaged in the transactions
deemed to occur because of this section, taking into account other
transactions that actually occurred or are deemed to occur. See Sec.
1.338-1(a)(2) regarding the application of other rules of law.
(f) Treatment of target under other provisions of the Internal
Revenue Code. The provisions Sec. 1.338-1(b) apply with respect to the
treatment of new target after a section 336(e) election, treating any
reference to section 338 or 338(h)(10) as a reference to section 336(e).
(g) Special rules--(1) Target as two corporations. Although target
is a single corporation under corporate law, if a section 336(e)
election is made, then, except with respect to a distribution described
in section 355(d)(2) or (e)(2) and as provided in Sec. 1.338-1(b)(2),
two separate corporations, old target and new target, generally are
considered to exist for purposes of subtitle A of the Internal Revenue
Code.
(2) Treatment of members of a consolidated group. For purposes of
Sec. Sec. 1.336-1 through 1.336-5, all members of seller's consolidated
group are treated as a single seller, regardless of which member or
members actually dispose of any stock. Accordingly, any dispositions of
stock made by members of the same consolidated group shall be treated as
made by one corporation, and any stock owned by members of the same
consolidated group and not disposed of will be treated as stock retained
by seller.
(3) International provisions--(i) Source and foreign tax credit. The
principles of
[[Page 94]]
section 338(h)(16) apply to section 336(e) elections for targets with
foreign operations to ensure that the source and foreign tax credit
limitation are properly determined.
(ii) Allocation of foreign taxes--(A) General rule. Except as
provided in paragraph (g)(3)(ii)(B) of this section, if a section 336(e)
election is made for target and target's taxable year under foreign law
(if any) does not close at the end of the disposition date, foreign tax
paid or accrued by new target with respect to such foreign taxable year
is allocated between old target and new target. If there is more than
one section 336(e) election with respect to target during target's
foreign taxable year, foreign tax paid or accrued with respect to that
foreign taxable year is allocated among all old targets and new targets.
The allocation is made based on the respective portions of the taxable
income (as determined under foreign law) for the foreign taxable year
that are attributable under the principles of Sec. 1.1502-76(b) to the
period of existence of each old target and new target during the foreign
taxable year.
(B) Taxes imposed on partnerships and disregarded entities. If a
section 336(e) election is made for target and target holds an interest
in a disregarded entity or partnership, the rules of Sec. 1.901-2(f)(4)
apply to determine the person who is considered for U.S. Federal income
tax purposes to pay foreign tax imposed at the entity level on the
income of the disregarded entity or partnership.
(iii) Disallowance of foreign tax credits under section 901(m). For
rules that may apply to disallow foreign tax credits with respect to
income not subject to United States taxation by reason of a covered
asset acquisition, see section 901(m).
(h) Making the section 336(e) election--(1) Consolidated group. If
seller(s) and target are members of the same consolidated group, a
section 336(e) election is made by completing the following
requirements:
(i) Seller(s) and target must enter into a written, binding
agreement, on or before the due date (including extensions) of the
consolidated group's consolidated Federal income tax return for the
taxable year that includes the disposition date, to make a section
336(e) election;
(ii) The common parent of the consolidated group must retain a copy
of the written agreement;
(iii) The common parent of the consolidated group must attach the
section 336(e) election statement, described in paragraphs (h)(5) and
(6) of this section, to the group's timely filed (including extensions)
consolidated Federal income tax return for the taxable year that
includes the disposition date; and
(iv) The common parent of the consolidated group must provide a copy
of the section 336(e) election statement to target on or before the due
date (including extensions) of the consolidated group's consolidated
Federal income tax return.
(2) Non-consolidated/non-S corporation target. If target is neither
a member of the same consolidated group as seller nor an S corporation,
a section 336(e) election is made by completing the following
requirements:
(i) Seller and target must enter into a written, binding agreement,
on or before the due date (including extensions) of seller's or target's
Federal income tax return for the taxable year that includes the
disposition date, whichever is earlier, to make a section 336(e)
election;
(ii) Seller and target each must retain a copy of the written
agreement; and
(iii) Seller and target each must attach the section 336(e) election
statement, described in paragraphs (h)(5) and (6) of this section, to
its timely filed (including extensions) Federal income tax return for
the taxable year that includes the disposition date. However, seller's
section 336(e) election statement may disregard paragraph (h)(6)(xii) of
this section (concerning a gain recognition election).
(3) S corporation target. A section 336(e) election for an S
corporation target is made by completing the following requirements:
(i) All of the S corporation shareholders, including those who do
not dispose of any stock in the qualified stock disposition, and the S
corporation target must enter into a written, binding agreement, on or
before the
[[Page 95]]
due date (including extensions) of the Federal income tax return of the
S corporation target for the taxable year that includes the disposition
date, to make a section 336(e) election;
(ii) S corporation target must retain a copy of the written
agreement; and
(iii) S corporation target must attach the section 336(e) election
statement, described in paragraphs (h)(5) and (6) of this section, to
its timely filed (including extensions) Federal income tax return for
the taxable year that includes the disposition date.
(4) Tiered targets. In the case of parent-subsidiary chains of
corporations making section 336(e) elections, in order to make a section
336(e) election for a lower-tier target (target subsidiary), the
requirements described in paragraph (h)(1) or (h)(2), of this section,
whichever is applicable to the qualified stock disposition of target
subsidiary, must be satisfied. The written agreement described in
paragraph (h)(1) or (h)(2) of this section for the section 336(e)
election with respect to target subsidiary may be either a separate
written agreement between target subsidiary and the corporation deemed
to dispose of the stock of target subsidiary or may be included in the
written agreement between seller(s) (or the S corporation shareholders)
and target.
(5) Section 336(e) election statement--(i) In general. The section
336(e) election statement must be entitled ``THIS IS AN ELECTION UNDER
SECTION 336(e) TO TREAT THE DISPOSITION OF THE STOCK OF [insert name and
employer identification number of target] AS A DEEMED SALE OF SUCH
CORPORATION'S ASSETS.'' The section 336(e) election statement must
include the information described in paragraph (h)(6) of this section.
The relevant information for each S corporation shareholder and,
notwithstanding paragraph (g)(2) of this section, each consolidated
group member that disposes of or retains target stock must be set forth
individually, not in the aggregate.
(ii) Target subsidiaries. In the case of a section 336(e) election
for a target subsidiary, a separate statement must be filed for each
target subsidiary. In preparing the section 336(e) election statement
with respect to a target subsidiary, any reference to seller in
paragraph (h)(6) of this section should be considered a reference to the
corporation deemed to dispose of the stock of the target subsidiary and
any reference to target in paragraphs (h)(5)(i) and (h)(6) of this
section should be considered a reference to the target subsidiary.
(6) Contents of section 336(e) election statement. The section
336(e) election statement must include:
(i) The name, address, taxpayer identifying number (TIN), taxable
year, and state of incorporation (if any) of the seller(s) or the S
corporation shareholder(s);
(ii) The name, address, employer identification number (EIN),
taxable year, and state of incorporation of the common parent, if any,
of seller(s);
(iii) The name, address, EIN, taxable year, and state of
incorporation of target;
(iv) The name, address, TIN, taxable year, and state of
incorporation (if any) of any 80-percent purchaser;
(v) The name, address, TIN, taxable year, and state of incorporation
(if any) of any purchaser that holds nonrecently disposed stock within
the meaning of Sec. 1.336-1(b)(18);
(vi) The disposition date;
(vii) The percentage of target stock that was disposed of by each
seller or S corporation shareholder in the qualified stock disposition;
(viii) The percentage of target stock that was disposed of by each
seller or S corporation shareholder in the qualified stock disposition
on or before the disposition date;
(ix) A statement regarding whether target realized a net loss on the
deemed asset disposition;
(x) If target realized a net loss on the deemed asset disposition, a
statement regarding whether any stock of target or that of any higher-
tier corporation up through the highest-tier corporation for which a
section 336(e) election was made by any seller(s) or S corporation
shareholder(s) was distributed during the 12-month disposition period.
If so, also provide a statement regarding whether any stock of target or
that of any higher-tier corporation up through the highest-tier
corporation for which a section 336(e) election was made was
[[Page 96]]
actually sold or exchanged (rather than deemed sold in a deemed asset
disposition) by any seller(s) or S corporation shareholder(s) in a
qualified stock disposition;
(xi) The percentage of target stock that was retained by each seller
or S corporation shareholder after the disposition date;
(xii) The name, address, and TIN of any purchaser that made a gain
recognition election pursuant to Sec. 1.336-4(c). A copy of the gain
recognition election statement must be retained by the filer of the
section 336(e) election statement designated as the appropriate party in
Sec. 1.336-4(c)(3); and
(xiii) A statement that each of the seller(s) or S corporation
shareholder(s) (as applicable) and target have executed a written,
binding agreement to make a section 336(e) election.
(7) Asset Allocation Statement. Old target and new target must
report information concerning the deemed sale of target's assets on Form
8883, ``Asset Allocation Statement Under Section 338,'' (making
appropriate adjustments to report the results of the section 336(e)
election), or on any successor form prescribed by the Internal Revenue
Service, in accordance with forms, instructions, or other appropriate
guidance provided by the Internal Revenue Service. In addition, in the
case of a section 336(e) election as the result of a transaction
described in section 355(d)(2) or (e)(2), old target should file two
Forms 8883, (or successor forms), one in its capacity as the seller of
the assets in the deemed asset disposition described in paragraph
(b)(2)(i) of this section and one in its capacity as the purchaser of
the assets in the deemed purchase described in paragraph (b)(2)(ii) of
this section.
(8) Examples. The following examples illustrate the provisions of
paragraph (h) of this section.
Example 1. (i) Facts. Seller owns all of the stock of Target and
Target owns all of the stock of Target Subsidiary. Seller is the common
parent of a consolidated group that includes Target. However, Target
Subsidiary is not included in the consolidated group pursuant to section
1504(a)(3). On Date 1, Seller sells 80 percent of its Target stock to A
and distributes the remaining 20 percent of Target stock to Seller's
unrelated shareholders.
(ii) Making of election for Target. Because Seller and Target are
members of a consolidated group, in order to make a section 336(e)
election for the qualified stock disposition of Target, the requirements
of paragraph (h)(1) of this section must be satisfied. On or before the
due date of Seller group's consolidated Federal income tax return that
includes Date 1, Seller and Target must enter into a written, binding
agreement to make a section 336(e) election; Seller must retain a copy
of the written agreement; Seller must attach the section 336(e) election
statement to the group's timely filed consolidated return for the
taxable year that includes Date 1, and Seller must provide a copy of the
section 336(e) election statement to Target on or before the due date
(including extensions) of the consolidated return.
(iii) Making of election for Target Subsidiary. Because Target and
Target Subsidiary do not join in the filing of a consolidated Federal
income tax return and Target Subsidiary is not an S corporation, in
order to make a section 336(e) election for the qualified stock
disposition of Target Subsidiary, the requirements of paragraph (h)(2)
of this section must be satisfied. On or before the due date of Seller
group's consolidated Federal income tax return that includes Date 1, or
Target Subsidiary's Federal income tax return that includes Date 1,
whichever is earlier, either Target Subsidiary must join in the written
agreement described in paragraph (ii) of this Example 1 to make a
section 336(e) election with respect to the qualified stock disposition
of Target Subsidiary or Target and Target Subsidiary must enter into a
separate written, binding agreement to make a section 336(e) election
with respect to the qualified stock disposition of Target Subsidiary;
Seller (as agent of the consolidated group that includes Target) and
Target Subsidiary each must retain a copy of the written agreement; and
Seller (as agent of the consolidated group that includes Target) and
Target Subsidiary each must attach the section 336(e) election statement
with respect to the qualified stock disposition of Target Subsidiary to
its timely filed Federal income tax return for the taxable year that
includes Date 1. In preparing the section 336(e) election statement,
paragraph (i) of the statement should include the relevant information
for Target, paragraph (ii) of the statement should include the relevant
information for Seller, paragraph (iii) of the statement should include
the relevant information for Target Subsidiary, paragraphs (vii) through
(xi) of the statement should provide information for both Seller's
actual sale and distribution of Target stock as well as information for
Target's deemed sale of Target Subsidiary stock, and paragraph (xiii) of
the statement should include a statement that Seller, Target, and Target
Subsidiary, or Target and Target Subsidiary, whichever is
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appropriate, have executed a written, binding agreement to make a
section 336(e) election with respect to the qualified stock disposition
of Target Subsidiary.
Example 2. (i) Facts. A and B each own 45 percent and C owns the
remaining 10 percent of the stock of S Corporation Target, an S
corporation. S Corporation Target owns 80 percent of the stock of Target
Subsidiary and D owns the remaining 20 percent. On Date 1, A and B each
sell all of their S Corporation Target stock to an unrelated individual.
C retains his 10 percent of the stock of S Corporation Target.
(ii) Making of election for S Corporation Target. Because S
Corporation Target is an S Corporation Target, in order to make a
section 336(e) election for the qualified stock disposition of S
Corporation Target, the requirements of paragraph (h)(3) of this section
must be satisfied. On or before the due date of S Corporation Target's
Federal income tax return that includes Date 1, A, B, C, and S
Corporation Target must enter into a written, binding agreement to make
a section 336(e) election; S Corporation Target must retain a copy of
the written agreement; and S Corporation Target must attach the section
336(e) election statement to its timely filed Federal income tax return
for the taxable year that includes Date 1.
(iii) Making of election for Target Subsidiary. Because Target
Subsidiary is neither a member of the same consolidated group as S
Corporation Target nor is an S corporation, in order to make a section
336(e) election for the qualified stock disposition of Target
Subsidiary, the requirements of paragraph (h)(2) of this section must be
satisfied. On or before the due date of S Corporation Target's Federal
income tax return that includes Date 1, or Target Subsidiary's Federal
income tax return that includes Date 1, whichever is earlier, either
Target Subsidiary must join in the written agreement described in
paragraph (ii) of this Example 2 to make a section 336(e) election with
respect to the qualified stock disposition of Target Subsidiary or S
Corporation Target and Target Subsidiary must enter into a separate
written, binding agreement to make a section 336(e) election with
respect to the qualified stock disposition of Target Subsidiary; S
Corporation Target and Target Subsidiary each must retain a copy of the
written agreement; and S Corporation Target and Target Subsidiary each
must attach the section 336(e) election statement to its timely filed
Federal income tax return for the taxable year that includes Date 1. In
preparing the section 336(e) election statement, paragraph (i) of the
statement should include the relevant information for S Corporation
Target, paragraph (iii) of the statement should include the relevant
information for Target Subsidiary, paragraphs (vii) through (xi) of the
statement should provide information for both A's and B's actual sale
and C's actual retention of S Corporation Target stock as well as
information for S Corporation Target's deemed sale of Target Subsidiary
stock, and paragraph (xiii) of the statement should include a statement
that A, B, C, S Corporation Target, and Target Subsidiary, or S
Corporation Target and Target Subsidiary, whichever is appropriate, have
executed a written, binding agreement to make a section 336(e) election
with respect to the qualified stock disposition of Target Subsidiary.
(i) [Reserved]
(j) Protective section 336(e) election. Taxpayers may make a
protective election under section 336(e) in connection with a
transaction. Such an election will have no effect if the transaction
does not constitute a qualified stock disposition, as defined in Sec.
1.336-1(b)(6), but will otherwise be binding and irrevocable.
(k) Examples. The following examples illustrate the provisions of
this section.
Example 1. Sale of 100 percent of Target stock. (i) Facts. Parent
owns all 100 shares of Target's only class of stock. Target's only
assets are two parcels of land. Parcel 1 has a basis of $5,000 and
Parcel 2 has a basis of $4,000. Target has no liabilities. On July 1 of
Year 1, Parent sells all 100 shares of Target stock to A for $100 per
share. Parent incurs no selling costs and A incurs no acquisition costs.
On July 1, the value of Parcel 1 is $7,000 and the value of Parcel 2 is
$3,000. A section 336(e) election is made.
(ii) Consequences. The sale of Target stock constitutes a qualified
stock disposition. July 1 of Year 1 is the disposition date.
Accordingly, pursuant to the section 336(e) election, for Federal income
tax purposes, rather than treating Parent as selling the stock of Target
to A, the following events are deemed to occur. Target is treated as if,
on July 1, it sold all of its assets to an unrelated person in exchange
for the ADADP of $10,000, which is allocated $7,000 to Parcel 1 and
$3,000 to Parcel 2 (see Sec. Sec. 1.336-3 and 1.338-6 for determination
of amount and allocation of ADADP). Target recognizes gain of $2,000 on
Parcel 1 and loss of $1,000 on Parcel 2. New Target is then treated as
acquiring all its assets from an unrelated person in a single
transaction in exchange for the amount of the AGUB of $10,000, which is
allocated $7,000 to Parcel 1 and $3,000 to Parcel 2 (see Sec. Sec.
1.336-4, 1.338-5, and 1.338-6 for determination of amount and allocation
of AGUB). Old Target is treated as liquidating into Parent immediately
thereafter, distributing the $10,000 deemed received in exchange for
Parcel 1 and Parcel 2 in a transaction qualifying under section 332.
Parent recognizes no gain or loss
[[Page 98]]
on the liquidation. A's basis in New Target stock is $100 per share, the
amount paid for the stock.
Example 2. Sale of 80 percent of Target stock. (i) Facts. The facts
are the same as in Example 1 except that Parent only sells 80 shares of
its Target stock to A and retains the other 20 shares.
(ii) Consequences. The results are the same as in Example 1 except
that Parent also is treated as purchasing from an unrelated person on
July 2, the day after the disposition date, the 20 shares of Target
stock (New Target stock) not sold to A, for their fair market value as
determined under Sec. 1.336-2(b)(1)(v) of $2,000 ($100 per share).
Example 3. Distribution of 100 percent of Target stock. (i) Facts.
The facts are the same as in Example 1 except that instead of on July 1
Parent selling 100 shares of Target stock to A, Parent distributes 100
shares to its shareholders, all of whom are unrelated to Parent, in a
transaction that does not qualify under section 355. The value of Target
stock on July 1 is $100 per share.
(ii) Consequences. The distribution of Target stock constitutes a
qualified stock disposition. July 1 of Year 1 is the disposition date.
Accordingly, pursuant to the section 336(e) election, for Federal income
tax purposes, rather than treating Parent as distributing the stock of
Target to its shareholders, the following events are deemed to occur.
Target is treated as if, on July 1, it sold all of its assets to an
unrelated person in exchange for the ADADP of $10,000, which is
allocated $7,000 to Parcel 1 and $3,000 to Parcel 2 (see Sec. Sec.
1.336-3 and 1.338-6 for determination of amount and allocation of
ADADP). Target recognizes gain of $2,000 on Parcel 1 and loss of $1,000
on Parcel 2. Because Target's losses realized on the deemed asset
disposition do not exceed Target's gains realized on the deemed asset
disposition, Target can recognize all of the losses from the deemed
asset disposition (see Sec. 1.336-2(b)(1)(i)(B)). New Target is then
treated as acquiring all its assets from an unrelated person in a single
transaction in exchange for the amount of the AGUB of $10,000, which is
allocated $7,000 to Parcel 1 and $3,000 to Parcel 2 (see Sec. Sec.
1.336-4, 1.338-5, and 1.338-6 for determination of amount and allocation
of AGUB). Old Target is treated as liquidating into Parent immediately
thereafter, distributing the $10,000 deemed received in exchange for
Parcel 1 and Parcel 2 in a transaction qualifying under section 332.
Parent recognizes no gain or loss on the liquidation. On July 1,
immediately after the deemed liquidation of Target, Parent is deemed to
purchase from an unrelated person 100 shares of New Target stock and
distribute those New Target shares to its shareholders. Parent
recognizes no gain or loss on the deemed distribution of the shares
under Sec. 1.336-2(b)(1)(iv). The shareholders receive New Target stock
as a distribution pursuant to section 301 and their basis in New Target
stock received is its fair market value pursuant to section 301(d).
Example 4. Distribution of 80 percent of Target stock. (i) Facts.
The facts are the same as in Example 3 except that Parent distributes
only 80 shares of Target stock to its shareholders and retains the other
20 shares.
(ii) Consequences. The results are the same as in Example 3 except
that Parent is treated as purchasing on July 1 only 80 shares of New
Target stock and as distributing only 80 shares of New Target stock to
its shareholders and then as purchasing (and retaining) on July 2, the
day after the disposition date, 20 shares of New Target stock at their
fair market value as determined under Sec. 1.336-2(b)(1)(v), $2,000
($100 per share).
Example 5. Part sale, part distribution. (i) Facts. Parent owns all
100 shares of Target's only class of stock. Target has two assets, both
of which are buildings used in its business. Building 1 has a basis of
$6,000 and Building 2 has a basis of $5,100. Target has no liabilities.
On January 1 of Year 1, Parent sells 50 shares of Target to A for $88
per share. Parent incurred no selling costs with respect to the sale of
Target stock and A incurred no acquisition costs with respect to the
purchase. On July 1 of Year 1, when the value of Target stock is $120
per share, Parent distributes 30 shares of Target to Parent's unrelated
shareholders. Parent retains the remaining 20 shares. On July 1, the
value of Building 1 is $7,800 and the value of Building 2 is $4,200. A
section 336(e) election is made.
(ii) Consequences. Because the sale of the 50 shares and the
distribution of the 30 shares occurred within a 12-month disposition
period, the 80 shares of Target stock sold and distributed were disposed
of in a qualified stock disposition. July 1 of Year 1 is the disposition
date. On July 1, Target is treated as if it sold its assets to an
unrelated person in exchange for the ADADP, $10,000 ($8,000 ((50 shares
x $88) + (30 shares x $120))/.80 ($9,600 (80 shares x $120)/$12,000 (100
shares x $120))), which is allocated to Buildings 1 and 2 in proportion
to their fair market values, $6,500 to Building 1 and $3,500 to Building
2 (see Sec. Sec. 1.336-3 and 1.338-6 for determination of amount and
allocation of ADADP). Target realizes a gain of $500 on the deemed sale
of Building 1 ($6,500-$6,000). Target realizes a loss of $1,600 on the
deemed sale of Building 2 ($3,500-$5,100). Target recognizes all of its
gains on the deemed asset disposition. However, because 30 shares of
Target stock were distributed during the 12-month disposition period and
there was a net loss of $1,100 realized on the deemed disposition of
Buildings 1 and 2, $413 of the loss on the deemed sale is disallowed
(see Sec. 1.336-2(b)(1)(i)(B)(2) for the determination of the
disallowed loss
[[Page 99]]
amount). New Target is then treated as acquiring all its assets from an
unrelated person in a single transaction in exchange for the amount of
the AGUB, $10,000 ($8,000 ((50 shares x $88) + (30 shares x $120)) x
1.25 ((100-0)/80)), which is allocated to Buildings 1 and 2 in
proportion to their fair market values, $6,500 to Building 1 and $3,500
to Building 2 (see Sec. Sec. 1.336-4, 1.338-5, and 1.338-6 for
determination of amount and allocation of AGUB). Old Target is treated
as liquidating into Parent immediately after the deemed asset
disposition, distributing the $10,000 deemed received in exchange for
its assets in a transaction qualifying under section 332. Parent
recognizes no gain or loss on the liquidation. Parent is then deemed to
purchase 30 shares of New Target stock from an unrelated person on July
1, and to distribute those 30 New Target shares to its shareholders.
Parent recognizes no gain or loss on the deemed distribution of the 30
shares under Sec. 1.336-2(b)(1)(iv). Parent is then deemed to purchase
(and retain) on July 2, the day after the disposition date, 20 shares of
New Target stock at their fair market value as determined under Sec.
1.336-2(b)(1)(v), $2,000 ($100 per share (20 shares multiplied by $100
fair market value per share ($10,000 grossed-up amount realized on the
sale and distribution of 80 shares of target stock divided by 100
shares)). A is treated as having purchased the 50 shares of New Target
stock on January 1 of Year 1 at a cost of $88 per share, the same as if
no section 336(e) election had been made. Parent's shareholders are
treated as receiving New Target stock on July 1 of Year 1 as a
distribution pursuant to section 301 and their basis in New Target stock
received is $120 per share, its fair market value, pursuant to section
301(d), the same as if no section 336(e) election had been made.
Example 6. Sale of Target stock by consolidated group members. (i)
Facts. Parent owns all of the stock of Sub and 50 of the 100 outstanding
shares of Target stock. Sub owns the remaining 50 shares of Target
stock. Target's assets have an aggregate basis of $9,000. Target has no
liabilities. Parent, Sub, and Target file a consolidated Federal income
tax return. On February 1 of Year 1, Parent sells 30 shares of its
Target stock to A for $2,400. On March 1 of Year 1, Sub sells all 50
shares of its Target stock to B for $5,600. Neither Parent nor Sub
incurred any selling costs. Neither A nor B incurred any acquisition
costs. A section 336(e) election is made.
(ii) Consequences. Because Parent and Sub are members of the same
consolidated group, their sale of Target stock is treated as made by one
seller (see paragraph (g)(2) of this section), and the sales of Target
stock constitute a qualified stock disposition. March 1 of Year 1 is the
disposition date. For Federal income tax purposes, Parent and Sub are
not treated as selling the stock of Target to A and B, respectively.
Instead, the following events are deemed to occur. Old Target is treated
as if, on March 1, it sold all its assets to unrelated person in
exchange for the ADADP, $10,000 (see Sec. 1.336-3 for determination of
ADADP), recognizing a net gain of $1,000. New Target is then treated as
acquiring all its assets from an unrelated person in a single
transaction in exchange for the amount of the AGUB, $10,000 (see
Sec. Sec. 1.336-4 and 1.338-5 for the determination of AGUB). Old
Target is treated as liquidating into Parent and Sub immediately
thereafter, distributing the $10,000 deemed received in exchange for its
assets in a transaction qualifying under section 332 (see Sec. 1.1502-
34). Neither Parent nor Sub recognizes gain or loss on the liquidation.
Parent is then treated as purchasing from an unrelated person on March
2, the day after the disposition date, the 20 shares of Target stock
(New Target stock) retained for their fair market value as determined
under Sec. 1.336-2(b)(1)(v), $2,000 ($100 per share). A is treated as
having purchased 30 shares of New Target stock on February 1 of Year 1
at a cost of $2,400 ($80 per share), the same as if no section 336(e)
election had been made. B is treated as having purchased 50 shares of
New Target stock on March 1 of Year 1 at a cost of $5,600 ($112 per
share), the same as if no section 336(e) election had been made.
Example 7. Sale of Target stock by non-consolidated group members.
(i) Facts. The facts are the same as in Example 6 except that Parent,
Sub, and Target do not join in the filing of a consolidated Federal
income tax return.
(ii) Consequences. Because Parent and Sub do not join in the filing
of a consolidated Federal income tax return and no single seller sells,
exchanges, or distributes Target stock meeting the requirements of
section 1504(a)(2), the transaction does not constitute a qualified
stock disposition. The section 336(e) election made with respect to the
disposition of Target stock has no effect.
Example 8. Distribution of 80 percent of Target stock in complete
redemption of a greater-than-50-percent shareholder. (i) Facts. A and B
own 51 and 49 shares, respectively, of Seller's only class of stock.
Seller owns all 100 shares of Target's only class of stock. Seller
distributes 80 shares of Target stock to A in complete redemption of A's
51 shares of Seller in a transaction that does not qualify under section
355. A section 336(e) election is made.
(ii) Consequences. Prior to the redemption, Seller and A would be
related persons because, under section 318(a)(2)(C), any stock of a
corporation that is owned by Seller would be attributed to A because A
owns 50 percent or more of the value of the stock of Seller. However,
for purposes of Sec. Sec. 1.336-1 through 1.336-5, the determination of
whether Seller and A are related is made immediately after the
redemption of A's stock. See Sec. Sec. 1.336-1(b)(5)(iii) and 1.338-
3(b)(3)(ii)(A). After the
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redemption, A no longer owns any stock of Seller. Accordingly, A and
Seller are not related persons, as defined in Sec. 1.336-1(b)(12), and
the distribution of Target stock constitutes a qualified stock
disposition. For Federal income tax purposes, rather than Seller
distributing the stock of Target to A, the following is deemed to occur.
Old Target is treated as if it sold its assets to an unrelated person.
New Target is then treated as acquiring all its assets from an unrelated
person in a single transaction. Immediately thereafter, Old Target is
treated as liquidating into Seller in a transaction qualifying under
section 332. Seller recognizes no gain or loss on the liquidation.
Seller is then treated as purchasing 80 shares of New Target stock from
an unrelated person and then distributing the 80 shares of New Target
stock to A in exchange for A's 51 shares of Seller stock. Seller
recognizes no gain or loss on the distribution of New Target stock
pursuant to Sec. 1.336-2(b)(1)(iv). Seller is then treated as
purchasing from an unrelated person on the day after the disposition
date the 20 shares of Target stock (New Target stock) retained for their
fair market value as determined under Sec. 1.336-2(b)(1)(v). The
Federal income tax consequences to A are the same as if no section
336(e) election had been made.
Example 9. Pro-rata distribution of 80 percent of Target stock. (i)
Facts. A and B own 60 and 40 shares, respectively, of Seller's only
class of stock. Seller owns all 100 shares of Target's only class of
stock. Seller distributes 48 shares of Target stock to A and 32 shares
of Target stock to B in a transaction that does not qualify under
section 355. A section 336(e) election is made.
(ii) Consequences. Any stock of a corporation that is owned by
Seller would be attributed to A under section 318(a)(2)(C) because,
after the distribution, A owns 50 percent or more of the value of the
stock of Seller. Therefore, after the distribution, A and Seller are
related persons, as defined in Sec. 1.336-1(b)(12), and the
distribution of Target stock to A is not a disposition. Because only 32
percent of Target stock was sold, exchanged, or distributed to unrelated
persons, there has not been a qualified stock disposition. Accordingly,
the section 336(e) election made with respect to the distribution of
Target stock has no effect.
(h) Effective/applicability date. Paragraph (d)(3)(ii) of this
section is applicable to any qualified stock purchase or qualified stock
disposition (as defined in Sec. 1.336-1(b)(6)) for which the
acquisition date or disposition date (as defined in Sec. 1.336-
1(b)(8)), respectively, is on or after May 15, 2013.
(h) Effective/applicability date. Paragraph (d)(3)(ii) of this
section is applicable to any qualified stock purchase or qualified stock
disposition (as defined in Sec. 1.336-1(b)(6)) for which the
acquisition date or disposition date (as defined in Sec. 1.336-
1(b)(8)), respectively, is on or after May 15, 2013.
[T.D. 9619, 78 FR 28474, May 15, 2013; 78 FR 53027, Aug. 28, 2013]
Sec. 1.336-3 Aggregate deemed asset disposition price; various
aspects of taxation of the deemed asset disposition.
(a) Scope. This section provides rules under section 336(e) to
determine the aggregate deemed asset disposition price (ADADP) for
Target. ADADP is the amount for which old Target is deemed to have sold
all of its assets in the deemed asset disposition. ADADP is allocated
among Target's assets in the same manner as the aggregate deemed sale
price (ADSP) is allocated under Sec. 1.338-6 to determine the amount
for which each asset is deemed to have been sold. If a subsequent
increase or decrease is required under general principles of tax law
with respect to an element of ADADP, the redetermined ADADP is allocated
among Target's assets in the same manner as redetermined ADSP is
allocated under Sec. 1.338-7.
(b) Determination of ADADP--(1) General rule. ADADP is the sum of--
(i) The grossed-up amount realized on the sale, exchange, or
distribution of recently disposed stock of Target; and
(ii) The liabilities of old Target.
(2) Time and amount of ADADP--(i) Original determination. ADADP is
initially determined at the beginning of the day after the disposition
date of Target. General principles of tax law apply in determining the
timing and amount of the elements of ADADP.
(ii) Redetermination of ADADP. ADADP is redetermined at such time
and in such amount as an increase or decrease would be required, under
general principles of tax law, for the elements of ADADP. For example,
ADADP is redetermined because of an increase or decrease in the amount
realized on the sale or exchange of recently disposed stock of Target or
because liabilities not originally taken into account in determining
ADADP are subsequently taken into account. Increases or decreases with
respect to
[[Page 101]]
the elements of ADADP result in the reallocation of ADADP among Target's
assets in the same manner as ADSP under Sec. 1.338-7.
(c) Grossed-up amount realized on the disposition of recently
disposed stock of Target--(1) Determination of amount. The grossed-up
amount realized on the disposition of recently disposed stock of Target
is an amount equal to--
(i) The sum of --
(A) With respect to recently disposed of stock of Target that is not
distributed in the qualified stock disposition, the amount realized on
the sale or exchange of such recently disposed stock of Target,
determined as if seller or S corporation shareholders were required to
use old Target's accounting methods and characteristics and the
installment method were not available and determined without regard to
the selling costs taken into account under paragraph (c)(1)(iii) of this
section, and
(B) With respect to recently disposed of stock of Target that is
distributed in the qualified stock disposition, the fair market value of
such recently disposed stock of Target determined on the date of each
distribution;
(ii) Divided by the percentage of Target stock (by value, determined
on the disposition date) attributable to the recently disposed stock;
(iii) Less the selling costs incurred by seller or S corporation
shareholders in connection with the sale or exchange of recently
disposed stock that reduce its amount realized on the sale or exchange
of the stock (for example, brokerage commissions and any similar costs
to sell the stock).
(2) Example. The following example illustrates this paragraph (c):
Example. Target has two classes of stock outstanding, voting common
stock and preferred stock described in section 1504(a)(4). Seller owns
all 100 shares of each class of stock. On March 1 of Year 1, Seller
sells 10 shares of Target voting common stock to A for $75. On April 1
of Year 2, Seller distributes 15 shares of Target voting common stock
with a fair market value of $120 to B. On May 1 of Year 2, Seller
distributes 10 shares of Target voting common stock with a fair market
value of $110 to C. On July 1 of Year 2, Seller sells 55 shares of
Target voting common stock to D for $550. On July 1 of Year 2, the fair
market value of all the Target voting common stock is $1,000 ($10 per
share) and the fair market value of all the preferred stock is $600 ($6
per share). Seller incurs $20 of selling costs with respect to the sale
to A and $60 of selling costs with respect to the sale to D. The
grossed-up amount realized on the sale, exchange, or distribution of
recently disposed stock of Target is calculated as follows: The sum of
the amount realized on the sale or exchange of recently disposed stock
sold or exchanged (without regard to selling costs) and the fair market
value of the recently disposed stock distributed is $780 ($120 + $110 +
$550) (the 10 shares sold to A on March 1 of Year 1 is not recently
disposed stock because it was not disposed of during the 12-month
disposition period). The percentage of Target stock by value on the
disposition date attributable to recently disposed stock equals 50%
($800 (80 shares of recently disposed stock x $10, the fair market value
of each share of Target common stock on the disposition date)/$1,600
($1,000 (the total value of Target's common stock on the disposition
date) + $600 (the total value of Target's preferred stock on the
disposition date))). The grossed-up amount realized equals $1,500
(($780/.50)-$60 selling costs).
(d) Liabilities of old Target--(1) In general. In general, the
liabilities of old Target are measured as of the beginning of the day
after the disposition date. However, if a Target for which a section
336(e) election is made engages in a transaction outside the ordinary
course of business on the disposition date after the event resulting in
the qualified stock disposition of Target or a higher-tier corporation,
Target and all persons related thereto (either before or after the
qualified stock disposition) under section 267(b) or section 707 must
treat the transaction for all Federal income tax purposes as occurring
at the beginning of the day following the transaction and after the
deemed disposition by old Target. In order to be taken into account in
ADADP, a liability must be a liability of Target that is properly taken
into account in amount realized under general principles of tax law that
would apply if old Target had sold its assets to an unrelated person for
consideration that included the discharge of its liabilities. See Sec.
1.1001-2(a). Such liabilities may include liabilities for the tax
consequences resulting from the deemed asset disposition.
(2) Time and amount of liabilities. The time for taking into account
liabilities of old Target in determining ADADP and the amount of the
liabilities taken into account is determined as if old
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Target had sold its assets to an unrelated person for consideration that
included the discharge of the liabilities by the unrelated person. For
example, if no amount of a Target liability is properly taken into
account in amount realized as of the beginning of the day after the
disposition date, the liability is not initially taken into account in
determining ADADP, but it may be taken into account at some later date.
(e) Deemed disposition tax consequences. Gain or loss on each asset
in the deemed asset disposition is computed by reference to the ADADP
allocated to that asset. ADADP is allocated in the same manner as is
ADSP under Sec. 1.338-6. Although deemed disposition tax consequences
may increase or decrease ADADP by creating or reducing a tax liability,
the amount of the tax liability itself may be a function of the size of
the deemed disposition tax consequences. Thus, these determinations may
require trial and error computations.
(f) Other rules apply in determining ADADP. ADADP may not be applied
in such a way as to contravene other applicable rules. For example, a
capital loss cannot be applied to reduce ordinary income in calculating
the tax liability on the deemed asset disposition for purposes of
determining ADADP.
(g) Examples. The following examples illustrate this section.
Example 1. (i) Facts. The facts are the same as in Example 1 of
Sec. 1.336-2(b)(1)(i)(B)(3), that is, Parent owns 60 of the 100
outstanding shares of the common stock of Seller, Seller's only class of
stock outstanding. The remaining 40 shares of the common stock of Seller
are held by shareholders unrelated to Seller or each other. Seller owns
95 of the 100 outstanding shares of Target common stock, and all 100
shares of Target preferred stock that is described in section
1504(a)(4). The remaining 5 shares of Target common stock are owned by
A. On January 1 of Year 1, Seller sells 72 shares of Target common stock
to B for $3,520. On July 1 of Year 1, Seller distributes 12 shares of
Target common stock to Parent and 8 shares to its unrelated shareholders
in a distribution described in section 301. Seller retains 3 shares of
Target common stock and all 100 shares of Target preferred stock
immediately after July 1. The value of Target common stock on July 1 is
$60 per share. The value of Target preferred stock on July 1 is $36 per
share. Target has three assets, Asset 1, a Class IV asset, with a basis
of $1,776 and a fair market value of $2,000, Asset 2, a Class V asset,
with a basis of $2,600 and a fair market value of $2,750, and Asset 3, a
Class V asset, with a basis of $3,900 and a fair market value of $3,850.
Seller incurred no selling costs on the sale of the 72 shares of Target
common stock to B. Target has no liabilities. A section 336(e) election
is made.
(ii) Determination of ADADP. The ADADP on the deemed asset
disposition of Target is determined as follows. The grossed-up amount
realized on the sale, exchange, or distribution of recently disposed
stock of Target is $8,000, the sum of $3,520, the amount realized on the
sale to B of the 72 shares of Target common stock and $480, the fair
market value on the date distributed of the 8 shares of Target common
stock distributed to Seller's unrelated shareholders in the qualified
stock disposition, divided by .50, the percentage of Target stock by
value, determined on the disposition date, attributable to the recently
disposed stock ($4,800 (80 shares of Target common stock disposed of in
the qualified stock disposition x $60, the value of a share of Target
common stock on the disposition date) divided by $9,600 ((100, the total
number of shares of Target common stock x $60, the value of a share of
Target common stock on the disposition date) + (100, the total number of
shares of Target preferred stock x $36, the value of a share of Target
preferred stock on the disposition date))), minus $0, Seller's selling
costs in connection with the sale of the 72 shares of Target common
stock sold to B. The $8,000 grossed-up amount realized on the sale,
exchange, or distribution of recently disposed stock of Target is then
added to the liabilities of Old Target, $0, to arrive at the ADADP,
$8,000.
(iii) Allocation of ADADP. The ADADP of $8,000 is allocated first to
Asset 1, the Class IV asset, but not in excess of Asset 1's fair market
value, $2,000. The remaining ADADP of $6,000 is allocated between Assets
2 and 3, both Class V assets, in proportion to their fair market values,
but not in excess of their fair market values. Because the total fair
market value of Assets 2 and 3, $6,600, exceeds the ADADP remaining
after allocation of a portion of the ADADP to Asset 1, the $6,000
remaining ADADP is allocated to Assets 2 and 3 in proportion to their
respective fair market values. Accordingly, $2,500 is allocated to Asset
2 ($6,000 x ($2,750/($2,750 + $3,850))) and $3,500 is allocated to Asset
3 ($6,000 x ($3,850/($2,750 + $3,850))).
Example 2. (i) Facts. The facts are the same as in Example 1 except
that Asset 2 is the stock of Target Subsidiary, a corporation of which
Target owns 100 of the 110 shares of common stock, the only outstanding
class of Target Subsidiary stock. The remaining 10 shares of Target
Subsidiary stock are owned by D. The value of Target Subsidiary stock on
July 1 is $27.50 per share. Target Subsidiary has two assets, Asset 4, a
Class IV
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asset, with a basis of $800 and a fair market value of $1,000, and Asset
5, a Class IV asset, with a basis of $2,200 and a fair market value of
$2,025. Target Subsidiary has no liabilities. A section 336(e) election
with respect to Target Subsidiary is also made.
(ii) Determination of ADADP. The ADADP on the deemed asset
disposition of Target Subsidiary is determined as follows. The grossed-
up amount realized on the sale, exchange, or distribution of recently
disposed stock of Target Subsidiary is $2,750, ($2,500 ADADP allocable
to Asset 2, the 100 shares of the stock of Target Subsidiary owned by
Target, divided by .909, the percentage of Target Subsidiary stock by
value, determined on the disposition date, attributable to the recently
disposed stock ($2,750 (100 shares of the stock of Target Subsidiary
deemed disposed in the qualified stock disposition x $27.50, the value
of a share of Target Subsidiary stock on the disposition date) divided
by $3,025 (110, the total number of shares of Target Subsidiary stock x
$27.50, the value of a share of Target Subsidiary stock on the
disposition date)), minus $0, Seller's selling costs in connection with
the deemed sale of the 100 shares of Target Subsidiary stock). The
$2,750 grossed-up amount realized on the sale, exchange, or distribution
of recently disposed stock of Target Subsidiary is then added to the
liabilities of Old Target Subsidiary, $0, to arrive at the ADADP of
Target Subsidiary, $2,750.
(iii) Allocation of ADADP. Because Assets 4 and 5 are each assets of
the same class, and the total fair market value of Assets 4 and 5
exceeds the $2,750 ADADP of Target Subsidiary, the $2,750 ADADP is
allocated to Assets 4 and 5 in proportion to their respective fair
market values. Accordingly, $909 is allocated to Asset 4 ($2,750 x
($1,000/($1,000 + $2,025))) and $1,841 is allocated to Asset 5 ($2,750 x
($2,025/($1,000 + $2,025))).
Example 3. (i) Seller owns all 100 of the outstanding shares of the
common stock of Target, the only class of Target stock outstanding. On
January 1 of Year 1, Seller sells 10 shares of Target stock to A for
$6,000 ($600 per share). On August 1 of Year 1, Seller distributes the
remaining 90 shares of Target stock to its unrelated shareholders in a
transaction described in section 355(d)(2) or (e)(2). The value of
Target stock on August 1 is $560 per share. Target has two assets, Asset
1, which is stock in trade of Target, a Class IV asset, with a basis of
$15,000 and a value of $50,000, and Asset 2, which is stock in a
publicly traded, unrelated corporation, a Class II asset, with a basis
of $38,000 and a value of $16,000. Target has no liabilities other than
any liabilities for Federal tax on account of the deemed asset
disposition. Assume Target's Federal tax rate for any gain or income on
the deemed asset disposition is 34 percent. Seller had no selling costs
in connection with its sale of the 10 shares of Target stock. A section
336(e) election is made.
(ii) Because at least 80 percent of Target stock was disposed of
(within the meaning of Sec. 1.336-1(b)(5)) by Seller during the 12-
month disposition period, a qualified stock disposition occurred. August
1 of Year 1 is the disposition date. Accordingly, pursuant to the
section 336(e) election, for Federal income tax purposes, Target is
treated as if, on August 1, it sold all of its assets to an unrelated
person in exchange for the ADADP.
(iii) Under these facts, although a portion of the qualified stock
disposition was the result of a stock distribution, because the grossed-
up amount realized on the disposition of recently disposed stock of
Target, $56,400 (($6,000 + ($560 x 90))/1) exceeds Target's total basis
in its assets, none of the losses realized on the deemed asset
disposition are disallowed under Sec. 1.336-2(b)(2)(i)(B)(2). Because
the grossed-up amount realized on the disposition of recently disposed
stock of Target exceeds the value of Asset 2, the ADADP allocated to
Asset 2 equals the value of Asset 2, $16,000, and Target realizes a
$22,000 loss on the deemed disposition of Asset 2. None of this loss is
disallowed under section 1091. See Sec. 1.336-2(b)(2)(ii)(C).
Accordingly, Target recognizes a $22,000 loss on the deemed disposition
of Asset 2.
(iv) The ADADP allocated to Asset 1 is determined as follows (for
purposes of this Example 3, TotADADP is the total ADADP for the deemed
asset disposition, A1ADADP is the tentative amount of the total ADADP
allocated to Asset 1, A2ADADP is the amount of the total ADADP allocated
to Asset 2, G is the grossed-up amount realized on the disposition of
recently disposed stock of Target, L is Target's liabilities other than
Target's tax liability for the deemed disposition tax consequences,
TR is the applicable tax rate, and B1 is the adjusted basis
of Asset 1 and B2 is the adjusted basis of Asset 2):
TotADADP = G + L + (TR x (TotADADP-B1-B2))
A1ADADP = TotADADP-A2ADADP
A2ADADP = $16,000
A1ADADP = TotADADP-$16,000
G = ($6,000 + ($560 x 90))/1
G = $56,400
TotADADP = $56,400 + 0 + (.34 x (TotADADP-$15,000-$38,000))
TotADADP = $56,400 + .34TotADADP-$18,020
.66TotADADP = $38,380
TotADADP = $58,152
A1ADADP = $42,152
(v) Because A1ADADP, $42,152, does not exceed the value of Asset 1,
$50,000, the entire A1ADADP is allocated to Asset 1. Old Target thus
realizes and recognizes a gain of $27,152 on the deemed disposition of
Asset 1 ($42,152-$15,000).
[T.D. 9619, 78 FR 28474, May 15, 2013]
[[Page 104]]
Sec. 1.336-4 Adjusted grossed-up basis.
(a) Scope. Except as provided in paragraphs (b) and (c) of this
section or as the context otherwise requires, the principles of
paragraphs (b) through (g) of Sec. 1.338-5 apply in determining the
adjusted grossed-up basis (AGUB) for target and the consequences of a
gain recognition election. AGUB is the amount for which new target is
deemed to have purchased all of its assets in the deemed purchase under
Sec. 1.336-2(b)(1)(ii) or the amount for which old target is deemed to
have purchased all of its assets in the deemed purchase under Sec.
1.336-2(b)(2)(ii). AGUB is allocated among target's assets in accordance
with Sec. 1.338-6 to determine the price at which the assets are deemed
to have been purchased. If a subsequent increase or decrease with
respect to an element of AGUB is required under general principles of
tax law, redetermined AGUB is allocated among target's assets in
accordance with Sec. 1.338-7.
(b) Modifications to the principles in Sec. 1.338-5. Solely for
purposes of applying Sec. Sec. 1.336-1 through 1.336-4, the principles
of Sec. 1.338-5 are modified as follows--
(1) Purchasing corporation; purchaser. Any reference to the
purchasing corporation shall be treated as a reference to a purchaser,
as defined in Sec. 1.336-1(b)(2).
(2) Acquisition date; disposition date. Any reference to the
acquisition date shall be treated as a reference to the disposition
date, as defined in Sec. 1.336-1(b)(8).
(3) Section 338 election; section 338(h)(10) election; section
336(e) election. Any reference to a section 338 election or a section
338(h)(10) election shall be treated as a reference to a section 336(e)
election, as defined in Sec. 1.336-1(b)(11).
(4) New target; old target. In the case of a disposition described
in section 355(d)(2) or (e)(2), any reference to new target shall be
treated as a reference to old target in its capacity as the purchaser of
assets pursuant to the section 336(e) election.
(5) Recently purchased stock; recently disposed stock. Any reference
to recently purchased stock shall be treated as a reference to recently
disposed stock, as defined in Sec. 1.336-1(b)(17). In the case of a
distribution of stock, for purposes of determining the purchaser's
grossed-up basis of recently disposed stock, the purchaser's basis in
recently disposed stock shall be deemed to be such stock's fair market
value on the date it was acquired.
(6) Nonrecently purchased stock; nonrecently disposed stock. Any
reference to nonrecently purchased stock shall be treated as a reference
to nonrecently disposed stock, as defined in Sec. 1.336-1(b)(18).
(c) Gain recognition election--(1) In general. Any holder of
nonrecently disposed stock of target may make a gain recognition
election. The gain recognition election is irrevocable. Each owner of
nonrecently disposed stock determines its basis amount, and therefore
the gain recognized pursuant to the gain recognition election, by
applying Sec. Sec. 1.338-5(c) and 1.338-5(d)(3)(ii) by reference to its
own recently disposed stock and nonrecently disposed stock, and not by
reference to all recently disposed stock and nonrecently disposed stock.
(2) 80-percent purchaser. If a section 336(e) election is made for
target, any 80-percent purchaser and all persons related to the 80-
percent purchaser are automatically deemed to have made a gain
recognition election for its nonrecently disposed target stock.
(3) Non-80-percent purchaser. If not automatically deemed made under
paragraph (c)(2) of this section, a gain recognition election is made by
a non-80-percent purchaser providing, on or before the due date for
filing the section 336(e) election statement by the appropriate party, a
gain recognition election statement, as described in paragraph (c)(4) of
this section, to the appropriate party. If seller and target are members
of the same consolidated group, seller is the appropriate party and the
common parent of the consolidated group must retain the gain recognition
election statement. If seller and target are members of the same
affiliated group but do not join in the filing of a consolidated Federal
income tax return, or if target is an S corporation, target is the
appropriate party and target must retain the gain recognition election
statement. If a non-
[[Page 105]]
80-percent purchaser makes a gain recognition election, all related
persons to the non-80-percent purchaser must also make a gain
recognition election. Otherwise, the gain recognition election for the
non-80-percent purchaser will have no effect.
(4) Gain recognition election statement. A gain recognition election
statement must include the following declarations (or substantially
similar declarations):
(i) [Insert name, address, and taxpayer identifying number of person
for whom gain recognition election is actually being made] has elected
to recognize gain under Sec. 1.336-4(c) with respect to [his, hers, or
its] nonrecently disposed stock.
(ii) [Insert name of person for whom gain recognition election is
actually being made] agrees to report any gain under the gain
recognition election on [his, hers, or its] Federal income tax return
(including an amended return, if necessary) for the taxable year that
includes the disposition date of [insert name and employer
identification number of target].
(d) Examples. The following examples illustrate the provisions of
this section.
Example 1. On January 1 of Year 1, Seller owns 85 shares of Target
stock, A owns 8 shares, B owns 4 shares, and C owns the remaining 3
shares. Each of A's 8 shares, B's 4 shares, and C's 3 shares have a $5
basis. Assume that Target has no liabilities. On July 1 of Year 2,
Seller sells 70 shares of Target stock to A for $10 per share. On
September 1 of Year 2, Seller sells 5 shares of Target stock to B and 5
shares of Target stock to C for $14 per share. A section 336(e) election
is made. A does not make a gain recognition election. A incurs $25 of
acquisition costs and B and C each incur $10 of acquisition costs in
connection with their respective Year 2 purchases. These costs are
capitalized in the basis of Target stock. September 1 of Year 2 is the
disposition date. Because A owns at least 10 percent of Target stock on
September 1, the disposition date, and A's original 8 shares of Target
stock owned on January 1 of Year 1 were not disposed of in the qualified
stock disposition, A's original 8 shares of Target stock are nonrecently
disposed stock. Although B's original 4 shares and C's original 3 shares
were not disposed of in the qualified stock disposition, because neither
B nor C owns, with the application of section 318(a), other than section
318(a)(4), at least 10 percent of the total voting power or value of
Target stock on the disposition date, their original shares are not
nonrecently disposed stock. The grossed-up basis of recently disposed
Target stock is $1,011, determined as follows: The purchasers' (A, B,
and C) aggregate basis in the recently disposed target stock, determined
without regard to acquisition costs, is $840 ((70 x $10) + (5 x $14) +
(5 x $14)). This amount is multiplied by a fraction, the numerator of
which is 100 minus 8, the percentage of Target stock that is nonrecently
disposed stock, and the denominator of which is 80, the percentage of
Target stock attributable to recently disposed stock ($840 x 92/80 =
$966). This amount is then increased by the $45 of acquisition costs
incurred by A, B, and C to arrive at the $1,011 grossed-up basis of
recently disposed Target stock ($966 + $45 = $1,011). New Target's AGUB
is $1,051, the sum of $1,011, the grossed-up basis of recently disposed
Target stock and $40 (8 x $5), A's basis in his nonrecently disposed
Target stock.
Example 2. The facts are the same as in Example 1 except that A
makes a gain recognition election. Pursuant to the gain recognition
election, A is treated as if he sold on September 1 of Year 2, the
disposition date, his 8 shares of nonrecently disposed Target stock for
the basis amount, and A's basis in nonrecently disposed target stock
immediately after the deemed sale is the basis amount. A's basis amount
equals his basis in his recently disposed Target stock without regard to
acquisition costs, $700 (70 x $10), multiplied by a fraction, the
numerator of which is 100 minus 8, the percentage of Target stock, by
value, determined on the disposition date, which is A's nonrecently
disposed Target stock, and the denominator of which is 70, the
percentage of Target stock, by value, determined on the disposition
date, which is A's recently disposed stock, which is then multiplied by
a fraction, the numerator of which is 8, the percentage of Target stock,
by value, determined on the disposition date, attributable to A's
nonrecently disposed Target stock and the denominator of which is 100
minus the numerator amount. Accordingly, A's basis amount is $80 ($700 x
92/70 x 8/92). A therefore recognizes gain of $40 under the gain
recognition election ($80 basis amount minus A's $40 basis in his
nonrecently disposed stock prior to the gain recognition election). New
Target's AGUB is $1,091, the sum of $1,011, the grossed-up basis of all
recently disposed Target stock and $80, A's basis in his nonrecently
disposed Target stock pursuant to the gain recognition election.
Example 3. (i) The facts are the same as in Example 3 of Sec.
1.336-3(g), that is, Seller owns all 100 of the outstanding shares of
the common stock of Target, the only class of Target stock outstanding.
On January 1 of Year 1, Seller sells 10 shares of Target stock to A for
$6,000 ($600 per share). On August 1 of Year 1,
[[Page 106]]
Seller distributes the remaining 90 shares of Target stock to its
unrelated shareholders in a transaction described in section 355(d)(2)
or (e)(2). The value of Target stock on August 1 is $560 per share.
Target has two assets, Asset 1, which is stock in trade of Target, a
Class IV asset, with a basis of $15,000 and a value of $50,000, and
Asset 2, which is stock in a publicly traded, unrelated corporation, a
Class II asset, with a basis of $38,000 and a value of $16,000. Target
has no liabilities other than any liabilities for Federal tax on account
of the deemed asset disposition. Assume Target's Federal tax rate for
any gain or income on the deemed asset disposition is 34 percent. Seller
had no selling costs in connection with its sale of the 10 shares of
Target stock. A section 336(e) election is made. In addition, A incurred
$100 of acquisition costs with respect to the purchase of the 10 shares
of Target stock. Target's AGUB in the assets deemed acquired pursuant to
Sec. 1.336-2(b)(2)(ii)(B) is determined as follows (for purposes of
this Example 3, GRD is the grossed-up basis of recently disposed stock,
BND is the basis in nonrecently disposed stock, TotL is Target's total
liabilities, including Target's tax liability, and X is the A's total
acquisition costs):
AGUB = GRD + BND + TotL
GRD = ($6,000 + ($560 x 90)) x ((100 - 0)/100) + X
GRD = ($6,000 + $50,400) x (100/100) + $100
GRD = $56,500
BND = $0
TotL = .34 x ($27,152 (Target's gain recognized on deemed disposition of
Asset 1) - $22,000 (Target's loss recognized on deemed
disposition of Asset 2)) (see Example 3 of Sec. 1.336-3(g)
for determination of Target's gain and loss recognized on
deemed disposition of Assets 1 and 2)
TotL = $1,752
AGUB = $56,500 + $0 + $1,752
AGUB = $58,252
(ii) The AGUB allocated to Asset 2 is $16,000, the value of Asset 2.
Because the excess of the total AGUB, $58,252, over the portion of the
AGUB allocated to Asset 2, $16,000, does not exceed the value of Asset
1, the AGUB allocated to Asset 1 is such excess, $42,252.
[T.D. 9619, 78 FR 28474, May 15, 2013]
1.336-5 Effective/applicability dates.
The provisions of Sec. Sec. 1.336-1 through 1.336-4 apply to any
qualified stock disposition for which the disposition date is on or
after May 15, 2013. The provisions of Sec. 1.336-1(b)(5)(i)(A) relating
to section 1022 are effective on and after January 19, 2017.
[T.D. 9619, 78 FR 28474, May 15, 2013, as amended by T.D. 9811, 82 FR
6237, Jan. 19, 2017]
effects on corporation
Sec. 1.337-1 Nonrecognition for property distributed to parent
in complete liquidation of subsidiary.
(a) General rule. If sections 332(a) and 337 are applicable with
respect to the receipt of a subsidiary`s property in complete
liquidation, no gain or loss is recognized to the liquidating subsidiary
with respect to such property (including property distributed with
respect to indebtedness, see section 337(b)(1) and Sec. 1.332-7),
except as provided in section 337(b)(2) (distributions to certain tax-
exempt distributees), section 367(e)(2) (distributions to foreign
corporations), and section 897(d) (distributions of U.S. real property
interests by foreign corporations).
(b) Aplicability date. This section applies to any taxable year
beginning on or after March 28, 2016.
[T.D. 9759, 81 FR 17074, Mar. 28, 2016]
Sec. 1.337(d)-1 Transitional loss limitation rule.
(a) Loss limitation rule for transitional subsidiary--(1) General
rule. No deduction is allowed for any loss recognized by a member of a
consolidated group with respect to the disposition of stock of a
transitional subsidiary. However, for transactions involving loss shares
of subsidiary stock occurring on or after September 17, 2008, see Sec.
1.1502-36. Further, this section does not apply to a transaction that is
subject to Sec. 1.1502-36.
(2) Allowable loss--(i) In general. Paragraph (a)(1) of this section
does not apply to the extent the taxpayer establishes that the loss is
not attributable to the recognition of built-in gain by any transitional
subsidiary on the disposition of an asset (including stock and
securities) after January 6, 1987.
(ii) Statement of allowable loss. Paragraph (a)(2)(i) of this
section applies only if a separate statement entitled ``Allowable Loss
Under Sec. 1.337(d)-1(a)'' is filed with the taxpayer's return for the
year of the stock disposition. If the
[[Page 107]]
separate statement is required to be filed with a return the due date
(including extensions) of which is before January 16, 1991, or with a
return due (including extensions) after January 15, 1991 but filed
before that date, the statement may be filed with an amended return for
the year of the disposition or with the taxpayer's first subsequent
return the due date (including extensions) of which is after January 15,
1991.
(iii) Contents of statement. The statement required under paragraph
(a)(2)(ii) of this section must contain--
(A) The name and employer identification number (E.I.N.) of the
transitional subsidiary.
(B) The basis of the stock of the transitional subsidiary
immediately before the disposition.
(C) The amount realized on the disposition.
(D) The amount of the deduction not disallowed under paragraph
(a)(1) of this section by reason of this paragraph (a)(2).
(E) The amount of loss disallowed under paragraph (a)(1) of this
section.
(3) Coordination with loss deferral and other disallowance rules.
(i) For purposes of this section, the rules of Sec. 1.1502-20(a)(3)
apply, with appropriate adjustments to reflect differences between the
approach of this section and that of Sec. 1.1502-20.
(ii) Other loss deferral rules. If paragraph (a)(1) of this section
applies to a loss subject to deferral or disallowance under any other
provision of the Code or the regulations, the other provision applies to
the loss only to the extent it is not disallowed under paragraph (a)(1).
(4) Definitions. For purposes of this section--
(i) The definitions in Sec. 1.1502-1 apply.
(ii) Transitional subsidiary means any corporation that became a
subsidiary of the group (whether or not the group was a consolidated
group) after January 6, 1987. Notwithstanding the preceding sentence, a
subsidiary is not a transitional subsidiary if the subsidiary (and each
predecessor) was a member of the group at all times after the
subsidiary's (and each predecessor's) organization.
(iii) Built-in gain of a transitional subsidiary means gain
attributable, directly or indirectly, in whole or in part, to any excess
of value over basis, determined immediately before the transitional
subsidiary became a subsidiary, with respect to any asset owned directly
or indirectly by the transitional subsidiary at that time.
(iv) Disposition means any event in which gain or loss is
recognized, in whole or in part.
(v) Value means fair market value.
(5) Examples. For purposes of the examples in this section, unless
otherwise stated, the group files consolidated returns on a calendar
year basis, the facts set forth the only corporate activity, and all
sales and purchases are with unrelated buyers or sellers. The basis of
each asset is the same determining earnings and profits adjustments and
taxable income. Tax liability and its effect on basis, value, and
earnings and profits are disregarded. Investment adjustment system means
the rules of Sec. 1.1502-32. The principles of this paragraph (a) are
illustrated by the following examples:
Example 1. Loss attributable to recognized built-in gain. (i) P buys
all the stock of T for $100 on February 1, 1987, and T becomes a member
of the P group. T has an asset with a value of $100 and basis of $0. T
sells the asset in 1989 and recognizes $100 of built-in gain on the sale
(i.e., the asset's value exceeded its basis by $100 at the time T became
a member of the P group). Under the investment adjustment system, P's
basis in the T stock increases to $200. P sells all the stock of T on
December 31, 1989, and recognizes a loss of $100. Under paragraph (a)(1)
of this section, no deduction is allowed to P for the $100 loss.
(ii) Assume that, after T sells its asset but before P sells the T
stock, T issues additional stock to unrelated persons and ceases to be a
member of the P group. P then sells all its stock of T in 1997. Although
T ceases to be a subsidiary within the meaning of Sec. 1.1502-1, T
continues to be a transitional subsidiary within the meaning of this
section. Consequently, under paragraph (a)(1) of this section, no
deduction is allowed to P for its $100 loss.
Example 2. Loss attributable to post-acquisition loss. P buys all
the stock of T for $100 on February 1, 1987, and T becomes a member of
the P group. T has $50 cash and an asset with $50 of built-in gain.
During 1988, T retains the asset but loses $40 of the cash. The P group
is unable to use the loss, and the loss
[[Page 108]]
becomes a net operating loss carryover attributable to T. Under the
investment adjustment system, P's basis in the stock of T remains $100.
P sells all the stock of T on December 31, 1988, for $60 and recognizes
a $40 loss. Under paragraph (a)(2)(i) of this section, P establishes
that it did not dispose of the built-in gain asset. None of P's loss is
disallowed under paragraph (a)(1) if P satisfies the requirements of
paragraph (a)(2)(ii) of this section.
Example 3. Stacking rules--postacquisition loss offsets
postacquisition gain. (i) P buys all the stock of T for $100 on February
1, 1987, and T becomes a member of the P group. T has 2 assets. Asset 1
has a basis and value of $50, and asset 2 has a basis of $0 and a value
of $50. During 1989, asset 1 declines in value to $0, and T sells asset
2 for $50, and reinvests the proceeds in asset 3. The value of asset 3
appreciates to $90. Under the investment adjustment system, P's basis in
the stock of T increases from $100 to $150 as a result of the gain
recognized on the sale of asset 2 but is unaffected by the unrealized
post-acquisition decline in the value of asset 1. On December 31, 1989,
P sells all the stock of T for $90 and recognizes a $60 loss.
(ii) Although T incurred a $50 post-acquisition loss of built-in
gain because of the decline in the value of asset 1, T also recognized
$50 of built-in gain. Under paragraph (a)(2) of this section, any loss
on the sale of stock is treated first as attributable to recognized
built-in gain. Thus, for purposes of determining under paragraph (a)(2)
of this section whether P's $60 loss on the disposition of the T stock
is attributable to the recognition of built-in gain on the disposition
of an asset, T's unrealized post-acquisition gain of $40 offsets $40 of
the $50 of unrealized post-acquisition loss. Therefore, $50 of the $60
loss is attributable to the recognition of built-in gain on the
disposition of an asset and is disallowed under paragraph (a)(1) of this
section.
Example 4. Stacking rules--built-in loss offsets built-in gain. (i)
P buys all the stock of T for $50 on February 1, 1987, and T becomes a
member of the P group. T has 2 assets. Asset 1 has a basis of $50 and a
value of $0, and asset 2 has a basis of $0 and a value of $50. During
1989, T sells asset 1 for $0 and asset 2 for $50, and reinvests the $50
proceeds in asset 3. The value of asset 3 declines to $40. Under the
investment adjustment system, P's basis in the stock of T remains $50 as
a result of the offsetting gain and loss recognized on the sale of
assets 1 and 2 and is unaffected by the unrealized post-acquisition
decline in the value of asset 3. On December 31, 1989, P sells all the
stock of T for $40 and recognizes a $10 loss.
(ii) Although T recognized a $50 built-in gain on the sale of asset
2, T also recognized a $50 built-in loss on the sale of asset 1. For
purposes of determining under paragraph (a)(2) of this section whether
P's $10 loss on the disposition of the T stock is attributable to the
recognition of built-in gain on the disposition of an asset, T's
recognized built-in gain is offset by its recognized built-in loss. Thus
none of P's $10 loss is attributable to the recognition of built-in gain
on the disposition of an asset.
(iii) The result would be the same if, instead of a $50 built-in
loss in asset 2, T has a $50 net operating loss carryover when P buys
the T stock, and the net operating loss carryover is used to offset the
built-in gain.
Example 5. Outside basis partially corresponds to inside basis. (i)
Individual A owns all the stock of T, for which A has a basis of $60. On
February 1, 1987, T owns 1 asset with a basis of $0 and a value of $100,
P acquires all the stock of T from A in an exchange to which section
351(a) applies, and T becomes a member of the P group. P has a carryover
basis of $60 in the T stock. During 1988, T sells the asset and
recognizes $100 of gain. Under the investment adjustment system, P's
basis in the T stock increases from $60 to $160. T reinvests the $100
proceeds in another asset, which declines in value to $90. On January 1,
1989, P sells all the stock of T for $90 and recognizes a loss of $70.
(ii) Although P's basis in the T stock was increased by $100 as a
result of the recognition of built-in gain on the disposition of T's
asset, only $60 of the $70 loss on the sale of the stock is attributable
under paragraph (a)(2) of this section to the recognition of built-in
gain from the disposition of the asset. (Had T's asset not declined in
value to $90, the T stock would have been sold for $100, and a $60 loss
would have been attributable to the recognition of the built-in gain.)
Therefore, $60 of the $70 loss is disallowed under paragraph (a)(2), and
$10 is not disallowed if P satisfies the requirements of paragraph
(a)(2). If P had sold the stock of T for $95 because T's other assets
had unrealized appreciation of $5, $60 of the $65 loss would still be
attributable to T's recognition of built-in gain on the disposition of
assets.
Example 6. Creeping acquisition. P owns 60 percent of the stock of S
on January 6, 1987. On February 1, 1987, P buys an additional 20 percent
of the stock of S, and S becomes a member of the P group. P sells all
the S stock on March 1, 1989 and recognizes a loss of $100. All 80
percent of the stock of S owned by P is subject to the rules of this
section and, under paragraph (a) (1) and (2) of this section, P is not
allowed to deduct the $100 loss, except to the extent P establishes the
loss is not attributable to the recognition by S of built-in gain on the
disposition of assets.
Example 7. Effect of post-acquisition appreciation. P buys all the
stock of T for $100, and T becomes a member of the P group. T has an
asset with a basis of $0 and a value of $100.
[[Page 109]]
T sells the asset for $100. Under the investment adjustment system, P's
basis in the T stock increases to $200. T reinvests the proceeds of the
sale in an asset that appreciates in value to $180. Five years after the
sale, P sells all the stock of T for $180 and recognizes a $20 loss.
Under paragraph (a)(1) of this section, no deduction is allowed to P for
the $20 loss.
Example 8. Deferred loss and recognized gain. (i) P is the common
parent of a consolidated group, S is a wholly owned subsidiary of P, and
T is a wholly owned subsidiary of S. S purchased all of the T stock on
February 1, 1987 for $100, and T has an asset with a basis of $40 and a
value of $100. T sells the asset for $100, recognizing $60 of gain.
Under the investment adjustment system, S's basis in the T stock
increases from $100 to $160. S sells its T stock to P for $100 in a
deferred intercompany transaction, recognizing a $60 loss that is
deferred under section 267(f) and Sec. 1.1502-13. P subsequently sells
all the stock of T for $100 to X, a member of the same controlled group
(as defined in section 267(f)) as P but not a member of the P
consolidated group.
(ii) Under paragraph (a)(3) of this section, the application of
paragraph (a)(1) of this section to S's $60 loss is deferred, because
S's loss is deferred under section 267(f) and Sec. 1.1502-13. Although
P's sale of the T stock to X would cause S's deferred loss to be taken
into account under Sec. 1.1502-13, Sec. 1.267(f)-1 provides that the
loss is not taken into account because X is a member of the same
controlled group as P and S. Nevertheless, under paragraph (a)(3) of
this section, because the T stock ceases to be owned by a member of the
P consolidated group, S's deferred loss is disallowed immediately before
the sale and is never taken into account under section 267(f).
(b) Indirect disposition of transitional subsidiary--(1) Loss
limitation rule for transitional parent. No deduction is allowed for any
loss recognized by a member of a consolidated group with respect to the
disposition of stock of a transitional parent.
(2) Allowable loss--(i) In general. Paragraph (b)(1) of this section
does not apply to the extent the taxpayer establishes that the loss
exceeds the amount that would be disallowed under paragraph (a) of this
section if each highest tier transitional subsidiary's stock in which
the transitional parent has a direct or indirect interest had been sold
immediately before the disposition of the transitional parent's stock.
In applying the preceding sentence, appropriate adjustments shall be
made to take into account circumstances where less than all the stock of
a transitional parent owned by members of a consolidated group is
disposed of in the same transaction, or the stock of a transitional
subsidiary or a transitional parent is directly owned by more than 1
member.
(ii) Statement of allowable loss. Paragraph (b)(2)(i) of this
section applies only if a separate statement entitled ``Allowable Loss
Under Section 1.337(d)-1(b)'' is filed with the taxpayer's return for
the year of the stock disposition. If the separate statement is required
to be filed with a return the due date (including extensions) of which
is before January 16, 1991, or with a return due (including extensions)
after January 15, 1991 but filed before that date, the statement may be
filed with an amended return for the year of the disposition or with the
taxpayer's first subsequent return the due date (including extensions)
of which is after January 15, 1991.
(iii) Contents of statement. The statement required under paragraph
(b)(2)(ii) of this section must contain--
(A) The name and employer identification number (E.I.N.) of the
transitional parent.
(B) The basis of the stock of the transitional parent immediately
before the disposition.
(C) The amount realized on the disposition.
(D) The amount of the deduction not disallowed under paragraph
(b)(1) of this section by reason of this paragraph (b)(2).
(E) The amount of loss disallowed under paragraph (b)(1) of this
section.
(3) Coordination with loss deferral and other disallowance rules.
(i) For purposes of this section, the rules of Sec. 1.1502-20(a)(3)
apply, with appropriate adjustments to reflect differences between the
approach of this section and that of Sec. 1.1502-20.
(ii) Other loss deferral rules. If paragraph (b)(1) of this section
applies to a loss subject to deferral or disallowance under any other
provision of the Code or the regulations, the other provision applies to
the loss only to the extent it is not disallowed under paragraph (b)(1).
(4) Definitions. For purposes of this section--
[[Page 110]]
(i) Transitional parent means any subsidiary, other than a
transitional subsidiary, that owned at any time after January 6, 1987, a
direct or indirect interest in the stock of a corporation that is a
transitional subsidiary.
(ii) Highest tier transitional subsidiary means the transitional
subsidiary (or subsidiaries) in which the transitional parent has a
direct or indirect interest and that is the highest transitional
subsidiary (or subsidiaries) in a chain of members.
(5) Examples. The principles of this paragraph (b) are illustrated
by the following examples:
Example 1. Ownership of chain of transitional subsidiaries. (i) P
forms S with $200 on January 1, 1985, and S becomes a member of the P
group. On February 1, 1987, S buys all the stock of T, and T buys all
the stock of T1, and both T and T1 become members of the P group. On
January 1, 1988, P sells all the stock of S and recognizes a $90 loss on
the sale.
(ii) Under paragraph (a)(4)(ii) of this section, both T and T1 are
transitional subsidiaries, because they became members of the P group
after January 6, 1987. Under paragraph (b)(4)(i) of this section, S is a
transitional parent, because it owns a direct interest in stock of
transitional subsidiaries and is not itself a transitional subsidiary.
(iii) Under paragraph (b) (1) and (2) of this section, because S is
a transitional parent, no deduction is allowed to P for its $90 loss
except to the extent the loss exceeds the amount of S's loss that would
have been disallowed if S had sold all the stock of T, S's highest tier
transitional subsidiary, immediately before P's sale of all the S stock.
Assume all the T stock would have been sold for a $90 loss and that all
the loss would be attributable to the recognition of built-in gain from
the disposition of assets. Because in that case $90 of loss would be
disallowed, all of P's loss on the sale of the S stock is disallowed
under paragraph (b).
Example 2. Ownership of brother-sister transitional subsidiaries.
(i) P forms S with $200 on January 1, 1985, and S becomes a member of
the P group. On February 1, 1987, S buys all the stock of both T and T1,
and T and T1 become members of the P group. On January 1, 1988, P sells
all the stock of S and recognizes a $90 loss on the sale.
(ii) Under paragraph (b) (1) and (2) of this section, no deduction
is allowed to P for its $90 loss except to the extent P establishes that
the loss exceeds the amount of S's stock losses that would be disallowed
if S sold all the stock of T and T1, S's highest tier transitional
subsidiaries, immediately before P's sale of all the S stock. Assume
that all the T stock would have been sold for a $50 loss, all the T1
stock of a $40 loss, and that the entire amount of each loss would be
attributable to the recognition of built-in gain on the disposition of
assets. Because $90 of loss would be disallowed with respect to the sale
of S's T and T1 stock, P's $90 loss on the sale of all the S stock is
disallowed under paragraph (b).
(c) Successors--(1) General rule. This section applies, to the
extent necessary to effectuate the purposes of this section, to--
(i) Any property owned by a member or former member, the basis of
which is determined, directly or indirectly, in whole or in part, by
reference to the basis in a subsidiary's stock, and
(ii) Any property owned by any other person whose basis in the
property is determined, directly or indirectly, in whole or in part, by
reference to a member's (or former member's) basis in a subsidiary's
stock.
(2) Examples. The principles of this paragraph (c) are illustrated
by the following examples:
Example 1. Merger into grandfathered subsidiary. P, the common
parent of a group, owns all the stock of T, a transitional subsidiary.
On January 1, 1989, T merges into S, a wholly owned subsidiary of P that
is not a transitional subsidiary. Under paragraph (c)(1) of this
section, all the stock of S is treated as stock of a transitional
subsidiary. As a result, no deduction is allowed for any loss recognized
by P on the disposition of any S stock, except to the extent the P group
establishes under paragraph (a)(2) that the loss is not attributable to
the recognition of built-in gain on the disposition of assets of T.
Example 2. Nonrecognition exchange of transitional stock. (i) P, the
common parent of a group, owns all the stock of T, a transitional
subsidiary. On January 1, 1989, P transfers the stock of T to X, a
corporation that is not a member of the P group, in exchange for 20
percent of its stock in a transaction to which section 351(a) applies. T
and X file separate returns.
(ii) Under paragraph (c)(1) of this section, all the stock of X
owned by P is treated as stock of a transitional subsidiary because P's
basis for the X stock is determined by reference to its basis for the T
stock. As a result, no deduction is allowed to P for any loss recognized
on the disposition of the X stock, except to the extent permitted under
paragraph (a) of this section.
(iii) Under paragraph (c)(1), X is treated as a member subject to
paragraph (a) of this section with respect to the T stock because
[[Page 111]]
X's basis for the stock is determined by reference to P's basis for the
stock. Moreover, all of the T stock owned by X continues to be stock of
a transitional subsidiary. As a result, no deduction is allowed to X for
any loss recognized on the disposition of any T stock, except to the
extent permitted under paragraph (a) of this section.
(d) Investment adjustments and earnings and profits--(1) In general.
For purposes of determining investment adjustments under Sec. 1.1502-32
and earnings and profits under Sec. 1.1502-33(c) with respect to a
member of a consolidated group that owns stock in a subsidiary, any
deduction that is disallowed under this section is treated as a loss
arising and absorbed by the member in the tax year in which the
disallowance occurs.
(2) Example. (i) In 1986, P forms S with a contribution of $100, and
S becomes a member of the P group. On February 1, 1987, S buys all the
stock of T for $100. T has an asset with a basis of $0 and a value of
$100. In 1988, T sells the asset for $100. Under the investment
adjustment system, S's basis in the T stock increases to adjustment
system, S's basis in the T stock increases to $200, P's basis in the S
stock increases to $200, and P's earnings and profits and S's earnings
and profits increase by $100. In 1989, S sells all of the T stock for
$100, and S's recognized loss of $100 is disallowed under paragraph
(a)(1) of this section.
(ii) Under paragraph (d)(1) of this section, S's earnings and
profits for 1989 are reduced by $100, the amount of the loss disallowed
under paragraph (a)(1). As a result, P's basis in the S stock is reduced
from $200 to $100 under the investment adjustment system. P's earnings
and profits for 1989 are correspondingly reduced by $100.
(e) Effective dates--(1) General rule. This section applies with
respect to dispositions after January 6, 1987. For dispositions on or
after November 19, 1990, however, this section applies only if the stock
was deconsolidated (as that term is defined in Sec. 1.337(d)-2(b)(2))
before November 19, 1990, and only to the extent the disposition is not
subject to Sec. 1.337(d)-2 or Sec. 1.1502-20.
(2) Binding contract rule. For purposes of this paragraph (e), if a
corporation became a subsidiary pursuant to a binding written contract
entered into before January 6, 1987, and in continuous effect until the
corporation became a subsidiary, or a disposition was pursuant to a
binding written contract entered into before March 9, 1990, and in
continuous effect until the disposition, the date the contract became
binding shall be treated as the date the corporation became a subsidiary
or as the date of disposition.
(3) Application of Sec. 1.1502-20T to certain transactions--(i) In
general. If a group files the certification described in paragraph
(e)(3)(ii) of this section, it may apply Sec. 1.1502-20T (as contained
in the CFR edition revised as of April 1, 1990), to all of its members
with respect to all dispositions and deconsolidations by the certifying
group to which Sec. 1.1502-20T otherwise applied by its terms
occurring--
(A) On or after March 9, 1990 (but only if not pursuant to a binding
contract described in Sec. 1.337(d)-1T(e)(2) (as contained in the CFR
edition revised as of April 1, 1990) that was entered into before March
9, 1990); and
(B) Before November 19, 1990 (or thereafter, if pursuant to a
binding contract described in Sec. 1.1502-20T(g)(3) that was entered
into on or after March 9, 1990 and before November 19, 1990).
The certification under this paragraph (e)(3)(i) with respect to the
application of Sec. 1.1502-20T to any transaction described in this
paragraph (e)(3)(i) may not be withdrawn and, if the certification is
filed, Sec. 1.1502-20T must be applied to all such transactions on all
returns (including amended returns) on which such transactions are
included.
(ii) Time and manner of filing certification. The certification
described in paragraph (e)(3)(i) of this section must be made in a
separate statement entitled ``[insert name and employer identification
number of common parent] hereby certifies under Sec. 1.337(d)-1 (e)(3)
that the group of which it is the common parent is applying Sec.
1.1502-20T to all transactions to which that section otherwise applied
by it terms.'' The statement must be signed by the common parent and
filed with the group's income tax return for the taxable year of the
first disposition or deconsolidation to which the certification applies.
If the separate statement required under this paragraph
[[Page 112]]
(e)(3) is to be filed with a return the due date (including extensions)
of which is before November 16, 1991, the statement may be filed with an
amended return for the year of the disposition or deconsolidation that
is filed within 180 days after September 13, 1991. Any other filings
required under Sec. 1.1502-20T, such as the statement required under
Sec. 1.1502-20T(f)(5), may be made with the amended return, regardless
of whether Sec. 1.1502-20T permits such filing by amended return.
[T.D. 8319, 55 FR 49031, Nov. 26, 1990, as amended by T.D. 8364, 56 FR
47389, Sept. 19, 1991; 57 FR 53550, Nov. 12, 1992; T.D. 8560, 59 FR
41674, 41675, Aug. 15, 1994; T.D. 8597, 60 FR 36679, July 18, 1995; T.D.
9424, 73 FR 53947, Sept. 17, 2008]
Sec. 1.337(d)-1T [Reserved]
Sec. 1.337(d)-2 Loss limitation rules.
(a) Loss disallowance--(1) General rule. No deduction is allowed for
any loss recognized by a member of a consolidated group with respect to
the disposition of stock of a subsidiary. However, for transactions
involving loss shares of subsidiary stock occurring on or after
September 17, 2008, see Sec. 1.1502-36. Further, this section does not
apply to a transaction that is subject to Sec. 1.1502-36.
(2) Definitions. For purposes of this section:
(i) The definitions in Sec. 1.1502-1 apply.
(ii) Disposition means any event in which gain or loss is
recognized, in whole or in part.
(3) Coordination with loss deferral and other disallowance rules.
For purposes of this section, the rules of Sec. 1.1502-20(a)(3) apply,
with appropriate adjustments to reflect differences between the approach
of this section and that of Sec. 1.1502-20.
(4) Netting. Paragraph (a)(1) of this section does not apply to loss
with respect to the disposition of stock of a subsidiary, to the extent
that, as a consequence of the same plan or arrangement, gain is taken
into account by members with respect to stock of the same subsidiary
having the same material terms. If the gain to which this paragraph
applies is less than the amount of the loss with respect to the
disposition of the subsidiary's stock, the gain is applied to offset
loss with respect to each share disposed of as a consequence of the same
plan or arrangement in proportion to the amount of the loss deduction
that would have been disallowed under paragraph (a)(1) of this section
with respect to such share before the application of this paragraph
(a)(4). If the same item of gain could be taken into account more than
once in limiting the application of paragraphs (a)(1) and (b)(1) of this
section, the item is taken into account only once.
(b) Basis reduction on deconsolidation--(1) General rule. If the
basis of a member of a consolidated group in a share of stock of a
subsidiary exceeds its value immediately before a deconsolidation of the
share, the basis of the share is reduced at that time to an amount equal
to its value. If both a disposition and a deconsolidation occur with
respect to a share in the same transaction, paragraph (a) of this
section applies and, to the extent necessary to effectuate the purposes
of this section, this paragraph (b) applies following the application of
paragraph (a) of this section.
(2) Deconsolidation. Deconsolidation means any event that causes a
share of stock of a subsidiary that remains outstanding to be no longer
owned by a member of any consolidated group of which the subsidiary is
also a member.
(3) Value. Value means fair market value.
(4) Netting. Paragraph (b)(1) of this section does not apply to
reduce the basis of stock of a subsidiary, to the extent that, as a
consequence of the same plan or arrangement, gain is taken into account
by members with respect to stock of the same subsidiary having the same
material terms. If the gain to which this paragraph applies is less than
the amount of basis reduction with respect to shares of the subsidiary's
stock, the gain is applied to offset basis reduction with respect to
each share deconsolidated as a consequence of the same plan or
arrangement in proportion to the amount of the reduction that would have
been required under paragraph (b)(1) of this section with respect to
such share before the application of this paragraph (b)(4).
[[Page 113]]
(c) Allowable loss--(1) Application. This paragraph (c) applies with
respect to stock of a subsidiary only if a separate statement entitled
Sec. 1.337(d)-2(c) statement is included with the return in accordance
with paragraph (c)(3) of this section.
(2) General rule. Loss is not disallowed under paragraph (a)(1) of
this section and basis is not reduced under paragraph (b)(1) of this
section to the extent the taxpayer establishes that the loss or basis is
not attributable to the recognition of built-in gain, net of directly
related expenses, on the disposition of an asset (including stock and
securities). Loss or basis may be attributable to the recognition of
built-in gain on the disposition of an asset by a prior group. For
purposes of this section, gain recognized on the disposition of an asset
is built-in gain to the extent attributable, directly or indirectly, in
whole or in part, to any excess of value over basis that is reflected,
before the disposition of the asset, in the basis of the share, directly
or indirectly, in whole or in part, after applying section 1503(e) and
other applicable provisions of the Internal Revenue Code and
regulations. Federal income taxes may be directly related to built-in
gain recognized on the disposition of an asset only to the extent of the
excess (if any) of the group's income tax liability actually imposed
under Subtitle A of the Internal Revenue Code for the taxable year of
the disposition of the asset over the group's income tax liability for
the taxable year redetermined by not taking into account the built-in
gain recognized on the disposition of the asset. For this purpose, the
group's income tax liability actually imposed and its redetermined
income tax liability are determined without taking into account the
foreign tax credit under section 27(a) of the Internal Revenue Code.
(3) Contents of statement and time of filing. The statement required
under paragraph (c)(1) of this section must be included with or as part
of the taxpayer's return for the year of the disposition or
deconsolidation and must contain--
(i) The name and employer identification number (E.I.N.) of the
subsidiary; and
(ii) The amount of the loss not disallowed under paragraph (a)(1) of
this section by reason of this paragraph (c) and the amount of basis not
reduced under paragraph (b)(1) of this section by reason of this
paragraph (c).
(4) Example. The principles of paragraphs (a), (b), and (c) of this
section are illustrated by the examples in Sec. Sec. 1.337(d)-1(a)(5)
and 1.1502-20(a)(5) (other than Examples 3, 4, and 5) and (b), with
appropriate adjustments to reflect differences between the approach of
this section and that of Sec. 1.1502-20, and by the following example.
For purposes of the examples in this section, unless otherwise stated,
the group files consolidated returns on a calendar year basis, the facts
set forth the only corporate activity, and all sales and purchases are
with unrelated buyers or sellers. The basis of each asset is the same
for determining earnings and profits adjustments and taxable income. Tax
liability and its effect on basis, value, and earnings and profits are
disregarded. Investment adjustment system means the rules of Sec.
1.1502-32. The example reads as follows:
Example. Loss offsetting built-in gain in a prior group. (i) P buys
all the stock of T for $50 in Year 1, and T becomes a member of the P
group. T has 2 assets. Asset 1 has a basis of $50 and a value of $0, and
asset 2 has a basis of $0 and a value of $50. T sells asset 2 during
Year 3 for $50 and recognizes a $50 gain. Under the investment
adjustment system, P's basis in the T stock increased to $100 as a
result of the recognition of gain. In Year 5, all of the stock of P is
acquired by the P1 group, and the former members of the P group become
members of the P1 group. T then sells asset 1 for $0, and recognizes a
$50 loss. Under the investment adjustment system, P's basis in the T
stock decreases to $50 as a result of the loss. T's assets decline in
value from $50 to $40. P then sells all the stock of T for $40 and
recognizes a $10 loss.
(ii) P's basis in the T stock reflects both T's unrecognized gain
and unrecognized loss with respect to its assets. The gain T recognizes
on the disposition of asset 2 is built-in gain with respect to both the
P and P1 groups for purposes of paragraph (c)(2) of this section. In
addition, the loss T recognizes on the disposition of asset 1 is built-
in loss with respect to the P and P1 groups for purposes of paragraph
(c)(2) of this section. T's recognition of the built-in loss while a
member of the P1 group offsets the effect on T's stock basis of T's
recognition of the built-in gain
[[Page 114]]
while a member of the P group. Thus, P's $10 loss on the sale of the T
stock is not attributable to the recognition of built-in gain, and the
loss is therefore not disallowed under paragraph (c)(2) of this section.
(iii) The result would be the same if, instead of having a $50
built-in loss in asset 1 when it becomes a member of the P group, T has
a $50 net operating loss carryover and the carryover is used by the P
group.
(d) Successors. For purposes of this section, the rules and examples
of Sec. 1.1502-20(d) apply, with appropriate adjustments to reflect
differences between the approach of this section and that of Sec.
1.1502-20.
(e) Anti-avoidance rules. For purposes of this section, the rules
and examples of Sec. 1.1502-20(e) apply, with appropriate adjustments
to reflect differences between the approach of this section and that of
Sec. 1.1502-20.
(f) Investment adjustments. For purposes of this section, the rules
and examples of Sec. 1.1502-20(f) apply, with appropriate adjustments
to reflect differences between the approach of this section and that of
Sec. 1.1502-20.
(g) Effective dates. This section applies with respect to
dispositions and deconsolidations on or after March 3, 2005. In
addition, this section applies to dispositions and deconsolidations for
which an election is made under Sec. 1.1502-20(i)(2) to determine
allowable loss under this section. If loss is recognized because stock
of a subsidiary became worthless, the disposition with respect to the
stock is treated as occurring on the date the stock became worthless.
For dispositions and deconsolidations after March 6, 2002 and before
March 3, 2005, see Sec. 1.337(d)-2T as contained in the 26 CFR part 1
in effect on March 2, 2005.
[70 FR 10322, Mar. 3, 2005, as amended by T.D. 9424, 73 FR 53947, Sept.
17, 2008]
Sec. 1.337(d)-3T Gain recognition upon certain partnership
transactions involving a partner's stock (temporary).
(a) Purpose. The purpose of this section is to prevent corporate
taxpayers from using a partnership to circumvent gain required to be
recognized under section 311(b) or section 336(a). The rules of this
section, including the determination of the amount of gain, must be
applied in a manner that is consistent with and that reasonably carries
out this purpose.
(b) In general. This section applies when a partnership, either
directly or indirectly, owns, acquires, or distributes Stock of the
Corporate Partner (within the meaning of paragraph (c)(2) of this
section). Under paragraphs (d) or (e) of this section, a Corporate
Partner (within the meaning of paragraph (c)(1) of this section) is
required to recognize gain when a transaction has the effect of the
Corporate Partner acquiring or increasing an interest in its own stock
in exchange for appreciated property in a manner that contravenes the
purpose of this section as set forth in paragraph (a) of this section.
Paragraph (f) of this section sets forth exceptions under which a
Corporate Partner does not recognize gain.
(c) Definitions. The following definitions apply for purposes of
this section:
(1) Corporate Partner. A Corporate Partner is a person that is
classified as a corporation for federal income tax purposes and holds or
acquires an interest in a partnership.
(2) Stock of the Corporate Partner--(i) In general. With respect to
a Corporate Partner, Stock of the Corporate Partner includes the
Corporate Partner's stock, or other equity interests, including options,
warrants, and similar interests, in the Corporate Partner or a
corporation that controls the Corporate Partner within the meaning of
section 304(c), except that section 318(a)(1) and (3) shall not apply.
Stock of the Corporate Partner also includes interests in any entity to
the extent that the value of the interest is attributable to Stock of
the Corporate Partner.
(ii) Affiliated partner exception. Stock of the Corporate Partner
does not include any stock or other equity interests held or acquired by
a partnership if all interests in the partnership's capital and profits
are held by members of an affiliated group as defined in section 1504(a)
that includes the Corporate Partner.
(3) Section 337(d) Transaction. A Section 337(d) Transaction is a
transaction (or series of transactions) that has the effect of an
exchange by a Corporate Partner of its interest in appreciated property
for an interest in Stock of the
[[Page 115]]
Corporate Partner owned, acquired, or distributed by a partnership. For
example, a Section 337(d) Transaction may occur when--
(i) A Corporate Partner contributes appreciated property to a
partnership that owns Stock of the Corporate Partner;
(ii) A partnership acquires Stock of the Corporate Partner;
(iii) A partnership that owns Stock of the Corporate Partner
distributes appreciated property to a partner other than a Corporate
Partner;
(iv) A partnership distributes Stock of the Corporate Partner to the
Corporate Partner; or
(v) A partnership agreement is amended in a manner that increases a
Corporate Partner's interest in Stock of the Corporate Partner
(including in connection with a contribution to, or distribution from, a
partnership).
(4) Gain Percentage. A Corporate Partner's Gain Percentage equals a
fraction, the numerator of which is the Corporate Partner's interest (by
value) in appreciated property effectively exchanged for Stock of the
Corporate Partner under the test described in paragraphs (d)(1) and (2)
of this section, and the denominator of which is the Corporate Partner's
interest (by value) in that appreciated property immediately before the
Section 337(d) Transaction. Paragraph (d) of this section requires a
partnership to multiply the Gain Percentage by the Corporate Partner's
aggregate gain in appreciated property to determine gain recognized
under this section.
(d) Deemed redemption rule--(1) In general. A Corporate Partner in a
partnership that engages in a Section 337(d) Transaction recognizes gain
at the time, and to the extent, that the Corporate Partner's interest in
appreciated property (other than Stock of the Corporate Partner) is
reduced in exchange for an increased interest in Stock of the Corporate
Partner, as determined under paragraph (d)(2) of this section. This
section does not apply to the extent a transaction has the effect of an
exchange by a Corporate Partner of non-appreciated property for Stock of
the Corporate Partner or has the effect of an exchange by a Corporate
Partner for property other than Stock of the Corporate Partner.
(2) Corporate Partner's Interest in Partnership Property. The
Corporate Partner's interest with respect to both Stock of the Corporate
Partner and the appreciated property that is the subject of the exchange
is determined based on all facts and circumstances, including the
allocation and distribution rights set forth in the partnership
agreement. The Corporate Partner's interest in an identified share of
Stock of the Corporate Partner will never be less than the Corporate
Partner's largest interest (by value) in that share of Stock of the
Corporate Partner that was taken into account when the partnership
previously determined whether there had been a Section 337(d)
Transaction with respect to such share (regardless of whether the
Corporate Partner recognized gain in the earlier transaction). See
Example 6 of paragraph (h) of this section. However, this limitation
will not apply if any reduction in the Corporate Partner's interest in
the identified share of Stock of the Corporate Partner occurred as part
of a plan or arrangement to circumvent the purpose of this section. See
Example 7 of paragraph (h) of this section.
(3) Amount of gain recognized on the exchange. The amount of gain
the Corporate Partner recognizes under paragraph (d)(1) of this section
equals the product of the Corporate Partner's Gain Percentage and the
gain from the appreciated property that is the subject of the exchange
that the Corporate Partner would recognize if, immediately before the
Section 337(d) Transaction, all assets of the partnership and any assets
contributed to the partnership in the Section 337(d) Transaction were
sold in a fully taxable transaction for cash in an amount equal to the
fair market value of such property (taking into account section
7701(g)), reduced, but not below zero, by any gain the Corporate Partner
is required to recognize with respect to the appreciated property in the
Section 337(d) Transaction under any other provision of this chapter.
This gain is computed taking into account allocations of tax items
applying the principles of section 704(c), including any remedial
allocations under Sec. 1.704-3(d).
[[Page 116]]
(4) Basis adjustments--(i) Corporate Partner's basis in the
partnership interest. The basis of the Corporate Partner's interest in
the partnership is increased by the amount of gain that the Corporate
Partner recognizes under this paragraph (d).
(ii) Partnership's basis in partnership property. The partnership's
adjusted tax basis in the appreciated property that is treated as the
subject of the exchange under this paragraph (d) is increased by the
amount of gain recognized with respect to that property by the Corporate
Partner as a result of that exchange, regardless of whether the
partnership has an election in effect under section 754.
(e) Distribution of Stock of the Corporate Partner--(1) In general.
This paragraph (e) applies to distributions to the Corporate Partner of
Stock of the Corporate Partner to which section 732(f) does not apply
and that have previously been the subject of a Section 337(d)
Transaction or become the subject of a Section 337(d) Transaction as a
result of the distribution. Upon the distribution of Stock of the
Corporate Partner to the Corporate Partner, paragraph (d) of this
section will apply as though immediately before the distribution the
partners amended the partnership agreement to allocate to the Corporate
Partner a 100 percent interest in that portion of the Stock of the
Corporate Partner that is distributed and to allocate an appropriately
reduced interest in other partnership property away from the Corporate
Partner.
(2) Basis rules--(i) Basis allocation on distributions of stock and
other property. If, as part of the same transaction, a partnership
distributes Stock of the Corporate Partner and other property (other
than cash) to the Corporate Partner, see Sec. 1.732-1T(c)(1)(iii) for a
rule allocating basis first to the Stock of the Corporate Partner before
the distribution of the other property.
(ii) Computation of Basis. For purposes of determining the basis of
property distributed to the Corporate Partner (other than the basis of
the Corporate Partner in its own stock), the basis of the Corporate
Partner's remaining partnership interest, and the partnership's basis in
undistributed Stock of the Corporate Partner, and for purposes of
computing gain under paragraph (e)(3) of this section, the partnership's
basis of Stock of the Corporate Partner distributed to the Corporate
Partner equals the greater of--
(A) The partnership's basis of that distributed Stock of the
Corporate Partner immediately before the distribution, or
(B) The fair market value of that distributed Stock of the Corporate
Partner immediately before the distribution less the Corporate Partner's
allocable share of gain from all of the Stock of the Corporate Partner
if the partnership sold all of its assets in a fully taxable transaction
for cash in an amount equal to the fair market value of such property
(taking into account section 7701(g)) immediately before the
distribution.
(3) Gain recognition. The Corporate Partner will recognize gain on a
distribution of Stock of the Corporate Partner to the Corporate Partner
to the extent that the partnership's basis in the distributed Stock of
the Corporate Partner (as determined under paragraph (e)(2)(ii) of this
section) exceeds the Corporate Partner's basis in its partnership
interest (as reduced by any cash distributed in the transaction)
immediately before the distribution.
(f) Exceptions--(1) De minimis rule--(i) In general. This section
does not apply to a Corporate Partner if at the time that the
partnership acquires Stock of the Corporate Partner or at the time of a
revaluation event as described in Sec. 1.704-1(b)(2)(iv)(f) (without
regard to whether or not the partnership revalues its assets)--
(A) The Corporate Partner and any persons related to the Corporate
Partner under section 267(b) or section 707(b) own in the aggregate less
than five percent of the partnership;
(B) The partnership holds Stock of the Corporate Partner with a
value of less than two percent of the partnership's gross assets
(including the Stock of the Corporate Partner); and
(C) The partnership has never, at any point in time, held in the
aggregate--
(1) Stock of the Corporate Partner with a fair market value greater
than $1,000,000; or
[[Page 117]]
(2) More than two percent of any particular class of Stock of the
Corporate Partner.
(ii) De minimis rule ceases to apply. If a partnership satisfies the
conditions of the de minimis rule of paragraph (f)(1) of this section
upon an acquisition of Stock of the Corporate Partner or revaluation
event as described in Sec. 1.704-1(b)(2)(iv)(f), but later fails to
satisfy the conditions of the de minimis rule upon a subsequent
acquisition or revaluation event, then solely for purposes of paragraph
(d) of this section, the Corporate Partner may compute its gain on the
subsequent acquisition or revaluation event as if it had already
recognized gain at the previous event. Neither the Corporate Partner nor
the partnership increases its basis by the gain the Corporate Partner
would have recognized if the de minimis rule of paragraph (f)(1) of this
section did not apply to the prior acquisition or revaluation event.
(2) Inadvertence rule. Unless acquired as part of a plan to
circumvent the purpose of this section, this section does not apply to
Stock of the Corporate Partner that--
(i) Is disposed of (by sale or distribution) by the partnership
before the due date (including extensions) of its federal income tax
return for the taxable year during which the Stock of the Corporate
Partner is acquired (or for the taxable year in which the Corporate
Partner becomes a partner, whichever is applicable); and
(ii) Is not distributed to the Corporate Partner or a corporation
that controls the Corporate Partner within the meaning of section
304(c), except that section 318(a)(1) and (3) shall not apply.
(g) Tiered partnerships. The rules of this section shall apply to
tiered partnerships in a manner that is consistent with the purpose set
forth in paragraph (a) of this section.
(h) Examples. The following examples illustrate the principles of
this section. All amounts in the following examples are reported in
millions of dollars:
Example 1. Deemed redemption rule--contribution of Stock of a
Corporate Partner. (i) In Year 1, X, a corporation, and A, an
individual, form partnership AX as equal partners in all respects. X
contributes Asset 1 with a fair market value of $100 and a basis of $20.
A contributes X stock, which is Stock of the Corporate Partner, with a
basis and fair market value of $100.
(ii) Because A and X are equal partners in AX in all respects, the
partnership formation causes X's interest in X stock to increase from $0
to $50 and its interest in Asset 1 to decrease from $100 to $50. Thus,
the partnership formation is a Section 337(d) Transaction because the
formation has the effect of an exchange by X of $50 of Asset 1 for $50
of X stock.
(iii) X must recognize gain under paragraph (d) of this section with
respect to Asset 1 to prevent the circumvention of section 311(b)
principles. X's gain equals the product of X's Gain Percentage and the
gain from Asset 1 that X would recognize (decreased, but not below zero,
by any gain that X recognized with respect to Asset 1 in the Section
337(d) Transaction under any other provision of this chapter) if,
immediately before the Section 337(d) Transaction, all assets were sold
in a fully taxable transaction for cash in an amount equal to the fair
market value of such property. If Asset 1 had been sold in a fully
taxable transaction immediately before the formation of partnership AX,
X's allocable share of gain would have been $80. X's Gain Percentage is
50% (equal to a fraction, the numerator of which is X's $50 interest in
Asset 1 effectively exchanged for X stock, and the denominator of which
is X's $100 interest in Asset 1 immediately before the Section 337(d)
Transaction). Thus, X recognizes $40 of gain ($80 multiplied by 50%)
under the deemed redemption rule in paragraph (d) of this section. Under
paragraph (d)(4)(i) of this section, X's basis in its AX partnership
interest increases from $20 to $60. Under paragraph (d)(4)(ii) of this
section, AX's basis in Asset 1 increases from $20 to $60 because Asset 1
is the appreciated property treated as the subject of the exchange.
Example 2. Distribution of Stock of the Corporate Partner--pro rata
distribution. (i) The facts are the same as in Example 1(i). AX
liquidates in Year 9, when Asset 1 and the X stock each have a fair
market value of $200. X and A each receive 50% of Asset 1 and 50% of the
X stock in the liquidation. At the time AX liquidates, X's basis in its
AX partnership interest is $60 and A's basis in its AX partnership
interest is $100.
(ii) When AX liquidates, X's interests in its stock and in Asset 1
do not change. Thus, the liquidation is not a Section 337(d) Transaction
because it does not have the effect of an exchange by X of appreciated
property for Stock of the Corporate Partner.
(iii) Paragraph (e) of this section applies because the distributed
X stock was the subject of a previous Section 337(d) Transaction and
because section 732(f) does not apply. Under Sec. 1.732-1T(c)(1)(iii),
the distribution to
[[Page 118]]
X of X stock is deemed to immediately precede the distribution of 50% of
Asset 1 to X for purposes of determining X's basis in the distributed
property. For purposes of determining X's basis in Asset 1 and X's gain
on distribution, the basis of the distributed X stock is treated as $50,
the greater of $50 (50% of the stock's $100 basis in the hands of the
partnership), or $50, the fair market value of that distributed X stock
($100) less X's allocable share of gain from the distributed X stock if
AX had sold all of its assets in a fully taxable transaction for cash in
an amount equal to the fair market value of such property immediately
before the distribution ($50). Thus, X reduces its basis in its
partnership interest by $50 prior to the distribution of Asset 1.
Accordingly, X's basis in the distributed portion of Asset 1 is $10.
Because AX's basis in the distributed X stock immediately before the
distribution ($50) does not exceed X's basis in its AX partnership
interest immediately before the distribution ($60), X recognizes no gain
under paragraph (e)(3) of this section.
Example 3. Distribution of Stock of the Corporate Partner--non pro
rata distribution. (i) The facts are the same as Example 2(i), except
that when AX liquidates, X receives 75% of the X stock and 25% of Asset
1 and A receives 25% of the X stock and 75% of Asset 1.
(ii) The liquidation of AX causes X's interest in X stock to
increase from $100 to $150 and its interest in Asset 1 to decrease from
$100 to $50. Thus, AX's liquidating distributions of X stock and Asset 1
to X are a Section 337(d) Transaction because the distributions have the
effect of an exchange by X of $50 of Asset 1 for $50 of X stock.
(iii) X must recognize gain with respect to Asset 1 to prevent the
circumvention of section 311(b) principles. Under paragraph (e)(1) of
this section, paragraph (d) of this section is applied as if X and A
amended the AX partnership agreement to allocate to X a 100% interest in
the distributed portion of the X stock. X must recognize gain equal to
the product of X's Gain Percentage and the gain from Asset 1 that X
would have recognized (decreased, but not below zero, by any gain X
recognized with respect to Asset 1 in the Section 337(d) Transaction
under any other provision of this chapter) if, immediately before the
Section 337(d) Transaction, AX had sold all of its assets in a fully
taxable transaction for cash in an amount equal to the fair market value
of such property.
(iv) If Asset 1 had been sold in a fully taxable transaction
immediately before the amendment of the AX partnership agreement, X's
allocable share of gain would have been $90, or the sum of X's $40
remaining gain under section 704(c) and $50 of the $100 post-
contribution appreciation. X's Gain Percentage is 50% (equal to a
fraction, the numerator of which is X's $50 interest in Asset 1
effectively exchanged for X stock, and the denominator of which is X's
$100 interest in Asset 1 immediately before the Section 337(d)
Transaction). Thus, X recognizes $45 of gain ($90 multiplied by 50%)
under the deemed redemption rule in paragraph (d) of this section. Under
paragraph (d)(4)(i) of this section, X's basis in its AX partnership
interest increases from $60 to $105. Under paragraph (d)(4)(ii) of this
section, AX's basis in Asset 1 increases from $60 to $105 because Asset
1 is the appreciated property treated as the subject of the exchange.
(v) Paragraph (e) of this section applies because the distributed X
stock was the subject of a previous Section 337(d) Transaction and
because section 732(f) does not apply. Under Sec. 1.732-1T(c)(1)(iii),
AX is treated as first distributing the X stock to X before the
distribution of 25% of Asset 1. For purposes of determining X's basis in
Asset 1 and X's gain on distribution, the basis of the distributed X
stock is treated as $100, the greater of $75 (75% of the stock's $100
basis in the hands of the partnership) or $100, the fair market value of
the distributed X stock ($150) less X's allocable share of gain if the
partnership had sold all of the X stock immediately before the
distribution for cash in an amount equal to its fair market value ($50).
Thus, X will reduce its basis in its partnership interest by $100 prior
to the distribution of Asset 1. Accordingly, X's basis in the
distributed portion of Asset 1 is $5. Because AX's basis in the
distributed X stock immediately before the distribution as computed for
purposes of this section ($100) does not exceed X's basis in its AX
partnership interest immediately before the distribution ($105), X
recognizes no additional gain under paragraph (e)(3) of this section.
Example 4. Deemed redemption rule--subsequent purchase of Stock of
the Corporate Partner. The facts are the same as Example 1(i), except
that A contributes cash of $100 instead of X stock. In a later year,
when the value of Asset 1 has not changed, AX uses the contributed cash
to purchase X stock for $100. AX's purchase of X stock has the effect of
an exchange by X of appreciated property for X stock, and thus, is a
Section 337(d) Transaction. X must recognize gain at the time, and to
the extent, that X's share of appreciated property (other than X stock)
is reduced in exchange for X stock. Thus, the consequences of the
partnership's purchase of X stock are the same as those described in
Example 1(ii) and (iii), resulting in X recognizing $40 of gain.
Example 5. Change in allocation ratios--amendment of partnership
agreement. (i) The facts are the same as Example 2(i), except that in
Year 9, AX does not liquidate, and the AX partnership agreement is
amended to allocate to X 80% of the income, gain, loss, and deduction
from the X stock and to allocate to A 80% of the income, gain, loss, and
[[Page 119]]
deduction from Asset 1. If AX had sold the partnership assets
immediately before the change to the partnership agreement, X would have
been allocated $90 of gain from Asset 1 and $50 of gain from the X
stock.
(ii) The amendment to the AX partnership agreement causes X's
interest in its stock to increase from $100 (50% of the stock value
immediately before the amendment of the agreement) to $160 (80% of stock
value immediately following amendment of agreement) and its interest in
Asset 1 to decrease from $100 to $40. Thus, the amendment of the
partnership agreement is a Section 337(d) Transaction because the
amendment has the effect of an exchange by X of $60 of Asset 1 for $60
of its stock.
(iii) X must recognize gain equal to the product of X's Gain
Percentage and the gain from Asset 1 that X would have recognized
(decreased, but not below zero, by any gain X recognized with respect to
Asset 1 in the Section 337(d) Transaction under any other provision of
this chapter) if, immediately before the Section 337(d) Transaction, AX
had sold all of its assets in a fully taxable transaction for cash in an
amount equal to the fair market value of such property. If Asset 1 had
been sold in a fully taxable transaction immediately before the
amendment of the AX partnership agreement, X's allocable share of gain
would have been $90, or the sum of X's $40 remaining gain under section
704(c) and 50% of the $100 post-contribution appreciation. X's Gain
Percentage is 60% (equal to a fraction, the numerator of which is X's
$60 interest in Asset 1 effectively exchanged for X stock, and the
denominator of which is X's $100 interest in Asset 1 immediately before
the Section 337(d) Transaction). Thus, X recognizes $54 of gain ($90
multiplied by 60%) under the deemed redemption rule in paragraph (d) of
this section. Under paragraph (d)(4)(i) of this section, X's basis in
its AX partnership interest increases from $60 to $114. Under paragraph
(d)(4)(ii) of this section, AX's basis in Asset 1 increases from $60 to
$114 because Asset 1 is the appreciated property treated as the subject
of the exchange.
Example 6. Change in allocation ratios--admission and exit of a
partner. (i) The facts are the same as Example 1(i). In addition, in
Year 2, when the values of Asset 1 and the X stock have not changed, B
contributes $100 of cash to AX in exchange for a one-third interest in
the partnership. Upon the admission of B as a partner, X's interest in
Asset 1 decreases from $50 to $33.33, and its interest in B's
contributed cash increases. B's admission is not a Section 337(d)
Transaction because it does not have the effect of an exchange by X of
its interest in Asset 1 for X stock. Accordingly, X does not recognize
gain under paragraph (d) of this section.
(ii) In Year 9, when the values of Asset 1 and the X stock have not
changed, the partnership distributes $50 of cash and 50% of Asset 1
(valued at $50) to B in liquidation of B's interest. X and A are equal
partners in all respects after the distribution. Upon the liquidation of
B's interest, X's interest in Asset 1 decreases from $33.33 to $25, and
its interest in X stock increases from $33.33 to $50. AX's liquidation
of B's interest has the effect of an exchange by X of appreciated
property for X stock, and thus, is a Section 337(d) Transaction.
(iii) Pursuant to paragraph (d)(2) of this section, X's interest in
X stock and other appreciated property held by the partnership is
determined based on all facts and circumstances, including allocation
and distribution rights in the partnership agreement. However, paragraph
(d)(2) of this section also requires that X's interest in its stock for
purposes of paragraph (d) will never be less than the Corporate
Partner's largest interest (by value) in those shares of Stock of the
Corporate Partner taken into account when the partnership previously
determined whether there had been a Section 337(d) Transaction
(regardless of whether the Corporate Partner recognized gain in the
earlier transaction). Although X's interest in X stock increases to $50
upon AX's liquidation of B's interest, X's largest interest previously
taken into account under paragraph (d)(1) of this section was $50. Thus,
X's interest in its stock is not considered to be increased, and X
therefore recognizes no gain under paragraph (d) of this section,
provided that the transactions did not occur as part of a plan or
arrangement to circumvent the purpose of this section.
Example 7. Change in allocation ratios--plan to circumvent purpose
of this section. (i) In Year 1, X, a corporation, and A, an individual,
contribute a small amount of capital to newly-formed partnership AX,
with X receiving a 99% interest in AX and A receiving a 1% interest in
AX. AX borrows $100 from a third-party lender and uses the proceeds to
purchase X stock, which is Stock of the Corporate Partner. Later, as
part of a plan or arrangement to circumvent the purposes of this
section, A contributes $100 of cash, which AX uses to repay the loan,
and X contributes Asset 1 with a fair market value of $100 and basis of
$20. After these contributions, A and X are equal partners in AX in all
respects.
(ii) Pursuant to paragraph (d)(2) of this section, X's interest in X
stock and other appreciated property held by the partnership is
determined based on all facts and circumstances, including allocation
and distribution rights in the partnership agreement. Generally pursuant
to paragraph (d)(2) of this section, X's interest in X stock for
purposes of paragraph (d) will never be less than the Corporate
Partner's largest interest (by value) in those shares of Stock of the
Corporate Partner taken into account when
[[Page 120]]
the partnership previously determined whether there had been a Section
337(d) Transaction (regardless of whether the Corporate Partner
recognized gain in the earlier transaction). This limitation does not
apply, however, if the reduction in X's interest in X's stock occurred
as part of a plan or arrangement to circumvent the purpose of this
section. Because the transactions described in this example are part of
a plan or arrangement to circumvent the purpose of this section, the
limitation in paragraph (d)(2) of this section does not apply.
Accordingly, the deemed redemption rule under paragraph (d) of this
section applies to the transactions with the consequences described in
Example 1(iii) of this section, resulting in X recognizing $40 of gain.
Example 8. Tiered partnership. (i) In Year 1, X, a corporation, and
A, an individual, form partnership UTP. X contributes Asset 1 with a
fair market value of $80 and a basis of $0 in exchange for an 80%
interest in UTP. A contributes $20 of cash in exchange for a 20%
interest in UTP. UTP and B, an individual, form partnership LTP as equal
partners. UTP contributes Asset 1 and $20 of cash. B contributes X
stock, which is Stock of the Corporate Partner, with a basis and fair
market value of $100.
(ii) Pursuant to paragraph (g) of this section, the rules of this
section shall apply to tiered partnerships in a manner that is
consistent with the purpose set forth in paragraph (a) of this section.
Pursuant to paragraph (d)(1) of this section, if X is in a partnership
that engages in a Section 337(d) Transaction, X must recognize gain at
the time, and to the extent, that X's share of appreciated property is
reduced in exchange for X stock. The formation of LTP causes X's
interest in X stock to increase from $0 to $40 and its interest in Asset
1 to decrease from $64 to $32. Thus, LTP's formation is a Section 337(d)
Transaction because the formation has the effect of an exchange by X of
$32 of Asset 1 for $32 of X stock.
(iii) X must recognize gain with respect to Asset 1 to prevent the
circumvention of section 311(b) principles. X must recognize gain equal
to the product of X's Gain Percentage and the gain from Asset 1
(decreased, but not below zero, by any gain X recognized with respect to
Asset 1 in the Section 337(d) Transaction under any other provision of
this chapter) that X would recognize if, immediately before the Section
337(d) Transaction, all assets were sold in a fully taxable transaction
for cash in an amount equal to the fair market value of such property.
If Asset 1 had been sold in a fully taxable transaction immediately
before LTP's formation, X's allocable share of gain would have been $80
pursuant to section 704(c). X's Gain Percentage is 50% (equal to a
fraction, the numerator of which is X's $32 interest in Asset 1
effectively exchanged for X stock, and the denominator of which is X's
$64 interest in Asset 1 immediately before the Section 337(d)
Transaction). Thus, X recognizes $40 of gain ($80 multiplied by 50%)
under the deemed redemption rule in paragraph (d) of this section. Under
paragraphs (d)(4)(i) and (d)(4)(ii) of this section, X's basis in its
UTP partnership interest increases from $0 to $40, UTP's basis in its
LTP partnership interest increases from $20 to $60, and LTP's basis in
Asset 1 increases from $0 to $40 pursuant to paragraph (g) of this
section.
(i) Effective/applicability date. This section applies to
transactions occurring on or after June 12, 2015.
(j) Expiration date. This section expires on June 11, 2018.
[T.D. 9722, 80 FR 33408, June 12, 2015, as amended by T.D. 9722, 80 FR
38940, July 8, 2015]
Sec. 1.337(d)-4 Taxable to tax-exempt.
(a) Gain or loss recognition--(1) General rule. Except as provided
in paragraph (b) of this section, if a taxable corporation transfers all
or substantially all of its assets to one or more tax-exempt entities,
the taxable corporation must recognize gain or loss immediately before
the transfer as if the assets transferred were sold at their fair market
values. But see section 267 and paragraph (d) of this section concerning
limitations on the recognition of loss.
(2) Change in corporation's tax status treated as asset transfer.
Except as provided in paragraphs (a)(3) and (b) of this section, a
taxable corporation's change in status to a tax-exempt entity will be
treated as if it transferred all of its assets to a tax-exempt entity
immediately before the change in status becomes effective in a
transaction to which paragraph (a)(1) of this section applies. For
example, if a State, a political subdivision thereof, or an entity any
portion of whose income is excluded from gross income under section 115,
acquires the stock of a taxable corporation and thereafter any of the
taxable corporation's income is excluded from gross income under section
115, the taxable corporation will be treated as if it transferred all of
its assets to a tax-exempt entity immediately before the stock
acquisition.
(3) Exceptions for certain changes in status--(i) To whom available.
Paragraph (a)(2) of this section does not apply to the following
corporations--
[[Page 121]]
(A) A corporation previously tax-exempt under section 501(a) which
regains its tax-exempt status under section 501(a) within three years
from the later of a final adverse adjudication on the corporation's tax
exempt status, or the filing by the corporation, or by the Secretary or
his delegate under section 6020(b), of a federal income tax return of
the type filed by a taxable corporation;
(B) A corporation previously tax-exempt under section 501(a) or that
applied for but did not receive recognition of exemption under section
501(a) before January 15, 1997, if such corporation is tax-exempt under
section 501(a) within three years from January 28, 1999;
(C) A newly formed corporation that is tax-exempt under section
501(a) (other than an organization described in section 501(c)(7))
within three taxable years from the end of the taxable year in which it
was formed;
(D) A newly formed corporation that is tax-exempt under section
501(a) as an organization described in section 501(c)(7) within seven
taxable years from the end of the taxable year in which it was formed;
(E) A corporation previously tax-exempt under section 501(a) as an
organization described in section 501(c)(12), which, in a given taxable
year or years prior to again becoming tax-exempt, is a taxable
corporation solely because less than 85 percent of its income consists
of amounts collected from members for the sole purpose of meeting losses
and expenses; if, in a taxable year, such a corporation would be a
taxable corporation even if 85 percent or more of its income consists of
amounts collected from members for the sole purpose of meeting losses
and expenses (a non-85 percent violation), paragraph (a)(3)(i)(A) of
this section shall apply as if the corporation became a taxable
corporation in its first taxable year that a non-85 percent violation
occurred; or
(F) A corporation previously taxable that becomes tax-exempt under
section 501(a) as an organization described in section 501(c)(15) if
during each taxable year in which it is described in section 501(c)(15)
the organization is the subject of a court supervised rehabilitation,
conservatorship, liquidation, or similar state proceeding; if such a
corporation continues to be described in section 501(c)(15) in a taxable
year when it is no longer the subject of a court supervised
rehabilitation, conservatorship, liquidation, or similar state
proceeding, paragraph (a)(2) of this section shall apply as if the
corporation first became tax-exempt for such taxable year.
(ii) Application for recognition. An organization is deemed to have
or regain tax-exempt status within one of the periods described in
paragraph (a)(3)(i)(A), (B), (C), or (D) of this section if it files an
application for recognition of exemption with the Commissioner within
the applicable period and the application either results in a
determination by the Commissioner or a final adjudication that the
organization is tax-exempt under section 501(a) during any part of the
applicable period. The preceding sentence does not require the filing of
an application for recognition of exemption by any organization not
otherwise required, such as by Sec. Sec. 1.501(a)-1, 1.505(c)-1T, and
1.508-1(a), to apply for recognition of exemption.
(iii) Anti-abuse rule. This paragraph (a)(3) does not apply to a
corporation that, with a principal purpose of avoiding the application
of paragraph (a)(1) or (a)(2) of this section, acquires all or
substantially all of the assets of another taxable corporation and then
changes its status to that of a tax-exempt entity.
(4) Related transactions. This section applies to any series of
related transactions having an effect similar to any of the transactions
to which this section applies.
(b) Exceptions. Paragraph (a) of this section does not apply to--
(1) Any assets transferred to a tax-exempt entity to the extent that
the assets are used in an activity the income from which is subject to
tax under section 511(a) (referred to hereinafter as a ``section 511(a)
activity''). However, if assets used to any extent in a section 511(a)
activity are disposed of by the tax-exempt entity, then, notwithstanding
any other provision of law (except section 1031 or section 1033), any
gain (not in excess of the amount
[[Page 122]]
not recognized by reason of the preceding sentence) shall be included in
the tax-exempt entity's unrelated business taxable income. To the extent
that the tax-exempt entity ceases to use the assets in a section 511(a)
activity, the entity will be treated for purposes of this paragraph
(b)(1) as having disposed of the assets on the date of the cessation for
their fair market value. For purposes of paragraph (a)(1) of this
section and this paragraph (b)(1)--
(i) If during the first taxable year following the transfer of an
asset or the corporation's change to tax-exempt status the asset will be
used by the tax-exempt entity partly or wholly in a section 511(a)
activity, the taxable corporation will recognize an amount of gain or
loss that bears the same ratio to the asset's built-in gain or loss as
100 percent reduced by the percentage of use for such taxable year in
the section 511(a) activity bears to 100 percent. For purposes of
determining the gain or loss, if any, to be recognized, the taxable
corporation may rely on a written representation from the tax-exempt
entity estimating the percentage of the asset's anticipated use in a
section 511(a) activity for such taxable year, using a reasonable method
of allocation, unless the taxable corporation has reason to believe that
the tax-exempt entity's representation is not made in good faith;
(ii) If for any taxable year the percentage of an asset's use in a
section 511(a) activity decreases from the estimate used in computing
gain or loss recognized under paragraph (b)(1)(i) of this section,
adjusted for any decreases taken into account under this paragraph
(b)(1)(ii) in prior taxable years, the tax-exempt entity shall recognize
an amount of gain or loss that bears the same ratio to the asset's
built-in gain or loss as the percentage point decrease in use in the
section 511(a) activity for the taxable year bears to 100 percent;
(iii) If property on which all or a portion of the gain or loss is
not recognized by reason of the first sentence of paragraph (b)(1) of
this section is disposed of in a transaction that qualifies for
nonrecognition treatment under section 1031 or section 1033, the tax-
exempt entity must treat the replacement property as remaining subject
to paragraph (b)(1) of this section to the extent that the exchanged or
involuntarily converted property was so subject;
(iv) The tax-exempt entity must use the same reasonable method of
allocation for determining the percentage that it uses the assets in a
section 511(a) activity as it uses for other tax purposes, such as
determining the amount of depreciation deductions. The tax-exempt entity
also must use this same reasonable method of allocation for each taxable
year that it holds the assets; and
(v) An asset's built-in gain or loss is the amount that would be
recognized under paragraph (a)(1) of this section except for this
paragraph (b)(1);
(2) Any transfer of assets to the extent gain or loss otherwise is
recognized by the taxable corporation on the transfer. See, for example,
sections 336, 337(b)(2), 367, and 1001;
(3) Any transfer of assets to the extent the transaction qualifies
for nonrecognition treatment under section 1031 or section 1033; or
(4) Any forfeiture of a taxable corporation's assets in a criminal
or civil action to the United States, the government of a possession of
the United States, a state, the District of Columbia, the government of
a foreign country, or a political subdivision of any of the foregoing;
or any expropriation of a taxable corporation's assets by the government
of a foreign country.
(c) Definitions. For purposes of this section:
(1) Taxable corporation. A taxable corporation is any corporation
that is not a tax-exempt entity as defined in paragraph (c)(2) of this
section.
(2) Tax-exempt entity. A tax-exempt entity is--
(i) Any entity that is exempt from tax under section 501(a) or
section 529;
(ii) A charitable remainder annuity trust or charitable remainder
unitrust as defined in section 664(d);
(iii) The United States, the government of a possession of the
United States, a state, the District of Columbia, the government of a
foreign country, or a political subdivision of any of the foregoing;
[[Page 123]]
(iv) An Indian Tribal Government as defined in section 7701(a)(40),
a subdivision of an Indian Tribal Government determined in accordance
with section 7871(d), or an agency or instrumentality of an Indian
Tribal Government or subdivision thereof;
(v) An Indian Tribal Corporation organized under section 17 of the
Indian Reorganization Act of 1934, 25 U.S.C. 477, or section 3 of the
Oklahoma Welfare Act, 25 U.S.C. 503;
(vi) An international organization as defined in section
7701(a)(18);
(vii) An entity any portion of whose income is excluded under
section 115; or
(viii) An entity that would not be taxable under the Internal
Revenue Code for reasons substantially similar to those applicable to
any entity listed in this paragraph (c)(2) unless otherwise explicitly
made exempt from the application of this section by statute or by action
of the Commissioner.
(3) Substantially all. The term substantially all has the same
meaning as under section 368(a)(1)(C).
(d) Loss limitation rule. For purposes of determining the amount of
gain or loss recognized by a taxable corporation on the transfer of its
assets to a tax-exempt entity under paragraph (a) of this section, if
assets are acquired by the taxable corporation in a transaction to which
section 351 applied or as a contribution to capital, or assets are
distributed from the taxable corporation to a shareholder or another
member of the taxable corporation's affiliated group, and in either case
such acquisition or distribution is made as part of a plan a principal
purpose of which is to recognize loss by the taxable corporation on the
transfer of such assets to the tax-exempt entity, the losses recognized
by the taxable corporation on such assets transferred to the tax-exempt
entity will be disallowed. For purposes of the preceding sentence, the
principles of section 336(d)(2) apply.
(e) Effective date. This section is applicable to transfers of
assets as described in paragraph (a) of this section occurring after
January 28, 1999, unless the transfer is pursuant to a written agreement
which is (subject to customary conditions) binding on or before January
28, 1999.
[T.D. 8802, 63 FR 71594, Dec. 29, 1998]
Sec. 1.337(d)-5 Old transitional rules imposing tax on property owned
by a C corporation that becomes property of a RIC or REIT
(a) Treatment of C corporations--(1) Scope. This section applies to
the net built-in gain of C corporation assets that become assets of a
RIC or REIT by--
(i) The qualification of a C corporation as a RIC or REIT; or
(ii) The transfer of assets of a C corporation to a RIC or REIT in a
transaction in which the basis of such assets are determined by
reference to the C corporation's basis (a carryover basis).
(2) Net built-in gain. Net built-in gain is the excess of aggregate
gains (including items of income) over aggregate losses.
(3) General rule. Unless an election is made pursuant to paragraph
(b) of this section, the C corporation will be treated, for all purposes
including recognition of net built-in gain, as if it had sold all of its
assets at their respective fair market values on the deemed liquidation
date described in paragraph (a)(7) of this section and immediately
liquidated.
(4) Loss. Paragraph (a)(3) of this section shall not apply if its
application would result in the recognition of net built-in loss.
(5) Basis adjustment. If a corporation is subject to corporate-level
tax under paragraph (a)(3) of this section, the bases of the assets in
the hands of the RIC or REIT will be adjusted to reflect the recognized
net built-in gain. This adjustment is made by taking the C corporation's
basis in each asset, and, as appropriate, increasing it by the amount of
any built-in gain attributable to that asset, or decreasing it by the
amount of any built-in loss attributable to that asset.
(6) Exception--(i) In general. Paragraph (a)(3) of this section does
not apply to any C corporation that--
(A) Immediately prior to qualifying to be taxed as a RIC was subject
to tax as a C corporation for a period not exceeding one taxable year;
and
[[Page 124]]
(B) Immediately prior to being subject to tax as a C corporation was
subject to the RIC tax provisions for a period of at least one taxable
year.
(ii) Additional requirement. The exception described in paragraph
(a)(6)(i) of this section applies only to assets acquired by the
corporation during the year when it was subject to tax as a C
corporation in a transaction that does not result in its basis in the
asset being determined by reference to a corporate transferor's basis.
(7) Deemed liquidation date--(i) Conversions. In the case of a C
corporation that qualifies to be taxed as a RIC or REIT, the deemed
liquidation date is the last day of its last taxable year before the
taxable year in which it qualifies to be taxed as a RIC or REIT.
(ii) Carryover basis transfers. In the case of a C corporation that
transfers property to a RIC or REIT in a carryover basis transaction,
the deemed liquidation date is the day before the date of the transfer.
(b) Section 1374 treatment--(1) In general. Paragraph (a) of this
section will not apply if the transferee RIC or REIT elects (as
described in paragraph (b)(3) of this section) to be subject to the
rules of section 1374, and the regulations thereunder. The electing RIC
or REIT will be subject to corporate-level taxation on the built-in gain
recognized during the 10-year period on assets formerly held by the
transferor C corporation. The built-in gains of electing RICs and REITs,
and the corporate-level tax imposed on such gains, are subject to rules
similar to the rules relating to net income from foreclosure property of
REITs. See sections 857(a)(1)(A)(ii), and 857(b)(2)(B), (D), and (E). An
election made under this paragraph (b) shall be irrevocable.
(2) Ten-year recognition period. In the case of a C corporation that
qualifies to be taxed as a RIC or REIT, the 10-year recognition period
described in section 1374(d)(7) begins on the first day of the RIC's or
REIT's taxable year for which the corporation qualifies to be taxed as a
RIC or REIT. In the case of a C corporation that transfers property to a
RIC or REIT in a carryover basis transaction, the 10-year recognition
period begins on the day the assets are acquired by the RIC or REIT.
(3) Making the election. A RIC or REIT validly makes a section 1374
election with the following statement: ``[Insert name and employer
identification number of electing RIC or REIT] elects under paragraph
(b) of this section to be subject to the rules of section 1374 and the
regulations thereunder with respect to its assets which formerly were
held by a C corporation, [insert name and employer identification number
of the C corporation, if different from name and employer identification
number of RIC or REIT].'' This statement must be signed by an official
authorized to sign the income tax return of the RIC or REIT and attached
to the RIC's or REIT's Federal income tax return for the first taxable
year in which the assets of the C corporation become assets of the RIC
or REIT.
(c) Special rule. In cases where the first taxable year in which the
assets of the C corporation become assets of the RIC or REIT ends after
June 10, 1987 but before March 8, 2000, the section 1374 election may be
filed with the first Federal income tax return filed by the RIC or REIT
after March 8, 2000.
(d) Effective date. In the case of carryover basis transactions
involving the transfer of property of a C corporation to a RIC or REIT,
the regulations apply to transactions occurring on or after June 10,
1987, and before January 2, 2002. In the case of a C corporation that
qualifies to be taxed as a RIC or REIT, the regulations apply to such
qualifications that are effective for taxable years beginning on or
after June 10, 1987, and before January 2, 2002. However, RICs and REITs
that are subject to section 1374 treatment under this section may not
rely on paragraph (b)(1) of this section, but must apply paragraphs
(c)(1)(i), (c)(2)(i), (c)(2)(ii), and (c)(3) of Sec. 1.337(d)-6, with
respect to built-in gains and losses recognized in taxable years
beginning on or after January 2, 2002. In lieu of applying this section,
taxpayers may rely on Sec. 1.337(d)-6 to determine the tax consequences
(for all taxable years) of any conversion transaction. For transactions
and qualifications that occur
[[Page 125]]
on or after January 2, 2002, see Sec. 1.337(d)-7.
[T.D. 8872, 65 FR 5776, Feb. 7, 2000, as amended by T.D. 8975, 67 FR 12,
Jan. 2, 2002. Redesignated and amended by T.D. 9047, 68 FR 12819, Mar.
19, 2003]
Sec. 1.337(d)-6 New transitional rules imposing tax on property owned
by a C corporation that becomes property of a RIC or REIT.
(a) General rule--(1) Property owned by a C corporation that becomes
property of a RIC or REIT. If property owned by a C corporation (as
defined in paragraph (a)(2)(i) of this section) becomes the property of
a RIC or REIT (the converted property) in a conversion transaction (as
defined in paragraph (a)(2)(ii) of this section), then deemed sale
treatment will apply as described in paragraph (b) of this section,
unless the RIC or REIT elects section 1374 treatment with respect to the
conversion transaction as provided in paragraph (c) of this section. See
paragraph (d) of this section for exceptions to this paragraph (a).
(2) Definitions--(i) C corporation. For purposes of this section,
the term C corporation has the meaning provided in section 1361(a)(2)
except that the term does not include a RIC or REIT.
(ii) Conversion transaction. For purposes of this section, the term
conversion transaction means the qualification of a C corporation as a
RIC or REIT or the transfer of property owned by a C corporation to a
RIC or REIT.
(b) Deemed sale treatment--(1) In general. If property owned by a C
corporation becomes the property of a RIC or REIT in a conversion
transaction, then the C corporation recognizes gain and loss as if it
sold the converted property to an unrelated party at fair market value
on the deemed sale date (as defined in paragraph (b)(3) of this
section). This paragraph (b) does not apply if its application would
result in the recognition of a net loss. For this purpose, net loss is
the excess of aggregate losses over aggregate gains (including items of
income), without regard to character.
(2) Basis adjustment. If a corporation recognizes a net gain under
paragraph (b)(1) of this section, then the converted property has a
basis in the hands of the RIC or REIT equal to the fair market value of
such property on the deemed sale date.
(3) Deemed sale date--(i) RIC or REIT qualifications. If the
conversion transaction is a qualification of a C corporation as a RIC or
REIT, then the deemed sale date is the end of the last day of the C
corporation's last taxable year before the first taxable year in which
it qualifies to be taxed as a RIC or REIT.
(ii) Other conversion transactions. If the conversion transaction is
a transfer of property owned by a C corporation to a RIC or REIT, then
the deemed sale date is the end of the day before the day of the
transfer.
(4) Example. The rules of this paragraph (b) are illustrated by the
following example:
Example. Deemed sale treatment on merger into RIC. (i) X, a
calendar-year taxpayer, has qualified as a RIC since January 1, 1991. On
May 31, 1994, Y, a C corporation and calendar-year taxpayer, transfers
all of its property to X in a transaction that qualifies as a
reorganization under section 368(a)(1)(C). X does not elect section 1374
treatment under paragraph (c) of this section and chooses not to rely on
Sec. 1.337(d)-5. As a result of the transfer, Y is subject to deemed
sale treatment under this paragraph (b) on its tax return for the short
taxable year ending May 31, 1994. On May 31, 1994, Y's only assets are
Capital Asset, which has a fair market value of $100,000 and a basis of
$40,000 as of the end of May 30, 1994, and $50,000 cash. Y also has an
unrestricted net operating loss carryforward of $12,000 and accumulated
earnings and profits of $50,000. Y has no taxable income for the short
taxable year ending May 31, 1994, other than gain recognized under this
paragraph (b). In 1997, X sells Capital Asset for $110,000. Assume the
applicable corporate tax rate is 35%.
(ii) Under this paragraph (b), Y is treated as if it sold the
converted property (Capital Asset and $50,000 cash) at fair market value
on May 30, 1994, recognizing $60,000 of gain ($150,000 amount realized--
$90,000 basis). Y must report the gain on its tax return for the short
taxable year ending May 31, 1994. Y may offset this gain with its
$12,000 net operating loss carryforward and will pay tax of $16,800 (35%
of $48,000).
(iii) Under section 381, X succeeds to Y's accumulated earnings and
profits. Y's accumulated earnings and profits of $50,000 increase by
$60,000 and decrease by $16,800 as a result of the deemed sale. Thus,
the aggregate amount of subchapter C earnings and profits that must be
distributed to satisfy section 852(a)(2)(B) is $93,200 ($50,000 +
$60,000 - $16,800). X's basis in Capital Asset is
[[Page 126]]
$100,000. On X's sale of Capital Asset in 1997, X recognizes $10,000 of
gain, which is taken into account in computing X's net capital gain for
purposes of section 852(b)(3).
(c) Election of section 1374 treatment--(1) In general--(i) Property
owned by a C corporation that becomes property of a RIC or REIT.
Paragraph (b) of this section does not apply if the RIC or REIT that was
formerly a C corporation or that acquired property from a C corporation
makes the election described in paragraph (c)(4) of this section. A RIC
or REIT that makes such an election will be subject to tax on the net
built-in gain in the converted property under the rules of section 1374
and the regulations thereunder, as modified by this paragraph (c), as if
the RIC or REIT were an S corporation.
(ii) Property subject to the rules of section 1374 owned by a RIC,
REIT, or S corporation that becomes property of a RIC or REIT. If
property subject to the rules of section 1374 owned by a RIC, a REIT, or
an S corporation (the predecessor) becomes the property of a RIC or REIT
(the successor) in a continuation transaction, the rules of section 1374
apply to the successor to the same extent that the predecessor was
subject to the rules of section 1374 with respect to such property, and
the 10-year recognition period of the successor with respect to such
property is reduced by the portion of the 10-year recognition period of
the predecessor that expired before the date of the continuation
transaction. For this purpose, a continuation transaction means the
qualification of the predecessor as a RIC or REIT or the transfer of
property from the predecessor to the successor in a transaction in which
the successor's basis in the transferred property is determined, in
whole or in part, by reference to the predecessor's basis in that
property.
(2) Modification of section 1374 treatment--(i) Net recognized
built-in gain for REITs--(A) Prelimitation amount. The prelimitation
amount determined as provided in Sec. 1.1374-2(a)(1) is reduced by the
portion of such amount, if any, that is subject to tax under section
857(b)(4), (5), (6), or (7). For this purpose, the amount of a REIT's
recognized built-in gain that is subject to tax under section 857(b)(5)
is computed as follows:
(1) Where the tax under section 857(b)(5) is computed by reference
to section 857(b)(5)(A), the amount of a REIT's recognized built-in gain
that is subject to tax under section 857(b)(5) is the tax imposed by
section 857(b)(5) multiplied by a fraction the numerator of which is the
amount of recognized built-in gain (without regard to recognized built-
in loss and recognized built-in gain from prohibited transactions) that
is not derived from sources referred to in section 856(c)(2) and the
denominator of which is the gross income (without regard to gross income
from prohibited transactions) of the REIT that is not derived from
sources referred to in section 856(c)(2).
(2) Where the tax under section 857(b)(5) is computed by reference
to section 857(b)(5)(B), the amount of a REIT's recognized built-in gain
that is subject to tax under section 857(b)(5) is the tax imposed by
section 857(b)(5) multiplied by a fraction the numerator of which is the
amount of recognized built-in gain (without regard to recognized built-
in loss and recognized built-in gain from prohibited transactions) that
is not derived from sources referred to in section 856(c)(3) and the
denominator of which is the gross income (without regard to gross income
from prohibited transactions) of the REIT that is not derived from
sources referred to in section 856(c)(3).
(B) Taxable income limitation. The taxable income limitation
determined as provided in Sec. 1.1374-2(a)(2) is reduced by an amount
equal to the tax imposed under sections 857(b)(5), (6), and (7).
(ii) Loss carryforwards, credits and credit carryforwards--(A) Loss
carryforwards. Consistent with paragraph (c)(1)(i) of this section, net
operating loss carryforwards and capital loss carryforwards arising in
taxable years for which the corporation that generated the loss was not
subject to subchapter M of chapter 1 of the Internal Revenue Code are
allowed as a deduction against net recognized built-in gain to the
extent allowed under section 1374 and the regulations thereunder. Such
loss carryforwards must be used as a deduction against net recognized
built-in gain for a taxable year to
[[Page 127]]
the greatest extent possible before such losses can be used to reduce
other investment company taxable income for purposes of section 852(b)
or other real estate investment trust taxable income for purposes of
section 857(b) for that taxable year.
(B) Credits and credit carryforwards. Consistent with paragraph
(c)(1)(i) of this section, minimum tax credits and business credit
carryforwards arising in taxable years for which the corporation that
generated the credit was not subject to subchapter M of chapter 1 of the
Internal Revenue Code are allowed to reduce the tax imposed on net
recognized built-in gain under this paragraph (c) to the extent allowed
under section 1374 and the regulations thereunder. Such credits and
credit carryforwards must be used to reduce the tax imposed under this
paragraph (c) on net recognized built-in gain for a taxable year to the
greatest extent possible before such credits and credit carryforwards
can be used to reduce the tax, if any, on other investment company
taxable income for purposes of section 852(b) or on other real estate
investment trust taxable income for purposes of section 857(b) for that
taxable year.
(iii) 10-year recognition period. In the case of a conversion
transaction that is a qualification of a C corporation as a RIC or REIT,
the 10-year recognition period described in section 1374(d)(7) begins on
the first day of the RIC's or REIT's first taxable year. In the case of
other conversion transactions, the 10-year recognition period begins on
the day the property is acquired by the RIC or REIT.
(3) Coordination with subchapter M rules--(i) Recognized built-in
gains and losses subject to subchapter M. Recognized built-in gains and
losses of a RIC or REIT are included in computing investment company
taxable income for purposes of section 852(b)(2), real estate investment
trust taxable income for purposes of section 857(b)(2), capital gains
for purposes of sections 852(b)(3) and 857(b)(3), gross income derived
from sources within any foreign country or possession of the United
States for purposes of section 853, and the dividends paid deduction for
purposes of sections 852(b)(2)(D), 852(b)(3)(A), 857(b)(2)(B), and
857(b)(3)(A). In computing such income and deduction items, capital loss
carryforwards and net operating loss carryforwards that are used by the
RIC or REIT to reduce recognized built-in gains are allowed as a
deduction, but only to the extent that they are otherwise allowable as a
deduction against such income under the Internal Revenue Code (including
section 852(b)(2)(B)).
(ii) Treatment of tax imposed. The amount of tax imposed under this
paragraph (c) on net recognized built-in gain for a taxable year is
treated as a loss sustained by the RIC or the REIT during such taxable
year. The character of the loss is determined by allocating the tax
proportionately (based on recognized built-in gain) among the items of
recognized built-in gain included in net recognized built-in gain. With
respect to RICs, the tax imposed under this paragraph (c) on net
recognized built-in gain is treated as attributable to the portion of
the RIC's taxable year occurring after October 31.
(4) Making the section 1374 election--(i) In general. A RIC or REIT
makes a section 1374 election with the following statement: ``[Insert
name and employer identification number of electing RIC or REIT] elects
under Sec. 1.337-6(c) to be subject to the rules of section 1374 and
the regulations thereunder with respect to its property that formerly
was held by a C corporation, [insert name and employer identification
number of the C corporation, if different from name and employer
identification number of the RIC or REIT].'' However, a RIC or REIT need
not file an election under this paragraph (c), but will be deemed to
have made such an election if it can demonstrate that it informed the
Internal Revenue Service prior to January 2, 2002 of its intent to make
a section 1374 election. An election under this paragraph (c) is
irrevocable.
(ii) Time for making the election. An election under this paragraph
(c) may be filed by the RIC or REIT with any Federal income tax return
filed by the RIC or REIT on or before September 15, 2003, provided that
the RIC or REIT has reported consistently with such election for all
periods.
[[Page 128]]
(5) Example. The rules of this paragraph (c) are illustrated by the
following example:
Example. Section 1374 treatment on REIT election. (i) X, a C
corporation that is a calendar-year taxpayer, elects to be taxed as a
REIT on its 1994 tax return, which it files on March 15, 1995. As a
result, X is a REIT for its 1994 taxable year and would be subject to
deemed sale treatment under paragraph (b) of this section but for X's
timely election of section 1374 treatment under this paragraph (c). X
chooses not to rely on Sec. 1.337(d)-5. As of the beginning of the 1994
taxable year, X's property consisted of Real Property, which is not
section 1221(a)(1) property and which had a fair market value of
$100,000 and an adjusted basis of $80,000, and $25,000 cash. X also had
accumulated earnings and profits of $25,000, unrestricted capital loss
carryforwards of $3,000, and unrestricted business credit carryforwards
of $2,000. On July 1, 1997, X sells Real Property for $110,000. For its
1997 taxable year, X has no other income or deduction items. Assume the
highest corporate tax rate is 35%.
(ii) Upon its election to be taxed as a REIT, X retains its $80,000
basis in Real Property and its $25,000 accumulated earnings and profits.
X retains its $3,000 of capital loss carryforwards and its $2,000 of
business credit carryforwards. To satisfy section 857(a)(2)(B), X must
distribute $25,000, an amount equal to its earnings and profits
accumulated in non-REIT years, to its shareholders by the end of its
1994 taxable year.
(iii) Upon X's sale of Real Property in 1997, X recognizes gain of
$30,000 ($110,000--$80,000). X's recognized built-in gain for purposes
of applying section 1374 is $20,000 ($100,000 fair market value as of
the beginning of X's first taxable year as a REIT--$80,000 basis).
Because X's $30,000 of net income for the 1997 taxable year exceeds the
net recognized built-in gain of $20,000, the taxable income limitation
does not apply. X, therefore, has $20,000 net recognized built-in gain
for the year. Assuming that X has not used its $3,000 of capital loss
carryforwards in a prior taxable year and that their use is allowed
under section 1374(b)(2) and Sec. 1.1374-5, X is allowed a $3,000
deduction against the $20,000 net recognized built-in gain. X would owe
tax of $5,950 (35% of $17,000) on its net recognized built-in gain,
except that X may use its $2,000 of business credit carryforwards to
reduce this tax, assuming that X has not used the credit carryforwards
in a prior taxable year and that their use is allowed under section
1374(b)(3) and Sec. 1.1374-6. Thus, X owes tax of $3,950 under this
paragraph (c).
(iv) For purposes of subchapter M of chapter 1 of the Internal
Revenue Code, X's earnings and profits for the year increase by $26,050
($30,000 capital gain on the sale of Real Property--$3,950 tax under
this paragraph (c)). For purposes of section 857(b)(2) and (b)(3), X's
net capital gain for the year is $23,050 ($30,000 capital gain reduced
by $3,000 capital loss carryforward and further reduced by $3,950 tax).
(d) Exceptions--(1) Gain otherwise recognized. Paragraph (a) of this
section does not apply to any conversion transaction to the extent that
gain or loss otherwise is recognized on such conversion transaction.
See, for example, sections 336, 351(b), 351(e), 356, 357(c), 367,
368(a)(2)(F), and 1001.
(2) Re-election of RIC or REIT status--(i) Generally. Except as
provided in paragraphs (d)(2)(ii) and (iii) of this section, paragraph
(a)(1) of this section does not apply to any corporation that--
(A) Immediately prior to qualifying to be taxed as a RIC or REIT was
subject to tax as a C corporation for a period not exceeding two taxable
years; and
(B) Immediately prior to being subject to tax as a C corporation was
subject to tax as a RIC or REIT for a period of at least one taxable
year.
(ii) Property acquired from another corporation while a C
corporation. The exception described in paragraph (d)(2)(i) of this
section does not apply to property acquired by the corporation while it
was subject to tax as a C corporation from any person in a transaction
that results in the acquirer's basis in the property being determined by
reference to a C corporation's basis in the property.
(iii) RICs and REITs previously subject to section 1374 treatment.
If the RIC or REIT had property subject to paragraph (c) of this section
before the RIC or REIT became subject to tax as a C corporation as
described in paragraph (d)(2)(i) of this section, then paragraph (c) of
this section applies to the RIC or REIT upon its requalification as a
RIC or REIT, except that the 10-year recognition period with respect to
such property is reduced by the portion of the 10-year recognition
period that expired before the RIC or REIT became subject to tax as a C
corporation and by the period of time that the corporation was subject
to tax as a C corporation.
(e) Effective date. This section applies to conversion transactions
that occur
[[Page 129]]
on or after June 10, 1987, and before January 2, 2002. In lieu of
applying this section, taxpayers generally may apply Sec. 1.337(d)-5 to
determine the tax consequences (for all taxable years) of any conversion
transaction that occurs on or after June 10, 1987 and before January 2,
2002, except that RICs and REITs that are subject to section 1374
treatment with respect to a conversion transaction may not rely on Sec.
1.337(d)-5(b)(1), but must apply paragraphs (c)(1)(i), (c)(2)(i),
(c)(2)(ii), and (c)(3) of this section, with respect to built-in gains
and losses recognized in taxable years beginning on or after January 2,
2002. Taxpayers are not prevented from relying on Sec. 1.337(d)-5
merely because they elect section 1374 treatment in the manner described
in paragraph (c)(4) of this section instead of in the manner described
in Sec. 1.337(d)-5(b)(3) and (c). For conversion transactions that
occur on or after January 2, 2002, see Sec. 1.337(d)-7.
[T.D. 9047, 68 FR 12820, Mar. 18, 2003]
Sec. 1.337(d)-7 Tax on property owned by a C corporation that
becomes property of a RIC or REIT.
(a) General rule. (1) [Reserved]. For further guidance, see Sec.
1.337(d)-7T(a)(1).
(2) Definitions. For purposes of this section:
(i) C corporation. The term C corporation has the meaning provided
in section 1361(a)(2) except that the term does not include a RIC or a
REIT.
(ii) Conversion transaction. The term conversion transaction means
the qualification of a C corporation as a RIC or REIT or the transfer of
property owned by a C corporation to a RIC or REIT.
(iii) RIC. The term RIC means a regulated investment company within
the meaning of section 851(a).
(iv) REIT. The term REIT means a real estate investment trust within
the meaning of section 856(a).
(v) S corporation. The term S corporation has the meaning provided
in section 1361(a)(1).
(vi) through (vii) [Reserved]. For further guidance, see Sec.
1.337(d)-7T(a)(2)(vi) through (vii).
(b) Section 1374 treatment--(1) In general--(i) Property owned by a
C corporation that becomes property of a RIC or REIT. If property owned
by a C corporation becomes the property of a RIC or REIT in a conversion
transaction, then the RIC or REIT will be subject to tax on the net
built-in gain in the converted property under the rules of section 1374
and the regulations thereunder, as modified by this paragraph (b), as if
the RIC or REIT were an S corporation.
(ii) Property subject to the rules of section 1374 owned by a RIC,
REIT, or S corporation that becomes property of a RIC or REIT. If
property subject to the rules of section 1374 owned by a RIC, a REIT, or
an S corporation (the predecessor) becomes the property of a RIC or REIT
(the successor) in a continuation transaction, the rules of section 1374
apply to the successor to the same extent that the predecessor was
subject to the rules of section 1374 with respect to such property, and
the recognition period of the successor with respect to such property is
reduced by the portion of the recognition period of the predecessor that
expired before the date of the continuation transaction. For this
purpose, a continuation transaction means the qualification of the
predecessor as a RIC or REIT or the transfer of property from the
predecessor to the successor in a transaction in which the successor's
basis in the transferred property is determined, in whole or in part, by
reference to the predecessor's basis in that property.
(2) Modification of section 1374 treatment--(i) Net recognized
built-in gain for REITs--(A) Prelimitation amount. The prelimitation
amount determined as provided in Sec. 1.1374-2(a)(1) is reduced by the
portion of such amount, if any, that is subject to tax under section
857(b)(4), (5), (6), or (7). For this purpose, the amount of a REIT's
recognized built-in gain that is subject to tax under section 857(b)(5)
is computed as follows:
(1) Where the tax under section 857(b)(5) is computed by reference
to section 857(b)(5)(A), the amount of a REIT's recognized built-in gain
that is subject to tax under section 857(b)(5) is the tax imposed by
section 857(b)(5) multiplied by a fraction the numerator of which is the
amount of recognized built-in gain (without regard to recognized built-
in loss and recognized built-in gain from prohibited transactions)
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that is not derived from sources referred to in section 856(c)(2) and
the denominator of which is the gross income (without regard to gross
income from prohibited transactions) of the REIT that is not derived
from sources referred to in section 856(c)(2).
(2) Where the tax under section 857(b)(5) is computed by reference
to section 857(b)(5)(B), the amount of a REIT's recognized built-in gain
that is subject to tax under section 857(b)(5) is the tax imposed by
section 857(b)(5) multiplied by a fraction the numerator of which is the
amount of recognized built-in gain (without regard to recognized built-
in loss and recognized built-in gain from prohibited transactions) that
is not derived from sources referred to in section 856(c)(3) and the
denominator of which is the gross income (without regard to gross income
from prohibited transactions) of the REIT that is not derived from
sources referred to in section 856(c)(3).
(B) Taxable income limitation. The taxable income limitation
determined as provided in Sec. 1.1374-2(a)(2) is reduced by an amount
equal to the tax imposed under section 857(b)(5), (6), and (7).
(ii) Loss carryforwards, credits and credit carryforwards--(A) Loss
carryforwards. Consistent with paragraph (b)(1)(i) of this section, net
operating loss carryforwards and capital loss carryforwards arising in
taxable years for which the corporation that generated the loss was not
subject to subchapter M of chapter 1 of the Internal Revenue Code are
allowed as a deduction against net recognized built-in gain to the
extent allowed under section 1374 and the regulations thereunder. Such
loss carryforwards must be used as a deduction against net recognized
built-in gain for a taxable year to the greatest extent possible before
such losses can be used to reduce other investment company taxable
income for purposes of section 852(b) or other real estate investment
trust taxable income for purposes of section 857(b) for that taxable
year.
(B) Credits and credit carryforwards. Consistent with paragraph
(b)(1)(i) of this section, minimum tax credits and business credit
carryforwards arising in taxable years for which the corporation that
generated the credit was not subject to subchapter M of chapter 1 of the
Internal Revenue Code are allowed to reduce the tax imposed on net
recognized built-in gain under this paragraph (b) to the extent allowed
under section 1374 and the regulations thereunder. Such credits and
credit carryforwards must be used to reduce the tax imposed under this
paragraph (b) on net recognized built-in gain for a taxable year to the
greatest extent possible before such credits and credit carryforwards
can be used to reduce the tax, if any, on other investment company
taxable income for purposes of section 852(b) or on other real estate
investment trust taxable income for purposes of section 857(b) for that
taxable year.
(iii) Recognition period. For purposes of applying the rules of
section 1374 and the regulations thereunder, as modified by paragraph
(b) of this section, the term recognition period means the recognition
period described in section 1374(d)(7), beginning--
(A) In the case of a conversion transaction that is a qualification
of a C corporation as a RIC or a REIT, on the first day of the RIC's or
the REIT's first taxable year; and
(B) In the case of other conversion transactions, on the day the RIC
or the REIT acquires the property.
(3) Coordination with subchapter M rules--(i) Recognized built-in
gains and losses subject to subchapter M. Recognized built-in gains and
losses of a RIC or REIT are included in computing investment company
taxable income for purposes of section 852(b)(2), real estate investment
trust taxable income for purposes of section 857(b)(2), capital gains
for purposes of sections 852(b)(3) and 857(b)(3), gross income derived
from sources within any foreign country or possession of the United
States for purposes of section 853, and the dividends paid deduction for
purposes of sections 852(b)(2)(D), 852(b)(3)(A), 857(b)(2)(B), and
857(b)(3)(A). In computing such income and deduction items, capital loss
carryforwards and net operating loss carryforwards that are used by the
RIC or REIT to reduce recognized built-in gains are allowed as a
deduction, but only to the extent that they are otherwise allowable as a
deduction against such income under
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the Internal Revenue Code (including section 852(b)(2)(B)).
(ii) Treatment of tax imposed. The amount of tax imposed under this
paragraph (b) on net recognized built-in gain for a taxable year is
treated as a loss sustained by the RIC or the REIT during such taxable
year. The character of the loss is determined by allocating the tax
proportionately (based on recognized built-in gain) among the items of
recognized built-in gain included in net recognized built-in gain. With
respect to RICs, the tax imposed under this paragraph (b) on net
recognized built-in gain is treated as attributable to the portion of
the RIC's taxable year occurring after October 31.
(4) [Reserved]. For further guidance, see Sec. 1.337(d)-7T(b)(4).
(5) Example. The rules of this paragraph (b) are illustrated by the
following example:
Example. Section 1374 treatment on REIT election. (i) X, a C
corporation that is a calendar-year taxpayer, elects to be taxed as a
REIT on its 2004 tax return, which it files on March 15, 2005. As a
result, X is a REIT for its 2004 taxable year and is subject to section
1374 treatment under this paragraph (b). X does not elect deemed sale
treatment under paragraph (c) of this section. As of the beginning of
the 2004 taxable year, X's property consisted of Real Property, which is
not section 1221(a)(1) property and which had a fair market value of
$100,000 and an adjusted basis of $80,000, and $25,000 cash. X also had
accumulated earnings and profits of $25,000, unrestricted capital loss
carryforwards of $3,000, and unrestricted business credit carryforwards
of $2,000. On July 1, 2007, X sells Real Property for $110,000. For its
2007 taxable year, X has no other income or deduction items. Assume the
highest corporate tax rate is 35%.
(ii) Upon its election to be taxed as a REIT, X retains its $80,000
basis in Real Property and its $25,000 accumulated earnings and profits.
X retains its $3,000 of capital loss carryforwards and its $2,000 of
business credit carryforwards. To satisfy section 857(a)(2)(B), X must
distribute $25,000, an amount equal to its earnings and profits
accumulated in non-REIT years, to its shareholders by the end of its
2004 taxable year.
(iii) Upon X's sale of Real Property in 2007, X recognizes gain of
$30,000 ($110,000--$80,000). X's recognized built-in gain for purposes
of applying section 1374 is $20,000 ($100,000 fair market value as of
the beginning of X's first taxable year as a REIT--$80,000 basis).
Because X's $30,000 of net income for the 2007 taxable year exceeds the
net recognized built-in gain of $20,000, the taxable income limitation
does not apply. X, therefore, has $20,000 net recognized built-in gain
for the year. Assuming that X has not used its $3,000 of capital loss
carryforwards in a prior taxable year and that their use is allowed
under section 1374(b)(2) and Sec. 1.1374-5, X is allowed a $3,000
deduction against the $20,000 net recognized built-in gain. X would owe
tax of $5,950 (35% of $17,000) on its net recognized built-in gain,
except that X may use its $2,000 of business credit carryforwards to
reduce the tax, assuming that X has not used the credit carryforwards in
a prior taxable year and that their use is allowed under section
1374(b)(3) and Sec. 1.1374-6. Thus, X owes tax of $3,950 under this
paragraph (b).
(iv) For purposes of subchapter M of chapter 1 of the Internal
Revenue Code, X's earnings and profits for the year increase by $26,050
($30,000 capital gain on the sale of Real Property--$3,950 tax under
this paragraph (b)). For purposes of section 857(b)(2) and (b)(3), X's
net capital gain for the year is $23,050 ($30,000 capital gain reduced
by $3,000 capital loss carryforward and further reduced by $3,950 tax).
(c) Election of deemed sale treatment--(1) [Reserved]. For further
guidance, see Sec. 1.337(d)-7T(c)(1).
(2) Basis adjustment. If a corporation recognizes a net gain under
paragraph (c)(1) of this section, then the converted property has a
basis in the hands of the RIC or REIT equal to the fair market value of
such property on the deemed sale date.
(3) Deemed sale date--(i) RIC or REIT qualifications. If the
conversion transaction is a qualification of a C corporation as a RIC or
REIT, then the deemed sale date is the end of the last day of the C
corporation's last taxable year before the first taxable year in which
it qualifies to be taxed as a RIC or REIT.
(ii) Other conversion transactions. If the conversion transaction is
a transfer of property owned by a C corporation to a RIC or REIT, then
the deemed sale date is the end of the day before the day of the
transfer.
(4) Anti-stuffing rule. A C corporation must disregard converted
property in computing gain or loss recognized on the conversion
transaction under this paragraph (c), if--
(i) The converted property was acquired by the C corporation in a
transaction to which section 351 applied or as a contribution to
capital;
(ii) Such converted property had an adjusted basis immediately after
its
[[Page 132]]
acquisition by the C corporation in excess of its fair market value on
the date of acquisition; and
(iii) The acquisition of such converted property by the C
corporation was part of a plan a principal purpose of which was to
reduce gain recognized by the C corporation in connection with the
conversion transaction. For purposes of this paragraph (c)(4), the
principles of section 336(d)(2) apply.
(5) Making the deemed sale election. A C corporation (or a
partnership to which the principles of this section apply under
paragraph (e) of this section) makes the deemed sale election with the
following statement: ``[Insert name and employer identification number
of electing corporation or partnership] elects deemed sale treatment
under Sec. 1.337(d)-7(c) with respect to its property that was
converted to property of, or transferred to, a RIC or REIT, [insert name
and employer identification number of the RIC or REIT, if different from
the name and employer identification number of the C corporation or
partnership].'' This statement must be attached to the Federal income
tax return of the C corporation or partnership for the taxable year in
which the deemed sale occurs. An election under this paragraph (c) is
irrevocable.
(6) [Reserved]. For further guidance, see Sec. 1.337(d)-7T(c)(6).
(7) Examples. The rules of this paragraph (c) are illustrated by the
following examples:
Example 1. Deemed sale treatment on merger into RIC. (i) X, a
calendar-year taxpayer, has qualified as a RIC since January 1, 2001. On
May 31, 2004, Y, a C corporation and calendar-year taxpayer, transfers
all of its property to X in a transaction that qualifies as a
reorganization under section 368(a)(1)(C). As a result of the transfer,
Y would be subject to section 1374 treatment under paragraph (b) of this
section but for its timely election of deemed sale treatment under this
paragraph (c). As a result of such election, Y is subject to deemed sale
treatment on its tax return for the short taxable year ending May 31,
2004. On May 31, 2004, Y's only assets are Capital Asset, which has a
fair market value of $100,000 and a basis of $40,000 as of the end of
May 30, 2004, and $50,000 cash. Y also has an unrestricted net operating
loss carryforward of $12,000 and accumulated earnings and profits of
$50,000. Y has no taxable income for the short taxable year ending May
31, 2004, other than gain recognized under this paragraph (c). In 2007,
X sells Capital Asset for $110,000. Assume the applicable corporate tax
rate is 35%.
(ii) Under this paragraph (c), Y is treated as if it sold the
converted property (Capital Asset and $50,000 cash) at fair market value
on May 30, 2004, recognizing $60,000 of gain ($150,000 amount realized--
$90,000 basis). Y must report the gain on its tax return for the short
taxable year ending May 31, 2004. Y may offset this gain with its
$12,000 net operating loss carryforward and will pay tax of $16,800 (35%
of $48,000).
(iii) Under section 381, X succeeds to Y's accumulated earnings and
profits. Y's accumulated earnings and profits of $50,000 increase by
$60,000 and decrease by $16,800 as a result of the deemed sale. Thus,
the aggregate amount of subchapter C earnings and profits that must be
distributed to satisfy section 852(a)(2)(B) is $93,200 ($50,000 +
$60,000-$16,800). X's basis in Capital Asset is $100,000. On X's sale of
Capital Asset in 2007, X recognizes $10,000 of gain which is taken into
account in computing X's net capital gain for purposes of section
852(b)(3).
Example 2. Loss limitation. (i) Assume the facts are the same as
those described in Example 1, but that, prior to the reorganization, a
shareholder of Y contributed to Y a capital asset, Capital Asset 2,
which has a fair market value of $10,000 and a basis of $20,000, in a
section 351 transaction.
(ii) Assuming that Y's acquisition of Capital Asset 2 was made
pursuant to a plan a principal purpose of which was to reduce the amount
of gain that Y would recognize in connection with the conversion
transaction, Capital Asset 2 would be disregarded in computing the
amount of Y's net gain on the conversion transaction.
(d) Exceptions--(1) Gain otherwise recognized. Paragraph (a)(1) of
this section does not apply to any conversion transaction to the extent
that gain or loss otherwise is recognized on such conversion transaction
by the C corporation that either qualifies as a RIC or a REIT or that
transfers property to a RIC or REIT. See, for example, sections 311(b),
336(a), 351(b), 351(e), 356, 357(c), 367, 368(a)(2)(F), 1001, 1031(b),
and 1033(a)(2).
(2) Re-election of RIC or REIT status--(i) Generally. Except as
provided in paragraphs (d)(2)(ii) and (iii) of this section, paragraph
(a)(1) of this section does not apply to any corporation that--
(A) Immediately prior to qualifying to be taxed as a RIC or REIT was
subject to tax as a C corporation for a period not exceeding two taxable
years; and
[[Page 133]]
(B) Immediately prior to being subject to tax as a C corporation was
subject to tax as a RIC or REIT for a period of at least one taxable
year.
(ii) Property acquired from another corporation while a C
corporation. The exception described in paragraph (d)(2)(i) of this
section does not apply to property acquired by the corporation while it
was subject to tax as a C corporation from any person in a transaction
that results in the acquirer's basis in the property being determined by
reference to a C corporation's basis in the property.
(iii) RICs and REITs previously subject to section 1374 treatment.
If the RIC or REIT had property subject to paragraph (b) of this section
before the RIC or REIT became subject to tax as a C corporation as
described in paragraph (d)(2)(i) of this section, then paragraph (b) of
this section applies to the RIC or REIT upon its requalification as a
RIC or REIT, except that the recognition period with respect to such
property is reduced by the portion of the recognition period that
expired before the RIC or REIT became subject to tax as a C corporation
and by the period of time that the corporation was subject to tax as a C
corporation.
(3) Special rules for like-kind exchanges and involuntary
conversions--(i) In general. Paragraph (a)(1) of this section does not
apply to a conversion transaction to the extent that a C corporation
transfers property with a built-in gain to a RIC or REIT, and the C
corporation's gain is not recognized by reason of either section 1031 or
1033.
(ii) Clarification regarding exchanged property previously subject
to section 1374 treatment. Notwithstanding paragraph (d)(3)(i) of this
section, if, in a transaction described in paragraph (d)(3)(i) of this
section, a RIC or REIT surrenders property that was subject to section
1374 treatment immediately prior to the transaction, the rules of
section 1374(d)(6) will apply to continue section 1374 treatment to the
replacement property acquired by the RIC or REIT in the transaction.
(iii) Examples. The rules of this paragraph (d)(3) are illustrated
by the following examples. In each of the examples, X is a REIT, Y is a
C corporation, and X and Y are not related.
Example 1. Section 1031(a) exchange. (i) Facts. X owned a building
that it leased for commercial use (Property A). Y owned a building
leased for commercial use (Property B). On January 1, Year 3, Y
transferred Property B to X in exchange for Property A in a
nonrecognition transaction under section 1031(a). Immediately before the
exchange, Properties A and B each had a value of $100, X had an adjusted
basis of $60 in Property A, Y had an adjusted basis of $70 in Property
B, and X was not subject to section 1374 treatment with respect to
Property A.
(ii) Analysis. The transfer of property (Property B) by Y (a C
corporation) to X (a REIT) is a conversion transaction within the
meaning of paragraph (a)(2)(ii) of this section. The conversion
transaction is a nonrecognition transaction under section 1031(a) as to
Y; thus, Y does not recognize any of its $30 gain. Therefore, the
conversion transaction is not subject to paragraph (a)(1) of this
section by reason of paragraph (d)(3)(i) of this section.
Example 2. Section 1031(a) exchange of section 1374 property. (i)
Facts. The facts are the same as in Example 1, except that X had
acquired Property A in a conversion transaction in Year 2, and
immediately before the Year 3 exchange X was subject to section 1374
treatment with respect to $25 of net built-in gain in Property A.
(ii) Analysis. The Year 3 transfer of Property B by Y to X is a
conversion transaction within the meaning of paragraph (a)(2)(ii) of
this section. The conversion transaction is a nonrecognition transaction
under section 1031(a) as to Y; thus, Y does not recognize any of its $30
gain. Therefore, the Year 3 transfer is not subject to paragraph (a)(1)
of this section by reason of paragraph (d)(3)(i) of this section.
However, X had been subject to section 1374 treatment with respect to
$25 of net built-in gain in Property A immediately before the Year 3
transfer, and X's basis in Property B is determined (in whole or in
part) by reference to its adjusted basis in Property A. Accordingly, the
rules of section 1374(d)(6) apply and X is subject to section 1374
treatment on Property B with respect to the $25 net built-in gain. See
paragraph (d)(3)(ii) of this section.
Example 3. Section 1031(b) exchange. (i) Facts. The facts are the
same as in Example 1, except that immediately before the Year 3 exchange
Property A had a value of $92, and X transferred Property A and $8 to Y
in exchange for Property B in a nonrecognition transaction under section
1031(b).
(ii) Analysis. The transfer of Property B by Y to X is a conversion
transaction within the meaning of paragraph (a)(2)(ii) of this section.
Pursuant to section 1031(b), Y recognizes $8 of its gain. Paragraph
(a)(1) of this section does not apply to the transaction to the extent
of the $8 gain recognized by Y by reason of paragraph (d)(1) of this
section, or
[[Page 134]]
to the extent of the $22 gain realized but not recognized by Y by reason
of paragraph (d)(3)(i) of this section.
Example 4. Section 1033(a) involuntary conversion of property held
by a C corporation transferor. (i) Facts. Y owned uninsured, improved
property (Property 1) that was involuntarily converted (within the
meaning of section 1033(a)) in a fire. Y sold Property 1 for $100 to X,
which owned an adjacent property and wanted Property 1 for use as a
parking lot. Y had a $70 basis in Property 1 immediately before the
sale. Y elected to defer gain recognition under section 1033(a)(2), and
purchased qualifying replacement property (Property 2) for $100 from an
unrelated party prior to the expiration of the period described in
section 1033(a)(2)(B).
(ii) Analysis. The transfer of Property 1 by Y to X is a conversion
transaction within the meaning of paragraph (a)(2)(ii) of this section.
The conversion transaction (combined with Y's purchase of Property 2) is
a nonrecognition transaction under section 1033(a) as to Y; thus, Y does
not recognize any of its $30 gain. Therefore, the conversion transaction
is not subject to paragraph (a)(1) of this section by reason of
paragraph (d)(3)(i) of this section.
Example 5. Section 1033(a) involuntary conversion of property held
by a REIT. (i) Facts. X owned property (Property 1). On January 1, Year
2, Property 1 had a fair market value of $100 and a basis of $70, and X
was not subject to section 1374 treatment with respect to Property 1. On
that date, when Property 1 was under a threat of condemnation, X sold
Property 1 to an unrelated party for $100 (First Transaction). X elected
to defer gain recognition under section 1033(a)(2), and purchased
qualifying replacement property (Property 2) for $100 from Y (Second
Transaction) prior to the expiration of the period described in section
1033(a)(2)(B).
(ii) Analysis. The transfer of Property 2 by Y to X in the Second
Transaction is a conversion transaction within the meaning of paragraph
(a)(2)(ii) of this section. The Second Transaction (combined with the
First Transaction) is a nonrecognition transaction under section 1033(a)
as to X, but not as to Y. Assume no nonrecognition provision applied to
Y; thus, Y recognized gain or loss on its sale of Property 2 in the
Second Transaction, and the Second Transaction is not subject to
paragraph (a)(1) of this section by reason of paragraph (d)(1) of this
section.
(4) Special rule if C corporation is a tax-exempt entity. Paragraph
(a)(1) of this section does not apply to a conversion transaction in
which the C corporation that owned the converted property is a tax-
exempt entity described in Sec. 1.337(d)-4(c)(2) to the extent that
gain (if any) would not be subject to tax under Title 26 of the United
States Code if a deemed sale election under paragraph (c)(5) of this
section were made.
(e) Special rule for partnerships--(1) In general. The principles of
this section apply to property transferred by a partnership to a RIC or
REIT to the extent of any gain or loss in the converted property that
would be allocated directly or indirectly, through one or more
partnerships, to a C corporation if the partnership sold the converted
property to an unrelated party at fair market value on the deemed sale
date (as defined in paragraph (c)(3) of this section). If the
partnership were to elect deemed sale treatment under paragraph (c) of
this section in lieu of section 1374 treatment under paragraph (b) of
this section with respect to such transfer, then any net gain recognized
by the partnership on the deemed sale must be allocated to the C
corporation partner, but does not increase the capital account of any
partner. Any adjustment to the partnership's basis in the RIC or REIT
stock as a result of deemed sale treatment under paragraph (c) of this
section shall constitute an adjustment to the basis of that stock with
respect to the C corporation partner only. The principles of section 743
apply to such basis adjustment.
(2) Example; Transfer by partnership of property to REIT. (i) Facts.
PRS, a partnership for Federal income tax purposes, has three partners:
TE, a C corporation (within the meaning of paragraph (a)(2)(i) of this
section) that is also a tax-exempt entity (within the meaning of Sec.
1.337(d)-4(c)(2)), owns 50 percent of the capital and profits of PRS; A,
an individual, owns 30 percent of the capital and profits of PRS; and Y,
a C corporation (within the meaning of paragraph (a)(2)(i) of this
section), owns the remaining 20 percent. PRS owns a building that it
leases for commercial use (Property 1). On January 1, Year 2, when PRS
has an adjusted basis in Property 1 of $100 and Property 1 has a fair
market value of $500, PRS transfers Property 1 to X, a REIT, in exchange
for stock of X in an exchange described in section 351. PRS does not
elect deemed sale treatment under paragraph (c) of this section. TE
would
[[Page 135]]
not be subject to tax with respect to any gain that would be allocated
to it if PRS had sold Property 1 to an unrelated party at fair market
value.
(ii) Analysis. The transfer of Property 1 by PRS to X is a
conversion transaction within the meaning of paragraph (a)(2)(ii) of
this section to the extent of any gain or loss that would be allocated
to any C corporation partner if PRS sold Property 1 at fair market value
to an unrelated party on the deemed sale date. TE and Y are C
corporations, but A is not a C corporation within the meaning of
paragraph (a)(2)(i) of this section. Therefore, the transfer of Property
1 by PRS to X is a conversion transaction within the meaning of
paragraph (a)(2)(ii) of this section to the extent of the gain in
Property 1 that would be allocated to TE and Y. Pursuant to paragraph
(d)(4) of this section, paragraph (a)(1) of this section does not apply
to the extent of the gain that would be allocated to TE if PRS had sold
Property 1 to an unrelated party at fair market value on the deemed sale
date. If PRS were to sell Property 1 to an unrelated party at fair
market value on the deemed sale date, PRS would allocate $80 of built-in
gain to Y. Thus, X is subject to section 1374 treatment on Property 1
with respect to $80 of built-in gain.
(f) [Reserved]. For further guidance, see Sec. 1.337(d)-7T(f).
(g) Effective/Applicability date--(1) In general. Except as provided
in paragraph (g)(2) of this section, this section applies to conversion
transactions that occur on or after January 2, 2002. For conversion
transactions that occurred on or after June 10, 1987, and before January
2, 2002, see Sec. Sec. 1.337(d)-5 and 1.337(d)-6.
(2) Special rules--(i) Conversion transactions occurring on or after
August 2, 2013 and certain prior conversion transactions. Paragraphs
(a)(2)(i) through (v), (d)(1), (d)(3), (d)(4), and (e) of this section
apply to conversion transactions that occur on or after August 2, 2013.
However, taxpayers may apply paragraphs (a)(2)(i) through (v), (d)(1),
(d)(3), (d)(4), and (e) of this section to conversion transactions that
occurred before August 2, 2013. For conversion transactions that
occurred on or after January 2, 2002 and before August 2, 2013, see
Sec. 1.337(d)-7 as contained in 26 CFR part 1 in effect on April 1,
2013.
(ii) [Reserved]. For further guidance, see Sec. 1.337(d)-
7T(g)(2)(ii) through (iii).
(iii) Recognition period. Paragraphs (b)(1)(ii) and (d)(2)(iii) of
this section apply to conversion transactions that occur on or after
August 8, 2016. Paragraph (b)(2)(iii) of this section applies to
conversion transactions that occur after February 17, 2017. For
conversion transactions that occurred on or after August 8, 2016 and on
or before February 17, 2017, see Sec. 1.337(d)-7T(b)(2)(iii) in effect
on August 8, 2016. However, taxpayers may apply paragraph (b)(2)(iii) of
this section to conversion transactions that occurred on or after August
8, 2016 and on or before February 17, 2017. For conversion transactions
that occurred on or after January 2, 2002 and before August 8, 2016, see
Sec. 1.337(d)-7 as contained in 26 CFR part 1 in effect on April 1,
2016.
[T.D. 9047, 68 FR 12822, Mar. 18, 2003, as amended by T.D. 9626, 78 FR
46806, Aug. 2, 2013; T.D. 9770, 81 FR 36797, June 8, 2016; T.D. 9810, 82
FR 5388, Jan. 18, 2017]
Sec. 1.337(d)-7T Tax on property owned by a C corporation that
becomes property of a RIC or REIT.
(a) General Rule--(1) Property owned by a C corporation that becomes
property of a RIC or REIT. If property owned by a C corporation (as
defined in Sec. 1.337(d)-7(a)(2)(i)) becomes the property of a RIC or a
REIT in a conversion transaction (as defined in Sec. 1.337(d)-
7(a)(2)(ii)), then section 1374 treatment will apply as described in
Sec. 1.337(d)-7(b) and paragraph (b) of this section, unless the C
corporation elects, or is treated as electing, deemed sale treatment
with respect to the conversion transaction as provided in Sec.
1.337(d)-7(c) and paragraph (c) of this section. See Sec. 1.337(d)-7(d)
for exceptions to this paragraph (a).
(2)(i) through (v) [Reserved]. For further guidance, see Sec.
1.337(d)-7(a)(2)(i) through (v).
(vi) Section 355 distribution. The term section 355 distribution
means any distribution to which section 355 (or so
[[Page 136]]
much of section 356 as relates to section 355) applies, including a
distribution on which the distributing corporation recognizes gain
pursuant to sections 355(d) or 355(e).
(vii) Converted property. The term converted property means property
owned by a C corporation that becomes the property of a RIC or a REIT.
(b)(1) through (3) [Reserved]. For further guidance, see Sec.
1.337(d)-7(b)(1) through (3).
(4) Section 355 distribution following a conversion transaction--(i)
In general. If a REIT is described in paragraph (f)(1) of this section
and the related section 355 distribution (as defined in paragraph
(f)(1)(i) of this section) follows a conversion transaction, then for
the taxable year in which the related section 355 distribution occurs,
Sec. 1.1374-2(a)(1) and (2) (as modified by Sec. 1.337(d)-7(b)(2)(i))
do not apply, and the REIT's net recognized built-in gain for such
taxable year is the amount of its net unrealized built-in gain
limitation (as defined in Sec. 1.1374-2(a)(3)) for such taxable year.
(ii) Basis adjustment--(A) In general. If a REIT recognizes gain
under paragraph (b)(4)(i) of this section, the aggregate basis of the
converted property held by the REIT at the end of the taxable year in
which the related section 355 distribution occurs shall be increased by
an amount equal to the amount of gain so recognized, increased by the
amount of the REIT's recognized built-in loss for such taxable year, and
reduced by the amount of the REIT's recognized built-in gain and
recognized built-in gain carryover for such taxable year.
(B) Allocation of basis increase. The aggregate increase in basis by
reason of paragraph (b)(4)(ii)(A) of this section shall be allocated
among the converted property in proportion to their respective built-in
gains on the date of the conversion transaction.
(5) [Reserved]. For further guidance, see Sec. 1.337(d)-7(b)(5).
(c) Election of deemed sale treatment--(1) In general. Section
1.337(d)-7(b) and paragraph (b) of this section do not apply if the C
corporation that qualifies as a RIC or a REIT or transfers property to a
RIC or a REIT makes the election described in Sec. 1.337(d)-7(c)(5) or
is treated as making such election under paragraph (c)(6) of this
section. A C corporation that makes, or is treated as making, such an
election recognizes gain and loss as if it sold the converted property
to an unrelated party at fair market value on the deemed sale date (as
defined in Sec. 1.337(d)-7(c)(3)). See Sec. 1.337(d)-7(c)(4)
concerning limitations on the use of loss in computing gain. Section
1.337(d)-7(c) and this paragraph (c) do not apply if their application
would result in the recognition of a net loss. For this purpose, net
loss is the excess of aggregate losses over aggregate gains (including
items of income), without regard to character.
(2) through (5) [Reserved]. For further guidance, see Sec.
1.337(d)-7(c)(2) through (5).
(6) Conversion transaction following a section 355 distribution. A C
corporation described in paragraph (f)(1) of this section is treated as
having made the election under Sec. 1.337(d)-7(c)(5) with respect to a
conversion transaction if the conversion transaction occurs following
the related section 355 distribution (as defined in paragraph (f)(1)(i)
of this section) and the C corporation has not made such election.
(7) through (e) [Reserved]. For further guidance, see Sec.
1.337(d)-7(c)(7) through (e).
(f) Conversion transaction preceding or following a section 355
distribution--(1) In general. A C corporation or a REIT is described in
this paragraph (f)(1) if--
(i) The C corporation or the REIT engages in a conversion
transaction involving a REIT during the twenty-year period beginning on
the date that is ten years before the date of a section 355 distribution
(the related section 355 distribution); and
(ii) The C corporation or the REIT engaging in the related section
355 distribution is either--
(A) The distributing corporation or the controlled corporation, as
those terms are defined in section 355(a)(1); or
(B) A member of the separate affiliated group (as defined in section
355(b)(3)(B)) of the distributing corporation or the controlled
corporation.
[[Page 137]]
(2) Predecessors and successors. For purposes of this paragraph (f),
any reference to a controlled corporation or a distributing corporation
includes a reference to any predecessor or successor of such
corporation. Predecessors and successors include corporations which
succeed to and take into account items described in section 381(c) of
the distributing corporation or the controlled corporation, and
corporations having such items to which the distributing corporation or
the controlled corporation succeeded and took into account.
(3) Exclusion of certain conversion transactions. A C corporation or
a REIT is not described in paragraph (f)(1) of this section if--
(i) The distributing corporation and the controlled corporation are
both REITs immediately after the related section 355 distribution
(including by reason of elections under section 856(c)(1) made after the
related section 355 distribution that are effective before the related
section 355 distribution) and at all times during the two years
thereafter;
(ii) Section 355(h)(1) does not apply to the related section 355
distribution by reason of section 355(h)(2)(B); or
(iii) The related section 355 distribution occurred before December
7, 2015 or is described in a ruling request referred to in section
311(c) of Division Q of the Consolidated Appropriations Act, 2016,
Public Law 114-113, 129 Stat. 2422.
(g) Effective/Applicability date. (1) [Reserved]. For further
guidance, see Sec. 1.337(d)-7(g)(1).
(2) Special rules. (i) [Reserved]. For further guidance, see Sec.
1.337(d)-7(g)(2)(i).
(ii) Conversion transactions occurring on or after June 7, 2016.
Paragraphs (a)(1), (a)(2)(vi) and (vii), (b)(4), (c)(1), (c)(6), and (f)
of this section apply to conversion transactions occurring on or after
June 7, 2016 and to conversion transactions and related section 355
distributions for which the conversion transaction occurs before, and
the related section 355 distribution occurs on or after, June 7, 2016.
For conversion transactions that occurred on or after January 2, 2002
and before June 7, 2016, see Sec. 1.337(d)-7 as contained in 26 CFR
part 1 in effect on April 1, 2016.
(iii) [Reserved]. For further guidance, see Sec. 1.337(d)-
7(g)(2)(iii).
(h) Expiration date. The applicability of this section expires on
June 7, 2019.
[T.D. 9770, 81 FR 36797, June 8, 2016, as amended at 81 FR 41800, June
28, 2016; T.D. 9810, 82 FR 5388, Jan. 18, 2017]
Sec. 1.338-0 Outline of topics.
This section lists the captions contained in the regulations under
section 338 as follows:
Sec. 1.338-1 General principles; status of old target and new target.
(a) In general.
(1) Deemed transaction.
(2) Application of other rules of law.
(3) Overview.
(b) Treatment of target under other provisions of the Internal
Revenue Code.
(1) General rule for subtitle A.
(2) Exceptions for subtitle A.
(3) General rule for other provisions of the Internal Revenue Code.
(c) Anti-abuse rule.
(1) In general.
(2) Examples.
(d) Next day rule for post-closing transactions.
(e) Effective/applicability date.
Sec. 1.338-2 Nomenclature and definitions; mechanics of the section 338
election.
(a) Scope.
(b) Nomenclature.
(c) Definitions.
(1) Acquisition date.
(2) Acquisition date assets.
(3) Affiliated group.
(4) Common parent.
(5) Consistency period.
(6) Deemed asset sale.
(7) Deemed sale tax consequences.
(8) Deemed sale return.
(9) Domestic corporation.
(10) Old target's final return.
(11) Purchasing corporation.
(12) Qualified stock purchase.
(13) Related persons.
(14) Section 338 election.
(15) Section 338(h)(10) election.
(16) Selling group.
(17) Target; old target; new target.
(18) Target affiliate.
(19) 12-month acquisition period.
(d) Time and manner of making election.
(e) Special rules for foreign corporations or DISCs.
(1) Elections by certain foreign purchasing corporations.
(i) General rule.
(ii) Qualifying foreign purchasing corporation.
[[Page 138]]
(iii) Qualifying foreign target.
(iv) Triggering event.
(v) Subject to United States tax.
(2) Acquisition period.
(3) Statement of section 338 may be filed by United States
shareholders in certain cases.
(4) Notice requirement for U.S. persons holding stock in foreign
target.
(i) General rule.
(ii) Limitation.
(iii) Form of notice.
(iv) Timing of notice.
(v) Consequence of failure to comply.
(vi) Good faith effort to comply.
Sec. 1.338-3 Qualification for the section 338 election.
(a) Scope.
(b) Rules relating to qualified stock purchases.
(1) Purchasing corporation requirement.
(2) Purchase.
(3) Acquisitions of stock from related corporations.
(i) In general.
(ii) Time for testing relationship.
(iii) Cases where section 338(h)(3)(C) applies--acquisitions treated
as purchases.
(iv) Examples.
(4) Acquisition date for tiered targets.
(i) Stock sold in deemed asset sale.
(ii) Examples.
(5) Effect of redemptions.
(i) General rule.
(ii) Redemptions from persons unrelated to the purchasing
corporation.
(iii) Redemptions from the purchasing corporation or related persons
during 12-month acquisition period.
(A) General rule.
(B) Exception for certain redemptions from related corporations.
(iv) Examples.
(c) Effect of post-acquisition events on eligibility for section 338
election.
(1) Post-acquisition elimination of target.
(2) Post-acquisition elimination of the purchasing corporation.
(d) Consequences of post-acquisition elimination of target where
section 338 election not made.
(1) Scope.
(2) Continuity of interest.
(3) Control requirement.
(4) Solely for voting stock requirement.
(5) Example.
Sec. 1.338-4 Aggregate deemed sale price; various aspects of taxation
of the deemed asset sale.
(a) Scope.
(b) Determination of ADSP.
(1) General rule.
(2) Time and amount of ADSP.
(i) Original determination.
(ii) Redetermination of ADSP.
(iii) Example.
(c) Grossed-up amount realized on the sale to the purchasing
corporation of the purchasing corporation's recently purchased target
stock.
(1) Determination of amount.
(2) Example.
(d) Liabilities of old target.
(1) In general.
(2) Time and amount of liabilities.
(e) Deemed sale tax consequences.
(f) Other rules apply in determining ADSP.
(g) Examples.
(h) Deemed sale of target affiliate stock.
(1) Scope.
(2) In general.
(3) Deemed sale of foreign target affiliate by a domestic target.
(4) Deemed sale producing effectively connected income.
(5) Deemed sale of insurance company target affiliate electing under
section 953(d).
(6) Deemed sale of DISC target affiliate.
(7) Anti-stuffing rule.
(8) Examples.
Sec. 1.338-5 Adjusted grossed-up basis.
(a) Scope.
(b) Determination of AGUB.
(1) General rule.
(2) Time and amount of AGUB.
(i) Original determination.
(ii) Redetermination of AGUB.
(iii) Examples.
(c) Grossed-up basis of recently purchased stock.
(d) Basis of nonrecently purchased stock; gain recognition election.
(1) No gain recognition election.
(2) Procedure for making gain recognition election.
(3) Effect of gain recognition election.
(i) In general.
(ii) Basis amount.
(iii) Losses not recognized.
(iv) Stock subject to election.
(e) Liabilities of new target.
(1) In general.
(2) Time and amount of liabilities.
(3) Interaction with deemed sale tax consequences.
(f) Adjustments by the Internal Revenue Service.
(g) Examples.
(h) Effective/applicability date.
Sec. 1.338-6 Allocation of ADSP and AGUB among target assets.
(a) Scope.
(1) In general.
(2) Fair market value.
(i) In general.
(ii) Transaction costs.
(iii) Internal Revenue Service authority.
(b) General rule for allocating ADSP and AGUB.
(1) Reduction in the amount of consideration for Class I assets.
[[Page 139]]
(2) Other assets.
(i) In general.
(ii) Class II assets.
(iii) Class III assets.
(iv) Class IV assets.
(v) Class V assets.
(vi) Class VI assets.
(vii) Class VII assets.
(3) Other items designated by the Internal Revenue Service.
(c) Certain limitations and other rules for allocation to an asset.
(1) Allocation not to exceed fair market value.
(2) Allocation subject to other rules.
(3) Special rule for allocating AGUB when purchasing corporation has
nonrecently purchased stock.
(i) Scope.
(ii) Determination of hypothetical purchase price.
(iii) Allocation of AGUB.
(4) Liabilities taken into account in determining amount realized on
subsequent disposition.
(5) Allocation to certain nuclear decommissioning funds.
(d) Examples.
Sec. 1.338-7 Allocation of redetermined ADSP and AGUB among target
assets.
(a) Scope.
(b) Allocation of redetermined ADSP and AGUB.
(c) Special rules for ADSP.
(1) Increases or decreases in deemed sale tax consequences taxable
notwithstanding old target ceases to exist.
(2) Procedure for transactions in which section 338(h)(10) is not
elected.
(i) Deemed sale tax consequences included in new target's return.
(ii) Carryovers and carrybacks.
(A) Loss carryovers to new target taxable years.
(B) Loss carrybacks to taxable years of old target.
(C) Credit carryovers and carrybacks.
(3) Procedure for transactions in which section 338(h)(10) is
elected.
(d) Special rules for AGUB.
(1) Effect of disposition or depreciation of acquisition date
assets.
(2) Section 38 property.
(e) Examples.
Sec. 1.338-8 Asset and stock consistency.
(a) Introduction.
(1) Overview.
(2) General application.
(3) Extension of the general rules.
(4) Application where certain dividends are paid.
(5) Application to foreign target affiliates.
(6) Stock consistency.
(b) Consistency for direct acquisitions.
(1) General rule.
(2) Section 338(h)(10) elections.
(c) Gain from disposition reflected in basis of target stock.
(1) General rule.
(2) Gain not reflected if section 338 election made for target.
(3) Gain reflected by reason of distributions.
(4) Controlled foreign corporations.
(5) Gain recognized outside the consolidated group.
(d) Basis of acquired assets.
(1) Carryover basis rule.
(2) Exceptions to carryover basis rule for certain assets.
(3) Exception to carryover basis rule for de minimis assets.
(4) Mitigation rule.
(i) General rule.
(ii) Time for transfer.
(e) Examples.
(1) In general.
(2) Direct acquisitions.
(f) Extension of consistency to indirect acquisitions.
(1) Introduction.
(2) General rule.
(3) Basis of acquired assets.
(4) Examples.
(g) Extension of consistency if dividends qualifying for 100 percent
dividends received deduction are paid.
(1) General rule for direct acquisitions from target.
(2) Other direct acquisitions having same effect.
(3) Indirect acquisitions.
(4) Examples.
(h) Consistency for target affiliates that are controlled foreign
corporations.
(1) In general.
(2) Income or gain resulting from asset dispositions.
(i) General rule.
(ii) Basis of controlled foreign corporation stock.
(iii) Operating rule.
(iv) Increase in asset or stock basis.
(3) Stock issued by target affiliate that is a controlled foreign
corporation.
(4) Certain distributions.
(i) General rule.
(ii) Basis of controlled foreign corporation stock.
(iii) Increase in asset or stock basis.
(5) Examples.
(i) [Reserved]
(j) Anti-avoidance rules.
(1) Extension of consistency period.
(2) Qualified stock purchase and 12-month acquisition period.
(3) Acquisitions by conduits.
(i) Asset ownership.
(A) General rule.
(B) Application of carryover basis rule.
(ii) Stock acquisitions.
[[Page 140]]
(A) Purchase by conduit.
(B) Purchase of conduit by corporation.
(C) Purchase of conduit by conduit.
(4) Conduit.
(5) Existence of arrangement.
(6) Predecessor and successor.
(i) Persons.
(ii) Assets.
(7) Examples.
Sec. 1.338-9 International aspects of section 338.
(a) Scope.
(b) Application of section 338 to foreign targets.
(1) In general.
(2) Ownership of FT stock on the acquisition date.
(3) Carryover FT stock.
(i) Definition.
(ii) Carryover of earnings and profits.
(iii) Cap on carryover of earnings and profits.
(iv) Post-acquisition date distribution of old FT earnings and
profits.
(v) Old FT earnings and profits unaffected by post-acquisition date
deficits.
(vi) Character of FT stock as carryover FT stock eliminated upon
disposition.
(4) Passive foreign investment company stock.
(c) Dividend treatment under section 1248(e).
(d) Allocation of foreign taxes.
(e) Operation of section 338(h)(16). [Reserved]
(f) Examples.
Sec. 1.338-10 Filing of returns.
(a) Returns including tax liability from deemed asset sale.
(1) In general.
(2) Old target's final taxable year otherwise included in
consolidated return of selling group.
(i) General rule.
(ii) Separate taxable year.
(iii) Carryover and carryback of tax attributes.
(iv) Old target is a component member of purchasing corporation's
controlled group.
(3) Old target is an S corporation.
(4) Combined deemed sale return.
(i) General rule.
(ii) Gain and loss offsets.
(iii) Procedure for filing a combined return.
(iv) Consequences of filing a combined return.
(5) Deemed sale excluded from purchasing corporation's consolidated
return.
(6) Due date for old target's final return.
(i) General rule.
(ii) Application of Sec. 1.1502-76(c).
(A) In general.
(B) Deemed extension.
(C) Erroneous filing of deemed sale return.
(D) Erroneous filing of return for regular tax year.
(E) Last date for payment of tax.
(7) Examples.
(b) Waiver.
(1) Certain additions to tax.
(2) Notification.
(3) Elections or other actions required to be specified on a timely
filed return.
(i) In general.
(ii) New target in purchasing corporation's consolidated return.
(4) Examples.
(c) Effective/applicability date.
Sec. 1.338-11 Effect of section 338 election on insurance company
targets.
(a) In general.
(b) Computation of ADSP and AGUB.
(1) Reserves taken into account as a liability.
(2) Allocation of ADSP and AGUB to specific insurance contracts.
(c) Application of assumption reinsurance principles.
(1) In general.
(2) Reinsurance premium.
(3) Ceding commission.
(4) Examples.
(d) Reserve increases by new target after the deemed asset sale.
(1) In general.
(2) Exceptions.
(3) Amount of additional premium.
(i) In general.
(ii) Increases in unpaid loss reserves.
(iii) Increases in other reserves.
(4) Limitation on additional premium.
(5) Treatment of additional premium under section 848.
(6) Examples.
(7) Effective/applicability date.
(i) In general.
(ii) Application to pre-effective date increases to reserves.
(e) Effect of section 338 election on section 846(e) election.
(1) In general.
(2) Revocation of existing section 846(e) election.
(f) Effect of section 338 election on old target's capitalization
amounts under section 848.
(1) Determination of net consideration for specified insurance
contracts.
(2) Determination of capitalization amount.
(3) Section 381 transactions.
(g) Effect of section 338 election on policyholders surplus account.
(h) Effect of section 338 election on section 847 special estimated
tax payments.
Sec. 1.338-11T Effect of section 338 election on insurance company
targets (temporary).
(a) through (c) [Reserved]
[[Page 141]]
(d) Reserve increases by new target after the deemed asset sale.
(1) In general.
(2) Exceptions.
(3) Amount of additional premium.
(i) In general.
(ii) Increases in unpaid loss reserves.
(iii) Increases in other reserves.
(4) Limitation on additional premium.
(5) Treatment of additional premium under section 848.
(6) Examples.
(7) Effective dates.
(i) In general.
(ii) Application to pre-effective date increases to reserves.
(e) Effect of section 338 election on section 846(e) election.
(1) In general.
(2) Revocation of existing section 846(e) election.
(f) through (h) [Reserved]
Sec. 1.338(h)(10)-1 Deemed asset sale and liquidation.
(a) Scope.
(b) Definitions.
(1) Consolidated target.
(2) Selling consolidated group.
(3) Selling affiliate; affiliated target.
(4) S corporation target.
(5) S corporation shareholders.
(6) Liquidation.
(c) Section 338(h)(10) election.
(1) In general.
(2) Simultaneous joint election requirement.
(3) Irrevocability.
(4) Effect of invalid election.
(d) Certain consequences of section 338(h)(10) election.
(1) P.
(2) New T.
(3) Old T--deemed sale.
(i) In general.
(ii) Tiered targets.
(4) Old T and selling consolidated group, selling affiliate, or S
corporation shareholders--deemed liquidation; tax characterization.
(i) In general.
(ii) Tiered targets.
(5) Selling consolidated group, selling affiliate, or S corporation
shareholders.
(i) In general.
(ii) Basis and holding period of T stock not acquired.
(iii) T stock sale.
(6) Nonselling minority shareholders other than nonselling S
corporation shareholders.
(i) In general.
(ii) T stock sale.
(iii) T stock not acquired.
(7) Consolidated return of selling consolidated group.
(8) Availability of the section 453 installment method.
(i) In deemed asset sale.
(ii) In deemed liquidation.
(9) Treatment consistent with an actual asset sale.
(e) Examples.
(f) Inapplicability of provisions.
(g) Required information.
Sec. 1.338(i)-1 Effective dates.
(a) In general.
(b) Section 338(h)(10) elections for S corporation targets.
(c) Section 338 elections for insurance company targets.
(1) In general.
(2) New target election for retroactive election.
(i) Availability of election.
(ii) Time and manner of making the election for new target.
(3) Old target election for retroactive election.
(i) Availability of election.
(ii) Time and manner of making the election for old target.
[T.D. 8940, 66 FR 9929, Feb. 13, 2001, as amended by T.D. 9158, 70 FR
55741, Sept. 16, 2004; T.D. 9257, 71 FR 17999, Apr. 10, 2006; T.D. 9264,
71 FR 30595, May 30, 2006; T.D. 9358, 72 FR 51705, Sept. 11, 2007; T.D.
9377, 73 FR 3871, Jan. 23, 2008; T.D. 9619, 78 FR 28489, May 15, 2013]
Sec. 1.338-1 General principles; status of old target and new target.
(a) In general--(1) Deemed transaction. Elections are available
under section 338 when a purchasing corporation acquires the stock of
another corporation (the target) in a qualified stock purchase. One type
of election, under section 338(g), is available to the purchasing
corporation. Another type of election, under section 338(h)(10), is, in
more limited circumstances, available jointly to the purchasing
corporation and the sellers of the stock. (Rules concerning eligibility
for these elections are contained in Sec. Sec. 1.338-2, 1.338-3, and
1.338(h)(10)-1.) However, if, as a result of the deemed purchase of old
target's assets pursuant to a section 336(e) election, there would be
both a qualified stock purchase and a qualified stock disposition (as
defined in Sec. 1.336-1(b)(6)) of the stock of a subsidiary of target,
neither a section 338(g) election nor a section 338(h)(10) election may
be made with respect to the qualified stock purchase of the subsidiary.
Instead, a section 336(e) election may be made with respect to such
purchase. See Sec. 1.336-
[[Page 142]]
1(b)(6)(ii). Although target is a single corporation under corporate
law, if a section 338 election is made, then two separate corporations,
old target and new target, generally are considered to exist for
purposes of subtitle A of the Internal Revenue Code. Old target is
treated as transferring all of its assets to an unrelated person in
exchange for consideration that includes the discharge of its
liabilities (see Sec. 1.1001-2(a)), and new target is treated as
acquiring all of its assets from an unrelated person in exchange for
consideration that includes the assumption of those liabilities. (Such
transaction is, without regard to its characterization for Federal
income tax purposes, referred to as the deemed asset sale and the income
tax consequences thereof as the deemed sale tax consequences.) If a
section 338(h)(10) election is made, old target is deemed to liquidate
following the deemed asset sale.
(2) Application of other rules of law. Other rules of law apply to
determine the tax consequences to the parties as if they had actually
engaged in the transactions deemed to occur under section 338 and the
regulations thereunder except to the extent otherwise provided in those
regulations. See also Sec. 1.338-6(c)(2). Other rules of law may
characterize the transaction as something other than or in addition to a
sale and purchase of assets; however, the transaction between old and
new target must be a taxable transaction. For example, if the target is
an insurance company for which a section 338 election is made, the
deemed asset sale results in an assumption reinsurance transaction for
the insurance contracts deemed transferred from old target to new
target. See, generally, Sec. 1.817-4(d), and for special rules
regarding the acquisition of insurance company targets, Sec. 1.338-11.
See also Sec. 1.367(a)-8(k)(13) for a rule applicable to gain
recognition agreements (filed under Sec. Sec. 1.367(a)-3(b)(1)(ii) and
1.367(a)-8) and deemed asset sales as a result of an election under
section 338(g).
(3) Overview. Definitions and special nomenclature and rules for
making the section 338 election are provided in Sec. 1.338-2.
Qualification for the section 338 election is addressed in Sec. 1.338-
3. The amount for which old target is treated as selling all of its
assets (the aggregate deemed sale price, or ADSP) is addressed in Sec.
1.338-4. The amount for which new target is deemed to have purchased all
its assets (the adjusted grossed-up basis, or AGUB) is addressed in
Sec. 1.338-5. Section 1.338-6 addresses allocation both of ADSP among
the assets old target is deemed to have sold and of AGUB among the
assets new target is deemed to have purchased. Section 1.338-7 addresses
allocation of ADSP or AGUB when those amounts subsequently change. Asset
and stock consistency are addressed in Sec. 1.338-8. International
aspects of section 338 are covered in Sec. 1.338-9. Rules for the
filing of returns are provided in Sec. 1.338-10. Section 1.338-11
provides special rules for insurance company targets. Eligibility for
and treatment of section 338(h)(10) elections is addressed in Sec.
1.338(h)(10)-1.
(b) Treatment of target under other provisions of the Internal
Revenue Code--(1) General rule for subtitle A. Except as provided in
this section, new target is treated as a new corporation that is
unrelated to old target for purposes of subtitle A of the Internal
Revenue Code. Thus--
(i) New target is not considered related to old target for purposes
of section 168 and may make new elections under section 168 without
taking into account the elections made by old target; and
(ii) New target may adopt, without obtaining prior approval from the
Commissioner, any taxable year that meets the requirements of section
441 and any method of accounting that meets the requirements of section
446. Notwithstanding Sec. 1.441-1T(b)(2), a new target may adopt a
taxable year on or before the last day for making the election under
section 338 by filing its first return for the desired taxable year on
or before that date.
(2) Exceptions for subtitle A. New target and old target are treated
as the same corporation for purposes of--
(i) The rules applicable to employee benefit plans (including those
plans described in sections 79, 104, 105, 106, 125, 127, 129, 132, 137,
and 220), qualified pension, profit-sharing, stock bonus and annuity
plans (sections 401(a) and 403(a)), simplified employee pensions
[[Page 143]]
(section 408(k)), tax qualified stock option plans (sections 422 and
423), welfare benefit funds (sections 419, 419A, 512(a)(3), and 4976),
and voluntary employee benefit associations (section 501(c)(9) and the
regulations thereunder);
(ii) Sections 1311 through 1314 (relating to the mitigation of the
effect of limitations), if a section 338(h)(10) election is not made for
target;
(iii) Section 108(e)(5) (relating to the reduction of purchase money
debt);
(iv) Section 45A (relating to the Indian Employment Credit), section
51 (relating to the Work Opportunity Credit), section 51A (relating to
the Welfare to Work Credit), and section 1396 (relating to the
Empowerment Zone Act);
(v) Sections 401(h) and 420 (relating to medical benefits for
retirees);
(vi) Section 414 (relating to definitions and special rules); and
(vii) Section 846(e) (relating to an election to use an insurance
company's historical loss payment pattern).
(viii) Any other provision designated in the Internal Revenue
Bulletin by the Internal Revenue Service. See Sec. 601.601(d)(2)(ii) of
this chapter. See, for example, Sec. 1.1001-3(e)(4)(i)(F) providing
that an election under section 338 does not result in the substitution
of a new obligor on target's debt. See also, for example, Sec. 1.1502-
77(c)(8), providing that an election under section 338 does not result
in a deemed termination of target's existence for purposes of the rules
applicable to the agent for a consolidated group.
(3) General rule for other provisions of the Internal Revenue Code.
Except as provided in the regulations under section 338 or in the
Internal Revenue Bulletin by the Internal Revenue Service (see Sec.
601.601(d)(2)(ii) of this chapter), new target is treated as a
continuation of old target for purposes other than subtitle A of the
Internal Revenue Code. For example--
(i) New target is liable for old target's Federal income tax
liabilities, including the tax liability for the deemed sale tax
consequences and those tax liabilities of the other members of any
consolidated group that included old target that are attributable to
taxable years in which those corporations and old target joined in the
same consolidated return (see Sec. 1.1502-6(a));
(ii) Wages earned by the employees of old target are considered
wages earned by such employees from new target for purposes of sections
3101 and 3111 (Federal Insurance Contributions Act) and section 3301
(Federal Unemployment Tax Act); and
(iii) Old target and new target must use the same employer
identification number.
(c) Anti-abuse rule--(1) In general. The rules of this paragraph (c)
apply for purposes of applying the regulations under sections 336(e),
338, and 1060. The Commissioner is authorized to treat any property
(including cash) transferred by old target in connection with the
transactions resulting in the application of the residual method (and
not held by target at the close of the acquisition date) as,
nonetheless, property of target at the close of the acquisition date if
the property so transferred is, within 24 months after the deemed asset
sale, owned by new target, or is owned, directly or indirectly, by a
member of the affiliated group of which new target is a member and
continues after the acquisition date to be held or used primarily in
connection with one or more of the activities of new target. In
addition, the Commissioner is authorized to treat any property
(including cash) transferred to old target in connection with the
transactions resulting in the application of the residual method (and
held by target at the close of the acquisition date) as, nonetheless,
not being property of target at the close of the acquisition date if the
property so transferred is, within 24 months after the deemed asset
sale, not owned by new target but owned, directly or indirectly, by a
member of the affiliated group of which new target is a member, or owned
by new target but held or used primarily in connection with an activity
conducted, directly or indirectly, by another member of the affiliated
group of which new target is a member in combination with other property
retained by or acquired, directly or indirectly, from the transferor of
the property (or a member of the same affiliated group) to old target.
For purposes of this paragraph (c)(1), an interest in
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an entity is considered held or used in connection with an activity if
property of the entity is so held or used. The authority of the
Commissioner under this paragraph (c)(1) includes the making of any
appropriate correlative adjustments (avoiding, to the extent possible,
the duplication or omission of any item of income, gain, loss,
deduction, or basis).
(2) Examples. The following examples illustrate this paragraph (c):
Example 1. Prior to a qualified stock purchase under section 338,
target transfers one of its assets to a related party. The purchasing
corporation then purchases the target stock and also purchases the
transferred asset from the related party. After its purchase of target,
the purchasing corporation and target are members of the same affiliated
group. A section 338 election is made. Under an arrangement with the
purchaser, the separately transferred asset is used primarily in
connection with target's activities. Applying the anti-abuse rule of
this paragraph (c), the Commissioner may consider target to own the
transferred asset for purposes of applying the residual method under
section 338.
Example 2. T owns all the stock of T1. T1 leases intellectual
property to T, which T uses in connection with its own activities. P, a
purchasing corporation, wishes to buy the T-T1 chain of corporations. P,
in connection with its planned purchase of the T stock, contracts to
consummate a purchase of all the stock of T1 on March 1 and of all the
stock of T on March 2. Section 338 elections are thereafter made for
both T and T1. Immediately after the purchases, P, T and T1 are members
of the same affiliated group. T continues to lease the intellectual
property from T1 and that is the primary use of the intellectual
property. Thus, an asset of T, the T1 stock, was removed from T's own
assets prior to the qualified stock purchase of the T stock, T1's own
assets are used after the deemed asset sale in connection with T's own
activities, and the T1 stock is after the deemed asset sale owned by P,
a member of the same affiliated group of which T is a member. Applying
the anti-abuse rule of this paragraph (c), the Commissioner may, for
purposes of application of the residual method under section 338 both to
T and to T1, consider P to have bought only the stock of T, with T at
the time of the qualified stock purchases of both T and T1 (the
qualified stock purchase of T1 being triggered by the deemed sale under
section 338 of T's assets) owning T1. The Commissioner accordingly would
allocate consideration to T's assets as though the T1 stock were one of
those assets, and then allocate consideration within T1 based on the
amount allocated to the T1 stock at the T level.
(d) Next day rule for post-closing transactions. If a target
corporation for which an election under section 338 is made engages in a
transaction outside the ordinary course of business on the acquisition
date after the event resulting in the qualified stock purchase of the
target or a higher tier corporation, the target and all persons related
thereto (either before or after the qualified stock purchase) under
section 267(b) or section 707 must treat the transaction for all Federal
income tax purposes as occurring at the beginning of the day following
the transaction and after the deemed purchase by new target.
(e) Effective/applicability date. Paragraphs (a)(1) and (c)(1) of
this section are applicable to any qualified stock disposition for which
the disposition date (as defined in Sec. 1.336-1(b)(8)) is on or after
May 15, 2013.
[T.D. 8940, 66 FR 9929, Feb. 13, 2001, as amended by T.D. 9002, 67 FR
43540, June 28, 2002; T.D. 9257, 71 FR 18000, Apr. 10, 2006; T.D. 9377,
73 FR 3871, Jan. 23, 2008; T.D. 9446, 74 FR 6957, Feb. 11, 2009; T.D.
9619, 78 FR 28489, May 15, 2013; T.D. 9715, 80 FR 17317, Apr. 1, 2015]
Sec. 1.338-2 Nomenclature and definitions; mechanics of the section
338 election.
(a) Scope. This section prescribes rules relating to elections under
section 338.
(b) Nomenclature. For purposes of the regulations under section 338
(except as otherwise provided):
(1) T is a domestic target corporation that has only one class of
stock outstanding. Old T refers to T for periods ending on or before the
close of T's acquisition date; new T refers to T for subsequent periods.
(2) P is the purchasing corporation.
(3) The P group is an affiliated group of which P is a member.
(4) P1, P2, etc., are domestic corporations that are members of the
P group.
(5) T1, T2, etc., are domestic corporations that are target
affiliates of T. These corporations (T1, T2, etc.) have only one class
of stock outstanding and may also be targets.
(6) S is a domestic corporation (unrelated to P and B) that owns T
prior to
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the purchase of T by P. (S is referred to in cases in which it is
appropriate to consider the effects of having all of the outstanding
stock of T owned by a domestic corporation.)
(7) A, a U.S. citizen or resident, is an individual (unrelated to P
and B) who owns T prior to the purchase of T by P. (A is referred to in
cases in which it is appropriate to consider the effects of having all
of the outstanding stock of T owned by an individual who is a U.S.
citizen or resident. Ownership of T by A and ownership of T by S are
mutually exclusive circumstances.)
(8) B, a U.S. citizen or resident, is an individual (unrelated to T,
S, and A) who owns the stock of P.
(9) F, used as a prefix with the other terms in this paragraph (b),
connotes foreign, rather than domestic, status. For example, FT is a
foreign corporation (as defined in section 7701(a)(5)) and FA is an
individual other than a U.S. citizen or resident.
(10) CFC, used as a prefix with the other terms in this paragraph
(b) referring to a corporation, connotes a controlled foreign
corporation (as defined in section 957, taking into account section
953(c)). A corporation identified with the prefix F may be a controlled
foreign corporation. (The prefix CFC is used when the corporation's
status as a controlled foreign corporation is significant.)
(c) Definitions. For purposes of the regulations under section 338
(except as otherwise provided):
(1) Acquisition date. The term acquisition date has the same meaning
as in section 338(h)(2).
(2) Acquisition date assets. Acquisition date assets are the assets
of the target held at the beginning of the day after the acquisition
date (but see Sec. 1.338-1(d) (regarding certain transactions on the
acquisition date)).
(3) Affiliated group. The term affiliated group has the same meaning
as in section 338(h)(5). Corporations are affiliated on any day they are
members of the same affiliated group.
(4) Common parent. The term common parent has the same meaning as in
section 1504.
(5) Consistency period. The consistency period is the period
described in section 338(h)(4)(A) unless extended pursuant to Sec.
1.338-8(j)(1).
(6) Deemed asset sale. The deemed asset sale is the transaction
described in Sec. 1.338-1(a)(1) that is deemed to occur for purposes of
subtitle A of the Internal Revenue Code if a section 338 election is
made.
(7) Deemed sale tax consequences. Deemed sale tax consequences
refers to, in the aggregate, the Federal income tax consequences
(generally, the income, gain, deduction, and loss) of the deemed asset
sale. Deemed sale tax consequences also refers to the Federal income tax
consequences of the transfer of a particular asset in the deemed asset
sale.
(8) Deemed sale return. The deemed sale return is the return on
which target's deemed sale tax consequences are reported that does not
include any other items of target. Target files a deemed sale return
when a section 338 election (but not a section 338(h)(10) election) is
filed for target and target is a member of a selling group (defined in
paragraph (c)(16) of this section) that files a consolidated return for
the period that includes the acquisition date. See Sec. 1.338-10. If
target is an S corporation for the period that ends on the day before
the acquisition date and a section 338 election (but not a section
338(h)(10) election) is filed for target, see Sec. 1.338-10(a)(3).
(9) Domestic corporation. A domestic corporation is a corporation--
(i) That is domestic within the meaning of section 7701(a)(4) or
that is treated as domestic for purposes of subtitle A of the Internal
Revenue Code (e.g., to which an election under section 953(d) or 1504(d)
applies); and
(ii) That is not a DISC, a corporation described in section 1248(e),
or a corporation to which an election under section 936 applies.
(10) Old target's final return. Old target's final return is the
income tax return of old target for the taxable year ending at the close
of the acquisition date that includes the deemed sale tax consequences.
However, if a deemed sale return is filed for old target, the deemed
sale return is considered old target's final return.
(11) Purchasing corporation. The term purchasing corporation has the
same
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meaning as in section 338(d)(1). The purchasing corporation may also be
referred to as purchaser. Unless otherwise provided, any reference to
the purchasing corporation is a reference to all members of the
affiliated group of which the purchasing corporation is a member. See
sections 338(h)(5) and (8). Also, unless otherwise provided, any
reference to the purchasing corporation is, with respect to a deemed
purchase of stock under section 338(a)(2), a reference to new target
with respect to its own deemed purchase of stock in another target.
(12) Qualified stock purchase. The term qualified stock purchase has
the same meaning as in section 338(d)(3).
(13) Related persons. Two persons are related if stock in a
corporation owned by one of the persons would be attributed under
section 318(a) (other than section 318(a)(4)) to the other.
(14) Section 338 election. A section 338 election is an election to
apply section 338(a) to target. A section 338 election is made by filing
a statement of section 338 election pursuant to paragraph (d) of this
section. The form on which this statement is filed is referred to in the
regulations under section 338 as the Form 8023, ``Elections Under
Section 338 For Corporations Making Qualified Stock Purchases.''
(15) Section 338(h)(10) election. A section 338(h)(10) election is
an election to apply section 338(h)(10) to target. A section 338(h)(10)
election is made by making a joint election for target under Sec.
1.338(h)(10)-1 on Form 8023.
(16) Selling group. The selling group is the affiliated group (as
defined in section 1504) eligible to file a consolidated return that
includes target for the taxable period in which the acquisition date
occurs. However, a selling group is not an affiliated group of which
target is the common parent on the acquisition date.
(17) Target; old target; new target. Target is the target
corporation as defined in section 338(d)(2). Old target refers to target
for periods ending on or before the close of target's acquisition date.
New target refers to target for subsequent periods.
(18) Target affiliate. The term target affiliate has the same
meaning as in section 338(h)(6) (applied without section
338(h)(6)(B)(i)). Thus, a corporation described in section
338(h)(6)(B)(i) is considered a target affiliate for all purposes of
section 338. If a target affiliate is acquired in a qualified stock
purchase, it is also a target.
(19) 12-month acquisition period. The 12-month acquisition period is
the period described in section 338(h)(1), unless extended pursuant to
Sec. 1.338-8(j)(2).
(d) Time and manner of making election. The purchasing corporation
makes a section 338 election for target by filing a statement of section
338 election on Form 8023 in accordance with the instructions to the
form. The section 338 election must be made not later than the 15th day
of the 9th month beginning after the month in which the acquisition date
occurs. A section 338 election is irrevocable. See Sec. 1.338(h)(10)-
1(c)(2) for section 338(h)(10) elections.
(e) Special rules for foreign corporations or DISCs--(1) Elections
by certain foreign purchasing corporations--(i) General rule. A
qualifying foreign purchasing corporation is not required to file a
statement of section 338 election for a qualifying foreign target before
the earlier of 3 years after the acquisition date and the 180th day
after the close of the purchasing corporation's taxable year within
which a triggering event occurs.
(ii) Qualifying foreign purchasing corporation. A purchasing
corporation is a qualifying foreign purchasing corporation only if,
during the acquisition period of a qualifying foreign target, all the
corporations in the purchasing corporation's affiliated group are
foreign corporations that are not subject to United States tax.
(iii) Qualifying foreign target. A target is a qualifying foreign
target only if target and its target affiliates are foreign corporations
that, during target's acquisition period, are not subject to United
States tax (and will not become subject to United States tax during such
period because of a section 338 election). A target affiliate is taken
into account for purposes of the preceding sentence only if, during
target's 12-month acquisition period, it is or becomes a member of the
affiliated group that includes the purchasing corporation.
[[Page 147]]
(iv) Triggering event. A triggering event occurs in the taxable year
of the qualifying foreign purchasing corporation in which either that
corporation or any corporation in its affiliated group becomes subject
to United States tax.
(v) Subject to United States tax. For purposes of this paragraph
(e)(1), a foreign corporation is considered subject to United States
tax--
(A) For the taxable year for which that corporation is required
under Sec. 1.6012-2(g) (other than Sec. 1.6012-2(g)(2)(i)(B)(2)) to
file a United States income tax return; or
(B) For the period during which that corporation is a controlled
foreign corporation, a passive foreign investment company for which an
election under section 1295 is in effect, a foreign investment company,
or a foreign corporation the stock ownership of which is described in
section 552(a)(2).
(2) Acquisition period. For purposes of this paragraph (e), the term
acquisition period means the period beginning on the first day of the
12-month acquisition period and ending on the acquisition date.
(3) Statement of section 338 election may be filed by United States
shareholders in certain cases. The United States shareholders (as
defined in section 951(b)) of a foreign purchasing corporation that is a
controlled foreign corporation (as defined in section 957 (taking into
account section 953(c))) may file a statement of section 338 election on
behalf of the purchasing corporation if the purchasing corporation is
not required under Sec. 1.6012-2(g) (other than Sec. 1.6012-
2(g)(2)(i)(B)(2)) to file a United States income tax return for its
taxable year that includes the acquisition date. Form 8023 must be filed
as described in the form and its instructions and also must be attached
to the Form 5471, ``Information Returns of U.S. Persons With Respect to
Certain Foreign Corporations,'' filed with respect to the purchasing
corporation by each United States shareholder for the purchasing
corporation's taxable year that includes the acquisition date (or, if
paragraph (e)(1)(i) of this section applies to the election, for the
purchasing corporation's taxable year within which it becomes a
controlled foreign corporation). The provisions of Sec. 1.964-1(c)
(including Sec. 1.964-1(c)(7)) do not apply to an election made by the
United States shareholders.
(4) Notice requirement for U.S. persons holding stock in foreign
target--(i) General rule. If a target subject to a section 338 election
was a controlled foreign corporation, a passive foreign investment
company, or a foreign personal holding company at any time during the
portion of its taxable year that ends on its acquisition date, the
purchasing corporation must deliver written notice of the election (and
a copy of Form 8023, its attachments and instructions) to--
(A) Each U.S. person (other than a member of the affiliated group of
which the purchasing corporation is a member (the purchasing group
member)) that, on the acquisition date of the foreign target, holds
stock in the foreign target; and
(B) Each U.S. person (other than a purchasing group member) that
sells stock in the foreign target to a purchasing group member during
the foreign target's 12-month acquisition period.
(ii) Limitation. The notice requirement of this paragraph (e)(4)
applies only where the section 338 election for the foreign target
affects income, gain, loss, deduction, or credit of the U.S. person
described in paragraph (e)(4)(i) of this section under section 551, 951,
1248, or 1293.
(iii) Form of notice. The notice to U.S. persons must be identified
prominently as a notice of section 338 election and must--
(A) Contain the name, address, and employer identification number
(if any) of, and the country (and, if relevant, the lesser political
subdivision) under the laws of which are organized the purchasing
corporation and the relevant target (i.e., the target the stock of which
the particular U.S. person held or sold under the circumstances
described in paragraph (e)(4)(i) of this section);
(B) Identify those corporations as the purchasing corporation and
the foreign target, respectively; and
(C) Contain the following declaration (or a substantially similar
declaration):
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THIS DOCUMENT SERVES AS NOTICE OF AN ELECTION UNDER SECTION 338 FOR
THE ABOVE CITED FOREIGN TARGET THE STOCK OF WHICH YOU EITHER HELD OR
SOLD UNDER THE CIRCUMSTANCES DESCRIBED IN TREASURY REGULATIONS SECTION
1.338-2(e)(4). FOR POSSIBLE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES UNDER SECTION 551, 951, 1248, OR 1293 OF THE INTERNAL
REVENUE CODE OF 1986 THAT MAY APPLY TO YOU, SEE TREASURY REGULATIONS
SECTION 1.338-9(b). YOU MAY BE REQUIRED TO ATTACH THE INFORMATION
ATTACHED TO THIS NOTICE TO CERTAIN RETURNS.
(iv) Timing of notice. The notice required by this paragraph (e)(4)
must be delivered to the U.S. person on or before the later of the 120th
day after the acquisition date of the particular target or the day on
which Form 8023 is filed. The notice is considered delivered on the date
it is mailed to the proper address (or an address similar enough to
complete delivery), unless the date it is mailed cannot be reasonably
determined. The date of mailing will be determined under the rules of
section 7502. For example, the date of mailing is the date of U.S.
postmark or the applicable date recorded or marked by a designated
delivery service.
(v) Consequence of failure to comply. A statement of section 338
election is not valid if timely notice is not given to one or more U.S.
persons described in this paragraph (e)(4). If the form of notice fails
to comply with all requirements of this paragraph (e)(4), the section
338 election is valid, but the waiver rule of Sec. 1.338-10(b)(1) does
not apply.
(vi) Good faith effort to comply. The purchasing corporation will be
considered to have complied with this paragraph (e)(4), even though it
failed to provide notice or provide timely notice to each person
described in this paragraph (e)(4), if the Commissioner determines that
the purchasing corporation made a good faith effort to identify and
provide timely notice to those U.S. persons.
[T.D. 8940, 66 FR 9929, Feb. 13, 2001]
Sec. 1.338-3 Qualification for the section 338 election.
(a) Scope. This section provides rules on whether certain
acquisitions of stock are qualified stock purchases and on other
miscellaneous issues under section 338.
(b) Rules relating to qualified stock purchases--(1) Purchasing
corporation requirement. An individual cannot make a qualified stock
purchase of target. Section 338(d)(3) requires, as a condition of a
qualified stock purchase, that a corporation purchase the stock of
target. If an individual forms a corporation (new P) to acquire target
stock, new P can make a qualified stock purchase of target if new P is
considered for tax purposes to purchase the target stock. Facts that may
indicate that new P does not purchase the target stock include new P's
merging downstream into target, liquidating, or otherwise disposing of
the target stock following the purported qualified stock purchase.
(2) Purchase. The term purchase has the same meaning as in section
338(h)(3). Stock in a target (or target affiliate) may be considered
purchased if, under general principles of tax law, the purchasing
corporation is considered to own stock of the target (or target
affiliate) meeting the requirements of section 1504(a)(2),
notwithstanding that no amount may be paid for (or allocated to) the
stock.
(3) Acquisitions of stock from related corporations--(i) In general.
Stock acquired by a purchasing corporation from a related corporation
(R) is generally not considered acquired by purchase. See section
338(h)(3)(A)(iii).
(ii) Time for testing relationship. For purposes of section
338(h)(3)(A)(iii), a purchasing corporation is treated as related to
another person if the relationship specified in section
338(h)(3)(A)(iii) exists--
(A) In the case of a single transaction, immediately after the
purchase of target stock;
(B) In the case of a series of acquisitions otherwise constituting a
qualified stock purchase within the meaning of section 338(d)(3),
immediately after the last acquisition in such series; and
(C) In the case of a series of transactions effected pursuant to an
integrated plan to dispose of target stock, immediately after the last
transaction in such series.
(iii) Cases where section 338(h)(3)(C) applies--acquisitions treated
as purchases. If section 338(h)(3)(C) applies
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and the purchasing corporation is treated as acquiring stock by purchase
from R, solely for purposes of determining when the stock is considered
acquired, target stock acquired from R is considered to have been
acquired by the purchasing corporation on the day on which the
purchasing corporation is first considered to own that stock under
section 318(a) (other than section 318(a)(4)).
(iv) Examples. The following examples illustrate this paragraph
(b)(3):
Example 1. (i) S is the parent of a group of corporations that are
engaged in various businesses. Prior to January 1, Year 1, S decided to
discontinue its involvement in one line of business. To accomplish this,
S forms a new corporation, Newco, with a nominal amount of cash. Shortly
thereafter, on January 1, Year 1, S transfers all the stock of the
subsidiary conducting the unwanted business (T) to Newco in exchange for
100 shares of Newco common stock and a Newco promissory note. Prior to
January 1, Year 1, S and Underwriter (U) had entered into a binding
agreement pursuant to which U would purchase 60 shares of Newco common
stock from S and then sell those shares in an Initial Public Offering
(IPO). On January 6, Year 1, the IPO closes.
(ii) Newco's acquisition of T stock is one of a series of
transactions undertaken pursuant to one integrated plan. The series of
transactions ends with the closing of the IPO and the transfer of all
the shares of stock in accordance with the agreements. Immediately after
the last transaction effected pursuant to the plan, S owns 40 percent of
Newco, which does not give rise to a relationship described in section
338(h)(3)(A)(iii). See Sec. 1.338-3(b)(3)(ii)(C). Accordingly, S and
Newco are not related for purposes of section 338(h)(3)(A)(iii).
(iii) Further, because Newco's basis in the T stock is not
determined by reference to S's basis in the T stock and because the
transaction is not an exchange to which section 351, 354, 355, or 356
applies, Newco's acquisition of the T stock is a purchase within the
meaning of section 338(h)(3).
Example 2. (i) On January 1 of Year 1, P purchases 75 percent in
value of the R stock. On that date, R owns 4 of the 100 shares of T
stock. On June 1 of Year 1, R acquires an additional 16 shares of T
stock. On December 1 of Year 1, P purchases 70 shares of T stock from an
unrelated person and 12 of the 20 shares of T stock held by R.
(ii) Of the 12 shares of T stock purchased by P from R on December 1
of Year 1, 3 of those shares are deemed to have been acquired by P on
January 1 of Year 1, the date on which 3 of the 4 shares of T stock held
by R on that date were first considered owned by P under section
318(a)(2)(C) (i.e., 4 x .75). The remaining 9 shares of T stock
purchased by P from R on December 1 of Year 1 are deemed to have been
acquired by P on June 1 of Year 1, the date on which an additional 12 of
the 20 shares of T stock owned by R on that date were first considered
owned by P under section 318(a)(2)(C) (i.e., (20 x .75)-3). Because
stock acquisitions by P sufficient for a qualified stock purchase of T
occur within a 12-month period (i.e., 3 shares constructively on January
1 of Year 1, 9 shares constructively on June 1 of Year 1, and 70 shares
actually on December 1 of Year 1), a qualified stock purchase is made on
December 1 of Year 1.
Example 3. (i) On February 1 of Year 1, P acquires 25 percent in
value of the R stock from B (the sole shareholder of P). That R stock is
not acquired by purchase. See section 338(h)(3)(A)(iii). On that date, R
owns 4 of the 100 shares of T stock. On June 1 of Year 1, P purchases an
additional 25 percent in value of the R stock, and on January 1 of Year
2, P purchases another 25 percent in value of the R stock. On June 1 of
Year 2, R acquires an additional 16 shares of the T stock. On December 1
of Year 2, P purchases 68 shares of the T stock from an unrelated person
and 12 of the 20 shares of the T stock held by R.
(ii) Of the 12 shares of the T stock purchased by P from R on
December 1 of Year 2, 2 of those shares are deemed to have been acquired
by P on June 1 of Year 1, the date on which 2 of the 4 shares of the T
stock held by R on that date were first considered owned by P under
section 318(a)(2)(C) (i.e., 4 x .5). For purposes of this attribution,
the R stock need not be acquired by P by purchase. See section
338(h)(1). (By contrast, the acquisition of the T stock by P from R does
not qualify as a purchase unless P has acquired at least 50 percent in
value of the R stock by purchase. Section 338(h)(3)(C)(i).) Of the
remaining 10 shares of the T stock purchased by P from R on December 1
of Year 2, 1 of those shares is deemed to have been acquired by P on
January 1 of Year 2, the date on which an additional 1 share of the 4
shares of the T stock held by R on that date was first considered owned
by P under section 318(a)(2)(C) (i.e., (4 x .75)-2). The remaining 9
shares of the T stock purchased by P from R on December 1 of Year 2, are
deemed to have been acquired by P on June 1 of Year 2, the date on which
an additional 12 shares of the T stock held by R on that date were first
considered owned by P under section 318(a)(2)(C) (i.e., (20 x .75)-3).
Because a qualified stock purchase of T by P is made on December 1 of
Year 2 only if all 12 shares of the T stock purchased by P from R on
that date are considered acquired during a 12-month period ending on
that date (so that, in conjunction with the 68 shares of the T stock P
purchased on that date from the unrelated
[[Page 150]]
person, 80 of T's 100 shares are acquired by P during a 12-month period)
and because 2 of those 12 shares are considered to have been acquired by
P more than 12 months before December 1 of Year 2 (i.e., on June 1 of
Year 1), a qualified stock purchase is not made. (Under Sec. 1.338-
8(j)(2), for purposes of applying the consistency rules, P is treated as
making a qualified stock purchase of T if, pursuant to an arrangement, P
purchases T stock satisfying the requirements of section 1504(a)(2) over
a period of more than 12 months.)
Example 4. Assume the same facts as in Example 3, except that on
February 1 of Year 1, P acquires 25 percent in value of the R stock by
purchase. The result is the same as in Example 3.
(4) Acquisition date for tiered targets--(i) Stock sold in deemed
asset sale. If an election under section 338 is made for target, old
target is deemed to sell target's assets and new target is deemed to
acquire those assets. Under section 338(h)(3)(B), new target's deemed
purchase of stock of another corporation is a purchase for purposes of
section 338(d)(3) on the acquisition date of target. If new target's
deemed purchase causes a qualified stock purchase of the other
corporation and if a section 338 election is made for the other
corporation, the acquisition date for the other corporation is the same
as the acquisition date of target. However, the deemed sale and purchase
of the other corporation's assets is considered to take place after the
deemed sale and purchase of target's assets.
(ii) Example. The following example illustrates this paragraph
(b)(4):
Example. A owns all of the T stock. T owns 50 of the 100 shares of X
stock. The other 50 shares of X stock are owned by corporation Y, which
is unrelated to A, T, or P. On January 1 of Year 1, P makes a qualified
stock purchase of T from A and makes a section 338 election for T. On
December 1 of Year 1, P purchases the 50 shares of X stock held by Y. A
qualified stock purchase of X is made on December 1 of Year 1, because
the deemed purchase of 50 shares of X stock by new T because of the
section 338 election for T and the actual purchase of 50 shares of X
stock by P are treated as purchases made by one corporation. Section
338(h)(8). For purposes of determining whether those purchases occur
within a 12-month acquisition period as required by section 338(d)(3), T
is deemed to purchase its X stock on T's acquisition date, i.e., January
1 of Year 1.
(5) Effect of redemptions--(i) General rule. Except as provided in
this paragraph (b)(5), a qualified stock purchase is made on the first
day on which the percentage ownership requirements of section 338(d)(3)
are satisfied by reference to target stock that is both--
(A) Held on that day by the purchasing corporation; and
(B) Purchased by the purchasing corporation during the 12-month
period ending on that day.
(ii) Redemptions from persons unrelated to the purchasing
corporation. Target stock redemptions from persons unrelated to the
purchasing corporation that occur during the 12-month acquisition period
are taken into account as reductions in target's outstanding stock for
purposes of determining whether target stock purchased by the purchasing
corporation in the 12-month acquisition period satisfies the percentage
ownership requirements of section 338(d)(3).
(iii) Redemptions from the purchasing corporation or related persons
during 12-month acquisition period--(A) General rule. For purposes of
the percentage ownership requirements of section 338(d)(3), a redemption
of target stock during the 12-month acquisition period from the
purchasing corporation or from any person related to the purchasing
corporation is not taken into account as a reduction in target's
outstanding stock.
(B) Exception for certain redemptions from related corporations. A
redemption of target stock during the 12-month acquisition period from a
corporation related to the purchasing corporation is taken into account
as a reduction in target's outstanding stock to the extent that the
redeemed stock would have been considered purchased by the purchasing
corporation (because of section 338(h)(3)(C)) during the 12-month
acquisition period if the redeemed stock had been acquired by the
purchasing corporation from the related corporation on the day of the
redemption. See paragraph (b)(3) of this section.
(iv) Examples. The following examples illustrate this paragraph
(b)(5):
Example 1. QSP on stock purchase date; redemption from unrelated
person during 12-month period. A owns all 100 shares of T stock. On
January 1 of Year 1, P purchases 40 shares of the T stock from A. On
July 1 of
[[Page 151]]
Year 1, T redeems 25 shares from A. On December 1 of Year 1, P purchases
20 shares of the T stock from A. P makes a qualified stock purchase of T
on December 1 of Year 1, because the 60 shares of T stock purchased by P
within the 12-month period ending on that date satisfy the 80-percent
ownership requirements of section 338(d)(3) (i.e., 60/75 shares),
determined by taking into account the redemption of 25 shares.
Example 2. QSP on stock redemption date; redemption from unrelated
person during 12-month period. The facts are the same as in Example 1,
except that P purchases 60 shares of T stock on January 1 of Year 1 and
none on December 1 of Year 1. P makes a qualified stock purchase of T on
July 1 of Year 1, because that is the first day on which the T stock
purchased by P within the preceding 12-month period satisfies the 80-
percent ownership requirements of section 338(d)(3) (i.e., 60/75
shares), determined by taking into account the redemption of 25 shares.
Example 3. Redemption from purchasing corporation not taken into
account. On December 15 of Year 1, T redeems 30 percent of its stock
from P. The redeemed stock was held by P for several years and
constituted P's total interest in T. On December 1 of Year 2, P
purchases the remaining T stock from A. P does not make a qualified
stock purchase of T on December 1 of Year 2. For purposes of the 80-
percent ownership requirements of section 338(d)(3), the redemption of
P's T stock on December 15 of Year 1 is not taken into account as a
reduction in T's outstanding stock.
Example 4. Redemption from related person taken into account. On
January 1 of Year 1, P purchases 60 of the 100 shares of X stock. On
that date, X owns 40 of the 100 shares of T stock. On April 1 of Year 1,
T redeems X's T stock and P purchases the remaining 60 shares of T stock
from an unrelated person. For purposes of the 80-percent ownership
requirements of section 338(d)(3), the redemption of the T stock from X
(a person related to P) is taken into account as a reduction in T's
outstanding stock. If P had purchased the 40 redeemed shares from X on
April 1 of Year 1, all 40 of the shares would have been considered
purchased (because of section 338(h)(3)(C)(i)) during the 12-month
period ending on April 1 of Year 1 (24 of the 40 shares would have been
considered purchased by P on January 1 of Year 1 and the remaining 16
shares would have been considered purchased by P on April 1 of Year 1).
See paragraph (b)(3) of this section. Accordingly, P makes a qualified
stock purchase of T on April 1 of Year 1, because the 60 shares of T
stock purchased by P on that date satisfy the 80-percent ownership
requirements of section 338(d)(3) (i.e., 60/60 shares), determined by
taking into account the redemption of 40 shares.
(c) Effect of post-acquisition events on eligibility for section 338
election--(1) Post-acquisition elimination of target. (i) The purchasing
corporation may make an election under section 338 for target even
though target is liquidated on or after the acquisition date. If target
liquidates on the acquisition date, the liquidation is considered to
occur on the following day and immediately after new target's deemed
purchase of assets. The purchasing corporation may also make an election
under section 338 for target even though target is merged into another
corporation, or otherwise disposed of by the purchasing corporation
provided that, under the facts and circumstances, the purchasing
corporation is considered for tax purposes as the purchaser of the
target stock. See Sec. 1.338(h)(10)-1(c)(2) for special rules
concerning section 338(h)(10) elections in certain multi-step
transactions.
(ii) The following examples illustrate this paragraph (c)(1):
Example 1. On January 1 of Year 1, P purchases 100 percent of the
outstanding common stock of T. On June 1 of Year 1, P sells the T stock
to an unrelated person. Assuming that P is considered for tax purposes
as the purchaser of the T stock, P remains eligible, after June 1 of
Year 1, to make a section 338 election for T that results in a deemed
asset sale of T's assets on January 1 of Year 1.
Example 2. On January 1 of Year 1, P makes a qualified stock
purchase of T. On that date, T owns the stock of T1. On March 1 of Year
1, T sells the T1 stock to an unrelated person. On April 1 of Year 1, P
makes a section 338 election for T. Notwithstanding that the T1 stock
was sold on March 1 of Year 1, the section 338 election for T on April 1
of Year 1 results in a qualified stock purchase by T of T1 on January 1
of Year 1. See paragraph (b)(4)(i) of this section.
(2) Post-acquisition elimination of the purchasing corporation. An
election under section 338 may be made for target after the acquisition
of assets of the purchasing corporation by another corporation in a
transaction described in section 381(a), provided that the purchasing
corporation is considered for tax purposes as the purchaser of the
target stock. The acquiring corporation in the section 381(a)
transaction may make an election under section 338 for target.
[[Page 152]]
(d) Consequences of post-acquisition elimination of target where
section 338 election not made--(1) Scope. The rules of this paragraph
(d) apply to the transfer of target assets to the purchasing corporation
(or another member of the same affiliated group as the purchasing
corporation) (the transferee) following a qualified stock purchase of
target stock, if the purchasing corporation does not make a section 338
election for target. Notwithstanding the rules of this paragraph (d),
section 354(a) (and so much of section 356 as relates to section 354)
cannot apply to any person other than the purchasing corporation or
another member of the same affiliated group as the purchasing
corporation unless the transfer of target assets is pursuant to a
reorganization as determined without regard to this paragraph (d).
(2) Continuity of interest. By virtue of section 338, in determining
whether the continuity of interest requirement of Sec. 1.368-1(b) is
satisfied on the transfer of assets from target to the transferee, the
purchasing corporation's target stock acquired in the qualified stock
purchase represents an interest on the part of a person who was an owner
of the target's business enterprise prior to the transfer that can be
continued in a reorganization.
(3) Control requirement. By virtue of section 338, the acquisition
of target stock in the qualified stock purchase will not prevent the
purchasing corporation from qualifying as a shareholder of the target
transferor for the purpose of determining whether, immediately after the
transfer of target assets, a shareholder of the transferor is in control
of the corporation to which the assets are transferred within the
meaning of section 368(a)(1)(D).
(4) Solely for voting stock requirement. By virtue of section 338,
the acquisition of target stock in the qualified stock purchase for
consideration other than voting stock will not prevent the subsequent
transfer of target assets from satisfying the solely for voting stock
requirement for purposes of determining if the transfer of target assets
qualifies as a reorganization under section 368(a)(1)(C).
(5) Example. The following example illustrates this paragraph (d):
Example. (i) Facts. P, T, and X are domestic corporations. T and X
each operate a trade or business. A and K, individuals unrelated to P,
own 85 and 15 percent, respectively, of the stock of T. P owns all of
the stock of X. The total adjusted basis of T's property exceeds the sum
of T's liabilities plus the amount of liabilities to which T's property
is subject. P purchases all of A's T stock for cash in a qualified stock
purchase. P does not make an election under section 338(g) with respect
to its acquisition of T stock. Shortly after the acquisition date, and
as part of the same plan, T merges under applicable state law into X in
a transaction that, but for the question of continuity of interest,
satisfies all the requirements of section 368(a)(1)(A). In the merger,
all of T's assets are transferred to X. P and K receive X stock in
exchange for their T stock. P intends to retain the stock of X
indefinitely.
(ii) Status of transfer as a reorganization. By virtue of section
338, for the purpose of determining whether the continuity of interest
requirement of Sec. 1.368-1(b) is satisfied, P's T stock acquired in
the qualified stock purchase represents an interest on the part of a
person who was an owner of T's business enterprise prior to the transfer
that can be continued in a reorganization through P's continuing
ownership of X. Thus, the continuity of interest requirement is
satisfied and the merger of T into X is a reorganization within the
meaning of section 368(a)(1)(A). Moreover, by virtue of section 338, the
requirement of section 368(a)(1)(D) that a target shareholder control
the transferee immediately after the transfer is satisfied because P
controls X immediately after the transfer. In addition, all of T's
assets are transferred to X in the merger and P and K receive the X
stock exchanged therefor in pursuance of the plan of reorganization.
Thus, the merger of T into X is also a reorganization within the meaning
of section 368(a)(1)(D).
(iii) Treatment of T and X. Under section 361(a), T recognizes no
gain or loss in the merger. Under section 362(b), X's basis in the
assets received in the merger is the same as the basis of the assets in
T's hands. X succeeds to and takes into account the items of T as
provided in section 381.
(iv) Treatment of P. By virtue of section 338, the transfer of T
assets to X is a reorganization. Pursuant to that reorganization, P
exchanges its T stock solely for stock of X, a party to the
reorganization. Because P is the purchasing corporation, section 354
applies to P's exchange of T stock for X stock in the merger of T into
X. Thus, P recognizes no gain or loss on the exchange. Under section
358, P's basis in the X stock received in the exchange is the same as
the basis of P's T stock exchanged therefor.
[[Page 153]]
(v) Treatment of K. Because K is not the purchasing corporation (or
an affiliate thereof), section 354 cannot apply to K's exchange of T
stock for X stock in the merger of T into X unless the transfer of T's
assets is pursuant to a reorganization as determined without regard to
this paragraph (d). Under general principles of tax law applicable to
reorganizations, the continuity of interest requirement is not satisfied
because P's stock purchase and the merger of T into X are pursuant to an
integrated transaction in which A, the owner of 85 percent of the stock
of T, received solely cash in exchange for A's T stock. See, e.g., Sec.
1.368-1(e)(1)(i); Yoc Heating v. Commissioner, 61 T.C. 168 (1973); Kass
v. Commissioner, 60 T.C. 218 (1973), aff'd, 491 F.2d 749 (3d Cir. 1974).
Thus, the requisite continuity of interest under Sec. 1.368-1(b) is
lacking and section 354 does not apply to K's exchange of T stock for X
stock. K recognizes gain or loss, if any, pursuant to section 1001(c)
with respect to its T stock.
[T.D. 8940, 66 FR 9929, Feb. 13, 2001; 66 FR 17363, Mar. 30, 2001, as
amended by T.D. 9071, 68 FR 40768, July 9, 2003; T.D. 9271, 71 FR 38075,
July 5, 2006]
Sec. 1.338-4 Aggregate deemed sale price; various aspects of
taxation of the deemed asset sale.
(a) Scope. This section provides rules under section 338(a)(1) to
determine the aggregate deemed sale price (ADSP) for target. ADSP is the
amount for which old target is deemed to have sold all of its assets in
the deemed asset sale. ADSP is allocated among target's assets in
accordance with Sec. 1.338-6 to determine the amount for which each
asset is deemed to have been sold. When a subsequent increase or
decrease is required under general principles of tax law with respect to
an element of ADSP, the redetermined ADSP is allocated among target's
assets in accordance with Sec. 1.338-7. This Sec. 1.338-4 also
provides rules regarding the recognition of gain or loss on the deemed
sale of target affiliate stock. Notwithstanding section
338(h)(6)(B)(ii), stock held by a target affiliate in a foreign
corporation or in a corporation that is a DISC or that is described in
section 1248(e) is not excluded from the operation of section 338.
(b) Determination of ADSP--(1) General rule. ADSP is the sum of--
(i) The grossed-up amount realized on the sale to the purchasing
corporation of the purchasing corporation's recently purchased target
stock (as defined in section 338(b)(6)(A)); and
(ii) The liabilities of old target.
(2) Time and amount of ADSP--(i) Original determination. ADSP is
initially determined at the beginning of the day after the acquisition
date of target. General principles of tax law apply in determining the
timing and amount of the elements of ADSP.
(ii) Redetermination of ADSP. ADSP is redetermined at such time and
in such amount as an increase or decrease would be required, under
general principles of tax law, for the elements of ADSP. For example,
ADSP is redetermined because of an increase or decrease in the amount
realized for recently purchased stock or because liabilities not
originally taken into account in determining ADSP are subsequently taken
into account. Increases or decreases with respect to the elements of
ADSP result in the reallocation of ADSP among target's assets under
Sec. 1.338-7.
(iii) Example. The following example illustrates this paragraph
(b)(2):
Example. In Year 1, T, a manufacturer, purchases a customized
delivery truck from X with purchase money indebtedness having a stated
principal amount of $100,000. P acquires all of the stock of T in Year 3
for $700,000 and makes a section 338 election for T. Assume T has no
liabilities other than its purchase money indebtedness to X. In Year 4,
when T is neither insolvent nor in a title 11 case, T and X agree to
reduce the amount of the purchase money indebtedness to $80,000. Assume
further that the reduction would be a purchase price reduction under
section 108(e)(5). T and X's agreement to reduce the amount of the
purchase money indebtedness would not, under general principles of tax
law that would apply if the deemed asset sale had actually occurred,
change the amount of liabilities of old target taken into account in
determining its amount realized. Accordingly, ADSP is not redetermined
at the time of the reduction. See Sec. 1.338-5(b)(2)(iii) Example 1 for
the effect on AGUB.
(c) Grossed-up amount realized on the sale to the purchasing
corporation of the purchasing corporation's recently purchased target
stock--(1) Determination of amount. The grossed-up amount realized on
the sale to the purchasing corporation of the purchasing corporation's
recently purchased target stock is an amount equal to--
[[Page 154]]
(i) The amount realized on the sale to the purchasing corporation of
the purchasing corporation's recently purchased target stock determined
as if the selling shareholder(s) were required to use old target's
accounting methods and characteristics and the installment method were
not available and determined without regard to the selling costs taken
into account under paragraph (c)(1)(iii) of this section;
(ii) Divided by the percentage of target stock (by value, determined
on the acquisition date) attributable to that recently purchased target
stock;
(iii) Less the selling costs incurred by the selling shareholders in
connection with the sale to the purchasing corporation of the purchasing
corporation's recently purchased target stock that reduce their amount
realized on the sale of the stock (e.g., brokerage commissions and any
similar costs to sell the stock).
(2) Example. The following example illustrates this paragraph (c):
Example. T has two classes of stock outstanding, voting common stock
and preferred stock described in section 1504(a)(4). On March 1 of Year
1, P purchases 40 percent of the outstanding T stock from S1 for $500,
20 percent of the outstanding T stock from S2 for $225, and 20 percent
of the outstanding T stock from S3 for $275. On that date, the fair
market value of all the T voting common stock is $1,250 and the
preferred stock $750. S1, S2, and S3 incur $40, $35, and $25
respectively of selling costs. S1 continues to own the remaining 20
percent of the outstanding T stock. The grossed-up amount realized on
the sale to P of P's recently purchased T stock is calculated as
follows: The total amount realized (without regard to selling costs) is
$1,000 (500 + 225 + 275). The percentage of T stock by value on the
acquisition date attributable to the recently purchased T stock is 50%
(1,000/(1,250 + 750)). The selling costs are $100 (40 + 35 + 25). The
grossed-up amount realized is $1,900 (1,000/.5 - 100).
(d) Liabilities of old target--(1) In general. In general, the
liabilities of old target are measured as of the beginning of the day
after the acquisition date. (But see Sec. 1.338-1(d) (regarding certain
transactions on the acquisition date).) In order to be taken into
account in ADSP, a liability must be a liability of target that is
properly taken into account in amount realized under general principles
of tax law that would apply if old target had sold its assets to an
unrelated person for consideration that included the discharge of its
liabilities. See Sec. 1.1001-2(a). Such liabilities may include
liabilities for the tax consequences resulting from the deemed sale.
(2) Time and amount of liabilities. The time for taking into account
liabilities of old target in determining ADSP and the amount of the
liabilities taken into account is determined as if old target had sold
its assets to an unrelated person for consideration that included the
discharge of the liabilities by the unrelated person. For example, if no
amount of a target liability is properly taken into account in amount
realized as of the beginning of the day after the acquisition date, the
liability is not initially taken into account in determining ADSP
(although it may be taken into account at some later date).
(e) Deemed sale tax consequences. Gain or loss on each asset in the
deemed sale is computed by reference to the ADSP allocated to that
asset. ADSP is allocated under the rules of Sec. 1.338-6. Though deemed
sale tax consequences may increase or decrease ADSP by creating or
reducing a tax liability, the amount of the tax liability itself may be
a function of the size of the deemed sale tax consequences. Thus, these
determinations may require trial and error computations.
(f) Other rules apply in determining ADSP. ADSP may not be applied
in such a way as to contravene other applicable rules. For example, a
capital loss cannot be applied to reduce ordinary income in calculating
the tax liability on the deemed sale for purposes of determining ADSP.
(g) Examples. The following examples illustrate this section. For
purposes of the examples in this paragraph (g), unless otherwise stated,
T is a calendar year taxpayer that files separate returns and that has
no loss, tax credit, or other carryovers to Year 1. Depreciation for
Year 1 is not taken into account. T has no liabilities other than the
Federal income tax liability resulting from the deemed asset sale, and
the T shareholders have no selling costs. Assume that T's tax rate for
any ordinary income or net capital gain resulting from the deemed sale
of assets is 34
[[Page 155]]
percent and that any capital loss is offset by capital gain. On July 1
of Year 1, P purchases all of the stock of T and makes a section 338
election for T. The examples are as follows:
Example 1. One class. (i) On July 1 of Year 1, T's only asset is an
item of section 1245 property with an adjusted basis to T of $50,400, a
recomputed basis of $80,000, and a fair market value of $100,000. P
purchases all of the T stock for $75,000, which also equals the amount
realized for the stock determined as if the selling shareholder(s) were
required to use old target's accounting methods and characteristics.
(ii) ADSP is determined as follows (for purposes of this section
(g), G is the grossed-up amount realized on the sale to P of P's
recently purchased T stock, L is T's liabilities other than T's tax
liability for the deemed sale tax consequences, TR is the
applicable tax rate, and B is the adjusted basis of the asset deemed
sold):
ADSP = G + L + TR x (ADSP-B)
ADSP = ($75,000/1) + $0 + .34 x (ADSP - $50,400)
ADSP = $75,000 + .34ADSP - $17,136 .66ADSP = $57,864
ADSP = $87,672.72
(iii) Because ADSP for T ($87,672.72) does not exceed the fair
market value of T's asset ($100,000), a Class V asset, T's entire ADSP
is allocated to that asset. Thus, T's deemed sale results in $37,272.72
of taxable income (consisting of $29,600 of ordinary income and
$7,672.72 of capital gain).
(iv) The facts are the same as in paragraph (i) of this Example 1,
except that on July 1 of Year 1, P purchases only 80 of the 100 shares
of T stock for $60,000. The grossed-up amount realized on the sale to P
of P's recently purchased T stock (G) is $75,000 ($60,000/.8).
Consequently, ADSP and the deemed sale tax consequences are the same as
in paragraphs (ii) and (iii) of this Example 1.
(v) The facts are the same as in paragraph (i) of this Example 1,
except that T also has goodwill (a Class VII asset) with an appraised
value of $10,000. The results are the same as in paragraphs (ii) and
(iii) of this Example 1. Because ADSP does not exceed the fair market
value of the Class V asset, no amount is allocated to the Class VII
asset (goodwill).
Example 2. More than one class. (i) P purchases all of the T stock
for $140,000, which also equals the amount realized for the stock
determined as if the selling shareholder(s) were required to use old
target's accounting methods and characteristics. On July 1 of Year 1, T
has liabilities (not including the tax liability for the deemed sale tax
consequences) of $50,000, cash (a Class I asset) of $10,000, actively
traded securities (a Class II asset) with a basis of $4,000 and a fair
market value of $10,000, goodwill (a Class VII asset) with a basis of
$3,000, and the following Class V assets:
------------------------------------------------------------------------
Ratio of
asset FMV
Asset Basis FMV to total
Class V FMV
------------------------------------------------------------------------
Land............................. $5,000 $35,000 .14
Building......................... 10,000 50,000 .20
Equipment A (Recomputed basis 5,000 90,000 .36
$80,000)........................
Equipment B (Recomputed basis 10,000 75,000 .30
$20,000)........................
--------------------------------------
Totals....................... $30,000 $250,000 1.00
------------------------------------------------------------------------
(ii) ADSP exceeds $20,000. Thus, $10,000 of ADSP is allocated to the
cash and $10,000 to the actively traded securities. The amount allocated
to an asset (other than a Class VII asset) cannot exceed its fair market
value (however, the fair market value of any property subject to
nonrecourse indebtedness is treated as being not less than the amount of
such indebtedness; see Sec. 1.338-6(a)(2)). See Sec. 1.338-6(c)(1)
(relating to fair market value limitation).
(iii) The portion of ADSP allocable to the Class V assets is
preliminarily determined as follows (in the formula, the amount
allocated to the Class I assets is referred to as I and the amount
allocated to the Class II assets as II):
ADSPV = (G-(I + II)) + L + TR x [(II -
BII) + (ADSPV - BV)]
ADSPV = ($140,000 - ($10,000 + $10,000)) + $50,000 + .34 x
[($10,000 - $4,000) + (ADSPV - ($5,000 + $10,000 +
$5,000 + $10,000))]
ADSPV = $161,840 + .34ADSPV
.66 ADSPV = $161,840
ADSPV = $245,212.12
(iv) Because, under the preliminary calculations of ADSP, the amount
to be allocated to the Class I, II, III, IV, V, and VI assets does not
exceed their aggregate fair market value, no ADSP amount is allocated to
goodwill. Accordingly, the deemed sale of the goodwill results in a
capital loss of $3,000. The portion of ADSP allocable to the
[[Page 156]]
Class V assets is finally determined by taking into account this loss as
follows:
ADSPV = (G - (I + II)) + L + T R x [(II -
BII) + (ADSPV - BV) +
(ADSPVII - B VII)]
ADSPV = ($140,000 - ($10,000 + $10,000)) + $50,000 + .34 x
[($10,000 - $4,000) + (ADSPV - $30,000) + ($0 -
$3,000)]
ADSPV = $160,820 + .34ADSPV
.66 ADSPV = $160,820
ADSPV = $243,666.67
(v) The allocation of ADSPV among the Class V assets is
in proportion to their fair market values, as follows:
------------------------------------------------------------------------
Asset ADSP Gain
------------------------------------------------------------------------
Land.......................... $34,113.33 $29,113.33 (capital
gain).
Building...................... 48,733.34 38,733.34 (capital
gain).
Equipment A................... 87,720.00 82,720.00 (75,000
ordinary income 7,720
capital gain).
Equipment B................... 73,100.00 63,100.00 (10,000
ordinary income
53,100 capital gain).
-----------------------------------------
Totals.................... 243,666.67 213,666.67.
------------------------------------------------------------------------
Example 3. More than one class. (i) The facts are the same as in
Example 2, except that P purchases the T stock for $150,000, rather than
$140,000. The amount realized for the stock determined as if the selling
shareholder(s) were required to use old target's accounting methods and
characteristics is also $150,000.
(ii) As in Example 2, ADSP exceeds $20,000. Thus, $10,000 of ADSP is
allocated to the cash and $10,000 to the actively traded securities.
(iii) The portion of ADSP allocable to the Class V assets as
preliminarily determined under the formula set forth in paragraph (iii)
of Example 2 is $260,363.64. The amount allocated to the Class V assets
cannot exceed their aggregate fair market value ($250,000). Thus,
preliminarily, the ADSP amount allocated to Class V assets is $250,000.
(iv) Based on the preliminary allocation, the ADSP is determined as
follows (in the formula, the amount allocated to the Class I assets is
referred to as I, the amount allocated to the Class II assets as II, and
the amount allocated to the Class V assets as V):
ADSP = G + L + TR x [(II - BII) + (V -
BV) + (ADSP - (I + II + V + BVII))]
ADSP = $150,000 + $50,000 + .34 x [($10,000 - $4,000) + ($250,000 -
$30,000) + (ADSP - ($10,000 + $10,000 + $250,000 + $3,000))]
ADSP = $200,000 + .34ADSP - $15,980
.66ADSP = $184,020
ADSP = $278,818.18
(v) Because ADSP as determined exceeds the aggregate fair market
value of the Class I, II, III, IV, V, and VI assets, the $250,000 amount
preliminarily allocated to the Class V assets is appropriate. Thus, the
amount of ADSP allocated to Class V assets equals their aggregate fair
market value ($250,000), and the allocated ADSP amount for each Class V
asset is its fair market value. Further, because there are no Class VI
assets, the allocable ADSP amount for the Class VII asset (goodwill) is
$8,818.18 (the excess of ADSP over the aggregate ADSP amounts for the
Class I, II, III, IV, V and VI assets).
Example 4. Amount allocated to T1 stock. (i) The facts are the same
as in Example 2, except that T owns all of the T1 stock (instead of the
building), and T1's only asset is the building. The T1 stock and the
building each have a fair market value of $50,000, and the building has
a basis of $10,000. A section 338 election is made for T1 (as well as
T), and T1 has no liabilities other than the tax liability for the
deemed sale tax consequences. T is the common parent of a consolidated
group filing a final consolidated return described in Sec. 1.338-
10(a)(1).
(ii) ADSP exceeds $20,000. Thus, $10,000 of ADSP is allocated to the
cash and $10,000 to the actively traded securities.
(iii) Because T does not recognize any gain on the deemed sale of
the T1 stock under paragraph (h)(2) of this section, appropriate
adjustments must be made to reflect accurately the fair market value of
the T and T1 assets in determining the allocation of ADSP among T's
Class V assets (including the T1 stock). In preliminarily calculating
ADSPV in this case, the T1 stock can be disregarded and,
because T owns all of the T1 stock, the T1 asset can be treated as a T
asset. Under this assumption, ADSPV is $243,666.67. See
paragraph (iv) of Example 2.
(iv) Because the portion of the preliminary ADSP allocable to Class
V assets ($243,666.67) does not exceed their fair market value
($250,000), no amount is allocated to Class VII assets for T. Further,
this amount ($243,666.67) is allocated among T's Class V assets in
proportion to their fair market values. See paragraph (v) of Example 2.
Tentatively, $48,733.34 of this amount is allocated to the T1 stock.
(v) The amount tentatively allocated to the T1 stock, however,
reflects the tax incurred on the deemed sale of the T1 asset equal to
$13,169.34 (.34 x ($48,733.34-$10,000)). Thus, the ADSP allocable to the
Class V assets of T, and the ADSP allocable to the T1
[[Page 157]]
stock, as preliminarily calculated, each must be reduced by $13,169.34.
Consequently, these amounts, respectively, are $230,497.33 and
$35,564.00. In determining ADSP for T1, the grossed-up amount realized
on the deemed sale to new T of new T's recently purchased T1 stock is
$35,564.00.
(vi) The facts are the same as in paragraph (i) of this Example 4,
except that the T1 building has a $12,500 basis and a $62,500 value, all
of the outstanding T1 stock has a $62,500 value, and T owns 80 percent
of the T1 stock. In preliminarily calculating ADSPV, the T1
stock can be disregarded but, because T owns only 80 percent of the T1
stock, only 80 percent of T1 asset basis and value should be taken into
account in calculating T's ADSP. By taking into account 80 percent of
these amounts, the remaining calculations and results are the same as in
paragraphs (ii), (iii), (iv), and (v) of this Example 4, except that the
grossed-up amount realized on the sale of the recently purchased T1
stock is $44,455.00 ($35,564.00/0.8).
(h) Deemed sale of target affiliate stock--(1) Scope. This paragraph
(h) prescribes rules relating to the treatment of gain or loss realized
on the deemed sale of stock of a target affiliate when a section 338
election (but not a section 338(h)(10) election) is made for the target
affiliate. For purposes of this paragraph (h), the definition of
domestic corporation in Sec. 1.338-2(c)(9) is applied without the
exclusion therein for DISCs, corporations described in section 1248(e),
and corporations to which an election under section 936 applies.
(2) In general. Except as otherwise provided in this paragraph (h),
if a section 338 election is made for target, target recognizes no gain
or loss on the deemed sale of stock of a target affiliate having the
same acquisition date and for which a section 338 election is made if--
(i) Target directly owns stock in the target affiliate satisfying
the requirements of section 1504(a)(2);
(ii) Target and the target affiliate are members of a consolidated
group filing a final consolidated return described in Sec. 1.338-
10(a)(1); or
(iii) Target and the target affiliate file a combined return under
Sec. 1.338-10(a)(4).
(3) Deemed sale of foreign target affiliate by a domestic target. A
domestic target recognizes gain or loss on the deemed sale of stock of a
foreign target affiliate. For the proper treatment of such gain or loss,
see, e.g., sections 1246, 1248, 1291 et seq., and 338(h)(16) and Sec.
1.338-9.
(4) Deemed sale producing effectively connected income. A foreign
target recognizes gain or loss on the deemed sale of stock of a foreign
target affiliate to the extent that such gain or loss is effectively
connected (or treated as effectively connected) with the conduct of a
trade or business in the United States.
(5) Deemed sale of insurance company target affiliate electing under
section 953(d). A domestic target recognizes gain (but not loss) on the
deemed sale of stock of a target affiliate that has in effect an
election under section 953(d) in an amount equal to the lesser of the
gain realized or the earnings and profits described in section
953(d)(4)(B).
(6) Deemed sale of DISC target affiliate. A foreign or domestic
target recognizes gain (but not loss) on the deemed sale of stock of a
target affiliate that is a DISC or a former DISC (as defined in section
992(a)) in an amount equal to the lesser of the gain realized or the
amount of accumulated DISC income determined with respect to such stock
under section 995(c). Such gain is included in gross income as a
dividend as provided in sections 995(c)(2) and 996(g).
(7) Anti-stuffing rule. If an asset the adjusted basis of which
exceeds its fair market value is contributed or transferred to a target
affiliate as transferred basis property (within the meaning of section
7701(a)(43)) and a purpose of such transaction is to reduce the gain (or
increase the loss) recognized on the deemed sale of such target
affiliate's stock, the gain or loss recognized by target on the deemed
sale of stock of the target affiliate is determined as if such asset had
not been contributed or transferred.
(8) Examples. The following examples illustrate this paragraph (h):
Example 1. (i) P makes a qualified stock purchase of T and makes a
section 338 election for T. T's sole asset, all of the T1 stock, has a
basis of $50 and a fair market value of $150. T's deemed purchase of the
T1 stock results in a qualified stock purchase of T1 and a section 338
election is made for T1. T1's assets have a basis of $50 and a fair
market value of $150.
(ii) T realizes $100 of gain on the deemed sale of the T1 stock, but
the gain is not recognized because T directly owns stock in T1
[[Page 158]]
satisfying the requirements of section 1504(a)(2) and a section 338
election is made for T1.
(iii) T1 recognizes gain of $100 on the deemed sale of its assets.
Example 2. The facts are the same as in Example 1, except that P
does not make a section 338 election for T1. Because a section 338
election is not made for T1, the $100 gain realized by T on the deemed
sale of the T1 stock is recognized.
Example 3. (i) P makes a qualified stock purchase of T and makes a
section 338 election for T. T owns all of the stock of T1 and T2. T's
deemed purchase of the T1 and T2 stock results in a qualified stock
purchase of T1 and T2 and section 338 elections are made for T1 and T2.
T1 and T2 each own 50 percent of the vote and value of T3 stock. The
deemed purchases by T1 and T2 of the T3 stock result in a qualified
stock purchase of T3 and a section 338 election is made for T3. T is the
common parent of a consolidated group and all of the deemed asset sales
are reported on the T group's final consolidated return. See Sec.
1.338-10(a)(1).
(ii) Because T, T1, T2 and T3 are members of a consolidated group
filing a final consolidated return, no gain or loss is recognized by T,
T1 or T2 on their respective deemed sales of target affiliate stock.
Example 4. (i) T's sole asset, all of the FT1 stock, has a basis of
$25 and a fair market value of $150. FT1's sole asset, all of the FT2
stock, has a basis of $75 and a fair market value of $150. FT1 and FT2
each have $50 of accumulated earnings and profits for purposes of
section 1248(c) and (d). FT2's assets have a basis of $125 and a fair
market value of $150, and their sale would not generate subpart F income
under section 951. The sale of the FT2 stock or assets would not
generate income effectively connected with the conduct of a trade or
business within the United States. FT1 does not have an election in
effect under section 953(d) and neither FT1 nor FT2 is a passive foreign
investment company.
(ii) P makes a qualified stock purchase of T and makes a section 338
election for T. T's deemed purchase of the FT1 stock results in a
qualified stock purchase of FT1 and a section 338 election is made for
FT1. Similarly, FT1's deemed purchase of the FT2 stock results in a
qualified stock purchase of FT2 and a section 338 election is made for
FT2.
(iii) T recognizes $125 of gain on the deemed sale of the FT1 stock
under paragraph (h)(3) of this section. FT1 does not recognize $75 of
gain on the deemed sale of the FT2 stock under paragraph (h)(2) of this
section. FT2 recognizes $25 of gain on the deemed sale of its assets.
The $125 gain T recognizes on the deemed sale of the FT1 stock is
included in T's income as a dividend under section 1248, because FT1 and
FT2 have sufficient earnings and profits for full recharacterization
($50 of accumulated earnings and profits in FT1, $50 of accumulated
earnings and profits in FT2, and $25 of deemed sale earnings and profits
in FT2). Section 1.338-9(b). For purposes of sections 901 through 908,
the source and foreign tax credit limitation basket of $25 of the
recharacterized gain on the deemed sale of the FT1 stock is determined
under section 338(h)(16).
[T.D. 8940, 66 FR 9929, Feb. 13, 2001; 66 FR 17466, Mar. 30, 2001]
Sec. 1.338-5 Adjusted grossed-up basis.
(a) Scope. This section provides rules under section 338(b) to
determine the adjusted grossed-up basis (AGUB) for target. AGUB is the
amount for which new target is deemed to have purchased all of its
assets in the deemed purchase under section 338(a)(2). AGUB is allocated
among target's assets in accordance with Sec. 1.338-6 to determine the
price at which the assets are deemed to have been purchased. When a
subsequent increase or decrease with respect to an element of AGUB is
required under general principles of tax law, redetermined AGUB is
allocated among target's assets in accordance with Sec. 1.338-7.
(b) Determination of AGUB--(1) General rule. AGUB is the sum of--
(i) The grossed-up basis in the purchasing corporation's recently
purchased target stock;
(ii) The purchasing corporation's basis in nonrecently purchased
target stock; and
(iii) The liabilities of new target.
(2) Time and amount of AGUB--(i) Original determination. AGUB is
initially determined at the beginning of the day after the acquisition
date of target. General principles of tax law apply in determining the
timing and amount of the elements of AGUB.
(ii) Redetermination of AGUB. AGUB is redetermined at such time and
in such amount as an increase or decrease would be required, under
general principles of tax law, with respect to an element of AGUB. For
example, AGUB is redetermined because of an increase or decrease in the
amount paid or incurred for recently purchased stock or nonrecently
purchased stock or because liabilities not originally taken into account
in determining AGUB are subsequently taken into account. An
[[Page 159]]
increase or decrease to one element of AGUB also may cause an increase
or decrease to another element of AGUB. For example, if there is an
increase in the amount paid or incurred for recently purchased stock
after the acquisition date, any increase in the basis of nonrecently
purchased stock because a gain recognition election was made is also
taken into account when AGUB is redetermined. Increases or decreases
with respect to the elements of AGUB result in the reallocation of AGUB
among target's assets under Sec. 1.338-7.
(iii) Examples. The following examples illustrate this paragraph
(b)(2):
Example 1. In Year 1, T, a manufacturer, purchases a customized
delivery truck from X with purchase money indebtedness having a stated
principal amount of $100,000. P acquires all of the stock of T in Year 3
for $700,000 and makes a section 338 election for T. Assume T has no
liabilities other than its purchase money indebtedness to X. In Year 4,
when T is neither insolvent nor in a title 11 case, T and X agree to
reduce the amount of the purchase money indebtedness to $80,000. Assume
that the reduction would be a purchase price reduction under section
108(e)(5). T and X's agreement to reduce the amount of the purchase
money indebtedness would, under general principles of tax law that would
apply if the deemed asset sale had actually occurred, change the amount
of liabilities of old target taken into account in determining its
basis. Accordingly, AGUB is redetermined at the time of the reduction.
See paragraph (e)(2) of this section. Thus the purchase price reduction
affects the basis of the truck only indirectly, through the mechanism of
Sec. Sec. 1.338-6 and 1.338-7. See Sec. 1.338-4(b)(2)(iii) Example for
the effect on ADSP.
Example 2. T, an accrual basis taxpayer, is a chemical manufacturer.
In Year 1, T is obligated to remediate environmental contamination at
the site of one of its plants. Assume that all the events have occurred
that establish the fact of the liability and the amount of the liability
can be determined with reasonable accuracy but economic performance has
not occurred with respect to the liability within the meaning of section
461(h). P acquires all of the stock of T in Year 1 and makes a section
338 election for T. Assume that, if a corporation unrelated to T had
actually purchased T's assets and assumed T's obligation to remediate
the contamination, the corporation would not satisfy the economic
performance requirements until Year 5. Under section 461(h), the assumed
liability would not be treated as incurred and taken into account in
basis until that time. The incurrence of the liability in Year 5 under
the economic performance rules is an increase in the amount of
liabilities properly taken into account in basis and results in the
redetermination of AGUB. (Respecting ADSP, compare Sec. 1.461-4(d)(5),
which provides that economic performance occurs for old T as the amount
of the liability is properly taken into account in amount realized on
the deemed asset sale. Thus ADSP is not redetermined when new T
satisfies the economic performance requirements.)
(c) Grossed-up basis of recently purchased stock. The purchasing
corporation's grossed-up basis of recently purchased target stock (as
defined in section 338(b)(6)(A)) is an amount equal to--
(1) The purchasing corporation's basis in recently purchased target
stock at the beginning of the day after the acquisition date determined
without regard to the acquisition costs taken into account in paragraph
(c)(3) of this section;
(2) Multiplied by a fraction, the numerator of which is 100 minus
the number that is the percentage of target stock (by value, determined
on the acquisition date) attributable to the purchasing corporation's
nonrecently purchased target stock, and the denominator of which is the
number equal to the percentage of target stock (by value, determined on
the acquisition date) attributable to the purchasing corporation's
recently purchased target stock;
(3) Plus the acquisition costs the purchasing corporation incurred
in connection with its purchase of the recently purchased stock that are
capitalized in the basis of such stock (e.g., brokerage commissions and
any similar costs incurred by the purchasing corporation to acquire the
stock).
(d) Basis of nonrecently purchased stock; gain recognition
election--(1) No gain recognition election. In the absence of a gain
recognition election under section 338(b)(3) and this section, the
purchasing corporation retains its basis in the nonrecently purchased
stock.
(2) Procedure for making gain recognition election. A gain
recognition election may be made for nonrecently purchased stock of
target (or a target affiliate) only if a section 338 election is made
for target (or the target affiliate). The gain recognition election is
made by attaching a gain recognition
[[Page 160]]
statement to a timely filed Form 8023 for target. The gain recognition
statement must contain the information specified in the form and its
instructions. The gain recognition election is irrevocable. If a section
338(h)(10) election is made for target, see Sec. 1.338(h)(10)-1(d)(1)
(providing that the purchasing corporation is automatically deemed to
have made a gain recognition election for its nonrecently purchased T
stock).
(3) Effect of gain recognition election--(i) In general. If the
purchasing corporation makes a gain recognition election, then for all
purposes of the Internal Revenue Code--
(A) The purchasing corporation is treated as if it sold on the
acquisition date the nonrecently purchased target stock for the basis
amount determined under paragraph (d)(3)(ii) of this section; and
(B) The purchasing corporation's basis on the acquisition date in
nonrecently purchased target stock immediately following the deemed sale
in paragraph (d)(3)(i)(A) of this section is the basis amount.
(ii) Basis amount. The basis amount is equal to the amount in
paragraphs (c)(1) and (2) of this section (the purchasing corporation's
grossed-up basis in recently purchased target stock at the beginning of
the day after the acquisition date determined without regard to the
acquisition costs taken into account in paragraph (c)(3) of this
section) multiplied by a fraction the numerator of which is the
percentage of target stock (by value, determined on the acquisition
date) attributable to the purchasing corporation's nonrecently purchased
target stock and the denominator of which is 100 percent minus the
numerator amount. Thus, if target has a single class of outstanding
stock, the purchasing corporation's basis in each share of nonrecently
purchased target stock after the gain recognition election is equal to
the average price per share of the purchasing corporation's recently
purchased target stock.
(iii) Losses not recognized. Only gains (unreduced by losses) on the
nonrecently purchased target stock are recognized.
(iv) Stock subject to election. The gain recognition election
applies to--
(A) All nonrecently purchased target stock; and
(B) Any nonrecently purchased stock in a target affiliate having the
same acquisition date as target if such target affiliate stock is held
by the purchasing corporation on such date.
(e) Liabilities of new target--(1) In general. The liabilities of
new target are the liabilities of target as of the beginning of the day
after the acquisition date (but see Sec. 1.338-1(d) (regarding certain
transactions on the acquisition date)). In order to be taken into
account in AGUB, a liability must be a liability of target that is
properly taken into account in basis under general principles of tax law
that would apply if new target had acquired its assets from an unrelated
person for consideration that included discharge of the liabilities of
that unrelated person. Such liabilities may include liabilities for the
tax consequences resulting from the deemed sale.
(2) Time and amount of liabilities. The time for taking into account
liabilities of old target in determining AGUB and the amount of the
liabilities taken into account is determined as if new target had
acquired its assets from an unrelated person for consideration that
included the discharge of its liabilities.
(3) Interaction with deemed sale tax consequences. In general, see
Sec. 1.338-4(e). Although ADSP and AGUB are not necessarily linked, if
an increase in the amount realized for recently purchased stock of
target is taken into account after the acquisition date, and if the tax
on the deemed sale tax consequences is a liability of target, any
increase in that liability is also taken into account in redetermining
AGUB.
(f) Adjustments by the Internal Revenue Service. In connection with
the examination of a return, the Commissioner may increase (or decrease)
AGUB under the authority of section 338(b)(2) and allocate such amounts
to target's assets under the authority of section 338(b)(5) so that AGUB
and the basis of target's assets properly reflect the cost to the
purchasing corporation of its interest in target's assets. Such items
may include distributions from target to the purchasing corporation,
capital
[[Page 161]]
contributions from the purchasing corporation to target during the 12-
month acquisition period, or acquisitions of target stock by the
purchasing corporation after the acquisition date from minority
shareholders. See also Sec. 1.338-1(d) (regarding certain transactions
on the acquisition date).
(g) Examples. The following examples illustrate this section. For
purposes of the examples in this paragraph (g), T has no liabilities
other than the tax liability for the deemed sale tax consequences, T
shareholders incur no costs in selling the T stock, and P incurs no
costs in acquiring the T stock. The examples are as follows:
Example 1. (i) Before July 1 of Year 1, P purchases 10 of the 100
shares of T stock for $5,000. On July 1 of Year 2, P purchases 80 shares
of T stock for $60,000 and makes a section 338 election for T. As of
July 1 of Year 2, T's only asset is raw land with an adjusted basis to T
of $50,400 and a fair market value of $100,000. T has no loss or tax
credit carryovers to Year 2. T's marginal tax rate for any ordinary
income or net capital gain resulting from the deemed asset sale is 34
percent. The 10 shares purchased before July 1 of Year 1 constitute
nonrecently purchased T stock with respect to P's qualified stock
purchase of T stock on July 1 of Year 2.
(ii) The ADSP formula as applied to these facts is the same as in
Sec. 1.338-4(g) Example 1. Accordingly, the ADSP for T is $87,672.72.
The existence of nonrecently purchased T stock is irrelevant for
purposes of the ADSP formula, because that formula treats P's
nonrecently purchased T stock in the same manner as T stock not held by
P.
(iii) The total tax liability resulting from T's deemed asset sale,
as calculated under the ADSP formula, is $12,672.72.
(iv) If P does not make a gain recognition election, the AGUB of new
T's assets is $85,172.72, determined as follows (In the following
formula below, GRP is the grossed-up basis in P's recently purchased T
stock, BNP is P's basis in nonrecently purchased T stock, L is T's
liabilities, and X is P's acquisition costs for the recently purchased T
stock):
AGUB = GRP + BNP + L + X
AGUB = $60,000 x [(1 - .1)/.8] + $5,000 + $12,672.72 + 0
AGUB = $85,172.72
(v) If P makes a gain recognition election, the AGUB of new T's
assets is $87,672.72, determined as follows:
AGUB = $60,000 x [(1 - .1)/.8] + $60,000 x [(1 - .1)/.8] x [.1/(1 - .1)]
+ $12,672.72
AGUB = $87,672.72
(vi) The calculation of AGUB if P makes a gain recognition election
may be simplified as follows:
AGUB = $60,000/.8 + $12,672.72
AGUB = $87,672.72
(vii) As a result of the gain recognition election, P's basis in its
nonrecently purchased T stock is increased from $5,000 to $7,500 (i.e.,
$60,000 x [(1 - .1)/.8] x [.1/(1 - .1)]). Thus, P recognizes a gain in
Year 2 with respect to its nonrecently purchased T stock of $2,500
(i.e., $7,500 - $5,000).
Example 2. On January 1 of Year 1, P purchases one-third of the T
stock. On March 1 of Year 1, T distributes a dividend to all of its
shareholders. On April 15 of Year 1, P purchases the remaining T stock
and makes a section 338 election for T. In appropriate circumstances,
the Commissioner may decrease the AGUB of T to take into account the
payment of the dividend and properly reflect the fair market value of
T's assets deemed purchased.
Example 3. (i) T's sole asset is a building worth $100,000. At this
time, T has 100 shares of stock outstanding. On August 1 of Year 1, P
purchases 10 of the 100 shares of T stock for $8,000. On June 1 of Year
2, P purchases 50 shares of T stock for $50,000. On June 15 of Year 2, P
contributes a tract of land to the capital of T and receives 10
additional shares of T stock as a result of the contribution. Both the
basis and fair market value of the land at that time are $10,800. On
June 30 of Year 2, P purchases the remaining 40 shares of T stock for
$40,000 and makes a section 338 election for T. The AGUB of T is
$108,800.
(ii) To prevent the shifting of basis from the contributed property
to other assets of T, the Commissioner may allocate $10,800 of the AGUB
to the land, leaving $98,000 to be allocated to the building. See
paragraph (f) of this section. Otherwise, applying the allocation rules
of Sec. 1.338-6 would, on these facts, result in an allocation to the
recently contributed land of an amount less than its value of $10,800,
with the difference being allocated to the building already held by T.
(h) Effective/applicability date. Paragraph (d)(3)(ii) of this
section is applicable to any qualified stock purchase or qualified stock
disposition (as defined in Sec. 1.336-1(b)(6)) for which the
acquisition date or disposition date (as defined in Sec. 1.336-
1(b)(8)), respectively, is on or after May 15, 2013.
[T.D. 8940, 66 FR 9929, Feb. 13, 2001, as amended by T.D. 9619, 78 FR
28489, May 15, 2013]
Sec. 1.338-6 Allocation of ADSP and AGUB among target assets.
(a) Scope--(1) In general. This section prescribes rules for
allocating ADSP and AGUB among the acquisition date
[[Page 162]]
assets of a target for which a section 338 election is made.
(2) Fair market value--(i) In general. Generally, the fair market
value of an asset is its gross fair market value (i.e., fair market
value determined without regard to mortgages, liens, pledges, or other
liabilities). However, for purposes of determining the amount of old
target's deemed sale tax consequences, the fair market value of any
property subject to a nonrecourse indebtedness will be treated as being
not less than the amount of such indebtedness. (For purposes of the
preceding sentence, a liability that was incurred because of the
acquisition of the property is disregarded to the extent that such
liability was not taken into account in determining old target's basis
in such property.)
(ii) Transaction costs. Transaction costs are not taken into account
in allocating ADSP or AGUB to assets in the deemed sale (except
indirectly through their effect on the total ADSP or AGUB to be
allocated).
(iii) Internal Revenue Service authority. In connection with the
examination of a return, the Internal Revenue Service may challenge the
taxpayer's determination of the fair market value of any asset by any
appropriate method and take into account all factors, including any lack
of adverse tax interests between the parties.
(b) General rule for allocating ADSP and AGUB--(1) Reduction in the
amount of consideration for Class I assets. Both ADSP and AGUB, in the
respective allocation of each, are first reduced by the amount of Class
I assets. Class I assets are cash and general deposit accounts
(including savings and checking accounts) other than certificates of
deposit held in banks, savings and loan associations, and other
depository institutions. If the amount of Class I assets exceeds AGUB,
new target will immediately realize ordinary income in an amount equal
to such excess. The amount of ADSP or AGUB remaining after the reduction
is to be allocated to the remaining acquisition date assets.
(2) Other assets--(i) In general. Subject to the limitations and
other rules of paragraph (c) of this section, ADSP and AGUB (as reduced
by the amount of Class I assets) are allocated among Class II
acquisition date assets of target in proportion to the fair market
values of such Class II assets at such time, then among Class III assets
so held in such proportion, then among Class IV assets so held in such
proportion, then among Class V assets so held in such proportion, then
among Class VI assets so held in such proportion, and finally to Class
VII assets. If an asset is described below as includible in more than
one class, then it is included in such class with the lower or lowest
class number (for instance, Class III has a lower class number than
Class IV).
(ii) Class II assets. Class II assets are actively traded personal
property within the meaning of section 1092(d)(1) and Sec. 1.1092(d)-1
(determined without regard to section 1092(d)(3)). In addition, Class II
assets include certificates of deposit and foreign currency even if they
are not actively traded personal property. Class II assets do not
include stock of target affiliates, whether or not of a class that is
actively traded, other than actively traded stock described in section
1504(a)(4). Examples of Class II assets include U.S. government
securities and publicly traded stock.
(iii) Class III assets. Class III assets are assets that the
taxpayer marks to market at least annually for Federal income tax
purposes and debt instruments (including accounts receivable). However,
Class III assets do not include--
(A) Debt instruments issued by persons related at the beginning of
the day following the acquisition date to the target under section
267(b) or 707;
(B) Contingent debt instruments subject to Sec. 1.1275-4, Sec.
1.483-4, or section 988, unless the instrument is subject to the non-
contingent bond method of Sec. 1.1275-4(b) or is described in Sec.
1.988-2(b)(2)(i)(B)(2); and
(C) Debt instruments convertible into the stock of the issuer or
other property.
(iv) Class IV assets. Class IV assets are stock in trade of the
taxpayer or other property of a kind that would properly be included in
the inventory of taxpayer if on hand at the close of the taxable year,
or property held by the taxpayer primarily for sale to customers
[[Page 163]]
in the ordinary course of its trade or business.
(v) Class V assets. Class V assets are all assets other than Class
I, II, III, IV, VI, and VII assets.
(vi) Class VI assets. Class VI assets are all section 197
intangibles, as defined in section 197, except goodwill and going
concern value.
(vii) Class VII assets. Class VII assets are goodwill and going
concern value (whether or not the goodwill or going concern value
qualifies as a section 197 intangible).
(3) Other items designated by the Internal Revenue Service. Similar
items may be added to any class described in this paragraph (b) by
designation in the Internal Revenue Bulletin by the Internal Revenue
Service (see Sec. 601.601(d)(2) of this chapter).
(c) Certain limitations and other rules for allocation to an asset--
(1) Allocation not to exceed fair market value. The amount of ADSP or
AGUB allocated to an asset (other than Class VII assets) cannot exceed
the fair market value of that asset at the beginning of the day after
the acquisition date.
(2) Allocation subject to other rules. The amount of ADSP or AGUB
allocated to an asset is subject to other provisions of the Internal
Revenue Code or general principles of tax law in the same manner as if
such asset were transferred to or acquired from an unrelated person in a
sale or exchange. For example, if the deemed asset sale is a transaction
described in section 1056(a) (relating to basis limitation for player
contracts transferred in connection with the sale of a franchise), the
amount of AGUB allocated to a contract for the services of an athlete
cannot exceed the limitation imposed by that section. As another
example, section 197(f)(5) applies in determining the amount of AGUB
allocated to an amortizable section 197 intangible resulting from an
assumption-reinsurance transaction.
(3) Special rule for allocating AGUB when purchasing corporation has
nonrecently purchased stock--(i) Scope. This paragraph (c)(3) applies if
at the beginning of the day after the acquisition date--
(A) The purchasing corporation holds nonrecently purchased stock for
which a gain recognition election under section 338(b)(3) and Sec.
1.338-5(d) is not made; and
(B) The hypothetical purchase price determined under paragraph
(c)(3)(ii) of this section exceeds the AGUB determined under Sec.
1.338-5(b).
(ii) Determination of hypothetical purchase price. Hypothetical
purchase price is the AGUB that would result if a gain recognition
election were made.
(iii) Allocation of AGUB. Subject to the limitations in paragraphs
(c)(1) and (2) of this section, the portion of AGUB (after reduction by
the amount of Class I assets) to be allocated to each Class II, III, IV,
V, VI, and VII asset of target held at the beginning of the day after
the acquisition date is determined by multiplying--
(A) The amount that would be allocated to such asset under the
general rules of this section were AGUB equal to the hypothetical
purchase price; by
(B) A fraction, the numerator of which is actual AGUB (after
reduction by the amount of Class I assets) and the denominator of which
is the hypothetical purchase price (after reduction by the amount of
Class I assets).
(4) Liabilities taken into account in determining amount realized on
subsequent disposition. In determining the amount realized on a
subsequent sale or other disposition of property deemed purchased by new
target, Sec. 1.1001-2(a)(3) shall not apply to any liability that was
taken into account in AGUB.
(5) Allocation to certain nuclear decommissioning funds--(i) General
rule. For purposes of allocating ADSP or AGUB among the acquisition date
assets of a target (and for no other purpose), a taxpayer may elect to
treat a nonqualified nuclear decommissioning fund (as defined in
paragraph (c)(5)(ii) of this section) of the target as if--
(A) Such fund were an entity classified as a corporation;
(B) The stock of the corporation were among the acquisition date
assets of the target and a Class V asset;
(C) The corporation owned the assets of the fund;
(D) The corporation bore the responsibility for decommissioning one
or more nuclear power plants to the extent assets of the fund are
expected to be used for that purpose; and
[[Page 164]]
(E) A section 338(h)(10) election were made for the corporation
(regardless of whether the requirements for a section 338(h)(10)
election are otherwise satisfied).
(ii) Definition of nonqualified nuclear decommissioning fund. A
nonqualified nuclear decommissioning fund means a trust, escrow account,
Government fund or other type of agreement--
(A) That is established in writing by the owner or licensee of a
nuclear generating unit for the exclusive purpose of funding the
decommissioning of one or more nuclear power plants;
(B) That is described to the Nuclear Regulatory Commission in a
report described in 10 CFR 50.75(b) as providing assurance that funds
will be available for decommissioning;
(C) That is not a Nuclear Decommissioning Reserve Fund, as described
in section 468A;
(D) That is maintained at all times in the United States; and
(E) The assets of which are to be used only as permitted by 10 CFR
50.82(a)(8).
(iii) Availability of election. P may make the election described in
this paragraph (c)(5) regardless of whether the selling consolidated
group (or the selling affiliate or the S corporation shareholders) also
makes the election. In addition, the selling consolidated group (or the
selling affiliate or the S corporation shareholders) may make the
election regardless of whether P also makes the election. If T is an S
corporation, all of the S corporation shareholders, including those that
do not sell their stock, must consent to the election for the election
to be effective as to any S corporation shareholder.
(iv) Time and manner of making election. The election described in
this paragraph (c)(5) is made by taking a position on an original or
amended tax return for the taxable year of the qualified stock purchase
that is consistent with having made the election. Such tax return must
be filed no later than the later of 30 days after the date on which the
section 338 election is due or the day the original tax return for the
taxable year of the qualified stock purchase is due (with extensions).
(v) Irrevocability of election. An election made pursuant to this
paragraph (c)(5) is irrevocable.
(vi) Effective/applicability date. This paragraph (c)(5) applies to
qualified stock purchases occurring on or after September 11, 2007. For
qualified stock purchases occurring before September 11, 2007 and on or
after September 15, 2004, see Sec. 1.338-6T as contained in 26 CFR part
1 in effect on April 1, 2007. For qualified stock purchases occurring
before September 15, 2004, see Sec. 1.338-6 as contained in 26 CFR part
1 in effect on April 1, 2004.
(d) Examples. The following examples illustrate Sec. Sec. 1.338-4,
1.338-5, and this section:
Example 1. (i) T owns 90 percent of the outstanding T1 stock. P
purchases 100 percent of the outstanding T stock for $2,000. There are
no acquisition costs. P makes a section 338 election for T and, as a
result, T1 is considered acquired in a qualified stock purchase. A
section 338 election is made for T1. The grossed-up basis of the T stock
is $2,000 (i.e., $2,000 + 1/1).
(ii) The liabilities of T as of the beginning of the day after the
acquisition date (including the tax liability for the deemed sale tax
consequences) that would, under general principles of tax law, properly
be taken into account at that time, are as follows:
Liabilities (nonrecourse mortgage plus unsecured liabilities).. $700
Taxes Payable.................................................. 300
--------
Total...................................................... 1,000
(iii) The AGUB of T is determined as follows:
Grossed-up basis............................................... $2,000
Total liabilities.............................................. 1,000
--------
AGUB....................................................... 3,000
(iv) Assume that ADSP is also $3,000.
(v) Assume that, at the beginning of the day after the acquisition
date, T's cash and the fair market values of T's Class II, III, IV, and
V assets are as follows:
------------------------------------------------------------------------
Fair
Asset class Asset market
value
------------------------------------------------------------------------
I........................... Cash............................. * $200
II.......................... Portfolio of actively traded 300
securities.
III......................... Accounts receivable.............. 600
IV.......................... Inventory........................ 300
V........................... Building......................... 800
V........................... Land............................. 200
V........................... Investment in T1................. 450
--------
Total........................... 2,850
------------------------------------------------------------------------
*Amount.
[[Page 165]]
(vi) Under paragraph (b)(1) of this section, the amount of ADSP and
AGUB allocable to T's Class II, III, IV, and V assets is reduced by the
amount of cash to $2,800, i.e., $3,000--$200. $300 of ADSP and of AGUB
is then allocated to actively traded securities. $600 of ADSP and of
AGUB is then allocated to accounts receivable. $300 of ADSP and of AGUB
is then allocated to the inventory. Since the remaining amount of ADSP
and of AGUB is $1,600 (i.e., $3,000--($200 + $300 + $600 + $300)), an
amount which exceeds the sum of the fair market values of T's Class V
assets, the amount of ADSP and of AGUB allocated to each Class V asset
is its fair market value:
Building....................................................... $800
Land........................................................... 200
Investment in T1............................................... 450
--------
Total...................................................... 1,450
(vii) T has no Class VI assets. The amount of ADSP and of AGUB
allocated to T's Class VII assets (goodwill and going concern value) is
$150, i.e., $1,600-$1,450.
(viii) The grossed-up basis of the T1 stock is $500, i.e., $450 x
1/.9.
(ix) The liabilities of T1 as of the beginning of the day after the
acquisition date (including the tax liability for the deemed sale tax
consequences) that would, under general principles of tax law, properly
be taken into account at that time, are as follows:
General Liabilities............................................. $100
Taxes Payable................................................... 20
-------
Total....................................................... 120
(x) The AGUB of T1 is determined as follows:
Grossed-up basis of T1 Stock.................................... $ 500
Liabilities..................................................... 120
-------
AGUB........................................................ 620
(xi) Assume that ADSP is also $620.
(xii) Assume that at the beginning of the day after the acquisition
date, T1's cash and the fair market values of its Class IV and VI assets
are as follows:
------------------------------------------------------------------------
Fair
Asset class Asset market
value
------------------------------------------------------------------------
I........................... Cash............................. *$50
IV.......................... Inventory........................ 200
VI.......................... Patent........................... 350
--------
Total........................... 600
------------------------------------------------------------------------
* Amount.
(xiii) The amount of ADSP and of AGUB allocable to T1's Class IV and
VI assets is first reduced by the $50 of cash.
(xiv) Because the remaining amount of ADSP and of AGUB ($570) is an
amount which exceeds the fair market value of T1's only Class IV asset,
the inventory, the amount allocated to the inventory is its fair market
value ($200). After that, the remaining amount of ADSP and of AGUB
($370) exceeds the fair market value of T1's only Class VI asset, the
patent. Thus, the amount of ADSP and of AGUB allocated to the patent is
its fair market value ($350).
(xv) The amount of ADSP and of AGUB allocated to T1's Class VII
assets (goodwill and going concern value) is $20, i.e., $570-$550.
Example 2. (i) Assume that the facts are the same as in Example 1
except that P has, for five years, owned 20 percent of T's stock, which
has a basis in P's hands at the beginning of the day after the
acquisition date of $100, and P purchases the remaining 80 percent of
T's stock for $1,600. P does not make a gain recognition election under
section 338(b)(3).
(ii) Under Sec. 1.338-5(c), the grossed-up basis of recently
purchased T stock is $1,600, i.e., $1,600 x (1-.2)/.8.
(iii) The AGUB of T is determined as follows:
Grossed-up basis of recently purchased stock as determined $1,600
under Sec. 1.338-5(c) ($1,600 x (1-.2)/.8)..................
Basis of nonrecently purchased stock........................... 100
Liabilities.................................................... 1,000
--------
AGUB....................................................... 2,700
(iv) Since P holds nonrecently purchased stock, the hypothetical
purchase price of the T stock must be computed and is determined as
follows:
Grossed-up basis of recently purchased stock as determined $1,600
under Sec. 1.338-5(c) ($1,600 x (1-.2)/.8)..................
Basis of nonrecently purchased stock as if the gain recognition 400
election under Sec. 1.338-5(d)(2) had been made ($1,600 x .2/
(1-.2)).......................................................
Liabilities.................................................... 1,000
--------
Total...................................................... 3,000
(v) Since the hypothetical purchase price ($3,000) exceeds the AGUB
($2,700) and no gain recognition election is made under section
338(b)(3), AGUB is allocated under paragraph (c)(3) of this section.
(vi) First, an AGUB amount equal to the hypothetical purchase price
($3,000) is allocated among the assets under the general rules of this
section. The allocation is set forth in the column below entitled
Original Allocation. Next, the allocation to each asset in Class II
through Class VII is multiplied by a fraction having a numerator equal
to the actual AGUB reduced by the amount of Class I assets ($2,700-$200
= $2,500) and a denominator equal to the hypothetical purchase price
reduced by the amount of Class I assets ($3,000-$200 = $2,800), or
2,500/2,800. This produces the Final Allocation:
------------------------------------------------------------------------
Original Final
Class Asset allocation allocation
------------------------------------------------------------------------
I.................... Cash..................... $200 $200
II................... Portfolio of actively 300 *268
traded securities.
III.................. Accounts receivable...... 600 536
[[Page 166]]
IV................... Inventory................ 300 268
V.................... Building................. 800 714
V.................... Land..................... 200 178
V.................... Investment in T1......... 450 402
VII.................. Goodwill and going 150 134
concern value.
-----------------------
Total................... 3,000 2,700
------------------------------------------------------------------------
* All numbers rounded for convenience.
[T.D. 8940, 66 FR 9929, Feb. 13, 2001; 66 FR 17363, Mar. 30, 2001; T.D.
9158, 69 FR 55742, Sept. 16, 2004; T.D. 9358, 72 FR 51706, Sept. 11,
2007]
Sec. 1.338-7 Allocation of redetermined ADSP and AGUB among target
assets.
(a) Scope. ADSP and AGUB are redetermined at such time and in such
amount as an increase or decrease would be required under general
principles of tax law for the elements of ADSP or AGUB. This section
provides rules for allocating redetermined ADSP or AGUB.
(b) Allocation of redetermined ADSP and AGUB. When ADSP or AGUB is
redetermined, a new allocation of ADSP or AGUB is made by allocating the
redetermined ADSP or AGUB amount under the rules of Sec. 1.338-6. If
the allocation of the redetermined ADSP or AGUB amount under Sec.
1.338-6 to a given asset is different from the original allocation to
it, the difference is added to or subtracted from the original
allocation to the asset, as appropriate. (See paragraph (d) of this
section for new target's treatment of the amount so allocated.) Amounts
allocable to an acquisition date asset (or with respect to a disposed-of
acquisition date asset) are subject to all the asset allocation rules
(for example, the fair market value limitation in Sec. 1.338-6(c)(1))
as if the redetermined ADSP or AGUB were the ADSP or AGUB on the
acquisition date.
(c) Special rules for ADSP--(1) Increases or decreases in deemed
sale tax consequences taxable notwithstanding old target ceases to
exist. To the extent general principles of tax law would require a
seller in an actual asset sale to account for events relating to the
sale that occur after the sale date, target must make such an
accounting. Target is not precluded from realizing additional deemed
sale tax consequences because the target is treated as a new corporation
after the acquisition date.
(2) Procedure for transactions in which section 338(h)(10) is not
elected--(i) Deemed sale tax consequences included in new target's
return. If an election under section 338(h)(10) is not made, any
additional deemed sale tax consequences of old target resulting from an
increase or decrease in the ADSP are included in new target's income tax
return for new target's taxable year in which the increase or decrease
is taken into account. For example, if after the acquisition date there
is an increase in the allocable ADSP of section 1245 property for which
the recomputed basis (but not the adjusted basis) exceeds the portion of
the ADSP allocable to that particular asset on the acquisition date, the
additional gain is treated as ordinary income to the extent it does not
exceed such excess amount. See paragraph (c)(2)(ii) of this section for
the special treatment of old target's carryovers and carrybacks.
Although included in new target's income tax return, the deemed sale tax
consequences are separately accounted for as an item of old target and
may not be offset by income, gain, deduction, loss, credit, or other
amount of new target. The amount of tax on income of old target
resulting from an increase or decrease in the ADSP is determined as if
such deemed sale tax consequences had been recognized in old target's
taxable year ending at the close of the acquisition date. However,
because the income resulting from the increase or decrease in ADSP is
reportable in new target's taxable year of the increase or decrease, not
in old target's taxable year ending at the close of the acquisition
date, there is not a resulting underpayment of tax in that past taxable
year of old target for purposes of calculation of interest due.
(ii) Carryovers and carrybacks--(A) Loss carryovers to new target
taxable years. A net operating loss or net capital loss of old target
may be carried forward to a taxable year of new target, under the
principles of section 172 or 1212, as applicable, but is allowed as a
deduction only to the extent of any recognized income of old target for
[[Page 167]]
such taxable year, as described in paragraph (c)(2)(i) of this section.
For this purpose, however, taxable years of new target are not taken
into account in applying the limitations in section 172(b)(1) or
1212(a)(1)(B) (or other similar limitations). In applying sections
172(b) and 1212(a)(1), only income, gain, loss, deduction, credit, and
other amounts of old target are taken into account. Thus, if old target
has an unexpired net operating loss at the close of its taxable year in
which the deemed asset sale occurred that could be carried forward to a
subsequent taxable year, such loss may be carried forward until it is
absorbed by old target's income.
(B) Loss carrybacks to taxable years of old target. An ordinary loss
or capital loss accounted for as a separate item of old target under
paragraph (c)(2)(i) of this section may be carried back to a taxable
year of old target under the principles of section 172 or 1212, as
applicable. For this purpose, taxable years of new target are not taken
into account in applying the limitations in section 172(b) or 1212(a)
(or other similar limitations).
(C) Credit carryovers and carrybacks. The principles described in
paragraphs (c)(2)(ii)(A) and (B) of this section apply to carryovers and
carrybacks of amounts for purposes of determining the amount of a credit
allowable under part IV, subchapter A, chapter 1 of the Internal Revenue
Code. Thus, for example, credit carryovers of old target may offset only
income tax attributable to items described in paragraph (c)(2)(i) of
this section.
(3) Procedure for transactions in which section 338(h)(10) is
elected. If an election under section 338(h)(10) is made, any changes in
the deemed sale tax consequences caused by an increase or decrease in
the ADSP are accounted for in determining the taxable income (or other
amount) of the member of the selling consolidated group, the selling
affiliate, or the S corporation shareholders to which such income, loss,
or other amount is attributable for the taxable year in which such
increase or decrease is taken into account.
(d) Special rules for AGUB--(1) Effect of disposition or
depreciation of acquisition date assets. If an acquisition date asset
has been disposed of, depreciated, amortized, or depleted by new target
before an amount is added to the original allocation to the asset, the
increased amount otherwise allocable to such asset is taken into account
under general principles of tax law that apply when part of the cost of
an asset not previously taken into account in basis is paid or incurred
after the asset has been disposed of, depreciated, amortized, or
depleted. A similar rule applies when an amount is subtracted from the
original allocation to the asset. For purposes of the preceding
sentence, an asset is considered to have been disposed of to the extent
that its allocable portion of the decrease in AGUB would reduce its
basis below zero.
(2) Section 38 property. Section 1.47-2(c) applies to a reduction in
basis of section 38 property under this section.
(e) Examples. The following examples illustrate this section. Any
amount described in the following examples is exclusive of interest. For
rules characterizing deferred contingent payments as principal or
interest, see Sec. Sec. 1.483-4, 1.1274-2(g), and 1.1275-4(c). The
examples are as follows:
Example 1. (i)(A) T's assets other than goodwill and going concern
value, and their fair market values at the beginning of the day after
the acquisition date, are as follows:
------------------------------------------------------------------------
Fair
Asset class Asset market
value
------------------------------------------------------------------------
V........................... Building........................ $ 100
V........................... Stock of X (not a target)....... 200
---------
Total.......................... 300
------------------------------------------------------------------------
(B) T has no liabilities other than a contingent liability that
would not be taken into account under general principles of tax law in
an asset sale between unrelated parties when the buyer assumed the
liability or took property subject to it.
(ii)(A) On September 1, 2000, P purchases all of the outstanding
stock of T for $270 and makes a section 338 election for T. The grossed-
up basis of the T stock and T's AGUB are both $270. The AGUB is ratably
allocated among T's Class V assets in proportion to their fair market
values as follows:
------------------------------------------------------------------------
Asset Basis
------------------------------------------------------------------------
Building ($270 x 100/300)....................................... $90
Stock ($270 x 200/300).......................................... 180
-------
[[Page 168]]
Total....................................................... 270
------------------------------------------------------------------------
(B) No amount is allocated to the Class VII assets. New T is a
calendar year taxpayer. Assume that the X stock is a capital asset in
the hands of new T.
(iii) On January 1, 2001, new T sells the X stock and uses the
proceeds to purchase inventory.
(iv) Pursuant to events on June 30, 2002, the contingent liability
of old T is at that time properly taken into account under general
principles of tax law. The amount of the liability is $60.
(v) T's AGUB increases by $60 from $270 to $330. This $60 increase
in AGUB is first allocated among T's acquisition date assets in
accordance with the provisions of Sec. 1.338-6. Because the
redetermined AGUB for T ($330) exceeds the sum of the fair market values
at the beginning of the day after the acquisition date of the Class V
acquisition date assets ($300), AGUB allocated to those assets is
limited to those fair market values under Sec. 1.338-6(c)(1). As there
are no Class VI assets, the remaining AGUB of $30 is allocated to
goodwill and going concern value (Class VII assets). The amount of
increase in AGUB allocated to each acquisition date asset is determined
as follows:
------------------------------------------------------------------------
Original Redetermined
Asset AGUB AGUB Increase
------------------------------------------------------------------------
Building.............................. $90 $100 $10
X Stock............................... 180 200 20
Goodwill and going concern value...... 0 30 30
---------------------------------
Total............................. 270 330 60
------------------------------------------------------------------------
(vi) Since the X stock was disposed of before the contingent
liability was properly taken into account for tax purposes, no amount of
the increase in AGUB attributable to such stock may be allocated to any
T asset. Rather, such amount ($20) is allowed as a capital loss to T for
the taxable year 2002 under the principles of Arrowsmith v.
Commissioner, 344 U.S. 6 (1952). In addition, the $10 increase in AGUB
allocated to the building and the $30 increase in AGUB allocated to the
goodwill and going concern value are treated as basis redeterminations
in 2002. See paragraph (d)(1) of this section.
Example 2. (i) On January 1, 2002, P purchases all of the
outstanding stock of T and makes a section 338 election for T. Assume
that ADSP and AGUB of T are both $500 and are allocated among T's
acquisition date assets as follows:
------------------------------------------------------------------------
Asset Class Asset Basis
------------------------------------------------------------------------
V........................... Machinery........................ $150
V........................... Land............................. 250
VII......................... Goodwill and going concern value. 100
--------
Total........................... 500
------------------------------------------------------------------------
(ii) On September 30, 2004, P filed a claim against the selling
shareholders of T in a court of appropriate jurisdiction alleging fraud
in the sale of the T stock.
(iii) On January 1, 2007, the former shareholders refund $140 of the
purchase price to P in a settlement of the lawsuit. Assume that, under
general principles of tax law, both the seller and the buyer properly
take into account such refund when paid. Assume also that the refund has
no effect on the tax liability for the deemed sale tax consequences.
This refund results in a decrease of T's ADSP and AGUB of $140, from
$500 to $360.
(iv) The redetermined ADSP and AGUB of $360 is allocated among T's
acquisition date assets. Because ADSP and AGUB do not exceed the fair
market value of the Class V assets, the ADSP and AGUB amounts are
allocated to the Class V assets in proportion to their fair market
values at the beginning of the day after the acquisition date. Thus,
$135 ($150 x ($360/($150 + $250))) is allocated to the machinery and
$225 ($250 x ($360/($150 + $250))) is allocated to the land.
Accordingly, the basis of the machinery is reduced by $15 ($150 original
allocation--$135 redetermined allocation) and the basis of the land is
reduced by $25 ($250 original allocation--$225 redetermined allocation).
No amount is allocated to the Class VII assets. Accordingly, the basis
of the goodwill and going concern value is reduced by $100 ($100
original allocation--$0 redetermined allocation).
(v) Assume that, as a result of deductions under section 168, the
adjusted basis of the machinery immediately before the decrease in AGUB
is zero. The machinery is treated as if it were disposed of before the
decrease is taken into account. In 2007, T recognizes income of $15, the
character of which is determined under the principles of Arrowsmith v.
Commissioner and the tax benefit rule. No adjustment to the basis of T's
assets is made for any tax paid on this amount. Assume also that, as a
result of amortization deductions, the adjusted basis of the goodwill
and going concern value immediately before the decrease in AGUB is $40.
A similar adjustment to income is made in 2007 with respect to the $60
of previously amortized goodwill and going concern value.
(vi) In summary, the basis of T's acquisition date assets, as of
January 1, 2007, is as follows:
------------------------------------------------------------------------
Asset Basis
------------------------------------------------------------------------
Machinery...................................................... $0
Land........................................................... 225
Goodwill and going concern value............................... 0
------------------------------------------------------------------------
[[Page 169]]
Example 3. (i) Assume that the facts are the same as Sec. 1.338-
6(d) Example 2 except that the recently purchased stock is acquired for
$1,600 plus additional payments that are contingent upon T's future
earnings. Assume that, under general principles of tax law, such later
payments are properly taken into account when paid. Thus, T's AGUB,
determined as of the beginning of the day after the acquisition date
(after reduction by T's cash of $200), is $2,500 and is allocated among
T's acquisition date assets under Sec. 1.338-6(c)(3)(iii) as follows:
------------------------------------------------------------------------
Final
Class Asset allocation
------------------------------------------------------------------------
I.......................... Cash........................... $200
II......................... Portfolio of actively traded *268
securities.
III........................ Accounts receivable............ 536
IV......................... Inventory...................... 268
V.......................... Building....................... 714
V.......................... Land........................... 178
V.......................... Investment in T1............... 402
VII........................ Goodwill and going concern 134
value.
------------------------------------------------------------------------
* All numbers rounded for convenience.
(ii) At a later point in time, P pays an additional $200 for its
recently purchased T stock. Assume that the additional consideration
paid would not increase T's tax liability for the deemed sale tax
consequences.
(iii) T's AGUB increases by $200, from $2,700 to $2,900. This $200
increase in AGUB is accounted for in accordance with the provisions of
Sec. 1.338-6(c)(3)(iii).
(iv) The hypothetical purchase price of the T stock is redetermined
as follows:
Grossed-up basis of recently purchased stock as determined $1,800
under Sec. 1.338-5(c) ($1,800 x (1- .2)/.8).................
Basis of nonrecently purchased stock as if the gain recognition 450
election under Sec. 1.338-5(d)(2) had been made ($1,800 x .2/
(1- .2))......................................................
Liabilities.................................................... 1,000
--------
Total...................................................... 3,250
(v) Since the redetermined hypothetical purchase price ($3,250)
exceeds the redetermined AGUB ($2,900) and no gain recognition election
was made under section 338(b)(3), the rules of Sec. 1.338-6(c)(3)(iii)
are reapplied using the redetermined hypothetical purchase price and the
redetermined AGUB.
(vi) First, an AGUB amount equal to the redetermined hypothetical
purchase price ($3,250) is allocated among the assets under the general
rules of Sec. 1.338-6. The allocation is set forth in the column below
entitled Hypothetical Allocation. Next, the allocation to each asset in
Class II through Class VII is multiplied by a fraction with a numerator
equal to the actual redetermined AGUB reduced by the amount of Class I
assets ($2,900 - $200 = $2,700) and a denominator equal to the
redetermined hypothetical purchase price reduced by the amount of Class
I assets ($3,250 - $200 = $3,050), or 2,700/3,050. This produces the
Final Allocation:
------------------------------------------------------------------------
Hypothetical Final
Class Asset allocation allocation
------------------------------------------------------------------------
I................... Cash.................... $200 $200
II.................. Portfolio of actively 300 *266
traded securities.
III................. Accounts receivable..... 600 531
IV.................. Inventory............... 300 266
V................... Building................ 800 708
V................... Land.................... 200 177
V................... Investment in T1........ 450 398
VII................. Goodwill and going 400 354
concern value.
-------------------------
Total.................. 3,250 2900
------------------------------------------------------------------------
* All numbers rounded for convenience.
(vii) As illustrated by this example, reapplying Sec. 1.338-6(c)(3)
results in a basis increase for some assets and a basis decrease for
other assets. The amount of redetermined AGUB allocated to each
acquisition date asset is determined as follows:
------------------------------------------------------------------------
Original Redetermined
Asset (c)(3) (c)(3) Increase
allocation allocation (decrease)
------------------------------------------------------------------------
Portfolio of actively traded $268 $266 $(2)
securities.......................
Accounts receivable............... 536 531 (5)
Inventory......................... 268 266 (2)
Building.......................... 714 708 (6)
Land.............................. 178 177 (1)
Investment in T1.................. 402 398 (4)
Goodwill and going concern value.. 134 354 220
-------------------------------------
Total......................... 2,500 2,700 200
------------------------------------------------------------------------
Example 4. (i) On January 1, 2001, P purchases all of the
outstanding T stock and makes a section 338 election for T. P pays $700
of cash and promises also to pay a maximum $300 of contingent
consideration at various times in the future. Assume that, under general
principles of tax law, such later payments are properly taken into
account by P when paid. Assume also, however, that the current fair
market value of the
[[Page 170]]
contingent payments is reasonably ascertainable. The fair market value
of T's assets (other than goodwill and going concern value) as of the
beginning of the following day is as follows:
------------------------------------------------------------------------
Fair
Asset class Assets market
value
------------------------------------------------------------------------
V.......................... Equipment....................... $200
V.......................... Non-actively traded securities.. 100
V.......................... Building........................ 500
----------
Total.......................... 800
------------------------------------------------------------------------
(ii) T has no liabilities. The AGUB is $700. In calculating ADSP,
assume that, under Sec. 1.1001-1, the current amount realized
attributable to the contingent consideration is $200. ADSP is therefore
$900 ($700 cash plus $200).
(iii) (A) The AGUB of $700 is ratably allocated among T's Class V
acquisition date assets in proportion to their fair market values as
follows:
------------------------------------------------------------------------
Asset Basis
------------------------------------------------------------------------
Equipment ($700 x 200/800)................................... $175.00
Non-actively traded securities ($700 x 100/800).............. 87.50
Building ($700 x 500/800).................................... 437.50
----------
Total.................................................... 700.00
------------------------------------------------------------------------
(B) No amount is allocated to goodwill or going concern value.
(iv) (A) The ADSP of $900 is ratably allocated among T's Class V
acquisition date assets in proportion to their fair market values as
follows:
------------------------------------------------------------------------
Asset Basis
------------------------------------------------------------------------
Equipment.................................................... $200
Non-actively traded securities............................... 100
Building..................................................... 500
----------
Total.................................................... 800
------------------------------------------------------------------------
(B) The remaining ADSP, $100, is allocated to goodwill and going
concern value (Class VII).
(v) P and T file a consolidated return for 2001 and each following
year with P as the common parent of the affiliated group.
(vi) In 2004, a contingent amount of $120 is paid by P. For old T,
this payment has no effect on ADSP, because the payment is accounted for
as a separate transaction. We have assumed that, under general
principles of tax law, the payment is properly taken into account by P
at the time made. Therefore, in 2004, there is an increase in new T's
AGUB of $120. The amount of the increase allocated to each acquisition
date asset is determined as follows:
------------------------------------------------------------------------
Original Redetermined
Asset AGUB AGUB Increase
------------------------------------------------------------------------
Equipment........................... $175.00 $200.00 $25.00
Land................................ 87.50 100.00 12.50
Building............................ 437.50 500.00 62.50
Goodwill and going concern value.... 0.00 20.00 20.00
-----------------------------------
Total........................... 700.00 820.00 120.00
------------------------------------------------------------------------
[T.D. 8940, 66 FR 9929, Feb. 13, 2001]
Sec. 1.338-8 Asset and stock consistency.
(a) Introduction--(1) Overview. This section implements the
consistency rules of sections 338(e) and (f). Under this section, no
election under section 338 is deemed made or required with respect to
target or any target affiliate. Instead, the person acquiring an asset
may have a carryover basis in the asset.
(2) General application. The consistency rules generally apply if
the purchasing corporation acquires an asset directly from target during
the target consistency period and target is a subsidiary in a
consolidated group. In such a case, gain from the sale of the asset is
reflected under the investment adjustment provisions of the consolidated
return regulations in the basis of target stock and may reduce gain from
the sale of the stock. See Sec. 1.1502-32 (investment adjustment
provisions). Under the consistency rules, the purchasing corporation
generally takes a carryover basis in the asset, unless a section 338
election is made for target. Similar rules apply if the purchasing
corporation acquires an asset directly from a lower-tier target
affiliate if gain from the sale is reflected under the investment
adjustment provisions in the basis of target stock.
(3) Extensions of the general rules. If an arrangement exists,
paragraph (f) of this section generally extends the carryover basis rule
to certain cases in which the purchasing corporation acquires assets
indirectly from target (or a lower-tier target affiliate). To prevent
avoidance of the consistency rules, paragraph (j) of this section also
may extend the consistency period or the 12-month acquisition period and
may disregard the presence of conduits.
(4) Application where certain dividends are paid. Paragraph (g) of
this section
[[Page 171]]
extends the carryover basis rule to certain cases in which dividends are
paid to a corporation that is not a member of the same consolidated
group as the distributing corporation. Generally, this rule applies
where a 100 percent dividends received deduction is used in conjunction
with asset dispositions to achieve an effect similar to that available
under the investment adjustment provisions of the consolidated return
regulations.
(5) Application to foreign target affiliates. Paragraph (h) of this
section extends the carryover basis rule to certain cases involving
target affiliates that are controlled foreign corporations.
(6) Stock consistency. This section limits the application of the
stock consistency rules to cases in which the rules are necessary to
prevent avoidance of the asset consistency rules. Following the general
treatment of a section 338(h)(10) election, a sale of a corporation's
stock is treated as a sale of the corporation's assets if a section
338(h)(10) election is made. Because gain from this asset sale may be
reflected in the basis of the stock of a higher-tier target, the
carryover basis rule may apply to the assets.
(b) Consistency for direct acquisitions--(1) General rule. The basis
rules of paragraph (d) of this section apply to an asset if--
(i) The asset is disposed of during the target consistency period;
(ii) The basis of target stock, as of the target acquisition date,
reflects gain from the disposition of the asset (see paragraph (c) of
this section); and
(iii) The asset is owned, immediately after its acquisition and on
the target acquisition date, by a corporation that acquires stock of
target in the qualified stock purchase (or by an affiliate of an
acquiring corporation).
(2) Section 338(h)(10) elections. For purposes of this section, if a
section 338(h)(10) election is made for a corporation acquired in a
qualified stock purchase--
(i) The acquisition is treated as an acquisition of the
corporation's assets (see Sec. 1.338(h)(10)-1); and
(ii) The corporation is not treated as target.
(c) Gain from disposition reflected in basis of target stock. For
purposes of this section:
(1) General rule. Gain from the disposition of an asset is reflected
in the basis of a corporation's stock if the gain is taken into account
under Sec. 1.1502-32, directly or indirectly, in determining the basis
of the stock, after applying section 1503(e) and other provisions of the
Internal Revenue Code.
(2) Gain not reflected if section 338 election made for target. Gain
from the disposition of an asset that is otherwise reflected in the
basis of target stock as of the target acquisition date is not
considered reflected in the basis of target stock if a section 338
election is made for target.
(3) Gain reflected by reason of distributions. Gain from the
disposition of an asset is not considered reflected in the basis of
target stock merely by reason of the receipt of a distribution from a
target affiliate that is not a member of the same consolidated group as
the distributee. See paragraph (g) of this section for the treatment of
dividends eligible for a 100 percent dividends received deduction.
(4) Controlled foreign corporations. For a limitation applicable to
gain of a target affiliate that is a controlled foreign corporation, see
paragraph (h)(2) of this section.
(5) Gain recognized outside the consolidated group. Gain from the
disposition of an asset by a person other than target or a target
affiliate is not reflected in the basis of a corporation's stock unless
the person is a conduit, as defined in paragraph (j)(4) of this section.
(d) Basis of acquired assets--(1) Carryover basis rule. If this
paragraph (d) applies to an asset, the asset's basis immediately after
its acquisition is, for all purposes of the Internal Revenue Code, its
adjusted basis immediately before its disposition.
(2) Exceptions to carryover basis rule for certain assets. The
carryover basis rule of paragraph (d)(1) of this section does not apply
to the following assets--
(i) Any asset disposed of in the ordinary course of a trade or
business (see section 338(e)(2)(A));
(ii) Any asset the basis of which is determined wholly by reference
to the adjusted basis of the asset in the hands
[[Page 172]]
of the person that disposed of the asset (see section 338(e)(2)(B));
(iii) Any debt or equity instrument issued by target or a target
affiliate (see paragraph (h)(3) of this section for an exception
relating to the stock of a target affiliate that is a controlled foreign
corporation);
(iv) Any asset the basis of which immediately after its acquisition
would otherwise be less than its adjusted basis immediately before its
disposition; and
(v) Any asset identified by the Internal Revenue Service in a
revenue ruling or revenue procedure.
(3) Exception to carryover basis rule for de minimis assets. The
carryover basis rules of this section do not apply to an asset if the
asset is not disposed of as part of the same arrangement as the
acquisition of target and the aggregate amount realized for all assets
otherwise subject to the carryover basis rules of this section does not
exceed $250,000.
(4) Mitigation rule--(i) General rule. If the carryover basis rules
of this section apply to an asset and the asset is transferred to a
domestic corporation in a transaction to which section 351 applies or as
a contribution to capital and no gain is recognized, the transferor's
basis in the stock of the transferee (but not the transferee's basis in
the asset) is determined without taking into account the carryover basis
rules of this section.
(ii) Time for transfer. This paragraph (d)(4) applies only if the
asset is transferred before the due date (including extensions) for the
transferor's income tax return for the year that includes the last date
for which a section 338 election may be made for target.
(e) Examples--(1) In general. For purposes of the examples in this
section, unless otherwise stated, the basis of each asset is the same
for determining earnings and profits and taxable income, the exceptions
to paragraph (d)(1) of this section do not apply, the taxable year of
all persons is the calendar year, and the following facts apply: S is
the common parent of a consolidated group that includes T, T1, T2, and
T3; S owns all of the stock of T and T3; and T owns all of the stock of
T1, which owns all of the stock of T2. B is unrelated to the S group and
owns all of the stock of P, which owns all of the stock of P1. Y and Y1
are partnerships that are unrelated to the S group but may be related to
the P group. Z is a corporation that is not related to any of the other
parties.
[GRAPHIC] [TIFF OMITTED] TC17OC91.000
[[Page 173]]
(2) Direct acquisitions. Paragraphs (b), (c), and (d) of this
section may be illustrated by the following examples:
Example 1. Asset acquired from target by purchasing corporation. (a)
On February 1 of Year 1, T sells an asset to P1 and recognizes gain. T's
gain from the disposition of the asset is taken into account under Sec.
1.1502-32 in determining S's basis in the T stock. On January 1 of Year
2, P1 makes a qualified stock purchase of T from S. No section 338
election is made for T.
(b) T disposed of the asset during its consistency period, gain from
the asset disposition is reflected in the basis of the T stock as of T's
acquisition date (January 1 of Year 2), and the asset is owned both
immediately after the asset disposition (February 1 of Year 1) and on
T's acquisition date by P1, the corporation that acquired T stock in the
qualified stock purchase. Consequently, under paragraph (b) of this
section, paragraph (d)(1) of this section applies to the asset and P1's
basis in the asset is T's adjusted basis in the asset immediately before
the sale to P1.
Example 2. Gain from section 338(h)(10) election reflected in stock
basis. (a) On February 1 of Year 1, P1 makes a qualified stock purchase
of T2 from T1. A section 338(h)(10) election is made for T2 and T2
recognizes gain on each of its assets. T2's gain is taken into account
under Sec. 1.1502-32 in determining S's basis in the T stock. On
January 1 of Year 2, P1 makes a qualified stock purchase of T from S. No
section 338 election is made for T.
(b) Under paragraph (b)(2) of this section, the acquisition of the
T2 stock is treated as an acquisition of T2's assets on February 1 of
Year 1, because a section 338(h)(10) election is made for T2. The gain
recognized by T2 under section 338(h)(10) is reflected in S's basis in
the T stock as of T's acquisition date. Because the other requirements
of paragraph (b) of this section are satisfied, paragraph (d)(1) of this
section applies to the assets and new T2's basis in its assets is old
T2's adjusted basis in the assets immediately before the disposition.
Example 3. Corporation owning asset ceases affiliation with
corporation purchasing target before target acquisition date. (a) On
February 1 of Year 1, T sells an asset to P1 and recognizes gain. On
December 1 of Year 1, P disposes of all of the P1 stock while P1 still
owns the asset. On January 1 of Year 2, P makes a qualified stock
purchase of T from S. No section 338 election is made for T.
(b) Immediately after T's disposition of the asset, the asset is
owned by P1 which is affiliated on that date with P, the corporation
that acquired T stock in the qualified stock purchase. However, the
asset is owned by a corporation (P1) that is no longer affiliated with P
on T's acquisition date. Although the other requirements of paragraph
(b) of this section are satisfied, the requirements of paragraph
(b)(1)(iii) of this section are not satisfied. Consequently, the basis
rules of paragraph (d) of this section do not apply to the asset by
reason of P1's acquisition.
(c) If P acquires all of the Z stock and P1 transfers the asset to Z
on or before T's acquisition date (January 1 of Year 2), the asset is
owned by an affiliate of P both on February 1 of Year 1 (P1) and on
January 1 of Year 2 (Z). Consequently, all of the requirements of
paragraph (b) of this section are satisfied and paragraph (d)(1) of this
section applies to the asset and P1's basis in the asset is T's adjusted
basis in the asset immediately before the sale to P1.
Example 4. Gain reflected in stock basis notwithstanding offsetting
loss or distribution. (a) On April 1 of Year 1, T sells an asset to P1
and recognizes gain. In Year 1, T distributes an amount equal to the
gain. On March 1 of Year 2, P makes a qualified stock purchase of T from
S. No section 338 election is made for T.
(b) Although, as a result of the distribution, there is no
adjustment with respect to the T stock under Sec. 1.1502-32 for Year 1,
T's gain from the disposition of the asset is considered reflected in
S's basis in the T stock. The gain is considered to have been taken into
account under Sec. 1.1502-32 in determining the adjustments to S's
basis in the T stock because S's basis in the T stock is different from
what it would have been had there been no gain.
(c) If T distributes an amount equal to the gain on February 1 of
Year 2, rather than in Year 1, the results would be the same because S's
basis in the T stock is different from what it would have been had there
been no gain. If the distribution in Year 2 is by reason of an election
under Sec. 1.1502-32(f)(2), the results would be the same.
(d) If, in Year 1, T does not make a distribution and the S group
does not file a consolidated return, but, in Year 2, the S group does
file a consolidated return and makes an election under Sec. 1.1502-
32(f)(2) for T, the results would be the same. S's basis in the T stock
is different from what it would have been had there been no gain.
Paragraph (c)(3) of this section (gain not considered reflected by
reason of distributions) does not apply to the deemed distribution under
the election because S and T are members of the same consolidated group.
If T distributes an amount equal to the gain in Year 2 and no election
is made under Sec. 1.1502-32(f)(2), the results would be the same.
(e) If, in Year 1, T incurs an unrelated loss in an amount equal to
the gain, rather than distributing an amount equal to the gain, the
results would be the same because the gain is taken into account under
Sec. 1.1502-32 in determining S's basis in the T stock.
Example 5. Gain of a target affiliate reflected in stock basis after
corporate reorganization. (a)
[[Page 174]]
On February 1 of Year 1, T3 sells an asset to P1 and recognizes gain. On
March 1 of Year 1, S contributes the T3 stock to T in a transaction
qualifying under section 351. On January 15 of Year 2, P1 makes a
qualified stock purchase of T from S. No section 338 election is made
for T.
(b) T3's gain from the asset sale is taken into account under Sec.
1.1502-32 in determining S's basis in the T3 stock. Under section 358,
the gain that is taken into account under Sec. 1.1502-32 in determining
S's basis in the T3 stock is also taken into account in determining S's
basis in the T stock following S's contribution of the T3 stock to T.
Consequently, under paragraph (b) of this section, paragraph (d)(1) of
this section applies to the asset and P1's basis in the asset is T3's
adjusted basis in the asset immediately before the sale to P1.
(c) If on March 1 of Year 1, rather than S contributing the T3 stock
to T, S causes T3 to merge into T in a transaction qualifying under
section 368(a)(1)(D), the results would be the same.
Example 6. Gain not reflected if election under section 338 made.
(a) On February 1 of Year 1, T1 sells an asset to P1 and recognizes
gain. On January 1 of Year 2, P1 makes a qualified stock purchase of T1
from T. A section 338 election (but not a section 338(h)(10) election)
is made for T1.
(b) Under paragraph (c)(2) of this section, because a section 338
election is made for T1, T's basis in the T1 stock is considered not to
reflect gain from the disposition. Consequently, the requirement of
paragraph (b)(1)(ii) of this section is not satisfied. Thus, P1's basis
in the asset is not determined under paragraph (d) of this section.
Although the section 338 election for T1 results in a qualified stock
purchase of T2, the requirement of paragraph (b)(1)(ii) of this section
is not satisfied with respect to T2, whether or not a section 338
election is made for T2.
(c) If, on January 1 of Year 2, P1 makes a qualified stock purchase
of T from S and a section 338 election for T, rather than T1, S's basis
in the T stock is considered not to reflect gain from T1's disposition
of the asset. However, the section 338 election for T results in a
qualified stock purchase of T1. Because the gain is reflected in T's
basis in the T1 stock, the requirements of paragraph (b) of this section
are satisfied. Consequently, P1's basis in the asset is determined under
paragraph (d)(1) of this section unless a section 338 election is also
made for T1.
(f) Extension of consistency to indirect acquisitions--(1)
Introduction. If an arrangement exists (see paragraph (j)(5) of this
section), this paragraph (f) generally extends the consistency rules to
indirect acquisitions that have the same effect as direct acquisitions.
For example, this paragraph (f) applies if, pursuant to an arrangement,
target sells an asset to an unrelated person who then sells the asset to
the purchasing corporation.
(2) General rule. This paragraph (f) applies to an asset if,
pursuant to an arrangement--
(i) The asset is disposed of during the target consistency period;
(ii) The basis of target stock as of, or at any time before, the
target acquisition date reflects gain from the disposition of the asset;
and
(iii) The asset ownership requirements of paragraph (b)(1)(iii) of
this section are not satisfied, but the asset is owned, at any time
during the portion of the target consistency period following the target
acquisition date, by--
(A) A corporation--
(1) The basis of whose stock, as of, or at any time before, the
target acquisition date, reflects gain from the disposition of the
asset; and
(2) That is affiliated, at any time during the target consistency
period, with a corporation that acquires stock of target in the
qualified stock purchase; or
(B) A corporation that at the time it owns the asset is affiliated
with a corporation described in paragraph (f)(2)(iii)(A) of this
section.
(3) Basis of acquired assets. If this paragraph (f) applies to an
asset, the principles of the basis rules of paragraph (d) of this
section apply to the asset as of the date, following the disposition
with respect to which gain is reflected in the basis of target's stock,
that the asset is first owned by a corporation described in paragraph
(f)(2)(iii) of this section. If the principles of the carryover basis
rule of paragraph (d)(1) of this section apply to an asset, the asset's
basis also is reduced (but not below zero) by the amount of any
reduction in its basis occurring after the disposition with respect to
which gain is reflected in the basis of target's stock.
(4) Examples. This paragraph (f) may be illustrated by the following
examples:
Example 1. Acquisition of asset from unrelated party by purchasing
corporation. (a) On February 1 of Year 1, T sells an asset to Z and
[[Page 175]]
recognizes gain. On February 15 of Year 1, P1 makes a qualified stock
purchase of T from S. No section 338 election is made for T. P1 buys the
asset from Z on March 1 of Year 1, before Z has reduced the basis of the
asset through depreciation or otherwise.
(b) Paragraph (b) of this section does not apply to the asset
because the asset ownership requirements of paragraph (b)(1)(iii) of
this section are not satisfied. However, the asset ownership
requirements of paragraph (f)(2)(iii) of this section are satisfied
because, during the portion of T's consistency period following T's
acquisition date, the asset is owned by P1 while it is affiliated with
T. Consequently, paragraph (f) of this section applies to the asset if
there is an arrangement for T to dispose of the asset during T's
consistency period, for the gain to be reflected in S's basis in the T
stock as of T's acquisition date, and for P1 to own the asset during the
portion of T's consistency period following T's acquisition date. If the
arrangement exists, under paragraph (f)(3) of this section, P1's basis
in the asset is determined as of March 1 of Year 1, under the principles
of paragraph (d) of this section. Consequently, P1's basis in the asset
is T's adjusted basis in the asset immediately before the sale to Z.
(c) If P1 acquires the asset from Z on January 15 of Year 2 (rather
than on March 1 of Year 1), and Z's basis in the asset has been reduced
through depreciation at the time of the acquisition, P1's basis in the
asset as of January 15 of Year 2 would be T's adjusted basis in the
asset immediately before the sale to Z, reduced (but not below zero) by
the amount of the depreciation. Z's basis and depreciation are
determined without taking into account the basis rules of paragraph (d)
of this section.
(d) If P, rather than P1, acquires the asset from Z, the results
would be the same.
(e) If, on March 1 of Year 1, P1 acquires the Z stock, rather than
acquiring the asset from Z, paragraph (f) of this section would apply to
the asset if an arrangement exists. However, under paragraph (f)(3) of
this section, Z's basis in the asset would be determined as of February
1 of Year 1, the date the asset is first owned by a corporation (Z)
described in paragraph (f)(2)(iii) of this section. Consequently, Z's
basis in the asset as of February 1 of Year 1, determined under the
principles of paragraph (d) of this section, would be T's adjusted basis
in the asset immediately before the sale to Z.
Example 2. Acquisition of asset from target by target affiliate. (a)
On February 1 of Year 1, T contributes an asset to T1 in a transaction
qualifying under section 351 and in which T recognizes gain under
section 351(b) that is deferred under Sec. 1.1502-13. On March 1 of
Year 1, P1 makes a qualified stock purchase of T from S and, pursuant to
Sec. 1.1502-13, the deferred gain is taken into account by T
immediately before T ceases to be a member of the S group. No section
338 election is made for T.
(b) Paragraph (b) of this section does not apply to the asset
because the asset ownership requirements of paragraph (b)(1)(iii) of
this section are not satisfied.
(c) T1 is not described in paragraph (f)(2)(iii)(A) of this section
because the basis of the T1 stock does not reflect gain from the
disposition of the asset. Although, under section 358(a)(1)(B)(ii), T's
basis in the T1 stock is increased by the amount of the gain, the gain
is not taken into account directly or indirectly under Sec. 1.1502-32
in determining T's basis in the T1 stock.
(d) T1 is described in paragraph (f)(2)(iii)(B) of this section
because, during the portion of T's consistency period following T's
acquisition date, T1 owns the asset while it is affiliated with T, a
corporation described in paragraph (f)(2)(iii)(A) of this section.
Consequently, paragraph (f) of this section applies to the asset if
there is an arrangement. Under paragraph (j)(5) of this section, the
fact that, at the time T1 acquires the asset from T, T1 is related
(within the meaning of section 267(b)) to T indicates that an
arrangement exists.
Example 3. Acquisition of asset from target and indirect acquisition
of target stock. (a) On February 1 of Year 1, T sells an asset to P1 and
recognizes gain. On March 1 of Year 1, Z makes a qualified stock
purchase of T from S. No section 338 election is made for T. On January
1 of Year 2, P1 acquires the T stock from Z other than in a qualified
stock purchase.
(b) The asset ownership requirements of paragraph (b)(1)(iii) of
this section are not satisfied because the asset was never owned by Z,
the corporation that acquired T stock in the qualified stock purchase
(or by a corporation that was affiliated with Z at the time it owned the
asset). However, because the asset is owned by P1 while it is affiliated
with T during the portion of T's consistency period following T's
acquisition date, paragraph (f) of this section applies to the asset if
there is an arrangement. If there is an arrangement, the principles of
the carryover basis rule of paragraph (d)(1) of this section apply to
determine P1's basis in the asset unless Z makes a section 338 election
for T. See paragraph (c)(2) of this section.
(c) If P1 also makes a qualified stock purchase of T from Z, the
results would be the same. If there is an arrangement, the principles of
the carryover basis rule of paragraph (d)(1) of this section apply to
determine P1's basis in the asset unless Z makes a section 338 election
for T. However, these principles apply to determine P1's basis in the
asset if P1, but not Z, makes a section 338 election for T. The basis of
the T stock no longer reflects, as of T's acquisition date
[[Page 176]]
by P1, the gain from the disposition of the asset.
(d) Assume Z purchases the T stock other than in a qualified stock
purchase and P1 makes a qualified stock purchase of T from Z. Paragraph
(b) of this section does not apply to the asset because gain from the
disposition of the asset is not reflected in the basis of T's stock as
of T's acquisition date (January 1 of Year 2). However, because the gain
is reflected in S's basis in the T stock before T's acquisition date and
the asset is owned by P1 while it is affiliated with T during the
portion of T's consistency period following T's acquisition date,
paragraph (f) of this section applies to the asset if there is an
arrangement. If there is an arrangement, the principles of the carryover
basis rule of paragraph (d)(1) of this section apply to determine P1's
basis in the asset even if P1 makes a section 338 election for T. The
basis of the T stock no longer reflects, as of T's acquisition date, the
gain from the disposition of the asset.
Example 4. Asset acquired from target affiliate by corporation that
becomes its affiliate. (a) On February 1 of Year 1, T1 sells an asset to
P1 and recognizes gain. On February 15 of Year 1, Z makes a qualified
stock purchase of T from S. No section 338 election is made for T. On
June 1 of Year 1, P1 acquires the T1 stock from T, other than in a
qualified stock purchase.
(b) The asset ownership requirements of paragraph (b)(1)(iii) of
this section are not satisfied because the asset was never owned by Z,
the corporation that acquired T stock in the qualified stock purchase
(or by a corporation that was affiliated with Z at the time it owned the
asset).
(c) P1 is not described in paragraph (f)(2)(iii)(A) of this section
because gain from the disposition of the asset is not reflected in the
basis of the P1 stock.
(d) P1 is described in paragraph (f)(2)(iii)(B) of this section
because the asset is owned by P1 while P1 is affiliated with T1 during
the portion of T's consistency period following T's acquisition date. T1
becomes affiliated with Z, the corporation that acquired T stock in the
qualified stock purchase, during T's consistency period, and, as of T's
acquisition date, the basis of T1's stock reflects gain from the
disposition of the asset. Consequently, paragraph (f) of this section
applies to the asset if there is an arrangement.
Example 5. De minimis rules. (a) On February 1 of Year 1, T sells an
asset to P and recognizes gain. On February 15 of Year 1, T1 sells an
asset to Z and recognizes gain. The aggregate amount realized by T and
T1 on their respective sales of assets is not more than $250,000. On
March 1 of Year 1, T3 sells an asset to P and recognizes gain. On April
1 of Year 1, P makes a qualified stock purchase of T from S. No section
338 election is made for T. On June 1 of Year 1, P1 buys from Z the
asset sold by T1.
(b) Under paragraph (b) of this section, the basis rules of
paragraph (d) of this section apply to the asset sold by T. Under
paragraph (f) of this section, the principles of the basis rules of
paragraph (d) of this section apply to the asset sold by T1 if there is
an arrangement. Because T3's gain is not reflected in the basis of the T
stock, the basis rules of this section do not apply to the asset sold by
T3.
(c) The de minimis rule of paragraph (d)(3) of this section applies
to an asset if the asset is not disposed of as part of the same
arrangement as the acquisition of T and the aggregate amount realized
for all assets otherwise subject to the carryover basis rules does not
exceed $250,000. The aggregate amount realized by T and T1 does not
exceed $250,000. (The asset sold by T3 is not taken into account for
purposes of the de minimis rule.) Thus, the de minimis rule applies to
the asset sold by T if the asset is not disposed of as part of the same
arrangement as the acquisition of T.
(d) If, under paragraph (f) of this section, the principles of the
carryover basis rules of paragraph (d)(1) of this section otherwise
apply to the asset sold by T1 because of an arrangement, the de minimis
rules of this section do not apply to the asset because of the
arrangement.
(e) Assume on June 1 of Year 1, Z acquires the T1 stock from T,
other than in a qualified stock purchase, rather than P1 buying the T1
asset, and paragraph (f) of this section applies because there is an
arrangement. Because the asset was disposed of and the T1 stock was
acquired as part of the arrangement, the de minimis rules of this
section do not apply to the asset.
(g) Extension of consistency if dividends qualifying for 100 percent
dividends received deduction are paid--(1) General rule for direct
acquisitions from target. Unless a section 338 election is made for
target, the basis rules of paragraph (d) of this section apply to an
asset if--
(i) Target recognizes gain (whether or not deferred) on disposition
of the asset during the portion of the target consistency period that
ends on the target acquisition date;
(ii) The asset is owned, immediately after the asset disposition and
on the target acquisition date, by a corporation that acquires stock of
target in the qualified stock purchase (or by an affiliate of an
acquiring corporation); and
(iii) During the portion of the target consistency period that ends
on the target acquisition date, the aggregate
[[Page 177]]
amount of dividends paid by target, to which section 243(a)(3) applies,
exceeds the greater of--
(A) $250,000; or
(B) 125 percent of the yearly average amount of dividends paid by
target, to which section 243(a)(3) applies, during the three calendar
years immediately preceding the year in which the target consistency
period begins (or, if shorter, the period target was in existence).
(2) Other direct acquisitions having same effect. The basis rules of
paragraph (d) of this section also apply to an asset if the effect of a
transaction described in paragraph (g)(1) of this section is achieved
through any combination of disposition of assets and payment of
dividends to which section 243(a)(3) applies (or any other dividends
eligible for a 100 percent dividends received deduction). See paragraph
(h)(4) of this section for additional rules relating to target
affiliates that are controlled foreign corporations.
(3) Indirect acquisitions. The principles of paragraph (f) of this
section also apply for purposes of this paragraph (g).
(4) Examples. This paragraph (g) may be illustrated by the following
examples:
Example 1. Asset acquired from target paying dividends to which
section 243(a)(3) applies. (a) The S group does not file a consolidated
return. In Year 1, Year 2, and Year 3, T pays dividends to S to which
section 243(a)(3) applies of $200,000, $250,000, and $300,000,
respectively. On February 1 of Year 4, T sells an asset to P and
recognizes gain. On January 1 of Year 5, P makes a qualified stock
purchase of T from S. No section 338 election is made for T. During the
portion of T's consistency period that ends on T's acquisition date, T
pays S dividends to which section 243(a)(3) applies of $1,000,000.
(b) Under paragraph (g)(1) of this section, paragraph (d) of this
section applies to the asset. T recognizes gain on disposition of the
asset during the portion of T's consistency period that ends on T's
acquisition date, the asset is owned by P immediately after the
disposition and on T's acquisition date, and T pays dividends described
in paragraph (g)(1)(iii) of this section. Consequently, under paragraph
(d)(1) of this section, P's basis in the asset is T's adjusted basis in
the asset immediately before the sale to P.
(c) If T is a controlled foreign corporation, the results would be
the same if T pays dividends in the amount described in paragraph
(g)(1)(iii) of this section that qualify for a 100 percent dividends
received deduction. See sections 243(e) and 245.
(d) If S and T3 file a consolidated return in which T, T1, and T2 do
not join, the results would be the same because the dividends paid by T
are still described in paragraph (g)(1)(iii) of this section.
(e) If T, T1, and T2 file a consolidated return in which S and T3 do
not join, the results would be the same because the dividends paid by T
are still described in paragraph (g)(1)(iii) of this section.
Example 2. Asset disposition by target affiliate achieving same
effect. (a) The S group does not file a consolidated return. On February
1 of Year 1, T2 sells an asset to P and recognizes gain. T pays
dividends to S described in paragraph (g)(1)(iii) of this section. On
January 1 of Year 2, P makes a qualified stock purchase of T from S. No
section 338 election is made for T.
(b) Paragraph (g)(1) of this section does not apply to the asset
because T did not recognize gain on the disposition of the asset.
However, under paragraph (g)(2) of this section, because the asset
disposition by T2 and the dividends paid by T achieve the effect of a
transaction described in paragraph (g)(1) of this section, the carryover
basis rule of paragraph (d)(1) of this section applies to the asset. The
effect was achieved because T2 is a lower-tier affiliate of T and the
dividends paid by T to S reduce the value to S of T and its lower-tier
affiliates.
(c) If T2 is a controlled foreign corporation, the results would be
the same because T2 is a lower-tier affiliate of T and the dividends
paid by T to S reduce the value to S of T and its lower-tier affiliates.
(d) If P buys an asset from T3, rather than T2, the asset
disposition and the dividends do not achieve the effect of a transaction
described in paragraph (g)(1) of this section because T3 is not a lower-
tier affiliate of T. Thus, the basis rules of paragraph (d) of this
section do not apply to the asset. The results would be the same whether
or not P also acquires the T3 stock (whether or not in a qualified stock
purchase).
Example 3. Dividends by target affiliate achieving same effect. (a)
The S group does not file a consolidated return. On February 1 of Year
1, T1 sells an asset to P and recognizes gain. On January 1 of Year 2, P
makes a qualified stock purchase of T from S. No section 338 election is
made for T. T does not pay dividends to S described in paragraph
(g)(1)(iii) of this section. However, T1 pays dividends to T that would
be described in paragraph (g)(1)(iii) of this section if T1 were a
target.
(b) Paragraph (g)(1) of this section does not apply to the asset
because T did not recognize gain on the disposition of the asset and did
not pay dividends described in paragraph (g)(1)(iii) of this section.
Further, paragraph (g)(2) of this section does not apply because
[[Page 178]]
the dividends paid by T1 to T do not reduce the value to S of T and its
lower-tier affiliates.
(c) If both S and T own T1 stock and T1 pays dividends to S that
would be described in paragraph (g)(1)(iii) of this section if T1 were a
target, paragraph (g)(2) of this section would apply because the
dividends paid by T1 to S reduce the value to S of T and its lower-tier
affiliates. If T, rather than T1, sold the asset to P, the results would
be the same. Further, if T and T1 pay dividends to S that, only when
aggregated, would be described in paragraph (g)(1)(iii) of this section
(if they were all paid by T), the results would be the same.
Example 4. Gain reflected by reason of dividends. (a) S and T file a
consolidated return in which T1 and T2 do not join. On February 1 of
Year 1, T1 sells an asset to P and recognizes gain. On January 1 of Year
2, P makes a qualified stock purchase of T from S. No section 338
election is made for T. T1 pays dividends to T that would be described
in paragraph (g)(1)(iii) of this section if T1 were a target.
(b) The requirements of paragraph (b) of this section are not
satisfied because, under paragraph (c)(3) of this section, gain from
T1's sale is not reflected in S's basis in the T stock by reason of the
dividends paid by T1 to T.
(c) Although the dividends paid by T1 to T do not reduce the value
to S of T and its lower-tier affiliates, paragraph (g)(2) of this
section applies because the dividends paid by T1 to T are taken into
account under Sec. 1.1502-32 in determining S's basis in the T stock.
Consequently, the carryover basis rule of paragraph (d)(1) of this
section applies to the asset.
(h) Consistency for target affiliates that are controlled foreign
corporations--(1) In general. This paragraph (h) applies only if target
is a domestic corporation. For additional rules that may apply with
respect to controlled foreign corporations, see paragraph (g) of this
section. The definitions and nomenclature of Sec. 1.338-2(b) and (c)
and paragraph (e) of this section apply for purposes of this section.
(2) Income or gain resulting from asset dispositions--(i) General
rule. Income or gain of a target affiliate that is a controlled foreign
corporation from the disposition of an asset is not reflected in the
basis of target stock under paragraph (c) of this section unless the
income or gain results in an inclusion under section 951(a)(1)(A),
951(a)(1)(C), 1291 or 1293.
(ii) Basis of controlled foreign corporation stock. If, by reason of
paragraph (h)(2)(i) of this section, the carryover basis rules of this
section apply to an asset, no increase in basis in the stock of a
controlled foreign corporation under section 961(a) or 1293(d)(1), or
under regulations issued pursuant to section 1297(b)(5), is allowed to
target or a target affiliate to the extent the increase is attributable
to income or gain described in paragraph (h)(2)(i) of this section. A
similar rule applies to the basis of any property by reason of which the
stock of the controlled foreign corporation is considered owned under
section 958(a)(2) or 1297(a).
(iii) Operating rule. For purposes of this paragraph (h)(2)--
(A) If there is an income inclusion under section 951 (a)(1)(A) or
(C), the shareholder's income inclusion is first attributed to the
income or gain of the controlled foreign corporation from the
disposition of the asset to the extent of the shareholder's pro rata
share of such income or gain; and
(B) Any income or gain under section 1293 is first attributed to the
income or gain from the disposition of the asset to the extent of the
shareholder's pro rata share of the income or gain.
(iv) Increase in asset or stock basis--(A) If the carryover basis
rules under paragraph (h)(2)(i) of this section apply to an asset, and
the purchasing corporation disposes of the asset to an unrelated party
in a taxable transaction and recognizes and includes in its U.S. gross
income or the U.S. gross income of its shareholders the greater of the
income or gain from the disposition of the asset by the selling
controlled foreign corporation that was reflected in the basis of the
target stock under paragraph (c) of this section, or the gain recognized
on the asset by the purchasing corporation on the disposition of the
asset, then the purchasing corporation or the target or a target
affiliate, as appropriate, shall increase the basis of the selling
controlled foreign corporation stock subject to paragraph (h)(2)(ii) of
this section, as of the date of the disposition of the asset by the
purchasing corporation, by the amount of the basis increase that was
denied under paragraph (h)(2)(ii) of this section. The preceding
sentence shall
[[Page 179]]
apply only to the extent that the controlled foreign corporation stock
is owned (within the meaning of section 958(a)) by a member of the
purchasing corporation's affiliated group.
(B) If the carryover basis rules under paragraph (h)(2)(i) of this
section apply to an asset, and the purchasing corporation or the target
or a target affiliate, as appropriate, disposes of the stock of the
selling controlled foreign corporation to an unrelated party in a
taxable transaction and recognizes and includes in its U.S. gross income
or the U.S. gross income of its shareholders the greater of the gain
equal to the basis increase that was denied under paragraph (h)(2)(ii)
of this section, or the gain recognized in the stock by the purchasing
corporation or by the target or a target affiliate, as appropriate, on
the disposition of the stock, then the purchasing corporation shall
increase the basis of the asset, as of the date of the disposition of
the stock of the selling controlled foreign corporation by the
purchasing corporation or by the target or a target affiliate, as
appropriate, by the amount of the basis increase that was denied
pursuant to paragraph (h)(2)(i) of this section. The preceding sentence
shall apply only to the extent that the asset is owned (within the
meaning of section 958(a)) by a member of the purchasing corporation's
affiliated group.
(3) Stock issued by target affiliate that is a controlled foreign
corporation. The exception to the carryover basis rules of this section
provided in paragraph (d)(2)(iii) of this section does not apply to
stock issued by a target affiliate that is a controlled foreign
corporation. After applying the carryover basis rules of this section to
the stock, the basis in the stock is increased by the amount treated as
a dividend under section 1248 on the disposition of the stock (or that
would have been so treated but for section 1291), except to the extent
the basis increase is attributable to the disposition of an asset in
which a carryover basis is taken under this section.
(4) Certain distributions--(i) General rule. In the case of a target
affiliate that is a controlled foreign corporation, paragraph (g) of
this section applies with respect to the target affiliate by treating
any reference to a dividend to which section 243(a)(3) applies as a
reference to any amount taken into account under Sec. 1.1502-32 in
determining the basis of target stock that is--
(A) A dividend;
(B) An amount treated as a dividend under section 1248 (or that
would have been so treated but for section 1291); or
(C) An amount included in income under section 951(a)(1)(B).
(ii) Basis of controlled foreign corporation stock. If the carryover
basis rules of this section apply to an asset, the basis in the stock of
the controlled foreign corporation (or any property by reason of which
the stock is considered owned under section 958(a)(2)) is reduced (but
not below zero) by the sum of any amounts that are treated, solely by
reason of the disposition of the asset, as a dividend, amount treated as
a dividend under section 1248 (or that would have been so treated but
for section 1291), or amount included in income under section
951(a)(1)(B). For this purpose, any dividend, amount treated as a
dividend under section 1248 (or that would have been so treated but for
section 1291), or amount included in income under section 951(a)(1)(B)
is considered attributable first to earnings and profits resulting from
the disposition of the asset.
(iii) Increase in asset or stock basis--(A) If the carryover basis
rules under paragraphs (g) and (h)(4)(i) of this section apply to an
asset, and the purchasing corporation disposes of the asset to an
unrelated party in a taxable transaction and recognizes and includes in
its U.S. gross income or the U.S. gross income of its shareholders the
greater of the gain equal to the basis increase denied in the asset
pursuant to paragraphs (g) and (h)(4)(i) of this section, or the gain
recognized on the asset by the purchasing corporation on the disposition
of the asset, then the purchasing corporation or the target or a target
affiliate, as appropriate, shall increase the basis of the selling
controlled foreign corporation stock subject to paragraph (h)(4)(ii) of
this section, as of the date of the disposition of the asset by the
purchasing corporation, by the amount of the basis reduction under
paragraph (h)(4)(ii) of
[[Page 180]]
this section. The preceding sentence shall apply only to the extent that
the controlled foreign corporation stock is owned (within the meaning of
section 958(a)) by a member of the purchasing corporation's affiliated
group.
(B) If the carryover basis rules under paragraphs (g) and (h)(4)(i)
of this section apply to an asset, and the purchasing corporation or the
target or a target affiliate, as appropriate, disposes of the stock of
the selling controlled foreign corporation to an unrelated party in a
taxable transaction and recognizes and includes in its U.S. gross income
or the U.S. gross income of its shareholders the greater of the amount
of the basis reduction under paragraph (h)(4)(ii) of this section, or
the gain recognized in the stock by the purchasing corporation or by the
target or a target affiliate, as appropriate, on the disposition of the
stock, then the purchasing corporation shall increase the basis of the
asset, as of the date of the disposition of the stock of the selling
controlled foreign corporation by the purchasing corporation or by the
target or a target affiliate, as appropriate, by the amount of the basis
increase that was denied pursuant to paragraphs (g) and (h)(4)(i) of
this section. The preceding sentence shall apply only to the extent that
the asset is owned (within the meaning of section 958(a)) by a member of
the purchasing corporation's affiliated group.
(5) Examples. This paragraph (h) may be illustrated by the following
examples:
Example 1. Stock of target affiliate that is a CFC. (a) The S group
files a consolidated return; however, T2 is a controlled foreign
corporation. On December 1 of Year 1, T1 sells the T2 stock to P and
recognizes gain. On January 2 of Year 2, P makes a qualified stock
purchase of T from S. No section 338 election is made for T.
(b) Under paragraph (b)(1) of this section, paragraph (d) of this
section applies to the T2 stock. Under paragraph (h)(3) of this section,
paragraph (d)(2)(iii) of this section does not apply to the T2 stock.
Consequently, paragraph (d)(1) of this section applies to the T2 stock.
However, after applying paragraph (d)(1) of this section, P's basis in
the T2 stock is increased by the amount of T1's gain on the sale of the
T2 stock that is treated as a dividend under section 1248. Because P has
a carryover basis in the T2 stock, the T2 stock is not considered
purchased within the meaning of section 338(h)(3) and no section 338
election may be made for T2.
Example 2. Stock of target affiliate CFC; inclusion under subpart F.
(a) The S group files a consolidated return; however, T2 is a controlled
foreign corporation. On December 1 of Year 1, T2 sells an asset to P and
recognizes subpart F income that results in an inclusion in T1's gross
income under section 951(a)(1)(A). On January 2 of Year 2, P makes a
qualified stock purchase of T from S. No section 338 election is made
for T.
(b) Because gain from the disposition of the asset results in an
inclusion under section 951(a)(1)(A), the gain is reflected in the basis
of the T stock as of T's acquisition date. See paragraph (h)(2)(i) of
this section. Consequently, under paragraph (b)(1) of this section,
paragraph (d)(1) of this section applies to the asset. In addition,
under paragraph (h)(2)(ii) of this section, T1's basis in the T2 stock
is not increased under section 961(a) by the amount of the inclusion
that is attributable to the sale of the asset.
(c) If, in addition to making a qualified stock purchase of T, P
acquires the T2 stock from T1 on January 1 of Year 2, the results are
the same for the asset sold by T2. In addition, under paragraph
(h)(2)(ii) of this section, T1's basis in the T2 stock is not increased
by the amount of the inclusion that is attributable to the gain on the
sale of the asset. Further, under paragraph (h)(3) of this section,
paragraph (d)(1) of this section applies to the T2 stock. However, after
applying paragraph (d)(1) of this section, P's basis in the T2 stock is
increased by the amount of T1's gain on the sale of the T2 stock that is
treated as a dividend under section 1248. Finally, because P has a
carryover basis in the T2 stock, the T2 stock is not considered
purchased within the meaning of section 338(h)(3) and no section 338
election may be made for T2.
(d) If P makes a qualified stock purchase of T2 from T1, rather than
of T from S, and T1's gain on the sale of T2 is treated as a dividend
under section 1248, under paragraph (h)(1) of this section, paragraphs
(h)(2) and (3) of this section do not apply because there is no target
that is a domestic corporation. Consequently, the carryover basis rules
of paragraph do not apply to the asset sold by T2 or the T2 stock.
Example 3. Gain reflected by reason of section 1248 dividend; gain
from non-subpart F asset. (a) The S group files a consolidated return;
however, T2 is a controlled foreign corporation. In Years 1 through 4,
T2 does not pay any dividends to T1 and no amount is included in T1's
income under section 951(a)(1)(B). On December 1 of Year 4, T2 sells an
asset with a basis of $400,000 to P for $900,000. T2's gain of $500,000
is not subpart F income. On December 15 of Year 4, T1 sells T2, in which
it has a basis of $600,000, to P for $1,600,000. Under section 1248,
$800,000 of T1's
[[Page 181]]
gain of $1,000,000 is treated as a dividend. However, in the absence of
the sale of the asset by T2 to P, only $300,000 would have been treated
as a dividend under section 1248. On December 30 of Year 4, P makes a
qualified stock purchase of T1 from T. No section 338 election is made
for T1.
(b) Under paragraph (h)(4) of this section, paragraph (g)(2) of this
section applies by reference to the amount treated as a dividend under
section 1248 on the disposition of the T2 stock. Because the amount
treated as a dividend is taken into account in determining T's basis in
the T1 stock under Sec. 1.1502-32, the sale of the T2 stock and the
deemed dividend have the effect of a transaction described in paragraph
(g)(1) of this section. Consequently, paragraph (d)(1) of this section
applies to the asset sold by T2 to P and P's basis in the asset is
$400,000 as of December 1 of Year 4.
(c) Under paragraph (h)(3) of this section, paragraph (d)(1) of this
section applies to the T2 stock and P's basis in the T2 stock is
$600,000 as of December 15 of Year 4. Under paragraphs (h)(3) and
(4)(ii) of this section, however, P's basis in the T2 stock is increased
by $300,000 (the amount of T1's gain treated as a dividend under section
1248 ($800,000), other than the amount treated as a dividend solely as a
result of the sale of the asset by T2 to P ($500,000)) to $900,000.
(i) [Reserved]
(j) Anti-avoidance rules. For purposes of this section--
(1) Extension of consistency period. The target consistency period
is extended to include any continuous period that ends on, or begins on,
any day of the consistency period during which a purchasing corporation,
or any person related, within the meaning of section 267(b) or
707(b)(1), to a purchasing corporation, has an arrangement--
(i) To purchase stock of target; or
(ii) To own an asset to which the carryover basis rules of this
section apply, taking into account the extension.
(2) Qualified stock purchase and 12-month acquisition period. The
12-month acquisition period is extended if, pursuant to an arrangement,
a corporation acquires by purchase stock of another corporation
satisfying the requirements of section 1504(a)(2) over a period of more
than 12 months.
(3) Acquisitions by conduits--(i) Asset ownership--(A) General rule.
A corporation is treated as owning any portion of an asset attributed to
the corporation from a conduit under section 318(a) (treating any asset
as stock for this purpose), for purposes of--
(1) The asset ownership requirements of this section; and
(2) Determining whether a controlled foreign corporation is a target
affiliate for purposes of paragraph (h) of this section.
(B) Application of carryover basis rule. If the basis rules of this
section apply to the asset, the basis rules of this section apply to the
entire asset (not just the portion for which ownership is attributed).
(ii) Stock acquisitions--(A) Purchase by conduit. A corporation is
treated as purchasing stock of another corporation attributed to the
corporation from a conduit under section 318(a) on the day the stock is
purchased by the conduit. The corporation is not treated as purchasing
the stock, however, if the conduit purchased the stock more than two
years before the date the stock is first attributed to the corporation.
(B) Purchase of conduit by corporation. If a corporation purchases
an interest in a conduit (treating the interest as stock for this
purpose), the corporation is treated as purchasing on that date any
stock owned by a conduit on that date and attributed to the corporation
under section 318(a) with respect to the interest in the conduit that
was purchased.
(C) Purchase of conduit by conduit. If a conduit (the first conduit)
purchases an interest in a second conduit (treating the interest as
stock for this purpose), the first conduit is treated as purchasing on
that date any stock owned by a conduit on that date and attributed to
the first conduit under section 318(a) with respect to the interest in
the second conduit that was purchased.
(4) Conduit. A person (other than a corporation) is a conduit as to
a corporation if--
(i) The corporation would be treated under section 318(a)(2)(A) and
(B) (attribution from partnerships, estates, and trusts) as owning any
stock owned by the person; and
(ii) The corporation, together with its affiliates, would be treated
as owning an aggregate of at least 50 percent of the stock owned by the
person.
[[Page 182]]
(5) Existence of arrangement. The existence of an arrangement is
determined under all the facts and circumstances. For an arrangement to
exist, there need not be an enforceable, written, or unconditional
agreement, and all the parties to the transaction need not have
participated in each step of the transaction. One factor indicating the
existence of an arrangement is the participation of a related party. For
this purpose, persons are related if they are related within the meaning
of section 267(b) or 707(b)(1).
(6) Predecessor and successor--(i) Persons. A reference to a person
(including target, target affiliate, and purchasing corporation)
includes, as the context may require, a reference to a predecessor or
successor. For this purpose, a predecessor is a transferor or
distributor of assets to a person (the successor) in a transaction--
(A) To which section 381(a) applies; or
(B) In which the successor's basis for the assets is determined,
directly or indirectly, in whole or in part, by reference to the basis
of the transferor or distributor.
(ii) Assets. A reference to an asset (the first asset) includes, as
the context may require, a reference to any asset the basis of which is
determined, directly or indirectly, in whole or in part, by reference to
the first asset.
(7) Examples. This paragraph (j) may be illustrated by the following
examples:
Example 1. Asset owned by conduit treated as owned by purchaser of
target stock. (a) P owns a 60-percent interest in Y. On March 1 of Year
1, T sells an asset to Y and recognizes gain. On January 1 of Year 2, P
makes a qualified stock purchase of T from S. No section 338 election is
made for T.
(b) Under paragraph (j)(4) of this section, Y is a conduit with
respect to P. Consequently, under paragraph (j)(3)(i)(A) of this
section, P is treated as owning 60% of the asset on March 1 of Year 1
and January 1 of Year 2. Because P is treated as owning part or all of
the asset both immediately after the asset disposition and on T's
acquisition date, paragraph (b) of this section applies to the asset.
Consequently, paragraph (d)(1) of this section applies to the asset and
Y's basis in the asset is T's adjusted basis in the asset immediately
before the sale to Y.
Example 2. Corporation whose stock is owned by conduit treated as
affiliate. (a) P owns an 80-percent interest in Y. Y owns all of the
stock of Z. On March 1 of Year 1, T sells an asset to Z and recognizes
gain. On January 1 of Year 2, P makes a qualified stock purchase of T
from S. No section 338 election is made for T.
(b) Under paragraph (j)(4) of this section, Y is a conduit with
respect to P. Consequently, under paragraph (j)(3)(i)(A) of this
section, P is treated as owning 80% of the Z stock and Z is therefore
treated as an affiliate of P for purposes of applying the asset
ownership requirements of paragraph (b)(1)(iii) of this section. Because
Z, an affiliate of P, owns the asset both immediately after the asset
disposition and on T's acquisition date, paragraph (b) of this section
applies to the asset, and the asset's basis is determined under
paragraph (d) of this section.
(c) If, instead of owning an 80-percent interest in Y, P owned a 79-
percent interest in Y, Z would not be treated as an affiliate of P and
paragraph (b) of this section would not apply to the asset.
Example 3. Qualified stock purchase by reason of stock purchase by
conduit. (a) P owns a 90-percent interest in Y. Y owns a 60-percent
interest in Y1. On February 1 of Year 2, T sells an asset to P and
recognizes gain. On January 1 of Year 3, P purchases 70% of the T stock
from S and Y1 purchases the remaining 30% of the T stock from S.
(b) Under paragraph (j)(3)(ii)(A) of this section, P is treated as
purchasing on January 1 of Year 3, the 16.2% of the T stock that is
attributed to P from Y and Y1 under section 318(a). Thus, for purposes
of this section, P is treated as making a qualified stock purchase of T
on January 1 of Year 3, paragraph (b) of this section applies to the
asset, and the asset's basis is determined under paragraph (d) of this
section. However, because P is not treated as having made a qualified
stock purchase of T for purposes of making an election under section
338, no election can be made for T.
(c) If Y1 purchases 20% of the T stock from S on December 1 of Year
1, rather than 30% on January 1 of Year 3, P would be treated as
purchasing 10.8% of the T stock on December 1 of Year 1. Thus, if
paragraph (j)(2) of this section (relating to extension of the 12-month
acquisition period) does not apply, P would not be treated as making a
qualified stock purchase of T, because P is not treated as purchasing T
stock satisfying the requirements of section 1504(a)(2) within a 12-
month period.
Example 4. Successor asset. (a) On February 1 of Year 1, T sells
stock of X to P1 and recognizes gain. On December 1 of Year 1, P1
exchanges its X stock for stock in new X in a reorganization qualifying
under section 368(a)(1)(F). On January 1 of Year 2, P1 makes a qualified
stock purchase of T from S. No section 338 election is made for T.
[[Page 183]]
(b) The asset ownership requirements of paragraph (b)(1)(iii) of
this section are satisfied because, under paragraph (j)(6)(ii) of this
section, P1 is treated as owning the X stock on T's acquisition date. P1
is treated as owning the X stock on that date because P1 owns the new X
stock and P1's basis in the new X stock is determined by reference to
P1's basis in the X stock. Consequently, under paragraph (d)(1) of this
section, P1's basis in the X stock on February 1 of Year 1 is T's
adjusted basis in the X stock immediately before the sale to P1.
[T.D. 8515, 59 FR 2972, Jan. 20, 1994, as amended by T.D. 8597, 60 FR
36679, July 18, 1995; T.D. 8710, 62 FR 3459, Jan. 23, 1997. Redesignated
by T.D. 8858, 65 FR 1246, Jan. 7, 2000, as amended by T.D. 8940, 66 FR
9929, Feb. 13, 2001; 66 FR 17466, Mar. 30, 2001]
Sec. 1.338-9 International aspects of section 338.
(a) Scope. This section provides guidance regarding international
aspects of section 338. As provided in Sec. 1.338-2(c)(18), a foreign
corporation, a DISC, or a corporation for which a section 936 election
has been made is considered a target affiliate for all purposes of
section 338. In addition, stock described in section 338(h)(6)(B)(ii)
held by a target affiliate is not excluded from the operation of section
338.
(b) Application of section 338 to foreign targets--(1) In general.
For purposes of subtitle A, the deemed sale tax consequences, as defined
in Sec. 1.338-2(c)(7), of a foreign target for which a section 338
election is made (FT), and the corresponding earnings and profits, are
taken into account in determining the taxation of FT and FT's direct and
indirect shareholders. See, however, section 338(h)(16). For example,
the income and earnings and profits of FT are determined, for purposes
of sections 551, 951, 1248, and 1293, by taking into account the deemed
sale tax sentence consequences.
(2) Ownership of FT stock on the acquisition date. A person who
transfers FT stock to the purchasing corporation on FT's acquisition
date is considered to own the transferred stock at the close of FT's
acquisition date. See, e.g., Sec. 1.951-1(f) (relating to determination
of holding period for purposes of sections 951 through 964). If on the
acquisition date the purchasing corporation owns a block of FT stock
that was acquired before FT's acquisition date, the purchasing
corporation is considered to own such block of stock at the close of the
acquisition date.
(3) Carryover FT stock--(i) Definition. FT stock is carryover FT
stock if--
(A) FT was a controlled foreign corporation within the meaning of
section 957 (taking into account section 953(c)) at any time during the
portion of the 12-month acquisition period that ends on the acquisition
date; and
(B) Such stock is owned as of the beginning of the day after FT's
acquisition date by a person other than a purchasing corporation, or by
a purchasing corporation if the stock is nonrecently purchased and is
not subject to a gain recognition election under Sec. 1.338-5(d).
(ii) Carryover of earnings and profits. The earnings and profits of
old FT (and associated foreign taxes) attributable to the carryover FT
stock (adjusted to reflect deemed sale tax sentence consequences) carry
over to new FT solely for purposes of--
(A) Characterizing an actual distribution with respect to a share of
carryover FT stock as a dividend;
(B) Characterizing gain on a post-acquisition date transfer of a
share of carryover FT stock as a dividend under section 1248 (if such
section is otherwise applicable);
(C) Characterizing an investment of earnings in United States
property as income under sections 951(a)(1)(B) and 956 (if such sections
are otherwise applicable); and
(D) Determining foreign taxes deemed paid under sections 902 and 960
with respect to the amount treated as a dividend or income by virtue of
this paragraph (b)(3)(ii) (subject to the operation of section
338(h)(16)).
(iii) Cap on carryover of earnings and profits. The amount of
earnings and profits of old FT taken into account with respect to a
share of carryover FT stock is limited to the amount that would have
been included in gross income of the owner of such stock as a dividend
under section 1248 if--
(A) The shareholder transferred that share to the purchasing
corporation on FT's acquisition date for a consideration equal to the
fair market value of that share on that date; or
[[Page 184]]
(B) In the case of nonrecently purchased FT stock treated as
carryover FT stock, a gain recognition election under section
338(b)(3)(A) applied to that share. For purposes of the preceding
sentence, a shareholder that is a controlled foreign corporation is
considered to be a United States person, and the principle of section
1248(c)(2)(D)(ii) (concerning a United States person's indirect
ownership of stock in a foreign corporation) applies in determining the
correct holding period.
(iv) Post-acquisition date distribution of old FT earnings and
profits. A post-acquisition date distribution with respect to a share of
carryover FT stock is considered to be derived first from earnings and
profits derived after FT's acquisition date and then from earnings and
profits derived on or before FT's acquisition date.
(v) Old FT earnings and profits unaffected by post-acquisition date
deficits. The carryover amount for a share of carryover FT stock is not
reduced by deficits in earnings and profits incurred by new FT. This
rule applies for purposes of determining the amount of foreign taxes
deemed paid regardless of the fact that there are no accumulated
earnings and profits. For example, a distribution by new FT with respect
to a share of carryover FT stock is treated as a dividend by the
distributee to the extent of the carryover amount for that share
notwithstanding that new FT has no earnings and profits.
(vi) Character of FT stock as carryover FT stock eliminated upon
disposition. A share of FT stock is not considered carryover FT stock
after it is disposed of provided that all gain realized on the transfer
is recognized at the time of the transfer, or that, if less than all of
the realized gain is recognized, the recognized amount equals or exceeds
the remaining carryover amount for that share.
(4) Passive foreign investment company stock. Stock that is owned as
of the beginning of the day after FT's acquisition date by a person
other than a purchasing corporation, or by a purchasing corporation if
the FT stock is nonrecently purchased stock not subject to a gain
recognition election under Sec. 1.338-5(d), is treated as passive
foreign investment company stock to the extent provided in section
1297(b)(1).
(c) Dividend treatment under section 1248(e). The principles of this
paragraph (b) apply to shareholders of a domestic corporation subject to
section 1248(e).
(d) Allocation of foreign taxes. If a section 338 election is made
for target (whether foreign or domestic), and target's taxable year
under foreign law (if any) does not close at the end of the acquisition
date, foreign income taxes attributable to the foreign taxable income
earned by target during such foreign taxable year are allocated to old
target and new target. Such allocation is made under the principles of
Sec. 1.1502-76(b).
(e) Operation of section 338(h)(16). [Reserved]
(f) Examples. (1) Except as otherwise provided, all corporations use
the calendar year as the taxable year, have no earnings and profits (or
deficit) accumulated for any taxable year, and have only one class of
outstanding stock.
(2) This section may be illustrated by the following examples:
Example 1. Gain recognition election for carryover FT stock. (a) A
has owned 90 of the 100 shares of CFCT stock since CFCT was organized on
March 13, 1989. P has owned the remaining 10 shares of CFCT stock since
CFCT was organized. Those 10 shares constitute nonrecently purchased
stock in P's hands within the meaning of section 338(b)(6)(B). On
November 1, 1994, P purchases A's 90 shares of CFCT stock for $90,000
and makes a section 338 election for CFCT. P also makes a gain
recognition election under section 338(b)(3)(A) and Sec. 1.338-5(d).
(b) CFCT's earnings and profits for its short taxable year ending on
November 1, 1994, are $50,000, determined without taking into account
the deemed asset sale. Assume A recognizes gain of $81,000 on the sale
of the CFCT stock. Further, assume that CFCT recognizes gain of $40,000
by reason of its deemed sale of assets under section 338(a)(1).
(c) A's sale of CFCT stock to P is a transfer to which section 1248
and paragraphs (b)(1) and (2) of this section apply. For purposes of
applying section 1248(a) to A, the earnings and profits of CFCT for its
short taxable year ending on November 1, 1994, are $90,000 (the earnings
and profits for that taxable year as determined under Sec. 1.1248-2(e)
($50,000) plus earnings from the deemed sale ($40,000)). Thus, A's
entire gain is characterized as a dividend under section 1248 (but see
section 338(h)(16)).
[[Page 185]]
(d) Assume that P recognizes a gain of $9,000 with respect to the 10
shares of nonrecently purchased CFCT stock by reason of the gain
recognition election. Because P is treated as selling the nonrecently
purchased stock for all purposes of the Internal Revenue Code, section
1248 applies. Thus, under Sec. 1.1248-2(e), $9,000 of the $90,000 of
earnings and profits for 1994 are attributable to the block of 10 shares
of CFCT stock deemed sold by P at the close of November 1, 1994 ($90,000
x 10/100). Accordingly, P's entire gain on the deemed sale of 10 shares
of CFCT stock is included under section 1248(a) in P's gross income as a
dividend (but see section 338(h)(16)).
Example 2. No gain recognition election for carryover FT stock. (a)
Assume the same facts as in Example 1, except that P does not make a
gain recognition election.
(b) The 10 shares of nonrecently purchased CFCT stock held by P is
carryover FT stock under paragraph (b)(3) of this section. Accordingly,
the earnings and profits (and attributable foreign taxes) of old CFCT
carry over to new CFCT solely for purposes of that block of 10 shares.
The amount of old CFCT's earnings and profits taken into account with
respect to that block in the event, for example, of a distribution by
new CFCT with respect to that block is the amount of the section 1248
dividend that P would have recognized with respect to that block had it
made a gain recognition election under section 338(b)(3)(A). Under the
facts of Example 1, P would have recognized a gain of $9,000 with
respect to that block, all of which would have been a section 1248
dividend ($90,000 x 10/100). Accordingly, the carryover amount for the
block of 10 shares of nonrecently purchased CFCT stock is $9,000.
Example 3. Sale of controlled foreign corporation stock prior to and
on the acquisition date. (a) X and Y, both U.S. corporations, have each
owned 50% of the CFCT stock since 1986. Among CFCT's assets are assets
the sale of which would generate subpart F income. On December 31, 1994,
X sells its CFCT stock to P. On June 30, 1995, Y sells its CFCT stock to
P. P makes a section 338 election for CFCT. In both 1994 and 1995, CFCT
has subpart F income resulting from operations.
(b) For taxable year 1994, X and Y are United States shareholders on
the last day of CFCT's taxable year, so pursuant to section 951(a)(1)(A)
each must include in income its pro rata share of CFCT's subpart F
income for 1994. Because P's holding period in the CFCT stock acquired
from X does not begin until January 1, 1995, P is not a United States
shareholder on the last day of 1994 for purposes of section 951(a)(1)(A)
(see Sec. 1.951-1(f)). X must then determine the extent to which
section 1248 recharacterizes its gain on the sale of CFCT stock as a
dividend.
(c) For the short taxable year ending June 30, 1995, Y is considered
to own the CFCT stock sold to P at the close of CFCT's acquisition date.
Because the acquisition date is the last day of CFCT's taxable year, Y
and P are United States shareholders on the last day of CFCT's taxable
year. Pursuant to section 951(a)(1)(A), each must include its pro rata
share of CFCT's subpart F income for the short taxable year ending June
30, 1995. This includes any income generated on the deemed sale of
CFCT's assets. Y must then determine the extent to which section 1248
recharacterizes its gain on the sale of the CFCT stock as a dividend,
taking into account any increase in CFCT's earnings and profits due to
the deemed sale of assets.
Example 4. Acquisition of control for purposes of section 951 prior
to the acquisition date. FS owns 100% of the FT stock. On July 1, 1994,
P buys 60% of the FT stock. On December 31, 1994, P buys the remaining
40% of the FT stock and makes a section 338 election for FT. For tax
year 1994, FT has earnings and profits of $1,000 (including earnings
resulting from the deemed sale). The section 338 election results in
$500 of subpart F income. As a result of the section 338 election, P
must include in gross income the following amount under section
951(a)(1)(A) (see Sec. 1.951-(b)(2)):
FT's subpart F income for 1994................................ $500.00
Less: reduction under section 951(a)(2)(A) for period (1-1-94 249.32
through 7-1-94) during which FT is not a controlled foreign
corporation ($500 x 182/365).................................
---------
Subpart F income as limited by section 951 (a)(2)(A).......... 250.68
P's pro rata share of subpart F income as determined under 150.41
section 951(a)(2)(A) (60% x 250.68)..........................
Example 5. Coordination with section 936. (a) T is a corporation for
which a section 936 election has been made. P makes a qualified stock
purchase of T and makes a section 338 election for T.
(b) T's deemed sale of assets under section 338 constitutes a sale
for purposes of subtitle A of the Internal Revenue Code, including
section 936(a)(1)(A)(ii). To the extent that the assets deemed sold are
used in the conduct of an active trade or business in a possession for
purposes of section 936(a)(1)(A)(i), and assuming all the other
conditions of section 936 are satisfied, the income from the deemed sale
qualifies for the credit granted by section 936(a). The source of income
from the deemed sale is determined as if the assets had actually been
sold and is not affected for purposes of section 936 by section
338(h)(16).
(c) Because new T is treated a new corporation for purposes of
subtitle A of the Internal Revenue Code, the three year testing period
in section 936(a)(2)(A) begins again for new T on the day following T's
acquisition date. Thus, if the character or source of old T's gross
income disqualified it for the credit
[[Page 186]]
under section 936, a fresh start is allowed by a section 338 election.
[T.D. 8515, 59 FR 2978, Jan. 20, 1994. Redesignated by T.D. 8858, 65 FR
1246, Jan. 7, 2000, as amended by T.D. 8940, 66 FR 9929, Feb. 13, 2001;
66 FR 17466, Mar. 30, 2001]
Sec. 1.338-10 Filing of returns.
(a) Returns including tax liability from deemed asset sale--(1) In
general. Except as provided in paragraphs (a)(2) and (3) of this
section, any deemed sale tax consequences are reported on the final
return of old target filed for old target's taxable year that ends at
the close of the acquisition date. Paragraphs (a)(2), (3) and (4) of
this section do not apply to elections under section 338(h)(10). If old
target is the common parent of an affiliated group, the final return may
be a consolidated return (any such consolidated return must also include
any deemed sale tax consequences of any members of the consolidated
group that are acquired by the purchasing corporation on the same
acquisition date as old target).
(2) Old target's final taxable year otherwise included in
consolidated return of selling group--(i) General rule. If the selling
group files a consolidated return for the period that includes the
acquisition date, old target is disaffiliated from that group
immediately before the deemed asset sale and must file a deemed sale
return separate from the group, which includes only the deemed sale tax
consequences and the carryover items specified in paragraph (a)(2)(iii)
of this section. The deemed asset sale occurs at the close of the
acquisition date and is the last transaction of old target and the only
transaction reported on the separate return. Except as provided in Sec.
1.338-1(d) (regarding certain transactions on the acquisition date), any
transactions of old target occurring on the acquisition date other than
the deemed asset sale are included in the selling group's consolidated
return. A deemed sale return includes a combined deemed sale return as
defined in paragraph (a)(4) of this section.
(ii) Separate taxable year. The deemed asset sale included in the
deemed sale return under this paragraph (a)(2) occurs in a separate
taxable year, except that old target's taxable year of the sale and the
consolidated year of the selling group that includes the acquisition
date are treated as the same year for purposes of determining the number
of years in a carryover or carryback period.
(iii) Carryover and carryback of tax attributes. Target's attributes
may be carried over to, and carried back from, the deemed sale return
under the rules applicable to a corporation that ceases to be a member
of a consolidated group.
(iv) Old target is a component member of purchasing corporation's
controlled group. For purposes of its deemed sale return, target is a
component member of the controlled group of corporations including the
purchasing corporation unless target is treated as an excluded member
under section 1563(b)(2).
(4) Combined deemed sale return--(i) General rule. Under section
338(h)(15), a combined deemed sale return (combined return) may be filed
for all targets from a single selling consolidated group (as defined in
Sec. 1.338(h)(10)-1(b)(3)) that are acquired by the purchasing
corporation on the same acquisition date and that otherwise would be
required to file separate deemed sale returns. The combined return must
include all such targets. For example, T and T1 may be included in a
combined return if--
(A) T and T1 are directly owned subsidiaries of S;
(B) S is the common parent of a consolidated group; and
(C) P makes qualified stock purchases of T and T1 on the same
acquisition date.
(ii) Gain and loss offsets. Gains and losses recognized on the
deemed asset sales by targets included in a combined return are treated
as the gains and losses of a single target. In addition, loss carryovers
of a target that were not subject to the separate return limitation year
restrictions (SRLY restrictions) of the consolidated return regulations
while that target was a member of the selling consolidated group may be
applied without limitation to the gains of other targets included in the
combined return. If, however, a target has loss carryovers that were
subject to the SRLY restrictions while that
[[Page 187]]
target was a member of the selling consolidated group, the use of those
losses in the combined return continues to be subject to those
restrictions, applied in the same manner as if the combined return were
a consolidated return. A similar rule applies, when appropriate, to
other tax attributes.
(iii) Procedure for filing a combined return. A combined return is
made by filing a single corporation income tax return in lieu of
separate deemed sale returns for all targets required to be included in
the combined return. The combined return reflects the deemed asset sales
of all targets required to be included in the combined return. If the
targets included in the combined return constitute a single affiliated
group within the meaning of section 1504(a), the income tax return is
signed by an officer of the common parent of that group. Otherwise, the
return must be signed by an officer of each target included in the
combined return. Rules similar to the rules in Sec. 1.1502-75(j) apply
for purposes of preparing the combined return. The combined return must
include a statement entitled, ``ELECTION TO FILE A COMBINED RETURN UNDER
SECTION 338(h)(15).'' The statement must include--
(A) The name, address, and employer identification number of each
target required to be included in the combined return; and
(B) The following declaration: EACH TARGET IDENTIFIED IN THIS
ELECTION TO FILE A COMBINED RETURN CONSENTS TO THE FILING OF A COMBINED
RETURN.
(iv) Consequences of filing a combined return. Each target included
in a combined return is severally liable for any tax associated with the
combined return. See Sec. 1.338-1(b)(3).
(5) Deemed sale excluded from purchasing corporation's consolidated
return. Old target may not be considered a member of any affiliated
group that includes the purchasing corporation with respect to its
deemed asset sale.
(6) Due date for old target's final return--(i) General rule. Old
target's final return is generally due on the 15th day of the third
calendar month following the month in which the acquisition date occurs.
See section 6072 (time for filing income tax returns).
(ii) Application of Sec. 1.1502-76(c)--(A) In general. Section
1.1502-76(c) applies to old target's final return if old target was a
member of a selling group that did not file consolidated returns for the
taxable year of the common parent that precedes the year that includes
old target's acquisition date. If the selling group has not filed a
consolidated return that includes old target's taxable period that ends
on the acquisition date, target may, on or before the final return due
date (including extensions), either--
(1) File a deemed sale return on the assumption that the selling
group will file the consolidated return; or
(2) File a return for so much of old target's taxable period as ends
at the close of the acquisition date on the assumption that the
consolidated return will not be filed.
(B) Deemed extension. For purposes of applying Sec. 1.1502-
76(c)(2), an extension of time to file old target's final return is
considered to be in effect until the last date for making the election
under section 338.
(C) Erroneous filing of deemed sale return. If, under this paragraph
(a)(6)(ii), target files a deemed sale return but the selling group does
not file a consolidated return, target must file a substituted return
for old target not later than the due date (including extensions) for
the return of the common parent with which old target would have been
included in the consolidated return. The substituted return is for so
much of old target's taxable year as ends at the close of the
acquisition date. Under Sec. 1.1502-76(c)(2), the deemed sale return is
not considered a return for purposes of section 6011 (relating to the
general requirement of filing a return) if a substituted return must be
filed.
(D) Erroneous filing of return for regular tax year. If, under this
paragraph (a)(6)(ii), target files a return for so much of old target's
regular taxable year as ends at the close of the acquisition date but
the selling group files a consolidated return, target must file an
amended return for old target not later than the due date (including
extensions) for the selling group's consolidated return. (The amended
return is a deemed sale return.)
[[Page 188]]
(E) Last date for payment of tax. If either a substituted or amended
final return of old target is filed under this paragraph (a)(6)(ii), the
last date prescribed for payment of tax is the final return due date (as
defined in paragraph (a)(6)(i) of this section).
(7) Examples. The following examples illustrate this paragraph (a):
Example 1. (i) S is the common parent of a consolidated group that
includes T. The S group files calendar year consolidated returns. At the
close of June 30 of Year 1, P makes a qualified stock purchase of T from
S. P makes a section 338 election for T, and T's deemed asset sale
occurs as of the close of T's acquisition date (June 30).
(ii) T is considered disaffiliated for purposes of reporting the
deemed sale tax consequences. Accordingly, T is included in the S
group's consolidated return through T's acquisition date except that the
tax liability for the deemed sale tax consequences is reported in a
separate deemed sale return of T. Provided that T is not treated as an
excluded member under section 1563(b)(2), T is a component member of P's
controlled group for the taxable year of the deemed asset sale, and the
taxable income bracket amounts available in calculating tax on the
deemed sale return must be limited accordingly.
(iii) If P purchased the stock of T at 10 a.m. on June 30 of Year 1,
the results would be the same. See paragraph (a)(2)(i) of this section.
Example 2. The facts are the same as in Example 1, except that the S
group does not file consolidated returns. T must file a separate return
for its taxable year ending on June 30 of Year 1, which return includes
the deemed asset sale.
(b) Waiver--(1) Certain additions to tax. An addition to tax or
additional amount (addition) under subchapter A of chapter 68 of the
Internal Revenue Code arising on or before the last day for making the
election under section 338 because of circumstances that would not exist
but for an election under section 338 is waived if--
(i) Under the particular statute the addition is excusable upon a
showing of reasonable cause; and
(ii) Corrective action is taken on or before the last day.
(2) Notification. The Internal Revenue Service should be notified at
the time of correction (e.g., by attaching a statement to a return that
constitutes corrective action) that the waiver rule of this paragraph
(b) is being asserted.
(3) Elections or other actions required to be specified on a timely
filed return--(i) In general. If paragraph (b)(1) of this section
applies or would apply if there were an underpayment, any election or
other action that must be specified on a timely filed return for the
taxable period covered by the late filed return described in paragraph
(b)(1) of this section is considered timely if specified on a late-filed
return filed on or before the last day for making the election under
section 338.
(ii) New target in purchasing corporation's consolidated return. If
new target is includible for its first taxable year in a consolidated
return filed by the affiliated group of which the purchasing corporation
is a member on or before the last day for making the election under
section 338, any election or other action that must be specified in a
timely filed return for new target's first taxable year (but which is
not specified in the consolidated return) is considered timely if
specified in an amended return filed on or before such last day, at the
place where the consolidated return was filed.
(4) Examples. The following examples illustrate this paragraph (b):
Example 1. T is an unaffiliated corporation with a tax year ending
March 31. At the close of September 20 of Year 1, P makes a qualified
stock purchase of T. P does not join in filing a consolidated return. P
makes a section 338 election for T on or before June 15 of Year 2, which
causes T's taxable year to end as of the close of September 20 of Year
1. An income tax return for T's taxable period ending on September 20 of
Year 1 was due on December 15 of Year 1. Additions to tax for failure to
file a return and to pay tax shown on a return will not be imposed if
T's return is filed and the tax paid on or before June 15 of Year 2.
(This waiver applies even if the acquisition date coincides with the
last day of T's former taxable year, i.e., March 31 of Year 2.) Interest
on any underpayment of tax for old T's short taxable year ending
September 20 of Year 1 runs from December 15 of Year 1. A statement
indicating that the waiver rule of this paragraph is being asserted
should be attached to T's return.
Example 2. Assume the same facts as in Example 1. Assume further
that new T adopts the calendar year by filing, on or before June 15 of
Year 2, its first return (for the period beginning on September 21 of
Year 1 and ending on December 31 of Year 1) indicating that a calendar
year is chosen. See Sec. 1.338-1(b)(1). Any additions to tax or amounts
described in
[[Page 189]]
this paragraph (b) that arise because of the late filing of a return for
the period ending on December 31 of Year 1 are waived, because they are
based on circumstances that would not exist but for the section 338
election. Notwithstanding this waiver, however, the return is still
considered due March 15 of Year 2, and interest on any underpayment runs
from that date.
Example 3. Assume the same facts as in Example 2, except that T's
former taxable year ends on October 31. Although prior to the election
old T had a return due on January 15 of Year 2 for its year ending
October 31 of Year 1, that return need not be filed because a timely
election under section 338 was made. Instead, old T must file a final
return for the period ending on September 20 of Year 1, which is due on
December 15 of Year 1.
(c) Effective/applicability date. Paragraph (a)(4)(iii) of this
section applies to any taxable year beginning on or after May 30, 2006.
However, taxpayers may apply paragraph (a)(4)(iii) of this section to
any original Federal income tax return (including any amended return
filed on or before the due date (including extensions) of such original
return) timely filed on or after May 30, 2006. For taxable years
beginning before May 30, 2006, see Sec. 1.338-10 as contained in 26 CFR
part 1 in effect on April 1, 2006.
[T.D. 8940, 66 FR 9948, Feb. 13, 2001, as amended by T.D. 9264, 71 FR
30596, May 30, 2006; T.D. 9329, 72 FR 32798, June 14, 2007]
Sec. 1.338-11 Effect of section 338 election on insurance company
targets.
(a) In general. This section provides rules that apply when an
election under section 338 is made for a target that is an insurance
company. The rules in this section apply in addition to those generally
applicable upon the making of an election under section 338. In the case
of a conflict between the provisions of this section and other
provisions of the Internal Revenue Code or regulations, the rules set
forth in this section determine the Federal income tax treatment of the
parties and the transaction when a section 338 election is made for an
insurance company target.
(b) Computation of ADSP and AGUB--(1) Reserves taken into account as
a liability. Old target's tax reserves are the reserves for Federal
income tax purposes for any insurance, annuity, and reinsurance
contracts deemed sold by old target to new target in the deemed asset
sale. The amount of old target's tax reserves is the amount that is
properly taken into account by old target for the contracts at the close
of the taxable year that includes the deemed sale tax consequences
(before giving effect to the deemed asset sale and assumption
reinsurance transaction). Old target's tax reserves are a liability of
old target taken into account in determining ADSP under Sec. 1.338-4
and a liability of new target taken into account in determining AGUB
under Sec. 1.338-5.
(2) Allocation of ADSP and AGUB to specific insurance contracts. For
purposes of allocating AGUB and ADSP under Sec. Sec. 1.338-6 and 1.338-
7, the fair market value of a specific insurance, reinsurance or annuity
contract or group of insurance, reinsurance or annuity contracts
(insurance contracts) is the amount of the ceding commission a willing
reinsurer would pay a willing ceding company in an arm's length
transaction for the reinsurance of the contracts if the gross
reinsurance premium for the contracts were equal to old target's tax
reserves for the contracts. See Sec. 1.197-2(g)(5) for rules concerning
the treatment of the amount allocable to insurance contracts acquired in
the deemed asset sale.
(c) Application of assumption reinsurance principles--(1) In
general. If a target is an insurance company, the deemed sale of
insurance contracts is treated for Federal income tax purposes as an
assumption reinsurance transaction between old target, as the reinsured
or ceding company, and new target, as the reinsurer or acquiring
company, at the close of the acquisition date. The Federal income tax
treatment of the assumption reinsurance transaction is determined under
the applicable provisions of subchapter L, chapter 1, subtitle A of the
Internal Revenue Code, as modified by the rules set forth in this
section.
(2) Reinsurance premium. Old target is deemed to pay a gross amount
of premium in the assumption reinsurance transaction equal to the amount
of old target's tax reserves for the insurance contracts that are
acquisition date assets (acquired contracts). New target is
[[Page 190]]
deemed to receive a reinsurance premium in the amount of old target's
tax reserves for the acquired contracts. See paragraph (d) of this
section for circumstances in which new target is deemed to receive
additional premium. See Sec. 1.817-4(d)(2) for old target's and new
target's treatment of the premium.
(3) Ceding commission. Old target is deemed to receive a ceding
commission in an amount equal to the amount of ADSP allocated to the
acquired contracts, as determined under Sec. Sec. 1.338-6 and 1.338-7
and paragraph (b) of this section. New target is deemed to pay a ceding
commission in an amount equal to the amount of AGUB allocated to the
acquired contracts, as determined under Sec. Sec. 1.338-6 and 1.338-7
and paragraph (b) of this section. See Sec. 1.817-4(d)(2) for old
target's and new target's treatment of the ceding commission.
(4) Examples. The following examples illustrate this paragraph (c):
Example 1. (i) Facts. On January 1, 2003, T, an insurance company,
has the following assets with the following fair market values: $10
cash, $30 of securities, $10 of equipment, a life insurance contract
having a value, under paragraph (b)(2) of this section, of $17, and
goodwill and going concern value. T has tax reserves of $50 and no other
liabilities. On January 1, 2003, P purchases all of the stock of T for
$16 and makes a section 338 election for T. For purposes of the
capitalization requirements of section 848, assume new T has $20 of
general deductions in its first taxable year ending on December 31,
2003, and earns no other premiums during the year.
(ii) Analysis. (A) For Federal income tax purposes, the section 338
election results in a deemed sale of the assets of old T to new T. Old
T's ADSP is $66 ($16 amount realized for the T stock plus $50
liabilities). New T's AGUB also is $66 ($16 basis for the T stock plus
$50 liabilities). See paragraph (b)(1) of this section. Each of the AGUB
and ADSP is allocated under the residual method of Sec. 1.338-6 to
determine the purchase or sale price of each asset transferred. Each of
the AGUB and ADSP is allocated as follows: $10 to cash (Class I), $30 to
the securities (Class II), $10 to equipment (Class V), $16 to the life
insurance contract (Class VI), and $0 to goodwill and going concern
value (Class VII).
(B) Under section 1001, old T's amount realized for the securities
is $30 and for the equipment is $10. As a result of the deemed asset
sale, there is an assumption reinsurance transaction between old T (as
ceding company) and new T (as reinsurer) at the close of the acquisition
date for the life insurance contract issued by old T. See paragraph
(c)(1) of this section. Although the assumption reinsurance transaction
results in a $50 decrease in old T's reserves, which is taxable income
to old T, the reinsurance premium paid by old T is deductible by old T.
Under paragraph (c)(2) of this section, old T is deemed to pay a
reinsurance premium equal to the reserve for the life insurance contract
immediately before the deemed asset sale ($50) and is deemed to receive
a ceding commission from new T. Under paragraph (c)(3) of this section,
the portion of the ADSP allocated to the life insurance contract is $16;
thus, the ceding commission is $16. Old T, therefore, is deemed to pay
new T a reinsurance premium of $34 ($50 - $16 = $34). Old T also has $34
of net negative consideration for purposes of section 848. See paragraph
(f) of this section for rules relating to the effect of a section 338
election on the capitalization of amounts under section 848.
(C) New T obtains an initial basis of $30 in the securities and $10
in the equipment. New T is deemed to receive a reinsurance premium from
old T in an amount equal to the $50 of reserves for the life insurance
contract and to pay old T a $16 ceding commission for the contract. See
paragraphs (c)(2) and (3) of this section. Accordingly, new T includes
$50 of premium in income and deducts $50 for its increase in reserves.
For purposes of section 848, new T has $34 of net positive consideration
for the deemed assumption reinsurance transaction. Because the only
contract involved in the deemed assumption reinsurance transaction is a
life insurance contract, new T must capitalize $2.62 ($34 x 7.7% =
$2.62) under section 848. New T will amortize the $2.62 as provided
under section 848. New T's adjusted basis in the life insurance
contract, which is an amortizable section 197 intangible, is $13.38, the
excess of the $16 ceding commission over the $2.62 capitalized under
section 848. See section 197 and Sec. 1.197-2(g)(5). New T deducts the
$2.62 of the ceding commission that is not amortizable under section 197
because it is reflected in the amount capitalized under section 848 and
also deducts the remaining $17.38 of its general deductions.
Example 2. (i) Facts. Assume the same facts as in Example 1, except
the life insurance contract has a value of $0 and the fair market value
of T's securities are $60. Thus, to reinsure the contract in an arm's
length transaction, T would have to pay the reinsurer a reinsurance
premium in excess of T's $50 of tax reserves for the contract.
(ii) Analysis. (A) For Federal income tax purposes, the section 338
election results in a deemed sale of the assets of old T to new T. Old
T's ADSP is $66 ($16 amount realized for the T stock plus $50
liabilities). New T's AGUB also is $66 ($16 basis for the T stock
[[Page 191]]
plus $50 liabilities). See paragraph (b)(1) of this section. Each of the
AGUB and ADSP is allocated under the residual method of Sec. 1.338-6 to
determine the purchase or sale price of each asset transferred. Each of
the AGUB and ADSP is allocated as follows: $10 to cash (Class I), $56 to
the securities (Class II), $0 to the equipment (Class V), $0 to the life
insurance contract (Class VI), and $0 to goodwill and going concern
value (Class VII).
(B) Under section 1001, old T's amount realized for the securities
is $56 and for the equipment is $0. As a result of the deemed asset
sale, there is an assumption reinsurance transaction between old T (as
ceding company) and new T (as reinsurer) at the close of the acquisition
date for the life insurance contract issued by old T. See paragraph
(c)(1) of this section. Although the assumption reinsurance transaction
results in a $50 decrease in old T's reserves, which is taxable income
to old T, the reinsurance premium deemed paid by old T to new T is
deductible by old T. Under paragraph (c)(2) of this section, old T is
deemed to pay a reinsurance premium equal to the reserve for the life
insurance contract immediately before the deemed asset sale ($50), and
is deemed to receive from new T a ceding commission equal to the amount
of AGUB allocated to the life insurance contract ($0), as provided in
paragraph (c)(3) of this section. Old T also has $50 of net negative
consideration for purposes of section 848. See paragraph (f) of this
section for rules relating to the effect of a section 338 election on
capitalization amounts under section 848.
(C) New T obtains an initial basis of $56 in the securities (with a
fair market value of $60) and $0 in the equipment (with a fair market
value of $10). New T is deemed to receive a reinsurance premium from old
T in an amount equal to the $50 of reserves for the life insurance
contract. Accordingly, new T includes $50 of premium in income and
deducts $50 for its increase in reserves. For purposes of section 848,
new T has $50 of net positive consideration for the deemed assumption
reinsurance transaction. Because the only contract involved in the
assumption reinsurance transaction is a life insurance contract, new T
must capitalize $3.85 ($50 x 7.7%) under section 848 from the
transaction and deducts the remaining $16.15 of its general deductions.
Because new T allocates $0 of the AGUB to the insurance contract, no
amount is amortizable under section 197 with respect to the insurance
contract. See Sec. 1.338-11T(d) for rules on adjustments required if
new T increases its reserves for, or reinsures at a loss, the acquired
life insurance contract.
(d) Reserve increases by new target after the deemed asset sale--(1)
In general. If in new target's first taxable year or any subsequent
year, new target increases its reserves for any acquired contracts, new
target is treated as receiving an additional premium, which is computed
under paragraph (d)(3) of this section, in the assumption reinsurance
transaction described in paragraph (c)(1) of this section. New target
includes the additional premium in gross income for the taxable year in
which new target increases its reserves for acquired contracts. New
target's increase in reserves for the insurance contracts acquired in
the deemed asset sale is a liability of new target not originally taken
into account in determining AGUB that is subsequently taken into
account. Thus, AGUB is increased by the amount of the additional premium
included in new target's gross income. See Sec. Sec. 1.338-5(b)(2)(ii)
and 1.338-7. Old target has no deduction under this paragraph (d) and
makes no adjustments under Sec. Sec. 1.338-4(b)(2)(ii) and 1.338-7.
(2) Exceptions. New target is not treated as receiving additional
premium under paragraph (d)(1) of this section if--
(i) It is under state receivership as of the close of the taxable
year for which the increase in reserves occurs; or
(ii) It is required by section 807(f) to spread the reserve increase
over the 10 succeeding taxable years.
(3) Amount of additional premium--(i) In general. The additional
premium taken into account under this paragraph (d) is an amount equal
to the sum of the positive amounts described in paragraphs (d)(3)(ii)
and (d)(3)(iii) of this section. However, the additional premium cannot
exceed the limitation described in paragraph (d)(4) of this section.
(ii) Increases in unpaid loss reserves. The positive amount with
respect to unpaid loss reserves is computed using the formula A/B x (C-
[D + E]) where--
(A) A equals old target's discounted unpaid losses (determined under
section 846) included in AGUB under paragraph 11(b)(1) of this section;
(B) B equals old target's undiscounted unpaid losses (determined
under section 846(b)(1)) as of the close of the acquisition date;
(C) C equals new target's undiscounted unpaid losses (determined
under section 846(b)(1)) at the
[[Page 192]]
end of the taxable year that are attributable to losses incurred by old
target on or before the acquisition date;
(D) D (which may be a negative number) equals old target's
undiscounted unpaid losses as of the close of the acquisition date,
reduced by the cumulative amount of losses, loss adjustment expenses,
and reinsurance premiums paid by new target through the end of the
taxable year for losses incurred by old target on or before the
acquisition date; and
(E) E equals the amount obtained by dividing the cumulative amount
of reserve increases taken into account under this paragraph (d) in
prior taxable years by A/B.
(iii) Increases in other reserves. The positive amount with respect
to reserves other than discounted unpaid loss reserves is the net
increase of those reserves due to changes in estimate, methodology, or
other assumptions used to compute the reserves (including the adoption
by new target of a methodology or assumptions different from those used
by old target).
(4) Limitation on additional premium. The additional premium taken
into account by new target under paragraph (d)(1) of this section is
limited to the excess, if any, of--
(i) The fair market value of old target's assets acquired by new
target in the deemed asset sale (other than Class VI and Class VII
assets); over
(ii) The AGUB allocated to those assets (including increases in AGUB
allocated to those assets as the result of reserve increases by new
target in prior taxable years).
(5) Treatment of additional premium under section 848. If a portion
of the positive amounts described in paragraphs (d)(3)(ii) and (iii) of
this section are attributable to an increase in reserves for specified
insurance contracts (as defined in section 848(e)), new target takes an
allocable portion of the additional premium in determining its specified
policy acquisition expenses under section 848(c) for the taxable year of
the reserve increase.
(6) Examples. The following examples illustrate this paragraph (d):
Example 1. (i) Facts. On January 1, 2006, P purchases all of the
stock of T, a non-life insurance company, for $120 and makes a section
338 election for T. On the acquisition date, old T has total reserve
liabilities under state law of $725, consisting of undiscounted unpaid
losses of $625 and unearned premiums of $100. Old T's tax reserves on
the acquisition date are $580, which consist of discounted unpaid losses
(as defined in section 846) of $500 and unearned premiums (as computed
under section 832(b)(4)(B)) of $80. Old T has Class I through Class V
assets with a fair market value of $800. Old T also has a Class VI asset
with a fair market value of $75, consisting of the future profit stream
of certain insurance contracts. During 2006, new T makes loss and loss
adjustment expense payments of $200 with respect to the unpaid losses
incurred by old T before the acquisition date. As of December 31, 2006,
new T reports undiscounted unpaid losses of $475 attributable to losses
incurred before the acquisition date. The related amount of discounted
unpaid losses (as defined in section 846) for those losses is $390.
(ii) Computation and allocation of AGUB. Under Sec. 1.338-5 and
paragraph (b)(1) of this section, as of the acquisition date, AGUB is
$700, reflecting the sum of the amount paid for old T's stock ($120) and
the tax reserves assumed by new T in the transaction ($580). The fair
market value of old T's Class I through V assets is $800, whereas the
AGUB available for such assets under Sec. 1.338-6 is $700. There is no
AGUB available for old T's Class VI assets, even though such assets have
a fair market value of $75 on the acquisition date.
(iii) Adjustments for increases in reserves for unpaid losses. Under
paragraph (d) of this section, new T must determine whether there are
any amounts by which it increased its unpaid loss reserves that will be
treated as an additional premium and an increase in AGUB. New T applies
the formula of paragraph (d)(3) of this section, where A equals $500, B
equals $625, C equals $475, D equals $425 ($625 - $200), and E equals
$0. Under this formula, new T is treated as having increased its
reserves for discounted unpaid losses attributable to losses incurred by
old T by $40 ($500/$625 x ($475 - [$425 + 0]). The limitation under
paragraph (d)(5) of this section based on the difference between the
fair market value of old T's Class I through Class V assets and the AGUB
allocated to such assets is $100. Accordingly, new T includes an
additional premium of $40 in gross income for 2006, and increases the
AGUB allocated to old T's Class I through Class V assets to reflect this
additional premium.
Example 2. (i) Facts. Assume the same facts as in Example 1. Further
assume that during 2007 new T deducts total loss and loss expense
payments of $375 with respect to losses incurred by old T before the
acquisition date. On December 31, 2007, new T reports
[[Page 193]]
undiscounted unpaid losses of $150 with respect to losses incurred
before the acquisition date. The related amount of discounted unpaid
losses (as defined in section 846) for those unpaid losses is $125.
(ii) Analysis. New T must determine whether any amounts by which it
increased its unpaid losses during 2007 will be treated as an additional
premium in paragraph (d)(3) of this section. New T applies the formula
under paragraph (d)(3) of this section, where A equals $500, B equals
$625, C equals $150, D equals $50 ($625 - $575), and E equals $50 ($40
divided by .8). In paragraph (d)(3) of this section, new T is treated as
increasing its reserves for discounted unpaid losses by $40 during 2007
with respect to losses incurred by old T ($500/$625 x ($150-[$50 +
$50]). New T determines the limitation of paragraph (d)(5) of this
section by comparing the $800 fair market value of the Class I through V
assets on the acquisition date to the $740 AGUB allocated to such assets
(which includes the $40 addition to AGUB included during 2006). Thus,
new T recognizes $40 of additional premium as a result of the increase
in reserves during 2007, and adjusts the AGUB allocable to the Class I
through V assets acquired from old T to reflect such additional premium.
Example 3. (i) Facts. The facts are the same as Example 2, except
that on January 1, 2008, new T reinsures the outstanding liability with
respect to losses incurred by old T before the acquisition date through
a portfolio reinsurance transaction with R, another non-life insurance
company. R agrees to assume any remaining liability relating to losses
incurred by old T before the acquisition date in exchange for a
reinsurance premium of $200. Accordingly, as of December 31, 2008, new T
reports no undiscounted unpaid losses with respect to losses incurred by
old T before the acquisition date.
(ii) Analysis. New T must determine whether any amount by which it
increased its unpaid loss reserves will be treated as an additional
premium under paragraph (d) of this section. New T applies the formula
of paragraph (d)(3) of this section, where A equals $500, B equals $625,
C equals $0, and D equals -$150 ($625 - ($575 + $200), and E equals $100
($80 divided by .8). Thus, new T is treated as having increased its
discounted unpaid losses by $40 in 2008 with respect to losses incurred
by old T before the acquisition date ($500/$625 x (0 -[-$150 + $100]).
New T includes this positive amount in gross income, subject to the
limitation of paragraph (d)(4) of this section. The limitation of
paragraph (d)(4) of this section equals $20, which is computed by
comparing the $800 fair market value of the Class I through V assets
acquired from old T with the $780 AGUB allocated to such assets (which
includes the $40 addition to AGUB in 2006 and the $40 addition to AGUB
in 2007). Thus, New T includes $20 in additional premium, and increases
the AGUB allocated to the Class I through V assets acquired from old T
by $20. As a result of these adjustments, the limitation under paragraph
(d)(4) of this section is reduced to zero.
(7) Effective/applicability date--(i) In general. This section
applies to increases to reserves made by new target after a deemed asset
sale occurring on or after April 10, 2006.
(ii) Application to pre-effective date increases to reserves. If
either new target makes an election under Sec. 1.338(i)-1(c)(2) or old
target makes an election under Sec. 1.338(i)-1(c)(3) to apply the rules
of this section, in whole, to a qualified stock purchase occurring
before April 10, 2006, then the rules contained in this section shall
apply in whole to the qualified stock purchase.
(e) Effect of section 338 election on section 846(e) election--(1)
In general. New target and old target are treated as the same
corporation for purposes of an election by old target to use its
historical loss payment pattern under section 846(e). See Sec. 1.338-
1(b)(2)(vii). Therefore, if old target has a section 846(e) election in
effect on the acquisition date, new target will continue to use the
historical loss payment pattern of old target to discount unpaid losses
incurred in accident years covered by the election, unless new target
elects to revoke the section 846(e) election. In addition, new target
may consider old target's historical loss payment pattern when
determining whether to make the section 846(e) election for a
determination year that includes or is subsequent to the acquisition
date.
(2) Revocation of existing section 846(e) election. New target may
revoke old target's section 846(e) election to use its historical loss
payment pattern to discount unpaid losses. If new target elects to
revoke old target's section 846(e) election, new target will use the
industry-wide patterns determined by the Secretary to discount unpaid
losses incurred in accident years beginning on or after the acquisition
date through the subsequent determination year. New target may revoke
old target's section 846(e) election by attaching a statement to new
target's original tax return for its first taxable year.
[[Page 194]]
(f) Effect of section 338 election on old target's capitalization
amounts under section 848--(1) Determination of net consideration for
specified insurance contracts. For purposes of applying section 848 and
Sec. 1.848-2(f) to the deemed assumption reinsurance transaction, old
target's net consideration (either positive or negative) for each
category of specified insurance contracts is an amount equal to--
(i) The allocable portion of the ceding commission (if any) relating
to contracts in that category; less
(ii) The amount by which old target's tax reserves for contracts in
that category has been reduced as a result of the deemed assumption
reinsurance transaction.
(2) Determination of capitalization amount. Except as provided in
Sec. 1.381(c)(22)-1(b)(13)--
(i) If, after the deemed asset sale, old target has an amount
otherwise required to be capitalized under section 848 for the taxable
year or an unamortized balance of specified policy acquisition expenses
from prior taxable years, then old target deducts such remaining amount
or unamortized balance as an expense incurred in the taxable year that
includes the deemed sale tax consequences; and
(ii) If, after the deemed asset sale, the negative capitalization
amount resulting from the reinsurance transaction exceeds the amount
that old target can deduct under section 848(f)(1), then old target's
capitalization amount is treated as zero at the close of the taxable
year that includes the deemed sale tax consequences.
(3) Section 381 transactions. For transactions described in section
381, see Sec. 1.381(c)(22)-1(b)(13).
(g) Effect of section 338 election on policyholders surplus account.
Except as specifically provided in Sec. 1.381(c)(22)-1(b)(7), the
deemed asset sale effects a distribution of old target's policyholders
surplus account to the extent the grossed-up amount realized on the sale
to the purchasing corporation of the purchasing corporation's recently
purchased target stock (as defined in Sec. 1.338-4(c)) exceeds old
target's shareholders surplus account under section 815(c).
(h) Effect of section 338 election on section 847 special estimated
tax payments. If old target had elected to claim an additional deduction
under section 847 for the taxable year that includes the deemed sale tax
consequences or any earlier years, the amount remaining in old target's
special loss discount account under section 847(3) must be reduced to
the extent it relates to contracts transferred to new target and the
amount of such reduction must be included in old target's gross income
for the taxable year that includes the deemed sale tax consequences. Old
target may apply the balance of its special estimated tax account as a
credit against any tax resulting from such inclusion in gross income.
Any special estimated tax payments remaining after this credit are
voided and, therefore, are not available for credit or refund. Under
section 847(1), new target is permitted to claim a section 847 deduction
for losses incurred before the deemed asset sale, subject to the general
requirement that new target makes timely special estimated tax payments
equal to the tax benefit resulting from this deduction. See Sec.
1.381(c)(22)-1(c)(14) regarding the carryover of the special loss
discount account attributable to contracts transferred in a section 381
transaction.
[T.D. 9257, 71 FR 18000, Apr. 10, 2006, as amended by T.D. 9377, 73 FR
3872, Jan. 23, 2008]
Sec. 1.338(h)(10)-1 Deemed asset sale and liquidation.
(a) Scope. This section prescribes rules for qualification for a
section 338(h)(10) election and for making a section 338(h)(10)
election. This section also prescribes the consequences of such
election. The rules of this section are in addition to the rules of
Sec. Sec. 1.338-1 through 1.338-10 and, in appropriate cases, apply
instead of the rules of Sec. Sec. 1.338-1 through 1.338-10.
(b) Definitions--(1) Consolidated target. A consolidated target is a
target that is a member of a consolidated group within the meaning of
Sec. 1.1502-1(h) on the acquisition date and is not the common parent
of the group on that date.
(2) Selling consolidated group. A selling consolidated group is the
consolidated
[[Page 195]]
group of which the consolidated target is a member on the acquisition
date.
(3) Selling affiliate; affiliated target. A selling affiliate is a
domestic corporation that owns on the acquisition date an amount of
stock in a domestic target, which amount of stock is described in
section 1504(a)(2), and does not join in filing a consolidated return
with the target. In such case, the target is an affiliated target.
(4) S corporation target. An S corporation target is a target that
is an S corporation immediately before the acquisition date.
(5) S corporation shareholders. S corporation shareholders are the S
corporation target's shareholders. Unless otherwise indicated, a
reference to S corporation shareholders refers both to S corporation
shareholders who do and those who do not sell their target stock.
(6) Liquidation. Any reference in this section to a liquidation is
treated as a reference to the transfer described in paragraph (d)(4) of
this section notwithstanding its ultimate characterization for Federal
income tax purposes.
(c) Section 338(h)(10) election--(1) In general. A section
338(h)(10) election may be made for T if P acquires stock meeting the
requirements of section 1504(a)(2) from a selling consolidated group, a
selling affiliate, or the S corporation shareholders in a qualified
stock purchase.
(2) Availability of section 338(h)(10) election in certain multi-
step transactions. Notwithstanding anything to the contrary in Sec.
1.338-3(c)(1)(i), a section 338(h)(10) election may be made for T where
P's acquisition of T stock, viewed independently, constitutes a
qualified stock purchase and, after the stock acquisition, T merges or
liquidates into P (or another member of the affiliated group that
includes P), whether or not, under relevant provisions of law, including
the step transaction doctrine, the acquisition of the T stock and the
merger or liquidation of T qualify as a reorganization described in
section 368(a). If a section 338(h)(10) election is made in a case where
the acquisition of T stock followed by a merger or liquidation of T into
P qualifies as a reorganization described in section 368(a), for all
Federal tax purposes, P's acquisition of T stock is treated as a
qualified stock purchase and is not treated as part of a reorganization
described in section 368(a).
(3) Simultaneous joint election requirement. A section 338(h)(10)
election is made jointly by P and the selling consolidated group (or the
selling affiliate or the S corporation shareholders) on Form 8023 in
accordance with the instructions to the form. S corporation shareholders
who do not sell their stock must also consent to the election. The
section 338(h)(10) election must be made not later than the 15th day of
the 9th month beginning after the month in which the acquisition date
occurs.
(4) Irrevocability. A section 338(h)(10) election is irrevocable. If
a section 338(h)(10) election is made for T, a section 338 election is
deemed made for T.
(5) Effect of invalid election. If a section 338(h)(10) election for
T is not valid, the section 338 election for T is also not valid.
(d) Certain consequences of section 338(h)(10) election. For
purposes of subtitle A of the Internal Revenue Code (except as provided
in Sec. 1.338-1(b)(2)), the consequences to the parties of making a
section 338(h)(10) election for T are as follows:
(1) P. P is automatically deemed to have made a gain recognition
election for its nonrecently purchased T stock, if any. The effect of a
gain recognition election includes a taxable deemed sale by P on the
acquisition date of any nonrecently purchased target stock. See Sec.
1.338-5(d).
(2) New T. The AGUB for new T's assets is determined under Sec.
1.338-5 and is allocated among the acquisition date assets under
Sec. Sec. 1.338-6 and 1.338-7. Notwithstanding paragraph (d)(4) of this
section (deemed liquidation of old T), new T remains liable for the tax
liabilities of old T (including the tax liability for the deemed sale
tax consequences). For example, new T remains liable for the tax
liabilities of the members of any consolidated group that are
attributable to taxable years in which those corporations and old T
joined in the same consolidated return. See Sec. 1.1502-6(a).
(3) Old T--deemed sale--(i) In general. Old T is treated as
transferring all of
[[Page 196]]
its assets to an unrelated person in exchange for consideration that
includes the discharge of its liabilities in a single transaction at the
close of the acquisition date (but before the deemed liquidation). See
Sec. 1.338-1(a) regarding the tax characterization of the deemed asset
sale. Except as provided in Sec. 1.338(h)(10)-1(d)(8) (regarding the
installment method), old T recognizes all of the gain realized on the
deemed transfer of its assets in consideration for the ADSP. ADSP for
old T is determined under Sec. 1.338-4 and allocated among the
acquisition date assets under Sec. Sec. 1.338-6 and 1.338-7. Old T
realizes the deemed sale tax consequences from the deemed asset sale
before the close of the acquisition date while old T is a member of the
selling consolidated group (or owned by the selling affiliate or owned
by the S corporation shareholders). If T is an affiliated target, or an
S corporation target, the principles of Sec. Sec. 1.338-2(c)(10) and
1.338-10(a)(1), (5), and (6)(i) apply to the return on which the deemed
sale tax consequences are reported. When T is an S corporation target,
T's S election continues in effect through the close of the acquisition
date (including the time of the deemed asset sale and the deemed
liquidation) notwithstanding section 1362(d)(2)(B). Also, when T is an S
corporation target (but not a qualified subchapter S subsidiary), any
direct and indirect subsidiaries of T which T has elected to treat as
qualified subchapter S subsidiaries under section 1361(b)(3) remain
qualified subchapter S subsidiaries through the close of the acquisition
date.
(ii) Tiered targets. In the case of parent-subsidiary chains of
corporations making elections under section 338(h)(10), the deemed asset
sale of a parent corporation is considered to precede that of its
subsidiary. See Sec. 1.338-3(b)(4)(i).
(4) Old T and selling consolidated group, selling affiliate, or S
corporation shareholders--deemed liquidation; tax characterization--(i)
In general. Old T is treated as if, before the close of the acquisition
date, after the deemed asset sale in paragraph (d)(3) of this section,
and while old T is a member of the selling consolidated group (or owned
by the selling affiliate or owned by the S corporation shareholders), it
transferred all of its assets to members of the selling consolidated
group, the selling affiliate, or S corporation shareholders and ceased
to exist. The transfer from old T is characterized for Federal income
tax purposes in the same manner as if the parties had actually engaged
in the transactions deemed to occur because of this section and taking
into account other transactions that actually occurred or are deemed to
occur. For example, the transfer may be treated as a distribution in
pursuance of a plan of reorganization, a distribution in complete
cancellation or redemption of all its stock, one of a series of
distributions in complete cancellation or redemption of all its stock in
accordance with a plan of liquidation, or part of a circular flow of
cash. In most cases, the transfer will be treated as a distribution in
complete liquidation to which section 336 or 337 applies.
(ii) Tiered targets. In the case of parent-subsidiary chains of
corporations making elections under section 338(h)(10), the deemed
liquidation of a subsidiary corporation is considered to precede the
deemed liquidation of its parent.
(5) Selling consolidated group, selling affiliate, or S corporation
shareholders--(i) In general. If T is an S corporation target, S
corporation shareholders (whether or not they sell their stock) take
their pro rata share of the deemed sale tax consequences into account
under section 1366 and increase or decrease their basis in T stock under
section 1367. Members of the selling consolidated group, the selling
affiliate, or S corporation shareholders are treated as if, after the
deemed asset sale in paragraph (d)(3) of this section and before the
close of the acquisition date, they received the assets transferred by
old T in the transaction described in paragraph (d)(4)(i) of this
section. In most cases, the transfer will be treated as a distribution
in complete liquidation to which section 331 or 332 applies.
(ii) Basis and holding period of T stock not acquired. A member of
the selling consolidated group (or the selling affiliate or an S
corporation shareholder) retaining T stock is treated as acquiring the
stock so retained on the day
[[Page 197]]
after the acquisition date for its fair market value. The holding period
for the retained stock starts on the day after the acquisition date. For
purposes of this paragraph, the fair market value of all of the T stock
equals the grossed-up amount realized on the sale to P of P's recently
purchased target stock. See Sec. 1.338-4(c).
(iii) T stock sale. Members of the selling consolidated group (or
the selling affiliate or S corporation shareholders) recognize no gain
or loss on the sale or exchange of T stock included in the qualified
stock purchase (although they may recognize gain or loss on the T stock
in the deemed liquidation).
(6) Nonselling minority shareholders other than nonselling S
corporation shareholders--(i) In general. This paragraph (d)(6)
describes the treatment of shareholders of old T other than the
following: Members of the selling consolidated group, the selling
affiliate, S corporation shareholders (whether or not they sell their
stock), and P. For a description of the treatment of S corporation
shareholders, see paragraph (d)(5) of this section. A shareholder to
which this paragraph (d)(6) applies is called a minority shareholder.
(ii) T stock sale. A minority shareholder recognizes gain or loss on
the shareholder's sale or exchange of T stock included in the qualified
stock purchase.
(iii) T stock not acquired. A minority shareholder does not
recognize gain or loss under this section with respect to shares of T
stock retained by the shareholder. The shareholder's basis and holding
period for that T stock is not affected by the section 338(h)(10)
election.
(7) Consolidated return of selling consolidated group. If P acquires
T in a qualified stock purchase from a selling consolidated group--
(i) The selling consolidated group must file a consolidated return
for the taxable period that includes the acquisition date;
(ii) A consolidated return for the selling consolidated group for
that period may not be withdrawn on or after the day that a section
338(h)(10) election is made for T; and
(iii) Permission to discontinue filing consolidated returns cannot
be granted for, and cannot apply to, that period or any of the
immediately preceding taxable periods during which consolidated returns
continuously have been filed.
(8) Availability of the section 453 installment method. Solely for
purposes of applying sections 453, 453A, and 453B, and the regulations
thereunder (the installment method) to determine the consequences to old
T in the deemed asset sale and to old T (and its shareholders, if
relevant) in the deemed liquidation, the rules in paragraphs (d)(1)
through (7) of this section are modified as follows:
(i) In deemed asset sale. Old T is treated as receiving in the
deemed asset sale new T installment obligations, the terms of which are
identical (except as to the obligor) to P installment obligations issued
in exchange for recently purchased stock of T. Old T is treated as
receiving in cash all other consideration in the deemed asset sale other
than the assumption of, or taking subject to, old T liabilities. For
example, old T is treated as receiving in cash any amounts attributable
to the grossing-up of amount realized under Sec. 1.338-4(c). The amount
realized for recently purchased stock taken into account in determining
ADSP is adjusted (and, thus, ADSP is redetermined) to reflect the
amounts paid under an installment obligation for the stock when the
total payments under the installment obligation are greater or less than
the amount realized.
(ii) In deemed liquidation. Old T is treated as distributing in the
deemed liquidation the new T installment obligations that it is treated
as receiving in the deemed asset sale. The members of the selling
consolidated group, the selling affiliate, or the S corporation
shareholders are treated as receiving in the deemed liquidation the new
T installment obligations that correspond to the P installment
obligations they actually received individually in exchange for their
recently purchased stock. The new T installment obligations may be
recharacterized under other rules. See for example Sec. 1.453-11(a)(2)
which, in certain circumstances, treats the new T installment
obligations deemed distributed by old T as if they were issued by new T
in exchange for the stock in old T
[[Page 198]]
owned by members of the selling consolidated group, the selling
affiliate, or the S corporation shareholders. The members of the selling
consolidated group, the selling affiliate, or the S corporation
shareholders are treated as receiving all other consideration in the
deemed liquidation in cash.
(9) Treatment consistent with an actual asset sale. No provision in
section 338(h)(10) or this section shall produce a Federal income tax
result under subtitle A of the Internal Revenue Code that would not
occur if the parties had actually engaged in the transactions deemed to
occur because of this section and taking into account other transactions
that actually occurred or are deemed to occur. See, however, Sec.
1.338-1(b)(2) for certain exceptions to this rule.
(e) Examples. The following examples illustrate the provisions of
this section:
Example 1. (i) S1 owns all of the T stock and T owns all of the
stock of T1 and T2. S1 is the common parent of a consolidated group that
includes T, T1, and T2. P makes a qualified stock purchase of all of the
T stock from S1. S1 joins with P in making a section 338(h)(10) election
for T and for the deemed purchase of T1. A section 338 election is not
made for T2.
(ii) S1 does not recognize gain or loss on the sale of the T stock
and T does not recognize gain or loss on the sale of the T1 stock
because section 338(h)(10) elections are made for T and T1. Thus, for
example, gain or loss realized on the sale of the T or T1 stock is not
taken into account in earnings and profits. However, because a section
338 election is not made for T2, T must recognize any gain or loss
realized on the deemed sale of the T2 stock. See Sec. 1.338-4(h).
(iii) The results would be the same if S1, T, T1, and T2 are not
members of any consolidated group, because S1 and T are selling
affiliates.
Example 2. (i) S and T are solvent corporations. S owns all of the
outstanding stock of T. S and P agree to undertake the following
transaction: T will distribute half its assets to S, and S will assume
half of T's liabilities. Then, P will purchase the stock of T from S. S
and P will jointly make a section 338(h)(10) election with respect to
the sale of T. The corporations then complete the transaction as agreed.
(ii) Under section 338(a), the assets present in T at the close of
the acquisition date are deemed sold by old T to new T. Under paragraph
(d)(4) of this section, the transactions described in paragraph (d) of
this section are treated in the same manner as if they had actually
occurred. Because S and P had agreed that, after T's actual distribution
to S of part of its assets, S would sell T to P pursuant to an election
under section 338(h)(10), and because paragraph (d)(4) of this section
deems T subsequently to have transferred all its assets to its
shareholder, T is deemed to have adopted a plan of complete liquidation
under section 332. T's actual transfer of assets to S is treated as a
distribution pursuant to that plan of complete liquidation.
Example 3. (i) S1 owns all of the outstanding stock of both T and
S2. All three are corporations. S1 and P agree to undertake the
following transaction. T will transfer substantially all of its assets
and liabilities to S2, with S2 issuing no stock in exchange therefor,
and retaining its other assets and liabilities. Then, P will purchase
the stock of T from S1. S1 and P will jointly make a section 338(h)(10)
election with respect to the sale of T. The corporations then complete
the transaction as agreed.
(ii) Under section 338(a), the remaining assets present in T at the
close of the acquisition date are deemed sold by old T to new T. Under
paragraph (d)(4) of this section, the transactions described in this
section are treated in the same manner as if they had actually occurred.
Because old T transferred substantially all of its assets to S2, and is
deemed to have distributed all its remaining assets and gone out of
existence, the transfer of assets to S2, taking into account the related
transfers, deemed and actual, qualifies as a reorganization under
section 368(a)(1)(D). Section 361(c)(1) and not section 332 applies to
T's deemed liquidation.
Example 4. (i) T owns two assets: an actively traded security (Class
II) with a fair market value of $100 and an adjusted basis of $100, and
inventory (Class IV) with a fair market value of $100 and an adjusted
basis of $100. T has no liabilities. S is negotiating to sell all the
stock in T to P for $100 cash and contingent consideration. Assume that
under generally applicable tax accounting rules, P's adjusted basis in
the T stock immediately after the purchase would be $100, because the
contingent consideration is not taken into account. Thus, under the
rules of Sec. 1.338-5, AGUB would be $100. Under the allocation rules
of Sec. 1.338-6, the entire $100 would be allocated to the Class II
asset, the actively traded security, and no amount would be allocated to
the inventory. P, however, plans immediately to cause T to sell the
inventory, but not the actively traded security, so it requests that,
prior to the stock sale, S cause T to create a new subsidiary, Newco,
and contribute the actively traded security to the capital of Newco.
Because the stock in Newco, which would not be actively traded, is a
Class V asset, under the rules of Sec. 1.338-6 $100 of AGUB would be
allocated to
[[Page 199]]
the inventory and no amount of AGUB would be allocated to the Newco
stock. Newco's own AGUB, $0 under the rules of Sec. 1.338-5, would be
allocated to the actively traded security. When P subsequently causes T
to sell the inventory, T would realize no gain or loss instead of
realizing gain of $100.
(ii) Assume that, if the T stock had not itself been sold but T had
instead sold both its inventory and the Newco stock to P, T would for
tax purposes be deemed instead to have sold both its inventory and
actively traded security directly to P, with P deemed then to have
created Newco and contributed the actively traded security to the
capital of Newco. Section 338, if elected, generally recharacterizes a
stock sale as a deemed sale of assets. However, paragraph (d)(9) of this
section states, in general, that no provision of section 338(h)(10) or
the regulations thereunder shall produce a Federal income tax result
under subtitle A of the Internal Revenue Code that would not occur if
the parties had actually engaged in the transactions deemed to occur by
virtue of the section 338(h)(10) election, taking into account other
transactions that actually occurred or are deemed to occur. Hence, the
deemed sale of assets under section 338(h)(10) should be treated as one
of the inventory and actively traded security themselves, not of the
inventory and Newco stock. The anti-abuse rule of Sec. 1.338-1(c) does
not apply, because the substance of the deemed sale of assets is a sale
of the inventory and the actively traded security themselves, not of the
inventory and the Newco stock. Otherwise, the anti-abuse rule might
apply.
Example 5. (i) T, a member of a selling consolidated group, has only
one class of stock, all of which is owned by S1. On March 1 of Year 2,
S1 sells its T stock to P for $80,000, and joins with P in making a
section 338(h)(10) election for T. There are no selling costs or
acquisition costs. On March 1 of Year 2, T owns land with a $50,000
basis and $75,000 fair market value and equipment with a $30,000
adjusted basis, $70,000 recomputed basis, and $60,000 fair market value.
T also has a $40,000 liability. S1 pays old T's allocable share of the
selling group's consolidated tax liability for Year 2 including the tax
liability for the deemed sale tax consequences (a total of $13,600).
(ii) ADSP of $120,000 ($80,000 + $40,000 + 0) is allocated to each
asset as follows:
----------------------------------------------------------------------------------------------------------------
Assets Basis FMV Fraction Allocable ADSP
----------------------------------------------------------------------------------------------------------------
Land.................................... $50,000 $75,000 \5/9\ $66,667
Equipment............................... 30,000 60,000 \4/9\ 53,333
-----------------------------------------------------------------------
Total............................. 80,000 135,000 1 120,000
----------------------------------------------------------------------------------------------------------------
(iii) Under paragraph (d)(3) of this section, old T has gain on the
deemed sale of $40,000 (consisting of $16,667 of capital gain and
$23,333 of ordinary income).
(iv) Under paragraph (d)(5)(iii) of this section, S1 recognizes no
gain or loss upon its sale of the old T stock to P. S1 also recognizes
no gain or loss upon the deemed liquidation of T. See paragraph (d)(4)
of this section and section 332.
(v) P's basis in new T stock is P's cost for the stock, $80,000. See
section 1012.
(vi) Under Sec. 1.338-5, the AGUB for new T is $120,000, i.e., P's
cost for the old T stock ($80,000) plus T's liability ($40,000). This
AGUB is allocated as basis among the new T assets under Sec. Sec.
1.338-6 and 1.338-7.
Example 6. (i) The facts are the same as in Example 5, except that
S1 sells 80 percent of the old T stock to P for $64,000, rather than 100
percent of the old T stock for $80,000.
(ii) The consequences to P, T, and S1 are the same as in Example 5,
except that:
(A) P's basis for its 80-percent interest in the new T stock is P's
$64,000 cost for the stock. See section 1012.
(B) Under Sec. 1.338-5, the AGUB for new T is $120,000 (i.e.,
$64,000/.8 + $40,000 + $0).
(C) Under paragraph (d)(4) of this section, S1 recognizes no gain or
loss with respect to the retained stock in T. See section 332.
(D) Under paragraph (d)(5)(ii) of this section, the basis of the T
stock retained by S1 is $16,000 (i.e., $120,000 - $40,000 (the ADSP
amount for the old T assets over the sum of new T's liabilities
immediately after the acquisition date) `` .20 (the proportion of T
stock retained by S1)).
Example 7. (i) The facts are the same as in Example 6, except that
K, a shareholder unrelated to T or P, owns the 20 percent of the T stock
that is not acquired by P in the qualified stock purchase. K's basis in
its T stock is $5,000.
(ii) The consequences to P, T, and S1 are the same as in Example 6.
(iii) Under paragraph (d)(6)(iii) of this section, K recognizes no
gain or loss, and K's basis in its T stock remains at $5,000.
Example 8. (i) The facts are the same as in Example 5, except that
the equipment is held by T1, a wholly-owned subsidiary of T, and a
section 338(h)(10) election is also made for T1. The T1 stock has a fair
market value of $60,000. T1 has no assets other than the equipment and
no liabilities. S1 pays old T's and old T1's allocable shares of the
selling group's consolidated tax liability for Year 2
[[Page 200]]
including the tax liability for T and T1's deemed sale tax consequences.
(ii) ADSP for T is $120,000, allocated $66,667 to the land and
$53,333 to the stock. Old T's deemed sale results in $16,667 of capital
gain on its deemed sale of the land. Under paragraph (d)(5)(iii) of this
section, old T does not recognize gain or loss on its deemed sale of the
T1 stock. See section 332.
(iii) ADSP for T1 is $53,333 (i.e., $53,333 + $0 + $0). On the
deemed sale of the equipment, T1 recognizes ordinary income of $23,333.
(iv) Under paragraph (d)(5)(iii) of this section, S1 does not
recognize gain or loss upon its sale of the old T stock to P.
Example 9. (i) The facts are the same as in Example 8, except that P
already owns 20 percent of the T stock, which is nonrecently purchased
stock with a basis of $6,000, and that P purchases the remaining 80
percent of the T stock from S1 for $64,000.
(ii) The results are the same as in Example 8, except that under
paragraph (d)(1) of this section and Sec. 1.338-5(d), P is deemed to
have made a gain recognition election for its nonrecently purchased T
stock. As a result, P recognizes gain of $10,000 and its basis in the
nonrecently purchased T stock is increased from $6,000 to $16,000. P's
basis in all the T stock is $80,000 (i.e., $64,000 + $16,000). The
computations are as follows:
(A) P's grossed-up basis for the recently purchased T stock is
$64,000 (i.e., $64,000 (the basis of the recently purchased T stock) x
(1-.2)/(.8) (the fraction in section 338(b)(4))).
(B) P's basis amount for the nonrecently purchased T stock is
$16,000 (i.e., $64,000 (the grossed-up basis in the recently purchased T
stock) x (.2)/(1.0-.2) (the fraction in section 338(b)(3)(B))).
(C) The gain recognized on the nonrecently purchased stock is
$10,000 (i.e., $16,000-$6,000).
Example 10. (i) T is an S corporation whose sole class of stock is
owned 40 percent each by A and B and 20 percent by C. T, A, B, and C all
use the cash method of accounting. A and B each has an adjusted basis of
$10,000 in the stock. C has an adjusted basis of $5,000 in the stock. A,
B, and C hold no installment obligations to which section 453A applies.
On March 1 of Year 1, A sells its stock to P for $40,000 in cash and B
sells its stock to P for a $25,000 note issued by P and real estate
having a fair market value of $15,000. The $25,000 note, due in full in
Year 7, is not publicly traded and bears adequate stated interest. A and
B have no selling expenses. T's sole asset is real estate, which has a
value of $110,000 and an adjusted basis of $35,000. Also, T's real
estate is encumbered by long-outstanding purchase-money indebtedness of
$10,000. The real estate does not have built-in gain subject to section
1374. A, B, and C join with P in making a section 338(h)(10) election
for T.
(ii) Solely for purposes of application of sections 453, 453A, and
453B, old T is considered in its deemed asset sale to receive back from
new T the $25,000 note (considered issued by new T) and $75,000 of cash
(total consideration of $80,000 paid for all the stock sold, which is
then divided by .80 in the grossing-up, with the resulting figure of
$100,000 then reduced by the amount of the installment note). Absent an
election under section 453(d), gain is reported by old T under the
installment method.
(iii) In applying the installment method to old T's deemed asset
sale, the contract price for old T's assets deemed sold is $100,000, the
$110,000 selling price reduced by the indebtedness of $10,000 to which
the assets are subject. (The $110,000 selling price is itself the sum of
the $80,000 grossed-up in paragraph (ii) above to $100,000 and the
$10,000 liability.) Gross profit is $75,000 ($110,000 selling price -
old T's basis of $35,000). Old T's gross profit ratio is 0.75 (gross
profit of $75,000 / $100,000 contract price). Thus, $56,250 (0.75 x the
$75,000 cash old T is deemed to receive in Year 1) is Year 1 gain
attributable to the sale, and $18,750 ($75,000 - $56,250) is recovery of
basis.
(iv) In its liquidation, old T is deemed to distribute the $25,000
note to B, since B actually sold the stock partly for that
consideration. To the extent of the remaining liquidating distribution
to B, it is deemed to receive, along with A and C, the balance of old
T's liquidating assets in the form of cash. Under section 453(h), B,
unless it makes an election under section 453(d), is not required to
treat the receipt of the note as a payment for the T stock; P's payment
of the $25,000 note in Year 7 to B is a payment for the T stock. Because
section 453(h) applies to B, old T's deemed liquidating distribution of
the note is, under section 453B(h), not treated as a taxable disposition
by old T.
(v) Under section 1366, A reports 40 percent, or $22,500, of old T's
$56,250 gain recognized in Year 1. Under section 1367, this increases
A's $10,000 adjusted basis in the T stock to $32,500. Next, in old T's
deemed liquidation, A is considered to receive $40,000 for its old T
shares, causing it to recognize an additional $7,500 gain in Year 1.
(vi) Under section 1366, B reports 40 percent, or $22,500, of old
T's $56,250 gain recognized in Year 1. Under section 1367, this
increases B's $10,000 adjusted basis in its T stock to $32,500. Next, in
old T's deemed liquidation, B is considered to receive the $25,000 note
and $15,000 of other consideration. Applying section 453, including
section 453(h), to the deemed liquidation, B's selling price and
contract price are both $40,000. Gross profit is $7,500 ($40,000 selling
price - B's basis of $32,500). B's gross profit ratio is 0.1875 (gross
profit of $7,500 / $40,000 contract price). Thus, $2,812.50 (0.1875 x
$15,000) is Year
[[Page 201]]
1 gain attributable to the deemed liquidation. In Year 7, when the
$25,000 note is paid, B has $4,687.50 (0.1875 x $25,000) of additional
gain.
(vii) Under section 1366, C reports 20 percent, or $11,250, of old
T's $56,250 gain recognized in Year 1. Under section 1367, this
increases C's $5,000 adjusted basis in its T stock to $16,250. Next, in
old T's deemed liquidation, C is considered to receive $20,000 for its
old T shares, causing it to recognize an additional $3,750 gain in Year
1. Finally, under paragraph (d)(5)(ii) of this section, C is considered
to acquire its stock in T on the day after the acquisition date for
$20,000 (fair market value = grossed-up amount realized of $100,000 x
20%). C's holding period in the stock deemed received in new T begins at
that time.
Example 11. Stock acquisition followed by upstream merger--without
section 338(h)(10) election. (i) P owns all the stock of Y, a newly
formed subsidiary. S owns all the stock of T. Each of P, S, T and Y is a
domestic corporation. P acquires all of the T stock in a statutory
merger of Y into T, with T surviving. In the merger, S receives
consideration consisting of 50% P voting stock and 50% cash. Viewed
independently of any other step, P's acquisition of T stock constitutes
a qualified stock purchase. As part of the plan that includes P's
acquisition of the T stock, T subsequently merges into P. Viewed
independently of any other step, T's merger into P qualifies as a
liquidation described in section 332. Absent the application of
paragraph (c)(2) of this section, the step transaction doctrine would
apply to treat P's acquisition of the T stock and T's merger into P as
an acquisition by P of T's assets in a reorganization described in
section 368(a). P and S do not make a section 338(h)(10) election with
respect to P's purchase of the T stock.
(ii) Because P and S do not make an election under section
338(h)(10) for T, P's acquisition of the T stock and T's merger into P
is treated as part of a reorganization described in section 368(a).
Example 12. Stock acquisition followed by upstream merger--with
section 338(h)(10) election. (i) The facts are the same as in Example 11
except that P and S make a joint election under section 338(h)(10) for
T.
(ii) Pursuant to paragraph (c)(2) of this section, as a result of
the election under section 338(h)(10), for all Federal tax purposes, P's
acquisition of the T stock is treated as a qualified stock purchase and
P's acquisition of the T stock is not treated as part of a
reorganization described in section 368(a).
Example 13. Stock acquisition followed by brother-sister merger--
with section 338(h)(10) election. (i) The facts are the same as in
Example 12, except that, following P's acquisition of the T stock, T
merges into X, a domestic corporation that is a wholly owned subsidiary
of P. Viewed independently of any other step, T's merger into X
qualifies as a reorganization described in section 368(a). Absent the
application of paragraph (c)(2) of this section, the step transaction
doctrine would apply to treat P's acquisition of the T stock and T's
merger into X as an acquisition by X of T's assets in a reorganization
described in section 368(a).
(ii) Pursuant to paragraph (c)(2) of this section, as a result of
the election under section 338(h)(10), for all Federal tax purposes, P's
acquisition of T stock is treated as a qualified stock purchase and P's
acquisition of T stock is not treated as part of a reorganization
described in section 368(a).
Example 14. Stock acquisition that does not qualify as a qualified
stock purchase followed by upstream merger. (i) The facts are the same
as in Example 11, except that, in the statutory merger of Y into T, S
receives only P voting stock.
(ii) Pursuant to Sec. 1.338-3(c)(1)(i) and paragraph (c)(2) of this
section, no election under section 338(h)(10) can be made with respect
to P's acquisition of the T stock because, pursuant to relevant
provisions of law, including the step transaction doctrine, that
acquisition followed by T's merger into P is treated as a reorganization
described in section 368(a)(1)(A), and that acquisition, viewed
independently of T's merger into P, does not constitute a qualified
stock purchase under section 338(d)(3). Accordingly, P's acquisition of
the T stock and T's merger into P is treated as a reorganization
described in section 368(a).
(f) Inapplicability of provisions. The provisions of section 6043,
Sec. Sec. 1.331-1(d) and 1.332-6 (relating to information returns and
recordkeeping requirements for corporate liquidations) do not apply to
the deemed liquidation of old T under paragraph (d)(4) of this section.
(g) Required information. The Commissioner may exercise the
authority granted in section 338(h)(10)(C)(iii) to require provision of
any information deemed necessary to carry out the provisions of section
338(h)(10) by requiring submission of information on any tax reporting
form.
(h) Effective date. This section is applicable to stock acquisitions
occurring on or after July 5, 2006. For stock acquisitions occurring
before July 5, 2006, see Sec. 1.338(h)(10)-1T as contained in the
edition of 26 CFR part 1, revised as of April 1, 2006.
[T.D. 8940, 66 FR 8950, Feb. 13, 2001, as amended by T.D. 9071, 68 FR
40768, July 9, 2003; T.D. 9264, 71 FR 30607, May 30, 2006; T.D. 9271, 71
FR 38075, July 5, 2006; T.D. 9329, 72 FR 32808, June 14, 2007]
[[Page 202]]
Sec. 1.338(i)-1 Effective/applicability date.
(a) In general. The provisions of Sec. Sec. 1.338-1 through 1.338-
7, 1.338-10 and 1.338(h)(10)-1 apply to any qualified stock purchase
occurring after March 15, 2001. For rules applicable to qualified stock
purchases on or before March 15, 2001, see Sec. Sec. 1.338-1T through
1.338-7T, 1.338-10T, 1.338(h)(10)-1T and 1.338(i)-1T in effect prior to
March 16, 2001 (see 26 CFR part 1 revised April 1, 2000).
(b) Section 338(h)(10) elections for S corporation targets. The
requirements of Sec. Sec. 1.338(h)(10)-1T(c)(2) and 1.338(h)(10)-
1(c)(2) that S corporation shareholders who do not sell their stock must
also consent to an election under section 338(h)(10) will not invalidate
an otherwise valid election made on the September 1997 revision of Form
8023, ``Elections Under Section 338 For Corporations Making Qualified
Stock Purchases,'' not signed by the nonselling shareholders, provided
that the S corporation and all of its shareholders (including nonselling
shareholders) report the tax consequences consistently with the results
under section 338(h)(10).
(c) Section 338 elections for insurance company targets--(1) In
general. The rules of Sec. 1.338-11 apply to qualified stock purchases
occurring on or after April 10, 2006.
(2) New target election for retroactive application--(i)
Availability of election. New target may make an irrevocable election to
apply the rules in Sec. Sec. 1.338-11 (including the applicable
provisions in Sec. Sec. 1.197-2(g)(5), 381(c)(22)-1, and 846) in whole,
but not in part, to a qualified stock purchase occurring before April
10, 2006 for which a section 338 election is made, provided that new
target's first taxable year and all subsequent affected taxable years
are years for which an assessment of deficiency or a refund for
overpayment is not prevented by any law or rule of law. In the case of a
section 338 election for which a section 338(h)(10) election is made (or
a section 338 election for a foreign target), new target may make the
election to apply the regulations retroactively without regard to
whether old target makes the election. In the case of a section 338
election for a domestic target for which no section 338(h)(10) election
is made, new target may make the election to apply the regulations
retroactively only if old target also makes the election. Paragraph
(c)(2)(ii) of this section prescribes the time and manner of the
election for new target.
(ii) Time and manner of making the election for new target. New
target may make an election described in paragraph (c)(2)(i) of this
section by attaching a statement to its original or amended income tax
return for its first taxable year. The statement must be entitled
``Election to Retroactively Apply the Rules in Sec. Sec. 1.338-11
(including the applicable provisions in Sec. Sec. 1.197-2(g)(5),
1.381(c)(22)-1 and 846) in whole to a transaction completed before April
10, 2006'' and must include the following information--
(A) The name and E.I.N. for new target; and
(B) The following declaration (or a substantially similar
declaration): New target has amended its income tax returns for its
first taxable year and for all affected subsequent years to reflect the
rules in Sec. Sec. 1.338-11 (including the applicable provisions in
Sec. Sec. 197-2(g)(5), 1.381(c)(22)-1 and 846). All other parties whose
income tax liabilities are affected by new target's election have
amended their income tax returns for all affected years to reflect the
rules in Sec. Sec. 1.338-11 (including the applicable provisions in
Sec. Sec. 1.197-2(g)(5), 1.381(c)(22)-1 and 846).
(3) Old target election for retroactive application--(i)
Availability of election. Old target may make an irrevocable election to
apply the rules in Sec. Sec. 1.338-11 (including the applicable
provisions in Sec. Sec. 1.197-2(g)(5), 1.381(c)(22)-1 and 846) in
whole, but not in part, to a qualified stock purchase occurring before
April 10, 2006 for which a section 338 election is made, provided that
old target's taxable year that includes the deemed sale tax consequences
and all subsequent affected taxable years are years for which an
assessment of deficiency or a refund for overpayment is not prevented by
any law or rule of law. In the case of a section 338 election for which
a section 338(h)(10) election is made (or a section 338 election for a
foreign target), old target may make the election to apply the
regulations retroactively without regard to whether new target makes the
election. In the case of a
[[Page 203]]
section 338 election for a domestic target for which no section
338(h)(10) election is made, old target may make the election to apply
the regulations retroactively only if new target also makes the
election. Paragraph (c)(3)(ii) of this section prescribes the time and
manner of the election for old target.
(ii) Time and manner of making the election for old target. Old
target may make an election described in paragraph (c)(3)(i) of this
section by attaching a statement to each affected party's original or
amended income tax return for the taxable year that includes the deemed
sale tax consequences. The statement must be entitled ``Election to
Retroactively Apply the Rules in Sec. Sec. 1.338-11 (including the
applicable provisions in Sec. Sec. 1.197-2(g)(5), 1.381(c)(22)-1 and
846) to a transaction completed before April 10, 2006'' and must include
the following information--
(A) The name and E.I.N. for old target; and
(B) The following declaration (or a substantially similar
declaration): Old target has amended its income tax returns for the
taxable year that includes the deemed sale tax consequences and for all
affected subsequent years to reflect the rules in Sec. Sec. 1.338-11
(including the applicable provisions in Sec. Sec. 1.197-2(g)(5),
1.381(c)(22)-1 and 846). All other parties whose income tax liabilities
are affected by old target's election have amended their income tax
returns for all affected years to reflect the rules in Sec. Sec. 1.338-
11 (including the applicable provisions in Sec. Sec. 1.197-2(g)(5),
1.381(c)(22)-1 and 846).
[T.D. 8940, 66 FR 9954, Feb. 13, 2001, as amended by T.D. 9257, 71 FR
18003, Apr. 10, 2006; T.D. 9377, 73 FR 3873, 3874, Jan. 23, 2008]
collapsible corporations; foreign personal holding companies
Sec. 1.341-1 Collapsible corporations; in general.
Subject to the limitations contained in Sec. 1.341-4 and the
exceptions contained in Sec. 1.341-6 and Sec. 1.341-7(a), the entire
gain from the actual sale or exchange of stock of a collapsible
corporation, (b) amounts distributed in complete or partial liquidation
of a collapsible corporation which are treated, under section 331, as
payment in exchange for stock, and (c) a distribution made by a
collapsible corporation which, under section 301(c)(3), is treated, to
the extent it exceeds the basis of the stock, in the same manner as a
gain from the sale or exchange of property, shall be considered as
ordinary income.
[T.D. 7655, 44 FR 68459, Nov. 29, 1979]
Sec. 1.341-2 Definitions.
(a) Determination of collapsible corporation. (1) A collapsible
corporation is defined by section 341(b)(1) to be a corporation formed
or availed of principally (i) for the manufacture, construction, or
production of property, (ii) for the purchase of property which (in the
hands of the corporation) is property described in section 341(b)(3), or
(iii) for the holding of stock in a corporation so formed or availed of,
with a view to (a) the sale or exchange of stock by its shareholders
(whether in liquidation or otherwise), or a distribution to its
shareholders, prior to the realization by the corporation manufacturing,
constructing, producing, or purchasing the property of a substantial
part of the taxable income to be derived from such property, and (b) the
realization by such shareholders of gain attributable to such property.
See Sec. 1.341-5 for a description of the facts which will ordinarily
be considered sufficient to establish whether or not a corporation is a
collapsible corporation under the rules of this section. See paragraph
(d) of Sec. 1.341-5 for examples of the application of section 341.
(2) Under section 341(b)(1) the corporation must be formed or
availed of with a view to the action therein described, that is, the
sale or exchange of its stock by its shareholders, or a distribution to
them prior to the realization by the corporation manufacturing,
constructing, producing, or purchasing the property of a substantial
part of the taxable income to be derived from such property, and the
realization by the shareholders of gain attributable to such property.
This requirement is satisfied in any case in which such action was
contemplated by those persons in a position to determine the policies of
the corporation, whether by reason of their owning a majority of the
voting stock of the corporation or otherwise.
[[Page 204]]
The requirement is satisfied whether such action was contemplated,
unconditionally, conditionally, or as a recognized possibility. If the
corporation was so formed or availed of, it is immaterial that a
particular shareholder was not a shareholder at the time of the
manufacture, construction, production, or purchase of the property, or
if a shareholder at such time, did not share in such view. Any gain of
such a shareholder on his stock in the corporation shall be treated in
the same manner as gain of a shareholder who did share in such view. The
existence of a bona fide business reason for doing business in the
corporate form does not, by itself, negate the fact that the corporation
may also have been formed or availed of with a view to the action
described in section 341(b).
(3) A corporation is formed or availed of with a view to the action
described in section 341(b) if the requisite view existed at any time
during the manufacture, production, construction, or purchase referred
to in that section. Thus, if the sale, exchange, or distribution is
attributable solely to circumstances which arose after the manufacture,
construction, production, or purchase (other than circumstances which
reasonably could be anticipated at the time of such manufacture,
construction, production, or purchase), the corporation shall, in the
absence of compelling facts to the contrary, be considered not to have
been so formed or availed of. However, if the sale, exchange or
distribution is attributable to circumstances present at the time of the
manufacture, construction, production, or purchase, the corporation
shall, in the absence of compelling facts to the contrary, be considered
to have been so formed or availed of.
(4) The property referred to in section 341(b) is that property or
the aggregate of those properties with respect to which the requisite
view existed. In order to ascertain the property or properties as to
which the requisite view existed, reference shall be made to each
property as to which, at the time of the sale, exchange, or distribution
referred to in section 341(b) there has not been a realization by the
corporation manufacturing, constructing, producing, or purchasing the
property of a substantial part of the taxable income to be derived from
such property. However, where any such property is a unit of an
integrated project involving several properties similar in kind, the
determination whether the requisite view existed shall be made only if a
substantial part of the taxable income to be derived from the project
has not been realized at the time of the sale, exchange, or
distribution, and in such case the determination shall be made by
reference to the aggregate of the properties constituting the single
project.
(5) A corporation shall be deemed to have manufactured, constructed,
produced, or purchased property if it (i) engaged in the manufacture,
construction, or production of property to any extent, or (ii) holds
property having a basis determined, in whole or in part, by reference to
the cost of such property in the hands of a person who manufactured,
constructed, produced, or purchased the property, or (iii) holds
property having a basis determined, in whole or in part, by reference to
the cost of property manufactured, constructed, produced, or purchased
by the corporation. Thus, under subdivision (i) of this subparagraph,
for example, a corporation need not have originated nor have completed
the manufacture, construction, or production of the property. Under
subdivision (ii) of this subparagraph, for example, if an individual
were to transfer property constructed by him to a corporation in
exchange for all of the capital stock of such corporation, and such
transfer qualifies under section 351, then the corporation would be
deemed to have constructed the property, since the basis of the property
in the hands of the corporation would, under section 362 be determined
by reference to the basis of the property in the hands of the
individual. Under subdivision (iii) of this subparagraph, for example,
if a corporation were to exchange property constructed by it for
property of like kind constructed by another person, and such exchange
qualifies under section 1031(a), then the corporation would be deemed to
have constructed the property received by it in the exchange, since the
basis of the property received by it in the exchange would,
[[Page 205]]
under section 1031(d), be determined by reference to the basis of the
property constructed by the corporation.
(6) In determining whether a corporation is a collapsible
corporation by reason of the purchase of property, it is immaterial
whether the property is purchased from the shareholders of the
corporation or from persons other than such shareholders. The property,
however, must be property which, in the hands of the corporation, is
property of a kind described in section 341(b)(3). The determination
whether property is of a kind described in section 341(b)(3) shall be
made without regard to the fact that the corporation is formed or
availed of with a view to the action described in section 341(b)(1).
(7) Section 341 is applicable whether the shareholder is an
individual, a trust, an estate, a partnership, a company, or a
corporation.
(b) Section 341 assets. For the purposes of this section, the term
``section 341 assets'' means the following listed property if held for
less than 3 years:
(1) Stock in trade of the corporation, or other property of a kind
which would properly be included in the inventory of the corporation if
on hand at the close of the taxable year.
(2) Property held primarily for sale to customers in the ordinary
course of a trade or business.
(3) Property used in a trade or business as defined in section
1231(b) and held for less than 3 years, except property that is or has
been used in connection with the manufacture, construction, production
or sale of property described in subparagraphs (1) and (2) of this
paragraph.
(4) Unrealized receivables or fees pertaining to property listed in
this paragraph. The term unrealized receivables or fees means any rights
(contractual or otherwise) to payment for property listed in
subparagraphs (1), (2), and (3) of this paragraph which has been
delivered or is to be delivered and rights to payments for services
rendered or to be rendered, to the extent such rights have not been
included in the income of the corporation under the method of accounting
used by it. In determining whether the assets referred to in this
paragraph have been held for 3 years, the time such assets were held by
a transferor shall be taken into consideration (section 1223). However,
no such period shall begin before the date the manufacture,
construction, production, or purchase of such assets is completed.
Sec. 1.341-3 Presumptions.
(a) Unless shown to the contrary a corporation shall be considered
to be a collapsible corporation if at the time of the transactions
described in Sec. 1.341-1 the fair market value of the section 341
assets held by it constitutes 50 percent or more of the fair market
value of its total assets and the fair market value of the section 341
assets is 120 percent or more of the adjusted basis of such assets. In
determining the fair market value of the total assets, cash, obligations
which are capital assets in the hands of the corporation, governmental
obligations, and stock in any other corporation shall not be taken into
consideration. The failure of a corporation to meet the requirements of
this paragraph, shall not give rise to the presumption that the
corporation was not a collapsible corporation.
(b) The following example will illustrate the application of this
section:
Example. A corporation, filing its income tax returns on the accrual
basis, on July 31, 1955, owned assets with the following fair market
values: Cash, $175,000; note receivable held for investment, $130,000;
stocks of other corporations, $545,000; rents receivable, $15,000; and a
building constructed by the corporation in 1953 and held thereafter as
rental property, $750,000. The adjusted basis of the building on that
date was $600,000. The only debt outstanding was a $500,000 mortgage on
the building. On July 31, 1955, the corporation liquidated and
distributed all of its assets to its shareholders. In computing whether
the fair market value of the section 341 assets (only the building) is
50 percent or more of the fair market value of the total assets, the
cash, note receivable, and stocks of other corporations are not taken
into account in determining the value of the total assets, with the
result that the fair market value of the total assets was $765,000
($750,000 (building) plus $15,000 rents receivable). Therefore, the
value of the building is 98 percent of the total assets ($750,000 /
$765,000). The value of the building is also 125 percent of the adjusted
basis of the building ($750,000 / $600,000). In view of the above facts,
there arises a presumption that the corporation is a collapsible
corporation.
[[Page 206]]
Sec. 1.341-4 Limitations on application of section.
(a) General. This section shall apply only to the extent that the
recognized gain of a shareholder upon his stock in a collapsible
corporation would be considered, but for the provisions of this section,
as gain from the sale or exchange of a capital asset held for more than
1 year (6 months for taxable years before 1977; 9 months for taxable
years beginning in 1977). Thus, if a taxpayer sells at a gain stock of a
collapsible corporation which he had held for six months or less, this
section would not, in any event, apply to such gain. Also, if it is
determined, under provisions of law other than section 341, that a sale
or exchange at a gain of stock of a collapsible corporation which has
been held for more than 1 year (6 months for taxable years before 1977;
9 months for taxable years beginning in 1977) results in ordinary income
rather than long-term capital gain, then this section (including the
limitations contained herein) has no application whatsoever to such
gain.
(b) Stock ownership rules. (1) This section shall apply in the case
of gain realized by a shareholder upon his stock in a collapsible
corporation only if the shareholder, at any time after the actual
commencement of the manufacture, construction, or production of the
property, or at the time of the purchase of the property described in
section 341(b)(3) or at any time thereafter, (i) owned, or was
considered as owning, more than 5 percent in value of the outstanding
stock of the corporation, or (ii) owned stock which was considered as
owned at such time by another shareholder who then owned, or was
considered as owning, more than 5 percent in value of the outstanding
stock of the corporation.
(2) The ownership of stock shall be determined in accordance with
the rules prescribed by section 544(a)(1), (2), (3), (5), and (6),
except that, in addition to the persons prescribed by section 544(a)(2),
the family of an individual shall include the spouses of that
individual's brothers and sisters, whether such brothers and sisters are
by the whole or the half blood, and the spouses of that individual's
lineal descendants.
(3) For the purpose of this limitation, treasury stock shall not be
considered as outstanding stock.
(4) It is possible, under this limitation, that a shareholder in a
collapsible corporation may have gain upon his stock in that corporation
treated differently from the gain of another shareholder in the same
collapsible corporation.
(c) Seventy-percent rule. (1) This section shall apply to the gain
recognized during a taxable year upon the stock in a collapsible
corporation only if more than 70 percent of such gain is attributable to
the property referred to in section 341(b)(1). If more than 70 percent
of such gain is so attributable, then all of such gain is subject to
this section, and, if 70 percent or less of such gain is so
attributable, then none of such gain is subject to this section.
(2) For the purpose of this limitation, the gain attributable to the
property referred to in section 341(b)(1) is the excess of the
recognized gain of the shareholder during the taxable year upon his
stock in the collapsible corporation over the recognized gain which the
shareholder would have if the property had not been manufactured,
constructed, produced, or purchased. In the case of gain on a
distribution in partial liquidation or a distribution described in
section 301(c)(3)(A), the gain attributable to the property shall not be
less than an amount which bears the same ratio to the gain on such
distribution as the gain which would be attributable to the property if
there had been a complete liquidation at the time of such distribution
bears to the total gain which would have resulted from such complete
liquidation.
(3) Gain may be attributable to the property referred to in section
341(b)(1) even though such gain is represented by an appreciation in the
value of property other than that manufactured, constructed, produced,
or purchased. Where, for example, a corporation owns a tract of land and
the development of one-half of the tract increases the value of the
other half, the gain attributable to the developed half of the tract
includes the increase in the value of the other half.
[[Page 207]]
(4) The following example will illustrate the application of the 70
percent rule:
Example: On January 2, 1954, A formed the Z Corporation and
contributed $1,000,000 cash in exchange for all of the stock thereof.
The Z Corporation invested $400,000 in one project for the purpose of
building and selling residential houses. As of December 31, 1954, the
residential houses in this project were all sold, resulting in a profit
of $100,000 (after taxes). Simultaneously with the development of the
first project and in connection with a second and separate project the Z
Corporation invested $600,000 in land for the purpose of subdividing
such land into lots suitable for sale as home sites and distributing
such lots in liquidation before the realization by the corporation of a
substantial part of the taxable income to be realized from this second
project. As of December 31, 1954, Corporation Z had derived $60,000 in
profits (after taxes) from the sale of some of the lots. On January 2,
1955, the Z Corporation made a distribution in complete liquidation to
shareholder A who received:
(i) $560,000 in cash and notes, and
(ii) Lots having a fair market value of $940,000.
The gain recognized to shareholder A upon the liquidation is $500,000
($1,500,000 minus $1,000,000). The gain which would have been recognized
to A if the second project had not been undertaken is $100,000
($1,100,000 minus $1,000,000). Therefore, the gain attributable to the
second project which is property referred to in section 341(b)(1), is
$400,000 ($500,000 minus $100,000). Since this gain ($400,000) is more
than 70 percent of the entire gain ($500,000) recognized to A on the
liquidation, the entire gain so recognized is gain subject to section
341(a).
(d) Three-year rule. This section shall not apply to that portion of
the gain of a shareholder that is realized more than three years after
the actual completion of the manufacture, construction, production, or
purchase of the property referred to in section 341(b)(1) to which such
portion is attributable. However, if the actual completion of the
manufacture, construction, production, or purchase of all of such
property occurred more than 3 years before the date on which the gain is
realized, this section shall not apply to any part of the gain realized.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6738, 29 FR
7671, June 16, 1964; T.D. 7728, 45 FR 72650, Nov. 3, 1980]
Sec. 1.341-5 Application of section.
(a) Whether or not a corporation is a collapsible corporation shall
be determined under the regulations of Sec. Sec. 1.341-2 and 1.341-3 on
the basis of all the facts and circumstances in each particular case.
The following paragraphs of this section set forth those facts which
will ordinarily be considered sufficient to establish that a corporation
is or is not a collapsible corporation. The facts set forth in the
following paragraphs of this section are not exclusive of other facts
which may be controlling in any particular case. For example, if the
facts in paragraph (b) of this section, but not the facts in paragraph
(c) of this section, are present, the corporation may nevertheless not
be a collapsible corporation if there are other facts which clearly
establish that the regulations of Sec. Sec. 1.341-2 and 1.341-3 are not
satisfied. Similarly, if the facts in paragraph (c) of this section are
present, the corporation may nevertheless be a collapsible corporation
if there are other facts which clearly establish that the corporation
was formed or availed of in the manner described in Sec. Sec. 1.341-2
and 1.341-3 or if the facts in paragraph (c) of this section are not
significant by reason of other facts, such as the fact that the
corporation is subject to the control of persons other than those who
were in control immediately prior to the manufacture, construction,
production, or purchase of the property. See Sec. 1.341-4 for
provisions which make section 341 inapplicable to certain shareholders
of collapsible corporations.
(b) The following facts will ordinarily be considered sufficient
(except as otherwise provided in paragraph (a) of this section and
paragraph (c) of this section) to establish that a corporation is a
collapsible corporation:
(1) A shareholder of the corporation sells or exchanges his stock,
or receives a liquidating distribution, or a distribution described in
section 301(c)(3)(A),
(2) Upon such sale, exchange, or distribution, such shareholder
realizes gain attributable to the property described in subparagraphs
(4) and (5) of this paragraph, and
(3) At the time of the manufacture, construction, production, or
purchase
[[Page 208]]
of the property described in subparagraphs (4) and (5) of this
paragraph, such activity was substantial in relation to the other
activities of the corporation which manufactured, constructed, produced,
or purchased such property.
The property referred to in subparagraphs (2) and (3) of this paragraph
is that property or the aggregate of those properties which meet the
following two requirements:
(4) The property is manufactured, constructed, or produced by the
corporation or by another corporation stock of which is held by the
corporation, or is property purchased by the corporation or by such
other corporation which (in the hands of the corporation holding such
property) is property described in section 341(b)(3), and
(5) At the time of the sale, exchange, or distribution described in
subparagraph (1) of this paragraph, the corporation which manufactured,
constructed, produced, or purchased such property has not realized a
substantial part of the taxable income to be derived from such property.
In the case of property which is a unit of an integrated project
involving several properties similar in kind, the rules of this
subparagraph shall be applied to the aggregate of the properties
constituting the single project rather than separately to such unit.
Under the rules of this subparagraph, a corporation shall be considered
a collapsible corporation by reason of holding stock in other
corporations which manufactured, constructed, produced, or purchased the
property only if the activity of the corporation in holding stock in
such other corporations is substantial in relation to the other
activities of the corporation.
(c) The absence of any of the facts set forth in paragraph (b) of
this section or the presence of the following facts will ordinarily be
considered sufficient (except as otherwise provided in paragraph (a) of
this section) to establish that a corporation is not a collapsible
corporation:
(1) In the case of a corporation subject to paragraph (b) of this
section only by reason of the manufacture, construction, production, or
purchase (either by the corporation or by another corporation the stock
of which is held by the corporation) of property which is property
described in section 341(b)(3)(A) and (B), the amount (both in quantity
and value) of such property is not in excess of the amount which is
normal--
(i) For the purpose of the business activities of the corporation
which manufactured, constructed, produced, or purchased the property if
such corporation has a substantial prior business history involving the
use of such property and continues in business, or
(ii) For the purpose of an orderly liquidation of the business if
the corporation which manufactured, constructed, produced, or purchased
such property has a substantial prior business history involving the use
of such property and is in the process of liquidation.
(2) In the case of a corporation subject to paragraph (b) of this
section with respect to the manufacture, construction, or production
(either by the corporation or by another corporation the stock of which
is held by the corporation) of property, the amount of the unrealized
taxable income from such property is not substantial in relation to the
amount of the taxable income realized (after the completion of a
material part of such manufacture, construction, or production, and
prior to the sale, exchange, or distribution referred to in paragraph
(b)(1) of this section) from such property and from other property
manufactured, constructed, or produced by the corporation.
(d) The following examples will illustrate the application of this
section:
Example 1. (i) On January 2, 1954, A formed the W Corporation and
contributed $50,000 cash in exchange for all of the stock thereof. The W
Corporation borrowed $900,000 from a bank and used $800,000 of such sum
in the construction of an apartment house on land which it purchased for
$50,000. The apartment house was completed on December 31, 1954. On
December 31, 1954, the corporation, having determined that the fair
market value of the apartment house, separate and apart from the land,
was $900,000, made a distribution (permitted under the applicable State
law) to A of $100,000. At this time, the fair market value of the land
was $50,000. As of December 31, 1954, the corporation has not realized
any earnings and profits. In 1955, the corporation began the operation
of the
[[Page 209]]
apartment house and received rentals therefrom. The corporation has
since continued to own and operate the building. The corporation
reported on the basis of the calendar year and cash receipts and
disbursements.
(ii) Since A received a distribution and realized a gain
attributable to the building constructed by the corporation, since, at
the time of such distribution, the corporation has not realized a
substantial part of the taxable income to be derived from such building,
and since the construction of the building was a substantial activity of
the corporation, the W Corporation is considered a collapsible
corporation under paragraph (b) of Sec. 1.341-5. The provisions of
section 341(d) do not prohibit the application of section 341(a).
Therefore, the distribution, if and to the extent that it may be
considered long-term capital gain rather than ordinary income without
regard to section 341, will be considered ordinary income under section
341(a).
(iii) In the event of the existence of additional facts and
circumstances in the above case, the corporation, notwithstanding the
above facts, might not be considered a collapsible corporation. See
Sec. 1.342-2 and paragraph (a) of Sec. 1.341-5.
Example 2. (i) On January 2, 1954, B formed X Corporation and became
its sole shareholder. In August 1954, the corporation completed
construction of an office building. It immediately sold this building at
a gain of $50,000, included this entire gain in its return for 1954, and
distributed this entire gain (less taxes) to B. In June 1955, the
corporation completed construction of a second office building. In
August 1955, B sold the entire stock of X Corporation at a gain of
$12,000, which gain is attributable to the second building.
(ii) X Corporation is a collapsible corporation under section 341(b)
for the following reasons: The gain realized through the sale of the
stock of X Corporation was attributable to the second office building;
the construction of that building was a substantial activity of X
Corporation during the time of construction and, at the time of sale,
the corporation had not realized a substantial part of the taxable
income to be derived from such building. Since the provisions of section
341(d) do not prohibit the application of section 341 (a) to B, the gain
of $12,000 to B is, accordingly, considered ordinary income.
Example 3. The facts are the same as in Example (2), except that the
following facts are shown: B was the president of the X Corporation and
active in the conduct of its business. The second building was
constructed as the first step in a project of the X Corporation for the
development for rental purposes of a large suburban center involving the
construction of several buildings by the corporation. The sale of the
stock by B was caused by his retiring from all business activity as a
result of illness arising after the second building was constructed.
Under these additional facts, the corporation is not considered a
collapsible corporation. See Sec. 1.341-2 and paragraph (a) of Sec.
1.341-5.
Example 4. (i) On January 2, 1948, C formed the Y Corporation and
became the sole shareholder thereof. The Y Corporation has been engaged
solely in the business of producing motion pictures and licensing their
exhibition. On January 2, 1955, C sold all of the stock of the Y
Corporation at a gain. The Y Corporation has produced one motion picture
each year since its organization and before January 2, 1955, it has
realized a substantial part of the taxable income to be derived from
each of its motion pictures except the last one made in 1954. This last
motion picture was completed September 1, 1954. As of January 2, 1955,
no license had been made for its exhibition. The fair market value on
January 2, 1955, of this last motion picture exceeds the cost of its
production by $50,000. A material part of the production of this last
picture was completed on January 1, 1954, and between that date and
January 2, 1955, the corporation had realized taxable income of $500,000
from other motion pictures produced by it. The corporation has
consistently distributed to its shareholder its taxable income when
received (after adjustment for taxes).
(ii) Although the corporation is within paragraph (b) of this
section with respect to the production of property, the amount of the
unrealized income from such property ($50,000) is not substantial in
relation to the amount of the income realized, after the completion of a
material part of the production of such property and prior to sale of
the stock, from such property and other property produced by the
corporation ($500,000). Accordingly, the Y Corporation is within
paragraph (c)(2) of this section, and is not considered a collapsible
corporation.
Example 5. The facts are the same as in Example (4) except that C
sold all of his stock to D on February 1, 1954. On January 2, 1955, D
sold all of the Y Corporation stock at a gain, the gain being
attributable to the picture completed September 1, 1954, and not
released by the corporation for exhibition. In view of the change of
control of the corporation, the provisions of paragraph (c)(2) of this
section are not significant at the time of the sale by D, and the Y
Corporation would be considered a collapsible corporation on January 2,
1955. See Sec. 1.341-2 and paragraph (a) of Sec. 1.341-5.
Sec. 1.341-6 Exceptions to application of section.
(a) In general--(1) Transactions excepted. Section 341(e) excepts 4
types of transactions from the application of the collapsible
corporation provisions. These exceptions, where applicable,
[[Page 210]]
eliminate the necessity of determining whether a corporation is a
collapsible corporation within the meaning of section 341(b) or whether
any of the limitations of section 341(d) are applicable. Under section
341(e)(1) and (2), there are 2 exceptions which are designed to allow
the shareholders of a corporation either to sell or exchange their stock
or to receive distributions in certain complete liquidations without
having any gain considered under section 341(a)(1) or (2) as gain from
the sale or exchange of property which is not a capital asset. Under
section 341(e)(3), a third exception is designed to permit the
shareholders of a corporation to make use of section 333, relating to
elections as to recognition of gain in certain complete liquidations
occurring within one calendar month. Under section 341(e)(4), the fourth
exception permits a corporation to make use of section 337, relating to
nonrecognition of gain or loss on sales or exchanges of property by a
corporation following the adoption of a plan of complete liquidation.
Section 341(e) does not apply to distributions in partial liquidation or
in redemption of stock (other than any such distribution pursuant to a
plan of complete liquidation), or to distributions described in section
301(c)(3)(A).
(2) Effective date. The exceptions in section 341(e)(1), (2), and
(3) apply only with respect to taxable years of shareholders beginning
after December 31, 1957, and only with respect to sales or exchanges of
stock and distributions of property occurring after September 2, 1958.
The exception in section 341(e)(4) applies only with respect to taxable
years of corporations beginning after December 31, 1957, and only if all
sales or exchanges of property, and all liquidating distributions, made
by the corporation under the plan of complete liquidation occur after
September 2, 1958.
(3) Definition of constructive shareholder and attribution rules.
(i) For purposes of this section, the term constructive shareholder
means a person who does not actually own any stock but who is considered
to own stock by reason of the application of subdivision (ii) of this
subparagraph.
(ii) For purposes of this section (other than paragraph (k),
relating to definition of related person) a person shall be considered
to own the stock he actually owns plus any stock which is attributed to
him by reason of applying the rules prescribed in paragraph (b)(2) and
(3) of Sec. 1.341-4. See section 341(e)(10).
(iii) As an example of this subparagraph, if a husband does not
actually own any stock in a corporation but his wife is the actual owner
of 5 shares in the corporation, then the husband is a constructive
shareholder who is considered to own 5 shares in the corporation.
(4) General corporate test. No exception provided in section 341(e)
applies unless a general corporate test and, where applicable, a
specific shareholder test are satisfied. Under the general corporate
test no taxpayer may utilize the provisions of section 341(e) unless the
net increase in value (called ``net unrealized appreciation'') in the
corporation's ``subsection (e) assets'' does not exceed 15 percent of
the corporation's net worth. Subsection (e) assets are, in general,
those assets of the corporation which, if sold at a gain by the
corporation or by any actual or constructive shareholder who is
considered to own more than 20 percent in value of the outstanding
stock, would result in the realization of ordinary income. See paragraph
(b) of this section for the definition of subsection (e) assets, and
paragraph (h) of this section for definition of net unrealized
appreciation. This subparagraph may be illustrated by the following
examples:
Example 1. X Corporation is in the business of selling whiskey. The
net unrealized appreciation in its whiskey is $20,000 and the net worth
of the corporation is $100,000. Since the corporation's whiskey is a
subsection (e) asset and since the net unrealized appreciation in
subsection (e) assets ($20,000) exceeds 15 percent of net worth
($15,000), the general corporate test is not satisfied and section
341(e) is inapplicable to the corporation or its shareholders.
Example 2. Assume the same facts as in Example (1) except that X
Corporation is not in the business of selling whiskey. Assume further
that an actual shareholder who owns more than 20 percent in value of the
outstanding X stock (or a person who is considered to own such actual
shareholder's stock, such as his spouse) is in the business of selling
whiskey. The result is the same as in Example (1).
[[Page 211]]
(5) Specific shareholder test. Even if the general corporate test is
met, a shareholder selling or exchanging his stock or receiving a
distribution with respect to his stock (referred to as a ``specific
shareholder'') who is considered to own more than 5 percent in value of
the outstanding stock of the corporation may not utilize the benefits of
the exception in section 341(e)(1) (or the exception in section
341(e)(2)) unless he satisfies the applicable specific shareholder test.
In general, the specific shareholder test is satisfied if the net
unrealized appreciation in subsection (e) assets of the corporation,
plus the net unrealized appreciation in certain other assets of the
corporation which would be subsection (e) assets in respect of the
specific shareholder under the following circumstances, does not exceed
15 percent of the corporation's net worth:
(i) If the specific shareholder is considered to own more than 5
percent but not more than 20 percent in value of the outstanding stock,
he must take into account the net unrealized appreciation in assets of
the corporation which would be subsection (e) assets if he was
considered to own more than 20 percent in value of the outstanding stock
(see paragraph (c)(3)(i) of this section);
(ii) In addition, if the specific shareholder is considered to own
more than 20 percent in value of the outstanding stock, he must also
take into account the net unrealized appreciation in assets of the
corporation which would be subsection (e) assets under section
341(e)(5)(A)(i) and (iii) if his ownership within the preceding 3 years
of stock in certain ``related'' corporations were taken into account in
the manner prescribed in paragraphs (c)(3)(ii) and (d) of this section.
(b) Subsection (e) asset defined--(1) General. The benefits of
section 341(e) are unavailable if the net unrealized appreciation (as
defined in paragraph (h) of this section) in certain assets of the
corporation (hereinafter called ``subsection (e) assets'') exceeds 15
percent of the corporation's net worth. In determining whether property
is a subsection (e) asset, it is immaterial whether the property is
described in section 341(b), and there shall not be taken into account
sections 617(d) (relating to gain from dispositions of certain mining
property), 1245 and 1250 (relating to gain from dispositions of certain
depreciable property), 1251 (relating to gain from disposition of farm
property where farm losses offset nonfarm income), 1252 (relating to
gain from disposition of farm land), and 1254 (relating to gain from
disposition of natural resource recapture property).
(2) Categories of subsection (e) assets. The term subsection (e)
assets, as defined in section 341(e)(5)(A)(i), (ii), (iii), and (iv),
means the following categories of property held by a corporation:
(i) The first category is property (except property described in
section 1231(b), without regard to any holding period prescribed
therein) which in the hands of the corporation is, or in the hands of
any actual or constructive shareholder who is considered to own more
than 20 percent in value of the outstanding stock of the corporation
would be, property gain from the sale or exchange of which would under
any provision of chapter 1 of the Code (other than section 617(d), 1245,
1250, 1251, 1252, or 1254) be considered in whole or in part as gain
from the sale or exchange of property which is neither a capital asset
nor property described in section 1231(b). For example, included in this
category is property held by a corporation which in its hands is stock
in trade, inventory, or property held by it primarily for sale to
customers in the ordinary course of its trade or business regardless of
whether such property is appreciated or depreciated in value. Also
included in this category is property held by a corporation which is a
capital asset in its hands but which, in the hands of any actual or
constructive shareholder who is considered to own more than 20 percent
in value of the outstanding stock, would be stock in trade, inventory,
or property held by such actual or constructive shareholder primarily
for sale to customers in the ordinary course of his trade or business.
For additional rules relating to whether property is a subsection (e)
asset under this subdivision, see subparagraphs (3), (4), and (5) of
this paragraph.
[[Page 212]]
(ii) The second category of subsection (e) assets is property which
in the hands of the corporation is property described in section 1231(b)
(without regard to any holding period prescribed therein), but only if
there is net unrealized depreciation (within the meaning of paragraph
(h)(2) of this section) on all such property. This subdivision may be
illustrated by the following example:
Example. X Corporation owns only the following section 1231(b)
property (determined without regard to holding period).
------------------------------------------------------------------------
Fair Unreal- ized
Oil leaseholds Adjusted market appreciation
basis value (depreciation)
------------------------------------------------------------------------
No. 1............................... $16,000 $10,000 ($6,000)
No. 2............................... 8,000 5,000 (3,000)
No. 3............................... 5,000 5,000 0
No. 4............................... 3,000 5,000 2,000
-----------------------------------
Totals............................. 32,000 25,000 (7,000)
------------------------------------------------------------------------
Since with respect to such property the unrealized depreciation in
property on which there is unrealized depreciation ($9,000) exceeds the
unrealized appreciation in property on which there is unrealized
appreciation ($2,000), all such property is included in subsection (e)
assets under clause (ii) of section 341(e)(5)(A).
(iii) The third category of subsection (e) assets exists only if
there is net unrealized appreciation on all property which in the hands
of the corporation is property described in section 1231(b) (without
regard to any holding period prescribed therein). In such case, any such
section 1231(b) property (whether appreciated or depreciated) is a
subsection (e) asset of the third category if, in the hands of an actual
or constructive shareholder who is considered to own more than 20
percent in value of the outstanding stock of the corporation, such
property would be property gain from the sale or exchange of which would
under any provision of chapter 1 of the Code (other than section 617(d),
1245, 1250, 1251, 1252, or 1254) be considered in whole or in part as
gain from the sale or exchange of property which is neither a capital
asset nor property described in section 1231(b). Included in this
category, for example, is property which in the hands of the corporation
is property described in section 1231(b) (without regard to any holding
period prescribed therein), but which in the hands of an actual or
constructive more-than-20-percent shareholder would be property used in
his trade or business held for not more than 1 year (6 months for
taxable years beginning before 1977; 9 months for taxable years
beginning in 1977), stock in trade, inventory, or property held by such
shareholder primarily for sale to customers in the ordinary course of
his trade or business. For additional rules relating to whether property
is a subsection (e) asset under this subdivision, see subparagraphs (3)
and (4) of this paragraph. This subdivision may be further illustrated
by the following example:
Example. Assume the same facts as stated in the example under
subdivision (ii) of this subparagraph, except that in addition to the
oil leaseholds the corporation also owns land which has a fair market
value of $30,000 and an adjusted basis of $20,000 and which in the hands
of the corporation is property described in section 1231(b) (without
regard to any holding period prescribed therein). Assume further that A
is a constructive shareholder of the corporation who is considered to
own 25 percent in value of its outstanding stock and that A holds land
primarily for sale to customers in the ordinary course of his trade or
business, and that no actual or constructive shareholder who is
considered to own more than 20 percent in value of the stock of
corporation X so holds oil leases. Since with respect to the
corporation's section 1231(b) property the unrealized appreciation in
such property on which there is unrealized appreciation ($12,000)
exceeds the unrealized depreciation in such property on which there is
unrealized depreciation ($9,000), then clause (iii), and not clause
(ii), of section 341(e)(5)(A) is applicable. Therefore, no oil lease of
the corporation is a subsection (e) asset. However, since in the hands
of A, a more-than-20-percent constructive shareholder, the land would be
property gain from the sale or exchange of which would be considered as
gain from the sale or exchange of property which is neither a capital
asset nor property described in section 1231(b), the land is a
subsection (e) asset. Consequently, the net unrealized appreciation on
subsection (e) assets of the corporation is $10,000 since the net
unrealized depreciation on the oil leases is not taken into account.
(iv) The fourth category of subsection (e) assets is property
(unless included under subdivision (i), (ii), or (iii) of this
subparagraph) which consists of
[[Page 213]]
a copyright, a literary, musical, or artistic composition, a letter or
memorandum, or similar property, or any interest in any such property,
if the property was created in whole or in part by the personal efforts
of, or, in the case of a letter, memorandum, or property similar to a
letter or memorandum, was prepared, or produced in whole or in part,
for, any individual actual or constructive shareholder who is considered
to own more than 5 percent in value of the outstanding stock of the
corporation. For items included in the phrase ``similar property'' see
paragraph (c) of Sec. 1.1221-1. In general, property is created in
whole or in part by the personal efforts of an individual if such
individual performs literary, theatrical, musical, artistic, or other
creative or productive work which affirmatively contributes to the
creation of the property, or if such individual directs and guides
others in the performance of such work. An individual, such as a
corporate executive, who merely has administrative control of writers,
actors, artists, or personnel and who does not substantially engage in
the direction and guidance of such persons in the performance of their
work, does not create property by his personal efforts. However, a
letter or memorandum, or property similar to a letter or memorandum,
which is prepared by personnel who are under the administrative control
of an individual, such as a corporate executive, shall be deemed to have
been prepared or produced for him whether or not such letter,
memorandum, or similar property is reviewed by him. In addition, a
letter, memorandum, or property similar to a letter or memorandum,
addressed to an individual shall be considered as prepared or produced
for him. In the case of a letter, memorandum, or property similar to a
letter or memorandum, this subdivision applies only to sales and other
dispositions occurring after July 25, 1969.
(3) Manner of determination. For purposes of determining whether
property is a subsection (e) asset under subparagraph (2)(i) or (iii) of
this paragraph, the determination as to whether property of a
corporation in the hands of the corporation is, or in the hands of an
actual or constructive shareholder of the corporation would be, property
gain from the sale or exchange of which would under any provision of
chapter 1 of the Code (other than section 617(d), 1245, 1250, 1251,
1252, or 1254) be considered in whole or in part as gain from the sale
or exchange of property which is neither a capital asset nor property
described in section 1231(b) shall be made as if all property of the
corporation had been sold or exchanged to one person in one transaction.
For example, if a corporation whose sole asset is an interest in a gas
well has entered into a long-term contract for the future delivery of
gas from the well, the ownership of which will pass to the buyer only
after extraction or severance from the well, the determination as to
whether such contract is a subsection (e) asset shall be made as if the
contract were sold or exchanged to one person in one transaction
together with such corporation's interest in the well. An assumed sale
under this subparagraph does not affect the character of property which
is held for sale to customers in the ordinary course of a person's trade
or business or the character of a transaction which would be an
anticipatory assignment of income. Thus, for example, if a corporation
holds subdivided lots for sale to customers in the ordinary course of
its trade or business, this subparagraph shall not be applied to change
the manner in which the lots are held.
(4) Shareholder reference test. For purposes of subparagraph (2)(i)
and (iii) of this paragraph, in determining whether any property of the
corporation would, in the hands of a particular actual or constructive
shareholder, be property gain from the sale or exchange of which would
be considered in whole or in part as gain from the sale or exchange of
property which is neither a capital asset nor property described in
section 1231(b), all the facts and circumstances of the direct and
indirect activities of the shareholder must be taken into account. If
the particular shareholder holds property primarily for sale to
customers in the ordinary course of his trade or business and if similar
property is held by the corporation, then in the hands of the
shareholder such corporate property will be
[[Page 214]]
treated as held primarily for sale to customers in the ordinary course
of his trade or business. Moreover, even if the shareholder does not
presently so hold property which is similar to property held by the
corporation, it may be determined under the particular facts and
circumstances (taking into account an assumed sale of such corporate
property by the shareholder, all his other direct and indirect
activities, and, if applicable, the fact that he previously so held
similar property) that he would hold the corporate property primarily
for sale to customers in the ordinary course of his trade or business.
See also paragraph (d) of this section, pertaining to effect of stock in
related corporations.
(5) Special rule for stock in shareholder's investment account. If--
(i) A dealer in stock or securities is an actual shareholder
(considered to own more than 20 percent of the outstanding stock of a
corporation) and holds such stock which he actually owns in his
investment account pursuant to section 1236(a), or
(ii) A dealer in stock or securities is a constructive shareholder
who is considered to own more than 20 percent of the outstanding stock
of a corporation,
then stock or securities held by such corporation shall not be
considered subsection (e) assets under subparagraph (2)(i) of this
paragraph solely because such actual or constructive shareholder is a
dealer in stock or securities. However, stock held by such corporation
shall be considered as a subsection (e) asset if, in the hands of any
more-than-20-percent actual or constructive shareholder of the
corporation, the gain (or any portion thereof) upon a sale of such stock
would (if it were held for more than 1 year (6 months for taxable years
beginning before 1977; 9 months for taxable years beginning in 1977),
constitute, by reason of the application of section 341, gain from the
sale of property which is not a capital asset. This subparagraph may be
illustrated by the following example:
Example. Jones, a more-than-20-percent actual shareholder in
corporation X holds his X stock in an investment account in the manner
prescribed in section 1236(a). Jones is a dealer in stock and securities
and holds land for sale to customers in the ordinary course of his trade
or business. No other actual or constructive shareholder is a dealer in
stock and securities or so holds land. X holds all of the stock in
corporation Y, a collapsible corporation within the meaning of section
341(b). Y's sole asset is land on which unrealized appreciation exceeds
15 percent of Y's net worth. Since Jones holds his X stock in an
investment account pursuant to section 1236(a), the Y stock cannot be
considered a subsection (e) asset of the X Corporation merely because
Jones is a dealer in stock and securities. Nevertheless, the Y stock is
a subsection (e) asset of the X Corporation because if Jones were
treated as having sold the Y stock, his gain would be treated as gain
from the sale of property which is not a capital asset by reason of the
application of section 341. If, however, the net unrealized appreciation
on Y's land did not exceed 15 percent of Y's net worth the Y stock would
not be a subsection (e) asset since section 341(e)(1) would except such
sale from the application of section 341.
(c) Sales or exchanges of stock--(1) General. Section 341(e)(1)
provides that, if certain requirements are satisfied, the provisions of
section 341(a)(1) shall in no event apply to certain sales or exchanges
of stock by a shareholder. See subparagraph (5) of this paragraph for
sales or exchanges of stock which do not qualify under section
341(e)(1). Section 341(e)(1) applies to a sale or exchange of stock by a
shareholder only if, at the time of such sale or exchange, the general
corporate test and, if applicable, the specific shareholder test are
satisfied.
(2) General corporate test. The general corporate test is satisfied
if the net unrealized appreciation in subsection (e) assets of the
corporation does not exceed an amount equal to 15 percent of the net
worth of the corporation. See paragraphs (h), (b), and (j) of this
section for the definition of ``net unrealized appreciation,''
``subsection (e) assets,'' and ``net worth.''
(3) Specific shareholder test. The specific shareholder test (if
applicable) is satisfied if the following conditions are met:
(i) If the shareholder selling or exchanging the stock is considered
to own more than 5 percent but not more than 20 percent in value of the
outstanding stock, the sum of the net unrealized appreciation in the
following
[[Page 215]]
assets of the corporation must not exceed an amount equal to 15 percent
of the net worth of the corporation:
(a) The subsection (e) assets of the corporation, plus
(b) The other assets of the corporation which would be subsection
(e) assets under section 341(e)(5)(A)(i) and (iii) if such shareholder
were considered to own more than 20 percent in value of the outstanding
stock.
(ii) If the shareholder selling or exchanging the stock is
considered to own more than 20 percent in value of the outstanding
stock, the sum of the net unrealized appreciation in the following
assets of the corporation must not exceed an amount equal to 15 percent
of the net worth of the corporation:
(a) The subsection (e) assets of the corporation, plus
(b) The other assets of the corporation which would be subsection
(e) assets under section 341(e)(5)(A)(i) and (iii) if the shareholder's
ownership of stock in certain related corporations were taken into
account in the manner prescribed in paragraph (d) of this section.
(4) Example. Subparagraph (3) of this paragraph may be illustrated
by the following example:
Example. Assume an individual, A, and his grandfather, G, each
actually owns 3 percent in value of the stock of corporation X, a
corporation holding apartment houses used in its trade or business on
which net unrealized appreciation exceeds 15 percent of X's net worth.
A, but not G, holds apartment houses primarily for sale to customers in
the ordinary course of trade or business. Assume that X satisfies the
general corporate test. A and G desire to sell their stock and to take
advantage of section 341(e)(1). Since a grandfather and grandson are
each considered to own the other's stock under paragraph (a)(3)(ii) of
this section, A and G are each considered to own 6 percent in value of
corporation X's outstanding stock. Therefore, A cannot avail himself of
section 341(e)(1) since he does not satisfy the specific shareholder
test prescribed in subparagraph (3)(i) of this paragraph. G, however,
who is considered to own 6 percent in value of the stock, does not hold
apartment houses for sale to customers in the ordinary course of trade
or business. Therefore, G satisfies the specific shareholder test and
may benefit from section 341(e)(1).
(5) Nonqualifying sales or exchanges. Section 341(e)(1) does not
apply to any sale or exchange of stock to the issuing corporation. Thus,
stock redemptions (including distributions in complete or partial
liquidation) cannot qualify under section 341(e)(1). In addition,
section 341(e)(1) does not apply in any case where a shareholder who is
considered to own more than 20 percent in value of the outstanding stock
sells or exchanges stock to any person related (within the meaning of
paragraph (k) of this section) to such shareholder. A sale or exchange
of stock of the corporation by a shareholder to which section 341(e)(1)
does not apply because of this subparagraph shall have no effect on the
application of this section to other sales or exchanges of stock of the
corporation.
(6) Example. For an illustration of the application of this
paragraph, see Example (2) in paragraph (o) of this section.
(d) Stock in related corporations--(1) General. This paragraph
provides rules for applying the specific shareholder test prescribed in
paragraph (c)(3)(ii) of this section for purposes of determining whether
section 341(e)(1) (relating to sales or exchanges of stock of a
corporation) or section 341(e)(2) (relating to distributions in complete
liquidation of a corporation) applies to an actual shareholder who is
considered as owning more than 20 percent in value of the corporation's
outstanding stock. In general, if such a more-than-20-percent
shareholder of such corporation (referred to as a ``first'' corporation)
owns, or at any time during the preceding 3 years has owned, more than
20 percent in value of the outstanding stock of a ``related''
corporation (see subparagraph (2) of this paragraph), then certain
transactions in respect of the stock of the related corporation are
taken into account in the manner prescribed in subparagraph (3) of this
paragraph. By taking such transactions into account, such shareholder of
the first corporation may be deemed to hold primarily for sale to
customers in the ordinary course of trade or business property similar
or related in service or use to property owned by the
[[Page 216]]
first corporation where his other activities, direct and indirect, are
insufficient to treat him as so holding such property. See section
341(e)(1)(C) and (2)(C). The transactions in respect of stock in a
related corporation are taken into account solely for the purpose of
determining the extent to which assets (other than subsection (e)
assets) of the first corporation are treated as subsection (e) assets
under the shareholder reference tests of section 341(e)(5)(A)(i) and
(iii). For purposes of this paragraph, the term ``similar or related in
service or use'' shall have the same meaning as such term has in section
1033 (relating to involuntary conversions), without regard to subsection
(g) thereof.
(2) Related corporation defined. (i) A corporation (referred to as a
``second'' corporation) is ``related'' to another corporation (referred
to as a ``first'' corporation) if the stock ownership test specified in
subdivision (ii) of this subparagraph and the more-than-70-percent-asset
comparison test specified in subdivision (iii) of this subparagraph are
met.
(ii) The stock ownership test specified in this subdivision is met--
(a) In the case of a sale or exchange referred to in paragraph
(c)(1) of this section, if the shareholder in the first corporation is
considered to own on the date of such sale or exchange more than 20
percent in value of the outstanding stock of the first corporation, and
if on such date (or at any time during the 3-year period preceding such
date) such shareholder in the first corporation is an actual or
constructive shareholder in the second corporation who was considered to
own more than 20 percent in value of the outstanding stock of the second
corporation, or
(b) In the case of a distribution pursuant to the adoption by the
first corporation of a plan of complete liquidation referred to in
paragraph (e) of this section, if the shareholder in the first
corporation is considered to own on any date after the adoption of such
plan more than 20 percent in value of the outstanding stock of the first
corporation, and if on such date (or at any time during the 3-year
period preceding such date) such shareholder in the first corporation
was an actual or constructive shareholder in the second corporation who
was considered to own more than 20 percent in value of the outstanding
stock of the second corporation.
(iii) The more-than-70-percent-asset comparison test specified in
this subdivision is met if more than 70 percent in value of the assets
of the second corporation (at any of the applicable times determined
under subdivision (ii) of this subparagraph during which the shareholder
of the first corporation is or was considered to own more than 20
percent in value of the outstanding stock of the second corporation)
are, or were, assets similar or related in service or use to assets
comprising more than 70 percent in value of the assets of the first
corporation (at any of the times determined under subdivision (ii) of
this subparagraph during which the shareholder of the first corporation
is or was considered to own more than 20 percent in value of the
outstanding stock of the first corporation).
(iv) This subparagraph may be illustrated by the following example:
Example. X is a first corporation and Y is a second corporation. On
January 15, 1960, Jones purchased 21 percent in value of the outstanding
stock of X, which he sold on January 1, 1961. On January 15, 1955, Jones
had purchased 21 percent in value of the outstanding stock of Y which he
sold on December 15, 1959. Since Jones owned 21 percent of the
outstanding X stock on January 1, 1961 (the date he sold his X stock)
and also owned 21 percent of the outstanding Y stock at some time during
the 3-year period preceding January 1, 1961, the stock ownership test
specified in subdivision (ii)(a) of this subparagraph is met. Assume
that more than 70 percent in value of the assets of Y were apartment
houses held for rental purposes at some time between January 1, 1958,
and December 15, 1959 (the portion of the 3-year period preceding the
date Jones sold his X stock during which he was a more-than-20-percent
shareholder in Y) and that more than 70 percent in value of the assets
of X were apartment houses held for rental purposes at some time during
the period January 15, 1960, to January 1, 1961, inclusive (the portion
of the 3-year period preceding the date he sold his X stock during which
he was a more-than-20-percent shareholder in X). Thus, the more-than-70-
percent-asset comparison test specified in subdivision (iii) of this
subparagraph is met. Accordingly, corporation Y is related to
corporation X within the meaning of this subparagraph.
[[Page 217]]
(3) Manner of taking into account. If an actual shareholder in a
first corporation who is considered to own more than 20 percent of the
first corporation's stock, owns or has owned stock in a related
corporation, then--
(i) Any sale or exchange by such shareholder, during the applicable
period specified in subparagraph (2)(ii) of this paragraph, of stock in
the related corporation shall be treated as a sale or exchange by him of
his proportionate share of the assets of the related corporation, if
immediately before such sale or exchange he was an actual shareholder of
the related corporation who was considered to own more than 20 percent
in value of the outstanding stock of the related corporation. A
shareholder's proportionate share of the assets of a related corporation
shall be that percent of each asset of the related corporation as the
fair market value of the stock of the related corporation which he
actually sold or exchanged bears, immediately before such sale or
exchange, to the total fair market value of the outstanding stock of
such related corporation; and
(ii) Any sale or exchange of property by the related corporation
during the applicable period specified in subparagraph (2)(ii) of this
paragraph, gain or loss on which was not recognized to the related
corporation by reason of the application of section 337(a), shall be
treated as a sale or exchange by him of his proportionate share of the
related corporation's property sold or exchanged, if at the time of such
sale or exchange he was an actual or constructive shareholder of the
related corporation who was considered to own more than 20 percent in
value of the outstanding stock of such related corporation. A
shareholder's proportionate share of such related corporation's property
sold or exchanged shall be that percent of each such property sold or
exchanged as the fair market value of the stock which he was considered
to own in the related corporation immediately before such sale or
exchange bears to the total fair market value of the outstanding stock
of such related corporation at such time.
(4) Example. This paragraph may be illustrated by the following
example:
Example. (i) A owns 25 percent in value of the outstanding stock of
Z Corporation. On December 31, 1959, he sells all his stock in the
corporation and desires to take advantage of section 341(e)(1). The only
asset of Z Corporation is an appreciated apartment house held for rental
purposes but which is not a subsection (e) asset. However, during the
preceding 3-year period A sold 25 percent in value of the outstanding
stock of each of 3 related corporations. More than 70 percent in value
of the assets of each related corporation consisted of an apartment
house.
(ii) In determining whether the apartment house owned by Z
Corporation would be a subsection (e) asset under the shareholder
reference test of section 341(e)(5)(A)(iii), A is treated as having sold
a one-fourth interest in each of 3 apartment houses during the preceding
3-year period and these sales must be taken into account, together with
all other facts and circumstances, in determining whether the apartment
house owned by Z Corporation would be, in the hands of A, property gain
from the sale or exchange of which would under any provision of chapter
1 of the Code (other than section 1245 or 1250) be considered as gain
from the sale or exchange of property which is neither a capital asset
nor property described in section 1231(b). However, A's sales of related
corporation stock are not taken into account in determining whether
section 341(e)(1) or (2) would be applicable to sales or exchanges of
stock by (or liquidating distributions to) other shareholders of Z
Corporation.
(e) Distributions in certain liquidations pursuant to section 337--
(1) In general. Section 341(e)(2) provides that, if certain requirements
are met, the provisions of section 341(a)(2) shall in no event apply to
certain distributions in complete liquidation of a corporation. Section
341(e)(2) applies with respect to any distribution to a shareholder
pursuant to a plan of complete liquidation if the following 3
requirements are satisfied:
(i) By reason of the application of section 341(e)(4) and paragraph
(g) of this section, section 337(a) applies to sales or exchanges of
property by the corporation within the 12-month period beginning on the
date of the adoption of such plan. Thus, for example, section 341(e)(2)
is not applicable in any case where depreciable, amortizable, or
depletable property is distributed after the date of adoption of the
plan or if the corporation does not sell substantially all of the
properties held by it on such date within such 12-month period, since
such a distribution, or the failure
[[Page 218]]
to make such a sale, makes section 337(a) inapplicable under section
341(e)(4).
(ii) At all times within such 12-month period the general corporate
test of paragraph (c)(2) of this section is satisfied.
(iii) In respect of the shareholder who receives the distribution--
(a) At all times within such 12-month period while such shareholder
is considered to own more than 5 percent but not more than 20 percent in
value of the outstanding stock of the corporation, the shareholder must
satisfy the specific shareholder test of paragraph (c)(3)(i) of this
section, and
(b) At all times within such 12-month period while such shareholder
is considered to own more than 20 percent in value of the outstanding
stock of the corporation, the shareholder must satisfy the specific
shareholder test of paragraph (c)(3)(ii) of this section.
(2) Illustration. For an illustration of this paragraph, see Example
(4) in paragraph (o) of this section.
(f) Recognition of gain in certain liquidations under section 333.
Section 341(e)(3) provides that, for purposes of section 333 (relating
to elections as to recognition of gain in certain complete liquidations
occurring within one calendar month), a corporation is considered not to
be a collapsible corporation if, at all times after the adoption of the
plan of complete liquidation, the net unrealized appreciation in
subsection (e) assets of the corporation does not exceed an amount equal
to 15 percent of the net worth of the corporation. For purposes of the
preceding sentence, the determination of subsection (e) assets shall be
made in accordance with paragraph (b) of this section except that
subparagraph (2)(i) and (iii) of such paragraph (b) shall apply in
respect of any actual or constructive shareholder who is considered to
own more than 5 percent in value of the outstanding stock (in lieu of
any actual or constructive shareholder who is considered to own more
than 20 percent in value of such stock). Thus, no shareholder of the
corporation can qualify under paragraph (3) of section 341(e) for use of
section 333 if, because of any actual or constructive shareholder who is
considered to own more than 5 percent in value of the stock, this
modified general corporate test is not satisfied. On the other hand,
once this modified general corporate test is satisfied, all the
shareholders can use section 333 (assuming that the requirements of that
section are satisfied) since there is no specific shareholder test. For
an illustration of this paragraph, see Example (3) in paragraph (o) of
this section.
(g) Gain or loss on sales or exchanges in connection with certain
liquidations, pursuant to section 337--(1) General. Section 341(e)(4)
provides that solely for purposes of section 337, a corporation is
considered not to be a collapsible corporation if (i) at all times
within the 12-month period beginning on the date of the adoption of a
plan of complete liquidation, the net unrealized appreciation in
subsection (e) assets of the corporation does not exceed an amount equal
to 15 percent of the net worth of the corporation; (ii) within the 12-
month period beginning on the date of the adoption of such plan, the
corporation sells substantially all of the properties held by it on such
date; and (iii) following the adoption of such plan, no distribution is
made of any property which in the hands of the corporation or in the
hands of the distributee is property in respect of which a deduction for
exhaustion, wear and tear, obsolescence, amortization, or depletion is
allowable. Thus, if at the time of the adoption of the plan of
liquidation the corporation is a collapsible corporation within the
meaning of section 341(b) and if the preceding requirements are
satisfied, then except as provided in subparagraph (2) of this paragraph
section 337(a) will apply to such corporation but the corporation will
continue to be a collapsible corporation within the meaning of section
341(b) (including for purposes of section 341(e)(2)) with the result
that each shareholder must still satisfy all the tests in paragraph (e)
of this section before he can utilize the benefits of section 341(e)(2).
(2) Exception to section 337 treatment. Section 341(e)(4) shall not
apply with respect to any sale or exchange of property by the
corporation to any actual or constructive shareholder who is considered
to own more than 20 percent in value of the outstanding stock of the
corporation or to any person related
[[Page 219]]
(within the meaning of paragraph (k) of this section) to such actual or
constructive shareholder if such property in the hands of the
corporation, or in the hands of such shareholder or such related person,
is property in respect of which a deduction for exhaustion, wear and
tear, obsolescence, amortization, or depletion is allowable. Thus, gain
or loss will be recognized on such sales or exchanges.
(3) Cross references. For effective date of section 341(e)(4) and
this paragraph, see paragraph (a)(2) of this section. For an
illustration of this paragraph, see Example (4) in paragraph (o) of this
section.
(h) Net unrealized appreciation and depreciation defined--(1) Net
unrealized appreciation. For purposes of this section, the term net
unrealized appreciation means, with respect to the assets of a
corporation, the amount by which--
(i) The unrealized appreciation in such assets on which there is
unrealized appreciation, exceeds
(ii) The unrealized depreciation in such assets on which there is
unrealized depreciation.
(2) Net unrealized depreciation. For purposes of paragraph
(b)(2)(ii) of this section, there is net unrealized depreciation on all
property of a corporation which in its hands is property described in
section 1231(b) (without regard to any holding period prescribed
therein) if--
(i) The unrealized depreciation in such property on which there is
unrealized depreciation, exceeds
(ii) The unrealized appreciation in such property on which there is
unrealized appreciation.
(3) Unrealized appreciation or depreciation. For purposes of this
paragraph--
(i) The term unrealized appreciation means (except as provided in
subparagraph (4) of this paragraph), with respect to any asset, the
amount by which (a) the fair market value of such asset, exceeds (b) the
adjusted basis for determining gain from the sale or other disposition
of such asset; and
(ii) The term unrealized depreciation means, with respect to any
asset, the amount by which (a) the adjusted basis for determining gain
from the sale or other disposition of such asset, exceeds (b) the fair
market value of such asset.
(4) Special rule. For purposes of determining whether the net
unrealized appreciation in subsection (e) assets of a corporation
exceeds an amount equal to 15 percent of the corporation's net worth
under the tests of section 341(e)(1), (2), (3), and (4), in the case of
any asset on the sale or exchange of which only a portion of the gain
would under any provision of chapter 1 of the Code (other than section
617(d), 1245, 1250, 1251, 1252, or 1254) be considered as gain from the
sale or exchange of property which is neither a capital asset nor
property described in section 1231(b), there shall be taken into account
only an amount equal to the unrealized appreciation in such asset which
is equal to such portion of the gain. This subparagraph shall have no
effect on whether paragraph (b)(2)(ii) or (iii) of this section applies
for purposes of identifying the subsection (e) assets of the
corporation.
(i) [Reserved]
(j) Net worth defined. For purposes of this section, the net worth
of a corporation, as of any day, is the amount by which--
(1) The fair market value of all its assets at the close of such
day, plus the amount of any distribution (taken into account at fair
market value on the date of such distribution) in complete liquidation
made by it on or before such day, exceeds
(2) All its liabilities at the close of such day.
In computing the fair market value of all the assets of a corporation at
the close of such day, there shall be excluded any amount attributable
to money or property received by it during the one-year period ending on
such day for stock, or as a contribution to capital or as paid-in
surplus, if it appears that there was not a bona fide business purpose
for the transaction in respect of which such money or property was
received.
(k) Related person defined--(1) General. For purposes of paragraphs
(c)(5) and (g)(2) of this section, the following persons are considered
to be related to a shareholder:
(i) If the shareholder is an individual--
(a) His spouse, ancestors, and lineal descendants, and
[[Page 220]]
(b) Any corporation which is controlled by him.
(ii) If the shareholder is a corporation--
(a) A corporation which controls, or is controlled by, such
shareholder, and
(b) If more than 50 percent in value of the outstanding stock of
such shareholder is owned by any person, any corporation more than 50
percent in value of the outstanding stock of which is owned by the same
person.
(2) Control. For purposes of this paragraph, control means the
ownership of stock possessing at least 50 percent of the total combined
voting power of all classes of stock entitled to vote or at least 50
percent of the total value of shares of all classes of stock of the
corporation.
(3) Constructive ownership rules. In determining the ownership of
stock for purposes of this paragraph, the constructive ownership rules
of section 267(c) shall apply, except that the family of an individual
shall include only his spouse, ancestors, and lineal descendants.
(l) [Reserved]
(m) Corporations and shareholders not meeting requirements. In
determining whether the provisions of section 341 (a) through (d) apply
with respect to any corporation, the fact that such corporation, or such
corporation with respect to any of its shareholders, does not meet the
requirements of section 341(e)(1), (2), (3), or (4) shall not be taken
into account, and such determination shall be made as if section 341(e)
had not been enacted.
(n) Determinations without regard to sections 617(d), 1245, 1250,
1251, 1252, and 1254. For purposes of this section, the determination of
whether gain from the sale or exchange of property would under any
provision of chapter 1 of the Code be considered as gain from the sale
or exchange of property which is neither a capital asset nor property
described in section 1231(b) shall be made without regard to the
application of sections 617(d)(1) (relating to gain from dispositions of
certain mining property), 1245(a) and 1250(a) (relating to gain from
dispositions of certain depreciable property), 1251(c) (relating to gain
from the disposition of farm property where farm losses offset nonfarm
income), 1252(a) (relating to gain from disposition of farm land), and
1254(a) (relating to gain from disposition of interest in natural
resource recapture property).
(o) Illustrations. The operation of section 341(e) may be
illustrated by the following examples:
Example 1. (i) The outstanding stock of X Corporation is actually
owned, on the basis of value, 75 percent by A, 15 percent by B, and 10
percent by C. None of the stock actually owned by one is attributed to
another under the constructive ownership rules of paragraph (a)(3) of
this section. The corporation owns no property which, in its hands, is
property gain from the sale or exchange of which would be considered
(without regard to section 617(d), 1245 or 1250, 1251, or 1252) as gain
from the sale or exchange of property which is neither a capital asset
nor property described in section 1231(b). The corporation owns no
property described in section 1231(b) except an apartment house on which
the unrealized appreciation is $20,000 and which in the hands of A would
be property held primarily for sale to customers in the ordinary course
of trade or business. The corporation owns no property of the type
described in clause (iv) of section 341(e)(5)(A). The net worth of the
corporation is $100,000.
(ii) Although the apartment house in the hands of the corporation is
section 1231(b) property, in the hands of A, a more-than-20-percent
shareholder, the apartment house would be ordinary-income type property.
Therefore, the apartment house is a subsection (e) asset under clause
(iii) of section 341(e)(5)(A). Accordingly, since the net unrealized
appreciation in subsection (e) assets ($20,000) exceeds 15 percent of
net worth ($15,000), the general corporate test is not satisfied and
section 341(e) is unavailable to the corporation or its shareholders.
Example 2. (i) Assume the same facts as in Example (1), except that
in the hands of B, but not in the hands of A or C, the apartment house
would be property held primarily for sale to customers in the ordinary
course of trade or business.
(ii) Since B does not own more than 20 percent in value of the
outstanding stock, the fact that the apartment house owned by the
corporation would, in his hands, be property held primarily for sale to
customers in the ordinary course of trade or business does not make the
apartment house owned by the corporation a subsection (e) asset.
Therefore, since the net unrealized appreciation in subsection (e)
assets (zero) does not exceed 15 percent of net worth, the general
corporate test is satisfied. C may sell his stock to anyone (other than
X Corporation) and will qualify under section 341(e)(1). However, a sale
by A of his stock to persons related to
[[Page 221]]
A within the meaning of paragraph (k) of this section will not so
qualify.
(iii) B, however, since he owns more than 5 percent but not more
than 20 percent in value of the outstanding stock, must take into
account not only the net unrealized appreciation in subsection (e)
assets but also the net unrealized appreciation in any other assets of
the corporation which would be subsection (e) assets under section
341(e)(5)(A) if he owned more than 20 percent in value of the
outstanding stock. Therefore, since the apartment house owned by the
corporation would be, in B's hands, property held primarily for sale to
customers in the ordinary course of trade or business, and since the net
unrealized appreciation in such property ($20,000) exceeds 15 percent of
net worth ($15,000), B does not satisfy the specific shareholder test
and therefore cannot avail himself of section 341(e)(1).
Example 3. (i) Assume the same facts as in Example (1), except that
in the hands of B, but not in the hands of A or C, the apartment house
of the corporation would be property held primarily for sale to
customers in the ordinary course of trade or business. Assume further
that the shareholders of X Corporation wish to avail themselves of
section 333.
(ii) For purposes of section 341(e)(3), section 341(e)(5)(A)(iii)
applies in respect of any shareholder who owns more than 5 percent
(instead of more than 20 percent) in value of the outstanding stock.
Since in the hands of B, a more-than-5-percent shareholder, the
apartment house would be held primarily for sale to customers in the
ordinary course of trade or business, the corporation's apartment house
is a subsection (e) asset. Therefore, since the net unrealized
appreciation in subsection (e) assets ($20,000) exceeds 15 percent of
net worth ($15,000), no shareholder of the corporation may qualify under
section 341(e)(3) for use of section 333. However, if B were not a more-
than-5-percent shareholder of the corporation, or if, in his hands, the
apartment house would not be held primarily for sale to customers in the
ordinary course of trade or business, then all shareholders of the
corporation could qualify under section 341(e)(3) for use of section 333
since the apartment house would not be a subsection (e) asset.
Example 4. (i) Assume the same facts as in Example (1), except that
in the hands of no shareholder of the corporation would the apartment
house be deemed property held primarily for sale to customers in the
ordinary course of trade or business (such determination, however,
having been made without regard to A's ownership of stock of related
corporations). Assume further that (a) X Corporation adopts a plan of
complete liquidation, (b) within the 12-month period beginning on the
date of such adoption X Corporation sells substantially all the property
held by it on such date and distributes all its assets in complete
liquidation, (c) following the adoption of such plan, no distribution is
made of any property which in the hands of the corporation or in the
hands of the distributee is property in respect of which a deduction for
exhaustion, wear and tear, obsolescence, amortization, or depletion is
allowable, and (d) following the adoption of such plan no property is
sold or exchanged to A, to a constructive owner of A's stock, or to a
person ``related'' (within the meaning of paragraph (k) of this section)
to A or such constructive owner.
(ii) Since, under the above-stated facts, the requirements of
section 341(e)(4) are satisfied, section 337(a) will apply to sales or
exchanges of property by the corporation within the 12-month period
beginning on the date of the adoption of the plan of liquidation.
(iii) Any distribution in complete liquidation to B and C, who own
15 and 10 percent, respectively, in value of the outstanding stock, will
qualify under section 341(e)(2) because (a) by reason of the application
of section 341(e)(4), section 337(a) applies to sales or exchanges of
property by the corporation, and (b) at all times within the 12-month
period beginning on the date of the adoption of the plan of complete
liquidation the general corporate test is satisfied and B and C each
satisfy the specific shareholder test of paragraph (e)(1)(iii)(a) of
this section.
(iv) Any distribution in complete liquidation to A, who owns 75
percent in value of the outstanding stock, will qualify under section
341(e)(2) if, at all times within the 12-month period beginning on the
date of the adoption of the plan of complete liquidation, and after
taking into account A's ownership of stock in related corporations in
the manner prescribed in paragraph (d) of this section, A satisfies the
specific shareholder test of paragraph (e)(1)(iii)(b) of this section.
[T.D. 6806, 30 FR 2845, Mar. 5, 1965, as amended by T.D. 7369, 40 FR
29840, July 16, 1975; T.D. 7418, 41 FR 18811, May 7, 1976; T.D. 7728, 45
FR 72650, Nov. 3, 1980; T.D. 8586, 60 FR 2500, Jan. 10, 1995]
Sec. 1.341-7 Certain sales of stock of consenting corporations.
(a) In general. (1) Under section 341(f)(1), if a corporation
consents (in the manner provided in paragraph (b) of this section) to
the application of section 341(f)(2) with respect to dispositions by it
of its subsection (f) assets (as defined in paragraph (g) of this
section), then section 341(a)(1) does not apply to any sales of stock of
such consenting corporation (other than sale to such corporation) made
by any of its shareholders within the 6-month period
[[Page 222]]
beginning on the date on which such consent is filed.
(2) For purposes of section 341(f)(1) and (5)--
(i) The term sale means a sale of exchange of stock at a gain, but
only if such gain would be recognized as long-term capital gain were
section 341 not a part of the Code. Thus, a sale or exchange of stock is
not a ``sale'' within the meaning of section 341(f)(1) and (5) if there
is no gain on the transaction, or if the sale or exchange gives rise to
ordinary income under a provision of the Code other than section 341, or
if gain on the transaction is not recognized under any provisions of
subtitle A of the Code.
(ii) A sale of stock in a corporation does not include any
disposition of such stock by a shareholder, if, by reason of section
341(d)(1), section 341(a) could not have applied to that disposition.
(Under section 341(d)(1), section 341(a) does not apply except to more-
than-5-percent shareholders.) Except as otherwise provided in paragraph
(a)(2)(i) of this section, the term ``sale'' included a disposition of
stock in a corporation by a more-than-5-percent shareholders described
in section 341(d)(1), even though section 341(a) did not apply to the
disposition because the corporation was not collapsible or by reason of
the application of section 341(d)(2), (3), or (e).
(3) A corporation which consents to the application of section
341(f)(2) does not thereby become noncollapsible, and the fact that a
corporation consents to the application of section 341(f)(2) does not
affect the determination as to whether it is a collapsible corporation.
(4) For limitation on the application of section 341(f)(1) see
section 341(f)(5) and (6) and paragraphs (h) and (j) of this section.
(b) Statement of consent. (1) The consent of a corporation referred
to in paragraph (a)(1) or (j)(1) of this section shall be given by means
of a statement, signed by any officer who is duly authorized to act on
behalf of the consenting corporation stating that the corporation
consents to have the provisions of section 341(f)(2) apply to any
disposition by it of its subsection (f) assets. The statement shall be
filed with the district director having jurisdiction over the income tax
return of the consenting corporation for the taxable year during which
the statement is filed.
(2)(i) The statement shall contain the name, address, and employer
identification number of any corporation 5 percent or more in value of
the outstanding stock of which is owned directly by the consenting
corporation, and of any other corporation connected to the consenting
corporation through a chain of stock ownership described in paragraph
(j)(4) of this section. The statement shall also indicate where such 5-
percent-or-more corporation (or such ``connected'' corporation) has
consented within the 6-month period ending on the date on which the
statement filed to the application of section 341 (f)(2) with respect to
any dispositions of its subsection (f) assets (see paragraph (j) of this
section), and, if so, the district director with whom such consent was
filed and the date on which such consent was filed.
(ii) If, during the 6-month period beginning on the date on which
the statement is filed, the consenting corporation becomes the owner of
5 percent or more in value of the outstanding stock of another
corporation or becomes connected to another corporation through a chain
of stock ownership described in paragraph (j)(4) of this section, then
the consenting corporation shall, within 5 days after such occurrence,
notify the district director with whom it filed the statement of the
name, address and employer identification number of such corporation.
(3) A consent under section 341(f)(1) may be filed at any time and
there is no limit as to the number of such consents that may be filed.
If a consent is filed by a corporation under section 341(f)(1) and if a
shareholder sells stock (i) in such corporation, or (ii) in another
corporation a sale of whose stock is treated under section 341(f)(6) as
a sale of stock in such corporation, at any time during the applicable
6-month period, then the consent cannot thereafter be revoked or
withdrawn by the corporation. However, a consent may be revoked or
withdrawn at any time prior to a sale during the applicable 6-month
period. If no sale is made during such period, the consent will have no
[[Page 223]]
effect on the corporation. See paragraph (g) of this section.
(c) Consenting corporation. (1) A consenting corporation at the time
that is filed a consent under section 341(f)(10) shall notify its
shareholders that such consent is being filed. In addition, the
consenting corporation shall, at the request of any shareholder,
promptly supply the shareholder with a copy of the consent.
(2) A consenting corporation shall maintain records adequate to
permit identification of its subsection (F) assets.
(d) Shareholders of consenting corporation. (1) A shareholder who
sells stock in a consenting corporation within the 6-month period
beginning on the date on which the consent is filed shall--
(i) Notify the corporation, within 5 days after such sale, of the
date on which such sale is made, and
(ii) Attach a copy of the corporation's consent to the shareholder's
income tax return for the taxable year in which the sale is made.
(2) If the sale of stock in a consenting corporation is treated
under section 341(f)(6) as the sale of stock in any other corporation,
the consenting corporation shall notify such other corporation, within 5
days after receiving notification of a sale of its stock, of the date on
which such sale was made.
(e) Recognition of gain under section 341(f)(2). (1) Under section
341(f)(2), if a subsection (f) asset (as defined in paragraph (g) of
this section) is disposed of any time by a consenting corporation, then,
except as provided in section 341(f)(3) and paragraph (f) of this
section, the amount by which--
(i) The amount realized (in the case of a sale, exchange, or
involuntary conversion), or
(ii) The fair market value of such asset (in the case of any other
disposition), exceeds the adjusted base of such asset is treated as gain
from the sale of exchange of such asset. Such gain is recognized
notwithstanding any contrary non-recognition provisions of subtitle A of
the Code, but only to the extent such gain is not recognized under any
other provisions of subtitle A of the Code (for example, section 1245
(a)(1) or 1250(a)). Gain recognized under section 341(f)(2) with respect
to a disposition of a subsection (f) asset has the same character (i.e.,
ordinary income or capital gain) that such gain would have if it arose
from a sale of such asset.
(2) The nonrecognition provisions of subtitle A of the Code which
section 341(f)(2) override include, but are not limited to, sections
311(a), 332(c), 336, 337, 351, 361, 371(a), 374(a), 721, 1031, 1033,
1071, and 1081.
(3) In the case of a foreign corporation which files a statement of
consent pursuant to paragraph (b) of this section, such statement, in
addition to the information required in paragraph (b) of this section,
shall also contain a declaration that the corporation consents that any
gain upon the disposition of a subsection (f) asset which would
otherwise be recognized under section 341(f)(2) will, for purposes of
section 882(a)(2), be considered as gross income which is effectively
connected with the conduct of a trade or business which is conducted
through a permanent establishment within the United States.
(4) The provisions of subparagraphs (1) and (2) of this paragraph
may be illustrated by the following examples:
Example 1. Corporation X, a consenting corporation, distributes a
subsection (f) asset to its shareholders in complete or partial
liquidation of the corporation. The asset, at the line of the
distribution, is held by the corporation primarily for sale to customers
in the ordinary course of business and has an adjusted basis of $1,000
and a fair market value of $2,000. Under section 341(f)(2), the excess
of the fair market value of the asset over its adjusted basis, or $1,000
is treated as ordinary income. Assuming the gain is not recognized by
corporation X under another provision of the Code, corporation X
recognizes the $1,000 gain as ordinary income under section 341(f)(2)
even though, in the absence of section 341(f)(2), section 336 would
preclude the recognition of such gain.
Example 2. Corporation Y, a consenting corporation, distributes a
subsection (f) asset to its shareholders as a dividend. The asset at the
time of the distribution is properly described in section 1231 and has
an adjusted basis of $6,000 and a fair market value of $8,000. Assuming
that no other section of the Code would require recognition of gain,
under section 341(f)(2) the excess of the fair market value of the asset
over its adjusted basis, or $2,000, is recognized by corporation Y as
gain from the sale or exchange of property described in section 1231
even though, in
[[Page 224]]
the absence of section 341(f)(2), section 311(a) would preclude the
recognition of such gain.
Example 3. Assume the same facts as in Example (2) except that the
subsection (f) asset is section 1245 property having a ``recomputed
basis'' (as defined in section 1245(a)(2)) or $7,200. Since the
recomputed basis of the asset is lower than its fair market value, the
excess of the recomputed basis over the adjusted basis, or $1,200, is
recognized as ordinary income under section 1245(a)(1). The remaining
amount, or $800, is recognized under section 341(f)(2) as gain from the
sale or exchange or property described in section 1231.
(5) The provisions of section 341(f)(2) apply whether or not (i) on
the date on which a consent is filed or at any time thereafter, the
consenting corporation was in fact a collapsible corporation within the
meaning of section 341(b), or (ii) on the date of any sale of stock of
the consenting corporation, the purchaser of such stock was aware that a
consent had been filed under section 341(f)(1) within the 6-month period
ending on the date of such sale.
(6) Section 341(f)(2) does not apply to losses. Thus, section
341(f)(2) does not apply if a loss is realized upon a sale, exahnger or
involuntary conversion of a subsection (f) asset nor does the section
appy to a disposition other than by way of sale, exchange, or
involuntary conversion if at the time of the disposition the fair market
value of such property is not greater than its adjusted basis.
(7) For purposes of this paragraph, the term ``disposition''
includes an abandonment or retirement, a gift, a sale in a sale-and-
leasback transaction, and a transfer upon the foreclosure of a security
interest. Such term, however, does not include a mere transfer of title
to a creditor upon creation of a security interest or to a debtor upon
termination of a security interest. Thus, for example, a disposition
occurs upon a sale of property prusuant to a conditional sales contract
even though the seller retains legal title to the propoerty for purposes
of security, but a disposition does not occur when the seller ultimately
gives up his security interest following payment by the purchaser.
(8) The amount of gain required to be recognized by section
341(f)(2) shall be determined separately for each subsection (f) asset
disposed of by the corporation. For purposes of applying section
341(f)(2), the facts and circumstances of each disposition shall be
considered in determining whether the transactions involves more than
one subsection (f) asset or involves both subsection (f) and
nonsubsection (f) assets. In appropriate cases, several subsection (f)
assets may be treated as a single asset as long as it is reasonably
clear, from the best estimates obtainable on the basis of all the facts
and circumstances, that the amount of gain required to be recognized by
section 341(f)(2) is not less than the total gain under section
341(f)(2) whish would be computed separately for each subsection (f)
asset.
(9) In the case of a sale, exchange, or involuntary conversion of a
subsection (f) asset and a nonsubsection (f) asset in one transaction,
the total amount realized upon the disposition shall be allocated
between the subsection (f) asset any arm's length agreement between the
buyer and the seller will establish the allocation. In the absence of
such an agreement, the allocation shall be made by taking into account
the appropriate facts and circumstances. Some of the facts and
circumstances which shall be taken into account to the extent
appropriate included, but are not limited to, a comparision between the
subsection (f) asset and all property disposed of in such transaction of
(i) the original costs and reproduction costs of construction, erection,
or production, (ii) the remaining economic useful life, (ii) state of
obsolencence, and (iv) anticipated expenditures to maintain, renovate,
or modernize.
(10) See Sec. 1.1502-13 for the treatment of gain recognized upon a
distribution other than in complete liquidation made by one member of a
group which files a consolidated return to another such members.
(f) Exception for certain tax-free transactions. (1) Under section
341(f)(3), no gain is taken into account under section 341(f)(2) by a
transferor corporation on the transfer of a subsection (f) asset to
another corporation (other than a corporation exempt from tax imposed by
chapter 1 of the Code) if--
(i) The basis of such asset in the hands of the transferee
corporation is
[[Page 225]]
determined by reference to its basis in the hands of the transferor by
reason of the application of section 332 (relating to distributions in
liquidation of an 80-percent-or-more controlled subsidairy corporation),
section 351 (relating to transfers to a corporation controlled by the
transferor), section 361 (relating to exchanges pursuant to certain
reorganizations), section 371(a) (relating to exchanges pursuant to
certain receivership and bankruptcy proceedings), or section 374 (a)
(relating to exchanges pursuant to certain railroad reorganizations),
and
(ii) The transferee corporation agrees (as provided in subparagraph
(3) of this paragraph) to have the provisiions of section 341(f)(2)
apply to any disposition by it of such asset.
(2) The provisions of subparagraph (1) of this paragraph may be
illustrated by the following examples:
Example 1. Corporation M. in exchange for its voting stock worth
$20,000 and $1,000 in cash, acquires the entire property of corporation
N (an unencumbered apartment building) in a transaction which is
described in section 368(a)(2)(B) and which, therefore, qualifies as a
reorganization under section 368(a)(1)(C). The apartment building, which
in the hands of corporation N. a consenting corporation, is a subsection
(f) asset, has an adjusted basis of $15,000 and a fair market value of
$21,000. The basis of the apartment house in the hands of corporation M
is determined by reference to its basis in the hands of corporation N by
reason of the application of section 361. Thus, under section 341(f)(3),
if corporation M agrees to have the provisions of section 341(f)(2)
apply to any disposition by it of the apartment house, then corporation
N will recognize no gain under section 341(f)(2) but will recognize
$1,000 gain under section 361(b) (assuming the cash it receives is not
distributed in pursuance of the plan of reorganization). However, if
corporation M does not so agree, the gain recognized by corporation N
will be $6,000, that is, the gain of $1,000 recognized under section
361(b) plus $5,000 gain recognized under section 341(f)(2). In either
case, if section 1245, 1250, or 1251 applies, some or all of the gain
may be recognized under sections in lieu of sections 341(f)(2) and
361(b).
Example 2. Corporation Y, a consenting corporation, is a wholly
owned subsidiary of corporation X. In the complete liquidation of Y it
distributes to X a subsection (f) asset which is section 1245 property.
The asset at the time of the distribution has an adjusted basis of
$10,000, a recomputed basis of $14,000, and a fair market value of
$10,000. The basis of the asset in the hands of X is determined by
reference to its basis in the hands of corporation Y by reason of the
application of section 332. Thus, under section 341(f)(3), if
corporation X agrees to have the provisions of section 341(f)(2) apply
to any disposition by it of the subsection (f) asset, then Y will
recognize no gain under section 341(f)(2) and will recognize no gain
under section 1245(a)(1) by reason of the application of section
1245(b)(3). Under section 334(b)(1), the basis of the subsection (f)
asset to corporation X will be the same as it would be in the hands of
Y, or $10,000. However, if corporation X does not so agree, then under
section 341(f)(2) $6,000 (the excess of the fair market value of the
asset over its adjusted basis) will be treated as gain from the sale or
exchange of the asset. Moreover, under section 1245(a)(1) $4,000 (the
excess of the recomputed basis over the adjusted basis) of the $6,000
will be recognized as ordinary income. The basis of the asset to
corporation X is $16,000, i.e., the same as it would be in the hands of
Y ($10,000) increased in the amount of gain recognized by Y on the
distribution ($6,000).
(3) The agreement of a transferee corporation referred to in
subparagraph (1) of this paragraph shall be filed, on or before the date
on which the subsection (f) assets are transferred, with the district
director having jurisdiction over its income tax return for the taxable
year during which the transfer is to be made. The agreement shall be
signed by any officer who is duly authorized to act on behalf of the
transferee corporation (if the transaxtion is one to which section
371(a) or 374(a) applies, the fiduciary for the transferee corporation,
in appropriate cases, may sign the agreement) and shall apply to all the
subsection (f) assets to be transferred pursuant to the applicable
transaction described in section 341(f)(3). The agreement shall identify
the transaction by which the subsection (f) assets will be acquired,
including the names, addresses, and employer identification numbers of
the transferor and transferee corporations, and shall contain a schedule
of the subsection (f) assets to be acquired. The agreement shall also
state that the transferee corporation (i) agrees to have the provisions
of section 341(f)(2) apply to any disposition by it of the subsection
(f) assets acquired, and (ii) agrees to maintain records adequate to
permit identification of such subsection (f) assets.
[[Page 226]]
(4) The transferor corporation shall attach a copy of the agreement
to its income tax return for the taxable year in which the subsection
(f) assets are transferred.
(g) Subsection (f) asset defined. (1) Under section 341(f)(4), a
subsection (f) asset is any property which, as of the date of any sale
of stock to which paragraph (a) or (j)(3) of this section applies, is
not a capital asset and is property owned by, or subject to a binding
contract or an option to acquire held by, the consenting corporation.
Land or any interest in real property (other than a security interest)
is treated as property which is not a capital asset. Also, unrealized
receivables or fees (as defined in section 341(b)(4)) are treated as
property which are not capital assets.
(2) If, with respect to any property described in subparagraph (1)
of this paragraph, manufacture, construction, or production has been
commenced by either the consenting corporation or another person before
any date of sale of stock described in subparagraph (1) of this
paragraph, a consenting corporation's subsection (f) assets include any
property resulting from such manufacture, construction, or production.
Thus, for example, if, on the date of any sale of stock within the 6-
month period, manufacture, construction, or production has been
commended on a tract of land to be used for residential housing or on a
television series, the term ``subsection (f) asset'' includes the
residential homes of the television tapes resulting from such
manufacture, construction, or production by the consenting corporation
(or by a transferee corporation which has agreed to the application of
section 341(f)(2)). If land or any interest in real property (other than
a security interest) is owned or held under an option by the consenting
corporation on the date of any sale of stock described in subparagraph
(1) of this paragraph, the term ``subsection (f) asset'' includes any
improvements resulting from construction with respect to such property
(by the consenting corporation or by a transferee corporation which has
agreed to the application of section 341(f)(2)) if such construction is
commenced within 2 years after the date of any such sale. The property
or improvements resulting from any manufacture, construction, or
production is a question to be determined on the basis of the particular
facts and circumstances of each individual case. Thus, for example, a
building which is a part of an integrated project is a subsection (f)
asset if construction of the project commenced before the date of sale
or within 2 years thereafter even if construction of the building
commenced more than 2 years thereafter. Similarly a television tape
which is part of a series is a subsection (i) asset if production of the
series was commenced on the date of sale even if production of the tape
commenced after the sale.
(3) The provisions of subparagraphs (1) and (2) of this paragraph
may be illustrated by the following examples:
Example 1. Corporation X files a consent to the application of
section 341(f)(2) on January 1, 1985. Shareholder A owns 100 percent of
the outstanding stock of the consenting corporation on January 1, 1965,
and sells 5 percent of the stock on January 2, 1965, 10 percent on
February 10, 1963, and 1 percent on May 1, 1965. No other sales of X
stock were made during the 6-month period beginning on January 1, 1965.
On such date X owns an apartment building and on March 1 X purchases an
office building. X's subsection (f) assets include the apartment
building owned on January 1 and the office building purchased on March
1.
Example 2. Assume the same facts as in Example (1) except that on
January 1, 1965, X also owns a tract of raw land. On April 1, 1965,
construction of a residential housing project is commenced on the tract
of land. Corporation X's subsection (i) assets will include the tract of
land plus the resulting improvements to the land. This result would not
be changed if construction of the residential housing project were not
commenced until July 1, 1966, since the construction would have been
commenced within 2 years after May 1, 1965.
Example 3. Corporation X files a consent to the application of
section 341(f)(2) on January 1, 1965. Shareholder B owns 100 percent of
the outstanding stock of the consenting corporation on January 1, 1965,
and sells 10 percent of the stock on June 1, 1965. On April 1, 1965, Y
acquires an option to purchase a motion picture when completed. On May
1, 1965, production is started on the motion picture. On February 1,
1967, production is completed, and Y exercises its option. Y holds the
option and the motion picture for use in its trade or business. Y's
subsection (f) assets initially include the option and ultimately
[[Page 227]]
include the motion picture. However the exercise of the option is not a
disposition of the option within the meaning of section 341(f)(2).
(h) Five-year limitation as to shareholder. Under section 341(f)(5),
section 341(f)(1) does not apply to the sale of stock of a consenting
corporation if, during the 5-year period ending on the date of such
sale, such shareholder (or any person related to such shareholder within
the meaning of section 341(e)(8)(A)) made a sale (as defined in
paragraph (a)(2) of this section) of any stock of another consenting
corporation within any 6-month period beginning on a date on which a
consent was filed under section 341(f)(1) by such other corporation.
Section 341(f)(5) does not prevent a shareholder of a consenting
corporation from receiving the benefit of section 341(f)(1) on the sale
of additional shares of the stock of the same consenting corporation.
(i) [Reserved]
(j) Special rule for stock ownership in other corporations--(1)
Section 341(f)(6) provides a special rule applicable to a consenting
corporation which owns 5 percent or more in value of the outstanding
stock of another corporation. In such a case, a consent filed by the
consenting corporation shall not be valid with respect to a sale of its
stock during the applicable 6-month period unless each corporation, 5
percent or more in value of the outstanding stock of which is owned by
the consenting corporation on the date of such sale, file (within the 6-
month period ending on the date of such sale) a valid consent under
section 341(f)(1) with respect to sales of its own stock.
(2) The provisions of subparagraph (1) of this paragraph may be
illustrated by the following example:
Example: Corporation X files a consent under section 341(f)(1) on
November 1, 1965. On January 1, 1966, the date on which a shareholder of
corporation X sells stock of X. X owns 80 percent in value of the
outstanding stock of corporation Y. In order for the consent filed by
corporation X to be valid with respect to the sale of its stock on
January 1, 1966, corporation Y must have filed, during the 6-month
period ending on January 1, 1966, a valid consent under section
341(f)(1) with respect to sales of its stock.
(3) For purposes of applying section 341(f)(4) (relating to the
definition of a subsection (f) asset) to a corporation 5 percent or more
in value of the outstanding stock of which is owned by the consenting
corporation, a sale of stock of the consenting corporation to which
section 341(f)(1) applies shall be treated as a sale of stock of such
other corporation. Thus, in the example in subparagraph (2) of this
paragraph, the subsection (f) assets of corporation Y would include
property described in section 341(f)(4) owned by or held under an option
by corporation Y on January 1, 1966.
(4) In the case of a chain of corporations connected by the 5-
percent ownership requirement described in subparagraph (1) of this
paragraph, rules similar to the rules described in subparagraphs (2) and
(3) of this paragraph shall apply. Thus, in the example in subparagraph
(2) of this paragraph, if corporation Y owned 5 percent or more of the
stock of corporation Z on January 1, 1966, then Z must have filed a
valid consent during the 6-month period ending January 1, 1966, in order
for the consent filed by X to be valid with respect to the sale of its
stock on January 1, 1966. In such case any of stock of either X or Y is
treated as a sale of stock of Z for purposes of applying section
341(f)(4) to Z.
(5) If a corporation is a member of an affiliated group (as defined
in section 1504(a)) that files a consolidated return, a corporation will
be considered to have filed a consent if a consent is filed on its
behalf by the common parent under Sec. 1.1502-77(a).
(k) Effective date. Paragraphs (b), (c), (e)(3), and (f)(3) of this
section apply only with respect to statements and notifications filed
more than 30 days after July 6, 1977. Paragraph (d) applies only with
respect to sales of stock made more than 30 days after July 6, 1977. All
other provisions of this section appy with respect to transactions after
August 22, 1964.
[T.D. 7655, 44 FR 68460, Nov. 29, 1979; 45 FR 17982, Mar. 20, 1980; 45
FR 20464, Mar. 28, 1980; T.D. 8597, 60 FR 36679, July 18, 1995]
[[Page 228]]
definition
Sec. 1.346-1 Partial liquidation.
(a) General. This section defines a partial liquidation. If amounts
are distributed in partial liquidation such amounts are treated under
section 331(a)(2) as received in part or full payment in exchange for
the stock. A distribution is treated as in partial liquidation of a
corporation if:
(1) The distribution is one of a series of distributions in
redemption of all of the stock of the corporation pursuant to a plan of
complete liquidation, or
(2) The distribution:
(i) Is not essentially equivalent to a dividend,
(ii) Is in redemption of a part of the stock of the corporation
pursuant to a plan, and
(iii) Occurs within the taxable year in which the plan is adopted or
within the succeeding taxable year.
An example of a distribution which will qualify as a partial liquidation
under subparagraph (2) of this paragraph and section 346(a) is a
distribution resulting from a genuine contraction of the corporate
business such as the distribution of unused insurance proceeds recovered
as a result of a fire which destroyed part of the business causing a
cessation of a part of its activities. On the other hand, the
distribution of funds attributable to a reserve for an expansion program
which has been abandoned does not qualify as a partial liquidation
within the meaning of section 346(a). A distribution to which section
355 applies (or so much of section 356 as relates to section 355) is not
a distribution in partial liquidation within the meaning of section
346(a).
(b) Special requirements on termination of business. A distribution
which occurs within the taxable year in which the plan is adopted or
within the succeeding taxable year and which meets the requirements of
subsection (b) of section 346 falls within paragraph (a)(2) of this
section and within section 346(a)(2). The requirements which a
distribution must meet to fall within subsection (b) of section 346 are:
(1) Such distribution is attributable to the corporation's ceasing
to conduct, or consists of assets of, a trade or business which has been
actively conducted throughout the five-year period immediately before
the distribution, which trade or business was not acquired by the
corporation within such period in a transaction in which gain or loss
was recognized in whole or in part, and
(2) Immediately after such distribution by the corporation it is
actively engaged in the conduct of a trade or business, which trade or
business was actively conducted throughout the five-year period ending
on the date of such distribution and was not acquired by the corporation
within such period in a transaction in which gain or loss was recognized
in whole or in part.
A distribution shall be treated as having been made in partial
liquidation pursuant to section 346(b) if it consists of the proceeds of
the sale of the assets of a trade or business which has been actively
conducted for the five-year period and has been terminated, or if it is
a distribution in kind of the assets of such a business, or if it is a
distribution in kind of some of the assets of such a business and of the
proceeds of the sale of the remainder of the assets of such a business.
In general, a distribution which will qualify under section 346(b) may
consist of, but is not limited to:
(i) Assets (other than inventory or property described in
subdivision (ii) of this subparagraph) used in the trade or business
throughout the five-year period immediately before the distribution (for
this purpose an asset shall be considered used in the trade or business
during the period of time the asset which it replaced was so used), or
(ii) Proceeds from the sale of assets described in subdivision (i)
of this subparagraph, and, in addition,
(iii) The inventory of such trade or business or property held
primarily for sale to customers in the ordinary course of business, if:
(a) The items constituting such inventory or such property were
substantially similar to the items constituting such inventory or
property during the five-year period immediately before the
distribution, and
[[Page 229]]
(b) The quantity of such items on the date of distribution was not
substantially in excess of the quantity of similar items regularly on
hand in the conduct of such business during such five-year period, or
(iv) Proceeds from the sale of inventory or property described in
subdivision (iii) of this subparagraph, if such inventory or property is
sold in bulk in the course of termination of such trade or business and
if with respect to such inventory the conditions of subdivision (iii)(a)
and (b) of this subparagraph would have been met had such inventory or
property been distributed on the date of such sale.
(c) Active conduct of a trade or business. For the purpose of
section 346(b)(1), a corporation shall be deemed to have actively
conducted a trade or business immediately before the distribution, if:
(1) In the case of a business the assets of which have been
distributed in kind, the business was operated by such corporation until
the date of distribution, or
(2) In the case of a business the proceeds of the sale of the assets
of which are distributed, such business was actively conducted until the
date of sale and the proceeds of such sale were distributed as soon
thereafter as reasonably possible.
The term active conduct of a trade or business shall have the same
meaning in this section as in paragraph (c) of Sec. 1.355-1.
Sec. 1.346-2 Treatment of certain redemptions.
If a distribution in a redemption of stock qualifies as a
distribution in part or full payment in exchange for the stock under
both section 302(a) and this section, then only this section shall be
applicable. None of the limitations of section 302 shall be applicable
to such redemption.
Sec. 1.346-3 Effect of certain sales.
The determination of whether assets sold in connection with a
partial liquidation are sold by the distributing corporation or by the
shareholder is a question of fact to be determined under the facts and
circumstances of each case.
Corporate Organizations and Reorganizations
corporate organizations
Sec. 1.351-1 Transfer to corporation controlled by transferor.
(a) In general--(1) Nonrecognition of gain or loss. Section 351(a)
provides, in general, for the nonrecognition of gain or loss upon the
transfer by one or more persons of property to a corporation solely in
exchange for stock of such corporation if, immediately after the
exchange, such person or persons are in control of the corporation to
which the property was transferred. As used in section 351, the phrase
``one or more persons'' includes individuals, trusts, estates,
partnerships, associations, companies, or corporations (see section
7701(a)(1)). To be in control of the transferee corporation, such person
or persons must own immediately after the transfer stock possessing at
least 80 percent of the total combined voting power of all classes of
stock entitled to vote and at least 80 percent of the total number of
shares of all other classes of stock of such corporation (see section
368(c)). In determining control under this section, the fact that any
corporate transferor distributes part or all of the stock which it
receives in the exchange to its shareholders shall not be taken into
account. The phrase ``immediately after the exchange'' does not
necessarily require simultaneous exchanges by two or more persons, but
comprehends a situation where the rights of the parties have been
previously defined and the execution of the agreement proceeds with an
expedition consistent with orderly procedure. For purposes of this
section, stock rights and stock warrants are not included in the term
stock. In addition, for purposes of this section--
(i) Stock will not be treated as issued for property if it is issued
for services rendered or to be rendered to or for the benefit of the
issuing corporation; and
(ii) Stock will not be treated as issued for property if it is
issued for property which is of relatively small value in comparison to
the value of the stock already owned (or to be received for services) by
the person who transferred such property and the primary
[[Page 230]]
purpose of the transfer is to qualify under this section the exchanges
of property by other persons transferring property.
(2) Application. The application of section 351(a) is illustrated by
the following examples:
Example 1. C owns a patent right worth $25,000 and D owns a
manufacturing plant worth $75,000. C and D organize the R Corporation
with an authorized capital stock of $100,000. C transfers his patent
right to the R Corporation for $25,000 of its stock and D transfers his
plant to the new corporation for $75,000 of its stock. No gain or loss
to C or D is recognized.
Example 2. B owns certain real estate which cost him $50,000 in
1930, but which has a fair market value of $200,000 in 1955. He
transfers the property to the N Corporation in 1955 for 78 percent of
each class of stock of the corporation having a fair market value of
$200,000, the remaining 22 percent of the stock of the corporation
having been issued by the corporation in 1940 to other persons for cash.
B realized a taxable gain of $150,000 on this transaction.
Example 3. E, an individual, owns property with a basis of $10,000
but which has a fair market value of $18,000. E also had rendered
services valued at $2,000 to Corporation F. Corporation F has
outstanding 100 shares of common stock all of which are held by G.
Corporation F issues 400 shares of its common stock (having a fair
market value of $20,000) to E in exchange for his property worth $18,000
and in compensation for the services he has rendered worth $2,000. Since
immediately after the transaction, E owns 80 percent of the outstanding
stock of Corporation F, no gain is recognized upon the exchange of the
property for the stock. However, E realized $2,000 of ordinary income as
compensation for services rendered to Corporation F.
(3) Underwritings of stock--(i) In general. For the purpose of
section 351, if a person acquires stock of a corporation from an
underwriter in exchange for cash in a qualified underwriting
transaction, the person who acquires stock from the underwriter is
treated as transferring cash directly to the corporation in exchange for
stock of the corporation and the underwriter is disregarded. A qualified
underwriting transaction is a transaction in which a corporation issues
stock for cash in an underwriting in which either the underwriter is an
agent of the corporation or the underwriter's ownership of the stock is
transitory.
(ii) Effective date. This paragraph (a)(3) is effective for
qualified underwriting transactions occurring on or after May 1, 1996.
(b) Multiple transferors--(1) Disproportionate transfers. When
property is transferred to a corporation by two or more persons in
exchange for stock, as described in paragraph (a) of this section, and
the stock received is disproportionate to the transferor's prior
interest in such property, the entire transaction will be given tax
effect in accordance with its true nature, and the transaction may be
treated as if the stock had first been received in proportion and then
some of such stock had been used to make gifts (section 2501 and
following), to pay compensation (sections 61(a)(1) and 83(a)), or to
satisfy obligations of the transferor of any kind.
(2) Application. The application of paragraph (b)(1) of this section
may be illustrated as follows:
Example 1. Individuals A and B, father and son, organize a
corporation with 100 shares of common stock to which A transfers
property worth $8,000 in exchange for 20 shares of stock, and B
transfers property worth $2,000 in exchange for 80 shares of stock. No
gain or loss will be recognized under section 351. However, if it is
determined that A in fact made a gift to B, such gift will be subject to
tax under section 2501 and following. Similarly, if B had rendered
services to A (such services having no relation to the assets
transferred or to the business of the corporation) and the disproportion
in the amount of stock received constituted the payment of compensation
by A to B, B will be taxable upon the fair market value of the 60 shares
of stock received as compensation for services rendered, and A will
realize gain or loss upon the difference between the basis to him of the
60 shares and their fair market value at the time of the exchange.
Example 2. Individuals C and D each transferred, to a newly
organized corporation, property having a fair market value of $4,500 in
exchange for the issuance by the corporation of 45 shares of its capital
stock to each transferor. At the same time, the corporation issued to E,
an individual, 10 shares of its capital stock in payment for
organizational and promotional services rendered by E for the benefit of
the corporation. E transferred no property to the corporation. C and D
were under no obligation to pay for E's services. No gain or loss is
recognized to C or D. E received compensation taxable as ordinary income
to the extent of the fair market
[[Page 231]]
value of the 10 shares of stock received by him.
(c)(1) The general rule of section 351 does not apply, and
consequently gain or loss will be recognized, where property is
transferred to an investment company after June 30, 1967. A transfer of
property after June 30, 1967, will be considered to be a transfer to an
investment company if--
(i) The transfer results, directly or indirectly, in diversification
of the transferors' interests, and
(ii) The transferee is (a) a regulated investment company, (b) a
real estate investment trust, or (c) a corporation more than 80 percent
of the value of whose assets (excluding cash and nonconvertible debt
obligations from consideration) are held for investment and are readily
marketable stocks or securities, or interests in regulated investment
companies or real estate investment trusts.
(2) The determination of whether a corporation is an investment
company shall ordinarily be made by reference to the circumstances in
existence immediately after the transfer in question. However, where
circumstances change thereafter pursuant to a plan in existence at the
time of the transfer, this determination shall be made by reference to
the later circumstances.
(3) Stocks and securities will be considered readily marketable if
(and only if) they are part of a class of stock or securities which is
traded on a securities exchange or traded or quoted regularly in the
over-the-counter market. For purposes of subparagraph (1)(ii)(c) of this
paragraph, the term ``readily marketable stocks or securities'' includes
convertible debentures, convertible preferred stock, warrants, and other
stock rights if the stock for which they may be converted or exchanged
is readily marketable. Stocks and securities will be considered to be
held for investment unless they are (i) held primarily for sale to
customers in the ordinary course of business, or (ii) used in the trade
or business of banking, insurance, brokerage, or a similar trade or
business.
(4) In making the determination required under subparagraph
(1)(ii)(c) of this paragraph, stock and securities in subsidiary
corporations shall be disregarded and the parent corporation shall be
deemed to own its ratable share of its subsidiaries' assets. A
corporation shall be considered a subsidiary if the parent owns 50
percent or more of (i) the combined voting power of all classes of stock
entitled to vote, or (ii) the total value of shares of all classes of
stock outstanding.
(5) A transfer ordinarily results in the diversification of the
transferors' interests if two or more persons transfer nonidentical
assets to a corporation in the exchange. For this purpose, if any
transaction involves one or more transfers of nonidentical assets which,
taken in the aggregate, constitute an insignificant portion of the total
value of assets transfered, such transfers shall be disregarded in
determining whether diversification has occurred. If there is only one
transferor (or two or more transferors of identical assets) to a newly
organized corporation, the transfer will generally be treated as not
resulting in diversification. If a transfer is part of a plan to achieve
diversification without recognition of gain, such as a plan which
contemplates a subsequent transfer, however delayed, of the corporate
assets (or of the stock or securities received in the earlier exchange)
to an investment company in a transaction purporting to qualify for
nonrecognition treatment, the original transfer will be treated as
resulting in diversification.
(6)(i) For purposes of paragraph (c)(5) of this section, a transfer
of stocks and securities will not be treated as resulting in a
diversification of the transferors' interests if each transferor
transfers a diversified portfolio of stocks and securities. For purposes
of this paragraph (c)(6), a portfolio of stocks and securities is
diversified if it satisfies the 25 and 50-percent tests of section
368(a)(2)(F)(ii), applying the relevant provisions of section
368(a)(2)(F). However, Government securities are included in total
assets for purposes of the denominator of the 25 and 50-percent tests
(unless the Government securities are acquired to meet the 25 and 50-
percent tests), but are not treated as securities of an issuer for
purposes of the numerator of the 25 and 50-percent tests.
[[Page 232]]
(ii) Paragraph (c)(6)(i) of this section is effective for transfers
completed on or after May 2, 1996. Transfers of diversified (within the
meaning of paragraph (c)(6)(i) of this section), but nonidentical,
portfolios of stocks and securities completed before May 2, 1996, may be
treated either--
(A) Consistent with paragraph (c)(6)(i) of this section; or
(B) As resulting in diversification of the transferors' interests.
(7) The application of subparagraph (5) of this paragraph may be
illustrated as follows:
Example 1. Individuals A, B, and C organize a corporation with 101
shares of common stock. A and B each transfers to it $10,000 worth of
the only class of stock of corporation X, listed on the New York Stock
Exchange, in exchange for 50 shares of stock. C transfers $200 worth of
readily marketable securities in corporation Y for one share of stock.
In determining whether or not diversification has occurred, C's
participation in the transaction will be disregarded. There is,
therefore, no diversification, and gain or loss will not be recognized.
Example 2. A, together with 50 other transferors, organizes a
corporation with 100 shares of stock. A transfers $10,000 worth of stock
in corporation X, listed on the New York Stock Exchange, in exchange for
50 shares of stock. Each of the other 50 transferors transfers $200
worth of readily marketable securities in corporations other than X in
exchange for one share of stock. In determining whether or not
diversification has occurred, all transfers will be taken into account.
Therefore, diversification is present, and gain or loss will be
recognized.
(d) Applicability date. Paragraphs (a)(1) and (b)(1) of this section
apply to transfers after October 2, 1989, for tax years ending after
such date, except as specified in section 7203(c)(2) and (3) of Public
Law 101-239.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6942, 32 FR
20977, Dec. 29, 1967; T.D. 8665, 61 FR 19189, May 1, 1996; T.D. 8663, 61
FR 19545, May 2, 1996; T.D. 9759, 81 FR 17074, Mar. 28, 2016]
Sec. 1.351-2 Receipt of property.
(a) If an exchange would be within the provisions of section 351(a)
if it were not for the fact that the property received in exchange
consists not only of property permitted by such subsection to be
received without the recognition of gain, but also of other property or
money, then the gain, if any, to the recipient shall be recognized, but
in an amount not in excess of the sum of such money and the fair market
value of such other property. No loss to the recipient shall be
recognized.
(b) See section 357 and the regulations pertaining to that section
for applicable rules as to the treatment of liabilities as ``other
property'' in cases subject to section 351, where another party to the
exchange assumes a liability, or acquires property subject to a
liability.
(c) See sections 358 and 362 and the regulations pertaining to those
sections for applicable rules with respect to the determination of the
basis of stock, securities, or other property received in exchanges
subject to section 351.
(d) See part I (section 301 and following), subchapter C, chapter 1
of the Code, and the regulations thereunder for applicable rules with
respect to the taxation of dividends where a distribution by a
corporation of its stock or securities in connection with an exchange
subject to section 351(a) has the effect of the distribution of a
taxable dividend.
(e) See Sec. 1.356-7(a) for the applicability of the definition of
nonqualified preferred stock in section 351(g)(2) for stock issued prior
to June 9, 1997, and for stock issued in transactions occurring after
June 8, 1997, that are described in section 1014(f)(2) of the Taxpayer
Relief Act of 1997, Public Law 105-34 (111 Stat. 788, 921). See Sec.
1.356-7(c) for the treatment of preferred stock received in certain
exchanges for common or preferred stock described in section
351(g)(2)(C)(i)(II).
[T.D. 6500, 25 FR 11607, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 8904, 65 FR 58650, Oct. 2, 2000]
Sec. 1.351-3 Records to be kept and information to be filed.
(a) Significant transferor. Every significant transferor must
include a statement entitled, ``STATEMENT PURSUANT TO Sec. 1.351-3(a)
BY [INSERT NAME AND TAXPAYER IDENTIFICATION NUMBER (IF ANY) OF
TAXPAYER], A SIGNIFICANT TRANSFEROR,'' on or with such transferor's
income tax return for the
[[Page 233]]
taxable year of the section 351 exchange. If a significant transferor is
a controlled foreign corporation (within the meaning of section 957),
each United States shareholder (within the meaning of section 951(b))
with respect thereto must include this statement on or with its return.
The statement must include--
(1) The name and employer identification number (if any) of the
transferee corporation;
(2) The date(s) of the transfer(s) of assets;
(3) The fair market value and basis of the property transferred by
such transferor in the exchange, determined immediately before the
transfer and aggregated as follows:
(i) Importation property transferred in a loss importation
transaction, as defined in Sec. 1.362-3(c)(2) and (3), respectively;
(ii) Loss duplication property as defined in Sec. 1.362-4(g)(1);
(iii) Property with respect to which any gain or loss was recognized
on the transfer (without regard to whether such property is also
identified in paragraph (a)(3)(i) or (ii) of this section); and
(iv) Property not described in paragraph (a)(3)(i), (ii), or (iii)
of this section.
(4) The date and control number of any private letter ruling(s)
issued by the Internal Revenue Service in connection with the section
351 exchange.
(b) Transferee corporation. Except as provided in paragraph (c) of
this section, every transferee corporation must include a statement
entitled, ``STATEMENT PURSUANT TO Sec. 1.351-3(b) BY [INSERT NAME AND
EMPLOYER IDENTIFICATION NUMBER (IF ANY) OF TAXPAYER], A TRANSFEREE
CORPORATION,'' on or with its income tax return for the taxable year of
the exchange. If the transferee corporation is a controlled foreign
corporation (within the meaning of section 957), each United States
shareholder (within the meaning of section 951(b)) with respect thereto
must include this statement on or with its return. The statement must
include--
(1) The name and taxpayer identification number (if any) of every
significant transferor;
(2) The date(s) of the transfer(s) of assets;
(3) The fair market value and basis of property received in the
exchange, determined immediately before the transfer and aggregated as
follows:
(i) Importation property transferred in a loss importation
transaction, as defined in Sec. 1.362-3(c)(2) and (3), respectively;
(ii) Loss duplication property as defined in Sec. 1.362-4(g)(1);
(iii) Property with respect to which any gain or loss was recognized
on the transfer (without regard to whether such property is also
identified in paragraph (b)(3)(ii) of this section);
(iv) Property not described in paragraph (b)(3)(i), (ii), or (iii)
of this section; and
(4) The date and control number of any private letter ruling(s)
issued by the Internal Revenue Service in connection with the section
351 exchange.
(c) Exception for certain transferee corporations. The transferee
corporation is not required to file a statement under paragraph (b) of
this section if all of the information that would be included in the
statement described in paragraph (b) of this section is included in any
statement(s) described in paragraph (a) of this section that is attached
to the same return for the same section 351 exchange.
(d) Definitions. For purposes of this section:
(1) Significant transferor means a person that transferred property
to a corporation and received stock of the transferee corporation in an
exchange described in section 351 if, immediately after the exchange,
such person--
(i) Owned at least five percent (by vote or value) of the total
outstanding stock of the transferee corporation if the stock owned by
such person is publicly traded, or
(ii) Owned at least one percent (by vote or value) of the total
outstanding stock of the transferee corporation if the stock owned by
such person is not publicly traded.
(2) Publicly traded stock means stock that is listed on--
(i) A national securities exchange registered under section 6 of the
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
[[Page 234]]
(ii) An interdealer quotation system sponsored by a national
securities association registered under section 15A of the Securities
Exchange Act of 1934 (15 U.S.C. 78o-3).
(e) Substantiation information. Under Sec. 1.6001-1(e), taxpayers
are required to retain their permanent records and make such records
available to any authorized Internal Revenue Service officers and
employees. In connection with the exchange described in this section,
these records should specifically include information regarding the
amount, basis, and fair market value of all transferred property, and
relevant facts regarding any liabilities assumed or extinguished as part
of such exchange.
(f) Effective/applicability date. * * * Paragraphs (a)(3) and (b)(3)
of this section apply with respect to exchanges under section 351
occurring on or after March 28, 2016, and also with respect to exchanges
under section 351 occurring before such date as a result of an entity
classification election under Sec. 301.7701-3 of this chapter filed on
or after March 28, 2016, unless such exchange is pursuant to a binding
agreement that was in effect prior to March 28, 2016 and at all times
thereafter.
[T.D. 9329, 72 FR 32798, June 14, 2007, as amended by T.D. 9759, 81 FR
17074, Mar. 28, 2016]
effects on shareholders and security holders
Sec. 1.354-1 Exchanges of stock and securities in certain
reorganizations.
(a) Section 354 provides that under certain circumstances no gain or
loss is recognized to a shareholder who surrenders his stock in exchange
for other stock or to a security holder who surrenders his securities in
exchange for stock. Section 354 also provides that under certain
circumstances a security holder may surrender securities and receive
securities in the same principal amount or in a lesser principal amount
without the recognition of gain or loss to him. The exchanges to which
section 354 applies must be pursuant to a plan of reorganization as
provided in section 368(a) and the stock and securities surrendered as
well as the stock and securities received must be those of a corporation
which is a party to the reorganization. Section 354 does not apply to
exchanges pursuant to a reorganization described in section 368(a)(1)(D)
unless the transferor corporation--
(1) Transfers all or substantially all of its assets to a single
corporation, and
(2) Distributes all of its remaining properties (if any) and the
stock, securities and other properties received in the exchange to its
shareholders or security holders in pursuance of the plan of
reorganization. The fact that properties retained by the transferor
corporation, or received in exchange for the properties transferred in
the reorganization, are used to satisfy existing liabilities not
represented by securities and which were incurred in the ordinary course
of business before the reorganization does not prevent the application
of section 354 to an exchange pursuant to a plan of reorganization
defined in section 368(a)(1)(D).
(b) Except as provided in section 354 (c) and (d), section 354 is
not applicable to an exchange of stock or securities if a greater
principal amount of securities is received than the principal amount of
securities the recipient surrenders, or if securities are received and
the recipient surrenders no securities. See, however, section 356 and
regulations pertaining to such section. See also section 306 with
respect to the receipt of preferred stock in a transaction to which
section 354 is applicable.
(c) An exchange of stock or securities shall be subject to section
354(a)(1) even though--
(1) Such exchange is not pursuant to a plan of reorganization
described in section 368(a), and
(2) The principal amount of the securities received exceeds the
principal amount of the securities surrendered or if securities are
received and no securities are surrendered--
if such exchange is pursuant to a plan of reorganization for a railroad
corporation as defined in section 77(m) of the Bankruptcy Act (11 U.S.C.
205(m)) and is approved by the Interstate Commerce Commission under
section 77 of such act or under section 20b of the Interstate Commerce
Act (49 U.S.C. 20b) as being in the public interest.
[[Page 235]]
Section 354 is not applicable to such exchanges if there is received
property other than stock or securities. See, however, section 356 and
regulations pertaining to such section.
(d) The rules of section 354 may be illustrated by the following
examples:
Example 1. Pursuant to a reorganization under section 368(a) to
which Corporations T and W are parties, A, a shareholder in Corporation
T, surrenders all his common stock in Corporation T in exchange for
common stock of Corporation W. No gain or loss is recognized to A.
Example 2. Pursuant to a reorganization under section 368(a) to
which Corporations X and Y (which are not railroad corporations) are
parties, B, a shareholder in Corporation X, surrenders all his stock in
X for stock and securities in Y. Section 354 does not apply to this
exchange. See, however, section 356.
Example 3. C, a shareholder in Corporation Z (which is not a
railroad corporation), surrenders all his stock in Corporation Z in
exchange for securities in Corporation Z. Whether or not this exchange
is in connection with a recapitalization under section 368(a)(1)(E),
section 354 does not apply. See, however, section 302.
Example 4. The facts are the same as in Example 3 of this paragraph
(d), except that C receivies solely rights to acquire stock in
Corporation Z. Section 354 does not apply.
(e) Except as provided in Sec. 1.356-6, for purposes of section
354, the term securities includes rights issued by a party to the
reorganization to acquire its stock. For purposes of this section and
section 356(d)(2)(B), a right to acquire stock has no principal amount.
For this purpose, rights to acquire stock has the same meaning as it
does under sections 305 and 317(a). Other Internal Revenue Code
provisions governing the treatment of rights to acquire stock may also
apply to certain exchanges occurring in connection with a
reorganization. See, for example, sections 83 and 421 through 424 and
the regulations thereunder. This paragraph (e) applies to exchanges
occurring on or after March 9, 1998.
(f) See Sec. 1.356-7(a) and (b) for the treatment of nonqualified
preferred stock (as defined in section 351(g)(2)) received in certain
exchanges for nonqualified preferred stock or preferred stock. See Sec.
1.356-7(c) for the treatment of preferred stock received in certain
exchanges for common or preferred stock described in section
351(g)(2)(C)(i)(II).
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7616, 44 FR
26869, May 8, 1979; T.D. 8752, 63 FR 410, Jan. 6, 1998; T.D. 8882, 65 FR
31078, May 16, 2000; T.D. 8904, 65 FR 58651, Oct. 2, 2000]
Sec. 1.355-0 Outline of sections.
In order to facilitate the use of Sec. Sec. 1.355-1 through 1.355-
8T, this section lists the major paragraphs in those sections as
follows:
Sec. 1.355-1 Distribution of stock and securities of a controlled
corporation.
(a) Effective date of certain sections.
(b) Application of section.
Sec. 1.355-2 Limitations.
(a) Property distributed.
(b) Independent business purpose.
(1) Independent business purpose requirement.
(2) Corporate business purpose.
(3) Business purpose for distribution.
(4) Business purpose as evidence of nondevice.
(5) Examples.
(c) Continuity of interest requirement.
(1) Requirement.
(2) Examples.
(d) Device for distribution of earnings and profits.
(1) In general.
(2) Device factors.
(i) In general.
(ii) Pro rata distribution.
(iii) Subsequent sale or exchange of stock.
(A) In general.
(B) Sale or exchange negotiated or agreed upon before the
distribution.
(C) Sale or exchange not negotiated or agreed upon before the
distribution.
(D) Negotiated or agreed upon before the distribution.
(E) Exchange in pursuance of a plan of reorganization.
(iv) Nature and use of assets.
(A) In general.
(B) Assets not used in a trade or business meeting the requirement
of section 355(b).
(C) Related function.
(3) Nondevice factors.
(i) In general.
(ii) Corporate business purpose.
(iii) Distributing corporation publicly traded and widely held.
(iv) Distribution to domestic corporate shareholders.
(4) Examples.
(5) Transactions ordinarily not considered as a device.
(i) In general.
(ii) Absence of earnings and profits.
[[Page 236]]
(iii) Section 303(a) transactions.
(iv) Section 302(a) transactions.
(v) Examples.
(e) Stock and securities distributed.
(1) In general.
(2) Additional rules.
(f) Principal amount of securities.
(1) Securities received.
(2) Only stock received.
(g) Recently acquired controlled stock under section 355(a)(3)(B).
(1) Other property.
(2) Exceptions.
(3) DSAG.
(4) Taxable transaction.
(5) Examples.
(h) Active conduct of a trade or business.
(i) Effective/applicability date.
Sec. 1.355-3 Active conduct of a trade or business.
(a) General requirements.
(1) Application of section 355.
(2) Examples.
(b) Active conduct of a trade or business defined.
(1) In general.
(2) Active conduct or a trade or business immediately after
distribution.
(i) In general.
(ii) Trade or business.
(iii) Active conduct.
(iv) Limitations.
(3) Active conduct for five-year period preceding distribution.
(4) Special rules for acquisition of a trade or business (Prior to
the Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of
1988).
(i) In general.
(ii) Example.
(iii) Gain or loss recognized in certain transactions.
(iv) Affiliated group.
(5) Special rules for acquisition of a trade or business (After the
Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of
1988).
(c) Examples.
Sec. 1.355-4 Non pro rata distributions, etc.
Sec. 1.355-5 Records to be kept and information to be filed.
(a) Distributing corporation.
(1) In general.
(2) Special rule when an asset transfer precedes a stock
distribution.
(b) Significant distributee.
(c) Definitions.
(1) Significant distributee.
(2) Publicly traded stock.
(d) Substantiation information.
(e) Effective/applicability date.
Sec. 1.355-6 Recognition of gain on certain distributions of stock or
securities in controlled corporation.
(a) Conventions.
(1) Examples.
(2) Five-year period.
(3) Distributing securities.
(4) Marketable securities.
(b) General rules and purposes of section 355(d).
(1) Disqualified distributions in general.
(2) Disqualified stock.
(i) In general.
(ii) Purchase.
(iii) Exceptions.
(A) Purchase eliminated.
(B) Deemed purchase eliminated.
(C) Elimination of basis.
(1) General rule.
(2) Special rule for transferred and exchanged basis property.
(3) Special rule for Split-offs and Split-ups.
(D) Special rule if basis allocated between two corporations.
(3) Certain distributions not disqualified distributions because
purposes of section 355(d) not violated.
(i) In general.
(ii) Disqualified person.
(iii) Purchased basis.
(iv) Increase in interest because payment of cash in lieu of
fractional shares.
(v) Other exceptions.
(vi) Examples.
(4) Anti-avoidance rule.
(i) In general.
(ii) Example.
(c) Whether a person holds a 50 percent or greater interest.
(1) In general.
(2) Valuation.
(3) Effect of options, warrants, convertible obligations, and other
similar interests.
(i) Application.
(ii) General rule.
(iii) Options deemed newly issued and substituted options.
(A) Exchange, adjustment, or alteration of existing option.
(B) Certain compensatory options.
(C) Substituted options.
(iv) Effect of treating an option as exercised.
(A) In general.
(B) Stock purchase agreement or similar arrangement.
(v) Instruments treated as options.
(vi) Instruments generally not treated as options.
(A) Escrow, pledge, or other security agreements.
(B) Compensatory options.
(1) General rule.
(2) Exception.
(C) Certain stock conversion features.
[[Page 237]]
(D) Options exercisable only upon death, disability, mental
imcompetency, or separation from service.
(E) Rights of first refusal.
(F) Other enumerated instruments.
(vii) Reasonably certain that the option will be exercised.
(A) In general.
(B) Stock purchase agreement or similar arrangement.
(viii) Examples.
(4) Plan or arrangement.
(i) In general.
(ii) Understanding.
(iii) Examples.
(iv) Exception.
(A) Subsequent disposition.
(B) Example.
(d) Purchase.
(1) In general.
(i) Definition of purchase under section 355(d)(5)(A).
(ii) Section 355 distributions.
(iii) Example.
(2) Exceptions to definition of purchase under section 355(d)(5)(A).
(i) Acquisition of stock in a transaction which includes other
property or money.
(A) Transferors and shareholders of transferor or distributing
corporations.
(1) In general.
(2) Exception.
(B) Transferee corporations.
(1) In general.
(2) Exception.
(C) Examples.
(ii) Acquisition of stock in a distribution to which section 305(a)
applies.
(iii) Section 1036(a) exchange.
(iv) Section 338 elections.
(A) In general.
(B) Example.
(v) Partnership distributions.
(A) Section 732(b).
(B) Section 734(b).
(3) Certain section 351 exchanges treated as purchases.
(i) In general.
(A) Treatment of stock received by transferor.
(B) Multiple classes of stock.
(ii) Cash item, marketable stock.
(iii) Exception for certain acquisitions.
(A) In general.
(B) Example.
(iv) Exception for assets transferred as part of an active trade or
business.
(A) In general.
(B) Active conduct of a trade or business.
(C) Reasonable needs of the trade or business.
(D) Consideration of all facts and circumstances.
(E) Successive transfers.
(v) Exception for transfer between members of the same affiliated
group.
(A) In general.
(B) Examples.
(4) Triangular asset reorganizations.
(i) Definition.
(ii) Treatment.
(iii) Example.
(5) Reverse triangular reorganizations other than triangular asset
reorganizations.
(i) In general.
(ii) Letter ruling and closing agreement.
(iii) Example.
(6) Treatment of group structure changes.
(i) In general.
(ii) Adjustments to basis of higher-tier members.
(iii) Example.
(7) Special rules for triangular asset reorganizations, other
reverse triangular reorganizations, and group structure changes.
(e) Deemed purchase and timing rules.
(1) Attribution and aggregation.
(i) In general.
(ii) Purchase of additional interest.
(iii) Purchase between persons treated as one person.
(iv) Purchase by a person already treated as holding stock under
section 355(d)(8)(A).
(v) Examples.
(2) Transferred basis rule.
(3) Exchanged basis rule.
(i) In general.
(ii) Example.
(4) Certain section 355 or section 305 distributions.
(i) Section 355.
(ii) Section 305.
(5) Substantial diminution of risk.
(i) In general.
(ii) Property to which suspension applies.
(iii) Risk of loss substantially diminished.
(iv) Special class of stock.
(f) Duty to determine stockholders.
(1) In general.
(2) Deemed knowledge of contents of securities filings.
(3) Presumptions as to securities filings.
(4) Presumption as to less-than-five-percent shareholders.
(5) Examples.
(g) Effective date.
Sec. 1.355-7 Recognition of gain on certain distributions of stock or
securities in connection with an acquisition.
(a) In general.
(b) Plan.
(1) In general.
(2) Certain post-distribution acquisitions.
(3) Plan factors.
(4) Non-plan factors.
(c) Operating rules.
(1) Internal discussions and discussions with outside advisors
evidence of business purpose.
(2) Takeover defense.
(3) Effect of distribution on trading in stock.
[[Page 238]]
(4) Consequences of section 355(e) disregarded for certain purposes.
(5) Multiple acquisitions.
(d) Safe harbors.
(1) Safe Harbor I.
(2) Safe Harbor II.
(i) In general.
(ii) Special rule.
(3) Safe Harbor III.
(4) Safe Harbor IV.
(i) In general.
(ii) Special rules.
(5) Safe Harbor V.
(i) In general.
(ii) Special rules.
(6) Safe Harbor VI.
(7) Safe Harbor VII.
(i) In general.
(ii) Special rules.
(8) Safe Harbor VIII.
(i) In general.
(ii) Special rule.
(9) Safe Harbor IX.
(i) In general.
(ii) Special rule.
(e) Options, warrants, convertible obligations, and other similar
interests.
(1) Treatment of options.
(i) General rule.
(ii) Agreement, understanding, or arrangement to write, transfer, or
modify an option.
(iii) Substantial negotiations related to options.
(2) Stock acquired pursuant to options.
(3) Instruments treated as options.
(4) Instruments generally not treated as options.
(i) Escrow, pledge, or other security agreements.
(ii) Options exercisable only upon death, disability, mental
incompetency, or separation from service.
(iii) Rights of first refusal.
(iv) Other enumerated instruments.
(f) Multiple controlled corporations.
(g) Valuation.
(h) Definitions.
(1) Agreement, understanding, arrangement, or substantial
negotiations.
(2) Controlled corporation.
(3) Controlling shareholder.
(4) Coordinating group.
(5) Disclosure event.
(6) Discussions.
(7) Established market.
(8) Five-percent shareholder.
(9) Implicit permission.
(10) Public announcement.
(11) Public offering.
(12) Similar acquisition (not involving a public offering).
(13) Similar acquisition involving a public offering.
(i) One public offering.
(ii) More than one public offering.
(iii) Potential acquisition involving a public offering.
(14) Ten-percent shareholder.
(i) [Reserved]
(j) Examples.
(k) Effective dates.
Sec. 1.355-8T Definition of predecessor and successor and limitations
on gain recognition under section 355(e) and section 355(f).
(a) In general.
(1) Scope.
(2) Purpose.
(3) Overview.
(4) References.
(i) References to Distributing or Controlled.
(ii) References to Plan or distribution.
(iii) Plan Period.
(b) Predecessor of Distributing.
(1) Definition.
(i) In general.
(ii) Pre-distribution requirements.
(A) Relevant Property.
(B) Reflection of basis.
(iii) Post-distribution requirement.
(2) Additional definitions and rules related to paragraph (b)(1) of
this section.
(i) References to Distributing and Controlled.
(ii) Potential Predecessor.
(iii) Successors of Potential Predecessors.
(iv) Relevant Property; Relevant Stock.
(A) In general.
(B) Property held by Distributing.
(C) Certain reorganizations.
(v) Stock of Distributing as Relevant Property.
(A) In general.
(B) Certain reorganizations.
(vi) Substitute Asset.
(vii) Separated Property.
(viii) Underlying Property.
(ix) Scope of definition of Predecessor of Distributing.
(x) Deemed exchanges.
(c) Additional definitions.
(1) Predecessor of Controlled.
(2) Successors.
(i) In general.
(ii) Determination of Successor status.
(3) Section 381 transaction.
(d) Special acquisition rules.
(1) Deemed acquisitions of stock in section 381 transactions.
(2) Deemed acquisitions of stock after section 381 transactions.
(3) Separate counting for Distributing and each Predecessor of
Distributing.
(e) Special rules for gain recognition.
(1) In general.
(2) Planned 50-percent or greater acquisitions of a Predecessor of
Distributing.
(i) In general.
(ii) Operating rules.
(A) Separated Property other than Controlled stock.
(B) Controlled stock that is Separated Property.
[[Page 239]]
(C) Anti-duplication rule.
(3) Planned 50-percent Acquisition of Distributing in a section 381
transaction.
(4) Overall gain recognition.
(5) Section 336(e) election.
(f) Predecessor or Successor as a member of the affiliated group.
(g) Inapplicability of section 355(f) to certain intra-group
distributions.
(1) In general.
(2) Alternative application of section 355(f).
(h) Examples.
(i) Effective/applicability date.
(1) In general.
(2) Transition rule.
(i) In general.
(ii) Definition of distribution.
(3) Exception.
[T.D. 8238, 54 FR 289, Jan. 5, 1989, as amended by T.D. 8913, 65 FR
79722, Dec. 20, 2000; T.D. 8960, 66 FR 40591, Aug. 3, 2001; T.D. 8988,
67 FR 20636, Apr. 26, 2002; 67 FR 38200, June 3, 2002; T.D. 9198, 70 FR
20283, Apr. 19, 2005; T.D. 9264, 71 FR 30597, May 30, 2006; T.D. 9329,
72 FR 32799, June 14, 2007; T.D. 9435, 73 FR 75950, Dec. 15, 2008; T.D.
9548, 76 FR 65111, Oct. 20, 2011; T.D. 9805, 81 FR 91747, Dec. 19, 2016]
Sec. 1.355-1 Distribution of stock and securities of a controlled
corporation.
(a) Effective/applicability date of certain sections. Except as
otherwise provided, this section and Sec. Sec. 1.355-2 through 1.355-4
apply to transactions occurring after February 6, 1989. For transactions
occurring on or before that date, see 26 CFR 1.355-1 through 1.355-4
(revised as of April 1, 1987). This section and Sec. Sec. 1.355-2
through 1.355-4, other than Sec. 1.355-2(g) and (i), do not reflect the
amendments to section 355 made by the Revenue Act of 1987, the Technical
and Miscellaneous Revenue Act of 1988, and the Tax Technical Corrections
Act of 2007. For the applicability date of Sec. Sec. 1.355-2(g), 1.355-
5, 1.355-6, and 1.355-7, see Sec. Sec. 1.355-2(i), 1.355-5(e), 1.355-
6(g), and 1.355-7(k), respectively.
(b) Application of section. Section 355 provides for the separation,
without recognition of gain or loss to (or the inclusion in income of)
the shareholders and security holders, of one or more existing
businesses formerly operated, directly or indirectly, by a single
corporation (the ``distributing corporation''). It applies only to the
separation of existing businesses that have been in active operation for
at least five years (or a business that has been in active operation for
at least five years into separate businesses), and which, in general,
have been owned, directly or indirectly, for at least five years by the
distributing corporation. A separation is achieved through the
distribution by the distributing corporation of stock, or stock and
securities, of one or more subsidiaries (the ``controlled
corporations'') to its shareholders with respect to its stock or to its
security holders in exchange for its securities. The controlled
corporations may be preexisting or newly created subsidiaries.
Throughout the regulations under section 355, the term distribution
refers to a distribution by the distributing corporation of stock, or
stock and securities, of one or more controlled corporations, unless the
context indicates otherwise. Section 355 contemplates the continued
operation of the business or businesses existing prior to the
separation. See Sec. 1.355-4 for types of distributions that may
qualify under section 355, including pro rata distributions and non pro
rata distributions.
(c) Stock rights. Except as provided in Sec. 1.356-6, for purposes
of section 355, the term securities includes rights issued by the
distributing corporation or the controlled corporation to acquire the
stock of that corporation. For purposes of this section and section
356(d)(2)(B), a right to acquire stock has no principal amount. For this
purpose, rights to acquire stock has the same meaning as it does under
sections 305 and 317(a). Other Internal Revenue Code provisions
governing the treatment of rights to acquire stock may also apply to
certain distributions occurring in connection with a transaction
described in section 355. See, for example, sections 83 and 421 through
424 and the regulations thereunder. This paragraph (c) applies to
distributions occurring on or after March 9, 1998.
(d) Nonqualified preferred stock. See Sec. 1.356-7(a) and (b) for
the treatment of nonqualified preferred stock (as defined in section
351(g)(2)) received in certain exchanges for (or in certain
distributions with respect to) nonqualified preferred stock or preferred
stock. See Sec. 1.356-7(c) for the treatment of the receipt of
preferred stock in certain exchanges for (or in certain distributions
with respect to) common or preferred
[[Page 240]]
stock described in section 351(g)(2)(C)(i)(II).
[T.D. 8238, 54 FR 289, Jan. 5, 1989, as amended by T.D. 8752, 63 FR 410,
Jan. 6, 1998; T.D. 8882, 65 FR 31078, May 16, 2000; T.D. 8904, 65 FR
58651, Oct. 2, 2000; T.D. 9435, 73 FR 75950, Dec. 15, 2008; 74 FR 3420,
Jan. 21, 2009; T.D. 9548, 76 FR 65111, Oct. 20, 2011]
Sec. 1.355-2 Limitations.
(a) Property distributed. Section 355 applies to a distribution only
if the property distributed consists solely of stock, or stock and
securities, of a controlled corporation. If additional property
(including an excess principal amount of securities received over
securities surrendered) is received, see section 356.
(b) Independent business purpose--(1) Independent business purpose
requirement. Section 355 applies to a transaction only if it is carried
out for one or more corporate business purposes. A transaction is
carried out for a corporate business purpose if it is motivated, in
whole or substantial part, by one or more corporate business purposes.
The potential for the avoidance of Federal taxes by the distributing or
controlled corporations (or a corporation controlled by either) is
relevant in determining the extent to which an existing corporate
business purpose motivated the distribution. The principal reason for
this business purpose requirement is to provide nonrecognition treatment
only to distributions that are incident to readjustments of corporate
structures required by business exigencies and that effect only
readjustments of continuing interests in property under modified
corporate forms. This business purpose requirement is independent of the
other requirements under section 355.
(2) Corporate business purpose. A corporate business purpose is a
real and substantial non Federal tax purpose germane to the business of
the distributing corporation, the controlled corporation, or the
affiliated group (as defined in Sec. 1.355-3(b)(4)(iv)) to which the
distributing corporation belongs. A purpose of reducing non Federal
taxes is not a corporate business purpose if (i) the transaction will
effect a reduction in both Federal and non Federal taxes because of
similarities between Federal tax law and the tax law of the other
jurisdiction and (ii) the reduction of Federal taxes is greater than or
substantially coextensive with the reduction of non Federal taxes. See
Examples (7) and (8) of paragraph (b)(5) of this section. A shareholder
purpose (for example, the personal planning purposes of a shareholder)
is not a corporate business purpose. Depending upon the facts of a
particular case, however, a shareholder purpose for a transaction may be
so nearly coextensive with a corporate business purpose as to preclude
any distinction between them. In such a case, the transaction is carried
out for one or more corporate business purposes. See Example (2) of
paragraph (b)(5) of this section.
(3) Business purpose for distribution. The distribution must be
carried out for one or more corporate business purposes. See Example (3)
of paragraph (b)(5) of this section. If a corporate business purpose can
be achieved through a nontaxable transaction that does not involve the
distribution of stock of a controlled corporation and which is neither
impractical nor unduly expensive, then, for purposes of paragraph (b)(1)
of this section, the separation is not carried out for that corporate
business purpose. See Examples (3) and (4) of paragraph (b)(5) of this
section. For rules with respect to the requirement of a business purpose
for a transfer of assets to a controlled corporation in connection with
a reorganization described in section 368(a)(1)(D), See Sec. 1.368-
1(b).
(4) Business purpose as evidence of nondevice. The corporate
business purpose or purposes for a transaction are evidence that the
transaction was not used principally as a device for the distribution of
earnings and profits within the meaning of section 355(a)(1)(B). See
paragraph (d)(3)(ii) of this section.
(5) Examples. The provisions of this paragraph (b) may be
illustrated by the following examples:
Example 1. Corporation X is engaged in the production,
transportation, and refining of petroleum products. In 1985, X acquires
all of the properties of corporation Z, which is also engaged in the
production, transportation, and refining of petroleum products. In 1991,
as a result of antitrust litigation, X is ordered to divest itself of
all of the properties acquired from Z. X transfers those properties
[[Page 241]]
to new corporation Y and distributes the stock of Y pro rata to X's
shareholders. In view of the divestiture order, the distribution is
carried out for a corporate business purpose. See paragraph (b)(1) of
this section.
Example 2. Corporation X is engaged in two businesses: The
manufacture and sale of furniture and the sale of jewelry. The
businesses are of equal value. The outstanding stock of X is owned
equally by unrelated individuals A and B. A is more interested in the
furniture business, while B is more interested in the jewelry business.
A and B decide to split up the businesses and go their separate ways. A
and B anticipate that the operations of each business will be enhanced
by the separation because each shareholder will be able to devote his
undivided attention to the business in which he is more interested and
more proficient. Accordingly, X transfers the jewelry business to new
corporation Y and distributes the stock of Y to B in exchange for all of
B's stock in X. The distribution is carried out for a corporate business
purpose, notwithstanding that it is also carried out in part for
shareholder purposes. See paragraph (b)(2) of this section.
Example 3. Corporation X is engaged in the manufacture and sale of
toys and the manufacture and sale of candy. The shareholders of X wish
to protect the candy business from the risks and vicissitudes of the toy
business. Accordingly, X transfers the toy business to new corporation Y
and distributes the stock of Y to X's shareholders. Under applicable
law, the purpose of protecting the candy business from the risks and
vicissitudes of the toy business is achieved as soon as X transfers the
toy business to Y. Therefore, the distribution is not carried out for a
corporate business purpose. See paragraph (b)(3) of this section.
Example 4. Corporation X is engaged in a regulated business in State
T. X owns all of the stock of corporation Y, a profitable corporation
that is not engaged in a regulated business. Commission C sets the rates
that X may charge its customers, based on its total income. C has
recently adopted rules according to which the total income of a
corporation includes the income of a business if, and only if, the
business is operated, directly or indirectly, by the corporation. Total
income, for this purpose, includes the income of a wholly owned
subsidiary corporation but does not include the income of a parent or
``brother/sister'' corporation. Under C's new rule, X's total income
includes the income of Y, with the result that X has suffered a
reduction of the rates that it may charge its customers. It would not be
impractical or unduly expensive to create in a nontaxable transaction
(such as a transaction qualifying under section 351) a holding company
to hold the stock of X and Y. X distributes the stock of Y to X's
shareholders. The distribution is not carried out for the purpose of
increasing the rates that X may charge its customers because that
purpose could be achieved through a nontaxable transaction, the creation
of a holding company, that does not involve the distribution of stock of
a controlled corporation and which is neither impractical nor unduly
expensive. See paragraph (b)(3) of this section.
Example 5. The facts are the same as in Example (4), except that C
has recently adopted rules according to which the total income of a
corporation includes not only the income included in Example (3), but
also the income of any member of the affiliated group to which the
corporation belongs. In order to avoid a reduction in the rates that it
may charge its customers, X distributes the stock of Y to X's
shareholders. The distribution is carried out for a corporate business
purpose. See paragraph (b)(3) of this section.
Example 6. (i) Corporation X owns all of the one class of stock of
corporation Y. X distributes the stock of Y pro rata to its five
shareholders, all of whom are individuals, for the sole purpose of
enabling X and/or Y to elect to become an S corporation. The
distribution does not meet the corporate business purpose requirement.
See paragraph (b)(1) and (2) of this section.
(ii) The facts are the same as in Example 6(i), except that the
business of Y is operated as a division of X. X transfers this division
to new corporation Y and distributes the stock of Y pro rata to its
shareholders, all of whom are individuals, for the sole purpose of
enabling X and/or Y to elect to become an S corporation. The
distribution does not meet the corporate business purpose requirement.
See paragraph (b)(1) and (2) of this section.
Example 7. The facts are the same as in Example (6)(i), except that
the distribution is made to enable X to elect to become an S corporation
both for Federal tax purposes and for purposes of the income tax imposed
by State M. State M has tax law provisions similar to subchapter S of
the Internal Revenue Code of 1986. An election to be an S corporation
for Federal tax purposes will effect a substantial reduction in Federal
taxes that is greater than the reduction of State M taxes pursuant to an
election to be an S corporation for State M purposes. The purpose of
reducing State M taxes is not a corporate business purpose. The
distribution does not meet the corporate business purpose requirements.
See paragraph (b)(1) and (2) of this section.
Example 8. The facts are the same as Example (7), except that the
distribution also is made to enable A, a key employee of Y, to acquire
stock of Y without investing in X. A is considered to be critical to the
success of Y and he has indicated that he will seriously consider
leaving the company if he is not given the opportunity to purchase a
significant amount of stock of Y. As a matter of
[[Page 242]]
state law, Y could not issue stock to the employee while it was a
subsidiary of X. As in Example (7), the purpose of reducing State M
taxes is not a corporate business purpose. In order to determine whether
the issuance of stock to the key employee, in fact, motivated the
distribution of the Y stock, the potential avoidance of Federal taxes is
a relevant factor to take into account. If the facts and circumstances
establish that the distribution was substantially motivated by the need
to issue stock to the employee, the distribution will meet the corporate
business purpose requirement.
(c) Continuity of interest requirement--(1) Requirement. Section 355
applies to a separation that effects only a readjustment of continuing
interests in the property of the distributing and controlled
corporations. In this regard section 355 requires that one or more
persons who, directly or indirectly, were the owners of the enterprise
prior to the distribution or exchange own, in the aggregate, an amount
of stock establishing a continuity of interest in each of the modified
corporate forms in which the enterprise is conducted after the
separation. This continuity of interest requirement is independent of
the other requirements under section 355.
(2) Examples.
Example 1. For more than five years, corporation X has been engaged
directly in one business, and indirectly in a different business through
its wholly owned subsidiary, S. The businesses are equal in value. At
all times, the outstanding stock of X has been owned equally by
unrelated individuals A and B. For valid business reasons, A and B cause
X to distribute all of the stock of S to B in exchange for all of B's
stock in X. After the transaction, A owns all the stock of X and B owns
all the stock of S. The continuity of interest requirement is met
because one or more persons who were the owners of X prior to the
distribution (A and B) own, in the aggregate, an amount of stock
establishing a continuity of interest in each of X and S after the
distribution.
Example 2. Assume the same facts as in Example (1), except that
pursuant to a plan to acquire a stock interest in X without acquiring,
directly or indirectly, an interest in S, C purchased one-half of the X
stock owned by A and immediately thereafter X distributed all of the S
stock to B in exchange for all of B's stock in X. After the
transactions, A owns 50 percent of X and B owns 100 percent of S. The
distribution by X of all of the stock of S to B in exchange for all of
B's stock in X will satisfy the continuity of interest requirement for
section 355 because one or more persons who were the owners of X prior
to the distribution (A and B) own, in the aggregate, an amount of stock
establishing a continuity of interest in each of X and S after the
distribution.
Example 3. Assume the same facts as in Examples (1) and (2), except
that C purchased all of the X stock owned by A. After the transactions,
neither A nor B own any of the stock of X, and B owns all the stock of
S. The continuity of interest requirement is not met because the owners
of X prior to the distribution (A and B) do not, in the aggregate, own
an amount of stock establishing a continuity of interest in each of X
and S after the distribution, i.e., although A and B collectively have
retained 50 percent of their equity interest in the former combined
enterprise, they have failed to continue to own the minimum stock
interest in the distributing corporation, X, that would be required in
order to meet the continuity of interest requirement.
Example 4. Assume the same facts as in Examples (1) and (2), except
that C purchased 80 percent of the X stock owned by A. After the
transactions, A owns 20 percent of the stock of X, B owns no X stock,
and B owns 100 percent of the S stock. The continuity of interest
requirement is not met because the owners of X prior to the distribution
(A and B) do not, in the aggregate, have a continuity of interest in
each of X and S after the distribution, i.e., although A and B
collectively have retained 60 percent of their equity interest in the
former combined enterprise, the 20 percent interest of A in X is less
than the minimum equity interest in the distributing corporation, X,
that would be required in order to meet the continuity of interest
requirement.
(d) Device for distribution of earnings and profits--(1) In general.
Section 355 does not apply to a transaction used principally as a device
for the distribution of the earnings and profits of the distributing
corporation, the controlled corporation, or both (a ``device''). Section
355 recognizes that a tax-free distribution of the stock of a controlled
corporation presents a potential for tax avoidance by facilitating the
avoidance of the dividend provisions of the Code through the subsequent
sale or exchange of stock of one corporation and the retention of the
stock of another corporation. A device can include a transaction that
effects a recovery of basis. In this paragraph (d), ``exchange''
includes transactions, such as redemptions, treated
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as exchanges under the Code. Generally, the determination of whether a
transaction was used principally as a device will be made from all of
the facts and circumstances, including, but not limited to, the presence
of the device factors specified in paragraph (d)(2) of this section
(``evidence of device''), and the presence of the nondevice factors
specified in paragraph (d)(3) of this section (``evidence of
nondevice''). However, if a transaction is specified in paragraph (d)(5)
of this section, then it is ordinarily considered not to have been used
principally as a device.
(2) Device factors--(i) In general. The presence of any of the
device factors specified in this subparagraph (2) is evidence of device.
The strength of this evidence depends on the facts and circumstances.
(ii) Pro rata distribution. A distribution that is pro rata or
substantially pro rata among the shareholders of the distributing
corporation presents the greatest potential for the avoidance of the
dividend provisions of the Code and, in contrast to other types of
distributions, is more likely to be used principally as a device.
Accordingly, the fact that a distribution is pro rata or substantially
pro rata is evidence of device.
(iii) Subsequent sale or exchange of stock--(A) In general. A sale
or exchange of stock of the distributing or the controlled corporation
after the distribution (a ``subsequent sale or exchange'') is evidence
of device. Generally, the greater the percentage of the stock sold or
exchanged after the distribution, the stronger the evidence of device.
In addition, the shorter the period of time between the distribution and
the sale or exchange, the stronger the evidence of device.
(B) Sale or exchange negotiated or agreed upon before the
distribution. A subsequent sale or exchange pursuant to an arrangement
negotiated or agreed upon before the distribution is substantial
evidence of device.
(C) Sale or exchange not negotiated or agreed upon before the
distribution. A subsequent sale or exchange not pursuant to an
arrangement negotiated or agreed upon before the distribution is
evidence of device.
(D) Negotiated or agreed upon before the distribution. For purposes
of this subparagraph (2), a sale or exchange is always pursuant to an
arrangement negotiated or agreed upon before the distribution if
enforceable rights to buy or sell existed before the distribution. If a
sale or exchange was discussed by the buyer and the seller before the
distribution and was reasonably to be anticipated by both parties, then
the sale or exchange will ordinarily be considered to be pursuant to an
arrangement negotiated or agreed upon before the distribution.
(E) Exchange in pursuance of a plan of reorganization. For purposes
of this subparagraph (2), if stock is exchanged for stock in pursuance
of a plan of reorganization, and either no gain or loss or only an
insubstantial amount of gain is recognized on the exchange, then the
exchange is not treated as a subsequent sale or exchange, but the stock
received in the exchange is treated as the stock surrendered in the
exchange. For this purpose, gain treated as a dividend pursuant to
sections 356(a)(2) and 316 shall be disregarded.
(iv) Nature and use of assets--(A) In general. The determination of
whether a transaction was used principally as a device will take into
account the nature, kind, amount, and use of the assets of the
distributing and the controlled corporations (and corporations
controlled by them) immediately after the transaction.
(B) Assets not used in a trade or business meeting the requirement
of section 355(b). The existence of assets that are not used in a trade
or business that satisfies the requirements of section 355(b) is
evidence of device. For this purpose, assets that are not used in a
trade or business that satisfies the requirements of section 355(b)
include, but are not limited to, cash and other liquid assets that are
not related to the reasonable needs of a business satisfying such
section. The strength of the evidence of device depends on all the facts
and circumstances, including, but not limited to, the ratio for each
corporation of the value of assets not used in a trade or business that
satisfies the requirements of section 355(b) to the value of its
business that satisfies such requirements. A difference in the ratio
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described in the preceding sentence for the distributing and controlled
corporation is ordinarily not evidence of device if the distribution is
not pro rata among the shareholders of the distributing corporation and
such difference is attributable to a need to equalize the value of the
stock distributed and the value of the stock or securities exchanged by
the distributees.
(C) Related function. There is evidence of device if a business of
either the distributing or controlled corporation (or a corporation
controlled by it) is (1) a ``secondary business'' that continues as a
secondary business for a significant period after the separation, and
(2) can be sold without adversely affecting the business of the other
corporation (or a corporation controlled by it). A secondary business is
a business of either the distributing or controlled corporation, if its
principal function is to serve the business of the other corporation (or
a corporation controlled by it). A secondary business can include a
business transferred to a newly-created subsidiary or a business which
serves a business transferred to a newly-created subsidiary. The
activities of the secondary business may consist of providing property
or performing services. Thus, in Example (11) of Sec. 1.355-3(c),
evidence of device would be presented if the principal function of the
coal mine (satisfying the requirements of the steel business) continued
after the separation and the coal mine could be sold without adversely
affecting the steel business. Similarly, in Example (10) of Sec. 1.355-
3(c), evidence of device would be presented if the principal function of
the sales operation after the separation is to sell the output from the
manufacturing operation and the sales operation could be sold without
adversely affecting the manufacturing operation.
(3) Nondevice factors--(i) In general. The presence of any of the
nondevice factors specified in this subparagraph (3) is evidence of
nondevice. The strength of this evidence depends on all of the facts and
circumstances.
(ii) Corporate business purpose. The corporate business purpose for
the transaction is evidence of nondevice. The stronger the evidence of
device (such as the presence of the device factors specified in
paragraph (d)(2) of this section), the stronger the corporate business
purpose required to prevent the determination that the transaction was
used principally as a device. Evidence of device presented by the
transfer or retention of assets not used in a trade or business that
satisfies the requirements of section 355(b) can be outweighed by the
existence of a corporate business purpose for those transfers or
retentions. The assessment of the strength of a corporate business
purpose will be based on all of the facts and circumstances, including,
but not limited to, the following factors:
(A) The importance of achieving the purpose to the success of the
business;
(B) The extent to which the transaction is prompted by a person not
having a proprietary interest in either corporation, or by other outside
factors beyond the control of the distributing corporation; and
(C) The immediacy of the conditions prompting the transaction.
(iii) Distributing corporation publicly traded and widely held. The
fact that the distributing corporation is publicly traded and has no
shareholder who is directly or indirectly the beneficial owner of more
than five percent of any class of stock is evidence of nondevice.
(iv) Distribution to domestic corporate shareholders. The fact that
the stock of the controlled corporation is distributed to one or more
domestic corporations that, if section 355 did not apply, would be
entitled to a deduction under section 243(a)(1) available to
corporations meeting the stock ownership requirements of section 243(c),
or a deduction under section 243(a)(2) or (3) or 245(b) is evidence of
nondevice.
(4) Examples. The provisions of paragraph (d)(1) through (3) of this
section may be illustrated by the following examples:
Example 1. Individual A owns all of the stock of corporation X,
which is engaged in the warehousing business. X owns all of the stock of
corporation Y, which is engaged in the transportation business. X
employs individual B, who is extremely knowledgeable of the warehousing
business in general and the operations of X in particular. B has
informed A that he will seriously consider leaving the company if he is
not given the opportunity to purchase a significant amount of stock of
X. Because of his knowledge and experience, the loss of B would
seriously damage the
[[Page 245]]
business of X. B cannot afford to purchase any significant amount of
stock of X as long as X owns Y. Accordingly, X distributes the stock of
Y to A and A subsequently sells a portion of his X stock to B. However,
X could have issued additional shares to B sufficient to give B an
equivalent ownership interest in X. There is no other evidence of device
or evidence of nondevice. In light of the fact that X could have issued
additional shares to B, the sale of X stock by A is substantial evidence
of device. The transaction is considered to have been used principally
as a device. See paragraph (d)(1), (2)(ii), (iii)(A), (B) and (D), and
(3)(i) and (ii) of this section.
Example 2. Corporation X owns and operates a fast food restaurant in
State M and owns all of the stock of corporation Y, which owns and
operates a fast food restaurant in State N. X and Y operate their
businesses under franchises granted by D and E, respectively. X owns
cash and marketable securities that exceed the reasonable needs of its
business but whose value is small relative to the value of its business.
E has recently changed its franchise policy and will no longer grant or
renew franchises to subsidiaries (or other members of the same
affiliated group) of corporations operating businesses under franchises
granted by its competitors. Thus, Y will lose its franchise if it
remains a subsidiary of X. The franchise is about to expire.
Accordingly, X distributes the stock of Y pro rata among X's
shareholders. X retains its business and transfers cash and marketable
securities to Y in an amount proportional to the value of Y's business.
There is no other evidence of device or evidence of nondevice. The
transfer by X to Y and the retention by X of cash and marketable
securities is relatively weak evidence of device because after the
transfer X and Y hold cash and marketable securities in amounts
proportional to the values of their businesses. The fact that the
distribution is pro rata is evidence of device. A strong corporate
business purpose is relatively strong evidence of nondevice.
Accordingly, the transaction is considered not to have been used
principally as a device. See paragraph (d)(1), (2)(ii), (iv)(A), and (B)
and (3)(i) and (ii)(A), (B) and (C) of this section.
Example 3. Corporation X is engaged in a regulated business in State
M and owns all of the stock of corporation Y, which is not engaged in a
regulated business in State M. State M has recently amended its laws to
provide that affiliated corporations operating in M may not conduct both
regulated and unregulated businesses. X transfers cash not related to
the reasonable needs of the business of X or Y to Y and then distributes
the stock of Y pro rata among X's shareholders. As a result of the
transfer of cash, the ratio of the value of its assets not used in a
trade or business that satisfies the requirements of section 355(b) to
the value of its business is substantially greater for Y than for X.
There is no other evidence of device or evidence of nondevice. The
transfer of cash by X to Y is relatively strong evidence of device
because after the transfer Y holds disproportionately many assets that
are not used in a trade or business that satisfies the requirements of
section 355(b). The fact that the distribution is pro rata is evidence
of device. The strong business purpose is relatively strong evidence of
nondevice, but it does not pertain to the transfer. Accordingly, the
transaction is considered to have been used principally as a device. See
paragraph (d)(1), (2)(ii), (iv)(A) and (B), and (3) and (i) and (ii) of
this section.
Example 4. The facts are the same as in Example (3), except that,
instead of transferring cash to Y, X purchases operating assets
unrelated to the business of Y and transfers them to Y prior to the
distribution. There is no other evidence of device or evidence of
nondevice. The transaction is considered to have been used principally
as a device. See paragraph (d)(1), (2)(ii), (iv)(A) and (B), and (3)(i)
and (ii) of this section.
(5) Transactions ordinarily not considered as a device--(i) In
general. This subparagraph (5) specifies three distributions that
ordinarily do not present the potential for tax avoidance described in
paragraph (d)(1) of this section. Accordingly, such distributions are
ordinarily considered not to have been used principally as a device,
notwithstanding the presence of any of the device factors described in
paragraph (d)(2) of this section. A transaction described in paragraph
(d)(5)(iii) or (iv) of this section is not protected by this
subparagraph (5) from a determination that it was used principally as a
device if it involves the distribution of the stock of more than one
controlled corporation and facilitates the avoidance of the dividend
provisions of the Code through the subsequent sale or exchange of stock
of one corporation and the retention of the stock of another
corporation.
(ii) Absence of earnings and profits. A distribution is ordinarily
considered not to have been used principally as a device if--
(A) The distributing and controlled corporations have no accumulated
earnings and profits at the beginning of their respective taxable years,
(B) The distributing and controlled corporations have no current
earnings and profits as of the date of the distribution, and
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(C) No distribution of property by the distributing corporation
immediately before the separation would require recognition of gain
resulting in current earnings and profits for the taxable year of the
distribution.
(iii) Section 303(a) transactions. A distribution is ordinarily
considered not to have been used principally as a device if, in the
absence of section 355, with respect to each shareholder distributee,
the distribution would be a redemption to which section 303(a) applied.
(iv) Section 302(a) transactions. A distribution is ordinarily
considered not to have been used principally as a device if, in the
absence of section 355, with respect to each shareholder distributee,
the distribution would be a redemption to which section 302(a) applied.
For purposes of the preceding sentence, section 302(c)(2)(A)(ii) and
(iii) shall not apply.
(v) Examples. The provisions of this subparagraph (5) may be
illustrated by the following examples:
Example 1. The facts are the same as in Example (3) of paragraph
(d)(4) of this section, except that X and Y had no accumulated earnings
and profits at the beginning of its taxable year, X and Y have no
current earnings and profits as of the date of the distribution, and no
distribution of property by X immediately before the separation would
require recognition of gain that would result in earnings and profits
for the taxable year of the distribution. The transaction is considered
not to have been used principally as a device. See paragraph (d)(5)(i)
and (ii) of this section.
Example 2. Corporation X is engaged in three businesses: a hotel
business, a restaurant business, and a rental real estate business.
Individuals A, B, and C own all of the stock of X. X transfers the
restaurant business to new corporation Y and transfers the rental real
estate business to new corporation Z. X then distributes the stock of Y
and Z pro rata between B and C in exchange for all of their stock in X.
In the absence of section 355, the distribution would be a redemption to
which section 302(a) applied. Since this distribution involves the stock
of more than one controlled corporation and facilitates the avoidance of
the dividend provisions of the Code through the subsequent sale or
exchange of stock in one corporation and the retention of the stock of
another corporation, it is not protected by paragraph (d)(5)(i) and (iv)
of this section from a determination that it was used principally as a
device. Thus, the determination of whether the transaction was used
principally as a device must be made from all the facts and
circumstances, including the presence of the device factors and
nondevice factors specified in paragraph (d)(2) and (3) of this section.
(e) Stock and securities distributed--(1) In general. Section 355
applies to a distribution only if the distributing corporation
distributes--
(i) All of the stock and securities of the controlled corporation
that it owns, or
(ii) At least an amount of the stock of the controlled corporation
that constitutes control as defined in section 368(c). In such a case,
all, or any part, of the securities of the controlled corporation may be
distributed, and paragraph (e)(2) of this section shall apply.
(2) Additional rules. Where a part of either the stock or the
securities of the controlled corporation is retained under paragraph
(e)(1)(ii) of this section, it must be established to the satisfaction
of the Commissioner that the retention by the distributing corporation
was not in pursuance of a plan having as one of its principal purposes
the avoidance of Federal income tax. Ordinarily, the corporate business
purpose or purposes for the distribution will require the distribution
of all of the stock and securities of the controlled corporation. If the
distribution of all of the stock and securities of a controlled
corporation would be treated to any extent as a distribution of ``other
property'' under section 356, this fact tends to establish that the
retention of stock or securities is in pursuance of a plan having as one
of its principal purposes the avoidance of Federal income tax.
(f) Principal amount of securities--(1) Securities received. Section
355 does not apply to a distribution if, with respect to any shareholder
or security holder, the principal amount of securities received exceeds
the principal amount of securities surrendered, or securities are
received but no securities are surrendered. In such cases, see section
356.
(2) Only stock received. If only stock is received in a distribution
to which section 355(a)(1)(A) applies, the principal amount of the
securities surrendered, if any, and the par value or stated value of the
stock surrendered, if any, are
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not relevant to the application of that section.
(g) Recently acquired controlled stock under section 355(a)(3)(B)--
(1) Other property. Except as provided in paragraph (g)(2) of this
section, for purposes of section 355(a)(1)(A), section 355(c), and so
much of section 356 as relates to section 355, stock of a controlled
corporation acquired by the DSAG in a taxable transaction (as defined in
paragraph (g)(4) of this section) within the five-year period ending on
the date of the distribution (pre-distribution period) shall not be
treated as stock of the controlled corporation but shall be treated as
``other property.'' Transfers of controlled corporation stock that is
owned by the DSAG immediately before and immediately after the transfer
are disregarded and are not acquisitions for purposes of this paragraph
(g)(1).
(2) Exceptions. Paragraph (g)(1) of this section does not apply to
an acquisition of stock of the controlled corporation--
(i) If the controlled corporation is a DSAG member at any time after
the acquisition (but prior to the distribution); or
(ii) Described in Sec. 1.355-3(b)(4)(iii).
(3) DSAG. For purposes of this paragraph (g), a DSAG is the
distributing corporation's separate affiliated group (the affiliated
group which would be determined under section 1504(a) if such
corporation were the common parent and section 1504(b) did not apply)
that consists of the distributing corporation as the common parent and
all corporations affiliated with the distributing corporation through
stock ownership described in section 1504(a)(1)(B) (regardless of
whether the corporations are includible corporations under section
1504(b)). For purposes of paragraph (g)(1) of this section, any
reference to the DSAG is a reference to the distributing corporation if
it is not the common parent of a separate affiliated group.
(4) Taxable transaction--(i) Generally. For purposes of this
paragraph (g), a taxable transaction is a transaction in which gain or
loss was recognized in whole or in part.
(ii) Dunn Trust and predecessor issues. [Reserved]
(5) Examples. The following examples illustrate this paragraph (g).
Assume that C, D, P, and S are corporations, X is an unrelated
individual, each of the transactions is unrelated to any other
transaction and, but for the issue of whether C stock is treated as
``other property'' under section 355(a)(3)(B), the distributions satisfy
all of the requirements of section 355. No inference should be drawn
from any of these examples as to whether any requirements of section 355
other than section 355(a)(3)(B), as specified, are satisfied.
Furthermore, the following definitions apply:
(i) Purchase is an acquisition that is a taxable transaction.
(ii) Section 368(c) stock is stock constituting control within the
meaning of section 368(c).
(iii) Section 1504(a)(2) stock is stock meeting the requirements of
section 1504(a)(2).
Example 1. Hot stock. For more than five years, D has owned section
368(c) stock but not section 1504(a)(2) stock of C. In year 6, D
purchases additional C stock from X. However, D does not own section
1504(a)(2) stock of C after the year 6 purchase. If D distributes all of
its C stock within five years after the year 6 purchase, for purposes of
section 355(a)(1)(A), section 355(c), and so much of section 356 as
relates to section 355, the C stock purchased in year 6 would be treated
as ``other property.'' See paragraph (g)(1) of this section.
Example 2. C becomes a DSAG member. For more than five years, D has
owned section 368(c) stock but not section 1504(a)(2) stock of C. In
year 6, D purchases additional C stock from X such that D's total
ownership of C is section 1504(a)(2) stock. If D distributes all of its
C stock within five years after the year 6 purchase, the distribution of
the C stock purchased in year 6 would not be treated as ``other
property'' because C becomes a DSAG member. See paragraph (g)(2)(i) of
this section. The result would be the same if D did not own any C stock
prior to year 6 and D purchased all of the C stock in year 6. See
paragraph (g)(2)(i) of this section. Similarly, if D did not own any C
stock prior to year 6, D purchased 20 percent of the C stock in year 6,
and then acquired all of the remaining C stock in year 7, the C stock
purchased in year 6 and the C stock acquired in year 7 (even if
purchased) would not be treated as ``other property'' because C becomes
a DSAG member. See paragraph (g)(2)(i) of this section.
Example 3. Intra-SAG transaction. For more than five years, D has
owned all of the stock
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of S. D and S, in the aggregate, have owned section 368(c) stock but not
section 1504(a)(2) stock of C. Therefore, D and S are DSAG members, but
C is not. In year 6, D purchases S's C stock. If D distributes all of
its C stock within five years after the year 6 purchase, the
distribution of the C stock purchased in year 6 would not be treated as
``other property.'' D's purchase of the C stock from S is disregarded
for purposes of paragraph (g)(1) of this section because that C stock
was owned by the DSAG immediately before and immediately after the
purchase. See paragraph (g)(1) of this section.
Example 4. Affiliate exception. For more than five years, P has
owned 90 percent of the sole outstanding class of the stock of D and a
portion of the stock of C, and X has owned the remaining 10 percent of
the D stock. Throughout this period, D has owned section 368(c) stock
but not section 1504(a)(2) stock of C. In year 6, D purchases P's C
stock. However, D does not own section 1504(a)(2) stock of C after the
year 6 purchase. If D distributes all of its C stock to X in exchange
for X's D stock within five years after the year 6 purchase, the
distribution of the C stock purchased in year 6 would not be treated as
``other property'' because the C stock was purchased from a member (P)
of the affiliated group (as defined in Sec. 1.355-3(b)(4)(iv)) of which
D is a member, and P did not purchase that C stock within the pre-
distribution period. See paragraph (g)(2)(ii) of this section.
(h) Active conduct of a trade or business. Section 355 applies to a
distribution only if the requirements of Sec. 1.355-3 (relating to the
active conduct of a trade or business) are satisfied.
(i) Effective/applicability date. Paragraphs (g)(1) through (g)(5)
of this section apply to distributions occurring after October 20, 2011.
For rules regarding distributions occurring on or before October 20,
2011, see Sec. 1.355-2T(i), as contained in 26 CFR part 1, revised as
of April 1, 2011.
[T.D. 8238, 54 FR 290, Jan. 5, 1989; 54 FR 5577, Feb. 3, 1989; 57 FR
28463, June 25, 1992; T.D. 9435, 73 FR 75950, Dec. 15, 2008; T.D. 9548,
76 FR 65111, Oct. 20, 2011]
Sec. 1.355-3 Active conduct of a trade or business.
(a) General requirements--(1) Application of section 355. Under
section 355(b)(1), a distribution of stock, or stock and securities, of
a controlled corporation qualifies under section 355 only if--
(i) The distributing and the controlled corporations are each
engaged in the active conduct of a trade or business immediately after
the distribution (section 355(b)(1)(A)), or
(ii) Immediately before the distribution, the distributing
corporation had no assets other than stock or securities of the
controlled corporations, and each of the controlled corporations is
engaged in the active conduct of a trade or business immediately after
the distribution (section 355(b)(1)(B)). A de minimis amount of assets
held by the distributing corporation shall be disregarded for purposes
of this paragraph (a)(1)(ii).
(2) Examples. Paragraph (a)(1) of this section may be illustrated by
the following examples:
Example 1. Prior to the distribution, corporation X is engaged in
the active conduct of a trade or business and owns all of the stock of
corporation Y, which also is engaged in the active conduct of a trade or
business. X distributes all of the stock of Y to X's shareholders, and
each corporation continues the active conduct of its trade or business.
The active business requirement of section 355(b)(1)(A) is satisfied.
Example 2. The facts are the same as in Example (1), except that X
transfers all of its assets other than the stock of Y to a new
corporation in exchange for all of the stock of the new corporation and
then distributes the stock of both controlled corporations to X's
shareholders. The active business requirement of section 355(b)(1)(B) is
satisfied.
(b) Active conduct of a trade or business defined--(1) In general.
Section 355(b)(2) provides rules for determining whether a corporation
is treated as engaged in the active conduct of a trade or business for
purposes of section 355(b)(1). Under section 355(b)(2)(A), a corporation
is treated as engaged in the active conduct of a trade or business if it
is itself engaged in the active conduct of a trade or business or if
substantially all of its assets consist of the stock, or stock and
securities, of a corporation or corporations controlled by it
(immediately after the distribution) each of which is engaged in the
active conduct of a trade or business.
(2) Active conduct of a trade or business immediately after
distribution--(i) In general. For purposes of section 355(b), a
corporation shall be treated as engaged in the ``active conduct of a
trade or business'' immediately after the distribution if the assets and
activities of
[[Page 249]]
the corporation satisfy the requirements and limitations described in
paragraph (b)(2)(ii), (iii), and (iv) of this section.
(ii) Trade or business. A corporation shall be treated as engaged in
a trade or business immediately after the distribution if a specific
group of activities are being carried on by the corporation for the
purpose of earning income or profit, and the activities included in such
group include every operation that forms a part of, or a step in, the
process of earning income or profit. Such group of activities ordinarily
must include the collection of income and the payment of expenses.
(iii) Active conduct. For purposes of section 355(b), the
determination whether a trade or business is actively conducted will be
made from all of the facts and circumstances. Generally, the corporation
is required itself to perform active and substantial management and
operational functions. Generally, activities performed by the
corporation itself do not include activities performed by persons
outside the corporation, including independent contractors. A
corporation may satisfy the requirements of this subdivision (iii)
through the activities that it performs itself, even though some of its
activities are performed by others. Separations of real property all or
substantially all of which is occupied prior to the distribution by the
distributing or the controlled corporation (or by any corporation
controlled directly or indirectly by either of those corporations) will
be carefully scrutinized with respect to the requirements of section
355(b) and this Sec. 1.355-3.
(iv) Limitations. The active conduct of a trade or business does not
include--
(A) The holding for investment purposes of stock, securities, land,
or other property, or
(B) The ownership and operation (including leasing) of real or
personal property used in a trade or business, unless the owner performs
significant services with respect to the operation and management of the
property.
(3) Active conduct for five-year period preceding distribution.
Under section 355(b)(2)(B), a trade or business that is relied upon to
meet the requirements of section 355(b) must have been actively
conducted throughout the five-year period ending on the date of the
distribution. For purposes of this subparagraph (3)--
(i) Activities which constitute a trade or business under the tests
described in paragraph (b)(2) of this section shall be treated as
meeting the requirement of the preceding sentence if such activities
were actively conducted throughout the 5-year period ending on the date
of distribution, and
(ii) The fact that a trade or business underwent change during the
five-year period preceding the distribution (for example, by the
addition of new or the dropping of old products, changes in production
capacity, and the like) shall be disregarded, provided that the changes
are not of such a character as to constitute the acquisition of a new or
different business. In particular, if a corporation engaged in the
active conduct of one trade or business during that five-year period
purchased, created, or otherwise acquired another trade or business in
the same line of business, then the acquisition of that other business
is ordinarily treated as an expansion of the original business, all of
which is treated as having been actively conducted during that five-year
period, unless that purchase, creation, or other acquisition effects a
change of such a character as to constitute the acquisition of a new or
different business.
(4) Special rules for acquisition of a trade or business (Prior to
the Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of
1988)--(i) In general. Under section 355(b)(2)(C), a trade or business
relied upon to meet the requirements of section 355(b) must not have
been acquired by the distributing corporation, the controlled
corporation, or another member of the affiliated group during the five-
year period ending on the date of the distribution unless it was
acquired in a transaction in which no gain or loss was recognized.
Similarly, under section 355(b)(2)(D), the trade or business must not
have been indirectly acquired by any of those corporations (or a
predecessor in interest of any of those corporations) during that five-
year period in a transaction in which gain or loss was recognized in
whole or in part and
[[Page 250]]
which consisted of the acquisition of control of the corporation
directly engaged in the trade or business, or the indirect acquisition
of control of that corporation through the direct or indirect
acquisition of control of one or more other corporations. A trade or
business acquired, directly or indirectly, within the five-year period
ending on the date of the distribution in a transaction in which the
basis of the assets acquired was not determined in whole or in part by
reference to the transferor's basis does not qualify under section
355(b)(2), even though no gain or loss was recognized by the
transferror.
(ii) Example. Paragraph (b)(4)(i) of this section may be illustrated
by the following example:
Example. In 1985, corporation X, which operates a business and has
cash and other liquid assets, purchases all of the stock of corporation
Y, which is engaged in the active conduct of a trade or business. Later
in the same year, X merges into Y in a ``downstream'' statutory merger.
In 1986, Y transfers the business assets formerly owned by X to a new
subsidiary, corporation Z, and then distributes the stock of Z to Y's
shareholders. Section 355 does not apply to the distribution of the
stock of Z because the trade or business of Y was indirectly acquired by
X, a predecessor in interest of Y, during the five-year period preceding
the distribution.
(iii) Gain or loss recognized in certain transactions. The
requirements of section 355(b)(2)(C) and (D) are intended to prevent the
direct or indirect acquisition of a trade or business by a corporation
in anticipation of a distribution by the corporation of that trade of
business in a distribution to which section 355 would otherwise apply. A
direct or indirect acquisition of a trade or business by one member of
an affiliated group from another member of the group is not the type of
transaction to which section 355(b)(2)(C) and (D) is intended to apply.
Therefore, in applying section 355(b)(2)(C) or (D), such an acquisition,
even though taxable, shall be disregarded.
(iv) Affiliated group. For purposes of this subparagraph (4), the
term affiliated group means an affiliated group as defined in section
1504(a) (without regard to section 1504(b)), except that the term stock
includes nonvoting stock described in section 1504(a)(4).
(5) Special rules for acquisition of a trade or business (After the
Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of
1988). [Reserved]
(c) Examples. The following examples illustrate section 355(b)(2)(A)
and (B) and paragraph (b)(1), (2), and (3) of this section. However, a
transaction that satisfies these active business requirements will
qualify under section 355 only if it satisfies the other requirements of
section 355 (a) and (b).
Example 1. Corporation X is engaged in the manufacture and sale of
soap and detergents and also owns investment securities. X transfers the
investment securities to new subsidiary Y and distributes the stocks of
Y to X's shareholders. Y does not satisfy the requirements of section
355(b) because the holding of investment securities does not constitute
the active conduct of a trade or business. See paragraph (b)(2)(iv)(A)
of this section.
Example 2. Corporation X owns, manages, and derives rental income
from an office building and also owns vacant land. X transfers the land
to new subsidiary Y and distributes the stock of Y to X's shareholders.
Y will subdivide the land, install streets and utilities, and sell the
developed lots to various homebuilders. Y does not satisfy the
requirements of section 355(b) because no significant development
activities were conducted with respect to the land during the five-year
period ending on the date of the distribution. See paragraph (b)(3) of
this section.
Example 3. Corporation X owns land on which it conducts a ranching
business. Oil has been discovered in the area, and it is apparent that
oil may be found under the land on which the ranching business is
conducted. X has engaged in no significant activities in connection with
its mineral rights. X transfers its mineral rights to new subsidiary Y
and distributes the stock of Y to X's shareholders. Y will actively
pursue the development of the oil producing potential of the property. Y
does not satisfy the requirements of section 355(b) because X engaged in
no significant exploitation activities with respect to the mineral
rights during the five-year period ending on the date of the
distribution. See paragraph (b)(3) of this section.
Example 4. For more than five years, corporation X has conducted a
single business of constructing sewage disposal plants and other
facilities. X transfers one-half of its assets to new subsidiary Y.
These assets include a contract for the construction of a
[[Page 251]]
sewage disposal plant in State M, construction equipment, cash, and
other tangible assets. X retains a contract for the construction of a
sewage disposal plant in State N, construction equipment, cash, and
other intangible assets. X then distributes the stock of Y to one of X's
shareholders in exchange for all of his stock of X. X and Y both satisfy
the requirements of section 355(b). See paragraph (b)(3)(i) of this
section.
Example 5. For the past six years, corporation X has owned and
operated two factories devoted to the production of edible pork skins.
The entire output of one factory is sold to one customer, C, while the
output of the second factory is sold to C and a number of other
customers. To eliminate errors in packaging, X opens a new factory.
Thereafter, orders from C are processed and packaged at the two original
factories, while the new factory handles only orders from other
customers. Eight months after opening the new factory, X transfers it
and related business assets to new subsidiary Y and distributes the
stock of Y to X's shareholders. X and Y both satisfy the requirements of
section 355(b). See paragraph (b)(3)(i) and (ii) of this section.
Example 6. Corporation X has owned and operated a men's retail
clothing store in the downtown area of the City of G for nine years and
has owned and operated another men's retail clothing store in a suburban
area of G for seven years. X transfers the store building, fixtures,
inventory, and other assets related to the operations of the suburban
store to new subsidiary Y. X also transfers to Y the delivery trucks and
delivery personnel that formerly served both stores. Henceforth, X will
contract with a local public delivery service to make its deliveries. X
retains the warehouses that formerly served both stores. Henceforth, Y
will lease warehouse space from an unrelated public warehouse company. X
then distributes the stock of Y to X's shareholders. X and Y both
satisfy the requirements of section 355(b). See paragraph (b)(3)(i) of
this section.
Example 7. For the past nine years, corporation X has owned and
operated a department store in the downtown area of the City of G. Three
years ago, X acquired a parcel of land in a suburban area of G and
constructed a new department store on it. X transfers the suburban store
and related business assets to new subsidiary Y and distributes the
stock of Y to X's shareholders. After the distribution, each store has
its own manager and is operated independently of the other store. X and
Y both satisfy the requirements of section 355(b). See paragraph
(b)(3)(i) and (ii) of this section.
Example 8. For the past six years, corporation X has owned and
operated hardware stores in several states. Two years ago, X purchased
all of the assets of a hardware store in State M, where X had not
previously conducted business. X transfers the State M store and related
business assets to new subsidiary Y and distributes the stock of Y to
X's shareholders. After the distribution, the State M store has its own
manager and is operated independently of the other stores. X and Y both
satisfy the requirements of section 355(b). See paragraph (b)(3)(i) and
(ii) of this section.
Example 9. For the past eight years, corporation X has engaged in
the manufacture and sale of household products. Throughout this period,
X has maintained a research department for use in connection with its
manufacturing activities. The research department has 30 employees
actively engaged in the development of new products. X transfers the
research department to new subsidiary Y and distributes the stock of Y
to X's shareholders. After the distribution, Y continues its research
operations on a contractual basis with several corporations, including
X. X and Y both satisfy the requirements of section 355(b). See
paragraph (b)(3)(i) of this section. The result in this example is the
same if, after the distribution, Y continues its research operations but
furnishes its services only to X. See paragraph (b)(3)(i) of this
section. However, see Sec. 1.355-2 (d)(2)(iv)(C) (related function
device factor) for possible evidence of device.
Example 10. For the past six years, corporation X has processed and
sold meat products. X derives income from no other source. X separates
the sales function from the processing function by transferring the
business assets related to the sales function and cash for working
capital to new subsidiary Y. X then distributes the stock of Y to X's
shareholders. After the distribution, Y purchases for resale the meat
products processed by X. X and Y both satisfy the requirements of
section 355(b). See paragraph (b)(3)(i) of this section. However, see
Sec. 1.355-2(d)(2)(iv)(C) (related function device factor) for possible
evidence of device.
Example 11. For the past eight years, corporation X has been engaged
in the manufacture and sale of steel and steel products. X owns all of
the stock of corporation Y, which, for the past six years, has owned and
operated a coal mine for the sole purpose of supplying X's coal
requirements in the manufacture of steel. X distributes the stock of Y
to X's shareholders. X and Y both satisfy the requirements of section
355 (b). See paragraph (b)(3)(i) of this section. However, see Sec.
1.355-2 (d)(2)(iv)(C) (related function device factor) for possible
evidence of device.
Example 12. For the past seven years, corporation X, a bank, has
owned an eleven-story office building, the ground floor of which X has
occupied in the conduct of its banking business. The remaining ten
floors are rented to various tenants. Throughout this seven-year period,
the building has been managed and maintained by employees of
[[Page 252]]
the bank. X transfers the building to new subsidiary Y and distributes
the stock of Y to X's shareholders. Henceforth, Y will manage the
building, negotiate leases, seek new tenants, and repair and maintain
the building. X and Y both satisfy the requirements of section 355 (b).
See paragraph (b)(3) of this section.
Example 13. For the past nine years, corporation X, a bank, has
owned a two-story building, the ground floor and one half of the second
floor of which X has occupied in the conduct of its banking business.
The other half of the second floor has been rented as storage space to a
neighboring retail merchant. X transfers the building to new subsidiary
Y and distributes the stock of Y to X's shareholders. After the
distribution, X leases from Y the space in the building that it formerly
occupied. Under the lease, X will repair and maintain its portion of the
building and pay property taxes and insurance. Y does not satisfy the
requirements of section 355 (b) because it is not engaged in the active
conduct of a trade or business immediately after the distribution. See
paragraph (b)(2)(iv)(A) of this section. This example does not address
the question of whether the activities of X with respect to the building
prior to the separation would constitute the active conduct of a trade
or business.
[T.D. 8238, 54 FR 294, Jan. 5, 1989]
Sec. 1.355-4 Non pro rata distributions, etc.
Section 355 provides for nonrecognition of gain or loss with respect
to a distribution whether or not (a) the distribution is pro rata with
respect to all of the shareholders of the distributing corporation, (b)
the distribution is pursuant to a plan of reorganization within the
meaning of section 368 (a) (1)(D), or (c) the shareholder surrenders
stock in the distributing corporation. Under section 355, the stock of a
controlled corporation may consist of common stock or preferred stock.
(See, however, section 306 and the regulations thereunder.) Section 355
does not apply, however, if the substance of a transaction is merely an
exchange between shareholders or security holders of stock or securities
in one corporation for stock or securities in another corporation. For
example, if two individuals, A and B, each own directly 50 percent of
the stock of corporation X and 50 percent of the stock of corporation Y,
section 355 would not apply to a transaction in which A and B transfer
all of their stock of X and Y to a new corporation Z, for all of the
stock of Z, and Z then distributes the stock of X to A and the stock of
Y to B.
[T.D. 8238, 54 FR 296, Jan. 5, 1989]
Sec. 1.355-5 Records to be kept and information to be filed.
(a) Distributing corporation--(1) In general. Every corporation that
makes a distribution (the distributing corporation) of stock or
securities of a controlled corporation, as described in section 355 (or
so much of section 356 as relates to section 355), must include a
statement entitled, ``STATEMENT PURSUANT TO Sec. 1.355-5(a) BY [INSERT
NAME AND EMPLOYER IDENTIFICATION NUMBER (IF ANY) OF TAXPAYER], A
DISTRIBUTING CORPORATION,'' on or with its return for the year of the
distribution. If the distributing corporation is a controlled foreign
corporation (within the meaning of section 957), each United States
shareholder (within the meaning of section 951(b)) with respect thereto
must include this statement on or with its return. The statement must
include--
(i) The name and employer identification number (if any) of the
controlled corporation;
(ii) The name and taxpayer identification number (if any) of every
significant distributee;
(iii) The date of the distribution of the stock or securities of the
controlled corporation;
(iv) The aggregate fair market value and basis, determined
immediately before the distribution or exchange, of the stock,
securities, or other property (including money) distributed by the
distributing corporation in the transaction; and
(v) The date and control number of any private letter ruling(s)
issued by the Internal Revenue Service in connection with the
transaction.
(2) Special rule when an asset transfer precedes a stock
distribution. If the distributing corporation transferred property to
the controlled corporation in a transaction described in section 351 or
368, as part of a plan to then distribute the stock or securities of the
controlled corporation in a transaction described in section 355 (or so
much of section 356 as relates to section 355), then, unless paragraph
(a)(1)(v) of this
[[Page 253]]
section applies, the distributing corporation must also include on or
with its return for the year of the distribution the statement required
by Sec. 1.351-3(a) or 1.368-3(a). If the distributing corporation is a
controlled foreign corporation (within the meaning of section 957), each
United States shareholder (within the meaning of section 951(b)) with
respect thereto must include the statement required by Sec. 1.351-3(a)
or 1.368-3(a) on or with its return.
(b) Significant distributee. Every significant distributee must
include a statement entitled, ``STATEMENT PURSUANT TO Sec. 1.355-5(b)
BY [INSERT NAME AND TAXPAYER IDENTIFICATION NUMBER (IF ANY) OF
TAXPAYER], A SIGNIFICANT DISTRIBUTEE,'' on or with such distributee's
return for the year in which such distribution is received. If a
significant distributee is a controlled foreign corporation (within the
meaning of section 957), each United States shareholder (within the
meaning of section 951(b)) with respect thereto must include this
statement on or with its return. The statement must include--
(1) The names and employer identification numbers (if any) of the
distributing and controlled corporations;
(2) The date of the distribution of the stock or securities of the
controlled corporation; and
(3) The aggregate basis, determined immediately before the exchange,
of any stock or securities transferred by the significant distributee in
the exchange, and the aggregate fair market value, determined
immediately before the distribution or exchange, of the stock,
securities or other property (including money) received by the
significant distributee in the distribution or exchange.
(c) Definitions. For purposes of this section:
(1) Significant distributee means--
(i) A holder of stock of a distributing corporation that receives,
in a transaction described in section 355 (or so much of section 356 as
relates to section 355), stock of a corporation controlled by the
distributing corporation if, immediately before the distribution or
exchange, such holder--
(A) Owned at least five percent (by vote or value) of the total
outstanding stock of the distributing corporation if the stock owned by
such holder is publicly traded; or
(B) Owned at least one percent (by vote or value) of the stock of
the distributing corporation if the stock owned by such holder is not
publicly traded; or
(ii) A holder of securities of a distributing corporation that
receives, in a transaction described in section 355 (or so much of
section 356 as relates to section 355), stock or securities of a
corporation controlled by the distributing corporation if, immediately
before the distribution or exchange, such holder owned securities in
such distributing corporation with a basis of $1,000,000 or more.
(2) Publicly traded stock means stock that is listed on--
(i) A national securities exchange registered under section 6 of the
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
(ii) An interdealer quotation system sponsored by a national
securities association registered under section 15A of the Securities
Exchange Act of 1934 (15 U.S.C. 78o-3).
(d) Substantiation information. Under Sec. 1.6001-1(e), taxpayers
are required to retain their permanent records and make such records
available to any authorized Internal Revenue Service officers and
employees. In connection with the distribution or exchange described in
this section, these records should specifically include information
regarding the amount, basis, and fair market value of all property
distributed or exchanged, and relevant facts regarding any liabilities
assumed or extinguished as part of such distribution or exchange.
(e) Effective/applicability date. This section applies to any
taxable year beginning on or after May 30, 2006. However, taxpayers may
apply this section to any original Federal income tax return (including
any amended return filed on or before the due date (including
extensions) of such original return) timely filed on or after May 30,
2006. For taxable years beginning before May 30, 2006, see Sec. 1.355-5
as contained in 26 CFR part 1 in effect on April 1, 2006.
[T.D. 9329, 72 FR 32799, June 14, 2007]
[[Page 254]]
Sec. 1.355-6 Recognition of gain on certain distributions of stock
or securities in controlled corporation.
(a) Conventions--(1) Examples. For purposes of the examples in this
section, unless otherwise stated, assume that P, S, T, X, Y, N, HC, D,
D1, D2, D3, and C are corporations, A and B are individuals,
shareholders are not treated as one person under section 355(d)(7),
stock has been owned for more than five years and section 355(d)(6) and
paragraph (e)(4) of this section do not apply, no election under section
338 (if available) is made, and all transactions described are respected
under general tax principles, including the step transaction doctrine.
No inference should be drawn from any example as to whether any
requirements of section 355 other than those of section 355(d), as
specified, are satisfied.
(2) Five-year period. For purposes of this section, the term five-
year period means the five-year period (determined after applying
section 355(d)(6) and paragraph (e)(4) of this section) ending on the
date of the distribution, but in no event beginning earlier than October
10, 1990.
(3) Distributing securities. For purposes of determining if stock of
any controlled corporation received in the distribution is disqualified
stock described in section 355(d)(3)(B)(ii)(II) (relating to a
distribution of controlled corporation stock on any securities in the
distributing corporation acquired by purchase during the five-year
period), references in this section to stock of a corporation that is or
becomes a distributing corporation includes securities of the
corporation. Similarly, a reference to stock in paragraph (c)(4) of this
section (relating to a plan or arrangement) includes securities.
(4) Marketable securities. Unless otherwise stated, any reference in
this section to marketable stock includes marketable securities.
(b) General rules and purposes of section 355(d)--(1) Disqualified
distributions in general. In the case of a disqualified distribution,
any stock or securities in the controlled corporation shall not be
treated as qualified property for purposes of section 355(c)(2) or
361(c)(2). In general, a disqualified distribution is any distribution
to which section 355 (or so much of section 356 as relates thereto)
applies if, immediately after the distribution--
(i) Any person holds disqualified stock in the distributing
corporation that constitutes a 50 percent or greater interest in such
corporation; or
(ii) Any person holds disqualified stock in the controlled
corporation (or, if stock of more than one controlled corporation is
distributed, in any controlled corporation) that constitutes a 50
percent or greater interest in such corporation.
(2) Disqualified stock--(i) In general. Disqualified stock is--
(A) Any stock in the distributing corporation acquired by purchase
during the five-year period; and
(B) Any stock in any controlled corporation--
(1) Acquired by purchase during the five-year period; or
(2) Received in the distribution to the extent attributable to
distributions on any stock in the distributing corporation acquired by
purchase during the five-year period.
(ii) Purchase. For the definition of a purchase for purposes of
section 355(d) and this section, see section 355(d)(5) and paragraph (d)
of this section.
(iii) Exceptions--(A) Purchase eliminated. Stock (or an interest in
another entity) that is acquired by purchase (including stock (or
another interest) that is treated as acquired by purchase under
paragraph (e)(2), (3), or (4) of this section) ceases to be acquired by
that purchase if (and when) the basis resulting from the purchase is
eliminated. For purposes of this paragraph (b)(2)(iii), basis resulting
from the purchase is basis in the stock (or in an interest in another
entity) that is directly purchased during the five-year period or that
is treated as acquired by purchase during such period under paragraph
(e)(2), (3), or (4) of this section.
(B) Deemed purchase eliminated. Stock (or an interest in another
entity) that is deemed purchased under section 355(d)(8) or paragraph
(e)(1) of this section shall cease to be treated as purchased if (and
when) the basis resulting from the purchase that effects the deemed
purchase is eliminated.
[[Page 255]]
(C) Elimination of basis--(1) General rule. Basis in the stock of a
corporation (or in an interest in another entity) is eliminated if (and
when) it would no longer be taken into account by any person in
determining gain or loss on a sale or exchange of any stock of such
corporation (or an interest in the other entity). Basis is not
eliminated, however, if it is allocated between stock of two
corporations under Sec. 1.358-2(a).
(2) Special rule for transferred and exchanged basis property. Basis
of stock (or an interest in another entity) resulting from a purchase
(the first purchase) is eliminated if (and when) such stock (or other
interest) is subsequently transferred to another person in an exchange
or other transfer to which paragraph (e)(2) or (3) of this section
applies (the second purchase). The elimination of basis in stock (or in
another interest) resulting from the first purchase, however, does not
eliminate the basis resulting from the second purchase in the stock (or
other interest) that is treated as acquired by purchase by the acquirer
in a transaction to which paragraph (e)(2) of this section applies or by
the person making the exchange in a transaction to which paragraph
(e)(3) of this section applies.
(3) Special rule for Split-offs and Split-ups. Under section
355(d)(3)(B)(ii) and paragraph (b)(2)(i)(B)(2) of this section,
disqualified stock includes controlled corporation stock received in
exchange for distributing corporation stock acquired by purchase. Solely
for purposes of determining whether controlled corporation stock
received in a distribution in exchange for distributing corporation
stock is disqualified stock described in that section and paragraph
immediately after the distribution, paragraph (b)(2)(iii)(C)(2) of this
section does not apply to the exchange to eliminate basis resulting from
a purchase of that distributing corporation stock (notwithstanding that
paragraph (e)(3) of this section applies to the exchange).
(D) Special rule if basis allocated between two corporations. If the
shareholder of a distributing corporation, pursuant to Sec. 1.358-2,
allocates basis resulting from a purchase between the stock of two or
more corporations then, following such allocation, the determination of
whether such basis has been eliminated shall be made separately with
respect to the stock of each such corporation.
(3) Certain distributions not disqualified distributions because
purposes of section 355(d) not violated--(i) In general. Notwithstanding
the provisions of section 355(d)(2) and this paragraph (b), a
distribution is not a disqualified distribution if the distribution does
not violate the purposes of section 355(d) as provided in this paragraph
(b)(3). A distribution does not violate the purposes of section 355(d)
if the effect of the distribution is neither--
(A) To increase ownership (combined direct and indirect) in the
distributing corporation or any controlled corporation by a disqualified
person; nor
(B) To provide a disqualified person with a purchased basis in the
stock of any controlled corporation.
(ii) Disqualified person. A disqualified person is any person
(taking into account section 355(d)(7) and paragraph (c)(4) of this
section) that, immediately after a distribution, holds (directly or
indirectly under section 355(d)(8) and paragraph (e)(1) of this section)
disqualified stock in the distributing corporation or controlled
corporation that--
(A) The person--
(1) Acquired by purchase under section 355(d)(5) or (8) and
paragraphs (d) and (e) of this section during the five-year period, or
(2) Received in the distribution to the extent attributable to
distributions on any stock in the distributing corporation acquired by
purchase under section 355(d)(5) or (8) and paragraphs (d) and (e) of
this section by that person during the five-year period; and
(B) Constitutes a 50 percent or greater interest in such corporation
(under section 355(d)(4) and paragraph (c) of this section).
(iii) Purchased basis. In general, a purchased basis is basis in
controlled corporation stock that is disqualified stock. However, basis
in controlled corporation stock that is disqualified stock will not be
treated as purchased basis if the controlled corporation stock and any
distributing corporation stock with respect to which the controlled
corporation stock is distributed
[[Page 256]]
are treated as acquired by purchase solely under the attribution rules
of section 355(d)(8) and paragraph (e)(1) of this section. The prior
sentence will not apply, however, if the distributing corporation stock
is treated as acquired by purchase under the attribution rules as a
result of the acquisition of an interest in a partnership (the purchased
partnership), and following the distribution, the controlled corporation
stock is directly held by the purchased partnership (or a chain of
partnerships that includes the purchased partnership).
(iv) Increase in interest because of payment of cash in lieu of
fractional shares. Any increase in direct or indirect ownership in the
distributing corporation or any controlled corporation by a disqualified
person because of a payment of cash in lieu of issuing fractional shares
will be disregarded for purposes of paragraph (b)(3)(i)(A) of this
section if the payment of the cash is solely to avoid the expense and
inconvenience of issuing fractional share interests, and does not
represent separately bargained for consideration.
(v) Other exceptions. The Commissioner may provide by guidance
published in the Internal Revenue Bulletin that other distributions are
not disqualified distributions because they do not violate the purposes
of section 355(d).
(vi) Examples. The following examples illustrate this paragraph
(b)(3):
Example 1. Stock distributed in spin-off; no purchased basis. D owns
all of the stock of D1, and D1 owns all the stock of C. A purchases 60
percent of the D stock for cash. Within five years of A's purchase, D1
distributes the C stock to D. A is treated as having purchased 60
percent of the stock of both D1 and C on the date A purchases 60 percent
of the D stock under the attribution rules of section 355(d)(8) and
paragraph (e)(1) of this section. The C stock received by D is
attributable to a distribution on purchased D1 stock under section
355(d)(3)(B)(ii). Accordingly, the D1 and C stock each is disqualified
stock under section 355(d)(3) and paragraph (b)(2) of this section, and
A is a disqualified person under paragraph (b)(3)(ii) of this section.
However, the purposes of section 355(d) under paragraph (b)(3)(i) of
this section are not violated. A did not increase direct or indirect
ownership in D1 or C. In addition, D's basis in the C stock is not a
purchased basis under paragraph (b)(3)(iii) of this section because both
the D1 and the C stock are treated as acquired by purchase solely under
the attribution rules of section 355(d)(8) and paragraph (e)(1) of this
section. Accordingly, D1's distribution of the C stock to D is not a
disqualified distribution under section 355(d)(2) and paragraph (b)(1)
of this section.
Example 2. Stock distributed in spin-off; purchased basis. The facts
are the same as Example 1, except that D immediately further distributes
the C stock to its shareholders (including A) pro rata. The D and C
stock each is disqualified stock under section 355(d)(3) and paragraph
(b)(2) of this section, and A is a disqualified person under paragraph
(b)(3)(ii) of this section. The purposes of section 355(d) under
paragraph (b)(3)(i) of this section are violated. A did not increase
direct or indirect ownership in D or C. However, A's basis in the C
stock is a purchased basis under paragraph (b)(3)(iii) of this section
because the D stock is not treated as acquired by purchase solely under
the attribution rules of section 355(d)(8) and paragraph (e)(1) of this
section. Accordingly, the further distribution is a disqualified
distribution under section 355(d)(2) and paragraph (b)(1) of this
section.
Example 3. Stock distributed in split-off with ownership increase;
purchased basis. The facts are the same as Example 1, except that D
immediately further distributes the C stock to A in exchange for A's
purchased stock in D. The C stock received by A is attributable to a
distribution on purchased D stock under section 355(d)(3)(B)(ii), and
A's basis in the C stock is determined by reference to the adjusted
basis of A's purchased D stock under paragraph (e)(3) of this section.
(Under paragraph (b)(2)(iii)(B)(3) of this section, the basis resulting
from A's purchase of D stock is not eliminated solely for purposes of
determining if the C stock acquired by A is disqualified stock
immediately after the distribution, notwithstanding that paragraph
(e)(3) of this section applies to the exchange.) Accordingly, the D
stock and the C stock each is disqualified stock under section 355(d)(3)
and paragraph (b)(2) of this section, and A is a disqualified person
under paragraph (b)(3)(ii) of this section. The purposes of section
355(d) under paragraph (b)(3)(i) of this section are violated because A
increased its ownership in C from a 60 percent indirect interest to a
100 percent direct interest, and because A's basis in the C stock is a
purchased basis under paragraph (b)(3)(iii) of this section.
Accordingly, the further distribution is a disqualified distribution
under section 355(d)(2) and paragraph (b)(1) of this section.
Example 4. Stock distributed in spin-off; purchased basis. D1 owns
all the stock of C. D purchases all of the stock of D1 for cash. Within
five years of D's purchase of D1, P acquires all of the stock of D1 from
D in a section 368(a)(1)(B) reorganization that is not a
[[Page 257]]
reorganization under section 368(a)(1)(A) by reason of section
368(a)(2)(E), and D1 distributes all of its C stock to P. P is treated
as having acquired the D1 stock by purchase on the date D acquired it
under the transferred basis rule of section 355(d)(5)(C) and paragraph
(e)(2) of this section. P is treated as having purchased all of the C
stock on the date D purchased the D1 stock under the attribution rules
of section 355(d)(8) and paragraph (e)(1) of this section, and the C
stock received by P is attributable to a distribution on purchased D1
stock under section 355(d)(3)(B)(ii). Accordingly, the D1 and C stock
each is disqualified stock under section 355(d)(3) and paragraph (b)(2)
of this section, and P is a disqualified person under paragraph
(b)(3)(ii) of this section. The purposes of section 355(d) under
paragraph (b)(3)(i) of this section are violated. P did not increase
direct or indirect ownership in D1 or C. However, P's basis in the C
stock is a purchased basis under paragraph (b)(3)(iii) of this section
because the D1 stock is not treated as acquired by purchase solely under
the attribution rules of section 355(d)(8) and paragraph (e)(1) of this
section. Accordingly, D1's distribution of the C stock to P is a
disqualified distribution under section 355(d)(2) and paragraph (b)(1)
of this section.
Example 5. Stock distributed in split-off with ownership increase;
no purchased basis. P owns 50 percent of the stock of D, the remaining D
stock is owned by unrelated persons, D owns all the stock of C, and A
purchases all of the P stock from the P shareholders. Within five years
of A's purchase, D distributes all of the C stock to P in exchange for
P's D stock. A is treated as having purchased 50 percent of the stock of
both D and C on the date A purchases the P stock under the attribution
rules of section 355(d)(8) and paragraph (e)(1) of this section. The C
stock received by P is attributable to a distribution on purchased D
stock under section 355(d)(3)(B)(ii). Accordingly, the D stock and the C
stock each is disqualified stock under section 355(d)(3) and paragraph
(b)(2) of this section, and A is a disqualified person under paragraph
(b)(3)(ii) of this section. The purposes of section 355(d) under
paragraph (b)(3)(i) of this section are violated because, even though
P's basis in the C stock is not a purchased basis under paragraph
(b)(3)(iii) of this section, A increased its direct or indirect
ownership in C from a 50 percent indirect interest to a 100 percent
indirect interest. Accordingly, D's distribution of the C stock to P is
a disqualified distribution under section 355(d)(2) and paragraph (b)(1)
of this section.
Example 6. Stock distributed in split-off with no ownership
increase; no purchased basis. A purchases all of the stock of T. T later
merges into D in a section 368(a)(1)(A) reorganization and A exchanges
its purchased T stock for 60 percent of the stock of D. D owns all of
the stock of D1 and D2, D1 and D2 each owns 50 percent of the stock of
D3, and D3 owns all of the stock of C. Within five years of A's purchase
of the T stock, D3 distributes the C stock to D1 in exchange for all of
D1's D3 stock. A is treated as having acquired 60 percent of the D stock
by purchase on the date A purchases the T stock under paragraph (e)(3)
of this section. A is treated as having purchased 60 percent of the
stock of D1, D2, D3, and C on the date A purchases the T stock under the
attribution rules of section 355(d)(8) and paragraph (e)(1) of this
section. The C stock received by D1 is attributable to a distribution on
purchased D3 stock under section 355(d)(3)(B)(ii). Accordingly, the D3
stock and the C stock each is disqualified stock under section 355(d)(3)
and paragraph (b)(2) of this section, and A is a disqualified person
under paragraph (b)(3)(ii) of this section. However, the purposes of
section 355(d) under paragraph (b)(3)(i) of this section are not
violated. A did not increase direct or indirect ownership in D3 or C,
and D1's basis in the C stock is not a purchased basis under paragraph
(b)(3)(iii) of this section because the D3 stock is treated as acquired
by purchase solely under the attribution rules of section 355(d)(8) and
paragraph (e)(1) of this section. Accordingly, D3's distribution of the
C stock to D1 is not a disqualified distribution under section 355(d)(2)
and paragraph (b)(1) of this section.
Example 7. Purchased basis eliminated by liquidation; stock
distributed in spin-off. P owns 30 percent of the stock of D, D owns all
of the stock of D1, and D1 owns all of the stock of C. P purchases the
remaining 70 percent of the D stock for cash. Within five years of P's
purchase, P liquidates D in a transaction qualifying under sections 332
and 337(a), and D1 then distributes the stock of C to P. Prior to the
liquidation, P is treated as having purchased 70 percent of the stock of
D1 and C on the date P purchases the D stock under the attribution rules
of section 355(d)(8)(B) and paragraph (e)(1) of this section. After the
liquidation, however, under paragraph (b)(2)(iii) of this section, P is
not treated as having acquired by purchase the D1 or the C stock under
section 355(d)(8)(B) and paragraph (e)(1) of this section because P's
basis in the D stock is eliminated in the liquidation of D. Under
section 334(b)(1), P's basis in the D1 stock is determined by reference
to D's basis in the D1 stock and not by reference to P's basis in D.
Paragraph (d)(2)(i)(B) of this section does not treat the D1 stock as
newly purchased in P's hands because no gain or loss was recognized by D
in the liquidation. Accordingly, neither the D1 stock nor the C stock is
disqualified stock under section 355(d)(3) and paragraph (b)(2) of this
section in P's hands, and the distribution is not a disqualified
distribution under section 355(d)(2) and paragraph (b)(1) of this
section.
[[Page 258]]
Example 8. Purchased basis eliminated by upstream merger; stock
distributed in spin-off. D owns all of the stock of D1, and D1 owns all
of the stock of C. P purchases 60 percent of the D stock for cash.
Within five years of P's purchase, D merges into P in a section
368(a)(1)(A) reorganization, with the D shareholders other than P
receiving solely P stock in exchange for their D stock, and D1 then
distributes the stock of C to P. Prior to the merger, P is treated as
having purchased 60 percent of the stock of D1 and C on the date P
purchases the D stock under the attribution rules of section 355(d)(8)
and paragraph (e)(1) of this section. After the merger, however, under
paragraph (b)(2)(iii) of this section, P is not treated as having
acquired by purchase the D1 or the C stock under section 355(d)(8)(B)
and paragraph (e)(1) of this section because P's basis in the D stock is
eliminated in the merger. Under section 362(b), P's basis in the D1
stock is determined by reference to D's basis in the D1 stock and not by
reference to P's basis in D. Paragraph (d)(2)(i)(B) of this section does
not treat the D1 stock as newly purchased in P's hands because no gain
or loss was recognized by D in the merger. Accordingly, neither the D1
stock nor the C stock is disqualified stock under section 355(d)(3) and
paragraph (b)(2) of this section in P's hands, and the distribution is
not a disqualified distribution under section 355(d)(2) and paragraph
(b)(1) of this section.
Example 9. Purchased basis eliminated by distribution; stock
distributed in spin-off. A purchases all the stock of C for cash on Date
1. D acquires all of the stock of C from A in a section 368(a)(1)(B)
reorganization that is not a reorganization under section 368(a)(1)(A)
by reason of section 368(A)(1)(E). A receives ten percent of the D stock
in the transaction. The remaining D stock is owned by B. Within five
years of A's purchase of the C stock, D distributes all the stock of C
pro rata to A and B. Under the transferred basis rule of paragraph
(e)(2) of this section, D is treated as having purchased all of the C
stock on the date A acquired it. Under the exchanged basis rule of
paragraph (e)(3) of this section, A is treated as having purchased its D
stock on Date 1 and A is treated as having purchased ten percent of the
C stock on Date 1 under the attribution rules of section 355(d)(8) and
paragraph (e)(3) of this section. Moreover, under paragraph
(b)(2)(iii)(C) of this section, A's basis in the C stock resulting from
A's Date 1 purchase of C stock is eliminated. After the distribution,
A's and B's bases in their C stock are determined by reference to the
bases of their D stock under Sec. 1.358-2(a)(2) (and not by reference
to D's basis in the C stock). D's basis in the stock of C resulting from
its deemed purchase of that stock under paragraph (e)(2) of this section
is eliminated by the distribution of the C stock because it would no
longer be taken into account by any person in determining gain or loss
on the sale of C stock. Therefore, the C stock distributed to A and B is
not disqualified stock as a result of D's purchase of C. However, A's
basis in its D stock resulting from its deemed purchase of that stock
under paragraph (e)(3) of this section is not eliminated. Therefore, A's
ten percent interest in the stock of D is disqualified stock.
Furthermore, A's ten percent interest in the stock of C is disqualified
stock because the distribution of the C stock is attributable to A's D
stock that was acquired by purchase. However, there has not been a
disqualified distribution because no person, immediately after the
distribution, holds disqualified stock in either D or C that constitutes
a 50 percent or greater interest in such corporation.
Example 10. Allocation of purchased basis analyzed separately. --(i)
P owns all the stock of D. D purchases all the stock of D1 for cash on
Date 1. D1 owns all the stock of C (which owns all the stock of C1) and
S. Within five years of Date 1, D1 distributes all the stock of C to D.
The D1 and C stock each is disqualified stock under section 355(d)(3)
and paragraph (b)(2) of this section, and D is a disqualified person
under paragraph (b)(3)(ii) of this section. The purposes of section
355(d) under paragraph (b)(3)(i) of this section are violated. D did not
increase direct or indirect ownership in D1 or C. However, D's basis in
the C stock is a purchased basis under paragraph (b)(3)(iii) of this
section because the D1 stock is not treated as acquired by purchase
solely under the attribution rules of section 355(d)(8) and paragraph
(e)(1) of this section. Accordingly, the distribution is a disqualified
distribution under section 355(d) and paragraph (b)(1) of this section.
D's basis in the D1 stock is allocated pursuant to Sec. 1.358-2 between
the D1 stock and the C stock. Therefore, under paragraph (e)(4) of this
section, the C stock is deemed to be acquired by purchase on Date 1, the
date D purchased all the stock of D1. If thereafter, and within five
years of Date 1, C were to distribute all the stock of C1 to D, that
distribution would also be a disqualified distribution because of D's
deemed purchase of the stock of C.
(ii) Following the distribution of the stock of C by D1, and within
five years of Date 1, D distributes all the stock of D1 to P. Under
paragraph (b)(2)(iii)(D) of this section, the determination of whether
D's basis in D1 has been eliminated shall be made without regard to D's
allocated basis in C. After the distribution, P's basis in the D1 stock
is determined by reference to its basis in its D stock under Sec.
1.358-2(a)(2) (and not by reference to D's basis in the D1 stock). D's
basis in the D1 stock resulting from the purchase of that stock is
eliminated by the distribution of the D1 stock because it would no
longer be taken into account by any person
[[Page 259]]
in determining gain or loss on the sale of D1 stock. Therefore, the D1
stock distributed to P is not disqualified stock as a result of D's
purchase of D1. Moreover, a subsequent distribution of the S stock by D1
to P would not be a disqualified distribution because both the D1 and S
stock would cease to be treated as purchased when D's basis in D1 has
been eliminated.
(4) Anti-avoidance rule--(i) In general. Notwithstanding any
provision of section 355(d) or this section, the Commissioner may treat
any distribution as a disqualified distribution under section 355(d)(2)
and paragraph (b)(1) of this section if the distribution or another
transaction or transactions are engaged in or structured with a
principal purpose to avoid the purposes of section 355(d) or this
section with respect to the distribution. Without limiting the preceding
sentence, the Commissioner may determine that the existence of a related
person, intermediary, pass-through entity, or similar person (an
intermediary) should be disregarded, in whole or in part, if the
intermediary is formed or availed of with a principal purpose to avoid
the purposes of section 355(d) or this section.
(ii) Example. The following example illustrates this paragraph
(b)(4):
Example. Post-distribution redemption. B wholly owns D, which wholly
owns C. With a principal purpose to avoid the purposes of section
355(d), A, B, D, and C engage in the following transactions. A purchases
45 of 100 shares of the only class of D stock. Within five years after
A's purchase, D distributes all of its 100 shares in C to A and B pro
rata. D then redeems 20 shares of B's D stock, and C redeems 20 shares
of B's C stock. After the redemption, A owns 45 shares and B owns 35
shares in each of D and C. Under paragraph (b)(4)(i) of this section,
the Commissioner may treat A as owning disqualified stock in D and C
that constitutes a 50 percent or greater interest in D and C immediately
after the distribution. Under that treatment, the distribution is a
disqualified distribution under section 355(d)(2) and paragraph (b)(1)
of this section.
(c) Whether a person holds a 50 percent or greater interest--(1) In
general. Under section 355(d)(4), 50 percent or greater interest means
stock possessing at least 50 percent of the total combined voting power
of all classes of stock entitled to vote or at least 50 percent of the
total value of shares of all classes of stock.
(2) Valuation. For purposes of section 355(d)(4) and this section,
all shares of stock within a single class are considered to have the
same value. But see paragraph (c)(3)(vii)(A) of this section
(determination of whether it is reasonably certain that an option will
be exercised).
(3) Effect of options, warrants, convertible obligations, and other
similar interests--(i) Application. This paragraph (c)(3) provides rules
to determine when an option is treated as exercised for purposes of
section 355(d) (other than section 355(d)(6)). Except as provided in
this paragraph (c)(3), an option is not treated as exercised for
purposes of section 355(d). This paragraph (c)(3) does not affect the
determination of whether an instrument is an option or stock under
general principles of tax law (such as substance over form).
(ii) General rule. In determining whether a person has acquired by
purchase a 50 percent or greater interest under section 355(d)(4), an
option to acquire stock (as described in paragraphs (c)(3)(v) and (vi)
of this section) that has not been exercised when a distribution occurs
is treated as exercised on the date it was issued or most recently
transferred if--
(A) Its exercise (whether by itself or in conjunction with the
deemed exercise of one or more other options) would cause a person to
become a disqualified person; and
(B) Immediately after the distribution, it is reasonably certain (as
described in paragraph (c)(3)(vii) of this section) that the option will
be exercised.
(iii) Options deemed newly issued and substituted options--(A)
Exchange, adjustment, or alteration of existing option. For purposes of
this paragraph (c)(3), each of the following is treated as a new
issuance or transfer of an existing option only if it materially
increases the likelihood that an option will be exercised--
(1) An exchange of an option for another option or options;
(2) An adjustment to the terms of an option (including an adjustment
pursuant to the terms of the option);
[[Page 260]]
(3) An adjustment to the terms of the underlying stock (including an
adjustment pursuant to the terms of the stock);
(4) A change to the capital structure of the issuing corporation;
and
(5) An alteration to the fair market value of issuing corporation
stock through an asset transfer (other than regular, ordinary dividends)
or through any other means.
(B) Certain compensatory options. An option described in paragraph
(c)(3)(vi)(B)(2) of this section is treated as issued on the date it
becomes transferable.
(C) Substituted options. If an option (existing option) is exchanged
for another option or options (substituted option or options) and
paragraph (c)(3)(iii)(A) of this section does not apply to treat such
exchange as a new issuance or transfer of the existing option, the
substituted option or options will be treated as issued or most recently
transferred on the date that the existing option was issued or most
recently transferred.
(iv) Effect of treating an option as exercised--(A) In general. For
purposes of section 355(d), an option that is treated as exercised under
this paragraph (c)(3) is treated as exercised both for purposes of
determining the percentage of the voting power of stock owned by the
holder and for purposes of determining the percentage of the value of
stock owned by the holder.
(B) Stock purchase agreement or similar arrangement. If a stock
purchase agreement or similar arrangement is deemed exercised, the
purchaser is treated as having purchased the stock under the terms of
the agreement or arrangement as though all covenants had been satisfied
and all contingencies met. The agreement or arrangement is deemed to
have been exercised as of the date it is entered into or most recently
assigned.
(v) Instruments treated as options. For purposes of this paragraph
(c)(3), except to the extent provided in paragraph (c)(3)(vi) of this
section, the following are treated as options: A call option, warrant,
convertible obligation, the conversion feature of convertible stock, put
option, redemption agreement (including a right to cause the redemption
of stock), notional principal contract (as defined in Sec. 1.446-3(c))
that provides for the payment of amounts in stock, stock purchase
agreement or similar arrangement, or any other instrument that provides
for the right to purchase, issue, redeem, or transfer stock (including
an option on an option).
(vi) Instruments generally not treated as options. For purposes of
this paragraph (c)(3), the following are not treated as options, unless
issued, transferred, or listed with a principal purpose to avoid the
application of section 355(d) or this section:
(A) Escrow, pledge, or other security agreements. An option that is
part of a security arrangement in a typical lending transaction
(including a purchase money loan), if the arrangement is subject to
customary commercial conditions. For this purpose, a security
arrangement includes, for example, an agreement for holding stock in
escrow or under a pledge or other security agreement, or an option to
acquire stock contingent upon a default under a loan.
(B) Compensatory options--(1) General rule. An option to acquire
stock in a corporation with customary terms and conditions, provided to
an employee, director, or independent contractor in connection with the
performance of services for the corporation or a person related to it
under section 355(d)(7)(A) (and that is not excessive by reference to
the services performed) and that--
(i) Is nontransferable within the meaning of Sec. 1.83-3(d); and
(ii) Does not have a readily ascertainable fair market value as
defined in Sec. 1.83-7(b).
(2) Exception. Paragraph (c)(3)(vi)(B)(1) of this section ceases to
apply to an option that becomes transferable.
(C) Certain stock conversion features. The conversion feature of
convertible stock, provided that--
(1) The stock is not convertible for at least five years after
issuance or transfer; and
(2) The terms of the conversion feature do not require the tender of
any consideration other than the stock being converted.
[[Page 261]]
(D) Options exercisable only upon death, disability, mental
incompetency, or separation from service. Any option entered into
between stockholders of a corporation (or a stockholder and the
corporation) with respect to the stock of either stockholder that is
exercisable only upon the death, disability, mental incompetency of the
stockholder, or, in the case of stock acquired in connection with the
performance of services for the corporation or a person related to it
under section 355(d)(7)(A) (and that is not excessive by reference to
the services performed), the stockholder's separation from service.
(E) Rights of first refusal. A bona fide right of first refusal
regarding the corporation's stock with customary terms, entered into
between stockholders of a corporation (or between the corporation and a
stockholder).
(F) Other enumerated instruments. Any other instruments specified in
regulations, a revenue ruling, or a revenue procedure. See Sec.
601.601(d)(2) of this chapter.
(vii) Reasonably certain that the option will be exercised--(A) In
general. The determination of whether, immediately after the
distribution, an option is reasonably certain to be exercised is based
on all the facts and circumstances. In applying the previous sentence,
the fair market value of stock underlying an option is determined by
taking into account control premiums and minority and blockage
discounts.
(B) Stock purchase agreement or similar arrangement. A stock
purchase agreement or similar arrangement is treated as reasonably
certain to be exercised if the parties' obligations to complete the
transaction are subject only to reasonable closing conditions.
(viii) Examples. The following examples illustrate this paragraph
(c)(3):
Example 1. D owns all of the stock of C. A purchases 40 percent of
D's only class of stock and an option to purchase D stock from D, that
if deemed exercised, would result in A owning a total of 60 percent of
the stock of D. Assume that no control premium or minority or blockage
discount applies to the D stock underlying the option. The option
permits A to acquire the D stock at $30 per share, and D's stock has a
fair market value of $27 per share on the date the option is issued. The
option is subject to no contingencies or restrictive covenants, may be
exercised within five years after its issuance, and is not described in
paragraph (c)(3)(vi) of this section (regarding instruments generally
not treated as options). Within five years of A's purchase of the D
stock and option, D distributes the stock of its subsidiary C pro rata
and A receives 40 percent of the C stock in the distribution.
Immediately after the distribution, D's stock has a fair market value of
$30 per share and C's stock has a fair market value of $15 per share. At
the time of the distribution, A exchanges A's option for an option to
purchase 20 percent of the D stock at $20 per share and an option to
purchase 20 percent of the C stock at $10 per share. The exchange of the
options in D for options in D and C did not materially increase the
likelihood that the options would be exercised. Nonetheless, based on
all the facts and circumstances, it is reasonably certain, immediately
after the distribution, that A will exercise its options. Under
paragraph (c)(3)(iii)(C) of this section, the substituted options are
treated as issued on the date the original option was issued.
Accordingly, the options are treated as exercised by A on the date that
A purchased the original option. A is treated as owning 60 percent of
the D stock and 60 percent of the C stock that is disqualified stock,
and the distribution is a disqualified distribution under section
355(d)(2) and paragraph (b)(1) of this section.
Example 2. D owns all of the stock of C. A purchases 37 percent of
D's only class of stock. B owns 38 percent of the D stock, and the
remaining 25 percent is owned by 20 individuals, each of whom owns less
than five percent of D's stock. A purchases an option to purchase an
additional 14 percent of the D stock from shareholders other than B for
$50 per share. The option is subject to no contingencies or restrictive
covenants, may be exercised within five years after its issuance, and is
not described in paragraph (c)(3)(vi) of this section. Within five years
of A's purchase of the option and 37 percent interest in D, D
distributes the stock of its subsidiary C pro rata and A receives 37
percent of the C stock in the distribution. At the time of the
distribution, A exchanges its option for an option to purchase 14
percent of the D stock at $25 per share and an option to purchase 14
percent of the C stock at $25 per share. Assume that, although a
shareholder that owned no D or C stock would pay only $20 per share for
D or C stock immediately after the distribution, a shareholder in A's
position would pay $30 per share for 14 percent of the stock of D or C
because of the control premium which attaches to the shares. The control
premium is taken into account under paragraph (c)(3)(vii)(A) of this
section to determine whether A is reasonably certain to
[[Page 262]]
exercise the options. The exchange of the options in D for options in D
and C did not materially increase the likelihood that the options would
be exercised. Nonetheless, based on all the facts and circumstances, it
is reasonably certain, immediately after the distribution, that A will
exercise its options. Under paragraph (c)(3)(iii)(C) of this section,
the substituted options are treated as issued on the date the original
option was issued. Accordingly, the options are treated as exercised by
A on the date that A purchased the original option. Under paragraph
(c)(2) of this section, all shares of D and C are considered to have the
same value to determine the amount of stock A is treated as purchasing
under the options. A is treated as owning 51 percent of the D stock and
51 percent of the C stock that is disqualified stock, and the
distribution is a disqualified distribution under section 355(d)(2).
(4) Plan or arrangement--(i) In general. Under section 355(d)(7)(B),
if two or more persons act pursuant to a plan or arrangement with
respect to acquisitions of stock in the distributing corporation or
controlled corporation, those persons are treated as one person for
purposes of section 355(d).
(ii) Understanding. For purposes of section 355(d)(7)(B), two or
more persons who are (or will after an acquisition become) shareholders
(or are treated as shareholders under paragraph (c)(3)(ii) of this
section) act pursuant to a plan or arrangement with respect to an
acquisition of stock only if they have a formal or informal
understanding among themselves to make a coordinated acquisition of
stock. A principal element in determining if such an understanding
exists is whether the investment decision of each person is based on the
investment decision of one or more other existing or prospective
shareholders. However, the participation by creditors in formulating a
plan for an insolvency workout or a reorganization in a title 11 or
similar case (whether as members of a creditors' committee or otherwise)
and the receipt of stock by creditors in satisfaction of indebtedness
pursuant to the workout or reorganization do not cause the creditors to
be considered as acting pursuant to a plan or arrangement.
(iii) Examples. The following examples illustrate paragraph
(c)(4)(ii) of this section:
Example 1. D has 1,000 shares of common stock outstanding. A group
of 20 unrelated individuals who previously owned no D stock (the Group)
agree among themselves to acquire 50 percent or more of D's stock. The
Group is not a person under section 7701(a)(1). Subsequently, pursuant
to their understanding, the members of the Group purchase 600 shares of
D common stock from the existing D shareholders (a total of 60 percent
of the D stock), with each member purchasing 30 shares. Under paragraph
(c)(4)(ii) of this section, the members of the Group have a formal or
informal understanding among themselves to make a coordinated
acquisition of stock. Their interests are therefore aggregated under
section 355(d)(7)(B), and they are treated as one person that purchased
600 shares of D's stock for purposes of section 355(d).
Example 2. D has 1,000 shares of outstanding stock owned by
unrelated individuals. D's management is concerned that D may become
subject to a takeover bid. In separate meetings, D's management meets
with potential investors who own no stock and are friendly to management
to convince them to acquire D's stock based on an understanding that D
will assemble a group that in the aggregate will acquire more than 50
percent of D's stock. Subsequently, 15 of these investors each purchases
four percent of D's outstanding stock. Under paragraph (c)(4)(ii) of
this section, the 15 investors have a formal or informal understanding
among themselves to make a coordinated acquisition of stock. Their
interests are therefore aggregated under section 355(d)(7)(B), and they
are treated as one person that purchased 600 shares of D stock for
purposes of section 355(d).
Example 3. (i) D has 1,000 shares of outstanding stock owned by
unrelated individuals. An investment advisor advises its clients that it
believes D's stock is undervalued and recommends that they acquire D
stock. Acting on the investment advisor's recommendation, 20 unrelated
individuals each purchases 30 shares of the outstanding D stock. Each
client's decision was not based on the investment decisions made by one
or more other clients. Because there is no formal or informal
understanding among the clients to make a coordinated acquisition of D
stock, their interests are not aggregated under section 355(d)(7)(B) and
they are treated as making separate purchases.
(ii) The facts are the same as in paragraph (i) of this Example 3,
except that the investment advisor is also the underwriter (without
regard to whether it is a firm commitment or best efforts underwriting)
for a primary or secondary offering of D stock. The result is the same.
(iii) The facts are the same as in paragraph (i) of this Example 3,
except that, instead of an investment advisor recommending that
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clients purchase D stock, the trustee of several trusts qualified under
section 401(a) sponsored by unrelated corporations causes each trust to
purchase the D stock. The result is the same, provided that the
trustee's investment decision made on behalf of each trust was not based
on the investment decision made on behalf of one or more of the other
trusts.
(iv) Exception--(A) Subsequent disposition. If two or more persons
do not act pursuant to a plan or arrangement within the meaning of this
paragraph (c)(4) with respect to an acquisition of stock in a
corporation (the first corporation), a subsequent acquisition in which
such persons exchange their stock in the first corporation for stock in
another corporation (the second corporation) in a transaction in which
the basis of the second corporation's stock in the hands of such persons
is determined in whole or in part by reference to the basis of their
stock in the first corporation, will not result in such persons being
treated as one person, even if the acquisition of the second
corporation's stock is pursuant to a plan or arrangement.
(B) Example. The following example illustrates this paragraph
(c)(4)(iv):
Example. In an initial public offering of D stock on Date 1, 100
investors independently purchase one percent each of the D stock. Two
years later, D merges into P (in a reorganization described in section
368(a)(1)(A)) and, pursuant to the plan of reorganization, the D
shareholders exchange their D stock for 50 percent of the stock of P.
The D shareholders approve the plan by a two-thirds vote, as required by
state law. Under section 358(a), each shareholder's basis in its P stock
is determined by reference to the basis of the D stock it purchased.
Under paragraph (e)(3) of this section, the former D shareholders are
treated as purchasing their P stock on Date 1. The investors do not
become a single person under paragraph (c)(4) of this section with
respect to the deemed purchase of the P stock on Date 1 by virtue of
their acquisition of the P stock pursuant to the merger on Date 2.
(d) Purchase--(1) In general--(i) Definition of purchase under
section 355(d)(5)(A). Under section 355(d)(5)(A), except as otherwise
provided in section 355(d)(5)(B) and (C), a purchase means any
acquisition, but only if--
(A) The basis of the property acquired in the hands of the acquirer
is not determined--
(1) In whole or in part by reference to the adjusted basis of such
property in the hands of the person from whom acquired; or
(2) Under section 1014(a) or 1022; and
(B) The property is not acquired in an exchange to which section
351, 354, 355, or 356 applies.
(ii) Section 355 distributions. Paragraph (d)(1)(i)(B) of this
section includes all section 355 distributions, whether in exchange (in
whole or in part) for stock or pro rata.
(iii) Example. The following example illustrates this paragraph
(d)(1):
Example. Section 304(a)(1) acquisition. A, who owns all of the stock
of P and T, sells the T stock to P for cash. The T stock is not
marketable stock under section 355(d)(5)(B)(ii) and paragraph (d)(3)(ii)
of this section. A is treated under section 304(a)(1) as receiving a
distribution in redemption of the P stock. Under section 302(d), the
deemed redemption is treated as a section 301 distribution. Assume that
under sections 304(b)(2) and 301(c)(1), all of the distribution is a
dividend. A and P are treated in the same manner as if A had transferred
the T stock to P in exchange for stock of P in a transaction to which
section 351(a) applies, and P had then redeemed the stock P was treated
as issuing in the transaction. Under section 362(a), P's basis in the T
stock is determined by reference to A's adjusted basis in the T stock,
and there is no basis increase in the T stock because A recognizes no
gain on the deemed transfer. Accordingly, P's acquisition of the T stock
from A is not a purchase by P under section 355(d)(5)(A)(i)(I) and
paragraphs (d)(1)(i)(A)(1) and (d)(2)(i)(B) of this section.
(2) Exceptions to definition of purchase under section 355(d)(5)(A).
The following acquisitions are not treated as purchases under section
355(d)(5)(A):
(i) Acquisition of stock in a transaction which includes other
property or money--(A) Transferors and shareholders of transferor or
distributing corporations--(1) In general. An acquisition of stock
permitted to be received by a transferor of property without the
recognition of gain under section 351(a), or permitted to be received
without the recognition of gain under section 354, 355, or 356 is not a
purchase to the extent section 358(a)(1) applies to determine the
recipient's basis in the stock received, whether or not the recipient
recognizes gain under section 351(b) or 356. But see paragraph (e)(3) of
this section (interest received in exchange for
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purchased interest in exchanged basis transaction treated as purchased).
(2) Exception. To the extent there is received in the exchange or
distribution, in addition to stock described in paragraph
(d)(2)(i)(A)(1) of this section, stock that is other property under
section 351(b) or 356(a)(1), the stock is treated as purchased on the
date of the exchange or distribution for purposes of section 355(d).
(B) Transferee corporations--(1) In general. An acquisition of stock
by a corporation is not a purchase to the extent section 334(b) or
362(a) or (b) applies to determine the corporation's basis in the stock
received. But see section 355(d)(5)(C) and paragraph (e)(2) of this
section (purchased property transferred in transferred basis transaction
is treated as purchased by transferee).
(2) Exception. If a corporation acquires stock, the stock is treated
as purchased on the date of the stock acquisition for purposes of
section 355(d)--
(i) If the liquidating corporation recognizes gain or loss with
respect to the transferred stock as described in section 334(b)(1); or
(ii) To the extent the basis of the transferred stock is increased
through the recognition of gain by the transferor under section 362(a)
or (b).
(C) Examples. The following examples illustrate this paragraph
(d)(2)(i):
Example 1. (i) A owns all the stock of T. T merges into D in a
transaction qualifying under section 368(a)(1)(A), with A exchanging all
of the T stock for D stock and $100 cash. Under section 356(a)(1), A
recognizes $100 of the realized gain on the transaction. Under section
358(a)(1), A's basis in the D stock equals A's basis in the T stock,
decreased by the $100 received and increased by the gain recognized,
also $100. Under paragraph (d)(2)(i)(A) of this section, A is not
treated as having purchased the D stock for purposes of section
355(d)(5).
(ii) The facts are the same as in paragraph (i) of this Example 1,
except that rather than D stock and $100 cash, A receives D stock and
stock in C, a corporation not a party to the reorganization, with a fair
market value of $100. Under section 358(a)(2), A's basis in the C stock
is its fair market value, or $100. Under paragraph (d)(2)(i)(A)(2) of
this section, A is treated as having purchased the C stock, but not the
D stock, for purposes of section 355(d)(5).
Example 2. A purchases all of the stock of D, which is not
marketable stock, on Date 1 for $90. Within five years of A's purchase,
on Date 2, A contributes the D stock to P in exchange for P stock worth
$90 and $10 cash in a transaction qualifying under section 351. A
recognizes a gain of $10 as a result of the transfer. Under section
362(a), P's basis in D is $100. P is treated as having purchased 90
percent ($90 worth) of the D stock on Date 1 under section 355(d)(5)(C)
and paragraph (e)(2) of this section and as having purchased 10 percent
($10 worth) of the D stock on Date 2 under paragraph (d)(2)(i)(B)(2)(ii)
of this section.
(ii) Acquisition of stock in a distribution to which section 305(a)
applies. An acquisition of stock in a distribution qualifying under
section 305(a) is not a purchase to the extent section 307(a) applies to
determine the recipient's basis. However, to the extent the distribution
is of rights to acquire stock, see paragraph (c)(3) of this section for
rules regarding options, warrants, convertible obligations, and other
similar interests.
(iii) Section 1036(a) exchange. An exchange of stock qualifying
under section 1036(a) is not a purchase by either party to the exchange
to the extent the basis of the property acquired equals that of the
property exchanged under section 1031(d).
(iv) Section 338 elections--(A) In general. Stock acquired in a
qualified stock purchase with respect to which a section 338 election
(or a section 338(h)(10) election) is made is not treated as a purchase
for purposes of section 355(d)(5)(A). However, any stock (or an interest
in another entity) held by old target that is treated as purchased by
new target is treated as acquired by purchase for purposes of section
355(d)(5)(A) unless a section 338 election or section 338(h)(10)
election also is made for that stock. See Sec. 1.338-2T(c) for the
definitions of section 338 election, section 338(h)(10) election, old
target, and new target.
(B) Example. The following example illustrates this paragraph
(d)(2)(iv):
Example. T owns all of the stock of S and no other assets. X
acquires all of the T stock from the T shareholders for cash and makes
an election under section 338. Under section 338(a) and (b), T, as Old
T, is treated as having sold all of its assets at fair market value and
purchased the assets as a new corporation, New T, as of the beginning of
the day after the acquisition date. Under paragraph (d)(2)(iv)(A) of
this section, X is not treated
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as having purchased the T stock. Absent a section 338 election or a
section 338(h)(10) election with respect to S, New T is treated as
having purchased all of the S stock under section 355(d)(5)(A).
(v) Partnership distributions--(A) Section 732(b). An acquisition of
stock (or an interest in another entity) in a liquidation of a partner's
interest in a partnership in which basis is determined pursuant to
section 732(b) is a purchase at the time of the liquidation.
(B) Section 734(b). If the adjusted basis of stock (or an interest
in another entity) held by a partnership is increased under section
734(b), a proportionate amount of the stock (or other interest) will be
treated as purchased at the time of the basis adjustment, determined by
reference to the amount of the basis adjustment (but not in excess of
the fair market value of the stock (or other interest) at the time of
the adjustment) over the fair market value of the stock (or other
interest) at the time of the adjustment.
(3) Certain section 351 exchanges treated as purchases--(i) In
general--(A) Treatment of stock received by transferor. Under section
355(d)(5)(B), a purchase includes any acquisition of property in an
exchange to which section 351 applies to the extent the property is
acquired in exchange for any cash or cash item, any marketable stock, or
any debt of the transferor. The property treated as acquired by purchase
is the property received by the transferor in the exchange.
(B) Multiple classes of stock. If the transferor in a transaction
described in section 355(d)(5)(B) receives stock or securities of more
than one class, or receives both stock and securities, then the amount
of stock or securities purchased is determined in a manner that
corresponds to the allocation of basis to the stock or securities under
section 358. See Sec. 1.358-2(b).
(ii) Cash item, marketable stock. For purposes of section
355(d)(5)(B) and this paragraph (d)(3), either or both of the terms cash
item and marketable stock include personal property within the meaning
of section 1092(d)(1) and Sec. 1.1092(d)-1, without giving effect to
section 1092(d)(3).
(iii) Exception for certain acquisitions--(A) In general. Except to
the extent provided in paragraph (e)(3) of this section (interest
received in exchange for purchased interest in exchanged basis
transaction treated as purchased), an acquisition of stock in a
corporation in a section 351 transaction by one or more persons in
exchange for an amount of stock in another corporation (the transferred
corporation) that meets the requirements of section 1504(a)(2) is not a
purchase by the transferor or transferors, regardless of whether the
stock of the transferred corporation is marketable stock under section
355(d)(5)(B)(ii) and paragraph (d)(3)(ii) of this section.
(B) Example. The following example illustrates this paragraph
(d)(3)(iii):
Example. D's two classes of stock, voting common and nonvoting
preferred, are both widely held and publicly traded. The nonvoting
preferred stock is stock described in section 1504(a)(4). Assume that
all of the D stock is marketable stock under section 355(d)(5)(B)(ii)
and paragraph (d)(3)(ii) of this section. D's board of directors
proposes that, for valid business purposes, D's common stock should be
held by a holding company, HC, but its preferred stock should not be
transferred to HC. As proposed, the D common shareholders exchange their
D stock solely for HC common stock in a section 351(a) transaction. The
D preferred shareholders retain their stock. HC acquires an amount of D
stock that meets the requirements of section 1504(a)(2). Although the D
common stock was marketable stock in the hands of the D shareholders
immediately before the transfer, and the D nonvoting preferred stock is
marketable stock after the transfer, the D shareholders are not treated
as having acquired the HC stock by purchase (except to the extent the
exchanged basis rule of paragraph (e)(3) of this section may apply to
treat HC stock as purchased on the date the exchanged D stock was
purchased).
(iv) Exception for assets transferred as part of an active trade or
business--(A) In general. Except to the extent provided in paragraph
(e)(3) of this section, an acquisition not described in paragraph
(d)(3)(iii) of this section of stock in exchange for any cash or cash
item, any marketable stock, or any debt of the transferor in a section
351 transaction is not a purchase if--
(1) The transferor is engaged in the active conduct of a trade or
business under paragraph (d)(3)(iv)(B) of this section and the
transferred items (including debt incurred in the ordinary
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course of the trade or business) are used in the trade or business;
(2) The transferred items do not exceed the reasonable needs of the
trade or business under paragraph (d)(3)(iv)(C) of this section;
(3) The transferor transfers the items as part of the trade or
business; and
(4) The transferee continues the active conduct of the trade or
business.
(B) Active conduct of a trade or business. For purposes of this
paragraph (d)(3)(iv), whether, with respect to the trade or business at
issue, the transferor and transferee are engaged in the active conduct
of a trade or business is determined under Sec. 1.355-3(b)(2) and (3),
except that--
(1) Conduct is tested before the transfer (with respect to the
transferor) and after the transfer (with respect to the transferee)
rather than immediately after a distribution; and
(2) The trade or business need not have been conducted for five
years before its transfer, but it must have been conducted for a
sufficient period of time to establish that it is a viable and ongoing
trade or business.
(C) Reasonable needs of the trade or business. For purposes of this
paragraph (d)(3)(iv), the reasonable needs of the trade or business
include only the amount of cash or cash items, marketable stock, or debt
of the transferor that a prudent business person apprised of all
relevant facts would consider necessary for the present and reasonably
anticipated future needs of the business. Transferred items may be
considered necessary for reasonably anticipated future needs only if the
transferor and transferee have specific, definite, and feasible plans
for their use. Those plans must require that items intended for
anticipated future needs rather than present needs be used as
expeditiously as possible consistent with the business purpose for
retention of the items. Future needs are not reasonably anticipated if
they are uncertain or vague or where the execution of the plan for their
use is substantially postponed. The reasonable needs of a trade or
business are generally its needs at the time of the transfer of the
business including the items. However, for purposes of applying section
355(d) to a distribution, events and conditions after the transfer and
through the date immediately after the distribution (including whether
plans for the use of transferred items have been consummated or
substantially postponed) may be considered to determine whether at the
time of the transfer the items were necessary for the present and
reasonably anticipated future needs of the business.
(D) Consideration of all facts and circumstances. All facts and
circumstances are considered in determining whether this paragraph
(d)(3)(iv) applies.
(E) Successive transfers. A transfer of assets does not fail to meet
the requirements of paragraph (d)(3)(iv)(A)(4) of this section solely
because the transferee transfers the assets directly (or indirectly
through other members) to another member of the transferee's affiliated
group, as defined in Sec. 1.355-3(b)(4)(iv) (the final transferee), if
the requirements of paragraphs (d)(3)(iv)(A)(1), (2), (3) and (4) of
this section would be met if the transferor had transferred the assets
directly to the final transferee.
(v) Exception for transfer between members of the same affiliated
group--(A) In general. Except to the extent provided in paragraph (e)(3)
of this section, an acquisition of stock (whether actual or
constructive) not described in paragraphs (d)(3)(iii) and (iv) of this
section in exchange for any cash or cash item, marketable stock, or debt
of the transferor in a section 351 transaction is not a purchase if--
(1) The transferor corporation or corporations and the transferee
corporation (whether formed in the transaction or already existing) are
members of the same affiliated group as defined in section 1504(a)
before the section 351 transaction (if the transferee corporation is in
existence before the transaction);
(2) The cash or cash item, marketable stock or debt of the
transferor are not included in assets that are acquired (or treated as
acquired) by the transferor (or another member of the transferor's
affiliated group) from a nonmember in a related transaction in which
section 362(a) or (b) applies to determine the basis in the acquired
assets; and
(3) The transferor corporation or corporations, the transferee
corporation,
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and any distributed controlled corporation of the transferee corporation
do not cease to be members of such affiliated group in any transaction
pursuant to a plan that includes the section 351 transaction (including
any distribution of a controlled corporation by the transferee
corporation). But see paragraph (b)(4) of this section where the
transfer is made for a principal purpose to avoid the purposes of
section 355(d).
(B) Examples. The following examples illustrate this paragraph
(d)(3)(v):
Example 1. Publicly traded P has wholly owned S since 1990. S is
engaged in the telecommunications business and the business of computer
software development. S is developing new software for use in the
managed health care industry. Over a period of four years beginning on
January 31, 2000, P contributes a substantial amount of cash to S solely
for the purpose of funding the software development. On completion of
the software in January of 2004, 60 percent of the value of the S stock
is attributable to the cash contributions made within the last four
years. The P group's primary lender requires that S separately
incorporate the software and related assets and distribute the new
subsidiary to P as a condition of providing required funding to market
the software. Accordingly, on February 1, 2004, S forms N, contributes
the software and related assets to N, and distributes all of the N stock
to P in a transaction intended to qualify under section 355(a). P, S,
and N will not leave the affiliated group in any transaction related to
the cash contributions. Under paragraph (d)(3)(v)(A) of this section,
P's cash contributions to S are not treated as purchases of additional S
stock, and the distribution of N from S to P is not a disqualified
distribution under section 355(d)(2) and paragraph (b)(1) of this
section.
Example 2. On Date 1, P contributes cash to its subsidiary S with a
principal purpose to increase its stock basis in S. Sixty percent of the
value of P's S stock is attributable to the cash contribution. Under
paragraph (b)(4) of this section (anti-avoidance rule), 60 percent of
the S stock is treated as purchased under section 355(d)(5)(B),
notwithstanding paragraph (d)(3)(v)(A) of this section. Accordingly, any
distribution of a subsidiary of S to P within the five-year period after
Date 1 will be a disqualified distribution, regardless of whether P, S,
and any distributed S subsidiary remain affiliated after the
distribution and any transactions related to the cash contribution.
(4) Triangular asset reorganizations--(i) Definition. A triangular
asset reorganization is a reorganization that qualifies under--
(A) Section 368(a)(1)(A) or (G) by reason of section 368(a)(2)(D);
(B) Section 368(a)(1)(A) by reason of section 368(a)(2)(E)
(regardless of whether section 368(a)(3)(E) applies), unless the
transaction also qualifies as either a section 351 transfer or a
reorganization under section 368(a)(1)(B); or
(C) Section 368(a)(1)(C), and stock of the controlling corporation
rather than the acquiring corporation is exchanged for the acquired
corporation's properties.
(ii) Treatment. Notwithstanding section 355(d)(5)(A), for purposes
of section 355(d), the controlling corporation in a triangular asset
reorganization is treated as having--
(A) Acquired the assets of the acquired corporation (and as having
assumed any liabilities assumed by the controlling corporation's
subsidiary corporation or to which the acquired corporation's assets
were subject (the acquired liabilities)) in a transaction in which the
controlling corporation's basis in the acquired corporation's assets was
determined under section 362(b); and
(B) Transferred the acquired assets and acquired liabilities to its
subsidiary corporation in a section 351 transfer.
(iii) Example. The following example illustrates this paragraph
(d)(4):
Example. Forward triangular reorganization. P forms S with $25 of
cash and T merges into S in a reorganization qualifying under section
368(a)(1)(A) by reason of section 368(a)(2)(D) in which the T
shareholders receive $70 of P stock and $15 of cash in exchange for
their T stock. T is not a common parent of a consolidated group of
corporations. The remaining $10 of cash with which P formed S will not
be used in the acquired business. T's assets consist only of assets part
of and used in its business with a value of $80, and $5 of cash that is
not part of or used in T's business. T has no liabilities. S will use
T's business assets in T's business (which will become S's business),
but will invest the $5 of cash in an unrelated passive investment. Under
paragraph (d)(4)(ii) of this section, P is treated as acquiring the T
assets in a transaction in which P's basis in the T assets was
determined under section 362(b) and contributing them to S in a section
351 transfer. Under paragraph (d)(3)(v) of
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this section, $10 (of the total $25) of cash contributed by P to S upon
S's formation is not treated as a purchase of S stock. The $15 (of the
total $25) of cash contributed by P to S upon S's formation that is paid
to T's shareholders is not treated as a purchase of S stock. The
exception in paragraph (d)(3)(v) of this section does not apply to the
$5 of cash from T's business because P is treated as having acquired T's
assets in a related transaction in which section 362(b) applies to
determine P's basis in such assets. Accordingly, P is treated under
section 355(d)(5)(B) and paragraph (d)(3)(iv) of this section as having
purchased $5 of the S stock, but is not deemed to have purchased the
remaining $80 of the S stock.
(5) Reverse triangular reorganizations other than triangular asset
reorganizations--(i) In general. Except as provided in paragraph
(d)(5)(ii) of this section, if a transaction qualifies as a
reorganization under section 368(a)(1)(A) by reason of section
368(a)(2)(E) and also as either a reorganization under section
368(a)(1)(B) or a section 351 transfer, then either section 355(d)(5)(B)
(and paragraphs (d)(3)(i) through (iv) of this section) or 355(d)(5)(C)
(and paragraph (e)(2) of this section) applies. Regardless of which
method the controlling corporation employs to determine its basis in the
surviving corporation stock under Sec. 1.358-6(c)(2)(ii) or Sec.
1.1502-30(b), the total amount of surviving corporation stock treated as
purchased by the controlling corporation will equal the higher of--
(A) The amount of surviving corporation stock that would be treated
as purchased (on the date of the deemed section 351 transfer) by the
controlling corporation if the controlling corporation acquired the
surviving corporation's assets and assumed its liabilities in a
transaction in which the controlling corporation's basis in the
surviving corporation assets was determined under section 362(b), and
then transferred the acquired assets and liabilities to the surviving
corporation in a section 351 transfer (see Sec. Sec. 1.358-6(c)(1) and
(2)(ii)(A), and 1.1502-30(b)); or
(B) The amount of surviving corporation stock that would be treated
as purchased (on the date the surviving corporation shareholders
purchased their surviving corporation stock) if the controlling
corporation acquired the stock of the surviving corporation in a
transaction in which the basis in the surviving corporation's stock was
determined under section 362(b) (see Sec. Sec. 1.358-6(c)(2)(ii)(B) and
1.1502-30(b)).
(ii) Letter ruling and closing agreement. If a controlling
corporation obtains a letter ruling and enters into a closing agreement
under section 7121 in which it agrees to determine its basis in
surviving corporation stock under Sec. 1.358-6(c)(2)(ii)(A), or under
Sec. 1.1502-30(b) by applying Sec. 1.358-6(c)(2)(ii)(A) (deemed asset
acquisition and transfer by controlling corporation), then section
355(d)(5)(B) and paragraphs (d)(3)(i) through (iv) of this section
apply, and section 355(d)(5)(C) and paragraph (e)(2) of this section do
not apply. If a controlling corporation obtains a letter ruling and
enters into a closing agreement under section 7121 under which it agrees
to determine its basis in surviving corporation stock under Sec. 1.358-
6(c)(2)(ii)(B), or under Sec. 1.1502-30(b) by applying Sec. 1.358-
6(c)(2)(ii)(B) (deemed stock acquisition), then section 355(d)(5)(C) and
paragraph (e)(2) of this section apply, and section 355(d)(5)(B) and
paragraphs (d)(3)(i) through (iv) of this section do not apply.
(iii) Example. The following example illustrates this paragraph
(d)(5):
Example. Reverse triangular reorganization; purchase. (i) A
purchases 60 percent of the stock of D on Date 1. D owns no cash items,
marketable stock, or transferor debt, but holds cash that is not part of
or used in D's trade or business under paragraph (d)(3)(iv) of this
section and that represents 20 percent of D's value. On Date 2, P forms
S, and S merges into D in a reorganization qualifying under section
368(a)(1)(B) and under section 368(a)(1)(A) by reason of section
368(a)(2)(E). In the reorganization, P acquires all of the D stock in
exchange solely for P stock. After Date 2, and within five years after
Date 1, D distributes its wholly owned subsidiary C to P. P does not
obtain a letter ruling and enter into a closing agreement under
paragraph (d)(5)(ii) of this section. P would acquire 20 percent of the
D stock by purchase on Date 2 under paragraph (d)(5)(i)(A) of this
section by operation of section 355(d)(5)(B) and paragraph (d)(3)(iv) of
this section. The exception in paragraph (d)(3)(v) of this section does
not apply because D was not affiliated with P before the transaction in
which the section 351 transfer is deemed to occur and D's assets are
treated as acquired by P in a related transaction in which section
362(b) applies to determine P's basis in the D assets. P would acquire
60 percent of the D stock by purchase on Date 1 under paragraph
(d)(5)(i)(B) of this
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section because, under the transferred basis rule of section
355(d)(5)(C) and paragraph (e)(2) of this section, P is treated as
though P purchased the D stock on the date A purchased it. Accordingly,
under paragraph (d)(5)(i) of this section, P is treated as acquiring the
higher amount (60 percent) by purchase on Date 1. D's distribution of C
to P is a disqualified distribution under section 355(d)(2) and
paragraph (b)(1) of this section. In addition, A is treated as acquiring
the P stock by purchase on Date 1 under paragraph (e)(3) of this section
because A's basis in the P stock is determined by reference to A's basis
in the D stock.
(ii) The facts are the same as in paragraph (i) of this Example,
except that P obtains a letter ruling and enters into a closing
agreement under which it agrees to determine its basis in the D stock
under Sec. 1.358-6(c)(2)(ii)(A). Under paragraph (d)(5)(ii) of this
section, section 355(d)(5)(B) (and paragraphs (d)(3)(i) through (iv) of
this section) applies, and section 355(d)(5)(C) (and paragraph (e)(2) of
this section) does not apply. Accordingly, P is treated as acquiring
only 20 percent of the D stock by purchase on Date 2. D's distribution
of C to P is not a disqualified distribution under section 355(d)(2) and
paragraph (b)(1) of this section.
(6) Treatment of group structure changes--(i) In general.
Notwithstanding section 355(d)(5)(A), for purposes of section 355(d), if
a corporation succeeds another corporation as the common parent of a
consolidated group in a group structure change to which Sec. 1.1502-31
applies, the new common parent is treated as having acquired the assets
and assumed the liabilities of the former common parent in a transaction
in which the new common parent's basis in the former common parent's
assets was determined under section 362(b), and then transferred the
acquired assets and liabilities to the former common parent (or, if the
former common parent does not survive, to the new common parent's
subsidiary) in a section 351 transfer, with the new common parent and
former common parent being treated as not in the same affiliated group
at the time of the transfer for purposes of applying paragraph (d)(3)(v)
of this section (notwithstanding Sec. 1.1502-31(c)(2)).
(ii) Adjustments to basis of higher-tier members. A higher-tier
member that indirectly owns all or part of the former common parent's
stock after a group structure change is treated as having purchased the
stock of an immediate subsidiary to the extent that the higher-tier
member's basis in the subsidiary is increased under Sec. 1.1502-
31(d)(4).
(iii) Example. The following example illustrates this paragraph
(d)(6):
Example. P is the common parent of a consolidated group, and T is
the common parent of another group. P has owned S for more than five
years, and the fair market value of the S stock is $50. T's assets
consist only of non-marketable stock of direct and indirect wholly owned
subsidiaries with a value of $50, assets used in its business with a
value of $50, and $50 of marketable stock that is not part of or used in
T's business. T has no liabilities. T merges into S with the T
shareholders receiving solely P stock with a value of $150 in exchange
for their T stock in a section 368(a)(2)(D) reorganization. S will use
T's business assets in T's business (which will become S's business),
but will hold the $50 of marketable stock for investment purposes.
Assume that the transaction is a reverse acquisition under Sec. 1.1502-
75(d)(3) because the T shareholders, as a result of owning T stock, own
more than 50 percent of the value of P's stock immediately after the
transaction. Thus, the transaction is a group structure change under
Sec. 1.1502-33(f)(1). Under paragraph (d)(6) of this section, P is
treated as having acquired the assets of T in a transaction in which P's
basis in the T assets was determined under section 362(b), and then
transferred the acquired assets to S in a section 351 transfer, with P
and T being treated as not in the same affiliated group at the time of
the transfer solely for purposes of paragraph (d)(3)(v) of this section.
The exception in paragraph (d)(3)(v) of this section (transfers within
an affiliated group) does not apply. Accordingly, P is treated under
section 355(d)(5)(B) and paragraph (d)(3)(iv) of this section as having
purchased $50 of the S stock (attributable to the marketable stock), but
is not deemed to have purchased the remaining $150 of the S stock.
(7) Special rules for triangular asset reorganizations, other
reverse triangular reorganizations, and group structure changes. The
amount of acquiring subsidiary, surviving corporation, or former common
parent stock that is treated as purchased under paragraph (c)(4),
(5)(i)(A), or (6) of this section (by operation of section 355(d)(5)(B)
and paragraphs (d)(3)(i) through (iv) of this section) is adjusted to
reflect any basis adjustment under--
(i) Section 1.358-6(c)(2)(i)(B) and (C) (reduction of basis
adjustment in reverse triangular reorganization where controlling
corporation acquires less
[[Page 270]]
than all of the surviving corporation stock), Sec. 1.1502-30(b)
(applying Sec. 1.358-6(c)(2)(i)(B) and (C) to a consolidated group),
and Sec. 1.1502-31(d)(2)(ii) (reduction of basis adjustment in group
structure change where new common parent acquires less than all of the
former common parent stock); or
(ii) Section 1.358-6(d) (reduction of basis adjustment in any
triangular reorganization to the extent controlling corporation does not
provide consideration), Sec. 1.1502-30(b) (applying Sec. 1.358-6(d)
(except Sec. 1.358-6(d)(2)) to a consolidated group), and Sec. 1.1502-
31(d)(1) (reduction of basis adjustment in group structure change to the
extent new common parent does not provide consideration).
(e) Deemed purchase and timing rules--(1) Attribution and
aggregation--(i) In general. Under section 355(d)(8)(B), if any person
acquires by purchase an interest in any entity, and the person is
treated under section 355(d)(8)(A) as holding any stock by reason of
holding the interest, the stock shall be treated as acquired by purchase
on the later of the date of the purchase of the interest in the entity
or the date the stock is acquired by purchase by such entity.
(ii) Purchase of additional interest. If a person and an entity are
treated as a single person under section 355(d)(7), and the person later
purchases an additional interest in the entity, the person is treated as
purchasing on the date of the later purchase the amount of stock
attributed from the entity to the person under section 355(d)(8)(A) as a
result of the additional interest.
(iii) Purchase between persons treated as one person. If two persons
are treated as one person under section 355(d)(7), and one later
purchases stock from the other, the date of the later purchase is used
for purposes of determining when the five-year period commences.
(iv) Purchase by a person already treated as holding stock under
section 355(d)(8)(A). If a person who is already treated as holding
stock under section 355(d)(8)(A) later directly purchases such stock,
the date of the later direct purchase is used for purposes of
determining when the five-year period commences.
(v) Examples. The following examples illustrate this paragraph
(e)(1):
Example 1. On Date 1, A purchases 10 percent of the stock of P,
which has held 100 percent of the stock of T for more than five years at
the time of A's purchase. A is deemed to have purchased 10 percent of
P's T stock on Date 1. If A later purchases an additional 41 percent of
the stock of P on Date 2, A is deemed to have purchased an additional 41
percent of P's T stock on Date 2. Because A and P are now related
persons under section 267(b), they are treated as one person under
section 355(d)(7)(A), and A is treated as owning all of P's T stock. A
is treated as acquiring 51 percent of the T stock by purchase at the
times of A's respective purchases of P stock on Date 1 and Date 2. The
remaining 49 percent of T stock is treated as acquired when P acquired
the T stock, more than five years before Date 1. If P distributes T
after Date 2 and within five years after Date 1, the distribution will
be a disqualified distribution under section 355(d)(2) and paragraph
(b)(1) of this section.
Example 2. A has owned 60 percent of the stock of P for more than
five years, and P has owned 40 percent of the stock of T for more than
five years. A and P are treated as one person, and A is treated as
owning 40 percent of the stock of T for more than five years. If P later
purchases an additional 20 percent of the stock of T on Date 1, A is
treated as acquiring by purchase the additional 20 percent of T stock on
Date 1. If A then purchases an additional 10 percent of the stock of P
on Date 2, under paragraph (e)(1)(i) of this section, A is deemed to
have purchased on Date 2 an additional four percent of the T stock (10
percent of the 40 percent that P originally owned). In addition, even
though A and P were already treated as one person under section
355(d)(7)(A), A also is deemed to have purchased two percent of the T
stock on Date 2 (10 percent of the 20 percent of the T stock that it was
treated as purchasing on Date 1). A is still treated as owning all 60
percent of the T stock owned by P. However, of the 60 percent, A is
treated as having purchased 18 percent of the T stock on Date 1 and 6
percent of the T stock on Date 2, for a total of 24 percent purchased
stock.
Example 3. A purchases a 20 percent interest in partnership M on
Date 1. M has owned 30 percent of the stock and 25 percent of the
securities of P for more than five years. P has owned 40 percent of the
stock and 100 percent of the securities of T for more than five years.
Under section 318(a)(2)(C) as modified by section 355(d)(8)(A), M is
deemed to own 12 percent of the stock (30 percent of the 40 percent P
owns) and 30 percent of the securities (30 percent of the 100 percent P
owns) of T. Under sections 318(a)(2)(A) and 355(d)(8)(B), A is deemed to
have purchased 2.4 percent of the stock (20 percent of the 12 percent M
is deemed to own) and 6 percent of the securities (20 percent of the 30
percent M
[[Page 271]]
is deemed to own) of T on Date 1. Similarly, A is deemed to have
purchased 6 percent of the stock (20 percent of the 30 percent M owns)
and five percent of the securities (20 percent of the 25 percent M owns)
of P on Date 1. If M later purchases an additional 10 percent of P stock
on Date 2, M is deemed to have purchased four percent of the stock (10
percent of the 40 percent P owns) and 10 percent of the securities (10
percent of the 100 percent P owns) of T on Date 2. A is deemed to have
purchased two percent of the stock of P on Date 2 (20 percent of the 10
percent M purchased). A is also deemed to have purchased 0.8 percent of
the stock (20 percent of the four percent M is deemed to have purchased)
and two percent of the securities (20 percent of the 10 percent M is
deemed to have purchased) of T on Date 2.
Example 4. A and B are brother and sister. For more than five years,
A has owned 75 percent of the stock of P, and B has owned 25 percent of
the stock of P. A and B are treated as one person under section 267(b),
and the stock of each is treated as purchased on the date it was
purchased by A and B, respectively. If B later purchases 50 percent of
the P stock from A on Date 1, A and B are still treated as one person.
However, under paragraph (e)(3)(iii) of this section, the 50 percent of
P stock that B purchased from A is treated as purchased on Date 1.
(2) Transferred basis rule. If any person acquires property from
another person who acquired the property by purchase (determined with
regard to section 355(d)(5) and paragraphs (d) and (e)(2), (3) and (4)
of this section, but without regard to section 355(d)(8) and paragraph
(e)(1) of this section), and the adjusted basis of the property in the
hands of the acquirer is determined in whole or in part by reference to
the adjusted basis of the property in the hands of the other person, the
acquirer is treated as having acquired the property by purchase on the
date it was so acquired by the other person. The rule in this paragraph
(e)(2) applies, for example, where stock of a corporation acquired by
purchase is subsequently acquired in a section 351 transfer or a
reorganization qualifying under section 368(a)(1)(B), but does not apply
if the stock of a former common parent is acquired in a group structure
change to which Sec. 1.1502-31 applies. But see paragraph
(d)(2)(i)(B)(2) of this section for situations where the stock is
treated as purchased on the date of a transfer.
(3) Exchanged basis rule--(i) In general. If any person acquires an
interest in an entity (the first interest) by purchase (determined with
regard to section 355(d)(5) and paragraphs (d) and (e)(2), (3) and (4)
of this section, but without regard to section 355(d)(8) and paragraph
(e)(1) of this section), and the first interest is exchanged for an
interest in the same or another entity (the second interest) where the
adjusted basis of the second interest is determined in whole or in part
by reference to the adjusted basis of the first interest, then the
second interest is treated as having been purchased on the date the
first interest was purchased. The rule in this paragraph (e)(3) applies
only to exchanges that are not otherwise treated as purchases under
section 355(d)(5) and paragraph (d) of this section. The rule in this
paragraph (e)(3) applies, for example, where stock of a corporation
acquired by purchase is subsequently exchanged for other stock in a
section 351, 354, or 1036(a) exchange. But see paragraph (d)(2)(i)(A)(2)
of this section for situations where the stock is treated as purchased
on the date of an exchange or distribution.
(ii) Example. The following example illustrates this paragraph
(e)(3):
Example. A purchases 50 percent of the stock of T on Date 1. On Date
2, T merges into D in a section 368(a)(1)(A) reorganization, with A
exchanging all of the T stock solely for stock of D. Under section
358(a), A's basis in the D stock is determined by reference to the basis
of the T stock it purchased. Accordingly, A is treated as having
purchased the D stock on Date 1, and has a purchased basis in the D
stock under paragraph (b)(3)(iii) of this section.
(4) Certain section 355 or section 305 distributions--(i) Section
355. If a distributing corporation distributes any stock of a controlled
corporation with respect to recently purchased distributing stock in a
distribution that qualifies under section 355 (or so much of section 356
as relates to section 355), such controlled corporation stock is deemed
to be acquired by purchase by the distributee on the date the
distributee acquired the recently purchased distributing stock. Recently
purchased distributing stock is stock in the distributing corporation
acquired by purchase (determined with
[[Page 272]]
regard to section 355(d)(5) and paragraphs (d) and (e)(2), (3), and (4)
of this section, but without regard to section 355(d)(8) and paragraph
(e)(1) of this section) by the distributee during the five-year period
with respect to that distribution.
(ii) Section 305. If a corporation distributes its stock in a
distribution that qualifies under section 305(a), the stock received in
the distribution (to the extent section 307(a) applies to determine the
recipient's basis) is deemed to be acquired by purchase by the recipient
on the date (if any) that the recipient acquired by purchase (determined
with regard to section 355(d)(5) and paragraphs (d) and (e)(2), (3), and
(4) of this section), the stock with respect to which the distribution
is made.
(5) Substantial diminution of risk--(i) In general. If section
355(d)(6) applies to any stock for any period, the running of any five-
year period set forth in section 355(d)(3) is suspended during such
period.
(ii) Property to which suspension applies. Section 355(d)(6) applies
to any stock for any period during which the holder's risk of loss with
respect to such stock, or with respect to any portion of the activities
of the corporation, is (directly or indirectly) substantially diminished
by an option, a short sale, any special class of stock, or any other
device or transaction.
(iii) Risk of loss substantially diminished. Whether a holder's risk
of loss is substantially diminished under section 355(d)(6) and
paragraph (e)(5)(ii) of this section will be determined based on all
facts and circumstances relating to the stock, the corporate activities,
and arrangements for holding the stock.
(iv) Special class of stock. For purposes of section 355(d)(6) and
paragraph (e)(5)(ii) of this section, the term special class of stock
includes a class of stock that grants particular rights to, or bears
particular risks for, the holder or the issuer with respect to the
earnings, assets, or attributes of less than all the assets or
activities of a corporation or any of its subsidiaries. The term
includes, for example, tracking stock and stock (or any related
instruments or arrangements) the terms of which provide for the
distribution (whether or not at the option of any party or in the event
of any contingency) of any controlled corporation or other specified
assets to the holder or to one or more persons other than the holder.
(f) Duty to determine stockholders--(1) In general. In determining
whether section 355(d) applies to a distribution of controlled
corporation stock, a distributing corporation must determine whether a
disqualified person holds its stock or the stock of any distributed
controlled corporation. This paragraph (f) provides rules regarding this
determination and the extent to which a distributing corporation must
investigate whether a disqualified person holds stock.
(2) Deemed knowledge of contents of securities filings. A
distributing corporation is deemed to have knowledge of the existence
and contents of all schedules, forms, and other documents filed with or
under the rules of the Securities and Exchange Commission, including
without limitation any Schedule 13D or 13G (or any similar schedules)
and amendments, with respect to any relevant corporation.
(3) Presumption as to securities filings. Absent actual knowledge to
the contrary, in determining whether section 355(d) applies to a
distribution, a distributing corporation may presume, with respect to
stock that is reporting stock (while such stock is reporting stock),
that every shareholder or other person required to file a schedule,
form, or other document with or under the rules of the Securities and
Exchange Commission as of a given date has filed the schedule, form, or
other document as of that date and that the contents of filed schedules,
forms, or other documents are accurate and complete. Reporting stock is
stock that is described in Rule 13d-1(i) of Regulation 13D (17 CFR
240.13d-1(i)) (or any rule or regulation to generally the same effect)
promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
(4) Presumption as to less-than-five-percent shareholders. Absent
actual knowledge (or deemed knowledge under paragraph (f)(2) of this
section) immediately after the distribution to the contrary with regard
to a particular
[[Page 273]]
shareholder, a distributing corporation may presume that no less-than-
five-percent shareholder of a corporation acquired stock or securities
by purchase under section 355(d)(5) or (8) and paragraphs (d) and (e) of
this section during the five-year period. For purposes of this paragraph
(f), a less-than-five-percent shareholder is a person that, at no time
during the five-year period, holds directly (or by application of
paragraph (c)(3)(ii) of this section, but not by application of section
355(d)(7) or (8)) stock possessing five percent or more of the total
combined voting power of all classes of stock entitled to vote or the
total value of shares of all classes of stock of a corporation. However,
this presumption does not apply to any less-than-five-percent
shareholder that, at any time during the five-year period--
(i) Is related under section 355(d)(7)(A) to a shareholder in the
corporation that is, at any time during the five-year period, not a
less-than-five-percent shareholder;
(ii) Acted pursuant to a plan or arrangement, with respect to
acquisitions of the corporation's stock or securities under section
355(d)(7)(B) and paragraph (c)(4) of this section, with a shareholder in
the corporation that is, at any time during the five-year period, not a
less-than-five-percent shareholder; or
(iii) Holds stock or securities that is attributed under section
355(d)(8)(A) to a shareholder in the corporation that is, at any time
during the five-year period, not a less-than-five-percent shareholder.
(5) Examples. The following examples illustrate this paragraph (f):
Example 1. Publicly traded corporation; no schedules filed. D is a
widely held and publicly traded corporation with a single class of
reporting stock and no other class of stock. Assume that applicable
federal law requires any person that directly holds five percent or more
of the D stock to file a schedule with the Securities and Exchange
Commission within 10 days after an acquisition. D distributes its wholly
owned subsidiary C pro rata. D determines that no schedule, form, or
other document has been filed with respect to its stock or the stock of
any other relevant corporation during the five-year period or within 10
days after the distribution. Immediately after the distribution, D has
no knowledge that any of its shareholders are (or were at any time
during the five-year period) not less-than-five-percent shareholders, or
that any particular shareholder acquired D stock by purchase under
section 355(d)(5) or (8) and paragraphs (d) and (e) of this section
during the five-year period. Under paragraph (f)(3) of this section, D
may presume it has no shareholder that is or was not a less-than-five-
percent shareholder during the five-year period due to the absence of
any filed schedules, forms, or other documents. Under paragraph (f)(4)
of this section, D may presume that none of its less-than-five-percent
shareholders acquired D's stock by purchase during the five-year period.
Accordingly, D may presume that section 355(d) does not apply to the
distribution of C.
Example 2. Publicly traded corporation; schedule filed. The facts
are the same as those in Example 1, except that D determines that, as of
10 days after the distribution, only one schedule has been filed with
respect to its stock. That schedule discloses that X acquired 15 percent
of the D stock one year before the distribution. Absent contrary
knowledge, D may rely on the presumptions in paragraph (f)(3) of this
section and so may presume that X is its only shareholder that is or was
not a less-than-five-percent shareholder during the five-year period. D
may not rely on the presumption in paragraph (f)(4) of this section with
respect to X. In addition, D may not rely on the presumption in
paragraph (f)(4) of this section with respect to any less-than-five-
percent shareholder that, at any time during the five-year period, is
related to X under section 355(d)(7)(A), acted pursuant to a plan or
arrangement with X under section 355(d)(7)(B) and paragraph (c)(4) of
this section with respect to acquisitions of D stock, or holds stock
that is attributed to X under section 355(d)(8)(A). Accordingly, under
paragraph (f)(1) of this section, to determine whether section 355(d)
applies, D must determine: whether X acquired its directly held D stock
by purchase under section 355(d)(5) and paragraphs (d) and (e)(2) and
(3) of this section during the five-year period; whether X is treated as
having purchased any additional D stock under section 355(d)(8) and
paragraph (e)(1) of this section during the five-year period; and
whether X is related to, or acquired its D stock pursuant to a plan or
arrangement with, one or more of D's other shareholders during the five-
year period under section 355(d)(7)(A) or (B) and paragraph (c)(4) of
this section, and if so, whether those shareholders acquired their D
stock by purchase under section 355(d)(5) or (8) and paragraphs (d) and
(e) of this section during the five-year period.
Example 3. Acquisition of publicly traded corporation. The facts are
the same as those in Example 1, except that P acquires all of the
[[Page 274]]
D stock in a section 368(a)(1)(B) reorganization that is not also a
reorganization under section 368(a)(1)(A) by reason of section
368(a)(2)(E), and D distributes C to P one year later. Because D was
widely held, P applies statistical sampling procedures that involve less
than 50% of D's outstanding shares, to estimate the basis of all shares
acquired, instead of surveying each shareholder. Under the deemed
purchase rule of section 355(d)(5)(C) and paragraph (e)(2) of this
section, P is treated as having acquired the D stock by purchase on the
date the D shareholders acquired the D stock by purchase. Even though D
has no less-than-five-percent shareholder immediately after the
distribution, D may rely on the presumptions in paragraphs (f)(3) and
(4) of this section to determine whether and to what extent the D stock
is treated as purchased during the five-year period in P's hands under
the deemed purchase rule of section 355(d)(5)(C) and paragraph (e)(2) of
this section. Accordingly, D may presume that section 355(d) does not
apply to the distribution of C to P. This result would not change even
if the statistical sampling that involves less than 50 percent of D's
outstanding shares indicated that more than 50% of D's shares were
acquired by purchase during the five-year period.
Example 4. Non-publicly traded corporation. D is owned by 20
shareholders and has a single class of stock that is not reporting
stock. D knows that A owns 40 percent of the D stock, and D does not
know that any other shareholder has owned as much as five percent of the
D stock at any time during the five-year period. D may not rely on the
presumption in paragraph (f)(3) of this section because its stock is not
reporting stock. D may not rely on the presumption in paragraph (f)(4)
of this section with respect to A. In addition, D may not rely on the
presumption in paragraph (f)(4) of this section for any less-than-five-
percent shareholder that, at any time during the five-year period, is
related to A under section 355(d)(7)(A), acted pursuant to a plan or
arrangement with A under section 355(d)(7)(B) and paragraph (c)(4) of
this section with respect to acquisitions of D stock, or holds stock
that is attributed to A under section 355(d)(8)(A). D may rely on the
presumption in paragraph (f)(4) of this section for less-than-five-
percent shareholders that during the five-year period are not related to
A, did not act pursuant to a plan or arrangement with A, and do not hold
stock attributed to A. Accordingly, under paragraph (f)(1) of this
section, to determine whether section 355(d) applies, D must determine:
that A is its only shareholder that is (or was at any time during the
five-year period) not a less-than-five-percent shareholder; whether A
acquired its directly held D stock by purchase under section 355(d)(5)
and paragraphs (d) and (e)(2) and (3) of this section during the five-
year period; whether A is treated as having purchased any additional D
stock under section 355(d)(8) and paragraph (e)(1) of this section
during the five-year period; and whether A is related to, or acquired
its D stock pursuant to a plan or arrangement with, one or more of D's
other shareholders during the five-year period under section
355(d)(7)(A) or (B) and paragraph (c)(4) of this section, and if so,
whether those shareholders acquired their D stock by purchase under
section 355(d)(5) or (8) and paragraphs (d) and (e) of this section
during the five-year period.
(g) Effective/applicability dates. This section applies to
distributions occurring after December 20, 2000, except that they do not
apply to any distributions occurring pursuant to a written agreement
that is (subject to customary conditions) binding on December 20, 2000,
and at all later times. The provisions of paragraph (d)(1)(i)(A)(2) of
this section relating to section 1022 are effective on and after January
19, 2017.
[T.D. 8913, 65 FR 79723, Dec. 20, 2000; 66 FR 9034, Feb. 6, 2001, as
amended by T.D. 9811, 82 FR 6237, Jan. 19, 2017]
Sec. 1.355-7 Recognition of gain on certain distributions of stock
or securities in connection with an acquisition.
(a) In general. Except as provided in section 355(e) and in this
section, section 355(e) applies to any distribution--
(1) To which section 355 (or so much of section 356 as relates to
section 355) applies; and
(2) That is part of a plan (or series of related transactions)
(hereinafter, plan) pursuant to which 1 or more persons acquire directly
or indirectly stock representing a 50-percent or greater interest in the
distributing corporation (Distributing) or any controlled corporation
(Controlled).
(b) Plan--(1) In general. Whether a distribution and an acquisition
are part of a plan is determined based on all the facts and
circumstances. The facts and circumstances to be considered in
demonstrating whether a distribution and an acquisition are part of a
plan include, but are not limited to, the facts and circumstances set
forth in paragraphs (b)(3) and (4) of this section. In general, the
weight to be given each of the facts and circumstances depends on the
particular case. Whether a
[[Page 275]]
distribution and an acquisition are part of a plan does not depend on
the relative number of facts and circumstances set forth in paragraph
(b)(3) that evidence that a distribution and an acquisition are part of
a plan as compared to the relative number of facts and circumstances set
forth in paragraph (b)(4) that evidence that a distribution and an
acquisition are not part of a plan.
(2) Certain post-distribution acquisitions. In the case of an
acquisition (other than involving a public offering) after a
distribution, the distribution and the acquisition can be part of a plan
only if there was an agreement, understanding, arrangement, or
substantial negotiations regarding the acquisition or a similar
acquisition at some time during the two-year period ending on the date
of the distribution. In the case of an acquisition (other than involving
a public offering) after a distribution, the existence of an agreement,
understanding, arrangement, or substantial negotiations regarding the
acquisition or a similar acquisition at some time during the two-year
period ending on the date of the distribution tends to show that the
distribution and the acquisition are part of a plan. See paragraph
(b)(3)(i) of this section. However, all facts and circumstances must be
considered to determine whether the distribution and the acquisition are
part of a plan. For example, in the case of an acquisition (other than
involving a public offering) after a distribution, if the distribution
was motivated in whole or substantial part by a corporate business
purpose (within the meaning of Sec. 1.355-2(b)) other than a business
purpose to facilitate the acquisition or a similar acquisition of
Distributing or Controlled (see paragraph (b)(4)(v) of this section) and
would have occurred at approximately the same time and in similar form
regardless of whether the acquisition or a similar acquisition was
effected (see paragraph (b)(4)(vi) of this section), the taxpayer may be
able to establish that the distribution and the acquisition are not part
of a plan.
(3) Plan factors. Among the facts and circumstances tending to show
that a distribution and an acquisition are part of a plan are the
following:
(i) In the case of an acquisition (other than involving a public
offering) after a distribution, at some time during the two-year period
ending on the date of the distribution, there was an agreement,
understanding, arrangement, or substantial negotiations regarding the
acquisition or a similar acquisition. The weight to be accorded this
fact depends on the nature, extent, and timing of the agreement,
understanding, arrangement, or substantial negotiations. The existence
of an agreement, understanding, or arrangement at the time of the
distribution is given substantial weight.
(ii) In the case of an acquisition involving a public offering after
a distribution, at some time during the two-year period ending on the
date of the distribution, there were discussions by Distributing or
Controlled with an investment banker regarding the acquisition or a
similar acquisition. The weight to be accorded this fact depends on the
nature, extent, and timing of the discussions.
(iii) In the case of an acquisition (other than involving a public
offering) before a distribution, at some time during the two-year period
ending on the date of the acquisition, there were discussions by
Distributing or Controlled with the acquirer regarding a distribution.
The weight to be accorded this fact depends on the nature, extent, and
timing of the discussions. In addition, in the case of an acquisition
(other than involving a public offering) before a distribution, the
acquirer intends to cause a distribution and, immediately after the
acquisition, can meaningfully participate in the decision regarding
whether to make a distribution.
(iv) In the case of an acquisition involving a public offering
before a distribution, at some time during the two-year period ending on
the date of the acquisition, there were discussions by Distributing or
Controlled with an investment banker regarding a distribution. The
weight to be accorded this fact depends on the nature, extent, and
timing of the discussions.
(v) In the case of an acquisition either before or after a
distribution, the distribution was motivated by a business purpose to
facilitate the acquisition or a similar acquisition.
[[Page 276]]
(4) Non-plan factors. Among the facts and circumstances tending to
show that a distribution and an acquisition are not part of a plan are
the following:
(i) In the case of an acquisition involving a public offering after
a distribution, during the two-year period ending on the date of the
distribution, there were no discussions by Distributing or Controlled
with an investment banker regarding the acquisition or a similar
acquisition.
(ii) In the case of an acquisition after a distribution, there was
an identifiable, unexpected change in market or business conditions
occurring after the distribution that resulted in the acquisition that
was otherwise unexpected at the time of the distribution.
(iii) In the case of an acquisition (other than involving a public
offering) before a distribution, during the two-year period ending on
the date of the earlier to occur of the acquisition or the first public
announcement regarding the distribution, there were no discussions by
Distributing or Controlled with the acquirer regarding a distribution.
Paragraph (b)(4)(iii) of this section does not apply to an acquisition
where the acquirer intends to cause a distribution and, immediately
after the acquisition, can meaningfully participate in the decision
regarding whether to make a distribution.
(iv) In the case of an acquisition before a distribution, there was
an identifiable, unexpected change in market or business conditions
occurring after the acquisition that resulted in a distribution that was
otherwise unexpected.
(v) In the case of an acquisition either before or after a
distribution, the distribution was motivated in whole or substantial
part by a corporate business purpose (within the meaning of Sec. 1.355-
2(b)) other than a business purpose to facilitate the acquisition or a
similar acquisition.
(vi) In the case of an acquisition either before or after a
distribution, the distribution would have occurred at approximately the
same time and in similar form regardless of the acquisition or a similar
acquisition.
(c) Operating rules. The operating rules contained in this paragraph
(c) apply for all purposes of this section.
(1) Internal discussions and discussions with outside advisors
evidence of business purpose. Discussions by Distributing or Controlled
with outside advisors and internal discussions may be indicative of one
or more business purposes for the distribution and the relative
importance of such purposes.
(2) Takeover defense. If Distributing engages in discussions with a
potential acquirer regarding an acquisition of Distributing or
Controlled and distributes Controlled stock intending, in whole or
substantial part, to decrease the likelihood of the acquisition of
Distributing or Controlled by separating it from another corporation
that is likely to be acquired, Distributing will be treated as having a
business purpose to facilitate the acquisition of the corporation that
was likely to be acquired.
(3) Effect of distribution on trading in stock. The fact that the
distribution made all or a part of the stock of Controlled available for
trading or made Distributing's or Controlled's stock trade more actively
is not taken into account in determining whether the distribution and an
acquisition of Distributing or Controlled stock were part of a plan.
(4) Consequences of section 355(e) disregarded for certain purposes.
For purposes of determining the intentions of the relevant parties under
this section, the consequences of the application of section 355(e), and
the existence of any contractual indemnity by Controlled for tax
resulting from the application of section 355(e) caused by an
acquisition of Controlled, are disregarded.
(5) Multiple acquisitions. All acquisitions of stock of Distributing
or Controlled that are considered to be part of a plan with a
distribution pursuant to paragraph (b) of this section will be
aggregated for purposes of the 50-percent test of paragraph (a)(2) of
this section.
(d) Safe harbors--(1) Safe Harbor I. A distribution and an
acquisition occurring after the distribution will not be considered part
of a plan if--
(i) The distribution was motivated in whole or substantial part by a
corporate business purpose (within the meaning of Sec. 1.355-2(b)),
other than a
[[Page 277]]
business purpose to facilitate an acquisition of the acquired
corporation (Distributing or Controlled); and
(ii) The acquisition occurred more than six months after the
distribution and there was no agreement, understanding, arrangement, or
substantial negotiations concerning the acquisition or a similar
acquisition during the period that begins one year before the
distribution and ends six months thereafter.
(2) Safe Harbor II--(i) In general. A distribution and an
acquisition occurring after the distribution will not be considered part
of a plan if--
(A) The distribution was not motivated by a business purpose to
facilitate the acquisition or a similar acquisition;
(B) The acquisition occurred more than six months after the
distribution and there was no agreement, understanding, arrangement, or
substantial negotiations concerning the acquisition or a similar
acquisition during the period that begins one year before the
distribution and ends six months thereafter; and
(C) No more than 25 percent of the stock of the acquired corporation
(Distributing or Controlled) was either acquired or the subject of an
agreement, understanding, arrangement, or substantial negotiations
during the period that begins one year before the distribution and ends
six months thereafter.
(ii) Special rule. For purposes of paragraph (d)(2)(i)(C) of this
section, acquisitions of stock that are treated as not part of a plan
pursuant to Safe Harbor VII, Safe Harbor VIII, or Safe Harbor IX are
disregarded.
(3) Safe Harbor III. If an acquisition occurs after a distribution,
there was no agreement, understanding, or arrangement concerning the
acquisition or a similar acquisition at the time of the distribution,
and there was no agreement, understanding, arrangement, or substantial
negotiations concerning the acquisition or a similar acquisition within
one year after the distribution, the acquisition and the distribution
will not be considered part of a plan.
(4) Safe Harbor IV--(i) In general. A distribution and an
acquisition (other than involving a public offering) occurring before
the distribution will not be considered part of a plan if the
acquisition occurs before the date of the first disclosure event
regarding the distribution.
(ii) Special rules. (A) Paragraph (d)(4)(i) of this section does not
apply to a stock acquisition if the acquirer or a coordinating group of
which the acquirer is a member is a controlling shareholder or a ten-
percent shareholder of the acquired corporation (Distributing or
Controlled) at any time during the period beginning immediately after
the acquisition and ending on the date of the distribution.
(B) Paragraph (d)(4)(i) of this section does not apply to an
acquisition that occurs in connection with a transaction in which the
aggregate acquisitions are of stock possessing 20 percent or more of the
total voting power of the stock of the acquired corporation
(Distributing or Controlled) or stock having a value of 20 percent or
more of the total value of the stock of the acquired corporation
(Distributing or Controlled).
(5) Safe Harbor V--(i) In general. A distribution that is pro rata
among the Distributing shareholders and an acquisition (other than
involving a public offering) of Distributing stock occurring before the
distribution will not be considered part of a plan if--
(A) The acquisition occurs after the date of a public announcement
regarding the distribution; and
(B) There were no discussions by Distributing or Controlled with the
acquirer regarding a distribution on or before the date of the first
public announcement regarding the distribution.
(ii) Special rules. (A) Paragraph (d)(5)(i) of this section does not
apply to a stock acquisition if the acquirer or a coordinating group of
which the acquirer is a member is a controlling shareholder or a ten-
percent shareholder of Distributing at any time during the period
beginning immediately after the acquisition and ending on the date of
the distribution.
(B) Paragraph (d)(5)(i) of this section does not apply to an
acquisition that occurs in connection with a transaction in which the
aggregate acquisitions are of stock possessing 20 percent
[[Page 278]]
or more of the total voting power of the stock of Distributing or stock
having a value of 20 percent or more of the total value of the stock of
Distributing.
(6) Safe Harbor VI. A distribution and an acquisition involving a
public offering occurring before the distribution will not be considered
part of a plan if the acquisition occurs before the date of the first
disclosure event regarding the distribution in the case of an
acquisition of stock that is not listed on an established market
immediately after the acquisition, or before the date of the first
public announcement regarding the distribution in the case of an
acquisition of stock that is listed on an established market immediately
after the acquisition.
(7) Safe Harbor VII--(i) In general. An acquisition (other than
involving a public offering) of Distributing or Controlled stock that is
listed on an established market is not part of a plan if, immediately
before or immediately after the transfer, none of the transferor, the
transferee, and any coordinating group of which either the transferor or
the transferee is a member is--
(A) The acquired corporation (Distributing or Controlled);
(B) A corporation that the acquired corporation (Distributing or
Controlled) controls within the meaning of section 368(c);
(C) A member of a controlled group of corporations within the
meaning of section 1563 of which the acquired corporation (Distributing
or Controlled) is a member;
(D) A controlling shareholder of the acquired corporation
(Distributing or Controlled); or
(E) A ten-percent shareholder of the acquired corporation
(Distributing or Controlled).
(ii) Special rules. (A) Paragraph (d)(7)(i) of this section does not
apply to a transfer of stock by or to a person if the corporation the
stock of which is being transferred knows, or has reason to know, that
the person or a coordinating group of which such person is a member
intends to become a controlling shareholder or a ten-percent shareholder
of the acquired corporation (Distributing or Controlled) at any time
after the acquisition and before the date that is two years after the
distribution.
(B) If a transfer of stock to which paragraph (d)(7)(i) of this
section applies results immediately, or upon a subsequent event or the
passage of time, in an indirect acquisition of voting power by a person
other than the transferee, paragraph (d)(7)(i) of this section does not
prevent an acquisition of stock (with the voting power such stock
represents after the transfer to which paragraph (d)(7)(i) of this
section applies) by such other person from being treated as part of a
plan.
(8) Safe Harbor VIII--(i) In general. If, in a transaction to which
section 83 or section 421(a) or (b) applies, stock of Distributing or
Controlled is acquired by a person in connection with such person's
performance of services as an employee, director, or independent
contractor for Distributing, Controlled, a related person, a corporation
the assets of which Distributing, Controlled, or a related person
acquires in a reorganization under section 368(a), or a corporation that
acquires the assets of Distributing or Controlled in such a
reorganization (and the stock acquired is not excessive by reference to
the services performed), the acquisition and the distribution will not
be considered part of a plan. For purposes of this paragraph (d)(8)(i),
a related person is a person related to Distributing or Controlled under
section 355(d)(7)(A).
(ii) Special rule. Paragraph (d)(8)(i) of this section does not
apply to a stock acquisition if the acquirer or a coordinating group of
which the acquirer is a member is a controlling shareholder or a ten-
percent shareholder of the acquired corporation (Distributing or
Controlled) immediately after the acquisition.
(9) Safe Harbor IX--(i) In general. If stock of Distributing or
Controlled is acquired by a retirement plan of Distributing or
Controlled (or a retirement plan of any other person that is treated as
the same employer as Distributing or Controlled under section 414(b),
(c), (m), or (o)) that qualifies under section 401(a) or 403(a), the
acquisition and the distribution will not be considered part of a plan.
[[Page 279]]
(ii) Special rule. Paragraph (d)(9)(i) of this section does not
apply to the extent that the stock acquired pursuant to acquisitions by
all of the qualified plans of the persons described in paragraph
(d)(9)(i) of this section during the four-year period beginning two
years before the distribution, in the aggregate, represents more than
ten percent of the total combined voting power of all classes of stock
entitled to vote, or more than ten percent of the total value of shares
of all classes of stock, of the acquired corporation (Distributing or
Controlled).
(e) Options, warrants, convertible obligations, and other similar
interests--(1) Treatment of options--(i) General rule. For purposes of
this section, if stock of Distributing or Controlled is acquired
pursuant to an option that is written by Distributing, Controlled, or a
person that is a controlling shareholder of Distributing or Controlled
at the time the option is written, or that is acquired by a person that
is a controlling shareholder of Distributing or Controlled immediately
after the option is written, the option will be treated as an agreement,
understanding, or arrangement to acquire the stock on the earliest of
the following dates: the date that the option is written, if the option
was more likely than not to be exercised as of such date; the date that
the option is transferred if, immediately before or immediately after
the transfer, the transferor or transferee was Distributing, Controlled,
a corporation that Distributing or Controlled controls within the
meaning of section 368(c), a member of a controlled group of
corporations within the meaning of section 1563 of which Distributing or
Controlled is a member, or a controlling shareholder or a ten-percent
shareholder of Distributing or Controlled and the option was more likely
than not to be exercised as of such date; and the date that the option
is modified in a manner that materially increases the likelihood of
exercise, if the option was more likely than not to be exercised as of
such date; provided, however, if the writing, transfer, or modification
had a principal purpose of avoiding section 355(e), the option will be
treated as an agreement, understanding, arrangement, or substantial
negotiations to acquire the stock on the date of the distribution. The
determination of whether an option was more likely than not to be
exercised is based on all the facts and circumstances, taking control
premiums and minority and blockage discounts into account in determining
the fair market value of stock underlying an option.
(ii) Agreement, understanding, or arrangement to write, transfer, or
modify an option. If there is an agreement, understanding, or
arrangement to write an option, the option will be treated as written on
the date of the agreement, understanding, or arrangement. If there is an
agreement, understanding, or arrangement to transfer an option, the
option will be treated as transferred on the date of the agreement,
understanding, or arrangement. If there is an agreement, understanding,
or arrangement to modify an option in a manner that materially increases
the likelihood of exercise, the option will be treated as so modified on
the date of the agreement, understanding, or arrangement.
(iii) Substantial negotiations related to options. If an option is
treated as an agreement, understanding, or arrangement to acquire the
stock on the date that the option is written, substantial negotiations
to acquire the option will be treated as substantial negotiations to
acquire the stock subject to such option. If an option is treated as an
agreement, understanding, or arrangement to acquire the stock on the
date that the option is transferred, substantial negotiations regarding
the transfer of the option will be treated as substantial negotiations
to acquire the stock subject to such option. If an option is treated as
an agreement, understanding, or arrangement to acquire the stock on the
date that the option is modified in a manner that materially increases
the likelihood of exercise, substantial negotiations regarding such
modifications to the option will be treated as substantial negotiations
to acquire the stock subject to such option.
(2) Stock acquired pursuant to options. For purposes of this
section, if an option is issued for cash, the terms of the acquisition
of the option and the terms of the option are established by the
[[Page 280]]
corporation the stock of which is subject to the option (Distributing or
Controlled) or the writer with the involvement of one or more investment
bankers, and the potential acquirers of the option have no opportunity
to negotiate the terms of the acquisition of the option or the terms of
the option, then an acquisition pursuant to such option shall be treated
as an acquisition involving a public offering occurring after the
distribution if the option is exercised after the distribution or an
acquisition involving a public offering before a distribution if the
option is exercised before the distribution. Otherwise, an acquisition
pursuant to an option shall be treated as an acquisition not involving a
public offering.
(3) Instruments treated as options. For purposes of this section,
except to the extent provided in paragraph (e)(4) of this section, call
options, warrants, convertible obligations, the conversion feature of
convertible stock, put options, redemption agreements (including rights
to cause the redemption of stock), any other instruments that provide
for the right or possibility to issue, redeem, or transfer stock
(including an option on an option), or any other similar interests are
treated as options.
(4) Instruments generally not treated as options. For purposes of
this section, the following are not treated as options unless (in the
case of paragraphs (e)(4)(i), (ii), and (iii) of this section) written,
transferred (directly or indirectly), modified, or listed with a
principal purpose of avoiding the application of section 355(e) or this
section.
(i) Escrow, pledge, or other security agreements. An option that is
part of a security arrangement in a typical lending transaction
(including a purchase money loan), if the arrangement is subject to
customary commercial conditions. For this purpose, a security
arrangement includes, for example, an agreement for holding stock in
escrow or under a pledge or other security agreement, or an option to
acquire stock contingent upon a default under a loan.
(ii) Options exercisable only upon death, disability, mental
incompetency, or separation from service. Any option entered into
between shareholders of a corporation (or a shareholder and the
corporation) that is exercisable only upon the death, disability, or
mental incompetency of the shareholder, or, in the case of stock
acquired in connection with the performance of services for the
corporation or a person related to it under section 355(d)(7)(A) (and
that is not excessive by reference to the services performed), the
shareholder's separation from service.
(iii) Rights of first refusal. A bona fide right of first refusal
regarding the corporation's stock with customary terms, entered into
between shareholders of a corporation (or between the corporation and a
shareholder).
(iv) Other enumerated instruments. Any other instrument the
Commissioner may designate in revenue procedures, notices, or other
guidance published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2) of this chapter).
(f) Multiple controlled corporations. Only the stock or securities
of a controlled corporation in which one or more persons acquire
directly or indirectly stock representing a 50-percent or greater
interest as part of a plan involving the distribution of that
corporation will be treated as not qualified property under section
355(e)(1) if--
(1) The stock or securities of more than one controlled corporation
are distributed in distributions to which section 355 (or so much of
section 356 as relates to section 355) applies; and
(2) One or more persons do not acquire, directly or indirectly,
stock representing a 50-percent or greater interest in Distributing
pursuant to a plan involving any of those distributions.
(g) Valuation. Except as provided in paragraph (e)(1)(i) of this
section, for purposes of section 355(e) and this section, all shares of
stock within a single class are considered to have the same value. Thus,
control premiums and minority and blockage discounts within a single
class are not taken into account.
(h) Definitions. For purposes of this section, the following
definitions shall apply:
(1) Agreement, understanding, arrangement, or substantial
negotiations. (i) An agreement, understanding, or arrangement generally
requires either--
(A) An agreement, understanding, or arrangement by one or more
officers or
[[Page 281]]
directors acting on behalf of Distributing or Controlled, by controlling
shareholders of Distributing or Controlled, or by another person or
persons with the implicit or explicit permission of one or more of such
officers, directors, or controlling shareholders, with the acquirer or
with a person or persons with the implicit or explicit permission of the
acquirer; or
(B) An agreement, understanding, or arrangement by an acquirer that
is a controlling shareholder of Distributing or Controlled immediately
after the acquisition that is the subject of the agreement,
understanding, or arrangement, or by a person or persons with the
implicit or explicit permission of such acquirer, with the transferor or
with a person or persons with the implicit or explicit permission of the
transferor.
(ii) In the case of an acquisition by a corporation, an agreement,
understanding, or arrangement with the acquiring corporation generally
requires an agreement, understanding, or arrangement with one or more
officers or directors acting on behalf of the acquiring corporation,
with controlling shareholders of the acquiring corporation, or with
another person or persons with the implicit or explicit permission of
one or more of such officers, directors, or controlling shareholders.
(iii) Whether an agreement, understanding, or arrangement exists
depends on the facts and circumstances. The parties do not necessarily
have to have entered into a binding contract or have reached agreement
on all significant economic terms to have an agreement, understanding,
or arrangement. However, an agreement, understanding, or arrangement
clearly exists if a binding contract to acquire stock exists.
(iv) Substantial negotiations in the case of an acquisition (other
than involving a public offering) generally require discussions of
significant economic terms, e.g., the exchange ratio in a
reorganization, either--
(A) By one or more officers or directors acting on behalf of
Distributing or Controlled, by controlling shareholders of Distributing
or Controlled, or by another person or persons with the implicit or
explicit permission of one or more of such officers, directors, or
controlling shareholders, with the acquirer or with a person or persons
with the implicit or explicit permission of the acquirer; or
(B) If the acquirer is a controlling shareholder of Distributing or
Controlled immediately after the acquisition that is the subject of
substantial negotiations, by the acquirer or by a person or persons with
the implicit or explicit permission of the acquirer, with the transferor
or with a person or persons with the implicit or explicit permission of
the transferor.
(v) In the case of an acquisition (other than involving a public
offering) by a corporation, substantial negotiations generally require
discussions of significant economic terms with one or more officers or
directors acting on behalf of the acquiring corporation, with
controlling shareholders of the acquiring corporation, or with another
person or persons with the implicit or explicit permission of one or
more of such officers, directors, or controlling shareholders.
(vi) In the case of an acquisition involving a public offering, the
existence of an agreement, understanding, arrangement, or substantial
negotiations will be based on discussions by one or more officers or
directors acting on behalf of Distributing or Controlled, by controlling
shareholders of Distributing or Controlled, or by another person or
persons with the implicit or explicit permission of one or more of such
officers, directors, or controlling shareholders, with an investment
banker.
(2) Controlled corporation. A controlled corporation is a
corporation the stock of which is distributed in a distribution to which
section 355 (or so much of section 356 as relates to section 355)
applies.
(3) Controlling shareholder. (i) A controlling shareholder of a
corporation the stock of which is listed on an established market is a
five-percent shareholder who actively participates in the management or
operation of the corporation. For purposes of this paragraph (h)(3)(i),
a corporate director will be treated as actively participating in the
management of the corporation.
(ii) A controlling shareholder of a corporation the stock of which
is not listed on an established market is any
[[Page 282]]
person that owns stock possessing voting power representing a meaningful
voice in the governance of the corporation. For purposes of determining
whether a person owns stock possessing voting power representing a
meaningful voice in the governance of the corporation, the person shall
be treated as owning the stock that such person owns actually and
constructively under the rules of section 318 (without regard to section
318(a)(4)). In addition, if the exercise of an option (whether by itself
or in conjunction with the deemed exercise of one or more other options)
would cause the holder to own stock possessing voting power representing
a meaningful voice in the governance of the corporation, then the option
will be treated as exercised.
(iii) If a distribution precedes an acquisition, Controlled's
controlling shareholders immediately after the distribution and
Distributing are included among Controlled's controlling shareholders at
the time of the distribution.
(4) Coordinating group. A coordinating group includes two or more
persons that, pursuant to a formal or informal understanding, join in
one or more coordinated acquisitions or dispositions of stock of
Distributing or Controlled. A principal element in determining if such
an understanding exists is whether the investment decision of each
person is based on the investment decision of one or more other existing
or prospective shareholders. A coordinating group is treated as a single
shareholder for purposes of determining whether the coordinating group
is treated as a controlling shareholder, a five-percent shareholder, or
a ten-percent shareholder.
(5) Disclosure event. A disclosure event regarding the distribution
means any communication by an officer, director, controlling
shareholder, or employee of Distributing, Controlled, or a corporation
related to Distributing or Controlled, or an outside advisor of any of
those persons (where such advisor makes the communication on behalf of
such person), regarding the distribution, or the possibility thereof, to
the acquirer or any other person (other than an officer, director,
controlling shareholder, or employee of Distributing, Controlled, or a
corporation related to Distributing or Controlled, or an outside advisor
of any of those persons). For purposes of this paragraph (h)(5), a
corporation is related to Distributing or Controlled if it is a member
of an affiliated group (as defined in section 1504(a) without regard to
section 1504(b)) that includes either Distributing or Controlled or it
is a member of a qualified group (as defined in Sec. 1.368-1(d)(4)(ii))
that includes either Distributing or Controlled.
(6) Discussions. Discussions by Distributing or Controlled generally
require discussions by one or more officers or directors acting on
behalf of Distributing or Controlled, by controlling shareholders of
Distributing or Controlled, or by another person or persons with the
implicit or explicit permission of one or more of such officers,
directors, or controlling shareholders. Discussions with the acquirer
generally require discussions with the acquirer or with a person or
persons with the implicit or explicit permission of the acquirer. In the
case of an acquisition by a corporation, discussions with the acquiring
corporation generally require discussions with one or more officers or
directors acting on behalf of the acquiring corporation, with
controlling shareholders of the acquiring corporation, or with another
person or persons with the implicit or explicit permission of one or
more of such officers, directors, or controlling shareholders.
(7) Established market. An established market is--
(i) A national securities exchange registered under section 6 of the
Securities Exchange Act of 1934 (15 U.S.C. 78f);
(ii) An interdealer quotation system sponsored by a national
securities association registered under section 15A of the Securities
Act of 1934 (15 U.S.C. 78o-3); or
(iii) Any additional market that the Commissioner may designate in
revenue procedures, notices, or other guidance published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter).
(8) Five-percent shareholder. A person will be considered a five-
percent shareholder of a corporation the stock of
[[Page 283]]
which is listed on an established market if the person owns five percent
or more of any class of stock of the corporation whose stock is
transferred. For purposes of determining whether a person owns five
percent or more of any class of stock of the corporation whose stock is
transferred, the person shall be treated as owning the stock that such
person owns actually and constructively under the rules of section 318
(without regard to section 318(a)(4)). In addition, if the exercise of
an option (whether by itself or in conjunction with the deemed exercise
of one or more other options) would cause the holder to become a five-
percent shareholder, then the option will be treated as exercised.
Absent actual knowledge that a person is a five-percent shareholder, a
corporation can rely on Schedules 13D and 13G (or any similar schedules)
filed with the Securities and Exchange Commission to identify its five-
percent shareholders.
(9) Implicit permission. A corporation is treated as having the
implicit permission of its shareholders when it engages in discussions
or negotiations, or enters into an agreement, understanding, or
arrangement.
(10) Public announcement. A public announcement regarding the
distribution means any communication by Distributing or Controlled
regarding Distributing's intention to effect the distribution where the
communication is generally available to the public.
(11) Public offering. An acquisition involving a public offering
means an acquisition of stock for cash where the terms of the
acquisition are established by the acquired corporation (Distributing or
Controlled) or the seller with the involvement of one or more investment
bankers and the potential acquirers have no opportunity to negotiate the
terms of the acquisition. For example, a public offering includes an
underwritten offering of registered stock for cash.
(12) Similar acquisition (not involving a public offering). In
general, an actual acquisition (other than involving a public offering)
is similar to another potential acquisition if the actual acquisition
effects a direct or indirect combination of all or a significant portion
of the same business operations as the combination that would have been
effected by such other potential acquisition. Thus, an actual
acquisition may be similar to another acquisition even if the timing or
terms of the actual acquisition are different from the timing or terms
of the other acquisition. For example, an actual acquisition of
Distributing by shareholders of another corporation in connection with a
merger of such other corporation with and into Distributing is similar
to another acquisition of Distributing by merger into such other
corporation or into a subsidiary of such other corporation. However, in
general, an actual acquisition (other than involving a public offering)
is not similar to another acquisition if the ultimate owners of the
business operations with which Distributing or Controlled is combined in
the actual acquisition are substantially different from the ultimate
owners of the business operations with which Distributing or Controlled
was to be combined in such other acquisition.
(13) Similar acquisition involving a public offering--(i) One public
offering. In general, an actual acquisition involving a public offering
may be similar to a potential acquisition involving a public offering,
even though there are changes in the terms of the stock, the class of
stock being offered, the size of the offering, the timing of the
offering, the price of the stock, or the participants in the offering.
(ii) More than one public offering. More than one actual acquisition
involving a public offering may be similar to a potential acquisition
involving a public offering. If there is an actual acquisition involving
a public offering (the first public offering) that is the same as, or
similar to, a potential acquisition involving a public offering, then
another actual acquisition involving a public offering (the second
public offering) cannot be similar to the potential acquisition unless
the purpose of the second public offering is similar to that of the
potential acquisition and occurs close in time to the first public
offering.
(iii) Potential acquisition involving a public offering. For
purposes of paragraph (h)(13)(i) and (ii) of this section, as the
context may require, a potential acquisition involving a public offering
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means a potential acquisition involving a public offering that was
discussed by Distributing or Controlled with an investment banker, that
motivated the distribution, or that was the subject of an agreement,
understanding, arrangement, or substantial negotiations.
(14) Ten-percent shareholder. A person will be considered a ten-
percent shareholder of a corporation the stock of which is listed on an
established market if the person owns, actually or constructively under
the rules of section 318 (without regard to section 318(a)(4)), ten
percent or more of any class of stock of the corporation whose stock is
transferred. A person will be considered a ten-percent shareholder of a
corporation the stock of which is not listed on an established market if
the person owns stock possessing ten percent or more of the total voting
power of the stock of the corporation whose stock is transferred or
stock having a value equal to ten percent or more of the total value of
the stock of the corporation whose stock is transferred. For purposes of
determining whether a person owns ten percent or more of the total
voting power or value of the stock of the corporation whose stock is
transferred, the person shall be treated as owning the stock that such
person owns actually and constructively under the rules of section 318
(without regard to section 318(a)(4)). In addition, if the exercise of
an option (whether by itself or in conjunction with the deemed exercise
of one or more other options) would cause the holder to become a ten-
percent shareholder, then the option will be treated as exercised.
Absent actual knowledge that a person is a ten-percent shareholder, a
corporation the stock of which is listed on an established market can
rely on Schedules 13D and 13G (or any similar schedules) filed with the
Securities and Exchange Commission to identify its ten-percent
shareholders.
(i) [Reserved]
(j) Examples. The following examples illustrate paragraphs (a)
through (h) of this section. Throughout these examples, assume that
Distributing (D) owns all of the stock of Controlled (C). Assume further
that D distributes the stock of C in a distribution to which section 355
applies and to which section 355(d) does not apply. Unless otherwise
stated, assume the corporations do not have controlling shareholders. No
inference should be drawn from any example concerning whether any
requirements of section 355 other than those of section 355(e) are
satisfied. The examples are as follows:
Example 1. Unwanted assets. (i) D is in business 1. C is in business
2. D is relatively small in its industry. D wants to combine with X, a
larger corporation also engaged in business 1. X and D begin negotiating
for X to acquire D, but X does not want to acquire C. To facilitate the
acquisition of D by X, D agrees to distribute all the stock of C pro
rata before the acquisition. Prior to the distribution, D and X enter
into a contract for D to merge into X subject to several conditions. One
month after D and X enter into the contract, D distributes C and, on the
day after the distribution, D merges into X. As a result of the merger,
D's former shareholders own less than 50 percent of the stock of X.
(ii) The issue is whether the distribution of C and the merger of D
into X are part of a plan. No Safe Harbor applies to this acquisition.
To determine whether the distribution of C and the merger of D into X
are part of a plan, D must consider all the facts and circumstances,
including those described in paragraph (b) of this section.
(iii) The following tends to show that the distribution of C and the
merger of D into X are part of a plan: X and D had an agreement
regarding the acquisition during the two-year period ending on the date
of the distribution (paragraph (b)(3)(i) of this section), and the
distribution was motivated by a business purpose to facilitate the
merger (paragraph (b)(3)(v) of this section). Because the merger was
agreed to at the time of the distribution, the fact described in
paragraph (b)(3)(i) of this section is given substantial weight.
(iv) None of the facts and circumstances listed in paragraph (b)(4)
of this section, tending to show that a distribution and an acquisition
are not part of a plan, exist in this case.
(v) The distribution of C and the merger of D into X are part of a
plan under paragraph (b) of this section.
Example 2. Public offering. (i) D's managers, directors, and
investment banker discuss the possibility of offering D stock to the
public. They decide a public offering of 20 percent of D's stock with D
as a stand-alone corporation would be in D's best interest. One month
later, to facilitate a stock offering by D of 20 percent of its stock, D
distributes all the stock of C pro rata to D's shareholders. D issues
new shares amounting to 20 percent of its stock to the public in a
public offering seven months after the distribution.
[[Page 285]]
(ii) The issue is whether the distribution of C and the public
offering by D are part of a plan. No Safe Harbor applies to this
acquisition. Safe Harbor VII, relating to public trading, does not apply
to public offerings (see paragraph (d)(7)(i) of this section). To
determine whether the distribution of C and the public offering by D are
part of a plan, D must consider all the facts and circumstances,
including those described in paragraph (b) of this section.
(iii) The following tends to show that the distribution of C and the
public offering by D are part of a plan: D discussed the public offering
with its investment banker during the two-year period ending on the date
of the distribution (paragraph (b)(3)(ii) of this section), and the
distribution was motivated by a business purpose to facilitate the
public offering (paragraph (b)(3)(v) of this section).
(iv) None of the facts and circumstances listed in paragraph (b)(4)
of this section, tending to show that a distribution and an acquisition
are not part of a plan, exist in this case.
(v) The distribution of C and the public offering by D are part of a
plan under paragraph (b) of this section.
Example 3. Hot market. (i) D is a widely-held corporation the stock
of which is listed on an established market. D announces a distribution
of C and distributes C pro rata to D's shareholders. By contract, C
agrees to indemnify D for any imposition of tax under section 355(e)
caused by the acts of C. The distribution is motivated by a desire to
improve D's access to financing at preferred customer interest rates,
which will be more readily available if D separates from C. At the time
of the distribution, although neither D nor C has been approached by any
potential acquirer of C, it is reasonably certain that soon after the
distribution either an acquisition of C will occur or there will be an
agreement, understanding, arrangement, or substantial negotiations
regarding an acquisition of C. Corporation Y acquires C in a merger
described in section 368(a)(1)(A) by reason of section 368(a)(2)(E)
within six months after the distribution. The C shareholders receive
less than 50 percent of the stock of Y in the exchange.
(ii) The issue is whether the distribution of C and the acquisition
of C by Y are part of a plan. No Safe Harbor applies to this
acquisition. Under paragraph (b)(2) of this section, because prior to
the distribution neither D nor C and Y had an agreement, understanding,
arrangement, or substantial negotiations regarding the acquisition or a
similar acquisition, the distribution of C by D and the acquisition of C
by Y are not part of a plan under paragraph (b) of this section.
Example 4. Unexpected opportunity. (i) D, the stock of which is
listed on an established market, makes a public announcement that it
will distribute all the stock of C pro rata to D's shareholders. After
the public announcement but before the distribution, widely-held X
becomes available as an acquisition target. There were no discussions by
D or C with X before the date of the public announcement. D negotiates
with X and X merges into D before the distribution. In the merger, X's
shareholders receive ten percent of D's stock. D distributes the stock
of C pro rata within six months after the acquisition of X. No
shareholder of X was a controlling shareholder or a ten-percent
shareholder of D at any time during the period beginning immediately
after the merger and ending on the date of the distribution
(ii) The issue is whether the acquisition of X by D and the
distribution of C are part of a plan. Safe Harbor V applies to this
acquisition because the distribution is pro rata among D's shareholders,
the acquisition occurs after the date of a public announcement regarding
the distribution, there were no discussions by D or C with X on or
before the date of the public announcement, no acquirer was a
controlling shareholder or a ten-percent shareholder of D during the
period beginning immediately after the merger and ending on the date of
the distribution, and not more than 20 percent of D's stock was acquired
by the X shareholders in the merger.
Example 5. Vote shifting transaction. (i) D is in business 1. C is
in business 2. D wants to combine with X, which is also engaged in
business 1. The stock of X is closely held. X and D begin negotiating
for D to acquire X, but the X shareholders do not want to acquire an
indirect interest in C. To facilitate the acquisition of X by D, D
agrees to distribute all the stock of C pro rata before the acquisition
of X. D and X enter into a contract for X to merge into D subject to
several conditions. Among those conditions is that D will amend its
corporate charter to provide for two classes of stock: Class A and Class
B. Under all circumstances, each share of Class A stock will be entitled
to ten votes in the election of each director on D's board of directors.
Upon issuance, each share of Class B stock will be entitled to ten votes
in the election of each director on D's board of directors; however, a
disposition of such share by its original holder will result in such
share being entitled to only one vote, rather than ten votes, in the
election of each director. Immediately after the merger, the Class B
shares will be listed on an established market. One month after D and X
enter into the contract, D distributes C. Immediately after the
distribution, the shareholders of D exchange their D stock for the new
Class B shares. On the day after the distribution, X merges into D. In
the merger, the former shareholders of X exchange their X stock for
Class A shares of D. Immediately after the merger, D's historic
shareholders own stock of D representing 51 percent of the
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total combined voting power of all classes of stock of D entitled to
vote and more than 50 percent of the total value of all classes of stock
of D. During the 30-day period following the merger, none of the Class A
shares are transferred, but a number of D's historic shareholders sell
their Class B stock of D in public trading with the result that, at the
end of that 30-day period, the Class A shares owned by the former X
shareholders represent 52 percent of the total combined voting power of
all classes of stock of D entitled to vote.
(ii) X acquisition. (A) The issue is whether the distribution of C
and the merger of X into D are part of a plan. No Safe Harbor applies to
this acquisition. To determine whether the distribution of C and the
merger of X into D are part of a plan, D must consider all the facts and
circumstances, including those described in paragraph (b) of this
section.
(B) The following tends to show that the distribution of C and the
merger of X into D are part of a plan: X and D had an agreement
regarding the acquisition during the two-year period ending on the date
of the distribution (paragraph (b)(3)(i) of this section), and the
distribution was motivated by a business purpose to facilitate the
merger (paragraph (b)(3)(v) of this section). Because the merger was
agreed to at the time of the distribution, the fact described in
paragraph (b)(3)(i) of this section is given substantial weight.
(C) None of the facts and circumstances listed in paragraph (b)(4)
of this section, tending to show that a distribution and an acquisition
are not part of a plan, exist in this case.
(D) The distribution of C and the merger of X into D are part of a
plan under paragraph (b) of this section.
(iii) Public trading of Class B shares. (A) Assuming that each of
the transferors and the transferees of the Class B stock of D in public
trading is not one of the prohibited transferors or transferees listed
in paragraph (d)(7)(i), Safe Harbor VII will apply to the acquisitions
of the Class B stock during the 30-day period following the merger such
that the distribution and those acquisitions will not be treated as part
of a plan. However, to the extent that those acquisitions result in an
indirect acquisition of voting power by a person other than the acquirer
of the transferred stock, Safe Harbor VII does not prevent the
acquisition of the D stock (with the voting power such stock represents
after those acquisitions) by the former X shareholders from being
treated as part of a plan.
(B) To the extent that the transfer of the Class B shares causes the
voting power of D to shift to the Class A stock acquired by the former X
shareholders, such shifted voting power will be treated as attributable
to the stock acquired by the former X shareholders as part of a plan
that includes the distribution and the X acquisition.
Example 6. Acquisition not involving a public offering that is not
similar. (i) D, X, and Y are each corporations the stock of which is
publicly traded and widely held. Each of D, X, and Y is engaged in the
manufacture and sale of trucks. C is engaged in the manufacture and sale
of buses. D and X engage in substantial negotiations concerning X's
acquisition of the stock of D from the D shareholders in exchange for
stock of X. D and X do not reach an agreement regarding that
acquisition. Three months after D and X first began negotiations
regarding that acquisition, D distributes the stock of C pro rata to its
shareholders. Three months after the distribution, Y acquires the stock
of D from the D shareholders in exchange for stock of Y. The ultimate
owners of Y are substantially different from the ultimate owners of X.
(ii) Although both X and Y engage in the manufacture and sale of
trucks, X's truck business and Y's truck business are not the same
business operations. Therefore, because Y's acquisition of D does not
effect a combination of the same business operations as X's acquisition
of D would have effected, and because the ultimate owners of Y are
substantially different from the ultimate owners of X, Y's acquisition
of D is not similar to X's potential acquisition of D that was the
subject of earlier negotiations.
Example 7. Acquisition not involving a public offering that is
similar. (i) D is engaged in the business of writing custom software for
several industries (industries 1 through 6). The software business of D
related to industries 4, 5, and 6 is significant relative to the
software business of D related to industries 3, 4, 5, and 6. X, an
unrelated corporation, is engaged in the business of writing software
and the business of manufacturing and selling hardware devices. X's
business of writing software is significant relative to its total
businesses. X and D engage in substantial negotiations regarding X's
acquisition of D stock from the D shareholders in exchange for stock of
X. Because X does not want to acquire the software businesses related to
industries 1 and 2, these negotiations relate to an acquisition of D
stock where D owns the software businesses related only to industries 3,
4, 5, and 6. Thereafter, D concludes that the intellectual property
licenses central to the software business related to industries 1 and 2
are not transferable and that a separation of the software business
related to industry 3 from the software business related to industry 2
is not desirable. One month after D begins negotiating with X, D
contributes the software businesses related to industries 4, 5, and 6 to
C, and distributes the stock of C pro rata to its shareholders. In
addition, X sells its hardware businesses for
[[Page 287]]
cash. After the distribution, C and X negotiate for X's acquisition of
the C stock from the C shareholders in exchange for X stock, and X
acquires the stock of C.
(ii) Although D and C are different corporations, C does not own the
custom software business related to industry 3, and X sold its hardware
business prior to the acquisition of C, because X's acquisition of C
involves a combination of a significant portion of the same business
operations as the combination that would have been effected by the
acquisition of D that was the subject of negotiations between D and X,
X's acquisition of C is the same as, or similar to, X's potential
acquisition of D that was the subject of earlier negotiations.
Example 8. Acquisitions involving public offerings with different
purposes. (i) D's managers, directors, and investment banker discuss the
possibility of offering D stock to the public for the purpose of funding
the acquisition of the assets of X. They decide a public offering of 20
percent of D's stock with D as a stand-alone corporation would allow D
to raise the capital needed to effect the acquisition of X's assets. One
month later, to facilitate a stock offering by D of 20 percent of its
stock, D distributes all the stock of C pro rata to D's shareholders.
Two months after the distribution, D issues new shares amounting to 20
percent of its stock to the public in a public offering (the first
public offering). Four months after the distribution, D acquires the
assets of X. Seven months after the distribution, D's managers,
directors, and investment banker discuss the possibility of offering D
stock to the public solely for the purpose of funding the acquisition of
the assets of Y, a corporation unrelated to X. One year after the
distribution, D issues new shares amounting to 40 percent of its stock
to the public in a public offering (the second public offering). One
month after the second public offering, D acquires the assets of Y.
(ii) The first public offering is the same as the potential
acquisition that D's managers, directors, and investment banker
discussed prior to the distribution. The purpose of the second public
offering (funding the acquisition of the assets of Y) is not similar to
that of the potential acquisition (funding the acquisition of the assets
of X). Therefore, the second public offering is not similar to the
potential acquisition.
Example 9. Acquisitions involving public offerings that are close in
time. (i) D's managers, directors, and investment banker discuss the
possibility of offering D stock to the public for the purpose of raising
funds for general corporate purposes. They decide a public offering of
20 percent of D's stock with D as a stand-alone corporation would allow
D to raise such funds. One month later, to facilitate a stock offering
by D of 20 percent of its stock, D distributes all the stock of C pro
rata to D's shareholders. Two months after the distribution, D issues
new shares amounting to 20 percent of its stock to the public in a
public offering (the first public offering). After the first public
offering, D's managers, directors, and investment banker discuss the
possibility of another offering of D stock to the public for the purpose
of raising additional funds for general corporate purposes. Eight months
after the distribution, D issues new shares amounting to ten percent of
its stock to the public in a public offering (the second public
offering).
(ii) The first public offering is the same as the potential
acquisition that D's managers, directors, and investment banker
discussed prior to the distribution. The purpose of the second public
offering (raising funds for general corporate purposes) is the same as
that of the potential acquisition. In addition, the second public
offering is close in time to the first public offering. Therefore, the
second public offering is similar to the potential acquisition.
Example 10. Acquisitions involving public offerings that are not
close in time. The facts are the same as those in Example 9, except that
the second public offering occurs fourteen months after the
distribution. Although the purpose of the second public offering is the
same as that of the potential acquisition, the second public offering is
not close in time to the first public offering. Therefore, the second
public offering is not similar to the potential acquisition.
(k) Effective dates. This section applies to distributions occurring
after April 19, 2005. For distributions occurring on or before April 19,
2005, and after April 26, 2002, see Sec. 1.355-7T as contained in 26
CFR part 1 revised as of April 1, 2003; however, taxpayers may apply
these regulations, in whole, but not in part, to such distributions. For
distributions occurring on or before April 26, 2002, and after August 3,
2001, see Sec. 1.355-7T as contained in 26 CFR part 1 revised as of
April 1, 2002; however, taxpayers may apply, in whole, but not in part,
either these regulations or Sec. 1.355-7T as contained in 26 CFR part 1
revised as of April 1, 2003, to such distributions. For distributions
occurring on or before August 3, 2001, and after April 16, 1997,
taxpayers may apply, in whole, but not in part, either these regulations
or Sec. 1.355-7T as contained in 26 CFR part 1 revised as of April 1,
2003, to such distributions.
[T.D. 9198, 70 FR 20283, Apr. 19, 2005]
[[Page 288]]
Sec. 1.355-8T Definition of predecessor and successor and limitations
on gain recognition under section 355(e) and section 355(f)
(temporary).
(a) In general--(1) Scope. This section provides rules under section
355(e)(4)(D) to determine whether a corporation is treated as a
predecessor or successor of a distributing corporation (Distributing) or
a controlled corporation (Controlled) for purposes of section 355(e).
This section also provides rules limiting the amount of Distributing's
gain recognized under section 355(e) on the distribution of Controlled
stock if section 355(e) applies to an acquisition by one or more
persons, as part of a Plan (within the meaning of Sec. 1.355-7 as
modified by paragraph (a)(3) of this section), of stock that in the
aggregate represents a 50-percent or greater interest (a Planned 50-
percent Acquisition) of a Predecessor of Distributing (as defined in
paragraph (b) of this section), or of Distributing. In addition, this
section provides rules regarding the application of section 336(e) to a
distribution to which this section applies and the application of
section 355(f) to a distribution of Controlled stock in certain cases.
(2) Purpose. The rules in this section have two principal purposes.
The first is to ensure that section 355(e) applies to a section 355
distribution if, as part of a Plan, some of the assets of a Predecessor
of Distributing (as defined in paragraph (b)(1) of this section) are
transferred directly or indirectly to Controlled without full
recognition of gain, and the distribution accomplishes a division of the
assets of the Predecessor of Distributing. The second is to ensure that
section 355(e) applies when there is a Planned 50-percent Acquisition of
a Successor of Distributing or Successor of Controlled (as defined in
paragraph (c)(2) of this section). The rules of this section must be
interpreted and applied in a manner that is consistent with and
reasonably carries out the purposes of this section.
(3) Overview. This section applies if a distribution of Controlled
stock (or stock and securities) is part of the same Plan that includes a
Planned 50-percent Acquisition of a Predecessor of Distributing,
Distributing, Controlled, a Successor of Distributing, or a Successor of
Controlled. Paragraph (a)(4) of this section provides rules regarding
references to the terms Distributing, Controlled, distribution, Plan,
and Plan Period for purposes of section 355(e), Sec. 1.355-7, and this
section. Paragraph (b) of this section defines the term Predecessor of
Distributing and several related terms. A corporation generally will be
a Predecessor of Distributing if: As part of a Plan, the distribution
accomplishes a division of the assets that the corporation directly and
indirectly held during the Plan Period; that division occurs through
transfers, as part of a Plan, resulting in Controlled directly or
indirectly holding some but not all of those assets immediately after
the distribution; and all of the gain on that corporation's assets
directly or indirectly held by Controlled is not recognized before the
distribution. In addition, a corporation generally will be a Predecessor
of Distributing if: As part of a Plan, the distribution accomplishes a
division of the assets that it directly and indirectly held during the
Plan Period; that division occurs as a result of the direct or indirect
transfer of Controlled stock by that corporation to Distributing without
the transfer of all of the corporation's other assets to Controlled; and
all of the gain on the corporation's assets (including the Controlled
stock) directly or indirectly held by Controlled is not recognized
before the distribution. In both cases, Controlled stock distributed in
the distribution must reflect the basis of any Separated Property (as
defined in paragraph (b)(2)(vii) of this section). Paragraph (c) of this
section defines other terms, including Predecessor of Controlled and
Successor (of Distributing or Controlled). Paragraph (d) of this section
provides guidance with regard to acquisitions and deemed acquisitions of
stock if there is a Predecessor of Distributing or a Successor of either
Distributing or Controlled. Paragraph (e) of this section provides two
rules that may limit the amount of Distributing's gain on the
distribution of Controlled stock if there is a Predecessor of
Distributing, as well as an overall gain limitation. Paragraph (e) of
this section also provides guidance
[[Page 289]]
with respect to the application of section 336(e). Regardless of whether
there is a predecessor or successor of Distributing or Controlled,
paragraph (f) of this section provides a special rule relating to
section 355(e)(2)(C), which provides that section 355(e) does not apply
to certain transactions within an affiliated group (as defined in
section 1504(a) without regard to section 1504(b)). Paragraph (g) of
this section provides rules coordinating the application of section
355(f) with the rules of this section. Paragraph (h) of this section
contains examples that illustrate the rules of this section.
(4) References--(i) References to Distributing or Controlled. For
purposes of section 355(e) and the regulations thereunder, except as
otherwise provided in this section, any reference to Distributing or
Controlled includes, as the context may require, a reference to any
Predecessor of Distributing (as defined in paragraph (b)(1) of this
section) or Predecessor of Controlled (as defined in paragraph (c)(1) of
this section), respectively, or any Successor (as defined in paragraph
(c)(2) of this section) of Distributing or Controlled, respectively.
However, except as otherwise provided in this section, a reference to a
Predecessor of Distributing or to a Successor of Distributing does not
include a reference to Distributing, and a reference to a Predecessor of
Controlled or to a Successor of Controlled does not include a reference
to Controlled.
(ii) References to Plan or distribution. Except as otherwise
provided in this section, references to a Plan in this section are
references to a plan within the meaning of Sec. 1.355-7. References to
a distribution in Sec. 1.355-7 include a reference to a distribution
and other related pre-distribution transactions that together effect a
division of the assets of a Predecessor of Distributing. In determining
whether a distribution and a Planned 50-percent Acquisition of a
predecessor or successor of Distributing or Controlled are part of a
Plan, the rules of Sec. 1.355-7 apply. In those cases, references to
Distributing or Controlled in Sec. 1.355-7 generally include references
to a predecessor or successor of Distributing or Controlled. However,
with regard to any possible Planned 50-percent Acquisition of a
Predecessor of Distributing, any agreement, understanding, arrangement,
or substantial negotiations with regard to the acquisition of the stock
of the Predecessor of Distributing is analyzed under Sec. 1.355-7 with
regard to the actions of officers or directors of Distributing or
Controlled, controlling shareholders (as defined in Sec. 1.355-7(h)(3))
of Distributing or Controlled, or a person acting with permission of one
of those parties. For that purpose, references in Sec. 1.355-7 to
Distributing do not include references to a Predecessor of Distributing.
Therefore, the actions of officers or directors, or controlling
shareholders of a Predecessor of Distributing, or a person acting with
the implicit or explicit permission of one of those parties are not
considered unless those parties otherwise would be treated as acting on
behalf of Distributing or Controlled under Sec. 1.355-7 (for example,
if a Predecessor of Distributing is a controlling shareholder of
Distributing).
(iii) Plan Period. For purposes of this section, the term Plan
Period means the period that ends immediately after the distribution and
begins on the earliest date on which any pre-distribution step that is
part of the Plan is agreed to or understood, arranged, or substantially
negotiated by one or more officers or directors acting on behalf of
Distributing or Controlled, by controlling shareholders of Distributing
or Controlled, or by another person or persons with the implicit or
explicit permission of one or more of such officers, directors, or
controlling shareholders. For purposes of the preceding sentence,
references to Distributing and Controlled do not include references to
any predecessor or successor of Distributing or Controlled.
(b) Predecessor of Distributing--(1) Definition--(i) In general. A
Potential Predecessor (as defined in paragraph (b)(2)(ii) of this
section) is a Predecessor of Distributing if, taking into account the
special rules of paragraph (b)(2) of this section, the pre-distribution
requirements of paragraph (b)(1)(ii) of this section and the post-
distribution requirements of paragraph (b)(1)(iii) of this section are
satisfied.
[[Page 290]]
(ii) Pre-distribution requirements--(A) Relevant Property. Before
the distribution, and as part of a Plan, either--
(1) Any Controlled stock distributed in the distribution was
directly or indirectly acquired (or deemed acquired under paragraph
(b)(2)(x) of this section) by Distributing in exchange for any direct or
indirect interest in Relevant Property (as defined in paragraph
(b)(2)(iv) of this section)--
(i) That is held directly or indirectly by Controlled immediately
before the distribution; and
(ii) The gain on which was not recognized in full as part of a Plan;
or
(2) Any Controlled stock that is distributed in the distribution is
Relevant Property of the Potential Predecessor, and the gain on that
Controlled stock was not recognized in full as part of a Plan.
(B) Reflection of basis. Any Controlled stock distributed in the
distribution reflects the basis of any Separated Property (as defined in
paragraph (b)(2)(vii) of this section).
(iii) Post-distribution requirement. Immediately after the
distribution, direct or indirect ownership of Relevant Property has been
divided between Controlled on the one hand, and Distributing or the
Potential Predecessor (or a successor of a Potential Predecessor) on the
other hand. For purposes of this paragraph (b)(1)(iii), if Controlled
stock that is distributed in the distribution is Relevant Property of a
Potential Predecessor, then Controlled is deemed to have received
Relevant Property of the Potential Predecessor.
(2) Additional definitions and rules related to paragraph (b)(1) of
this section--(i) References to Distributing and Controlled. For
purposes of paragraphs (b)(1)(ii) and (b)(1)(iii) of this section,
references to Distributing and Controlled do not include references to
any predecessor or successor of Distributing or Controlled.
(ii) Potential Predecessor. The term Potential Predecessor means a
corporation other than Distributing or Controlled.
(iii) Successors of Potential Predecessors. For purposes of
paragraph (b)(1)(iii) of this section, if a Potential Predecessor
transfers property in a section 381 transaction to a corporation (other
than Distributing or Controlled) during the Plan Period, the corporation
is a successor to the Potential Predecessor.
(iv) Relevant Property; Relevant Stock--(A) In general. Except as
otherwise provided in this paragraph (b)(2)(iv), the term Relevant
Property means any property that was held, directly or indirectly, by
the Potential Predecessor during the Plan Period. The term Relevant
Stock means stock of a corporation if that stock is a Potential
Predecessor's Relevant Property.
(B) Property held by Distributing. Except as provided in paragraph
(b)(2)(iv)(C) of this section, property held directly or indirectly by
Distributing (including Controlled stock) is Relevant Property of a
Potential Predecessor only to the extent that the property was
transferred directly or indirectly to Distributing during the Plan
Period, and it was Relevant Property of the Potential Predecessor before
the direct or indirect transfers. For example, if during the Plan Period
a subsidiary corporation of a Potential Predecessor merges into
Controlled in a reorganization under section 368(a)(1)(A) and (2)(D),
and, as a result, the Potential Predecessor directly or indirectly owns
Distributing stock received in the merger, the subsidiary's assets held
by Controlled will be Relevant Property of that Potential Predecessor.
(C) Certain reorganizations. For purposes of paragraph (b)(2)(iv)(B)
of this section, the transferor and transferee in any reorganization
described in section 368(a)(1)(F) (F reorganization) are treated as a
single corporation. Therefore, for example, Relevant Property acquired
during the Plan Period by a corporation that is a transferor (as to a
later F reorganization) is treated as having been acquired directly (and
from the same source) by the transferee (as to the later F
reorganization) during the Plan Period. In addition, any transfer (or
deemed transfer) of assets to Distributing in an F reorganization will
not cause the transferred assets to be treated as Relevant Property.
(v) Stock of Distributing as Relevant Property--(A) In general. For
purposes of paragraph (b)(1)(ii) of this section,
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except as provided in paragraph (b)(2)(v)(B) of this section, stock of
Distributing is not Relevant Stock (and thus not Relevant Property) to
the extent that the Potential Predecessor becomes, as part of a Plan,
the direct or indirect owner of that stock as the result of the transfer
to Distributing of direct or indirect interests in the Potential
Predecessor's Relevant Property. For example, stock of Distributing is
not Relevant Stock if it is acquired by a Potential Predecessor as part
of a Plan in an exchange to which section 351(a) applies.
(B) Certain reorganizations. For purposes of paragraph (b)(1)(ii) of
this section, stock of Distributing is Relevant Stock (and thus Relevant
Property) to the extent that the Potential Predecessor becomes, as part
of the Plan, the direct or indirect owner of that stock as the result of
a transaction described in section 368(a)(1)(E).
(vi) Substitute Asset. The term Substitute Asset means any property
that is held directly or indirectly by Distributing during the Plan
Period and was received, during the Plan Period, in exchange for
Relevant Property that was acquired directly or indirectly by
Distributing if all gain on the transferred Relevant Property is not
recognized on the exchange. For example, property received by Controlled
in exchange for Relevant Property in a transaction qualifying under
section 1031 is a Substitute Asset. Irrespective of the general rule of
this paragraph (b)(2)(vi), stock of Controlled received in exchange for
a direct or indirect transfer of Relevant Property by Distributing
generally is not a Substitute Asset. However, if Controlled stock
received or deemed received in an exchange reflects in whole or in part
the basis of Relevant Stock the issuer of which ceases to exist for
Federal income tax purposes under the Plan, then that Controlled stock
will constitute a Substitute Asset. See paragraph (b)(2)(x) of this
section. In addition, stock received by Distributing in a distribution
qualifying under section 305(a) or section 355(a) on Relevant Stock is a
Substitute Asset. For purposes of this section, a Substitute Asset is
treated as Relevant Property with the same ownership and transfer
history as the Relevant Property for which (or on which) it was
received.
(vii) Separated Property. The term Separated Property means each
item of Relevant Property that is described in paragraph (b)(1)(ii)(A)
of this section. However, if Relevant Stock is Separated Property,
Underlying Property (as defined in paragraph (b)(2)(viii) of this
section) associated with that stock is not treated as Separated
Property. In addition, if Distributing directly or indirectly acquires
Relevant Stock in a transaction in which gain is recognized in full,
Underlying Property associated with that stock is not treated as
Separated Property.
(viii) Underlying Property. The term Underlying Property means
property directly or indirectly held by a corporation that is the issuer
of Relevant Stock.
(ix) Scope of definition of Predecessor of Distributing. If there
are multiple Potential Predecessors that satisfy the requirements of
paragraph (b)(1) of this section, each of those Potential Predecessors
will be a Predecessor of Distributing. For example, a Potential
Predecessor that transfers property to a Predecessor of Distributing
without full recognition of gain (and that otherwise meets the
requirements of paragraph (b)(1) of this section) is also a Predecessor
of Distributing if the applicable transfer occurred as part of a Plan
that existed at the time of such transfer.
(x) Deemed exchanges. For purposes of paragraph (b)(1)(ii) and
(b)(2)(vi) of this section, Distributing is treated as acquiring
Controlled stock in exchange for a direct or indirect interest in
Relevant Property if the basis of Distributing in that Controlled stock
reflects the basis of the Relevant Property in whole or in part.
(c) Additional definitions--(1) Predecessor of Controlled. Solely
for purposes of applying paragraph (f) of this section, a corporation is
a Predecessor of Controlled if, before the distribution, it transfers
property to Controlled in a section 381 transaction as part of a Plan.
Other than for the purpose described in the preceding sentence, no
corporation can be a Predecessor of Controlled. For purposes of this
paragraph (c)(1), a reference to Controlled
[[Page 292]]
includes a reference to a Predecessor of Controlled. If multiple
corporations satisfy the requirements of this paragraph (c)(1), each of
those corporations will be a Predecessor of Controlled. For example, a
corporation that transfers property to a Predecessor of Controlled in a
section 381 transaction is also a Predecessor of Controlled if the
section 381 transaction occurred as part of a Plan that existed at the
time of such transaction.
(2) Successors--(i) In general. A Successor of Distributing or
Controlled, respectively, is a corporation to which Distributing or
Controlled transfers property in a section 381 transaction after the
distribution (a Successor Transaction).
(ii) Determination of Successor status. More than one corporation
may be a Successor of Distributing or Controlled. Therefore, if
Distributing transfers property to another corporation (X) in a section
381 transaction, and X transfers property to another corporation (Y) in
a section 381 transaction, then each of X and Y may be a Successor of
Distributing. In this case, the determination of whether Y is a
Successor of Distributing is made after the determination of whether X
is a Successor of Distributing.
(3) Section 381 transaction. The term section 381 transaction means
a transaction to which section 381 applies.
(d) Special acquisition rules--(1) Deemed acquisitions of stock in
section 381 transactions. Each person that owned an interest in the
acquiring corporation immediately before a section 381 transaction (an
Acquiring Owner) is treated for purposes of this section as acquiring,
in the section 381 transaction, stock representing an interest in the
distributor or transferor corporation, to the extent that the Acquiring
Owner did not hold an equivalent direct or indirect interest in the
distributor or transferor corporation before the section 381
transaction. For example, if Distributing held a 25-percent interest in
a Predecessor of Distributing before a section 381 transaction in which
the Predecessor of Distributing transfers its assets to Distributing,
each person that owns an interest in Distributing is treated as
acquiring in the section 381 transaction a proportionate share of the
remaining 75-percent interest in the Predecessor of Distributing.
Similarly, each Acquiring Owner of a Successor of Distributing is
treated as acquiring, in the Successor Transaction, stock of
Distributing, to the extent that the Acquiring Owner did not hold an
equivalent direct or indirect interest in Distributing before the
section 381 transaction.
(2) Deemed acquisitions of stock after section 381 transactions. For
purposes of this section, after a section 381 transaction (including a
Successor Transaction), an acquisition of stock of an acquiring
corporation (including a deemed stock acquisition under paragraph (d)(1)
of this section) is treated also as an acquisition of an interest in the
stock of the distributor or transferor corporation. For example, an
acquisition of the stock of Distributing that occurs after a section 381
transaction is treated not only as an acquisition of the stock of
Distributing, but also as an acquisition of the stock of any Predecessor
of Distributing whose assets were acquired by Distributing in a prior
section 381 transaction. Similarly, an acquisition of the stock of a
Successor of Distributing that occurs after the Successor Transaction is
treated not only as an acquisition of the stock of the Successor of
Distributing, but also as an acquisition of the stock of Distributing.
(3) Separate counting for Distributing and each Predecessor of
Distributing. The measurement of whether one or more persons have
acquired stock of any specific corporation in a Planned 50-percent
Acquisition is made separately from the measurement of any potential
Planned 50-percent Acquisition of any other corporation. Therefore,
there may be a Planned 50-percent Acquisition of a Predecessor of
Distributing even if there is no Planned 50-percent Acquisition of
Distributing. Similarly, there may be a Planned 50-percent Acquisition
of Distributing even if there is no Planned 50-percent Acquisition of a
Predecessor of Distributing.
(e) Special rules for gain recognition--(1) In general. If there are
Planned 50-percent Acquisitions of multiple corporations (for example,
two Predecessors of Distributing), Distributing
[[Page 293]]
must recognize gain in the amount described in section 355(c)(2) or
361(c)(2) (the Statutory Recognition Amount), as applicable, with
respect to each such corporation, subject to the limitations in
paragraph (e)(2) of this section (relating to the Planned 50-percent
Acquisition of a Predecessor of Distributing) and paragraph (e)(3) of
this section (relating to the Planned 50-percent Acquisition of
Distributing), if applicable. The limitations in paragraphs (e)(2) and
(e)(3) of this section are applied separately to the Planned 50-percent
Acquisition of each such corporation to determine the amount of gain
required to be recognized. Paragraph (e)(4) of this section sets forth
an overall limitation based on the full amount of gain otherwise
required to be recognized by Distributing by reason of section 355(e).
Paragraph (e)(5) of this section clarifies the availability of an
election under section 336(e) with regard to certain distributions.
(2) Planned 50-percent or greater acquisitions of a Predecessor of
Distributing--(i) In general. If there is a Planned 50-percent
Acquisition of a Predecessor of Distributing, the amount of gain
recognized by Distributing by reason of section 355(e) as a result of
the Planned 50-percent Acquisition is limited to the amount of gain, if
any, that Distributing would have recognized if, immediately before the
distribution, Distributing had engaged in the following transaction:
Distributing transferred all Separated Property received from the
Predecessor of Distributing to a newly-formed corporation in exchange
solely for stock of such corporation in a reorganization under section
368(a)(1)(D) and then distributed the stock of such corporation to the
shareholders of Distributing in a transaction to which section 355(e)
applied (a Hypothetical D/355(e) Reorganization). This computation is
applied regardless of whether Distributing actually directly held the
Separated Property.
(ii) Operating rules. For purposes of applying paragraph (e)(2)(i)
of this section, the following rules apply:
(A) Separated Property other than Controlled stock. The basis and
fair market value of Separated Property other than stock of Controlled
treated as transferred by Distributing to a hypothetical Controlled in a
Hypothetical D/355(e) Reorganization equal the basis and fair market
value, respectively, of such property in the hands of Controlled
immediately before the distribution of Controlled stock.
(B) Controlled stock that is Separated Property. The basis and fair
market value of the stock of Controlled that is Separated Property
treated as transferred by Distributing to a hypothetical Controlled in a
Hypothetical D/355(e) Reorganization equal the basis and fair market
value, respectively, of such stock in the hands of Distributing
immediately before the distribution of Controlled stock.
(C) Anti-duplication rule. A Predecessor of Distributing's Separated
Property is taken into account for purposes of applying this paragraph
(e)(2) only to the extent such property was not taken into account by
Distributing in a Hypothetical D/355(e) Reorganization with respect to
another Predecessor of Distributing. Further, appropriate adjustments
must be made to prevent other duplicative inclusions of section 355(e)
gain under this paragraph (e) reflecting the same economic gain.
(3) Planned 50-percent Acquisition of Distributing in a section 381
transaction. This paragraph (e)(3) applies if there is a Planned 50-
percent Acquisition of Distributing (by application of paragraph (d)(1)
of this section) that occurs as part of a Plan as the result of a
transfer by a Predecessor of Distributing to Distributing in a section
381 transaction. In that case, the amount of gain recognized by
Distributing by reason of section 355(e) as a result of the acquisition
is the excess, if any, of the Statutory Recognition Amount, as
applicable, over the amount of gain, if any, that Distributing would
have been required to recognize under paragraph (e)(2) of this section
if there had been a Planned 50-percent Acquisition of the Predecessor of
Distributing, but not of Distributing, in the section 381 transaction.
For purposes of this paragraph (e)(3), references to Distributing are
not references to a Predecessor of Distributing.
(4) Overall gain recognition. The sum of the amounts required to be
recognized by Distributing under section
[[Page 294]]
355(e) and the regulations thereunder (taking into account paragraphs
(e)(2) and (3) of this section) with regard to a single distribution
will not exceed the Statutory Recognition Amount, as applicable. In
addition, Distributing may choose not to apply the limitations of
paragraph (e)(2) and (3) of this section to a distribution, and instead
may recognize the Statutory Recognition Amount. Distributing indicates
its choice to apply the preceding sentence by reporting the Statutory
Recognition Amount on its original or amended Federal income tax return
for the year of the distribution.
(5) Section 336(e) election. Distributing is not eligible to make a
section 336(e) election with respect to a distribution to which this
section applies unless Distributing would, absent the making of a
section 336(e) election (as defined in Sec. 1.336-1(b)(11)), recognize
the Statutory Recognition Amount with respect to a distribution of
Controlled stock under paragraph (e)(2), (e)(3), and (e)(4) (without
regard to the final two sentences thereof) of this section. See
Sec. Sec. 1.336-1 through 1.336-5 for additional requirements with
regard to a section 336(e) election.
(f) Predecessor or Successor as a member of the affiliated group.
For purposes of section 355(e)(2)(C), if a corporation transfers its
assets to a member of the same affiliated group (as defined in section
1504 without regard to section 1504(b)) in a section 381 transaction,
the transferor will be treated as continuing in existence within the
same affiliated group.
(g) Inapplicability of section 355(f) to certain intra-group
distributions--(1) In general. Section 355(f) does not apply to a
distribution if there is a Planned 50-percent Acquisition of a
Predecessor of Distributing (but not of Distributing, Controlled, or
their Successors), except as provided in paragraph (g)(2) of this
section. Therefore, except as provided in paragraph (g)(2) of this
section, section 355 (or so much of section 356 as relates to section
355) and the regulations thereunder, including the gain limitation rules
of paragraph (e)(2) of this section, apply, without regard to section
355(f), to the distribution of Controlled within an affiliated group if
the distribution and the Planned 50-percent Acquisition of the
Predecessor of Distributing are part of a Plan. For purposes of this
paragraph (g)(1), references to the distribution (and Distributing and
Controlled) include references to a distribution (and Distributing and
Controlled) to which section 355 would apply but for the application of
section 355(f).
(2) Alternative application of section 355(f). Distributing may
choose not to apply paragraph (g)(1) of this section to each
distribution (that occurs under a single Plan) to which section 355(f)
would otherwise apply absent paragraph (g)(1) of this section and may
instead apply section 355(f) to all such distributions according to its
terms, but only if all members of the same affiliated group (as defined
in section 1504(a) without regard to section 1504(b)) report
consistently the Federal income tax consequences of the distributions
that are part of the Plan (determined without regard to section 355(f)).
In such a case, no gain limitation under paragraph (e)(2) or (3) of this
section is available with regard to any applicable distribution.
Distributing indicates its choice to apply section 355(f) consistently
to all applicable distributions by reporting the Federal income tax
consequences of each distribution in accordance with section 355(f) on
its Federal income tax return for the year of the distribution.
(h) Examples. The following examples illustrate the principles of
this section. Unless the facts indicate otherwise, assume throughout
these examples that: Distributing (D) owns all the stock of Controlled
(C), and none of the shares of C held by D has a built-in loss; D
distributes the stock of C in a distribution to which section 355
applies, but to which section 355(d) does not apply; X, Y, and Z are
individuals; each of D, D1, D2, C, P, P1, P2, and R is a corporation
having one class of stock outstanding, and none is a member of a
consolidated group; and each transaction that is part of a Plan defined
in this section is respected as a separate transaction under general
Federal income tax principles. No inference should be drawn from any
example concerning whether any requirements of section 355 are satisfied
other than those of section 355(e):
[[Page 295]]
Example 1. Predecessor of Distributing--(i) Facts. X owns 100% of
the stock of P, which holds multiple assets. Y owns 100% of the stock of
D. The following steps occur as part of a Plan: P merges into D in a
reorganization under section 368(a)(1)(A). Immediately after the merger,
X and Y own 10% and 90%, respectively, of the stock of D. D then
contributes to C one of the assets (Asset 1) acquired from P in the
merger. At the time of the contribution, Asset 1 has a basis of $40x and
a fair market value of $110x. In exchange for Asset 1, D receives
additional C stock and $10x. D distributes the stock of C (but not the
cash) to X and Y, pro rata. The contribution and distribution constitute
a reorganization under section 368(a)(1)(D), and D recognizes $10x of
gain under section 361(b) on the contribution. Immediately before the
distribution, taking into account the $10x of gain recognized by D on
the contribution, Asset 1 has an adjusted basis of $50x under section
362(b) and a fair market value of $110x, and the stock of C held by D
has a basis of $100x and a fair market value of $200x.
(ii) Analysis--(A) Predecessor. Under paragraph (b)(1) of this
section, P is a Predecessor of D. Immediately before the distribution
and as part of a Plan, C holds P Relevant Property (Asset 1) the gain on
which was not recognized in full as part of a Plan. Further, some of the
C stock distributed in the distribution was acquired by D in exchange
for Asset 1, and it reflects the basis of Separated Property (Asset 1).
In addition, immediately after the distribution, D continues to hold
Relevant Property of P. Therefore, P's Relevant Property has been
divided between C and D.
(B) Acquisition of predecessor stock. Under paragraph (d)(1) of this
section, Y is treated as acquiring stock representing 90% of the voting
power and value of P as a result of the merger of P into D. Accordingly,
there has been a Planned 50-percent Acquisition of P.
(C) Gain limited. Without regard to the limitations in paragraph (e)
of this section, D would be required to recognize $100x of gain ($200x
of aggregate fair market value minus $100x of aggregate basis of the C
stock held by D), the Statutory Recognition Amount described in section
361(c)(2). However, under paragraph (e)(2) of this section, D's gain
recognized by reason of the deemed acquisition of P stock will not
exceed $60x, an amount equal to the amount of gain D would have
recognized had D transferred Asset 1 (Separated Property) to a newly-
formed corporation (C1) solely for C1 stock and distributed the C1 stock
to D's shareholders in a Hypothetical D/355(e) Reorganization. For
purposes of this computation, the basis and fair market value of Asset 1
equal the basis and fair market value of Asset 1 in the hands of C
immediately before the distribution of C stock. Under section 361(c)(2),
D would recognize $60x of gain, an amount equal to the gain in the
hypothetical C1 stock (excess of the $110x fair market value over the
$50x basis). Therefore, D recognizes $60x of gain.
(iii) Plan not in existence at time of acquisition of Potential
Predecessor's Property. The facts are the same as in paragraph (i) of
this Example 1 except that the merger of P into D occurred before the
existence of a Plan. Even though D transferred P property (Asset 1) to
C, Asset 1 was not Relevant Property of P because P did not hold Asset 1
during the Plan Period. See paragraphs (b)(2)(iv) and (a)(4)(iii) of
this section. Because Asset 1 is not Relevant Property, D did not
receive C stock distributed in the distribution in exchange for Relevant
Property when it contributed Asset 1 to C, none of the distributed stock
reflects the basis of Separated Property, and C does not hold Relevant
Property immediately before the distribution. Further, Relevant Property
of P has not been divided. Therefore, P is not a Predecessor of D.
Example 2. Planned acquisition of Distributing, but not Predecessor
of Distributing--(i) Facts. X owns 100% of the stock of P, which holds
multiple assets. Y owns 100% of the stock of D. The following steps
occur as part of a Plan: P merges into D in a reorganization under
section 368(a)(1)(A). Immediately after the merger, X and Y own 90% and
10%, respectively, of the stock of D. D then contributes to C one of the
assets (Asset 1) acquired from P in the merger. In exchange for Asset 1,
D receives additional C stock. D distributes the stock of C to X and Y,
pro rata. The contribution and distribution constitute a reorganization
under section 368(a)(1)(D). Immediately before the distribution, Asset 1
has a basis of $50x and a fair market value of $110x, and the stock of C
held by D has a basis of $120x and a fair market value of $200x.
(ii) Analysis--(A) Predecessor. Under paragraph (b)(1) of this
section, P is a Predecessor of D. Immediately before the distribution
and as part of a Plan, C holds P Relevant Property (Asset 1) the gain on
which was not recognized in full as part of a Plan. Further, some of the
C stock distributed in the distribution was acquired by D in exchange
for Asset 1, and it reflects the basis of Separated Property (Asset 1).
In addition, immediately after the distribution, D continues to hold
Relevant Property of P. Therefore, P's Relevant Property has been
divided between C and D.
(B) Acquisition of predecessor stock. Under paragraph (d)(1) of this
section, Y is treated as acquiring stock representing 10% of the voting
power and value of P as a result of the merger of P into D. The 10%
acquisition of P stock does not cause section 355(e) gain recognition or
cause application of paragraph (e)(2) of this section because there has
not been a Planned 50-percent Acquisition of P. X acquires 90% of the
voting power and value
[[Page 296]]
of D as a result of the merger of P into D. The acquisition of greater
than 50% of the D stock implicates section 355(e) and results in gain
recognition, subject to the rules of paragraph (e) of this section.
(C) Gain limited. Without regard to the limitations in paragraph (e)
of this section, D would be required to recognize $80x of gain ($200x of
fair market value minus $120x of basis of the C stock held by D), the
Statutory Recognition Amount described in section 361(c)(2). However,
under paragraph (e)(3) of this section, D's gain recognized by reason of
X's acquisition of D stock will not exceed $20x, the excess of the
Statutory Recognition Amount ($80x) over the amount of gain that D would
have been required to recognize under paragraph (e)(2) of this section
if there had been a Planned 50-percent Acquisition of the Predecessor of
D but not D in the section 381 transaction ($60x). The hypothetical gain
under paragraph (e)(2) of this section equals the amount D would have
recognized had it transferred Asset 1 (Separated Property) to a newly-
formed corporation (C1) solely for stock and distributed the C1 stock in
a Hypothetical D/355(e) Reorganization. Under section 361(c)(2), D would
recognize $60x of gain, an amount equal to the gain in the hypothetical
C1 stock (excess of the $110x fair market value over the $50x basis).
Therefore, D recognizes $20x of gain ($80x-$60x).
Example 3. Predecessor of Distributing owns Controlled stock; gain
duplication--(i) Facts. X owns 100% of the stock of P, which holds
multiple assets, including Asset 2. Y owns 100% of the stock of D. P
owns 35% of the stock of C (Block 1), and D owns the remaining 65% of
the C stock (Block 2). The following steps occur as part of a Plan: P
merges into D in a reorganization under section 368(a)(1)(A), and D
immediately thereafter distributes all of the C stock to X and Y pro
rata. Immediately after the merger, X and Y own 10% and 90%,
respectively, of the D stock, and, prior to the distribution, D owns
Block 1 with a basis of $40x and a fair market value of $45x, and Block
2 with a basis of $10x and a fair market value of $65x. D continues to
hold Asset 2.
(ii) Analysis--(A) Predecessor. Under paragraph (b)(1) of this
section, P is a Predecessor of D. Some of the Controlled stock
distributed in the distribution was Relevant Property of P, the gain on
which was not recognized in full as part of a Plan. See paragraph
(b)(1)(ii)(A)(2) of this section. This Controlled stock is Separated
Property. See paragraph (b)(2)(vii) of this section. Because the gain on
the P Controlled stock was not recognized in full, this stock reflects
the basis of Separated Property. See paragraph (b)(1)(ii)(B) of this
section. Because some of the Controlled stock distributed in the
distribution was Relevant Property of P, C is deemed to have received
Relevant Property of P. See paragraph (b)(1)(iii) of this section.
Further, D continues to hold Relevant Property of P immediately after
the distribution. Therefore, P's Relevant Property has been divided
between C and D.
(B) Acquisition of predecessor stock. Under paragraph (d)(1) of this
section, Y is treated as acquiring stock representing 90% of the voting
power and value of P, as a result of the merger of P into D.
Accordingly, there has been a Planned 50-percent Acquisition of P.
(C) Gain limited. Without regard to the limitations in paragraph (e)
of this section, D would be required to recognize $60x of gain ($110x of
fair market value minus $50x of basis of the C stock held by D), the
Statutory Recognition Amount under section 355(c)(2). However, under
paragraph (e)(2) of this section, D's gain recognized by reason of the
deemed acquisition of P stock will not exceed $5x, an amount equal to
the amount D would have recognized had it transferred Block 1 of the C
stock (Separated Property) to a newly-formed corporation (C1) solely for
stock and distributed the C1 stock to D shareholders in a Hypothetical
D/355(e) Reorganization. For purposes of this computation, the basis and
fair market value of the Block 1 C stock equal their basis and fair
market value in the hands of D immediately before the distribution of C
stock. Under section 361(c)(2), D would recognize $5x of gain, an amount
equal to the gain in the hypothetical C1 stock ($45x-$40x). Therefore, D
recognizes $5x of gain.
Example 4. Controlled stock as Substitute Asset--(i) Facts. X owns
100% of the stock of P, which owns multiple assets, including 100% of
the stock of R and Asset 2. Y owns 100% of the stock of D. The following
steps occur as part of a Plan: P merges into D in a reorganization under
section 368(a)(1)(A) (the P-D reorganization). Immediately after the
merger, X and Y own 10% and 90%, respectively, of the stock of D. D then
causes R to transfer all of its assets to C in a reorganization under
section 368(a)(1) (the R-C reorganization). At the time of the P-D
reorganization, the R stock has a basis of $40x and a fair market value
of $110x. D distributes the stock of C to X and Y, pro rata. D continues
to directly hold Asset 2. Immediately before the distribution, the C
stock held by D that was deemed received in the R-C reorganization has a
basis of $40x and a fair market value of $110x, and all of the stock of
C held by D has a basis of $100x and a fair market value of $200x.
(ii) Analysis--(A) Predecessor. Under paragraph (b)(1) of this
section, P is a Predecessor of D. D is treated as acquiring a block of C
stock in exchange for a direct or indirect interest in R stock (Relevant
Stock) in the R-C reorganization because the basis of D in that C stock
reflects the basis of the R stock. See paragraph (b)(2)(x) of this
section. Further, because the block of C stock is
[[Page 297]]
treated as received in exchange for R stock, that block of C stock is a
Substitute Asset, which is treated as Relevant Property. See paragraph
(b)(2)(vi) of this section. Therefore, some of the C stock distributed
in the distribution was Relevant Property of P, gain on which was not
recognized in full as part of a Plan. This C stock is Separated
Property. See paragraph (b)(2)(vii) of this section. Because the gain on
P's R Stock (for which C stock is substituted) was not recognized in
full, this C stock reflects the basis of Separated Property. See
paragraph (b)(1)(ii)(B) of this section. Finally, under paragraph
(b)(1)(iii) of this section, C is deemed to have received Relevant
Property of P, and, immediately after the distribution, D continues to
hold Asset 2, which is Relevant Property of P. Therefore, P's Relevant
Property has been divided between C and D.
(B) Acquisition of predecessor stock. Under paragraph (d)(1) of this
section, Y is treated as acquiring stock representing 90% of the voting
power and value of P, as a result of the P-D reorganization.
Accordingly, there has been a Planned 50-percent Acquisition of P.
(C) Gain limited. Without regard to the limitations in paragraph (e)
of this section, D would be required to recognize $100x of gain ($200x
of fair market value minus $100x of basis of all C stock held by D), the
Statutory Recognition Amount described in section 355(c)(2). However,
under paragraph (e)(2) of this section, D's gain recognized by reason of
the deemed acquisition of P stock will not exceed $70x, an amount equal
to the amount D would have recognized had it transferred the C stock
deemed received in the R-C reorganization under section (b)(2)(x) of
this section (Separated Property) to a newly-formed corporation (C1)
solely for stock and distributed the C1 stock to D shareholders in a
Hypothetical D/355(e) Reorganization. Under section 361(c)(2), D would
recognize $70x of gain, an amount equal to the gain in the hypothetical
C1 stock (excess of the $110x fair market value over the $40x basis).
Therefore, D recognizes $70x of gain.
Example 5. Predecessor of Distributing; section 351 transaction--(i)
Facts. X owns 100% of the stock of P, which holds multiple assets,
including Asset 1, Asset 2, and Asset 3. Y owns 100% of the stock of D.
The following steps occur as part of a Plan: P transfers Asset 1 and
Asset 2 to D and Y transfers property to D in an exchange qualifying
under section 351. Immediately after the exchange, P and Y own 10% and
90%, respectively, of the stock of D. D then contributes Asset 1 to C in
exchange for additional C stock. D distributes all of the stock of C to
P and Y, pro rata. D continues to directly hold Asset 2, and P continues
to directly hold Asset 3. The contribution and distribution constitute a
reorganization under section 368(a)(1)(D). Immediately before the
distribution, Asset 1 has a basis of $40x and a fair market value of
$110x, and the stock of C held by D has a basis of $100x and a fair
market value of $200x. Following the distribution, and as part of the
same Plan, Z acquires 51% of the P stock.
(ii) Analysis--(A) Predecessor. Under paragraph (b)(1) of this
section, P is a Predecessor of D. Immediately before the distribution,
and as part of a Plan, C holds P Relevant Property (Asset 1), the gain
on which was not recognized in full as part of a Plan. Further, the C
stock distributed in the distribution was acquired by D in exchange for
an interest in P Relevant Property transferred to C, and the basis of
the C stock reflects the basis of Separated Property (Asset 1). In
addition, immediately after the distribution, each of P and D holds
Relevant Property of P. Therefore, P's Relevant Property has been
divided between C, on the one hand, and P and D on the other hand.
(B) Gain limited. Without regard to the limitations in paragraph (e)
of this section, D would be required to recognize $100x of gain ($200x
of fair market value minus $100x of basis of the C stock held by D), the
Statutory Recognition Amount described in section 361(c)(2). However,
under paragraph (e)(2) of this section, D's gain recognized by reason of
Z's acquisition of P stock will not exceed $70x, an amount equal to the
amount D would have recognized had it transferred Asset 1 (Separated
Property) to a newly-formed corporation (C1) solely for voting stock and
distributed the C1 stock to D shareholders in a Hypothetical D/355(e)
Reorganization. Under section 361(c)(2), D would recognize $70x of gain,
an amount equal to the gain in the hypothetical C1 stock (excess of the
$110x fair market value over the $40x basis). Therefore, D recognizes
$70x of gain.
Example 6. Predecessor of Distributing; forward triangular merger--
(i) Facts. X owns 100% of the stock of P, which owns multiple assets,
including 100% of the stock of R and Asset 2. Y owns 100% of the stock
of D. The following steps occur as part of a Plan: R merges into C in a
reorganization under section 368(a)(1)(A) and (2)(D). Immediately after
the merger P and Y own 10% and 90%, respectively, of the stock of D. D
distributes the stock of C to P and Y pro rata. Immediately before the
distribution, R's directly-held assets have a basis of $40x and a fair
market value of $110x. Immediately before the distribution, D has a
basis in the C stock of $60x and a fair market value of $200x. Pursuant
to the same Plan, Z acquires 51% of P stock. P continues to hold Asset
2.
(ii) Analysis--(A) Predecessor. Under paragraph (b)(1) of this
section, P is a Predecessor of D because immediately before the
distribution, and as part of a Plan, C holds directly P Relevant
Property (Underlying Property of R) the gain on which was not
[[Page 298]]
recognized in full as part of a Plan. Further, the C stock distributed
in the distribution was acquired by D, in part, in deemed exchange for P
Relevant Property (see paragraph (b)(2)(x) of this section), and the C
stock reflects the basis of Separated Property (Underlying Property of
R). See Sec. 1.358-6(c)(1). In addition, immediately after the
distribution, P's Relevant Property has been divided between C, on the
one hand, and P and D on the other hand.
(B) Gain limited. Without regard to the limitations in paragraph (e)
of this section, D would be required to recognize $140x of gain ($200x
of fair market value minus $60x of basis of the C stock held by D), the
Statutory Recognition Amount under section 355(c)(2). However, under
paragraph (e)(2) of this section, D's gain recognized by reason of the
51% acquisition of P stock by Z will not exceed $70x, an amount equal to
the amount D would have recognized had it transferred the Underlying
Property of R to a newly-formed corporation (C1) solely in exchange for
stock and distributed the C1 stock to D shareholders in a Hypothetical
D/355(e) Reorganization. Under section 361(c)(2), D would recognize $70x
of gain, an amount equal to the gain in hypothetical C1 stock (excess of
the $110x aggregate fair market value of the Underlying Property of R
over the $40x basis). Therefore, D recognizes $70x of gain.
Example 7. Potential Predecessor in sequential distributions--(i)
Facts. X owns 100% of P, which owns multiple assets, including Asset 1
and Asset 2. Y owns 100% of the stock of D, D owns 100% of the stock of
D1, and D1 owns 100% of the stock of C. The following steps occur as
part of a Plan: P merges into D1 in a reorganization under section
368(a)(1)(A). Immediately after the merger, X and D own 10% and 90%,
respectively, of the stock of D1. D1 contributes Asset 1 to C in
exchange for additional C stock, but D1 continues to hold Asset 2. D1
distributes the stock of C to D and X, pro rata in a distribution to
which section 355 applies (First Distribution), and D distributes to Y
all of the stock of C that it received from D1 in a distribution to
which section 355 applies (Second Distribution). The contribution of
Asset 1 by D1 to C and the First Distribution constitute a
reorganization under section 368(a)(1)(D). Immediately before the First
Distribution and the Second Distribution, Asset 1 has a basis of $10x
and a fair market value of $60x, and the stock of C has a fair market
value of $200x. Immediately before the First Distribution, the stock of
C held by D1 has a basis of $100x. The stock of C held by D immediately
before the Second Distribution has a basis of $80x.
(ii) Analysis--(A) Predecessor in First Distribution. Under
paragraph (b)(1) of this section, P is a Predecessor of D1. Immediately
before the First Distribution, and as part of a Plan, C holds P Relevant
Property (Asset 1), the gain on which was not recognized in full as part
of a Plan. Further, the C stock distributed in the First Distribution
was directly acquired by D1 in exchange for P Relevant Property, and it
reflects the basis of Separated Property (Asset 1). In addition,
immediately after the First Distribution, each of C and D1 continues to
hold Relevant Property of P. Therefore, P's Relevant Property has been
divided between C and D1.
(B) Predecessor in Second Distribution. Under paragraph (b)(1) of
this section, P is not a Predecessor of D. Immediately before the Second
Distribution, the stock of C distributed does not reflect the basis of
Separated Property (Asset 1). Because there has been no Planned 50-
percent Acquisition of D, C, or a Predecessor of D, there is no
application of section 355(e) to the Second Distribution.
(C) Gain on First Distribution. By application of section 355(f),
section 355 and the regulations thereunder (including the gain
limitation rules in paragraph (e) of this section) would not apply to
the First Distribution. Therefore, D1 would be required to recognize
$100x of gain (excess of the $200x fair market value over the $100x
basis of C stock held by D1) under section 311(b), and D would be
treated as receiving a distribution of $180x to which section 301
applied. However, under paragraph (g)(1) of this section, section 355(f)
will not apply to the First Distribution. As a result, section 355,
including the gain limitation rules of paragraph (e)(2) of this section,
will apply to the First Distribution. Under paragraph (e)(2) of this
section, D1's gain recognized by reason of the deemed acquisition of P
stock by D will not exceed $50x, an amount equal to the amount D1 would
have recognized had it transferred Asset 1 (Separated Property) to a
newly-formed corporation (C1) solely for stock and distributed the C1
stock to D1 shareholders in a Hypothetical D/355(e) Reorganization.
Under section 361(c)(2), D1 would recognize $50x of gain, an amount
equal to the gain in the hypothetical C1 stock (excess of the $60x fair
market value over the $10x basis). Therefore, D1 recognizes $50x of
gain. Under paragraph (g)(2) of this section, however, D1 may choose to
apply section 355(f) to the First Distribution, in which case D1 would
recognize $100x of gain under section 311(b) and section 301 would apply
to the distribution of C stock to D.
Example 8. Sequential Predecessors--(i) Facts. X owns 100% of P1,
which holds multiple assets, including Asset 1 and Asset 2. Y owns 100%
of P2, which holds Asset 3, and Z owns 100% of D. The following steps
occur as part of a Plan: P1 merges into P2 in a reorganization under
368(a)(1)(A). Immediately after the merger, X and Y own 10% and 90%,
respectively, of the stock of P2. P2 then transfers Asset 1 to D and Z
transfers property to D in an exchange qualifying under section 351. As
a result of the exchange, P2 and Z own 10% and 90%, respectively, of the
stock
[[Page 299]]
of D. D then contributes Asset 1 to C in exchange for additional C
stock, and P2 retains Asset 2 and Asset 3. D distributes all of the
stock of C to P2 and Z, pro rata. The contribution and distribution
constitute a reorganization under 368(a)(1)(D), and D recognizes no gain
under section 361. Immediately before the distribution, Asset 1 has a
basis of $40x and a fair market value of $100x, and the stock of C held
by D has a basis of $100x and a fair market value of $200x.
(ii) Analysis--(A) P2 as Predecessor of D. Under paragraph (b)(1) of
this section, P2 is a Predecessor of D. Immediately before the
distribution, and as part of a Plan, C holds P2 Relevant Property (Asset
1), the gain on which was not recognized in full as part of a Plan.
Further, the C stock distributed in the distribution was acquired by D
in exchange for a direct interest in P2 Relevant Property (Asset 1), and
it reflects the basis in Separated Property (Asset 1). In addition,
immediately after the distribution, P2 continues to hold P2 Relevant
Property. Therefore, P2's Relevant Property has been divided between C
and P2.
(B) P1 as Predecessor of D. Under paragraph (b)(1) of this section,
P1 is a Predecessor of D. P1 transferred property to P2 (a Predecessor
of D) as part of a Plan. Immediately before the distribution, and as
part of a Plan, C holds P1 Relevant Property (Asset 1) the gain on which
was not recognized in full as part of a Plan. Further, the C stock
distributed in the distribution was acquired by D in exchange for a
direct interest in P1 Relevant Property, and it reflects the basis in
Separated Property (Asset 1). In addition, immediately after the
distribution, P2 (a successor of P1 under paragraph (b)(2)(iii) of this
section) continues to hold Relevant Property of P1. Therefore, P1's
Relevant Property has been divided between C and P2 (the successor of
P1).
(C) Acquisition of predecessor stock. Under paragraph (d)(1) of this
section, Y is treated as acquiring stock representing 90% of the voting
power and value of P1 as a result of the merger of P1 into P2.
Accordingly, there has been a Planned 50-percent Acquisition of P1.
There is no acquisition of P2 stock.
(D) Gain limited. Without regard to the limitations in paragraph (e)
of this section, D would be required to recognize $100x of gain ($200x
of aggregate fair market value minus $100x of aggregate basis of the C
stock held by D), the Statutory Recognition Amount described in section
361(c)(2), because there has been a Planned 50-percent Acquisition of
P1, a Predecessor of D. However, under paragraph (e)(2) of this section,
D's gain recognized by reason of the deemed acquisition of P1 stock will
not exceed $60x, an amount equal to the amount D would have recognized
had it transferred Asset 1 (Separated Property) to a newly-formed
corporation (C1) solely for stock and distributed the C1 stock to D
shareholders in a Hypothetical D/355(e) Reorganization. Under section
361(c)(2), D would recognize $60x, an amount equal to the gain in
hypothetical C1 stock (excess of the $100x fair market over the $40x
basis). The fact that there is no Planned 50-percent Acquisition of
either P2 or D does not change this result. Therefore, D recognizes $60x
of gain.
Example 9. Multiple Predecessors of Distributing--(i) Facts. X owns
100% of the stock of P1, which holds multiple assets, including Asset 1
and Asset 3. Y owns 100% of the stock of P2, which holds multiple
assets, including Asset 2 and Asset 4. Z owns 100% of the stock of D.
The following steps occur as part of a Plan: Each of P1 and P2 merges
into D in a reorganization under section 368(a)(1)(A). Immediately after
the mergers, each of X and Y owns 10%, and Z owns 80%, of the stock of
D. D then contributes to C Asset 1 (acquired from P1), and Asset 2
(acquired from P2). In exchange for Asset 1 and Asset 2, D receives
additional C stock. D distributes the stock of C to X, Y, and Z, pro
rata. D's contribution of Asset 1 and Asset 2 and the distribution
constitute a reorganization under section 368(a)(1)(D). D continues to
hold Asset 3 and Asset 4. Immediately before the distribution, Asset 1
has a basis of $50x and a fair market value of $110x, Asset 2 has a
basis of $70x and a fair market value of $90x, and the stock of C held
by D has a basis of $130x and a fair market value of $220x.
(ii) Analysis--(A) Predecessor. Under paragraph (b)(1) of this
section, each of P1 and P2 is a Predecessor of D. Immediately before the
distribution and as part of a Plan, C holds P1 Relevant Property (Asset
1) and P2 Relevant Property (Asset 2), each of which was transferred as
part of a Plan without full gain recognition. The C stock distributed in
the distribution was acquired by D in exchange for Asset 1 and Asset 2,
and that stock reflects the basis in both Asset 1 and Asset 2 (Relevant
Property). In addition, immediately after the distribution, D continues
to hold Relevant Property of P1 and P2. Therefore, each of P1's and P2's
Relevant Property has been divided between C and D.
(B) Acquisition of Predecessor stock. Under paragraph (d)(1) of this
section, Z is treated as acquiring stock representing 80% of the voting
power and value of each of P1 and P2 as a result of the mergers of P1
and P2 into D. Accordingly, there has been a Planned 50-percent
Acquisition of P1 and P2.
(C) Gain limited. Without regard to the limitations in paragraph (e)
of this section, D would be required to recognize $90x of gain ($220x of
fair market value minus $130x of basis of the C stock held by D), the
Statutory Recognition Amount under section 361(c)(2). However, under
paragraph (e)(2) of this section, D's gain recognized by reason of the
deemed acquisition of P1 stock will not exceed $60x ($110x fair market
value minus
[[Page 300]]
$50x basis), an amount equal to the amount D would have recognized had
it transferred Asset 1 (Separated Property) to a newly-formed
corporation (C1) solely for stock and distributed that (C1) stock to D
shareholders in a Hypothetical D/355(e) Reorganization. D's gain
recognized by reason of the deemed acquisition of P2 stock will not
exceed $20x ($90x fair market value minus $70x basis), an amount equal
to the amount D would have recognized had it transferred Asset 2
(Separated Property) to a second newly-formed corporation (C2) solely
for stock and distributed the (C2) stock to D shareholders in a
Hypothetical D/355(e) Reorganization. Therefore, D will recognize $80x
of gain ($60x + $20x).
Example 10. Successor of Controlled--(i) Facts. X owns 100% of the
stock of each of D and R. The following steps occur as part of a Plan: D
distributes all of its C stock to X. Immediately before the
Distribution, D's C stock has a basis of $10x and a fair market value of
$30x. C then merges into R in a reorganization under section
368(a)(1)(D). Immediately after the merger, X owns all of the R stock.
As part of the same Plan, Z purchases 51% of the stock of R from X.
(ii) Analysis--(A) Successor. Under paragraph (c)(2) of this
section, R is a Successor of C because after the distribution C
transfers property to R in a section 381 transaction. Accordingly, under
paragraph (d)(2) of this section, Z's acquisition of stock of R is
treated as an acquisition of stock of C. Therefore, Z is treated as
acquiring 51% of the stock of C.
(B) Gain not limited. The special gain limitation rules in paragraph
(e)(2) or (3) of this section do not apply because there is not an
acquisition of stock of D or a Predecessor of D. Therefore, because the
distribution and Z's acquisition of a 51% interest in R are part of a
Plan, D is required to recognize gain in the amount of $20x ($30x fair
market value minus $10x basis of the C stock held by D), the Statutory
Recognition Amount under section 355(c)(2).
Example 11. Multiple Successors--(i) Facts. X owns 100% of the stock
of both D and R. Y owns 100% of the stock of S. The following steps
occur as part of a Plan: D distributes all of the C stock to X.
Immediately after the distribution, D merges into R in a reorganization
under section 368(a)(1)(A). Following the merger, R merges into S in a
reorganization under section 368(a)(1)(A). As a result of the merger of
R into S, X and Y own 10% and 90%, respectively, of the S stock.
Immediately before the distribution, D's C stock has a basis of $10x and
a fair market value of $30x.
(ii) Analysis--(A) Successor. Under paragraph (c)(2)(i) of this
section, R is a successor of D because, after the distribution, D
transfers property to R in a section 381 transaction. Under paragraph
(c)(2)(ii), S is also a successor of D because R (a successor of D)
transfers property to S in a section 381 transaction.
(B) Acquisition of Successor Stock. Under paragraph (d)(1) of this
section, there is no deemed acquisition of D stock as a result of the
merger of D into R because X wholly owns the stock of D before the
merger and wholly owns the stock of R after the merger. Under paragraph
(d)(1) of this section, Y is treated as acquiring stock representing 90%
of the voting power and value of R (Successor of D) as a result of the
merger of R into S. Under paragraph (d)(2) of this section, an
acquisition of the R stock is also treated as an acquisition of the D
stock.
(C) Gain. The special gain limitation rules in paragraph (e)(2) or
(3) of this section do not apply because there is not an acquisition of
stock of D or a Predecessor of D. Therefore, because there is a Planned
50-percent Acquisition of R (Successor of D), D is required to recognize
$20x of gain ($30x fair market value minus $10x basis of the C stock
held by D), the Statutory Recognition Amount described in section
355(c)(2).
(i) Effective/applicability date--(1) In general. Except as provided
in paragraph (i)(2) or (3) of this section, this section applies to
distributions occurring after January 18, 2017.
(2) Transition rule--(i) In general. Except as provided in paragraph
(i)(3) of this section, this section does not apply to a distribution
(as defined in paragraph (i)(2)(ii) of this section) that is--
(A) Made pursuant to a binding agreement in effect on or before
December 16, 2016 and at all times thereafter;
(B) Described in a ruling request submitted to the Internal Revenue
Service on or before December 16, 2016; or
(C) Described on or before December 16, 2016 in a public
announcement or in a filing with the Securities and Exchange Commission.
(ii) Definition of distribution. For purposes of paragraphs
(i)(2)(i) and (3) of this section, references to a distribution include
a reference to a distribution and other related pre-distribution
transactions that together effect a division of the assets of a
Predecessor of Distributing. Therefore, for example, if a corporation
would qualify as a Predecessor of Distributing under paragraph (b)(1) of
this section, Distributing may claim the benefit of the transition rule
of paragraph (i)(2) of this section only
[[Page 301]]
if all steps relevant to the determination of Predecessor of
Distributing status are described in the binding agreement, ruling
request, announcement, or filing described in paragraph (i)(2)(i) of
this section.
(3) Exception. Notwithstanding paragraph (i)(1) or (2) of this
section, Distributing and any affiliated group that it is a member of as
of the beginning of the date on which a distribution (as defined in
paragraph (i)(2)(ii) of this section) may apply this section in its
entirety to that distribution if it occurs after November 22, 2004.
However, under this paragraph (i)(3), taxpayers must consistently apply
this section in its entirety to all distributions occurring after
November 22, 2004, that are part of the same Plan.
(j) Expiration date. The applicability of this section expires on or
before December 16, 2019.
[T.D. 9805, 81 FR 91747, Dec. 19, 2016]
Sec. 1.356-1 Receipt of additional consideration in connection with
an exchange.
(a) If in any exchange to which the provisions of section 354 or
section 355 would apply except for the fact that there is received by
the shareholders or security holders other property (in addition to
property permitted to be received without recognition of gain by such
sections) or money, then--
(1) The gain, if any, to the taxpayer shall be recognized in an
amount not in excess of the sum of the money and the fair market value
of the other property, but,
(2) The loss, if any, to the taxpayer from the exchange or
distribution shall not be recognized to any extent.
(b) For purposes of computing the gain, if any, recognized pursuant
to section 356 and paragraph (a)(1) of this section, to the extent the
terms of the exchange specify the other property or money that is
received in exchange for a particular share of stock or security
surrendered or a particular class of stock or securities surrendered,
such terms shall control provided that such terms are economically
reasonable. To the extent the terms of the exchange do not specify the
other property or money that is received in exchange for a particular
share of stock or security surrendered or a particular class of stock or
securities surrendered, a pro rata portion of the other property and
money received shall be treated as received in exchange for each share
of stock and security surrendered, based on the fair market value of
such surrendered share of stock or security.
(c) If the distribution of such other property or money by or on
behalf of a corporation has the effect of the distribution of a
dividend, then there shall be chargeable to each distributee (either an
individual or a corporation)--
(1) As a dividend, such an amount of the gain recognized as is not
in excess of the distributee's ratable share of the undistributed
earnings and profits of the corporation accumulated after February 28,
1913, and
(2) As a gain from the exchange of property, the remainder of the
gain so recognized.
(d) The rules of this section may be illustrated by the following
examples:
Example 1. In an exchange to which the provisions of section 356
apply and to which section 354 would apply but for the receipt of
property not permitted to be received without the recognition of gain or
loss, A (either an individual or a corporation), received the following
in exchange for a share of stock having an adjusted basis to A of $85:
------------------------------------------------------------------------
------------------------------------------------------------------------
One share of stock worth................................... $100
Cash....................................................... 25
Other property (basis $25) fair market value............... 50
Total fair market value of consideration received...... 175
Adjusted basis of stock surrendered in exchange........ 85
Total gain......................................... 90
Gain to be recognized, limited to cash and other property 75
received..................................................
A's pro rata share of earnings and profits accumulated 30
after February 28, 1913 (taxable dividend)................
Remainder to be treated as a gain from the exchange of 45
property..............................................
------------------------------------------------------------------------
[[Page 302]]
Example 2. If, in Example 1, A's stock had an adjusted basis to A of
$200, A would have realized a loss of $25 on the exchange, which loss
would not be recognized.
Example 3. (i) Facts. J, an individual, acquired 10 shares of Class
A stock of Corporation X on Date 1 for $3 each and 10 shares of Class B
stock of Corporation X on Date 2 for $9 each. On Date 3, Corporation Y
acquires the assets of Corporation X in a reorganization under section
368(a)(1)(A). Pursuant to the terms of the plan of reorganization, J
surrenders all of J's shares of Corporation X stock for 10 shares of
Corporation Y stock and $100 of cash. On the date of the exchange, the
fair market value of each share of Class A stock of Corporation X is
$10, the fair market value of each share of Class B stock of Corporation
X is $10, and the fair market value of each share of Corporation Y stock
is $10. The terms of the exchange do not specify that shares of
Corporation Y stock or cash are received in exchange for particular
shares of Class A stock or Class B stock of Corporation X.
(ii) Analysis. Under paragraph (b) of this section, because the
terms of the exchange do not specify that the cash is received in
exchange for shares of Class A or Class B stock of Corporation X, a pro
rata portion of the cash received is treated as received in exchange for
each share of Class A stock of Corporation X and each share of Class B
stock of Corporation X based on the fair market value of the surrendered
shares. Therefore, J is treated as receiving shares of Corporation Y
stock with a fair market value of $50 and $50 of cash in exchange for
its shares of Class A stock of Corporation X and shares of Corporation Y
stock with a fair market value of $50 and $50 of cash in exchange for
its shares of Class B stock of Corporation X. J realizes a gain of $70
on the exchange of shares of Class A stock, $50 of which is recognized
under section 356 and paragraph (a) of this section, and J realizes a
gain of $10 on the exchange of shares of Class B stock of Corporation X,
all of which is recognized under section 356 and paragraph (a) of this
section. Assuming that J's gain recognized is not treated as a dividend
under section 356(a)(2), such gain shall be treated as gain from the
exchange of property.
Example 4. (i) Facts. The facts are the same as in Example 3, except
that the terms of the plan of reorganization specify that J receives 10
shares of stock of Corporation Y in exchange for J's shares of Class A
stock of Corporation X and $100 of cash in exchange for J's shares of
Class B stock of Corporation X.
(ii) Analysis. Under paragraph (b) of this section, because the
terms of the exchange specify that J receives 10 shares of stock of
Corporation Y in exchange for J's shares of Class A stock of Corporation
X and $100 of cash in exchange for J's shares of Class B stock of
Corporation X and such terms are economically reasonable, such terms
control. J realizes a gain of $70 on the exchange of shares of Class A
stock, none of which is recognized under section 356 and paragraph (a)
of this section, and J realizes a gain of $10 on the exchange of shares
of Class B stock of Corporation X, all of which is recognized under
section 356 and paragraph (a) of this section.
(e) Section 301(b)(1)(B) and section 301(d)(2) do not apply to a
distribution of ``other property'' to a corporate shareholder if such
distribution is within the provisions of section 356.
(f) See paragraph (l) of Sec. 1.301-1 for certain transactions
which are not within the scope of section 356.
(g) This section applies to exchanges and distributions of stock and
securities occurring on or after January 23, 2006.
[T.D. 9244, 71 FR 4268, Jan. 26, 2006]
Sec. 1.356-2 Receipt of additional consideration not in connection
with an exchange.
(a) If, in a transaction to which section 355 would apply except for
the fact that a shareholder (individual or corporate) receives property
permitted by section 355 to be received without the recognition of gain,
together with other property or money, without the surrender of any
stock or securities of the distributing corporation, then the sum of the
money and the fair market value of the other property as of the date of
the distribution shall be treated as a distribution of property to which
the rules of section 301 (other than section 301(b) and section 301(d))
apply. See section 358 for determination of basis of such other
property.
(b) Paragraph (a) of this section may be illustrated by the
following examples:
Example 1. Individuals A and B each own 50 of the 100 outstanding
shares of common stock of Corporation X. Corporation X owns all of the
stock of Corporation Y, 100 shares. Corporation X distributes to each
shareholder 50 shares of the stock of Corporation Y plus $100 cash
without requiring the surrender of any shares of its own stock. The $100
cash received by each is treated as a distribution of property to which
the rules of section 301 apply.
Example 2. If, in the above example, Corporation X distributes 50
shares of stock of Corporation Y to A and 30 shares of such
[[Page 303]]
stock plus $100 cash to B without requiring the surrender of any of its
own stock, the amount of cash received by B is treated as a distribution
of property to which the rules of section 301 apply.
Sec. 1.356-3 Rules for treatment of securities as ``other property''.
(a) As a general rule, for purposes of section 356, the term other
property includes securities. However, it does not include securities
permitted under section 354 or section 355 to be received tax free.
Thus, when securities are surrendered in a transaction to which section
354 or section 355 is applicable, the characterization of the securities
received as ``other property'' does not include securities received
where the principal amount of such securities does not exceed the
principal amount of securities surrendered in the transaction. If a
greater principal amount of securities is received in an exchange
described in section 354 (other than subsection (c) or (d) thereof) or
section 355 over the principal amount of securities surrendered, the
term other property includes the fair market value of such excess
principal amount as of the date of the exchange. If no securities are
surrendered in exchange, the term other property includes the fair
market value, as of the date of receipt, of the entire principal amount
of the securities received.
(b) Except as provided in Sec. 1.356-6, for purposes of this
section, a right to acquire stock that is treated as a security for
purposes of section 354 or 355 has no principal amount. Thus, such right
is not other property when received in a transaction to which section
356 applies (regardless of whether securities are surrendered in the
exchange). This paragraph (b) applies to transactions occurring on or
after March 9, 1998.
(c) In the examples in this paragraph (c), stock means common stock
and warrants means rights to acquire common stock. The following
examples illustrate the rules of paragraph (a) of this section:
Example 1. A, an individual, exchanged 100 shares of stock for 100
shares of stock and a security in the principal amount of $1,000 with a
fair market value of $990. The amount of $990 is treated as ``other
property.''
Example 2. B, an individual, exchanged 100 shares of stock and a
security in the principal amount of $1,000 for 300 shares of stock and a
security in the principal amount of $1,500. The security had a fair
market value on the date of receipt of $1,575. The fair market value of
the excess principal amount, or $525, is treated as ``other property.''
Example 3. C, an individual, exchanged a security in the principal
amount of $1,000 for 100 shares of stock and a security in the principal
amount of $900. No part of the security received is treated as ``other
property.''
Example 4. D, an individual, exchanged a security in the principal
amount of $1,000 for 100 shares of stock and a security in the principal
amount of $1,200 with a fair market value of $1,100. The fair market
value of the excess principal amount, or $183.33, is treated as ``other
property.''
Example 5. E, an individual, exchanged a security in the principal
amount of $1,000 for another security in the principal amount of $1,200
with a fair market value of $1,080. The fair market value of the excess
principal amount, or $180, is treated as ``other property.''
Example 6. F, an individual, exchanged a security in the principal
amount of $1,000 for two different securities each in the principal
amount of $750. One of the securities had a fair market value of $750,
the other had a fair market value of $600. One-third of the fair market
value of each security ($250 and $200) is treated as ``other property.''
Example 7. G, an individual, exchanged stock for stock and a
warrant. The warrant had no principal amount. Thus, G received no excess
principal amount within the meaning of section 356(d).
Example 8. H, an individual, exchanged a warrant for stock and a
warrant. The warrants had no principal amount. Thus, H received no
excess principal amount within the meaning of section 356(d).
Example 9. I, an individual, exchanged a warrant for stock and a
debt security. The warrant had no principal amount. The debt security
had a $100 principal amount. I received $100 of excess principal amount
within the meaning of section 356(d).
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7616, 44 FR
26869, May 8, 1979; T.D. 8752, 63 FR 410, Jan. 6, 1998; T.D. 8882, 65 FR
31078, May 16, 2000]
Sec. 1.356-4 Exchanges for section 306 stock.
If, in a transaction to which section 356 is applicable, other
property or money is received in exchange for section 306 stock, an
amount equal to the fair market value of the property plus the money, if
any, shall be treated as a
[[Page 304]]
distribution of property to which section 301 is applicable. The
determination of whether section 306 stock is surrendered for other
property (including money) is a question of fact to be decided under all
of the circumstances of each case. Ordinarily, the other property
(including money) received will first be treated as received in exchange
for any section 306 stock owned by a shareholder prior to such
transaction. For example, if a shareholder who owns a share of common
stock (having a basis to him of $100) and a share of preferred stock
which is section 306 stock (having a basis to him of $100) surrenders
both shares in a transaction to which section 356 is applicable for one
share of common stock having a fair market value of $80 and one $100
bond having a fair market value of $100, the bond will be deemed
received in exchange for the section 306 stock and it will be treated as
a distribution to which section 301 is applicable to the extent of its
entire fair market value ($100).
Sec. 1.356-5 Transactions involving gift or compensation.
With respect to transactions described in sections 354, 355, or 356,
but which--
(a) Result in a gift, see section 2501 and following, and the
regulations pertaining thereto, or
(b) Have the effect of the payment of compensation, see section
61(a)(1), and the regulations pertaining thereto.
Sec. 1.356-6 Rules for treatment of nonqualified preferred stock
as other property.
(a) In general. For purposes of Sec. Sec. 1.354-1(e), 1.355-1(c),
and 1.356-3(b), the terms stock and securities do not include--
(1) Nonqualified preferred stock, as defined in section 351(g)(2),
received in exchange for (or in a distribution with respect to) stock,
or a right to acquire stock, other than nonqualified preferred stock; or
(2) A right to acquire such nonqualified preferred stock, received
in exchange for (or in a distribution with respect to) stock, or a right
to acquire stock, other than nonqualified preferred stock.
(b) Exceptions. The following exceptions apply:
(1) Certain recapitalizations. Paragraph (a) of this section does
not apply in the case of a recapitalization under section 368(a)(1)(E)
of a family-owned corporation as described in section
354(a)(2)(C)(ii)(II).
(2) Transition rule. Paragraph (a) of this section does not apply to
a transaction described in section 1014(f)(2) of the Taxpayer Relief Act
of 1997 (111 Stat. 921).
(c) Effective date. This section applies to nonqualified preferred
stock, or a right to acquire such stock, received in connection with a
transaction occurring on or after March 9, 1998.
[T.D. 8753, 63 FR 411, Jan. 6, 1998. Redesignated by T.D. 8882, 65 FR
31078, May 16, 2000]
Sec. 1.356-7 Rules for treatment of nonqualified preferred stock and
other preferred stock received in certain transactions.
(a) Stock issued prior to effective date. Stock described in section
351(g)(2) is nonqualified preferred stock (NQPS) regardless of the date
on which the stock is issued. However, sections 351(g), 354(a)(2)(C),
355(a)(3)(D), 356(e), and 1036(b) do not apply to any transaction
occurring prior to June 9, 1997, or to any transaction occurring after
June 8, 1997, that is described in section 1014(f)(2) of the Taxpayer
Relief Act of 1997, Public Law 105-34 (111 Stat. 788, 921). For purposes
of this section, preferred stock that is not NQPS is referred to as
Qualified Preferred Stock (QPS).
(b) Receipt of preferred stock in exchange for (or distribution on)
substantially identical preferred stock--(1) General rule. For purposes
of sections 354(a)(2)(C)(i), 355(a)(3)(D), and 356(e)(2), preferred
stock is QPS, even though it is described in section 351(g)(2), if it is
received in exchange for (or in a distribution with respect to)
preferred stock (the original preferred stock) that is QPS, provided--
(i) The original preferred stock is QPS solely because, on its issue
date, either a right or obligation described in clause (i), (ii), or
(iii) of section 351(g)(2)(A) was not exercisable until after a 20-year
period beginning on the issue date, or the right or obligation
[[Page 305]]
was exercisable within the 20-year period beginning on the issue date
but was subject to a contingency which made remote the likelihood of the
redemption or purchase, or the issuer's (or a related party's) right to
redeem or purchase the stock was not more likely than not to be
exercised within a 20-year period beginning on the issue date, or
because of any combination of these reasons; and
(ii) The stock received is substantially identical to the original
preferred stock.
(2) Substantially identical. The stock received is substantially
identical to the original preferred stock if--
(i) The stock received does not contain any term or terms that, in
relation to any term or terms of the original preferred stock, either
decrease the period in which a right or obligation described in clause
(i), (ii), or (iii) of section 351(g)(2)(A) can be exercised, or
increase the likelihood that such a right or obligation will be
exercised, or accelerate the timing of the returns from the stock
instrument, including the timing of actual or deemed dividends or other
distributions received on the stock; and
(ii) As a result of the exchange or distribution, exercise of the
right or obligation does not become more likely than not to occur within
a 20-year period beginning on the issue date of the original preferred
stock.
(3) Treatment of stock received. The stock received will continue to
be treated as QPS in subsequent transactions involving such stock, and
the principles of this paragraph (b) apply to such transactions as
though the stock received is the original preferred stock issued on the
same date as the original preferred stock.
(c) Stock transferred for services. For purposes of sections
351(g)(1), 354(a)(2)(C)(i), 355(a)(3)(D), and 356(e)(2), preferred stock
containing a right or obligation described in clause (i), (ii) or (iii)
of section 351(g)(2)(A) that is exercisable only upon the holder's
separation from service from the issuer or a related person (as
described in section 351(g)(3)(B)) will be treated as transferred in
connection with the performance of services (and representing reasonable
compensation) within the meaning of section 351(g)(2)(C)(i)(II), if such
preferred stock is received in exchange for (or in a distribution with
respect to) existing stock containing a similar right or obligation
(exercisable only upon separation from service) and the existing stock
was transferred in connection with the performance of services for the
issuer or a related person (and represented reasonable compensation when
transferred). In applying the rules relating to NQPS, the preferred
stock received will continue to be treated as transferred in connection
with the performance of services (and representing reasonable
compensation) in subsequent transactions involving such stock, and the
principles of this paragraph (c) apply to such transactions.
(d) Rights to acquire stock. For purposes of Sec. 1.356-6, the
principles of paragraphs (a), (b), and (c) of this section apply.
(e) Examples. In the examples in this paragraph (e), T and P are
corporations, A is a shareholder of T, and A surrenders and receives (in
addition to the stock exchanged in the examples) common stock in the
reorganizations described. The following examples illustrate paragraphs
(a), (b), and (c) of this section:
Example 1. In 1995, A transfers property to T and receives T
preferred stock that is described in section 351(g)(2) in a transaction
under section 351. In 2002, pursuant to a reorganization under section
368(a)(1)(B), A surrenders the T preferred stock in exchange for P NQPS.
Under paragraph (a) of this section, the T preferred stock issued to A
in 1995 is NQPS. However, because section 351(g) does not apply to
transactions occurring before June 9, 1997, the T NQPS was not ``other
property'' within the meaning of section 351(b) when issued in 1995.
Under sections 354(a)(2)(C) and 356(e)(2), the P NQPS received by A in
2002 is not ``other property'' within the meaning of section
356(a)(1)(B) because it is received in exchange for NQPS.
Example 2. T issues QPS to A on January 1, 2000 that is not NQPS
solely because the holder cannot require T to redeem the stock until
January 1, 2022. In 2007, pursuant to a reorganization under section
368(a)(1)(A) in which T merges into P, A surrenders the T preferred
stock in exchange for P preferred stock with terms that are identical to
the terms of the T preferred stock, including the term that the holder
cannot require the redemption of the stock until January 1, 2022.
Because the P stock and the T stock have
[[Page 306]]
identical terms, and because the redemption did not become more likely
than not to occur within the 20-year period that begins on January 1,
2000 (which is the issue date of the T preferred stock) as a result of
the exchange, under paragraph (b) of this section, the P preferred stock
received by A is treated as QPS. Thus, the P preferred stock received is
not ``other property'' within the meaning of section 356(a)(1)(B).
Example 3. The facts are the same as in Example 2, except that, in
addition, in 2010, pursuant to a recapitalization of P under section
368(a)(1)(E), A exchanges the P preferred stock above for P NQPS that
permits the holder to require P to redeem the stock in 2020. Under
paragraph (b) of this section, the P preferred stock surrendered by A is
treated as QPS. Because the P preferred stock received by A in the
recapitalization is not substantially identical to the P preferred stock
surrendered, the P preferred stock received by A is not treated as QPS.
Thus, the P preferred stock received is ``other property'' within the
meaning of section 356(a)(1)(B).
Example 4. T issues preferred stock to A on January 1, 2000 that
permits the holder to require T to redeem the stock on January 1, 2018,
or at any time thereafter, but which is not NQPS solely because, as of
the issue date, the holder's right to redeem is subject to a contingency
that makes remote the likelihood of redemption on or before January 1,
2020. In 2007, pursuant to a reorganization under section 368(a)(1)(A)
in which T merges into P, A surrenders the T preferred stock in exchange
for P preferred stock with terms that are identical to the terms of the
T preferred stock. Immediately before the exchange, the contingency to
which the holder's right to cause redemption of the T stock is subject
makes remote the likelihood of redemption before January 1, 2020, but
the P stock, although subject to the same contingency, is more likely
than not to be redeemed before January 1, 2020. Because, as a result of
the exchange of T stock for P stock, the exercise of the redemption
right became more likely than not to occur within the 20-year period
beginning on the issue date of the T preferred stock, the P preferred
stock received by A is not substantially identical to the T stock
surrendered, and is not treated as QPS. Thus, the P preferred stock
received is ``other property'' within the meaning of section
356(a)(1)(B).
Example 5. The facts are the same as in Example 4, except that,
immediately before the merger of T into P in 2007, the contingency to
which the holder's right to cause redemption of the T stock is subject
makes it more likely than not that the T stock will be redeemed before
January 1, 2020. Because exercise of the redemption right did not become
more likely than not to occur within the 20-year period beginning on the
issue date of the T preferred stock as a result of the exchange, the P
preferred stock received by A is substantially identical to the T stock
surrendered, and is treated as QPS. Thus, the P preferred stock received
is not ``other property'' within the meaning of section 356(a)(1)(B).
Example 6. A is an employee of T. In connection with A's performance
of services for T, T transfers to A in 2000 an amount of T common stock
that represents reasonable compensation. The T common stock contains a
term granting A the right to require T to redeem the common stock, but
only upon A's separation from service from T. In 2005, pursuant to a
reorganization under section 368(a)(1)(A) in which T merges into P, A
receives, in exchange for A's T common stock, P preferred stock granting
a similar redemption right upon A's separation from P's service. Under
paragraph (c) of this section, the P preferred stock received by A is
treated as transferred in connection with the performance of services
(and representing reasonable compensation) within the meaning of section
351(g)(2)(C)(i)(II). Thus, the P preferred stock received by A is QPS.
(f) Effective dates. This section applies to transactions occurring
on or after October 2, 2000.
[T.D. 8904, 65 FR 58651, Oct. 2, 2000]
Sec. 1.357-1 Assumption of liability.
(a) General rule. Section 357(a) does not affect the rule that
liabilities assumed are to be taken into account for the purpose of
computing the amount of gain or loss realized under section 1001 upon an
exchange. Section 357(a) provides, subject to the exceptions and
limitations specified in section 357 (b) and (c), that--
(1) Liabilities assumed are not to be treated as ``other property or
money'' for the purpose of determining the amount of realized gain which
is to be recognized under section 351, 361, 371, or 374, if the
transactions would, but for the receipt of ``other property or money''
have been exchanges of the type described in any one of such sections;
and
(2) If the only type of consideration received by the transferor in
addition to that permitted to be received by section 351, 361, 371, or
374, consists of an assumption of liabilities, the transaction, if
otherwise qualified, will be deemed to be within the provisions of
section 351, 361, 371, or 374.
[[Page 307]]
(b) Application of general rule. The application of paragraph (a) of
this section may be illustrated by the following example:
Example. A, an individual, transfers to a controlled corporation
property with an adjusted basis of $10,000 in exchange for stock of the
corporation with a fair market value of $8,000, $3,000 cash, and the
assumption by the corporation of indebtedness of A amounting to $4,000.
A's gain is $5,000, computed as follows:
Stock received, fair market value............................. $8,000
Cash received................................................. 3,000
Liability assumed by transferee............................... 4,000
---------
Total consideration received................................. 15,000
Less: Adjusted basis of property transferred.................. 10,000
---------
Gain realized................................................ 5,000
Assuming that the exchange falls within section 351 as a transaction in
which the gain to be recognized is limited to ``other property or
money'' received, the gain recognized to A will be limited to the $3,000
cash received, since, under the general rule of section 357(a), the
assumption of the $4,000 liability does not constitute ``other
property.''
(c) Tax avoidance purpose. The benefits of section 357(a) do not
extend to any exchange involving an assumption of liabilities where it
appears that the principal purpose of the taxpayer with respect to such
assumption was to avoid Federal income tax on the exchange, or, if not
such purpose, was not a bona fide business purpose. In such cases, the
total amount of liabilities assumed or acquired pursuant to such
exchange (and not merely a particular liability with respect to which
the tax avoidance purpose existed) shall, for the purpose of determining
the amount of gain to be recognized upon the exchange in which the
liabilities are assumed or acquired, be treated as money received by the
taxpayer upon the exchange. Thus, if in the example set forth in
paragraph (b) of this section, the principal purpose of the assumption
of the $4,000 liability was to avoid tax on the exchange, or was not a
bona fide business purpose, then the amount of gain recognized would be
$5,000. In any suit or proceeding where the burden is on the taxpayer to
prove that an assumption of liabilities is not to be treated as ``other
property or money'' under section 357, which is the case if the
Commissioner determines that the taxpayer's purpose with respect thereto
was a purpose to avoid Federal income tax on the exchange or was not a
bona fide business purpose, and the taxpayer contests such determination
by litigation, the taxpayer must sustain such burden by the clear
preponderance of the evidence. Thus, the taxpayer must prove his case by
such a clear preponderance of all the evidence that the absence of a
purpose to avoid Federal income tax on the exchange, or the presence of
a bona fide business purpose, is unmistakable.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6528, 26 FR
399, Jan. 19, 1961]
Sec. 1.357-2 Liabilities in excess of basis.
(a) Section 357(c) provides in general that in an exchange to which
section 351 (relating to a transfer to a corporation controlled by the
transferor) is applicable, or to which section 361 (relating to the
nonrecognition of gain or loss to corporations) is applicable by reason
of a section 368(a)(1)(D) reorganization, if the sum of the amount of
liabilities assumed plus the amount of liabilities to which the property
is subject exceeds the total of the adjusted basis of the property
transferred pursuant to such exchange, then such excess shall be
considered as a gain from the sale or exchange of a capital asset or of
property which is not a capital asset as the case may be. Thus, if an
individual transfers, under section 351, properties having a total basis
in his hands of $20,000, one of which has a basis of $10,000 but is
subject to a mortgage of $30,000, to a corporation controlled by him,
such individual will be subject to tax with respect to $10,000, the
excess of the amount of the liability over the total adjusted basis of
all the properties in his hands. The same result will follow whether or
not the liability is assumed by the transferee. The determination of
whether a gain resulting from the transfer of capital assets is long-
term or short-term capital gain shall be made by reference to the
holding period to the transferor of the assets transferred. An exception
to the general rule of section 357(c) is made (1) for any exchange as to
which under section 357(b) (relating to assumption of liabilities for
tax-avoidance purposes) the entire amount of the liabilities is treated
as money received and
[[Page 308]]
(2) for an exchange to which section 371 (relating to reorganizations in
certain receivership and bankruptcy proceedings) or section 374
(relating to gain or loss not recognized in certain railroad
reorganizations) is applicable.
(b) The application of paragraph (a) of this section may be
illustrated by the following examples:
Example 1. If all such assets transferred are capital assets and if
half the assets (ascertained by reference to their fair market value at
the time of the transfer) have been held for less than 1 year (6 months
for taxable years beginning before 1977; 9 months for taxable years
beginning in 1977), and the remaining half for more than 1 year (6
months for taxable years beginning before 1977; 9 months for taxable
years beginning in 1977), half the excess of the amount of the liability
over the total of the adjusted basis of the property transferred
pursuant to the exchange shall be treated as short-term capital gain,
and the remaining half shall be treated as long-term capital gain.
Example 2. If half of the assets (ascertained by reference to their
fair market value at the time of the transfer) transferred are capital
assets and half are assets other than capital assets, then half of the
excess of the amount of the liability over the total of the adjusted
basis of the property transferred pursuant to the exchange shall be
treated as capital gain, and the remaining half shall be treated as gain
from the sale or exchange of assets other than capital assets.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6528, 26 FR
399, Jan. 19, 1961; T.D. 7728, 45 FR 72650, Nov. 3, 1980]
Sec. 1.358-1 Basis to distributees.
(a) In the case of an exchange to which section 354 or 355 applies
in which, under the law applicable to the year in which the exchange is
made, only nonrecognition property is received, immediately after the
transaction, the sum of the basis of all of the stock and securities
received in the transaction shall be the same as the basis of all the
stock and securities in such corporation surrendered in the transaction,
allocated in the manner described in Sec. 1.358-2. In the case of a
distribution to which section 355 applies in which, under the law
applicable to the year in which the distribution is made, only
nonrecognition property is received, immediately after the transaction,
the sum of the basis of all of the stock and securities with respect to
which the distribution is made plus the basis of all stock and
securities received in the distribution with respect to such stock and
securities shall be the same as the basis of the stock and securities
with respect to which the distribution is made immediately before the
transaction, allocated in the manner described in Sec. 1.358-2. In the
case of an exchange to which section 351 or 361 applies in which, under
the law applicable to the year in which the exchange was made, only
nonrecognition property is received, the basis of all the stock and
securities received in the exchange shall be the same as the basis of
all property exchanged therefor. If in an exchange or distribution to
which section 351, 356, or 361 applies both nonrecognition property and
``other property'' are received, the basis of all the property except
``other property'' held after the transaction shall be determined as
described in the preceding three sentences decreased by the sum of the
money and the fair market value of the ``other property'' (as of the
date of the transaction) and increased by the sum of the amount treated
as a dividend (if any) and the amount of the gain recognized on the
exchange, but the term gain as here used does not include any portion of
the recognized gain that was treated as a dividend. In any case in which
a taxpayer transfers property with respect to which loss is recognized,
such loss shall be reflected in determining the basis of the property
received in the exchange. The basis of the ``other property'' is its
fair market value as of the date of the transaction. See Sec. 1.460-
4(k)(3)(iv)(A) for rules relating to stock basis adjustments required
where a contract accounted for using a long-term contract method of
accounting is transferred in a transaction described in section 351 or a
reorganization described in section 368(a)(1)(D) with respect to which
the requirements of section 355 (or so much of section 356 as relates to
section 355) are met.
(b) The application of paragraph (a) of this section may be
illustrated by the following example:
Example. A purchased a share of stock in Corporation X in 1935 for
$150. Since that date A has received distributions out of other than
earnings and profits (as defined in
[[Page 309]]
section 316) totaling $60, so that A's adjusted basis for the stock is
$90. In a transaction qualifying under section 356, A exchanged this
share for one share in Corporation Y, worth $100, cash in the amount of
$10, and other property with a fair market value of $30. The exchange
had the effect of the distribution of a dividend. A's ratable share of
the earnings and profits of Corporation X accumulated after February 28,
1913, was $5. A realized a gain of $50 on the exchange, but the amount
recognized is limited to $40, the sum of the cash received and the fair
market value of the other property. Of the gain recognized, $5 is
taxable as a dividend, and $35 is taxable as a gain from the exchange of
property. The basis to A of the one share of stock of Corporation Y is
$90, that is, the adjusted basis of the one share of stock of
Corporation X ($90), decreased by the sum of the cash received ($10) and
the fair market value of the other property received ($30) and increased
by the sum of the amount treated as a dividend ($5) and the amount
treated as a gain from the exchange of property ($35). The basis of the
other property received is $30.
(c) This section applies to exchanges and distributions of stock and
securities occurring on or after January 23, 2006.
[T.D. 9244, 71 FR 4269, Jan. 26, 2006; 71 FR 19118, Apr. 13, 2006; 71 FR
62556, Oct. 26, 2006]
Sec. 1.358-2 Allocation of basis among nonrecognition property.
(a) Allocation of basis in exchanges or distributions to which
section 354, 355, or 356 applies. (1) As used in this paragraph the term
stock means stock which is not ``other property'' under section 356. The
term securities means securities (including, where appropriate,
fractional parts of securities) which are not ``other property'' under
section 356. Stock, or securities, as the case may be, which differ
either because they are in different corporations or because the rights
attributable to them differ (although they are in the same corporation)
are considered different classes of stock or securities, as the case may
be, for purposes of this section.
(2)(i) If a shareholder or security holder surrenders a share of
stock or a security in an exchange under the terms of section 354, 355,
or 356, the basis of each share of stock or security received in the
exchange shall be the same as the basis of the share or shares of stock
or security or securities (or allocable portions thereof) exchanged
therefor (as adjusted under Sec. 1.358-1). If more than one share of
stock or security is received in exchange for one share of stock or one
security, the basis of the share of stock or security surrendered shall
be allocated to the shares of stock or securities received in the
exchange in proportion to the fair market value of the shares of stock
or securities received. If one share of stock or security is received in
exchange for more than one share of stock or security or if a fraction
of a share of stock or security is received, then the basis of the
shares of stock or securities surrendered must be allocated to the
shares of stock or securities (or allocable portions thereof) received
in a manner that reflects, to the greatest extent possible, that a share
of stock or security received is received in respect of shares of stock
or securities that were acquired on the same date and at the same price.
To the extent it is not possible to allocate basis in this manner, the
basis of the shares of stock or securities surrendered must be allocated
to the shares of stock or securities (or allocable portions thereof)
received in a manner that minimizes the disparity in the holding periods
of the surrendered shares of stock or securities whose basis is
allocated to any particular share of stock or security received.
(ii) If a shareholder or security holder surrenders a share of stock
or a security in an exchange under the terms of section 354, 355, or
356, and receives shares of stock or securities of more than one class,
or receives ``other property'' or money in addition to shares of stock
or securities, then, to the extent the terms of the exchange specify
that shares of stock or securities of a particular class or ``other
property'' or money is received in exchange for a particular share of
stock or security or a particular class of stock or securities, for
purposes of applying the rules of this section, such terms shall control
provided such terms are economically reasonable. To the extent the terms
of the exchange do not specify that shares of stock or securities of a
particular class or ``other property'' or money is received in exchange
for a particular share of stock or security or
[[Page 310]]
a particular class of stock or securities, then, for purposes of
applying the rules of paragraph (a)(2)(i) of this section, a pro rata
portion of the shares of stock and securities of each class received and
a pro rata portion of the ``other property'' and money received shall be
treated as received in exchange for each share of stock and security
surrendered, based on the fair market value of the stock and securities
surrendered.
(iii)(A) For purposes of this section, if a shareholder or security
holder surrenders a share of stock or a security in a transaction under
the terms of section 354 (or so much of section 356 as relates to
section 354) in which the shareholder or security holder receives no
property or property (including property permitted by section 354 to be
received without the recognition of gain or ``other property'' or money)
with a fair market value less than that of the stock or securities
surrendered in the transaction:
(1) Such shareholder or security holder shall be treated as
receiving the stock, securities, other property, and money actually
received by the shareholder or security holder in the transaction and an
amount of stock of the issuing corporation (as defined in Sec. 1.368-
1(b)) that has a value equal to the excess of the value of the stock or
securities the shareholder or security holder surrendered in the
transaction over the value of the stock, securities, other property, and
money the shareholder or security holder actually received in the
transaction. If the shareholder owns only one class of stock of the
issuing corporation the receipt of which would be consistent with the
economic rights associated with each class of stock of the issuing
corporation, the stock deemed received by the shareholder pursuant to
the previous sentence shall be stock of such class. If the shareholder
owns multiple classes of stock of the issuing corporation the receipt of
which would be consistent with the economic rights associated with each
class of stock of the issuing corporation, the stock deemed received by
the shareholder shall be stock of each such class owned by the
shareholder immediately prior to the transaction, in proportion to the
value of the stock of each such class owned by the shareholder at that
time. The basis of each share of stock or security of the issuing
corporation deemed received and actually received shall be determined
under the rules of this section. If and to the extent necessary to
reflect the actual ownership of the issuing corporation immediately
after the exchange to which section 354 (or so much of section 356 as
relates to section 354) applies, an appropriate amount of the stock of
the issuing corporation treated as issued to the shareholder or security
holder in the exchange is deemed further transferred in accordance with
Sec. 1.368-2(l) to reflect the actual ownership of the issuing
corporation. Paragraph (a)(2)(iii)(A)(2) of this section is only applied
to any shareholder of the issuing corporation after all of the deemed
transfers pursuant to Sec. 1.368-2(l) are completed. The transferred
shares' basis shall be adjusted for all deemed transfers required by
Sec. 1.368-2(l).
(2) A direct shareholder of the issuing corporation that receives
the shares deemed issued as part of the transaction, as described in
paragraph (a)(2)(iii)(A)(1) of this section, shall then be treated as
surrendering all of its shares of stock and securities in the issuing
corporation, including those shares of stock or securities held
immediately prior to the transaction, those shares of stock or
securities actually received in the transaction, and those shares of
stock deemed received as described in paragraph (a)(2)(iii)(A)(1) of
this section, in a reorganization under section 368(a)(1)(E) in exchange
for the shares of stock and securities of the issuing corporation that
the shareholder or security holder actually holds immediately after the
transaction. The basis of each share of stock and security deemed
received in the reorganization under section 368(a)(1)(E) shall be
determined under the rules of this section.
(B) For purposes of this section, if an actual shareholder of the
issuing corporation is deemed to receive a nominal share of stock of the
issuing corporation as provided in Sec. 1.368-2(l), then that
shareholder must, after allocating and adjusting the basis of the
nominal share in accordance with the rules of
[[Page 311]]
this section and Sec. 1.358-1, designate the share of stock of the
issuing corporation that it owns to which the basis, if any, of the
nominal share will attach. If the shareholder does not actually own any
shares of stock in the issuing corporation immediately after the
exchange to which section 354 (or so much of section 356 as relates to
section 354) applies, the nominal share of stock of the issuing
corporation received by the shareholder in the exchange is deemed
further transferred in accordance with Sec. 1.368-2(l) without applying
the designation rule set forth in the first sentence of this paragraph
until it is transferred to a person that actually owns stock in the
issuing corporation. The transferred share's basis shall be adjusted for
all deemed transfers required by Sec. 1.368-2(l).
(iv) If a shareholder or security holder receives one or more shares
of stock or one or more securities in a distribution under the terms of
section 355 (or so much of section 356 as relates to section 355), the
basis of each share of stock or security of the distributing corporation
(as defined in Sec. 1.355-1(b)), as adjusted under Sec. 1.358-1, shall
be allocated between the share of stock or security of the distributing
corporation with respect to which the distribution is made and the share
or shares of stock or security or securities (or allocable portions
thereof) received with respect to the share of stock or security of the
distributing corporation in proportion to their fair market values. If
one share of stock or security is received with respect to more than one
share of stock or security or if a fraction of a share of stock or
security is received, then the basis of each share of stock or security
of the distributing corporation must be allocated to the shares of stock
or securities (or allocable portions thereof) received in a manner that
reflects that, to the greatest extent possible, a share of stock or
security received is received with respect to shares of stock or
securities acquired on the same date and at the same price. To the
extent it is not possible to allocate basis in this manner, the basis of
each share of stock or security of the distributing corporation must be
allocated to the shares of stock or securities (or allocable portions
thereof) received in a manner that minimizes the disparity in the
holding periods of the shares of stock or securities with respect to
which such shares of stock or securities are received.
(v) If a shareholder or security holder receives shares of stock or
securities of more than one class, or receives ``other property'' or
money in addition to stock or securities in a distribution under the
terms of section 355 (or so much of section 356 as relates to section
355), then, to the extent the terms of the distribution specify that
shares of stock or securities of a particular class or ``other
property'' or money is received with respect to a particular share of
stock or security of the distributing corporation or a particular class
of stock or securities of the distributing corporation, for purposes of
applying the rules of this section, such terms shall control provided
that such terms are economically reasonable. To the extent the terms of
the distribution do not specify that shares of stock or securities of a
particular class or ``other property'' or money is received with respect
to a particular share of stock or security of the distributing
corporation or a particular class of stock or securities of the
distributing corporation, then, for purposes of applying the rules of
this section, a pro rata portion of the shares of stock and securities
of each class received and a pro rata portion of the ``other property''
and money received shall be treated as received with respect to each
share of stock and security of the distributing corporation with respect
to which the distribution is made, based on the fair market value of
each such share of stock or security.
(vi) If a share of stock or a security is received in exchange for,
or with respect to, more than one share of stock or security and such
shares or securities were acquired on different dates or at different
prices, the share of stock or security received shall be divided into
segments based on the relative fair market values of the shares of stock
or securities surrendered in exchange for such share or security or the
relative fair market values of the
[[Page 312]]
shares of stock or securities with respect to which the share of stock
or security is received in a distribution under the terms of section 355
(or so much of section 356 as relates to section 355)). Each segment
shall have a basis determined under the rules of paragraph (a)(2) of
this section and a corresponding holding period.
(vii) If a shareholder or security holder that purchased or acquired
shares of stock or securities in a corporation on different dates or at
different prices exchanges such shares of stock or securities under the
terms of section 354, 355, or 356, or receives a distribution of shares
of stock or securities under the terms of section 355 (or so much of
section 356 as relates to section 355), and the shareholder or security
holder is not able to identify which particular share of stock or
security (or allocable portion of a share of stock or security) is
received (or deemed received) in exchange for, or with respect to, a
particular share of stock or security, the shareholder or security
holder may designate which share of stock or security is received in
exchange for, or with respect to, a particular share of stock or
security, provided that such designation is consistent with the terms of
the exchange or distribution (or an exchange deemed to have occurred
pursuant to paragraph (a)(2)(iii) of this section), and the other rules
of this section. In the case of an exchange under the terms of section
354 or 356 (including a deemed exchange as a result of the application
of paragraph (a)(2)(iii) of this section), the designation must be made
on or before the first date on which the basis of a share of stock or a
security received (or deemed received in the reorganization under
section 368(a)(1)(E) in the case of a transaction to which paragraph
(a)(2)(iii) of this section applies) is relevant. In the case of an
exchange or distribution under the terms of section 355 (or so much of
section 356 as relates to section 355), the designation must be made on
or before the first date on which the basis of a share of stock or a
security of the distributing corporation or the controlled corporation
(as defined in Sec. 1.355-1(b)) is relevant. The basis of the shares or
securities received in an exchange under the terms of section 354 or
section 356, for example, is relevant when such shares or securities are
sold or otherwise transferred. The designation will be binding for
purposes of determining the Federal tax consequences of any sale or
transfer of, or distribution with respect to, the shares or securities
received. If the shareholder fails to make a designation in a case in
which the shareholder is not able to identify which share of stock is
received in exchange for, or with respect to, a particular share of
stock, then the shareholder will not be able to identify which shares
are sold or transferred for purposes of determining the basis of
property sold or transferred under section 1012 and Sec. 1.1012-1(c)
and, instead, will be treated as selling or transferring the share
received in respect of the earliest share purchased or acquired.
(viii) This paragraph (a)(2) shall not apply to determine the basis
of a share of stock or security received by a shareholder or security
holder in an exchange described in both section 351 and either section
354 or 356, if, in connection with the exchange--
(A) The shareholder or security holder exchanges property for stock
or securities in an exchange to which neither section 354 nor section
356 applies;
(B) The shareholder or security holder exchanges property for stock
or securities in a transaction for which an election to apply section
362(e)(2)(C) is in effect; or
(C) Liabilities of the shareholder or security holder are assumed.
(ix) This paragraph (a)(2) shall apply to determine the basis of a
share of stock or security received by a shareholder or security holder
in an exchange described in both section 1036 and section 354 or section
356.
(b) Allocation of basis in exchanges to which section 351 or 361
applies. (1) As used in this paragraph (b), the term stock refers only
to stock which is not ``other property'' under section 351 or 361 and
the term securities refers only to securities which are not ``other
property'' under section 351 or 361.
(2) If in an exchange to which section 351 or 361 applies property
is transferred to a corporation and the transferor receives stock or
securities of more than one class or receives both
[[Page 313]]
stock and securities, then the basis of the property transferred (as
adjusted under Sec. 1.358-1) shall be allocated among all of the stock
and securities received in proportion to the fair market values of the
stock of each class and the securities of each class.
(c) Examples. The application of paragraphs (a) and (b) of this
section is illustrated by the following examples:
Example 1. (i) Facts. J, an individual, acquired 20 shares of
Corporation X stock on Date 1 for $3 each and 10 shares of Corporation X
stock on Date 2 for $6 each. On Date 3, Corporation Y acquires the
assets of Corporation X in a reorganization under section 368(a)(1)(A).
Pursuant to the terms of the plan of reorganization, J receives 2 shares
of Corporation Y stock in exchange for each share of Corporation X
stock. Therefore, J receives 60 shares of Corporation Y stock. Pursuant
to section 354, J recognizes no gain or loss on the exchange. J is not
able to identify which shares of Corporation Y stock are received in
exchange for each share of Corporation X stock.
(ii) Analysis. Under paragraph (a)(2)(i) of this section, J has 40
shares of Corporation Y stock each of which has a basis of $1.50 and is
treated as having been acquired on Date 1 and 20 shares of Corporation Y
stock each of which has a basis of $3 and is treated as having been
acquired on Date 2. Under paragraph (a)(2)(vii) of this section, on or
before the date on which the basis of a share of Corporation Y stock
received becomes relevant, J may designate which of the shares of
Corporation Y stock have a basis of $1.50 and which have a basis of $3.
Example 2. (i) Facts. The facts are the same as in Example 1, except
that instead of receiving 2 shares of Corporation Y stock in exchange
for each share of Corporation X stock, J receives 1\1/2\ shares of
Corporation Y stock in exchange for each share of Corporation X stock.
Therefore, J receives 45 shares of Corporation Y stock. Again, J is not
able to identify which shares (or portions of shares) of Corporation Y
stock are received in exchange for each share of Corporation X stock.
(ii) Analysis. Under paragraph (a)(2)(i) of this section, J has 30
shares of Corporation Y stock each of which has a basis of $2 and is
treated as having been acquired on Date 1 and 15 shares of Corporation Y
stock each of which has a basis of $4 and is treated as having been
acquired on Date 2. Under paragraph (a)(2)(vii) of this section, on or
before the date on which the basis of a share of Corporation Y stock
received becomes relevant, J may designate which of the shares of
Corporation Y stock received have a basis of $2 and which have a basis
of $4.
Example 3. (i) Facts. J, an individual, acquired 10 shares of Class
A stock of Corporation X on Date 1 for $3 each, 10 shares of Class A
stock of Corporation X on Date 2 for $9 each, and 10 shares of Class B
stock of Corporation X on Date 3 for $3 each. On Date 4, J surrenders
all of J's shares of Class A stock in exchange for 20 shares of new
Class C stock and 20 shares of new Class D stock in a reorganization
under section 368(a)(1)(E). Pursuant to section 354, J recognizes no
gain or loss on the exchange. On the date of the exchange, the fair
market value of each share of Class A stock is $6, the fair market value
of each share of Class C stock is $2, and the fair market value of each
share of Class D stock is $4. The terms of the exchange do not specify
that shares of Class C stock or shares of Class D stock of Corporation X
are received in exchange for particular shares of Class A stock of
Corporation X.
(ii) Analysis. Under paragraph (a)(2)(ii) of this section, because
the terms of the exchange do not specify that shares of Class C stock or
shares of Class D stock of Corporation X are received in exchange for
particular shares of Class A stock of Corporation X, a pro rata portion
of the shares of Class C stock and shares of Class D stock received will
be treated as received in exchange for each share of Class A stock based
on the fair market value of the surrendered shares of Class A stock.
Therefore, J is treated as receiving one share of Class C stock and one
share of Class D stock in exchange for each share of Class A stock.
Under paragraph (a)(2)(i) of this section, J has 10 shares of Class C
stock, each of which has a basis of $1 and is treated as having been
acquired on Date 1 and 10 shares of Class C stock, each of which has a
basis of $3 and is treated as having been acquired on Date 2. In
addition, J has 10 shares of Class D stock, each of which has a basis of
$2 and is treated as having been acquired on Date 1 and 10 shares of
Class D stock, each of which has a basis of $6 and is treated as having
been acquired on Date 2. J's basis in each share of Class B stock
remains $3. Under paragraph (a)(2)(vii) of this section, on or before
the date on which the basis of a share of Class C stock or Class D stock
received becomes relevant, J may designate which of the shares of Class
C stock have a basis of $1 and which have a basis of $3, and which of
the shares of Class D stock have a basis of $2 and which have a basis of
$6.
Example 4. (i) Facts. J, an individual, acquired 10 shares of Class
A stock of Corporation X on Date 1 for $2 each, 10 shares of Class A
stock of Corporation X on Date 2 for $4 each, and 20 shares of Class B
stock of Corporation X on Date 3 for $6 each. On Date 4, Corporation Y
acquires the assets of Corporation X in a reorganization under section
368(a)(1)(A). Pursuant to the terms of the plan of reorganization, J
surrenders all of J's
[[Page 314]]
shares of Corporation X stock for 40 shares of Corporation Y stock and
$200 of cash. On the date of the exchange, the fair market value of each
share of Class A stock of Corporation X is $10, the fair market value of
each share of Class B stock of Corporation X is $10, and the fair market
value of each share of Corporation Y stock is $5. The terms of the
exchange do not specify that shares of Corporation Y stock or cash are
received in exchange for particular shares of Class A stock or Class B
stock of Corporation X.
(ii) Analysis. Under paragraph (a)(2)(ii) of this section and under
Sec. 1.356-1(b), because the terms of the exchange do not specify that
shares of Corporation Y stock or cash are received in exchange for
particular shares of Class A stock or Class B stock of Corporation X, a
pro rata portion of the shares of Corporation Y stock and cash received
will be treated as received in exchange for each share of Class A stock
and Class B stock of Corporation X surrendered based on the fair market
value of such stock. Therefore, J is treated as receiving one share of
Corporation Y stock and $5 of cash in exchange for each share of Class A
stock of Corporation X and one share of Corporation Y stock and $5 of
cash in exchange for each share of Class B stock of Corporation X. J
realizes a gain of $140 on the exchange of shares of Class A stock of
Corporation X, $100 of which is recognized under Sec. 1.356-1(a). J
realizes a gain of $80 on the exchange of Class B stock of Corporation
X, all of which is recognized under Sec. 1.356-1(a). Under paragraph
(a)(2)(i) of this section, J has 10 shares of Corporation Y stock, each
of which has a basis of $2 and is treated as having been acquired on
Date 1, 10 shares of Corporation Y stock, each of which has a basis of
$4 and is treated as having been acquired on Date 2, and 20 shares of
Corporation Y stock, each of which has a basis of $5 and is treated as
having been acquired on Date 3. Under paragraph (a)(2)(vii) of this
section, on or before the date on which the basis of a share of
Corporation Y stock received becomes relevant, J may designate which of
the shares of Corporation Y stock received have a basis of $2, which
have a basis of $4, and which have a basis of $5.
Example 5. (i) Facts. The facts are the same as in Example 4, except
that the terms of the plan of reorganization specify that J receives 40
shares of stock of Corporation Y in exchange for J's shares of Class A
stock of Corporation X and $200 of cash in exchange for J's shares of
Class B stock of Corporation X.
(ii) Analysis. Under paragraph (a)(2)(ii) of this section and under
Sec. 1.356-1(b), because the terms of the exchange specify that J
receives 40 shares of stock of Corporation Y in exchange for J's shares
of Class A stock of Corporation X and $200 of cash in exchange for J's
shares of Class B stock of Corporation X and such terms are economically
reasonable, such terms control. J realizes a gain of $140 on the
exchange of shares of Class A stock of Corporation X, none of which is
recognized under Sec. 1.356-1(a). J realizes a gain of $80 on the
exchange of shares of Class B stock of Corporation X, all of which is
recognized under Sec. 1.356-1(a). Under paragraph (a)(2)(i) of this
section, J has 20 shares of Corporation Y stock, each of which has a
basis of $1 and is treated as having been acquired on Date 1, and 20
shares of Corporation Y stock, each of which has a basis of $2 and is
treated as having been acquired on Date 2. Under paragraph (a)(2)(vii)
of this section, on or before the date on which the basis of a share of
Corporation Y stock received becomes relevant, J may designate which of
the shares of Corporation Y stock received have a basis of $1 and which
have a basis of $2.
Example 6. (i) Facts. J, an individual, acquired 10 shares of stock
of Corporation X on Date 1 for $2 each, and a security issued by
Corporation X to J on Date 2 with a principal amount of $100 and a basis
of $100. On Date 3, Corporation Y acquires the assets of Corporation X
in a reorganization under section 368(a)(1)(A). Pursuant to the terms of
the plan of reorganization, J surrenders all of J's shares of
Corporation X stock in exchange for 10 shares of Corporation Y stock and
surrenders J's Corporation X security in exchange for a Corporation Y
security. On the date of the exchange, the fair market value of each
share of stock of Corporation X is $10, the fair market value of J's
Corporation X security is $100, the fair market value of each share of
Corporation Y stock is $10, and the fair market value and principal
amount of the Corporation Y security received by J is $100.
(ii) Analysis. Under paragraph (a)(2)(ii) of this section and under
Sec. 1.354-1(a), because the terms of the exchange specify that J
receives 10 shares of stock of Corporation Y in exchange for J's shares
of Class A stock of Corporation X and a Corporation Y security in
exchange for its Corporation X security and such terms are economically
reasonable, such terms control. Pursuant to section 354, J recognizes no
gain on either exchange. Under paragraph (a)(2)(i) of this section, J
has 10 shares of Corporation Y stock, each of which has a basis of $2
and is treated as having been acquired on Date 1, and a security that
has a basis of $100 and is treated as having been acquired on Date 2.
Example 7. (i) Facts. J, an individual, acquired 10 shares of
Corporation X stock on Date 1 for $2 each and 10 shares of Corporation X
stock on Date 2 for $5 each. On Date 3, Corporation Y acquires the stock
of Corporation X in a reorganization under section 368(a)(1)(B).
Pursuant to the terms of the plan of reorganization, J receives one
share of Corporation Y stock in exchange for every 2 shares of
Corporation X stock. Pursuant to
[[Page 315]]
section 354, J recognizes no gain or loss on the exchange. J is not able
to identify which portion of each share of Corporation Y stock is
received in exchange for each share of Corporation X stock.
(ii) Analysis. Under paragraph (a)(2)(i) of this section, J has 5
shares of Corporation Y stock each of which has a basis of $4 and is
treated as having been acquired on Date 1 and 5 shares of Corporation Y
stock each of which has a basis of $10 and is treated as having been
acquired on Date 2. Under paragraph (a)(2)(vii) of this section, on or
before the date on which the basis of a share of Corporation Y stock
received becomes relevant, J may designate which of the shares of
Corporation Y stock received have a basis of $4 and which have a basis
of $10.
Example 8. (i) Facts. The facts are the same as in Example 7, except
that, in addition to transferring the stock of Corporation X to
Corporation Y, J transfers land to Corporation Y. In addition, after the
transaction, J owns stock of Corporation Y satisfying the requirements
of section 368(c). J's transfer of the Corporation X stock to
Corporation Y is an exchange described in sections 351 and 354. J's
transfer of land to Corporation Y is an exchange described in section
351.
(ii) Analysis. Under paragraph (a)(2)(viii) of this section, because
neither section 354 nor section 356 applies to the transfer of land to
Corporation Y, the rules of paragraph (a)(2) of this section do not
apply to determine J's basis in the Corporation Y stock received in the
transaction.
Example 9. (i) Facts. J, an individual, acquired 10 shares of
Corporation X stock on Date 1 for $3 each and 10 shares of Corporation X
stock on Date 2 for $6 each. On Date 3, Corporation Z, a newly formed,
wholly owned subsidiary of Corporation Y, merges with and into
Corporation X with Corporation X surviving. As part of the plan of
merger, J receives one share of Corporation Y stock in exchange for each
share of Corporation X stock. In connection with the transaction,
Corporation Y assumes a liability of J. In addition, after the
transaction, J owns stock of Corporation Y satisfying the requirements
of section 368(c). J's transfer of the Corporation X stock to
Corporation Y is an exchange described in sections 351 and 354.
(ii) Analysis. Under paragraph (a)(2)(viii) of this section,
because, in connection with the transfer of the Corporation X stock to
Corporation Y, Corporation Y assumed a liability of J, the rules of
paragraph (a)(2) of this section do not apply to determine J's basis in
the Corporation Y stock received in the transaction.
Example 10. (i) Facts. Each of Corporation X and Corporation Y has a
single class of stock outstanding, all of which is owned by J, an
individual. J acquired 100 shares of Corporation X stock on Date 1 for
$1 each and 100 shares of Corporation Y stock on Date 2 for $2 each. On
Date 3, Corporation Y acquires the assets of Corporation X in a
reorganization under section 368(a)(1)(D). Pursuant to the terms of the
plan of reorganization, J surrenders J's 100 shares of Corporation X
stock but does not receive any additional Corporation Y stock.
Immediately before the effective time of the reorganization, the fair
market value of each share of Corporation X stock and each share of
Corporation Y stock is $1. Pursuant to section 354, J recognizes no gain
or loss.
(ii) Analysis. Under paragraph (a)(2)(iii) of this section, J is
deemed to have received shares of Corporation Y stock with an aggregate
fair market value of $100 in exchange for J's Corporation X shares.
Given the number of outstanding shares of stock of Corporation Y and
their value immediately before the effective time of the reorganization,
J is deemed to have received 100 shares of stock of Corporation Y in the
reorganization. Under paragraph (a)(2)(i) of this section, each of those
shares has a basis of $1 and is treated as having been acquired on Date
1. Then, the stock of Corporation Y is deemed to be recapitalized in a
reorganization under section 368(a)(1)(E) in which J receives 100 shares
of Corporation Y stock in exchange for those shares of Corporation Y
stock that J held immediately prior to the reorganization and those
shares J is deemed to have received in the reorganization. Under
paragraph (a)(2)(i), immediately after the reorganization, J holds 50
shares of Corporation Y stock each of which has a basis of $2 and is
treated as having been acquired on Date 1 and 50 shares of Corporation Y
stock each of which has a basis of $4 and is treated as having been
acquired on Date 2. Under paragraph (a)(2)(vii) of this section, on or
before the date on which the basis of any share of J's Corporation Y
stock becomes relevant, J may designate which of the shares of
Corporation Y have a basis of $2 and which have a basis of $4.
Example 11. (i) Facts. Corporation X has a single class of stock
outstanding, all of which is owned by J, an individual. J acquired 100
shares of Corporation X stock on Date 1 for $1 each. Corporation Y has
two classes of stock outstanding, common stock and nonvoting preferred
stock. On Date 2, J acquired 100 shares of Corporation Y common stock
for $2 each and 100 shares of Corporation Y preferred stock for $4 each.
On Date 3, Corporation Y acquires the assets of Corporation X in a
reorganization under section 368(a)(1)(D). Pursuant to the terms of the
plan of reorganization, J surrenders J's 100 shares of Corporation X
stock but does not receive any additional Corporation Y stock.
Immediately before the effective time of the reorganization, the fair
market value of each share of Corporation X stock is $10, the fair
market value of each share of Corporation Y common stock is $10, and the
fair
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market value of each share of Corporation Y preferred stock is $20.
Pursuant to section 354, J recognizes no gain or loss.
(ii) Analysis. Under paragraph (a)(2)(iii) of this section, J is
deemed to have received shares of Corporation Y stock with an aggregate
fair market value of $1,000 in exchange for J's Corporation X shares.
Consistent with the economics of the transaction and the rights
associated with each class of stock of Corporation Y owned by J, J is
deemed to receive additional shares of Corporation Y common stock.
Because the value of the common stock indicates that the liquidation
preference associated with the Corporation Y preferred stock could be
satisfied even if the reorganization did not occur, it is not
appropriate to deem the issuance of additional Corporation Y preferred
stock. Given the number of outstanding shares of common stock of
Corporation Y and their value immediately before the effective time of
the reorganization, J is deemed to have received 100 shares of common
stock of Corporation Y in the reorganization. Under paragraph (a)(2)(i)
of this section, each of those shares has a basis of $1 and is treated
as having been acquired on Date 1. Then, the common stock of Corporation
Y is deemed to be recapitalized in a reorganization under section
368(a)(1)(E) in which J receives 100 shares of Corporation Y common
stock in exchange for those shares of Corporation Y common stock that J
held immediately prior to the reorganization and those shares of
Corporation Y common stock that J is deemed to have received in the
reorganization. Under paragraph (a)(2)(i), immediately after the
reorganization, J holds 50 shares of Corporation Y common stock, each of
which has a basis of $2 and is treated as having been acquired on Date
1, and 50 shares of Corporation Y common stock, each of which has a
basis of $4 and is treated as having been acquired on Date 2. Under
paragraph (a)(2)(vii) of this section, on or before the date on which
the basis of any share of J's Corporation Y common stock becomes
relevant, J may designate which of those shares have a basis of $2 and
which have a basis of $4.
Example 12. (i) Facts. J, an individual, acquired 5 shares of
Corporation X stock on Date 1 for $4 each and 5 shares of Corporation X
stock on Date 2 for $8 each. Corporation X owns all of the outstanding
stock of Corporation Y. The fair market value of the stock of
Corporation X is $1800. The fair market value of the stock of
Corporation Y is $900. In a distribution to which section 355 applies,
Corporation X distributes all of the stock of Corporation Y pro rata to
its shareholders. No stock of Corporation X is surrendered in connection
with the distribution. In the distribution, J receives 2 shares of
Corporation Y stock with respect to each share of Corporation X stock.
Pursuant to section 355, J recognizes no gain or loss on the receipt of
the shares of Corporation Y stock. J is not able to identify which share
of Corporation Y stock is received in respect of each share of
Corporation X stock.
(ii) Analysis. Under paragraph (a)(2)(iv) of this section, because J
receives 2 shares of Corporation Y stock with respect to each share of
Corporation X stock, the basis of each share of Corporation X stock is
allocated between such share of Corporation X stock and two shares of
Corporation Y stock in proportion to the fair market value of those
shares. Therefore, each of the 5 shares of Corporation X stock acquired
on Date 1 will have a basis of $2 and each of the 10 shares of
Corporation Y stock received with respect to those shares will have a
basis of $1. In addition, each of the 5 shares of Corporation X stock
acquired on Date 2 will have a basis of $4 and each of the 10 shares of
Corporation Y stock received with respect to those shares will have a
basis of $2. Under paragraph (a)(2)(vii) of this section, on or before
the date on which the basis of a share of Corporation Y stock received
becomes relevant, J may designate which of the shares of Corporation Y
stock have a basis of $1 and which have a basis of $2.
Example 13. (i) Facts. J, an individual, acquired 20 shares of
Corporation X stock on Date 1 for $2 each and 20 shares of Corporation X
stock on Date 2 for $4 each. Corporation X has 80 shares of stock
outstanding. Corporation X owns 40 shares of stock of Corporation Y,
which represents all of the outstanding stock of Corporation Y. The fair
market value of the stock of Corporation X is $80. The fair market value
of the stock of Corporation Y is $40. Corporation X distributes all of
the stock of Corporation Y in a transaction to which section 355
applies. In the transaction, J surrenders 20 shares of stock of
Corporation X in exchange for 20 shares of stock of Corporation Y. J
retains 20 shares of Corporation X stock. Pursuant to section 355, J
recognizes no gain or loss on the receipt of the shares of Corporation Y
stock. J is not able to identify which shares of Corporation X stock are
surrendered. In addition, J is not able to identify which shares of
Corporation Y stock are received in exchange for each surrendered share
of Corporation X stock.
(ii) Analysis. Under paragraph (a)(2)(i) of this section, J has 20
shares of Corporation Y stock each of which is treated as received in
exchange for one share of Corporation X stock. The basis of the 20
shares of Corporation X stock that are retained by J will remain
unchanged. Under paragraph (a)(2)(vii) of this section, on or before the
date on which the basis of a share of Corporation X or Corporation Y
stock becomes relevant, J may designate which shares of Corporation X
stock J surrendered in the exchange and
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which share of the Corporation Y stock received is received for each
share of Corporation X stock surrendered. Therefore, it is possible that
a share of Corporation Y stock would have a basis of $2 and be treated
as having been acquired on Date 1, or would have a basis of $4 and be
treated as having been acquired on Date 2.
Example 14. (i) Facts. J, an individual, acquired 10 shares of
Corporation X stock on Date 1 for $3 each, 10 shares of Corporation X
stock on Date 2 for $18 each, 10 shares of Corporation X stock on Date 3
for $6 each, and 10 shares of Corporation X stock on Date 4 for $9 each.
On Date 5, Corporation Y acquires the assets of Corporation X in a
reorganization under section 368(a)(1)(A). Pursuant to the terms of the
plan of reorganization, J receives a \3/4\ share of Corporation Y stock
in exchange for each share of Corporation X stock. Therefore, J receives
30 shares of Corporation X stock. Pursuant to section 354, J recognizes
no gain or loss on the exchange. J is not able to identify which shares
of Corporation Y stock are received in exchange for each share (or
portions of shares) of Corporation X stock.
(ii) Analysis. Under paragraph (a)(2)(i) of this section, J has 7
shares of Corporation Y stock each of which has a basis of $4 and is
treated as having been acquired on Date 1, 7 shares of Corporation Y
stock each of which has a basis of $24 and is treated as having been
acquired on Date 2, 7 shares of Corporation Y stock each of which has a
basis of $8 and is treated as having been acquired on Date 3, and 7
shares of Corporation Y stock each of which has a basis of $12 and is
treated as having been acquired on Date 4. In addition, J has two shares
of Corporation Y stock, each of which is divided into two equal segments
under paragraph (a)(2)(vi) of this section. The first of those two
shares has one segment with a basis of $2 that is treated as having been
acquired on Date 1 and a second segment with a basis of $12 that is
treated as having been acquired on Date 2. The second of those two
shares has one segment with a basis of $4 that is treated as having been
acquired on Date 3 and a second segment with a basis of $6 that is
treated as having been acquired on Date 4. Under paragraph (a)(2)(vii),
on or before the date on which a share of Corporation Y stock received
becomes relevant, J may designate which of the shares of Corporation Y
stock have a basis of $4, which have a basis of $24, which have a basis
of $8, which have a basis of $12, and which share has a split basis of
$2 and $12, and which share has a split basis of $4 and $6.
Example 15. (i) Facts. Each of Corporation X and Corporation Y has a
single class of stock outstanding, all of which is owned by J, an
individual. J purchased 100 shares of Corporation X stock on Date 1 for
$1.50 each, resulting in J having an aggregate basis in the stock of
Corporation X of $150. On Date 2, Corporation Y acquires the assets of
Corporation X for $100 of cash, their fair market value, in a
transaction described in Sec. 1.368-2(l). Pursuant to the terms of the
exchange, Corporation X does not receive any Corporation Y stock.
Corporation X distributes the $100 of cash to J and retains no assets.
(ii) Analysis. Pursuant to Sec. 1.368-2(l), Corporation Y will be
deemed to issue a nominal share of Corporation Y stock to Corporation X
in addition to the $100 of cash actually exchanged for the Corporation X
assets. Corporation X will then be deemed to distribute the nominal
share of Corporation Y stock to J in addition to the $100 of cash
actually distributed to J. Pursuant to Sec. 1.368-2(l), J, the actual
shareholder of Corporation Y, the issuing corporation, is deemed to
receive the nominal share of Corporation Y stock described in Sec.
1.368-2(l). J will have a basis of $50 in the nominal share of
Corporation Y stock under section 358(a)(1). Therefore, under paragraph
(a)(2)(iii)(B) of this section, J must designate a share of Corporation
Y stock to which J's basis of $50 in the nominal share of Corporation Y
stock will attach.
Example 16. (i) Facts. Each of Corporation X and Corporation Y has a
single class of stock outstanding, all of which is owned by Corporation
P. Corporation T has a single class of stock outstanding, all of which
is owned by Corporation X. The corporations do not join in the filing of
a consolidated return. Corporation X purchased 100 shares of Corporation
T stock on Date 1 for $1.50 each, resulting in Corporation X having an
aggregate basis in the stock of Corporation T of $150. On Date 2,
Corporation Y acquires the assets of Corporation T for $100 of cash,
their fair market value, in a transaction described in Sec. 1.368-2(l).
Pursuant to the terms of the exchange, Corporation T does not receive
any Corporation Y stock. Corporation T distributes the $100 of cash to
Corporation X and retains no assets.
(ii) Analysis. Pursuant to Sec. 1.368-2(l), Corporation Y will be
deemed to issue a nominal share of Corporation Y stock to Corporation T
in addition to the $100 of cash actually exchanged for the Corporation T
assets. Corporation T will be deemed to distribute the nominal share of
Corporation Y stock to Corporation X in addition to the $100 of cash
actually distributed. Corporation X will have a basis of $50 in the
nominal share of Corporation Y stock under section 358(a). However,
Corporation X is not an actual shareholder of Corporation Y, the issuing
corporation. Therefore, Corporation X cannot designate any share of
Corporation Y stock under paragraph (a)(2)(iii)(B) of this section to
which the basis of the nominal share of Corporation Y stock will attach
and Corporation X will be deemed to distribute the nominal share of
Corporation Y stock to Corporation P as required by Sec. 1.368-2(l).
Corporation X does not
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recognize the loss on the deemed distribution of the nominal share to
Corporation P under section 311(a). Corporation P's basis in the nominal
share it receives is zero, its fair market value, under section 301(d).
Under paragraph (a)(2)(iii)(B) of this section, Corporation P must
designate a share of Corporation Y stock to which the nominal share's
zero basis will attach.
(d) Effective/applicability date. This section generally applies to
exchanges and distributions of stock and securities occurring on or
after January 23, 2006. However, paragraph (a)(2)(iii) and Examples 15
and 16 of paragraph (c) of this section apply to exchanges and
distributions of stock and securities occurring on or after November 12,
2014. See Sec. 1.358-2T(a)(2)(iii) and Sec. 1.358-2T(c), Examples 15
and 16, as contained in 26 CFR part 1, revised April 1, 2014, for
exchanges and distributions of stock and securities occurring on or
after November 21, 2011 and before November 12, 2014; see Sec. 1.358-
2(a)(2)(iii), as contained in 26 CFR part 1, revised as of April 1,
2011, for exchanges and distributions of stock and securities occurring
on or after January 23, 2006 and before November 21, 2011.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7616, 44 FR
26869, May 8, 1979; T.D. 8648, 60 FR 66079, Dec. 21, 1995; T.D. 9244, 71
FR 4270, Jan. 26, 2006; 71 FR 19118, Apr. 13, 2006; 71 FR 62556, Oct.
26, 2006; T.D. 9475, 74 FR 67057, Dec. 18, 2009; T.D. 9558, 76 FR 71879,
Nov. 21, 2011; T.D. 9633, 78 FR 54160, Sept. 3, 2013; T.D. 9702, 79 FR
67062, Nov. 12, 2014]
Sec. 1.358-3 Treatment of assumption of liabilities.
(a) For purposes of section 358, where a party to the exchange
assumes a liability of a distributee or acquires from him property
subject to a liability, the amount of such liability is to be treated as
money received by the distributee upon the exchange, whether or not the
assumption of liabilities resulted in a recognition of gain or loss to
the taxpayer under the law applicable to the year in which the exchange
was made.
(b) The application of paragraph (a) of this section may be
illustrated by the following examples:
Example 1. A, an individual, owns property with an adjusted basis of
$100,000 on which there is a purchase money mortgage of $25,000. On
December 1, 1945, A organizes Corporation X to which he transfers the
property in exchange for all the stock of Corporation X and the
assumption by Corporation X of the mortgage. The capital stock of the
Corporation X has a fair market value of $150,000. Under sections 351
and 357, no gain or loss is recognized to A. The basis in A's hands of
the stock of Corporation X is $75,000, computed as follows:
Adjusted basis of property transferred...................... $100,000
Less: Amount of money received (amount of liabilities --25,000
assumed)...................................................
-----------
Basis of Corporation X stock to A.......................... 75,000
Example 2. A, an individual, owns property with an adjusted basis of
$25,000 on which there is a mortgage of $50,000. On December 1, 1954, A
organizes Corporation X to which he transfers the property in exchange
for all the stock of Corporation X and the assumption by Corporation X
of the mortgage. The stock of Corporation X has a fair market value of
$50,000. Under sections 351 and 357, gain is recognized to A in the
amount of $25,000. The basis in A's hands of the stock of Corporation X
is zero, computed as follows:
Adjusted basis of property transferred...................... $25,000
Less: Amount of money received (amount of liabilities)...... --50,000
Plus: Amount of gain recognized to taxpayer................. 25,000
-----------
Basis of Corporation X stock to A.......................... 0
Sec. 1.358-4 Exceptions.
(a) Plan of reorganization adopted after October 22, 1968. In the
case of a plan of reorganization adopted after October 22, 1968, section
358 does not apply in determining the basis of property acquired by a
corporation in connection with such reorganization by the exchange of
its stock or securities (or by the exchange of stock or securities of a
corporation which is in control of the acquiring corporation) as the
consideration in whole or in part for the transfer of the property to
it. See section 362 and the regulations pertaining to that section for
rules relating to basis to corporations of property acquired in such
cases.
(b) Plan of reorganization adopted before October 23, 1968. In the
case of a plan of reorganization adopted before October 23, 1968,
section 358 does not apply in determining the basis of property acquired
by a corporation in connection with such reorganization by the issuance
of stock or securities of such corporation (or by the issuance of
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stock or securities of another corporation which is in control of such
corporation) as the consideration in whole or in part for the transfer
of the property to it. The term issuance of stock or securities includes
any transfer of stock or securities, including stock or securities which
were purchased or were acquired as a contribution to capital. See
section 362 and the regulations pertaining to that section for rules
relating to basis to corporations of property acquired in such cases.
[T.D. 7422, 41 FR 26569, June 28, 1976]
Sec. 1.358-5 Special rules for assumption of liabilities.
(a) In general. Section 358(h)(2)(B) does not apply to an exchange
occurring on or after May 9, 2008.
(b) Effective/Applicability date. For exchanges occurring on or
after June 24, 2003, and before May 9, 2008, see Sec. 1.358-5T as
contained in 26 CFR part 1 in effect on April 1, 2007.
[T.D. 9397, 73 FR 26322, May 9, 2008]
Sec. 1.358-6 Stock basis in certain triangular reorganizations.
(a) Scope. This section provides rules for computing the basis of a
controlling corporation in the stock of a controlled corporation as the
result of certain reorganizations involving the stock of the controlling
corporation as described in paragraph (b) of this section. The rules of
this section are in addition to rules under other provisions of the
Internal Revenue Code and principles of law. See, e.g., section 1001 for
the recognition of gain or loss by the controlled corporation on the
exchange of property for the assets or stock of a target corporation in
a reorganization described in section 368. See also sections 362(e)(1)
and 362(e)(2) for further adjustments to basis that may be necessary
under either or both of those sections.
(b) Triangular reorganizations--(1) Nomenclature. For purposes of
this section--
(i) P is a corporation--
(A) That is a party to a reorganization,
(B) That is in control (within the meaning of section 368(c)) of
another party to the reorganization, and
(C) Whose stock is transferred pursuant to the reorganization.
(ii) S is a corporation--
(A) That is a party to the reorganization, and
(B) That is controlled by P.
(iii) T is a corporation that is another party to the
reorganization.
(2) Definitions of triangular reorganizations. This section applies
to the following reorganizations (which are referred to collectively as
triangular reorganizations):
(i) Forward triangular merger. A forward triangular merger is a
statutory merger of T and S, with S surviving, that qualifies as a
reorganization under section 368(a)(1)(A) or (G) by reason of the
application of section 368(a)(2)(D).
(ii) Triangular C reorganization. A triangular C reorganization is
an acquisition by S of substantially all of T's assets in exchange for P
stock in a transaction that qualifies as a reorganization under section
368(a)(1)(C).
(iii) Reverse triangular merger. A reverse triangular merger is a
statutory merger of S and T, with T surviving, that qualifies as a
reorganization under section 368(a)(1)(A) by reason of the application
of section 368(a)(2)(E).
(iv) Triangular B reorganization. A triangular B reorganization is
an acquisition by S of T stock in exchange for P stock in a transaction
that qualifies as a reorganization under section 368(a)(1)(B).
(v) Triangular G reorganization. A triangular G reorganization is an
acquisition by S (other than by statutory merger) of substantially all
of T's assets in a title 11 or similar case in exchange for P stock in a
transaction that qualifies as a reorganization under section
368(a)(1)(G) by reason of the application of section 368(a)(2)(D).
(c) General rules. Subject to the special rule provided in paragraph
(d) of this section, P's basis in the stock of S or T, as applicable, as
a result of a triangular reorganization, is adjusted under the following
rules--
(1) Forward triangular merger or triangular C reorganization--(i) In
general. In a forward triangular merger or a triangular C
reorganization, P's basis in its S stock is adjusted as if--
[[Page 320]]
(A) P acquired the T assets acquired by S in the reorganization (and
P assumed any liabilities which S assumed or to which the T assets
acquired by S were subject) directly from T in a transaction in which
P's basis in the T assets was determined under section 362(b); and
(B) P transferred the T assets (and liabilities which S assumed or
to which the T assets acquired by S were subject) to S in a transaction
in which P's basis in S stock was determined under section 358.
(ii) Limitation. If, in applying section 358, the amount of T
liabilities assumed by S or to which the T assets acquired by S are
subject equals or exceeds T's aggregate adjusted basis in its assets,
the amount of the adjustment under paragraph (c)(1)(i) of this section
is zero. P recognizes no gain under section 357(c) as a result of a
triangular reorganization.
(2) Reverse triangular merger--(i) In general--(A) Treated as a
forward triangular merger. Except as otherwise provided in this
paragraph (c)(2), P's basis in its T stock acquired in a reverse
triangular merger equals its basis in its S stock immediately before the
transaction adjusted as if T had merged into S in a forward triangular
merger to which paragraph (c)(1) of this section applies.
(B) Allocable share. If P acquires less than all of the T stock in
the transaction, the basis adjustment described in paragraph
(c)(2)(i)(A) of this section is reduced in proportion to the percentage
of T stock not acquired in the transaction. The percentage of T stock
not acquired in the transaction is determined by taking into account the
fair market value of all classes of T stock.
(C) Special rule if P owns T stock before the transaction. Solely
for purposes of paragraphs (c)(2)(i)(A) and (B) of this section, if P
owns T stock before the transaction, P may treat that stock as acquired
in the transaction or not, without regard to the form of the
transaction.
(ii) Reverse triangular merger that qualifies as a section 351
transfer or section 368(a)(1)(B) reorganization. Notwithstanding
paragraph (c)(2)(i) of this section, if a reorganization qualifies as
both a reverse triangular merger and as a section 351 transfer or as
both a reverse triangular merger and a reorganization under section
368(a)(1)(B), P can--
(A) Determine the basis in its T stock as if paragraph (c)(2)(i) of
this section applies; or
(B) Determine the basis in the T stock acquired as if P acquired
such stock from the former T shareholders in a transaction in which P's
basis in the T stock was determined under section 362(b).
(3) Triangular B reorganization. In a triangular B reorganization,
P's basis in its S stock is adjusted as if--
(i) P acquired the T stock acquired by S in the reorganization
directly from the T shareholders in a transaction in which P's basis in
the T stock was determined under section 362(b); and
(ii) P transferred the T stock to S in a transaction in which P's
basis in its S stock was determined under section 358.
(4) Examples. The rules of this paragraph (c) are illustrated by the
following examples. For purposes of these examples, P, S, and T are
domestic corporations, the property transferred is not importation
property within the meaning of Sec. 1.362-3(c)(2) or loss duplication
property within the meaning of Sec. 1.362-4(g)(1), P and S do not file
consolidated returns, P owns all of the shares of the only class of S
stock, the P stock exchanged in the transaction satisfies the
requirements of the applicable triangular reorganization provisions, and
the facts set forth the only corporate activity.
Example 1. Forward triangular merger. (a) Facts. T has assets with
an aggregate basis of $60 and fair market value of $100 and no
liabilities. Pursuant to a plan, P forms S with $5 cash (which S
retains), and T merges into S. In the merger, the T shareholders receive
P stock worth $100 in exchange for their T stock. The transaction is a
reorganization to which sections 368(a)(1)(A) and (a)(2)(D) apply.
(b) Basis adjustment. Under Sec. 1.358-6(c)(1), P's $5 basis in its
S stock is adjusted as if P acquired the T assets acquired by S in the
reorganization directly from T in a transaction in which P's basis in
the T assets was determined under section 362(b). Under section 362(b),
P would have an aggregate basis of $60 in the T assets. P is then
treated as if it transferred the T assets to S in a transaction
[[Page 321]]
in which P's basis in the S stock was determined under section 358.
Under section 358, P's $5 basis in its S stock would be increased by the
$60 basis in the T assets deemed transferred. Consequently, P has a $65
basis in its S stock as a result of the reorganization.
(c) Use of pre-existing S. The facts are the same as paragraph (a)
of this Example 1, except that S is an operating company with
substantial assets that has been in existence for several years. P has a
$110 basis in the S stock. Under Sec. 1.358-6(c)(1), P's $110 basis in
its S stock is increased by the $60 basis in the T assets deemed
transferred. Consequently, P has a $170 basis in its S stock as a result
of the reorganization.
(d) Mixed consideration. The facts are the same as paragraph (a) of
this Example 1, except that the T shareholders receive P stock worth $80
and $20 cash from P. Under section 358, P's $5 basis in its S stock is
increased by the $60 basis in the T assets deemed transferred.
Consequently, P has a $65 basis in its S stock as a result of the
reorganization.
(e) Liabilities. The facts are the same as paragraph (a) of this
Example 1, except that T's assets are subject to $50 of liabilities, and
the T shareholders receive $50 of P stock in exchange for their T stock.
Under section 358, P's basis in its S stock is increased by the $60
basis in the T assets deemed transferred and decreased by the $50 of
liabilities to which the T assets acquired by S are subject.
Consequently, P has a net basis adjustment of $10, and a $15 basis in
its S stock as a result of the reorganization. For certain triangular
reorganizations where the surviving corporation (S or T) is foreign, see
Sec. 1.367(b)-13.
(f) Liabilities in excess of basis. The facts are the same as in
paragraph (a) of this Example 1, except that T's assets are subject to
liabilities of $90, and the T shareholders receive $10 of P stock in
exchange for their T stock in the reorganization. Under Sec. 1.358-
6(c)(1)(ii), the adjustment under Sec. 1.358-6(c) is zero if the amount
of the liabilities which S assumed or to which the T assets acquired by
S are subject exceeds the aggregate adjusted basis in T's assets.
Consequently, P has no adjustment in its S stock, and P has a $5 basis
in its S stock as a result of the reorganization.
Example 2. Reverse triangular merger. (a) Facts. T has assets with
an aggregate basis of $60 and a fair market value of $100 and no
liabilities. P has a $110 basis in its S stock. Pursuant to a plan, S
merges into T with T surviving. In the merger, the T shareholders
receive $10 cash from P and P stock worth $90 in exchange for their T
stock. The transaction is a reorganization to which sections
368(a)(1)(A) and (a)(2)(E) apply.
(b) Basis adjustment. Under Sec. 1.358-6(c)(2)(i)(A), P's basis in
the T stock acquired is P's $110 basis in its S stock before the
transaction, adjusted as if T had merged into S in a forward triangular
merger to which Sec. 1.358-6(c)(1) applies. In such a case, P's $110
basis in its S stock before the transaction would have been increased by
the $60 basis of the T assets deemed transferred. Consequently, P has a
$170 basis in its T stock immediately after the transaction.
(c) Reverse triangular merger that also qualifies under section
368(a)(1)(B). The facts relating to T are the same as in paragraph (a)
of this Example 2. P, however, forms S pursuant to the plan of
reorganization. The T shareholders receive $100 worth of P stock (and no
cash) in exchange for their T stock. The T shareholders have an
aggregate basis in their T stock of $85 immediately before the
reorganization. The reorganization qualifies as both a reverse
triangular merger and a reorganization under section 368(a)(1)(B). Under
Sec. 1.358-6(c)(2)(ii), P may determine its basis in its T stock either
as if Sec. 1.358-6(c)(2)(i) applied to the T stock acquired, or as if P
acquired the T stock from the former T shareholders in a transaction in
which P's basis in the T stock was determined under section 362(b).
Accordingly, P may determine a basis in its T stock of $60 (T's net
asset basis) or $85 (the T shareholders' aggregate basis in the T stock
immediately before the reorganization).
(d) Allocable share in a reverse triangular merger. The facts are
the same as in paragraph (a) of this Example 2, except that X, a 10%
shareholder of T, does not participate in the transaction. The remaining
T shareholders receive $10 cash from P and P stock worth $80 for their T
stock. P owns 90% of the T stock after the transaction. Under Sec.
1.358-6(c)(2)(i)(A), P's basis in its T stock is P's $110 basis in its S
stock before the reorganization, adjusted as if T had merged into S in a
forward triangular merger. In such a case, P's basis would have been
adjusted by the $60 basis in the T assets deemed transferred. Under
Sec. 1.358-6(c)(2)(i)(B), however, the basis adjustment determined
under Sec. 1.358-6(c)(2)(i)(A) is reduced in proportion to the
percentage of T stock not acquired by P in the transaction. The
percentage of T stock not acquired in the transaction is 10%. Therefore,
P reduces its $60 basis adjustment by 10%, resulting in a net basis
adjustment of $54. Consequently, P has a $164 basis in its T stock as a
result of the transaction.
(e) P's ownership of T stock. The facts are the same as in paragraph
(a) of this Example 2, except that P owns 10% of the T stock before the
transaction. P's basis in that T stock is $8. All the T shareholders
other than P surrender their T stock for $10 cash from P and P stock
worth $80. P does not surrender the stock in the transaction. Under
Sec. 1.358-6(c)(2)(i)(C), P may treat its T stock owned before the
transaction as acquired in the transaction or not. If P treats that T
stock as acquired in the transaction, P's basis in that T stock and the
T stock actually acquired in the transaction equals P's $110
[[Page 322]]
basis in its S stock before the transaction, adjusted by the $60 basis
of the T assets deemed transferred, for a total basis of $170. If P
treats its T stock as not acquired, P retains its $8 pre-transaction
basis in that stock. P's basis in its other T shares equals P's $110
basis in its S stock before the transaction, adjusted by $54 (the $60
basis in the T assets deemed transferred, reduced by 10%), for a total
basis of $164 in those shares. See Sec. 1.358-6(c)(2)(i)(A) and (B).
Consequently, if P treats its T shares as not acquired, P's total basis
in all of its T shares is $172.
Example 3. Triangular B reorganization. (a) Facts. T has assets with
a fair market value of $100 and no liabilities. The T shareholders have
an aggregate basis in their T stock of $85 immediately before the
reorganization. Pursuant to a plan, P forms S with $5 cash and S
acquires all of the T stock in exchange for $100 of P stock. The
transaction is a reorganization to which section 368(a)(1)(B) applies.
(b) Basis adjustment. Under Sec. 1.358-6(c)(3), P adjusts its $5
basis in its S stock by treating P as if it acquired the T stock
acquired by S in the reorganization directly from the T shareholders in
exchange for the P stock in a transaction in which P's basis in the T
stock was determined under section 362(b). Under section 362(b), P would
have an aggregate basis of $85 in the T stock received by S in the
reorganization. P is then treated as if it transferred the T stock to S
in a transaction in which P's basis in the S stock was determined under
section 358. Under section 358, P's basis in its S stock would be
increased by the $85 basis in the T stock deemed transferred.
Consequently, P has a $90 basis in its S stock as a result of the
reorganization.
(d) Special rule for consideration not provided by P--(1) In
general. The amount of P's adjustment to basis in its S or T stock, as
applicable, described in paragraph (c) of this section is decreased by
the fair market value of any consideration (including P stock in which
gain or loss is recognized, see Sec. 1.1032-2(c)) that is exchanged in
the reorganization and that is not provided by P pursuant to the plan of
reorganization. This paragraph (d) does not apply to the amount of T
liabilities assumed by S or to which the T assets acquired by S are
subject under paragraph (c)(1) of this section (or deemed assumed or
taken subject to by S under paragraph (c)(2)(i) of this section).
(2) Limitation. P makes no adjustment to basis under this section if
the decrease required under paragraph (d)(1) of this section equals or
exceeds the amount of the adjustment described in paragraph (c) of this
section.
(3) Example. The rules of this paragraph (d) are illustrated by the
following example. For purposes of this example, P, S, and T are
domestic corporations, P and S do not file consolidated returns, P owns
all of the only class of S stock, the P stock exchanged in the
transaction satisfies the requirements of the applicable triangular
reorganization provisions, and the facts set forth the only corporate
activity.
Example. (a) Facts. T has assets with an aggregate basis of $60 and
fair market value of $100 and no liabilities. S is an operating company
with substantial assets that has been in existence for several years. P
has a $100 basis in its S stock. Pursuant to a plan, T merges into S and
the T shareholders receive $70 of P stock provided by P pursuant to the
plan and $30 of cash provided by S in exchange for their T stock. The
transaction is a reorganization to which sections 368(a)(1)(A) and
(a)(2)(D) apply.
(b) Basis adjustment. Under Sec. 1.358-6(c)(1), P's $100 basis in
its S stock is increased by the $60 basis in the T assets deemed
transferred. Under Sec. 1.358-6(d)(1), the $60 adjustment is decreased
by the $30 of cash provided by S in the reorganization. Consequently, P
has a net adjustment of $30 in its S stock, and P has a $130 basis in
its S stock as a result of the reorganization.
(c) Appreciated asset. The facts are the same as in paragraph (a) of
this Example, except that in the reorganization S provides an asset with
a $20 adjusted basis and $30 fair market value instead of $30 of cash.
The basis results are the same as in paragraph (b) of this Example. In
addition, S recognizes $10 of gain under section 1001 on its disposition
of the asset in the reorganization.
(d) Depreciated asset. The facts are the same as in paragraph (c) of
this Example, except that S has a $60 adjusted basis in the asset. The
basis results are the same as in paragraph (b) of this Example. In
addition, S recognizes $30 of loss under section 1001 on its disposition
of the asset in the reorganization.
(e) P stock. The facts are the same as in paragraph (a) of this
Example, except that in the reorganization S provides P stock with a
fair market value of $30 instead of $30 of cash. S acquired the P stock
in an unrelated transaction several years before the reorganization. S
has a $20 adjusted basis in the P stock. The basis results are the same
as in paragraph (b) of this Example. In addition, S recognizes $10 of
gain on its disposition of the P stock in the reorganization. See Sec.
1.1032-2(c).
[[Page 323]]
(e) Cross-references--(1) Triangular reorganizations involving
members of a consolidated group. For rules relating to stock basis
adjustments made as a result of a triangular reorganization in which P
and S, or P and T, as applicable, are, or become, members of a
consolidated group, see Sec. 1.1502-30. However, if a transaction is a
group structure change, stock basis adjustments are determined under
Sec. 1.1502-31 and not under Sec. 1.1502-30, even if the transaction
also qualifies as a reorganization otherwise subject to Sec. 1.1502-30.
(2) Triangular reorganizations involving certain foreign
corporations. For rules relating to stock basis adjustments made as a
result of triangular reorganizations involving certain foreign
corporations, see Sec. Sec. 1.367(b)-4(b), 1.367(b)-10, and 1.367(b)-
13.
(f) Effective/applicability dates--(1) General rule. Paragraph
(e)(1) of this section shall apply to triangular reorganizations
occurring on or after September 17, 2008.
(2) Special rule for reverse triangular mergers. For a reverse
triangular merger occurring before December 23, 1994, P may--
(i) Determine the basis in its T stock as if paragraph (c)(2)(i) of
this section applied; or
(ii) Determine the basis in its T stock acquired as if P acquired
such stock from the former T shareholders in a transaction in which P's
basis in the T stock was determined under section 362(b).
(3) Triangular G reorganization and special rule for triangular
reorganizations involving members of a consolidated group. Paragraphs
(b)(2)(v) and (e) of this section shall apply to triangular
reorganizations occurring on or after September 17, 2008. However,
taxpayers may apply paragraph (b)(2)(v) of this section to triangular
reorganizations occurring before September 17, 2008 and on or after
December 23, 1994.
(4) Triangular reorganizations involving importation property
acquired in loss importation transaction or loss duplication
transaction; triangular reorganizations involving certain foreign
corporations. Paragraphs (a) and (e)(2) of this section apply to
triangular reorganizations occurring after October 22, 2004 unless
effected to a binding agreement that was in effect prior to that date
and at all times thereafter.
[T.D. 8648, 60 FR 66079, Dec. 21, 1995; 61 FR 11547, Mar. 21, 1996; T.D.
9243, 71 FR 4282, Jan. 26, 2006; T.D. 9424, Sept. 17, 2008; 73 FR 62204,
Oct. 20, 2008; T.D. 9759, 81 FR 17074, Mar. 28, 2016]
Sec. 1.358-7 Transfers by partners and partnerships to corporations.
(a) Transfers by partners of partnership interests. For purposes of
section 358(h), a transfer of a partnership interest to a corporation is
treated as a transfer of the partner's share of each of the
partnership's assets and an assumption by the corporation of the
partner's share of partnership liabilities (including section 358(h)
liabilities, as defined in paragraph (d) of this section). See paragraph
(e) Example 2 of this section.
(b) Transfers by partnerships. If a corporation assumes a section
358(h) liability from a partnership in an exchange to which section
358(a) applies, then, for purposes of applying section 705
(determination of basis of partner's interest) and Sec. 1.704-1(b), any
reduction, under section 358(h)(1), in the partnership's basis in
corporate stock received in the transaction is treated as an expenditure
of the partnership described in section 705(a)(2)(B). See paragraph (e)
Example 1 of this section. This expenditure must be allocated among the
partners in accordance with section 704(b) and (c) and Sec. 1.752-7(c).
If a partner's share of the reduction, under section 358(h)(1), in the
partnership's basis in corporate stock exceeds the partner's basis in
the partnership interest, then the partner recognizes gain equal to the
excess, which is treated as gain from the sale or exchange of a
partnership interest. This paragraph does not apply to the extent that
Sec. 1.752-7(j)(4) applies to the assumption of the Sec. 1.752-7
liability by the corporation.
(c) Assumption of section 358(h) liability by partnership followed
by transfer of partnership interest or partnership property to a
corporation--trade or business exception. Where a partnership assumes a
section 358(h) liability from a partner and, subsequently, the partner
transfers all or part of the partner's partnership interest to a
corporation in an exchange to which section 358(a) applies, then, for
purposes of applying section
[[Page 324]]
358(h)(2), the section 358(h) liability is treated as associated only
with the contribution made to the partnership by that partner. See
paragraph (e) Example 2 of this section. Similar rules apply where a
partnership assumes a section 358(h) liability of a partner and a
corporation subsequently assumes that section 358(h) liability from the
partnership in an exchange to which section 358(a) applies.
(d) Section 358(h) liabilities defined. For purposes of this
section, section 358(h) liabilities are liabilities described in section
358(h)(3).
(e) Examples. The following examples illustrate the provisions of
this section. Assume, for purposes of these examples, that the
obligation assumed by the corporation does not reduce the shareholder's
basis in the corporate stock under section 358(d). The examples are as
follows:
Example 1. Transfer of partnership property to corporation. In 2004,
in an exchange to which section 351(a) applies, PRS, a cash basis
taxpayer, transfers $2,000,000 cash to Corporation X, also a cash basis
taxpayer, in exchange for Corporation X shares and the assumption by
Corporation X of $1,000,000 of accounts payable incurred by PRS. At the
time of the exchange, PRS has two partners, A, a 90% partner, who has a
$2,000,000 basis in the PRS interest, and B, a 10% partner, who has a
$50,000 basis in the PRS interest. Assume that, under section 358(h)(1),
PRS's basis in the Corporation X stock is reduced by the accounts
payable assumed by Corporation X ($1,000,000). Under paragraph (b) of
this section, A's and B's bases in PRS must be reduced, but not below
zero, by their respective shares of the section 358(h)(1) basis
reduction. If either partner's share of the section 358(h)(1) basis
reduction exceeds the partner's basis in the partnership interest, then
the partner recognizes gain equal to the excess. A's share of the
section 358(h) basis reduction is $900,000 (90% of $1,000,000).
Therefore, A's basis in the PRS interest is reduced to $1,100,000
($2,000,000 - $900,000). B's share of the section 358(h) basis reduction
is $100,000 (10% of $1,000,000). Because B's share of the section 358(h)
basis reduction ($100,000) exceeds B's basis in the PRS interest
($50,000), B's basis in the PRS interest is reduced to $0 and B
recognizes $50,000 of gain. This gain is treated as gain from the sale
of the PRS interest.
Example 2. Transfer of partnership interest to corporation. In 2004,
A contributes undeveloped land with a value and basis of $4,000,000 in
exchange for a 50% interest in PRS and an assumption by PRS of
$2,000,000 of pension liabilities from a separate business that A
conducts. A's basis in the PRS interest immediately after the
contribution is A's basis in the land, $4,000,000, unreduced by the
amount of the pension liabilities. PRS develops the land as a landfill.
Before PRS has economically performed with respect to the pension
liabilities, A transfers A's interest in PRS to Corporation X, in an
exchange to which section 351 applies. At the time of the exchange, the
value of A's PRS interest is $2,000,000, A's basis in PRS is $4,000,000,
and A has no share of partnership liabilities other than the pension
liabilities. For purposes of applying section 358(h), the transfer of
the PRS interest to Corporation X is treated as a transfer to
Corporation X of A's share of PRS assets and an assumption by
Corporation X of A's share of the pension liabilities of PRS
($2,000,000). Because the pension liabilities were not assumed by PRS
from A in an exchange in which the trade or business associated with the
liability was transferred to PRS, the transfer of the PRS interest to
Corporation X is not excepted from section 358(h) under section
358(h)(2). See paragraph (c) of this section. Under section 358(h), A's
basis in the Corporation X stock is reduced by the $2,000,000 of pension
liabilities.
(f) Effective date. This section applies to assumptions of
liabilities by a corporation occurring on or after June 24, 2003.
[T.D. 9207, 70 FR 30341, May 26, 2005]
effects on corporation
Sec. 1.361-1 Nonrecognition of gain or loss to corporations.
Section 361 provides the general rule that no gain or loss shall be
recognized if a corporation, a party to a reorganization, exchanges
property in pursuance of the plan of reorganization solely for stock or
securities in another corporation, a party to the reorganization. This
provision includes only stock and securities received in connection with
a reorganization defined in section 368(a). It also includes nonvoting
stock and securities in a corporation, a party to a reorganization,
received in a transaction to which section 368(a)(1)(C) is applicable
only by reason of section 368(a)(2)(B).
Sec. 1.362-1 Basis to corporations.
(a) In general. Section 362 provides, as a general rule, that if
property was acquired on or after June 22, 1954, by a corporation (1) in
connection with a
[[Page 325]]
transaction to which section 351 (relating to transfer of property to
corporation controlled by transferor) applies, (2) as paid-in surplus or
as a contribution to capital, or (3) in connection with a reorganization
to which part III, subchapter C, chapter 1 of the Code applies, then the
basis shall be the same as it would be in the hands of the transferor,
increased in the amount of gain recognized to the transferor on such
transfer. (See also Sec. 1.362-2.) See Sec. 1.460-4(k)(3)(iv)(B)(2)
for rules relating to adjustments to the basis of certain contracts
accounted for using a long-term contract method of accounting that are
acquired in certain transfers described in section 351 and certain
reorganizations described in section 368(a).
(b) Exceptions. (1) In the case of a plan of reorganization adopted
after October 22, 1968, section 362 does not apply if the property
acquired in connection with such reorganization consists of stock or
securities in a corporation a party to the reorganization, unless
acquired by the exchange of stock or securities of the transferee (or of
a corporation which is in control of the transferee) as the
consideration in whole or in part for the transfer.
(2) In the case of a plan of reorganization adopted before October
23, 1968, section 362 does not apply if the property acquired in
connection with such reorganization consists of stock or securities in a
corporation a party to the reorganization, unless acquired by the
issuance of stock or securities of the transferee (or, in the case of
transactions occurring after December 31, 1963, of a corporation which
is in control of the transferee) as the consideration in whole or in
part for the transfer. The term issuance of stock or securities includes
any transfer of stock or securities, including stock or securities which
were purchased or were acquired as a contribution to capital.
[T.D. 7422, 41 FR 26569, June 28, 1976, as amended by T.D. 8995, 67 FR
34605, May 15, 2002]
Sec. 1.362-2 Certain contributions to capital.
The following regulations shall be used in the application of
section 362(c):
(a) Property deemed to be acquired with contributed money shall be
that property, if any, the acquisition of which was the purpose
motivating the contribution;
(b) In the case of an excess of the amount of money contributed over
the cost of the property deemed to be acquired with such money (as
defined in paragraph (a) of this section) such excess shall be applied
to the reduction of the basis (but not below zero) of other properties
held by the corporation, on the last day of the 12-month period
beginning on the day the contribution is received, in the following
order--
(1) All property of a character subject to an allowance for
depreciation (not including any properties as to which a deduction for
amortization is allowable),
(2) Property with respect to which a deduction for amortization is
allowable,
(3) Property with respect to which a deduction for depletion is
allowable under section 611 but not under section 613, and
(4) All other remaining properties.
The reduction of the basis of each of the properties within each of the
above categories shall be made in proportion to the relative bases of
such properties.
(c) With the consent of the Commissioner, the taxpayer may, however,
have the basis of the various units of property within a particular
category adjusted in a manner different from the general rule set forth
in paragraph (b) of this section. Variations from such rule may, for
example, involve adjusting the basis of only certain units of the
taxpayer's property within a given category. A request for variations
from the general rule should be filed by the taxpayer with its return
for the taxable year for which the transfer of the property has
occurred.
Sec. 1.362-3 Basis of importation property acquired in loss
importation transaction.
(a) Purpose. The purpose of section 362(e)(1) and this section is to
modify the application of section 362(a) (section 351 transfers,
contributions to capital, or paid-in surplus) and section 362(b)
(reorganizations) to prevent a
[[Page 326]]
corporation (Acquiring) from importing a net built-in loss in a
transaction described in either section. See paragraph (c) of this
section for definitions of terms used in this section.
(b) Basis determinations under this section--(1) Basis of
importation property received in loss importation transaction.
Notwithstanding the general rules of section 362(a) and (b), Acquiring's
basis in importation property (as defined in paragraph (c)(2) of this
section) acquired in a loss importation transaction (as defined in
paragraph (c)(3) of this section) is equal to the value of the property
immediately after the transaction.
(2) Adjustment to basis of subsidiary stock in triangular
reorganizations. If a corporation (P) computes its basis in stock of a
subsidiary (whether S or T) under Sec. 1.358-6 (stock basis in certain
triangular reorganizations), P's basis in property treated as acquired
by P in Sec. 1.358-6(c) is determined under section 362(e)(1) and this
section to the extent such property, if actually acquired by P, would be
importation property acquired in a loss importation transaction. See
Sec. 1.358-6(c)(1)(i)(A), (c)(2)(ii)(B), and (c)(3)(i). The
subsidiary's basis in the property actually acquired in the transaction
is determined under applicable law (including this section), without
regard to the amount of any adjustment to P's basis in the subsidiary's
stock. Thus, the basis of the property in S's or T's hands may differ
from the amount of the adjustment to P's basis in its stock of S or T.
(3) Acquiring's basis in other property transferred. In general,
Acquiring's basis in property received in a section 362 transaction (as
defined in paragraph (c)(1) of this section) that is not determined
under section 362(e)(1) and this section is determined under section
362(a) or section 362(b). However, if the transaction is described in
section 362(a) (without regard to whether it is also described in any
other section), further adjustment may be required under section
362(e)(2). See Sec. 1.362-4.
(4) Other effects of basis determination under this section--(i)
Determination by reference to transferor's basis. A determination of
basis under this section is a determination by reference to the
transferor's basis, including for purposes of sections 1223(2) and
7701(a)(43). However, solely for purposes of applying section 755, a
determination of basis under this section is treated as a determination
not by reference to the transferor's basis.
(ii) Not tax-exempt income or noncapital, nondeductible expense. The
application of this section does not give rise to an item treated as
tax-exempt income under Sec. 1.1502-32(b)(2)(ii) or as a noncapital,
nondeductible expense under Sec. 1.1502-32(b)(2)(iii).
(iii) No effect on earnings and profits. Any determination of basis
under this section does not reduce or otherwise affect the calculation
of the all earnings and profits amount provided in Sec. 1.367(b)-2(d).
(c) Definitions. For purposes of this section, the following
definitions apply:
(1) Section 362 transaction. The term section 362 transaction means
any transaction described in section 362(a) or in section 362(b).
(2) Importation property--(i) General rule. The term importation
property means any property (including separate portions determined
under paragraph (d)(4) of this section and separate portions of property
tentatively divided under paragraph (e)(2) of this section) with respect
to which--
(A) Any gain or loss that would be recognized on its sale by the
transferor immediately before the transaction (the transferor's
hypothetical sale) would not be subject to tax imposed under any
provision of subtitle A of the Internal Revenue Code (federal income
tax) (taking into account the provisions of paragraph (d) of this
section); and
(B) Any gain or loss that would be recognized on its sale by
Acquiring immediately after the transaction (Acquiring's hypothetical
sale) would be subject to federal income tax (taking into account the
provisions of paragraph (d) of this section).
(ii) Special rules for applying this paragraph (c)(2). See paragraph
(d) of this section for rules for determining whether gain or loss on a
hypothetical sale would be taken into account in determining a federal
income tax liability and paragraph (e) of this section for rules
applicable when more than one
[[Page 327]]
person would take such gain or loss into account.
(3) Loss importation transaction. The term loss importation
transaction means any section 362 transaction in which Acquiring's
aggregate basis in all importation property received from all
transferors in the transaction would exceed the aggregate value of such
property immediately after the transaction. For this purpose,
Acquiring's basis in property received is determined without regard to
this section or section 362(e)(2).
(4) Value--(i) General rule. The term value means fair market value.
(ii) Special rule for transfers of partnership interests.
Notwithstanding the general rule in paragraph (c)(4)(i) of this section,
when referring to a partnership interest, for purposes of this section,
the term value means the sum of the cash that Acquiring would receive
for the interest, assuming an exchange between a willing buyer and a
willing seller (neither being under any compulsion to buy or sell and
both having reasonable knowledge of relevant facts), increased by any
Sec. 1.752-1 liabilities (as defined in Sec. 1.752-1(a)(4)) of the
partnership allocated to Acquiring with regard to such transferred
interest under section 752 immediately after the transfer to Acquiring.
If a partnership has elected under section 754, or if section 743(b)
would require a downward basis adjustment to the partnership property,
the partnership must apply the rules of Sec. 1.743-1 to determine the
amount of the basis adjustment to the partnership property.
(d) Rules for determining whether gain or loss would be taken into
account in determining a federal income tax liability--(1) General rule.
In general, any gain or loss that would be recognized on a hypothetical
sale described in paragraph (c)(2) of this section is considered to be
subject to federal income tax if, taking into account all relevant facts
and circumstances, such gain or loss would affect or be taken into
account in determining the federal income tax liability of the
transferor or Acquiring, respectively. This determination is made
without regard to whether such person has or would have any actual
federal income tax liability for the taxable year of the transaction.
(2) Look-through rule in the case of certain pass-through entities.
Notwithstanding the general rule in paragraph (d)(1) of this section,
the determination of whether any gain or loss on a hypothetical sale
would be treated as subject to federal income tax is made by reference
to the person that would be required to include such gain or loss in its
taxable income if the hypothetical seller is--
(i) A trust treated as owned by its grantors or others (see section
671);
(ii) A partnership (see section 701); or
(iii) An S corporation (see sections 1363 and 1366).
(3) Controlled foreign corporation (CFC), passive foreign investment
company (PFIC). For purposes of this section, gain or loss that would be
recognized by a CFC (as defined in section 957(a)) or a PFIC (as defined
in section 1297(a)) is not deemed taken into account in determining a
federal income tax liability solely because it could affect an inclusion
under section 951(a) or section 1293(a).
(4) Special rule for debt-financed property subject to section 512.
If property is debt-financed property (as defined in section 514(b))
owned by an organization subject to the unrelated business income tax
described in section 511(a)(2) and, as a result, a portion of any gain
or loss on a sale of the property would be included in unrelated taxable
business income (UBTI) under section 512, such property is treated as
divided into separate portions in proportion to the amount of such gain
or loss that would be includible in UBTI. The rules of paragraph (e) of
this section apply to determine the characterization of such portions
(as includible in the determination of a federal income tax liability or
not), and the tax treatment and consequences of the transaction in which
such portions are transferred.
(5) Look-through treatment in the case of certain avoidance
transactions--(i) Application of this paragraph (d)(5). This paragraph
(d)(5) applies if--
(A) The transferor is a domestic entity that is a trust (other than
a trust described in paragraph (d)(2)(i) of this section), estate,
regulated investment company (as defined in section 851(a)),
[[Page 328]]
a real estate investment trust (as defined in section 856(a)), or a
cooperative (as described in section 1381); and
(B) The transferor transfers, directly or indirectly, property that
was transferred to or acquired by it as part of a plan (whether of
transferor, Acquiring, or any other person) to avoid the application of
section 362(e)(1) and this section to a section 362 transaction.
(ii) Effect of application of this paragraph (d)(5). Notwithstanding
paragraph (d)(1) of this section, if a transferor is described in both
paragraphs (d)(5)(i)(A) and (B) of this section--
(A) The transferor is treated as though it distributes the proceeds
of the hypothetical sale (which, for this purpose, are presumed to be an
amount greater than zero);
(B) To the fullest extent possible under the transferor's organizing
instrument, the deemed distribution is treated as made to a distributee
or distributees that would not take distributions from the transferor
into account in determining a federal income tax liability; and
(C) The determination of whether the gain or loss on the
hypothetical sale is treated as subject to federal income tax is made by
reference to the deemed distributee or distributees.
(iii) Tiered entities. If a deemed distributee is an entity
described in paragraph (d)(5)(i)(A) of this section, the determination
of whether gain or loss on the hypothetical sale is taken into account
in determining a federal income tax liability is made by treating the
deemed distributee, and any successive such deemed distributees, as a
transferor and applying the rules in paragraphs (d)(5)(i) and (ii) of
this section to its deemed distribution (and to all successive deemed
distributions), until no deemed distributee or successive deemed
distributee is an entity described in paragraph (d)(5)(i)(A) of this
section.
(e) Special rules for gain or loss that would be taken into account
by multiple persons--(1) In general. If gain or loss from a disposition
of property would be includible in income by more than one person, the
property is treated as tentatively divided into separate portions in
proportion to the amount of gain or loss recognized with respect to the
property that would be allocated to each such person. If an entity's
organizing instrument specially allocates gain and loss, the tentative
division of property under this paragraph (e) must reflect the manner in
which gain or loss on the disposition of such property would be
allocated under the terms of the organizing instrument and any
applicable rules of law, taking into account the net gain or loss
actually recognized by the entity in that tax year.
(2) Application of section. The rules of this section apply
independently to each tentatively divided portion to determine if the
portion is importation property. Each tentatively divided portion that
is determined to be importation property is included with all other
importation property in the determination of whether the transaction is
a loss importation transaction.
(3) Acquiring's basis in property tentatively divided into separate
portions. Immediately after the application of section 362(e)(1) and
this section and before the application of section 362(e)(2), each
property treated as tentatively divided into separate portions for
purposes of applying section 362(e)(1) and this section ceases to be
treated as tentatively divided and Acquiring has a single, undivided
basis in such property that is equal to the sum of--
(i) The value of each tentatively divided portion that is
importation property, if the transaction is a loss importation
transaction; and
(ii) Acquiring's basis in each tentatively divided portion that is
not importation property received in a loss importation transaction, as
determined under section 362(a) or section 362(b), as applicable, and
without regard to any potential application of section 362(e)(2).
(f) Examples. The examples in this paragraph (f) illustrate the
application of section 362(e)(1) and the provisions of this section.
Unless otherwise indicated, the examples use the following nomenclature
and assumptions: A and B are U.S. citizens. DC, DC1, and P are domestic
corporations that have not elected to be S corporations within the
meaning of section 1361(a)(1) and that are not members of a consolidated
group. F is a foreign individual. FP is
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a foreign partnership. FC, FC1, and FC2 are foreign corporations. Unless
the facts indicate otherwise, the foreign individuals, corporations, and
partnerships are not engaged in a U.S. trade or business, have no U.S.
real property interests, and have no other relationships, activities, or
interests that would cause them, their shareholders, their partners, or
their property to be subject to federal income tax. There is no
applicable income tax treaty, all persons' tax years are calendar years,
and all persons and transactions are unrelated unless the facts indicate
otherwise.
Example 1. Basic application of section. (i) Section 351 transfer of
importation property in a loss importation transaction. (A) Facts. FC
owns three assets, A1 (basis $40, value $150), A2 (basis $120, value
$30), and A3 (basis $140, value $20). On Date 1, FC transfers A1, A2,
and A3 to DC in a transaction to which section 351 applies.
(B) Importation property. If FC had sold A1, A2, or A3 immediately
before the transaction, no gain or loss recognized on the sale would
have been taken into account in determining a federal income tax
liability. Further, if DC had sold A1, A2, or A3 immediately after the
transaction, DC would take into account any gain or loss recognized on
the sale in determining its federal income tax liability. Therefore, A1,
A2, and A3 are all importation properties. See paragraph (c)(2) of this
section.
(C) Loss importation transaction. FC's transfer of A1, A2, and A3 is
a section 362 transaction. Furthermore, but for section 362(e)(1) and
this section and section 362(e)(2), DC's aggregate basis in the
importation properties, A1, A2, and A3, would be $300 ($40 + $120 +
$140) under section 362(a) and the properties' aggregate value would be
$200 ($150 + $30 + $20). Therefore, the importation properties'
aggregate basis would exceed their aggregate value and the transaction
is a loss importation transaction. See paragraph (c)(3) of this section.
(D) Application of section 362(e)(1) and this section to importation
property received in loss importation transaction. Because the
importation properties, A1, A2, and A3, were transferred in a loss
importation transaction, paragraph (b)(1) of this section applies and
DC's basis in A1, A2, and A3 will each be equal to the property's value
($150, $30, and $20, respectively) immediately after the transfer.
(E) Basis of property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. Taking into account the application of
section 362(e)(1) and this section, DC's aggregate basis in the
transferred properties would not exceed their aggregate value
immediately after the transfer. Therefore, FC does not have a net built-
in loss, FC's transfer is not a loss duplication transaction, and
section 362(e)(2) does not apply to this transaction. DC's bases in A1,
A2, and A3, as determined under paragraph (i)(D) of this Example 1, are
$150, $30, and $20, respectively. Under section 358(a), FC receives the
DC stock with a basis of $300 (the sum of FC's bases in A1, A2, and A3
immediately before the exchange).
(ii) Reorganization. The facts are the same as in paragraph (i)(A)
of this Example 1 except that, instead of transferring property to DC in
a section 351 exchange, FC merges with and into DC in a transaction
described in section 368(a)(1)(A). The analysis and results are the same
as set forth in paragraphs (i)(B), (C), and (D) of this Example 1.
However, the analysis in paragraph (i)(E) of this Example 1 does not
apply to these facts because the transaction is not subject to 362(e)(2)
and Sec. 1.362-4. Under section 358(a), FC's shareholders will take the
DC stock with a basis determined by reference to their FC stock basis.
(iii) FC's property used in U.S. trade or business. (A) Facts. The
facts are the same as in paragraph (i)(A) of this Example 1, except that
FC is engaged in a U.S. trade or business and uses all the properties in
that U.S. trade or business. In this case, none of the properties would
be importation property because FC would take any gain or loss on the
disposition of the properties into account in determining its federal
income tax liability. Accordingly, this section does not apply to the
transaction.
(B) Basis of property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. Taking into account the application of
section 362(e)(1) and this section but without taking into account the
provisions of section 362(e)(2), DC's aggregate basis in the transferred
properties would be $300 ($40 + $120 + $140) under section 362(a) and
the properties' aggregate value immediately after the transfer would be
$200 ($150 + $30 + $20). Therefore, FC has a net built-in loss and FC's
transfer of A1, A2, and A3 is a loss duplication transaction.
Accordingly, under the general rule of section 362(e)(2), FC's $100 net
built-in loss ($300 aggregate basis over $200 aggregate value) would be
allocated proportionately (by the amount of built-in loss in each
property) to reduce DC's basis in the loss properties, A2 and A3. See
Sec. 1.362-4. As a result, DC's basis in A2 would be $77.14 ($120 basis
under section 362(a) reduced by $42.86, A2's proportionate share of FC's
net built-in loss, computed as $90/$210 x $100) and DC's basis in
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A3 would be $82.86 ($140 basis under section 362(a) reduced by $57.14,
A3's proportionate share of FC's net built-in loss, computed as $120/
$210 x $100). However, if FC and DC were to elect under section
362(e)(2)(C) to apply the $100 basis reduction to FC's basis in the DC
stock received in the transaction, DC's bases in A2 and A3 would remain
their section 362(a) bases of $120 and $140, respectively. Under section
362(a), DC's basis in A1 is $40 (irrespective of whether the section
362(e)(2)(C) election is made). If FC and DC do not make a section
362(e)(2)(C) election, FC's basis in the DC stock received in the
exchange will be $300; if FC and DC do make the election, FC's basis in
the DC stock will be $200 ($300-$100 net built-in loss). See Sec.
1.362-4(b).
Example 2. Multiple transferors. (i) Facts. The facts are the same
as in paragraph (i)(A) of Example 1 of this paragraph (f), except that
FC only owns A1 (basis $40, value $150) and A2 (basis $120, value $30)
and F owns A3 (basis $140, value $20). On Date 1, FC transfers A1 and
A2, and F transfers A3, to DC in a single transaction described in
section 351.
(ii) Importation property. A1 and A2 are importation properties for
the reasons set forth in paragraph (i)(B) of Example 1 of this paragraph
(f). A3 is also an importation property because, if F had sold A3
immediately before the transaction, no gain or loss recognized on the
sale would have been taken into account in determining a federal income
tax liability, and, further, if DC had sold A3 immediately after the
transaction, DC would take into account any gain or loss recognized on
the sale in determining its federal income tax liability.
(iii) Loss importation transaction. The transfers by FC and F are a
section 362 transaction. The transaction is a loss importation
transaction for the reasons set forth in paragraph (i)(C) of Example 1
of this paragraph (f) (notwithstanding that one of the transferors, FC,
did not transfer a net built-in loss). See paragraph (c)(3) of this
section.
(iv) Application of section 362(e)(1) and this section to
importation property received in loss importation transaction. Because
the importation properties, A1, A2, and A3, were transferred in a loss
importation transaction, paragraph (b)(1) of this section applies and
DC's basis in A1, A2, and A3 will each be equal to the property's value
($150, $30, and $20, respectively) immediately after the transfer.
(v) Basis of property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. The application of section 362(e)(2) is
determined separately for each transferor. See Sec. 1.362-4(b). Taking
into account the application of section 362(e)(1) and this section,
neither DC's aggregate basis in FC's properties nor DC's basis in F's
property would exceed the properties' respective values immediately
after the transaction. Therefore neither FC nor F has a net built-in
loss, neither transfer is a loss duplication transaction, and section
362(e)(2) does not apply to either transfer. DC's bases in A1, A2, and
A3, as determined under paragraph (iv) of this Example 2, are $150, $30,
and $20, respectively. Under section 358(a), FC's basis in the DC stock
received is $160 ($40 + $120) and F's basis in the DC stock received in
the exchange is $140.
Example 3. Transfer of importation and non-importation property. (i)
Facts. As in paragraph (i) of Example 2, FC owns A1 (basis $40, value
$150) and A2 (basis $120, value $30), and F owns A3 (basis $140, value
$20). In addition, A2 is a U.S. real property interest as defined in
section 897(c)(1). On Date 1, FC transfers A1 and A2, and F transfers
A3, to DC in a single transaction described in section 351.
(ii) Importation property. A1 and A3 are importation properties for
the reasons set forth in paragraph (i)(B) of Example 1 and paragraph
(ii) of Example 2 of this paragraph (f), respectively. However, A2 is
not importation property because, if FC had sold A2 immediately before
the transaction, FC would take into account any gain or loss recognized
on the sale in determining its federal income tax liability.
(iii) Loss importation transaction. FC's and F's transfer is a
section 362 transaction. Furthermore, but for section 362(e)(1) and this
section and section 362(e)(2), DC's aggregate basis in the importation
properties, A1 and A3, would be $180 ($40 + $140) and the properties'
aggregate value would be $170 ($150 + $20) immediately after the
transaction. Therefore, the importation properties' aggregate basis
would exceed their aggregate value immediately after the transaction,
and the transfer is a loss importation transaction.
(iv) Application of section 362(e)(1) and this section to
importation property received in loss importation transaction. Because
the importation properties, A1 and A3, were transferred in a loss
importation transaction, paragraph (b)(1) of this section applies and
DC's basis in A1 and in A3 will each be equal to the property's value
($150 and $20, respectively) immediately after the transfer.
(v) Basis of property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. The application of section 362(e)(2) is
determined separately for each transferor. See Sec. 1.362-4(b).
(A) FC's transfer. Taking into account the application of section
362(e)(1) and this section but without taking into account the
provisions of section 362(e)(2), DC would have an aggregate basis of
$270 in the transferred
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properties ($150 in A1, as determined under paragraph (iv) of this
Example 3, plus $120 in A2, determined under section 362(a)), and the
properties would have an aggregate value of $180 ($150 + $30)
immediately after the transfer. Therefore, FC has a net built-in loss
and FC's transfer of A1 and A2 is a loss duplication transaction.
Accordingly, under the general rule of section 362(e)(2), FC's $90 net
built-in loss ($270 aggregate basis to DC over $180 aggregate value)
would be allocated proportionately to reduce DC's basis in the loss
property transferred by FC. As a result, FC's entire net built-in loss
would be allocated to A2, the only loss property transferred by FC, and
DC's basis in A2 would be $30 ($120 basis under section 362(a) reduced
by $90 net built-in loss). However, if FC and DC were to elect under
section 362(e)(2)(C) to apply the $90 basis reduction to FC's basis in
the DC stock received in the transaction, DC's basis in A2 would remain
its section 362(a) basis of $120. DC's basis in A1 is $150 as determined
under paragraph (iv) of this Example 3 (irrespective of whether the
section 362(e)(2)(C) election is made). If FC and DC do not make a
section 362(e)(2)(C) election, FC's basis in the DC stock received in
the exchange will be $160; if FC and DC do make the election, FC's basis
in the DC stock will be $70 ($160-$90 net built-in loss). See Sec.
1.362-4.
(B) F's transfer of A3. Taking into account the application of
section 362(e)(1) and this section, DC's basis in A3, the property
transferred by F, would not exceed its value immediately after the
transfer. Therefore, F does not have a built-in loss, F's transfer is
not a loss duplication transaction, and section 362(e)(2) does not apply
to F's transfer. DC's basis in A3, as determined under paragraph (iv) of
this Example 3, is $20. Under section 358(a), F receives the DC stock
with a basis of $140.
Example 4. Multiple transferors of non-importation properties. (i)
Facts. DC1 owns A1 (basis $40, value $150). In addition, as in Example 3
of this paragraph (f), FC owns A2 (basis $120, value $30), a U.S. real
property interest as defined in section 897(c)(1), and F owns A3 (basis
$140, value $20). On Date 1, DC1 transfers A1, FC transfers A2, and F
transfers A3, to DC in a single transaction described in section 351.
(ii) Importation property. A2 is not importation property and A3 is
importation property for the reasons set forth in paragraph (ii) of
Example 3 and paragraph (i)(B) of Example 1 of this paragraph (f),
respectively. A1 is not importation property because, if DC1 had sold A2
immediately before the transaction, DC1 would take into account any gain
or loss recognized on the sale in determining its federal income tax
liability.
(iii) Loss importation transaction. The transfer of A1, A2, and A3
is a section 362 transaction. Furthermore, but for section 362(e)(1) and
this section and section 362(e)(2), DC's basis in importation property,
A3, would be $140 and the value of the property would be $20 immediately
after the transaction. Therefore, the importation property's basis would
exceed value and the transfer is a loss importation transaction.
(iv) Application of section 362(e)(1) and this section to
importation property received in loss importation transaction. Because
the importation property, A3, was transferred in a loss importation
transaction, section 362(e)(1) and paragraph (b)(1) of this section
apply and DC's basis in A3 will be equal to A3's $20 value immediately
after the transfer.
(v) Basis of property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. The application of section 362(e)(2) is
determined separately for each transferor. See Sec. 1.362-4.
(A) DC1's transfer. Taking into account the application of section
362(e)(1) and this section, DC's basis in A1 ($40 under section 362(a))
would not exceed its value immediately after the transfer. Therefore,
DC1 does not have a net built-in loss, DC1's transfer is not a loss
duplication transaction, and section 362(e)(2) does not apply to DC1's
transfer. DC's basis in A1, determined under section 362(a), is $40.
Under section 358(a), DC1 receives the DC stock with a basis of $40.
(B) FC's transfer. Taking into account the application of section
362(e)(1) and this section, but without taking into account the
provisions of section 362(e)(2), DC would have a section 362(a) basis of
$120 in A2, which would exceed A2's $30 value immediately after the
transfer. Therefore, FC has a net built-in loss and FC's transfer of A2
is a loss duplication transaction. Accordingly, under the general rule
of section 362(e)(2), FC's $90 net built-in loss (DC's $120 basis in A2
over A2's $30 value) would be applied to reduce DC's basis in A2, the
only loss property transferred by FC. As a result, DC's basis in A2
would be $30 ($120 basis under section 362(a), reduced by the $90 net
built-in loss). However, if FC and DC were to elect under section
362(e)(2)(C) to apply the $90 basis reduction to FC's basis in the DC
stock received in the transaction, DC's basis in A2 would be its $120
basis determined under section 362(a). If FC and DC do not make a
section 362(e)(2)(C) election, FC's basis in the DC stock received in
the exchange will be $120; if FC and DC do make the election, FC's basis
in the DC stock will be $30 ($120-$90). See Sec. 1.362-4.
(C) F's transfer. F's transfer of A3 is a transaction described in
section 362(a). However, taking into account the application of section
362(e)(1) and this section, DC's basis in A3 ($20) would not exceed its
value immediately after the transfer. Therefore, F does not have a
built-in loss, F's transfer is not a
[[Page 332]]
loss duplication transaction, and section 362(e)(2) does not apply to
F's transfer. DC's basis in A3, as determined under paragraph (iv) of
this Example 4, is $20. Under section 358(a), F receives the DC stock
with a basis of $140.
Example 5. Partnership transactions. (i) Transfer by foreign
partnership, foreign and domestic partners. (A) Facts. A and F are equal
partners in FP. FP owns A1 (basis $100, value $70). Under the terms of
the FP partnership agreement, FP's items of income, gain, deduction, and
loss are allocated equally between A and F. Section 704(c) does not
apply with respect to the partnership property. FP transfers A1 to DC in
a transfer to which section 351 applies. No election is made under
section 362(e)(2)(C).
(B) Importation property. If FP had sold A1 immediately before the
transaction, any gain or loss recognized on the sale would be allocated
to and includible by A and F equally under the partnership agreement.
Thus, under paragraph (d)(2) of this section, A1 is treated as
tentatively divided into two equal portions, one treated as owned by A
and one treated as owned by F. If FP had sold A1 immediately before the
transaction, any gain or loss recognized on the portion treated as owned
by A would have been taken into account in determining a federal income
tax liability (A's); thus A's tentatively divided portion of A1 is not
importation property. However, no gain or loss recognized on the
tentatively divided portion treated as owned by F would have been taken
into account in determining a federal income tax liability. Further, if
DC had sold A1 immediately after the transaction, any gain or loss
recognized on the sale would have been taken into account in determining
a federal income tax liability (DC's); thus, F's tentatively divided
portion of A1 is importation property.
(C) Loss importation transaction. FP's transfer of A1 is a section
362 transaction. Furthermore, but for section 362(e)(1) and this section
and section 362(e)(2), DC's basis in the importation property, F's
portion of A1, would be $50 under section 362(a) and the property's
value would be $35 immediately after the transaction. Therefore, the
importation property's basis would exceed its value and the transfer is
a loss importation transaction.
(D) Application of section 362(e)(1) and this section to importation
property received in loss importation transaction. Because the
importation property, F's tentatively divided portion of A1, was
transferred in a loss importation transaction, section 362(e)(1) and
paragraph (b)(1) of this section apply and DC's basis in F's portion of
A1 will be equal to its $35 value.
(E) Basis of property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. Taking into account the application of
section 362(e)(1) and this section but without taking into account the
provisions of section 362(e)(2), DC's aggregate basis in A1 would be $85
(the sum of the $35 basis in F's tentatively divided portion of A1, as
determined under paragraph (i)(D) of this Example 5, and the $50 basis
in A's tentatively divided portion of A1, determined under section
362(a), see paragraphs (d)(2) and (e)(3) of this section) and A1's value
immediately after the transfer would be $70. Therefore, FP has a net
built-in loss and FP's transfer of A1 is a loss duplication transaction.
Accordingly, under the general rule of section 362(e)(2), FP's $15 net
built-in loss ($85 basis over $70 value) would be allocated to reduce
DC's basis in the loss asset, A1, the only loss property transferred by
FP. As a result, DC's basis in A1 would be $70 ($85 basis under section
362(a) and this section, reduced by the $15 net built-in loss). Under
section 358, FP's basis in the DC stock received in the exchange will be
$100. See Sec. 1.362-4.
(ii) Transfer with election to apply section 362(e)(2)(C). The facts
are the same as in paragraph (i)(A) of this Example 5, except that FP
and DC elect to apply section 362(e)(2)(C) to reduce FP's basis in the
DC stock received in the exchange. The analysis and results are the same
as in paragraphs (i)(B), (C), (D), and (E) of this Example 5, except
that the $15 reduction to DC's basis in A1 is not made and, as a result,
DC's basis in A1 remains $85, and FP's basis in the DC stock received in
the exchange is reduced from $100 to $85. The $15 reduction to FP's
basis in DC stock reduces A's basis in its FP interest under section
705(a)(2)(B). See Sec. 1.362-4(e)(1).
(iii) Transfer by domestic partnership. The facts are the same as in
paragraph (i)(A) of this Example 5 except that FP is a domestic
partnership. The analysis and results are the same as in paragraphs
(i)(B), (C), (D), and (E) of this Example 5.
(iv) Transfer of interest in partnership with liability. (A) Facts.
F and two other individuals are equal partners in FP. F's basis in its
partnership interest is $247. F's share of FP's Sec. 1.752-1
liabilities (as defined in Sec. 1.752-1(a)(4)) is $150. F transfers his
partnership interest to DC in a transaction to which section 351
applies. If DC were to sell the FP interest immediately after the
transfer, DC would receive $100 in cash or other property. In addition,
taking into account the rules under Sec. 1.752-4, DC's share of FP's
Sec. 1.752-1 liabilities (as defined in Sec. 1.752-1(a)(4)) is $145
immediately after the transfer.
(B) Importation property. If F had sold his partnership interest
immediately before the transaction, no gain or loss recognized on the
sale would have been taken into account in determining a federal income
tax liability. Further, if DC had sold the partnership
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interest immediately after the transaction, any gain or loss recognized
on the sale would have been taken into account in determining a federal
income tax liability. Therefore, F's partnership interest is importation
property.
(C) Loss importation transaction. F's transfer is a section 362
transaction. However, but for section 362(e)(1) and this section and
section 362(e)(2), DC's basis in the importation property, the
partnership interest, determined under section 362(a) and taking into
account the rules under section 752, would be $242 (F's $247 basis
reduced by F's $150 share of FP liabilities and increased by DC's $145
share of FP liabilities) and, under paragraph (c)(4)(ii) of this
section, the value of the FP interest would be $245 (the sum of $100,
the cash DC would receive if DC immediately sold the partnership
interest, and $145, DC's share of the Sec. 1.752-1 liabilities (as
defined in Sec. 1.752-1(a)(4)) under section 752 immediately after the
transfer to DC). Therefore, the importation property's basis ($242)
would not exceed its value ($245), and the transfer is not a loss
importation transaction.
(D) Basis in property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. As described in paragraph (iv)(C) of this
Example 5, taking into account the application of section 362(e)(1) and
this section, DC's basis in the partnership interest would not exceed
its value. Therefore, under Sec. 1.362-4, F does not have a net built-
in loss, the transfer is not a loss duplication transaction, and section
362(e)(2) does not apply to the transfer. DC's basis in F's partnership
interest is $242, determined under sections 362(a) and 752. Under
section 358, taking into account the rules under section 752, F's basis
in the DC stock received in the exchange is $97 ($247 reduced by F's
$150 share of FP liabilities). If FP had elected under section 754, or
if section 743(b) required a downward basis adjustment to the
partnership property, FP would apply the rules of Sec. 1.743-1 to
determine the amount of the basis adjustment to the partnership
property.
Example 6. Transactions involving tax-exempt entities. (i) Exempt
transferor. (A) Facts. InsCo is a benevolent life insurance association
of a purely local character exempt from federal income tax under section
501(a) because it is described in section 501(c)(12). InsCo owns shares
of stock of DC1 (basis $100, value $70) for investment purposes, which
are not debt-financed property (as defined in section 514). On December
31, Year 1, InsCo transfers the DC1 stock to DC in exchange for DC stock
in a transaction to which section 351 applies. No election is made under
section 362(e)(2)(C).
(B) Importation property. If InsCo had sold the DC1 stock
immediately before the transaction, any gain or loss realized would be
excluded from UBTI under section 512(b)(5), and thus no gain or loss
recognized on the sale would have been taken into account in determining
federal income tax liability. Further, if DC had sold the DC1 stock
immediately after the transaction, any gain or loss recognized on the
sale would have been taken into account in determining federal income
tax liability. Therefore, the DC1 stock is importation property.
(C) Loss importation transaction. InsCo's transfer is a section 362
transaction. Furthermore, but for section 362(e)(1) and this section and
section 362(e)(2), DC's basis in importation property, the DC1 stock,
would be $100, and the stock's value would be $70 immediately after the
transaction. Therefore, the importation property's basis would exceed
its value and the transfer is a loss importation transaction.
(D) Application of section 362(e)(1) and this section to importation
property received in loss importation transaction. Because the
importation property, the DC1 stock, was transferred in a loss
importation transaction, paragraph (b)(1) of this section applies and
DC's basis in the stock will be equal to its $70 value.
(E) Basis of property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. Taking into account the application of
section 362(e)(1) and this section, DC's basis in the DC1 stock does not
exceed its value immediately after the transaction. Therefore, InsCo
does not have a net built-in loss, InsCo's transfer is not a loss
duplication transaction, and section 362(e)(2) has no application to the
transaction. DC's basis in the DC1 stock, as determined under paragraph
(i)(D) of this Example 6, is $70. Under section 358, InsCo's basis in
the DC stock received in the exchange will be $100.
(ii) Transferor loses tax-exempt status. (A) Facts. The facts are
the same as in paragraph (i)(A) of this Example 6 except that InsCo
fails to be described in section 501(c)(12) in Year 1.
(B) Importation property. If InsCo had sold the DC1 stock
immediately before the transaction, any gain or loss recognized on the
sale would have been taken into account in determining a federal income
tax liability. Therefore, the DC1 stock is not importation property and
this section does not apply to the transaction.
(C) Basis of property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. Taking into account the application of
section 362(e)(1) and this section but without taking into account the
provisions of section 362(e)(2), DC would have a section 362(a) basis of
$100 in the stock, which would exceed its
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value of $70 immediately after the transfer. Therefore, InsCo has a net
built-in loss and InsCo's transfer of the DC1 stock is a loss
duplication transaction. Accordingly, under the general rule of section
362(e)(2), InsCo's $30 net built-in loss ($100 basis over $70 value)
would be allocated to reduce DC's basis in the loss asset, the DC1
stock, the only loss property transferred by InsCo. As a result, DC's
basis in the DC1 stock would be $70 ($100 basis under section 362(a),
reduced by the $30 net built-in loss). Under section 358, InsCo's basis
in the DC stock received in the exchange will be $100.
(iii) Transfer of property that is subject to unrelated business
tax. (A) Facts. The facts are the same as in paragraph (i)(A) of this
Example 6 except that, on December 31, Year 1, instead of the DC1 stock,
InsCo transfers A1 (basis $200, value $150) to DC. A1 is real property
that InsCo owned from January 1 to December 31 of Year 1. During the
entirety of this period, A1's basis was $200, and in the twelve months
prior to December 31, Year 1, the highest amount of outstanding
principal indebtedness on A1 was $40. For purposes of the UBTI rules
under section 512, A1 is debt-financed property within the meaning of
section 514(b).
(B) Importation property. If InsCo had sold A1 immediately before
the transaction, 20 percent of any gain or loss recognized on that sale
(that is, $40 of acquisition indebtedness on A1 divided by A1's $200
basis in Year 1) would, under sections 512 and 514, be includible in
UBTI at the end of Year 1, and 80 percent would not. Thus, under
paragraph (d)(4) of this section, A1 is treated as tentatively divided
into two portions, one reflecting the gain or loss that would be taken
into account in determining a federal income tax liability in InsCo's
hands immediately before the transfer (the 20 percent portion) and one
that would not (the 80 percent portion). Further, if DC sold A1
immediately after the transfer, any gain or loss on both portions would
be taken into account in determining a federal income tax liability.
Accordingly, the 20 percent portion is not importation property, but the
80 percent portion is.
(C) Loss importation transaction. InsCo's transfer of A1 is a
section 362 transaction. Furthermore, but for section 362(e)(1) and this
section and section 362(e)(2), DC's basis in the importation property,
the 80 percent portion of A1, would be $160 (80 percent of InsCo's $200
basis) under section 362(a) and the property's value would be $120 (80%
of A1's $120 value) immediately after the transaction. Therefore, the
importation property's basis would exceed its value and the transfer is
a loss importation transaction.
(D) Application of section 362(e)(1) and this section to importation
property received in loss importation transaction. Because the
importation property, the 80 percent portion of A1, was transferred in a
loss importation transaction, section 362(e)(1) and paragraph (b)(1) of
this section apply and DC's basis in that portion of A1 will be equal to
its $120 value.
(E) Basis of property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. Taking into account the application of
section 362(e)(1) and this section but without taking into account the
provisions of section 362(e)(2), DC's aggregate basis in A1 would be
$160 (the sum of the $120 basis in the 80 percent importation portion of
A1, as determined under paragraph (iii)(D) of this Example 6, and the
$40 basis in the 20 percent portion of A1 that is not importation
property, determined under section 362(a). See paragraph (e)(3) of this
section). Further, A1's value immediately after the transfer would be
$150. Therefore, InsCo has a net built-in loss in A1, and InsCo's
transfer of A1 is a loss duplication transaction. Accordingly, under the
general rule of section 362(e)(2), InsCo's $10 net built-in loss ($160
basis over $150 value) would be allocated to reduce DC's basis in the
loss asset, A1, the only loss property transferred by InsCo. As a
result, DC's basis in A1 would be $150 ($160 basis under section 362(a)
and this section, reduced by the $10 net built-in loss). Under section
358, InsCo's basis in the DC stock received in the exchange will be
$200. See Sec. 1.362-4.
(iv) Transfer with election to apply section 362(e)(2)(C). The facts
are the same as in paragraph (iii)(A) of this Example 6, except that
InsCo and DC elect to apply section 362(e)(2)(C) to reduce InsCo's basis
in the DC stock received in the exchange. The analysis and results are
the same as in paragraphs (iii)(B), (C), (D), and (E) of this Example 6,
except that the $10 reduction to DC's basis in A1 is not made and, as a
result, DC's basis in A1 remains $160; however, InsCo's basis in the DC
stock received in the exchange is reduced from $200 to $190.
Example 7. Transactions involving CFCs. (i) Transfer by CFC. (A)
Facts. FC is a CFC with 100 shares of stock outstanding. A owns 60 of
the shares and F owns the remaining 40 shares. FC owns two assets, A1
(basis $70, value $100), which is used in the conduct of a U.S. trade or
business, and A2 (basis $100, value $75), which is not used in the
conduct of a U.S. trade or business. FC transfers both assets to DC in a
transaction to which section 351 applies.
(B) Importation property. If FC had sold A1 immediately before the
transaction, any gain or loss recognized on the sale would have been
taken into account in determining a federal income tax liability (FC's).
See section 882(a). Therefore, A1 is not importation property. If FC had
sold A2 immediately before the transaction, FC would not take the
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gain or loss recognized into account in determining its federal income
tax liability, but the gain or loss could be taken into account in
determining a section 951 inclusion to FC's U.S. shareholders. However,
under paragraph (d)(3) of this section, gain or loss is not deemed taken
into account in determining a federal income tax liability solely
because it could affect an inclusion under section 951(a). Further, if
DC had sold A2 immediately after the transaction, any gain or loss
recognized on the sale would have been taken into account in determining
a federal income tax liability. Therefore, A2 is importation property.
(C) Loss importation transaction. FC's transfer is a section 362
transaction. Furthermore, but for section 362(e)(1) and this section and
section 362(e)(2), DC's basis in the importation property, A2, would be
$100 and the property's value would be $75 immediately after the
transaction. Therefore, the importation property's basis would exceed
its value and the transfer is a loss importation transaction.
(D) Application of section 362(e)(1) and this section to importation
property received in loss importation transaction. Because the
importation property, A2, was transferred in a loss importation
transaction, paragraph (b)(1) of this section applies and DC's basis in
A2 will be equal to A2's $75 value immediately after the transfer.
(E) Basis of property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. Taking into account the application of
section 362(e)(1) and this section but without taking into account the
provisions of section 362(e)(2), DC would have an aggregate basis of
$145 in the transferred properties ($70 in A1, determined under section
362(a), plus $75 in A2, determined under this section) and the
properties would have an aggregate value of $175 ($100 + $75)
immediately after the transfer. Therefore, FC does not have a net built-
in loss, FC's transfer is not a loss duplication transaction, and
section 362(e)(2) does not apply to the transaction. DC's basis in A1
will be $70, determined under section 362(a), and DC's basis in A2 will
be $75, as determined under paragraph (i)(D) of this Example 7. Under
the general rule in section 358(a), FC receives the DC stock with a
basis of $170 ($70 attributable to A1 plus $100 attributable to A2).
(ii) Transfer of CFC stock. (A) Facts. The facts are the same as in
paragraph (i)(A) of this Example 7, except that A transfers its 60
shares of FC stock (basis $80, value $105) and F transfers its 40 shares
of FC stock (basis $100, value $70) to DC in an exchange that qualifies
under section 351.
(B) Importation property. If A had sold its FC shares immediately
before the transaction, any gain or loss recognized on the sale would
have been taken into account in determining a federal income tax
liability (A's). Therefore, A's FC shares are not importation property.
However, if F had sold its FC shares immediately before the transaction,
no gain or loss recognized on the sale would have been taken into
account in determining a federal income tax liability. Further, if DC
had sold F's FC shares immediately after the transaction, any gain or
loss recognized on the sale would have been taken into account in
determining a federal income tax liability. Therefore, F's FC shares are
importation property.
(C) Loss importation transaction. The transfer of the FC shares is a
section 362 transaction. Furthermore, but for section 362(e)(1) and this
section and section 362(e)(2), DC's aggregate basis in the importation
property, F's shares of FC stock, would be $100 under section 362(a) and
the shares' aggregate value would be $70. Therefore, the importation
property's aggregate basis would exceed its aggregate value, and the
transfer is a loss importation transaction.
(D) Application of section 362(e)(1) and this section to importation
property received in loss importation transaction. Because the
importation property, F's shares of FC stock, was transferred in a loss
importation transaction, paragraph (b)(1) of this section applies and
DC's aggregate basis in the shares will be equal to their $70 aggregate
value immediately after the transfer.
(E) Basis of property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. The application of section 362(e)(2) is
determined separately for each transferor. See Sec. 1.362-4(b).
(1) A's transfer. Taking into account the application of section
362(e)(1) and this section, DC's aggregate basis in the shares ($80
under section 362(a)) would not exceed the shares' value ($105)
immediately after the transaction. Therefore A does not have a built-in
loss, A's transfer is not a loss duplication transaction, and section
362(e)(2) does not apply to A's transfer. DC's aggregate basis in A's
shares, determined under section 362(a), is $80. Under section 358(a), A
receives the DC stock with a basis of $80.
(2) F's transfer. Taking into account the application of section
362(e)(1) and this section, DC's aggregate basis in the shares would not
exceed their value immediately after the transaction. Therefore, F does
not have a built-in loss, F's transfer is not a loss duplication
transaction, and section 362(e)(2) does not apply to F's transfer. DC's
aggregate basis in F's shares, as determined under paragraph (ii)(D) of
this Example 7, is $70. Under section 358(a), F receives the DC stock
with a basis of $100.
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Example 8. Property subject to withholding tax. (i) Facts. FC owns a
share of DC1 stock (basis $100, value $70) as an investment. FC receives
dividends on the share that are subject to federal withholding tax of 30
percent of the amount received under section 881(a); under section
1442(a), DC1 must withhold tax on the dividends paid. FC transfers the
DC1 share to DC in a transaction to which section 351 applies.
(ii) Importation property. Although any dividends received with
respect to the DC1 stock were subject to withholding tax, if FC had sold
the share of stock of DC1, no gain or loss recognized on the sale would
have been taken into account in determining a federal income tax
liability. See section 865(a)(2). Further, if DC had sold the share of
DC1 stock immediately after the transaction, any gain or loss recognized
on the sale would be taken into account in determining federal income
tax liability. Therefore, the share of DC1 stock is importation
property.
(iii) Loss importation transaction. FC's transfer is a section 362
transaction. Furthermore, but for section 362(e)(1) and this section and
section 362(e)(2), DC's basis in the importation property, the share of
DC1 stock, would be $100 and the share's value would be $70 immediately
after the transaction. Therefore, the share's basis would exceed its
value and the transfer is a loss importation transaction.
(iv) Application of section 362(e)(1) and this section to
importation property received in loss importation transaction. Because
the importation property, the DC1 share, was transferred in a loss
importation transaction, paragraph (b)(1) of this section applies and
DC's basis in the share will be equal to the share's $70 value.
(v) Basis of property received in transaction. Following the
application of section 362(e)(1) and this section, the provisions of
section 362(e)(2) must be taken into account because the transfer is a
section 362(a) transaction. Taking into account the application of
section 362(e)(1) and this section, DC's basis in the DC1 share would
not exceed the share's value immediately after the transaction.
Therefore, FC does not have a net built-in loss, FC's transfer is not a
loss duplication transaction, and section 362(e)(2) does not apply to
the transaction. DC's basis in the DC1 share, as determined under
paragraph (iv) of this Example 8, is $70. Under section 358, FC's basis
in the DC stock received in the exchange will be $100.
Example 9. Property transferred in triangular reorganization. (i)
Foreign subsidiary. (A) Facts. P owns the sole outstanding share of
stock of FC (basis $1), FC1 owns the sole outstanding share of FC2
(basis $100), and FC2 owns one asset, A1 (basis $100, value $20). In a
forward triangular merger described in Sec. 1.358-6(b)(2)(i), FC2
merges with and into FC, and FC1 receives shares of P stock in exchange
for its FC2 stock. The forward triangular merger is a transaction
described in section 368(a)(2)(D) and, therefore, in section 362(b).
(B) Determining P's basis in its FC share. Pursuant to Sec. 1.358-
6, for purposes of determining the adjustment to P's basis in its FC
shares, P is treated as though it first received A1 in a transaction in
which its basis in A1 would be determined under section 362(b) and then
it transferred A1 to FC in a transaction in which P's basis in its FC
stock would be determined under section 358.
(1) P's deemed acquisition and transfer of A1. If FC2 had sold A1
for its value immediately before the deemed transaction, no gain or loss
recognized on the sale would have been taken into account in determining
a federal income tax liability. If P had sold A1 immediately after the
deemed transaction, any gain or loss recognized on the sale would have
been taken into account in determining a federal income tax liability
(P's). Therefore, with respect to P's deemed acquisition, A1 is
importation property. Furthermore, immediately after the deemed
transaction, P's basis in A1, but for section 362(e)(1) and this section
and section 362(e)(2), would be $100 and A1's value is $20. Therefore,
the importation property's basis would exceed its value and the transfer
is a loss importation transaction. Accordingly, P's deemed basis in A1
will be equal to A1's $20 value.
(2) P's FC stock basis. As a result of P's deemed transfer of A1 to
FC (and applying the principles of Sec. 1.367(b)-13), P's basis in its
FC stock is increased by its $20 deemed basis in A1. Accordingly,
following the transaction, P's basis in its share of FC stock will be
$21 (the sum of its original $1 basis and the $20 adjustment for the
deemed transfer of A1).
(C) FC's basis in A1. FC's basis in A1 is determined under the rules
of this section without regard to the determination of P's adjustment to
its basis in FC stock. If FC2 had sold A1 for its value immediately
before the transaction, no gain or loss recognized on the sale would
have been taken into account in determining a federal income tax
liability. However, if FC had sold A1 immediately after the transaction,
no gain or loss recognized on the sale would have been taken into
account in determining a federal income tax liability, so A1 is not
importation property. Accordingly, this section will not apply to the
transaction. Although there is a net built-in loss in A1, the
transaction is not described in section 362(a), and so section 362(e)(2)
and Sec. 1.362-4 will not apply to the transaction. Thus, under section
362(b), FC's basis in A1 will be $100.
(D) FC1's basis in P stock. Under section 358, FC1's basis in the P
stock it receives in the exchange will be $100.
(ii) Property transferred to U.S. subsidiary in triangular
reorganization. (A) Facts. The facts
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are the same as in paragraph (i)(A) of this Example 9, except that P
also owns the sole outstanding share of DC (basis $1) and, instead of
merging into FC, FC2 merged into DC.
(B) Determining P's basis in its DC share. As determined under
paragraph (i)(B)(2) of this Example 9, P's basis in its DC share is $21,
the sum of its original $1 basis plus the $20 adjustment for the deemed
transfer of A1.
(C) DC's basis in A1. If FC2 had sold A1 for its value immediately
before the transaction, no gain or loss recognized on the sale would
have been taken into account in determining a federal income tax
liability. However, if DC had sold A1 immediately after the transaction,
any gain or loss recognized on the sale would have been taken into
account in determining a federal income tax liability, so A1 is
importation property with respect to DC. Furthermore, immediately after
the transaction, DC's basis in A1, but for section 362(e)(1) and this
section and section 362(e)(2), would be $100 and A1's value is $20.
Therefore, the importation property's basis would exceed its value and
the transfer is a loss importation transaction. Accordingly, DC's basis
in A1 will be $20, A1's value immediately after the transaction.
(D) FC1's basis in P stock. Under section 358, FC1's basis in the P
stock it receives in the exchange is $100.
(g) Applicability date. This section applies with respect to any
transaction occurring on or after March 28, 2016, and also with respect
to any transaction occurring before such date as a result of an entity
classification election under Sec. 301.7701-3 of this chapter filed on
or after March 28, 2016, unless such transaction is pursuant to a
binding agreement that was in effect prior to March 28, 2016 and at all
times thereafter. In addition, taxpayers may apply this section to any
transaction occurring after October 22, 2004.
[T.D. 9759, 81 FR 17075, Mar. 28, 2016]
Sec. 1.362-4 Basis of loss duplication property.
(a) Purpose and scope--(1) In general. The purpose of section
362(e)(2) and this section is to prevent the duplication of net loss in
transfers to which section 351 applies, capital contributions, and paid-
in surplus (each, a section 362(a) transaction). See paragraph (g) of
this section for definitions of terms used in this section.
(2) Intercompany transactions. For rules relating to the application
of section 362(e)(2) to transfers between members of a consolidated
group on or after October 22, 2004, see Sec. 1.1502-80(h).
(b) Basis determinations under section 362(e)(2) and this section.
Notwithstanding section 362(a), if a corporation (Acquiring) receives
loss duplication property (as defined in paragraph (g)(1) of this
section) from a person (Transferor) in a loss duplication transaction
(as defined in paragraph (g)(2) of this section), Acquiring's basis in
such property is equal to the basis of the property determined without
regard to section 362(e)(2) and this section (as described in paragraph
(g)(1)(ii) of this section), reduced by the property's allocable portion
of Transferor's net built-in loss (as defined in paragraph (g)(3) of
this section). If more than one Transferor transfers property to a
corporation in a section 362(a) transaction, whether and the extent to
which section 362(e)(2) and this section apply is determined separately
for each Transferor.
(c) Exceptions and special rules.--(1) Transactions in which net
built-in loss is eliminated without recognition. Section 362(e)(2) does
not apply to a transaction to the extent that--
(i) Without recognizing gain or loss, Transferor distributes the
Acquiring stock received in the transaction; and
(ii) Upon completion of the transaction, no person holds Acquiring
stock or any other asset with a basis determined, in whole or in part,
by reference to Transferor's basis in the distributed Acquiring stock.
(2) Certain transactions outside of the United States. Section
362(e)(2) does not apply to a transaction if--
(i) Neither Transferor nor Acquiring is a U.S. person (as defined in
section 7701(a)(30)), a person otherwise required to file a U.S. return
for the year of the transaction, a controlled foreign corporation (CFC,
as defined in paragraph (g)(7) of this section), or a controlled foreign
partnership (CFP, as defined in paragraph (g)(9) of this section) on the
date of the transaction;
(ii) The transfer occurs more than two years prior to the date of
any event described in paragraph (d)(3)(ii)(E), (F), or (G) of this
section; and
(iii) The original transaction and the event or events described in
paragraph
[[Page 338]]
(d)(3)(ii)(E), (F), or (G) of this section were not entered into with a
view to reducing or avoiding the Federal income tax liability of any
person by avoiding the application of section 362(e)(2) and this section
to the original transaction.
(3) Other effects of basis determination under this section--(i)
Determination by reference to transferor's basis. A determination of
basis under this section is a determination by reference to the
transferor's basis, including for purposes of sections 755, 1223(2), and
7701(a)(43).
(ii) Treatment as tax-exempt income or noncapital, nondeductible
expense. A determination of basis under paragraph (b) of this section
does not give rise to an item treated as a noncapital, nondeductible
expense under Sec. 1.1502-32(b)(2)(iii). However, a determination of
basis under paragraph (d) of this section does give rise to an item
treated as a noncapital, nondeductible expense under Sec. 1.1502-
32(b)(2)(iii).
(d) Election to reduce Transferor's stock basis instead of
Acquiring's asset basis--(1) In general. In lieu of making the basis
reductions otherwise required under paragraph (b) of this section,
Transferor and Acquiring may elect to reduce Transferor's basis in
Acquiring stock that is received in the transaction without the
recognition of gain or loss (the section 362(e)(2)(C) election). The
section 362(e)(2)(C) election may be made protectively and will have no
effect to the extent that property transferred in the transaction is
determined not to be subject to section 362(e)(2) and this section.
However, the election is irrevocable once it is made. A section
362(e)(2)(C) election is made and effective if--
(i) Prior to the filing of a Section 362(e)(2)(C) Statement
(described in paragraph (d)(3)(i) of this section), Transferor and
Acquiring enter into a written, binding agreement to elect to apply
section 362(e)(2)(C); and
(ii) The Section 362(e)(2)(C) Statement is filed in accordance with
the provisions of paragraph (d)(3) of this section.
(2) Effect of section 362(e)(2)(C) election. If a section
362(e)(2)(C) election is made and in effect--
(i) An amount equal to the portion of Transferor's net built-in loss
(as defined in paragraph (g)(3) of this section) that would otherwise be
applied to reduce asset basis under paragraph (b) of this section is
allocated among the Acquiring shares received or deemed received in the
exchange (in proportion to the value of such shares) and applied to
reduce Transferor's basis (determined without regard to section
362(e)(2) and this section) in each such share; and
(ii) Acquiring's basis in loss duplication property received from
Transferor in the transaction is not determined under section 362(e)(2)
and this section.
(3) Section 362(e)(2)(C) Statement--(i) Form and contents of
statement. The Section 362(e)(2)(C) Statement is to be titled ``Section
362(e)(2)(C) Statement.'' The Section 362(e)(2)(C) Statement must--
(A) Identify (by name and tax identification number, if any)
Transferor and Acquiring;
(B) State that Transferor and Acquiring have entered into a written,
binding agreement to elect to apply section 362(e)(2)(C) as required in
paragraph (d)(1)(i) of this section; and
(C) State the date of the transaction (or, if the transaction
includes transfers on more than one date, then the dates of all
transfers) to which the election applies.
(ii) Filing the Section 362(e)(2)(C) Statement. In general, the
Section 362(e)(2)(C) Statement is filed by the person or entity
described in the applicable paragraph of this paragraph (d)(3)(ii).
Thus, if Transferor is a partnership, S corporation, trust (including a
subpart E trust), or other pass-through entity, or Acquiring is an S
corporation, the entity (and not the partners, shareholders, or other
persons having an interest in the entity or its property) is the person
that must file the Section 362(e)(2)(C) Statement, without regard to
whether such entity is foreign or domestic. However, in the case of a
CFC or CFP, the controlling U.S. shareholders of the CFC or the
reporting U.S. partners of the CFP, respectively, file the Section
362(e)(2)(C) Statement.
[[Page 339]]
(A) Transferor is a person required to file a U.S. return. If
Transferor is a person required to file a U.S. return for the year of
the transfer, Transferor must include the Section 362(e)(2)(C) Statement
on or with its timely filed (including extensions) original U.S. return
for the taxable year in which the transfer occurred.
(B) Transferor is a CFC or CFP and not required to file a U.S.
return. If paragraph (d)(3)(ii)(A) of this section does not apply and
Transferor is either a CFC or a CFP on the date of the transfer, all of
Transferor's controlling U.S. shareholders (in the case of a CFC) or all
of Transferor's reporting U.S. partners (in the case of a CFP) must
include the Section 362(e)(2)(C) Statement on or with their timely filed
(including extensions) original U.S. returns for their taxable years in
which the transfer occurred.
(C) Transferor is not a person required to file a U.S. return, a
CFC, or a CFP, but Acquiring is required to file U.S. return. If
paragraphs (d)(3)(ii)(A) and (B) of this section do not apply and
Acquiring is a person required to file a U.S. return for the year of the
transfer, Acquiring must include the Section 362(e)(2)(C) Statement on
or with its timely filed (including extensions) original U.S. return for
the taxable year in which the transfer occurred.
(D) Transferor is not a person required to file a U.S. return, a
CFC, or a CFP, Acquiring is not required to file a U.S. return, but
Acquiring is a CFC. If paragraphs (d)(3)(ii)(A) through (C) of this
section do not apply and Acquiring is a CFC on the date of the transfer,
all of Acquiring's controlling U.S. shareholders must include the
Section 362(e)(2)(C) Statement on or with their timely filed (including
extensions) original U.S. returns for their taxable years in which the
transfer occurred.
(E) Neither Transferor nor Acquiring is a person required to file a
U.S. return, a CFC, or a CFP, but Transferor later becomes a person
required to file a U.S. return, a CFC, or a CFP. If paragraphs
(d)(3)(ii)(A) through (D) of this section do not apply and Transferor
becomes a person required to file a U.S. return, a CFC, or a CFP,
Transferor (if required to file a U.S. return), all of Transferor's
controlling U.S. shareholders (if Transferor becomes a CFC not otherwise
required to file a U.S. return), or all of Transferor's reporting U.S.
partners (if Transferor becomes a CFP not otherwise required to file a
U.S. return) must include the Section 362(e)(2)(C) Statement on or with
their timely filed (including extensions) original U.S. returns for
their taxable years in which an event described in this paragraph
(d)(3)(ii)(E) first occurs. For purposes of this paragraph
(d)(3)(ii)(E), the term Transferor includes any person holding property
with a basis determined directly or indirectly by reference to
Transferor's basis in the Acquiring stock received in the transaction.
(F) Transferor is not and does not become a person required to file
a U.S. return, a CFC, or a CFP, Acquiring is not, but later becomes
either a person required to file a U.S. return, a CFC, or a CFP. If
paragraphs (d)(3)(ii)(A) through (E) of this section do not apply and
Acquiring becomes a person required to file a U.S. return, a CFC, or a
CFP, Acquiring (if required to file a U.S. return), all of Acquiring's
controlling U.S. shareholders (if Acquiring becomes a CFC not otherwise
required to file a U.S. return), or all of Acquiring's reporting U.S.
partners (if Acquiring becomes a CFP not otherwise required to file a
U.S. return) must include the Section 362(e)(2)(C) Statement on or with
their timely filed (including extensions) original U.S. returns for
their taxable years in which an event described in this paragraph
(d)(3)(ii)(F) first occurs. For purposes of this paragraph
(d)(3)(ii)(F), the term Acquiring includes any person holding property
with a basis determined directly or indirectly by reference to
Acquiring's basis in loss duplication property received in the
transaction.
(G) Transferor and Acquiring are not and do not become a person
required to file a U.S. return, a CFC, or a CFP, but the basis of the
loss duplication property or Acquiring stock later becomes relevant for
Federal tax purposes. If paragraphs (d)(3)(ii)(A) through (F) of this
section do not apply and, in a transferred basis transaction, a person
required to file a U.S. return, a CFC, or a CFP acquires either loss
duplication property or Acquiring stock that was received in the
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loss duplication transaction, or any property the basis of which is
determined in whole or in part by reference to any such property or
stock, all such persons (or, in the case of a CFC or CFP not required to
file a U.S. return, all the controlling U.S. shareholders or all the
reporting U.S. partners, as applicable) must include the Section
362(e)(2)(C) Statement on or with their timely filed (including
extensions) original U.S. returns for their first taxable year(s) in
which there occurs an event or events described in this paragraph
(d)(3)(ii)(G).
(e) Transfers by partnerships and S corporations--(1) Transfers by
partnerships. If a partnership transfers property in a loss duplication
transaction with respect to which a section 362(e)(2)(C) election is
made, the resulting reduction to the partnership's basis in the
Acquiring stock received in exchange for the loss duplication property
is treated as an expenditure of the partnership described in section
705(a)(2)(B).
(2) Transfers by S corporations. If an S corporation transfers
property in a loss duplication transaction with respect to which a
section 362(e)(2)(C) election is made, the resulting reduction to the S
corporation's basis in the Acquiring stock received in exchange for the
loss duplication property is treated as an expense of the S corporation
described in section 1367(a)(2)(D).
(f) Transfers to S corporations. If a person transfers property to
an S corporation in a loss duplication transaction, any resulting
reduction under section 362(e)(2) and this section to the S
corporation's basis in the property received is not treated as an
expense of the S corporation described in section 1367(a)(2)(D).
(g) Definitions. For purposes of section 362(e)(2) and this
section--
(1) Loss duplication property is any property--
(i) That is transferred by Transferor to Acquiring in a loss
duplication transaction (as defined in paragraph (g)(2) of this
section); and
(ii) That Acquiring would take with a basis in excess of value
immediately after the transaction; for this purpose, the basis Acquiring
would take in the property is determined immediately after the
transaction and without regard to section 362(e)(2) and this section,
but otherwise taking into account all applicable provisions of law,
including, without limitation, section 362(e)(1).
(2) A loss duplication transaction is a section 362(a) transaction
in which Acquiring's aggregate basis in the property received from
Transferor would, but for section 362(e)(2) and this section, exceed the
aggregate value of such property immediately after the transaction. For
this purpose--
(i) A transaction is a section 362(a) transaction if it is described
in section 362(a) without regard to whether it is also described in any
other provision of the Internal Revenue Code (Code), including, without
limitation, section 362(b); and
(ii) Acquiring's aggregate basis in the property received from
Transferor is determined immediately after the transaction and without
regard to section 362(e)(2) and this section, but otherwise taking into
account all applicable provisions of law, including, without limitation,
section 362(e)(1).
(3) Transferor's net built-in loss is the excess of--
(i) Acquiring's aggregate basis (determined under paragraph
(g)(2)(ii) of this section) in all property received from Transferor in
a loss duplication transaction, over
(ii) The aggregate value of such property immediately after the
transaction.
(4) A property's built-in loss is the excess of Acquiring's basis in
the property (determined as described in paragraph (g)(1)(ii) of this
section) over the property's value (determined immediately after the
transaction).
(5) A property's allocable portion of Transferor's net built-in loss
is the portion of Transferor's net built-in loss that bears the same
ratio to Transferor's net built-in loss that the property's built-in
loss bears to the aggregate built-in losses reflected in the bases of
loss duplication property transferred by Transferor in the transaction.
(6) A U.S. return is a return of income under section 6012 or an
information return under Subtitle F, Chapter 61,
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Subchapter A, Part III of the Code (sections 6031 and following) or the
regulations thereunder, that the taxpayer is unconditionally required to
file. Thus, the term does not include elective forms or statements that
are required to be filed only to obtain a particular tax treatment,
including forms filed to make an election or to reduce or avoid
withholding by a person not otherwise required to file a U.S. return (as
described in this paragraph (g)(6)) (for example, a notice of
nonrecognition under Sec. 1.1445-2(d)).
(7) A controlled foreign corporation (CFC) is any corporation
described in section 957 or section 953(c).
(8) A controlling U.S. shareholder is any person that is treated as
a controlling U.S. shareholder under Sec. 1.964-1(c)(5) because such
person either owns a direct interest in the CFC or is treated as owning
an interest in the CFC by reason of section 318(a)(2) (attribution from
partnerships, estates, trusts, and corporations).
(9) A controlled foreign partnership (CFP) is any partnership
treated as a controlled foreign partnership for purposes of section
6038.
(10) A reporting U.S. partner is any partner of a CFP that is
required to file an information return with respect to the CFP pursuant
to section 6038 or the regulations thereunder, without regard to Sec.
1.6038-3(c) or (j). In addition, in applying the constructive ownership
rules of Sec. 1.6038-3(b)(4), the term ``nonresident alien'' is
replaced by the term ``individual.''
(11) The term stock means both Acquiring stock and Acquiring
securities received by Transferor in the transaction if gain or loss on
the receipt of the stock or securities is not recognized in whole or in
part.
(12) Value--(i) General rule. The term value means fair market
value.
(ii) Special rule for transfers of partnership interests.
Notwithstanding the general rule in paragraph (g)(12)(i) of this
section, when referring to a partnership interest, for purposes of
section 362(e)(2) and this section, the term value means the sum of the
cash that Acquiring would receive for the interest, assuming an exchange
between a willing buyer and a willing seller (neither being under any
compulsion to buy or sell and both having reasonable knowledge of
relevant facts), increased by any Sec. 1.752-1 liabilities (as defined
in Sec. 1.752-1(a)(4)) of the partnership allocated to Acquiring with
regard to such transferred interest under section 752 immediately after
the transfer to Acquiring. See Sec. 1.743-1 regarding the application
of section 743(b) following a section 362(e) basis reduction.
(h) Examples. The examples in this paragraph (h) illustrate the
application of section 362(e)(2) and the provisions of this section.
Unless the facts otherwise indicate, the examples use the following
nomenclature and assumptions: X, Y, P, S, S1, and S2 are domestic
corporations; A and B are U.S. individuals; FC1 and FC2 are foreign
corporations and are not engaged in a U.S. trade or business, have no
U.S. real property interests, and have no other relationships,
activities, or interests that would cause them, their shareholders, or
their property to be subject to tax imposed under any provision of
subtitle A of the Internal Revenue Code (federal income tax); there is
no applicable income tax treaty; PRS is a domestic partnership; no
election is made under section 362(e)(2)(C); and the transferred
property is not importation property (as defined in Sec. 1.362-3(c)(2))
and the transfers are not loss importation transactions (as defined in
Sec. 1.362-3(c)(3)), so that the basis of no property is determined
under section 362(e)(1). All persons and transactions are unrelated
unless the facts indicate otherwise, all taxpayers are on a calendar tax
year, and all other relevant facts are set forth in the examples. See
Sec. 1.362-3(f) for additional examples illustrating the application of
section 362(e)(2) and this section, including to transactions that are
subject to section 362(e)(2), and section 362(e)(1).
Example 1. Transfer described in section 351. (i) Basic application
of section. (A) Facts. A owns Asset 1 (basis $90, value $60) and Asset 2
(basis $110, value $120). In a transaction to which section 351 applies,
A transfers Asset 1 and Asset 2 to X in exchange for a single
outstanding share of X stock representing all the outstanding X stock
immediately after the transaction.
(B) Analysis--(1) Loss duplication transaction. A's transfer of
Asset 1 and Asset 2 is a section 362(a) transaction. But for section
362(e)(2) and this section, X's aggregate basis
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in those assets would be $200 ($90 + $110), which would exceed the
aggregate value of the assets $180 ($60 + $120) immediately after the
transaction. Accordingly, the transfer is a loss duplication transaction
and A has a net built-in loss of $20 ($200-$180).
(2) Identifying loss duplication property. But for section 362(e)(2)
and this section, X's basis in Asset 1 would be $90, which would exceed
Asset 1's $60 value immediately after the transaction. Accordingly,
Asset 1 is loss duplication property. But for section 362(e)(2) and this
section, X's basis in Asset 2 would be $110, which would not exceed
Asset 2's $120 value immediately after the transaction. Accordingly,
Asset 2 is not loss duplication property.
(C) Basis in loss duplication property. X's basis in Asset 1 is $70,
computed as its $90 basis under section 362(a) reduced by A's $20 net
built-in loss.
(D) Basis in other property. Under section 362(a), X has a
transferred basis of $110 in Asset 2. Under section 358(a), A has an
exchanged basis of $200 in the X stock it receives in the transaction.
(ii) Section 362(e)(2)(C) election. The facts are the same as in
paragraph (i)(A) of this Example 1, except that A and X make an election
under section 362(e)(2)(C). Under paragraph (d)(2)(i) of this section, A
reduces its basis in the X stock, as determined without regard to
section 362(e)(2) and this section, by the amount of A's net built-in
loss that would have been applied to reduce X's basis in Asset 1 had the
section 362(e)(2)(C) election not been made. In addition, no reduction
is made to X's basis in Asset 1, as determined without regard to section
362(e)(2) and this section. As a result, A's basis in the X stock is
$180 ($200-$20), X's basis in Asset 1 is $90, and X's basis in Asset 2
is $110.
Example 2. Transfer described in both section 351 and section
368(a)(1)(B). (i) Basic application of section--(A) Facts. P owns the
sole outstanding share of S1 stock and the ten outstanding shares of S2
stock. In a transaction to which section 351 applies and that is
described in section 368(a)(1)(B), P transfers its ten S2 shares to S1
in exchange for an additional ten shares of S1 voting stock. At the time
of the transfer, P has a basis of $10 each in five of its S2 shares
(Shares 1-5) and a basis of $5 each in its other five S2 shares (Shares
6-10), and the value of each share is $7.
(B) Analysis--(1) Loss duplication transaction. P's transfer of the
S2 shares is a section 362(a) transaction notwithstanding that it is
also a transaction described in section 368(a)(1)(B) and therefore
section 362(b). But for section 362(e)(2) and this section, S1's
aggregate basis in the S2 shares would be $75 ($10 x 5, or $50, for
Shares 1-5 + $5 x 5, or $25, for Shares 6-10). Thus, S1's $75 aggregate
basis in the shares would exceed the aggregate value of the shares, $70
($7 x 10 shares), immediately after the transaction. Accordingly, the
transfer is a loss duplication transaction and P has a net built-in loss
of $5 ($75-$70).
(2) Identifying loss duplication property. But for section 362(e)(2)
and this section, S1's basis in each of Shares 1-5 would be $10, which
would exceed each share's $7 value immediately after the transaction.
Accordingly, Shares 1-5 are each loss duplication property. But for
section 362(e)(2) and this section, S1's basis in each of Shares 6-10
would be $5, which would not exceed each share's $7 value immediately
after the transaction. Accordingly, Shares 6-10 are not loss duplication
property.
(C) Basis in loss duplication property. S1's basis in each of Shares
1-5 is $9, computed as its $10 basis (determined without regard to
section 362(e)(2) and this section) reduced by $1, the share's allocable
portion (1/5) of P's net built-in loss ($5).
(D) Basis in other property. Under section 362(a), S1 has a
transferred basis of $5 in each of Shares 6-10. Under section 358(a), P
has an exchanged basis in the ten S1 shares it receives in the exchange
($10 in each of the five S1 shares received in exchange for Shares 1-5
and $5 in each of the five S1 shares received in exchange for Shares 5-
10).
(ii) Section 362(e)(2)(C) election. The facts are the same as in
paragraph (i)(A) of this Example 2, except that an election under
section 362(e)(2)(C) is made to reduce P's basis in the shares of S1
stock received in the exchange. Under paragraph (d)(2)(i) of this
section, P reduces its basis in the S1 stock by $5, the amount of P's
net built-in loss that S1's basis in the S2 shares would have been
reduced under section 362(e)(2) and this section had the section
362(e)(2)(C) election not been made, and no reduction is made to S1's
basis in the S2 stock (as determined without regard to section 362(e)(2)
and this section). Because an election is being made under section
362(e)(2)(C), P's basis in the new S1 shares is not determined under the
general rule of Sec. 1.358-2(a)(2)(i) (under which P's basis in each
new S1 share would be equal to the basis of the S2 share transferred in
exchange for the S1 share). Section 1.358-2(a)(2)(viii)(B). Accordingly,
P's basis in each new S1 share will be $7, the share's allocable portion
of P's $75 aggregate basis in the S2 shares transferred in the
transaction (or, $7.50 per share), reduced under paragraph (d)(2)(i) of
this section by the $5 that would have been applied to reduce S1's basis
in the S2 shares had the section 362(e)(2)(C) election not been made (or
$.50 per share). Under paragraph (d)(2)(ii) of this section and section
362(a), S1 receives five shares of the S2 stock with a basis of $10 each
and five shares of the S2 stock with a basis of $5 each.
Example 3. Transfer described in both section 351 and section
368(a)(1)(A), multiple transferors, elimination of duplicated loss. (i)
Facts.
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A owns Asset 1 (basis $120, value $130) and all the outstanding shares
of X stock. B owns all the outstanding shares of Y stock (basis $150). Y
owns Asset 2 (basis $250, value $210). Pursuant to a single plan, A
transfers Asset 1 to X in exchange for additional X shares and, in a
transaction qualifying as a reorganization described in section
368(a)(1)(A), Y merges with and into X. In the merger, B receives X
stock with a basis equal to B's basis in its Y stock immediately before
the merger. A's transfer of Asset 1 to X in exchange for X stock and Y's
transfer of Asset 2 to X in the merger are both transactions to which
section 351 applies. Notwithstanding that the transfers by A and Y are
pursuant to a single plan forming one transaction, section 362(e)(2) and
this section apply to each transferor separately.
(ii) Application of section to A's transfer of Asset 1. A's transfer
of Asset 1 is a section 362(a) transaction. But for section 362(e)(2)
and this section, X's basis in Asset 1 would be $120, which would not
exceed Asset 1's $130 value immediately after the transaction.
Accordingly, A's transfer of Asset 1 is not a loss duplication
transaction notwithstanding that, taking both A's transfer and Y's
transfer into account, X has an aggregate net loss in Asset 1 and Asset
2. Because Asset 1 is not received in a loss duplication transaction, it
is not loss duplication property and section 362(e)(2) and this section
do not apply to A's transfer of Asset 1.
(iii) Application of section to Y's transfer of Asset 2--(A)
Analysis--(1) Loss duplication transaction. Y's transfer of Asset 2 to X
is a section 362(a) transaction, notwithstanding that it is also a
transaction described in section 368(a)(1)(A) and therefore section
362(b). But for section 362(e)(2) and this section, X's basis in Asset 2
would be $250, which would exceed Asset 2's $210 value immediately after
the transaction. Accordingly, Y's transfer is a loss duplication
transaction and Y has a net built-in loss of $40.
(2) Identifying loss duplication property. But for section 362(e)(2)
and this section, X's basis in Asset 2 would be $250, which would exceed
Asset 2's $210 value immediately after the transaction. Accordingly,
Asset 2 is loss duplication property.
(B) Basis in loss duplication property. Although Asset 2 is loss
duplication property, section 362(e)(2) does not apply to Y's transfer
of Asset 2 to X because Y distributes all of the X stock received in the
exchange without recognizing gain or loss, and, upon completion of the
transaction, no person will hold the X stock or any other asset with a
basis determined in whole or in part by reference to Y's basis in such
stock. Accordingly, under paragraph (c)(1) of this section, X's basis in
Asset 2 is not determined under section 362(e)(2) and this section.
Thus, under section 362(a), X's basis in Asset 2 is $250.
(iv) Basis in other property. Under section 358, A's basis in the X
stock received in exchange for Asset 1 is $120 and B's basis in the X
stock received in the merger is $150. Under section 362(a), X's basis in
Asset 1 is $120.
Example 4. Transfer described in both section 351 and section
368(a)(1)(D), followed by a distribution qualifying under section 355.
(i) Basic transaction--(A) Facts. A and B each own one of the two
outstanding shares of X common stock. X's assets include Asset 1 (basis
$120, value $70), Asset 2 (basis $160, value $110), and Asset 3 (basis
$220, value $240). In a transaction to which section 351 applies and
that is described in section 368(a)(1)(D), X transfers Asset 1, Asset 2,
and Asset 3 to Y in exchange for all the Y stock; then, in a
distribution that qualifies under section 355, X distributes all the Y
stock received in the exchange to A in exchange for all of A's X stock.
Under section 361(c)(1), X does not recognize gain or loss as a result
of the distribution of all the Y stock.
(B) Analysis--(1) Loss duplication transaction. X's transfer of
Asset 1, Asset 2, and Asset 3 is a section 362(a) transaction. But for
section 362(e)(2) and this section, Y's aggregate basis in those assets
would be $500 ($120 + $160 + $220). The aggregate value of the assets
immediately after the transaction is $420 ($70 + $110 + $240). Thus, Y's
aggregate basis in the assets would exceed the aggregate value of the
assets immediately after the transaction. Accordingly, the transfer is a
loss duplication transaction and X has a net built-in loss of $80 ($500
- $420).
(2) Identifying loss duplication property. But for section 362(e)(2)
and this section, Y's basis in Asset 1 would be $120, which would exceed
Asset 1's $70 value immediately after the transaction. Accordingly,
Asset 1 is loss duplication property. But for section 362(e)(2) and this
section, Y's basis in Asset 2 would be $160, which would exceed Asset
2's $110 value immediately after the transaction. Accordingly, Asset 2
is also loss duplication property. But for section 362(e)(2) and this
section, Y's basis in Asset 3 would be $220 and would therefore not
exceed Asset 3's $240 value immediately after the transaction.
Accordingly, Asset 3 is not loss duplication property.
(C) Basis in loss duplication property. Although Asset 1 and Asset 2
are each loss duplication property, X will distribute the Y stock
received in exchange for Asset 1 and Asset 2 without recognition of gain
or loss, and, upon completion of the transaction, no person will hold
the Y stock received by X or any other asset with a basis determined in
whole or in part by reference to X's basis in the Y stock received in
the exchange. (A's basis in the Y stock will be determined by reference
to his basis in his X stock.) Accordingly, under paragraph (c)(1) of
this section,
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Y's bases in Asset 1 and Asset 2 are determined under section 362(a) and
not under section 362(e)(2) and this section. Thus, Y's basis in Asset 1
is $120 and Y's basis in Asset 2 is $160.
(D) Basis in other property. Under section 358, A's basis in the Y
stock received in exchange for his X stock is determined by reference to
his basis in his X stock surrendered. Under section 362(a), Y's basis in
Asset 3 is $220.
(ii) Section 355(e)--(A) Facts. The facts are the same as in
paragraph (i)(A) of this Example 4, except that, after the section 355
distribution, Y is acquired pursuant to a plan (within the meaning of
Sec. 1.355-7), resulting in the application of section 355(e) to the
transactions.
(B) Analysis. Because section 361(c)(2), and not section 361(c)(1),
will apply to X's distribution of Y stock, X will not qualify for
nonrecognition treatment on the distribution of the Y stock. As a
result, paragraph (c)(1) of this section does not apply to the
transaction, and Y's bases in Asset 1 and Asset 2, the loss duplication
property, are determined under section 362(e)(2) and this section. Asset
1 has a built-in loss of $50 ($120 - $70), and Asset 2 has a built-in
loss of $50 ($160 - $110). Thus, Asset 1's allocable portion of X's net
built-in loss is $40 ($50/$100 x $80), and Asset 2's allocable portion
of X's net built-in loss is $40 ($50/$100 x $80). Accordingly, Y
receives Asset 1 with a basis of $80 ($120 - $40) and Asset 2 with a
basis of $120 ($160 - $40).
(iii) Retained stock and securities--(A) Facts. The facts are the
same as in paragraph (i)(A) of this Example 4, except that X transfers
Asset 1, Asset 2, and Asset 3 to Y in exchange for Y stock and Y
securities, each constituting half of the consideration. In addition,
for a valid business purpose, X retains Y stock and Y securities each
worth 1 percent of the total consideration.
(B) Analysis. Paragraph (c)(1) of this section applies only to the
extent that stock received in a transaction is distributed without
recognition of gain or loss. Thus, section 362(e)(2) and this section
apply to the extent that property was exchanged for the retained Y stock
and Y securities (2 percent of the total). Accordingly, Y reduces its
basis in Asset 1 and in Asset 2, the loss duplication property, by $1.60
(two percent of X's $80 net built-in loss). Asset 1 has a built-in loss
of $50 ($120 - $70), and Asset 2 has a built-in loss of $50 ($160 -
$110). Thus, Asset 1's allocable portion of X's net built-in loss is
$.80 ($50/$100 x $1.60), and Asset 2's allocable portion of X's net
built-in loss is $.80 ($50/$100 x $1.60). As a result, Y receives Asset
1 with a basis of $119.20 ($120 - $.80) and Asset 2 with a basis of
$159.20 ($160 - $.80).
(iv) Retained stock and securities with a section 362(e)(2)(C)
election--(A) Facts. The facts are the same as in paragraph (iii)(A) of
this Example 4, except that an election under section 362(e)(2)(C) is
made to reduce X's bases in its retained Y stock and retained Y
securities.
(B) Analysis. Under paragraph (d)(2)(i) of this section, X reduces
its basis in the retained Y stock and the retained Y securities
(determined without regard to section 362(e)(2) and this section) by
$1.60, the portion of X's $80 net built-in loss that would have been
applied to reduce Y's basis in the transferred assets had the election
to apply section 362(e)(2)(C) not been made. (Because the value of the Y
stock and the value of the Y securities are equal, X's $500 basis in the
transferred property would be allocated equally between the Y stock and
the Y securities, $250 to each, under Sec. 1.358-2(b)(2), and the
retained Y stock and Y securities have a basis of $2.50 each (one
percent of $250).) For the reasons set forth in paragraph (iii)(B) of
this Example 4, Y would have been required to reduce its basis in the
transferred assets by $1.60. Accordingly, X must reduce its aggregate
basis in the retained Y stock and Y securities by $1.60. Under paragraph
(d)(2)(i) of this section, the $1.60 basis reduction is allocated and
applied to reduce X's bases in the retained Y stock and Y securities in
proportion to the value of each. Because X retained Y stock and Y
securities with equal values, X holds each of the retained Y stock and
securities with an adjusted basis of $1.70 ($2.50 - $.80). Under
paragraph (d)(2)(ii) of this section, Y receives Asset 1 with a basis of
$120, Asset 2 with a basis of $160, and Asset 3 with a basis of $220.
Example 5. Transfer of liabilities. (i) Liabilities described in
section 358(d)(1)--(A) Basic application of section, no section
362(e)(2)(C) election--(1) Facts. A owns Asset 1 (basis $800, value
$700). A also has a $200 liability that has been taken into account for
tax purposes and is thus described in section 358(d)(1), and not in
sections 357(c)(3), 358(d)(2), and 358(h)(1). A transfers Asset 1 to X
in exchange for a single outstanding share of X stock representing all
the outstanding X stock immediately after the transaction and X's
assumption of the liability. The transfer is a transaction to which
section 351 applies.
(2) Analysis--(i) Loss duplication transaction. A's transfer of
Asset 1 is a section 362(a) transaction. But for section 362(e)(2) and
this section, X's basis in Asset 1 would be $800, which would exceed
Asset 1's $700 value immediately after the transaction. Accordingly, the
transfer is a loss duplication transaction and A has a net built-in loss
of $100 ($800 - $700).
(ii) Identifying loss duplication property. But for section
362(e)(2) and this section, X's basis in Asset 1 would be $800, which
would exceed the $700 value of Asset 1 immediately after the
transaction. Accordingly, Asset 1 is loss duplication property.
[[Page 345]]
(3) Basis in loss duplication property. X's basis in Asset 1 is
$700, computed as its $800 basis determined under section 362(a) reduced
by A's $100 net built-in loss.
(4) Basis in other property. Under sections 358(a) and (d)(1), A's
basis in the X stock is $600 ($800 basis in property transferred--$200
liability assumed).
(B) Section 362(e)(2)(C) election. The facts are the same as in
paragraph (i)(A)(1) of this Example 5, except that A and X make an
election under section 362(e)(2)(C). In this case, A's $100 net built-in
loss that would have been applied to reduce X's basis in Asset 1 is
applied to reduce A's basis in the X stock received. As a result, A's
basis in the X stock is $500 ($600, as determined in paragraph (i)(A)(4)
of this Example 5, reduced by $100) and X's basis in Asset 1 is $800.
(ii) Contingent liabilities described in section 358(h)(1), section
358(h)(2)(A) exception applies--(A) Facts. The facts are the same as in
paragraph (i)(A)(1) of this Example 5, except that A's liability (valued
at $200) has not been taken into account for tax purposes and is
described in sections 358(d)(2) and 358(h)(1). However, Asset 1 is a
trade or business and the liability is associated with the trade or
business; as a result, the liability is described in section
358(h)(2)(A) and is excepted from the general rule of section 358(h)(1).
(B) Analysis. For the reasons set forth in paragraph (i)(A)(2) of
this Example 5, A's transfer of Asset 1 is a loss duplication
transaction, A has a net built-in loss of $100, and Asset 1 is loss
duplication property.
(C) Basis in loss duplication property. For the reasons set forth in
paragraph (i)(A)(3) of this Example 5, X's basis in Asset 1 is $700.
(D) Basis in other property. A's basis in the X stock is $800 under
sections 358(a), 358(d)(2), and 358(h)(2)(A).
(E) Section 362(e)(2)(C) election. The facts are the same as in
paragraph (ii)(A) of this Example 5, except that A and X make an
election under section 362(e)(2)(C). In this case, A's $100 net built-in
loss that would have applied to reduce X's basis in Asset 1 is applied
to reduce A's basis in the X stock received. As a result, A's basis in
the X stock is $700 ($800, as determined in paragraph (ii)(D) of this
Example 5, reduced by $100). X's basis in Asset 1 is $800.
Example 6. Section 351 transfer with boot. (i) Basic transaction-(A)
Facts. A owns Asset 1 (basis $80, value $100) and Asset 2 (basis $30,
value $25). In a transaction to which section 351 applies, A transfers
Asset 1 and Asset 2 to X in exchange for 10 shares of X stock and $25.
(B) Analysis--(1) Loss duplication transaction. A's transfer of
Asset 1 and Asset 2 is a section 362(a) transaction. But for section
362(e)(2) and this section, X's aggregate basis in those assets would be
$130, computed as follows. Under section 362(a), a corporation's basis
in property acquired in a transaction to which section 351 applies is
the same as the property's basis in the hands of the transferor,
increased by any gain recognized to the transferor on such transfer.
Under section 351(b), gain (but not loss) is recognized to the extent a
transferor in a section 351 exchange receives other property or money in
addition to the stock permitted to be received without the recognition
of gain. To determine the amount of gain recognized under section
351(b), the consideration is allocated proportionately (by value) among
the transferred properties. A's gain on the transfer is therefore
computed as follows: Asset 1 reflects 80 percent of the value
transferred ($100/$125) and Asset 2 reflects 20 percent of the value
transferred ($25/$125). Thus, 80 percent of the stock (eight shares) and
the cash ($20) are treated as being received in exchange for Asset 1 and
20 percent of the stock (two shares) and the cash ($5) are treated as
being received in exchange for Asset 2. Thus, under section 351(b), A
recognizes $20 of gain for the cash received in exchange for Asset 1,
but A recognizes no loss for the amount received for Asset 2. As a
result, under section 362(a), X would have a basis of $100 in Asset 1
and $30 in Asset 2. Thus, X's aggregate basis in the assets would be
$130, which exceeds the $125 aggregate value of the assets ($100 +
$25)). The transfer is a loss duplication transaction and A has a net
built-in loss of $5 ($130-$125).
(2) Identifying loss duplication property. But for section 362(e)(2)
and this section, X's basis in Asset 1 would be $100 (A's $80 basis
increased by A's $20 gain recognized), which would not exceed Asset 1's
$100 value immediately after the transaction. Accordingly, Asset 1 is
not loss duplication property. But for section 362(e)(2) and this
section, X's basis in Asset 2 would be $30, which would exceed Asset 2's
$25 value immediately after the transaction. Accordingly, Asset 2 is
loss duplication property.
(C) Basis in loss duplication property. X's basis in Asset 2 is $25,
computed as its $30 basis under section 362(a) reduced by A's $5 net
built-in loss.
(D) Basis in other property. Under section 362(a), X's basis in
Asset 1 is $100 (A's $80 basis increased by the $20 gain recognized).
Under section 358, A's basis in the X stock is $105 (the sum of its $80
basis in Asset 1, its $30 basis in Asset 2, and its $20 gain recognized,
reduced by the $25 cash received in the exchange).
(ii) Section 362(e)(2)(C) election. The facts are the same as in
paragraph (i)(A) of this Example 6, except that A and X elect to reduce
A's stock basis under section 362(e)(2)(C). Under paragraph (d)(2)(i) of
this section, A reduces its $105 basis in the X stock by $5, the amount
of A's net built-in loss of that would have been applied to reduce X's
basis in Asset 2 had the section
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362(e)(2)(C) election not been made. As a result, A's basis in the X
stock is $100, and X's basis in Asset 2 is $30.
Example 7. Section 304 sale of built-in loss stock. (i) Basic
transaction--(A) Facts. A owns all the stock of X (basis $90, value $60)
and all the stock of Y. A sells all his X stock to Y for $60. Under
section 304, A is treated as though he transferred the X stock to Y in
exchange for Y stock in a transaction to which section 351 applies.
Then, Y is treated as redeeming the Y stock it was treated as having
issued to A in the deemed section 351 transaction.
(B) Analysis--(1) Loss duplication transaction. A's deemed transfer
of X stock to Y is a section 362(a) transaction. But for section
362(e)(2) and this section, Y's aggregate basis in the X stock would be
$90, which would exceed the X stock's value of $60 immediately after the
transaction. Accordingly, the transfer is a loss duplication transaction
and A has a net built-in loss of $30.
(2) Identifying loss duplication property. But for section 362(e)(2)
and this section, Y's basis in the X stock would be $90, which would
exceed the X stock's $60 value immediately after the transaction.
Accordingly, the X stock is loss duplication property.
(C) Basis in loss duplication property. Y's basis in the X stock is
$60, its $90 basis determined without regard to section 362(e)(2) and
this section, reduced by A's $30 net built-in loss.
(D) Basis in other property. Under section 358(a), A has an
exchanged basis of $90 in the Y stock he is deemed to receive in the
exchange; the effect of the deemed redemption of that stock is then
determined under section 302.
(ii) Section 362(e)(2)(C) election. The facts are the same as in
paragraph (i)(A) of this Example 7, except that the parties elect to
reduce A's stock basis under section 362(e)(2)(C). For the reasons set
forth in paragraphs (i)(B) and (C) of this Example 7, Y's basis in the X
stock would be reduced by $30. Accordingly, A's basis in the deemed-
issued Y stock is $60, his $90 basis otherwise determined under section
358(a) reduced by the $30 that would have been applied to reduce Y's
basis in the X stock under section 362(e)(2) and this section; the
effect of the deemed redemption of that stock is then determined under
section 302. Y's basis in the X stock is $90.
Example 8. Transactions involving partnerships. (i) Transfer by a
partnership--(A) Basic application of section--(1) Facts. PRS owns Asset
1 (basis $100, value $70). PRS contributes Asset 1 to X in a transaction
to which section 351 applies.
(2) Analysis--(i) Loss duplication transaction. PRS's transfer of
Asset 1 is a section 362(a) transaction. But for section 362(e)(2) and
this section, X's basis in Asset 1 would be $100, which would exceed
Asset 1's $70 value immediately after the transaction. Accordingly, the
transfer is a loss duplication transaction and PRS has a net built-in
loss of $30 ($100-$70).
(ii) Identifying loss duplication property. But for section
362(e)(2) and this section, X's basis in Asset 1 would be $100, which
would exceed Asset 1's $70 value immediately after the transaction.
Accordingly, Asset 1 is loss duplication property.
(3) Basis in loss duplication property. X's basis in Asset 1 is $70,
computed as its $100 basis under section 362(a) reduced by PRS's $30 net
built-in loss.
(4) Basis in other property. Under section 358(a), PRS has an
exchanged basis of $100 in the X stock it receives in the exchange.
(B) Section 362(e)(2)(C) election. The facts are the same as in
paragraph (i)(A)(1) of this Example 8, except that PRS and X elect to
reduce PRS's stock basis under section 362(e)(2)(C). In this case, PRS's
$30 net built-in loss (as determined in paragraph (i)(A)(2)(i) of this
Example 8) that would have been applied to reduce X's basis in Asset 1
is applied to reduce PRS's basis in the X stock received. As a result,
PRS's basis in the X stock is $70 ($100-$30) and X's basis in Asset 1 is
$100. The $30 reduction to PRS's basis in the X stock is treated as an
expenditure of PRS under section 705(a)(2)(B) and paragraph (e)(1) of
this section. As a result, the partners of PRS must reduce their bases
in their PRS interests.
(ii) Transfer of interest in partnership with liability--(A) Basic
application of section--(1) Facts. A and two other individuals are equal
partners in PRS. A's basis in its partnership interest is $247. A's
share of PRS's Sec. 1.752-1 liabilities (as defined in Sec. 1.752-
1(a)(4)) is $145. A transfers his partnership interest to X in a
transaction to which section 351 applies. PRS has no election in effect
under section 754. If X were to sell the PRS interest immediately after
the transfer, X would receive $100 in cash or other property. In
addition, assume that, taking into account the rules under Sec. 1.752-
4, X's share of PRS's Sec. 1.752-1 liabilities (as defined in Sec.
1.752-1(a)(4)) is $150 immediately after the transfer.
(2) Analysis--(i) Loss duplication transaction. A's transfer of its
PRS interest is a section 362(a) transaction. But for section 362(e)(2)
and this section, X's basis in the PRS interest, would be $252 (A's
basis of $247, reduced by A's $145 share of PRS liabilities, increased
by X's $150 share of PRS liabilities) and, under paragraph (g)(12)(ii)
of this section, the value of the PRS interest would be $250 (the sum of
$100, the cash X would receive if X immediately sold the interest, and
$150, X's share of the Sec. 1.752-1 liabilities (as defined in Sec.
1.752-1(a)(4)) under section 752 immediately after the transfer to X).
Therefore, the transfer is a loss duplication transaction and A has a
net built-in loss of $2 ($252-$250).
[[Page 347]]
(ii) Identifying loss duplication property. But for section
362(e)(2) and this section, X's basis in the PRS interest would be $252,
which would exceed the PRS interest's $250 value immediately after the
transaction. Accordingly, the PRS interest is loss duplication property.
(3) Basis in loss duplication property. X's basis in the PRS
interest is $250, computed as its $252 basis under section 362(a),
taking into account the rules under section 752, reduced by A's $2 net
built-in loss.
(4) Basis in other property. Under section 358, taking into account
the rules under section 752, A has a basis of $102 ($247 reduced by A's
$145 share of PRS liabilities) in the X stock he receives in the
transaction.
(B) Section 362(e)(2)(C) election. The facts are the same as in
paragraph (i)(A) of this Example 8, except that A and X make an election
under section 362(e)(2)(C). Under paragraph (d)(2)(i) of this section, A
reduces his basis in the X stock, as determined without regard to
section 362(e)(2) and this section, by the amount of A's net built-in
loss that would have been applied to reduce X's basis in the PRS
interest had the section 362(e)(2)(C) election not been made. In
addition, no reduction is made to X's basis in the PRS interest, as
determined without regard to section 362(e)(2) and this section. As a
result, A's basis in the X stock is $100 ($102-$2) and X's basis in the
PRS interest is $252.
(C) Transfer of partnership interest with liability, not loss
duplication transaction. The facts are the same as in paragraph
(ii)(A)(1) of this Example 8, except that A's share of PRS's Sec.
1.752-1 liabilities (as defined in Sec. 1.752-1(a)(4)) is $155. But for
section 362(e)(2) and this section, X's basis in the PRS interest would
be $242 (A's basis of $247, reduced by A's $155 share of PRS
liabilities, increased by X's $150 share of PRS liabilities), which
would not exceed the PRS interest's $250 value immediately after the
transaction. Accordingly, A's transfer of the PRS interest is not a loss
duplication transaction and section 362(e)(2) and this section have no
application to the transaction. Under section 362(a), X's basis in the
PRS interest is $242 and, under section 358, taking into account the
rules under section 752, A has a basis of $92 ($247 reduced by A's $155
share of PRS liabilities) in the X stock he receives in the transaction.
Example 9. Transactions involving S Corporations. (i) Transfer by S
Corporation--(A) No section 362(e)(2)(C) election--(1) Facts. S, an S
corporation as defined in section 1361(a)(1), owns Asset 1 (basis $100,
value $70). S transfers Asset 1 to X in exchange for a single
outstanding share of X stock representing all the outstanding X stock
immediately after the transaction. S does not elect to treat X as a
qualified subchapter S subsidiary. The transaction is one to which
section 351 applies.
(2) Analysis--(i) Loss duplication transaction. S's transfer of
Asset 1 is a section 362(a) transaction. But for section 362(e)(2) and
this section, X's basis in Asset 1 would be $100, which would exceed
Asset 1's $70 value immediately after the transaction. Accordingly, the
transfer is a loss duplication transaction and S has a net built-in loss
of $30 ($100-$70).
(ii) Identifying loss duplication property. But for section
362(e)(2) and this section, X's basis in Asset 1 would be $100, which
would exceed Asset 1's $70 value immediately after the transaction.
Accordingly, Asset 1 is loss duplication property.
(iii) Basis in loss duplication property. X's basis in Asset 1 is
$70, computed as its $100 basis under section 362(a) reduced by S's $30
net built-in loss.
(iv) Basis in other property. Under section 358(a), S has an
exchanged basis of $100 in the X stock it receives in the exchange.
(B) Section 362(e)(2)(C) election. The facts are the same as in
paragraph (i)(A)(1) of this Example 9, except that S and X elect to
reduce S's stock basis under section 362(e)(2). In this case, S's $30
built-in loss (as determined in paragraph (i)(A)(2)(i) of this Example
9) that would have been applied to reduce X's basis in Asset 1 is
applied to reduce S's basis in the X stock received. As a result, S's
basis in the X stock is $70 ($100 - $30) and X's basis in Asset 1 is
$100. The $30 reduction to S's basis in the X stock is treated as an
expense of S under section 1367(a)(2)(D) and paragraph (e)(2) of this
section. As a result, the shareholders of S must reduce their bases in
their S stock.
(ii) Transfer to S Corporation--(A) Basic application of section.
(1) Facts. A owns Asset 1 (basis $90, value $60) and Asset 2 (basis
$110, value $120). In a transaction to which section 351 applies, A
transfers Asset 1 and Asset 2 to S, an S corporation as defined in
section 1361(a)(1), in exchange for a single share of S stock
representing all the outstanding S stock immediately after the
transaction.
(2) Analysis--(i) Loss duplication transaction. A's transfer of
Asset 1 and Asset 2 is a section 362(a) transaction. But for section
362(e)(2) and this section, S's aggregate basis in those assets would be
$200 ($90 + $110), which would exceed the aggregate value of the assets
$180 ($60 + $120) immediately after the transaction. Accordingly, the
transfer is a loss duplication transaction and A has a net built-in loss
of $20 ($200 - $180).
(ii) Identifying loss duplication property. But for section
362(e)(2) and this section, S's basis in Asset 1 would be $90, which
would exceed Asset 1's $60 value immediately after the transaction. As a
result, Asset 1 is loss duplication property. But for section 362(e)(2)
and this section, S's basis in Asset 2 would be $110, which would not
exceed Asset 2's $120 value immediately after the transaction. As a
result, Asset 2 is not loss duplication property.
[[Page 348]]
(3) Basis in loss duplication property. S's basis in Asset 1 is $70,
computed as its $90 basis under section 362(a) reduced by S's $20 net
built-in loss. The $20 reduction to S's basis in Asset 1 does not
require a reduction to A's basis in its S stock under section
1367(a)(2)(D). See paragraph (f) of this section.
(4) Basis in other property. Under section 362(a), S has a
transferred basis of $110 in Asset 2. Under section 358(a), A has a
basis of $200 in the S stock it receives in the exchange.
(B) Section 362(e)(2)(C) election--(1) Application of section to
transaction. The facts are the same as in paragraph (ii)(A)(1) of this
Example 9, except that A and S elect to reduce A's stock basis under
section 362(e)(2)(C). In this case, A's $20 built-in loss (as determined
in paragraph (ii)(A)(2) of this Example 9) that would have been applied
to reduce S's basis in Asset 1 is applied to reduce A's basis in the S
stock received. As a result, A's basis in the S stock is $180 ($200 -
$20), S's basis in Asset 1 is $90, and S's basis in Asset 2 is $110.
(2) Tax consequences of subsequent disposition of transferred
assets. The facts are the same as in paragraph (ii)(B)(1) of this
Example 9 except that, in addition, the year after the transaction, S
sells Asset 1 (basis $90, value $60) and Asset 2 (basis $110, value
$120) for $180, recognizing the $20 net built-in loss. The loss is
allocated to A and reduces A's basis in the S stock from $180 to $160
under section 1367(a)(2)(B). If A then sells its S stock for its $180
value, A will recognize a gain of $20.
Example 10. Triangular reorganizations. (i) Facts. P owns all the
stock of S1 and X owns all the stock of S2. In a merger described in
section 368(a)(2)(D), S2 merges with and into S1, and X receives stock
of P in exchange for its S2 stock. S2 has a net built-in loss in its
assets acquired by S1 in the transaction.
(ii) Analysis. The reorganization is not a section 362(a)
transaction, notwithstanding that, under Sec. 1.358-6(c), P is treated
as acquiring and then transferring S2's assets to S1 for purposes of
determining P's adjustment to its basis in its S1 stock. Accordingly,
S1's basis in the property acquired in the transaction is not determined
under section 362(e)(2) and this section; it is determined under section
362(b).
Example 11. Transfers of importation property with non-importation
property. (i) Single transferor, loss importation transaction. (A)
Facts. FC1 transfers Asset 1 (basis $80, value $50), Asset 2 (basis
$120, value $110), and Asset 3 (basis $32, value $40) to DC in a
transaction to which section 351 applies. Asset 1 is not importation
property within the meaning of Sec. 1.362-3(c)(2). Asset 2 and Asset 3
are importation property within the meaning of Sec. 1.362-3(c)(2).
(B) Application of section 362(e)(1). Immediately after the
transfer, and without regard to section 362(e)(1) or section 362(e)(2)
and this section, DC's aggregate basis in importation property (Asset 2
and Asset 3) would be $152. The aggregate value of the importation
property immediately after the transfer is $150. Accordingly, the
transaction is a loss importation transaction within the meaning of
Sec. 1.362-3(c)(3) and, under section 362(e)(1), DC's bases in Asset 2
and Asset 3 would equal the value of each, $110 and $40, respectively.
(C) Application of section 362(e)(2) and this section. (1) Analysis.
(i) Loss duplication transaction. FC1's transfer of Asset 1, Asset 2,
and Asset 3 is a transaction described in section 362(a). But for
section 362(e)(2) and this section, DC's aggregate basis in those assets
would be $230 ($80 under section 362(a) + $110 + $40 under section
362(e)(1)), which would exceed the aggregate value of the assets $200
($50 + $110 + 40) immediately after the transaction. Accordingly, the
transfer is a loss duplication transaction and FC1 has a net built-in
loss of $30 ($230 - $200).
(ii) Identifying loss duplication property. But for section
362(e)(2) and this section, DC's basis in Asset 1 would be $80, which
would exceed Asset 1's $50 value immediately after the transaction.
Accordingly, Asset 1 is loss duplication property. But for section
362(e)(2) and this section, DC's basis in Asset 2 would be $110, which
would not exceed Asset 2's $110 value immediately after the transaction.
Accordingly, Asset 2 is not loss duplication property. But for section
362(e)(2) and this section, DC's basis in Asset 3 would be $40, which
would not exceed Asset 3's $40 value immediately after the transaction.
Accordingly, Asset 3 is not loss duplication property.
(D) Basis in loss duplication property. DC's basis in Asset 1 is
$50, computed as its $80 basis under section 362(a) reduced by FC1's $30
net built-in loss.
(E) Basis in other property. Under section 362(e)(1), DC's basis in
Asset 2 is $110 and DC's basis in Asset 3 is $40. Under section 358(a),
FC1 has an exchanged basis of $232 in the DC stock it receives in the
transaction.
(ii) Multiple transferors, no importation of loss. (A) Facts. The
facts are the same as paragraph (i)(A) of this Example 11, except that,
in addition, FC2 transfers Asset 4 (basis $100, value $150) to DC as
part of the same transaction. Asset 4 is importation property within the
meaning of Sec. 1.362-3(c)(2).
(B) Application of section 362(e)(1). Immediately after the
transfer, and without regard to section 362(e)(1) or section 362(e)(2)
and this section, DC's aggregate basis in importation property (Asset 2,
Asset 3, and Asset 4) would be $252 ($120 + $32 + $100). The aggregate
value of the importation property immediately after the transfer is $300
($110 + $40 + $150). Accordingly, the transaction is not a loss
importation transaction within the meaning of Sec. 1.362-3(c)(3) and
DC's bases
[[Page 349]]
in the importation property is not determined under section 362(e)(1).
(C) Application of section 362(e)(2) and this section.
Notwithstanding that the transfers by FC1 and FC2 are pursuant to a
single plan forming one transaction, section 362(e)(2) and this section
apply to each transferor separately.
(1) Application of section to FC1. (i) Loss duplication transaction.
FC1's transfer of Asset 1, Asset 2, and Asset 3 is a transaction
described in section 362(a). But for section 362(e)(2) and this section,
DC's aggregate basis in those assets would be $232 ($80 + $120 + $32),
which would exceed the aggregate value of the assets $200 ($50 + $110 +
$40) immediately after the transaction. Accordingly, the transfer is a
loss duplication transaction and FC1 has a net built-in loss of $32
($232 - $200).
(ii) Identifying loss duplication property. But for section
362(e)(2) and this section, DC's basis in Asset 1 would be $80, which
would exceed Asset 1's $50 value immediately after the transaction.
Accordingly, Asset 1 is loss duplication property. But for section
362(e)(2) and this section, DC's basis in Asset 2 would be $120, which
would exceed Asset 2's $110 value immediately after the transaction.
Accordingly, Asset 2 is also loss duplication property. But for section
362(e)(2) and this section, DC's basis in Asset 3 would be $32, which
would not exceed Asset 3's $40 value immediately after the transaction.
Accordingly, Asset 3 is not loss duplication property.
(iii) Basis in loss duplication property. DC's basis in Asset 1 is
$56, computed as its $80 basis under section 362(a) reduced by $24, its
allocable portion of FC1's $32 net built-in loss ($30/40 x $32). DC's
basis in Asset 2 is $112, computed as its $120 basis under section
362(a) reduced by $8, its allocable portion of FC1's $40 net built-in
loss ($10/$40 x $32).
(iv) Basis in other property. Under section 358(a), FC1 has an
exchanged basis of $232 in the DC stock it receives in the transaction.
(2) Application of section to FC2. FC2's transfer of Asset 3 is not
a loss duplication transaction because Asset 3's value exceeds its basis
immediately after the transaction. Accordingly, under section 362(a),
DC's basis in Asset 3 is $100.
Example 12. Section 362(e)(2)(C) elections with respect to transfers
between persons that are not required to file a U.S. return and that are
not CFCs or CFPs--(i) Basic application of section. On June 30, Year 1,
FC1 transfers Asset 1 to FC2 in a transaction to which section 351
applies (the original transfer) and that is therefore a section 362(a)
transaction. But for section 362(e)(2) and this section, FC2's basis in
Asset 1 (determined immediately after the transfer, taking into account
all applicable law, including section 362(e)(1)) exceeds the value of
Asset 1 immediately after the transaction. Accordingly, the transaction
is a loss duplication transaction and Asset 1 is loss duplication
property. FC1 and FC2 executed a written, binding agreement to apply
section 362(e)(2)(C) at some point before any Section 362(e)(2)(C)
Statement is filed. However, the transfer was not entered into with a
view to reducing or avoiding the Federal income tax liability of any
person by avoiding the application of section 362(e)(2) and this
section; further, no event described in paragraph (d)(3)(ii)(E), (F), or
(G) of this section occurs prior to June 30, Year 3. As a result, under
paragraph (c)(2) of this section, section 362(e)(2) and this section do
not apply to the transfer. Accordingly, FC2's basis in Asset 1 is
determined under section 362(a), no section 362(e)(2)(C) election can be
made, and any protective filing of a Section 362(e)(2)(C) Statement will
have no effect.
(ii) Loss duplication property later acquired by a person required
to file U.S. return. The facts are the same as in paragraph (i) of this
Example 12, except that, in addition, on January 1, Year 2, FC2
transfers Asset 1 to DC in an exchange to which section 351 applies.
FC2's transfer is an event described in paragraph (d)(3)(ii)(G) of this
section. As a result, paragraph (c)(2) does not except the original
transfer from the application of section 362(e)(2) and this section.
Under paragraph (d)(3)(ii)(G) of this section, DC must include the
Section 362(e)(2)(C) Statement for the original transfer on or with its
Year 2 U.S. return in order for that election to be effective. The
result would be the same if, instead of FC2 transferring Asset 1 to DC,
FC1 transferred its FC2 stock to DC in an exchange to which section 351
applies. (Further, if an asset transferred by FC1 or FC2 to DC is a loss
asset immediately after its transfer to DC, DC's basis in that asset may
be subject to section 362(e)(1).)
(iii) Party to exchange later becomes a person required to file U.S.
return. The facts are the same as in paragraph (i) of this Example 12,
except that, in addition, on January 1, Year 2, FC2 becomes engaged in a
U.S. business. FC2's becoming engaged in a U.S. business is an event
described in paragraph (d)(3)(ii)(F) of this section because it will
cause FC2 to become a person required to file a U.S. return. As a
result, paragraph (c)(2) of this section does not except the transfer
from the application of section 362(e)(2) and this section. Under
paragraph (d)(3)(ii)(F) of this section, FC2 must include the Section
362(e)(2)(C) Statement for the original transfer on or with its Year 2
U.S. return in order for the section 362(e)(2)(C) election for the
original transfer to be effective.
(iv) Statement not filed with respect to designated event. The facts
are the same as in paragraph (iii) of this Example 12, except that, in
addition, FC1 became engaged in a U.S. trade or business on October 31,
Year 1 and as a result became a person required to
[[Page 350]]
file a U.S. return, an event described in paragraph (d)(3)(ii)(E) of
this section. As a result, paragraph (c)(2) of this section does not
except the transfer from the application of section 362(e)(2) and this
section. Further, in order for the election to be effective, FC1 must
file the Section 362(e)(2)(C) Statement on or with its Year 1 U.S.
return. See paragraph (d)(3)(ii)(E) of this section. A statement filed
by FC2 on or with its Year 2 U.S. return has no effect. Thus, if FC1
does not file the statement, the election does not become effective and
basis is determined under the general rule of section 362(e)(2).
(v) Nonrecognition transfer of loss duplication property outside
United States, transferee later becomes engaged in U.S. trade or
business. The facts are the same as in paragraph (i) of this Example 12,
except that, in addition, on December 31, Year 1, FC2 transfers Asset 1
to FC3 in a transferred basis transaction. In Year 2, FC3 becomes
engaged in a U.S. trade or business and as a result becomes a person
required to file a U.S. return; Asset 1 is not used in or connected with
the U.S. trade or business or otherwise subject to Federal income tax.
FC3's becoming engaged in a U.S. trade or business is an event described
in paragraph (d)(3)(ii)(F) of this section because FC3, a person who
holds loss duplication property with a basis determined by FC2's basis
in the property, will be required to file a U.S. return as a result of
its becoming engaged in a U.S. business. As a result, paragraph (c)(2)
of this section does not except the transfer from the application of
section 362(e)(2) and this section. Under paragraph (d)(3)(ii)(F) of
this section, FC3 must include the Section 362(e)(2)(C) Statement for
the original transfer on or with its Year 2 U.S. return in order for the
section 362(e)(2)(C) election for the original transfer to be effective.
(i) [Reserved]
(j) Effective/applicability date. * * * The introductory text and
Example 11 of paragraph (h) of this section apply with respect to
transactions occurring on or after March 28, 2016, and also with respect
to transactions occurring before such date as a result of an entity
classification election under Sec. 301.7701-3 of this chapter filed on
or after March 28, 2016, unless such transaction is pursuant to a
binding agreement that was in effect prior to March 28, 2016 and at all
times thereafter. In addition, taxpayers may apply such provisions to
any transaction occurring after October 22, 2004.
[T.D. 9424, 73 FR 53948, Sept. 17, 2008, as amended by T.D. 9633, 78 FR
54160, Sept. 3, 2013; T.D. 9759, 81 FR 17082, Mar. 28, 2016]
Sec. 1.367(a)-0 Table of contents.
This section lists the paragraphs contained in Sec. Sec. 1.367(a)-1
through 1.367(a)-8.
Sec. 1.367(a)-1 Transfers to foreign corporations subject to section
367(a): In general.
(a) Scope.
(b) General rules.
(1) Foreign corporation not considered a corporation for purposes of
certain transfers.
(2) Cases in which foreign corporate status is not disregarded.
(3) Determination of value.
(4) In general.
(5) Treatment of certain property as subject to section 367(d).
(c) [Reserved]
(d) Definitions.
(1) United States person.
(2) Foreign corporation.
(3) Transfer.
(4) Property.
(5) Intangible property.
(6) Operating intangibles.
(e) Close of taxable year in certain section 368(a)(1)(F)
reorganizations.
(f) Exchanges under sections 354(a) and 361(a) in certain section
368(a)(1)(F) reorganizations.
(1) Rule.
(2) Rule applies regardless of whether a continuance under
applicable law.
(g) Effective/applicability dates.
Sec. 1.367(a)-2 Exceptions for transfers of property for use in the
active conduct of a trade or business.
(a) Scope and general rule.
(1) Scope.
(2) General rule.
(b) Eligible property.
(c) Exception for certain property.
(1) Inventory.
(2) Installment obligations, etc.
(3) Nonfunctional currency, etc.
(4) Certain leased tangible property.
(d) Active conduct of a trade or business outside the United States.
(1) In general.
(2) Trade or business.
(3) Active conduct.
(4) Outside of the United States.
(5) Use in the trade or business.
(6) Active leasing and licensing.
(e) Special rules for certain property to be leased.
(1) Leasing business of the foreign corporation.
(2) De minimis leasing by the foreign corporation.
(3) Aircraft and vessels leased in foreign commerce.
(f) Special rules for oil and gas working interests.
[[Page 351]]
(1) In general.
(2) Active use of working interest.
(3) Start-up operations.
(4) Other applicable rules.
(g) Property retransferred by the foreign corporation.
(1) General rule.
(2) Exception.
(h) Compulsory transfers of property.
(i) [Reserved]
(j) Failure to comply with reporting requirements of section 6038B.
(1) Failure to comply.
(2) Relief for certain failures to comply that are not willful.
(k) Effective/applicability dates.
(1) In general.
(2) Foreign currency exception.
Sec. 1.367(a)-3 Treatment of transfers of stock or securities to
foreign corporations.
(a) In general.
(1) Overview.
(2) Exceptions for certain exchanges of stock or securities.
(3) Cross-references.
(b) Transfers of stock or securities of foreign corporations.
(1) General rule.
(2) Certain transfers subject to sections 367(a) and (b).
(c) Transfers of stock or securities of domestic corporations.
(1) General rule.
(2) Ownership presumption.
(3) Active trade or business test.
(4) Special rules.
(5) Definitions.
(6) Reporting requirements of U.S. target company.
(7) Ownership statements.
(8) Certain transfers in connection with performance of services.
(9) Private letter ruling option.
(10) Examples.
(11) Effective date.
(d) Indirect stock transfers in certain nonrecognition transfers.
(1) In general.
(2) Special rules for indirect transfers.
(3) Examples.
(e) [Reserved]
(f) Failure to file statements.
(1) Failure to file.
(2) Relief for certain failures to file that are not willful.
(g) Effective/applicability dates.
(1) Rules of applicability.
(2) Election.
(h) Former 10-year gain recognition agreements.
(i) [Reserved]
(j) Transition rules regarding certain transfers of domestic or
foreign stock or securities after December 16, 1987, and prior to July
20, 1998.
(1) Scope.
(2) Transfers of domestic or foreign stock or securities: Additional
substantive rules.
(k) [Reserved]
Sec. 1.367(a)-4 Special rule applicable to U.S. depreciated property.
(a) Depreciated property used in the United States.
(1) In general.
(2) U.S. depreciated property.
(3) Property used within and without the United States.
(b) Effective/applicability dates.
Sec. 1.367(a)-5 [Reserved].
Sec. 1.367(a)-6 Transfer of foreign branch with previously deducted
losses.
(a) through (b)(1) [Reserved]
(2) No active conduct exception.
(c)(1) [Reserved]
(2) Gain limitation.
(3) [Reserved]
(4) Transfers of certain intangible property.
(d) through (i) [Reserved].
(j) Effective/applicability dates.
Sec. 1.367(a)-7 Outbound transfers of property described in section
361(a) or (b).
(a) Scope and purpose.
(b) General rule.
(1) Nonrecognition exchanges enumerated in section 367(a)(1).
(2) Nonrecognition exchanges not enumerated in section 367(a)(1).
(c) Elective exception.
(1) Control.
(2) Gain recognition.
(3) Basis adjustments required for control group members.
(4) Agreement to amend or file a U.S. income tax return.
(5) Election and reporting requirements.
(d) Section 361 exchange followed by successive distributions to
which section 355 applies.
(e) Other rules.
(1) Section 367(a) property with respect to which gain is
recognized.
(2) Relief for certain failures to comply that are not willful.
(3) Anti-abuse rule.
(4) Certain income inclusions under Sec. 1.367(b)-4.
(5) Certain gain under Sec. 1.367(a)-6.
(f) Definitions.
(g) Examples.
(h) Applicable cross-references.
(i) [Reserved]
(j) Effective/applicability dates.
(1) In general.
(2) Section 367(d) property.
[[Page 352]]
Sec. 1.367(a)-8 Gain recognition agreement requirements.
(a) Scope.
(b) Definitions and special rules.
(1) Definitions.
(2) Special rules.
(c) Gain recognition agreement.
(1) Terms of agreement.
(2) Content of gain recognition agreement.
(3) Description of transferred stock or securities and other
information.
(4) Basis adjustments for gain recognized.
(5) Terms and conditions of a new gain recognition agreement.
(6) Cross-reference.
(d) Filing requirements.
(1) General rule.
(2) Special requirements.
(3) Common parent as agent for U.S. transferor.
(e) Signatory.
(1) General rule.
(2) Signature requirement.
(f) Extension of period of limitations on assessments of tax.
(1) General rule.
(2) New gain recognition agreement.
(g) Annual certification.
(h) Use of security.
(i) [Reserved]
(j) Triggering events.
(1) Disposition of transferred stock or securities.
(2) Disposition of substantially all of the assets of the
transferred corporation.
(3) Disposition of certain partnership interests.
(4) Disposition of stock of the transferee foreign corporation.
(5) Deconsolidation.
(6) Consolidation.
(7) Death of an individual; trust or estate ceases to exist.
(8) Failure to comply.
(9) Gain recognition agreement filed in connection with indirect
stock transfers and certain triangular asset reorganizations.
(10) Gain recognition agreement filed pursuant to paragraph (k)(14)
of this section.
(k) Triggering event exceptions.
(1) Transfers of stock of the transferee foreign corporation to a
corporation or partnership.
(2) Complete liquidation of U.S. transferor under sections 332 and
337.
(3) Transfers of transferred stock or securities to a corporation or
partnership.
(4) Transfers of substantially all of the assets of the transferred
corporation.
(5) Recapitalizations and section 1036 exchanges.
(6) Certain asset reorganizations.
(7) Certain triangular reorganizations.
(8) Complete liquidation of transferred corporation.
(9) Death of U.S. transferor.
(10) Deconsolidation.
(11) Consolidation.
(12) Intercompany transactions.
(13) Deemed asset sales pursuant to section 338(g) elections.
(14) Other dispositions or events.
(l) [Reserved]
(m) Receipt of boot in nonrecognition transactions.
(1) Dispositions of transferred stock or securities.
(2) Dispositions of assets of transferred corporation.
(n) Special rules for distributions with respect to stock.
(1) Certain dividend equivalent redemptions treated as dispositions.
(2) Gain recognized under section 301(c)(3).
(o) Dispositions or other events that terminate or reduce the amount
of gain subject to the gain recognition agreement.
(1) Taxable disposition of stock of the transferee foreign
corporation.
(2) Gain recognized in connection with certain nonrecognition
transactions.
(3) Gain recognized under section 301(c)(3).
(4) Dispositions of substantially all of the assets of a domestic
transferred corporation.
(5) Certain distributions or transfers of transferred stock or
securities to U.S. persons.
(6) Dispositions or other event following certain intercompany
transactions.
(7) Expropriations under foreign law.
(p) Relief for certain failures to file or failures to comply that
are not willful.
(1) In general.
(2) Procedures for establishing that a failure to file or failure to
comply was not willful.
(3) Examples.
(q) Examples.
(1) Presumed facts and references.
(2) Examples.
(r) Effective/applicability date.
(1) General rule.
(2) Applicability to transfers occurring before March 13, 2009.
(3) Applicability to requests for relief submitted before November
19, 2014.
[T.D. 9803, 81 FR 91021, Dec. 16, 2016]
Sec. 1.367(a)-1 Transfers to foreign corporations subject to section
367(a): In general.
(a) Scope. Section 367(a)(1) provides the general rule concerning
certain transfers of property by a United States person (referred to at
times in this section as the ``U.S. person'' or ``U.S. transferor'') to
a foreign corporation. Paragraph (b) of this section provides general
rules explaining the effect of section 367(a)(1). Paragraph (c) of this
section describes transfers of
[[Page 353]]
property that are described in section 367(a)(1). Paragraph (d) of this
section provides definitions that apply for purposes of sections 367(a)
and (d) and the regulations thereunder. Paragraphs (e) and (f) of this
section provide rules that apply to certain reorganizations described in
section 368(a)(1)(F). Paragraph (g) of this section provides dates of
applicability. For rules concerning the reporting requirements under
section 6038B for certain transfers of property to a foreign
corporation, see Sec. 1.6038B-1.
(b) General rules--(1) Foreign corporation not considered a
corporation for purposes of certain transfers. If a U.S. person
transfers property to a foreign corporation in connection with an
exchange described in section 351, 354, 356, or 361, then, pursuant to
section 367(a)(1), the foreign corporation will not be considered to be
a corporation for purposes of determining the extent to which gain is
recognized on the transfer. Section 367(a)(1) denies nonrecognition
treatment only to transfers of items of property on which gain is
realized. Thus, the amount of gain recognized because of section
367(a)(1) is unaffected by the transfer of items of property on which
loss is realized (but not recognized).
(2) Cases in which foreign corporate status is not disregarded. For
circumstances in which section 367(a)(1) does not apply to a U.S.
transferor's transfer of property to a foreign corporation, and thus the
foreign corporation is considered to be a corporation, see Sec. Sec.
1.367(a)-2, 1.367(a)-3, and 1.367(a)-7.
(3) Determination of value. In cases in which a U.S. transferor's
transfer of property to a foreign corporation constitutes a controlled
transaction as defined in Sec. 1.482-1(i)(8), the value of the property
transferred is determined in accordance with section 482 and the
regulations thereunder.
(4) Character, source, and adjustments--(i) In general. If a U.S.
person is required to recognize gain under section 367 upon a transfer
of property to a foreign corporation, then--
(A) The character and source of such gain are determined as if the
property had been disposed of in a taxable exchange with the transferee
foreign corporation (unless otherwise provided by regulation); and
(B) Appropriate adjustments to earnings and profits, basis, and
other affected items will be made according to otherwise applicable
rules, taking into account the gain recognized under section 367(a)(1).
For purposes of applying section 362, the foreign corporation's basis in
the property received is increased by the amount of gain recognized by
the U.S. transferor under section 367(a) and the regulations issued
pursuant to that section. To the extent the regulations provide that the
U.S. transferor recognizes gain with respect to a particular item of
property, the foreign corporation increases its basis in that item of
property by the amount of such gain recognized. For example, Sec. Sec.
1.367(a)-2, 1.367(a)-3, and 1.367(a)-4 provide that gain is recognized
with respect to particular items of property. To the extent the
regulations do not provide that gain recognized by the U.S. transferor
is with respect to a particular item of property, such gain is treated
as recognized with respect to items of property subject to section
367(a) in proportion to the U.S. transferor's gain realized in such
property, after taking into account gain recognized with respect to
particular items of property transferred under any other provision of
section 367(a). For example, Sec. 1.367(a)-6 provides that branch
losses must be recaptured by the recognition of gain realized on the
transfer but does not associate the gain with particular items of
property. See also Sec. 1.367(a)-1(c)(3) for rules concerning transfers
by partnerships or of partnership interests.
(C) The transfer will not be recharacterized for U.S. Federal tax
purposes solely because the U.S. person recognizes gain in connection
with the transfer under section 367(a)(1). For example, if a U.S. person
transfers appreciated stock or securities to a foreign corporation in an
exchange described in section 351, the transfer is not recharacterized
as other than an exchange described in section 351 solely because the
U.S. person recognizes gain in the transfer under section 367(a)(1).
(ii) Example. The rules of this paragraph (b)(4) are illustrated by
the following example.
[[Page 354]]
Example. Domestic corporation DC transfers inventory with a fair
market value of $1 million and adjusted basis of $800,000 to foreign
corporation FC in exchange for stock of FC that is described in section
351(a). Title passes within the United States. Pursuant to section
367(a), DC is required to recognize gain of $200,000 upon the transfer.
Under the rule of this paragraph (b)(4), the gain is treated as ordinary
income (sections 1201 and 1221) from sources within the United States
(section 861) arising from a taxable exchange with FC. Appropriate
adjustments to earnings and profits, basis, etc., will be made as if the
transfer were subject to section 351. Thus, for example, DC's basis in
the FC stock received, and FC's basis in the transferred inventory, will
each be increased by the $200,000 gain recognized by DC, pursuant to
sections 358(a)(1) and 362(a), respectively.
(5) Treatment of certain property as subject to section 367(d). A
U.S. transferor may apply section 367(d) and Sec. 1.367(d)-1, rather
than section 367(a) and the regulations thereunder, to a transfer of
property to a foreign corporation that otherwise would be subject to
section 367(a), provided that the property is not eligible property, as
defined in Sec. 1.367(a)-2(b) but determined without regard to Sec.
1.367(a)-2(c). A U.S. transferor and any other U.S. transferor that is
related (within the meaning of section 267(b) or 707(b)(1)) to the U.S.
transferor must consistently apply this paragraph (b)(5) to all property
described in this paragraph (b)(5) that is transferred to one or more
foreign corporations pursuant to a plan. A U.S. transferor applies the
provisions of this paragraph (b)(5) in the form and manner set forth in
Sec. 1.6038B-1(d)(1)(iv) and (v).
(c)(1) through (c)(3)(i) [Reserved]. For further guidance, see Sec.
1.367(a)-1T(c)(1) through (c)(3)(i).
(ii) Transfer of partnership interest treated as transfer of
proportionate share of assets--(A) In general. If a U.S. person
transfers an interest as a partner in a partnership (whether foreign or
domestic) in an exchange described in section 367(a)(1), then that
person is treated as having transferred a proportionate share of the
property of the partnership in an exchange described in section
367(a)(1). Accordingly, the applicability of the exception to section
367(a)(1) provided in Sec. 1.367(a)-2 is determined with reference to
the property of the partnership rather than the partnership interest
itself. A U.S. person's proportionate share of partnership property is
determined under the rules and principles of sections 701 through 761
and the regulations thereunder.
(c)(3)(i)(A) Example through (7) [Reserved]. For further guidance,
see Sec. 1.367(a)-1T(c)(3)(i)(A) Example through (7).
(d) Definitions. The following definitions apply for purposes of
sections 367(a) and (d) and the regulations thereunder.
(1) United States person. The term ``United States person'' includes
those persons described in section 7701(a)(30). The term includes a
citizen or resident of the United States, a domestic partnership, a
domestic corporation, and any estate or trust other than a foreign
estate or trust. (For definitions of these terms, see section 7701 and
the regulations thereunder.) For purposes of this section, an individual
with respect to whom an election has been made under section 6013(g) or
(h) is considered to be a resident of the United States while such
election is in effect. A nonresident alien or a foreign corporation will
not be considered a United States person because of its actual or deemed
conduct of a trade or business within the United States during a taxable
year.
(2) Foreign corporation. The term ``foreign corporation'' has the
meaning set forth in section 7701(a)(3) and (5) and Sec. 301.7701-5.
(3) Transfer. For purposes of section 367 and regulations
thereunder, the term ``transfer'' means any transaction that constitutes
a transfer for purposes of section 332, 351, 354, 355, 356, or 361, as
applicable. A person's entering into a cost sharing arrangement under
Sec. 1.482-7 or acquiring rights to intangible property under such an
arrangement shall not be considered a transfer of property described in
section 367(a)(1). See Sec. 1.6038B-1T(b)(4) for the date on which the
transfer is considered to be made.
(4) Property. For purposes of section 367 and the regulations
thereunder, the term ``property'' means any item that constitutes
property for purposes of section 351, 354, 355, 356, or 361, as
applicable.
[[Page 355]]
(5) Intangible property. The term ``intangible property'' means
either property described in section 936(h)(3)(B) or property to which a
U.S. person applies section 367(d) pursuant to paragraph (b)(5) of this
section, but does not include property described in section 1221(a)(3)
or a working interest in oil and gas property.
(6) Operating intangibles. An operating intangible is any property
described in section 936(h)(3)(B) of a type not ordinarily licensed or
otherwise transferred in transactions between unrelated parties for
consideration contingent upon the licensee's or transferee's use of the
property. Examples of operating intangibles may include long-term
purchase or supply contracts, surveys, studies, and customer lists.
(e) Close of taxable year in certain section 368(a)(1)(F)
reorganizations. If a domestic corporation is the transferor corporation
in a reorganization described in section 368(a)(1)(F) after March 30,
1987, in which the acquiring corporation is a foreign corporation, then
the taxable year of the transferor corporation shall end with the close
of the date of the transfer and the taxable year of the acquiring
corporation shall end with the close of the date on which the
transferor's taxable year would have ended but for the occurrence of the
transfer. With regard to the consequences of the closing of the taxable
year, see section 381 and the regulations thereunder.
(f) Exchanges under sections 354(a) and 361(a) in certain section
368(a)(1)(F) reorganizations--(1) Rule. In every reorganization under
section 368(a)(1)(F), where the transferor corporation is a domestic
corporation, and the acquiring corporation is a foreign corporation,
there is considered to exist--
(i) A transfer of assets by the transferor corporation to the
acquiring corporation under section 361(a) in exchange for stock (or
stock and securities) of the acquiring corporation and the assumption by
the acquiring corporation of the transferor corporation's liabilities;
(ii) A distribution of the stock (or stock and securities) of the
acquiring corporation by the transferor corporation to the shareholders
(or shareholders and security holders) of the transferor corporation;
and
(iii) An exchange by the transferor corporation's shareholders (or
shareholders and security holders) of their stock (or stock and
securities) of the transferor corporation for stock (or stock and
securities) of the acquiring corporation under section 354(a).
(2) Rule applies regardless of whether a continuance under
applicable law. For purposes of paragraph (f)(1) of this section, it
shall be immaterial that the applicable foreign or domestic law treats
the acquiring corporation as a continuance of the transferor
corporation.
(g) Effective/applicability dates. (1) through (3) [Reserved]. For
further guidance, see Sec. 1.367(a)-1T(g)(1) through (3).
(4) The rules in paragraphs (b)(4)(i)(B) and (b)(4)(i)(C) of this
section apply to transfers occurring on or after April 18, 2013. For
guidance with respect to paragraph (b)(4)(i)(B) of this section before
April 18, 2013, see 26 CFR part 1 revised as of April 1, 2012. The rules
in paragraph (e) of this section apply to transactions occurring on or
after March 31, 1987. The rules in paragraph (f) of this section apply
to transactions occurring on or after January 1, 1985.
(5) Paragraphs (a), (b)(1) through (b)(4)(i)(B), (b)(4)(ii) through
(b)(5), (c)(3)(ii)(A), (d) introductory text through (d)(2), (d)(4)
through (d)(6) of this section apply to transfers occurring on or after
September 14, 2015, and to transfers occurring before September 14,
2015, resulting from entity classification elections made under Sec.
301.7701-3 that are filed on or after September 14, 2015. For transfers
occurring before this section is applicable, see Sec. Sec. 1.367(a)-1
and 1.367(a)-1T as contained in 26 CFR part 1 revised as of April 1,
2016.
[T.D. 9803, 81 FR 91022, Dec. 16, 2016, as amended at 82 FR 52848, Nov.
15, 2017]
Sec. 1.367(a)-1T Transfers to foreign corporations subject to section
367(a): In general (temporary).
(a) [Reserved]
(b) General rules--
(b)(1) through (3) [Reserved]
(4) Character, source, and adjustments--(i) In general. If a U.S.
person is
[[Page 356]]
required to recognize gain under section 367 upon a transfer of property
to a foreign corporation, then--
(A) [Reserved]
(B) [Reserved] For further guidance see Sec. 1.367(a)-
1(b)(4)(i)(B).
(C) [Reserved] For further guidance see Sec. 1.367(a)-
1(b)(4)(i)(C).
(b)(4)(ii) through (5) [Reserved]
(c) Transfers described in section 367(a)(1)--(1) In general. A
transfer described in section 367(a)(1) is any transfer of property by a
U.S. person to a foreign corporation pursuant to an exchange described
in section 332, 351, 354, 355, 356, or 361. Section 367(a)(1) applies to
such a transfer whether it is made directly, indirectly, or
constructively. Indirect or constructive transfers that are described in
section 367(a)(1) include the transfers described in subparagraphs (2)
through (7) of this paragraph (c).
(2) Indirect transfers in certain reorganizations. [Reserved]. For
further guidance, see Sec. 1.367(a)-3(d).
(3) Indirect transfers involving partnerships and interests
therein--(i) Transfer by partnership treated as transfer by partners--
(A) In general. If a partnership (whether foreign or domestic) transfers
property to a foreign corporation in an exchange described in section
367(a)(1), then a U.S. person that is a partner in the partnership shall
be treated as having transferred a proportionate share of the property
in an exchange described in section 367(a)(1). A U.S. person's
proportionate share of partnership property shall be determined under
the rules and principles of sections 701 through 761 and the regulations
thereunder. The rule of this paragraph (c)(3)(i)(A) is illustrated by
the following example.
Example. P is a partnership having five equal general partners, two
of whom are United States persons. P transfers property to F, a foreign
corporation, in connection with an exchange described in section 351.
The exchange includes an indirect transfer of property by the partners
to F. The transfers of property attributable to those partners who are
United States persons, that is, 40 percent of each asset transferred to
F, are transfers described in section 367(a)(1). The gain (if any)
recognized on the transfer of 40 percent of each asset to F is
attributable to the two partners who are United States persons.
(B) Special adjustments to basis. If a U.S. person is treated under
the rule of this paragraph (c)(3)(i) as having transferred a
proportionate share of the property of a partnership in an exchange
described in section 367(a), and is therefore required to recognize gain
upon the transfer, then--
(1) The U.S. person's basis in the partnership shall be increased by
the amount of gain recognized by him;
(2) Solely for purposes of determining the basis of the partnership
in the stock of the transferee foreign corporation, the U.S. person
shall be treated as having newly acquired an interest in the partnership
(for an amount equal to the gain recognized), permitting the partnership
to make an optional adjustment to basis pursuant to sections 743 and
754; and
(3) The transferee foreign corporation's basis in the property
acquired from the partnership shall be increased by the amount of gain
recognized by U.S. persons under this paragraph (c)(3)(i).
(ii) Transfer of partnership interest treated as transfer of
proportionate share of assets--(A) [Reserved]
(B) Special adjustments to basis. If a U.S. person is treated under
the rule of paragraph (c)(3)(ii)(A) of this section as having
transferred a proportionate share of the property of a partnership in an
exchange described in section 367(a), and is therefore required to
recognize gain upon the transfer, then--
(1) The U.S. person's basis in the stock of the transferee foreign
corporation shall be increased by the amount of gain so recognized by
that person;
(2) The transferee foreign corporation's basis in the transferred
partnership interest shall be increased by the amount of gain recognized
by the U.S. person; and
(3) Solely for purposes of determining the partnership's basis in
the property held by it, the U.S. person shall be treated as having
newly acquired an interest in the partnership (for an amount equal to
the gain recognized), permitting the partnership to make an optional
adjustment to basis pursuant to sections 743 and 754.
(C) Limited partnership interest. The transfer by a U.S. person of
an interest in a partnership shall not be subject to
[[Page 357]]
the rules of paragraph (c)(3)(ii)(A) and (B) if--
(1) The interest transferred is a limited partnership interest; and
(2) Such interest is regularly traded on an established securities
market.
Instead, the transfer of such an interest shall be treated in the same
manner as a transfer of stock or securities. Thus, the consequences of
such a transfer shall be determined under the rules of Sec. 1.367(a)-3.
For purposes of this section, a limited partnership interest is an
interest as a limited partner in a partnership that is organized under
the laws of any State of the United States or the District of Columbia.
Whether such an interest is regularly traded on an established
securities market shall be determined under the provisions of paragraph
(c)(3)(ii)(D) of this section.
(D) Regularly traded on an established securities market--(1)
Established securities market. For purposes of this paragraph
(c)(3)(ii), an established securities market is--
(i) A national securities exchange which is registered under section
6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f);
(ii) A foreign national securities exchange which is officially
recognized, sanctioned, or supervised by governmental authority; and
(iii) An over-the-counter market. An over-the-counter market is any
market reflected by the existence of an inter-dealer quotation system.
An inter-dealer quotation system is any system of general circulation to
brokers and dealers which regularly disseminates quotations of stock and
securities by identified brokers or dealers, other than by quotation
sheets which are prepared and distributed by a broker or dealer in the
regular course of business and which contain only quotations of such
broker or dealer.
(2) Regularly traded. A class of interests that is traded on an
established securities market is considered to be regularly traded if it
is regularly quoted by brokers or dealers making a market in such
interests. A class of interests shall be presumed to be regularly traded
if the entity has a total of 500 or more interest-holders.
(4) Transfers by trusts and estates--(i) In general. For purposes of
section 367(a), a transfer of property by an estate or trust shall be
treated as a transfer by the entity itself and not as an indirect
transfer by its beneficiaries. Thus, a transfer of property by a foreign
trust or estate (as defined in section 7701(a)(31)) is not described in
section 367(a)(1), regardless of whether the beneficiaries of the trust
or estate are U.S. persons. Similarly, a transfer of property by a
domestic trust or estate may be described in section 367(a)(1),
regardless of whether the beneficiaries of the trust or estate are
foreign persons.
(ii) Grantor trusts. A transfer of a portion or all of the assets of
a foreign or domestic trust to a foreign corporation in an exchange
described in section 367(a)(1) is considered a transfer by any U.S.
person who is treated as the owner of any such portion or all of the
assets of the trust under sections 671 through 679.
(5) Termination of election under section 1504(d). Section 367(A)
applies to the constructive reorganization and transfer of property from
a domestic corporation to a foreign corporation that occurs upon the
termination of an election under section 1504(d), which permits the
treatment of certain contiguous country corporations as domestic
corporations. The rule of this paragraph (c)(5) is illustrated by the
following example.
Example. Domestic corporation Y previously made a valid election
under section 1504(d) to have its wholly owned Canadian subsidiary, C,
treated as a domestic corporation. On July, 1, 1986, C fails to continue
to qualify for the election under section 1504 (d). A constructive
reorganization described in section 368(a)(1)(D) occurs. The resulting
constructive transfer of assets by ``domestic'' corporation C to
Canadian corporation C upon the termination of the election is a
transfer of property described in section 367(a)(1).
(6) Changes in classification of an entity. If a foreign entity is
classified as an entity other than an association taxable as a
corporation for United States tax purposes, and subsequently a change is
made in the governing documents, articles, or agreements of the entity
so that the entity is thereafter classified as an association taxable as
a
[[Page 358]]
corporation, the change in classification is considered a transfer of
property to a foreign corporation in connection with an exchange
described in section 351. For purposes of section 367(a)(1), the
transfer of property is considered as made by the persons determined
under the rules set forth in paragraph (c)(3) of this section with
respect to partnerships, and paragraph (c)(4)(i) or (ii), with respect
to trusts and estates, and the rules of such paragraphs apply
determining whether a transfer described in section 367(a)(1) has been
made.
(7) Contributions to capital. For rules with respect to the
treatment of a contribution to the capital of a foreign corporation as a
transfer described in section 367(a)(1), see section 367(c)(2) and the
regulations thereunder.
(d) introductory text through (d)(2) [Reserved]
(3) [Reserved] For further guidance, see Sec. 1.367(a)-1(d)(3).
(4) through (6) [Reserved]
(e) [Reserved]. For further guidance, see Sec. 1.367(a)-1(e).
(f) [Reserved]. For further guidance, see Sec. 1.367(a)-1(f).
(g) Effective date of certain section--
(1) In general. Except as specifically provided to the contrary
elsewhere in these sections, Sec. Sec. 1.367(a)-1T through 1.367(a)-6T
apply to transfers occurring after December 31, 1984.
(2) Private rulings. The taxpayer may rely on a private ruling under
section 367(a) received by him before June 16, 1986.
(3) Certain indirect transfers. Sections 1.367(a)-1T(c)(2)(i) and
(iii) and 1.367(a)-1T(c)(3) apply to transfers made after June 16, 1986.
For transfers made before that date, see 26 CFR 1.367(a)-1(b) (revised
as of April 1, 1986).
(4) [Reserved] For further guidance see Sec. 1.367(a)-1(g)(4).
[T.D. 8087, 51 FR 17938, May 16, 1986, as amended by T.D. 8280, 55 FR
1408, Jan. 16, 1990; T.D. 8770, 63 FR 33555, June 19, 1998; T.D. 9441,
74 FR 348, Jan. 5, 2009; T.D. 9568, 76 FR 80087, Dec. 22, 2011; T.D.
9614, 78 FR 17031, Mar. 19, 2013; T.D. 9739, 80 FR 56192, Sept. 21,
2015; T.D. 9803, 81 FR 91024, Dec. 16, 2016]
Sec. 1.367(a)-2 Exceptions for transfers of property for use in the
active conduct of a trade or business.
(a) Scope and general rule--(1) Scope. Paragraph (a)(2) of this
section provides the general exception to section 367(a)(1) for certain
property transferred for use in the active conduct of a trade or
business. Paragraph (b) of this section describes property that is
eligible for the exception provided in paragraph (a)(2) of this section.
Paragraph (c) of this section describes property that is not eligible
for the exception provided in paragraph (a)(2) of this section.
Paragraph (d) of this section provides general rules, and paragraphs (e)
through (h) of this section provide special rules, for determining
whether property is used in the active conduct of a trade or business
outside of the United States. Paragraph (i) of this section is reserved.
Paragraph (j) of this section provides relief for certain failures to
comply with the reporting requirements under paragraph (a)(2)(iii) of
this section that are not willful. Paragraph (k) of this section
provides dates of applicability. The rules of this section do not apply
to a transfer of stock or securities in an exchange subject to Sec.
1.367(a)-3.
(2) General rule. Except as otherwise provided in Sec. Sec.
1.367(a)-4, 1.367(a)-6, and 1.367(a)-7, section 367(a)(1) does not apply
to property transferred by a United States person (U.S. transferor) to a
foreign corporation if--
(i) The property constitutes eligible property;
(ii) The property is transferred for use by the foreign corporation
in the active conduct of a trade or business outside of the United
States, as determined under paragraph (d), (e), (f), (g), or (h) of this
section, as applicable; and
(iii) The U.S. transferor complies with the reporting requirements
of section 6038B and the regulations thereunder.
(b) Eligible property. Except as provided in paragraph (c) of this
section, eligible property means--
(1) Tangible property;
(2) A working interest in oil and gas property; and
(3) A financial asset. For purposes of this section, a financial
asset is--
(i) A cash equivalent;
[[Page 359]]
(ii) A security within the meaning of section 475(c)(2), without
regard to the last sentence of section 475(c)(2) (referencing section
1256) and without regard to section 475(c)(4), but excluding an interest
in a partnership;
(iii) A commodities position described in section 475(e)(2)(B),
475(e)(2)(C), or 475(e)(2)(D); and
(iv) A notional principal contract described in Sec. 1.446-3(c)(1).
(c) Exception for certain property. Notwithstanding paragraph (b) of
this section, property described in paragraph (c)(1), (2), (3), or (4)
of this section does not constitute eligible property.
(1) Inventory. Stock in trade of the taxpayer or other property of a
kind which would properly be included in the inventory of the taxpayer
if on hand at the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary course of its
trade or business (including raw materials and supplies, partially
completed goods, and finished products).
(2) Installment obligations, etc. Installment obligations, accounts
receivable, or similar property, but only to the extent that the
principal amount of any such obligation has not previously been included
by the taxpayer in its taxable income.
(3) Nonfunctional currency, etc.--(i) In general. Property that
gives rise to a section 988 transaction of the taxpayer described in
section 988(c)(1)(A) through (C), without regard to section 988(c)(1)(D)
and (E), or that would give rise to such a section 988 transaction if it
were acquired, accrued, entered into, or disposed of directly by the
taxpayer.
(ii) Limitation of gain required to be recognized. If section
367(a)(1) applies to a transfer of property described in paragraph
(c)(3)(i) of this section, then the gain required to be recognized is
limited to the gain realized as part of the same transaction upon the
transfer of property described in paragraph (c)(3)(i) of this section,
less any loss realized as part of the same transaction upon the transfer
of property described in paragraph (c)(3)(i) of this section. This
limitation applies in lieu of the rule in Sec. 1.367(a)-1(b)(1). No
loss is recognized with respect to property described in this paragraph
(c)(3).
(4) Certain leased tangible property. Tangible property with respect
to which the transferor is a lessor at the time of the transfer, unless
either the foreign corporation is the lessee at the time of the transfer
or the foreign corporation will lease the property to third persons.
(d) Active conduct of a trade or business outside the United
States--(1) In general. Except as provided in paragraphs (e), (f), (g),
and (h) of this section, to determine whether property is transferred
for use by the foreign corporation in the active conduct of a trade or
business outside of the United States, four factual determinations must
be made:
(i) What is the trade or business of the foreign corporation (see
paragraph (d)(2) of this section);
(ii) Do the activities of the foreign corporation constitute the
active conduct of that trade or business (see paragraph (d)(3) of this
section);
(iii) Is the trade or business conducted outside of the United
States (see paragraph (d)(4) of this section); and
(iv) Is the transferred property used or held for use in the trade
or business (see paragraph (d)(5) of this section)?
(2) Trade or business. Whether the activities of the foreign
corporation constitute a trade or business is determined based on all
the facts and circumstances. In general, a trade or business is a
specific unified group of activities that constitute (or could
constitute) an independent economic enterprise carried on for profit.
For example, the activities of a foreign selling subsidiary could
constitute a trade or business if they could be independently carried on
for profit, even though the subsidiary acts exclusively on behalf of,
and has operations fully integrated with, its parent corporation. To
constitute a trade or business, a group of activities must ordinarily
include every operation which forms a part of, or a step in, a process
by which an enterprise may earn income or profit. In this regard, one or
more of such activities may be carried on by independent contractors
under the direct control of the foreign corporation. (However, see
paragraph (d)(3) of this section.) The group of activities must
ordinarily include the collection of income and the
[[Page 360]]
payment of expenses. If the activities of the foreign corporation do not
constitute a trade or business, then the exception provided by this
section does not apply, regardless of the level of activities carried on
by the corporation. The following activities are not considered to
constitute by themselves a trade or business for purposes of this
section:
(i) Any activity giving rise to expenses that would be deductible
only under section 212 if the activities were carried on by an
individual; or
(ii) The holding for one's own account of investments in stock,
securities, land, or other property, including casual sales thereof.
(3) Active conduct. Whether a trade or business is actively
conducted by the foreign corporation is determined based on all the
facts and circumstances. In general, a corporation actively conducts a
trade or business only if the officers and employees of the corporation
carry out substantial managerial and operational activities. A
corporation may be engaged in the active conduct of a trade or business
even though incidental activities of the trade or business are carried
out on behalf of the corporation by independent contractors. In
determining whether the officers and employees of the corporation carry
out substantial managerial and operational activities, however, the
activities of independent contractors are disregarded. On the other
hand, the officers and employees of the corporation are considered to
include the officers and employees of related entities who are made
available to and supervised on a day-to-day basis by, and whose salaries
are paid by (or reimbursed to the lending related entity by), the
foreign corporation. See paragraph (d)(6) of this section for the
standard that applies to determine whether a trade or business that
produces rents or royalties is actively conducted. The rule of this
paragraph (d)(3) is illustrated by the following example.
Example. X, a domestic corporation, and Y, a foreign corporation not
related to X, transfer property to Z, a newly formed foreign corporation
organized for the purpose of combining the research activities of X and
Y. Z contracts all of its operational and research activities to Y for
an arm's-length fee. Z's activities do not constitute the active conduct
of a trade or business.
(4) Outside of the United States. Whether the foreign corporation
conducts a trade or business outside of the United States is determined
based on all the facts and circumstances. Generally, the primary
managerial and operational activities of the trade or business must be
conducted outside the United States and immediately after the transfer
the transferred assets must be located outside the United States. Thus,
the exception provided by this section would not apply to the transfer
of the assets of a domestic business to a foreign corporation if the
domestic business continued to operate in the United States after the
transfer. In such a case, the primary operational activities of the
business would continue to be conducted in the United States. Moreover,
the transferred assets would be located in the United States. However,
it is not necessary that every item of property transferred be used
outside of the United States. As long as the primary managerial and
operational activities of the trade or business are conducted outside of
the United States and substantially all of the transferred assets are
located outside the United States, incidental items of transferred
property located in the United States may be considered to have been
transferred for use in the active conduct of a trade or business outside
of the United States.
(5) Use in the trade or business. Whether property is used or held
for use by the foreign corporation in a trade or business is determined
based on all the facts and circumstances. In general, property is used
or held for use in the foreign corporation's trade or business if it
is--
(i) Held for the principal purpose of promoting the present conduct
of the trade or business;
(ii) Acquired and held in the ordinary course of the trade or
business; or
(iii) Otherwise held in a direct relationship to the trade or
business. Property is considered held in a direct relationship to a
trade or business if it is held to meet the present needs of that trade
or business and not its anticipated future needs. Thus, property will
[[Page 361]]
not be considered to be held in a direct relationship to a trade or
business if it is held for the purpose of providing for future
diversification into a new trade or business, future expansion of trade
or business activities, future plant replacement, or future business
contingencies.
(6) Active leasing and licensing. For purposes of paragraph (d)(3)
of this section, whether a trade or business that produces rents or
royalties is actively conducted is determined under the principles of
section 954(c)(2)(A) and the regulations thereunder, but without regard
to whether the rents or royalties are received from an unrelated party.
See Sec. Sec. 1.954-2(c) and (d).
(e) Special rules for certain property to be leased--(1) Leasing
business of the foreign corporation. Except as otherwise provided in
this paragraph (e), tangible property that will be leased to another
person by the foreign corporation will be considered to be transferred
for use by the foreign corporation in an active trade or business
outside the United States only if--
(i) The foreign corporation's leasing of the property constitutes
the active conduct of a leasing business, as determined under paragraph
(d)(6) of this section;
(ii) The lessee of the property is not expected to, and does not,
use the property in the United States; and
(iii) The foreign corporation has a need for substantial investment
in assets of the type transferred.
(2) De minimis leasing by the foreign corporation. Tangible property
that will be leased to another person by the foreign corporation but
that does not satisfy the conditions of paragraph (e)(1) of this section
will, nevertheless, be considered to be transferred for use in the
active conduct of a trade or business if either--
(i) The property transferred will be used by the foreign corporation
in the active conduct of a trade or business but will be leased during
occasional brief periods when the property would otherwise be idle, such
as an airplane leased during periods of excess capacity; or
(ii) The property transferred is real property located outside the
United States and--
(A) The property will be used primarily in the active conduct of a
trade or business of the foreign corporation; and
(B) Not more than ten percent of the square footage of the property
will be leased to others.
(3) Aircraft and vessels leased in foreign commerce. For purposes of
satisfying paragraph (e)(1) of this section, an aircraft or vessel,
including component parts such as an engine leased separately from the
aircraft or vessel, that will be leased to another person by the foreign
corporation will be considered to be transferred for use in the active
conduct of a trade or business if--
(i) The employees of the foreign corporation perform substantial
managerial and operational activities of leasing aircraft or vessels
outside the United States; and
(ii) The leased property is predominantly used outside the United
States, as determined under Sec. 1.954-2(c)(2)(v).
(f) Special rules for oil and gas working interests--(1) In general.
A working interest in oil and gas property will be considered to be
transferred for use in the active conduct of a trade or business if--
(i) The transfer satisfies the conditions of paragraph (f)(2) or
(f)(3) of this section;
(ii) At the time of the transfer, the foreign corporation has no
intention to farm out or otherwise transfer any part of the transferred
working interest; and
(iii) During the first three years after the transfer there are no
farmouts or other transfers of any part of the transferred working
interest as a result of which the foreign corporation retains less than
a 50-percent share of the transferred working interest.
(2) Active use of working interest. A working interest in oil and
gas property that satisfies the conditions in paragraphs (f)(1)(ii) and
(iii) of this section will be considered to be transferred for use in
the active conduct of a trade or business if--
(i) The U.S. transferor is regularly and substantially engaged in
exploration for and extraction of minerals, either directly or through
working interests in joint ventures, other than by
[[Page 362]]
reason of the property that is transferred;
(ii) The terms of the working interest transferred were actively
negotiated among the joint venturers;
(iii) The working interest transferred constitutes at least a five
percent working interest;
(iv) Before and at the time of the transfer, through its own
employees or officers, the U.S. transferor was regularly and actively
engaged in--
(A) Operating the working interest, or
(B) Analyzing technical data relating to the activities of the
venture;
(v) Before and at the time of the transfer, through its own
employees or officers, the U.S. transferor was regularly and actively
involved in decision making with respect to the operations of the
venture, including decisions relating to exploration, development,
production, and marketing; and
(vi) After the transfer, the foreign corporation will for the
foreseeable future satisfy the requirements of subparagraphs (iv) and
(v) of this paragraph (f)(2).
(3) Start-up operations. A working interest in oil and gas property
that satisfies the conditions in paragraphs (f)(1)(ii) and (iii) of this
section but that does not satisfy all the requirements of paragraph
(f)(2) of this section will, nevertheless, be considered to be
transferred for use in the active conduct of a trade or business if--
(i) The working interest was acquired by the U.S. transferor
immediately before the transfer and for the specific purpose of
transferring it to the foreign corporation;
(ii) The requirements of paragraphs (f)(2)(ii) and (iii) of this
section are satisfied; and
(iii) The foreign corporation will for the foreseeable future
satisfy the requirements of paragraph (f)(2)(iv) and (v) of this
section.
(4) Other applicable rules. A working interest in oil and gas
property that is not described in paragraph (f)(1) of this section may
nonetheless qualify for the exception to section 367(a)(1) contained in
this section depending upon the facts and circumstances.
(g) Property retransferred by the foreign corporation--(1) General
rule. Property will not be considered to be transferred for use in the
active conduct of a trade or business outside of the United States if--
(i) At the time of the transfer, it is reasonable to believe that,
in the reasonably foreseeable future, the foreign corporation will sell
or otherwise dispose of any material portion of the property other than
in the ordinary course of business; or
(ii) Except as provided in paragraph (g)(2) of this section, the
foreign corporation receives the property in an exchange described in
section 367(a)(1), and, as part of the same transaction, transfers the
property to another person. For purposes of the preceding sentence, a
subsequent transfer within six months of the initial transfer will be
considered to be part of the same transaction, and a subsequent transfer
more than six months after the initial transfer may be considered to be
part of the same transaction under step-transaction principles.
(2) Exception. Notwithstanding paragraph (g)(1) of this section, the
active conduct exception provided by this section shall apply to the
initial transfer if--
(i) The initial transfer is followed by one or more subsequent
transfers described in section 351 or 721; and
(ii) Each subsequent transferee is either a partnership in which the
preceding transferor is a general partner or a corporation in which the
preceding transferor owns common stock; and
(iii) The ultimate transferee uses the property in the active
conduct of a trade or business outside the United States.
(h) Compulsory transfers of property. Property is presumed to be
transferred for use in the active conduct of a trade or business outside
of the United States, if--
(1) The property was previously in use in the country in which the
foreign corporation is organized; and
(2) The transfer is either:
(i) Legally required by the foreign government as a necessary
condition of doing business; or
(ii) Compelled by a genuine threat of immediate expropriation by the
foreign government.
(i) [Reserved]
[[Page 363]]
(j) Failure to comply with reporting requirements of section 6038B--
(1) Failure to comply. For purposes of the exception to the application
of section 367(a)(1) provided in paragraph (a)(2) of this section, a
failure to comply with the reporting requirements of section 6038B and
the regulations thereunder (failure to comply) has the meaning set forth
in Sec. 1.6038B-1(f)(2).
(2) Relief for certain failures to comply that are not willful--(i)
In general. A failure to comply described in paragraph (j)(1) of this
section will be deemed not to have occurred for purposes of satisfying
the requirements of this section if the taxpayer demonstrates that the
failure was not willful using the procedure set forth in this paragraph
(j)(2). For this purpose, willful is to be interpreted consistent with
the meaning of that term in the context of other civil penalties, which
would include a failure due to gross negligence, reckless disregard, or
willful neglect. Whether a failure to comply was a willful failure will
be determined by the Director of Field Operations, Cross Border
Activities Practice Area, Large Business & International (or any
successor to the roles and responsibilities of such position, as
appropriate) (Director) based on all the facts and circumstances. The
taxpayer must submit a request for relief and an explanation as provided
in paragraph (j)(2)(ii)(A) of this section. Although a taxpayer whose
failure to comply is determined not to be willful will not be subject to
gain recognition under this section, the taxpayer will be subject to a
penalty under section 6038B if the taxpayer fails to demonstrate that
the failure was due to reasonable cause and not willful neglect. See
Sec. 1.6038B-1(b)(1) and (f). The determination of whether the failure
to comply was willful under this section has no effect on any request
for relief made under Sec. 1.6038B-1(f).
(ii) Procedures for establishing that a failure to comply was not
willful--(A) Time and manner of submission. A taxpayer's statement that
the failure to comply was not willful will be considered only if,
promptly after the taxpayer becomes aware of the failure, an amended
return is filed for the taxable year to which the failure relates that
includes the information that should have been included with the
original return for such taxable year or that otherwise complies with
the rules of this section, and that includes a written statement
explaining the reasons for the failure to comply. The amended return
must be filed with the Internal Revenue Service at the location where
the taxpayer filed its original return. The taxpayer may submit a
request for relief from the penalty under section 6038B as part of the
same submission. See Sec. 1.6038B-1(f).
(B) Notice requirement. In addition to the requirements of paragraph
(j)(2)(ii)(A) of this section, the taxpayer must comply with the notice
requirements of this paragraph (j)(2)(ii)(B). If any taxable year of the
taxpayer is under examination when the amended return is filed, a copy
of the amended return and any information required to be included with
such return must be delivered to the Internal Revenue Service personnel
conducting the examination. If no taxable year of the taxpayer is under
examination when the amended return is filed, a copy of the amended
return and any information required to be included with such return must
be delivered to the Director.
(3) For illustrations of the application of the willfulness standard
of this paragraph (j), see the examples in Sec. 1.367(a)-8(p)(3).
(4) Paragraph (j) applies to requests for relief submitted on or
after November 19, 2014.
(k) Effective/applicability dates--(1) In general. Except as
provided in paragraphs (j)(4) and (k)(2) of this section, the rules of
this section apply to transfers occurring on or after September 14,
2015, and to transfers occurring before September 14, 2015, resulting
from entity classification elections made under Sec. 301.7701-3 that
are filed on or after September 14, 2015. For transfers occurring before
this section is applicable, see Sec. Sec. 1.367(a)-2, -2T, -4, -4T, -5,
and -5T as contained in 26 CFR part 1 revised as of April 1, 2016.
(2) Foreign currency exception. Notwithstanding paragraph (c)(3)(i)
of this section, Sec. 1.367(a)-5T(d)(2) as contained in 26 CFR part 1
revised as of April 1, 2016, applies to transfers of property
[[Page 364]]
denominated in a foreign currency occurring before December 16, 2016,
other than transfers occurring before that date resulting from entity
classification elections made under Sec. 301.7701-3 that are filed on
or after that date.
[T.D. 9803, 81 FR 91024, Dec. 16, 2016]
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 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
[[Page 365]]
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)-1(c). For
additional rules regarding a transfer of stock or securities in an
exchange described in section 361(a) or (b), see Sec. 1.367(a)-7. 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.
(b) Transfers of stock or securities of foreign corporations --(1)
General rule. Except as provided in paragraph (e) of this section, a
transfer of stock or securities of a foreign corporation by a U.S.
person to a foreign corporation that would otherwise be subject to
section 367(a)(1) under paragraph (a) of this section will not be
subject to section 367(a)(1) if either--
(i) Less than 5-percent shareholder. The U.S. person owns less than
five percent (applying the attribution rules of section 318, as modified
by section 958(b)) of both the total voting power and the total value of
the stock of the transferee foreign corporation immediately after the
transfer; or
(ii) 5-percent shareholder. The U.S. person enters into a five-year
gain recognition agreement with respect to the transferred stock or
securities as provided in Sec. 1.367(a)-8.
(2) Certain transfers subject to sections 367(a) and (b)--(i) In
general. A transfer of stock or securities described in section 367(a)
or the regulations thereunder as well as in section 367(b) or the
regulations thereunder shall be subject concurrently to sections 367(a)
and (b) and the respective regulations thereunder, except as provided in
paragraph (b)(2)(i)(A) through (C) of this section. See paragraph (d)(3)
Examples 11 and 14 of this section.
(A) Section 367(b) and the regulations thereunder shall not apply if
a foreign corporation is not treated as a corporation under section
367(a)(1). See the example in paragraph (b)(2)(ii) of this section and
paragraph (d)(3) Example 14 of this section.
(B) If a foreign corporation transfers assets to a domestic
corporation in a transaction to which Sec. 1.367(b)-3(a) and (b) and
the indirect stock transfer rules of paragraph (d) of this section
apply, and all the earnings and profits amount attributable to the stock
of an exchanging shareholder under Sec. 1.367(b)-3(b) is greater than
the amount of gain in such stock subject to section 367(a) pursuant to
the indirect stock transfer rules of paragraph (d) of this section, then
the rules of section 367(b), and not the rules of section 367(a), shall
apply to the exchange. See paragraph (d)(3) Example 15 of this section.
(C) [Reserved] For further guidance, see Sec. 1.367(a)-
3T(b)(2)(i)(C).
(ii) Example. The following example illustrates the provisions of
this paragraph (b)(2):
Example. (i) Facts. DC, a domestic corporation, owns all of the
stock of FC1, a controlled foreign corporation within the meaning of
section 957(a). DC's basis in the stock of FC1 is $50, and the value of
such stock is $100. The section 1248 amount with respect to such stock
is $30. FC2, also a foreign corporation, is owned entirely by foreign
individuals who are not related to DC or FC1. In a reorganization
described in section 368(a)(1)(B), FC2 acquires all of the stock of FC1
from DC in exchange for 20 percent of the voting stock of FC2. FC2 is
not a controlled foreign corporation after the reorganization.
(ii) Result without gain recognition agreement. Under the provisions
of this paragraph (b), if DC fails to enter into a gain recognition
agreement, DC is required to recognize
[[Page 366]]
in the year of the transfer the $50 of gain that it realized upon the
transfer, $30 of which will be treated as a dividend under section 1248.
(iii) Result with gain recognition agreement. If DC enters into a
gain recognition agreement under Sec. 1.367(a)-8 with respect to the
transfer of FC1 stock, the exchange will also be subject to the
provisions of section 367(b) and the regulations thereunder to the
extent that it is not subject to tax under section 367(a)(1). In such
case, DC will be required to recognize the section 1248 amount of $30 on
the exchange of FC1 for FC2 stock. See Sec. 1.367(b)-4(b). The deemed
dividend of $30 recognized by DC will increase its basis in the FC1
stock exchanged in the transaction and, therefore, the basis of the FC2
stock received in the transaction. The remaining gain of $20 realized by
DC (otherwise recognizable under section 367(a)) in the exchange of FC1
stock will not be recognized if DC enters into a gain recognition
agreement with respect to the transfer. (The result would be unchanged
if, for example, the exchange of FC1 stock for FC2 stock qualified as a
section 351 exchange, or as an exchange described in both sections 351
and 368(a)(1)(B).)
(c) Transfers of stock or securities of domestic corporations--(1)
General rule. Except as provided in paragraph (e) of this section, a
transfer of stock or securities of a domestic corporation by a U.S.
person to a foreign corporation that would otherwise be subject to
section 367(a)(1) under paragraph (a) of this section will not be
subject to section 367(a)(1) if the domestic corporation the stock or
securities of which are transferred (referred to as the U.S. target
company) complies with the reporting requirements in paragraph (c)(6) of
this section and if each of the following four conditions is met:
(i) Fifty percent or less of both the total voting power and the
total value of the stock of the transferee foreign corporation is
received in the transaction, in the aggregate, by U.S. transferors
(i.e., the amount of stock received does not exceed the 50-percent
ownership threshold).
(ii) Fifty percent or less of each of the total voting power and the
total value of the stock of the transferee foreign corporation is owned,
in the aggregate, immediately after the transfer by U.S. persons that
are either officers or directors of the U.S. target company or that are
five-percent target shareholders (as defined in paragraph (c)(5)(iii) of
this section) (i.e., there is no control group). For purposes of this
paragraph (c)(1)(ii), any stock of the transferee foreign corporation
owned by U.S. persons immediately after the transfer will be taken into
account, whether or not it was received in the exchange for stock or
securities of the U.S. target company.
(iii) Either--
(A) The U.S. person is not a five-percent transferee shareholder (as
defined in paragraph (c)(5)(ii) of this section); or
(B) The U.S. person is a five-percent transferee shareholder and
enters into a five-year agreement to recognize gain with respect to the
U.S. target company stock or securities it exchanged in the form
provided in Sec. 1.367(a)-8; and
(iv) The active trade or business test (as defined in paragraph
(c)(3) of this section) is satisfied.
(2) Ownership presumption. For purposes of paragraph (c)(1) of this
section, persons who transfer stock or securities of the U.S. target
company in exchange for stock of the transferee foreign corporation are
presumed to be U.S. persons. This presumption may be rebutted in
accordance with paragraph (c)(7) of this section.
(3) Active trade or business test--(i) In general. The tests of this
paragraph (c)(3), collectively referred to as the active trade or
business test, are satisfied if:
(A) The transferee foreign corporation or any qualified subsidiary
(as defined in paragraph (c)(5)(vii) of this section) or any qualified
partnership (as defined in paragraph (c)(5)(viii) of this section) is
engaged in an active trade or business outside the United States, within
the meaning of Sec. 1.367(a)-2(d)(2), (3), and (4) for the entire 36-
month period immediately before the transfer;
(B) At the time of the transfer, neither the transferors nor the
transferee foreign corporation (and, if applicable, the qualified
subsidiary or qualified partnership engaged in the active trade or
business) have an intention to substantially dispose of or discontinue
such trade or business; and
(C) The substantiality test (as defined in paragraph (c)(3)(iii) of
this section) is satisfied.
[[Page 367]]
(ii) Special rules. For purposes of paragraphs (c)(3)(i)(A) and (B)
of this section, the following special rules apply:
(A) The transferee foreign corporation, a qualified subsidiary, or a
qualified partnership will be considered to be engaged in an active
trade or business for the entire 36-month period preceding the exchange
if it acquires at the time of, or any time prior to, the exchange a
trade or business that has been active throughout the entire 36-month
period preceding the exchange. This special rule shall not apply,
however, if the acquired active trade or business assets were owned by
the U.S. target company or any affiliate (within the meaning of section
1504(a) but excluding the exceptions contained in section 1504(b) and
substituting ``50 percent'' for ``80 percent'' where it appears therein)
at any time during the 36-month period prior to the acquisition. Nor
will this special rule apply if the principal purpose of such
acquisition is to satisfy the active trade or business test.
(B) An active trade or business does not include the making or
managing of investments for the account of the transferee foreign
corporation or any affiliate (within the meaning of section 1504(a) but
excluding the exceptions contained in section 1504(b) and substituting
``50 percent'' for ``80 percent'' where it appears therein). (This
paragraph (c)(3)(ii)(B) shall not create any inference as to the scope
of Sec. 1.367(a)-2(d)(2) and (3) for other purposes.)
(iii) Substantiality test--(A) General rule. A transferee foreign
corporation will be deemed to satisfy the substantiality test if, at the
time of the transfer, the fair market value of the transferee foreign
corporation is at least equal to the fair market value of the U.S.
target company.
(B) Special rules for transferee foreign corporation value. (1) For
purposes of paragraph (c)(3)(iii)(A) of this section, the value of the
transferee foreign corporation shall include assets acquired outside the
ordinary course of business by the transferee foreign corporation within
the 36-month period preceding the exchange only if either--
(i) Both--
(A) At the time of the exchange, such assets or, as applicable, the
proceeds thereof, do not produce, and are not held for the production
of, passive income as defined in section 1297(b); and
(B) Such assets are not acquired for the principal purpose of
satisfying the substantiality test; or
(ii) Such assets consist of the stock of a qualified subsidiary or
an interest in a qualified partnership. See paragraph (c)(3)(iii)(B)(2)
of this section.
(2) For purposes of paragraph (c)(3)(iii)(A) of this section, the
value of the transferee foreign corporation shall not include the value
of the stock of any qualified subsidiary or the value of any interest in
a qualified partnership, held directly or indirectly, to the extent that
such value is attributable to assets acquired by such qualified
subsidiary or partnership outside the ordinary course of business and
within the 36-month period preceding the exchange unless those assets
satisfy the requirements in paragraph (c)(3)(iii)(B)(1) of this section.
(3) For purposes of paragraph (c)(3)(iii)(A) of this section, the
value of the transferee foreign corporation shall not include the value
of assets received within the 36-month period prior to the acquisition,
notwithstanding the special rule in paragraph (c)(3)(iii)(B)(1) of this
section, if such assets were owned by the U.S. target company or an
affiliate (within the meaning of section 1504(a) but without the
exceptions under section 1504(b) and substituting ``50 percent'' for
``80 percent'' where it appears therein) at any time during the 36-month
period prior to the transaction.
(C) [Reserved]. For further guidance, see Sec. 1.367(a)-
3T(c)(3)(iii)(C).
(4) Special rules--(i) Treatment of partnerships. For purposes of
this paragraph (c), if a partnership (whether domestic or foreign) owns
stock or securities in the U.S. target company or the transferee foreign
corporation, or transfers stock or securities in an exchange described
in section 367(a), each partner in the partnership, and not the
partnership itself, is treated as owning and as having transferred, or
as owning, a proportionate share of the stock or securities. See Sec.
1.367(a)-1(c)(3).
[[Page 368]]
(ii) Treatment of options. For purposes of this paragraph (c), one
or more options (or an interest similar to an option) will be treated as
exercised and thus will be counted as stock for purposes of determining
whether the 50-percent threshold is exceeded or whether a control group
exists if a principal purpose of the issuance or the acquisition of the
option (or other interest) was the avoidance of the general rule
contained in section 367(a)(1).
(iii) U.S. target has a vestigial ownership interest in transferee
foreign corporation. In cases where, immediately after the transfer, the
U.S. target company owns, directly or indirectly (applying the
attribution rules of sections 267(c)(1) and (5)), stock of the
transferee foreign corporation, that stock will not in any way be taken
into account (and, thus, will not be treated as outstanding) in
determining whether the 50-percent threshold under paragraph (c)(1)(i)
of this section is exceeded or whether a control group under paragraph
(c)(1)(ii) of this section exists.
(iv) Attribution rule. Except as otherwise provided in this section,
the rules of section 318, as modified by the rules of section 958(b)
shall apply for purposes of determining the ownership or receipt of
stock, securities or other property under this paragraph (c).
(5) Definitions--(i) Ownership statement. An ownership statement is
a statement, signed under penalties of perjury, stating--
(A) The identity and taxpayer identification number, if any, of the
person making the statement;
(B) That the person making the statement is not a U.S. person (as
defined in paragraph (c)(5)(iv) of this section);
(C) That the person making the statement either--
(1) Owns less than 1 percent of the total voting power and total
value of a U.S. target company the stock of which is described in Rule
13d-1(d) of Regulation 13D (17 CFR 240.13d-1(d)) (or any rule or
regulation to generally the same effect) promulgated by the Securities
and Exchange Commission under the Securities and Exchange Act of 1934
(15 U.S.C. 78m), and such person did not acquire the stock with a
principal purpose to enable the U.S. transferors to satisfy the
requirement contained in paragraph (c)(1)(i) of this section; or
(2) Is not related to any U.S. person to whom the stock or
securities owned by the person making the statement are attributable
under the rules of section 958(b), and did not acquire the stock with a
principal purpose to enable the U.S. transferors to satisfy the
requirement contained in paragraph (c)(1)(i) of this section;
(D) The citizenship, permanent residence, home address, and U.S.
address, if any, of the person making the statement; and
(E) The ownership such person has (by voting power and by value) in
the U.S. target company prior to the exchange and the amount of stock of
the transferee foreign corporation (by voting power and value) received
by such person in the exchange.
(ii) Five-percent transferee shareholder. A five-percent transferee
shareholder is a person that owns at least five percent of either the
total voting power or the total value of the stock of the transferee
foreign corporation immediately after the transfer described in section
367(a)(1). For special rules involving cases in which stock is held by a
partnership, see paragraph (c)(4)(i) of this section.
(iii) Five-percent target shareholder and certain other 5-percent
shareholders. A five-percent target shareholder is a person that owns at
least five percent of either the total voting power or the total value
of the stock of the U.S. target company immediately prior to the
transfer described in section 367(a)(1). If the stock of the U.S. target
company (or any company through which stock of the U.S. target company
is owned indirectly or constructively) is described in Rule 13d-1(d) of
Regulation 13D (17 CFR 240.13d-1(d)) (or any rule or regulation to
generally the same effect), promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78m),
then, in the absence of actual knowledge to the contrary, the existence
or absence of filings of Schedule 13-D or 13-G (or any similar
schedules) may be relied upon for purposes of identifying five-percent
target shareholders (or a five-percent shareholder
[[Page 369]]
of a corporation which itself is a five-percent shareholder of the U.S.
target company). For special rules involving cases in which U.S. target
company stock is held by a partnership, see paragraph (c)(4)(i) of this
section.
(iv) U.S. Person. For purposes of this section, a U.S. person is
defined by reference to Sec. 1.367(a)-1(d)(1). For application of the
rules of this section to stock or securities owned or transferred by a
partnership that is a U.S. person, however, see paragraph (c)(4)(i) of
this section.
(v) U.S. Transferor. A U.S. transferor is a U.S. person (as defined
in paragraph (c)(5)(iv) of this section) that transfers stock or
securities of one or more U.S. target companies in exchange for stock of
the transferee foreign corporation in an exchange described in section
367.
(vi) Transferee foreign corporation. Except as provided in paragraph
(d)(2)(i)(B) of this section, a transferee foreign corporation is the
foreign corporation whose stock is received in the exchange by U.S.
persons.
(vii) Qualified Subsidiary. A qualified subsidiary is a foreign
corporation whose stock is at least 80-percent owned (by total voting
power and total value), directly or indirectly, by the transferee
foreign corporation. However, a corporation will not be treated as a
qualified subsidiary if it was affiliated with the U.S. target company
(within the meaning of section 1504(a) but without the exceptions under
section 1504(b) and substituting ``50 percent'' for ``80 percent'' where
it appears therein) at any time during the 36-month period prior to the
transfer. Nor will a corporation be treated as a qualified subsidiary if
it was acquired by the transferee foreign corporation at any time during
the 36-month period prior to the transfer for the principal purpose of
satisfying the active trade or business test, including the
substantiality test.
(viii) Qualified partnership. (A) Except as provided in paragraph
(c)(5)(viii)(B) or (C) of this section, a qualified partnership is a
partnership in which the transferee foreign corporation--
(1) Has active and substantial management functions as a partner
with regard to the partnership business; or --
(2) Has an interest representing a 25 percent or greater interest in
the partnership's capital and profits.
(B) A partnership is not a qualified partnership if the U.S. target
company or any affiliate of the U.S. target company (within the meaning
of section 1504(a) but without the exceptions under section 1504(b) and
substituting ``50 percent'' for ``80 percent'' where it appears therein)
held a 5 percent or greater interest in the partnership's capital and
profits at any time during the 36-month period prior to the transfer.
(C) A partnership is not a qualified partnership if the transferee
foreign corporation's interest was acquired by that corporation at any
time during the 36-month period prior to the transfer for the principal
purpose of satisfying the active trade or business test, including the
substantiality test.
(6) Reporting requirements of U.S. target company. (i) In order for
a U.S. person that transfers stock or securities of a domestic
corporation to qualify for the exception provided by this paragraph (c)
to the general rule under section 367(a)(1), in cases where 10 percent
or more of the total voting power or the total value of the stock of the
U.S. target company is transferred by U.S. persons in the transaction,
the U.S. target company must comply with the reporting requirements
contained in this paragraph (c)(6). The U.S. target company must attach
to its timely filed U.S. income tax return for the taxable year in which
the transfer occurs a statement titled ``Section 367(a)--Reporting of
Cross-Border Transfer Under Reg. Sec. 1.367(a)-3(c)(6),'' signed under
penalties of perjury by an officer of the corporation to the best of the
officer's knowledge and belief, disclosing the following information--
(A) A description of the transaction in which a U.S. person or
persons transferred stock or securities in the U.S. target company to
the transferee foreign corporation in a transfer otherwise subject to
section 367(a)(1);
(B) The amount (specified as to the percentage of the total voting
power and the total value) of stock of the transferee foreign
corporation received
[[Page 370]]
in the transaction, in the aggregate, by persons who transferred stock
or securities of the U.S. target company. For additional information
that may be required to rebut the ownership presumption of paragraph
(c)(2) of this section in cases where more than 50 percent of either the
total voting power or the total value of the stock of the transferee
foreign corporation is received in the transaction, in the aggregate, by
persons who transferred stock or securities of the U.S. target company,
see paragraph (c)(7) of this section;
(C) The amount (if any) of transferee foreign corporation stock
owned directly or indirectly (applying the attribution rules of sections
267(c)(1) and (5)) immediately after the exchange by the U.S. target
company;
(D) A statement that there is no control group within the meaning of
paragraph (c)(1)(ii) of this section;
(E) A list of U.S. persons who are officers, directors or five-
percent target shareholders and the percentage of the total voting power
and the total value of the stock of the transferee foreign corporation
owned by such persons both immediately before and immediately after the
transaction; and
(F) A statement that includes the following--
(1) A statement that the active trade or business test described in
paragraph (c)(3) of this section is satisfied by the transferee foreign
corporation and a description of such business;
(2) A statement that on the day of the transaction, there was no
intent on the part of the transferee foreign corporation (or its
qualified subsidiary, if relevant) or the transferors of the transferee
foreign corporation (or qualified subsidiary, if relevant) to
substantially discontinue its active trade or business; and
(3) A statement that the substantiality test described in paragraph
(c)(3)(iii) of this section is satisfied, and documentation that such
test is satisfied, including the value of the transferee foreign
corporation and the value of the U.S. target company on the day of the
transfer, and either one of the following--
(i) A statement demonstrating that the value of the transferee
foreign corporation 36 months prior to the acquisition, plus the value
of any assets described in paragraph (c)(3)(iii)(B) of this section
(including stock) acquired by the transferee foreign corporation within
the 36-month period, less the amount of any liabilities acquired during
that period, equals or exceeds the value of the U.S. target company on
the acquisition date; or
(ii) A statement demonstrating that the value of the transferee
foreign corporation on the date of the acquisition, reduced by the value
of any assets not described in paragraph (c)(3)(iii)(B) of this section
(including stock) acquired by the transferee foreign corporation within
the 36-month period, equals or exceeds the value of the U.S. target
company on the date of the acquisition.
(ii) Except as provided in paragraph (f) of this section, for
purposes of this paragraph (c)(6), a U.S. income tax return will be
considered timely filed if it is filed on or before the last date
prescribed for filing (taking into account any extensions of time
therefor) for the taxable year in which the transfer occurs.
(7) Ownership statements. To rebut the ownership presumption of
paragraph (c)(2) of this section, the U.S. target company must obtain
ownership statements (described in paragraph (c)(5)(i) of this section)
from a sufficient number of persons that transfer U.S. target company
stock or securities in the transaction that are not U.S. persons to
demonstrate that the 50-percent threshold of paragraph (c)(1)(i) of this
section is not exceeded. In addition, the U.S. target company must
attach to its timely filed U.S. income tax return (as described in
paragraph (c)(6)(ii) of this section) for the taxable year in which the
transfer occurs a statement, titled ``Section 367(a)--Compilation of
Ownership Statements Under Reg. Sec. 1.367(a)-3(c),'' signed under
penalties of perjury by an officer of the corporation, disclosing the
following information:
(i) The amount (specified as to the percentage of the total voting
power and the total value) of stock of the transferee foreign
corporation received, in the aggregate, by U.S. transferors;
[[Page 371]]
(ii) The amount (specified as to the percentage of total voting
power and total value) of stock of the transferee foreign corporation
received, in the aggregate, by foreign persons that filed ownership
statements;
(iii) A summary of the information tabulated from the ownership
statements, including--
(A) The names of the persons that filed ownership statements stating
that they are not U.S. persons;
(B) The countries of residence and citizenship of such persons; and
(C) Each of such person's ownership (by voting power and by value)
in the U.S. target company prior to the exchange and the amount of stock
of the transferee foreign corporation (by voting power and value)
received by such persons in the exchange.
(8) Certain transfers in connection with performance of services.
Section 367(a)(1) shall not apply to a domestic corporation's transfer
of its own stock or securities in connection with the performance of
services, if the transfer is considered to be to a foreign corporation
solely by reason of Sec. 1.83-6(d)(1). The transfer may still, however,
be reportable under section 6038B. See Sec. 1.6038B-1(b)(2)(i)(A)(4)
and (b)(2)(i)(B)(4).
(9) Private letter ruling option. The Internal Revenue Service may,
in limited circumstances, issue a private letter ruling to permit the
taxpayer to qualify for an exception to the general rule under section
367(a)(1) if--
(i) A taxpayer is unable to satisfy all of the requirements of
paragraph (c)(3) of this section relating to the active trade or
business test of paragraph (c)(1)(iv) of this section, but such taxpayer
meets all of the other requirements contained in paragraphs (c)(1)(i)
through (c)(1)(iii) of this section, and such taxpayer is substantially
in compliance with the rules set forth in paragraph (c)(3) of this
section; or
(ii) A taxpayer is unable to satisfy any requirement of paragraph
(c)(1) of this section due to the application of paragraph (c)(4)(iv) of
this section. Notwithstanding the preceding sentence, in no event will
the Internal Revenue Service rule on the issue of whether the principal
purpose of an acquisition was to satisfy the active trade or business
test, including the substantiality test.
(10) Examples. This paragraph (c) may be illustrated by the
following examples:
Example 1. Ownership presumption. (i) FC, a foreign corporation,
issues 51 percent of its stock to the shareholders of S, a domestic
corporation, in exchange for their S stock, in a transaction described
in section 367(a)(1).
(ii) Under paragraph (c)(2) of this section, all shareholders of S
who receive stock of FC in the exchange are presumed to be U.S. persons.
Unless this ownership presumption is rebutted, the condition set forth
in paragraph (c)(1)(i) of this section will not be satisfied, and the
exception in paragraph (c)(1) of this section will not be available. As
a result, all U.S. persons that transferred S stock will recognize gain
on the exchange. To rebut the ownership presumption, S must comply with
the reporting requirements contained in paragraph (c)(6) of this
section, obtaining ownership statements (described in paragraph
(c)(5)(i) of this section) from a sufficient number of non-U.S. persons
who received FC stock in the exchange to demonstrate that the amount of
FC stock received by U.S. persons in the exchange does not exceed 50
percent.
Example 2. Filing of Gain Recognition Agreement. (i) The facts are
the same as in Example 1, except that FC issues only 40 percent of its
stock to the shareholders of S in the exchange. FC satisfies the active
trade or business test of paragraph (c)(1)(iv) of this section. A, a
U.S. person, owns 10 percent of S's stock immediately before the
transfer. All other shareholders of S own less than five percent of its
stock. None of S's officers or directors owns any stock in FC
immediately after the transfer. A will own 15 percent of the stock of FC
immediately after the transfer, 4 percent received in the exchange, and
the balance being stock in FC that A owned prior to and independent of
the transaction. No S shareholder besides A owns five percent or more of
FC immediately after the transfer. The reporting requirements under
paragraph (c)(6) of this section are satisfied.
(ii) The condition set forth in paragraph (c)(1)(i) of this section
is satisfied because, even after application of the presumption in
paragraph (c)(2) of this section, U.S. transferors could not receive
more than 50 percent of FC's stock in the transaction. There is no
control group because five-percent target shareholders and officers and
directors of S do not, in the aggregate, own more than 50 percent of the
stock of FC immediately after the transfer (A, the sole five-percent
target shareholder, owns 15 percent of the stock of FC immediately after
the transfer, and no officers or directors of S own any stock of FC
immediately after the transfer). Therefore, the condition set forth in
paragraph (c)(1)(ii)
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of this section is satisfied. The facts assume that the condition set
forth in paragraph (c)(1)(iv) of this section is satisfied. Thus, U.S.
persons that are not five-percent transferee shareholders will not
recognize gain on the exchange of S shares for FC shares. A, a five-
percent transferee shareholder, will not be required to include in
income any gain realized on the exchange in the year of the transfer if
he files a 5-year gain recognition agreement (GRA) and complies with
section 6038B.
Example 3. Control Group. (i) The facts are the same as in Example
2, except that B, another U.S. person, is a 5-percent target
shareholder, owning 25 percent of S's stock immediately before the
transfer. B owns 40 percent of the stock of FC immediately after the
transfer, 10 percent received in the exchange, and the balance being
stock in FC that B owned prior to and independent of the transaction.
(ii) A control group exists because A and B, each a five-percent
target shareholder within the meaning of paragraph (c)(5)(iii) of this
section, together own more than 50 percent of FC immediately after the
transfer (counting both stock received in the exchange and stock owned
prior to and independent of the exchange). As a result, the condition
set forth in paragraph (c)(1)(ii) of this section is not satisfied, and
all U.S. persons (not merely A and B) who transferred S stock will
recognize gain on the exchange.
Example 4. Partnerships. (i) The facts are the same as in Example 3,
except that B is a partnership (domestic or foreign) that has five equal
partners, only two of whom, X and Y, are U.S. persons. Under paragraph
(c)(4)(i) of this section, X and Y are treated as the owners and
transferors of 5 percent each of the S stock owned and transferred by B
and as owners of 8 percent each of the FC stock owned by B immediately
after the transfer. U.S. persons that are five-percent target
shareholders thus own a total of 31 percent of the stock of FC
immediately after the transfer (A's 15 percent, plus X's 8 percent, plus
Y's 8 percent).
(ii) Because no control group exists, the condition in paragraph
(c)(1)(ii) of this section is satisfied. The conditions in paragraphs
(c)(1)(i) and (iv) of this section also are satisfied. Thus, U.S.
persons that are not five-percent transferee shareholders will not
recognize gain on the exchange of S shares for FC shares. A, X, and Y,
each a five-percent transferee shareholder, will not be required to
include in income in the year of the transfer any gain realized on the
exchange if they file 5-year GRAs and comply with section 6038B.
(11) Applicability date of this paragraph (c)--(i) In general.
Except as otherwise provided, this paragraph (c) applies to transfers
occurring after January 29, 1997. However, taxpayers may elect to apply
this section in its entirety to all transfers occurring after April 17,
1994, provided that the statute of limitations of the affected tax year
or years is open.
(ii) [Reserved]. For further guidance, see Sec. 1.367(a)-
3T(c)(11)(ii).
(d) Indirect stock transfers in certain nonrecognition transfers--
(1) In general. For purposes of this section, a U.S. person who
exchanges, under section 354 (or section 356) stock or securities in a
domestic or foreign corporation for stock or securities in a foreign
corporation (or in a domestic corporation in control of a foreign
acquiring corporation in a triangular section 368(a)(1)(B)
reorganization) in connection with a transaction described in paragraphs
(d)(1)(i) through (v) of this section (or who is deemed to make such an
exchange under paragraph (d)(1)(vi) of this section) shall, except as
provided in paragraph (d)(2)(vii) of this section, be treated as having
made an indirect transfer of such stock or securities to a foreign
corporation that is subject to the rules of this section, including, for
example, the requirement, where applicable, that the U.S. transferor
enter into a gain recognition agreement to preserve nonrecognition
treatment under section 367(a). If the U.S. person exchanges stock or
securities of a foreign corporation, see also section 367(b) and the
regulations thereunder. For examples of the concurrent application of
the indirect stock transfer rules under section 367(a) and the rules of
section 367(b), see paragraph (d)(3) Examples 14 and 15 of this section.
For purposes of this paragraph (d), if a corporation acquiring assets in
an asset reorganization transfers all or a portion of such assets to a
corporation controlled (within the meaning of section 368(c)) by the
acquiring corporation as part of the same transaction, the subsequent
transfer of assets to the controlled corporation will be referred to as
a controlled asset transfer. See section 368(a)(2)(C).
(i) Mergers described in sections 368(a)(1)(A) and (a)(2)(D) and
reorganizations described in sections 368(a)(1)(G) and (a)(2)(D). A U.S.
person exchanges stock or securities of a corporation (the acquired
corporation) for stock or
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securities of a foreign corporation that controls the acquiring
corporation in a reorganization described in either sections
368(a)(1)(A) and (a)(2)(D), or in sections 368(a)(1)(G) and (a)(2)(D).
See paragraph (d)(3) Example 1 of this section for an example of a
reorganization described in sections 368(a)(1)(A) and (a)(2)(D)
involving domestic acquired and acquiring corporations, and see
paragraph (d)(3) Example 10 of this section for an example involving a
domestic acquired corporation and a foreign acquiring corporation.
(ii) Mergers described in sections 368(a)(1)(A) and (a)(2)(E). A
U.S. person exchanges stock or securities of a corporation (the
acquiring corporation) for stock or securities in a foreign corporation
that controls the acquired corporation in a reorganization described in
sections 368(a)(1)(A) and (a)(2)(E). See paragraph (d)(3) Example 2 of
this section for an example of a reorganization described in sections
368(a)(1)(A) and (a)(2)(E) involving domestic acquired and acquiring
corporations, and see paragraph (d)(3) Example 11 of this section for an
example involving a domestic acquired corporation and a foreign
acquiring corporation.
(iii) Triangular reorganizations described in section 368(a)(1)(B)--
(A) A U.S. person exchanges stock or securities of the acquired
corporation for voting stock or securities of a foreign corporation that
is in control (as defined in section 368(c)) of the acquiring
corporation in a reorganization described in section 368(a)(1)(B). See
paragraph (d)(3) Example 5 of this section.
(B) A U.S. person exchanges stock or securities of the acquired
corporation for voting stock or securities of a domestic corporation
that is in control (as defined in section 368(c)) of a foreign acquiring
corporation in a reorganization described in section 368(a)(1)(B). See
paragraph (d)(3) Example 5A of this section.
(iv) Triangular reorganizations described in section 368(a)(1)(C). A
U.S. person exchanges stock or securities of a corporation (the acquired
corporation) for voting stock or securities of a foreign corporation
that controls the acquiring corporation in a reorganization described in
section 368(a)(1)(C). See, e.g., paragraph (d)(3) Example 6 of this
section (for an example of a triangular section 368(a)(1)(C)
reorganization involving domestic acquired and acquiring corporations),
and paragraph (d)(3) Example 8 of this section (for an example involving
a domestic acquired corporation and a foreign acquiring corporation). If
the acquired corporation is a foreign corporation, see paragraph (d)(3)
Example 14 of this section, and section 367(b) and the regulations
thereunder.
(v) Transfers of assets to subsidiaries in certain section 368(a)(1)
reorganizations. A U.S. person exchanges stock or securities of a
corporation (the acquired corporation) for stock or securities of a
foreign acquiring corporation in an asset reorganization (other than a
triangular section 368(a)(1)(C) reorganization described in paragraph
(d)(1)(iv) of this section, a reorganization described in sections
368(a)(1)(A) and (a)(2)(D) or sections 368(a)(1)(G) and (a)(2)(D)
described in paragraph (d)(1)(i) of this section, a reorganization
described in sections 368(a)(1)(A) and (a)(2)(E) described in paragraph
(d)(1)(ii) of this section, or a same-country section 368(a)(1)(F)
reorganization) that is followed by a controlled asset transfer. For
purposes of this section, a same-country section 368(a)(1)(F)
reorganization is a reorganization described in section 368(a)(1)(F) in
which both the acquired corporation and the acquiring corporation are
foreign corporations and are created or organized under the laws of the
same foreign country. In the case of a transaction described in this
paragraph (d)(1)(v) in which some but not all of the assets of the
acquired corporation are transferred in a controlled asset transfer, the
transaction shall be considered to be an indirect transfer of stock or
securities subject to this paragraph (d) only to the extent of the
assets so transferred. The remaining assets shall be treated as having
been transferred by the acquired corporation in an asset transfer rather
than an indirect stock transfer, and, if the acquired corporation is a
domestic corporation, such asset transfer shall be subject to the other
provisions of section 367, including sections 367(a)(1), (3), and (5),
and (d). See paragraph (d)(3) Examples 6A and 6B of this section.
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(vi) Successive transfers of property to which section 351 applies.
A U.S. person transfers property (other than stock or securities) to a
foreign corporation in an exchange described in section 351, and all or
a portion of such assets transferred to the foreign corporation by such
person are, in connection with the same transaction, transferred to a
second corporation that is controlled by the foreign corporation in one
or more exchanges described in section 351. For purposes of this
paragraph (d)(1) and Sec. 1.367(a)-8, the initial transfer by the U.S.
person shall be deemed to be a transfer of stock described in section
354. (Any assets transferred to the foreign corporation that are not
transferred by the foreign corporation to a second corporation shall be
treated as a transfer of assets subject to the general rules of section
367, including sections 367(a)(1), (3), (5) and (d), and not as an
indirect stock transfer under the rules of this paragraph (d).) See,
e.g., paragraph (d)(3) Example 13 and Example 13A of this section.
(2) Special rules for indirect transfers. If a U.S. person is
considered to make an indirect transfer of stock or securities described
in paragraph (d)(1) of this section, the rules of this section and Sec.
1.367(a)-8 shall apply to the transfer. For purposes of applying the
rules of this section and Sec. 1.367(a)-8:
(i) Transferee foreign corporation--(A) General rule. Except as
provided in paragraph (d)(2)(i)(B) of this section, the transferee
foreign corporation shall be the foreign corporation that issues stock
or securities to the U.S. person in the exchange.
(B) Special rule for triangular reorganizations described in
paragraph (d)(1)(iii)(B) of this section. In the case of a triangular
reorganization described in paragraph (d)(1)(iii)(B) of this section,
the transferee foreign corporation shall be the foreign acquiring
corporation. See paragraph (d)(3) Example 5A of this section.
(ii) Transferred corporation. The transferred corporation shall be
the acquiring corporation, except as provided in this paragraph
(d)(2)(ii). In the case of a triangular section 368(a)(1)(B)
reorganization described in paragraph (d)(1)(iii) of this section, the
transferred corporation shall be the acquired corporation. In the case
of an indirect stock transfer described in paragraph (d)(1)(i), (ii), or
(iv) of this section followed by a controlled asset transfer, or an
indirect stock transfer described in paragraph (d)(1)(v) of this
section, the transferred corporation shall be the controlled corporation
to which the assets are transferred. In the case of successive section
351 transfers described in paragraph (d)(1)(vi) of this section, the
transferred corporation shall be the corporation to which the assets are
transferred in the final section 351 transfer. The transferred property
shall be the stock or securities of the transferred corporation, as
appropriate under the circumstances.
(iii) Amount of gain. For purposes of determining the amount of gain
that a U.S. person is required to include in income as a result of a
triggering event, see Sec. 1.367(a)-8(c)(1)(i).
(iv) Gain recognition agreements involving multiple parties. The
U.S. person's agreement to recognize gain, as provided in Sec.
1.367(a)-8, shall include appropriate provisions consistent with the
principles of Sec. 1.367(a)-8. See Examples 5 and 5A of this section
and Sec. 1.367(a)-8(j)(9).
(v) Determination of whether substantially all of the transferred
corporation's assets are disposed of. For purposes of applying Sec.
1.367(a)-8(j)(2)(i) to determine whether substantially all of the assets
of the transferred corporation have been disposed of, the following
assets shall be taken into account (but only if such assets are not
fully taxable under section 367 in the taxable year that includes the
indirect transfer)--
(A) In the case of a reorganization described in paragraph (d)(1)(i)
of this section (a reorganization described in sections 368(a)(1)(A) and
(a)(2)(D) or sections 368(a)(1)(G) and (a)(2)(D)) or a reorganization
described in section (d)(1)(iv) of this section (a triangular section
368(a)(1)(C) reorganization), the assets of the acquired corporation;
(B) In the case of a sections 368(a)(1)(A) and (a)(2)(E)
reorganization described in paragraph (d)(1)(ii) of this section, the
assets of the acquiring corporation immediately prior to the
transaction;
(C) In the case of an asset reorganization followed by a controlled
asset
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transfer, as described in paragraph (d)(1)(v) of this section, the
assets of the acquired corporation that are transferred to the
corporation controlled by the acquiring corporation;
(D) In the case of a triangular reorganization described in section
368(a)(1)(C) followed by a controlled asset transfer, a reorganization
described in sections 368(a)(1)(A) and (a)(2)(D) followed by a
controlled asset transfer, or a reorganization described in sections
368(a)(1)(G) and (a)(2)(D) followed by a controlled asset transfer, the
assets of the acquired corporation including those transferred to the
corporation controlled by the acquiring corporation;
(E) In the case of a reorganization described in sections
368(a)(1)(A) and (a)(2)(E) followed by a controlled asset transfer, the
assets of the acquiring corporation including those transferred to the
corporation controlled by the acquiring corporation; and
(F) In the case of successive section 351 exchanges described in
paragraph (d)(1)(vi) of this section, the assets that are both
transferred initially to the foreign corporation, and transferred by the
foreign corporation to a second corporation.
(vi) Coordination between asset transfer rules and indirect stock
transfer rules--(A) General rule. Except as otherwise provided in this
paragraph (d)(2)(vi), if, pursuant to any of the transactions described
in paragraph (d)(1) of this section, a U.S. person transfers (or is
deemed to transfer) assets to a foreign corporation in an exchange
described in section 351 or section 361, the rules of section 367,
including sections 367(a)(1), (a)(3), and (a)(5), as well as section
367(d), and the regulations thereunder shall apply prior to the
application of the rules of this section.
(B) Exceptions--(1) If a transaction is described in paragraph
(d)(2)(vi)(A) of this section, section 367(a) and (d) will not apply to
the extent a domestic corporation (domestic acquired corporation)
transfers assets to a foreign corporation (foreign acquiring
corporation) in an asset reorganization, and those assets (re-
transferred assets) are transferred to a domestic corporation (domestic
controlled corporation) in a controlled asset transfer, provided that
each of the following conditions is satisfied:
(i) The domestic controlled corporation's adjusted basis in the re-
transferred assets is not greater than the domestic acquired
corporation's adjusted basis in those assets. For this purpose, any
increase in basis in the re-transferred assets that results because the
domestic acquired corporation recognized gain or income with respect to
the re-transferred assets in the transaction is not taken into account.
(ii) The domestic acquired corporation includes a statement
described in paragraph (d)(2)(vi)(C) of this section with its timely
filed U.S. income tax return for the taxable year of the transfer; and
(iii) The requirements of paragraphs (c)(1)(i), (ii), and (iv) and
(c)(6) of this section are satisfied with respect to the indirect
transfer of stock in the domestic acquired corporation.
(2) Sections 367(a) and (d) shall not apply to transfers described
in paragraph (d)(1)(vi) of this section if a U.S. person transfers
assets to a foreign corporation in a section 351 exchange, to the extent
that such assets are transferred by such foreign corporation to a
domestic corporation in another section 351 exchange, but only if the
domestic transferee's adjusted basis in the assets is not greater than
the adjusted basis that the U.S. person had in such assets. Any increase
in adjusted basis in the assets that results because the U.S. person
recognized gain or income with respect to such assets in the initial
section 351 exchange is not taken into account for purposes of
determining whether the domestic transferee's adjusted basis in the
assets is not greater than the U.S. person's adjusted basis in such
assets. This paragraph (d)(2)(vi)(B)(2) will not, however, apply to an
exchange described in section 351 that is also an exchange described in
section 361(a) or (b). An exchange described in section 351 that is also
an exchange described in section 361(a) or (b) is only eligible for the
exception in paragraph (d)(2)(vi)(B)(1) of this section.
(C) Required statement. The statement required by paragraph
(d)(2)(vi)(B)(1)(ii) of this section shall be entitled ``Required
Statement under Sec. 1.367(a)-3(d)
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for Assets Transferred to a Domestic Corporation'' and shall be signed
under penalties of perjury by an authorized officer of the domestic
acquired corporation and by an authorized officer of the foreign
acquiring corporation. The required statement shall contain a
certification that, if the foreign acquiring corporation disposes of any
stock of the domestic controlled corporation in a transaction described
in paragraph (d)(2)(vi)(D) of this section, the domestic acquired
corporation shall recognize gain as described in paragraph (d)(2)(vi)(E)
of this section. The domestic acquired corporation (or the foreign
acquiring corporation on behalf of the domestic acquired corporation)
shall file a U.S. income tax return (or an amended U.S. tax return, as
the case may be) for the year of the transfer reporting such gain.
(D) Gain recognition transaction. (1) A transaction described in
this paragraph (d)(2)(vi)(D) is one where a principal purpose of the
transfer by the domestic acquired corporation is the avoidance of U.S.
tax that would have been imposed on the domestic acquired corporation on
the disposition of the re-transferred assets. A transfer may have a
principal purpose of tax avoidance even though the tax avoidance purpose
is outweighed by other purposes when taken together.
(2) For purposes of paragraph (d)(2)(vi)(D)(1) of this section, a
transaction is deemed to have a principal purpose of tax avoidance if
the foreign acquiring corporation disposes of any stock of the domestic
controlled corporation (whether in a recognition or non-recognition
transaction) within 2 years of the transfer described in paragraph
(d)(2)(vi)(A) of this section. The rule in this paragraph
(d)(2)(vi)(D)(2) shall not apply if the domestic acquired corporation
(or the foreign acquiring corporation on behalf of the domestic acquired
corporation) demonstrates to the satisfaction of the Commissioner that
the avoidance of U.S. tax was not a principal purpose of the
transaction. For this purpose, a disposition by the foreign acquiring
corporation of stock of the domestic controlled corporation more than 5
years after completion of the transfer described in paragraph
(d)(2)(vi)(A) of this section is deemed to not have a principal purpose
of tax avoidance.
(E) Amount of gain recognized and other matters. (1) In the case of
a transaction described in paragraph (d)(2)(vi)(D) of this section,
solely for purposes of this paragraph (d)(2)(vi)(E), the domestic
acquired corporation shall be treated as if, immediately prior to the
transfer described in paragraph (d)(2)(vi)(A) of this section, it
transferred the re-transferred assets, including any intangible assets,
directly to a domestic corporation in exchange for stock of such
domestic corporation in a transaction that is treated as a section 351
exchange, and immediately sold such stock to an unrelated party for its
fair market value in a sale in which it shall recognize gain, if any
(but not loss). Any gain recognized by the domestic acquired corporation
pursuant to this paragraph (d)(2)(vi)(E) will increase the basis that
the foreign acquiring corporation has in the stock of the domestic
controlled corporation immediately before the transaction described in
paragraph (d)(2)(vi)(D) of this section, but will not increase the basis
of the re-transferred assets held by the domestic controlled
corporation. Section 1.367(d)-1T(g)(6) shall not apply with respect to
any intangible property included in the re-transferred assets described
in this paragraph.
(2) If additional tax is required to be paid as a result of a
transaction described in paragraph (d)(2)(vi)(D) of this section, then
interest must be paid on that amount at rates determined under section
6621 with respect to the period between the date prescribed for filing
the domestic acquired corporation's income tax return for the year of
the transfer and the date on which the additional tax for that year is
paid.
(F) Examples. For illustrations of the rules in paragraph (d)(2)(vi)
of this section, see paragraph (d)(3) Examples 6B, 6C, 9, and 13A of
this section.
(vii) Change in status of a domestic acquired corporation to a
foreign corporation. (A) A U.S. person that exchanges stock or
securities of a domestic corporation for stock or securities of a
foreign corporation under section 354 (or section 356) will be treated
for purposes of this section as having made an indirect stock transfer
of the stock or
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securities of a foreign corporation (and not of a domestic corporation)
to a foreign corporation under paragraph (b) of this section (but not
paragraph (c) of this section), if the acquired domestic corporation is
a subsidiary member (within the meaning of Sec. 1.1502-1(c)) of a
consolidated group (within the meaning of Sec. 1.1502-1(h)) immediately
before the transaction, and if the transaction is either of the
following:
(1) Described in paragraph (d)(1)(i) or (iv) of this section, but
only if the acquiring corporation is foreign. See paragraph (d)(3)
Examples 8, 9, 10 and 12 of this section.
(2) Described in paragraph (d)(1)(v) of this section, but only to
the extent the controlled asset transfer is to a foreign corporation.
See paragraph (d)(3) Example 6A of this section.
(B) The rules of paragraph (d)(2)(vii)(A) of this section will not
apply to the extent assets transferred to the foreign acquiring
corporation in a transaction described in paragraph (d)(2)(vii)(A)(1) of
this section, or assets transferred to a foreign corporation in a
controlled asset transfer in a transaction described in paragraph
(d)(2)(vii)(A)(2) of this section, are retransferred to a domestic
controlled corporation in one or more successive transfers as part of
the same transaction. See paragraph (d)(3) Example 9 of this section.
(3) Examples. The rules of this paragraph (d) and Sec. 1.367(a)-8
are illustrated by the following examples. For purposes of these
examples, assume section 7874 does not apply.
Example 1. Section 368(a)(1)(A)/(a)(2)(D) reorganization. (i) Facts.
F, a foreign corporation, owns all the stock of Newco, a domestic
corporation. A, a domestic corporation, owns all of the stock of W, also
a domestic corporation. A and W file a consolidated Federal income tax
return. A does not own any stock in F (applying the attribution rules of
section 318, as modified by section 958(b)). In a reorganization
described in sections 368(a)(1)(A) and (a)(2)(D), Newco acquires all of
the assets of W, and A receives 40% of the stock of F in an exchange
described in section 354.
(ii) Result. Pursuant to paragraph (d)(1)(i) of this section, the
reorganization is subject to the indirect stock transfer rules. F is
treated as the transferee foreign corporation, and Newco is treated as
the transferred corporation. Provided that the requirements of paragraph
(c)(1) of this section are satisfied, including the requirement that A
enter into a five-year gain recognition agreement as described in Sec.
1.367(a)-8, A's exchange of W stock for F stock under section 354 will
not be subject to section 367(a)(1). If F disposes (within the meaning
of Sec. 1.367(a)-8(j)(1)) of all (or a portion) of Newco's stock within
the five-year term of the agreement (and A has not made a valid election
under Sec. 1.367(a)-8(c)(2)(vi)), A is required to file an amended
return for the year of the transfer and include in income, with
interest, the gain realized but not recognized on the initial section
354 exchange. If A has made a valid election under Sec. 1.367(a)-
8(c)(2)(vi) to include the amount subject to the gain recognition
agreement in the year of the triggering event, A would instead include
the gain on its tax return for the taxable year that includes the
triggering event, together with interest.
Example 1A. Transferor is a subsidiary in consolidated group. (i)
Facts. The facts are the same as in Example 1, except that A is owned by
P, a domestic corporation, and for the taxable year in which the
transaction occurred, P, A and W filed a consolidated Federal income tax
return.
(ii) Result. Even though A is the U.S. transferor, P is required
under Sec. 1.367(a)-8(d)(3) and (e)(1)(i) to enter into the gain
recognition agreement and comply with the requirements under Sec.
1.367(a)-8. If A leaves the P group, the gain recognition agreement
would be triggered pursuant to Sec. 1.367(a)-8(j)(5), unless the
exception provided under Sec. 1.367(a)-8(k)(10) applies.
Example 2. Section 368(a)(1)(A)/(a)(2)(E) reorganization. (i)
Facts.The facts are the same as in Example 1, except that Newco merges
into W and Newco receives stock of W which it distributes to F in a
reorganization described in sections 368(a)(1)(A) and (a)(2)(E).
Pursuant to the reorganization, A receives 40 percent of the stock of F
in an exchange described in section 354.
(ii) Result. The consequences of the transfer are similar to those
described in Example 1. Pursuant to paragraph (d)(1)(ii) of this
section, A is considered to have transferred its W stock to F pursuant
to the indirect stock transfer rules. F is treated as the transferee
foreign corporation, and W is treated as the transferred corporation.
Provided that the requirements of paragraph (c)(1) of this section are
satisfied, including the requirement that A enter into a five-year gain
recognition agreement as described in Sec. 1.367(a)-8, A's exchange of
W stock for F stock under section 354 will not be subject to section
367(a)(1).
Example 3. Taxable transaction pursuant to indirect stock transfer
rules. (i) Facts.The facts are the same as in Example 1, except that A
receives 55 percent of either the total voting
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power or the total value of the stock of F in the transaction.
(ii) Result. A is required to include in income in the year of the
exchange the amount of gain realized on such exchange. See paragraph
(c)(1)(i) of this section. If A fails to include the income on its
timely-filed return, A will also be liable for the penalty under section
6038B (together with interest and other applicable penalties) unless A's
failure to include the income is due to reasonable cause and not willful
neglect. See Sec. 1.6038B-1(f).
Example 4. Disposition by U.S. transferred corporation of
substantially all of its assets. (i) Facts. The facts are the same as in
Example 1, except that, during the third year of the gain recognition
agreement, Newco disposes of substantially all (as described inSec.
1.367(a)-8(j)(2)(i)) of the assets described in paragraph (d)(2)(v)(A)
of this section for cash and recognizes currently all of the gain
realized on the disposition.
(ii) Result. Under Sec. 1.367(a)-8(j)(2), the gain recognition
agreement is generally triggered when the transferred corporation
disposes of substantially all of its assets. However, under the special
rule contained in Sec. 1.367(a)-8(o)(4), because A owned an amount of
stock in W described in section 1504(a)(2) immediately before the
transaction, because A and W filed a consolidated Federal income tax
return prior to the transaction, and Newco, the transferred corporation,
is a domestic corporation, the gain recognition agreement is terminated
and has no further effect.
Example 5. Triangular section 368(a)(1)(B) reorganization. (i)
Facts. F, a foreign corporation, owns all the stock of S, a domestic
corporation. U, a domestic corporation, owns all of the stock of Y, also
a domestic corporation. U does not own any of the stock of F (applying
the attribution rules of section 318, as modified by section 958(b)). In
a triangular reorganization described in section 368(a)(1)(B) and
paragraph (d)(1)(iii)(A) of this section, S acquires all the stock of Y,
and U receives 10% of the voting stock of F.
(ii) Result. U's exchange of Y stock for F stock will not be subject
to section 367(a)(1), provided that all of the requirements of paragraph
(c)(1) are satisfied, including the requirement that U enter into a
five-year gain recognition agreement. For purposes of this section, F is
treated as the transferee foreign corporation and Y is treated as the
transferred corporation. See paragraphs (d)(2)(i) and (ii) of this
section. Under Sec. 1.367(a)-8(j)(9), the gain recognition agreement
would be triggered if F sold all or a portion of the stock of S.
Example 5A. Triangular section 368(a)(1)(B) reorganization. (i)
Facts. The facts are the same as in Example 5, except that F is a
domestic corporation and S is a foreign corporation.
(ii) Result. U's exchange of Y stock for stock of F, a domestic
corporation in control of S, the foreign acquiring corporation, is
treated as an indirect transfer of Y stock to a foreign corporation
under paragraph (d)(1)(iii)(B) of this section. U's exchange of Y stock
for F stock will not be subject to section 367(a)(1) provided that all
of the requirements of paragraph (c)(1) of this section are satisfied,
including the requirement that U enter into a five-year gain recognition
agreement. In satisfying the 50 percent or less ownership requirements
of paragraphs (c)(1)(i) and (ii) of this section, U's indirect ownership
of S stock (through its direct ownership of F) will determine whether
the requirement of paragraph (c)(1)(i) of this section is satisfied and
will be taken into account in determining whether the requirement of
paragraph (c)(1)(ii) of this section is satisfied. See paragraph
(c)(4)(iv) of this section. For purposes of this section, S is treated
as the transferee foreign corporation (see paragraph (d)(2)(i)(B) of
this section). If Y sold substantially all of its assets (within the
meaning of section 368(a)(1)(C)), the gain recognition agreement would
be terminated because U owned an amount of stock in Y described in
section 1504(a)(2) immediately before the transaction and Y is a
domestic corporation. See Sec. 1.367(a)-8(o)(4).
Example 6. Triangular section 368(a)(1)(C) reorganization. (i)
Facts. F, a foreign corporation, owns all of the stock of R, a domestic
corporation that operates an historical business. V, a domestic
corporation, owns all of the stock of Z, also a domestic corporation. V
does not own any of the stock of F (applying the attribution rules of
section 318 as modified by section 958(b)). In a triangular
reorganization described in section 368(a)(1)(C) (and paragraph
(d)(1)(iv) of this section), R acquires all of the assets of Z, and V
receives 30% of the voting stock of F.
(ii) Result. The consequences of the transfer are similar to those
described in Example 1; V is required to enter into a 5-year gain
recognition agreement under Sec. 1.367(a)-8 to secure nonrecognition
treatment under section 367(a). Under paragraphs (d)(2)(i) and (ii) of
this section, F is treated as the transferee foreign corporation and R
is treated as the transferred corporation. In determining whether, in a
later transaction, R has disposed of substantially all of its assets
under Sec. 1.367(a)-8(j)(2)(i), see paragraph (d)(2)(v)(A) of this
section.
Example 6A. Section 368(a)(1)(C) reorganization followed by section
368(a)(2)(C) exchange. (i) Facts. The facts are the same as in Example
6, except that the transaction is structured as a section 368(a)(1)(C)
reorganization with Z transferring its assets to F, followed by a
controlled asset transfer, and R is a foreign corporation. The following
additional facts are present. Z has 3 businesses: Business A with a
basis of $10 and a value of $50,
[[Page 379]]
Business B with a basis of $10 and a value of $40, and Business C with a
basis of $10 and a value of $30. V and Z file a consolidated Federal
income tax return and V has a basis of $30 in the Z stock, which has a
value of $120. Assume that Businesses A and B consist solely of assets
that will satisfy the section 367(a)(3) active trade or business
exception; none of Business C's assets will satisfy the exception. Z
transfers all 3 businesses to F in exchange for 30 percent of the F
stock, which Z distributes to V pursuant to a section 368(a)(1)(C)
reorganization. F then contributes Businesses B and C to R in a
controlled asset transfer.
(ii) Result. The transfer of the Business A assets by Z to F does
not constitute an indirect stock transfer under paragraph (d) of this
section, and, subject to the conditions and requirements of section
367(a)(5) and Sec. 1.367(a)-7(c), the Business A assets qualify for the
section 367(a)(3) active trade or business exception and are not subject
to section 367(a)(1). The transfer of the Business B and C assets by Z
to F must first be tested under sections 367(a)(1), (a)(3), and (a)(5).
Z recognizes $20 of gain on the outbound transfer of the Business C
assets, as those assets do not qualify for an exception to section
367(a)(1). Subject to the conditions and requirements of section
367(a)(5) and Sec. 1.367(a)-7(c), the Business B assets qualify for the
active trade or business exception under section 367(a)(3). Pursuant to
paragraphs (d)(1) and (d)(2)(vii)(A)(2) of this section, V is deemed to
transfer the stock of a foreign corporation to F in a section 354
exchange subject to the rules of paragraphs (b) and (d) of this section.
V must enter into the gain recognition agreement in the amount of $30 to
preserve Z's nonrecognition treatment with respect to its transfer of
Business B assets. Under paragraphs (d)(2)(i) and (d)(2)(ii) of this
section, F is the transferee foreign corporation and R is the
transferred corporation.
Example 6B. Section 368(a)(1)(C) reorganization followed by a
controlled asset transfer to a domestic controlled corporation--(i)
Facts. The facts are the same as in paragraph (d)(3), Example 6A, of
this section, except that R is a domestic corporation.
(ii) Result. As in paragraph (d)(3), Example 6A, of this section,
the outbound transfer of the Business A assets to F is not affected by
the rules of Sec. 1.367-3(d) and is subject to the general rules under
section 367. Subject to the conditions and requirements of section
367(a)(5) and Sec. 1.367(a)-7(c), the Business A assets qualify for the
section 367(a)(3) active trade or business exception and are not subject
to section 367(a)(1). The Business B and C assets are part of an
indirect stock transfer under Sec. 1.367-3(d), but must first be tested
under section 367(a) and (d). The Business B assets qualify for the
active trade or business exception under section 367(a)(3); the Business
C assets do not. However, pursuant to paragraph (d)(2)(vi)(B)(1) of this
section, the Business B and C assets are not subject to section 367(a)
or (d), provided that the basis of the Business B and C assets in the
hands of R is not greater than the basis of the assets in the hands of
Z, the requirements of paragraphs (c)(1)(i), (ii), and (iv) and (c)(6)
of this section are satisfied, and Z attaches a statement described in
paragraphs (d)(2)(vi)(C) of this section to its U.S. income tax return
for the taxable year of the transfer. V also is deemed to make an
indirect transfer of Z stock under the rules of paragraph (d) of this
section to the extent the assets are transferred to R. To preserve non-
recognition treatment, and assuming the other requirements of paragraph
(c) of this section are satisfied, V must enter into a gain recognition
agreement in the amount of $50, which equals the aggregate gain in the
Business B and C assets, because the transfer of those assets by Z was
not taxable under section 367(a)(1) and constitute an indirect stock
transfer.
Example 6C. Section 368(a)(1)(C) reorganization followed by a
controlled asset transfer to a domestic controlled corporation--(i)
Facts. The facts are the same as in paragraph (d)(3), Example 6B, of
this section, except that Z is owned by U.S. individuals, none of whom
qualify as five-percent target shareholders with respect to Z within the
meaning of paragraph (c)(5)(iii) of this section. The following
additional facts are present. No U.S. persons that are either officers
or directors of Z own any stock of F immediately after the transfer. F
is engaged in an active trade or business outside the United States that
satisfies the test set forth in paragraph (c)(3) of this section.
(ii) Result. The Business A assets transferred to F are not re-
transferred to R and therefore Z's transfer of these assets is not
subject to the rules of paragraph (d) of this section. However, gain
must be recognized on the transfer of those assets under section
367(a)(1) because the section 367(a)(3) active trade or business
exception is inapplicable pursuant to section 367(a)(5) and Sec.
1.367(a)-7(b). The Business B and C assets are part of an indirect stock
transfer under paragraph (d) of this section, but must first be tested
with respect to Z under section 367(a) and (d), as provided in paragraph
(d)(2)(vi) of this section. The transfer of the Business B assets (which
otherwise would satisfy the section 367(a)(3) active trade or business
exception) generally is subject to section 367(a)(1) pursuant to section
367(a)(5) and Sec. 1.367(a)-7(b). The transfer of the Business C assets
generally is subject to section 367(a)(1) because these assets do not
qualify for the active trade or business exception under section
367(a)(3). However, pursuant to paragraph (d)(2)(vi)(B) of this section,
the transfer of the Business B and C assets is not subject to sections
367(a)(1) and (d), provided the basis
[[Page 380]]
of the Business B and C assets in the hands of R is no greater than the
basis in the hands of Z and certain other requirements are satisfied. Z
may avoid immediate gain recognition under section 367(a) and (d) on the
transfers of the Business B and Business C assets to F if, pursuant to
paragraph (d)(2)(vi)(B) of this section, the indirect transfer of Z
stock satisfies the requirements of paragraphs (c)(1)(i), (ii), and (iv)
and (c)(6) of this section, and Z attaches a statement described in
paragraph (d)(2)(vi)(C) of this section to its U.S. income tax return
for the taxable year of the transfer. In general, the statement must
contain a certification that, if F disposes of the stock of R (in a
recognition or nonrecognition transaction) and a principal purpose of
the transfer is the avoidance of U.S. tax that would have been imposed
on Z on the disposition of the Business B and C assets transferred to R,
then Z (or F on behalf of Z) will file a return (or amended return as
the case may be) recognizing gain ($50), as if, immediately prior to the
reorganization, Z transferred the Business B and C assets to a domestic
corporation in exchange for stock in a transaction treated as a section
351 exchange and immediately sold such stock to an unrelated party for
its fair market value. A transaction is deemed to have a principal
purpose of U.S. tax avoidance if F disposes of R stock within two years
of the transfer, unless Z (or F on behalf of Z) can rebut the
presumption to the satisfaction of the Commissioner. See paragraph
(d)(2)(vi)(D)(2) of this section. With respect to the indirect transfer
of Z stock, assume the requirements of paragraphs (c)(1)(i), (ii), and
(iv) of this section are satisfied. Thus, assuming Z attaches the
statement described in paragraph (d)(2)(vi)(C) of this section to its
U.S. income tax return and satisfies the reporting requirements of
paragraph (c)(6) of this section, the transfer of Business B and C
assets is not subject to immediate gain recognition under section 367(a)
or (d).
Example 7. Triangular section 368(a)(1)(C) reorganization followed
by 351 exchange. (i) Facts. The facts are the same as in Example 6,
except that, during the fourth year of the gain recognition agreement, R
transfers substantially all of the assets received from Z to K, a
wholly-owned domestic subsidiary of R, in an exchange described in
section 351.
(ii) Result. The disposition by R, the transferred corporation, of
substantially all of its assets would terminate the gain recognition
agreement if the assets were disposed of in a taxable transaction
because V owned an amount of stock in Z described in section 1504(a)(2)
immediately before the transaction, and R is a domestic corporation. See
Sec. 1.367(a)-8(o)(4). Because the assets were transferred in an
exchange to which section 351 applies, such transfer does not trigger
the gain recognition agreement if V complies with the requirements
contained in Sec. 1.367(a)-8(k)(4). See also paragraph (d)(2)(iv) of
this section. To determine whether substantially all of the assets are
disposed of, any assets of Z that were transferred by Z to R and then
contributed by R to K are taken into account.
Example 7A. Triangular section 368(a)(1)(C) reorganization followed
by section 351 exchange with foreign transferee. (i) Facts. The facts
are the same as in Example 7 except that K is a foreign corporation.
(ii) Result. This transfer of assets by R to K must be analyzed to
determine its effect upon the gain recognition agreement, and such
transfer is also an outbound transfer of assets that is taxable under
section 367(a)(1) unless the active trade or business exception under
section 367(a)(3) applies. If the transfer is fully taxable under
section 367(a)(1), the transfer is treated as if the transferred
company, R, sold substantially all of its assets. Thus, the gain
recognition agreement would terminate because V owned an amount of stock
in Z described in section 1504(a)(2) immediately before the transaction,
and R is a domestic corporation. See Sec. 1.367(a)-8(o)(4). If each
asset transferred qualifies for nonrecognition treatment under section
367(a)(3) and the regulations thereunder (which require, under Sec.
1.367(a)-2(a)(2)(iii), the transferor to comply with the reporting
requirements under section 6038B), the result is the same as in Example
7. If a portion of the assets transferred qualify for nonrecognition
treatment under section 367(a)(3) and a portion are taxable under
section 367(a)(1) (but such portion does not result in the disposition
of substantially all of the assets), the gain recognition agreement will
not be triggered if such information is reported as required under Sec.
1.367(a)-8(g) and V satisfies the requirements contained in Sec.
1.367(a)-8(k)(4).
Example 8. Concurrent application of asset transfer and indirect
stock transfer rules in consolidated return setting. (i) Facts. Assume
the same facts as in Example 6, except that R is a foreign corporation
and V and Z file a consolidated return for Federal income tax purposes.
The properties of Z consist of Business A assets, with an adjusted basis
of $50 and fair market value of $90, and Business B assets, with an
adjusted basis of $50 and a fair market value of $110. Assume that the
Business A assets do not qualify for the active trade or business
exception under section 367(a)(3), but that the Business B assets do
qualify for the exception. V's basis in the Z stock is $100, and the
value of such stock is $200.
(ii) Result. Under paragraph (d)(2)(vi), the assets of Businesses A
and B that are transferred to R must be tested under sections 367(a)(3)
and (a)(5) prior to consideration of the indirect stock transfer rules
of this paragraph (d). Thus, Z must recognize $40 of income under
section 367(a)(1) on the outbound transfer of Business A assets. Subject
to the
[[Page 381]]
conditions and requirements of section 367(a)(5) and Sec. 1.367(a)-
7(c), the Business B assets qualify for the active trade or business
exception under section 367(a)(3). Under Sec. 1.1502-32, because V and
Z file a consolidated return, V's basis in its Z stock increases from
$100 to $140 as a result of Z's $40 gain. Pursuant to paragraphs (d)(1)
and (d)(2)(vii)(A)(1) of this section, V is deemed to transfer the stock
of a foreign corporation to F in a section 354 exchange subject to the
rules of paragraphs (b) and (d) of this section, and therefore must
enter into a gain recognition agreement in the amount of $60 (the gain
realized but not recognized by V in the stock of Z after the $40 basis
adjustment). If F sells a portion of its stock in R during the term of
the agreement, V will be required to recognize a portion of the $60 gain
subject to the agreement. To determine whether R disposes of
substantially all of its assets (under Sec. 1.367(a)-8(j)(2)(i)), only
the Business B assets will be considered (because the transfer of the
Business A assets was taxable to Z under section 367). See paragraph
(d)(2)(v)(A) of this section.
Example 8A. Concurrent application without consolidated returns. (i)
Facts. The facts are the same as in Example 8, except that V and Z do
not file consolidated income tax returns.
(ii) Result. Z would still recognize $40 of gain on the transfer of
its Business A assets, and the Business B assets would still qualify for
the active trade or business exception under section 367(a)(3). However,
V's basis in its stock of Z would not be increased by the amount of Z's
gain. V's indirect transfer of stock will be taxable unless V enters
into a gain recognition agreement (as described in Sec. 1.367(a)-8) for
the $100 of gain realized but not recognized with respect to the stock
of Z.
Example 8B. Concurrent application with individual U.S. shareholder.
(i) Facts. The facts are the same as in Example 8, except that V is an
individual U.S. citizen.
(ii) Result. Under section 367(a)(5) and Sec. 1.367(a)-7(b), the
active trade or business exception under section 367(a)(3) does not
apply to Z's transfer of assets to R. Thus, Z's transfer of assets to R
would be fully taxable under section 367(a)(1). Z would recognize $100
of income. V's basis in its stock of Z is not increased by this amount.
V is taxable with respect to its indirect transfer of its Z stock unless
V enters into a gain recognition agreement in the amount of the $100,
the gain realized but not recognized with respect to its Z stock.
Example 8C. Concurrent application with nonresident alien
shareholder. (i) Facts. The facts are the same as in Example 8, except
that V is a nonresident alien.
(ii) Result. Under section 367(a)(5) and Sec. 1.367(a)-7(b), the
active trade or business exception under section 367(a)(3) does not
apply to Z's transfer of assets to R. Thus, Z has $100 of gain with
respect to the Business A and B assets. Because V is a nonresident
alien, however, V is not subject to section 367(a) with respect to its
indirect transfer of Z stock.
Example 9. Indirect stock transfer by reason of a controlled asset
transfer--(i) Facts. The facts are the same as in paragraph (d)(3),
Example 8, of this section, except that R transfers the Business A
assets to M, a wholly owned domestic subsidiary of R, in a controlled
asset transfer. In addition, V's basis in its Z stock is $90.
(ii) Result. Pursuant to paragraph (d)(2)(vi)(B) of this section,
sections 367(a) and (d) do not apply to Z's transfer of the Business A
assets to R if M's basis in the Business A assets is not greater than
the basis of the assets in the hands of Z, the requirements of
paragraphs (c)(1)(i), (ii), and (iv) and (c)(6) of this section are
satisfied, and Z includes a statement described in paragraph
(d)(2)(vi)(C) of this section with its U.S. income tax return for the
taxable year of the transfer. Subject to the conditions and requirements
of section 367(a)(5) and Sec. 1.367(a)-7(c), Z's transfer of the
Business B assets to R (which are not re-transferred to M) qualifies for
the active trade or business exception under section 367(a)(3). Pursuant
to paragraphs (d)(1) and (d)(2)(vii)(A)(1) of this section, V is
generally deemed to transfer the stock of a foreign corporation to F in
a section 354 exchange subject to the rules of paragraphs (b) and (d) of
this section, including the requirement that V enter into a gain
recognition agreement and comply with the requirements of Sec.
1.367(a)-8. However, pursuant to paragraph (d)(2)(vii)(B) of this
section, paragraph (d)(2)(vii)(A) of this section does not apply to the
extent of the transfer of business A assets by R to M, a domestic
corporation. As a result, to the extent of the business A assets
transferred by R to M, V is deemed to transfer the stock of Z (a
domestic corporation) to F in a section 354 exchange subject to the
rules of paragraphs (c) and (d) of this section. Thus, with respect to
V's indirect transfer of stock of a domestic corporation to F, such
transfer is not subject to gain recognition under section 367(a)(1) if
the requirements of paragraph (c) of this section are satisfied,
including the requirement that V enter into a gain recognition agreement
(separate from the gain recognition agreement described above with
respect to the deemed transfer of stock of a foreign corporation to F)
and comply with the requirements of Sec. 1.367(a)-8. Under paragraphs
(d)(2)(i) and (ii) of this section, the transferee foreign corporation
is F and the transferred corporation is R (with respect to the transfer
of stock of a foreign corporation) and M (with respect to the transfer
of stock of a domestic corporation).
[[Page 382]]
Pursuant to paragraph (d)(2)(iv) of this section, a disposition by F of
the stock of R would trigger both gain recognition agreements. In
addition, a disposition by R of the stock of M would trigger the gain
recognition agreement filed with respect to the transfer of the stock of
a domestic corporation. To determine whether there is a triggering event
under Sec. 1.367(a)-8(j)(2)(i) for the gain recognition agreement filed
with respect to the transfer of stock of the domestic corporation, the
Business A assets in M must be considered. To determine whether there is
such a triggering event for the gain recognition agreement filed with
respect to the transfer of stock of the foreign corporation, the
Business B assets in R must be considered.
Example 10. Concurrent application of asset transfer and indirect
stock transfer rules in section 368(a)(1)(A)/(a)(2)(D) reorganization.
(i) Facts. The facts are the same as in Example 8, except that R
acquires all of the assets of Z in a reorganization described in
sections 368(a)(1)(A) and (a)(2)(D). Pursuant to the reorganization, V
receives 30 percent of the stock of F in a section 354 exchange.
(ii) Result. The consequences of the transaction are similar to
those in Example 8. The assets of Businesses A and B that are
transferred to R must be tested under section 367(a) and (d) prior to
the consideration of the indirect stock transfer rules of this paragraph
(d). Subject to the conditions and requirements of section 367(a)(5) and
Sec. 1.367(a)-7(c), the Business B assets qualify for the active trade
or business exception under section 367(a)(3). Because the Business A
assets do not qualify for the exception, Z must recognize $40 of gain
under section 367(a) on the transfer of Business A assets to R. Further,
because V and Z file a consolidated return, V's basis in the stock of Z
is increased from $100 to $140 as a result of Z's $40 gain. Pursuant to
paragraphs (d)(1) and (d)(2)(vii)(A)(1) of this section, V is deemed to
transfer the stock of a foreign corporation to F in a section 354
exchange subject to the rules of paragraphs (b) and (d) of this section.
V's indirect transfer of foreign stock will be taxable under section
367(a) unless V enters into a gain recognition agreement in the amount
of $60 ($200 value of Z stock less $140 adjusted basis).
Example 11. Concurrent application of section 367(a) and (b) in
section 368(a)(1)(A)/(a)(2)(E) reorganization. (i) Facts. F, a foreign
corporation, owns all the stock of D, a domestic corporation. V, a
domestic corporation, owns all the stock of Z, a foreign corporation. V
has a basis of $100 in the stock of Z which has a fair market value of
$200. D is an operating corporation with assets valued at $100 with a
basis of $60. In a reorganization described in sections 368(a)(1)(A) and
(a)(2)(E), D merges into Z, and V exchanges its Z stock for 55 percent
of the outstanding F stock.
(ii) Result. Under paragraph (d)(1)(ii) of this section, V is
treated as indirectly transferring Z stock to F. V must recognize gain
on its indirect transfer of Z stock to F under section 367(a) (and
section 1248 will be applicable) if V does not enter into a gain
recognition agreement with respect to the indirect stock transfer in
accordance with Sec. 1.367(a)-8. Under paragraph (b)(2) of this
section, if V enters into a gain recognition agreement with respect to
the indirect stock transfer, the exchange will be subject to the
provisions of section 367(b) and the regulations pursuant to such
section as well as section 367(a). Under Sec. 1.367(b)-4(b), however,
no income inclusion is required because, immediately after the exchange,
F and Z are controlled foreign corporations with respect to which V is a
section 1248 shareholder. Under paragraphs (d)(2)(i) and (d)(2)(ii) of
this section, the transferee foreign corporation is F, and the
transferred corporation is Z (the acquiring corporation). If F disposes
(within the meaning of Sec. 1.367(a)-8(j)(1)) of all (or a portion) of
Z stock within the term of the gain recognition agreement, V must either
file an amended return for the year of the indirect stock transfer and
include in income, with interest, the gain realized but not recognized
on the initial exchange or if a valid election under Sec. 1.367(a)-
8(c)(2)(vi) was made, currently recognize the gain and pay the related
interest. Under paragraph (d)(2)(v)(B) of this section, to determine
whether, for purposes of the gain recognition agreement, Z (the
transferred corporation) disposes of substantially all of its assets,
only the assets held by Z immediately before the transaction are taken
into account. Because D is wholly owned by F, a foreign corporation, the
control requirement of section 367(a)(5) and Sec. 1.367(a)-7(c)(1)
cannot be satisfied. Therefore, section 367(a)(5) and Sec. 1.367(a)-
7(b) preclude the application of the active trade or business exception
under section 367(a)(3) to any property transferred by D to Z. Thus,
under section 367(a)(1), D must recognize the gross amount of gain in
each asset transferred to Z, or $40.
Example 12. Concurrent application of direct and indirect stock
transfer rules. (i) Facts. F, a foreign corporation, owns all of the
stock of O, also a foreign corporation. D, a domestic corporation, owns
all of the stock of E, also a domestic corporation, which owns all of
the stock of N, also a domestic corporation. Prior to the transactions
described in this Example 12, D, E and N filed a consolidated income tax
return. D has a basis of $100 in the stock of E, which has a fair market
value of $160. The N stock has a fair market value of $100, and E has a
basis of $60 in such stock. In addition to the stock of N, E owns the
assets of Business X. The assets of Business X have a fair market value
of $60, and E has a basis of $50 in such assets. Assume that the
Business X assets qualify for nonrecognition
[[Page 383]]
treatment under section 367(a)(3). D does not own any stock in F
(applying the attribution rules of section 318 as modified by section
958(b)). In a triangular reorganization described in section
368(a)(1)(C) and paragraph (d)(1)(iv) of this section, O acquires all of
the assets of E, and D exchanges its stock in E for 40% of the voting
stock of F.
(ii) Result. E's transfer of its assets, including the N stock, must
be tested under the general rules of section 367(a) before consideration
of D's indirect transfer of the stock of E. Subject to the conditions
and requirements of section 367(a)(5) and Sec. 1.367(a)-7(c), the
active trade or business exception under section 367(a)(3) applies to
E's transfer of Business X assets. E's transfer of its N stock could
qualify for nonrecognition treatment if D satisfies the requirements in
Sec. 1.367(a)-3(e)(3). O is the transferee foreign corporation; N is
the transferred corporation. Pursuant to paragraphs (d)(1) and
(d)(2)(vii)(A)(1) of this section, D is deemed to transfer the stock of
a foreign corporation to F in a section 354 exchange subject to the
rules of paragraphs (b) and (d) of this section, and therefore may enter
into a gain recognition agreement for such indirect stock transfer as
provided in paragraph (b) of this section and Sec. 1.367(a)-8. As to
this transfer, F is the transferee foreign corporation; O is the
transferred corporation.
Example 13. Successive section 351 exchanges. (i) Facts. D, a
domestic corporation, owns all the stock of X, a controlled foreign
corporation that operates an historical business, which owns all the
stock of Y, a controlled foreign corporation that also operates an
historical business. The properties of D consist of Business A assets,
with an adjusted basis of $50 and a fair market value of $90, and
Business B assets, with an adjusted basis of $50 and a fair market value
of $110. Assume that the Business B assets qualify for the exception
under section 367(a)(3) and Sec. 1.367(a)-2(g)(2), but that the
Business A assets do not qualify for the exception. In an exchange
described in section 351, D transfers the assets of Businesses A and B
to X, and, in connection with the same transaction, X transfers the
assets of Business B to Y in another exchange described in section 351.
(ii) Result. Under paragraph (d)(1)(vi) of this section, this
transaction is treated as an indirect stock transfer for purposes of
section 367(a), but the transaction is not recharacterized for purposes
of section 367(b). Moreover, under paragraph (d)(2)(vi) of this section,
the assets of Businesses A and B that are transferred to X must be
tested under section 367(a)(3). The Business A assets, which were not
transferred to Y, are subject to the general rules of section 367(a),
and not the indirect stock transfer rules described in this paragraph
(d). D must recognize $40 of income on the outbound transfer of Business
A assets. The transfer of the Business B assets is subject to both the
asset transfer rules (under section 367(a)(3)) and the indirect stock
transfer rules of this paragraph (d) and Sec. 1.367(a)-8. Thus, D's
transfer of the Business B assets will not be subject to section
367(a)(1) if D enters into a five-year gain recognition agreement with
respect to the stock of Y. Under paragraphs (d)(2)(i) and (ii) of this
section, X will be treated as the transferee foreign corporation and Y
will be treated as the transferred corporation for purposes of applying
the terms of the agreement. If X sells all or a portion of the stock of
Y during the term of the agreement, D will be required to recognize a
proportionate amount of the $60 gain that was realized by D on the
initial transfer of the Business B assets.
Example 13A. Successive section 351 exchanges with ultimate domestic
transferee. (i) Facts. The facts are the same as in Example 13, except
that Y is a domestic corporation.
(ii) Result. As in Example 13, D must recognize $40 of income on the
outbound transfer of the Business A assets. Although the Business B
assets qualify for the exception under section 367(a)(3) (and end up in
U.S. corporate solution, in Y), the $60 of gain realized on the Business
B assets is nevertheless taxable under paragraphs (c)(1) and (d)(1)(vi)
of this section because the transaction is considered to be a transfer
by D of stock of a domestic corporation, Y, in which D receives more
than 50 percent of the stock of the transferee foreign corporation, X. A
gain recognition agreement is not permitted.
Example 14. Concurrent application of indirect stock transfer rules
and section 367(b). (i) Facts. F, a foreign corporation, owns all of the
stock of Newco, which is also a foreign corporation. P, a domestic
corporation, owns all of the stock of S, a foreign corporation that is a
controlled foreign corporation within the meaning of section 957(a). P's
basis in the stock of S is $50 and the value of S is $100. The section
1248 amount with respect to S stock is $30. In a reorganization
described in section 368(a)(1)(C) (and paragraph (d)(1)(iv) of this
section), Newco acquires all of the properties of S, and P exchanges its
stock in S for 49 percent of the stock of F.
(ii) Result. P's exchange of S stock for F stock under section 354
will be taxable under section 367(a) (and section 1248 will be
applicable) if P fails to enter into a 5-year gain recognition agreement
in accordance with Sec. 1.367(a)-8. Under paragraph (b)(2) of this
section, if P enters into a gain recognition agreement, the exchange
will be subject to the provisions of section 367(b) and the regulations
thereunder as well as section 367(a). Under Sec. 1.367(b)-4(b), P must
recognize the
[[Page 384]]
section 1248 amount of $30 because P exchanged stock of a controlled
foreign corporation, S, for stock of a foreign corporation that is not a
controlled foreign corporation, F. The indirect stock transfer rules do
not apply with respect to section 367(b). The deemed dividend of $30
recognized by P will increase P's basis in the F stock received in the
transaction, and F's basis in the Newco stock. Thus, the amount of the
gain recognition agreement is $20 ($50 gain realized on the transfer
less the $30 inclusion under section 367(b)). Under paragraphs (d)(2)(i)
and (ii) of this section, F is treated as the transferee foreign
corporation and Newco is the transferred corporation.
Example 14A. Triangular section 368(a)(1)(C) reorganization
involving foreign acquired corporation. (i) Facts. Assume the same facts
as in Example 14, except that P receives 51 percent of the stock of F.
(ii) Result. Assuming Sec. 1.367(b)-4(b) does not apply, there is
no income inclusion under section 367(b), and the amount of the gain
recognition agreement is $50.
Example 15. Concurrent application of indirect stock transfer rules
and section 367(b). (i) Facts. F, a foreign corporation, owns all of the
stock of Newco, a domestic corporation. P, a domestic corporation, owns
all of the stock of FC, a foreign corporation. P's basis in the stock of
FC is $50 and the value of FC stock is $100. The all earnings and
profits amount with respect to the FC stock held by P is $60. See Sec.
1.367(b)-2(d). In a reorganization described in sections 368(a)(1)(A)
and (a)(2)(D) (and paragraph (d)(1)(i) of this section), Newco acquires
all of the properties of FC, and P exchanges its stock in FC for 20
percent of the stock in F.
(ii) Result. P's section 354 exchange is considered an indirect
stock transfer under paragraph (d)(1)(i) of this section. Further,
because the assets of FC were acquired by Newco, a domestic corporation,
in an asset reorganization, the transaction is within Sec. 1.367(b)-
3(a) and (b). Because the transaction is subject to Sec. 1.367(b)-3 and
the indirect stock rules of paragraph (d) of this section, and because
the all earnings and profits amount with respect to the FC stock
exchanged by P ($60) is greater than the gain in such stock subject to
section 367(a) ($50), the section 367(b) rules (and not the section
367(a) rules) apply to the exchange. See Sec. 1.367(a)-3(b)(2)(i)(B).
Under the rules of section 367(b), P must include in income the all
earnings and profits amount of $60 with respect to its FC stock. See
Sec. 1.367(b)-3. Alternatively, if P's all earnings and profits amount
with respect to its FC stock were $30 (which is less than the gain in
such stock subject to section 367(a) ($50)), section 367(b) and the
regulations thereunder would not apply if there is gain recognition
under section 367(a). Thus, if P failed to enter into a 5-year gain
recognition agreement in accordance with Sec. 1.367(a)-8, then P would
recognize $50 of gain under section 367(a) and there would be no income
inclusion under section 367(b). If, instead, P enters into a 5-year gain
recognition agreement under Sec. 1.367(a)-8, thereby avoiding immediate
gain recognition on the entire $50 of section 367(a) gain, P is required
to include in income the all earnings and profits amount of $30. In such
a case, P will adjust its basis in the FC stock pursuant to Sec.
1.367(b)-2(e)(3)(ii) and enter into a gain recognition agreement in the
amount of $20.
Example 16. Direct asset reorganization not subject to stock
transfer rules. (i) Facts. D is a domestic corporation that owns all the
stock of F1 and F2, both foreign corporations. In a reorganization
described in section 368(a)(1)(D), F2 acquires all of the assets of F1,
and D receives 30 percent of the stock of F2 in an exchange described in
section 354.
(ii) Result. The section 368(a)(1)(D) reorganization is not an
indirect stock transfer described in paragraph (d) of this section.
Moreover, the section 354 exchange by D of F1 stock for F2 stock is not
an exchange described under section 367(a). See paragraph (a)(2)(ii) of
this section.
(e) Transfers of stock or securities by a domestic corporation to a
foreign corporation in a section 361 exchange--(1) Overview--(i) Scope
and definitions. This paragraph (e) applies to a domestic corporation
(U.S. transferor) that transfers stock or securities of a domestic or
foreign corporation (transferred stock or securities) to a foreign
corporation (foreign acquiring corporation) in a section 361 exchange.
Except as otherwise provided in this paragraph (e), paragraphs (b) and
(c) of this section do not apply to the U.S. transferor's transfer of
the transferred stock or securities in the section 361 exchange. For
purposes of this paragraph (e), the definitions of control group,
control group member, and non-control group member in Sec. 1.367(a)-
7(f)(1), ownership interest percentage in Sec. 1.367(a)-7(f)(7),
section 361 exchange in Sec. 1.367(a)-7(f)(8), and U.S. transferor
shareholder in Sec. 1.367(a)-7(f)(13), apply.
(ii) Ordering rules. Except as otherwise provided, this paragraph
(e) applies to the transfer of the transferred stock or securities in
the section 361 exchange prior to the application of any other provision
of section 367 to such transfer. Furthermore, any gain recognized
(including gain treated as a deemed dividend pursuant to section
1248(a)) by the U.S. transferor under
[[Page 385]]
this paragraph (e) shall be taken into account for purposes of applying
any other provision of section 367 (including Sec. Sec. 1.367(a)-6,
1.367(a)-7, and 1.367(b)-4) to the transfer of the transferred stock or
securities.
(2) General rule. Except as provided in paragraph (e)(3) of this
section, the transfer by the U.S. transferor of the transferred stock or
securities to the foreign acquiring corporation in the section 361
exchange shall be subject to section 367(a)(1), and therefore the U.S.
transferor shall recognize any gain (but not loss) realized with respect
to the transferred stock or securities. Realized gain is recognized
pursuant to the prior sentence notwithstanding that the transfer is
described in any other nonrecognition provision enumerated in section
367(a)(1) (such as section 351 or 354).
(3) Exception. The general rule of paragraph (e)(2) of this section
shall not apply if the conditions of paragraphs (e)(3)(i), (ii), and
(iii) of this section are satisfied.
(i) The conditions set forth in Sec. 1.367(a)-7(c) are satisfied
with respect to the section 361 exchange.
(ii) If the transferred stock or securities are of a domestic
corporation, the U.S. target company (as defined in paragraph (c)(1) of
this section) complies with the reporting requirements of paragraph
(c)(6) of this section, and the conditions of paragraphs (c)(1)(i),
(ii), and (iv) of this section are satisfied with respect to the
transferred stock or securities.
(iii) If the U.S. transferor owns (applying the attribution rules of
section 318, as modified by section 958(b)) five percent or more of the
total voting power or the total value of the stock of the transferee
foreign corporation immediately after the transfer of the transferred
stock or securities in the section 361 exchange, then the conditions set
forth in paragraphs (e)(3)(iii)(A), (B), and (C) of this section are
satisfied.
(A) Except as otherwise provided in this paragraph (e)(3)(iii)(A),
each U.S. transferor shareholder that is a qualified U.S. person (as
defined in paragraph (e)(6)(vii) of this section) owning (applying the
attribution rules of section 318, as modified by section 958(b)) five
percent or more of the total voting power or the total value of the
stock of the transferee foreign corporation immediately after the
reorganization enters into a gain recognition agreement that satisfies
the conditions of paragraph (e)(6) of this section and Sec. 1.367(a)-8.
A U.S. transferor shareholder is not required to enter into a gain
recognition agreement pursuant to this paragraph if the amount of gain
that would be subject to the gain recognition agreement (as determined
under paragraph (e)(6)(i) of this section) is zero.
(B) With respect to non-control group members that are not described
in paragraph (e)(3)(iii)(A) of this section, the U.S. transferor
recognizes gain equal to the product of the aggregate ownership interest
percentage of such non-control group members multiplied by the gain
realized by the U.S. transferor on the transfer of the transferred stock
or securities.
(C) With respect to each control group member that is not described
in paragraph (e)(3)(iii)(A) of this section, the U.S. transferor
recognizes gain equal to the product of the ownership interest
percentage of such control group member multiplied by the gain realized
by the U.S. transferor on the transfer of the transferred stock or
securities.
(4) Application of certain rules at U.S. transferor-level. For
purposes of paragraphs (c)(5)(iii) and (e)(3)(ii) and (iii) of this
section, ownership of the stock of the transferee foreign corporation is
determined by reference to stock owned by the U.S. transferor
immediately after the transfer of the transferred stock or securities to
the foreign acquiring corporation in the section 361 exchange, but prior
to and without taking into account the U.S. transferor's distribution
under section 361(c)(1) of the stock received.
(5) Transferee foreign corporation--(i) General rule. Except as
provided in paragraph (e)(5)(ii) of this section, the transferee foreign
corporation for purposes of applying paragraph (e) of this section and
Sec. 1.367(a)-8 shall be the foreign corporation that issues stock or
securities to the U.S. transferor in the section 361 exchange.
[[Page 386]]
(ii) Special rule for triangular asset reorganizations involving the
receipt of stock or securities of a domestic corporation. In the case of
a triangular asset reorganization described in Sec. 1.358-(6)(b)(2)(i),
(ii), or (iii) or (b)(2)(v) (triangular asset reorganization) in which
the U.S. transferor receives stock or securities of a domestic
corporation that is in control (within the meaning of section 368(c)) of
the foreign acquiring corporation, the transferee foreign corporation
shall be the foreign acquiring corporation.
(6) Special requirements for gain recognition agreements. A gain
recognition agreement filed by a U.S. transferor shareholder pursuant to
paragraph (e)(3)(iii)(A) of this section is, in addition to the terms
and conditions of Sec. 1.367(a)-8, subject to the conditions of this
paragraph (e)(6).
(i) The amount of gain subject to the gain recognition agreement
shall equal the product of the ownership interest percentage of the U.S.
transferor shareholder multiplied by the gain realized by the U.S.
transferor on the transfer of the transferred stock or securities,
reduced (but not below zero) by the sum of the amounts described in
paragraphs (e)(6)(i)(A),(B), (C), and (D) of this section.
(A) Gain recognized by the U.S. transferor with respect to the
transferred stock or securities under section 367(a)(1) (including any
portion treated as a deemed dividend under section 1248(a)) that is
attributable to such U.S. transferor shareholder pursuant to Sec.
1.367(a)-7(c)(2) or (e)(5).
(B) A deemed dividend included in the income of the U.S. transferor
with respect to the transferred stock under Sec. 1.367(b)-4(b)(1)(i)
that is attributable to such U.S. transferor shareholder pursuant to
Sec. 1.367(a)-7(e)(4).
(C) If the U.S. transferor shareholder is subject to an election
under Sec. 1.1248(f)-2(c)(1), a deemed dividend included in the income
of the U.S. transferor pursuant to Sec. 1.1248(f)-2(c)(3) that is
attributable to the U.S. transferor shareholder.
(D) If the U.S. transferor shareholder is not subject to an election
under Sec. 1.1248(f)-2(c)(1), the hypothetical section 1248 amount (as
defined in Sec. 1.1248(f)-1(c)(4)) with respect to the stock of each
foreign corporation transferred in the section 361 exchange attributable
to the U.S. transferor shareholder.
(ii) The gain recognition agreement shall include the election
described in Sec. 1.367(a)-8(c)(2)(vi).
(iii) The gain recognition agreement shall designate the U.S.
transferor shareholder as the U.S. transferor for purposes of Sec.
1.367(a)-8.
(iv) If the transfer of the transferred stock or securities in the
section 361 exchange is pursuant to a triangular asset reorganization,
the gain recognition agreement shall include appropriate provisions that
are consistent with the principles of Sec. 1.367(a)-8 for gain
recognition agreements involving multiple parties. See Sec. 1.367(a)-
8(j)(9).
(v) The gain recognition agreement shall not be eligible for
termination upon a taxable disposition pursuant to Sec. 1.367(a)-
8(o)(1) unless the value of the stock or securities received by the U.S.
transferor shareholder in exchange for the stock or securities of the
U.S. transferor under section 354 or 356 is at least equal to the amount
of gain subject to the gain recognition agreement filed by such U.S.
transferor shareholder.
(vi) Except as otherwise provided in this paragraph (e)(6)(vi), if
gain is subsequently recognized by the U.S. transferor shareholder under
the terms of the gain recognition agreement pursuant to Sec. 1.367(a)-
8(c)(1)(i), the increase in stock basis provided under Sec. 1.367(a)-
8(c)(4)(i) with respect to the stock received by the U.S. transferor
shareholder shall not exceed the amount of the stock basis adjustment
made pursuant to Sec. 1.367(a)-7(c)(3) with respect to the stock
received by the U.S. transferor shareholder. This paragraph (e)(6)(vi)
shall not apply if the U.S. transferor shareholder and the U.S.
transferor are members of the same consolidated group at the time of the
reorganization.
(vii) For purposes of this section, a qualified U.S. person means a
U.S. person, as defined in Sec. 1.367(a)-1T(d)(1), but for this purpose
does not include domestic partnerships, regulated investment companies
(as defined in section 851(a)), real estate investment trusts
[[Page 387]]
(as defined in section 856(a)), and S corporations (as defined in
section 1361(a)).
(7) Gain subject to section 1248(a). If the U.S. transferor
recognizes gain under paragraphs (e)(3)(iii)(B) or (C) of this section
with respect to transferred stock that is stock in a foreign corporation
to which section 1248(a) applies, then the portion of such gain treated
as a deemed dividend under section 1248(a) is the product of the amount
of the gain multiplied by the section 1248(a) ratio. The section 1248(a)
ratio is the ratio of the amount that would be treated as a deemed
dividend under section 1248(a) if all the gain in the transferred stock
were recognized to the amount of gain realized in all the transferred
stock.
(8) Examples. The following examples illustrate the provisions of
paragraph (e) of this section. Except as otherwise indicated: US1, US2,
and UST are domestic corporations that are not members of a consolidated
group; X is a United States citizen; US1, US2, and X are unrelated
parties; CFC1, CFC2, and FA are foreign corporations; each corporation
described herein has a single class of stock issued and outstanding and
a tax year ending on December 31; the section 1248 amount (within the
meaning of Sec. 1.367(b)-2(c)) with respect to the stock of CFC1 and
CFC2 is zero; Asset A is section 367(a) property that, but for the
application of section 367(a)(5), would qualify for the active foreign
trade or business exception under Sec. 1.367(a)-2T; the requirements of
Sec. 1.367(a)-7(c)(2) through (5) are satisfied with respect to a
section 361 exchange; the provisions of Sec. 1.367(a)-6T (regarding
branch loss recapture) are not applicable; and none of the foreign
corporations in the examples is a surrogate foreign corporation (within
the meaning of section 7874) as a result of the transactions described
in the examples because one or more of the conditions of section
7874(a)(2)(B) is not satisfied.
Example 1. U.S. transferor owns less than 5% of stock of transferee
foreign corporation--(i) Facts. US1, US2, and X own 80%, 5%, and 15%,
respectively, of the stock of UST with a fair market value of $160x,
$10x, and $30x, respectively. UST has two assets, Asset A and 100% of
the stock of CFC1. UST has no liabilities. Asset A has a $150x basis and
$100x fair market value (as defined in Sec. 1.367(a)-7(f)(3)), and the
CFC1 stock has a $0x basis and $100x fair market value. UST transfers
Asset A and the CFC1 stock to FA solely in exchange for $200x of FA
voting stock in a reorganization described in section 368(a)(1)(C).
UST's transfer of Asset A and the CFC1 stock to FA qualifies as a
section 361 exchange. UST distributes the FA stock received in the
section 361 exchange to US1, US2, and X pursuant to the plan of
reorganization, and liquidates. US1 receives $160x of FA stock, US2
receives $10x of FA stock, and X receives $30x of FA stock in exchange
for the UST stock. Immediately after the transfer of Asset A and the
CFC1 stock to FA in the section 361 exchange, but prior to and without
taking into account UST's distribution of the FA stock pursuant to
section 361(c)(1), UST does not own (applying the attribution rules of
section 318, as modified by section 958(b)) five percent or more of the
total voting power or the total value of the stock of FA.
(ii) Result--(A) UST's transfer of the CFC1 stock to FA in the
section 361 exchange is subject to the provisions of this paragraph (e),
and this paragraph (e) applies to the transfer of the CFC1 stock prior
to the application of any other provision of section 367 to such
transfer. See paragraphs (e)(1)(i) and (ii) of this section. Pursuant to
the general rule of paragraph (e)(2) of this section, UST must recognize
the gain realized of $100x on the transfer of the CFC1 stock (computed
as the excess of the $100x fair market value over the $0x basis) unless
the requirements for the exception provided in paragraph (e)(3) of this
section are satisfied. In this case, the requirements of paragraph
(e)(3) of this section are satisfied. First, the requirement of
paragraph (e)(3)(i) of this section is satisfied because the control
requirement of Sec. 1.367(a)-7(c)(1) is satisfied, and a stated
assumption is that the requirements of Sec. 1.367(a)-7(c)(2) through
(5) will be satisfied. The control requirement is satisfied because US1
and US2, each a control group member, own in the aggregate 85% of the
stock of UST immediately before the reorganization. Second, the
requirement of paragraph (e)(3)(ii) of this section is not applicable
because that paragraph applies to the transfer of stock of a domestic
corporation and CFC1 is a foreign corporation. Third, paragraph
(e)(3)(iii) of this section is not applicable because immediately after
the section 361 exchange, but prior to and without taking into account
UST's distribution of the FA stock pursuant to section 361(c)(1), UST
does not own (applying the attribution rules of section 318, as modified
by section 958(b)) 5% or more of the total voting power or the total
value of the stock of FA. See paragraph (e)(4) of this section.
Accordingly, UST does not recognize the $100x of gain realized in the
CFC1 stock pursuant to this section.
(B) In order to meet the requirements of Sec. 1.367(a)-7(c)(2)(i),
UST must recognize gain
[[Page 388]]
equal to the portion of the inside gain (as defined in Sec. 1.367(a)-
7(f)(5)) attributable to non-control group members (X), or $7.50x. The
$7.50x of gain is computed as the product of the inside gain ($50x)
multiplied by X's ownership interest percentage in UST (15%). Pursuant
to Sec. 1.367(a)-7(f)(5), the $50x of inside gain is the amount by
which the aggregate fair market value ($200x) of the section 367(a)
property (as defined in Sec. 1.367(a)-7(f)(10), or Asset A and the CFC1
stock) exceeds the sum of the inside basis ($150x) of such property and
the product of the section 367(a) percentage (as defined in Sec.
1.367(a)-7(f)(9), or 100%) multiplied by UST's deductible liabilities
(as defined in Sec. 1.367(a)-7(f)(2), or $0x). Pursuant to Sec.
1.367(a)-7(f)(4), the inside basis equals the aggregate basis of the
section 367(a) property transferred in the section 361 exchange ($150x),
increased by any gain or deemed dividends recognized by UST with respect
to the section 367(a) property under section 367 ($0x), but not
including the $7.50x of gain recognized by UST under Sec. 1.367(a)-
7(c)(2)(i). Pursuant to Sec. 1.367(a)-7(e)(1), the $7.50x of gain
recognized by UST is treated as recognized with respect to the CFC1
stock and Asset A in proportion to the amount of gain realized in each.
However, because there is no gain realized by UST with respect to Asset
A, all $7.50x of the gain is allocated to the CFC1 stock. Furthermore,
FA's basis in the CFC1 stock, as determined under section 362 is
increased by the $7.50x of gain recognized by UST. See Sec. 1.367(a)-
1(b)(4)(i)(B).
(C) The requirement to recognize gain under Sec. 1.367(a)-
7(c)(2)(ii) is not applicable because the portion of the inside gain
attributable to US1 and US2 (control group members) can be preserved in
the stock received by each such shareholder. As described in paragraph
(ii)(B) of this Example 1, the inside gain is $50x. US1's attributable
inside gain of $40x (equal to the product of $50x inside gain multiplied
by US1's 80% ownership interest percentage, reduced by $0x, the sum of
the amounts described in Sec. 1.367(a)-7(c)(2)(ii)(A)(1) through (3))
does not exceed $160x (equal to the product of the section 367(a)
percentage of 100% multiplied by $160x fair market value of FA stock
received by US1). Similarly, US2's attributable inside gain of $2.50x
(equal to the product of $50x inside gain multiplied by US2's 5%
ownership interest percentage, reduced by $0x, the sum of the amounts
described in Sec. 1.367(a)-7(c)(2)(ii)(A)(1) through (3)) does not
exceed $10x (equal to the product of the section 367(a) percentage of
100% multiplied by $10x fair market value of FA stock received by US2).
(D) Each control group member (US1 and US2) must separately compute
any required adjustment to stock basis under Sec. 1.367(a)-7(c)(3).
Example 2. U.S. transferor owns 5% or more of the stock of the
transferee foreign corporation--(i) Facts. The facts are the same as in
paragraph (e), Example 1, of this section except that immediately after
the section 361 exchange, but prior to and without taking into account
UST's distribution of the FA stock pursuant to section 361(c)(1), UST
owns (applying the attribution rules of section 318, as modified by
section 958(b)) 5% or more of the total voting power or value of the
stock of FA. Furthermore, immediately after the reorganization, US1 and
X (but not US2) each own (applying the attribution rules of section 318,
as modified by section 958(b)) five percent or more of the total voting
power or value of the stock of FA.
(ii) Result--(A) As is the case with paragraph (e), Example 1, of
this section, UST's transfer of the CFC1 stock to FA in the section 361
exchange is subject to the provisions of this paragraph (e), and this
paragraph (e) applies to the transfer of the CFC1 stock prior to the
application of any other provision of section 367 to such transfer. See
paragraphs (e)(1)(i) and (ii) of this section. In addition, UST must
recognize the gain realized of $100x on the transfer of the CFC1 stock
(computed as the excess of the $100x fair market value over the $0x
basis) unless the requirements for the exception provided in paragraph
(e)(3) of this section are satisfied. For the same reasons provided in
Example 1, the requirement in paragraph (e)(3)(i) of this section is
satisfied and the requirement of paragraph (e)(3)(ii) of this section is
not applicable.
(B) Unlike paragraph (e), Example 1, of this section, however, UST
owns 5% or more of the voting power or value of the stock of FA
immediately after the transfer of the CFC1 stock in the section 361
exchange, but prior to and without taking into account UST's
distribution of the FA stock under section 361(c)(1). As a result,
paragraph (e)(3)(iii) of this section is applicable to the section 361
exchange of the CFC1 stock. Accordingly, in order to meet the
requirements of paragraph (e)(3)(iii)(A) of this section US1 and X must
enter into gain recognition agreements that satisfy the requirements of
paragraph (e)(6) of this section and Sec. 1.367(a)-8. See paragraph
(ii)(G) of this Example 2 for the computation of the amount of gain
subject to each gain recognition agreement.
(C) In order to meet the requirements of paragraph (e)(3)(iii)(C) of
this section, UST must recognize $5x of gain attributable to US2
(computed as the product of the $100x of gain realized with respect to
the transfer of the CFC1 stock multiplied by the 5% ownership interest
percentage of US2). The $5x of gain recognized is not included in the
computation of inside basis (see Sec. 1.367(a)-7(f)(4)(i)), but reduces
(but not below zero) the amount of gain recognized by UST pursuant to
Sec. 1.367(a)-7(c)(2)(ii) that is attributable
[[Page 389]]
to US2. Furthermore, FA's basis in the CFC1 stock as determined under
section 362 is increased for the $5x of gain recognized. See Sec.
1.367(a)-1(b)(4)(i)(B). Assuming US1 and X enter into the gain
recognition agreements described in paragraph (ii)(B) of this Example 2,
and UST recognizes the $5x of gain described in this example, the
requirements of paragraph (e)(3) of this section are satisfied and,
accordingly, UST does not recognize the remaining $95x of gain realized
in the CFC1 stock pursuant to this section.
(D) As described in paragraph (ii)(B) of Example 1 of this paragraph
(e), UST must recognize $7.50x of gain pursuant to Sec. 1.367(a)-
7(c)(2)(i), the amount of the $50x of inside gain attributable to X.
Pursuant to Sec. 1.367(a)-7(e)(1), the $7.50x of gain recognized by UST
is treated as recognized with respect to the CFC1 stock and Asset A in
proportion to the amount of gain realized in each. However, because
there is no gain realized by UST with respect to Asset A, all $7.50x of
the gain is allocated to the CFC1 stock. Furthermore, FA's basis in the
CFC1 stock as determined under section 362 is increased for the $7.50x
of gain recognized. See Sec. 1.367(a)-1(b)(4)(i)(B).
(E) As described in paragraph (ii)(C) of Example 1 of this paragraph
(e), the requirement to recognize gain pursuant to Sec. 1.367(a)-
7(c)(2)(ii) is not applicable because the attributable inside gain of
US1 and US2 can be preserved in the stock received by each shareholder.
However, if UST were required to recognize gain pursuant to Sec.
1.367(a)-7(c)(2)(ii) for inside gain attributable to US2 (for example,
if US2 received solely cash rather than FA stock in the reorganization),
the amount of such gain would be reduced (but not below zero) by the
amount of gain recognized by UST pursuant to paragraph (e)(3)(iii)(C) of
this section that is attributable to US2 (computed as $5x in paragraph
(ii)(C) of this Example 2). See Sec. 1.367(a)-7(c)(2)(ii)(A)(1).
(F) Each control group member (US1 and US2) must separately compute
any required adjustment to stock basis under Sec. 1.367(a)-7(c)(3).
(G) The amount of gain subject to the gain recognition agreement
filed by each of US1 and X is determined pursuant to paragraph (e)(6)(i)
of this section. With respect to US1, the amount of gain subject to the
gain recognition agreement is $80x. The $80x is computed as the product
of US1's ownership interest percentage (80%) multiplied by the gain
realized by UST in the CFC1 stock as determined prior to taking into
account the application of any other provision of section 367 ($100x),
reduced by the sum of the amounts described in paragraphs (e)(6)(i)(A)
through (D) of this section attributable to US1 ($0x). With respect to
X, the amount of gain subject to the gain recognition agreement is
$7.50x. The $7.50x is computed as the product of X's ownership interest
percentage (15%) multiplied by the gain realized by UST in the CFC1
stock as determined prior to taking into account the application of any
other provision of section 367 ($100x), reduced by the sum of the
amounts described in paragraphs (e)(6)(i)(A) through (D) of this section
attributable to X ($7.50x, as computed in paragraph (ii)(D) of this
Example 2).
(H) In order the meet the requirements of paragraph (e)(6)(ii) of
this section, each gain recognition agreement must include the election
described in Sec. 1.367(a)-8(c)(2)(vi). Furthermore, pursuant to
paragraph (e)(6)(iii) of this section, US1 and X must be designated as
the U.S. transferor on their respective gain recognition agreements for
purposes of Sec. 1.367(a)-8.
Example 3. U.S. transferor owns 5% or more of the stock of the
transferee foreign corporation; interaction with section 1248(f)--(i)
Facts. US1, US2, and X own 50%, 30%, and 20%, respectively, of the stock
of UST. The UST stock owned by US1 has a $180x basis and $200x fair
market value; the UST stock owned by US2 has a $100x basis and $120x
fair market value; and the UST stock owned by X has a $80x fair market
value. UST owns Asset A, and all the stock of CFC1 and CFC2. UST has no
liabilities. Asset A has a $10x basis and $200x fair market value. The
CFC1 stock is a single block of stock (as defined in Sec. 1.1248(f)-
1(c)(2)) with a $20x basis, $40x fair market value, and $30x of earnings
and profits attributable to it for purposes of section 1248 (with the
result that the section 1248 amount (as defined in Sec. 1.1248(f)-
1(c)(9)) is $20x). The CFC2 stock is also a single block of stock with a
$30x basis, $160x fair market value, and $150x of earnings and profits
attributable to it for purposes of section 1248 (with the result that
the section 1248 amount is $130x). On December 31, Year 3, in a
reorganization described in section 368(a)(1)(D), UST transfers the CFC1
stock, CFC2 stock, and Asset A to FA in exchange for 60 shares of FA
stock with a $400x fair market value. UST's transfer of the CFC1 stock,
CFC2 stock, and Asset A to FA in exchange for the 60 shares of FA stock
qualifies as a section 361 exchange. UST distributes the FA stock
received in the section 361 exchange to US1, US2, and X pursuant to
section 361(c)(1). US1, US2, and X exchange their UST stock for 30, 18,
and 12 shares, respectively, of FA stock pursuant to section 354.
Immediately after the reorganization, FA has 100 shares of stock
outstanding, and US1 and US2 are each a section 1248 shareholder with
respect to FA.
(ii) Result--(A) UST's transfer of the CFC1 stock and CFC2 stock to
FA in the section 361 exchange is subject to the provisions of this
paragraph (e), and this paragraph (e) applies to the transfer of the
CFC1 stock and CFC2 stock prior to the application of any other
provision of section 367 to such transfer. See paragraphs (e)(1)(i) and
(ii) of this
[[Page 390]]
section. Pursuant to the general rule of paragraph (e)(2) of this
section, UST must recognize the gain realized of $20x on the transfer of
the CFC1 stock (the excess of $40x fair market value over $20x basis)
and the gain realized of $130x on the transfer of the CFC2 stock (the
excess of $160x fair market value over $30x basis), subject to the
application of section 1248(a), unless the requirements for the
exception provided in paragraph (e)(3) of this section are satisfied. In
this case, the requirement of paragraph (e)(3)(i) of this section is
satisfied because the control requirement of Sec. 1.367(a)-7(c)(1) is
satisfied, and a stated assumption is that the requirements of Sec.
1.367(a)-7(c)(2) through (5) will be satisfied. The control requirement
is satisfied because US1 and US2, each a control group member, own in
the aggregate 80% of the UST stock immediately before the
reorganization. The requirement of paragraph (e)(3)(ii) of this section
is not applicable because paragraph (e)(3)(ii) applies to the transfer
of stock of a domestic corporation, and CFC1 and CFC2 are foreign
corporations. UST owns 5% or more of the total voting power or value of
the stock of FA (60%, or 60 of the 100 shares of FA stock outstanding)
immediately after the transfer of the CFC1 stock and CFC2 stock in the
section 361 exchange, but prior to and without taking into account UST's
distribution of the FA stock under section 361(c)(1). As a result,
paragraph (e)(3)(iii) of this section is applicable to the section 361
exchange of the CFC1 stock and CFC2 stock. US1, US2, and X each own
(applying the attribution rules of section 318, as modified by section
958(b)) 5% or more of the total voting power or value of the FA stock
immediately after the reorganization, or 30%, 18%, and 12%,
respectively. Accordingly, in order to meet the requirements of
paragraph (e)(3)(iii)(A) of this section, US1 and US2 must enter into
gain recognition agreements with respect to the CFC1 stock and CFC2
stock that satisfy the requirements of paragraph (e)(6) of this section
and Sec. 1.367(a)-8. X is not required to enter into a gain recognition
agreement because the amount of gain that would be subject to the gain
recognition agreement is zero. See paragraph (ii)(J) of this Example 3
for the computation of the amount of gain subject to each gain
recognition agreement. Assuming US1 and US2 enter into the gain
recognitions agreements described above, the requirements of paragraph
(e)(3) of this section are satisfied and accordingly, UST does not
recognize the gain realized of $20x in the stock of CFC1 or the gain
realized of $130x in the stock of CFC2 pursuant to this section.
(B) UST's transfer of the CFC1 stock and CFC2 stock to FA pursuant
to the section 361 exchange is subject to Sec. 1.367(b)-4(b)(1)(i),
which applies prior to the application of Sec. 1.367(a)-7(c). See
paragraph (e)(1) of this section. UST (the exchanging shareholder) is a
U.S. person and a section 1248 shareholder with respect to CFC1 and CFC2
(each a foreign acquired corporation). However, UST is not required to
include in income as a deemed dividend the section 1248 amount with
respect to the CFC1 stock ($20x) or CFC2 stock ($130x) under Sec.
1.367(b)-4(b)(1)(i) because, immediately after UST's section 361
exchange of the CFC1 stock and CFC2 stock for FA stock (and before the
distribution of the FA stock to US1, US2, and X under section 361(c)(1),
FA, CFC1, and CFC2 are controlled foreign corporations as to which UST
is a section 1248 shareholder. See Sec. 1.367(b)-4(b)(1)(ii)(A).
However, if UST were required to include in income as a deemed dividend
the section 1248 amount with respect to the CFC1 stock or CFC2 stock
(for example, if FA were not a controlled foreign corporation), such
deemed dividend would be taken into account prior to the application of
Sec. 1.367(a)-7(c). Furthermore, because US1, US2, and X are all
persons described in paragraph (e)(3)(iii)(A) of this section, any such
deemed dividend would increase inside basis. See Sec. 1.367(a)-7(f)(4).
(C) In order to meet the requirements of Sec. 1.367(a)-7(c)(2)(i),
UST must recognize gain equal to the portion of the inside gain
attributable to non-control group members (X), or $68x. The $68x of gain
is computed as the product of the inside gain ($340x) multiplied by X's
ownership interest percentage in UST (20%), reduced (but not below zero)
by $0x, the sum of the amounts described in Sec. 1.367(a)-7(c)(2)(i)(A)
through (C). Pursuant to Sec. 1.367(a)-7(f)(5), the $340x of inside
gain is the amount by which the aggregate fair market value ($400x) of
the section 367(a) property (Asset A, CFC1 stock, and CFC2 stock)
exceeds the sum of the inside basis ($60x) and $0x (the product of the
section 367(a) percentage (100%) multiplied by UST's deductible
liabilities ($0x)). Pursuant to Sec. 1.367(a)-7(f)(4), the inside basis
equals the aggregate basis of the section 367(a) property transferred in
the section 361 exchange ($60x), increased by any gain or deemed
dividends recognized by UST with respect to the section 367(a) property
under section 367 ($0x), but not including the $68x of gain recognized
by UST under Sec. 1.367(a)-7(c)(2)(i). Under Sec. 1.367(a)-7(e)(1),
the $68x gain recognized is treated as being with respect to the CFC1
stock, CFC2 stock, and Asset A in proportion to the amount of gain
realized by UST on the transfer of the property. The amount treated as
recognized with respect to the CFC1 stock is $4x ($68x gain multiplied
by $20x/$340x). The amount treated as recognized with respect to the
CFC2 stock is $26x ($68x gain multiplied by $130x/$340x). The amount
treated as recognized with respect to Asset A is $38x ($68x gain
multiplied by $190x/$340x). Under section 1248(a), UST must include in
gross income as
[[Page 391]]
a dividend the $4x gain recognized with respect to the CFC1 stock and
the $26x gain recognized with respect to CFC2 stock. Furthermore, FA's
basis in the CFC1 stock, CFC2 stock, and Asset A, as determined under
section 362, is increased by the amount of gain recognized by UST with
respect to such property. See Sec. 1.367(a)-1(b)(4)(i)(B). Thus, FA's
basis in the CFC1 stock is $24x ($20x increased by $4x of gain), the
CFC2 stock is $56x ($30x increased by $26x of gain), and Asset A is $48x
($10x increased by $38x of gain).
(D) The requirement to recognize gain under Sec. 1.367(a)-
7(c)(2)(ii) is not applicable because the portion of the inside gain
attributable to US1 and US2 (control group members) can be preserved in
the stock received by each such shareholder. As described in paragraph
(ii)(C) of this Example 3, the inside gain is $340x. US1's attributable
inside gain of $170x (equal to the product of $340x inside gain
multiplied by US1's 50% ownership interest percentage, reduced by $0x,
the sum of the amounts described in Sec. 1.367(a)-7(c)(2)(ii)(A)(1)
through (3)) does not exceed $200x (equal to the product of the section
367(a) percentage of 100% multiplied by $200x fair market value of FA
stock received by US1). Similarly, US2's attributable inside gain of
$102x (equal to the product of $340x inside gain multiplied by US2's 30%
ownership interest percentage, reduced by $0x, the sum of the amounts
described in Sec. 1.367(a)-7(c)(2)(ii)(A)(1) through (3)) does not
exceed $120x (equal to the product of the section 367(a) percentage of
100% multiplied by $120x fair market value of FA stock received by US2).
(E) Each control group member (US1 and US2) separately computes any
required adjustment to stock basis under Sec. 1.367(a)-7(c)(3). US1's
section 358 basis in the FA stock received of $180x (equal to US1's
basis in the UST stock exchanged) is reduced to preserve the
attributable inside gain with respect to US1, less any gain recognized
with respect to US1 under Sec. 1.367(a)-7(c)(2)(ii). Because UST does
not recognize gain on the section 361 exchange with respect to US1 under
Sec. 1.367(a)-7(c)(2)(ii) (as determined in paragraph (ii)(D) of this
Example 3), the attributable inside gain of $170x with respect to US1 is
not reduced under Sec. 1.367(a)-7(c)(3)(i)(A). US1's outside gain (as
defined in Sec. 1.367(a)-7(f)(6)) in the FA stock is $20x, the product
of the section 367(a) percentage (100%) multiplied by the $20x gain
(equal to the difference between $200x fair market value and $180x
section 358 basis in the FA stock). Thus, US1's $180x section 358 basis
in the FA stock must be reduced by $150x (the excess of $170x
attributable inside gain, reduced by $0x, over $20x outside gain) to
$30x. Similarly, US2's section 358 basis in the FA stock received of
$100x (equal to US2's basis in the UST stock exchanged) is reduced to
preserve the attributable inside gain with respect to US2, less any gain
recognized with respect to US2 under Sec. 1.367(a)-7(c)(2)(ii). Because
UST does not recognize gain on the section 361 exchange with respect to
US2 under Sec. 1.367(a)-7(c)(2)(ii) (as determined in paragraph (ii)(D)
of this Example 3), the attributable inside gain of $102x with respect
to US2 is not reduced under Sec. 1.367(a)-7(c)(3)(i)(A). US2's outside
gain in the FA stock is $20x, the product of the section 367(a)
percentage (100%) multiplied by the $20x gain (equal to the difference
between $120x fair market value and $100x section 358 basis in FA
stock). Thus, US2's $100x section 358 basis in the FA stock must be
reduced by $82x (the excess of $102x attributable inside gain, reduced
by $0x, over $20x outside gain) to $18x.
(F) UST's distribution of the FA stock to US1, US2, and X under
section 361(c)(1) (new stock distribution) is subject to Sec.
1.1248(f)-1(b)(3). Except as provided in Sec. 1.1248(f)-2(c), under
Sec. 1.1248(f)-1(b)(3) UST must include in gross income as a dividend
the total section 1248(f) amount (as defined in Sec. 1.1248(f)-
1(c)(14)). The total section 1248(f) amount is $120x, the sum of the
section 1248(f) amount (as defined in Sec. 1.1248(f)-1(c)(10)) with
respect to the CFC1 stock ($16x) and CFC2 stock ($104x). The $16x
section 1248(f) amount with respect to the CFC1 stock is the amount that
UST would have included in income as a dividend under Sec. 1.367(b)-
4(b)(1)(i) with respect to the CFC1 stock if the requirements of Sec.
1.367(b)-4(b)(1)(ii)(A) had not been satisfied ($20x), reduced by the
amount of gain recognized by UST under Sec. 1.367(a)-7(c)(2) allocable
to the CFC1 stock and treated as a dividend under section 1248(a) ($4x,
as described in paragraph (ii)(C) of this Example 3). Similarly, the
section 1248(f) amount with respect to the CFC2 stock is $104x ($130x
reduced by $26x).
(G) If, however, UST along with US1 and US2 (each a section 1248
shareholder of FA immediately after the distribution) elect to apply the
provisions of Sec. 1.1248(f)-2(c) (as provided in Sec. 1.1248(f)-
2(c)(1)), the amount that UST is required to include in income as a
dividend under Sec. 1.1248(f)-1(b)(3) ($120x total section 1248(f)
amount as computed in paragraph (ii)(F) of this Example 3) is reduced by
the sum of the portions of the section 1248(f) amount with respect to
the CFC1 stock and CFC2 stock that is attributable (under the rules of
Sec. 1.1248(f)-2(d)) to the FA stock distributed to US1 and US2. Assume
that the election is made to apply Sec. 1.1248(f)-2(c).
(1) Under Sec. 1.1248(f)-2(d)(1), the portion of the section
1248(f) amount with respect to the CFC1 stock that is attributed to the
30 shares of FA stock distributed to US1 is equal to the hypothetical
section 1248 amount (as defined in Sec. 1.1248(f)-1(c)(4)) with
[[Page 392]]
respect to the CFC1 stock that is attributable to US1's ownership
interest percentage in UST. US1's hypothetical section 1248 amount with
respect to the CFC1 stock is the amount that UST would have included in
income as a deemed dividend under Sec. 1.367(b)-4(b)(1)(i) with respect
to the CFC1 stock if the requirements of Sec. 1.367(b)-4(b)(1)(ii)(A)
had not been satisfied ($20x) and that would be attributable to US1's
ownership interest percentage in UST (50%), reduced by the amount of
gain recognized by UST under Sec. 1.367(a)-7(c)(2) attributable to US1
and allocable to the CFC1 stock, but only to the extent such gain is
treated as a dividend under section 1248(a) ($0x, as described in
paragraphs (ii)(C) and (D) of this Example 3). Thus, US1's hypothetical
section 1248 amount with respect to the CFC1 stock is $10x ($20x
multiplied by 50%, reduced by $0x). The $10x hypothetical section 1248
amount is attributed pro rata (based on relative values) among the 30
shares of FA stock distributed to US1, and the attributable share amount
(as defined in Sec. 1.1248(f)-2(d)(1)) is $.33x ($10x/30 shares).
Similarly, US1's hypothetical section 1248 amount with respect to the
CFC2 stock is $65x ($130x multiplied by 50%, reduced by $0x), and the
attributable share amount is $2.17x ($65x/30 shares). Similarly, US2's
hypothetical section 1248 amount with respect to the CFC1 stock is $6x
($20x multiplied by 30%, reduced by $0x), and the attributable share
amount is also $.33x ($6x/18 shares). Finally, US2's hypothetical
section 1248 amount with respect to the CFC2 stock is $39x ($130x
multiplied by 30%, reduced by $0x), and the attributable share amount is
also $2.17x ($39x/18 shares). Thus, the sum of the portion of the
section 1248(f) amount with respect to the CFC1 stock and CFC2 stock
attributable to shares of stock of FA distributed to US1 and US2 is
$120x ($10x plus $65x plus $6x plus $39x).
(2) If the shares of FA stock are divided into portions, Sec.
1.1248(f)-2(d)(2) applies to attribute the attributable share amount to
portions of shares of FA stock distributed to US1 and US2. Under Sec.
1.1248(f)-2(c)(2) each share of FA stock received by US1 (30 shares) and
US2 (18 shares) is divided into three portions, one attributable to the
single block of stock of CFC1, one attributable to the single block of
stock of CFC2, and one attributable to Asset A. Thus, the attributable
share amount of $.33x with respect to the CFC1 stock is attributed to
the portion of each of the 30 shares and 18 shares of FA stock received
by US1 and US2, respectively, that relates to the CFC1 stock. Similarly,
the attributable share amount of $2.17x with respect to the CFC2 stock
is attributed to the portion of each of the 30 shares and 18 shares of
FA stock received by US1 and US2, respectively, that relates to the CFC2
stock.
(3) The total section 1248(f) amount ($120x) that UST is otherwise
required to include in gross income as a dividend under Sec. 1.1248(f)-
1(b)(3) is reduced by $120x, the sum of the portions of the section
1248(f) amount with respect to the CFC1 stock and CFC2 stock that are
attributable to the shares of FA stock distributed to US1 and US2. Thus,
the amount DC is required to include in gross income as a dividend under
Sec. 1.1248(f)-1(b)(3) is $0x ($120x reduced by $120x).
(H) As stated in paragraph (ii)(G)(2) of this Example 3, under Sec.
1.1248(f)-2(c)(2) each share of FA stock received by US1 (30 shares) and
US2 (18 shares) is divided into three portions, one attributable to the
CFC1 stock, one attributable to the CFC2 stock, and one attributable to
Asset A. Under Sec. 1.1248(f)-2(c)(4)(i), the basis of each portion is
the product of US1's and US2's section 358 basis in the share of FA
stock multiplied by the ratio of the section 362 basis of the property
(CFC1 stock, CFC2 stock, or Asset A, as applicable) received by FA in
the section 361 exchange to which the portion relates, to the aggregate
section 362 basis of all property received by FA in the section 361
exchange. Under Sec. 1.1248(f)-2(c)(4)(ii), the fair market value of
each portion is the product of the fair market value of the share of FA
stock multiplied by the ratio of the fair market value of the property
(CFC1 stock, CFC2 stock, or Asset A, as applicable) to which the portion
relates, to the aggregate fair market value of all property received by
FA in the section 361 exchange. The section 362 basis of the CFC1 stock,
CFC2 stock, and Asset A is $24x, $56x, and $48x, respectively, for an
aggregate section 362 basis of $128x. See paragraph (ii)(C) of this
Example 3. The fair market value of the CFC1 stock, CFC2 stock, and
Asset A is $40x, $160x, and $200x, for an aggregate fair market value of
$400x. Furthermore, US1's 30 shares of FA stock have an aggregate fair
market value of $200x and section 358 basis of $30x (resulting in
aggregate gain of $170x), and US2's 18 shares of FA stock have an
aggregate fair market value of $120x and section 358 basis of $18x
(resulting in aggregate gain of $102x). See paragraph (ii)(E) of this
Example 3.
(1) With respect to US1's 30 shares of FA stock, the portions
attributable to the CFC1 stock have an aggregate basis of $5.63x ($30x
multiplied by $24x/$128x) and fair market value of $20x ($200x
multiplied by $40x/$400x), resulting in aggregate gain in such portions
of $14.38x (or $.48x gain in each such portion of the 30 shares). The
portions attributable to the CFC2 stock have an aggregate basis of
$13.13x ($30x multiplied by $56x/$128x) and fair market value of $80x
($200x multiplied by $160x/$400x), resulting in aggregate gain in such
portions of $66.88x (or $2.23x in each such portion of the 30 shares).
The portions attributable to Asset A have an aggregate basis of $11.25x
($30x multiplied by $48x/$128x) and fair market value of $100x ($200x
multiplied by $200x/$400x), resulting in aggregate
[[Page 393]]
gain in such portions of $88.75x (or $2.96x in each such portion of the
30 shares). Thus, the aggregate gain in all the portions of the 30
shares is $170x ($14.38x plus $66.88x plus $88.75x).
(2) With respect to US2's 18 shares of FA stock, the portions
attributable to the CFC1 stock have an aggregate basis of $3.38x ($18x
multiplied by $24x/$128x) and fair market value of $12x ($120x
multiplied by $40x/$400x), resulting in aggregate gain in such portions
of $8.63x (or $.48x in each such portion of the 18 shares). The portions
attributable to the CFC2 stock have an aggregate basis of $7.88x ($18x
multiplied by $56x/$128x) and fair market value of $48x ($120x
multiplied by $160x/$400x), resulting in aggregate gain of $40.13x (or
$2.23x in each such portion of the 18 shares). The portions attributable
to Asset A have an aggregate basis of $6.75x ($18x multiplied by $48x/
$128x) and fair market value of $60x ($120x multiplied by $200x/$400x),
resulting in aggregate gain of $53.25x (or $2.96x in each such portion
of the 18 shares). Thus, the aggregate gain in all the portions of the
18 shares is $102x ($8.63x plus $40.13x plus $53.25x).
(3) Under Sec. 1.1248-8(b)(2)(iv), the earnings and profits of CFC1
attributable to the portions of US1's 30 shares of FA stock that relate
to the CFC1 stock is $15x (the product of US1's 50% ownership interest
percentage in UST multiplied by $30x of earnings and profits
attributable to the CFC1 stock before the section 361 exchange, reduced
by $0x of dividend included in UST's income with respect to the CFC1
stock under section 1248(a) attributable to US1). The earnings and
profits of CFC2 attributable to the portions of US1's 30 shares of FA
stock that relate to the CFC2 stock is $75x (the product of US1's 50%
ownership interest percentage in UST multiplied by $150x of earnings and
profits attributable to the CFC2 stock before the section 361 exchange,
reduced by $0x of dividend included in UST's income with respect to the
CFC2 stock under section 1248(a) attributable to US1). Similarly, the
earnings and profits of CFC1 attributable to the portions of US2's 18
shares of FA stock that relate to the CFC1 stock is $9x (the product of
US2's 30% ownership interest percentage in UST multiplied by $30x of
earnings and profits attributable to the CFC1 stock before the section
361 exchange, reduced by $0x of dividend included in UST's income with
respect to the CFC1 stock under section 1248(a) attributable to US2).
Finally, the earnings and profits of CFC2 attributable to the portions
of US2's 18 shares of FA stock that relate to the CFC2 stock is $45x
(the product of US2's 30% ownership interest percentage in UST
multiplied by $150x of earnings and profits attributable to the CFC2
stock before the section 361 exchange, reduced by $0x of dividend
included in UST's income with respect to the CFC2 stock under section
1248(a) attributable to US2).
(I) Under Sec. 1.1248(f)-2(c)(3), neither US1 nor US2 is required
to reduce the aggregate section 358 basis in the portions of their
respective shares of FA stock, and UST is not required to include in
gross income any additional deemed dividend.
(1) US1 is not required to reduce the aggregate section 358 basis of
the portions of its 30 shares of FA stock that relate to the CFC1 stock
because the $10x section 1248(f) amount with respect to the CFC1 stock
attributable to the portions of the shares of FA stock received by US1
(as computed in paragraph (ii)(G) of this Example 3) does not exceed
US1's postdistribution amount (as defined in Sec. 1.1248(f)-1(c)(6), or
$14.38x) in those portions. The $14.38x postdistribution amount equals
the amount that US1 would be required to include in income as a dividend
under section 1248(a) with respect to such portion if it sold the 30
shares of FA stock immediately after the distribution in a transaction
in which all realized gain is recognized, without taking into account
basis adjustments or income inclusions under Sec. 1.1248(f)-2(c)(3)
($20x fair market value, $5.63x basis, and $15x earnings and profits
attributable to the portions for purposes of section 1248). Similarly,
US1 is not required to reduce the aggregate section 358 basis of the
portions of its 30 shares of FA stock that relate to the CFC2 stock
because the $65x section 1248(f) amount with respect to the CFC2 stock
attributable to the portions of the shares of FA stock received by US1
(as computed in paragraph (ii)(G) of this Example 3) does not exceed
US1's postdistribution amount ($66.88x) in those portions. The $66.88x
postdistribution amount equals the amount that US1 would be required to
include in income as a dividend under section 1248(a) with respect to
such portion if it sold the 30 shares of FA stock immediately after the
distribution in a transaction in which all realized gain is recognized,
without taking into account basis adjustments or income inclusions under
Sec. 1.1248(f)-2(c)(3) ($80x fair market value, $13.13x basis, and $75x
earnings and profits attributable to the portions for purposes of
section 1248).
(2) US2 is not required to reduce the aggregate section 358 basis of
the portions of its 18 shares of FA stock that relate to the CFC1 stock
because the $6x section 1248(f) amount with respect to the CFC1 stock
attributable to the portions of the shares of FA stock received by US2
(as computed in paragraph (ii)(G) of this Example 3) does not exceed
US2's postdistribution amount ($8.63x) in those portions. The $8.63x
postdistribution amount equals the amount that US2 would be required to
include in income as a dividend under section 1248(a) with respect to
such portion if it sold the 18 shares of FA stock immediately after the
distribution in a
[[Page 394]]
transaction in which all realized gain is recognized, without taking
into account basis adjustments or income inclusions under Sec.
1.1248(f)-2(c)(3) ($12x fair market value, $3.38x basis, and $9x
earnings and profits attributable to the portions for purposes of
section 1248). Similarly, US2 is not required to reduce the aggregate
section 358 basis of the portions of its 18 shares of FA stock that
relate to the CFC2 stock because the $39x section 1248(f) amount with
respect to the CFC2 stock attributable to the portions of the shares of
FA stock received by US2 (as computed in paragraph (ii)(G) of this
Example 3) does not exceed US1's postdistribution amount ($40.13x) in
those portions. The $40.13x postdistribution amount equals the amount
that US2 would be required to include in income as a dividend under
section 1248(a) with respect to such portion if it sold the 18 shares of
FA stock immediately after the distribution in a transaction in which
all realized gain is recognized, without taking into account basis
adjustments or income inclusions under Sec. 1.1248(f)-2(c)(3) ($48x
fair market value, $7.88x basis, and $45x earnings and profits
attributable to the portions for purposes of section 1248).
(J) The amount of gain subject to the gain recognition agreement
filed by each of US1 and US2 is determined pursuant to paragraph
(e)(6)(i) of this section. The amount of gain subject to the gain
recognition agreement filed by US1 with respect to the stock of CFC1 and
CFC2 is $10x and $65x, respectively. The $10x and $65x are computed as
the product of US1's ownership interest percentage (50%) multiplied by
the gain realized by UST in the CFC1 stock ($20x) and CFC2 stock
($130x), respectively, as determined prior to taking into account the
application of any other provision of section 367, reduced by the sum of
the amounts described in paragraphs (e)(6)(i)(A) through (D) of this
section with respect to the CFC1 stock and CFC2 stock attributable to
US1 ($0x with respect to the CFC1 stock, and $0x with respect to the
CFC2 stock). The amount of gain subject to the gain recognition
agreement filed by US2 with respect to the stock of CFC1 and CFC2 is $6x
and $39x, respectively. The $6x and $39x are computed as the product of
US2's ownership interest percentage (30%) multiplied by the gain
realized by UST in the CFC1 stock ($20x) and CFC2 stock ($130x),
respectively, as determined prior to taking into account the application
of any other provision of section 367, reduced by the sum of the amounts
described in paragraphs (e)(6)(i)(A) through (D) of this section with
respect to the CFC1 stock and CFC2 stock attributable to US2 ($0x with
respect to the CFC1 stock, and $0x with respect to the CFC2 stock). X is
not required to enter into a gain recognition agreement because the
amount of gain that would be subject to the gain recognition agreement
is $0x with respect to the CFC1 stock, and $0x with respect to the CFC2
stock, computed as X's ownership percentage (20%) multiplied by the gain
realized in the stock of CFC1 ($20x multiplied by 20%, or $4x) and CFC2
($130x multiplied by 20%, or $26x), reduced by the amount of gain
recognized by UST with respect to the stock of CFC1 and CFC2 that is
attributable to X pursuant to Sec. 1.367(a)-7(c)(2) ($4x and $26x,
respectively, as determined in paragraph (ii)(C) of this Example 3).
Pursuant to paragraph (e)(6)(ii) of this section, each gain recognition
agreement must include the election described in Sec. 1.367(a)-
8(c)(2)(vi). Furthermore, pursuant to paragraph (e)(6)(iii) of this
section, US1 and US2 must be designated as the U.S. transferor on their
respective gain recognition agreements for purposes of Sec. 1.367(a)-8.
(9) Illustration of rules. For rules relating to certain
distributions of stock of a foreign corporation by a domestic
corporation, see section 1248(f) and Sec. Sec. 1.1248(f)-1 through
1.1248(f)-3.
(f) Failure to file statements--(1) Failure to file. For purposes of
the exceptions to the application of section 367(a)(1) provided in
paragraphs (c) and (d)(2)(vi)(B) of this section, there is a failure to
file a statement described in paragraph (c)(6), (c)(7), or (d)(2)(vi)(C)
of this section (failure to file) if the statement is not filed with a
timely filed U.S. income tax return or is not completed in all material
respects.
(2) Relief for certain failures to file that are not willful--(i) In
general. A failure to file described in paragraph (f)(1) of this section
will be deemed not to have occurred for purposes of satisfying the
requirements of the applicable regulation if the taxpayer demonstrates
that the failure was not willful using the procedure set forth in this
paragraph (f)(2). For this purpose, willful is to be interpreted
consistent with the meaning of that term in the context of other civil
penalties, which would include a failure due to gross negligence,
reckless disregard, or willful neglect. Whether a failure to file was a
willful failure will be determined by the Director of Field Operations
International, Large Business & International (or any successor to the
roles and responsibilities of such position, as appropriate) (Director)
based on all the facts and circumstances. The taxpayer must submit a
request for relief and an explanation as provided in paragraph
(f)(2)(ii)(A) of this section. Although a
[[Page 395]]
taxpayer whose failure to file is determined not to be willful will not
be subject to gain recognition under this section, the taxpayer will be
subject to a penalty under section 6038B if the taxpayer fails to
satisfy the reporting requirements, if any, under that section and does
not demonstrate that the failure was due to reasonable cause and not
willful neglect. See Sec. 1.6038B-1(b) and (f). The determination of
whether the failure to file was willful under this section has no effect
on any request for relief made under Sec. 1.6038B-1(f).
(ii) Procedures for establishing that a failure to file was not
willful--(A) Time and manner of submission. A taxpayer's statement that
the failure to file was not willful will be considered only if, promptly
after the taxpayer becomes aware of the failure, an amended return is
filed for the taxable year to which the failure relates that includes
the information that should have been included with the original return
for such taxable year or that otherwise complies with the rules of this
section, and that includes a written statement explaining the reasons
for the failure to file. The amended return must be filed with the
Internal Revenue Service at the location where the taxpayer filed its
original return. The taxpayer may submit a request for relief from the
penalty under section 6038B as part of the same submission. See Sec.
1.6038B-1(f).
(B) Notice requirement. In addition to the requirements of paragraph
(f)(2)(ii)(A) of this section, the taxpayer must comply with the notice
requirements of this paragraph (f)(2)(ii)(B). If any taxable year of the
taxpayer is under examination when the amended return is filed, a copy
of the amended return and any information required to be included with
such return must be delivered to the Internal Revenue Service personnel
conducting the examination. If no taxable year of the taxpayer is under
examination when the amended return is filed, a copy of the amended
return and any information required to be included with such return must
be delivered to the Director.
(3) For illustrations of the application of the willfulness standard
of this paragraph (f), see the examples in Sec. 1.367(a)-8(p)(3).
(g) Effective/applicability dates--(1) Rules of applicability. (i)
Except as otherwise provided in this paragraph (g), the rules in
paragraphs (a), (b), and (d) of this section apply to transfers
occurring on or after July 20, 1998.
(ii) The following rules apply to transactions occurring on or after
January 23, 2006--
(A) The rules in paragraphs (a) and (d) of this section, as they
apply to section 368(a)(1)(A) reorganizations (including reorganizations
described in section 368(a)(2)(D) or (E)) involving a foreign acquiring
or foreign acquired corporation;
(B) The rules in paragraph (b)(2)(i)(B) of this section;
(C) The rules in paragraph (d) of this section, as they apply to
section 368(a)(1)(G) reorganizations (including reorganizations
described in section 368(a)(2)(D));
(D) The rules of paragraph (d)(1) and (d)(2)(iv), as they relate to
exchanges by a U.S. person of securities of an acquired corporation for
voting stock or securities of a foreign corporation in control of the
acquiring corporation in a triangular section 368(a)(1)(B)
reorganization;
(E) The rules in paragraph (d)(1) and (d)(2)(iv) of this section, as
they relate to exchanges by a U.S. person of stock or securities of an
acquired corporation for voting stock or securities of a domestic
corporation in control of the foreign acquiring corporation in a
triangular section 368(a)(1)(B) reorganization; and
(F) The rules in paragraph (d)(2)(vii) of this section.
(iii) The rules of paragraph (a) of this section that apply to
transfers of securities in a section 354 or 356 exchange (pursuant to a
section 368(a)(1)(E) reorganization or an asset reorganization that is
not treated as an indirect stock transfer) that is not subject to
section 367(a) apply only to transfers occurring after January 5, 2005
(although taxpayers may apply such provision to transfers of securities
occurring on or after July 20, 1998, and on or before January 5, 2005,
if done consistently to all transactions).
(iv) The rules in paragraph (d)(1)(v) of this section apply to:
[[Page 396]]
(A) A reorganization described in section 368(a)(1)(C) followed by a
controlled asset transfer if such reorganization occurs on or after July
20, 1998;
(B) A reorganization described in section 368(a)(1)(D) followed by a
controlled asset transfer if such reorganization occurs after December
9, 2002 (for additional guidance concerning such reorganizations that
occur on or after July 20, 1998 and on or before December 9, 2002, see
Rev. Rul. 2002-85 (2002-2 C.B. 986) and Sec. 601.601(d)(2) of this
chapter); and
(C) A reorganization described in section 368(a)(1)(A), (F), or (G)
followed by a controlled asset transfer if such reorganization occurs on
or after January 23, 2006.
(v) The rules of paragraph (d)(2)(vi) of this section apply only to
transactions occurring on or after January 23, 2006. See Sec. 1.367(a)-
3(d)(2)(vi), as contained in 26 CFR part 1 revised as of April 1, 2005,
for transactions occurring on or after July 20, 1998 and before January
23, 2006.
(vi) With respect to certain transfers of domestic stock or
securities, the rules in paragraph (c) of this section are generally
applicable for transfers occurring after January 29, 1997. See Sec.
1.367(a)-3(c)(11). For transition rules regarding certain transfers of
domestic stock or securities after December 16, 1987, and before January
30, 1997, and transfers of foreign stock or securities after December
16, 1987, and before July 20, 1998, see paragraph (j) of this section.
(vii)(A) Except as provided in this paragraph (g)(1)(vii), the rules
of paragraph (e) of this section apply to transfers of stock or
securities occurring on or after April 17, 2013. For matters covered in
this section for periods before April 17, 2013, but on or after March
13, 2009, see Sec. 1.367(a)-3(e) as contained in 26 CFR part 1 revised
as of April 1, 2012. For matters covered in this section for periods
before March 13, 2009, but on or after March 7, 2007, see Sec.
1.367(a)-3T(e) as contained in 26 CFR part 1 revised as of April 1,
2007. For matters covered in this section for periods before March 7,
2007, but on or after July 20, 1998, see Sec. 1.367(a)-8(f)(2)(i) as
contained in 26 CFR part 1 revised as of April 1, 2006.
(B) Taxpayers may apply the rules of Sec. 1.367(a)-3(e) to
transfers occurring before March 13, 2009, and during a taxable year for
which the period of limitations on assessments under section 6501(a) has
not closed, if done consistently to all such transfers occurring during
each taxable year. A taxpayer applies the rules of Sec. 1.367(a)-3(e)
to transfers occurring before March 13, 2009, and during a taxable year
for which the period of limitations on assessments under section 6501(a)
has not closed, by including the gain recognition agreement, annual
certification, or other information filing, that is required as a result
of the rules of Sec. 1.367(a)-3(e) applying to such a transfer, with an
amended tax return for the taxable year in which the transfer occurs
that is filed on or before August 10, 2009. A taxpayer that wishes to
apply the rules of Sec. 1.367(a)-3(e) to transfers occurring before
March 13, 2009, and during a taxable year for which the period of
limitations on assessments under section 6501(a) has not closed but that
fails to meet the filing requirement described in the preceding sentence
must request relief for reasonable cause for such failure as provided in
Sec. 1.367(a)-8.
(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.
(ix) Paragraphs (d)(2)(vi)(B)(1)(i) and (iii), (d)(2)(vi)(B)(2), and
(d)(3), Examples 6B, 6C, and 9 of this section apply to transfers that
occur on or after March 18, 2013. See paragraphs (d)(2)(vi)(B)(1)(i) and
(iii), (d)(2)(vi)(B)(2), and (d)(3), Examples 6B, 6C, and 9 of this
section, as contained in 26 CFR part 1 revised as of April 1, 2012, for
transfers that occur on or after January 23, 2006, and before March 18,
2013. Paragraph (d)(2)(vi)(B)(1)(ii) of this section applies to
statements that are required to be filed on or after November 19, 2014.
See paragraph (d)(2)(vi)(B)(1)(ii) of this section, as contained in 26
CFR part 1 revised as of April 1, 2014, for statements required to be
filed on or after March 18, 2013, and before November 19, 2014.
[[Page 397]]
(x) Paragraphs (c)(6)(ii) and (f) of this section apply to
statements that are required to be filed on or after November 19, 2014,
as well as to requests for relief submitted on or after November 19,
2014.
(2) Election. Notwithstanding paragraphs (g)(1) and (j) of this
section, taxpayers may, by timely filing an original or amended return,
elect to apply paragraphs (b) and (d) of this section to all transfers
of foreign stock or securities occurring after December 16, 1987, and
before July 20, 1998, except to the extent that a gain recognition
agreement has been triggered prior to July 20, 1998. If an election is
made under this paragraph (g)(2), the provisions of Sec. 1.367(a)-3T(g)
(see 26 CFR part 1, revised April 1, 1998) shall apply, and, for this
purpose, the term substantial portion under Sec. 1.367(a)-3T(g)(3)(iii)
(see 26 CFR part 1, revised April 1, 1998) shall be interpreted to mean
substantially all as defined in section 368(a)(1)(C). In addition, if
such an election is made, the taxpayer must apply the rules under
section 367(b) and the regulations thereunder to any transfers occurring
within that period as if the election to apply Sec. 1.367(a)-3(b) and
(d) to transfers occurring within that period had not been made, except
that in the case of an exchange described in section 351 the taxpayer
must apply section 367(b) and the regulations thereunder as if the
exchange was described in Sec. 7.367(b)-7 of this chapter (as in effect
before February 23, 2000; see 26 CFR part 1, revised as of April 1,
1999). For example, if a U.S. person, pursuant to a section 351
exchange, transfers stock of a controlled foreign corporation in which
it is a United States shareholder but does not receive back stock of a
controlled foreign corporation in which it is a United States
shareholder, the U.S. person must include in income under Sec.
7.367(b)-7 of this chapter (as in effect before February 23, 2000; see
26 CFR part 1, revised as of April 1, 1999) the section 1248 amount
attributable to the stock exchanged (to the extent that the fair market
value of the stock exchanged exceeds its adjusted basis). Such inclusion
is required even though Sec. 7.367(b)-7 of this chapter (as in effect
before February 23, 2000; see 26 CFR part 1, revised as of April 1,
1999), by its terms, did not apply to section 351 exchanges.
(h) Former 10-year gain recognition agreements. If a taxpayer elects
to apply the rules of this section to all prior transfers occurring
after December 16, 1987, any 10-year gain recognition agreement that
remains in effect (has not been triggered in full) on July 20, 1998 will
be considered by the Internal Revenue Service to be a 5-year gain
recognition agreement with a duration of five full taxable years
following the close of the taxable year of the initial transfer.
(i) [Reserved]
(j) Transition rules regarding certain transfers of domestic or
foreign stock or securities after December 16, 1987, and prior to July
20, 1998--(1) Scope. Transfers of domestic stock or securities described
under section 367(a) that occurred after December 16, 1987, and prior to
April 17, 1994, and transfers of foreign stock or securities described
under section 367(a) that occur after December 16, 1987, and prior to
July 20, 1998 are subject to the rules contained in section 367(a) and
the regulations thereunder, as modified by the rules contained in
paragraph (j)(2) of this section. For transfers of domestic stock or
securities described under section 367(a) that occurred after April 17,
1994 and before January 30, 1997, see Temporary Income Regulations under
section 367(a) in effect at the time of the transfer (Sec. 1.367(a)-
3T(a) and (c), 26 CFR part 1, revised April 1, 1996) and paragraph
(c)(11) of this section. For transfers of domestic stock or securities
described under section 367(a) that occur after January 29, 1997, see
Sec. 1.367(a)-3(c).
(2) Transfers of domestic or foreign stock or securities: Additional
substantive rules--(i) Rule for less than 5-percent shareholders. Unless
paragraph (j)(2)(iii) of this section applies (in the case of domestic
stock or securities) or paragraph (j)(2)(iv) of this section applies (in
the case of foreign stock or securities), a U.S. transferor that
transfers stock or securities of a domestic or foreign corporation in an
exchange described in section 367(a) and owns less than 5 percent of
both the total voting power and the total value of the stock of the
transferee foreign corporation
[[Page 398]]
immediately after the transfer (taking into account the attribution
rules of section 958) is not subject to section 367(a)(1) and is not
required to enter into a gain recognition agreement.
(ii) Rule for 5-percent shareholders. Unless paragraph (j)(2)(iii)
or (iv) of this section applies, a U.S. transferor that transfers
domestic or foreign stock or securities in an exchange described in
section 367(a) and owns at least 5 percent of either the total voting
power or the total value of the stock of the transferee foreign
corporation immediately after the transfer (taking into account the
attribution rules under section 958) may qualify for nonrecognition
treatment by filing a gain recognition agreement in accordance with
Sec. 1.367(a)-3T(g) in effect prior to July 20, 1998 (see 26 CFR part
1, revised April 1, 1998) for a duration of 5 or 10 years. The duration
is 5 years if the U.S. transferor (5-percent shareholder) determines
that all U.S. transferors, in the aggregate, own less than 50 percent of
both the total voting power and the total value of the transferee
foreign corporation immediately after the transfer. The duration is 10
years in all other cases. See, however, Sec. 1.367(a)-3(h). If a 5-
percent shareholder fails to properly enter into a gain recognition
agreement, the exchange is taxable to such shareholder under section
367(a)(1).
(iii) Gain recognition agreement option not available to controlling
U.S. transferor if U.S. stock or securities are transferred.
Notwithstanding the provisions of paragraph (j)(2)(ii) of this section,
in no event will any exception to section 367(a)(1) apply to the
transfer of stock or securities of a domestic corporation where the U.S.
transferor owns (applying the attribution rules of section 958) more
than 50 percent of either the total voting power or the total value of
the stock of the transferee foreign corporation immediately after the
transfer (i.e., the use of a gain recognition agreement to qualify for
nonrecognition treatment is unavailable in this case).
(iv) Loss of United States shareholder status in the case of a
transfer of foreign stock. Notwithstanding the provisions of paragraphs
(j)(2)(i) and (ii) of this section, in no event will any exception to
section 367(a)(1) apply to the transfer of stock of a foreign
corporation in which the U.S. transferor is a United States shareholder
(as defined in Sec. 7.367(b)-2(b) of this chapter (as in effect before
February 23, 2000; see 26 CFR part 1, revised as of April 1, 1999) or
section 953(c)) unless the U.S. transferor receives back stock in a
controlled foreign corporation (as defined in section 953(c), section
957(a) or section 957(b)) as to which the U.S. transferor is a United
States shareholder immediately after the transfer.
(k) [Reserved] For further guidance, see Sec. 1.367-3T(k).
[T.D. 8702, 61 FR 68637, Dec. 30, 1996]
Editorial Notes: 1. For Federal Register citations affecting Sec.
1.367(a)-3, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
2. By T.D. 9614, 78 FR 17031, Mar. 19, 2013, Sec. 1.367(a)-3 was
amended by revising paragraphs (g)(1)(v)(A) and (B); however, these
paragraphs did not exist and the amendment could not be incorporated
into the section.
Sec. 1.367(a)-3T Treatment of transfers of stock or securities
to foreign corporations. (temporary).
(a) through (c)(3)(iii)(B) [Reserved]. For further guidance, see
Sec. 1.367(a)-3(a) through (c)(3)(iii)(B).
(C) Special rule for U.S. target company value. For purposes of
Sec. 1.367(a)-3(c)(3)(iii)(A), the fair market value of the U.S. target
company includes the aggregate amount of non-ordinary course
distributions (NOCDs) made by the U.S. target company. To calculate the
aggregate value of NOCDs, the principles of Sec. 1.7874-10T, including
the rule regarding predecessors in Sec. 1.7874-10T(e) and the rule
regarding a deemed distribution of stock in certain cases in Sec.
1.7874-10T(g), apply. However, this paragraph (c)(3)(iii)(C) does not
apply if the principles of the de minimis exception in Sec. 1.7874-
10T(d) are satisfied.
(4) through (11)(i) [Reserved]. For further guidance, see Sec.
1.367(a)-3(c)(4) through (c)(11)(i).
(ii) Applicability date of certain provisions of this paragraph (c).
The first and second sentence of paragraph (c)(3)(iii)(C) of this
section apply to transfers completed on or after September 22, 2014. The
third sentence of
[[Page 399]]
paragraph (c)(3)(iii)(C) of this section applies to transfers completed
on or after November 19, 2015. Taxpayers may, however, elect to apply
the third sentence of paragraph (c)(3)(iii)(C) of this section to
transfers completed on or after September 22, 2014, and before November
19, 2015.
(d) through (j) [Reserved]. For further guidance, see Sec.
1.367(a)-3(d) through (j).
(k) Expiration date. Paragraph (c)(3)(iii)(C) of this section
expires on or before April 4, 2019.
[T.D. 9761, 81 FR 20883, Apr. 8, 2016, as amended at 81 FR 40810, June
23, 2016]
Sec. 1.367(a)-4 Special rule applicable to U.S. depreciated property.
(a) Depreciated property used in the United States--(1) In general.
A U.S. person that transfers U.S. depreciated property (as defined in
paragraph (a)(2) of this section) to a foreign corporation in an
exchange described in section 367(a)(1), must include in its gross
income for the taxable year in which the transfer occurs ordinary income
equal to the gain realized that would have been includible in the
transferor's gross income as ordinary income under section 617(d)(1),
1245(a), 1250(a), 1252(a), 1254(a), or 1255(a), whichever is applicable,
if at the time of the transfer the U.S. person had sold the property at
its fair market value. Recapture of depreciation under this paragraph
(a) is required regardless of whether the exception to section 367(a)(1)
provided by Sec. 1.367(a)-2(a)(2) applies to the transfer of the U.S.
depreciated property. However, the transfer of the U.S. depreciated
property may qualify for the exception with respect to realized gain
that is not included in ordinary income pursuant to this paragraph (a).
(2) U.S. depreciated property. U.S. depreciated property subject to
the rules of this paragraph (a) is any property that--
(i) Is either mining property (as defined in section 617(f)(2)),
section 1245 property (as defined in section 1245(a)(3)), section 1250
property (as defined in section 1250(c)), farm land (as defined in
section 1252(a)(2)), section 1254 property (as defined in section
1254(a)(3)), or section 126 property (as defined in section 1255(a)(2));
and
(ii) Has been used in the United States or has been described in
section 168(g)(4) before its transfer.
(3) Property used within and without the United States. (i) If U.S.
depreciated property has been used partly within and partly without the
United States, then the amount required to be included in ordinary
income pursuant to this paragraph (a) is reduced to an amount determined
in accordance with the following formula:
[GRAPHIC] [TIFF OMITTED] TR16DE16.037
(ii) For purposes of the fraction in paragraph (a)(3)(i) of this
section, the ``full recapture amount'' is the amount that would
otherwise be included in the transferor's income under paragraph (a)(1)
of this section. ``U.S. use'' is the number of months that the property
either was used within the United States or has been described in
section 168(g)(4), and was subject to depreciation by the transferor or
a related person. ``Total use'' is the total number of months that the
property was used (or available for use), and subject to depreciation,
by the transferor or a related person. For purposes of this paragraph
(a)(3), property is not considered to have been in use outside of the
United States during any period in which such property was, for purposes
of section 168, treated as property not used predominantly outside the
United States pursuant to section 168(g)(4). For purposes of this
paragraph (a)(3), the term ``related person'' has the meaning set forth
in Sec. 1.367(d)-1(h).
(b) Effective/applicability dates. The rules of this section apply
to transfers occurring on or after September 14, 2015, and to transfers
occurring before September 14, 2015, resulting from entity
classification elections made under
[[Page 400]]
Sec. 301.7701-3 that are filed on or after September 14, 2015. For
transfers occurring before this section is applicable, see Sec. Sec.
1.367(a)-4 and 1.367(a)-4T as contained in 26 CFR part 1 revised as of
April 1, 2016.
[T.D. 9803, 81 FR 91027, Dec. 16, 2016]
Sec. 1.367(a)-5 [Reserved]
Sec. 1.367(a)-6 Transfer of foreign branch with previously deducted
losses.
(a) through (b)(1) [Reserved]. For further guidance, see Sec.
1.367(a)-6T(a) through (b)(1).
(b)(2) No active conduct exception. The rules of this paragraph (b)
apply regardless of whether any of the assets of the foreign branch
satisfy the active trade or business exception of Sec. 1.367(a)-
2(a)(2).
(c)(1) [Reserved]. For further guidance, see Sec. 1.367(a)-
6T(c)(1).
(2) Gain limitation. The gain required to be recognized under
paragraph (b)(1) of this section will not exceed the aggregate amount of
gain realized on the transfer of all branch assets (without regard to
the transfer of any assets on which loss is realized but not
recognized).
(3) [Reserved]
(4) Transfers of certain intangible property. Gain realized on the
transfer of intangible property (computed with reference to the fair
market value of the intangible property as of the date of the transfer)
that is an asset of a foreign branch is taken into account in computing
the limitation on loss recapture under paragraph (c)(2) of this section.
For rules relating to the crediting of gain recognized under this
section against income deemed to arise by operation of section 367(d),
see Sec. 1.367(d)-1(g)(3).
(d) through (i) [Reserved]. For further guidance, see Sec.
1.367(a)-6T(d) through (i).
(j) Effective/applicability dates. The rules of this section apply
to transfers occurring on or after September 14, 2015, and to transfers
occurring before September 14, 2015, resulting from entity
classification elections made under Sec. 301.7701-3 that are filed on
or after September 14, 2015. For transfers occurring before this section
is applicable, see Sec. 1.367(a)-6T as contained in 26 CFR part 1
revised as of April 1, 2016.
[T.D. 9803, 81 FR 91028, Dec. 16, 2016]
Sec. 1.367(a)-6T Transfer of foreign branch with previously deducted
losses (temporary).
(a) In general. This section provides special rules relating to the
transfer of the assets of a foreign branch with previously deducted
losses. Paragraph (b) of this section provides generally that such
losses must be recaptured by the recognition of the gain realized on the
transfer. Paragraph (c) of this section sets forth rules concerning the
character of, and limitations on, the gain required to be recognized.
Paragraph (d) of this section defines the term previously deducted
losses. Paragraph (e) of this section describes certain reductions that
are made to the previously deducted losses before they are taken into
income under this section. Finally, paragraph (g) of this section
defines the term foreign branch.
(b) Recognition of gain required--(1) In general. If a U.S. person
transfers any assets of a foreign branch to a foreign corporation in an
exchange described in section 367(a)(1), then the transferor shall
recognize gain equal to--
(i) The sum of the previously deducted branch ordinary losses as
defined and reduced in paragraphs (d) and (e) of this section; and
(ii) The sum of the previously deducted branch capital losses as
defined and reduced in paragraphs (d) and (e) of this section.
(2) [Reserved]
(c) Special rules concerning gain recognized--(1) Character and
source of gain. The gain described in paragraph (b)(1)(i) of this
section shall be treated as ordinary income of the transferor, and the
gain described in paragraph (b)(1)(ii) of this section shall be treated
as long-term capital gain of the transferor. Gain that is recognized
pursuant to the rules of this section shall be treated as income from
sources outside the United States. Such recognized gain shall be treated
as foreign oil and gas extraction income (as defined in section 907) in
the same proportion that previously deducted foreign oil and gas
extraction losses bore to the
[[Page 401]]
total amount of previously deducted losses.
(2) [Reserved]
(3) Foreign goodwill and going concern value. For purposes of this
section, the assets of a foreign branch shall include foreign goodwill
and going concern value related to the business of the foreign branch,
as defined in Sec. 1.367(a)-1T(d)(5)(iii). Thus, gain realized upon the
transfer of the foreign goodwill or going concern value of a foreign
branch to a foreign corporation will be taken into account in computing
the limitation on loss recapture under paragraph (c)(2) of this section.
(4) [Reserved]
(d) Previously deducted losses--(1) In general. This paragraph (d)
provides rules for determining, for purposes of paragraph (b)(1) of this
section, the previously deducted losses of a foreign branch any of whose
assets are transferred to a foreign corporation in an exchange described
in section 367(a)(1). Initially, the two previously deducted losses of a
foreign branch for a taxable year are the total ordinary loss
(``previously deducted branch ordinary loss'') and the total capital
loss (``previously deducted branch capital loss'') that were realized by
the foreign branch in that taxable year (a ``branch loss year'') prior
to the transfer and that were or will be reflected on a U.S. income tax
return of the transferor. The previously deducted branch ordinary loss
for each branch loss year is reduced by expired net ordinary losses
under paragraph (d)(2) of this section, while the previously deducted
capital loss for each loss year is reduced by expired net capital losses
under paragraph (d)(3) of this section. For each branch loss year, the
remaining previously deducted branch ordinary loss and the remaining
previously deducted branch capital loss are then reduced, proceeding
from the first branch loss year to the last branch loss year, to reflect
expired foreign tax credits under paragraph (d)(4) of this section. The
reductions are made in the order of the taxable years in which the
foreign tax credits arose. Finally, similar reductions are made to
reflect expired investment credits under paragraph (d)(5) of this
section.
(2) Reduction by expired net ordinary loss--(i) In general. The
previously deducted branch ordinary loss for each branch loss year shall
be reduced under this paragraph (d)(2) by the amount of any expired net
ordinary loss with respect to that branch loss year. Expired net
ordinary losses arising in years other than the branch loss year shall
reduce the previously deducted branch ordinary loss for the branch loss
year only to the extent that the previously deducted branch ordinary
loss exceeds the net operating loss, if any, incurred by the transferor
in the branch loss year. The previously deducted branch ordinary losses
shall be reduced proceeding from the first branch loss year to the last
branch loss year. For each branch loss year, expired net operating
losses shall be applied to reduce the previously deducted branch
ordinary loss for that year in the order in which the expired net
ordinary losses arose.
(ii) Existence of expired net ordinary loss. An expired net ordinary
loss exists with respect to a branch loss year to the extent that--
(A) The transferor incurred a net operating loss (within the meaning
of section 172(c));
(B) That net operating loss arose in the branch loss year or was
available for carryover or carryback to the branch loss year under
section 172(b)(1);
(C) That net operating loss has neither given rise to a net
operating loss deduction (within the meaning of section 172(a)) for any
taxable year prior to the year of the transfer, nor given rise to a
reduction of any previously deducted branch ordinary loss (pursuant to
paragraph (d)(2) of this section) of any foreign branch of the
transferor upon a previous transfer to a foreign corporation; and
(D) The period during which the transferor may claim a net operating
loss deduction with respect to that net operating loss has expired.
(3) Reduction by expired net capital loss--(i) In general. The
previously deducted branch capital loss for each branch loss year shall
be reduced under this paragraph (d)(3) by the amount of any expired net
capital loss with respect to that branch loss year. Expired net capital
losses arising in years other than the branch loss year shall reduce
[[Page 402]]
the previously deducted branch capital loss for the branch loss year
only to the extent that the previously deducted branch capital loss
exceeds the net capital loss, if any, incurred by the transferor in the
branch loss year. The previously deducted branch capital losses shall be
reduced proceeding from the first branch loss year to the last branch
loss year. For each branch loss year, expired net capital losses shall
be applied to reduce the previously deducted branch capital loss for
that year in the order in which the expired net capital losses arose.
(ii) Existence of expired net capital loss. An expired net capital
loss exists with respect to a branch loss year to the extent that--
(A) The transferor incurred a net capital loss (within the meaning
of section 1222(10));
(B) That net capital loss arose in the branch loss year or was
available for carryover or carryback to the branch loss year under
section 1212;
(C) That net capital loss has neither been allowed for any taxable
year prior to the year of the transfer, nor given rise to a reduction of
any previously deducted branch capital loss (pursuant to paragraph
(c)(3) of this section) of any foreign branch of the transferor upon any
previous transfer to a foreign corporation; and
(D) The period during which the transferor may claim a capital loss
deduction with respect to that net capital loss has expired.
(4) Reduction for expired foreign tax credit--(i) In general. The
previously deducted branch ordinary loss and the previously deducted
branch capital loss for each branch loss year remaining after the
reductions described in paragraph (d)(2) and (3) of this section shall
be further reduced under this paragraph (d)(4) proportionately by the
amount of any expired foreign tax credit loss equivalent with respect to
that branch loss year. The previously deducted branch losses shall be
reduced proceeding from the first branch loss year to the last branch
loss year. For each branch loss year, expired foreign tax credit loss
equivalents shall be applied to reduce the previously deducted branch
loss for that year in the order in which the expired foreign tax credits
arose.
(ii) Existence of foreign tax credit loss equivalent. A foreign tax
credit loss equivalent exists with respect to a branch loss year if--
(A) The transferor paid, accrued, or is deemed under section 902 or
960 to have paid creditable foreign taxes in a taxable year;
(B) The creditable foreign taxes were paid, accrued, or deemed paid
in the branch loss year or were available for carryover or carryback to
the branch loss year under section 904(c);
(C) No foreign tax credit with respect to the foreign taxes paid,
accrued, or deemed paid has been taken because of the operation of
section 904(a) or similar limitations provided by the Code or an
applicable treaty, and such taxes have not given rise to a reduction
(pursuant to this paragraph (d)(5)) of any previously deducted branch
loss of the foreign branch for a prior taxable year or of any previously
deducted branch losses of any foreign branch of the transferor upon a
prior transfer to a foreign corporation; and
(D) The period during which the transferor may claim a foreign tax
credit for the foreign taxes paid, accrued, or deemed paid has expired.
(iii) Amount of foreign tax credit loss equivalent. The amount of
the foreign tax credit loss equivalent for the branch loss year with
respect to the creditable foreign taxes described in paragraph
(d)(4)(ii) of this section is the amount of those creditable foreign
taxes divided by the highest rate of tax to which the transferor was
subject in the loss year.
(5) Reduction for expired investment credits--(i) In general. The
previously deducted branch ordinary loss and the previously deducted
branch capital loss for each branch loss year shall be further reduced
under this paragraph (d)(5) proportionately by the amount of any expired
investment credit loss equivalent with respect to that branch year. The
previously deducted branch losses shall be reduced proceeding from the
first branch loss year to the last branch loss year. For each branch
loss year, expired investment credit loss equivalents shall be applied
to reduce the previously deducted branch loss for
[[Page 403]]
that year in the order in which the expired investment credits were
earned.
(ii) Existence of investment credit loss equivalent. An investment
credit loss equivalent exists with respect to a branch loss year if--
(A) The transferor earned an investment credit (within the meaning
of section 46(a)) in a taxable year;
(B) The investment credit was earned in the branch loss year or was
available for carryover or carryback to the branch loss year under
section 39;
(C) The investment credit earned by the transferor in the credit
year has been denied by section 38(a) or by similar provisions of the
Code and has not given rise to a reduction (pursuant to this paragraph
(d)(5)) of any previously deducted branch loss of the foreign branch for
a preceding taxable year or of the previously deducted losses of any
foreign branch of the transferor upon any previous transfer to a foreign
corporation; and
(D) The period during which the transferor may claim the investment
credit has expired.
(iii) Amount of investment tax credit loss equivalent. The amount of
the investment credit loss equivalent for the branch loss year with
respect to the investment credit described in paragraph (d)(5)(ii) of
this section is 85 percent of the amount of that investment credit
divided by the highest rate of tax to which the transferor was subject
in the loss year.
(e) Amounts that reduce previously deducted losses subject to
recapture--(1) In general. This paragraph (e) describes five amounts
that reduce the sum of the previously deducted branch ordinary losses
and the sum of the previously deducted branch capital losses before they
are taken into income under paragraph (b) of this section. Amounts
representing ordinary income shall be applied to reduce first the sum of
the previously deducted branch ordinary losses to the extent thereof,
and then the sum of the previously deducted branch capital losses to the
extent thereof. Similarly, amounts representing capital gains shall be
applied to reduce first the sum of the previously deducted branch
capital losses and then the sum of the previously deducted branch
ordinary losses.
(2) Taxable income. The previously deducted losses shall be reduced
by any taxable income of the foreign branch recognized through the close
of the taxable year of the transfer, whether before or after any taxable
year in which losses were incurred.
(3) Amounts currently recaptured under section 904(f)(3). The
previously deducted losses shall be reduced by the amount recognized
under section 904(f)(3) on account of the transfer.
(4) [Reserved]
(5) Amounts previously recaptured under section 904(f)(3)--(i) In
general. The previously deducted branch losses shall be reduced by the
portion of any amount recognized under section 904(f)(3) upon a previous
transfer of property that was attributable to the losses of the foreign
branch, provided that the amount did not reduce any gain otherwise
required to be recognized under section 367(a)(3)(C) and this section
(or Revenue Ruling 78-201, 1978-1 C.B. 91).
(ii) Portion attributable to the losses of the foreign branch--(A)
Branch property. The full amount recognized under section 904(f)(3) upon
a previous transfer of property of the branch shall be treated as
attributable to the losses of the foreign branch.
(B) Non-branch property. The portion of the amount previously
recognized under section 904(f)(3) upon a transfer of non-branch
property that was attributable to the losses of the foreign branch shall
be the sum, over the taxable years in which the transferor sustained an
overall foreign loss some portion of which was recaptured on the
disposition, of the recaptured portions of those overall foreign losses
after multiplication by the following fraction:
[GRAPHIC] [TIFF OMITTED] TR25SE06.009
[[Page 404]]
For purposes of this fraction, the term losses of the foreign branch for
the year means the losses of the foreign branch that were taken into
account under section 904(f)(2) in determining the amount of the
transferor's overall foreign loss for the year, and the term all foreign
losses for the year means all of the losses of the transferor that were
taken into account under section 904(f)(2).
(6) Amounts previously recognized under the rules of this section.
The previously deducted losses shall be reduced by the amounts
previously recognized under the rules of this section upon a previous
transfer of assets of the foreign branch.
(f) Example. The rules of paragraphs (b) through (e) of this section
are illustrated by the following example.
Example. (i) Facts. X, a U.S. corporation, is a calendar year
taxpayer. On January 1, 1981, X established a branch in foreign country
A to manufacture and sell X's products in country A. On July 1, 1986, X
organized corporation Y, a country A subsidiary, and transferred to Y
all of the assets of its country A branch, including goodwill and going
concern value. During the period from January 1, 1981, through July 1,
1986, X's country A branch earned income and incurred losses in the
following amounts:
Country A Branch
------------------------------------------------------------------------
Ordinary Capital
Year income gain
(loss) (loss)
------------------------------------------------------------------------
1981................................................ (200) 0
1982................................................ (300) (100)
1983................................................ (400) 0
1984................................................ (200) 0
1985................................................ (100) 0
1986................................................ 50 0
------------------------------------------------------------------------
At the time of the transfer of X's country A branch assets to Y,
those assets had a fair market value of $2,500 and an adjusted basis of
$1,000. For each of the assets, fair market value exceeded adjusted
basis. X had no net capital loss or unused investment credit during any
taxable year relevant to the transfer. In 1984, X incurred a net
operating loss of $400, $200 of which was carried back to prior years.
An additional $50 of the 1984 net operating loss was carried over to
1985. The remaining $150 of the 1984 net operating loss was not used in
any year prior to the transfer. In 1979, X paid creditable foreign taxes
of $330 that could not be claimed as a credit in that year or any
earlier year because of section 904. Of those foreign taxes, $100 were
carried over and claimed as a credit in 1983, but the remaining $230
were not used in any year prior to the transfer. X was not required to
recognize any gain under section 904(f)(3) on account of the 1986
transfer or any prior transfer. X was not required to recognize gain
upon the transfer under section 367(a) (other than by reason of the
provisions of this section).
(ii) Previously deducted losses. The previously deducted losses of
X's country A branch are $575 of ordinary losses and $25 of capital
losses, computed as follows: Initially, the branch has previously
deducted ordinary losses of $1,000 ($200 + $300 + $400 + $100), and
previously deducted capital losses of $100. (See paragraph (d)(1) of
this section.)
(iii) Expired losses and credits. Under the facts of this example,
there are no reductions for expired net ordinary losses or expired net
capital losses under paragraph (d)(2) or (3) of this section. However,
the previously deducted losses are reduced proceeding from the first
branch loss year to the last branch loss year to reflect the expired
foreign tax credit from 1979. The amount of the foreign tax credit loss
equivalent with respect to 1981 is $500 ($230/.46). It reduces the
previously deducted losses for 1981 proportionately. Thus, the
previously deducted ordinary loss for 1981 is reduced from $200 to $0.
(See paragraph (d)(4) of this section.) The amount of the foreign tax
credit loss equivalent with respect to 1982 is $300 ($500-$200, i.e.,
$138/.46). (See paragraph (d)(4)(ii)(C) of this section.) It reduces the
previously deducted losses for 1982 proportionately. Thus, the
previously deducted ordinary loss for 1982 is reduced from $300 to $75,
and the previously deducted capital loss for 1982 is reduced from $100
to $25.
(iv) Further reductions. The previously deducted ordinary losses of
$575 and the previously deducted capital losses of $25 are reduced by
the taxable income earned by the branch prior to the date of the
transfer ($250). (See paragraph (e)(2) of this section.) Since that
income was ordinary income, it is applied first to reduce the previously
deducted ordinary losses of $575 to $325. (See paragraph (e)(1) of this
section.)
(v) Recapture. Since the gain realized by X upon its transfer of the
branch assets to Y exceeds the sum of the previously deducted branch
losses as defined and reduced above $325 + $25), the limitation in
paragraph (c)(2) of this section does not apply. Thus, X is required to
recognize $325 of ordinary income and $25 of long-term capital gain upon
the transfer. (See paragraph (b) and (c)(1) of this section.)
(g) Definition of foreign branch--(1) In general. For purposes of
this section, the term foreign branch means an integral business
operation carried on by a U.S. person outside the United States. Whether
the activities of a U.S. person
[[Page 405]]
outside the United States constitute a foreign branch operation must be
determined under all the facts and circumstances. Evidence of the
existence of a foreign branch includes, but is not limited to, the
existence of a separate set of books and records, and the existence of
an office or other fixed place of business used by employees or officers
of the U.S. person in carrying out business activities outside the
United States. Activities outside the United States shall be deemed to
constitute a foreign branch for purposes of this section if the
activities constitute a permanent establishment under the terms of a
treaty between the United States and the country in which the activities
are carried out. Any U.S. person may be treated as having a foreign
branch for purposes of this section, whether that person is a
corporation, partnership, trust, estate, or individual.
(2) More than one branch. If a U.S. person carries on more than one
branch operation outside the United States, then the rules of this
section must be separately applied with respect to each foreign branch
that is transferred to a foreign corporation. Thus, the previously
deducted losses of one branch may not be offset, for purposes of
determining the gain required to be recognized under the rules of this
section, by the income of another branch that is also transferred to a
foreign corporation. Similarly, the losses of one branch shall not be
recaptured upon a transfer of the assets of a separate branch. Whether
the foreign activities of a U.S. person are carried out through more
than one branch must be determined under all of the facts and
circumstances. In general, a separate branch exists if a particular
group of activities is sufficiently integrated to constitute a single
business that could be operated as an independent enterprise. For
purposes of determining the combination of activities that constitute a
branch operation as defined in this paragraph (g), the nominal
relationship among those activities shall not be controlling. Factors
suggesting that nominally separate business operations constitute a
single foreign branch include a substantial identity of products,
customers, operational facilities, operational processes, accounting and
record-keeping functions, management, employees, distribution channels,
or sales and purchasing forces. For examples of the application of the
principles of this paragraph (g)(2), see Revenue Ruling 81-82, 1981-1
C.B. 127.
(3) Consolidated group. For purposes of this section, the activities
of each of two domestic corporations outside the United States will be
considered to constitute a single foreign branch if--
(i) The two corporations are members of the same consolidated group
of corporations; and
(ii) The activities of the two corporations in the aggregate would
constitute a single foreign branch if conducted by a single corporation.
Notwithstanding the preceding rule of this paragraph (g)(3), gains of a
foreign branch of a domestic corporation arising in a year in which that
corporation did not file a consolidated return with a second domestic
corporation shall not be applied to reduce the previously deducted
losses of a foreign branch of the second corporation (but may be applied
to reduce such losses of the foreign branch of the first corporation)
upon the transfer of the two branches to a foreign corporation, even
though the two domestic corporations file a consolidated return for the
year in which the transfer occurs and the two branches are considered at
that time to constitute a single foreign branch. For an example of the
application of the principles of this paragraph (g)(3), see Revenue
Ruling 81-89, 1981-1 C.B. 129.
(4) Property not transferred. A U.S. transferor's failure to
transfer any property of a foreign branch shall be irrelevant to the
determination of the previously deducted losses of the branch subject to
recapture under the rules of this section. Thus, if the activities with
respect to untransferred property constituted a part of the branch
operation under the rules of this paragraph (g), then the losses
generated by those activities shall be subject to recapture,
notwithstanding the failure to transfer the property. For an example of
the application of the principles of this paragraph (g)(4), see Revenue
Ruling 80-247, 1980-2 C.B. 127, relating to property abandoned by the
U.S. transferor.
(h) Anti-abuse rule. If--
[[Page 406]]
(1) A U.S. person transfers property of a foreign branch to a
domestic corporation for a principal purpose of avoiding the effect of
this section; and
(2) The domestic corporation thereafter transfers the property of
the foreign branch to a foreign corporation,
Then, solely for purposes of this section, that U.S. person shall be
treated as having transferred the property of the branch directly to the
foreign corporation. A U.S. person shall be presumed to have transferred
property of a foreign branch for a principal purpose of avoiding the
effect of this section if the property is transferred to the domestic
corporation less than two years prior to the domestic corporation's
transfer of the property to a foreign corporation. This presumption may
be rebutted by clear evidence that the subsequent transfer of the
property was not contemplated at the time of the initial transfer to the
domestic corporation and that avoidance of the effect of this section
was not a principal purpose for the transaction. A transfer may have
more than one principal purpose.
(i) Basis adjustments. Basis adjustments reflecting gain recognized
pursuant to this section shall be made as described in Sec. 1.367(a)-
1T(b)(4)(ii).
(j) [Reserved]
[T.D. 8087, 51 FR 17950, May 16, 1986, as amended by T.D. 9615, 78 FR
17063, Mar. 19, 2013; T.D. 9760, 81 FR 15169, Mar. 22, 2016; T.D. 9803,
81 FR 91028, Dec. 16, 2016]
Sec. 1.367(a)-7 Outbound transfers of property described in section
361(a) or (b).
(a) Scope and purpose. This section provides rules under section
367(a)(5) that apply to the transfer of certain property (including
stock or securities) by a domestic corporation (U.S. transferor) to a
foreign corporation (foreign acquiring corporation) in a section 361
exchange. This section applies only to the transfer of section 367(a)
property. See section 367(d) for rules applicable to transfers of
section 367(d) property. Paragraph (b) of this section provides the
general rule requiring the recognition of gain on the transfer of
section 367(a) property, while paragraph (c) of this section provides an
elective exception to the general rule that is available if certain
requirements are satisfied. Paragraph (d) of this section provides rules
for applying the elective exception to a section 361 exchange followed
by successive distributions to which section 355 applies. Paragraph (e)
of this section provides rules for recognizing gain on section 367(a)
property, not willful relief provisions, an anti-abuse rule, and special
rules that take into account income inclusions under Sec. 1.367(b)-4
and gain recognition under Sec. 1.367(a)-6. Paragraph (f) of this
section provides definitions, and paragraph (g) of this section provides
examples. Paragraph (h) of this section provides applicable cross-
references, paragraph (i) of this section is reserved, and paragraph (j)
of this section provides effective/applicability dates.
(b) General rule--(1) Nonrecognition exchanges enumerated in section
367(a)(1). Except to the extent provided in paragraphs (b)(2) and (c) of
this section, the exceptions to section 367(a)(1) provided in section
367(a) and the regulations under that section do not apply to a transfer
of section 367(a) property by a U.S. transferor to a foreign acquiring
corporation in a section 361 exchange, and the U.S. transferor shall
recognize any gain (but not loss) realized with respect to the section
367(a) property under section 367(a)(1). Realized gain is recognized
pursuant to the prior sentence notwithstanding the application of any
other nonrecognition provision enumerated in section 367(a)(1) to the
transfer (such as section 351 or 354).
(2) Nonrecognition exchanges not enumerated in section 367(a)(1). To
the extent a transfer of items of property described in paragraph (b)(1)
of this section also qualifies for nonrecognition under a provision that
is not enumerated in section 367(a)(1) (such as section 1036), the U.S.
transferor recognizes gain or loss realized on the transfer of such
items of property, but the amount of loss recognized on the property
shall not exceed the amount of gain recognized on the property. See
section 337(d).
(c) Elective exception. Except to the extent provided in paragraph
(d) of this section, paragraph (b) of this section does not apply to the
transfer of section 367(a) property by a U.S. transferor to a foreign
acquiring corporation
[[Page 407]]
in a section 361 exchange if the conditions of paragraphs (c)(1),
(c)(2), (c)(3), and (c)(4) of this section are satisfied, and an
election to apply the exception provided by this paragraph (c) is made
in the manner provided by paragraph (c)(5) of this section. If this
paragraph (c) applies to the section 361 exchange, see, for example,
Sec. 1.367(a)-2, Sec. 1.367(a)-3, Sec. 1.367(a)-4, or Sec. 1.367(a)-
6, as applicable, for additional requirements that must be satisfied in
order for the U.S. transferor to not recognize gain under section
367(a)(1) on the transfer of section 367(a) property in the section 361
exchange. Nothing in this section provides for the nonrecognition of
gain not otherwise permitted under another provision of the Internal
Revenue Code (Code) or the regulations.
(1) Control. Immediately before the reorganization, the U.S.
transferor is controlled (within the meaning of section 368(c)) by five
or fewer, but at least one, control group members. For illustrations of
this rule, see paragraph (g) of this section, Example 4 and Example 5.
(2) Gain recognition--(i) Non-control group members. The U.S.
transferor recognizes gain equal to the product of the inside gain
multiplied by the aggregate ownership interest percentage of all non-
control group members, reduced (but not below zero) by the sum of the
amounts described in paragraphs (c)(2)(i)(A), (c)(2)(i)(B), and
(c)(2)(i)(C) of this section.
(A) Gain recognized with respect to stock or securities under Sec.
1.367(a)-3(e)(3)(iii)(B) (including any portion treated as a deemed
dividend under section 1248(a));
(B) Gain recognized with respect to stock or securities under Sec.
1.367(a)-6 (including any portion treated as a deemed dividend under
section 1248(a)) attributable to non-control group members (as
determined pursuant to Sec. 1.367(a)-7(e)(5)); and
(C) A deemed dividend included in income under Sec. 1.367(b)-4
attributable to non-control group members (as determined pursuant to
Sec. 1.367(a)-7(e)(4)).
(ii) Control group members. With respect to each control group
member, the U.S. transferor recognizes gain equal to the amount, if any,
by which the amount described in paragraph (c)(2)(ii)(A) of this section
exceeds the amount described in paragraph (c)(2)(ii)(B) of this section.
(A) The product of the inside gain multiplied by such control group
member's ownership interest percentage, reduced (but not below zero) by
the sum of the amounts described in paragraphs (c)(2)(ii)(A)(1),
(c)(2)(ii)(A)(2), and (c)(2)(ii)(A)(3) of this section (attributable
inside gain).
(1) Gain recognized with respect to stock or securities under Sec.
1.367(a)-3(e)(3)(iii)(C) (including any portion treated as a deemed
dividend under section 1248(a)) attributable to the control group
member;
(2) Gain recognized with respect to stock or securities under Sec.
1.367(a)-6 (including any portion treated as a deemed dividend under
section 1248(a)) attributable to the control group member (as determined
pursuant to Sec. 1.367(a)-7(e)(5)); and
(3) A deemed dividend included in income under Sec. 1.367(b)-4
attributable to the control group member (as determined pursuant to
Sec. 1.367(a)-7(e)(4)).
(B) The product of the section 367(a) percentage multiplied by the
fair market value of the stock received by the U.S. transferor in the
section 361 exchange and distributed to the control group member under
section 354, 355, or 356.
(iii) Illustration of rules. For an illustration of gain recognition
under paragraph (c)(2)(i) of this section, see paragraph (g) of this
section, Example 1. For an illustration of gain recognition under
paragraph (c)(2)(ii) of this section, see paragraph (g) of this section,
Example 2.
(3) Basis adjustments required for control group members--(i)
General rule. Except as provided in paragraph (c)(3)(iv) of this
section, if there is any attributable inside gain (determined under
paragraph (c)(2)(ii)(A) of this section) with respect to a control group
member, then such control group member's aggregate basis in the stock
received in exchange for (or with respect to, as applicable) stock or
securities of the U.S. transferor under section 354, 355, or 356, as
determined under section 358 and the regulations under that section
(section 358 basis), is reduced by the amount in paragraph (c)(3)(i)(A),
[[Page 408]]
(c)(3)(i)(B), or (c)(3)(i)(C) of this section, as applicable.
(A) If the control group member has outside gain, the amount, if
any, by which the attributable inside gain, reduced by any gain
recognized by the U.S. transferor with respect to the control group
member under paragraph (c)(2)(ii) of this section, exceeds the control
group member's outside gain.
(B) If the control group member has outside loss, the amount, if
any, by which the attributable inside gain, reduced by any gain
recognized by the U.S. transferor with respect to the control group
member under paragraph (c)(2)(ii) of this section, exceeds the control
group member's outside loss (for this purpose, treating the outside loss
as a negative amount).
(C) If the control group member has no outside gain or outside loss,
the amount of the attributable inside gain, reduced by any gain
recognized by the U.S. transferor with respect to the control group
member under paragraph (c)(2)(ii) of this section.
(ii) Stock received in the section 361 exchange. This paragraph
(c)(3) applies only to stock received by the U.S. transferor in the
section 361 exchange and distributed to the control group member in
exchange for (or with respect to, as applicable) stock or securities of
the U.S. transferor.
(iii) Pro rata adjustments. The section 358 basis of each share of
stock received by the control group member must be reduced pro rata
based on the relative section 358 basis of all shares of stock received
by the control group member.
(iv) Successive distributions to which section 355 applies.
Paragraph (c)(3) of this section does not apply to a control group
member that distributes the stock of a foreign acquiring corporation
received from the U.S. transferor in a distribution satisfying the
requirements of section 355 (section 355 distribution) that is in
connection with a transaction described in paragraph (d) of this section
(relating to successive section 355 distributions). If paragraph (c)(3)
of this section does not apply to a control group member pursuant to
this paragraph (c)(3)(iv), then paragraph (c)(3) of this section shall
apply to the final distributee (as defined in paragraph (d) of this
section) that receives the stock of the foreign acquiring corporation in
the final section 355 distribution described in paragraph (d) of this
section.
(v) Illustration of rules. For illustrations of the adjustment to
stock basis under paragraph (c)(3)(i) of this section, see paragraph (g)
of this section, Example 1 and Example 2, Sec. 1.367(a)-3(e)(8),
Example 3, and Sec. 1.1248(f)-2(e), Example 3. For an illustration of
the adjustment to stock basis under paragraph (c)(3)(iii) of this
section, see paragraph (g) of this section, Example 3.
(4) Agreement to amend or file a U.S. income tax return--(i) General
rule. Except as provided in paragraph (c)(4)(ii) of this section, the
U.S. transferor complies with the requirements of Sec. 1.6038B-
1(c)(6)(iii), relating to the requirement to report gain that was not
recognized by the U.S. transferor upon certain subsequent dispositions
by the foreign acquiring corporation of section 367(a) property received
from the U.S. transferor in the section 361 exchange.
(ii) Exception. To the extent section 367(a) property transferred in
the section 361 exchange is subject to Sec. 1.367(a)-3(e) (relating to
transfers of stock or securities by a domestic corporation to a foreign
corporation in a section 361 exchange), Sec. 1.6038B-1(c)(6)(iii) does
not apply with respect to the transfer of that property.
(5) Election and reporting requirements--(i) General rule. The U.S.
transferor and each control group member elect to apply the provisions
of paragraph (c) of this section in the manner provided under paragraph
(c)(5)(ii) or (c)(5)(iii) of this section, as applicable, and by
entering into a written agreement described in paragraph (c)(5)(iv) of
this section. If a control group member distributes the stock of the
foreign acquiring corporation received from the U.S. transferor in a
section 355 distribution that is in connection with a transaction
described in paragraph (d) of this section, the final distributee that
receives that stock in the final section 355 distribution elects to
apply the provisions of this paragraph (c) and enters into the written
agreement instead of the control group member. For this purpose, the
term control group
[[Page 409]]
member will be replaced by the term final distributee, as appropriate.
(ii) Control group member--(A) Time and manner of making election.
Each control group member elects to apply the provisions of paragraph
(c) of this section by including a statement (in the form and with the
content specified in paragraph (c)(5)(ii)(B) of this section) on or with
a timely filed return for the taxable year in which the reorganization
occurs. If the control group member is a member of a consolidated group
but is not the common parent of the consolidated group, the common
parent makes the election on behalf of the control group member.
(B) Form and content of election statement. The statement must be
entitled, ``ELECTION TO APPLY EXCEPTION UNDER Sec. 1.367(a)-7(c),'' and
set forth:
(1) The name and taxpayer identification number (if any) of the
control group member, the U.S. transferor, the foreign acquiring
corporation and, in the case of a triangular reorganization (within the
meaning of Sec. 1.358-6(b)(2)), the corporation that controls the
foreign acquiring corporation; the control group member's ownership
interest percentage in the U.S. transferor; and the percentage of voting
stock and non-voting stock of the U.S. transferor owned by the control
group member for purposes of satisfying the control requirement of
paragraph (c)(1) of this section;
(2) If the control group member is a member of a consolidated group
but is not the common parent, the name and taxpayer identification
number of the common parent;
(3) The amount of the adjustment (if any) to stock basis required
under paragraph (c)(3) of this section, the resulting adjusted basis in
the stock, and the fair market value of the stock, or if no stock was
received, indicate no stock was received; and
(4) The date on which the written agreement described in paragraph
(c)(5)(iv) of this section was entered into.
(iii) Statement by U.S. transferor. The U.S. transferor elects to
apply the provisions of paragraph (c) of this section in the form and
manner set forth in Sec. 1.6038B-1(c)(6)(ii).
(iv) Written agreement. The U.S. transferor and each control group
member must enter into a written agreement satisfying the conditions of
this paragraph on or before the due date (including extensions) for the
U.S. transferor's tax return for the taxable year in which the
reorganization occurs. Each party to the agreement must retain the
original or a copy of the agreement in the manner specified by Sec.
1.6001-1(e). Each party to the agreement must provide a copy of the
agreement to the Internal Revenue Service within 30 days of the receipt
of a request for the copy of the agreement. The written agreement must--
(A) State the document constitutes an agreement entered into
pursuant to paragraph (c)(5) of this section;
(B) Identify the U.S. transferor, the foreign acquiring corporation,
the corporation that controls the foreign acquiring corporation (in the
case of a triangular reorganization within the meaning of Sec. 1.358-
6(b)(2)), and each control group member, and provide the taxpayer
identification number (if any) for each corporation;
(C) State the amount of gain (if any) recognized by the U.S.
transferor under paragraph (c)(2) of this section; and
(D) With respect to each control group member, state the amount of
the adjustment (if any) to stock basis required under paragraph (c)(3)
of this section, the resulting adjusted basis in the stock, and the fair
market value of the stock. Alternatively, if a control group member did
not receive any stock, indicate that no stock was received.
(d) Section 361 exchange followed by successive distributions to
which section 355 applies. If the U.S. transferor distributes stock of
the foreign acquiring corporation received in the section 361 exchange
to a control group member in a section 355 distribution and, as part of
a plan or series of related transactions, that stock is further
distributed in one or more successive section 355 distributions,
paragraph (c) of this section can apply to the section 361 exchange only
to the extent each subsequent section 355 distribution is to a member of
the affiliated group (within the meaning of section 1504) that includes
the U.S. transferor immediately
[[Page 410]]
before the reorganization. In that case, each affiliated group member
that receives stock of the foreign acquiring corporation in the final
section 355 distribution (final distributee) is subject to the
requirements of paragraphs (c)(3) and (c)(5) of this section. If this
paragraph (d) applies, then for purposes of applying paragraphs (c)(3),
(c)(5) or (e)(2) of this section the term control group member is
replaced by the term final distributee, as appropriate.
(e) Other rules--(1) Section 367(a) property with respect to which
gain is recognized. Except as otherwise provided in this paragraph
(e)(1), gain recognized by the U.S. transferor pursuant to paragraph
(c)(2) of this section will be treated as recognized with respect to the
section 367(a) property transferred in the section 361 exchange in
proportion to the amount of gain realized by the U.S. transferor on the
transfer of each item of section 367(a) property. This paragraph (e)(1)
will be applied after taking into account any gain or deemed dividends
(including any deemed dividends under section 1248(a)) recognized by the
U.S. transferor on the transfer of the section 367(a) property in the
section 361 exchange pursuant to all other provisions of sections 367(a)
and (b) and the regulations under that section. See, for example,
Sec. Sec. 1.367(a)-2, 1.367(a)-3(e), 1.367(a)-4, 1.367(a)-6, and
1.367(b)-4. If the U.S. transferor recognizes gain (including gain
treated as a deemed dividend under section 1248(a)) pursuant to Sec.
1.367(a)-3(e)(3)(iii)(B) or (e)(3)(iii)(C) with respect to stock or
securities transferred in the section 361 exchange, the realized gain in
such stock or securities shall not be taken into account for purposes of
applying this paragraph (e)(1) to gain recognized under paragraph (c)(2)
of this section attributable to U.S. transferor shareholders described
in Sec. 1.367(a)-3(e)(3)(iii)(B) or (e)(3)(iii)(C). Accordingly, gain
recognized under paragraph (c)(2) attributable to such U.S. transferor
shareholders shall not be treated as recognized with respect to such
stock or securities under this paragraph. Furthermore, to the extent
gain recognized by the U.S. transferor under paragraph (c)(2) is treated
as recognized with respect to stock in a foreign corporation transferred
in the section 361 exchange to which section 1248(a) applies, the
portion of such gain treated as a deemed dividend under section 1248(a)
is the product of the amount of the gain multiplied by the ratio of the
amount that would be treated as a deemed dividend under section 1248(a)
if all gain in the transferred stock were recognized under Sec.
1.367(a)-7(b) and the amount of gain realized in the transferred stock.
See Sec. 1.367(a)-1(b)(4) for additional rules on the character,
source, and adjustments relating to gain recognized under section
367(a)(1), and Sec. 1.367(b)-2(e) for rules on the timing, treatment,
and effect of amounts included in income as deemed dividends pursuant to
regulations under section 367(b).
(2) Relief for certain failures to comply that are not willful--(i)
In general. A control group member or U.S. transferor's failure to
comply with any requirement of this section will be deemed not to have
occurred for purposes of satisfying the requirements of this section if
the control group member or U.S. transferor (or the foreign acquiring
corporation on behalf of the U.S. transferor), as applicable,
demonstrates that the failure was not willful using the procedure set
forth in paragraph (e)(2)(ii) of this section. For this purpose, willful
is to be interpreted consistent with the meaning of that term in the
context of other civil penalties, which would include a failure due to
gross negligence, reckless disregard, or willful neglect. Whether the
failure to comply was a willful failure will be determined by the
Director of Field Operations, Cross Border Activities Practice Area of
Large Business & International (or any successor to the roles and
responsibilities of such person) (Director) based on all the facts and
circumstances. The control group member or U.S. transferor (or the
foreign acquiring corporation on behalf of the U.S. transferor), as
applicable, must submit a request for relief and an explanation as
provided in paragraph (e)(2)(ii) of this section. Although a U.S
transferor whose failure to comply is determined not to be willful will
not be subject to gain recognition under this section, the U.S.
transferor will be subject to a penalty under section 6038B if
[[Page 411]]
the U.S. transferor fails to demonstrate that the failure was due to
reasonable cause and not willful neglect. See Sec. 1.6038B-1(b) and
(f). The determination of whether the failure to comply was willful
under this section has no effect on any request for relief made under
Sec. 1.6038B-1(f).
(ii) Procedures for establishing that a failure to comply was not
willful--(A) Time and manner of submission. A control group member or
U.S. transferor's statement that the failure to comply was not willful
will be considered only if, promptly after the control group member or
U.S. transferor, as applicable, becomes aware of the failure, an amended
return is filed for the taxable year to which the failure relates that
includes the information that should have been included with the
original return for such taxable year or that otherwise complies with
the rules of this section, and that includes a written statement
explaining the reasons for the failure to comply. The amended return
must be filed with the Internal Revenue Service at the location where
the taxpayer filed its original return. The U.S. transferor may submit a
request for relief from the penalty under section 6038B as part of the
same submission. See Sec. 1.6038B-1(f).
(B) Notice requirement. In addition to the requirements of paragraph
(e)(2)(ii)(A) of this section, a control group member or U.S.
transferor, as applicable, must comply with the notice requirements of
this paragraph (e)(2)(ii)(B). If any taxable year of the control group
member or U.S. transferor, as applicable, is under examination when the
amended return is filed, a copy of the amended return and any
information required to be included with such return must be delivered
to the Internal Revenue Service personnel conducting the examination. If
no taxable year of the control group member or U.S transferor, as
applicable, is under examination when the amended return is filed, a
copy of the amended return and any information required to be included
with such return must be delivered to the Director.
(iii) For illustrations of the application of the willfulness
standard of this paragraph (e)(2), see the examples in Sec. 1.367(a)-
8(p)(3).
(3) Anti-abuse rule. Any property of the U.S. transferor acquired
with a principal purpose of affecting any determination under this
section (including, for example, the section 367(a) percentage, inside
gain, or inside basis) shall not be taken in account for purposes of any
determination under this section. Nothing in this paragraph (e)(3)
constitutes a limitation on or modification to judicial doctrines,
including step-transaction or substance-over-form.
(4) Certain income inclusions under Sec. 1.367(b)-4--(i) Income
inclusion attributable to U.S. transferor shareholder described in Sec.
1.367(a)-3(e)(3)(iii)(A). If pursuant to Sec. 1.367(a)-3(e)(3)(iii)(B)
or (e)(3)(iii)(C) the U.S. transferor is required to recognize gain on
the transfer of foreign stock (all or a portion of which is treated as a
deemed dividend under section 1248(a)), and if pursuant to Sec.
1.367(b)-4(b)(1)(i) the U.S. transferor is also required to include in
income as a deemed dividend the section 1248 amount (within the meaning
of Sec. 1.367(b)-2(c)) in the foreign stock, then the section 1248
amount included in income under Sec. 1.367(b)-4(b)(1)(i) is
attributable to each U.S. transferor shareholder described in Sec.
1.367(a)-3(e)(3)(iii)(A) pursuant to this paragraph (e)(4)(i). The
portion of the section 1248 amount attributable to each U.S. transferor
shareholder described in Sec. 1.367(a)-3(e)(3)(iii)(A) is the portion
of the section 1248 amount that bears the same ratio as such U.S.
transferor shareholder's ownership interest percentage bears to the
aggregate ownership interest percentage of all U.S. transferor
shareholders described in Sec. 1.367(a)-3(e)(3)(iii)(A).
(ii) Ordering rules for determining section 1248 amount. The section
1248 amount (within the meaning of Sec. 1.367(b)-2(c)) included in
income as a deemed dividend under Sec. 1.367(b)-4(b)(1)(i) is
determined after taking into account any gain recognized under
Sec. Sec. 1.367(a)-3(e)(3)(iii)(B) or (e)(3)(iii)(C) or 1.367(a)-6 that
is treated as a deemed dividend under section 1248(a). See Sec.
1.367(a)-3(e)(7) and paragraph (e)(5)(ii) of this section for rules to
determine the amount of gain recognized under Sec. Sec. 1.367(a)-
3(e)(3)(iii)(B) or (e)(3)(iii)(C)
[[Page 412]]
or 1.367(a)-6, respectively, that is treated as a deemed dividend under
section 1248(a).
(5) Certain gain under Sec. 1.367(a)-6--(i) Gain attributable to
U.S. transferor shareholder described in Sec. 1.367(a)-3(e)(3)(iii)(A).
If pursuant to Sec. 1.367(a)-3(e)(3)(iii)(B) or (e)(3)(iii)(C), the
U.S. transferor is required to recognize gain on the transfer of stock
or securities, and if pursuant to Sec. 1.367(a)-6 the U.S. transferor
is also required to recognize gain, then gain recognized under Sec.
1.367(a)-6 (including any portion treated as a deemed dividend under
section 1248(a)) to the extent treated as recognized with respect to the
stock or securities, is attributable to each U.S. transferor shareholder
described in Sec. 1.367(a)-3(e)(3)(iii)(A) pursuant to this paragraph
(e)(5)(i). The portion of the gain (including any portion treated as a
deemed dividend under section 1248(a)) that is attributable to each U.S.
transferor shareholder described in Sec. 1.367(a)-3(e)(3)(iii)(A) is
the portion of the gain that bears the same ratio as such U.S.
transferor shareholder's ownership interest percentage bears to the
aggregate ownership interest percentage of all U.S. transferor
shareholders described in Sec. 1.367(a)-3(e)(3)(iii)(A).
(ii) Gain subject to section 1248(a). If the U.S. transferor
recognizes gain under Sec. 1.367(a)-6 with respect to transferred stock
that is stock in a foreign corporation to which section 1248(a) applies,
the portion of such gain treated as a deemed dividend under section
1248(a) is determined after taking into account any gain recognized
under Sec. 1.367(a)-3(e)(3)(iii)(B) or (e)(3)(iii)(C) and the amount of
such gain treated as a deemed dividend under section 1248(a) pursuant to
Sec. 1.367(a)-3(e)(7).
(f) Definitions. The following definitions apply for purposes of
this section:
(1) Control group, control group member, and non-control group
member--(i) General rule. Except as provided in paragraph (f)(1)(ii) of
this section, the control group is the group of five or fewer, but at
least one, domestic corporations that controls (within the meaning of
section 368(c)) the U.S. transferor immediately before the
reorganization. If the U.S. transferor is owned directly by more than
five domestic corporations immediately before the reorganization, but
some combination of five or fewer domestic corporations controls the
U.S. transferor, the U.S. transferor must designate the five or fewer
domestic corporations that comprise the control group on Form 926,
``Return by a U.S. Transferor of Property to a Foreign Corporation.''
For purposes of identifying the control group, members of an affiliated
group (within the meaning of section 1504) are treated as a single
corporation. Except as provided in paragraph (f)(1)(ii) of this section,
a control group member is a domestic corporation that is part of the
control group. A non-control group member is a shareholder of the U.S.
transferor immediately before the reorganization that is not a control
group member.
(ii) Exception for certain entities. Regulated investment companies
(as defined in section 851(a)), real estate investment trusts (as
defined in section 856(a)), and S corporations (as defined in section
1361(a)) cannot be control group members.
(2) Deductible liability is any liability of the U.S. transferor
that is assumed in the section 361 exchange if payment of the liability
would give rise to a deduction.
(3) Fair market value is the fair market value determined without
regard to mortgages, liens, pledges, or other liabilities. For this
purpose, the fair market value of any property subject to a nonrecourse
indebtedness shall be treated as being not less than the amount of any
nonrecourse indebtedness to which such property is subject.
(4) Inside basis is the aggregate basis of the section 367(a)
property transferred by the U.S. transferor in the section 361 exchange
and, except as otherwise provided in this paragraph (f)(4), increased by
any gain recognized or any deemed dividend included in income by the
U.S. transferor under section 367 on the transfer of the section 367(a)
property in the section 361 exchange, but not including any gain
recognized under paragraph (c)(2) of this section. If the U.S.
transferor transfers stock or securities and recognizes gain under Sec.
1.367(a)-3(e)(3)(iii)(B) or (e)(3)(iii)(C) with respect to such stock or
securities, then inside basis is not increased for gain recognized or
[[Page 413]]
deemed dividends included in income that are described in paragraph
(f)(4)(i), (f)(4)(ii), or (f)(4)(iii) of this section.
(i) Gain recognized under Sec. 1.367(a)-3(e)(3)(iii)(B) or
(e)(3)(iii)(C) (including any portion treated as a deemed dividend under
section 1248(a));
(ii) Gain recognized under Sec. 1.367(a)-6 (including any portion
treated as a deemed dividend under section 1248(a)) attributable to U.S.
transferor shareholders described in Sec. 1.367(a)-3(e)(3)(iii)(A) (as
determined pursuant to Sec. 1.367(a)-7(e)(5));
(iii) A deemed dividend included in income under Sec. 1.367(b)-4(b)
attributable to U.S. transferor shareholders described in Sec.
1.367(a)-3(e)(3)(iii)(A) (as determined pursuant to Sec. 1.367(a)-
7(e)(4)).
(5) Inside gain is the amount (but not below zero) by which the
aggregate fair market value of the section 367(a) property transferred
in the section 361 exchange exceeds the sum of:
(i) The inside basis; and
(ii) The product of the section 367(a) percentage multiplied by the
aggregate deductible liabilities of the U.S. transferor.
(6) Outside gain or loss is the product of the section 367(a)
percentage multiplied by the difference between--
(i) The aggregate fair market value of the stock received by a
control group member in exchange for (or with respect to, as applicable)
stock or securities of the U.S. transferor under section 354, 355, or
356, and
(ii) The control group member's aggregate section 358 basis (as
defined in paragraph (c)(3) of this section) in such stock received,
determined without regard to any adjustment to that basis under
paragraph (c)(3) of this section.
(7) Ownership interest percentage is the ratio of the fair market
value of the stock in the U.S. transferor owned by a shareholder to the
fair market value of all of the outstanding stock of the U.S.
transferor. Except as provided in this paragraph (f)(7), the ownership
interest percentage of a shareholder is determined immediately before
the reorganization. For purposes of determining the ownership interest
percentage with respect to each shareholder, however, the numerator and
denominator of the fraction are first reduced as described in this
paragraph (f)(7). The numerator is reduced (but not below zero) by any
distributions by the U.S. transferor of money or other property (within
the meaning of section 356) to such shareholder pursuant to the plan of
reorganization, but only to the extent such money or other property is
not provided by the foreign acquiring corporation in exchange for
property of the U.S. transferor acquired in the section 361 exchange.
Furthermore, the denominator of the fraction is reduced (but not below
zero) by all such distributions by the U.S. transferor to all
shareholders. For illustrations of this definition, see paragraph (g) of
this section, Example 4 and Example 5.
(8) Section 361 exchange is an exchange described in section 361(a)
or (b).
(9) Section 367(a) percentage is the ratio of the aggregate fair
market value of the section 367(a) property transferred by the U.S.
transferor in the section 361 exchange to the aggregate fair market
value of all property transferred by the U.S. transferor in the section
361 exchange.
(10) Section 367(a) property. Except as provided in paragraph (e)(3)
of this section, section 367(a) property is any property, as defined in
Sec. 1.367(a)-1T(d)(4), other than section 367(d) property.
(11) Section 367(d) property is intangible property as defined in
Sec. 1.367(a)-1(d)(5).
(12) Timely filed return is a U.S. income tax return filed on or
before the due date set forth in section 6072(b), including any
extensions of time to file the return granted under section 6081.
(13) U.S. transferor shareholder is a person that is either a
control group member or a non-control group member.
(g) Examples. The rules of this section are illustrated by the
examples set forth in this paragraph (g). See also Sec. 1.367(a)-
3(e)(8), Example 2 and Example 3. The analysis of the following examples
is limited to a discussion of issues under this section. Unless
otherwise indicated, for purposes of the following examples: DP1, DP2,
and DC are domestic corporations that do not join in the filing of a
consolidated return and none of which is a regulated investment company,
a real estate investment trust, or an S corporation; FP and FA
[[Page 414]]
are foreign corporations created or organized under the laws of Country
B and are unrelated to DP1, DP2, and DC; each corporation has a single
class of stock outstanding; each share of stock of DC owned by a
shareholder of DC has an identical stock basis; Business A consists
solely of section 367(a) property whose fair market value exceeds its
basis and that, but for the application of this section, would qualify
for the active foreign trade or business exception under Sec. 1.367(a)-
2; the fair market value of any FA stock received in a reorganization is
equal to the fair market value of property exchanged therefor; FA is not
a surrogate foreign corporation for purposes of section 7874 because one
or more of the conditions of section 7874(a)(2)(B) is not satisfied; DC
has no liabilities; DP1 and DP2 satisfy the requirements of paragraph
(c)(5) of this section, and DC satisfies the requirements of Sec.
1.6038B-1(c)(6)(ii).
Example 1. Tainted assets and non-control group ownership. (i)
Facts. DP1, DP2, and FP own 50%, 30%, and 20%, respectively, of the
outstanding stock of DC. DP1 and DP2 are members of the same affiliated
group within the meaning of section 1504. DP1's DC stock has a $120x
basis and $100x fair market value. DP2's DC stock has a $50x basis and
$60x fair market value. DC owns inventory with a $40x basis and a $100x
fair market value. DC also owns Business A (excluding the inventory)
with a $10x basis and $100x fair market value. In a reorganization
described in section 368(a)(1)(F), DC transfers the inventory and
Business A to FA, a newly formed corporation, in exchange for all of the
outstanding stock of FA. DC's transfer of the inventory and Business A
to FA qualifies as a section 361 exchange. DP1, DP2, and FP exchange the
DC stock for a proportionate amount of FA stock pursuant to section 354.
(ii) Result. (A) Under section 367(a)(3)(B)(i), DC must recognize
$60x gain ($100x fair market value less $40x basis) on the transfer of
the inventory to FA. The basis of the inventory in the hands of FA is
increased by the gain recognized of $60x (that is, increased from $40x
to $100x). See Sec. 1.367(a)-1(b)(4)(i)(B). Under section 367(a)(5) and
paragraph (b) of this section, DC's transfer of Business A to FA is
subject to the general rule of section 367(a)(1). As a result, DC must
also generally recognize $90x gain ($100x fair market value less $10x
basis) on the transfer of Business A to FA notwithstanding the
application of section 361 (or any other nonrecognition provision
enumerated in section 367(a)(1)). However, if the conditions and
requirements of paragraph (c) of this section are met, DC's transfer of
Business A to FA would qualify for the active foreign trade or business
exception provided by section 367(a)(3) and Sec. 1.367(a)-2.
(B) The requirement of paragraph (c)(1) of this section is satisfied
because DC is controlled (within the meaning of section 368(c)) by five
or fewer domestic corporations immediately before the reorganization (in
this case, by a single domestic corporation because DP1 and DP2 together
own 80% of the stock of DC). DP1 and DP2 are treated as a single
domestic corporation for this purpose under paragraph (f)(1)(i) of this
section because DP1 and DP2 are members of the same affiliated group.
(C) Paragraph (c)(2)(i) of this section would be satisfied only if
DC recognizes $18x gain on the transfer of Business A, which is the
amount of inside gain attributable to FP, a non-control group member.
The $18x gain equals the product of the inside gain ($90x) multiplied by
FP's ownership interest percentage (20%) in DC, reduced by $0x (the sum
of the amounts described in paragraphs (c)(2)(i)(A) through (c)(2)(i)(C)
of this section). Under paragraph (f)(5) of this section, the $90x
inside gain is the amount by which the aggregate fair market value
($200x) of the section 367(a) property (inventory and Business A)
exceeds $110x, the sum of the inside basis of $110x and the product of
the section 367(a) percentage (100%) multiplied by the deductible
liabilities of DC ($0x). Under paragraph (f)(4) of this section, the
inside basis equals the $50x aggregate basis of the section 367(a)
property transferred in the section 361 exchange, increased by the $60x
gain recognized by DC on the transfer of the inventory to FA, but not by
the $18x gain recognized by DC under paragraph (c)(2)(i) of this section
attributable to FP. The section 367(a) percentage is 100% because the
only assets transferred are the inventory and Business A, which are
section 367(a) property. Under paragraph (e)(1) of this section, the
$18x gain recognized under paragraph (c)(2)(i) of this section is
treated as recognized with respect to Business A. FA's basis in Business
A as determined under section 362 is increased for the $18x gain
recognized. See Sec. 1.367(a)-1(b)(4)(i)(B).
(D) Paragraph (c)(2)(ii) of this section is not applicable with
respect to either DP1 or DP2 because the attributable inside gain with
respect to each such shareholder can be preserved in the FA stock
received. As stated in paragraph (ii)(C) of this Example 1, the amount
of the inside gain is $90x. The attributable inside gain with respect to
DP1 of $45x (equal to the product of $90x inside gain multiplied by
DP1's 50% ownership interest percentage, reduced by $0x (the sum of the
amounts described in paragraphs (c)(2)(ii)(A)(1) through
(c)(2)(ii)(A)(3) of this section)) does not exceed $100x (equal to the
product of the section 367(a) percentage of
[[Page 415]]
100% multiplied by $100x fair market value of FA stock received by DP1).
Similarly, the attributable inside gain with respect to DP2 of $27x
(equal to the product of $90x inside gain multiplied by DP2's 30%
ownership interest percentage, reduced by $0x (the sum of the amounts
described in paragraphs (c)(2)(ii)(A)(1) through (c)(2)(ii)(A)(3) of
this section)) does not exceed $60x (equal to the product of the section
367(a) percentage of 100% multiplied by $60x fair market value of FA
stock received by DP2).
(E) Each control group member (DP1 and DP2) separately computes any
required adjustment to stock basis under paragraph (c)(3) of this
section. DP1's section 358 basis in the FA stock received of $120x (the
amount of DP1's basis in the DC stock exchanged) is reduced to preserve
the attributable inside gain with respect to DP1, less any gain
recognized with respect to DP1 under paragraph (c)(2)(ii) of this
section. Because DC does not recognize gain on the section 361 exchange
with respect to DP1 under paragraph (c)(2)(ii) of this section (as
determined in paragraph (ii)(D) of this Example 1), the attributable
inside gain of $45x with respect to DP1 is not reduced under paragraph
(c)(3)(i)(B) of this section. DP1's outside loss in the FA stock is
$20x, the product of the section 367(a) percentage of 100% multiplied by
$20x loss (equal to the difference between $100x fair market value and
$120x section 358 basis in FA stock). Thus, DP1's $120x section 358
basis in the FA stock must be reduced by $65x (excess of $45x, reduced
by $0x, over $20x outside loss) to $55x.
(F) DP2's aggregate section 358 basis in the FA stock received of
$50x (the amount of DP2's basis in the DC stock exchanged) is reduced to
preserve the attributable inside gain with respect to DP2, less any gain
recognized with respect to DP2 under paragraph (c)(2)(ii) of this
section. Because DC does not recognize gain on the section 361 exchange
with respect to DP2 (as determined in paragraph (ii)(D) of this Example
1), the attributable inside gain of $27x with respect to DP2 is not
reduced under paragraph (c)(3)(i)(A) of this section. DP2's outside gain
in the FA stock is $10x, the product of the section 367(a) percentage of
100% multiplied by $10x gain (equal to the difference between $60x fair
market value and $50x section 358 basis in FA stock). Thus, DP2's $50x
section 358 basis in the FA stock must be reduced by $17x (excess of
$27x, reduced by $0x, over the $10x outside gain) to $33x.
(G) Paragraph (c)(4) of this section would be satisfied only if DC
complies with the requirements of Sec. 1.6038B-1(c)(6)(iii), including
filing with its timely filed return for the year of the reorganization a
statement agreeing to file an amended return reporting the gain realized
but not recognized on the section 361 exchange in certain cases if a
significant amount of the section 367(a) property received in the
section 361 exchange is disposed of, directly or indirectly, in one or
more related transactions within the prescribed 60-month period.
Example 2. Triangular reorganization involving an exchange of
section 367(a) property for foreign stock and cash. (i) Facts. (A) DP1
wholly owns DC. DP1 and DC file a consolidated return. DP1's DC stock
has a $170x basis and $200x fair market value. DC owns Business A, which
has a $10x basis and $200x fair market value. FP wholly owns FA.
(B) In a triangular reorganization described in section 368(a)(1)(A)
by reason of section 368(a)(2)(D), DC transfers Business A to FA in
exchange for $180x of FP stock and $20x cash. DC's transfer of Business
A to FA qualifies as a section 361 exchange. DP1 exchanges its DC stock
for $180x of FP stock and $20x cash pursuant to section 356. The
triangular reorganization constitutes an indirect stock transfer under
Sec. 1.367(a)-3(d)(1)(i), and DP1 properly files a gain recognition
agreement under Sec. 1.367(a)-8 with respect to the transfer. See also
Sec. 1.367(a)-3(d)(2)(vii).
(ii) Result. (A) Under section 367(a)(5) and paragraph (b) of this
section, DC's transfer of Business A to FA is subject to the general
rule of section 367(a)(1). As a result, DC must generally recognize
$190x gain ($200x fair market value less $10x basis) on the transfer of
Business A to FA notwithstanding the application of section 361 (or any
other nonrecognition exchange enumerated in section 367(a)(1)). However,
if the requirements of paragraph (c) of this section are satisfied, DC's
transfer of Business A to FA would qualify for the active foreign trade
or business exception provided in section 367(a)(3) and Sec. 1.367(a)-
2.
(B) The requirement of paragraph (c)(1) of this section is satisfied
because DC is controlled (within the meaning of section 368(c)) by five
or fewer domestic corporations immediately before the reorganization (in
this case, by a single domestic corporation, DP1).
(C) DC is not required to recognize gain under paragraph (c)(2)(i)
of this section because, immediately before the reorganization, DC is
wholly owned by DP1, a control group member. In addition, DP1's
ownership interest percentage is 100%. Paragraph (c)(2)(ii) of this
section would be satisfied only if DC recognizes $10x gain, computed as
the amount by which the attributable inside gain with respect to DP1 of
$190x (the product of $190x inside gain multiplied by DP1's ownership
interest percentage of 100%, reduced by $0x (the sum of the amounts in
paragraphs (c)(2)(ii)(A)(1) through (c)(2)(ii)(A)(3) of this section))
exceeds $180x (the product of the section 367(a) percentage of 100%
multiplied by $180x fair market value of FP stock received by DP1).
Under paragraph (f)(5) of this section, the $190x inside
[[Page 416]]
gain is the amount by which the $200x aggregate fair market value of
Business A exceeds $10x (the sum of the inside basis of $10x and the
product of the section 367(a) percentage (100%) multiplied by the
deductible liabilities of DC ($0x)). Under paragraph (f)(4) of this
section, the inside basis equals the $10x aggregate basis of the section
367(a) property transferred in the section 361 exchange (not increased
by the $10x gain recognized by DC under paragraph (c)(2)(ii) of this
section). The section 367(a) percentage is 100% because the only asset
transferred is Business A, which is section 367(a) property. Under Sec.
1.1502-32(b)(2), DP1 increases the basis of its DC stock by the $10x
gain recognized, that is, from $170x to $180x. Under paragraph (e)(1) of
this section, the $10x gain recognized under paragraph (c)(2)(ii) of
this section is treated as recognized with respect to Business A. FA's
basis in Business A as determined under section 362 is increased for the
$10x gain recognized. See Sec. 1.367(a)-1(b)(4)(i)(B).
(D) Paragraph (c)(3) of this section would be satisfied only if
DP1's section 358 basis in the FP stock is reduced by the amount by
which the attributable inside gain with respect to DP1, reduced by any
gain recognized by DC with respect to DP1 under paragraph (c)(2)(ii) of
this section, exceeds DP1's outside gain in the FP stock. DP1's section
358 basis in the FP stock is $180x, computed as $180x basis in DC stock,
as determined in paragraph (ii)(C) of this Example 2, decreased by $20x
cash received and increased by $20x gain recognized under section 356
(such amount equal to the lesser of the $20x cash received and the $20x
gain in the DC stock, computed as $200x fair market value less $180x
basis). Because DC recognizes $10x gain on the section 361 exchange with
respect to DP1 under paragraph (c)(2)(ii) of this section as determined
in paragraph (ii)(C) of this Example 2, the $190x attributable inside
gain with respect to DP1 is reduced by $10x to $180x under paragraph
(c)(3)(i)(C) of this section. DP1's outside gain in the FP stock is $0x,
the product of the section 367(a) percentage of 100% multiplied by $0x
gain (the difference between $180x fair market value and $180x section
358 basis in FP stock). Thus, DP1's section 358 basis in the FP stock
($180x) must be reduced by $180x ($190x attributable inside gain reduced
by $10x) to $0x.
(E) Paragraph (c)(4)(i) of this section would be satisfied only if
DC complies with the requirements of Sec. 1.6038B-1(c)(6)(iii),
including filing with its tax return for the year of the reorganization
a statement agreeing to file an amended return reporting the gain on the
section 361 exchange in certain cases if a significant amount of the
section 367(a) property received in the section 361 exchange is disposed
of, directly or indirectly, in one or more related transactions within
the prescribed 60-month period.
Example 3. Adjustment to basis of multiple blocks of stock; transfer
of section 367(d) property. (i) Facts. (A) DP1 wholly owns DC. One half
of DP1's shares of stock in DC, each with an identical basis, has an
aggregate basis of $60x and fair market value of $100x (Block 1). The
other one half of DP's shares of stock in DC, each with an identical
basis, has an aggregate basis of $120x and fair market value of $100x
(Block 2). DC owns Business A ($15x basis and $150x fair market value)
(excluding the patent) and a patent ($0x basis and $50x fair market
value). The patent is section 367(d) property.
(B) In a reorganization described in section 368(a)(1)(F), DC
transfers Business A and the patent to FA, a newly formed corporation,
in exchange for 2 shares of FA stock. DC's transfer of Business A and
the patent to FA qualifies as a section 361 exchange. DP1 exchanges
Block 1 and Block 2 for the two shares of FA stock pursuant to section
354. Pursuant to Sec. 1.358-2(a)(2)(i), one share of the FA stock
corresponds to Block 1 (Share 1) and the other share of FA stock
corresponds to Block 2 (Share 2). The basis of Share 1 and Share 2
correspond to the basis of Block 1 and Block 2, respectively.
(ii) Result. (A) Under section 367(a)(5) and paragraph (b) of this
section, DC's transfer of Business A to FA is subject to the general
rule of section 367(a)(1). As a result, DC must generally recognize
$135x of gain on the transfer of Business A to FA notwithstanding the
application of section 361 (or any other nonrecognition exchange
described in section 367(a)(1)). However, if the requirements of
paragraph (c) of this section are met, DC's transfer of Business A to FA
would qualify for the active foreign trade or business exception
provided in section 367(a)(3). For rules applicable to DC's transfer of
the patent to FA, see section 367(d).
(B) The requirement of paragraph (c)(1) of this section is satisfied
because DC is controlled (within the meaning of section 368(c)) by five
or fewer domestic corporations immediately before the reorganization (in
this case, by a single domestic corporation, DP1).
(C) Paragraph (c)(2)(i) of this section is not applicable because,
immediately before the reorganization, DC is wholly owned by DP1, a
control group member. In addition, DP1's ownership interest percentage
is 100%. Paragraph (c)(2)(ii) of this section is not applicable because
the attributable inside gain with respect to DP1 can be preserved in the
FA stock received. The attributable inside gain with respect to DP1 of
$135x (equal to the product of $135x inside gain multiplied by DP1's
100% ownership interest percentage, reduced by $0x (the sum of the
amounts in paragraphs (c)(2)(ii)(A)(1) through (c)(2)(ii)(A)(3) of this
section)) does not exceed $150x (equal to the product of the section
367(a) percentage of 75% multiplied by $200x fair market value of FA
stock received
[[Page 417]]
by DP1). Under paragraph (f)(5) of this section, the $135x inside gain
is the amount by which the aggregate fair market value of Business A
($150x) exceeds $15x, the sum of the inside basis of Business A ($15x)
and the product of the section 367(a) percentage (75%) multiplied by the
deductible liabilities of DC ($0x). Under paragraph (f)(4) of this
section, the inside basis equals the $15x aggregate basis of the section
367(a) property transferred in the exchange. The section 367(a)
percentage of 75% is equal to the ratio of the fair market value of the
section 367(a) property ($150x for Business A) to the fair market value
of all the property transferred ($200x, the sum of $150x for Business A
and $50x for the patent).
(D) Under paragraph (c)(3) of this section, DP1's aggregate section
358 basis of $180x in the stock of FA (computed as the sum of $60x basis
in Share 1 and $120x basis in Share 2) is reduced by the amount by which
the attributable inside gain with respect to DP1, reduced by any gain
recognized by DC with respect to DP1 under paragraph (c)(2)(ii) of this
section, exceeds DP1's outside gain in the FP stock received. Because DC
recognizes no gain on the section 361 exchange with respect to DP1 under
paragraph (c)(2)(ii) of this section as determined in paragraph (ii)(C)
of this Example 3, the $135x attributable inside gain with respect to
DP1 is not reduced under paragraph (c)(3)(i)(A) of this section. DP1's
outside gain in Share 1 and Share 2 in the aggregate is $15x, the
product of the section 367(a) percentage of 75% multiplied by $20x (the
difference between $200x aggregate fair market value and $180x aggregate
section 358 basis in the FA stock received by DP1). Thus, DP1's section
358 basis in the FA stock ($180x) must be reduced by $120x (the excess
of $135x attributable inside gain, reduced by $0x, over $15x outside
gain) to $60x.
(E) Under paragraph (c)(3)(iii) of this section, the $120x reduction
to basis is allocated between Share 1 and Share 2 based on the relative
section 358 basis of each share. Therefore, the basis in Share 1 is
reduced by $40x ($120x multiplied by $60x/$180x). As adjusted, DP1's
basis in Share 1 is $20x ($60x less $40x). The basis in Share 2 is
reduced by $80x ($120x multiplied by $120x/$180x). As adjusted, DP1's
basis in Share 2 is $40x ($120x less $80x).
(F) Paragraph (c)(4)(i) of this section would be satisfied only if
DC complies with the requirements of Sec. 1.6038B-1(c)(6)(iii),
including filing with its tax return for the year of the reorganization,
a statement agreeing to file an amended return reporting the gain
realized but not recognized on the section 361 exchange in certain cases
if a significant amount of the section 367(a) property received in the
section 361 exchange is disposed of, directly or indirectly, in one or
more related transactions within the prescribed 60-month period.
Example 4. Control requirement and ownership interest percentage;
non-qualified property provided by foreign acquiring corporation. (i)
Facts. DP1 and FP own 80% and 20%, respectively, of the outstanding
stock of DC. DC owns Business A with a basis of $0x and $100x fair
market value. DP1's DC stock has a fair market value of $80x, and FP's
DC stock has a fair market value of $20x. In a reorganization described
in section 368(a)(1)(D), DC transfers Business A to FA in exchange for
$80x of FA stock and $20x cash. DC's transfer of Business A to FA
qualifies as a section 361 exchange. DP1 exchanges its $80x of DC stock
for $60x of FA stock and $20x cash, and FP exchanges its $20x of DC
stock for $20x of FA stock.
(ii) Result. (A) The requirement of paragraph (c)(1) of this section
is satisfied because DC is controlled (within the meaning of section
368(c)) by five or fewer domestic corporations immediately before the
reorganization (in this case, by a single domestic corporation, DP1).
The fact that the $20x cash is distributed solely to DP1 does not change
the analysis of the control requirement. The control requirement is
determined immediately before the reorganization and is not affected by
distributions of property.
(B) Pursuant to paragraph (f)(7) of this section, the ownership
interest percentages of DP1 and FP immediately before the reorganization
are 80% ($80x/($80x + $20x)) and 20% ($20x/($80x + $20x)), respectively.
The fact that the $20x of cash is distributed solely to DP1 does not
change this result. The distribution of the $20x of cash is not taken
into account for purposes of the ownership interest percentage
computation because the $20x of cash distributed by DC is provided by FA
to DC in the section 361 exchange.
Example 5. Control requirement and ownership interest percentage;
non-qualified property provided by U.S. transferor. (i) Facts. The facts
are the same as in Example 4, except as follows. Business A has a fair
market value of $80x (and not $100x) and DC also owns inventory with a
basis of $0x and fair market value of $20x. DC transfers Business A, but
not the inventory, to FA in exchange for $80x of FA stock. DP1 exchanges
its $80x of DC stock for $60x of FA stock and the $20x of inventory, and
FP exchanges its $20x of DC stock for $20x of FA stock.
(ii) Result. (A) The requirement of paragraph (c)(1) of this section
is satisfied because DC is controlled (within the meaning of section
368(c)) by five or fewer domestic corporations immediately before the
reorganization (in this case, by a single domestic corporation, DP1).
The fact that the $20x of inventory is not transferred to FA, but is
instead distributed solely to DP1, does not
[[Page 418]]
change the analysis of the control requirement. The control requirement
is determined immediately before the reorganization, and is not affected
by distributions of property.
(B) Pursuant to the general rule of paragraph (f)(7) of this
section, the ownership interest percentages of DP1 and FP immediately
before the reorganization would be 80% ($80x/($80x + $20x)) and 20%
($20x/($80x + $20x)), respectively. In this case, however, the
distribution of the $20x inventory to DP1 is taken into account for
purposes of computing the ownership interest percentage of DP1 and FP
because the inventory is not provided by FA to DC in the section 361
exchange. With respect to DP1, the numerator of the ownership interest
percentage computation is $60x, computed as the fair market value of DC
stock owned by DP1 immediately before the reorganization but reduced by
the fair market value of the inventory distributed to DP1 ($80x less
$20x). With respect to FP, the numerator of the ownership interest
percentage computation is $20x, the fair market value of the DC stock
owned by FP immediately before the reorganization. With respect to both
DP1 and FP, the denominator of the ownership interest percentage
computation is $80x, computed as the fair market value of all DC stock
immediately before the reorganization, but reduced by the fair market
value of the inventory distributed to DP1 ($100x, less $20x).
Accordingly, the ownership interest percentage of DP1 is 75% ($60x/
$80x), and the ownership interest percentage of FP is 25% ($20x/$80x).
(h) Applicable cross-references. For rules relating to the
character, source, and adjustments resulting from gain recognized by a
U.S. transferor under section 367(a), see Sec. 1.367(a)-1(b)(4). For
rules relating to transfers of stock or securities in a section 361
exchange, see Sec. 1.367(a)-3(e). For rules relating to the acquisition
of the stock or assets of a foreign corporation by another foreign
corporation, see Sec. 1.367(b)-4. For rules relating to transfers of
section 367(d) property by a U.S. transferor to a foreign corporation,
see section 367(d). For rules relating to distributions of stock of a
foreign corporation by a domestic corporation under section 355 or 361,
see Sec. Sec. 1.367(b)-5, 1.367(e)-1, and 1.1248(f)-1 through
1.1248(f)-3. For additional rules relating to certain reporting
requirements of a U.S. transferor, see Sec. 1.6038B-1. For rules
regarding expatriated entities, see section 7874 and the regulations
under that section.
(i) [Reserved]
(j)(1) Effective/applicability dates. Except for paragraph (e)(2) of
this section, and as provided in paragraph (j)(2) of this section, this
section applies to transfers occurring on or after April 18, 2013.
Paragraph (e)(2) applies to requests for relief submitted on or after
November 19, 2014. Paragraph (e)(2) of this section also applies to
requests for relief submitted before November 19, 2014 if the statute of
limitations on the assessment of tax has not expired for any year to
which the request relates and the control group member or U.S.
transferor, as applicable, resubmits the request under paragraph (e)(2)
of this section and notes, on the request, that the request is being
submitted pursuant to the third sentence of this paragraph (j). See
paragraph (e)(2) of this section, as contained in 26 CFR part 1 revised
as of April 1, 2014, for requests for relief submitted after April 17,
2013, and before November 19, 2014, that are not resubmitted under
paragraph (e)(2) of this section.
(2) Section 367(d) property. The definition provided in paragraph
(f)(11) of this section applies to transfers occurring on or after
September 14, 2015, and to transfers occurring before September 14,
2015, resulting from entity classification elections made under Sec.
301.7701-3 that are filed on or after September 14, 2015. For transfers
occurring before this section is applicable, see Sec. 1.367(a)-7 as
contained in 26 CFR part 1 revised as of April 1, 2016.
[T.D. 9614, 78 FR 17032, Mar. 19, 2013, as amended by T.D. 9704, 79 FR
68767, Nov. 19, 2014; T.D. 9760, 81 FR 15169, Mar. 22, 2016; T.D. 9803,
81 FR 91028, Dec. 16, 2016]
Sec. 1.367(a)-8 Gain recognition agreement requirements.
(a) Scope. This section provides the terms and conditions for a gain
recognition agreement entered into by a United States person pursuant to
Sec. 1.367(a)-3(b) through (e) in connection with a transfer of stock
or securities to a foreign corporation pursuant to an exchange that
would otherwise be subject to section 367(a)(1). Paragraph (b) of this
section provides definitions and special rules. Paragraphs (c) through
(h) of this section identify the form, content, and other conditions of
a gain recognition agreement. Paragraph (i)
[[Page 419]]
of this section is reserved. Paragraph (j) of this section identifies
certain events that may require gain to be recognized under a gain
recognition agreement. Paragraph (k) of this section provides exceptions
for certain events that would otherwise require gain to be recognized
under a gain recognition agreement. Paragraph (l) of this section is
reserved. Paragraph (m) of this section provides rules that require gain
to be recognized under a gain recognition agreement in connection with
certain events to which an exception under paragraph (k) of this section
otherwise applies. Paragraph (n) of this section provides special rules
in the case of a distribution of property with respect to stock to which
section 301 applies. Paragraph (o) of this section provides rules for
certain transactions that terminate or reduce the amount of gain subject
to a gain recognition agreement. Paragraph (p) of this section provides
relief for certain failures to file an initial gain recognition
agreement (as defined in paragraph (b)(1)(vi) of this section) or to
comply with the requirements of this section with respect to a gain
recognition agreement (as described in paragraph (c) of this section).
Paragraph (q) of this section provides examples that illustrate the
rules of the section. Paragraph (r) of this section provides effective
dates for the provisions of this section.
(b) Definitions and special rules. The following definitions and
special rules apply for purposes of this section.
(1) Definitions--(i) Asset reorganization--(A) General rule. Except
as provided in paragraph (b)(1)(i)(B) of this section, an asset
reorganization is a reorganization described in section 368(a)(1) that
involves an exchange of property described in section 361(a) or (b) (a
section 361 exchange).
(B) Exceptions. An asset reorganization does not include the
following:
(1) A reorganization described in section 368(a)(1)(D) or (G) if the
requirements of section 354(b)(1)(A) and (B) are not met.
(2) For purposes of paragraphs (j)(2)(ii)(B), (k)(6)(ii), and
(k)(6)(iii) of this section, a triangular asset reorganization. For
rules applicable to a triangular asset reorganization, see paragraph
(k)(7) of this section.
(ii) A consolidated group has the meaning set forth in Sec. 1.1502-
1(h).
(iii) Disposition. Except as provided in this paragraph (b)(1)(iii),
a disposition includes any transfer that would constitute a disposition
for any purpose of the Internal Revenue Code. A disposition includes an
indirect disposition of the stock of the transferred corporation as
described in Sec. 1.367(a)-3(d). Except as provided in paragraph (n)(1)
of this section, a disposition does not include the receipt of a
distribution of property with respect to stock to which section 301
applies (including by reason of section 302(d)). See paragraphs (n)(2)
and (o)(3) of this section for rules that apply if gain is recognized
under section 301(c)(3). A complete or partial disposition by
installment sale (under section 453) shall be treated as a disposition
in the year of the installment sale.
(iv) A gain recognition agreement document means any agreement,
statement, schedule, or form required to be filed under this section,
including an initial gain recognition agreement (as defined in paragraph
(b)(1)(vi) of this section), a new gain recognition agreement described
in paragraph (c)(5) of this section, a Form 8838 extending the period of
limitations on assessment of tax described in paragraph (f) of this
section, and an annual certification described in paragraph (g) of this
section.
(v) A gain recognition event is an event described in paragraphs (j)
through (o) of this section that requires gain to be recognized under a
gain recognition agreement.
(vi) An initial gain recognition agreement means the gain
recognition agreement entered into under paragraph (c) of this section
with respect to the initial transfer.
(vii) The initial transfer means a transfer of stock or securities
(transferred stock or securities) to a foreign corporation pursuant to
an exchange that would otherwise be subject to section 367(a)(1) but
with respect to which a gain recognition agreement is entered into by a
United States person pursuant to Sec. 1.367(a)-3(b) through (e).
(viii) An intercompany item has the meaning set forth in Sec.
1.1502-13(b)(2).
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(ix) An intercompany transaction has the meaning set forth in Sec.
1.1502-13(b)(1).
(x) A nonrecognition transaction has the meaning set forth in
section 7701(a)(45). In addition, a nonrecognition transaction includes
an exchange described in section 351(b) or 356 even if all gain realized
in the exchange is recognized.
(xi) The terms P, S, and T have the meanings set forth in Sec.
1.358-6(b)(1)(i), (ii), and (iii), respectively.
(xii) The determination of whether substantially all of the assets
of the transferred corporation have been disposed of is based on all the
facts and circumstances.
(xiii) A timely filed return means a Federal income tax return filed
on or before the last date prescribed for filing (taking into account
any extensions of time therefor) such return.
(xiv) Transferee foreign corporation. Except as provided in this
paragraph (b)(1)(xiv), the transferee foreign corporation is the foreign
corporation to which the transferred stock or securities are transferred
in an initial transfer. In the case of an indirect stock transfer, the
transferee foreign corporation has the meaning set forth in Sec.
1.367(a)-3(d)(2)(i). The transferee foreign corporation also includes a
corporation designated as the transferee foreign corporation in the case
of a new gain recognition agreement entered into under this section.
(xv) Transferred corporation. Except as provided in this paragraph
(b)(1)(xv), the transferred corporation is the corporation the stock or
securities of which are transferred in the initial transfer. In the case
of an indirect stock transfer, the transferred corporation has the
meaning set forth in Sec. 1.367(a)-3(d)(2)(ii). The transferred
corporation also includes a corporation designated as the transferred
corporation in the case of a new gain recognition agreement entered into
under this section.
(xvi) A triangular asset reorganization is a reorganization
described in Sec. 1.358-6(b)(2)(i), (ii), (iii), or (v).
(xvii) The U.S. transferor is the United States person (as defined
in Sec. 1.367(a)-1(d)(1)) that transfers the transferred stock or
securities to the transferee foreign corporation in the initial
transfer. For purposes of determining the U.S. transferor in the case of
a transfer by a partnership, see Sec. 1.367(a)-1(c)(3)(i). The U.S.
transferor also includes the United States person designated as the U.S.
transferor in the case of a new gain recognition agreement entered into
under this section including, for example, under paragraph (k)(14) of
this section.
(2) Special rules--(i) Stock deemed received or transferred.
References to stock received include stock deemed received (for example,
pursuant to section 367(c)(2)). References to a transfer of stock or
securities include a deemed transfer of stock or securities.
(ii) Stock of the transferee foreign corporation. References to
stock of the transferee foreign corporation include any stock of the
transferee foreign corporation the basis of which is determined, in
whole or in part, by reference to the basis of the stock of the
transferee foreign corporation received by the U.S. transferor in the
initial transfer.
(iii) Transferred stock or securities. References to transferred
stock or securities include any stock or securities of the transferred
corporation the basis of which is determined, in whole or in part, by
reference to the basis of the stock or securities transferred in the
initial transfer.
(c) Gain recognition agreement--(1) Terms of agreement--(i) General
rule. Except as provided in this paragraph (c)(1)(i), if a gain
recognition event occurs during the period beginning on the date of the
initial transfer and ending as of the close of the fifth full taxable
year (not less than 60 months) following the close of the taxable year
in which the initial transfer occurs (GRA term), the U.S. transferor
must include in income the gain realized but not recognized on the
initial transfer by reason of entering into the gain recognition
agreement. In the case of a gain recognition event that occurs as a
result of a partial disposition of stock, securities, or a partnership
interest, as applicable, the U.S. transferor is required to recognize a
proportionate amount of the gain subject to the gain recognition
agreement, determined based on the fair market value of the
[[Page 421]]
stock, securities, or partnership interest, as applicable, disposed of
(measured at the time of the partial disposition) as compared to the
fair market value of all the stock, securities, or partnership interest,
as applicable (measured at the time of the partial disposition). If the
U.S. transferor must recognize gain under this paragraph as a result of
an event described in paragraph (m) or (n) of this section, see those
paragraphs to determine the amount of the gain that must be recognized.
The amount of gain subject to the gain recognition agreement shall be
reduced by the amount of gain recognized under this paragraph. If the
amount of gain subject to the gain recognition agreement is reduced to
zero, the gain recognition agreement shall terminate without further
effect.
(ii) Ordering rule for gain recognized under multiple gain
recognition agreements. If a gain recognition event occurs that requires
gain to be recognized under multiple gain recognition agreements, gain
shall first be recognized under the gain recognition agreement that
relates to the earliest initial transfer, then under the gain
recognition agreement that relates to the immediately following initial
transfer and so forth until the appropriate amount of gain has been
recognized under each gain recognition agreement. The amount of gain
recognized under a gain recognition agreement shall be determined after
taking into account, as appropriate, any increase to basis (including
the basis of the transferred stock or securities) under paragraph (c)(4)
of this section resulting from gain recognized under another gain
recognition agreement. For an illustration of this ordering rule, see
paragraph (q)(2) of this section, Example 6.
(iii) Taxable year in which gain is reported--(A) Year of initial
transfer. Except as provided in paragraph (c)(1)(iii)(B) of this
section, the U.S. transferor must report any gain recognized under
paragraph (c)(1)(i) of this section on an amended Federal income tax
return for the taxable year of the initial transfer. The amended return
must be filed on or before the 90th day following the date on which the
gain recognition event occurs.
(B) Year of gain recognition event. If an election under paragraph
(c)(2)(vi) of this section is made with the gain recognition agreement
or if paragraph (c)(5)(ii) of this section applies to the gain
recognition agreement, the U.S. transferor must report any gain
recognized under paragraph (c)(1)(i) of this section on its Federal
income tax return for the taxable year during which the gain recognition
event occurs. If an election under paragraph (c)(2)(vi) of this section
is made with the gain recognition agreement or if paragraph (c)(5)(ii)
of this section applies to the gain recognition agreement but the U.S.
transferor does not report the gain recognized on its Federal income tax
return for the taxable year during which the gain recognition event
occurs, the Commissioner may require the U.S. transferor to report the
gain on an amended Federal income tax return for the taxable year during
which the initial transfer occurred.
(iv) Offsets. No special limitations apply with respect to
offsetting gain recognized under paragraph (c)(1)(i) of this section
with net operating losses, capital losses, credits against tax, or
similar items.
(v) Payment and reporting of interest. Interest must be paid on any
additional tax due with respect to gain recognized by the U.S.
transferor under paragraph (c)(1)(i) of this section. Any interest due
shall be determined based on the rates under section 6621 for the period
between the date that was prescribed for filing the Federal income tax
return of the U.S. transferor for the year of the initial transfer and
the date on which the additional tax due is paid. If paragraph
(c)(1)(iii)(B) of this section applies, any interest due must be
included with the payment of tax due with the Federal income tax return
of the U.S. transferor for the taxable year during which the gain
recognition event occurs (or should reduce the amount of any refund due
to the U.S. transferor for such taxable year). A schedule entitled
``Calculation of Section 367 Tax and Interest'' that separately
identifies and calculates any additional tax and interest due must be
included with the Federal income tax return on which any interest due is
reported.
[[Page 422]]
(2) Content of gain recognition agreement. The gain recognition
agreement must be entitled ``GAIN RECOGNITION AGREEMENT UNDER Sec.
1.367(a)-8'' and include the information described in paragraphs
(c)(2)(i) through (viii) of this paragraph with the corresponding
paragraph numbers. The information required under this paragraph (c)(2)
and paragraph (c)(3) of this section must be included in the gain
recognition agreement as filed.
(i) A statement that the document constitutes an agreement by the
U.S. transferor to recognize gain in accordance with the requirements of
this section.
(ii) A description of the transferred stock or securities and other
information as required in paragraph (c)(3) of this section.
(iii) A statement that the U.S. transferor agrees to comply with all
the conditions and requirements of this section, including to recognize
gain under the gain recognition agreement in accordance with paragraph
(c)(1)(i) of this section, to extend the period of limitations on
assessment of tax as provided in paragraph (f) of this section, to file
the certification described in paragraph (g) of this section, and, as
provided in paragraph (j)(8) of this section, to treat a failure to
comply (as described in paragraph (j)(8) of this section) as extending
the period of limitations on assessment of tax for the taxable year in
which gain is required to be reported.
(iv) A statement that arrangements have been made to ensure that the
U.S. transferor is informed of any events that affect the gain
recognition agreement, including triggering events or other gain
recognition events.
(v) In the case of a new gain recognition agreement filed under this
section--
(A) A description of the event (such as a triggering event) and the
applicable exception, if any, that gave rise to the new gain recognition
agreement (such as a triggering event exception), including the date of
the event and the name, address, and taxpayer identification number (if
any) of each person that is a party to the event;
(B) As applicable, a description of the class, amount, and
characteristics of the stock, securities or partnership interest
received in the transaction; and
(C) As applicable, a calculation of the amount of gain that remains
subject to the new gain recognition agreement as a result of the
application of paragraph (m), (n), or (o) of this section.
(vi) A statement whether the U.S. transferor elects to include in
income any gain recognized under paragraph (c)(1)(i) of this section in
the taxable year during which a gain recognition event occurs. See
paragraph (c)(5)(ii) of this section for a rule that requires, in
certain cases, for the gain recognized pursuant to a new gain
recognition agreement to be included in income during the taxable year
in which the gain recognition event occurs.
(vii) A statement whether a gain recognition event has occurred
during the taxable year of the initial transfer.
(viii) A statement describing any disposition of assets of the
transferred corporation during such taxable year other than in the
ordinary course of business.
(3) Description of transferred stock or securities and other
information. The gain recognition agreement shall include the following:
(i) A description of the transferred stock or securities including--
(A) The type or class, amount, and characteristics of the
transferred stock or securities;
(B) A calculation of the amount of the built-in gain in the
transferred stock or securities that are subject to the gain recognition
agreement, reflecting the basis and fair market value on the date of the
initial transfer;
(C) The amount of any gain recognized by the U.S. transferor on the
initial transfer; and
(D) The percentage (by voting power and value) that the transferred
stock (if any) represents of the total stock outstanding of the
transferred corporation on the date of the initial transfer.
(ii) The name, address, place of incorporation, and taxpayer
identification number (if any) of the transferred corporation.
(iii) The date on which the U.S. transferor acquired the transferred
stock or securities.
(iv) The name, address and place of incorporation of the transferee
foreign
[[Page 423]]
corporation, and a description of the stock or securities received by
the U.S. transferor in the initial transfer, including the percentage of
stock (by vote and value) of the transferee foreign corporation received
in such exchange.
(v) If the initial transfer is described in Sec. 1.367(a)-3(e), a
statement that the conditions of section 367(a)(5) and any regulations
under that section have been satisfied, and a description of any
adjustments to the basis of the stock received in the transaction or
other adjustments made pursuant to section 367(a)(5) and any regulations
under that section.
(vi) If the transferred corporation is domestic, a statement
describing the application of section 7874 to the transaction, and
indicating that the requirements of Sec. 1.367(a)-3(c)(1) are
satisfied.
(vii) If the transferred corporation is foreign, a statement
indicating whether the U.S. transferor was a section 1248 shareholder
(as defined in Sec. 1.367(b)-2(b)) of the transferred corporation
immediately before the initial transfer, and whether the U.S. transferor
is a section 1248 shareholder with respect to the transferee foreign
corporation immediately after the initial transfer, and whether any
reporting requirements or other rules contained in regulations under
section 367(b) are applicable, and, if so, whether they have been
satisfied.
(viii) If the initial transfer involves a transfer by a partnership
(see Sec. 1.367(a)-1(c)(3)(i)) or a transfer of a partnership interest
(see section 367(a)(4) and Sec. 1.367(a)-1(c)(3)(ii)) a complete
description of the transfer, including a description of the partners in
the partnership.
(ix) If the transaction involved the transfer of property other than
the transferred stock or securities and the transaction was subject to
the indirect stock transfer rules of Sec. 1.367(a)-3(d), a statement
indicating whether--
(A) The reporting requirements under section 6038B have been
satisfied with respect to the transfer of such other property;
(B) Whether gain was recognized under section 367(a)(1);
(C) Whether section 367(d) applied to the transfer of such property;
and
(D) Whether the other property transferred qualified for the active
foreign trade or business exception under section 367(a)(3).
(4) Basis adjustments for gain recognized. The following basis
adjustments shall be made if gain is recognized under paragraph
(c)(1)(i) of this section.
(i) Stock or securities of transferee foreign corporation. The basis
of the stock or securities, as applicable, of the transferee foreign
corporation received by the U.S. transferor in the initial transfer
shall be increased as of the date of the initial transfer by the amount
of gain recognized.
(ii) Transferred stock or securities. The basis of the transferred
stock or securities shall be increased as of the date of the initial
transfer by the amount of the gain recognized.
(iii) Other appropriate adjustments. The basis of other stock,
securities, or a partnership interest shall be increased, as
appropriate, in accordance with the principles of this paragraph (c)(4).
Under no circumstances shall the basis of stock, securities, or of a
partnership interest held by a U.S. person that does not recognize gain
under paragraph (c)(1)(i) of this section be increased under this
paragraph (c)(4). In addition, under no circumstances shall the basis of
any property be increased by the amount of any additional tax due or
interest paid with respect to such tax, nor shall the basis of the
assets of the transferred corporation be increased as a result of gain
recognized by the U.S. transferor under paragraph (c)(1)(i) of this
section.
(iv) Cross-reference. See paragraph (q)(2) of this section, Examples
1, 2, 3, and 5 for illustrations of the rules of this paragraph (c)(4).
See also Sec. 1.367(a)-1(b)(4) for rules that determine the increase to
basis of property resulting from the application of section 367(a).
(5) Terms and conditions of a new gain recognition agreement--(i)
General rule. A new gain recognition agreement entered into pursuant to
this section shall replace the existing gain recognition agreement,
which shall terminate without further effect. The term of the new gain
recognition agreement shall be the remaining term of the existing gain
recognition agreement. The
[[Page 424]]
amount of gain subject to the new gain recognition agreement shall equal
the amount of gain subject to the existing gain recognition agreement,
reduced by any gain recognized under paragraph (c)(1)(i) of this section
with respect to the existing gain recognition agreement by reason of the
gain recognition event that gives rise to the new gain recognition
agreement. The new gain recognition agreement shall, as applicable, be
subject to the conditions and requirements of this section to the same
extent as the existing gain recognition agreement. For example, a
triggering event with respect to the new gain recognition agreement will
generally include a disposition of the transferred stock or securities
or of substantially all the assets of the transferred corporation. If,
however, the transferred stock is canceled or redeemed pursuant to the
disposition or other event that gives rise to the new gain recognition
agreement (for example, pursuant to a liquidation where the transferee
foreign corporation is the corporate distributee (within the meaning of
section 334(b)(2)), or an asset reorganization where the transferee
foreign corporation is the acquiring corporation) the transferred stock
is not subject to the new gain recognition agreement.
(ii) Special rule for inclusion of gain. If the U.S. transferor with
respect to the new gain recognition agreement is not the U.S. transferor
with respect to the existing gain recognition agreement, or a member of
the consolidated group of which the U.S. transferor with respect to the
existing gain recognition agreement was a member on the date of the
initial transfer, then any gain recognized under paragraph (c)(1)(i) of
this section with respect to the new gain recognition agreement must be
included in income in the taxable year during which the gain recognition
event occurs.
(6) Cross-reference. For gain recognition agreements entered into
pursuant to certain outbound asset reorganizations, see Sec. 1.367(a)-
3(e)(6).
(d) Filing requirements--(1) General rule. An initial gain
recognition agreement must be timely filed in order for the U.S.
transferor to avoid recognizing gain under section 367(a)(1) with
respect to the transferred stock or securities by reason of the
applicable exceptions provided under Sec. 1.367(a)-3. Except as
provided in paragraph (p) of this section, an initial gain recognition
agreement is timely filed only if--
(i) The initial gain recognition agreement and any other gain
recognition agreement document required to be filed with the initial
gain recognition agreement are included with a timely filed return of
the U.S. transferor for the taxable year during which the initial
transfer occurs; and
(ii) Each gain recognition agreement document identified in
paragraph (d)(1)(i) of this section is completed in all material
respects.
(2) Special requirements--(i) New gain recognition agreement. A new
gain recognition agreement entered into under this section must be
included with the timely-filed return of the U.S. transferor (as
identified in the new gain recognition agreement) for the taxable year
during which the disposition or event that requires the new gain
recognition agreement occurs. If the new gain recognition agreement is
entered into by the U.S. transferor that entered into the existing gain
recognition agreement, the new gain recognition agreement is in lieu of
the annual certification otherwise required for such taxable year under
paragraph (g) of this section with respect to the existing gain
recognition agreement.
(ii) Multiple events within a taxable year. Except as otherwise
provided in this paragraph (d)(2)(ii), if the initial transfer and one
or more dispositions or other events (even if a triggering event
exception applies) that affect the gain recognition agreement entered
into by the U.S. transferor with respect to the initial transfer occur
within the same taxable year of such U.S. transferor, or if multiple
dispositions or other events occur in a taxable year of the U.S.
transferor that does not include the initial transfer, only one gain
recognition agreement is required to be entered into and included with
the timely-filed return of the U.S. transferor for such taxable year.
The gain recognition agreement must describe the initial transfer and/or
each disposition or other event that affects the gain recognition
agreement (even if a
[[Page 425]]
triggering event exception applies). This paragraph does not apply,
however, if any such disposition or other event requires a new gain
recognition agreement to be entered into by a United States person other
than the U.S. transferor with respect to the initial transfer or that
entered into the existing gain recognition agreement, as applicable.
(3) Common parent as agent for U.S. transferor. If the U.S.
transferor is a member but not the common parent of a consolidated
group, the common parent of the consolidated group is the agent for the
U.S. transferor under Sec. 1.1502-77(a)(1). Thus, the common parent
must file the gain recognition agreement on behalf of the U.S.
transferor. References in this section to the timely-filed return of the
U.S. transferor include the timely-filed return of the consolidated
group of which the U.S. transferor is a member, as applicable.
(e) Signatory--(1) General rule. The gain recognition agreement must
be signed under penalties of perjury by an agent of the U.S. transferor
that is authorized to sign under a general or specific power of
attorney, or by the appropriate party based on the category of the U.S.
transferor described in this paragraph (e)(1).
(i) If the U.S. transferor is a corporation but not a member of a
consolidated group, a responsible officer of the U.S. transferor. If the
U.S. transferor is a member of a consolidated group, a responsible
officer of the common parent of the consolidated group.
(ii) If the U.S. transferor is an individual, the individual.
(iii) If the U.S. transferor is a trust or estate, a trustee,
executor, or equivalent fiduciary of the U.S. transferor.
(iv) In a bankruptcy case under title 11, United States Code, a
debtor in possession or trustee.
(2) Signature requirement. The inclusion of an unsigned copy of the
gain recognition agreement with the timely-filed return of the U.S.
transferor shall satisfy the signature requirement of paragraph (e)(1)
of this section if the U.S. transferor retains the original signed gain
recognition agreement in the manner specified by Sec. 1.6001-1(e).
(f) Extension of period of limitations on assessments of tax--(1)
General rule. In connection with the filing of a gain recognition
agreement, the U.S. transferor must extend the period of limitations on
assessments of tax with respect to the gain realized but not recognized
on the initial transfer through the close of the eighth full taxable
year following the taxable year during which the initial transfer
occurs. The U.S. transferor extends the period of limitations by filing
Form 8838 ``Consent to Extend the Time to Assess Tax Under Section 367--
Gain Recognition Agreement.'' The Form 8838 must be signed by a person
authorized to sign the gain recognition agreement under paragraph (e)(1)
of this section.
(2) New gain recognition agreement. If a new gain recognition
agreement is entered into under this section, the U.S. transferor must
extend the period of limitations on assessments of tax on the initial
transfer through the close of the eighth full taxable year following the
taxable year during which the initial transfer occurs, consistent with
paragraph (f)(1) of this section, unless the U.S. transferor with
respect to the new gain recognition agreement is the U.S. transferor
with respect to the existing gain recognition agreement, or a member of
the consolidated group of which the U.S. transferor with respect to the
existing gain recognition agreement was a member on the date of the
initial transfer.
(g) Annual certification. Except as provided in paragraph (d)(2)(i)
of this section, the U.S. transferor must include with its timely-filed
return for each of the five full taxable years following the taxable
year of the initial transfer a certification (annual certification) that
includes the information described in paragraphs (g)(1) through (3) of
this section, as appropriate. The annual certification must be signed by
a person authorized under paragraph (e)(1) of this section to sign the
gain recognition agreement for the initial transfer. The inclusion of an
unsigned copy of the annual certification with the relevant timely-filed
return of the U.S. transferor shall satisfy the signature requirement of
paragraph (e)(1) of this
[[Page 426]]
section provided the U.S. transferor retains the original signed
certification in the manner specified by Sec. 1.6001-1(e).
(1) A statement of whether a gain recognition event has or has not
occurred during such taxable year. If a gain recognition event has
occurred during such taxable year, the annual certification must state:
(i) The amount of gain subject to the gain recognition agreement at
the time of the gain recognition event;
(ii) The amount of gain recognized under the gain recognition
agreement by reason of the gain recognition event; and
(iii) A calculation of the reduction to the amount of gain subject
to the gain recognition agreement by reason of the gain recognition
event (for example, in the case of a gain recognition event described in
paragraph (n)(2) of this section).
(2) A complete description of any event occurring during such
taxable year that has terminated or reduced the amount of gain subject
to the gain recognition agreement (for example, an event described in
paragraph (o) of this section), including a calculation of any reduction
to the amount of gain subject to the gain recognition agreement.
(3) A statement describing any disposition of assets of the
transferred corporation during the taxable year not in the ordinary
course of business.
(h) Use of security. The U.S. transferor may be required to furnish
a bond or other security that satisfies the requirements of Sec.
301.7101-1 if the Area Director, Field Examination, Small Business/Self
Employed or the Director of Field Operations, Large and Mid-Size
Business (Director) determines that such security is necessary to ensure
the payment of any tax on the gain realized, but not recognized, upon
the initial transfer. Such bond or security generally will be required
only if the transferred stock or securities are a principal asset of the
U.S. transferor and the Director has reason to believe that a
disposition of the stock or securities may be contemplated.
(i) [Reserved]
(j) Triggering events. Except as provided in this section, if an
event described in paragraphs (j)(1) through (10) of this section
(triggering event) occurs during the GRA term, the U.S. transferor must
recognize gain under the gain recognition agreement in accordance with
paragraph (c)(1)(i) of this section. This paragraph (j) generally
requires the U.S. transferor to recognize gain (and pay applicable
interest with respect to any additional tax due as provided in paragraph
(c)(1)(v) of this section) under the gain recognition agreement to the
extent the transferred stock or securities are disposed of, directly or
indirectly. This paragraph (j) also requires the U.S. transferor to
recognize gain under the gain recognition agreement in certain cases
where it is not appropriate for the gain recognition agreement to
continue. See paragraph (k) of this section for exceptions available for
certain events that would otherwise constitute triggering events under
this paragraph (j). See paragraph (o) of this section for certain events
that terminate or reduce the amount of gain subject to a gain
recognition agreement.
(1) Disposition of transferred stock or securities. A complete or
partial disposition of the transferred stock or securities. See
paragraph (q)(2) of this section, Example 2 for an illustration of the
rule of this paragraph (j)(1).
(2) Disposition of substantially all of the assets of the
transferred corporation--(i) General rule. Except as provided in
paragraph (j)(2)(ii) of this section, a disposition in one or more
related transactions of substantially all of the assets of the
transferred corporation (including stock or securities in a subsidiary
corporation or a partnership interest). If the transferred corporation
is domestic, see paragraph (o)(4) of this section.
(ii) Exceptions. For purposes of paragraph (j)(2)(i) of this
section, the following dispositions shall be disregarded--
(A) Dispositions of property described in section 1221(a)(1)
occurring in the ordinary course of business;
(B) An exchange of stock or securities described in section 354 that
is pursuant to an asset reorganization; and
(C) An exchange of stock by a corporate distributee (as defined in
section 334(b)(2)) pursuant to a complete liquidation to which section
332 applies.
[[Page 427]]
(3) Disposition of certain partnership interests. If the initial
transfer occurs by reason of the transfer of a partnership interest, a
complete or partial disposition of such partnership interest. See
section 367(a)(4) and Sec. 1.367(a)-1(c)(3)(ii).
(4) Disposition of stock of the transferee foreign corporation. A
complete or partial disposition of the stock of the transferee foreign
corporation received by the U.S. transferor in the initial transfer. For
purposes of this section, an individual U.S. transferor that loses U.S.
citizenship or ceases to be a lawful permanent resident of the United
States (within the meaning of section 7701(b)(6)) shall be treated as
disposing of all the stock of the transferee foreign corporation
received in the initial transfer as of the date before the loss of such
status.
(5) Deconsolidation. A U.S. transferor that is a member of a
consolidated group ceases to be a member of the consolidated group,
other than by reason of an acquisition of the assets of the U.S.
transferor in a transaction to which section 381(a) applies, or by
reason of the U.S. transferor joining another consolidated group as part
of the same transaction.
(6) Consolidation. A U.S. transferor becomes a member of a
consolidated group, including a U.S. transferor that is a member of a
consolidated group and that becomes a member of another consolidated
group.
(7) Death of an individual; trust or estate ceases to exist. A U.S.
transferor that is an individual dies, or a U.S. transferor that is a
trust or estate ceases to exist.
(8) Failure to comply. A U.S. transferor fails to comply in any
material respect with any requirement of this section, or the terms of
the gain recognition agreement as described in paragraph (c)(1) of this
section. A failure to comply under this paragraph (j)(8) will extend the
period of limitations on assessment of tax for the taxable year in which
gain is required to be reported until the close of the third full
taxable year ending after the date on which the U.S. transferor
furnishes to the Director of Field Operations, Cross Border Activities
Practice Area of Large Business & International (or any successor to the
roles and responsibilities of such person) (Director) the information
that should have been provided under this section. Except as provided in
paragraph (p) of this section, for purposes of this paragraph (j)(8), a
failure to comply includes--
(i) If there is a gain recognition event in a taxable year, a
failure to report gain or pay any additional tax or interest due under
the terms of the gain recognition agreement; and
(ii) A failure to file a gain recognition agreement document, other
than an initial gain recognition agreement or a document required to be
filed with the initial gain recognition agreement. For this purpose,
there is a failure to file a gain recognition agreement document if--
(A) The gain recognition agreement document is not timely filed as
required under this section, or
(B) The gain recognition agreement document is not completed in all
material respects.
(9) Gain recognition agreement filed in connection with indirect
stock transfers and certain triangular asset reorganizations. With
respect to a gain recognition agreement entered into in connection with
an indirect stock transfer (as defined in Sec. 1.367(a)-3(d)), or a
triangular asset reorganization described in Sec. 1.367(a)-3(e)(6)(iv),
an indirect disposition of the transferred stock or securities. For
example, in the case of an indirect stock transfer described in Sec.
1.367(a)-3(d)(1)(iii)(A), a complete or partial disposition of the stock
of the acquiring corporation.
(10) Gain recognition agreement filed pursuant to paragraph (k)(14)
of this section. In the case of a gain recognition agreement entered
into pursuant to paragraph (k)(14) of this section, in addition to any
disposition or other event described in paragraphs (j)(1) through (9) of
this section,--
(i) Any disposition or other event identified as a triggering event
in a new gain recognition agreement as required under paragraph
(k)(14)(iii) of this section; and
(ii) Any disposition or other event that is inconsistent with the
principles
[[Page 428]]
of paragraph (k) of this section including, for example, an indirect
disposition of the transferred stock or securities.
(k) Triggering event exceptions. Notwithstanding paragraph (j) of
this section, a disposition or other event described in paragraphs
(k)(1) through (14) of this section shall not constitute a triggering
event. This paragraph (k) generally provides exceptions for certain
dispositions that constitute nonrecognition transactions but only if,
immediately after the disposition, a U.S. transferor retains, as
applicable, a direct or indirect interest in the transferred stock or
securities, or in the assets of the transferred corporation, and a new
gain recognition agreement is entered into with respect to the initial
transfer in accordance with this paragraph (k). Notwithstanding the
application of this paragraph (k), if a gain recognition event described
under paragraphs (m) and (n) of this section occurs during the GRA term
the U.S. transferor may be required to recognize gain under the gain
recognition agreement in accordance with paragraph (c)(1)(i) of this
section. See paragraph (o) of this section which provides that,
notwithstanding paragraph (j) of this section, certain dispositions or
other events shall instead terminate or reduce the amount of gain
subject to a gain recognition agreement.
(1) Transfers of stock of the transferee foreign corporation to a
corporation or partnership. A disposition of stock of the transferee
foreign corporation received in the initial transfer pursuant to an
exchange to which section 351, 354 (but only in a reorganization
described in section 368(a)(1)(B) that is not a triangular
reorganization), 361 (but only in a divisive reorganization to which
section 355 applies), or 721 applies, shall not constitute a triggering
event if a new gain recognition agreement is entered into in accordance
with paragraphs (k)(1)(i) through (iv) of this section, as applicable.
In the case of an exchange to which section 354 applies that is pursuant
to a triangular reorganization described in section 368(a)(1)(B), see
paragraph (k)(14) of this section and paragraph (q)(2) of this section,
Example 4.
(i) In the case of an exchange to which section 351 or 354 applies
in which stock of a foreign acquiring corporation is received, the U.S.
transferor includes with the new gain recognition agreement a statement
that a complete or partial disposition of the stock of the foreign
acquiring corporation received in the exchange shall constitute a
triggering event. The principles of paragraph (o)(1)(i) or (ii), as
appropriate, shall be applied to determine whether a subsequent complete
or partial disposition of the stock of the foreign acquiring corporation
received in the exchange shall instead terminate or reduce the amount of
the new gain recognition agreement.
(ii) In the case of an exchange to which section 351 or 354 applies
in which stock of a domestic acquiring corporation is received, the
domestic acquiring corporation enters into the new gain recognition
agreement, which must designate the domestic acquiring corporation as
the U.S. transferor for purposes of this section. For an illustration of
the rule provided by this paragraph (k)(1)(ii), see paragraph (q)(2) of
this section, Example 3.
(iii) In the case of a section 361 exchange that is pursuant to a
divisive reorganization to which section 355 applies and in which stock
of a domestic corporation (domestic controlled corporation) is received,
the domestic controlled corporation enters into the new gain recognition
agreement, which must designate the domestic controlled corporation as
the U.S. transferor for purposes of this section. For an illustration of
the rule provided by this paragraph (k)(1)(iii), see paragraph (q)(2) of
this section, Example 11.
(iv) In the case of an exchange to which section 721 applies, the
U.S. transferor includes with the new gain recognition agreement a
statement that a complete or partial disposition of the partnership
interest received in the exchange shall constitute a triggering event
for purposes of the new gain recognition agreement.
(2) Complete liquidation of U.S. transferor under sections 332 and
337. A distribution by the U.S. transferor of the stock of the
transferee foreign corporation received in the initial transfer to
[[Page 429]]
which section 337 applies, that is pursuant to a complete liquidation
under section 332, shall not constitute a triggering event if the
corporate distributee (as defined in section 334(b)(2)) is a domestic
corporation (domestic corporate distributee) and the domestic corporate
distributee enters into a new gain recognition agreement. The new gain
recognition agreement must designate the domestic corporate distributee
as the U.S. transferor for purposes of this section.
(3) Transfers of transferred stock or securities to a corporation or
partnership. A disposition of the transferred stock or securities
pursuant to an exchange to which section 351, 354 (but only in a
reorganization described in section 368(a)(1)(B)), or 721 applies, shall
not constitute a triggering event if the U.S. transferor enters in to a
new gain recognition agreement that provides that the dispositions
described in paragraphs (k)(3)(i) and (ii) of this section shall
constitute triggering events for purposes of the new gain recognition
agreement.
(i) A complete or partial disposition of the stock, securities, or
partnership interest (as applicable) received in exchange for the
transferred stock or securities.
(ii) Any other event that is inconsistent with the principles of
this paragraph (k), including the indirect disposition of the
transferred stock or securities.
(4) Transfers of substantially all of the assets of the transferred
corporation. A disposition of substantially all of the assets of the
transferred corporation pursuant to an exchange to which section 351,
354 (but only in a reorganization described in section 368(a)(1)(B)), or
721 applies, shall not constitute a triggering event if the U.S.
transferor enters into a new gain recognition agreement that provides
that a complete or partial disposition of the stock, securities, or
partnership interest (as applicable) received in exchange for the assets
shall constitute a triggering event for purposes of the new gain
recognition agreement.
(5) Recapitalizations and section 1036 exchanges. A complete or
partial disposition of the transferred stock or securities, or of the
stock of the transferee foreign corporation received in the initial
transfer, pursuant to a reorganization described under section
368(a)(1)(E), or pursuant to a transaction to which section 1036
applies, shall not constitute a triggering event if the U.S. transferor
enters into a new gain recognition agreement.
(6) Certain asset reorganizations--(i) Stock of transferee foreign
corporation. If stock of the transferee foreign corporation received in
the initial transfer is transferred to a domestic acquiring corporation
in a section 361 exchange that is pursuant to an asset reorganization,
the exchanges made pursuant to the asset reorganization shall not
constitute triggering events if the domestic acquiring corporation
enters into a new gain recognition agreement that designates the
domestic acquiring corporation as the U.S. transferor for purposes of
this section. For an illustration of the rule provided by this paragraph
(k)(6), see paragraph (q)(2) of this section, Example 5. If the
acquiring corporation is foreign, see paragraph (k)(14) of this section
and paragraph (q)(2) of this section, Example 6.
(ii) Transferred stock or securities. If the transferred stock or
securities are transferred to a foreign acquiring corporation in a
section 361 exchange that is pursuant to an asset reorganization, the
exchanges made pursuant to the asset reorganization shall not constitute
triggering events if the U.S. transferor enters into a new gain
recognition agreement that designates the foreign acquiring corporation
as the transferee foreign corporation for purposes of this section. For
an illustration of the rule provided by this paragraph, see paragraph
(q)(2) of this section, Example 7. If the transfer is to a domestic
acquiring corporation, or is pursuant to a triangular asset
reorganization, see paragraph (k)(14) or (o)(5) of this section.
(iii) Assets of transferred corporation. If substantially all of the
assets of the transferred corporation are transferred to a foreign or
domestic acquiring corporation in a section 361 exchange that is
pursuant to an asset reorganization, the exchanges made pursuant to the
asset reorganization shall not constitute triggering events if the U.S.
[[Page 430]]
transferor enters into a new gain recognition agreement that, unless the
acquiring corporation is the transferee foreign corporation, designates
the acquiring corporation as the transferred corporation for purposes of
this section. Only the assets of the transferred corporation received by
the acquiring corporation shall be treated as assets of the transferred
corporation for purposes of this section (for example, only such assets
will be taken into account for purposes of paragraph (j)(2) of this
section). For an illustration of the rule provided by this paragraph,
see paragraph (q)(2) of this section, Example 8. If the transferred
corporation is domestic, see section 367(a)(1) and (a)(5), and paragraph
(o)(4) of this section. If the transfer is pursuant to a triangular
asset reorganization, see paragraph (k)(14) of this section.
(7) Certain triangular reorganizations--(i) Transferee foreign
corporation. If substantially all of the assets of the transferee
foreign corporation are transferred to a foreign acquiring corporation
in a section 361 exchange that is pursuant to a triangular asset
reorganization, the exchanges made pursuant to the reorganization shall
not constitute triggering events if a new gain recognition agreement is
entered into in accordance with paragraphs (k)(7)(i)(A) through (C) of
this section. If the acquiring corporation is domestic, see paragraph
(k)(14) of this section. For rules that apply to gain recognition
agreements entered into as a result of an indirect stock transfer, see
Sec. 1.367(a)-3(d)(2)(iv) and paragraph (j)(9) of this section.
(A) If P is foreign, the new gain recognition agreement designates P
as the transferee foreign corporation and includes a statement that the
U.S. transferor agrees to treat a complete or partial disposition of the
S stock held by P as a triggering event.
(B) Except as provided in paragraph (k)(7)(i)(C) of this section, if
P is domestic, P enters into the new gain recognition agreement that
designates P as the U.S. transferor and S as the transferee foreign
corporation.
(C) If the triangular asset reorganization is described in section
368(a)(1)(A) by reason of section 368(a)(2)(E) and the transferee
foreign corporation is the merged corporation, the U.S. transferor
enters into the new gain recognition agreement and designates the
surviving corporation as the transferee foreign corporation.
(ii) Transferred corporation. If substantially all of the assets of
the transferred corporation are transferred in a section 361 exchange
pursuant to a triangular asset reorganization, the exchanges made
pursuant to the reorganization shall not constitute triggering events if
the U.S. transferor enters into a new gain recognition agreement in
accordance with paragraph (k)(7)(ii)(A) of this section and, as
applicable, paragraph (k)(7)(ii)(B) or (C) of this section.
(A) The new gain recognition agreement includes a statement that the
U.S. transferor agrees to treat a complete or partial disposition of the
P stock received in the reorganization as a triggering event.
(B) If the triangular asset reorganization is described in section
368(a)(1)(C), or section 368(a)(1)(A) or (G) by reason of section
368(a)(2)(D), the new gain recognition agreement includes a statement
that the U.S. transferor agrees to treat a complete or partial
disposition of the S stock held by P as a triggering event.
(C) If the triangular asset reorganization is described in section
368(a)(1)(A) by reason of section 368(a)(2)(E) and the transferred
corporation is the merged corporation, the new gain recognition
agreement includes a statement that the U.S. transferor agrees to treat
a complete or partial disposition of the stock of the surviving
corporation as a triggering event.
(8) Complete liquidation of transferred corporation. A distribution
of substantially all of the assets of the transferred corporation to
which section 337 applies, and the related exchange of the transferred
stock to which section 332 applies, shall not constitute triggering
events, if the U.S. transferor enters into a new gain recognition
agreement. If the transferred corporation is domestic, see Sec.
1.367(e)-2 and paragraph (o)(4) of this section. See paragraph (q)(2) of
this section, Example 9 for an illustration of the rules provided in
this paragraph (k)(8).
[[Page 431]]
(9) Death of U.S. transferor. The death of a U.S. transferor shall
not constitute a triggering event if the person winding up the affairs
of the U.S. transferor--
(i) Retains sufficient assets of the U.S. transferor to satisfy any
possible Federal tax liability of the U.S. transferor under the gain
recognition agreement for the duration of the extended period of
limitations on assessments of tax on the gain realized but not
recognized in the initial transfer;
(ii) Provides security as required under paragraph (h) of this
section for any possible Federal tax liability of the U.S. transferor
under the gain recognition agreement; or
(iii) Obtains a ruling from the Internal Revenue Service providing
for one or more successors to the U.S. transferor under the gain
recognition agreement.
(10) Deconsolidation. A deconsolidation of the U.S. transferor shall
not constitute a triggering event if the U.S. transferor enters into a
new gain recognition agreement.
(11) Consolidation. A consolidation of the U.S. transferor shall not
constitute a triggering event if the U.S. transferor enters into a new
gain recognition agreement. See paragraph (d)(3) of this section.
(12) Intercompany transactions--(i) General rule. If, pursuant to an
intercompany transaction, the U.S. transferor disposes of stock of the
transferee foreign corporation received in the initial transfer, this
paragraph (k)(12) applies to such disposition to the extent the
intercompany transaction creates an intercompany item that is not taken
into account in the taxable year during which the intercompany
transaction occurs. To the extent this paragraph (k)(12) applies, the
disposition shall not constitute a triggering event, and the U.S.
transferor shall remain subject to the gain recognition agreement if the
conditions of paragraphs (k)(12)(i)(A) and (B) of this section are
satisfied. To the extent the intercompany transaction does not create an
intercompany item see, for example, paragraph (k)(1) and paragraph
(q)(2) of this section, Example 20. See paragraph (o)(6) of this section
for the effect on a gain recognition agreement when an intercompany item
from an intercompany transaction to which this paragraph (k)(12)(i)
applies is taken into account.
(A) At the time of the disposition, the basis of the stock of the
transferee foreign corporation received in the initial transfer that is
disposed of in the intercompany transaction is not greater than the sum
of the amounts described in paragraphs (k)(12)(i)(A)(1) through (3) of
this section. If only a portion of the stock of the transferee foreign
corporation received in the initial transfer is disposed of, then the
basis of such stock shall be compared with a proportionate amount
(measured by value as determined at the time of the disposition) of the
amounts described in paragraph (k)(12)(i)(A)(1) through (3) of this
section. To satisfy the basis condition of this paragraph (k)(12)(i)(A),
the U.S. transferor may reduce the basis of the stock of the transferee
foreign corporation received in the initial transfer that is disposed of
in the intercompany transaction in accordance with the principles of
paragraph (o)(1)(iii) of this section.
(1) The aggregate basis of the transferred stock or securities at
the time of the initial transfer;
(2) The amount of any increase to the basis of the transferred stock
or securities by reason of gain recognized by the U.S. transferor on the
initial transfer; and
(3) The amount of any increase to the basis of the stock disposed of
by reason of an income inclusion by the U.S. transferor with respect to
such stock (for example, pursuant to section 961(a)).
(B) The annual certification filed with respect to the existing gain
recognition agreement for the taxable year during which the intercompany
transaction occurs includes a complete description of the intercompany
transaction and a schedule illustrating how the basis condition of
paragraph (k)(12)(i)(A) of this section is satisfied.
(ii) Certain dispositions following intercompany transaction. A
subsequent disposition of stock of the transferee foreign corporation
that is transferred in an intercompany transaction to which the
exception provided by paragraph
[[Page 432]]
(k)(12)(i) of this section applies shall not constitute a triggering
event if--
(A) The stock is transferred to a member of the consolidated group
that includes the U.S. transferor immediately after the disposition, and
(B) The annual certification filed with respect to the existing gain
recognition agreement for the taxable year during which the subsequent
disposition occurs includes a complete description of the disposition.
(13) Deemed asset sales pursuant to section 338(g) elections. A
deemed sale of the assets of the transferred corporation or the
transferee foreign corporation as a result of an election under section
338(g) shall not constitute a triggering event. This paragraph does not
apply to the sale of the stock of the target corporation (within the
meaning of section 338(d)(2)) with respect to which such election is
made.
(14) Other dispositions or events. A disposition or other event that
would constitute a triggering event, without regard to this paragraph
(k)(14), shall not constitute a triggering event if the conditions of
paragraph (k)(14)(i) through (iii) of this section, as applicable, are
satisfied. See paragraph (q)(2), Examples 4, 6, 10, 12, 17, 21, and 23
of this section for illustrations of the rules provided by this
paragraph (k)(14).
(i) The disposition qualifies as a nonrecognition transaction.
(ii) Immediately after the disposition or other event, a U.S.
transferor retains a direct or indirect interest in the transferred
stock or securities or, as applicable, in substantially all of the
assets of the transferred corporation (for example, in a case where the
transferred corporation has been liquidated pursuant to section 332).
If, as a result of the disposition or other event, a foreign corporation
acquires the transferred stock or securities or, as applicable,
substantially all the assets of the transferred corporation, the
condition of this paragraph (k)(14)(ii) shall be satisfied only if the
U.S. transferor owns at least five percent (applying the attribution
rules of section 318, as modified by section 958(b)) of the total voting
power and the total value of the outstanding stock of such foreign
corporation.
(iii) A new gain recognition agreement is entered into by the U.S.
transferor described in paragraph (k)(14)(ii) of this section that
includes--
(A) An explanation of why this paragraph (k)(14) applies to the
disposition or other event; and
(B) A description of each subsequent disposition or other event that
would constitute a triggering event, other than those described in
paragraph (j) of this section, with respect to the new gain recognition
agreement based on the principles of paragraphs (j) and (k) of this
section including, for example, an indirect disposition of the
transferred stock or securities.
(l) [Reserved]
(m) Receipt of boot in nonrecognition transactions--(1) Dispositions
of transferred stock or securities. Notwithstanding paragraph (k) of
this section, if gain is required to be recognized (not including any
gain that would be treated as a dividend under section 356(a)(2)) in
connection with a disposition of the transferred stock or securities to
which an exception under paragraph (k) of this section otherwise applies
(triggering event exception), the U.S. transferor shall recognize gain
under paragraph (c)(1)(i) of this section equal to the amount of gain
required to be recognized in connection with the disposition, but not in
excess of the amount of gain subject to the gain recognition agreement.
For purposes of this paragraph (m)(1), the amount of gain required to be
recognized in connection with the disposition shall be determined before
taking into account any increase to the basis of the transferred stock
or securities under paragraph (c)(4)(ii) of this section. See paragraph
(q)(2) of this section, Example 13, for an illustration of the rule
provided by this paragraph (m)(1).
(2) Dispositions of assets of transferred corporation. If gain is
required to be recognized (not including any gain that would be treated
as a dividend under section 356(a)(2)) in connection with a disposition
of substantially all of the assets of the transferred corporation to
which a triggering event exception otherwise applies, the U.S.
transferor shall recognize gain under paragraph (c)(1)(i) of this
section equal to the amount of
[[Page 433]]
gain required to be recognized in connection with the disposition, but
not in excess of the amount of gain subject to the gain recognition
agreement.
(n) Special rules for distributions with respect to stock--(1)
Certain dividend equivalent redemptions treated as dispositions. A
redemption of the transferred stock or of stock of the transferee
foreign corporation received in the initial transfer that is treated by
reason of section 302(d) as a distribution of property to which section
301 applies shall constitute a disposition for purposes of this section
unless the U.S. transferor enters into a new gain recognition agreement
that includes appropriate provisions to account for the redemption. For
an illustration of the rule of this paragraph (n)(1), see paragraph
(q)(2) of this section, Example 14.
(2) Gain recognized under section 301(c)(3). If gain is required to
be recognized under section 301(c)(3) with respect to the transferred
stock, the U.S. transferor shall recognize gain under the gain
recognition agreement in accordance with paragraph (c)(1)(i) of this
section in an amount equal to the gain required to be recognized under
section 301(c)(3), but not in excess of the amount of gain subject to
the gain recognition agreement. For this purpose, the amount of gain
required to be recognized under section 301(c)(3) shall be determined
before taking into account any increase in the basis of the transferred
stock under paragraph (c)(4)(ii) of this section.
(o) Dispositions or other events that terminate or reduce the amount
of gain subject to the gain recognition agreement. Notwithstanding
paragraph (j) of this section, the following dispositions or other
events shall not constitute triggering events but instead shall
terminate or reduce the amount of gain subject to the gain recognition
agreement.
(1) Taxable disposition of stock of the transferee foreign
corporation--(i) Complete disposition. Except as otherwise provided in
this paragraph (o)(1)(i), if the U.S. transferor disposes of all the
stock of the transferee foreign corporation received in the initial
transfer in a transaction in which all gain realized is recognized and
included in taxable income during the taxable year of the disposition,
the gain recognition agreement shall terminate without further effect
if, at the time of the disposition, the aggregate basis of such stock is
not greater than the sum of the amounts described in paragraphs
(o)(1)(i)(A) through (C) of this section. This paragraph shall not apply
to a disposition of stock of the transferee foreign corporation pursuant
to an intercompany transaction to which paragraph (k)(12) of this
section applies. This paragraph shall also not apply to an individual
U.S. transferor that loses U.S. citizenship or ceases to be a lawful
permanent resident of the United States (within the meaning of section
7701(b)(6)).
(A) The aggregate basis of the transferred stock or securities at
the time of the initial transfer;
(B) The amount of any increase to the basis of the transferred stock
or securities by reason of gain recognized by the U.S. transferor on the
initial transfer; and
(C) The amount of any increase to the basis of the stock disposed of
by reason of an income inclusion by the U.S. transferor with respect to
such stock (for example, pursuant to section 961(a)).
(ii) Partial dispositions. A partial disposition by the U.S.
transferor of the stock of the transferee foreign corporation received
in the initial transfer in a transaction otherwise described in
paragraph (o)(1)(i) of this section shall reduce the amount of gain
subject to the gain recognition agreement based on the relative fair
market value of the stock disposed of (measured at the time of the
disposition) compared to the fair market value of all of the stock of
the transferee foreign corporation received in the initial transfer
(measured at the time of the disposition). For determining whether the
basis condition of paragraph (o)(1)(i) of this section is satisfied in
the case of a partial disposition, the aggregate basis of the stock
disposed of is compared to a proportionate amount (based on fair market
value, as measured at the time of the partial disposition) of the
amounts described in paragraphs (o)(1)(i)(A) through (C) of this
section. For an illustration of the rules of this paragraph (o)(1)(ii),
see paragraph (q)(2), Example 15, of this section.
[[Page 434]]
(iii) Reduction of stock basis. For purposes of satisfying the basis
condition of paragraph (o)(1)(i) or (ii) of this section, the U.S.
transferor may reduce the aggregate basis of the stock of the transferee
foreign corporation received in the initial transfer, effective
immediately before the disposition. For an illustration of the rules of
this paragraph (o)(1)(iii), see paragraph (q)(2), Example 16, of this
section. The U.S. transferor reduces the basis of the stock of the
transferee foreign corporation by including a statement with the timely-
filed return of the U.S. transferor for the taxable year in which the
disposition occurs, entitled ``Election to Reduce Stock Basis Under
Sec. 1.367(a)-8(o)(1)(iii)'' and that includes--
(A) A description, including the date, of the disposition;
(B) A description of the stock of the transferee foreign corporation
disposed of and the basis adjustments made under this paragraph
(o)(1)(iii); and
(C) The fair market value of all the stock of the transferee foreign
corporation held by the U.S. transferor at the time of the disposition.
(2) Gain recognized in connection with certain nonrecognition
transactions. If the U.S. transferor recognizes gain in connection with
a complete or partial disposition of stock of the transferee foreign
corporation received in the initial transfer that is described in
paragraph (k) of this section, and the basis condition of paragraph
(o)(1)(i) or (ii) of this section, as applicable, is satisfied with the
respect to such disposition, the amount of gain subject to the new gain
recognition agreement filed under paragraph (k) of this section as a
result of such disposition shall equal the amount of gain subject to the
existing gain recognition agreement reduced by the amount of gain
recognized by the U.S. transferor on the disposition. If the U.S.
transferor recognizes gain in connection with a complete or partial
disposition of the stock of the transferee foreign corporation received
in the initial transfer that is described in paragraph (k) of this
section, and the condition of paragraph (o)(1)(i) or (ii) of this
section, as applicable, is satisfied with the respect to the
disposition, but a new gain recognition agreement is not filed with
respect to such disposition so that a triggering event exception does
not apply to the disposition, the amount of gain required to be
recognized by the U.S. transferor under the existing gain recognition
agreement shall be reduced by the amount of the gain recognized on the
disposition.
(3) Gain recognized under section 301(c)(3). If the U.S. transferor
recognizes gain under section 301(c)(3) with respect to the stock of the
transferee foreign corporation received in the initial transfer, the
amount of gain subject to the gain recognition agreement shall be
reduced by the amount of such recognized gain.
(4) Dispositions of substantially all of the assets of a domestic
transferred corporation. Except as otherwise provided in this paragraph
(o)(4), the gain recognition agreement shall terminate without further
effect if substantially all of the assets of the transferred corporation
are disposed of in a transaction in which all gain realized is
recognized and included in taxable income during the taxable year of the
disposition, but only if, at the time of the initial transfer, the U.S.
transferor owned stock in the transferred corporation satisfying the
requirements of section 1504(a)(2) and the U.S. transferor and the
transferred corporation were members of the same consolidated group. If
the initial transfer was part of an indirect stock transfer, the gain
recognition agreement shall terminate without further effect if
substantially all of the assets of the transferred corporation (taking
into account Sec. 1.367(a)-3(d)(2)(v)) are disposed of in a transaction
in which all gain realized is recognized and included in taxable income
during the taxable year of the disposition, but only if at the time of
the initial transfer the U.S. transferor owned stock in the transferred
corporation satisfying the requirements of section 1504(a)(2) (for
example, in the case of a reorganization described in section
368(a)(1)(A) by reason of section 368(a)(2)(E)) and the U.S. transferor
and the transferred corporation were members of the same consolidated
group.
(5) Certain distributions or transfers of transferred stock or
securities to U.S. persons. To the extent a distribution or transfer of
the transferred stock or securities satisfies the conditions of
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paragraphs (o)(5)(i) through (iii) of this section, the gain recognition
agreement shall terminate without further effect, or the amount of gain
subject to the gain recognition agreement shall be reduced, as
appropriate.
(i) Distributions or transfers described in section 337, 355, or
361. The transferred stock or securities are distributed or transferred
pursuant to a transaction described in paragraph (o)(5)(i)(A) through
(D) of this section, as appropriate.
(A) A distribution described in section 337 that is pursuant to a
complete liquidation described in section 332. See paragraph (q)(2) of
this section, Example 18, for an illustration of the rule provided by
this paragraph (o)(5)(i)(A).
(B) A distribution to which section 355 applies. See paragraph
(q)(2) of this section, Example 19, for an illustration of the rule
provided by this paragraph (o)(5)(i)(B).
(C) A section 361 exchange that is pursuant to an asset
reorganization. See paragraph (q)(2) of this section, Example 22, for an
illustration of the rule provided by this paragraph (o)(5)(i)(C).
(D) A distribution to which section 361(c) applies that is pursuant
to an asset reorganization. See paragraph (q)(2) of this section,
Example 22, for an illustration of the rule provided by this paragraph
(o)(5)(i)(D).
(ii) Qualified recipient. The recipient of the transferred stock or
securities in the relevant transaction described in paragraph (o)(5)(i)
of this section (qualified recipient) is--
(A) The U.S. transferor;
(B) A member of the consolidated group that includes the U.S.
transferor immediately after the transaction; or
(C) An individual that is a United States person.
(iii) Basis requirement--(A) General rule. Immediately after the
relevant transaction described in paragraph (o)(5)(i) of this section,
the aggregate basis of the transferred stock or securities received by
the qualified recipient is not greater than the aggregate basis of such
stock or securities at the time of the initial transfer (as adjusted for
gain recognized by the U.S. transferor on the initial transfer
attributable to such stock or securities). For this purpose, the basis
of the transferred stock in the hands of the qualified recipient shall
be determined without regard to any basis attributable to income
inclusions with respect to the stock (for example, under section
961(a)). In the case of a distribution to which section 355 applies, any
adjustments to basis under Sec. 1.367(b)-5(c) shall be made before
determining whether the basis condition of this paragraph is satisfied.
(B) Election to reduce basis in transferred stock or securities. If
the basis condition of paragraph (o)(5)(iii)(A) of this section is not
satisfied, each qualified recipient may reduce the basis of the
transferred stock or securities received in the transaction to the
extent necessary to satisfy the basis condition. A qualified recipient
reduces the basis of the transferred stock or securities by including a
statement with its timely-filed return for the taxable year during which
the distribution or transfer occurs entitled ``Election to Reduce Stock
Basis Under Sec. 1.367(a)-8(o)(5)(iii)(B)'' and that includes--
(1) A complete description and the date of the distribution or
transfer;
(2) The fair market value of the transferred stock or securities
received by the qualified recipient in the transaction; and
(3) The basis of the transferred stock or securities received by the
qualified recipient immediately before and after the basis reduction.
(6) Dispositions or other event following certain intercompany
transactions. If, subsequent to an intercompany transaction to which
paragraph (k)(12) of this section applies, a disposition or other event
occurs that requires the U.S. transferor to take into account the
intercompany item related to the intercompany transaction (under the
provisions of Sec. 1.1502-13), the gain recognition agreement shall
terminate without further effect or the amount of gain subject to the
gain recognition agreement shall be reduced based on the principles of
paragraph (o)(1)(i) or (ii) of this section, as appropriate. For an
illustration of the rules of this paragraph (o)(6), see paragraph (q)(2)
of this section, Example 20.
(7) Expropriations under foreign law. The amount of gain subject to
the gain recognition agreement shall be reduced to the extent the stock
or securities of
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the transferee foreign corporation received in the initial transfer, the
transferred stock or securities, or substantially all the assets of the
transferred corporation, are expropriated, seized, or subjected to a
similar taking of such property by the government of a foreign country,
any political subdivision thereof, or any agency or instrumentality of
the foregoing. Principles similar to those of paragraph (o)(1)(i) or
(o)(1)(ii) of this paragraph, as relevant, shall be applied to determine
the amount of the reduction.
(p) Relief for certain failures to file or failures to comply that
are not willful--(1) In general. This paragraph (p) provides relief if
there is a failure to file an initial gain recognition agreement as
required under paragraph (d)(1) of this section (failure to file), or a
failure to comply that is a triggering event under paragraph (j)(8) of
this section (failure to comply). A failure to file or failure to comply
will be deemed not to have occurred for purposes of paragraph (d)(1) of
this section or paragraph (j)(8) of this section if the U.S. transferor
demonstrates that the failure was not willful using the procedure set
forth in this paragraph (p). For this purpose, willful is to be
interpreted consistent with the meaning of that term in the context of
other civil penalties, which would include a failure due to gross
negligence, reckless disregard, or willful neglect. Whether a failure to
file or failure to comply was willful will be determined by the Director
(as described in paragraph (j)(8) of this section) based on all the
facts and circumstances. The U.S. transferor must submit a request for
relief and an explanation as provided in paragraph (p)(2)(i) of this
section. Although a U.S. transferor whose failure to file or failure to
comply is determined not to be willful will not be subject to gain
recognition under paragraph (b), (c), or (e) of Sec. 1.367(a)-3 or
paragraph (c)(1) of this section, as applicable, the U.S. transferor
will be subject to a penalty under section 6038B if the U.S. transferor
fails to satisfy the reporting requirements under that section and does
not demonstrate that the failure was due to reasonable cause and not
willful neglect. See Sec. 1.6038B-1(b)(2) and (f). The determination of
whether the failure to file or failure to comply was willful under this
section has no effect on any request for relief made under Sec.
1.6038B-1(f).
(2) Procedures for establishing that a failure to file or failure to
comply was not willful--(i) Time and manner of submission. A U.S.
transferor's statement that a failure to file or failure to comply was
not willful will be considered only if, promptly after the U.S.
transferor becomes aware of the failure, an amended return is filed for
the taxable year to which the failure relates that includes the
information that should have been included with the original return for
such taxable year or that otherwise complies with the rules of this
section, and that includes a written statement explaining the reasons
for the failure to file or failure to comply. The U.S. transferor must
file, with the amended return, a Form 8838 extending the period of
limitations on assessment of tax with respect to the gain realized but
not recognized on the initial transfer to the later of: The close of the
eighth full taxable year following the taxable year during which the
initial transfer occurred (date one); or the close of the third full
taxable year ending after the date on which the required information is
provided to the Director (date two). However, the U.S. transferor is not
required to file a Form 8838 with the amended return if both date one is
later than date two and a Form 8838 was previously filed extending the
period of limitations on assessment of tax with respect to the gain
realized but not recognized on the initial transfer to date one. If a
Form 8838 is not required to be filed with the amended return pursuant
to the previous sentence, a copy of the previously filed Form 8838 must
be filed with the amended return. The amended return and either a Form
8838 or a copy of the previously filed Form 8838, as the case may be,
must be filed with the Internal Revenue Service at the location where
the U.S. transferor filed its original return. The U.S. transferor may
submit a request for relief from the penalty under section 6038B as part
of the same submission. See Sec. 1.6038B-1(f).
(ii) Notice requirement. In addition to the requirements of
paragraph (p)(2)(i)
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of this section, the U.S. transferor must comply with the notice
requirements of this paragraph (p)(2)(ii). If any taxable year of the
U.S. transferor is under examination when the amended return is filed, a
copy of the amended return and any information required to be included
with such return must be delivered to the Internal Revenue Service
personnel conducting the examination. If no taxable year of the U.S.
transferor is under examination when the amended return is filed, a copy
of the amended return and any information required to be included with
such return must be delivered to the Director.
(3) Examples. The following examples illustrate the application of
this paragraph (p). All of the examples are based solely on the
following facts and any additional facts stated in the particular
example. DC, a domestic corporation, wholly owns FS and FA, each a
foreign corporation. In Year 1, pursuant to a transaction qualifying
both as an exchange under section 351 and a reorganization under section
368(a)(1)(B), DC transferred all the FS stock to FA solely in exchange
for voting stock of FA (FS Transfer). The fair market value of the FS
stock exceeded DC's tax basis in the stock at the time of the FS
transfer. Absent the application of section 367 to the transaction, DC's
exchange of the FS stock for the stock of FA qualified as a tax-free
exchange under sections 351(a) and section 354. Immediately after the
transaction, both FA and FS were controlled foreign corporations (as
defined in section 957). Furthermore, DC was a section 1248 shareholder
(as defined in Sec. 1.367(b)-2(b)) with respect to FA and FS, and a 5-
percent shareholder with respect to FA for purposes of Sec. 1.367(a)-
3(b)(ii). Thus, DC was required to recognize gain under section
367(a)(1) by reason of the FS Transfer unless DC timely filed an initial
gain recognition agreement (GRA) as required by paragraph (d)(1) of this
section and complies in all material respects with the requirements of
this section throughout the term of the GRA. The application of section
6038B is not addressed in these examples. DC may be subject to a penalty
under section 6038B even if DC demonstrates under this section that a
failure to file or failure to comply was not willful. See Sec. 1.6038B-
1(b) and (f) for the application of section 6038B.
Example 1. Taxpayer failed to file a GRA due to accidental
oversight. (i) Facts. DC filed its tax return for the year of the FS
Transfer, reporting no gain with respect to the exchange of the FS
stock. DC, through its tax department, was aware of the requirement to
file a GRA in order for DC to avoid recognizing gain with respect to the
FS Transfer under section 367(a)(1), and had the experience and
competency to properly prepare the GRA. DC had filed many GRAs over the
years and had never failed to timely file a GRA. However, although DC
prepared the GRA with respect to the FS Transfer, it was not filed with
DC's tax return for the year of the FS Transfer due to an accidental
oversight. During the preparation of the following year's tax return, DC
discovered that the GRA was not filed. DC filed an amended return to
file the GRA and complied with the procedures set forth under paragraph
(p)(2) of this section promptly after it became aware of the failure.
(ii) Result. Because DC failed to file a GRA with its timely filed
tax return for the year of the FS Transfer, there is a failure to timely
file the GRA as required by paragraph (d)(1) of this section. However,
based on the facts of this Example 1, including that the failure to
timely file the GRA was an isolated and accidental oversight, the
failure to timely file is not a willful failure to file. Accordingly,
the timely filed requirement of paragraph (d)(1) of this section is
considered to be satisfied, and DC is not required to recognize the gain
realized on the FS Transfer under section 367(a)(1).
Example 2. Taxpayer's course of conduct is taken into account in
determination. (i) Facts. DC filed its tax return for the year of the FS
Transfer, reporting no gain with respect to the exchange of the FS
stock, but failed to file a GRA. DC, through its tax department, was
aware of the requirement to file a GRA in order for DC to avoid
recognizing gain with respect to the FS Transfer under section
367(a)(1). DC had not consistently and in a timely manner filed GRAs in
the past, and also had an established history of failing to timely file
other tax and information returns for which it was subject to penalties.
In a year subsequent to Year 1, DC transferred stock of another foreign
subsidiary with respect to which DC had a built-in gain (FS2) to FA in a
transaction that qualified as both a reorganization under section
368(a)(1)(B) and an exchange described under section 351 (FS2 Transfer).
DC was required to recognize gain on the FS2 Transfer under section
367(a)(1) unless DC timely filed a GRA as required by paragraph (d)(1)
of this section and
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complied with the requirements of this section during the term of the
GRA. DC reported no gain on the FS2 Transfer on its tax return, but
failed to file a GRA. At the time of the FS2 Transfer, DC was already
aware of its failure to file the GRA required for the prior FS Transfer,
but had not implemented any safeguards to ensure that it would timely
file GRAs for future transactions. DC filed an amended return to file
the GRA for the FS2 Transfer and complied with the procedures set forth
under paragraph (p)(2) of this section promptly after it became aware of
the failure. DC asserts that its failure to timely file a GRA with
respect to the FS2 Transfer was due to an isolated oversight similar to
the one that occurred with respect to the FS Transfer. At issue is DC's
failure to timely file a GRA for the FS2 Transfer.
(ii) Result. Because DC failed to file a GRA with its timely filed
tax return for the year of the FS2 Transfer, there is a failure to
timely file the GRA as required by paragraph (d)(1) of this section.
DC's course of conduct is taken into account in determining whether its
failure to timely file a GRA for the FS2 Transfer was willful. Based on
the facts of this Example 2, including DC's history of failing to file
required tax and information returns in general and GRAs in particular,
and its failure to implement safeguards to ensure that it would timely
file GRAs, the failure to timely file a GRA with respect to the FS2
Transfer rises to the level of a willful failure to timely file.
Accordingly, DC is ineligible for relief under paragraph (p) of this
section, the GRA is not considered timely filed for purposes of
paragraph (d)(1) of this section, and DC must recognize the full amount
of the gain realized on the FS2 Transfer.
Example 3. GRA not completed in all material respects. (i) Facts. DC
timely filed its tax return for the year of the FS Transfer, reporting
no gain with respect to the exchange of the FS stock. DC was aware of
the requirement to file a GRA to avoid recognizing gain under section
367(a)(1), including the requirement to provide the basis and fair
market value of the transferred stock. However, DC filed a purported GRA
that did not contain the fair market value of the FS stock. Instead, the
GRA was filed with the statement that the fair market value information
was ``available upon request.'' Other than the omission of the fair
market value of the FS stock, the GRA contained all other information
required by this section.
(ii) Result. Because DC omitted the fair market value of the FS
stock from the GRA, the GRA was not completed in all material respects.
Accordingly, there is a failure to timely file the GRA. Furthermore,
because DC knowingly omitted such information, DC's omission is a
willful failure to timely file a GRA. Accordingly, DC is ineligible for
relief under paragraph (p) of this section, the GRA is not considered
timely filed for purposes of paragraph (d)(1) of this section, and DC
must recognize the full amount of the gain realized on the FS Transfer.
The same result would arise if DC had included the fair market value of
the FS stock, but knowingly omitted its tax basis from the GRA.
Example 4. Taxpayer knew of GRA filing requirement, but
intentionally chose not to file. (i) Facts. When DC filed its tax return
for the tax year of the FS Transfer, it was aware of the requirement to
file a GRA to avoid recognizing gain under section 367(a)(1). However,
because DC anticipated selling Business A in the following tax year,
which was expected to produce a capital loss that could be carried back
to fully offset the gain recognized on the FS Transfer, DC intentionally
chose not to file a GRA. DC recognized the gain from the FS Transfer
under section 367(a)(1) and reported the gain on its timely filed tax
return. At the end of the following year, a large class action lawsuit
was filed against Business A and, consequently, DC was unable to sell
the business. As a result, DC did not realize the expected capital loss,
and it was not able to offset the gain from the FS Transfer. DC now
seeks to file a GRA for the FS Transfer.
(ii) Result. Because DC failed to file a GRA with its timely filed
tax return for the year of the FS Transfer, there is a failure to timely
file the GRA as required by paragraph (d)(1) of this section.
Furthermore, because DC intentionally chose not to file a GRA for the FS
Transfer, its actions constitute a willful failure to timely file a GRA.
Accordingly, DC is ineligible for relief under paragraph (p) of this
section, the GRA is not considered timely filed for purposes of
paragraph (d)(1) of this section, and DC must recognize the full amount
of the gain realized on the FS Transfer in Year 1.
(q) Examples--(1) Presumed facts and references. For purposes of the
examples in paragraph (q)(2) of this section, and except where otherwise
indicated, the following is presumed.
(i) UST, USP, and DC are domestic corporations that each use a
calendar taxable year.
(ii) USP wholly owns UST and is the common parent of the
consolidated group of which UST is a member.
(iii) TFC, TFD, F1, and FA are foreign corporations.
(iv) UST wholly owns TFD.
(v) In a section 351 exchange, UST transfers all of the stock of TFD
(TFD stock) to TFC in exchange solely for stock of TFC (the initial
transfer).
(vi) Pursuant to Sec. 1.367(a)-3(b)(1)(ii) and this section, UST
enters into a
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gain recognition agreement in connection with the initial transfer and
makes the election described under paragraph (c)(2)(vi) of this section
with respect to the gain recognition agreement.
(vii) As applicable, the section 1248 amount (within the meaning of
Sec. 1.367(b)-2(c)) or all earnings and profits amount (within the
meaning of Sec. 1.367(b)-2(d)) attributable to the stock of a foreign
corporation is zero.
(viii) All transactions are respected under general principles of
tax law, including the step transaction doctrine.
(ix) References to a U.S. transferor entering into a gain
recognition agreement mean, where applicable, that the common parent of
the consolidated group of which the U.S. transferor is a member has
filed the gain recognition agreement on behalf of the U.S. transferor in
accordance with paragraph (d)(3) of this section.
(x) Taxable years during the GRA term are referred to, for example,
as year 1 and year 2.
(2) Examples. The following examples illustrate the application of
the rules of this section.
Example 1. Basis adjustments from gain recognized under the gain
recognition agreement. (i) Facts. TFC wholly owns F1. In year 3,
pursuant to a section 351 exchange, TFC transfers all of the TFD stock
to F1 in exchange solely for voting stock of F1. UST enters into a new
gain recognition agreement with respect to the initial transfer under
paragraph (k)(3) of this section, and therefore the transfer by TFC of
the TFD stock to F1 is not a triggering event. Under paragraph (c)(5)(i)
of this section, the existing gain recognition agreement terminates
without further effect. In year 4, in an exchange to which section 721
applies, UST contributes the TFC stock received in the initial transfer
to PRS, a domestic partnership, in exchange for a partnership interest.
UST enters into a new gain recognition agreement with respect to the
initial transfer under paragraph (k)(1) of this section, and therefore
the transfer by UST of the TFC stock to PRS is not a triggering event.
Under paragraph (c)(5)(i) of this section, the new gain recognition
agreement filed by UST in year 3 terminates without further effect. In
year 5, TFD disposes of substantially all of its assets in a transaction
that constitutes a triggering event under paragraph (j)(2)(i) of this
section. Under paragraph (c)(1)(i) of this section, UST recognizes the
gain realized but not recognized on the initial transfer by reason of
entering into the gain recognition agreement.
(ii) Result. Under paragraph (c)(4) of this section, the basis of
the PRS interest held by UST, the TFC stock held by PRS that was
received from UST in year 4, the F1 stock held by TFC that was received
in exchange for the TFD stock in year 3, and the TFD stock held by F1
that was received from TFC in year 3 is increased by the amount of gain
recognized by UST (but not by the additional tax or interest paid as
result of such gain) with respect to the initial transfer under the gain
recognition agreement. However, the basis of the assets of TFD
(including the assets disposed of in year 5) is not increased as a
result of the gain recognized by UST.
Example 2. Impact of gain recognition event on computation of
income. (i) Facts. At the time of the initial transfer, the TFD stock
has a $50x basis, a $100x fair market value, and a $30x section 1248
amount. The amount of gain subject to the gain recognition agreement is
$50x. UST did not make an election under paragraph (c)(2)(vi) of this
section with respect to the gain recognition agreement. In year 3, TFC
disposes of the TFD stock received in the initial transfer in exchange
for $120x cash.
(ii) Result--(A) Gain recognition without an election. The
disposition by TFC of the TFD stock in year 3 is a triggering event
under paragraph (j)(1) of this section. As a result, under paragraph
(c)(1)(i) of this section, UST must recognize and include in income $50x
gain under the gain recognition agreement. Under paragraph
(c)(1)(iii)(A) of this section, UST must report the $50x gain on an
amended return filed for the taxable year of the initial transfer. Under
paragraph (c)(1)(v) of this section, UST must pay applicable interest on
any additional tax due with respect to the $50x gain recognized. Under
section 1248(a), $30x of the gain recognized by UST under the gain
recognition agreement is recharacterized as a dividend. Under paragraph
(c)(4) of this section, as of the date of the initial transfer, the
basis of the TFC stock received by UST in the initial transfer and the
TFD stock received by TFC in the initial transfer, respectively, is
increased by $50x. After taking into account the increase to the basis
of the TFD stock, TFC recognizes $20x gain on the disposition of the TFD
stock in year 3.
(B) Gain recognition with an election. If UST made an election under
paragraph (c)(2)(vi) of this section with the gain recognition agreement
filed for the initial transfer, the result would be the same as in
paragraph (ii)(A) of this Example 2, except that UST must include in
income the $50x gain recognized under the gain recognition agreement on
its tax return filed for year 3. Any additional tax due with respect to
the $50x gain and applicable interest on the additional tax due must be
included with such return. The
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amount, if any, of the $50x gain recognized by UST under the gain
recognition agreement that is characterized as a dividend under section
1248(a) is determined in year 3.
Example 3. Transfer of stock of the transferee foreign corporation
to a domestic corporation in a section 351 exchange. (i) Facts. UST
wholly owns DC. In year 3, pursuant to a section 351 exchange, UST
transfers all of the TFC stock received in the initial transfer to DC in
an exchange solely for voting stock of DC.
(ii) Result. The year 3 transfer of the TFC stock by UST to DC
constitutes a triggering event under paragraph (j)(4) of this section.
However, the transfer shall not constitute a triggering event pursuant
to paragraph (k)(1)(ii) of this section if DC enters into a new gain
recognition agreement with respect to the initial transfer that
designates DC as the U.S. transferor for purposes of this section.
Pursuant to paragraphs (c)(4)(i) and (ii) of this section, if DC is
required to recognize gain under the new gain recognition agreement, the
basis of the stock of TFC and TFD would be increased by the amount of
gain recognized. However, pursuant to paragraph (c)(4)(iii) of this
section, no adjustment would be made to the basis of the DC voting stock
received by UST in year 3 as a result of such gain recognition.
Alternatively, if the conditions for the application of paragraph
(k)(14) of this section are satisfied UST could instead enter into the
new gain recognition agreement with respect to the initial transfer.
Example 4. Transfer of stock of the transferee foreign corporation
in a triangular section 368(a)(1)(B) reorganization. (i) Facts. DC
wholly owns FA. In year 3, pursuant to a triangular reorganization
described in section 368(a)(1)(B), UST transfers all of the TFC stock
received in the initial transfer to FA in exchange solely for 20% of the
outstanding voting stock of DC. At the time of the reorganization, the
TFC stock has a basis in excess of fair market value.
(ii) Result. (A) The transfer by UST of the TFC stock to FA is an
indirect stock transfer under Sec. 1.367(a)-3(d)(1)(iii)(B).
Accordingly, to preserve nonrecognition treatment, UST must enter into a
separate gain recognition agreement under this section with respect to
such transfer.
(B) With respect to the gain recognition agreement filed for the
initial transfer of the TFD stock, the transfer by UST of the TFC stock
to FA is a triggering event under paragraph (j)(4) of this section.
However, the transfer shall not constitute a triggering event if the
conditions of the exception provided by paragraph (k)(14) of this
section are satisfied.
(1) The condition of paragraph (k)(14)(i) of this section is
satisfied because the transfer qualifies as a nonrecognition transaction
(assuming UST enters into a gain recognition agreement as described in
paragraph (ii)(A) of this Example 4).
(2) The condition of paragraph (k)(14)(ii) of this section is
satisfied because immediately after the transfer DC, a domestic
corporation that is eligible to be a U.S. transferor, owns at least 5%
(applying the attribution rules of section 318, as modified by section
958(b)) of the total voting power and total fair market value of the
outstanding stock of FA. As a result, DC is treated as retaining an
indirect interest in the TFD stock immediately following the transfer.
(3) The condition of paragraph (k)(14)(iii) of this section is
satisfied if DC enters into a new gain recognition agreement with
respect to the initial transfer of the TFD stock that, based on the
principles of paragraph (j) of this section, describes the subsequent
dispositions or other events that would constitute triggering events for
purposes of the new gain recognition agreement (other than the
dispositions and other events described in paragraph (j) of this
section). For example, a complete or partial disposition of the stock of
FA would constitute a triggering event for purposes of the new gain
recognition agreement.
Example 5. Transfer of stock of the transferee foreign corporation
to a domestic corporation pursuant to an asset reorganization. (i)
Facts. At the time of the initial transfer the TFD stock has a $50x
basis and a $100x fair market value. Therefore, the amount of gain
subject to the gain recognition agreement is $50x. In year 3, pursuant
to an asset reorganization described in section 368(a)(1)(A), UST
transfers its assets to DC in exchange solely for 20% of the outstanding
stock of DC. UST distributes the stock of DC to USP pursuant to the plan
of reorganization.
(ii) Result. The transfer by UST of the TFC stock to DC constitutes
a triggering event under paragraph (j)(4) of this section. However,
pursuant to paragraph (k)(6)(i) of this section, if DC enters into a new
gain recognition agreement with respect to the initial transfer that
designates DC as the U.S. transferor, the transfer shall not constitute
a triggering event.
Example 6. Transfer of stock of the transferee foreign corporation
to a foreign corporation pursuant to an asset reorganization. (i) Facts.
The facts are the same as in Example 5, except the acquiring corporation
in the asset reorganization is FA, and, at the time of the asset
reorganization, the TFC stock transferred by UST to FA has a $50x basis
and a $150x fair market value. All of the conditions under section
367(a)(5) and the regulations under that section are satisfied, and no
adjustment is required to the basis of the FA stock received by USP in
the transaction.
(ii) Result. (A) The transfer by UST of the TFC stock to FA is
described in section 361(a) and is therefore subject to section
367(a)(5). In general, UST cannot file a gain
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recognition agreement with respect to such transfer, and the transfer
therefore is subject to the general rule of section 367(a)(1). However,
if the conditions of Sec. 1.367(a)-3(e)(1)(i) through (iv) are
satisfied, USP can enter into a gain recognition agreement with respect
to the transfer to avoid the recognition of gain by UST on the transfer
under section 367(a)(1). If the exception provided by paragraph (k)(14)
of this section applies so that the transfer by UST of the TFC stock to
FA is not a triggering event with respect to the gain recognition
agreement filed for the initial transfer (discussed in paragraph (ii)(B)
of this Example 6), the amount of gain subject to the gain recognition
agreement (if entered into) with respect to the transfer by UST of the
TFC stock to FA in the asset reorganization is $100x.
(B) Under paragraph (j)(4) of this section, the transfer of the TFC
stock by UST to FA is a triggering event with respect to the gain
recognition agreement for the initial transfer. The exception provided
by paragraph (k)(6)(i) of this section does not apply to such transfer
because FA, the acquiring corporation in the asset reorganization, is
foreign. However, the transfer shall not constitute a triggering event
if the conditions of the exception provided by paragraph (k)(14) of this
section are satisfied.
(1) The condition of paragraph (k)(14)(i) of this section is
satisfied because the transfer of the TFC stock to FA qualifies as a
nonrecognition transaction (assuming USP enters into a gain recognition
agreement with respect to such transfer).
(2) The condition of paragraph (k)(14)(ii) of this section is
satisfied because immediately after the transfer USP, a domestic
corporation that is eligible to be a U.S. transferor, owns at least 5%
(applying the attribution rules of section 318, as modified by section
958(b)) of the total voting power and total fair market value of the
outstanding stock of FA. As a result, USP is treated as retaining an
indirect interest in the TFD stock immediately following the transfer.
(3) The condition of paragraph (k)(14)(iii) of this section is
satisfied if USP enters into a new gain recognition agreement with
respect to the initial transfer of the TFD stock that, based on the
principles of paragraph (j) of this section, describes the subsequent
dispositions or other events that would constitute triggering events for
purposes of the new gain recognition agreement, other than those already
provided in paragraph (j) of this section. For example, a disposition of
the stock of FA would constitute such a triggering event for purposes of
the new gain recognition agreement.
(iii) Alternate facts. Assume the same facts as in paragraph (i) of
this Example 6, including that paragraph (k)(14) of this section applies
to the year 3 reorganization so that USP enters into a new gain
recognition agreement with respect to the initial transfer of the TFD
stock that occurred in year 1 (GRA 1), and that under Sec. 1.367(a)-
3(e) USP enters into a separate gain recognition agreement with respect
to the initial transfer of the TFC stock by UST to FA pursuant to the
year 3 asset reorganization (GRA 2). Assume further that in year 4 TFC
disposes of 10% of the TFD stock pursuant to a transaction that
constitutes a triggering event with respect to GRA 1. The disposition of
the TFD stock is not a triggering event with respect to GRA 2 because
the TFD stock disposed of does not constitute substantially all the
assets of TFC. Under paragraphs (j)(1) and (c)(1)(i) of this section,
USP must recognize $5x gain (10% of $50x) under GRA 1. Under paragraph
(c)(4)(i) and (ii) of this section, as of the date of the initial
transfer (with respect to which GRA 1 was filed), the basis of the TFC
stock and TFD stock, respectively, is increased by $5x. Under paragraph
(c)(1)(i) of this section, the amount of gain subject to GRA 1 is
reduced from $50x to $45x. Similarly, because the transferred stock for
purposes of GRA 2 is the TFC stock, the amount of gain subject to GRA 2
is reduced from $100x to $95x to reflect the increase to the basis of
the TFC stock.
Example 7. Transfer of transferred stock to a foreign corporation
pursuant to an asset reorganization. (i) Facts. UST wholly owns FA. In
year 4, pursuant to a reorganization described in section 368(a)(1)(D),
TFC transfers all of the TFD stock to FA in exchange solely for stock of
FA. TFC distributes the FA stock to UST pursuant to the plan of
reorganization.
(ii) Analysis. In general, the year 4 transfer by TFC of the TFD
stock to FA and the exchange by UST of the TFC stock for FA stock
constitute triggering events under paragraphs (j)(1) and (4) of this
section, respectively. However, under paragraph (k)(6)(ii) of this
section, the transfers shall not constitute triggering events if UST
enters into a new gain recognition agreement with respect to the initial
transfer that designates FA as the transferee foreign corporation.
Example 8. Transfer of substantially all the assets of the
transferred corporation pursuant to an asset reorganization. (i) Facts.
In year 4, pursuant to an asset reorganization described in section
368(a)(1)(C), TFD transfers all of its assets to FA in exchange solely
for voting stock of FA. TFD distributes the FA voting stock to TFC
pursuant to the plan of reorganization.
(ii) Analysis. The year 4 transfer by TFD of all its assets to FA
and the exchange by TFC of its TFD stock for FA voting stock pursuant to
the reorganization constitute triggering events under paragraphs (j)(2)
and (j)(1) of this section, respectively. However, under paragraph
(k)(6)(iii) of this section, the transfers shall not constitute
triggering
[[Page 442]]
events if UST enters into a new gain recognition agreement with respect
to the initial transfer that designates FA as the transferred
corporation. In addition, under paragraph (k)(6)(iii) of this section
only the assets of TFD acquired by FA in the asset reorganization shall
be treated as assets of the transferred corporation for purposes of the
new gain recognition agreement.
Example 9. Complete liquidation of transferred corporation into
transferee foreign corporation. (i) Facts. UST does not make an election
under paragraph (c)(2)(vi) of this section in connection with the gain
recognition agreement entered into with respect to the initial transfer.
In year 3, TFD distributes all of its assets to TFC pursuant to a
complete liquidation to which sections 332 and 337 apply. Under
paragraph (k)(8) of this section, UST enters into a new gain recognition
agreement with respect to the initial transfer such that the liquidation
is not a triggering event. Under paragraph (c)(5)(i) of this section,
the new gain recognition agreement is subject to the conditions and
requirements of this section to the same extent as the existing gain
recognition agreement, except that the transferred stock is no longer
subject to the gain recognition agreement because the transferred stock
is cancelled by reason of the liquidation. In year 5 TFC disposes of
substantially all of the assets received from TFD in the year 3
liquidation.
(ii) Result. The year 5 disposition by TFC of substantially all of
the assets received from TFD in the year 3 liquidation is a triggering
event under paragraph (j)(2) of this section, and therefore UST must
recognize the gain subject to the gain recognition agreement. UST must
report the gain recognized on an amended return for the taxable year
during which the initial transfer occurred. UST must also pay applicable
interest on any additional tax due with respect to the gain recognized.
Under paragraph (c)(4)(i) of this section, the basis of the TFC stock
received by UST in the initial transfer is increased as of the date of
the initial transfer by the amount of gain recognized under the gain
recognition agreement. The basis of the assets of TFD, however, is not
increased.
Example 10. Transfer of transferred stock to foreign corporation in
section 351 exchange, followed by a section 332 liquidation of the
foreign corporation. (i) Facts. In year 3, pursuant to a section 351
exchange, TFC transfers the TFD stock to F1, a newly formed corporation,
in exchange solely for voting stock of F1. The transfer by TFC of the
TFD stock to F1 is not a triggering event because UST complies with the
conditions of paragraph (k)(3) of this section. In year 5, F1
distributes all of its assets to TFC in a complete liquidation to which
sections 332 and 337 apply.
(ii) Result. The distribution of the TFD stock by F1, and the
exchange of F1 stock by TFC pursuant to the year 5 liquidation of F1
constitute triggering events under paragraphs (j)(1) and (k)(3)(i) of
this section, respectively. However, if paragraph (k)(14) of this
section applies, neither the distribution of the TFD stock by F1, nor
the exchange by TFC of the F1 stock, shall constitute a triggering
event.
(A) The condition of paragraph (k)(14)(i) of this section is
satisfied because the distribution of the TFD stock, and the exchange of
F1 stock, both qualify as nonrecognition transactions.
(B) The condition of paragraph (k)(14)(ii) of this section is
satisfied because immediately after the distribution UST, a domestic
corporation that is eligible to be a U.S. transferor, owns at least 5%
(applying the attribution rules of section 318, as modified by section
958(b)) of the stock of TFC. As a result, UST is treated as retaining an
indirect interest in the TFD stock following the complete liquidation of
F1.
(C) The condition of paragraph (k)(14)(iii) of this section is
satisfied if UST enters into a new gain recognition agreement. Because
after the complete liquidation of F1, UST wholly owns TFC, which wholly
owns TFD, as was the case immediately after the initial transfer, UST is
not required to describe, with the new gain recognition agreement, other
dispositions or events that would constitute triggering events based on
the principles of paragraph (j) of this section, other than the
dispositions or events described in paragraph (j) of this section.
Example 11. Disposition of stock of transferee foreign corporation
pursuant to a divisive reorganization. (i) Facts. In year 3, pursuant to
a divisive reorganization described in section 368(a)(1)(D), UST
transfers all of the TFC stock to DC, a newly-formed corporation, in
exchange solely for stock of DC. UST then distributes all of the DC
stock to USP in a transaction to which section 355 applies.
(ii) Result. The transfer of the TFC stock by UST to DC constitutes
a triggering event under paragraph (j)(4) of this section. However,
under paragraph (k)(1)(iii) of this section, the transfer of the TFC
stock shall not constitute a triggering event if DC enters into a new
gain recognition agreement that designates DC as the U.S. transferor for
purposes of this section.
(iii) Alternate facts. The facts are the same as in paragraph (i) of
this Example 11, except that UST transfers only 90% of the TFC stock to
DC. Paragraph (k)(1)(iii) of this section applies only with respect to
the TFC stock transferred to DC. Thus, the conditions of paragraph
(k)(1)(iii) of this section are satisfied if DC enters into a new gain
recognition agreement with respect to the TFC stock received from UST.
The amount of gain subject to the new gain recognition agreement entered
into by DC equals 90% of the amount of gain subject to the gain
recognition agreement entered into by UST
[[Page 443]]
with respect to the initial transfer. The amount of gain subject to the
gain recognition agreement entered into by UST with respect to the
initial transfer is reduced by the amount of gain subject to the new
gain recognition agreement entered into by DC. The gain recognition
agreement entered into by UST with respect to the initial transfer
continues to apply to the remaining TFC stock held by UST.
Example 12. Disposition of transferred stock pursuant to a divisive
reorganization. (i) Facts. In year 3, pursuant to a divisive
reorganization described in section 368(a)(1)(D), TFC transfers all of
the TFD stock to F1, a newly formed corporation, in exchange solely for
all of the outstanding stock of F1. TFC then distributes all of the F1
stock to UST in a transaction to which section 355 applies.
(ii) Result. The transfer by TFC of the TFD stock to F1 constitutes
a triggering event under paragraph (j)(1) of this section. However, if
paragraph (k)(14) of this section applies, neither the transfer of the
TFD stock by TFC to F1, nor the distribution of the F1 stock by TFC to
UST, shall constitute triggering events.
(A) The condition of paragraph (k)(14)(i) of this section is
satisfied because the dispositions of the TFD stock and F1 stock qualify
as nonrecognition transactions.
(B) The condition of paragraph (k)(14)(ii) of this section is
satisfied because immediately after the transfer UST, an eligible U.S.
transferor, owns at least 5% (applying the attribution rules of section
318, as modified by section 958(b)) of the total voting power and the
total fair market value of the outstanding stock of F1. As a result, UST
is treated as retaining an indirect interest in the TFD stock following
the dispositions.
(C) The condition of paragraph (k)(14)(iii) of this section is
satisfied if UST enters into a new gain recognition agreement with
respect to the initial transfer that describes the subsequent
dispositions or other events that would constitute triggering events
based on the principles of paragraph (j) of this section, other than
those described in paragraph (j) of this section. For example, a
complete or partial disposition of the F1 stock would constitute a
triggering event for purposes of the new gain recognition agreement
(subject to the exceptions provided by paragraph (k) of this section).
Example 13. Receipt of boot by the transferee foreign corporation in
a subsequent section 351 exchange. (i) Facts. At the time of the initial
transfer, the TFD stock has a $50x basis and $100x fair market value.
The amount of gain subject to the gain recognition agreement is $50x. In
year 3, TFC and X, an unrelated foreign corporation, form F1. TFC
transfers the TFD stock to F1 in exchange for $35x cash and $65x stock
of F1. At the time of the transfer, the TFD stock has a $50x basis and
$100x fair market value. The F1 stock received by TFC represents 25% of
the outstanding stock of F1. Without regard to the gain recognized under
the gain recognition agreement and any adjustments to basis under
paragraph (c)(4)(ii) of this section, under section 351(b) TFC would
recognize $35x gain in connection with the transfer of the TFD stock to
F1. UST complies with the conditions of paragraph (k)(3) of this
section, and therefore the disposition by TFC of the TFD stock does not
constitute a triggering event.
(ii) Result. Under paragraph (m)(1) of this section, UST must
recognize $35x gain under the gain recognition agreement as a result of
the year 3 disposition by TFC of the TFD stock. Thus, the amount of gain
subject to the new gain recognition agreement entered into by UST
pursuant to paragraph (k)(3) of this section is $15x. Under paragraph
(c)(4)(ii) of this section, as of the date of the initial transfer, the
basis of the TFD stock held by TFC is increased by $35x, the amount of
the gain recognized by UST under the gain recognition agreement. Under
paragraph (c)(4)(i) of this section, the basis of the TFC stock received
by UST in the initial transfer is also increased by $35x. After taking
into account the increase to the basis of the TFD stock under paragraph
(c)(4)(ii) of this section, TFC recognizes $15x gain under section
351(b) in connection with the year 3 transfer of the TFD stock to F1.
Under section 362(a), the basis of the TFD stock in the hands of F1 is
$100x.
Example 14. Complete disposition of transferred stock pursuant to a
section 304(a)(1) transaction. (i) Facts. UST wholly owns FA. In year 3,
in a transaction to which section 304(a)(1) applies, TFC transfers all
of the TFD stock to FA in exchange for cash. Under section 304(a)(1),
TFC and FA are treated as if TFC transferred the TFD stock to FA in a
section 351 exchange in exchange solely for FA stock, and then FA
redeemed the FA stock deemed issued in exchange for the cash. Under
section 302(d), the redemption of the FA stock deemed issued by FA to
TFC under section 304(a)(1) is treated as a distribution to which
section 301 applies.
(ii) Result. (A) In general, the deemed contribution by TFC of the
TFD stock to FA in the section 351 exchange is a triggering event under
paragraph (j)(1) of this section. However, under paragraph (k)(3) of
this section the deemed contribution shall not be a triggering event if
UST enters into a new gain recognition agreement with respect to the
initial transfer in which it agrees to treat as a triggering event a
complete or partial disposition of the FA stock deemed received by TFC.
(B) Under paragraph (n)(1) of this section, the redemption of the FA
stock deemed received by TFC in exchange for the TFD stock shall not
constitute a disposition if UST enters into a new gain recognition
agreement
[[Page 444]]
with respect to the initial transfer that includes appropriate
provisions to take into account such redemption. Therefore, under the
new gain recognition agreement UST must agree to treat as a triggering
event a complete or partial disposition of the stock of FA. Pursuant to
paragraph (d)(2)(ii) of this section, UST is permitted to enter into a
single new gain recognition agreement in year 3, but the gain
recognition agreement must provide a complete description of the section
304(a)(1) transaction including the deemed section 351 exchange and
redemption of the FA stock.
Example 15. Reduction in amount of gain subject to gain recognition
agreement, followed by triggering event. (i) Facts. In year 3, UST
disposes of 60% of the TFC stock received in the initial transfer in a
transaction in which the conditions of paragraph (o)(1)(ii) of this
section are satisfied. Thus, the amount of gain subject to the gain
recognition agreement is reduced by 60%. In year 5, TFC disposes of 50%
of the TFD stock in a transaction that constitutes a triggering event.
(ii) Result. As a result of the year 5 disposition by TFC of 50% of
the TFD stock, under paragraphs (j)(1) and (c)(1)(i) of this section,
UST must recognize and include in income 50% of the gain subject to the
gain recognition agreement (because of the year 3 disposition of TFC
stock, the amount of gain subject to the gain recognition agreement
equals 40% of the gain realized, but not recognized, on the initial
transfer). UST must pay applicable interest on any additional tax due
with respect to the gain recognized. The amount of gain subject to the
gain recognition agreement is reduced by the amount of gain recognized
by UST (the remaining gain equals 20% of the gain realized, but not
recognized, by UST on the initial transfer).
Example 16. Taxable sale of stock of transferee foreign corporation
and election to reduce stock basis. (i) Facts. UST wholly owns F1 and
TFD. The F1 stock has a $100x basis and $90x fair market value, and the
TFD stock has a $0x basis and $100x fair market value. UST also owns
real property with a $10x basis and $10x fair market value. In year 1,
pursuant to a section 351 exchange, UST transfers the real property, the
TFD stock, and the F1 stock to TFC in exchange solely for 20 shares of
TFC stock. UST enters into a gain recognition agreement with respect to
the transfer of the TFD stock. The amount of the gain recognition
agreement is $100x. UST takes the position that the basis of each share
of TFC stock received in the exchange is $5.5x (a proportionate amount
of the $110x aggregate basis of the transferred property). In year 3,
UST disposes of all its TFC stock in a transaction in which all gain
realized is recognized and included in taxable income.
(ii) Result. The year 3 disposition of the TFC stock is a triggering
event under paragraph (j)(4) of this section. The disposition does not
terminate the gain recognition agreement pursuant to paragraph (o)(1)(i)
of this section because the basis of each share of TFC stock received in
exchange for the TFD stock in the initial transfer is $5.5x, which
exceeds the $0x basis of the TFD stock at time of the initial transfer.
However, under paragraph (o)(1)(iii) of this section, to satisfy the
basis condition of paragraph (o)(1)(i) of this section, UST can reduce
the basis of the 10 shares of the TFC stock received in exchange for the
TFD stock to $0x. If UST reduces the basis of the 10 shares of TFC stock
to $0x, under paragraph (o)(1)(i) of this section the disposition of the
TFC stock shall not constitute a triggering event but instead shall
terminate the gain recognition agreement without further effect.
Example 17. Successive section 351 exchanges, section 301
distributions, and transactions involving partnerships. (i) Facts. UST
owns a 40 percent capital and profits interest in a foreign partnership
(PRS). PRS wholly owns TFD and other assets with basis equal to fair
market value. The TFD stock has a $50x basis and $200x fair market
value. TFC wholly owns F1. On day 1 of year 1, in a section 351
exchange, UST transfers its PRS interest to TFC in exchange solely for
stock of TFC (initial transfer). On that same day, in a section 351
exchange, TFC transfers the PRS interest received from UST to F1 in
exchange solely for stock of F1. In year 3, PRS receives a $150x
distribution from TFD to which section 301 applies. Under section
301(c), $25x of the distribution constitutes a dividend, $50x is applied
against and reduces the basis of the TFD stock held by PRS, and the
remaining $75x is treated as gain from the sale or exchange of property.
With respect to the TFD stock deemed transferred by UST in the initial
transfer, under section 301(c), $10x (40% of $25x) of the distribution
constitutes a dividend, $20x (40% of $50x) is applied against and
reduces the basis of TFD stock, and $30x (40% of $75x) is treated as
gain from the sale or exchange of property. In year 5, pursuant to a
distribution to which section 731 applies, PRS distributes all of the
TFD stock to F1.
(ii) Result. (A) Successive section 351 transfers. Under section
367(a)(4) and Sec. 1.367(a)-1T(c)(3)(ii), the transfer of the PRS
interest by UST to TFC is treated, for purposes of section 367(a), as a
transfer by UST to TFC of its proportionate share of the TFD stock held
by PRS (the initial transfer). The initial transfer by UST of the TFD
stock to TFC is subject to the general rule of section 367(a)(1), unless
UST enters into a gain recognition agreement with respect to such
transfer pursuant to Sec. 1.367(a)-3(b)(1)(ii) and this section. Under
paragraph (c)(3)(viii) of this section, the gain recognition agreement
must include a complete description of the transfer, including a
description of the partners of PRS. Even if UST enters into a gain
[[Page 445]]
recognition agreement with respect to the initial transfer, under
paragraph (j)(3) of this section, the subsequent transfer by TFC of the
PRS interest to F1 is a triggering event unless UST enters into a new
gain recognition agreement with respect to the initial transfer under
paragraph (k)(14) that provides that, in addition to the triggering
events provided in paragraph (j) of this section, a complete or partial
disposition of the F1 stock received by TFC in exchange for the PRS
interest shall constitute a triggering event for purposes of the gain
recognition agreement. The new gain recognition agreement must also
provide that any other disposition that is inconsistent with the
principles of paragraph (k), including an indirect disposition of the
TFD stock or of substantially all of the assets of TFD, shall constitute
a triggering event for purposes of the new gain recognition agreement.
Under paragraph (d)(2)(ii) of this section, UST is permitted to enter
into a single gain recognition agreement with respect to the initial
transfer and the subsequent transfer by TFC of the PRS interest, but the
agreement must include a complete description of the initial transfer
and the subsequent transfer of the PRS interest.
(B) Section 301 distribution from TFD to PRS. Under paragraph
(b)(1)(iii) of this section, the section 301 distribution received by
PRS from TFD is not a disposition (and therefore does not affect the
gain recognition agreement) to the extent it is described in section
301(c)(1) or (2). However, under paragraph (n)(2) of this section, to
the extent the distribution is described in section 301(c)(3), UST must
recognize gain ($30x) under the gain recognition agreement. For this
purpose, the amount of the distribution that is described in section
301(c)(3) is determined before taking into account the increase to the
basis of the TFD stock under paragraph (c)(4)(ii) of this section.
(C) Distribution of TFD stock by PRS to F1. The year 5 distribution
of the TFD stock by PRS to F1 is a triggering event under paragraph
(j)(1) of this section, unless paragraph (k)(14) of this section
applies.
(1) The condition of paragraph (k)(14)(i) of this section is
satisfied because the distribution qualifies as a nonrecognition
transaction.
(2) The condition of paragraph (k)(14)(ii) of this section is
satisfied because immediately after the distribution UST, a domestic
corporation that is eligible to be a U.S. transferor, owns at least 5%
(applying the attribution rules of section 318, as modified by section
958(b)) of the total voting power and total value of the outstanding
stock of F1. As a result, UST is treated as retaining an indirect
interest in the TFD stock following the distribution.
(3) The condition of paragraph (k)(14)(iii) of this section is
satisfied if UST enters into a new gain recognition agreement with
respect to the initial transfer. The new gain recognition agreement need
not describe additional dispositions or other events that would
constitute triggering events because, pursuant to paragraph (c)(5) of
this section, the dispositions or other events described in paragraph
(j) of this section or in the existing gain recognition agreement apply
to the new gain recognition agreement.
Example 18. Complete liquidation of transferee foreign corporation.
(i) Facts. TFD has 10 shares of stock outstanding immediately before the
initial transfer. On the date of the initial transfer, the TFD stock has
a $0x basis and $90x fair market value. In year 2, in exchange for 1
share of TFD stock TFC transfers real estate to TFD with a $10x basis
and $10x fair market value. In year 4, TFC distributes the 11 shares of
TFD stock to UST in a complete liquidation to which sections 332 and 337
apply.
(ii) Result. In determining whether the gain recognition agreement
entered into by UST with respect to the initial transfer is terminated
under paragraph (o)(5) of this section, or triggered under paragraphs
(j)(1) and (j)(4) of this section, only the 10 shares of TFD stock
transferred by UST in the initial transfer are considered. Thus, the 1
share of TFD stock received by TFC in exchange for the real estate in
year 2 is not taken into account.
Example 19. Spin-off of transferred corporation. (i) Facts. Before
the initial transfer, the TFD stock has an $80x basis and a $100x fair
market value, and the TFC stock has a $100x basis and a $100x fair
market value. In year 4, TFC distributes all of the TFD stock to UST in
a transaction to which section 355 applies. At the time of the
distribution, the TFD stock has a $200x fair market value, and the TFC
stock (without regard to the value of the TFD stock held by TFC) has a
$100x fair market value. At such time, the TFC stock has a $180x basis.
As determined under section 358, immediately after the distribution, the
TFC stock has a $60x basis, and the TFD stock has a $120x basis.
(ii) Result. The distribution of the TFD stock by TFC in year 4 is a
triggering event under paragraph (j)(1) of this section. The
distribution does not terminate the gain recognition agreement under
paragraph (o)(5) of this section because after the distribution, the
basis of the TFD stock in the hands of UST ($120x) is greater than the
basis of the TFD stock at the time of the initial transfer ($80x).
However, if UST reduces the basis of the TFD stock to $80x (as provided
under paragraph (o)(5)(iii) of this section) the gain recognition
agreement will terminate without further effect. If UST does not elect
to reduce the basis of the TFD stock, see paragraph (k)(14) of this
section.
Example 20. Intercompany transaction followed by disposition to
nonmember. (i) Facts.
[[Page 446]]
At the time of the initial transfer, the TFD stock has a $50x basis and
$100x fair market value. The amount of the gain recognition agreement is
$50x. In year 3, UST distributes all of the TFC stock to USP in a
transaction to which section 301 applies. At the time of the
distribution, the TFC stock has a $50x basis and $90x fair market value.
Under section 311(b), UST must recognize $40x gain (the intercompany
item) on the distribution, but because the distribution is an
intercompany transaction, under the provisions of Sec. 1.1502-13, the
$40x gain is not taken into account in year 3. In year 4, USP sells all
of the TFC stock to X, an unrelated corporation. Under the provisions of
Sec. 1.1502-13, in year 4 UST takes into account the $40x intercompany
item as a result of the sale of the TFC stock to X.
(ii) Result. (A) The year 3 distribution of the TFC stock by UST to
USP does not terminate the gain recognition agreement under paragraph
(o)(1) of this section because UST does not include the $40x gain in
taxable income during year 3. Under paragraph (j)(4) of this section,
the year 3 distribution of the TFC stock by UST to USP is generally a
triggering event; however, because the distribution is an intercompany
transaction that creates an intercompany item, the distribution shall
not constitute a triggering event if the conditions of paragraph
(k)(12)(i) of this section are satisfied.
(1) The condition of paragraph (k)(12)(i)(A) of this section is
satisfied because the aggregate basis of the TFC stock distributed
($50x) is not greater than the sum of the aggregate basis of the TFD
stock at the time of the initial transfer ($50x).
(2) The condition of paragraph (k)(12)(i)(B) of this section is
satisfied if the next annual certification for the existing gain
recognition agreement includes a complete description of the
intercompany transaction and an explanation of how the basis condition
of paragraph (k)(12)(i)(A) of this section is satisfied.
(B) Under paragraph (o)(6) of this section and the principles of
paragraph (o)(1)(i) of this section, because the year 4 sale of the TFC
stock to X requires UST to take into account the $40x gain (the
intercompany item) from the year 3 distribution, the year 4 sale
terminates the gain recognition agreement. If, alternatively, in year 4
USP had sold only 30% of the TFC stock, then under paragraph (o)(6) of
this section and the principles of paragraph (o)(1)(ii) of this section
the amount of gain subject to the gain recognition agreement would be
reduced by 30%.
(iii) Alternate facts. Intercompany transaction followed by sale of
transferee foreign corporation to member. Assume the same facts as in
paragraph (i) of this Example 20, except that, instead of USP selling
the TFC stock to X, in year 4 USP sells the TFC stock to USS in exchange
for $90x cash. UST and USS are members of the USP consolidated group
immediately after the sale. The results of the year 3 distribution of
the TFC stock by UST to USP are the same as in paragraph (ii) of this
Example 20. In addition, under paragraph (k)(12)(ii) of this section,
the year 4 sale by USP of the TFC stock to USS is not a triggering
event, provided UST includes a complete description of the sale with the
annual certification filed for the gain recognition agreement in year 4.
(iv) Alternate facts. Intercompany transaction followed by complete
liquidation of transferee foreign corporation. Assume the same facts as
in paragraph (i) of this Example 20, except that, instead of USP selling
the TFC stock to X, in year 4 TFC distributes all of its assets to USP
in a complete liquidation to which sections 332 and 337 apply. The
result is the same as in paragraph (ii) of this Example 20 because,
under the provisions of Sec. 1.1502-13, in year 4 UST takes into
account the $40x gain (the intercompany item) from the year 3
distribution.
(v) Alternate facts. Intercompany transaction followed by triggering
event. Assume the same facts as in paragraph (i) of this Example 20,
except that instead of USP selling the TFC stock to X, in year 4 TFC
disposes of all of the TFD stock in a transaction that constitutes a
triggering event under paragraph (j)(1) of this section. Under paragraph
(c)(1)(i) of this section UST must recognize $50x gain under the gain
recognition agreement. Under paragraphs (c)(4)(i) and (ii) of this
section, as of the date of the initial transfer the basis of the TFC
stock and TFD stock, respectively, is increased by $50x.
(vi) Alternate facts. Intercompany transaction followed by section
351 transfer to member. The facts are the same as in paragraph (i) of
this Example 20, except that, in year 3, in a section 351 exchange UST
transfers all of the TFC stock to USS in exchange for $10x cash and $80x
of stock of USS. USS is a member of the USP consolidated group
immediately after the exchange. The transfer of the TFC stock by UST to
USS is an intercompany transaction. Under section 351(b), UST must
generally recognize $10x gain (intercompany item) in connection with the
transfer; however, under the provisions of Sec. 1.1502-13, UST does not
take the $10x gain into account in year 3. Under paragraph (k)(12) of
this section, as result of the intercompany transaction creating an
intercompany item ($10x gain), the existing gain recognition agreement
($50x gain) must be divided between UST and USS. UST shall remain
subject to a gain recognition agreement of $10x (equal to the amount of
the intercompany item). The amount of the gain recognition agreement
entered into by USS under paragraph (k)(1) of this section is $40x
(equal to the amount of the existing gain recognition agreement,
[[Page 447]]
reduced by the amount of the of the gain recognition agreement to which
UST remains subject).
Example 21. Transfer of transferred stock to United States person
other than U.S. transferor. (i) Facts. An individual (A) that is a
United States citizen wholly owns TFD, TFC, and DC. A transfers the TFD
stock to TFC in a section 351 exchange and enters into a gain
recognition agreement with respect to such transfer. In year 5, pursuant
to an asset reorganization, TFC transfers all of its assets to DC in
exchange solely for DC stock. TFC distributes the DC stock to A pursuant
to the plan of reorganization.
(ii) Result. The transfer by TFC of the TFD stock to DC and the
exchange by A of the TFC stock for DC stock pursuant to the asset
reorganization are triggering events under paragraphs (j)(1) and (j)(4)
of this section, respectively. The gain recognition agreement does not
terminate under paragraph (o)(5) of this section because DC is neither
the U.S. transferor, nor an individual that is a United States person,
nor a member of the same consolidated group of which the U.S. transferor
is a member. However, if paragraph (k)(14) of this section applies the
exchanges shall not constitute triggering events.
(A) The condition of paragraph (k)(14)(i) of this section is
satisfied because the transfer of the TFD stock to DC qualifies as a
nonrecognition transaction.
(B) The condition of paragraph (k)(14)(ii) of this section is
satisfied because immediately after the transfer DC, a domestic
corporation that is eligible to be a U.S. transferor, retains a direct
interest in the TFD stock following the transfer.
(C) The condition of paragraph (k)(14)(iii) of this section is
satisfied if DC enters into a new gain recognition agreement with
respect to the initial transfer. Under paragraph (k)(14)(iii)(B) of this
section, DC is not required to describe any subsequent dispositions or
other events that (based on the principles of paragraph (j) of this
section) would constitute triggering events for purposes of the new gain
recognition agreement, other than the dispositions or other events
described in paragraph (j) of this section, because DC holds a direct
interest in TFD after the asset reorganization.
Example 22. Transfer of transferred stock to consolidated group
member. (i) Facts. UST wholly owns DC, a member of the USP consolidated
group that includes UST. In year 5, pursuant to an asset reorganization
described in section 368(a)(1)(A) TFC merges with and into DC.
Immediately after the asset reorganization, DC wholly owns TFD, and the
basis of the TFD stock is not greater than the aggregate basis of such
stock at the time of the initial transfer.
(ii) Result. The gain recognition agreement filed by UST with
respect to the initial transfer terminates without further effect if the
conditions of paragraph (o)(5) of this section are satisfied.
(A) The condition of paragraph (o)(5)(i) of this section is
satisfied because the transfer of the TFD stock is a section 361
exchange.
(B) The condition of paragraph (o)(5)(ii) of this section is
satisfied because DC is a member of the consolidated group that includes
UST immediately after the section 361 exchange.
(C) The condition of paragraph (o)(5)(iii) of this section is
satisfied because the aggregate basis of the TFD stock immediately after
the section 361 exchange is not greater than the aggregate basis of the
TFD stock at the time of the initial transfer (as adjusted for any gain
recognized by UST on such transfer). If the basis condition of paragraph
(o)(5)(iii) were not satisfied, under paragraph (o)(5)(iii) of this
section, DC could reduce the basis of the TFD stock received in the
reorganization. Alternatively, a new gain recognition agreement could be
entered into if paragraph (k)(14) of this section applied to the
disposition of the TFD stock pursuant to the section 361 exchange.
(iii) Alternate facts. The facts are the same as in paragraph (i) of
this Example 22, except that instead of TFC merging into DC, TFC merges
into TFD in a reorganization described in section 368(a)(1)(A). The gain
recognition agreement terminates without further effect if the
conditions of paragraph (o)(5) of this section are satisfied.
(A) The condition of paragraph (o)(5)(i) of this section is
satisfied because the TFD stock issued by TFD to TFC in the
reorganization, which is treated as transferred stock under paragraph
(b)(2)(iii) of this section, is distributed by TFC to UST pursuant to
section 361(c).
(B) The condition of paragraph (o)(5)(ii) of this section is
satisfied because UST is the U.S. transferor.
(C) The condition of paragraph (o)(5)(iii) of this section is
satisfied if the aggregate basis of the TFD stock received by UST from
TFC is not greater than the aggregate basis of the TFD stock at the time
of the initial transfer (as adjusted for any gain recognized by UST on
such transfer). If the basis condition of paragraph (o)(5)(iii) were not
satisfied, under paragraph (o)(5)(iii) of this section, UST could reduce
the basis of the TFD stock received in the reorganization.
Example 23. Split-off of transferred stock. (i) Facts. X, a domestic
corporation that is unrelated to USP and UST, wholly owns TFC. Pursuant
to a reorganization described in section 368(a)(1)(B), UST transfers all
of the TFD stock to TFC in exchange for 50% of the outstanding voting
stock of TFC. UST enters into a gain recognition agreement with respect
to such transfer. In year 4, in a split-off transaction to which section
355 applies,
[[Page 448]]
TFC distributes all of the TFD stock to X in exchange for all the TFC
stock held by X.
(ii) Result. Under paragraph (j)(1) of this section, the year 4
distribution of the TFD stock to X constitutes a triggering event.
However, the distribution shall not constitute a triggering event if
paragraph (k)(14) of this section applies. The gain recognition
agreement does not terminate under paragraph (o)(5) of this section
because X is not a recipient described in paragraph (o)(5)(ii) of this
section.
(A) The condition of paragraph (k)(14)(i) of this section is
satisfied because the distribution of the TFD stock qualifies as a
nonrecognition transaction.
(B) The condition of paragraph (k)(14)(ii) of this section is
satisfied because immediately after the distribution X, a domestic
corporation that is eligible to be a U.S. transferor, retains a direct
interest in the TFD stock.
(C) The condition of paragraph (k)(14)(iii) of this section is
satisfied if X enters into a new gain recognition agreement with respect
to the initial transfer. Under paragraph (k)(14)(iii)(B) of this
section, X is not required to describe, with the new gain recognition
agreement, any subsequent dispositions or other events that (based on
the principles of paragraph (j) of this section) would constitute
triggering events, other than the dispositions described in paragraph
(j) of this section, because X directly owns TFD after the distribution.
(D) If X were a United States citizen, the gain recognition
agreement would terminate if the condition of paragraph (o)(5)(iii) of
this section were satisfied. Alternatively, the gain recognition
agreement would continue for its remaining term if the conditions for
the application of paragraph (k)(14) of this section were satisfied.
(iii) Alternate facts. Distribution to unrelated foreign
corporation. The facts are the same as in paragraph (i) of this Example
23, except that X is a foreign corporation wholly owned by DC. DC is
unrelated to UST. The results are the same as in paragraph (ii) of this
Example 23, except as follows.
(A) The condition of paragraph (k)(14)(ii) of this section is
satisfied because immediately after the distribution DC, a domestic
corporation that is eligible to be a U.S. transferor, owns at least 5%
(applying the attribution rules of section 318, as modified by section
958(b)) of the total voting power and total value of the outstanding
stock of X. As a result, DC is treated as retaining an indirect interest
in the TFD stock immediately following the distribution.
(B) The condition of paragraph (k)(14)(iii) of this section is
satisfied if DC enters into a new gain recognition agreement with
respect to the initial transfer. Under paragraph (k)(14)(iii)(B) of this
section, DC must, in addition to the dispositions described in paragraph
(j) of this section, include as a triggering event a complete or partial
disposition of the stock of X.
(iv) Alternate facts. Distribution to nonresident alien individual.
The facts are the same as in paragraph (i) of this Example 23, except
that X is a nonresident alien individual. Paragraph (k)(14) of this
section does not apply to the distribution because the conditions of
paragraph (k)(14)(ii) and (iii) of this section cannot be satisfied.
Therefore, the distribution is a triggering event, and UST will
recognize gain under the gain recognition agreement as required under
paragraphs (c)(1)(i) and (v) of this section. The result would be the
same if X were a foreign corporation and, immediately after the
distribution, no United States person owned at least 5% (applying the
attribution rules of section 318, as modified by section 958(b)) of the
total voting power and value of the outstanding stock of X.
Example 24. Applicability of this section to gain recognition
agreements filed before March 13, 2009. (i) Facts. The facts are the
same as in paragraph (i) of Example 6, except that the initial transfer
occurred on March 7, 2007, and the asset reorganization occurred on July
1, 2008.
(ii) Result. Under paragraph (r)(1)(ii) of this section, the rules
of Sec. 1.367(a)-8T (see 26 CFR part 1, revised April 1, 2007) apply to
the transfers pursuant to the asset reorganization because the initial
transfer occurred on March 7, 2007. As a result of the disposition of
the TFC stock pursuant to the asset reorganization, under Sec.
1.367(a)-8T(d), USP is required to recognize the gain subject to the
gain recognition agreement and pay applicable interest on any additional
tax due with respect to such gain. Because the acquiring corporation in
the asset reorganization is foreign, an exception under Sec. 1.367(a)-
8T(e) is not available for the exchange of TFC stock by USP. However,
pursuant to paragraph (r)(2)(i) of this section, because the exception
provided by paragraph (k)(14) of this section is not included in Sec.
1.367(a)-8T, USP may apply paragraph (k)(14) of this section to such
exchange (provided the conditions of paragraph (k)(14) of this section
are satisfied), if the statute of limitations on assessments of tax for
the 2007 tax year has not closed. If USP applies paragraph (k)(14) of
this section to its exchange of the TFC stock pursuant to the asset
reorganization, under paragraph (r)(2)(ii) of this section USP must
include the new gain recognition agreement required under paragraph
(k)(14)(iii) of this section with an amended Federal income tax return
for its 2008 tax year that is filed August 10, 2009.
Example 25. Applicability of this section to gain recognition
agreements filed before March 13, 2009. (i) Facts. The initial transfer
occurs in 2004. In 2005, pursuant to a section 351 exchange, TFC
transfers the TFD stock to F1 in exchange solely for F1 voting stock.
UST
[[Page 449]]
does not file a new gain recognition agreement under Sec. 1.367(a)-
8(g)(2) with respect to the exchange.
(ii) Result. Under paragraph (r)(1)(ii) of this section, the rules
of Sec. 1.367(a)-8 (see 26 CFR part 1, revised April 1, 2006) apply to
the year 2005 disposition of the TFD stock because UST filed the gain
recognition agreement after July 20, 1998, but before March 7, 2007.
Under Sec. 1.367(a)-8(e) (see 26 CFR part 1, revised April 1, 2006), as
a result of the disposition of the TFD stock by TFC, UST must recognize
the amount of gain subject to the gain recognition agreement. Paragraph
(r)(2)(i) of this section does not apply because the rule provided by
paragraph (k)(3) of this section was included in Sec. 1.367(a)-8(g)(2)
(see 26 CFR part 1, revised April 1, 2006). However, UST may request
relief for reasonable cause under Sec. 1.367(a)-8(c)(2) (see 26 CFR
part 1, revised April 1, 2006) to file a new gain recognition agreement
with respect to the disposition of the TFD stock by TFC in 2005.
(r) Effective/applicability date--(1) General rule--(i) Transfers
occurring on or after March 13, 2009; relief for certain failures that
are not willful. The rules of this section apply to gain recognition
agreements filed with respect to transfers of stock or securities
occurring on or after March 13, 2009. However, the rules of this section
do not apply to gain recognition agreements filed with respect to any
such transfer occurring on or after March 13, 2009, if such transfer was
entered into pursuant to a written agreement that was (subject to
customary conditions) binding before February 11, 2009, and at all times
thereafter. Solely for purposes of this paragraph (r), a transfer
described in the preceding sentence shall be deemed to be a transfer
occurring before March 13, 2009 to which the rules of Sec. 1.367(a)-8
(see 26 CFR part 1, revised April 1, 2006) apply. See paragraph
(r)(2)(iii) of this section for the ability to apply the rules of this
section with respect to gain recognition agreements filed for taxable
years ending before March 13, 2009. The eleventh sentence of paragraph
(a) and paragraphs (b)(1)(iv), (b)(1)(vi), (b)(1)(xiii), (d)(1), (j)(8),
and (p) of this section will apply to gain recognition agreement
documents that are required to be filed on or after November 19, 2014,
as well as to requests for relief submitted on or after November 19,
2014.
(ii) Transfers occurring before March 13, 2009. For matters covered
in this section for periods before March 13, 2009 but on or after March
7, 2007, the corresponding rules of Sec. 1.367(a)-8T (see 26 CFR part
1, revised April 1, 2007) apply. For matters covered in this section for
periods before March 7, 2007 but on or after July 20, 1998, the
corresponding rules of Sec. 1.367(a)-8 (see 26 CFR part 1, revised
April 1, 2006) apply. For matters covered in this section for periods
before July 20, 1998, the corresponding rules of Sec. 1.367(a)-3T(g)
(see 26 CFR part 1, revised April 1, 1998) and Notice 87-85 (1987-2 CB
395) apply. In addition, if a U.S. transferor entered into a gain
recognition agreement for transfers before July 20, 1998, then the rules
of Sec. 1.367(a)-3T(g) (see 26 CFR part 1, revised April 1, 1998)
continue to apply in lieu of this section in the event of any direct or
indirect nonrecognition transfer of the same property. See also, Sec.
1.367(a)-3(h).
(2) Applicability to transfers occurring before March 13, 2009 March
13, 2009--(i) General rule. Taxpayers may apply the rules of this
regulation Sec. 1.367(a)-8 that were not included in Sec. 1.367(a)-8T
(see 26 CFR part 1, revised April 1, 2007), to gain recognition
agreements filed with respect to transfers of stock or securities for
all open taxable years, if done consistently to all transfers. A U.S.
transferor subject to section 877 and Sec. 1.367(a)-8T(d)(6) shall not
apply the rules of this regulation to reach a contrary result. A
taxpayer that failed to file a gain recognition agreement for a
transfer, or to comply materially with any requirement of this section
with respect to an existing gain recognition agreement, must obtain
relief for reasonable cause for such failure under Sec. 1.367(a)-
8T(e)(10) before applying the rules of this regulation Sec. 1.367(a)-8
that were not included in Sec. 1.367(a)-8T as permitted by this
paragraph (r)(2). See paragraph (q)(2) of this section, Examples 24 and
25 for illustrations of the rule provided by this paragraph (r)(2)(i).
(ii) Taxable years ending before March 13, 2009. Notwithstanding the
requirements of Sec. 1.367(a)-8(d), any gain recognition agreement or
other filing required by reason of electing to apply the rules of this
regulation Sec. 1.367(a)-8
[[Page 450]]
that were not included in Sec. 1.367(a)-8T, as permitted by this
paragraph (r)(2), for a taxable year ending before March 13, 2009 shall
be considered filed in accordance with the requirements of Sec.
1.367(a)-8(d), provided the gain recognition agreement or other filing
is attached to an original or amended return for such taxable year. An
amended return required to be filed by reason of electing to apply the
rules of this regulation Sec. 1.367(a)-8 that were not included in
Sec. 1.367(a)-8T, as permitted by this paragraph (r)(2), must be filed
on or before August 10, 2009. A taxpayer that wishes to apply the rules
of this regulation Sec. 1.367(a)-8 that were not included in Sec.
1.367(a)-8T, as permitted by this paragraph (r)(2), but that fails to
meet the filing requirement described in the preceding sentence must
request relief for reasonable cause under paragraph (p) of this section.
(iii) Taxable years ending after effective date. A taxpayer that
entered into a gain recognition agreement to which Sec. 1.367(a)-8T
(see 26 CFR part 1, revised April 1, 2007) applies may apply the rules
of this section in a tax year ending on or after March 13, 2009 by
attaching the agreement, certification, or other information related to
such gain recognition agreement that the rules of this section require
in accordance with the rules of this section and with the time and
manner rules provided in Sec. 1.367(a)-8(d).
(3) Applicability to requests for relief submitted before November
19, 2014. The eleventh sentence of paragraph (a) and paragraphs
(b)(1)(iv), (b)(1)(vi), (b)(1)(xiii), (d)(1), (j)(8), and (p) of this
section will apply to requests for relief submitted before November 19,
2014 if--
(i) The statute of limitations on the assessment of tax has not
expired for any year to which the request relates; and
(ii) The U.S. transferor resubmits the request under paragraph (p)
of this section, notes on the request that the request is being
submitted pursuant to this paragraph (r)(3), and acknowledges on the
request that the last sentence of Sec. 1.6038B-1(g)(6) provides a
special rule regarding the application of Sec. 1.6038B-1 to any
transfer that is the subject of the request.
[T.D. 9446, 74 FR 6960, Feb. 11, 2009; 74 FR 10175, Mar. 10, 2009, as
amended at T.D. 9446, 74 FR 13340, Mar. 27, 2009; T.D. 9614, 78 FR
17039, Mar. 19, 2013; T.D. 9704, 79 FR 68768, Nov. 19, 2014; 80 FR 167,
Jan. 5, 2015; T.D. 9760, 81 FR 15169, Mar. 22, 20116; T.D. 9803, 81 FR
91029, Dec. 16, 2016]
Sec. 1.367(a)-9T Treatment of deemed section 351 exchanges pursuant
to section 304(a)(1) (temporary).
(a) Scope and general rule. This section applies to the extent that,
pursuant to section 304(a)(1), a United States person is treated as
transferring stock of a domestic or foreign corporation to a foreign
corporation (foreign acquiring corporation) in exchange for stock of the
foreign acquiring corporation in a transaction to which section 351(a)
applies (deemed section 351 exchange). Except to the extent provided in
paragraph (b) of this section, a transfer of stock by a United States
person to a foreign acquiring corporation in a deemed section 351
exchange is not subject to section 367(a)(1).
(b) Special rule. Notwithstanding paragraph (a) of this section, if
the distribution received by the United States person in redemption of
the stock of the foreign acquiring corporation deemed issued in the
deemed section 351 exchange is applied against and reduces (in whole or
in part), pursuant to section 301(c)(2), the basis of stock of the
foreign acquiring corporation held by the United States person other
than the stock deemed issued in the deemed section 351 exchange, the
United States person shall recognize gain pursuant to this paragraph
(b). The exceptions described in Sec. 1.367(a)-3(b)(1) and (c)(1) shall
not apply to a transfer of stock described in paragraph (a) of this
section. The amount of gain recognized by a United States person
pursuant to this paragraph (b) shall equal the amount, if any, by
which--
(1) The gain realized by the United States person with respect to
the transferred stock in connection with the deemed section 351 exchange
exceeds;
(2) The amount of the distribution received by the United States
person in redemption of the stock of the foreign acquiring corporation
deemed issued in
[[Page 451]]
the deemed section 351 exchange that is treated as a dividend under
section 301(c)(1) and included in gross income by the United States
person.
(c) Ordering rule. For purposes of paragraph (b)(1) of this section,
the amount of gain realized by the United States person in connection
with the deemed section 351 exchange shall be determined without regard
to the amount of gain recognized by the United States person under
paragraph (b) of this section.
(d) Allocation of recognized gain. Gain recognized by a United
States person pursuant to paragraph (b) of this section shall be treated
as recognized with respect to the stock transferred in the deemed
section 351 exchange in proportion to the amount of gain realized by the
United States person with respect to such stock. See Sec. 1.367(a)-
1T(b)(4) for additional rules on the character, source, and adjustments
relating to gain recognized under section 367(a).
(e) Example. The following example illustrates the rules of this
section:
Example. (i) Facts. (A) USP, a domestic corporation, wholly owns FC1
and FC2, each a foreign corporation. USP, FC1 and FC2 use a calendar
taxable year. The FC1 stock has a $40x basis and $100x fair market
value. The FC2 stock has a $100x basis and $100x fair market value. As
of December 31, year 1, FC1 has zero earnings and profits, and FC2 has
$20x earnings and profits. On December 31, year 1, in a transaction
described in section 304(a)(1), USP sells the FC1 stock to FC2 for $100x
cash.
(B) Because USP wholly owns FC1 before the transactions and is
treated, under section 318, as indirectly owning 100% of the FC1 stock
after the transfer, under section 304(a)(1), USP and FC2 are treated in
the same manner as if USP contributed the FC1 stock to FC2 in a deemed
section 351 exchange in exchange solely for $100x of FC2 stock, and then
FC2 redeemed for $100x cash its stock deemed issued to USP. Because USP
wholly owns FC1 before the sale and is treated as owning 100% of FC1
after the sale, section 302(a) does not apply to the redemption.
Instead, under section 302(d), the redemption is treated as a
distribution to which section 301 applies. Pursuant to section
304(b)(2), $20x of the distribution is treated as a dividend from FC2.
With respect to the remaining $80x, USP takes the position that $40x is
applied against and reduces the basis of the FC2 stock issued in the
deemed section 351 exchange, and $40x is applied against and reduces the
basis of the FC2 stock held by USP prior to (and after) the transaction.
(ii) Analysis. Under paragraph (b) of this section, USP must
recognize gain of $40x on its transfer of the FC1 stock to FC2 in the
deemed section 351 exchange (the amount by which the $60x gain realized
by USP on the deemed section 351 exchange with respect to the F1 stock
exceeds the $20x dividend inclusion). Pursuant to paragraph (b) of this
section, the exception under Sec. 1.367(a)-3(b) is not available to the
transfer of the FC1 stock by USP to FC2 in the deemed section 351
exchange. Thus, USP cannot avoid gain recognition under paragraph (b) of
this section by entering into a gain recognition agreement with respect
to its transfer of the FC1 stock to FC2 in the deemed section 351
exchange. Under paragraph (d) of this section, the $40x gain recognized
is allocated among the shares of FC1 stock transferred to FC2 in the
deemed section 351 exchange in proportion to the gain realized by USP on
the transfer of such shares. Under paragraph (c) of this section, the
application of paragraph (b) of this section is determined prior to
taking into account the $40x increase to the basis of the FC1 stock
transferred by USP. Under section 362, the basis of the FC1 stock in the
hands of FC2 is increased by $40x, the amount of gain recognized by the
USP on the transfer of the FC1 stock under paragraph (b) of this
section. Under section 358, the basis of the FC2 stock received by USP
in the deemed section 351 exchange is similarly increased by $40x. See
Sec. 1.367(a)-1T(b)(4). The $40x increase to the basis of the FC2 stock
is taken into account before determining the consequences of the
redemption of such stock under section 304(a)(1).
(f) Effective/applicability date. This section applies to transfers
occurring on or after February 10, 2009. See Sec. 1.367(a)-3(a), as
contained in 26 CFR part 1 revised as of April 1, 2008, for transfers
occurring on or after February 21, 2006, and before February 10, 2009.
(g) Expiration date. This section expires on or before February 10,
2012.
[T.D. 9444, 74 FR 6826, Feb. 11, 2009; 74 FR 10175, Mar. 10, 2009]
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)-1 Other transfers.
(a) Scope.
(b) General rules.
(1) Rules.
(2) Example.
[[Page 452]]
(c) Notice required.
(1) In general.
(2) Persons subject to section 367(b) notice.
(3) Time and manner for filing notice.
(i) United States persons described in Sec. 1.367(b)-1(c)(2).
(ii) Foreign corporations described in Sec. 1.367(b)-1(c)(2).
(4) Information required.
(5) Abbreviated notice provision for shareholders that make the
election described in Sec. 1.367(b)-3(c)(3).
(6) Supplemental published guidance.
Sec. 1.367(b)-2 Definitions and special rules.
(a) Controlled foreign corporation.
(b) Section 1248 shareholder.
(c) Section 1248 amount.
(1) Rule.
(2) Examples.
(d) All earnings and profits amount.
(1) General rule.
(2) Rules for determining earnings and profits.
(i) Domestic rules generally applicable.
(ii) Certain adjustments to earnings and profits.
(iii) Effect of section 332 liquidating distribution.
(3) Amount attributable to a block of stock.
(i) Application of section 1248 principles.
(A) In general.
(1) Rule.
(2) Example.
(B) Foreign shareholders.
(ii) Exclusion of lower-tier earnings.
(e) Treatment of deemed dividends.
(1) In general.
(2) Consequences of dividend characterization.
(3) Ordering rules.
(4) Examples.
(f) Deemed asset transfer and closing of taxable year in certain
section 368(a)(1)(F) reorganizations.
(1) Scope.
(2) Deemed asset transfer.
(3) Other applicable rules.
(4) Closing of taxable year.
(g) Stapled stock under section 269B.
(h) Section 953(d) domestication elections.
(1) Effect of election.
(2) Post-election exchanges.
(i) Section 1504(d) elections.
(j) Sections 985 through 989.
(1) Change in functional currency of a qualified business unit.
(i) Rule.
(ii) Example.
(2) Previously taxed earnings and profits.
(i) Exchanging shareholder that is a United States person.
(ii) Exchanging shareholder that is a foreign corporation.
(3) Other rules.
(k) Partnerships, trusts and estates.
(l) Additional definitions.
(1) Foreign income taxes.
(2) Post-1986 undistributed earnings.
(3) Post-1986 foreign income taxes.
(4) Pre-1987 accumulated profits.
(5) Pre-1987 foreign income taxes.
(6) Pre-1987 section 960 earnings and profits.
(7) Pre-1987 section 960 foreign income taxes.
(8) Earnings and profits.
(9) Pooling corporation.
(10) Nonpooling corporation.
(11) Separate category.
(12) Passive category.
(13) General category
Sec. 1.367(b)-3 Repatriation of foreign corporate assets in certain
nonrecognition transactions.
(a) Scope.
(b) Exchange of stock owned directly by a United States shareholder
or by certain foreign corporate shareholders.
(1) Scope.
(2) United States shareholder.
(3) Income inclusion.
(i) Inclusion of all earnings and profits amount.
(ii) Examples.
(iii) Recognition of exchange gain or loss with respect to capital.
[Reserved]
(4) [Reserved]
(c) Exchange of stock owned by a United States person that is not a
United States shareholder.
(1) Scope.
(2) Requirement to recognize gain.
(3) Election to include all earnings and profits amount.
(4) De minimis exception.
(5) Examples.
(d) Carryover of certain foreign taxes.
(1) Rule.
(2) Example.
(e) Net operating loss and capital loss carryovers.
(f) Carryover of earnings and profits.
(1) General rule.
(2) Previously taxed earnings and profits. [Reserved
Sec. 1.367(b)-4 Acquisition of foreign corporate stock or assets by a
foreign corporation in certain nonrecognition transactions.
(a) Scope.
(b) Income inclusion.
(1) Exchange that results in loss of status as section 1248
shareholder.
(i) General rule.
(ii) Special rules.
(iii) Examples.
(2) Receipt by exchanging shareholder of preferred or other stock in
certain instances.
(i) Rule.
(ii) Examples.
(3) Certain recapitalizations.
[[Page 453]]
(c) Exclusion of deemed dividend from foreign personal holding
company income.
(1) Rule.
(2) Example.
(d) Rules for subsequent exchanges.
(1) Rule.
(2) Example.
Sec. 1.367(b)-5 Distributions of stock described in section 355.
(a) In general.
(1) Scope.
(2) Treatment of distributees as exchanging shareholders.
(b) Distribution by a domestic corporation.
(1) General rule.
(2) Section 367(e) transactions.
(3) Determining whether distributees are individuals.
(4) Applicable cross-references.
(c) Pro rata distribution by a controlled foreign corporation.
(1) Scope.
(2) Adjustment to basis in stock and income inclusion.
(3) Interaction with Sec. 1.367(b)-2(e)(3)(ii).
(4) Basis redistribution.
(d) Non-pro rata distribution by a controlled foreign corporation.
(1) Scope.
(2) Treatment of certain shareholders as distributees.
(3) Inclusion of excess section 1248 amount by exchanging
shareholder.
(4) Interaction with Sec. 1.367(b)-2(e)(3)(ii).
(i) Limited application.
(ii) Interaction with predistribution amount.
(e) Definitions.
(1) Predistribution amount.
(2) Postdistribution amount.
(f) Exclusion of deemed dividend from foreign personal holding
company income.
(g) Examples.
Sec. 1.367(b)-6 Effective/applicability dates and coordination rules.
(a) Effective/applicability dates.
(1) In general.
(2) Exception.
(b) Certain recapitalizations described in Sec. 1.367(b)-4(b)(3).
(c) Use of reasonable method to comply with prior published
guidance.
(1) Prior exchanges.
(2) Future exchanges.
(d) Effect of removal of attribution rules.
Sec. 1.367(b)-7 Carryover of earnings and profits and foreign income
taxes in certain foreign-to-foreign nonrecognition transactions.
(a) Scope.
(b) General rules.
(1) Non-previously taxed earnings and profits and related taxes.
(2) Previously taxed earnings and profits. [Reserved]
(c) Ordering rule for post-transaction distributions.
(1) If foreign surviving corporation is a pooling corporation.
(2) If foreign surviving corporation is a nonpooling corporation.
(d) Post-1986 pool.
(1) In general.
(i) Qualifying earnings and taxes.
(ii) Carryover rule.
(2) Hovering deficit.
(i) In general.
(ii) Offset rule.
(iii) Related taxes.
(3) Examples.
(e) Pre-pooling annual layers.
(1) If foreign surviving corporation is a pooling corporation.
(i) Qualifying earnings and taxes.
(ii) Carryover rule.
(iii) Deficits.
(A) In general.
(B) Aggregate positive pre-1987 accumulated profits.
(C) Aggregate deficit in pre-1987 accumulated profits.
(D) Deficit and positive separate categories within annual layers
(iv) Pre-1987 section 960 earnings and profits and foreign income
taxes.
(v) Examples.
(2) If foreign surviving corporation is a nonpooling corporation.
(i) Qualifying earnings and taxes.
(ii) Carryover rule.
(iii) Deficits.
(A) In general.
(B) Aggregate positive pre-1987 accumulated profits.
(C) Aggregate deficit in pre-1987 accumulated profits.
(D) Deficit and positive separate categories within annual layers.
(iv) Pre-1987 section 960 earnings and profits and foreign income
taxes.
(v) Examples.
(f) Special rules.
(1) Treatment of deficit.
(i) General rule.
(ii) Exceptions.
(iii) Examples.
(2) Reconciling taxable years.
(3) Post-transaction change of status.
(4) Ordering rule for multiple hovering deficits.
(i) Rule.
(ii) Example.
(5) Pro rata rule for earnings and deficits during transaction year.
(g) Effective date.
[[Page 454]]
Sec. 1.367(b)-8 Allocation of earnings and profits and foreign income
taxes in certain foreign corporate separations. [Reserved]
Sec. 1.367(b)-9 Special rule for F reorganizations and similar
transactions.
(a) Scope.
(b) Hovering deficit rules inapplicable.
(c) Foreign divisive transactions. [Reserved]
(d) Examples.
(e) Effective date.
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)-12 Subsequent treatment of amounts attributed or included
in income.
(a) In general.
(b) Applicable rules.
(c) Effective 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.
[T.D. 8862, 65 FR 3596, Jan. 24, 2000; 65 FR 66501, Nov. 6, 2000, as
amended by T.D. 8937, 66 FR 2257, Jan. 11, 2001; T.D. 9273, 71 FR 44984,
Aug. 8, 2006; T.D. 9526, 76 FR 28893, May 19, 2011; T.D. 9614, 78 FR
17039, Mar. 19, 2013]
Editorial Note: At 76 FR 28893, May 19, 2011 Sec. 1.376(b)-0 was
amended by redesignating the entries for (d)(3)(iii)(A) and (B) as
entries for (d)(3)(ii)(A) and (B); however, the amendment could not be
incorporated due to inaccurate amendatory instruction.
Sec. 1.367(b)-1 Other transfers.
(a) Scope. The regulations promulgated under section 367(b) (the
section 367(b) regulations) set forth rules regarding the proper
inclusions and adjustments that must be made as a result of an exchange
described in section 367(b) (a section 367(b) exchange). A section
367(b) exchange is any exchange described in section 332, 351, 354, 355,
356 or 361, with respect to which the status of a foreign corporation as
a corporation is relevant for determining the extent to which income
shall be recognized or for determining the effect of the transaction on
earnings and profits, basis of stock or securities, basis of assets, or
other relevant tax attributes. For rules coordinating the concurrent
application of sections 367(a) and (b), see Sec. 1.367(a)-3(b)(2).
(b) General rules--(1) Rules. The following general rules apply
under the section 367(b) regulations--
(i) A foreign corporation in a section 367(b) exchange is considered
to be a corporation and, as a result, all of the related provisions
(e.g., section 381) shall apply, except to the extent provided in the
section 367(b) regulations; and
(ii) Nothing in the section 367(b) regulations shall permit--
(A) The nonrecognition of income that would otherwise be required to
be recognized under another provision of the Internal Revenue Code or
the regulations thereunder; or
(B) The recognition of a loss or deduction that would otherwise not
be recognized under another provision of the Internal Revenue Code or
the regulations thereunder.
(2) Example. The following example illustrates the rules of this
paragraph (b):
Example. (i) Facts. DC, a domestic corporation, owns 90 percent of
P, a partnership. The remaining 10 percent of P is owned by a person
unrelated to DC. P owns all of the outstanding stock of FC, a controlled
foreign corporation. FC liquidates into P.
[[Page 455]]
(ii) Result. FC's liquidation is not a transaction described in
section 332. Nothing in the section 367(b) regulations, including Sec.
1.367(b)-2(k), permits FC's liquidation to qualify as a liquidation
described in section 332.
(c) Notice Required--(1) In general. A notice under this paragraph
(c) (section 367(b) notice) must be filed with regard to any person
described in paragraph (c)(2) of this section. A section 367(b) notice
must be filed in the time and manner described in paragraph (c)(3) of
this section and must include the information described in paragraph
(c)(4) of this section.
(2) Persons subject to section 367(b) notice. The following persons
are described in this paragraph (c)(2)--
(i) A shareholder described in Sec. 1.367(b)-3(b)(1) that realizes
income in a transaction described in Sec. 1.367(b)-3(a);
(ii) A shareholder that makes the election described in Sec.
1.367(b)-3(c)(3);
(iii) A shareholder described in Sec. 1.367(b)-4(b)(1)(i)(A)(1) or
(2) that realizes income in a transaction described in Sec. 1.367(b)-
4(a);
(iv) A shareholder that realizes income in a transaction described
in Sec. 1.367(b)-5(c) or 1.367(b)-5(d) and that is either--
(A) A section 1248 shareholder of the distributing or controlled
corporation; or
(B) A foreign corporation with one or more shareholders that are
described in paragraph (c)(2)(iv)(A) of this section; and
(v) A foreign surviving corporation described in Sec. 1.367(b)-
7(a).
(3) Time and manner for filing notice--(i) United States persons
described in Sec. 1.367(b)-1(c)(2). A United States person described in
paragraph (c)(2) of this section must file a section 367(b) notice
attached to a timely filed Federal tax return (including extensions) for
the person's taxable year in which income is realized in the section
367(b) exchange. In the case of a shareholder that makes the election
described in Sec. 1.367(b)-3(c)(3), notification of such election must
be sent to the foreign acquired corporation (or its successor in
interest) on or before the date the section 367(b) notice is filed, so
that appropriate corresponding adjustments can be made in accordance
with the rules of Sec. 1.367(b)-2(e).
(ii) Foreign corporations described in Sec. 1.367(b)-1(c)(2). Each
United States person listed in this paragraph (c)(3)(ii) must file a
section 367(b) notice with regard to a foreign corporation described in
paragraph (c)(2) of this section. Such notice must be attached to a
timely filed Federal tax return (including extensions) for the United
States person's taxable year in which income is realized in the section
367(b) exchange and, if the United States person is required to file a
Form 5471 (Information Return of U.S. Persons With Respect to Certain
Foreign Corporations), the section 367(b) notice must be attached to the
Form 5471. The following persons are listed in this paragraph
(c)(3)(ii)--
(A) United States shareholders (as defined in Sec. 1.367(b)-
3(b)(2)) of foreign corporations described in paragraph (c)(2)(i) or (v)
of this section; and
(B) Section 1248 shareholders of foreign corporations described in
paragraph (c)(2)(iii) or (iv) of this section.
(4) Information required. Except as provided in paragraph (c)(5) of
this section, a section 367(b) notice shall include the following
information--
(i) A statement that the exchange is a section 367(b) exchange;
(ii) A complete description of the exchange;
(iii) A description of any stock, securities or other consideration
transferred or received in the exchange;
(iv) A statement that describes any amount (or amounts) required,
under the section 367(b) regulations, to be taken into account as income
or loss or as an adjustment (including an adjustment under Sec.
1.367(b)-7 or 1.367(b)-9) to basis, earnings and profits, or other tax
attributes as a result of the exchange;
(v) Any information that is or would be required to be furnished
with a Federal income tax return pursuant to regulations 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;
(vi) Any information required to be furnished with respect to the
exchange under sections 6038, 6038A, 6038B, 6038C
[[Page 456]]
or 6046, or the regulations under those sections, if such information
has not otherwise been provided by the person filing the section 367(b)
notice; and
(vii) If applicable, a statement that the shareholder is making the
election described in Sec. 1.367(b)-3(c)(3). This statement must
include--
(A) A copy of the information the shareholder received from the
foreign acquired corporation (or its successor in interest) establishing
and substantiating the shareholder's all earnings and profits amount
with respect to the shareholder's stock in the foreign acquired
corporation; and
(B) A representation that the shareholder has notified the foreign
acquired corporation (or its successor in interest) that the shareholder
is making the election described in Sec. 1.367(b)-3(c)(3).
(5) Abbreviated notice provision for shareholders that make the
election described in Sec. 1.367(b)-3(c)(3). In the case of a foreign
acquired corporation that has never had earnings and profits that would
result in any shareholder having an all earnings and profits amount, a
shareholder making the election described in Sec. 1.367(b)-3(c)(3) may
satisfy the information requirements of paragraph (c)(4) of this section
by filing a section 367(b) notice that includes--
(i) A statement from the foreign acquired corporation (or its
successor in interest) that the foreign acquired corporation has never
had any earnings and profits that would result in any shareholder having
an all earnings and profits amount; and
(ii) The information described in paragraphs (c)(4) (i) through
(iii) of this section.
(6) Supplemental published guidance. The section 367(b) notice
requirements may be updated or amended by revenue procedure or other
published guidance.
[T.D. 8862, 65 FR 3597, Jan. 24, 2000; 65 FR 66501, Nov. 6, 2000, as
amended by T.D. 9243, 71 FR 4288, Jan. 26, 2006; T.D. 9273, 71 FR 44894,
Aug. 8, 2006]
Sec. 1.367(b)-2 Definitions and special rules.
(a) Controlled foreign corporation. The term controlled foreign
corporation means a controlled foreign corporation as defined in section
957 (taking into account section 953(c)).
(b) Section 1248 shareholder. The term section 1248 shareholder
means any United States person that satisfies the ownership requirements
of section 1248 (a)(2) or (c)(2) with respect to a foreign corporation.
(c) Section 1248 amount--(1) Rule. The term section 1248 amount with
respect to stock in a foreign corporation means the net positive
earnings and profits (if any) that would have been attributable to such
stock and includible in income as a dividend under section 1248 and the
regulations thereunder if the stock were sold by the shareholder. In the
case of a transaction in which the shareholder is a foreign corporation
(foreign shareholder), the following additional rules shall apply--
(i) The foreign shareholder shall be deemed to be a United States
person for purposes of this paragraph (c), except that the foreign
shareholder shall not be considered a United States person for purposes
of determining whether the stock owned by the foreign shareholder is
stock of a controlled foreign corporation; and
(ii) The foreign shareholder's holding period in the stock of the
foreign corporation shall be determined by reference to the period that
the foreign shareholder's section 1248 shareholders held (directly or
indirectly) an interest in the foreign corporation. This paragraph
(c)(1)(ii) applies in addition to the section 1248 regulations'
incorporation of section 1223 holding periods. See Sec. 1.1248-8.
(2) Examples. The following examples illustrate the rules of this
paragraph (c):
Example 1. (i) Facts. DC, a domestic corporation, owns all of the
outstanding stock of FC1, a controlled foreign corporation (CFC). FC1
owns all of the outstanding stock of FC2, a CFC. DC has always owned all
of the stock of FC1, and FC1 has always owned all of the stock of FC2.
(ii) Result. Under this paragraph (c), DC's section 1248 amount with
respect to its FC1 stock is computed by reference to all of FC1's and
FC2's earnings and profits. See section 1248(c)(2). Because FC1's
section 1248 shareholder (DC) always indirectly held all of the stock of
FC2, FC1's section 1248 amount with respect to its FC2 stock is computed
by reference to all of FC2's earnings and profits.
Example 2. (i) Facts. DC, a domestic corporation, owns 40 percent of
the outstanding
[[Page 457]]
stock of FC1, a foreign corporation. The other 60 percent of FC1 stock
is owned (directly and indirectly) by foreign persons that are unrelated
to DC. FC1 owns all of the outstanding stock of FC2, a foreign
corporation. On January 1, 2001, DC purchases the remaining 60 percent
of FC1 stock.
(ii) Result. Under this paragraph (c), DC's section 1248 amount with
respect to its FC1 stock is computed by reference to FC1's and FC2's
earnings and profits that accumulated on or after January 1, 2001, the
date FC1 and FC2 became controlled foreign corporations (CFCs). See
section 1248(a). Because FC1 is not considered a United States person
for purposes of determining whether FC2 is a CFC, FC1's section 1248
amount with respect to its FC2 stock is computed by reference to FC2's
earnings and profits that accumulated on or after January 1, 2001, the
date FC2 became an actual CFC.
Example 3. (i) Facts. FC1, a foreign corporation, owns all of the
outstanding stock of FC2, a foreign corporation. DC is a domestic
corporation that is unrelated to FC1, FC2, and their direct and indirect
owners. On January 1, 2001, DC purchases all of the outstanding stock of
FC1.
(ii) Result. Under this paragraph (c), DC's section 1248 amount with
respect to its FC1 stock is computed by reference to FC1's and FC2's
earnings and profits that accumulated on or after January 1, 2001, the
first day DC held the stock of FC1. See section 1248(a). FC1's section
1248 amount with respect to its FC2 stock is computed by reference to
FC2's earnings and profits that accumulated on or after January 1, 2001,
the first day FC1's section 1248 shareholder (DC) indirectly held the
stock of FC2.
(d) All earnings and profits amount--(1) General rule. The term all
earnings and profits amount with respect to stock in a foreign
corporation means the net positive earnings and profits (if any)
determined as provided under paragraph (d)(2) of this section and
attributable to such stock as provided under paragraph (d)(3) of this
section. The all earnings and profits amount shall be determined without
regard to the amount of gain that would be realized on a sale or
exchange of the stock of the foreign corporation.
(2) Rules for determining earnings and profits--(i) Domestic rules
generally applicable. For purposes of this paragraph (d), except as
provided in sections 312(k)(4) and (n)(8), 964 and 986, the earnings and
profits of a foreign corporation for any taxable year shall be
determined according to principles substantially similar to those
applicable to domestic corporations.
(ii) Certain adjustments to earnings and profits. Notwithstanding
paragraph (d)(2)(i) of this section, for purposes of this paragraph (d),
the earnings and profits of a foreign corporation for any taxable year
shall not include the amounts specified in section 1248(d). In the case
of amounts specified in section 1248(d)(4), the preceding sentence
requires that the earnings and profits for any taxable year be decreased
by the net positive amount (if any) of earnings and profits attributable
to activities described in section 1248(d)(4), and increased by the net
reduction (if any) in earnings and profits attributable to activities
described in section 1248(d)(4).
(iii) Effect of section 332 liquidating distribution. The all
earnings and profits amount with respect to stock of a corporation that
distributes all of its property in a liquidation described in section
332 shall be determined without regard to the adjustments prescribed by
section 312(a) and (b) resulting from the distribution of such property
in liquidation, except that gain or loss realized by the corporation on
the distribution shall be taken into account to the extent provided in
section 312(f)(1). See Sec. 1.367(b)-3(b)(3)(ii) Example 3.
(3) Amount attributable to a block of stock--(i) Application of
section 1248 principles--(A) In general--(1) Rule. The all earnings and
profits amount with respect to stock of a foreign corporation is
determined according to the attribution principles of section 1248 and
the regulations thereunder. The attribution principles of section 1248
shall apply without regard to the requirements of section 1248 that are
not relevant to the determination of a shareholder's pro rata portion of
earnings and profits. Thus, for example, the all earnings and profits
amount is determined without regard to whether the foreign corporation
was a controlled foreign corporation at any time during the five years
preceding the section 367(b) exchange in question, without regard to
whether the shareholder owned a 10 percent or greater interest in the
stock, and without regard to whether the earnings and profits of the
foreign corporation were accumulated in post-
[[Page 458]]
1962 taxable years or while the corporation was a controlled foreign
corporation.
(2) Example. The following example illustrates the rules of this
paragraph (d)(3)(i)(A):
Example. (i) Facts. On January 1, 2001, DC, a domestic corporation,
purchases 9 percent of the outstanding stock of FC, a foreign
corporation. On January 1, 2002, DC purchases an additional 1 percent of
FC stock. On January 1, 2003, DC exchanges its stock in FC in a section
367(b) exchange in which DC is required to include the all earnings and
profits amount in income. FC was not a controlled foreign corporation
during the entire period DC held its FC stock.
(ii) Result. The all earnings and profits amount with respect to
DC's stock in FC is computed by reference to 9 percent of FC's earnings
and profits from January 1, 2001, through December 31, 2001, and by
reference to 10 percent of FC's earnings and profits from January 1,
2002, through January 1, 2003.
(B) Foreign shareholders. In the case of a transaction in which the
exchanging shareholder is a foreign corporation (foreign shareholder),
the following additional rules shall apply--
(1) The attribution principles of section 1248 shall apply without
regard to whether the person directly owning the stock is a United
States person; and
(2) The foreign shareholder's holding period in the stock of the
foreign acquired corporation shall be determined by reference to the
period that the foreign shareholder's United States shareholders (as
defined in Sec. 1.367(b)-3(b)(2)) held (directly or indirectly) an
interest in the foreign acquired corporation. This paragraph
(d)(3)(i)(B)(2) applies in addition to the section 1248 regulations'
incorporation of section 1223 holding periods. See Sec. 1.1248-8.
(ii) Exclusion of lower-tier earnings. In applying the attribution
principles of section 1248 and the regulations thereunder to determine
the all earnings and profits amount with respect to stock of a foreign
corporation, the earnings and profits of subsidiaries of the foreign
corporation shall not be taken into account notwithstanding section
1248(c)(2).
(e) Treatment of deemed dividends--(1) In general. In certain
circumstances these regulations provide that an exchanging shareholder
shall include an amount in income as a deemed dividend. This paragraph
provides rules for the treatment of the deemed dividend.
(2) Consequences of dividend characterization. A deemed dividend
described in paragraph (e)(1) of this section shall be treated as a
dividend for purposes of the Internal Revenue Code. The deemed dividend
shall be considered as paid out of the earnings and profits with respect
to which the amount of the deemed dividend was determined. Thus, for
example, a deemed dividend that is determined by reference to the all
earnings and profits amount or the section 1248 amount will never be
considered as paid out of (and therefore will never reduce) earnings and
profits specified in section 1248(d), because such earnings and profits
are excluded in computing the all earnings and profits amount (under
paragraph (d)(2)(ii) of this section) and the section 1248 amount (under
section 1248(d) and paragraph (c)(1) of this section). If the deemed
dividend is determined by reference to the earnings and profits of a
foreign corporation that is owned indirectly (i.e., through one or more
tiers of intermediate owners) by the person that is required to include
the deemed dividend in income, the deemed dividend shall be considered
as having been paid by such corporation to such person through the
intermediate owners, rather than directly to such person.
(3) Ordering rules. In the case of an exchange of stock in which the
exchanging shareholder is treated as receiving a deemed dividend from a
foreign corporation, the following ordering rules concerning the timing,
treatment, and effect of such a deemed dividend shall apply. See also
paragraph (j)(2) of this section.
(i) For purposes of the section 367(b) regulations, the gain
realized by an exchanging shareholder shall be determined before
increasing (as provided in paragraph (e)(3)(ii) of this section) the
basis in the stock of the foreign corporation by the amount of the
deemed dividend.
(ii) Except as provided in paragraph (e)(3)(i) of this section, the
deemed dividend shall be considered to be received immediately before
the exchanging shareholder's receipt of consideration for its stock in
the foreign corporation, and the shareholder's basis in the stock
[[Page 459]]
exchanged shall be increased by the amount of the deemed dividend. Such
basis increase shall be taken into account before determining the gain
otherwise recognized on the exchange (for example, under section 356),
the basis that the exchanging shareholder takes in the property that it
receives in the exchange (under section 358(a)(1)), and the basis that
the transferee otherwise takes in the transferred stock (under section
362).
(iii) Except as provided in paragraph (e)(3)(i) of this section, the
earnings and profits of the appropriate foreign corporation shall be
reduced by the deemed dividend amount before determining the
consequences of the recognition of gain in excess of the deemed dividend
amount (for example, under section 356(a)(2) or sections 356(a)(1) and
1248).
(4) Examples. The following examples illustrate the rules of this
paragraph (e):
Example 1. DC, a domestic corporation, exchanges stock in FC, a
foreign corporation, in a section 367(b) exchange in which DC includes
the all earnings and profits amount in income as a deemed dividend.
Under paragraph (e)(2) of this section, a deemed dividend is treated as
a dividend for purposes of the Internal Revenue Code. As a result, if
the requirements of section 902 are met, DC may qualify for a deemed
paid foreign tax credit with respect to the deemed dividend that it
receives from FC.
Example 2. DC, a domestic corporation, exchanges stock in FC1, a
foreign corporation that is a controlled foreign corporation, in a
transaction in which DC is required to include the section 1248 amount
in income as a deemed dividend. A portion of the section 1248 amount is
determined by reference to the earnings and profits of FC1 (the upper-
tier portion of the section 1248 amount), and the remainder of the
section 1248 amount is determined by reference to the earnings and
profits of FC2, which is a wholly owned foreign subsidiary of FC1 (the
lower-tier portion of the section 1248 amount). Under paragraph (e)(2)
of this section, DC computes its deemed paid foreign tax credit as if
the lower-tier portion of the section 1248 amount were distributed as a
dividend by FC2 to FC1, and as if such portion and the upper-tier
portion of the section 1248 amount were then distributed as a dividend
by FC1 to DC.
Example 3. DC, a domestic corporation, exchanges stock in FC, a
foreign corporation that is a controlled foreign corporation, in a
transaction in which DC realizes gain of $100 (prior to the application
of the section 367(b) regulations). In connection with the transaction,
DC is required to include $40 in income as a deemed dividend under the
section 367(b) regulations. In addition to receiving property permitted
to be received under section 354 without the recognition of gain, DC
also receives cash in the amount of $70. Under paragraph (e)(3) of this
section, the $40 deemed dividend increases DC's basis in its FC stock
before determining the gain to be recognized under section 356. Thus, in
applying section 356, DC is considered to realize $60 of gain on the
exchange, all of which is recognized under section 356(a)(1).
(f) Deemed asset transfer and closing of taxable year in certain
section 368(a)(1)(F) reorganizations--(1) Scope. This paragraph applies
to a reorganization described in section 368(a)(1)(F) in which the
transferor corporation is a foreign corporation.
(2) Deemed asset transfer. In a reorganization described in
paragraph (f)(1) of this section, there is considered to exist--
(i) A transfer of assets by the foreign transferor corporation to
the acquiring corporation in exchange for stock (or stock and
securities) of the acquiring corporation and the assumption by the
acquiring corporation of the foreign transferor corporation's
liabilities;
(ii) A distribution of such stock (or stock and securities) by the
foreign transferor corporation to its shareholders (or shareholders and
security holders); and
(iii) An exchange by the foreign transferor corporation's
shareholders (or shareholders and security holders) of their stock (or
stock and securities) for stock (or stock and securities) of the
acquiring corporation.
(3) Other applicable rules. For purposes of this paragraph (f), it
is immaterial that the applicable foreign or domestic law treats the
acquiring corporation as a continuation of the foreign transferor
corporation.
(4) Closing of taxable year. In a reorganization described in
paragraph (f)(1) of this section, the taxable year of the foreign
transferor corporation shall end with the close of the date of the
transfer and, except as otherwise required under the Internal Revenue
Code (e.g. section 1502 and the regulations thereunder), the taxable
year of the acquiring corporation shall end with the close of the date
on which the
[[Page 460]]
transferor's taxable year would have ended but for the occurrence of the
reorganization if--
(i) The acquiring corporation is a domestic corporation; or
(ii) The foreign transferor corporation has effectively connected
earnings and profits (as defined in section 884(d)) or accumulated
effectively connected earnings and profits (as defined in section
884(b)(2)(B)(ii)).
(g) Stapled stock under section 269B. For rules addressing the
deemed conversion of a foreign corporation to a domestic corporation
under section 269B, see Sec. 1.269B-1(c).
(h) Section 953(d) domestication elections--(1) Effect of election.
A foreign corporation that elects under section 953(d) to be treated as
a domestic corporation shall be treated for purposes of section 367(b)
as transferring, as of the first day of the first taxable year for which
the election is effective, all of its assets to a domestic corporation
in a reorganization described in section 368(a)(1)(F). Notwithstanding
paragraph (d) of this section, for purposes of determining the
consequences of the reorganization under Sec. 1.367(b)-3, the all
earnings and profits amount shall not be considered to include earnings
and profits accumulated in taxable years beginning before January 1,
1988.
(2) Post-election exchanges. For purposes of applying section 367(b)
to post-election exchanges with respect to a corporation that has made a
valid election under section 953(d) to be treated as a domestic
corporation, such corporation shall be treated as a domestic corporation
as to earnings and profits that were taken into account at the time of
the section 953(d) election or which accrue after such election, and
shall be treated as a foreign corporation as to earnings and profits
accumulated in taxable years beginning before January 1, 1988. Thus, for
example, if the section 953(d) corporation subsequently transfers its
assets to a domestic corporation (other than another section 953(d)
corporation) in a transaction described in section 381(a), the rules of
Sec. 1.367(b)-3 shall apply to such transaction to the extent of the
section 953(d) corporation's earnings and profits accumulated in taxable
years beginning before January 1, 1988.
(i) Section 1504(d) elections. An election under section 1504(d),
which permits certain foreign corporations to be treated as domestic
corporations, is treated as a transfer of property to a domestic
corporation and will generally constitute a reorganization described in
section 368(a)(1)(F). However, if an election under section 1504(d) is
made with respect to a foreign corporation from the first day of the
foreign corporation's existence, then the foreign corporation shall be
treated as a domestic corporation, and the section 367(b) regulations
will not apply.
(j) Sections 985 through 989--(1) Change in functional currency of a
qualified business unit--(i) Rule. If, as a result of a section 367(b)
exchange described in section 381(a), a qualified business unit (as
defined in section 989(a)) (QBU) has a different functional currency
determined under the rules of section 985(b) than it used prior to the
transaction, then the QBU shall be deemed to have automatically changed
its functional currency immediately prior to the transaction. A QBU that
is deemed to change its functional currency pursuant to this paragraph
(j) must make the adjustments described in Sec. 1.985-5.
(ii) Example. The following example illustrates the rule of this
paragraph (j)(1):
Example. (i) Facts. DC, a domestic corporation, owns 100 percent of
FC1, a foreign corporation. FC1 owns and operates a qualified business
unit (QBU) (B1) in France, whose functional currency is the euro. FC2,
an unrelated foreign corporation, owns and operates a QBU (B2) in
France, whose functional currency is the dollar. FC2 acquires FC1's
assets (including B1) in a reorganization described in section
368(a)(1)(C). As a part of the reorganization, B1 and B2 combine their
operations into one QBU. Applying the rules of section 985(b), the
functional currency of the combined operations of B1 and B2 is the euro.
(ii) Result. FC2's acquisition of FC1's assets is a section 367(b)
exchange that is described in section 381(a). Because the functional
currency of the combined operations of B1 and B2 after the exchange is
the euro, B2 is deemed to have automatically changed its functional
currency to the euro immediately prior to the section 367(b) exchange.
B2 must make the adjustments described in Sec. 1.985-5.
(2) Previously taxed earnings and profits--(i) Exchanging
shareholder that is a United States person. If an exchanging
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shareholder that is a United States person 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, then
immediately prior to the exchange, and solely for the purpose of
computing exchange gain or loss under section 986(c), the exchanging
shareholder shall be treated as receiving a distribution of previously
taxed earnings and profits from the appropriate foreign corporation that
is attributable (under the principles of section 1248) to the exchanged
stock. If an exchanging shareholder that is a United States person is a
distributee in an exchange described in Sec. 1.367(b)-5(c) or (d), then
immediately prior to the exchange, and solely for the purpose of
computing exchange gain or loss under section 986(c), the exchanging
shareholder shall be treated as receiving a distribution of previously
taxed earnings and profits from the appropriate foreign corporation to
the extent such shareholder has a diminished interest in such previously
taxed earnings and profits after the exchange. The exchange gain or loss
recognized under this paragraph (j)(2)(i) will increase or decrease the
exchanging shareholder's adjusted basis in the stock of the foreign
corporation, including for purposes of computing gain or loss realized
with respect to the stock on the transaction. The exchanging
shareholder's dollar basis with respect to each account of previously
taxed income shall be increased or decreased by the exchange gain or
loss recognized.
(ii) Exchanging shareholder that is a foreign corporation. If an
exchanging shareholder that is a foreign corporation 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, then, immediately prior to the exchange, the exchanging
shareholder shall be treated as receiving a distribution of previously
taxed earnings and profits from the appropriate foreign corporation that
is attributable (under the principles of section 1248) to the exchanged
stock. If an exchanging shareholder that is a foreign corporation is a
distributee in an exchange described in Sec. 1.367(b)-5(c) or (d), then
the exchanging shareholder shall be treated as receiving (immediately
prior to the exchange) a distribution of previously taxed earnings and
profits from the appropriate foreign corporation. Such distribution
shall be measured by the extent to which the exchanging shareholder's
direct or indirect United States shareholders (as defined in section
951(b)) have a diminished interest in such previously taxed earnings and
profits after the exchange.
(3) Other rules. See sections 985 through 989 for other currency
rules that may apply in connection with a section 367(b) exchange.
(k) Partnerships, trusts and estates. In applying the section 367(b)
regulations, stock of a corporation that is owned by a foreign
partnership, trust or estate shall be considered as owned
proportionately by its partners, owners, or beneficiaries under the
principles of Sec. 1.367(e)-1(b)(2). Stock owned by an entity that is
disregarded as an entity separate from its owner under Sec. 301.7701-3
is owned directly by the owner of such entity. In applying Sec.
1.367(b)-5(b), the principles of Sec. 1.367(e)-1(b)(2) shall also apply
to a domestic partnership, trust or estate.
(l) Additional definitions--(1) Foreign income taxes. The term
foreign income taxes has the meaning set forth in Sec. 1.902-1(a)(7).
(2) Post-1986 undistributed earnings. The term post-1986
undistributed earnings has the meaning set forth in Sec. 1.902-1(a)(9).
(3) Post-1986 foreign income taxes. The term post-1986 foreign
income taxes has the meaning set forth in Sec. 1.902-1(a)(8).
(4) Pre-1987 accumulated profits. The term pre-1987 accumulated
profits means the earnings and profits described in Sec. 1.902-
1(a)(10)(i), computed in accordance with the rules of Sec. 1.902-
1(a)(10)(ii).
(5) Pre-1987 foreign income taxes. The term pre-1987 foreign income
taxes has the meaning set forth in Sec. 1.902-1(a)(10)(iii).
(6) Pre-1987 section 960 earnings and profits. The term pre-1987
section 960 earnings and profits means the earnings and profits of a
foreign corporation accumulated in taxable years beginning before
January 1, 1987, computed under Sec. 1.964-1(a) through (e), and
translated
[[Page 462]]
into the functional currency (as determined under section 985) of the
foreign corporation at the spot rate on the first day of the foreign
corporation's first taxable year beginning after December 31, 1986. For
further guidance, see Notice 88-70 (1988-2 C.B. 369, 370) (see also
Sec. 601.601(d)(2) of this chapter). The term pre-1987 section 960
earnings and profits does not include earnings and profits that
represent previously taxed earnings and profits described in section
959.
(7) Pre-1987 section 960 foreign income taxes. The term pre-1987
section 960 foreign income taxes means the foreign income taxes related
to pre-1987 section 960 earnings and profits, determined in accordance
with the principles of Sec. 1.902-1(a)(10)(iii), except that the U.S.
dollar amounts of pre-1987 section 960 foreign income taxes are
determined by reference to the exchange rates in effect when the taxes
were paid or accrued.
(8) Earnings and profits. For purposes of Sec. Sec. 1.367(b)-7 and
1.367(b)-9, the term earnings and profits means post-1986 undistributed
earnings, pre-1987 accumulated profits, and pre-1987 section 960
earnings and profits.
(9) Pooling corporation. The term pooling corporation means a
foreign corporation with respect to which the requirements of section
902(c)(3)(B) have been met in the current taxable year or any prior
taxable year.
(10) Nonpooling corporation. The term nonpooling corporation means a
foreign corporation that is not a pooling corporation.
(11) Separate category. The term separate category has the meaning
set forth in section 904(d)(1), and shall also include any other
category of income to which section 904(a), (b), and (c) are applied
separately under any other provision of the Internal Revenue Code (e.g.,
sections 56(g)(4)(C)(iii)(IV), 245(a)(10), 865(h), 901(j), and
904(h)(10) (or section 904(g)(10) for taxable years beginning on or
before December 31, 2006).
(12) Passive category. The term passive category means the separate
category that includes income described in section 904(d)(1)(A).
(13) General category. The term general category means the separate
category that includes income described in section 904(d)(1)(B) (or
section 904(d)(1)(I) for taxable years beginning on or before December
31, 2006).
[T.D. 8862, 65 FR 3598, Jan. 24, 2000; 65 FR 66501, Nov. 6, 2000, as
amended by T.D. 9216, 70 FR 43760, July 29, 2005; T.D. 9273, 71 FR
44894, Aug. 8, 2006; T.D. 9345, 72 FR 41444, July 30, 2007; T.D. 9400,
73 FR 30303, May 27, 2008]
Sec. 1.367(b)-3 Repatriation of foreign corporate assets in certain
nonrecognition transactions.
(a) Scope. This section applies to an acquisition by a domestic
corporation (the domestic acquiring corporation) of the assets of a
foreign corporation (the foreign acquired corporation) in a liquidation
described in section 332 or an asset acquisition described in section
368(a)(1).
(b) Exchange of stock owned directly by a United States shareholder
or by certain foreign corporate shareholders--(1) Scope. This paragraph
(b) applies in the case of an exchanging shareholder that is either--
(i) A United States shareholder of the foreign acquired corporation;
or
(ii) A foreign corporation with respect to which there are one or
more United States shareholders.
(2) United States shareholder. For purposes of this section (and for
purposes of the other section 367(b) regulation provisions that
specifically refer to this paragraph (b)(2)), the term United States
shareholder means any shareholder described in section 951(b) (without
regard to whether the foreign corporation is a controlled foreign
corporation), and also any shareholder described in section 953(c)(1)(A)
(but only if the foreign corporation is a controlled foreign corporation
as defined in section 953(c)(1)(B) subject to the rules of section
953(c)).
(3) Income inclusion--(i) Inclusion of all earnings and profits
amount. An exchanging shareholder shall include in income as a deemed
dividend the all earnings and profits amount with respect to its stock
in the foreign acquired corporation. For the consequences of the deemed
dividend, see Sec. 1.367(b)-2(e). Notwithstanding Sec. 1.367(b)-2(e),
however, a deemed dividend from the foreign acquired corporation to an
exchanging foreign corporate shareholder shall not qualify for
[[Page 463]]
the exception from foreign personal holding company income provided by
section 954(c)(3)(A)(i), although it may qualify for the look-through
treatment provided by section 904(d)(3) if the requirements of that
section are met with respect to the deemed dividend.
(ii) Examples. The following examples illustrate the rules of
paragraph (b)(3)(i) of this section:
Example 1. (i) Facts. DC, a domestic corporation, owns all of the
outstanding stock of FC, a foreign corporation. The stock of FC has a
value of $100, and DC has a basis of $30 in such stock. The all earnings
and profits amount attributable to the FC stock owned by DC is $20, of
which $15 is described in section 1248(a) and the remaining $5 is not
(for example, because it accumulated prior to 1963). FC has a basis of
$50 in its assets. In a liquidation described in section 332, FC
distributes all of its property to DC, and the FC stock held by DC is
canceled.
(ii) Result. Under paragraph (b)(3)(i) of this section, DC must
include $20 in income as a deemed dividend from FC. Under section 337(a)
FC does not recognize gain or loss in the assets that it distributes to
DC, and under section 334(b), DC takes a basis of $50 in such assets.
Because the requirements of section 902 are met, DC qualifies for a
deemed paid foreign tax credit with respect to the deemed dividend that
it receives from FC.
Example 2. (i) Facts. DC, a domestic corporation, owns all of the
outstanding stock of FC, a foreign corporation. The stock of FC has a
value of $100, and DC has a basis of $30 in such stock. The all earnings
and profits amount attributable to the FC stock owned by DC is $75. FC
has a basis of $50 in its assets. In a liquidation described in section
332, FC distributes all of its property to DC, and the FC stock held by
DC is canceled.
(ii) Result. Under paragraph (b)(3)(i) of this section, DC must
include $75 in income as a deemed dividend from FC. Under section 337(a)
FC does not recognize gain or loss in the assets that it distributes to
DC, and under section 334(b), DC takes a basis of $50 in such assets.
Because the requirements of section 902 are met, DC qualifies for a
deemed paid foreign tax credit with respect to the deemed dividend that
it receives from FC.
Example 3. (i) Facts. DC, a domestic corporation, owns 80 percent of
the outstanding stock of FC, a foreign corporation. DC has owned its 80
percent interest in FC since FC was incorporated. The remaining 20
percent of the outstanding stock of FC is owned by a person unrelated to
DC (the minority shareholder). The stock of FC owned by DC has a value
of $80, and DC has a basis of $24 in such stock. The stock of FC owned
by the minority shareholder has a value of $20, and the minority
shareholder has a basis of $18 in such stock. FC's only asset is land
having a value of $100, and FC has a basis of $50 in the land. Gain on
the land would not generate earnings and profits qualifying under
section 1248(d) for an exclusion from earnings and profits for purposes
of section 1248. FC has earnings and profits of $20 (determined under
the rules of Sec. 1.367(b)-2(d)(2) (i) and (ii)), $16 of which is
attributable to the stock owned by DC under the rules of Sec. 1.367(b)-
2(d)(3). FC subdivides the land and distributes to the minority
shareholder land with a value of $20 and a basis of $10. As part of the
same transaction, in a liquidation described in section 332, FC
distributes the remainder of its land to DC, and the FC stock held by DC
and the minority shareholder is canceled.
(ii) Result. Under section 336, FC must recognize the $10 of gain it
realizes in the land it distributes to the minority shareholder, and
under section 331 the minority shareholder recognizes its gain of $2 in
the stock of FC. Such gain is included in income by the minority
shareholder as a dividend to the extent provided in section 1248 if the
minority shareholder is a United States person that is described in
section 1248(a)(2). Under Sec. 1.367(b)-2(d)(2)(iii), the $10 of gain
recognized by FC increases its earnings and profits for purposes of
computing the all earnings and profits amount and, as a result, $8 of
such increase (80 percent of $10) is considered to be attributable to
the FC stock owned by DC under Sec. 1.367(b)-2(d)(3)(i)(A)(1). DC's all
earnings and profits amount with respect to its stock in FC is $24 (the
$16 of initial all earnings and profits amount with respect to the FC
stock held by DC, plus the $8 addition to such amount that results from
FC's recognition of gain on the distribution to the minority
shareholder). Under paragraph (b)(3)(i) of this section, DC must include
the $24 all earnings and profits amount in income as a deemed dividend
from FC.
Example 4. (i) Facts. DC1, a domestic corporation, owns all of the
outstanding stock of DC2, a domestic corporation. DC1 also owns all of
the outstanding stock of FC, a foreign corporation. The stock of FC has
a value of $100, and DC1 has a basis of $30 in such stock. The assets of
FC have a value of $100. The all earnings and profits amount with
respect to the FC stock owned by DC1 is $20. In a reorganization
described in section 368(a)(1)(D), DC2 acquires all of the assets of FC
solely in exchange for DC2 stock. FC distributes the DC2 stock to DC1,
and the FC stock held by DC1 is canceled.
(ii) Result. DC1 must include $20 in income as a deemed dividend
from FC under paragraph (b)(3)(i) of this section. Under section 361, FC
does not recognize gain or loss in the assets that it transfers to DC2
or in the DC2 stock that it distributes to DC1, and under section 362(b)
DC2 takes a basis in the assets
[[Page 464]]
that it acquires from FC equal to the basis that FC had therein. Under
Sec. 1.367(b)-2(e)(3)(ii) and section 358(a)(1), DC1 takes a basis of
$50 (its $30 basis in the stock of FC, plus the $20 that was treated as
a deemed dividend to DC1) in the stock of DC2 that it receives in
exchange for the stock of FC. Under Sec. 1.367(b)-2(e)(3)(iii) and
section 312(a), the earnings and profits of FC are reduced by the $20
deemed dividend.
Example 5. (i) Facts. DC1, a domestic corporation, owns all of the
outstanding stock of FC1, a foreign corporation. FC1 owns all of the
outstanding stock of FC2, a foreign corporation. The all earnings and
profits amount with respect to the FC2 stock owned by FC1 is $20. In a
reorganization described in section 368(a)(1)(A), DC2, a domestic
corporation unrelated to FC1 or FC2, acquires all of the assets and
liabilities of FC2 pursuant to a State W merger. FC2 receives DC2 stock
and distributes such stock to FC1. The FC2 stock held by FC1 is
canceled, and FC2 ceases its separate legal existence.
(ii) Result. FC1 must include $20 in income as a deemed dividend
from FC2 under paragraph (b)(3)(i) of this section. The deemed dividend
is treated as a dividend for purposes of the Internal Revenue Code as
provided in Sec. 1.367(b)-2(e)(2); however, under paragraph (b)(3)(i)
of this section the deemed dividend cannot qualify for the exception
from foreign personal holding company income provided by section
954(c)(3)(A)(i), even if the provisions of that section would otherwise
have been met in the case of an actual dividend.
Example 6. (i) Facts. DC1, a domestic corporation, owns 99 percent
of USP, a domestic partnership. The remaining 1 percent of USP is owned
by a person unrelated to DC1. DC1 and USP each directly own 9 percent of
the outstanding stock of FC, a foreign corporation that is not a
controlled foreign corporation subject to the rule of section 953(c). In
a reorganization described in section 368(a)(1)(C), DC2, a domestic
corporation, acquires all of the assets and liabilities of FC in
exchange for DC2 stock. FC distributes to its shareholders DC2 stock,
and the FC stock held by its shareholders is canceled.
(ii) Result. (A) DC1 and USP are United States persons that are
exchanging shareholders in a transaction described in paragraph (a) of
this section. As a result, DC1 and USP are subject to the rules of
paragraph (b) of this section if they qualify as United States
shareholders as defined in paragraph (b)(2) of this section.
Alternatively, if they do not qualify as United States shareholders as
defined in paragraph (b)(2) of this section, DC1 and USP are subject to
the rules of paragraph (c) of this section. Paragraph (b)(2) of this
section defines the term United States shareholder to include any
shareholder described in section 951(b) (without regard to whether the
foreign corporation is a controlled foreign corporation). A shareholder
described in section 951(b) is a United States person that is considered
to own, applying the rules of section 958(a) and 958(b), 10 percent or
more of the total combined voting power of all classes of stock entitled
to vote of a foreign corporation. Under section 958(b), the rules of
section 318(a), as modified by section 958(b) and the regulations
thereunder, apply so that, in general, stock owned directly or
indirectly by a partnership is considered as owned proportionately by
its partners, and stock owned directly or indirectly by a partner is
considered as owned by the partnership. Thus, under section 958(b), DC1
is treated as owning its proportionate share of FC stock held by USP,
and USP is treated as owning all of the FC stock held by DC1.
(B) Accordingly, for purposes of determining whether DC1 is a United
States shareholder under paragraph (b)(2) of this section, DC1 is
considered as owning 99 percent of the 9 percent of FC stock held by
USP. Because DC1 also owns 9 percent of FC stock directly, DC1 is
considered as owning more than 10 percent of FC stock. DC1 is thus a
United States shareholder of FC under paragraph (b)(2) of this section
and, as a result, is subject to the rules of paragraph (b) of this
section. However, for purposes of determining DC1's all earnings and
profits amount, DC1 is not treated as owning the FC stock held by USP.
Under Sec. 1.367(b)-2(d)(3), DC1's all earnings and profits amount is
determined by reference to the 9 percent of FC stock that it directly
owns.
(C) For purposes of determining whether USP is a United States
shareholder under paragraph (b)(2) of this section, USP is considered as
owning the 9 percent of FC stock held by DC1. Because USP also owns 9
percent of FC stock directly, USP is considered as owning more than 10
percent of FC stock. USP is thus a United States shareholder of FC under
paragraph (b)(2) of this section and, as a result, is subject to the
rules of paragraph (b) of this section. However, for purposes of
determining USP's all earnings and profits amount, USP is not treated as
owning the FC shares held by DC1. Under Sec. 1.367(b)-2(d)(3), USP's
all earnings and profits amount is determined by reference to the 9
percent of FC stock that it directly owns.
(iii) Recognition of exchange gain or loss with respect to capital.
[Reserved]
(4) Reserved. For further guidance concerning section 367(b)
exchanges occurring before February 23, 2001, see Sec. 1.367(b)-
3T(b)(4).
(c) Exchange of stock owned by a United States person that is not a
United States shareholder--(1) Scope. This paragraph (c) applies in the
case of an exchanging shareholder that is a United
[[Page 465]]
States person not described in paragraph (b)(1)(i) of this section
(i.e., a United States person that is not a United States shareholder of
the foreign acquired corporation).
(2) Requirement to recognize gain. An exchanging shareholder
described in paragraph (c)(1) of this section shall recognize realized
gain (but not loss) with respect to the stock of the foreign acquired
corporation.
(3) Election to include all earnings and profits amount. In lieu of
the treatment prescribed by paragraph (c)(2) of this section, an
exchanging shareholder described in paragraph (c)(1) of this section may
instead elect to include in income as a deemed dividend the all earnings
and profits amount with respect to its stock in the foreign acquired
corporation. For the consequences of a deemed dividend, see Sec.
1.367(b)-2(e). Such election may be made only if--
(i) The foreign acquired corporation (or its successor in interest)
has provided the exchanging shareholder information to substantiate the
exchanging shareholder's all earnings and profits amount with respect to
its stock in the foreign acquired corporation; and
(ii) The exchanging shareholder complies with the section 367(b)
notice requirement described in Sec. 1.367(b)-1(c), including the
specific rules contained therein concerning the time and manner for
electing to apply the rules of this paragraph (c)(3).
(4) De minimis exception. This paragraph (c) shall not apply in the
case of an exchanging shareholder whose stock in the foreign acquired
corporation has a fair market value of less than $50,000 on the date of
the section 367(b) exchange.
(5) Examples. The following examples illustrate the rules of this
paragraph (c):
Example 1. (i) Facts. DC1, a domestic corporation, owns 5 percent of
the outstanding stock of FC, a foreign corporation that is not a
controlled foreign corporation subject to the rule of section 953(c).
Persons unrelated to DC1 own the remaining 95 percent of the outstanding
stock of FC. DC1 has owned its 5 percent interest in FC since FC was
incorporated. DC1's stock in FC has a basis of $40,000 and a value of
$100,000. The all earnings and profits amount with respect to DC1's
stock in FC is $50,000. In a reorganization described in section
368(a)(1)(C), DC2, a domestic corporation, acquires all of the assets
and liabilities of FC in exchange for DC2 stock. FC distributes DC2
stock to its shareholders, and the FC stock held by its shareholders is
canceled.
(ii) Alternate result 1. If DC1 does not make the election described
in paragraph (c)(3) of this section, then the general rule of paragraph
(c)(2) of this section applies and DC1 must recognize its $60,000 gain
in the FC stock. Under section 358(a)(1), DC1 has a $100,000 basis (its
$40,000 basis in the FC stock, plus the $60,000 recognized gain) in the
DC2 stock that it receives in exchange for its FC stock. Because DC1 is
not a shareholder described in section 1248(a)(2), section 1248 does not
apply to recharacterize any of DC1's gain as a dividend.
(iii) Alternate result 2. If DC1 makes a valid election under
paragraph (c)(3) of this section, then DC1 must include in income as a
deemed dividend the $50,000 all earnings and profits amount with respect
to its FC stock. Under Sec. 1.367(b)-2(e)(3) and section 358(a)(1), DC1
has a $90,000 basis (its $40,000 basis in the FC stock, plus the $50,000
that was treated as a deemed dividend to DC1) in the DC2 stock that it
receives in exchange for its FC stock. Because DC1 owns less than 10
percent of the voting stock of FC, DC1 does not qualify for a deemed
paid foreign tax credit under section 902.
Example 2. (i) Facts. The facts are the same as in Example 1, except
that DC1's stock in FC has a fair market value of $48,000 on the date
DC1 receives the DC2 stock.
(ii) Result. Because DC1's stock in FC has a fair market value of
less than $50,000 on the date of the section 367(b) exchange, the de
minimis exception of paragraph (c)(4) of this section applies. As a
result, DC1 is not subject to the gain or income inclusion requirements
of this paragraph (c).
(d) Carryover of certain foreign taxes--(1) Rule. Excess foreign
taxes under section 904(c) allowable to the foreign acquired corporation
under section 906 shall carry over to the domestic acquiring corporation
and become allowable under section 901, subject to the limitations
prescribed by the Internal Revenue Code (for example, sections 383, 904
and 907). The domestic acquiring corporation shall not succeed to any
other foreign taxes paid or incurred by the foreign acquired
corporation.
(2) Example. The following example illustrates the rules of this
paragraph (d):
Example. (i) Facts. DC, a domestic corporation owns 100 percent of
the outstanding stock of FC, a foreign corporation. FC has
[[Page 466]]
net positive earnings and profits, none of which are attributable to
DC's FC stock under Sec. 1.367(b)-2(d)(3). FC has paid foreign taxes
that are not eligible for credit under section 906. In a liquidation
described in section 332, FC distributes all of its property to DC, and
the FC stock held by DC is canceled.
(ii) Result. The liquidation of FC into DC is a section 367(b)
exchange. Thus, DC is subject to the section 367(b) regulations, and
must file a section 367(b) notice pursuant to Sec. 1.367(b)-1(c).
Pursuant to the provisions of paragraph (d)(1) of this section, the
foreign taxes paid by FC do not carryover to DC because FC's foreign
taxes are not eligible for credit under section 906.
(e) Net operating loss and capital loss carryovers. A net operating
loss or capital loss carryover of the foreign acquired corporation is
described in section 381(c)(1) and (c)(3) and thus is eligible to carry
over from the foreign acquired corporation to the domestic acquiring
corporation only to the extent the underlying deductions or losses were
allowable under chapter 1 of subtitle A of the Internal Revenue Code.
Thus, only a net operating loss or capital loss carryover that is
effectively connected with the conduct of a trade or business within the
United States (or that is attributable to a permanent establishment, in
the context of an applicable United States income tax treaty) is
eligible to be carried over under section 381. For further guidance, see
Rev. Rul. 72-421 (1972-2 C.B. 166) (see also Sec. 601.601(d)(2) of this
chapter).
(f) Carryover of earnings and profits--(1) General rule. Except to
the extent otherwise specifically provided (see, e.g., Notice 89-79
(1989-2 C.B. 392) (see also Sec. 601.601(d)(2) of this chapter)),
earnings and profits of the foreign acquired corporation that are not
included in income as a deemed dividend under the section 367(b)
regulations (or deficit in earnings and profits) are eligible to carry
over from the foreign acquired corporation to the domestic acquiring
corporation under section 381(c)(2) only to the extent such earnings and
profits (or deficit in earnings and profits) are effectively connected
with the conduct of a trade or business within the United States (or are
attributable to a permanent establishment in the United States, in the
context of an applicable United States income tax treaty). All other
earnings and profits (or deficit in earnings and profits) of the foreign
acquired corporation shall not carry over to the domestic acquiring
corporation and, as a result, shall be eliminated.
(2) Previously taxed earnings and profits. [Reserved]
[T.D. 8862, 65 FR 3601, Jan. 24, 2000; 65 FR 66501, Nov. 6, 2000, as
amended by T.D. 9243, 71 FR 4288, Jan. 26, 2006; T.D. 9273, 71 FR 44895,
Aug. 8, 2006]
Sec. 1.367(b)-3T Repatriation of foreign corporate assets in certain
nonrecognition transactions (temporary).
(a)-(b)(3) [Reserved]. For further guidance, see Sec. 1.367(b)-3(a)
through (b)(3).
(4) Election of taxable exchange treatment--(i) Rules--(A) In
general. In lieu of the treatment prescribed by Sec. 1.367(b)-
3(b)(3)(i), an exchanging shareholder described in Sec. 1.367(b)-
3(b)(1) may instead elect to recognize the gain (but not loss) that it
realizes in the exchange (taxable exchange election). To make a taxable
exchange election, the following requirements must be satisfied--
(1) The exchanging shareholder (and its direct or indirect owners
that would be affected by the election, in the case of an exchanging
shareholder that is a foreign corporation) reports the exchange in a
manner consistent therewith (see, e.g., sections 954(c)(1)(B)(i), 1001
and 1248);
(2) The notification requirements of paragraph (b)(4)(i)(C) of this
section are satisfied; and
(3) The adjustments described in paragraph (b)(4)(i)(B) of this
section are made when the following circumstances are present--
(i) The transaction is described in section 332 or is an asset
acquisition described in section 368(a)(1), with regard to which one
U.S. person owns (directly or indirectly) 100 percent of the foreign
acquired corporation; and
(ii) The all earnings and profits amount described in Sec.
1.367(b)-3(b)(3)(i) with respect to the exchange exceeds the gain
recognized by the exchanging shareholder.
(B) Attribute reduction--(1) Reduction of NOL carryovers. The amount
by which the all earnings and profits amount exceeds the gain recognized
by
[[Page 467]]
the exchanging shareholder (the excess earnings and profits amount)
shall be applied to reduce the net operating loss carryovers (if any) of
the foreign acquired corporation to which the domestic acquiring
corporation would otherwise succeed under section 381(a) and (c)(1). See
also Rev. Rul. 72-421 (1972-2 C.B. 166) (see Sec. 601.601(d)(2) of this
chapter).
(2) Reduction of capital loss carryovers. After the application of
paragraph (b)(4)(i)(B)(1) of this section, any remaining excess earnings
and profits amount shall be applied to reduce the capital loss
carryovers (if any) of the foreign acquired corporation to which the
domestic acquiring corporation would otherwise succeed under section
381(a) and (c)(3).
(3) Reduction of basis. After the application of paragraph
(b)(4)(i)(B)(2) of this section, any remaining excess earnings and
profits amount shall be applied to reduce (but not below zero) the basis
of the assets (other than dollar-denominated money) of the foreign
acquired corporation that are acquired by the domestic acquiring
corporation. Such remaining excess earnings and profits amount shall be
applied to reduce the basis of such assets in the following order:
first, tangible depreciable or depletable assets, according to their
class lives (beginning with those assets with the shortest class life);
second, other non-inventory tangible assets; third, intangible assets
that are amortizable; and finally, the remaining assets of the foreign
acquired corporation that are acquired by the domestic acquiring
corporation. Within each of these categories, if the total basis of all
assets in the category is greater than the excess earnings and profits
amount to be applied against such basis, the taxpayer may choose to
which specific assets in the category the basis reduction first applies.
(C) Notification. The exchanging shareholder shall elect to apply
the rules of this paragraph (b)(4)(i) by attaching a statement of its
election to its section 367(b) notice. See Sec. 1.367(b)-1(c) For the
rules concerning filing a section 367(b) notice.
(D) Example. The following example illustrates the rules of this
paragraph (b)(4)(i):
Example. (i) Facts. DC, a domestic corporation, owns all of the
outstanding stock of FC, a foreign corporation. The stock of FC has a
value of $100, and DC has a basis of $80 in such stock. The assets of FC
are one parcel of land with a value of $60 and a basis of $30, and
tangible depreciable assets with a value of $40 and a basis of $80. FC
has no net operating loss carryovers or capital loss carryovers. The all
earnings and profits amount with respect to the FC stock owned by DC is
$30, of which $19 is described in section 1248(a) and the remaining $11
is not (for example, because it was earned prior to 1963). In a
liquidation described in section 332, FC distributes all of its property
to DC, and the FC stock held by DC is canceled. Rather than including in
income as a deemed dividend the all earnings and profits amount of $30
as provided in Sec. 1.367(b)-3(b)(3)(i), DC instead elects taxable
exchange treatment under paragraph (b)(4)(i)(A) of this section.
(ii) Result. DC recognizes the $20 of gain it realizes on its stock
in FC. Of this $20 amount, $19 is included in income by DC as a dividend
pursuant to section 1248(a). (For the source of the remaining $1 of gain
recognized by DC, see section 865. For the treatment of the $1 for
purposes of the foreign tax credit limitation, see generally section
904(d)(2)(A)(i).) Because the transaction is described in section 332
and because the all earnings and profits amount with respect to the FC
stock held by DC ($30) exceeds by $10 the income recognized by DC ($20),
the attribute reduction rules of paragraph (b)(4)(i)(B) of this section
apply. Accordingly, the $10 excess earnings and profits amount is
applied to reduce the basis of the tangible depreciable assets of FC,
beginning with those assets with the shortest class lives. Under section
337(a) FC does not recognize gain or loss in the assets that it
distributes to DC, and under section 334(b) (which is applied taking
into account the basis reduction prescribed by paragraph (b)(4)(i)(A)(3)
of this section) DC takes a basis of $30 in the land and $70 in the
tangible depreciable assets that it receives from FC.
(ii) Effective date. This paragraph (b)(4) applies for section
367(b) exchanges that occur between February 23, 2000, and February 23,
2001.
(c)-(d) [Reserved]. For further guidance, see Sec. 1.367(b)-3(c)
through (d).
[T.D. 8863, 65 FR 3588, Jan. 24, 2000, as amended by T.D. 9243, 71 FR
4288, Jan. 26, 2006]
Sec. 1.367(b)-4 Acquisition of foreign corporate stock or assets
by a foreign corporation in certain nonrecognition transactions.
(a) [Reserved]. For further guidance, see Sec. 1.367(b)-4T(a).
[[Page 468]]
(b) introductory text [Reserved]. For further guidance, see Sec.
1.367(b)-4T(b) introductory text.
(1) Exchange that results in loss of status as section 1248
shareholder--(i) General rule. Except as provided in paragraph
(b)(1)(ii) of this section, an exchange is described in this paragraph
(b)(1)(i) if--
(A) Immediately before the exchange, the exchanging shareholder is--
(1) A United States person that is a section 1248 shareholder with
respect to the foreign acquired corporation; or
(2) A foreign corporation, and a United States person is a section
1248 shareholder with respect to such foreign corporation and with
respect to the foreign acquired corporation;
(B) Either of the following conditions is satisfied--
(1) Immediately after the exchange, the stock received in the
exchange is not stock in a corporation that is a controlled foreign
corporation as to which the United States person described in paragraph
(b)(1)(i)(A) of this section is a section 1248 shareholder; or
(2) Immediately after the exchange, the transferee foreign
corporation or the foreign acquired corporation (in the case of the
acquisition of the stock of a foreign acquired corporation) is not a
controlled foreign corporation as to which the United States person
described in paragraph (b)(1)(i)(A) of this section is a section 1248
shareholder; and
(C) [Reserved]. For further guidance, see Sec. 1.367(b)-
4T(b)(1)(i)(C).
(ii) Special rules--(A) Receipt of foreign stock in an exchange to
which Sec. 1.367(a)-7(c) applies. If an exchanging shareholder is a
domestic corporation that transfers stock of a foreign acquired
corporation in an exchange under section 361(a) or (b) (section 361
exchange) to which the exception to section 367(a)(5) in Sec. 1.367(a)-
7(c) applies, and the exchanging shareholder receives stock in either
the transferee foreign corporation or foreign controlling corporation
(in the case of a triangular reorganization), such exchange will not be
described in paragraph (b)(1)(i) of this section only if immediately
after the exchanging shareholder's receipt of the foreign stock in the
section 361 exchange, but prior to, and without taking into account, the
exchanging shareholder's distribution of the foreign stock under section
361(c)(1), the foreign acquired corporation, transferee foreign
corporation, and foreign controlling corporation (in the case of a
triangular reorganization) are controlled foreign corporations as to
which the exchanging shareholder is a section 1248 shareholder. See
paragraph (b)(1)(iii) of this section, Example 4, for an illustration of
this rule. If an exchange is not described in paragraph (b)(1)(i) of
this section as a result of the application of this paragraph, see
Sec. Sec. 1.1248(f)-1(b)(3) and 1.1248(f)-2(c), as applicable. For
adjustments to the basis of stock of the foreign surviving corporation
in certain triangular reorganizations, see paragraph (b)(1)(ii)(B)(2)(i)
of this section.
(B) Special rules for certain triangular reorganizations--(1)
Receipt of domestic stock. In the case of a triangular reorganization in
which the stock received in the exchange is stock of a domestic
controlling corporation, such exchange is not described in paragraph
(b)(1)(i) of this section if immediately after the exchange the
following foreign corporations are controlled foreign corporations as to
which the domestic controlling corporation is a section 1248
shareholder--
(i) The foreign acquired corporation and foreign surviving
corporation, in the case of a section 354 exchange of the stock of the
foreign acquired corporation pursuant to a triangular B reorganization.
(ii) The foreign surviving corporation, in the case of a section 354
or section 356 exchange of the stock of the foreign acquired corporation
pursuant to a forward triangular merger, triangular C reorganization,
reverse triangular merger, or triangular G reorganization. See paragraph
(b)(1)(iii) of this section, Example 3B for an illustration of this
rule.
(iii) The foreign acquired corporation and foreign surviving
corporation, in the case of a section 361 exchange of the stock of the
foreign acquired corporation by an exchanging shareholder that is a
foreign corporation described
[[Page 469]]
in paragraph (b)(1)(i)(A)(2) of this section and that is a foreign
acquired corporation the assets of which are acquired in a triangular
reorganization described in paragraph (b)(1)(ii)(B)(1)(ii) of this
section.
(iv) The foreign acquired corporation and foreign surviving
corporation, in the case of a section 361 exchange of the stock of the
foreign acquired corporation by an exchanging shareholder that is a
domestic corporation described in paragraph (b)(1)(i)(A)(1) of this
section and that is acquired in a triangular reorganization to which the
exception to section 367(a)(5) in Sec. 1.367(a)-7(c) applies. See
paragraph (b)(1)(iii) of this section, Example 5 for an illustration of
this rule.
(2) Adjustments to basis of stock of foreign surviving corporation--
(i) Section 361 exchanges to which Sec. 1.367(a)-7(c) applies. If stock
of the foreign acquired corporation is acquired by the foreign surviving
corporation in a section 361 exchange by reason of triangular
reorganization (other than a triangular B reorganization) to which the
exception to section 367(a)(5) provided in Sec. 1.367(a)-7(c) applies,
and if paragraph (b)(1)(i) of this section does not apply to the section
361 exchange by reason of (b)(1)(ii)(A) of this section (if the stock
received is stock of a foreign controlling corporation) or by reason of
(b)(1)(ii)(B)(1)(iv) of this section (if the stock received is stock of
a domestic controlling corporation), then the controlling corporation
(foreign or domestic) must apply the principles of Sec. 1.367(b)-13 to
adjust the basis of the stock of the foreign surviving corporation so
that the section 1248 amount in the stock of the foreign acquired
corporation (determined when the foreign surviving corporation acquires
such stock) is reflected in the stock of the foreign surviving
corporation immediately after the exchange. See paragraph (b)(1)(iii) of
this section, Example 5, for an illustration of this rule.
(ii) Other exchanges. See Sec. 1.367(b)-13 for rules regarding the
adjustment to the basis of the stock of the foreign surviving
corporation in exchanges pursuant to triangular reorganizations that are
not subject to paragraph (b)(1)(ii)(B)(2)(i) of this section.
(iii) Examples. The following examples illustrate the rules of this
paragraph (b)(1):
Example 1. (i) Facts. FC1 is a foreign corporation that is owned,
directly and indirectly (applying the ownership rules of section 958),
solely by foreign persons. DC is a domestic corporation that is
unrelated to FC1. DC owns all of the outstanding stock of FC2, a foreign
corporation. Thus, under Sec. 1.367(b)-2(a) and (b), DC is a section
1248 shareholder with respect to FC2, and FC2 is a controlled foreign
corporation. Under Sec. 1.367(b)-2(c)(1), the section 1248 amount
attributable to the stock of FC2 held by DC is $20. In a reorganization
described in section 368(a)(1)(C), FC1 acquires all of the assets and
assumes all of the liabilities of FC2 in exchange for FC1 voting stock.
The FC1 voting stock received does not represent more than 50 percent of
the voting power or value of FC1's stock. FC2 distributes the FC1 stock
to DC, and the FC2 stock held by DC is canceled.
(ii) Result. FC1 is not a controlled foreign corporation immediately
after the exchange. As a result, the exchange is described in paragraph
(b)(1)(i) of this section. Under paragraph (b) of this section, DC must
include in income, as a deemed dividend from FC2, the section 1248
amount ($20) attributable to the FC2 stock that DC exchanged.
Example 2. (i) Facts. The facts are the same as in Example 1, except
that the voting stock of FC1, which is received by FC2 in exchange for
its assets and distributed by FC2 to DC, represents more than 50 percent
of the voting power of FC1's stock under the rules of section 957(a).
(ii) Result. Paragraph (b)(1)(i) of this section does not apply to
require inclusion in income of the section 1248 amount, because FC1 is a
controlled foreign corporation as to which DC is a section 1248
shareholder immediately after the exchange.
Example 3. (i) Facts. The facts are the same as in Example 1, except
that FC2 receives and distributes voting stock of FP, a foreign
corporation that is in control (within the meaning of section 368(c)) of
FC1, instead of receiving and distributing voting stock of FC1.
(ii) Result. For purposes of section 367(a), the transfer is an
indirect stock transfer subject to section 367(a). See Sec. 1.367(a)-
3(d)(1)(iv). Accordingly, DC's exchange of FC2 stock for FP stock under
section 354 will be taxable under section 367(a) (and section 1248 will
be applicable) if DC fails to enter into a gain recognition agreement in
accordance with Sec. 1.367(a)-8. Under Sec. 1.367(a)-3(b)(2), if DC
enters into a gain recognition agreement, the exchange will be subject
to the provisions of section 367(b) and the regulations thereunder, as
well as section 367(a). If FP and FC1 are controlled foreign
corporations as to which DC is a (direct or indirect) section 1248
[[Page 470]]
shareholder immediately after the reorganization, then the section
367(b) result is the same as in Example 2--that is, paragraph (b)(1)(i)
of this section does not apply to require inclusion in income of the
section 1248 amount. Under these circumstances, the amount of the gain
recognition agreement would equal the amount of the gain realized on the
indirect stock transfer. If FP or FC1 is not a controlled foreign
corporation as to which DC is a (direct or indirect) section 1248
shareholder immediately after the exchange, then the section 367(b)
result is the same as in Example 1--that is, DC must include in income,
as a deemed dividend from FC2, the section 1248 amount ($20)
attributable to the FC2 stock that DC exchanged. Under these
circumstances, the amount of the gain recognition agreement would equal
the amount of the gain realized on the indirect stock transfer, less the
$20 section 1248 amount inclusion.
Example 3A. (i) Facts. The facts are the same as in Example 3,
except that FC1 merges into FC2 in a reorganization described in
sections 368(a)(1)(A) and (a)(2)(E). Pursuant to the reorganization, DC
exchanges its FC2 stock for stock of FP.
(ii) Result. The result is similar to the result in Example 3. The
transfer is an indirect stock transfer subject to section 367(a). See
Sec. 1.367(a)-3(d)(1)(ii). Accordingly, DC's exchange of FC2 stock for
FP stock will be taxable under section 367(a) (and section 1248 will be
applicable) if DC fails to enter into a gain recognition agreement. If
DC enters into a gain recognition agreement, the exchange will be
subject to the provisions of section 367(b) and the regulations
thereunder, as well as section 367(a). If FP and FC2 are controlled
foreign corporations as to which DC is a section 1248 shareholder
immediately after the reorganization, then paragraph (b)(1)(i) of this
section does not apply to require DC to include in income the section
1248 amount attributable to the FC2 stock that was exchanged and the
amount of the gain recognition agreement is the amount of gain realized
on the indirect stock transfer. If FP or FC2 is not a controlled foreign
corporation as to which DC is a section 1248 shareholder immediately
after the exchange, then DC must include in income as a deemed dividend
from FC2 the section 1248 amount ($20) attributable to the FC2 stock
that DC exchanged. Under these circumstances, the gain recognition
agreement would be the amount of gain realized on the indirect transfer,
less the $20 section 1248 amount inclusion.
Example 3B. (i) Facts. The facts are the same as Example 3, except
that USP, a domestic corporation, owns the controlling interest (within
the meaning of section 368(c)) in FC1 stock. In addition, FC2 merges
into FC1 in a reorganization described in sections 368(a)(1)(A) and
(a)(2)(D). Pursuant to the reorganization, DC exchanges its FC2 stock
for USP stock.
(ii) Result. Because DC receives stock of a domestic corporation,
USP, in the section 354 exchange, the transfer is not an indirect stock
transfer subject to section 367(a). Accordingly, the exchange will be
subject only to the provisions of section 367(b) and the regulations
thereunder. Under paragraph (b)(1)(ii) of this section, because the
stock received is stock of a domestic corporation (USP) and, immediately
after the exchange, USP is a section 1248 shareholder of FC1 (the
surviving corporation) and FC1 is a controlled foreign corporation, the
exchange is not described in paragraph (b)(1)(i) of this section and DC
is not required to include in income the section 1248 amount
attributable to the FC2 stock that was exchanged. See Sec. 1.367(b)-
13(c) for the basis and holding period rules applicable to this
transaction, which cause USP's adjusted basis and holding period in the
stock of FC1 after the transaction to reflect the basis and holding
period that DC had in its FC2 stock.
Example 4. (i) Facts. DC1, a domestic corporation, owns all of the
outstanding stock of DC2, a domestic corporation. DC2 owns various
assets, including all of the outstanding stock of FC2, a foreign
corporation. The stock of FC2 has a value of $100, and DC2 has a basis
of $30 in the stock. The section 1248 earnings and profits attributable
to the FC2 stock held by DC2 is $20. DC2 does not own any stock other
than the FC2 stock. FC1 is a foreign corporation that is unrelated to
DC1, DC2, and FC2. In a reorganization described in section
368(a)(1)(C), FC1 acquires all of the assets of DC2 in exchange for the
assumption of DC2's liabilities and voting stock of FC1 that represents
20% of the outstanding voting stock of FC1. DC2 distributes the FC1
stock to DC1 under section 361(c)(1), and the DC2 stock held by DC1 is
canceled. The exception to section 367(a)(5) provided in Sec. 1.367(a)-
7(c) applies to the section 361 exchange. DC1 properly files a gain
recognition agreement that satisfies the conditions of Sec. Sec.
1.367(a)-3(e)(6) and 1.367(a)-8 to qualify for nonrecognition treatment
under section 367(a) with respect to DC2's transfer of the FC2 stock to
FC1. See Sec. 1.367(a)-3(e). FC1 is not a surrogate foreign corporation
(within the meaning of section 7874) because DC1 does not hold at least
60% of the stock of FC1 by reason of holding stock of DC2.
(ii) Result. DC2, the exchanging shareholder, is a U.S. person and a
section 1248 shareholder with respect to FC2, the foreign acquired
corporation. Whether DC2 is required to include in income the section
1248 amount attributable to the FC2 stock under paragraph (b)(1)(i) of
this section depends on whether, immediately after DC2's section 361
exchange of the FC2 stock for FC1 stock (and before the distribution of
the FC1 stock to DC1 under section 361(c)(1)), FC1 and FC2 are
[[Page 471]]
controlled foreign corporations as to which DC2 is a section 1248
shareholder. See paragraph (b)(1)(ii)(A) of this section. If,
immediately after the section 361 exchange (and before the distribution
of the FC1 stock to DC1 under section 361(c)(1)), FC1 and FC2 are both
controlled foreign corporations as to which DC2 is a section 1248
shareholder, then DC2 is not required to include in income the section
1248 amount attributable to the FC2 stock under paragraph (b)(1)(i) of
this section because neither condition in paragraph (b)(1)(i)(B) of this
section is satisfied. Alternatively, if immediately after the section
361 exchange (and before the distribution of the FC1 stock to DC1 under
section 361(c)(1)) either FC1 or FC2 is not a controlled foreign
corporation as to which DC2 is a section 1248 shareholder, then,
pursuant to paragraph (b)(1)(i) of this section, DC2 must include in
income the section 1248 amount attributable to the FC2 stock. For the
treatment of DC2's transfer of assets other than the FC2 stock to FC1,
see section 367(a)(1) and (a)(3) and the regulations under that section.
Furthermore, because DC2's transfer of any other assets to FC1 is
pursuant to a section 361 exchange, see section 367(a)(5) and Sec.
1.367(a)-7. If any of the assets transferred are intangible assets for
purposes of section 367(d), see section 367(d). With respect to DC2's
distribution of the FC1 stock to DC1 under section 361(c)(1), see
section 1248(f)(1), and Sec. Sec. 1.1248(f)-1 and 1.1248(f)-2.
Example 5. (i) Facts. DC1, a domestic corporation, wholly owns DC2,
a domestic corporation. The DC2 stock has a $100x fair market value, and
DC1 has a basis of $30x in the stock. DC2's only asset is all of the
outstanding stock of FC2, a foreign corporation. The FC2 stock has a
$100x fair market value, and DC2 has a basis of $30x in the stock. There
are $20x of earnings and profits attributable to the FC2 stock for
purposes of section 1248. USP, a domestic corporation unrelated to DC1,
DC2, and FC2, wholly owns FC1, a foreign corporation. In a triangular
reorganization described in section 368(a)(1)(C), DC2 transfers all the
FC2 stock to FC1 in exchange solely for voting stock of USP, and
distributes the USP stock to DC1 under section 361(c)(1). DC1 exchanges
its DC2 stock for the USP stock under section 354. DC2's transfer of the
FC2 stock to FC1 is described in section 361(a) and therefore, under
section 367(a)(5) and Sec. 1.367(a)-7, is generally subject to section
367(a)(1). However, the exception to section 367(a)(5) provided in Sec.
1.367(a)-7(c) applies to the section 361 exchange. In addition, DC1 is
not required to adjust the basis of its USP stock (determined under
section 358) under section 367(a)(5) and Sec. 1.367(a)-7(c)(3). DC1
properly files a gain recognition agreement that satisfies the
conditions of Sec. Sec. 1.367(a)-3(e)(6) and 1.367(a)-8 to qualify for
nonrecognition treatment under section 367(a) with respect to DC2's
transfer of the FC2 stock to FC1. See Sec. 1.367(a)-3(e).
(ii) Result. Immediately after the exchange, FC1 and FC2 are
controlled foreign corporations as to which USP is a section 1248
shareholder because USP directly and indirectly owns all the FC1 stock
and FC2 stock, respectively. Because DC2 receives stock of a domestic
corporation (USP) in exchange for the FC2 stock and, immediately after
the exchange, FC1 and FC2 are controlled foreign corporations as to
which USP is a section 1248 shareholder, DC2's exchange of the FC2 stock
for the USP stock is not described in paragraph (b)(1)(i) of this
section. See paragraph (b)(1)(ii)(B)(1)(iv) of this section. Therefore,
DC2 is not required to include in income the section 1248 amount in the
FC2 stock. Under paragraph (b)(1)(ii)(B)(2)(i) of this section, USP must
apply the principles of Sec. 1.367(b)-13 to adjust the basis of its FC1
stock to preserve the section 1248 amount ($20x) in the FC2 stock. Under
the principles of Sec. 1.367(b)-13, each share of FC1 stock held by USP
after the exchange must be divided into portions, one portion
attributable to the FC1 stock owned before the exchange and one portion
attributable to the FC2 stock received in the exchange. The $30x basis
in the FC2 stock and the $20x earnings and profits attributable to the
FC2 stock before the exchange are attributable to the divided portions
of the FC1 stock to which the FC2 stock relates.
(2) Receipt by exchanging shareholder of preferred or other stock in
certain instances--(i) Rule. An exchange is described in this paragraph
(b)(2)(i) if--
(A) Immediately before the exchange, the foreign acquired
corporation and the transferee foreign corporation are not members of
the same affiliated group (within the meaning of section 1504(a), but
without regard to the exceptions set forth in section 1504(b), and
substituting the words ``more than 50'' in place of the words ``at least
80'' in sections 1504(a)(2)(A) and (B));
(B) Immediately after the exchange, a domestic corporation meets the
ownership threshold specified by section 902(a) or (b) such that it may
qualify for a deemed paid foreign tax credit if it receives a
distribution from the transferee foreign corporation (directly or
through tiers); and
(C) The exchanging shareholder receives preferred stock (other than
preferred stock that is fully participating with respect to dividends,
redemptions and corporate growth) in consideration for common stock or
preferred stock that is fully participating with respect
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to dividends, redemptions and corporate growth, or, in the discretion of
the Commissioner or the Commissioner's delegate (and without regard to
whether the stock exchanged is common stock or preferred stock),
receives stock that entitles it to participate (through dividends,
redemption payments or otherwise) disproportionately in the earnings
generated by particular assets of the foreign acquired corporation or
transferee foreign corporation.
(ii) Examples. The following examples illustrate the rules of this
paragraph (b)(2):
Example 1. (i) Facts. FC1 is a foreign corporation. DC is a domestic
corporation that is unrelated to FC1. DC owns all of the outstanding
stock of FC2, a foreign corporation, and FC2 has no outstanding
preferred stock. The value of FC2 is $100 and DC has a basis of $50 in
the stock of FC2. Under Sec. 1.367(b)-2(c)(1), the section 1248 amount
attributable to the stock of FC2 held by DC is $20. In a reorganization
described in section 368(a)(1)(B), FC1 acquires all of the stock of FC2
and, in exchange, DC receives FC1 voting preferred stock that
constitutes 10 percent of the voting stock of FC1 for purposes of
section 902(a). Immediately after the exchange, FC1 and FC2 are
controlled foreign corporations and DC is a section 1248 shareholder of
FC1 and FC2, so paragraph (b)(1)(i) of this section does not require
inclusion in income of the section 1248 amount.
(ii) Result. Pursuant to Sec. 1.367(a)-3(b)(2), the transfer is
subject to both section 367(a) and section 367(b). Under Sec. 1.367(a)-
3(b)(1), DC will not be subject to tax under section 367(a)(1) if it
enters into a gain recognition agreement in accordance with Sec.
1.367(a)-8. Even though paragraph (b)(1)(i) of this section does not
apply to require inclusion in income by DC of the section 1248 amount,
DC must nevertheless include the $20 section 1248 amount in income as a
deemed dividend from FC2 under paragraph (b)(2)(i) of this section.
Thus, if DC enters into a gain recognition agreement, the amount is $30
(the $50 gain realized less the $20 recognized under section 367(b)). If
DC fails to enter into a gain recognition agreement, it must include in
income under section 367(a)(1) the $50 of gain realized ($20 of which is
treated as a dividend under section 1248). Section 367(b) does not apply
in such case.
Example 2. (i) Facts. The facts are the same as in Example 1, except
that DC owns all of the outstanding stock of FC1 immediately before the
transaction.
(ii) Result. Both section 367(a) and section 367(b) apply to the
transfer. Paragraph (b)(2)(i) of this section does not apply to require
inclusion of the section 1248 amount. Under paragraph (b)(2)(i)(A) of
this section, the transaction is outside the scope of paragraph
(b)(2)(i) of this section because FC1 and FC2 are, immediately before
the transaction, members of the same affiliated group (within the
meaning of such paragraph). Thus, if DC enters into a gain recognition
agreement in accordance with Sec. 1.367(a)-8, the amount of such
agreement is $50. As in Example 1, if DC fails to enter into a gain
recognition agreement, it must include in income $50, $20 of which will
be treated as a dividend under section 1248.
Example 3. (i) Facts. FC1 is a foreign corporation. DC is a domestic
corporation that is unrelated to FC1. DC owns all of the outstanding
stock of FC2, a foreign corporation. The section 1248 amount
attributable to the stock of FC2 held by DC is $20. In a reorganization
described in section 368(a)(1)(B), FC1 acquires all of the stock of FC2
in exchange for FC1 voting stock that constitutes 10 percent of the
voting stock of FC1 for purposes of section 902(a). The FC1 voting stock
received by DC in the exchange carries voting rights in FC1, but by
agreement of the parties the shares entitle the holder to dividends,
amounts to be paid on redemption, and amounts to be paid on liquidation,
that are to be determined by reference to the earnings or value of FC2
as of the date of such event, and that are affected by the earnings or
value of FC1 only if FC1 becomes insolvent or has insufficient capital
surplus to pay dividends.
(ii) Result. Under Sec. 1.367(a)-3(b)(1), DC will not be subject to
tax under section 367(a)(1) if it enters into a gain recognition
agreement with respect to the transfer of FC2 stock to FC1. Under Sec.
1.367(a)-3(b)(2), the exchange will be subject to the provisions of
section 367(b) and the regulations thereunder to the extent that it is
not subject to tax under section 367(a)(1). Furthermore, even if DC
would not otherwise be required to recognize income under this section,
the Commissioner or the Commissioner's delegate may nevertheless require
that DC include the $20 section 1248 amount in income as a deemed
dividend from FC2 under paragraph (b)(2)(i) of this section.
(3) Certain recapitalizations. An exchange pursuant to a
recapitalization under section 368(a)(1)(E) shall be deemed to be an
exchange described in this paragraph (b)(3) if the following conditions
are satisfied--
(i) During the 24-month period immediately preceding or following
the date of the recapitalization, the corporation that undergoes the
recapitalization (or a predecessor of, or successor to, such
[[Page 473]]
corporation) also engages in a transaction that would be described in
paragraph (b)(2)(i) of this section but for paragraph (b)(2)(i)(C) of
this section, either as the foreign acquired corporation or the
transferee foreign corporation; and
(ii) The exchange in the recapitalization is described in paragraph
(b)(2)(i)(C) of this section.
(c) Exclusion of deemed dividend from foreign personal holding
company income--(1) Rule. In the event the section 1248 amount is
included in income as a deemed dividend by a foreign corporation under
paragraph (b) of this section, such deemed dividend shall not be
included as foreign personal holding company income under section
954(c).
(2) Example. The following example illustrates the rule of this
paragraph (c):
Example. (i) Facts. FC1 is a foreign corporation that is owned,
directly and indirectly (applying the ownership rules of section 958),
solely by foreign persons. DC is a domestic corporation that is
unrelated to FC1. DC owns all of the outstanding stock of FC2, a foreign
corporation. FC2 owns all of the outstanding stock of FC3, a foreign
corporation. Under Sec. 1.367(b)-2(c)(1), the section 1248 amount
attributable to the stock of FC3 held by FC2 is $20. In a reorganization
described in section 368(a)(1)(B), FC1 acquires from FC2 all of the
stock of FC3 in exchange for FC1 voting stock. The FC1 voting stock
received by FC2 does not represent more than 50 percent of the voting
power or value of FC1's stock.
(ii) Result. FC1 is not a controlled foreign corporation immediately
after the exchange. Under paragraph (b)(1) of this section, FC2 must
include in income, as a deemed dividend from FC3, the section 1248
amount ($20) attributable to the FC3 stock that FC2 exchanged. The
deemed dividend is treated as a dividend for purposes of the Internal
Revenue Code as provided in Sec. 1.367(b)-2(e)(2); however, under this
paragraph (c) the deemed dividend is not foreign personal holding
company income to FC2.
(d) Rules for subsequent sales or exchanges--(1) [Reserved]. For
further guidance, see Sec. 1.367(b)-4T(d)(1).
(2) Example. The following example illustrates the rules of this
section. For purposes of the example, assume that--
(i) There is no immediate gain recognition pursuant to section
367(a)(1) and the regulations under that section (either through
operation of the rules or because the appropriate parties have entered
into a gain recognition agreement under Sec. Sec. 1.367(a)-3(b) and
1.367(a)-8);
(ii) References to earnings and profits are to earnings and profits
that would be includible in income as a dividend under section 1248 and
the regulations under that section if stock to which the earnings and
profits are attributable were sold or exchanged by its shareholder;
(iii) Each corporation has only a single class of stock outstanding
and uses the calendar year as its taxable year; and
(iv) Each transaction is unrelated to all other transactions.
Example. Acquisition of the stock of a foreign corporation that
controls a transferee foreign corporation in a reorganization described
in section 368(a)(1)(C). (i) Facts. DC1, a domestic corporation, has
owned all the stock of CFC1, a controlled foreign corporation, since its
formation on January 1, year 1. CFC1 has owned all the stock of CFC2, a
controlled foreign corporation, since its formation on January 1, year
1. FC, a foreign corporation that is not a controlled foreign
corporation, has owned all of the stock of FC2, a foreign corporation,
since its formation on January 1, year 2. On December 31, year 3,
pursuant to a restructuring transaction that was a triangular
reorganization described in section 368(a)(1)(C), CFC1 transfers all of
its assets, including the CFC2 stock, to FC2 in exchange for 80% of the
voting stock of FC. CFC1 transfers the voting stock of FC to DC1 and the
CFC1 stock is cancelled. Pursuant to section 1223(1), DC1 is considered
to have held the stock of FC since January 1, year 1. Under section
1223(2), FC2 is considered to have held the stock of CFC2 since January
1, year 1. On December 31, year 3, CFC1 has $100 of earnings and
profits. From January 1, year 4, until December 31, year 5, FC (a
controlled foreign corporation after the restructuring transaction)
accumulates an additional $50 of earnings and profits. FC2, a controlled
foreign corporation after the restructuring transaction, accumulates
$100 of earnings and profits from January 1, year 4, until December 31,
year 5. On December 31, year 5, FC is liquidated into DC1 in a
transaction described in section 332.
(ii) Result. Generally, this paragraph (d) requires that DC1 include
in income the earnings and profits attributable to its stock in FC as
determined under Sec. 1.1248-8. However, since the liquidation of FC
into DC1 is a transaction described in Sec. 1.367(b)-3, the earnings
and profits attributable to the stock of FC are limited by Sec.
1.367(b)-2(d) (3)(ii) to that
[[Page 474]]
portion of the earnings and profits accumulated by FC itself before or
after the restructuring transaction, and do not include the earnings and
profits of FC's subsidiaries accumulated before or after the
restructuring transaction. Thus, DC1 will include $40 of earnings and
profits in income (80% of the $50 of earnings and profits accumulated by
FC after the restructuring transaction).
(e) [Reserved] For further guidance, see Sec. 1.367(b)-4T(e).
(f) [Reserved] For further guidance, see Sec. 1.367(b)-4T(f).
(g) [Reserved] For further guidance, see Sec. 1.367(b)-4T(g).
(h) [Reserved]. For further guidance, see Sec. 1.367(b)-4T(h).
[T.D. 8862, 65 FR 3603, Jan. 24, 2000; 65 FR 66501, Nov. 6, 2000]
Editorial Note: For Federal Register citations affecting Sec.
1.367(b)-4, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
Sec. 1.367(b)-4T Acquisition of foreign corporate stock or assets
by a foreign corporation in certain nonrecognition transactions
(temporary).
(a) Scope. This section applies to certain acquisitions by a foreign
corporation of the stock or assets of a foreign corporation in an
exchange described in section 351 or in a reorganization described in
section 368(a)(1). Paragraph (b) of this section provides a rule
regarding when an exchanging shareholder is required to include in
income as a deemed dividend the section 1248 amount attributable to the
stock that it exchanges. Paragraph (c) of this section provides a rule
excluding deemed dividends from foreign personal holding company income.
Paragraph (d) of this section provides rules for subsequent sales or
exchanges. Paragraphs (e) and (f) of this section provide rules
regarding certain exchanges following inversion transactions. Paragraph
(g) of this section provides definitions and special rules, including
special rules regarding triangular reorganizations and
recapitalizations. Paragraph (h) of this section provides the
applicability dates, and paragraph (i) of this section provides the date
of expiration. See also Sec. 1.367(a)-3(b)(2) for transactions subject
to the concurrent application of sections 367(a) and (b) and Sec.
1.367(b)-2 for additional definitions that apply.
(b) Income inclusion. If a foreign corporation (the transferee
foreign corporation) acquires the stock of a foreign corporation in an
exchange described in section 351 or the stock or assets of a foreign
corporation in a reorganization described in section 368(a)(1) (in
either case, the foreign acquired corporation), then an exchanging
shareholder must, if its exchange is described in paragraph (b)(1)(i),
(b)(2)(i), or (b)(3) of this section, include in income as a deemed
dividend the section 1248 amount attributable to the stock that it
exchanges.
(b)(1) through (b)(1)(i)(B) [Reserved]. For further guidance, see
Sec. 1.367(b)-4(b)(1) through (b)(1)(i)(B).
(C) The exchange is not a specified exchange to which paragraph
(e)(1) of this section applies.
(b)(1)(ii) through (d) introductory text [Reserved]. For further
guidance, see Sec. 1.367(b)-4(b)(1)(ii) through (d) introductory text.
(1) Rule. If an exchanging shareholder (as defined in Sec. 1.1248-
8(b)(1)(iv)) is not required to include in income as a deemed dividend
the section 1248 amount under Sec. 1.367(b)-4(b) or paragraph (e)(1) of
this section (non-inclusion exchange), then, for purposes of applying
section 367(b) or 1248 to subsequent sales or exchanges, and subject to
the limitation of Sec. 1.367(b)-2(d)(3)(ii) (in the case of a
transaction described in Sec. 1.367(b)-3, the determination of the
earnings and profits attributable to the stock an exchanging shareholder
receives in the non-inclusion exchange is determined pursuant to the
rules of section 1248 and the regulations under that section.
(2) [Reserved]. For further guidance, see Sec. 1.367(b)-4(d)(2).
(e) Income inclusion and gain recognition in certain exchanges
following an inversion transaction--(1) General rule. If a foreign
corporation (the transferee foreign corporation) acquires stock of a
foreign corporation in an exchange described in section 351 or stock or
assets of a foreign corporation in a reorganization described in section
368(a)(1) (in either case, the foreign acquired corporation), then an
exchanging shareholder must, if its exchange is a
[[Page 475]]
specified exchange and the exception in paragraph (e)(3) of this section
does not apply--
(i) Include in income as a deemed dividend the section 1248 amount
attributable to the stock that it exchanges; and
(ii) After taking into account the increase in basis 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 that would not
otherwise be recognized.
(2) Specified exchanges. An exchange is a specified exchange if--
(i) Immediately before the exchange, the foreign acquired
corporation is an expatriated foreign subsidiary and the exchanging
shareholder is either an expatriated entity described in Sec. 1.367(b)-
4(b)(1)(i)(A)(1) or an expatriated foreign subsidiary described in Sec.
1.367(b)-4(b)(1)(i)(A)(2);
(ii) The stock received in the exchange is stock of a foreign
corporation; and
(iii) The exchange occurs during the applicable period.
(3) De minimis exception. The exception in this paragraph (e)(3)
applies if--
(i) Immediately after the exchange, the foreign acquired corporation
(in the case of an acquisition of stock of the foreign acquired
corporation) or the transferee foreign corporation (in the case of an
acquisition of assets of the foreign acquired corporation) is a
controlled foreign corporation;
(ii) The post-exchange ownership percentage with respect to the
foreign acquired corporation (in the case of an acquisition of stock of
the foreign acquired corporation) or the transferee foreign corporation
(in the case of an acquisition of assets of the foreign acquired
corporation) is at least 90 percent of the pre-exchange ownership
percentage with respect to the foreign acquired corporation; and
(iii) The post-exchange ownership percentage with respect to each
lower-tier expatriated foreign subsidiary of the foreign acquired
corporation is at least 90 percent of the pre-exchange ownership
percentage with respect to the lower-tier expatriated foreign
subsidiary.
(4) Certain exceptions from foreign personal holding company not
available. An income inclusion of a foreign corporation under paragraph
(e)(1) of this section does not qualify for the exceptions from foreign
personal holding company income provided by sections 954(c)(3)(A)(i) and
954(c)(6) (to the extent in effect).
(5) Examples. The following examples illustrate the application of
this paragraph (e). For purposes of all of the examples, unless
otherwise indicated: FP, a foreign corporation, owns all of the stock of
USP, a domestic corporation, and all 40 shares of stock of FS, a foreign
corporation. USP owns all 50 shares of stock of FT1, a controlled
foreign corporation, which, in turn, owns all 50 shares of FT2, a
controlled foreign corporation. FP acquired all of the stock of USP in
an inversion transaction that was completed on July 1, 2016. Therefore,
with respect to that inversion transaction, USP is an expatriated
entity; FT1 and FT2 are expatriated foreign subsidiaries; and FP and FS
are each a non-CFC foreign related person. All shares of stock have a
fair market value of $1x, and each corporation has a single class of
stock outstanding.
Example 1. Specified exchange to which general rule applies--(i)
Facts. During the applicable period, and pursuant to a reorganization
described in section 368(a)(1)(B), FT1 transfers all 50 shares of FT2
stock to FS in exchange solely for 50 newly issued voting shares of FS.
Immediately before the exchange, USP is a section 1248 shareholder with
respect to FT1 and FT2. At the time of the exchange, the FT2 stock owned
by FT1 has a fair market value of $50x and an adjusted basis of $5x,
such that the FT2 stock has a built-in gain of $45x. In addition, the
earnings and profits of FT2 attributable to FT1's stock in FT2 for
purposes of section 1248 is $30x, taking into account the rules of Sec.
1.367(b)-2(c)(1)(i) and (ii), and therefore the section 1248 amount with
respect to the FT2 stock is $30x (the lesser of the $45x of built-in
gain and the $30x of earnings and profits attributable to the stock).
(ii) Analysis. FT1's exchange is a specified exchange because the
requirements set forth in paragraphs (e)(2)(i) through (iii) of this
section are satisfied. The requirement set forth in paragraph (e)(2)(i)
of this section is satisfied because, immediately before the exchange,
FT2 (the foreign acquired corporation) is an expatriated foreign
subsidiary and FT1 (the exchanging shareholder) is an expatriated
foreign subsidiary that is described in Sec. 1.367(b)-4(b)(1)(i)(A)(2).
The requirement
[[Page 476]]
set forth in paragraph (e)(2)(ii) of this section is also satisfied
because the stock received in the exchange (FS stock) is stock of a
foreign corporation. The requirement set forth in paragraph (e)(2)(iii)
of this section is satisfied because the exchange occurs during the
applicable period. Accordingly, under paragraph (e)(1)(i) of this
section, FT1 must include in income as a deemed dividend $30x, the
section 1248 amount with respect to its FT2 stock. In addition, under
paragraph (e)(1)(ii) of this section, FT1 must, after taking into
account the increase in basis provided in Sec. 1.367(b)-2(e)(3)(ii)
resulting from the deemed dividend (which increases FT1's basis in its
FT2 stock from $5x to $35x), recognize $15x ($50x amount realized less
$35x basis), the realized gain with respect to the FT2 stock that would
not otherwise be recognized.
Example 2. De minimis shift to non-CFC foreign related persons--(i)
Facts. The facts are the same as in the introductory sentences of this
paragraph (e)(5) that precede Example 1 of this paragraph (e)(5), except
as follows. FT1 does not own any shares of FT2, and all 40 shares of FS
are owned by DX, a domestic corporation wholly owned by individual A,
and thus FS is not a non-CFC foreign related person. During the
applicable period and pursuant to a reorganization described in section
368(a)(1)(D), FT1 transfers all of its assets to FS in exchange for 50
newly issued FS shares, FT1 distributes the 50 FS shares to USP in
liquidation under section 361(c)(1), and USP exchanges its 50 shares of
FT1 stock for the 50 FS shares under section 354. Further, immediately
after the exchange, FS is a controlled foreign corporation.
(ii) Analysis. Although USP's exchange is a specified exchange,
paragraph (e)(1) of this section does not apply to the exchange because,
as described in paragraphs (ii)(A) through (C) of this Example 2, the
requirements of paragraph (e)(3) of this section are satisfied.
(A) Because the assets, rather than the stock, of FT1 (the foreign
acquired corporation) are acquired, the requirement set forth in
paragraph (e)(3)(i) of this section is satisfied if FS (the transferee
foreign corporation) is a controlled foreign corporation immediately
after the exchange. As stated in the facts, FS is a controlled foreign
corporation immediately after the exchange.
(B) The requirement set forth in paragraph (e)(3)(ii) of this
section is satisfied if the post-exchange ownership percentage with
respect to FS is at least 90% of the pre-exchange ownership percentage
with respect to FT1. Because USP, a domestic corporation that is an
expatriated entity, directly owns 50 shares of FT stock immediately
before the exchange, none of those shares are treated as indirectly
owned by FP (a non-CFC foreign related person) for purposes of
calculating the pre-exchange ownership percentage with respect to FT1.
See paragraph (g)(1) of this section. Thus, for purposes of calculating
the pre-exchange ownership percentage with respect to FT1, FP is treated
as directly or indirectly owning 0%, or 0 of 50 shares, of the stock of
FT1. Accordingly, the pre-exchange ownership percentage with respect to
FT1 is 100 (calculated as 100% less 0%, the percentage of FT1 stock that
non-CFC foreign related persons are treated as directly or indirectly
owning immediately before the exchange). Consequently, for the
requirement set forth in paragraph (e)(3)(ii) of this section to be
satisfied, the post-exchange ownership percentage with respect to FS
must be at least 90. Because USP, a domestic corporation that is an
expatriated entity, directly owns 50 shares of FS stock immediately
after the exchange, none of those shares are treated as indirectly owned
by FP (a non-CFC foreign related person) for purposes of calculating the
post-exchange ownership percentage with respect to FS. See paragraph
(g)(1) of this section. Thus, for purposes of calculating the post-
exchange ownership percentage with respect to FS, FP is treated as
directly or indirectly owning 0%, or 0 of 90 shares, of the stock of FS.
As a result, the post-exchange ownership percentage with respect to FS
is 100 (calculated as 100% less 0%, the percentage of FS stock that non-
CFC foreign related persons are treated as directly or indirectly owning
immediately after the exchange). Therefore, because the post-exchange
ownership percentage with respect to FS (100) is at least 90, the
requirement set forth in paragraph (e)(3)(ii) of this section is
satisfied.
(C) Because there is not a lower-tier expatriated foreign subsidiary
of FT1, the requirement set forth in paragraph (e)(3)(iii) of this
section does not apply.
(f) Gain recognition upon certain transfers of property described in
section 351 following an inversion transaction--(1) General rule. If,
during the applicable period, an expatriated foreign subsidiary
transfers specified property to a foreign corporation (the transferee
foreign corporation) in an exchange described in section 351, then the
expatriated foreign subsidiary must recognize all realized gain with
respect to the specified property transferred that would not otherwise
be recognized, unless the exception in paragraph (f)(2) of this section
applies.
(2) De minimis exception. The exception in this paragraph (f)(2)
applies if--
(i) Immediately after the transfer, the transferee foreign
corporation is a controlled foreign corporation; and
[[Page 477]]
(ii) The post-exchange ownership percentage with respect to the
transferee foreign corporation is at least 90 percent of the pre-
exchange ownership percentage with respect to the expatriated foreign
subsidiary.
(3) Examples. The following examples illustrate the application of
this paragraph (f). For purposes of all of the examples, unless
otherwise indicated: FP, a foreign corporation, owns all of the stock of
USP, a domestic corporation, and all 10 shares of stock of FS, a foreign
corporation. USP owns all 50 shares of stock of FT, a controlled foreign
corporation. FT owns Asset A, which is specified property with a fair
market value of $50x and an adjusted basis of $10x. FP acquired all of
the stock of USP in an inversion transaction that was completed on or
after September 22, 2014. Accordingly, with respect to that inversion
transaction, USP is an expatriated entity, FT is an expatriated foreign
subsidiary, and FP and FS are each a non-CFC foreign related person. All
shares of stock have a fair market value of $1x, and each corporation
has a single class of stock outstanding.
Example 1. Transfer to which general rule applies--(i) Facts. In
addition to the stock of USP and FS, FP owns Asset B, which has a fair
market value of $40x. During the applicable period, and pursuant to an
exchange described in section 351, FT transfers Asset A to FS in
exchange for 50 newly issued shares of FS stock, and FP transfers Asset
B to FS in exchange for 40 newly issued shares of FS stock. Immediately
after the transfer, FS is not a controlled foreign corporation.
(ii) Analysis. Paragraph (f)(1) of this section applies to the
transfer by FT (an expatriated foreign subsidiary) of Asset A, which is
specified property, to FS (the transferee foreign corporation). Thus, FT
must recognize gain of $40x under paragraph (f)(1) of this section,
which is the realized gain with respect to Asset A that would not
otherwise be recognized ($50x amount realized less $10x basis). For
rules regarding whether the FS stock held by FT is treated as United
States property for purposes of section 956, see Sec. 1.956-
2T(a)(4)(i).
Example 2. De minimis shift to non-CFC foreign related persons--(i)
Facts. Individual, a United States person, owns Asset B, which has a
fair market value of $40x. During the applicable period, and pursuant to
an exchange described in section 351, FT transfers Asset A to FS in
exchange for 50 newly issued shares of FS stock, and Individual
transfers Asset B to FS in exchange for 40 newly issued shares of FS
stock.
(ii) Analysis. Paragraph (f)(1) of this section does not apply to
the transfer by FT (an expatriated foreign subsidiary) of Asset A, which
is specified property, to FS (the transferee foreign corporation))
because the requirements set forth in paragraph (f)(2) of this section
are satisfied. FS is a controlled foreign corporation immediately after
the transfer because 90 out of FS's 100 outstanding shares are owned
(within the meaning of section 958(a)) by Individual and USP, who are
both United States shareholders (within the meaning of section 951(b)).
Accordingly, the requirement set forth in paragraph (f)(2)(i) of this
section is satisfied. The requirement set forth in paragraph (f)(2)(ii)
of this section is satisfied if the post-exchange ownership percentage
with respect to FS is at least 90 percent of the pre-exchange ownership
percentage with respect to FT. Because USP, a domestic corporation that
is an expatriated entity, directly owns 50 shares of FT stock
immediately before the transfer, none of those shares are treated as
indirectly owned by FP (a non-CFC foreign related person) for purposes
of calculating the pre-exchange ownership percentage with respect to FT.
See paragraph (g)(1) of this section. Thus, for purposes of calculating
the pre-exchange ownership percentage with respect to FT, FP is treated
as directly or indirectly owning 0 percent, or 0 of 50 shares, of the
stock of FT. Accordingly, the pre-exchange ownership percentage with
respect to FT is 100 (calculated as 100 percent less 0 percent, the
percentage of FT stock that non-CFC foreign related persons are treated
as directly or indirectly owning immediately before the transfer).
Consequently, for the requirement set forth in paragraph (f)(2)(ii) of
this section to be satisfied, the post-exchange ownership percentage
with respect to FS must be at least 90. Although FP directly owns 10 FS
shares, none of the 50 FS shares that FP owns through USP (a domestic
corporation that is an expatriated entity) are treated as indirectly
owned by FP for purposes of calculating the post-exchange ownership
percentage with respect to FS because USP directly owns them. See
paragraph (g)(1) of this section. Thus, for purposes of calculating the
post-exchange ownership percentage with respect to FS, FP is treated as
directly or indirectly owning 10 percent, or 10 of 100 shares, of the
stock of FS. As a result, the post-exchange ownership percentage with
respect to FS is 90 (calculated as 100 percent less 10 percent, the
percentage of FS stock that non-CFC foreign related persons are treated
as directly or indirectly owning immediately after the transfer).
Therefore, because the post-exchange ownership percentage with respect
to FS (90) is at least 90, the requirement set forth in paragraph
(f)(2)(ii) of this section is satisfied.
[[Page 478]]
(g) Definitions and special rules. In addition to the definitions
and special rules in Sec. Sec. 1.367(b)-2 and 1.7874-12T, the following
definitions and special rules apply for purposes of this section and
Sec. 1.367(b)-4.
(1) Indirect ownership. To determine indirect ownership of the stock
of a corporation for purposes of calculating a pre-exchange ownership
percentage or post-exchange ownership percentage with respect to that
corporation, the principles of section 958(a) apply without regard to
whether an intermediate entity is foreign or domestic. For this purpose,
stock of the corporation that is directly or indirectly (applying the
principles of section 958(a) without regard to whether an intermediate
entity is foreign or domestic) owned by a domestic corporation that is
an expatriated entity is not treated as indirectly owned by a non-CFC
foreign related person.
(2) A lower-tier expatriated foreign subsidiary means an expatriated
foreign subsidiary whose stock is directly or indirectly owned (under
the principles of section 958(a)) by an expatriated foreign subsidiary.
(3) Pre-exchange ownership percentage means, with respect to a
corporation, 100 percent less the percentage of stock (by value) in the
corporation that, immediately before an exchange, is owned, in the
aggregate, directly or indirectly by non-CFC foreign related persons.
(4) Post-exchange ownership percentage means, with respect to a
corporation, 100 percent less the percentage of stock (by value) in the
corporation that, immediately after the exchange, is owned, in the
aggregate, directly or indirectly by non-CFC foreign related persons.
(5) Specified property means any property other than stock of a
lower-tier expatriated foreign subsidiary.
(6) Recapitalizations. A foreign corporation that undergoes a
reorganization described in section 368(a)(1)(E) is treated as both the
foreign acquired corporation and the transferee foreign corporation.
(7) Triangular reorganizations--(i) Definition. A triangular
reorganization means a reorganization described in Sec. 1.358-
6(b)(2)(i) (forward triangular merger), (ii) (triangular C
reorganization), (iii) (reverse triangular merger), (iv) (triangular B
reorganization), and (v) (triangular G reorganization).
(ii) Special rules--(A) Triangular reorganizations other than a
reverse triangular merger. In the case of a triangular reorganization
other than a reverse triangular merger, the surviving corporation is the
transferee foreign corporation that acquires the assets or stock of the
foreign acquired corporation, and the reference to controlling
corporation (foreign or domestic) is to the corporation that controls
the surviving corporation.
(B) Reverse triangular merger. In the case of a reverse triangular
merger, the surviving corporation is the entity that survives the
merger, and the controlling corporation (foreign or domestic) is the
corporation that before the merger controls the merged corporation. In
the case of a reverse triangular merger, Sec. 1.367(b)-4 and this
section apply only if stock of the foreign surviving corporation is
exchanged for stock of a foreign corporation in control of the merging
corporation; in such a case, the foreign surviving corporation is
treated as a foreign acquired corporation.
(h) Applicability date of certain paragraphs in this section. Except
as otherwise provided in this paragraph (h), this section applies to
exchanges completed on or after September 22, 2014, but only if the
inversion transaction was completed on or after September 22, 2014.
Paragraph (e)(1)(ii) of this section applies to exchanges completed on
or after November 19, 2015, but only if the inversion transaction was
completed on or after September 22, 2014. The portion of paragraph
(e)(2)(i) of this section that requires the exchanging shareholder to be
an expatriated entity or an expatriated foreign subsidiary apply to
exchanges completed on or after April 4, 2016, but only if the inversion
transaction was completed on or after September 22, 2014. For inversion
transactions completed on or after September 22, 2014, however,
taxpayers may elect to apply the portion of paragraph (e)(2)(i) of this
section that requires the exchanging shareholder to be an expatriated
entity or
[[Page 479]]
an expatriated foreign subsidiary to exchanges completed on or after
September 22, 2014, and before April 4, 2016. Paragraphs (f) and (g)(5)
of this section apply to transfers completed on or after April 4, 2016,
but only if the inversion transaction was completed or after September
22, 2014. See Sec. 1.367(b)-4, as contained in 26 CFR part 1 revised as
of April 1, 2016, for exchanges completed before September 22, 2014.
(i) Expiration date. This section expires on or before April 4,
2019.
[T.D. 9761, 81 FR 20883, Apr. 8, 2016, as amended at 81 FR 40811, June
23, 2016]
Sec. 1.367(b)-5 Distributions of stock described in section 355.
(a) In general--(1) Scope. This section provides rules relating to a
distribution described in section 355 (or so much of section 356 as
relates to section 355) and to which section 367(b) applies. For
purposes of this section, the terms distributing corporation, controlled
corporation, and distributee have the same meaning as used in section
355 and the regulations thereunder.
(2) Treatment of distributees as exchanging shareholders. For
purposes of the section 367(b) regulations, all distributees in a
transaction described in paragraph (b), (c), or (d) of this section
shall be treated as exchanging shareholders that realize income in a
section 367(b) exchange.
(b) Distribution by a domestic corporation--(1) General rule. In a
distribution described in section 355, if the distributing corporation
is a domestic corporation and the controlled corporation is a foreign
corporation, the following general rules shall apply--
(i) If the distributee is a corporation, then the controlled
corporation shall be considered to be a corporation; and
(ii) If the distributee is an individual, then, solely for purposes
of determining the gain recognized by the distributing corporation, the
controlled corporation shall not be considered to be a corporation, and
the distributing corporation shall recognize any gain (but not loss)
realized on the distribution.
(2) Section 367(e) transactions. The rules of paragraph (b)(1) of
this section shall not apply to a foreign distributee to the extent gain
is recognized under section 367(e)(1) and the regulations thereunder.
(3) Determining whether distributees are individuals. All
distributees in a distribution described in paragraph (b)(1) of this
section are presumed to be individuals. However, the shareholder
identification principles of Sec. 1.367(e)-1(d) (including the
reporting procedures in Sec. 1.367(e)-1(d)(2) and (3)) shall apply for
purposes of rebutting this presumption.
(4) Applicable cross-references. For rules with respect to a
distributee that is a partnership, trust or estate, see Sec. 1.367(b)-
2(k). For additional rules relating to a distribution of stock of a
foreign corporation by a domestic corporation, see section 1248(f) and
the regulations thereunder. For additional rules relating to a
distribution described in section 355 by a domestic corporation to a
foreign distributee, see section 367(e)(1) and the regulations
thereunder.
(c) Pro rata distribution by a controlled foreign corporation--(1)
Scope. This paragraph (c) applies to a distribution described in section
355 in which the distributing corporation is a controlled foreign
corporation and in which the stock of the controlled corporation is
distributed pro rata to each of the distributing corporation's
shareholders.
(2) Adjustment to basis in stock and income inclusion. If the
distributee's postdistribution amount (as defined in paragraph (e)(2) of
this section) with respect to the distributing or controlled corporation
is less than the distributee's predistribution amount (as defined in
paragraph (e)(1) of this section) with respect to such corporation, then
the distributee's basis in such stock immediately after the distribution
(determined under the normal principles of section 358) shall be reduced
by the amount of the difference. However, the distributee's basis in
such stock shall not be reduced below zero, and to the extent the
foregoing reduction would have reduced basis below zero, the distributee
shall instead include such amount in income as a deemed dividend from
such corporation.
(3) Interaction with Sec. 1.367(b)-2(e)(3)(ii). The basis increase
provided in Sec. 1.367(b)-2(e)(3)(ii) shall not apply to a
[[Page 480]]
deemed dividend that is included in income pursuant to paragraph (c)(2)
of this section.
(4) Basis redistribution. If a distributee reduces the basis in the
stock of the distributing or controlled corporation (or has an inclusion
with respect to such stock) under paragraph (c)(2) of this section, the
distributee shall increase its basis in the stock of the other
corporation by the amount of the basis decrease (or deemed dividend
inclusion) required by paragraph (c)(2) of this section. However, the
distributee's basis in such stock shall not be increased above the fair
market value of such stock and shall not be increased to the extent the
increase diminishes the distributee's postdistribution amount with
respect to such corporation.
(d) Non-pro rata distribution by a controlled foreign corporation--
(1) Scope. This paragraph (d) applies to a distribution described in
section 355 in which the distributing corporation is a controlled
foreign corporation and in which the stock of the controlled corporation
is not distributed pro rata to each of the distributing corporation's
shareholders.
(2) Treatment of certain shareholders as distributees. For purposes
of the section 367(b) regulations, all persons owning stock of the
distributing corporation immediately after a transaction described in
paragraph (d)(1) of this section shall be treated as distributees of
such stock. For other applicable rules, see paragraph (a)(2) of this
section.
(3) Inclusion of excess section 1248 amount by exchanging
shareholder. If the distributee's postdistribution amount (as defined in
paragraph (e)(2) of this section) with respect to the distributing or
controlled corporation is less than the distributee's predistribution
amount (as defined in paragraph (e)(1) of this section) with respect to
such corporation, then the distributee shall include in income as a
deemed dividend the amount of the difference. For purposes of this
paragraph (d)(3), if a distributee owns no stock in the distributing or
controlled corporation immediately after the distribution, the
distributee's postdistribution amount with respect to such corporation
shall be zero.
(4) Interaction with Sec. 1.367(b)--2(e)(3)(ii)--(i) Limited
application. The basis increase provided in Sec. 1.367(b)--2(e)(3)(ii)
shall apply to a deemed dividend that is included in income pursuant to
paragraph (d)(3) of this section only to the extent that such basis
increase does not increase the distributee's basis above the fair market
value of such stock and does not diminish the distributee's
postdistribution amount with respect to such corporation.
(ii) Interaction with predistribution amount. For purposes of this
paragraph (d), the distributee's predistribution amount (as defined in
paragraph (e)(1) of this section) shall be determined without regard to
any basis increase permitted under paragraph (d)(4)(i) of this section.
(e) Definitions--(1) Predistribution amount. For purposes of this
section, the predistribution amount with respect to a distributing or
controlled corporation is the distributee's section 1248 amount (as
defined in Sec. 1.367(b)--2(c)(1)) computed immediately before the
distribution (and after any section 368(a)(1)(D) transfer connected with
the section 355 distribution), but only to the extent that such amount
is attributable to the distributing corporation and any corporations
controlled by it immediately before the distribution (the distributing
group) or the controlled corporation and any corporations controlled by
it immediately before the distribution (the controlled group), as the
case may be, under the principles of Sec. Sec. 1.1248-1(d)(3), 1.1248-2
and 1.1248-3. However, the predistribution amount with regard to the
distributing group shall be computed without taking into account the
distributee's predistribution amount with respect to the controlled
group.
(2) Postdistribution amount. For purposes of this section, the
postdistribution amount with respect to a distributing or controlled
corporation is the distributee's section 1248 amount (as defined in
Sec. 1.367(b)-2(c)(1)) with respect to such stock, computed immediately
after the distribution (but without regard to paragraph (c) or (d) of
this section (whichever is applicable)). The postdistribution amount
under this paragraph (e)(2) shall be
[[Page 481]]
computed before taking into account the effect (if any) of any inclusion
under section 356(a) or (b).
(f) Exclusion of deemed dividend from foreign personal holding
company income. In the event an amount is included in income as a deemed
dividend by a foreign corporation under paragraph (c) or (d) of this
section (including amounts received as an intermediate owner under the
rule of Sec. 1.367(b)-2(e)(2)), such deemed dividend shall not be
included as foreign personal holding company income under section
954(c).
(g) Examples. The following examples illustrate the rules of this
section:
Example 1. (i) Facts. USS, a domestic corporation, owns 40 percent
of the outstanding stock of FD, a controlled foreign corporation (CFC).
USS has owned the stock since FD was incorporated, and FD has always
been a CFC. USS has a basis of $80 in its FD stock, which has a fair
market value of $200. FD owns 100 percent of the outstanding stock of
FC, a foreign corporation. FD has owned the stock since FC was
incorporated. Neither FD nor FC own stock in any other corporation. FD
has earnings and profits of $0 and a fair market value of $250 (not
considering its ownership of FC). FC has earnings and profits of $300,
none of which is described in section 1248(d), and a fair market value
of $250. In a pro rata distribution described in section 355, FD
distributes to USS stock in FC worth $100; thereafter, USS's FD stock is
worth $100 as well.
(ii) Result--(A) FD's distribution is a transaction described in
paragraph (c)(1) of this section. Under paragraph (c)(2) of this
section, USS must compare its predistribution amounts with respect to FD
and FC to its respective postdistribution amounts. Under paragraph
(e)(1) of this section, USS's predistribution amount with respect to FD
or FC is its section 1248 amount computed immediately before the
distribution, but only to the extent such amount is attributable to FD
or FC. Under Sec. 1.367(b)-2(c)(1), USS's section 1248 amount computed
immediately before the distribution is $120, all of which is
attributable to FC. Thus, USS's predistribution amount with respect to
FD is $0, and its predistribution amount with respect to FC is $120.
These amounts are computed as follows: If USS had sold its FD stock
immediately before the transaction, it would have recognized $120 of
gain ($200 fair market value $80 basis). All of the gain would have been
treated as a dividend under section 1248, and all of the section 1248
amount would have been attributable to FC (based on USS's pro rata share
of FC's earnings and profits (40 percent x $300)).
(B) Under paragraph (e)(2) of this section, USS's postdistribution
amount with respect to FD or FC is its section 1248 amount with respect
to such corporation, computed immediately after the distribution (but
without regard to paragraph (c) of this section). Under Sec. 1.367(b)-
2(c)(1), USS's section 1248 amounts computed immediately after the
distribution with respect to FD and FC are $0 and $60, respectively.
These amounts, which are USS's postdistribution amounts, are computed as
follows: Under the normal principles of section 358, USS allocates its
$80 predistribution basis in FD between FD and FC according to the stock
blocks' relative values, yielding a $40 basis in each block. If USS sold
its FD stock immediately after the distribution, none of the resulting
gain would be treated as a dividend under section 1248. If USS sold its
FC stock immediately after the distribution, it would have a $60 gain
($100 fair market value--$40 basis), all of which would be treated as a
dividend under section 1248.
(C) The basis adjustment and income inclusion rules of paragraph
(c)(2) of this section apply to the extent of any difference between
USS's postdistribution and predistribution amounts. In the case of FD,
there is no difference between the two amounts and, as a result, no
adjustment or income inclusion is required. In the case of FC, USS's
postdistribution amount is $60 less than its predistribution amount.
Accordingly, under paragraph (c)(2) of this section, USS is required to
reduce its basis in its FC stock from $40 to $0 and include $20 in
income as a deemed dividend. Under Sec. 1.367(b)-2(e)(2), the $20
deemed dividend is considered as having been paid by FC to FD, and by FD
to USS, immediately prior to the distribution. Under paragraph (f) of
this section, the deemed dividend is not included by FD as foreign
personal holding company income under section 954(c). Under paragraph
(c)(3) of this section, the basis increase provided in Sec. 1.367(b)-
2(e)(3)(ii) does not apply with regard to the $20 deemed dividend. Under
the rules of paragraph (c)(4) of this section, USS increases its basis
in FD by the amount by which it decreased its basis in FC, as well as by
the amount of its deemed dividend inclusion ($40 + $40 + $20 = $100).
Example 2. (i) Facts. USS1 and USS2, domestic corporations, each own
50 percent of the outstanding stock of FD, a controlled foreign
corporation (CFC). USS1 and USS2 have owned their FD stock since it was
incorporated, and FD has always been a CFC. USS1 and USS2 each have a
basis of $500 in their FD stock, and the fair market value of each block
of FD stock is $750. FD owns 100 percent of the outstanding stock of FC,
a foreign corporation. FD owned the stock since FC was incorporated.
Neither FD nor FC own stock in any other corporation. FD has earnings
and profits of $0 and a fair market value
[[Page 482]]
of $750 (not considering its ownership of FC). FC has earnings and
profits of $500, none of which is described in section 1248(d), and a
fair market value of $750. In a non-pro rata distribution described in
section 355, FD distributes all of the stock of FC to USS2 in exchange
for USS2's FD stock.
(ii) Result--(A) FD's distribution is a transaction described in
paragraph (d)(1) of this section. Under paragraph (d)(2) of this
section, USS1 is considered a distributee of FD stock. Under paragraph
(d)(3) of this section, USS1 and USS2 must compare their predistribution
amounts with respect to FD and FC stock to their respective
postdistribution amounts. Under paragraph (e)(1) of this section, USS1's
predistribution amount with respect to FD or FC is USS1's section 1248
amount computed immediately before the distribution, but only to the
extent such amount is attributable to FD or FC. USS2's predistribution
amount is determined in the same manner. Under Sec. 1.367(b)-2(c)(1),
USS1 and USS2 each have a section 1248 amount computed immediately
before the distribution of $250, all of which is attributable to FC.
Thus, USS1 and USS2 each have a predistribution amount with respect to
FD of $0, and each have a predistribution amount with respect to FC of
$250. These amounts are computed as follows: If either USS1 or USS2 had
sold its FD stock immediately before the transaction, it would have
recognized $250 of gain ($750 fair market value--$500 basis). All of the
gain would have been treated as a dividend under section 1248, and all
of the section 1248 amount would have been attributable to FC (based on
USS1's and USS2's pro rata shares of FC's earnings and profits (50
percent x $500)).
(B) Under paragraph (d)(3) of this section, a distributee that owns
no stock in the distributing or controlled corporation immediately after
the distribution has a postdistribution amount with regard to that stock
of zero. Accordingly, USS2 has a postdistribution amount of $0 with
respect to FD and USS1 has a postdistribution amount of $0 with respect
to FC. Under paragraph (e)(2) of this section, USS1's postdistribution
amount with respect to FD is its section 1248 amount with respect to
such corporation, computed immediately after the distribution (but
without regard to paragraph (d) of this section). USS2's
postdistribution amount with respect to FC is determined in the same
manner. Under Sec. 1.367(b)-2(c)(1), USS1's section 1248 amount
computed immediately after the distribution with respect to FD is $0 and
USS2's section 1248 amount computed immediately after the distribution
with respect to FC is $250. These amounts, which are USS1's and USS2's
postdistribution amounts, are computed as follows: After the non-pro
rata distribution, USS1 owns all the stock of FD and USS2 owns all the
stock of FC. If USS1 sold its FD stock immediately after the
distribution, none of the resulting $250 gain ($750 fair market value
$500 basis) would be treated as a dividend under section 1248. If USS2
sold its FC stock immediately after the distribution, it would have a
$250 gain ($750 fair market value--$500 basis), all of which would be
treated as a dividend under section 1248.
(C) The income inclusion rule of paragraph (d)(3) of this section
applies to the extent of any difference between USS1's and USS2's
postdistribution and predistribution amounts. In the case of USS2, there
is no difference between the two amounts with respect to either FD or FC
and, as a result, no income inclusion is required. In the case of USS1,
there is no difference between the two amounts with respect to its FD
stock. However, USS1's postdistribution amount with respect to FC is
$250 less than its predistribution amount. Accordingly, under paragraph
(d)(3) of this section, USS1 is required to include $250 in income as a
deemed dividend. Under Sec. 1.367(b)-2(e)(2), the $250 deemed dividend
is considered as having been paid by FC to FD, and by FD to USS1,
immediately prior to the distribution. This deemed dividend increases
USS1's basis in FD ($500 + $250 = $750). Under paragraph (f) of this
section, the deemed dividend is not included by FD as foreign personal
holding company income under section 954(c).
[T.D. 8862, 65 FR 3606, Jan. 24, 2000; 65 FR 66502, Nov. 6, 2000]
Sec. 1.367(b)-6 Effective/applicability dates and coordination
rules.
(a) Effective/applicability dates--(1) In general. (i) Except as
otherwise provided in this paragraph (a)(1) and paragraph (a)(2) of this
section, Sec. Sec. 1.367(b)-1 through 1.367(b)-5, and this section,
apply to section 367(b) exchanges that occur on or after February 23,
2000.
(ii) The rules of Sec. Sec. 1.367(b)-3 and 1.367(b)-4, as they
apply to reorganizations described in section 368(a)(1)(A) (including
reorganizations described in section 368(a)(2)(D) or (a)(2)(E))
involving a foreign acquiring or foreign acquired corporation, apply
only to transfers occurring on or after January 23, 2006.
(iii) The second sentence of paragraph Sec. 1.367(b)-4(a) applies
to section 304(a)(1) transactions occurring on or after February 23,
2006; however, taxpayers may rely on this sentence for all section
304(a)(1) transactions occurring in open taxable years.
(iv) Section 1.367(b)-1(c)(2)(v), (c)(3)(ii)(A), (c)(4)(iv),
(c)(4)(v), Sec. 1.367(b)-2(j)(1)(i) and (l), and Sec. 1.367(b)-
[[Page 483]]
3(e) and (f), apply to section 367(b) exchanges that occur on or after
November 6, 2006. For guidance with respect to Sec. 1.367(b)-
1(c)(3)(ii)(A), (c)(4)(iv), and (c)(4)(v) and Sec. 1.367(b)-2(j)(1)(i)
for exchanges that occur before November 6, 2006, see 26 CFR part 1
revised as of April 1, 2006.
(v) Section 1.367(b)-4(a), Sec. 1.367(b)-4(b)(1)(i)(B)(2), Sec.
1.367(b)-4(b)(1)(ii), Sec. 1.367(b)-4(b)(1)(iii), Example 4 and Example
5 apply to section 367(b) exchanges that occur on or after April 18,
2013. For guidance with respect to Sec. 1.367(b)-4(a), Sec. 1.367(b)-
4(b)(1)(i)(B)(2), Sec. 1.367(b)-4(b)(1)(ii) and Sec. 1.367(b)-
4(b)(1)(iii), Example 4, for exchanges that occur before April 18, 2013,
see 26 CFR part 1 revised as of April 1, 2012.
(2) Exception. A taxpayer may, however, elect to have Sec. Sec.
1.367(b)-1 through 1.367(b)-5, and this section, apply to section 367(b)
exchanges that occur (or occurred) before February 23, 2000, if the due
date for the taxpayer's timely filed Federal tax return (including
extensions) for the taxable year in which the section 367(b) exchange
occurs (or occurred) is after February 23, 2000. The election under this
paragraph (a)(2) will be valid only if--
(i) The electing taxpayer makes the election on a timely filed
section 367(b) notice;
(ii) In the case of an exchanging shareholder that is a foreign
corporation, the election is made on the section 367(b) notice that is
filed by each of its shareholders listed in Sec. 1.367(b)-1(c)(3)(ii);
and
(iii) The electing taxpayer provides notice of the election to all
corporations (or their successors in interest) whose earnings and
profits are affected by the election on or before the date the section
367(b) notice is filed.
(b) Certain recapitalizations described in Sec. 1.367(b)-4(b)(3).
In the case of a recapitalization described in Sec. 1.367(b)-4(b)(3)
that occurred prior to July 20, 1998, the exchanging shareholder shall
include the section 1248 amount on its tax return for the taxable year
that includes the exchange described in Sec. 1.367(b)-4(b)(3)(i) (and
not in the taxable year of the recapitalization), except that no
inclusion is required if both the recapitalization and the exchange
described in Sec. 1.367(b)-4(b)(3)(i) occurred prior to July 20, 1998.
(c) Use of reasonable method to comply with prior published
guidance--(1) Prior exchanges. The taxpayer may use a reasonable method
to comply with the following prior published guidance to the extent such
guidance relates to section 367(b): Notice 88-71 (1988-2 C.B. 374);
Notice 89-30 (1989-1 C.B. 670); and Notice 89-79 (1989-2 C.B. 392) (see
Sec. 601.601(d)(2) of this chapter). This rule applies to section
367(b) exchanges that occur (or occurred) before February 23, 2000, or,
if a taxpayer makes the election described in paragraph (a)(2) of this
section, for section 367(b) exchanges that occur (or occurred) before
the date described in paragraph (a)(2) of this section. This rule also
applies to section 367(b) exchanges and distributions described in
paragraph (d) of this section.
(2) Future exchanges. Section 367(b) exchanges that occur on or
after February 23, 2000, (or, if a taxpayer makes the election described
in paragraph (a)(2) of this section, for section 367(b) exchanges that
occur on or after the date described in paragraph (a)(2) of this
section) are governed by the section 367(b) regulations and, as a
result, paragraph (c)(1) of this section shall not apply.
(d) Effect of removal of attribution rules. To the extent that the
rules under Sec. Sec. 7.367(b)-9 and 7.367(b)-10(h) of this chapter, as
in effect prior to February 23, 2000 (see 26 CFR part 1, revised as of
April 1, 1999), attributed earnings and profits to the stock of a
foreign corporation in connection with an exchange described in section
351, 354, 355, or 356 before February 23, 2000, the foreign corporation
shall continue to be subject to the rules of Sec. 7.367(b)-12 of this
chapter in the event of any subsequent exchanges and distributions with
respect to such stock, notwithstanding the fact that such subsequent
exchange or distribution occurs on or after the effective date described
in paragraph (a) of this section.
[T.D. 8862, 65 FR 3608, Jan. 24, 2000, as amended by T.D. 9243, 71 FR
4289, Jan. 26, 2006; T.D. 9250, 71 FR 8805, Feb. 21, 2006; T.D. 9243, 71
FR 28266, May 16, 2006; T.D. 9273, 71 FR 44895, Aug. 8, 2006; 73 FR
14386, Mar. 18, 2008; T.D. 9614, 78 FR 17041, Mar. 19, 2013]
[[Page 484]]
Sec. 1.367(b)-7 Carryover of earnings and profits and foreign
income taxes in certain foreign-to-foreign nonrecognition
transactions.
(a) Scope. This section applies to an acquisition by a foreign
corporation (foreign acquiring corporation) of the assets of another
foreign corporation (foreign target corporation) in a transaction
described in section 381 (foreign section 381 transaction). This section
describes the manner and extent to which earnings and profits and
foreign income taxes of the foreign acquiring corporation and the
foreign target corporation carry over to the surviving foreign
corporation (foreign surviving corporation) and the ordering of
distributions by the foreign surviving corporation. See Sec. 1.367(b)-9
for special rules governing reorganizations described in section
368(a)(1)(F) and foreign section 381 transactions involving foreign
corporations that hold no property and have no tax attributes
immediately before the transaction, other than a nominal amount of
assets (and related tax attributes).
(b) General rules--(1) Non-previously taxed earnings and profits and
related taxes. Earnings and profits and related foreign income taxes of
the foreign acquiring corporation and the foreign target corporation
(pre-transaction earnings and pre-transaction taxes, respectively) shall
carry over to the foreign surviving corporation in the manner described
in paragraphs (d), (e), and (f) of this section. Dividend distributions
by the foreign surviving corporation (post-transaction distributions)
shall be out of earnings and profits and shall reduce related foreign
income taxes in the manner described in paragraph (c) of this section.
(2) Previously taxed earnings and profits. [Reserved]
(c) Ordering rule for post-transaction distributions. Dividend
distributions out of a foreign surviving corporation's earnings and
profits shall be ordered in accordance with the rules of paragraph
(c)(1) or (2) of this section, depending on whether the foreign
surviving corporation is a pooling corporation or a nonpooling
corporation.
(1) If foreign surviving corporation is a pooling corporation. In
the case of a foreign surviving corporation that is a pooling
corporation, post-transaction distributions shall be first out of the
post-1986 pool (as described in paragraph (d) of this section) and
second out of the pre-pooling annual layers (as described in paragraph
(e)(1) of this section) under an annual last-in, first-out (LIFO)
method.
(2) If foreign surviving corporation is a nonpooling corporation. In
the case of a foreign surviving corporation that is a nonpooling
corporation, post-transaction distributions shall be out of the pre-
pooling annual layers (as described in paragraph (e)(2) of this section)
under the LIFO method.
(d) Post-1986 pool. If the foreign surviving corporation is a
pooling corporation, then the post-1986 pool shall be determined under
the rules of this paragraph (d).
(1) In general--(i) Qualifying earnings and taxes. The post-1986
pool shall consist of the post-1986 undistributed earnings and related
post-1986 foreign income taxes of the foreign acquiring corporation and
the foreign target corporation.
(ii) Carryover rule. Subject to paragraph (d)(2) of this section,
the amounts described in paragraph (d)(1)(i) of this section
attributable to the foreign acquiring corporation and the foreign target
corporation shall carry over to the foreign surviving corporation and
shall be combined on a separate category-by-separate category basis.
(2) Hovering deficit--(i) In general. If immediately prior to the
foreign section 381 transaction either the foreign acquiring corporation
or the foreign target corporation has a deficit in one or more separate
categories of post-1986 undistributed earnings or an aggregate deficit
in pre-1987 accumulated profits, such deficit will be a hovering deficit
of the foreign surviving corporation. The rules of this paragraph (d)(2)
apply to hovering deficits in separate categories of post-1986
undistributed earnings. See paragraphs (e)(1)(iii) and (e)(2)(iii) of
this section for rules that apply to hovering deficits in pre-1987
accumulated profits. If the foreign acquiring corporation and the
foreign target corporation each have a post-1986 hovering deficit in the
same separate category of post-1986 undistributed
[[Page 485]]
earnings, such deficits and their related post-1986 foreign income taxes
shall be combined for purposes of applying this paragraph (d)(2). See
also paragraphs (f)(1) and (4) of this section (describing other rules
applicable to a deficit described in this paragraph (d)(2)).
(ii) Offset rule. A hovering deficit in a separate category of post-
1986 undistributed earnings shall offset only earnings and profits
accumulated by the foreign surviving corporation after the foreign
section 381 transaction (post-transaction earnings) in the same separate
category of post-1986 undistributed earnings. For purposes of this rule,
however, post-transaction earnings do not include post-1986
undistributed earnings in the same category that are earned after the
foreign section 381 transaction, but are distributed or deemed
distributed in the same year they are earned (that is, that do not
become accumulated). The offset shall occur as of the first day of the
foreign surviving corporation's first taxable year following the year in
which the post-transaction earnings accumulated.
(iii) Related taxes. Post-1986 foreign income taxes that are related
to a hovering deficit in a separate category of post-1986 undistributed
earnings shall only be added to the foreign surviving corporation's
post-1986 foreign income taxes in that separate category on a pro rata
basis as the hovering deficit is absorbed. Pro rata means in the same
proportion as the portion of the hovering deficit that offsets post-
transaction earnings in the separate category under paragraph (d)(2)(ii)
of this section bears to the total amount of the hovering deficit.
(3) Examples. The following examples illustrate the rules of this
paragraph (d). The examples assume the following facts: Foreign
corporations A and B are controlled foreign corporations (CFCs) that
were incorporated after December 31, 1986, have always been pooling
corporations, and have always had calendar taxable years. None of the
shareholders of foreign corporations A and B are required to include any
amount in income under Sec. 1.367(b)-4 as a result of the foreign
section 381 transaction. Foreign corporations A and B (and all of their
respective qualified business units as defined in section 989) maintain
a ``u'' functional currency. Finally, unless otherwise stated, any post-
1986 undistributed earnings in the passive category resulted from a
look-through dividend that was paid by a lower-tier CFC out of earnings
accumulated when the CFC was a noncontrolled section 902 corporation and
that qualified for the subpart F same-country exception under section
954(c)(3)(A). The examples are as follows:
Example 1. (i) Facts. (A) On December 31, 2006, foreign corporations
A and B have the following post-1986 undistributed earnings and post-
1986 foreign income taxes:
------------------------------------------------------------------------
Foreign
Separate category E&P taxes
------------------------------------------------------------------------
Foreign Corporation A
------------------------------------------------------------------------
General............................................. 300u $60
Passive............................................. 100u 40
-------------------
400u $100
------------------------------------------------------------------------
Foreign Corporation B
------------------------------------------------------------------------
General............................................. 300u $70
------------------------------------------------------------------------
(B) On January 1, 2007, foreign corporation B acquires the assets of
foreign corporation A in a reorganization described in section
368(a)(1)(C). Immediately following the foreign section 381 transaction,
foreign surviving corporation is a CFC.
(ii) Result. Under the rules described in paragraph (d)(1) of this
section, foreign surviving corporation has the following post-1986
undistributed earnings and post-1986 foreign income taxes:
------------------------------------------------------------------------
Foreign
Separate category E&P taxes
------------------------------------------------------------------------
General............................................. 600u $130
Passive............................................. 100u 40
-------------------
700u $170
------------------------------------------------------------------------
(iii) Post-transaction distribution. (A) During 2007, foreign
surviving corporation does not accumulate any earnings and profits or
pay or accrue any foreign income taxes. On December 31, 2007, foreign
surviving corporation distributes 350u to its shareholders. Under the
rules described in Sec. 1.902-1(d)(1) and paragraph (c)(1) of this
section, the distribution is out of, and reduces, post-1986
undistributed earnings and post-1986 foreign income taxes in the
separate categories on a pro rata basis, as follows:
[[Page 486]]
------------------------------------------------------------------------
Foreign
Separate category E&P taxes
------------------------------------------------------------------------
General............................................. 300u $65
Passive............................................. 50u 20
-------------------
350u $85
------------------------------------------------------------------------
(B) The foreign income taxes deemed paid by qualifying shareholders
of foreign surviving corporation upon the distribution are subject to
generally applicable rules and limitations, such as those of sections
78, 902, and 904(d).
(C) Immediately after the distribution, foreign surviving
corporation has the following post-1986 undistributed earnings and post-
1986 foreign income taxes:
------------------------------------------------------------------------
Foreign
Separate category E&P taxes
------------------------------------------------------------------------
General............................................. 300u $65
Passive............................................. 50u 20
-------------------
350u $85
------------------------------------------------------------------------
Example 2. (i) Facts. (A) On December 31, 2006, foreign corporations
A and B have the following post-1986 undistributed earnings and post-
1986 foreign income taxes:
------------------------------------------------------------------------
Foreign
Separate category E&P taxes
------------------------------------------------------------------------
Foreign Corporation A
------------------------------------------------------------------------
General............................................. 200u $30
Passive............................................. (100u) 10
-------------------
100u $40
------------------------------------------------------------------------
Foreign Corporation B
------------------------------------------------------------------------
General............................................. 300u $60
Passive............................................. 100u 30
-------------------
400u $90
------------------------------------------------------------------------
(B) On January 1, 2007, foreign corporation B acquires the assets of
foreign corporation A in a reorganization described in section
368(a)(1)(C). Immediately following the foreign section 381 transaction,
foreign surviving corporation is a CFC.
(ii) Result. Under the rules described in paragraphs (d)(1) and (2)
of this section, foreign surviving corporation has the following post-
1986 undistributed earnings and post-1986 foreign income taxes:
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
taxes
Separate category Positive Hovering Foreign associated
E&P deficit taxes with
available hovering
deficit
----------------------------------------------------------------------------------------------------------------
General..................................................... 500u ........... $ 90 ...........
Passive..................................................... 100u (100u) 30 $10
---------------------------------------------------
600u (100u) $120 $10
----------------------------------------------------------------------------------------------------------------
(iii) Post-transaction distribution. (A) During 2007, foreign
surviving corporation does not accumulate any earnings and profits or
pay or accrue any foreign income taxes. On December 31, 2007, foreign
surviving corporation distributes 300u to its shareholders. Under the
rules described in Sec. 1.902-1(d)(1) and paragraph (c)(1) of this
section, the distribution is out of, and reduces, post-1986
undistributed earnings and post-1986 foreign income taxes on a pro rata
basis as follows:
------------------------------------------------------------------------
Foreign
Separate category E&P taxes
------------------------------------------------------------------------
General............................................. 250u $45
Passive............................................. 50u 15
-------------------
300u $60
------------------------------------------------------------------------
(B) The foreign income taxes deemed paid by qualifying shareholders
of foreign surviving corporation upon the distribution are subject to
generally applicable rules and limitations, such as those of sections
78, 902, and 904(d).
(C) Immediately after the distribution, foreign surviving
corporation has the following post-1986 undistributed earnings and post-
1986 foreign income taxes:
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
taxes
Separate category Positive Hovering Foreign associated
E&P deficit taxes with
available hovering
deficit
----------------------------------------------------------------------------------------------------------------
General..................................................... 250u ........... $45 ...........
[[Page 487]]
Passive..................................................... 50u (100u) 15 $10
---------------------------------------------------
300u (100u) $60 $10
----------------------------------------------------------------------------------------------------------------
(iv) Post-transaction earnings--(A) In its taxable year ending on
December 31, 2008, foreign surviving corporation accumulates earnings
and profits and pays related foreign income taxes as follows:
------------------------------------------------------------------------
Foreign
Separate category E&P taxes
------------------------------------------------------------------------
General............................................. 100u $20
Passive............................................. 50u $10
-------------------
150u $40
------------------------------------------------------------------------
(B) None of foreign surviving corporation's earnings and profits for
its 2008 taxable year qualifies as subpart F income as defined in
section 952(a). Under the rules described in paragraphs (d)(2)(ii) and
(iii) of this section, the hovering deficit in the passive category will
offset the post-transaction earnings in that category and a
proportionate amount of the foreign taxes related to the hovering
deficit will be added to the post-1986 foreign income taxes pool.
Because the post-transaction earnings in the passive category are half
of the amount of the hovering deficit, half of the related taxes are
added to the post-1986 foreign income taxes pool. Accordingly, foreign
surviving corporation has the following post-1986 undistributed earnings
and post-1986 foreign income taxes on January 1, 2009:
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
taxes
Separate category Positive Hovering Foreign associated
E&P deficit taxes with
available hovering
deficit
----------------------------------------------------------------------------------------------------------------
General..................................................... 350u ........... $65 ...........
Passive..................................................... 50u (50u) 30 $5
---------------------------------------------------
400u (50u) $95 $5
----------------------------------------------------------------------------------------------------------------
Example 3. (i) Facts. The facts are the same as Example 2, except
that the 50u of earnings in the passive category accrued by foreign
surviving corporation during 2008 is subpart F income, all of which is
included in income under section 951(a) by United States shareholders
(as defined in section 951(b)). This example assumes that none of the
United States shareholders are able to reduce their subpart F income
inclusion with a qualified deficit under section 952(c)(1)(B).
(ii) Result. (A) Under the rule described in paragraph (f)(1) of
this section, the (100u) hovering deficit in the passive category does
not reduce foreign surviving corporation's current passive earnings and
profits for purposes of determining subpart F income or associated
deemed paid credits. Thus, foreign surviving corporation's United States
shareholders include their pro rata shares of 50u in taxable income for
the year and are eligible for a deemed paid foreign tax credit under
section 960, computed by reference to their pro rata shares of $12.50
(50u subpart F inclusion / (50u + 50u post-1986 undistributed earnings
in the passive category = 100u) = 50%, x $25 post-1986 foreign income
taxes in the passive category = $12.50). The United States shareholders
will also include their pro rata shares of the deemed-paid taxes of
$12.50 in taxable income for the year as a deemed dividend pursuant to
section 78.
(B) Immediately after the subpart F inclusion and section 960 deemed
paid taxes (and taking into account the taxable year 2008 earnings and
profits and related taxes in the general category), foreign surviving
corporation has the following post-1986 undistributed earnings and post-
1986 foreign income taxes:
[[Page 488]]
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign
-------------------------- taxes
------------
Foreign Foreign
Separate category taxes taxes
Positive Hovering available associated
E&P deficit with
hovering
deficit
----------------------------------------------------------------------------------------------------------------
General..................................................... 350u ........... $65.00 ...........
Passive..................................................... 50u (100u) 12.50 $10
---------------------------------------------------
400u (100u) 77.50 10
----------------------------------------------------------------------------------------------------------------
(C) The 50u included as subpart F income constitutes previously
taxed earnings and profits under section 959.
Example 4. (i) Facts. (A) On December 31, 2006, foreign corporations
A and B have the following post-1986 undistributed earnings and post-
1986 foreign income taxes:
------------------------------------------------------------------------
Foreign
Separate category E&P taxes
------------------------------------------------------------------------
Foreign Corporation A
------------------------------------------------------------------------
General............................................. 50u $10
------------------------------------------------------------------------
Foreign Corporation B
------------------------------------------------------------------------
General............................................. (100u) $20
------------------------------------------------------------------------
------------------------------------------------------------------------
(B) On January 1, 2007, foreign corporation B acquires the assets of
foreign corporation A in a reorganization described in section
368(a)(1)(C). Immediately following the foreign section 381 transaction,
foreign surviving corporation is a CFC.
(ii) Result. (A) Under the rules described in paragraphs (d)(1) and
(2) of this section, foreign surviving corporation has the following
post-1986 undistributed earnings and post-1986 foreign income taxes:
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign
-------------------------- taxes
------------
Foreign Foreign
Separate category taxes taxes
Positive Hovering available associated
E&P deficit with
hovering
deficit
----------------------------------------------------------------------------------------------------------------
General..................................................... 50u (100u) $10 $20
----------------------------------------------------------------------------------------------------------------
(iii) Post-transaction earnings and distribution. (A) In its taxable
year ending on December 31, 2007, foreign surviving corporation earns
100u in the general category and pays related foreign income taxes of
$24. On December 31, 2007, foreign surviving corporation distributes 75u
to its shareholders.
(B) Result. For purposes of determining the dividend amount under
section 316 and the foreign income taxes deemed paid with respect to
that dividend under section 902, under paragraph (d)(2)(ii) of this
section the hovering deficit does not offset the post-transaction
current year earnings. Accordingly, the full 75u will be a dividend
under section 316. The deemed paid taxes on that dividend are $17 (75u
distribution / (100u current earnings + 50u accumulated earnings) = 50%,
x ($10 accumulated foreign taxes + $24 current year foreign taxes) =
$17). The 25u of undistributed earnings and profits in 2007 will be
offset by (25u) of the hovering deficit for purposes of determining the
opening balance of the post-1986 undistributed earnings pool in 2008.
Because the amount of earnings offset by the hovering deficit is 25% of
the amount of the hovering deficit, under paragraph (d)(2)(iii) of this
section $5 (25% of $20) of the related taxes are added to the post-1986
foreign income taxes pool at the beginning of the next taxable year.
Accordingly, foreign surviving corporation has the following post-1986
undistributed earnings and post-1986 foreign income taxes on January 1,
2008:
[[Page 489]]
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
taxes
Separate category Positive Hovering Foreign associated
E&P deficit taxes with
available hovering
deficit
----------------------------------------------------------------------------------------------------------------
General..................................................... 50u (75u) $22 $15
----------------------------------------------------------------------------------------------------------------
(e) Pre-pooling annual layers--(1) If foreign surviving corporation
is a pooling corporation. If the foreign surviving corporation is a
pooling corporation, the pre-pooling annual layers shall be determined
under the rules of this paragraph (e)(1).
(i) Qualifying earnings and taxes. The pre-pooling annual layers
shall consist of the pre-1987 accumulated profits and the pre-1987
foreign income taxes of the foreign acquiring corporation and the
foreign target corporation.
(ii) Carryover rule. Subject to paragraph (e)(1)(iii) of this
section, the amounts described in paragraph (e)(1)(i) of this section
shall carry over to the foreign surviving corporation but shall not be
combined. If the foreign acquiring corporation and the foreign target
corporation have pre-1987 accumulated profits in the same year and a
distribution is made therefrom, the rules of Sec. 1.902-1(b)(2)(ii) and
(b)(3) shall apply separately to reduce pre-1987 accumulated profits and
pre-1987 foreign income taxes of the foreign acquiring corporation and
the foreign target corporation on a pro rata basis. For further
guidance, see Rev. Rul. 68-351 (1968-2 C.B. 307); Rev. Rul. 70-373
(1970-2 C.B. 152) (see also Sec. 601.601(d)(2) of this chapter); see
also paragraph (f)(2) of this section (governing the reconciliation of
taxable years).
(iii) Deficit--(A) In general. The rules of this paragraph
(e)(1)(iii) apply when, immediately prior to the foreign section 381
transaction, the foreign acquiring corporation or the foreign target
corporation (or both) has a deficit in earnings and profits for one or
more of the years that comprise its pre-1987 accumulated profits (see
also paragraphs (f)(1) and (4) of this section, describing other rules
applicable to a deficit described in this paragraph (e)(1)(iii)).
(B) Aggregate positive pre-1987 accumulated profits. If the foreign
acquiring corporation or the foreign target corporation (or both) has an
aggregate positive (or zero) amount of pre-1987 accumulated profits, but
a deficit in earnings and profits for one or more years, then the rules
otherwise applicable to such deficits shall apply separately to the pre-
1987 accumulated profits and related pre-1987 foreign income taxes of
such corporation. A deficit in pre-1987 accumulated profits for one or
more years is applied to reduce pre-1987 accumulated profits on a LIFO
basis. Any remaining deficit shall be applied to reduce pre-1987
accumulated profits in succeeding years. See Rev. Rul. 74-550 (1974-2
C.B. 209) (see also Sec. 601.601(d)(2) of this chapter); Champion Int'l
Corp. v. Commissioner, 81 T.C. 424 (1983), acq. in result, 1987-2 C.B.
1; Rev. Rul. 87-72 (1987-2 C.B. 170) (see also Sec. 601.601(d)(2) of
this chapter). As a result, no amount in excess of the aggregate
positive amount of pre-1987 accumulated profits shall be distributed
from the pre-transaction earnings of the foreign acquiring corporation
or the foreign target corporation.
(C) Aggregate deficit in pre-1987 accumulated profits. If the
foreign acquiring corporation or the foreign target corporation (or
both) has an aggregate deficit in pre-1987 accumulated profits, a
hovering deficit as defined under paragraph (d)(2)(i) of this section,
then the rules under Sec. 1.902-2(b) shall apply to such hovering
deficit (and related pre-1987 foreign income taxes) immediately prior to
the transaction, except that the aggregate hovering deficit that is
carried forward into the foreign surviving corporation's post-1986 pool
shall offset only post-transaction earnings accumulated by the foreign
surviving corporation in the same separate category of post-1986
undistributed earnings to which the relevant portion of the hovering
deficit is attributable. Post-transaction earnings do not include
earnings and profits that are
[[Page 490]]
earned after the foreign section 381 transaction but distributed or
deemed distributed in the same year they are earned.
(D) Deficit and positive separate categories within annual layers.
For purposes of applying the rules of paragraphs (e)(1)(iii)(B) and (C)
of this section, if within a single pre-pooling annual layer, the
foreign acquiring corporation or the foreign target corporation (or
both) has a deficit in pre-1987 accumulated profits in a separate
category and positive pre-1987 accumulated profits in another separate
category, the deficit shall first be used to offset the positive pre-
1987 accumulated profits in the other separate category in the same pre-
pooling annual layer. Any remaining deficit shall be carried forward or
back to other years according to the rules of paragraph (e)(1)(iii)(B)
or (C) of this section as applicable.
(iv) Pre-1987 section 960 earnings and profits and foreign income
taxes. The pre-1987 section 960 earnings and profits and pre-1987
section 960 foreign income taxes of the foreign acquiring corporation
and the foreign target corporation shall carry over to the foreign
surviving corporation but shall not be combined. The rules otherwise
applicable to such amounts shall apply separately to the pre-1987
section 960 earnings and profits and pre-1987 section 960 foreign income
taxes of the foreign acquiring corporation and the foreign target
corporation on a pro rata basis. For further guidance, see Notice 88-70
(1988-2 C.B. 369) (see also Sec. 601.601(d)(2) of this chapter).
(v) Examples. The following examples illustrate the rules of this
paragraph (e)(1). The examples assume the following facts: Foreign
corporation A was incorporated in 2003 and was a nonpooling corporation
through December 31, 2004. Foreign corporation A became a CFC on January
1, 2005 and, as a result, began to maintain a pool of post-1986
undistributed earnings on that date. Foreign corporation B was
incorporated in 2003 and has always been owned by foreign shareholders
(and thus never has met the requirements of section 902(c)(3)(B)). Both
foreign corporation A and foreign corporation B have always had calendar
taxable years. Foreign corporations A and B (and all of their respective
qualified business units as defined in section 989) maintain a ``u''
functional currency. Finally, unless otherwise stated, all earnings and
profits of foreign corporations A and B are in the general category. The
examples are as follows:
Example 1. (i) Facts. (A) On December 31, 2006, foreign corporations
A and B have the following earnings and profits and foreign income
taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Foreign Corporation A:
Post-1986 pool.................................... 1,000u $350
2004.............................................. 400u 160u
2003.............................................. 100u 5u
-------------------
1,500u ........
Foreign Corporation B:
2006............................................ 100u 20u
2005............................................ 150u 30u
2004............................................ 0u 50u
2003............................................ 50u 5u
-------------------
300u 105u
------------------------------------------------------------------------
(B) On January 1, 2007, foreign corporation B acquires the assets of
foreign corporation A in a reorganization described in section
368(a)(1)(C). Immediately following the foreign section 381 transaction,
foreign surviving corporation is a CFC.
(ii) Result. Under the rules described in paragraphs (e)(1)(i) and
(ii) of this section, foreign surviving corporation has the following
earnings and profits and foreign income taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Post-1986 Pool...................................... 1,000u $350
2006................................................ 100u 20u
2005................................................ 150u 30u
Two Side-by-Side Layers of 2004 E&P:
2004 layer 1 (from Corp A)..................... 400u 160u
2004 layer 2 (from Corp B)..................... 0u 50u
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1 (from Corp A)..................... 100u 5u
2003 layer 2 (from Corp B)..................... 50u 5u
-------------------
1,800u ........
------------------------------------------------------------------------
(iii) Post-transaction distribution. (A) During 2007, foreign
surviving corporation does not accumulate any earnings and profits or
pay or accrue any foreign income taxes. On December 31, 2007, foreign
surviving corporation distributes 1,725u to its shareholders. Under the
rules of paragraph (c)(1) of this section, the distribution is first out
of the post-1986 pool, and then out of the pre-pooling annual layers
under the LIFO method, as follows:
[[Page 491]]
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Post-1986 pool...................................... 1,000u $350
2006................................................ 100u 20u
2005................................................ 150u 30u
Two Side-by-Side Layers of 2004 E&P:
2004 layer 1................................... 400u 160u
2004 layer 2................................... 0u 0u
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1................................... * 50u 2.5u
2003 layer 2................................... ** 25u 2.5u
-------------------
1,725u
------------------------------------------------------------------------
* 100u in layer/150u aggregate 2003 earnings = 66.67% x 75u
distribution.
** 50u in layer/150u aggregate 2003 earnings = 33.33% x 75u
distribution.
(B) The foreign income taxes deemed paid by qualifying shareholders
of foreign surviving corporation upon the distribution are subject to
generally applicable rules and limitations, such as those of sections
78, 902, and 904(d).
(C) Immediately after the distribution, foreign surviving
corporation has the following earnings and profits and foreign income
taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
2004 layer 2....................................... 0u 50u
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1................................... 50u 2.5u
2003 layer 2................................... 25u 2.5u
75u 55u
------------------------------------------------------------------------
(iv) Post-transaction earnings. For the taxable year ending on
December 31, 2008, foreign surviving corporation has 500u of current
earnings and profits in the general category, none of which qualify as
subpart F income under section 952(a), and pays $70 in foreign income
taxes. As of the close of the 2008 taxable year, foreign surviving
corporation has the following earnings and profits and foreign income
taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Post-1986 pool...................................... 500u $70
2004................................................ 0u 50u
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1................................... 50u 2.5u
2003 layer 2................................... 25u 2.5u
-------------------
575u
------------------------------------------------------------------------
Example 2. (i) Facts. (A) On December 31, 2006, foreign corporations
A and B have the following earnings and profits and foreign income
taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Foreign Corporation A:
Post-1986 pool.................................... 1,000u $350
2004............................................ 100u 20u
2003............................................ (50u) 5u
-------------------
1,050u
Foreign Corporation B:
2006............................................ 100u 20u
2005............................................ (50u) 5u
2004............................................ 0u 50u
2003............................................ 100u 10u
-------------------
150u 85u
------------------------------------------------------------------------
(B) On January 1, 2007, foreign corporation B acquires the assets of
foreign corporation A in a reorganization described in section
368(a)(1)(C). Immediately following the foreign section 381 transaction,
foreign surviving corporation is a CFC.
(ii) Result. Because foreign corporations A and B have aggregate
positive amounts of pre-1987 accumulated profits with a deficit in one
or more years, the rules of paragraph (e)(1)(iii)(B) of this section
apply. Accordingly, after the foreign section 381 transaction, foreign
surviving corporation has the following earnings and profits and foreign
income taxes:
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
Foreign taxes
Positive Deficit E&P taxes assoicated
E&P available with
deficit E&P
----------------------------------------------------------------------------------------------------------------
Post-1986 pool.............................................. 1,000u ........... $350 ...........
2006........................................................ 100u ........... 20u ...........
2005........................................................ ........... (50u) ........... 5u
Two Side-by-Side Layers of 2004 E&P:
2004 layer 1 (from Corp A)............................. 100u ........... 20u ...........
2004 layer 2 (from Corp B)............................. 0u ........... 50u ...........
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1 (from Corp A)............................. ........... (50u) ........... 5u
2003 layer 2 (from Corp B)............................. 100u ........... 10u ...........
---------------------------------------------------
1,300u (100u) ........... 10u
----------------------------------------------------------------------------------------------------------------
[[Page 492]]
(iii) Post-transaction distribution. (A) During 2007, foreign
surviving corporation does not accumulate any earnings and profits or
pay or accrue any foreign income taxes. On December 31, 2007, foreign
surviving corporation distributes 1,175u to its shareholders. Under the
rules described in paragraphs (c)(1) and (e)(1)(iii)(B) of this section,
the distribution is first out of the post-1986 pool, and then out of the
pre-pooling annual layers, as follows:
------------------------------------------------------------------------
Foreign
Distribution E&P taxes
------------------------------------------------------------------------
Post-1986 pool...................................... 1,000u $350
2006................................................ 100u 20u
2005................................................ 0u 0u
Two Side-by-Side Layers of 2004 E&P:
2004 layer 1................................... 50u 20u
2004 layer 2................................... 0u 0u
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1................................... 0u 0u
2003 layer 2................................... 25u 5u
-------------------
1,175u ........
------------------------------------------------------------------------
(B) Under paragraph (e)(1)(iii)(B) of this section, the rules
otherwise applicable when a foreign corporation has an aggregate
positive (or zero) amount of pre-1987 accumulated profits, but a deficit
in one or more years, apply separately to the pre-1987 accumulated
profits and related foreign income taxes of foreign corporation A and
foreign corporation B. As a result, distributions out of the pre-pooling
annual layers of foreign corporation A and foreign corporation B cannot
exceed the aggregate positive amount of pre-1987 accumulated profits of
each corporation. Accordingly, only 50u can be distributed from foreign
corporation A's pre-pooling annual layers and is out of its 2004 layer
1 (after rolling forward the (50u) deficit in 2003 layer 1 to reduce
earnings in 2004 layer 1 to 50u (100u -50u)). Under the principles of
Sec. 1.902-1(b)(3), the full 20u of taxes related to 2004 layer 1 is
reduced or deemed paid ($20 x (50/50)). 100u is distributed from foreign
corporation B's 2006 annual layer. Foreign corporation B's (50u) deficit
in 2005 is then rolled back to offset its 2003 annual layer to reduce
earnings in that layer to 50u, 25u of which is distributed. Thus, after
the distribution, 25u remains in 2003 layer 2 along with 5u of foreign
income taxes (10u x (25u/50u)).
(C) The foreign income taxes deemed paid by qualifying shareholders
of foreign surviving corporation upon the distribution are subject to
generally applicable rules and limitations, such as those of sections
78, 902, and 904(d).
(D) Immediately after the distribution, foreign surviving
corporation has the following earnings and profits and foreign income
taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
2005................................................ 0u 5u
2004 layer 2....................................... 0u 50u
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1................................... 0u 5u
2003 layer 2................................... 25u 5u
-------------------
25u 65u
------------------------------------------------------------------------
(E) Under paragraph (e)(1)(iii)(B) of this section, the 5u, 50u, and
5u of pre-1987 foreign income taxes related to foreign surviving
corporation's 2005 layer, 2004 layer 2, and 2003 layer 1,
respectively, remain in those layers. These foreign income taxes
generally will not be reduced or deemed paid unless a foreign tax refund
restores a positive balance to the associated earnings pursuant to
section 905(c), and thus will be trapped. See Sec. 1.902-2(b)(2).
Example 3. (i) Facts. (A) On December 31, 2006, foreign corporations
A and B have the following earnings and profits and foreign income
taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Foreign Corporation A:
Post-1986 pool...................................... 1,000u $350
2004............................................ 150u 20u
2003............................................ 100u 5u
-------------------
1,250u ........
Foreign Corporation B:
2006............................................ 100u 20u
2005............................................ (250u) 5u
2004............................................ 0u 50u
2003............................................ 100u 10u
-------------------
(50u) 85u
------------------------------------------------------------------------
(B) On January 1, 2007, foreign corporation B acquires the assets of
foreign corporation A in a reorganization described in section
368(a)(1)(C). Immediately following the foreign section 381 transaction,
foreign surviving corporation is a CFC.
(ii) Result. (A) Because foreign corporation B has an aggregate
hovering deficit in pre-1987 accumulated profits, the rules of paragraph
(e)(1)(iii)(C) of this section apply. Accordingly, Sec. 1.902-2(b)
applies immediately prior to the foreign section 381 transaction, except
that the hovering deficit is carried forward into the foreign surviving
corporation's post-1986 undistributed earnings pool and will offset only
post-transaction earnings accumulated by foreign surviving corporation
in the general category. Accordingly, after the foreign section 381
transaction, foreign surviving corporation has the following earnings
and profits and foreign income taxes:
[[Page 493]]
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
taxes
Positive Hovering Foreign assoicated
E&P deficit taxes with
available hovering
deficit
----------------------------------------------------------------------------------------------------------------
Post-1986 pool.............................................. 1,000u (50u) $350 $0
2006........................................................ 0u ........... 20u ...........
2005........................................................ 0u ........... 5u ...........
Two Side-by-Side Layers of 2004 E&P:
2004 layer 1 (from Corp A)............................. 150u ........... 20u ...........
2004 layer 2 (from Corp B)............................. 0u ........... 50u ...........
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1 (from Corp A)............................. 100u ........... 5u ...........
2003 layer 2 (from Corp B)............................. 0u ........... 10u ...........
---------------------------------------------------
1,250u (50u) ........... $0
----------------------------------------------------------------------------------------------------------------
(B) Under paragraph (e)(1)(iii)(C) of this section, the 20u, 5u,
50u, and 10u of pre-1987 foreign income taxes associated with foreign
corporation B's pre-1987 accumulated profits for 2006, 2005, 2004 layer
2, and 2003 layer 2, respectively, remain in those layers. These
foreign income taxes generally will not be reduced or deemed paid unless
a foreign tax refund restores a positive balance to the associated
earnings pursuant to section 905(c), and thus will be trapped. See Sec.
1.902-2(b)(2).
(2) If foreign surviving corporation is a nonpooling corporation. If
the foreign surviving corporation is a nonpooling corporation, then the
pre-pooling annual layers shall be determined under the rules of this
paragraph (e)(2).
(i) Qualifying earnings and taxes. The pre-pooling annual layers
shall consist of the pre-1987 accumulated profits and the pre-1987
foreign income taxes of the foreign acquiring corporation and the
foreign target corporation. If the foreign acquiring corporation or the
foreign target corporation (or both) has post-1986 undistributed
earnings or a deficit in post-1986 undistributed earnings, then those
earnings or deficits and any related post-1986 foreign income taxes
shall be recharacterized as pre-1987 accumulated profits or deficits and
pre-1987 foreign income taxes of the foreign acquiring corporation or
the foreign target corporation accumulated immediately prior to the
foreign section 381 transaction.
(ii) Carryover rule. Subject to paragraph (e)(2)(iii) of this
section, the amounts described in paragraph (e)(2)(i) of this section
shall carry over to the foreign surviving corporation but shall not be
combined. If the foreign acquiring corporation and the foreign target
corporation have pre-1987 accumulated profits in the same year and a
distribution is made therefrom, the principles of Sec. 1.902-
1(b)(2)(ii) and (3) shall apply separately to reduce pre-1987
accumulated profits and pre-1987 foreign income taxes of the foreign
acquiring corporation and the foreign target corporation on a pro rata
basis. For further guidance, see Rev. Rul. 68-351 (1968-2 C.B. 307);
Rev. Rul. 70-373 (1970-2 C.B. 152) (see also Sec. 601.601(d)(2) of this
chapter); see also paragraph (f)(2) of this section (governing the
reconciliation of taxable years).
(iii) Deficits--(A) In general. The rules of this paragraph
(e)(2)(iii) apply when, immediately prior to the foreign section 381
transaction (and after application of the last sentence of paragraph
(e)(2)(i) of this section), the foreign acquiring corporation or the
foreign target corporation (or both) has a deficit in one or more years
that comprise its pre-1987 accumulated profits. See also paragraphs
(f)(1) and (4) of this section (describing other rules applicable to a
deficit described in this paragraph (e)(2)(iii)).
(B) Aggregate positive pre-1987 accumulated profits. If the foreign
acquiring corporation or the foreign target corporation (or both) has an
aggregate positive (or zero) amount of pre-1987 accumulated profits, but
a deficit in pre-1987 accumulated profits in one or more years, then the
rules otherwise applicable to such deficits shall apply separately to
the pre-1987 accumulated profits and related foreign income taxes of
such corporation. A deficit in pre-1987 accumulated profits for one or
[[Page 494]]
more years is applied to reduce pre-1987 accumulated profits on a LIFO
basis. Any remaining deficit shall be applied to reduce pre-1987
accumulated profits in succeeding years. See Rev. Rul. 74-550 (1974-2
C.B. 209) (see also Sec. 601.601(d)(2) of this chapter); Champion Int'l
Corp. v. Commissioner, 81 T.C. 424 (1983), acq. in result, 1987-2 C.B.
1; Rev. Rul. 87-72 (1987-2 C.B. 170) (see also Sec. 601.601(d)(2) of
this chapter). As a result, no amount in excess of the aggregate
positive amount of pre-1987 accumulated profits shall be distributed
from the pre-transaction earnings of the foreign acquiring corporation
or the foreign target corporation.
(C) Aggregate deficit in pre-1987 accumulated profits. If the
foreign acquiring corporation or the foreign target corporation (or
both) has an aggregate deficit in pre-1987 accumulated profits, a
hovering deficit as defined under paragraph (d)(2)(i) of this section,
then the rules otherwise applicable to such hovering deficits shall
apply separately to the pre-transaction earnings and profits and related
taxes of the relevant corporation. See, e.g., sections 316(a) and
381(c)(2)(B). Thus, any hovering deficit shall offset only post-
transaction earnings accumulated by the foreign surviving corporation in
the same separate category of earnings and profits to which the relevant
portion of the hovering deficit is attributable. Post-transaction
earnings do not include earnings and profits that are earned after the
foreign section 381 transaction but distributed or deemed distributed in
the same year they are earned. Following the principles of Sec. 1.902-
2(b), if there is an aggregate deficit in pre-1987 accumulated profits,
any related pre-1987 foreign income taxes generally will not be reduced
or deemed paid unless a foreign tax refund restores a positive balance
to the associated earnings pursuant to section 905(c), and creates a
pre-transaction aggregate positive balance for pre-1987 accumulated
profits.
(D) Deficit and positive separate categories within annual layers.
For purposes of applying the rules of paragraphs (e)(2)(iii)(B) and (C)
of this section, if within a single pre-pooling annual layer, the
foreign acquiring corporation or the foreign target corporation (or
both) has a deficit in pre-1987 accumulated profits in a separate
category and positive pre-1987 accumulated profits in another separate
category, the deficit shall first be used to offset the positive pre-
1987 accumulated profits in the other separate category in the same pre-
pooling annual layer. Any remaining deficit shall be carried forward or
back to other years according to the rules of paragraph (e)(2)(iii)(B)
or (C) as applicable.
(iv) Pre-1987 section 960 earnings and profits and foreign income
taxes. The pre-1987 section 960 earnings and profits and pre-1987
section 960 foreign income taxes of the foreign acquiring corporation
and the foreign target corporation shall carry over to the foreign
surviving corporation but shall not be combined. The rules otherwise
applicable to such amounts shall apply separately to the pre-1987
section 960 earnings and profits and pre-1987 section 960 foreign income
taxes of the foreign acquiring corporation and the foreign target
corporation on a pro rata basis. For further guidance, see Notice 88-70
(1988-2 C.B. 369) (see also Sec. 601.601(d)(2) of this chapter).
(v) Examples. The following examples illustrate the rules of this
paragraph (e)(2). The examples assume the following facts: Both foreign
corporation A and foreign corporation B have always had calendar taxable
years. Foreign corporations A and B (and all of their respective
qualified business units as defined in section 989) maintain a ``u''
functional currency, and 1u = US$1 at all times. Finally, unless
otherwise stated, all earnings and profits of foreign corporations A and
B are in the general category. The examples are as follows:
Example 1. (i) Facts. (A) Foreign corporations A and B both were
incorporated in 2003. Nine percent of the voting stock of foreign
corporation A is owned by domestic corporate shareholder C. Nine percent
of the voting stock of foreign corporation B is owned by domestic
corporate shareholder D. Shareholders C and D are unrelated. The
remaining 91% of the voting stock of each foreign corporation is owned
by unrelated foreign shareholders. Thus, neither corporation meets the
requirements of section 902(c)(3)(B). On December 31, 2006, foreign
corporations A and B have the following
[[Page 495]]
earnings and profits and foreign income taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Foreign Corporation A:
2006............................................ 500u 350u
2005............................................ 400u 300u
2004............................................ 400u 160u
2003............................................ 100u 5u
==========---------
1,400u 815u
Foreign Corporation B:
2006............................................ 100u 20u
2005............................................ 300u 60u
2004............................................ 0u 50u
2003............................................ 50u 5u
-------------------
450u 135u
------------------------------------------------------------------------
(B) On January 1, 2007, foreign corporation B acquires the assets of
foreign corporation A in a reorganization described in section
368(a)(1)(C). Immediately following the foreign section 381 transaction,
foreign surviving corporation is a nonpooling corporation that does not
meet the requirements of section 902(c)(3)(B).
(ii) Result. Under the rules described in paragraphs (e)(2)(i) and
(ii) of this section, foreign surviving corporation has the following
earnings and profits and foreign income taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Two Side-by-Side Layers of 2006 E&P:
2006 layer 1 (from Corp A)..................... 500u 350u
2006 layer 2 (from Corp B)..................... 100u 20u
Two Side-by-Side Layers of 2005 E&P:
2005 layer 1 (from Corp A)..................... 400u 300u
2005 layer 2 (from Corp B)..................... 300u 60u
Two Side-by-Side Layers of 2004 E&P:
2004 layer 1 (from Corp A)..................... 400u 160u
2004 layer 2 (from Corp B)..................... 0u 50u
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1 (from Corp A)..................... 100u 5u
2003 layer 2 (from Corp B)..................... 50u 5u
-------------------
1,850u 950u
------------------------------------------------------------------------
(iii) Post-transaction distribution. (A) During 2007, foreign
surviving corporation does not accumulate any earnings and profits or
pay or accrue any foreign income taxes. On December 31, 2007, foreign
surviving corporation distributes 600u to its shareholders. Under the
rules of paragraph (c)(3) of this section, the distribution is out of
pre-pooling annual layers under the LIFO method as follows:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Two Side-by-Side Layers of 2006 E&P:
2006 layer 1 (from Corp A)..................... 500u 350u
2006 layer 2 (from Corp B)..................... 100u 20u
-------------------
600u 370u
------------------------------------------------------------------------
(B) Foreign surviving corporation's foreign income tax accounts are
reduced to reflect the distribution of earnings and profits
notwithstanding that no shareholders are eligible to claim deemed paid
foreign income taxes under section 902. See Sec. 1.902-1(a)(10)(iii).
(C) Immediately after the distribution, foreign surviving
corporation has the following earnings and profits and foreign income
taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Two Side-by-Side Layers of 2005 E&P:
2005 layer 1 (from Corp A)..................... 400u 300u
2005 layer 2 (from Corp B)..................... 300u 60u
Two Side-by-Side Layers of 2004 E&P:
2004 layer 1 (from Corp A)..................... 400u 160u
2004 layer 2 (from Corp B)..................... 0u 50u
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1 (from Corp A)..................... 100u 5u
2003 layer 2 (from Corp B)..................... 50u 5u
-------------------
1,250u 580u
------------------------------------------------------------------------
Example 2. (i) Facts. (A) The facts are the same as in Example 1
(i)(A), except that foreign corporation A met the requirements of
section 902(c)(3)(B) on January 1, 2005, when U.S. corporate shareholder
C acquired an additional 1% of voting stock for a total ownership
interest of 10%; foreign corporation A thereby became a pooling
corporation. On December 31, 2006, foreign corporations A and B have the
following earnings and profits and foreign income taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Foreign Corporation A:
Post-1986 pool.................................. 900u $650
2004............................................ 400u 160u
2003............................................ 100u 5u
-------------------
1,400u ........
===================
Foreign Corporation B:
2006............................................ 100u 20u
2005............................................ 300u 60u
2004............................................ 0u 50u
2003............................................ 50u 5u
-------------------
450u 135u
------------------------------------------------------------------------
(B) On January 1, 2007, foreign corporation B acquires the assets of
foreign corporation A in a reorganization described in section
368(a)(1)(C). Immediately following the foreign section 381 transaction,
foreign surviving corporation is a nonpooling corporation that does not
meet the requirements of section 902(c)(3)(B).
(ii) Result. Under the rules described in paragraphs (e)(2)(i) and
(ii) of this section,
[[Page 496]]
foreign surviving corporation has the following earnings and profits and
foreign income taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Two Side-by-Side Layers of 2006 E&P:
2006 layer 1 (from Corp A's pool).............. 900u $650
2006 layer 2 (from Corp B's layer)............. 100u 20u
2005 (from Corp B):............................. 300u 60u
Two Side-by-Side Layers of 2004 E&P:
2004 layer 1 (from Corp A)..................... 400u 160u
2004 layer 2 (from Corp B)..................... 0u 50u
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1 (from Corp A)..................... 100u 5u
2003 layer 2 (from Corp B)..................... 50u 5u
-------------------
1,850u
------------------------------------------------------------------------
(iii) Subsequent ownership change. On July 1, 2010, USS (a domestic
corporation) acquires 100% of the stock of foreign surviving
corporation. Under the rules of paragraph (f)(3) of this section,
foreign surviving corporation begins to pool its earnings and profits
under section 902(c)(3) as of January 1, 2010. Foreign surviving
corporation's earnings and profits and foreign income taxes accrued
before January 1, 2010 retain their character as pre-1987 accumulated
profits and pre-1987 foreign income taxes.
Example 3. (i) Facts. (A) The facts are the same as in Example
2(i)(A), except that on December 31, 2006, foreign corporations A and B
have the following earnings and profits and foreign income taxes:
------------------------------------------------------------------------
Foreign
E&P Taxes
------------------------------------------------------------------------
Foreign Corporation A:
Post-1986 pool.................................. 1,000u $500
2004............................................ (200u) 10u
2003............................................ 400u 5u
-------------------
1,200u ........
===================
Foreign Corporation B
2006............................................ 300u 20u
2005............................................ (100u) 60u
2004............................................ 0u 50u
2003............................................ 50u 5u
-------------------
250u 135u
------------------------------------------------------------------------
(B) On January 1, 2007, foreign corporation B acquires the assets of
foreign corporation A in a reorganization described in section
368(a)(1)(C). Immediately following the foreign section 381 transaction,
foreign surviving corporation is a nonpooling corporation that does not
meet the requirements of section 902(c)(3)(B).
(ii) Result. Because foreign corporations A and B have aggregate
positive amounts of pre-1987 accumulated profits with a deficit in one
or more years, the rules of paragraph (e)(2)(iii)(B) of this section
apply. Accordingly, after the foreign section 381 transaction, foreign
surviving corporation has the following earnings and profits and foreign
income taxes:
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
Foreign taxes
Positive Deficit E&P taxes associated
E&P available with
deficit E&P
----------------------------------------------------------------------------------------------------------------
Two Side-by-Side Layers of 2006 E&P:
2006 layer 1 (from Corp A's pool)...................... 1,000u ........... $500 ...........
2006 layer 2 (from Corp B's layer)..................... 300u ........... 20u
2005 (from Corp B)...................................... ........... (100u) ........... 60u
Two Side-by-Side Layers of 2004 E&P:
2004 layer 1 (from Corp A)............................. ........... (200u) ........... 10u
2004 layer 2 (from Corp B)............................. 0u ........... 50u ...........
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1 (from Corp A)............................. 400u ........... 5u ...........
2003 layer 2 (from Corp B)............................. 50u ........... 5u ...........
---------------------------------------------------
1,750u (300u) ........... 70u
----------------------------------------------------------------------------------------------------------------
(iii) Post-transaction distribution. (A) During 2007, foreign
surviving corporation does not accumulate any earnings and profits or
pay or accrue any foreign income taxes. On December 31, 2007, foreign
surviving corporation distributes 1,300u to its shareholders. Under the
rules described in paragraphs (c)(3) and (e)(2)(iii)(B) of this section,
the distribution is out of the pre-pooling annual layers, as follows:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Two Side-by-Side Layers of 2006 E&P:
2006 layer 1................................... 1,000u $500
2006 layer 2................................... 250u 20u
2003 E&P:
-------------------
2003 layer 1................................... 50u 1.25u
(25% of
5u
taxes)
[[Page 497]]
1,300u ........
------------------------------------------------------------------------
(B) Under paragraph (e)(2)(iii)(B) of this section, the rules
otherwise applicable when a foreign corporation has an aggregate
positive (or zero) amount of pre-1987 accumulated profits, but a deficit
in one or more years, apply separately to the pre-1987 accumulated
profits and related pre-1987 foreign income taxes of foreign corporation
A and foreign corporation B. As a result, distributions out of the pre-
pooling annual layers of foreign corporation A and foreign corporation B
cannot exceed the aggregate positive amount of pre-1987 accumulated
profits of each corporation. Accordingly, only 1,200u and 250u can be
distributed out of foreign corporation A's and foreign corporation B's
pre-pooling annual layers, respectively. Thus, 1,000u of the
distribution is out of foreign corporation A's 2006 layer 1 and 250u is
out of foreign corporation B's 2006 layer 2 (after rolling forward
(50u) of the deficit in 2005 layer to reduce earnings in 2006 layer 1
to 250u (300u-50u)). Under the principles of Sec. 1.902-1(b)(3), all of
the taxes in each of those respective layers are reduced. The remaining
50u is distributed from foreign corporation A's 2003 layer 1 (after
rolling back the (200u) deficit in 2004 layer 1 to reduce earnings in
2003 layer 1 to 200u (400u-200u)). Thus, after the distribution, 150u
remains in the 2003 layer 1 along with 3.75u of foreign income taxes
(5u x (150u/200u)).
(C) Foreign surviving corporation's foreign income tax accounts are
reduced to reflect the distribution of earnings and profits
notwithstanding that no shareholders are eligible to claim a credit for
deemed paid foreign income taxes under section 902. See Sec. 1.902-
1(a)(10)(iii).
(D) Immediately after the distribution, foreign surviving
corporation has the following earnings and profits and foreign income
taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
2005................................................ 0u 60u
Two Side-by-Side Layers of 2004 E&P:
2004 layer 1................................... 0u 10u
2004 layer 2................................... 0u 50u
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1................................... 150u 3.75u
2003 layer 2................................... 0u 5u
-------------------
150u 128.75u
------------------------------------------------------------------------
(E) Under paragraph (e)(2)(iii)(B) of this section, the 60u, 10u,
50u, and 5u of foreign income taxes related to foreign surviving
corporation's 2005 layer, 2004 layer 1, 2004 layer 2, and 2003 layer
2, respectively, remain in those layers. These foreign income taxes
generally will not be reduced or deemed paid unless a foreign tax refund
restores a positive balance to the associated earnings pursuant to
section 905(c), and thus will be trapped. See Sec. 1.902-2(b)(2).
Example 4. (i) Facts. (A) The facts are the same as in Example 2
(i)(A), except that on December 31, 2006, foreign corporations A and B
have the following earnings and profits and foreign income taxes:
------------------------------------------------------------------------
Foreign
E&P Taxes
------------------------------------------------------------------------
Foreign Corporation A:
Post-1986 pool.................................. (1,000u) $20
2004............................................ (200u) 10u
2003............................................ 400u 5u
-------------------
(800u)
Foreign Corporation B:
===================
2006............................................ 100u 20u
2005............................................ 300u 60u
2004............................................ 0u 50u
2003............................................ 50u 5u
-------------------
450u 135u
------------------------------------------------------------------------
(B) On January 1, 2007, foreign corporation A acquires the assets of
foreign corporation B in a reorganization described in section
368(a)(1)(C). Immediately following the foreign section 381 transaction,
foreign surviving corporation is a nonpooling corporation.
(ii) Result. (A) Under paragraph (e)(2)(i) of this section, foreign
corporation A's post-1986 pool is recharacterized as a 2006 layer of
pre-1987 accumulated profits. Because after the foreign section 381
transaction foreign corporation A has an aggregate deficit in pre-1987
accumulated profits, the rules of paragraph (e)(2)(iii)(C) of this
section apply and the rules otherwise applicable apply separately to the
pre-1987 accumulated profits that carry over to foreign surviving
corporation from foreign corporation A. The (800u) aggregate deficit in
foreign corporation A's pre-1987 accumulated profits is a hovering
deficit that will offset only post-transaction earnings accumulated by
foreign surviving corporation in the general category. Accordingly,
after the foreign section 381 transaction, foreign surviving corporation
has the following earnings and profits and foreign income taxes:
[[Page 498]]
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
Positive Foreign taxes
E&P Deficit E&P taxes associated
available deficit E&P
----------------------------------------------------------------------------------------------------------------
Hovering deficit from Corp A's annual layers................ ........... (800u) ........... 0
Two Side-by-Side Layers of 2006 E&P:
2006 layer 1 (from Corp A's pool)...................... ........... 0u ........... $20
2006 layer 2 (from Corp B's layer)..................... 100u ........... 20u ...........
2005 (from Corp B)...................................... 300u ........... 60u ...........
Two Side-by-Side Layers of 2004 E&P:
2004 layer 1 (from Corp A)............................. ........... 0u ........... 10u
2004 layer 2 (from Corp B)............................. 0u ........... 50u ...........
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1 (from Corp A)............................. 0u ........... 5u ...........
2003 layer 2 (from Corp B)............................. 50u ........... 5u ...........
---------------------------------------------------
450u (800u) 140u ...........
----------------------------------------------------------------------------------------------------------------
(B) Under paragraph (e)(2)(iii)(C) of this section, the $20, 10u,
and 5u of pre-1987 foreign income taxes associated with foreign
corporation A's pre-1987 accumulated profits for 2006 layer 1, 2004
layer 1, and 2003 layer 1, respectively, remain in those layers. These
foreign income taxes generally will not be reduced or deemed paid unless
a foreign tax refund restores a positive balance to the associated
earnings pursuant to section 905(c), and thus will be trapped. See Sec.
1.902-2(b)(2).
(iii) Post-transaction distribution. (A) During 2007, foreign
surviving corporation does not accumulate any earnings and profits or
pay or accrue any foreign income taxes. On December 31, 2007, foreign
surviving corporation distributes 200u to its shareholders. Under the
rules described in paragraph (e)(2)(iii)(C) of this section, no
distribution can be made out of the pre-1987 accumulated profits of
foreign corporation A (and the (800u) aggregate hovering deficit will
offset only post-transaction earnings accumulated by foreign surviving
corporation). Thus, the distribution is out of pre-pooling annual layers
as follows:
------------------------------------------------------------------------
Foreign
E&P taxes
paid
------------------------------------------------------------------------
2006 layer 2....................................... 100u 20u
2005................................................ 100u 20u
-------------------
200u 40u
------------------------------------------------------------------------
(B) Foreign surviving corporation's foreign income tax accounts are
reduced to reflect the distribution of earnings and profits
notwithstanding that no shareholders are eligible to claim deemed paid
foreign income taxes under section 902. See Sec. 1.902-1(a)(10)(iii).
(C) Immediately after the distribution, foreign surviving
corporation has the following earnings and profits and foreign income
taxes:
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
Foreign taxes
Positive Deficit E&P taxes associated
E&P available with
deficit E&P
----------------------------------------------------------------------------------------------------------------
Hovering deficit from Corp A's annual layers................ ........... (800u) ........... 0
Two Side-by-Side Layers of 2006 E&P:
2006 layer 1 (from Corp A's pool)...................... ........... 0u ........... $20
2006 layer 2 (from Corp B's layer)..................... 0u ........... 0u ...........
2005 (from Corp B)...................................... 200u ........... 40u ...........
Two Side-by-Side Layers of 2004 E&P:
2004 layer 1 (from Corp A)............................. ........... 0u ........... 10u
2004 layer 2 (from Corp B)............................. 0u ........... 50u ...........
Two Side-by-Side Layers of 2003 E&P:
2003 layer 1 (from Corp A)............................. 0u ........... 5u ...........
2003 layer 2 (from Corp B)............................. 50u ........... 5u ...........
250u (800u) 140u ...........
----------------------------------------------------------------------------------------------------------------
(f) Special rules--(1) Treatment of deficit--(i) General rule. Any
deficit described in paragraph (d)(2), (e)(1)(iii), or (e)(2)(iii) of
this section shall not be
[[Page 499]]
taken into account in determining current or accumulated earnings and
profits of a foreign surviving corporation other than to offset post-
transaction accumulated earnings, as defined in paragraph (d)(2)(ii) of
this section, including for purposes of calculating--
(A) The earnings and profits limitation of section 952(c)(1)(A); and
(B) The amount of the foreign surviving corporation's subpart F
income as defined in section 952(a).
(ii) Exceptions. The rule in paragraph (i) shall not apply for
purposes of calculating an earnings and profits limitation under section
952(c)(1)(B) or (C).
(iii) Examples. The following examples illustrate the principles of
this paragraph (f)(1). The examples assume the following facts: foreign
corporation A, incorporated in 2002, is and always has been a wholly
owned subsidiary of USP, a domestic corporation. Foreign corporation B,
incorporated in 2004, is and always has been a wholly owned subsidiary
of foreign corporation A. Both foreign corporation A and foreign
corporation B are organized under the laws of foreign country X and have
always had a calendar taxable year. Foreign corporations A and B (and
all of their respective qualified business units as defined in section
989) maintain a ``u'' functional currency. Unless otherwise stated, any
earnings and profits or deficit in earnings and profits of foreign
corporation A and B in the general category are attributable to subpart
F income derived from foreign base company sales income. Foreign
corporation C is a wholly owned subsidiary of USP2 and was organized in
2004 under the laws of foreign country Y. Foreign corporation C (and all
of its qualified business units as defined in section 989) maintains a
``u'' functional currency. Earnings and profits of foreign corporation C
in the general category are not attributable to subpart F income. The
examples are as follows:
Example 1. (i) Facts. (A) On December 31, 2007, foreign corporations
A and B have the following post-1986 undistributed earnings and post-
1986 foreign income taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Foreign Corporation A Separate Category:
General......................................... (100u) $25
Foreign Corporation B Separate Category:
General......................................... 0u $10
------------------------------------------------------------------------
(B) On January 1, 2008, foreign corporation B elects under Sec.
301.7701-3(c) of this chapter to be disregarded as an entity separate
from foreign corporation A. Accordingly, foreign corporation B is deemed
to have distributed all its property to foreign corporation A in a
liquidation described in section 332.
(ii) Result. Under the rules described in paragraphs (d)(1) and (2)
of this section, foreign surviving corporation A has the following post-
1986 undistributed earnings and post-1986 foreign income taxes:
----------------------------------------------------------------------------------------------------------------
Earnings & profits: Foreign taxes:
---------------------------------------------------
Foreign
taxes
Separate category Positive Hovering Foreign associated
E&P deficit taxes with
available hovering
deficit
----------------------------------------------------------------------------------------------------------------
General..................................................... 0u (100u) $10 $25
----------------------------------------------------------------------------------------------------------------
(iii) Post-transaction earnings and subpart F limitations. (A) In
its taxable year ending on December 31, 2008, foreign surviving
corporation A earns 300u of subpart F general category income with
respect to which it pays $50 in foreign income taxes. The hovering
deficit of (100u) meets the requirements under section 952(c)(1)(B) and
therefore is taken into account as a qualified deficit that may be used
by USP to offset a portion of its income inclusion related to foreign
surviving corporation A's subpart F income of 300u in the 2008 taxable
year. Accordingly, USP includes 200u in taxable income for the year and
is eligible for a deemed paid foreign tax credit under section 960 of
$40 (200u subpart F inclusion/300 post-1986 undistributed earnings in
the general category = 66.67%, x $60 foreign income taxes in the general
category = $40). USP will also include the deemed paid foreign taxes of
$40 in taxable income for the year as a deemed dividend pursuant to
section 78. The 100u offset under section 952(c)(1)(B) does not result
in a reduction of the hovering deficit for purposes of section 316 or
section 902.
[[Page 500]]
(B) Foreign surviving corporation A's 100u of subpart F income not
included in income by USP will accumulate and be added to its post-1986
undistributed earnings as of the beginning of 2009. This 100u of post-
transaction earnings will be offset by the (100u) hovering deficit.
Because the amount of earnings offset by the hovering deficit is 100% of
the total amount of the hovering deficit, all $25 of the related taxes
are added to the post-1986 foreign income taxes pool as well.
Accordingly, foreign surviving corporation A has the following post-1986
undistributed earnings and post-1986 foreign income taxes on January 1,
2009:
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
taxes
Separate category Positive Hovering Foreign associated
E&P deficit taxes with
available hovering
deficit
----------------------------------------------------------------------------------------------------------------
General..................................................... 0u (0u) $45 $0
----------------------------------------------------------------------------------------------------------------
(C) The 200u included as subpart F income constitutes previously
taxed earnings under section 959.
Example 2. (i) Facts. (A) On July 1, 2007, foreign corporation B
elects under Sec. 301.7701-3(c) of this chapter to be disregarded as an
entity separate from foreign corporation A. Accordingly, foreign
corporation B is deemed to have distributed all of its property to
foreign corporation A in a liquidation described in section 332.
(B) Neither foreign corporation A nor B has any post-1986
undistributed earnings or post-1986 foreign income taxes as of the
beginning of the 2007 taxable year. For its short taxable year ending on
June 30, 2007, foreign corporation B has the following post-1986
undistributed earnings and post-1986 foreign income taxes:
Foreign Corporation B
------------------------------------------------------------------------
Foreign
Separate category E&P taxes
------------------------------------------------------------------------
General............................................. (200u) $30
------------------------------------------------------------------------
(C) For the 2007 taxable year, foreign surviving corporation A earns
a total of 200u of subpart F foreign based company sales income in the
general category with respect to which it pays $40 in foreign income
taxes.
(ii) Result. (A) Under paragraph (d)(2) of this section, foreign
corporation B's (200u) deficit carries over to foreign surviving
corporation A as a hovering deficit. Nevertheless, because it is a
deficit of a qualified chain member for a taxable year ending within the
2007 taxable year of foreign surviving corporation A, the (200u) deficit
meets the requirements under section 952(c)(1)(C) and therefore may
still be taken into account for purposes of limiting foreign surviving
corporation A's subpart F income. Accordingly, foreign surviving
corporation A's 200u of subpart F income for the 2007 taxable year is
fully offset by the (200u) deficit of foreign corporation B, and USP
will have no subpart F income inclusion for the 2007 taxable year. The
offset under section 952(c)(1)(C) does not result in a reduction of the
hovering deficit for purposes of section 316 or section 902. The
hovering deficit may not also be taken into account under section
952(c)(1)(B).
(B) Because USP has no subpart F income inclusion, foreign surviving
corporation A's subpart F earnings of 200u will accumulate and be added
to its post-1986 undistributed earnings as of the beginning of 2008.
Under the rules of paragraph (f)(5) of this section, a pro rata amount,
in this case 50% or 100u, will be deemed to have been accumulated prior
to the foreign section 381 transaction and the other 50%, or 100u, will
be deemed to have been accumulated after the foreign section 381
transaction. The 100u of post-transaction earnings will be offset by
(100u) of the hovering deficit for purposes of determining the opening
balance of the post-1986 undistributed earnings pool in 2008. Because
the amount of earnings offset by the hovering deficit is 50% of the
total amount of the hovering deficit, $15 (50% of $30) of the related
taxes are added to the post-1986 foreign income taxes pool as well. The
100u of pre-transaction earnings remain in the post-1986 undistributed
earnings pool. Accordingly, foreign surviving corporation A has the
following post-1986 undistributed earnings and post-1986 foreign income
taxes on January 1, 2008:
[[Page 501]]
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
taxes
Separate category Positive Hoverinig Foreign associated
E&P deficit taxes with
available hovering
deficit
----------------------------------------------------------------------------------------------------------------
General..................................................... 100u (100u) $55 $15
----------------------------------------------------------------------------------------------------------------
Example 3. (i) Facts. (A) On January 1, 2007, foreign corporation B
and foreign corporation C have the following post-1986 undistributed
earnings and post-1986 foreign income taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Foreign Corporation B Separate Category:
General......................................... (100u) $0
Foreign Corporation C Separate Category:
General......................................... 0u $10
------------------------------------------------------------------------
(B) On July 1, 2007, foreign corporation B acquires the assets of
foreign corporation C in a reorganization described in section
368(a)(1)(C). Immediately following the foreign section 381 transaction,
foreign surviving corporation B is a CFC.
(C) During the 2007 taxable year foreign surviving corporation B has
a current deficit of (400u) and $60 of related foreign income taxes.
During its short taxable year ending on June 30, 2007, foreign
corporation C has no additional earnings and pays or accrues no foreign
income taxes.
(ii) Result. (A) Under the rules of paragraph (f)(5) of this
section, a pro rata amount, in this case 50% or (200u), of foreign
surviving corporation B's (400u) current year deficit for the 2007
taxable year will be deemed to have been accumulated prior to the
foreign section 381 transaction and be treated as a hovering deficit.
The other 50%, or (200u) of the deficit will be deemed to have been
accumulated after the foreign section 381 transaction. The related
foreign income taxes of $60 will also be allocated on a similar 50/50
basis.
(B) Under the rules described in paragraphs (d)(1) and (2) of this
section, foreign surviving corporation B has the following post-1986
undistributed earnings and post-1986 foreign income taxes as of January
1, 2008:
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
taxes
Separate category Hovering Foreign assoicated
E&P deficit taxes with
available hovering
deficit
----------------------------------------------------------------------------------------------------------------
General..................................................... (200u) (300u) $40 $30
----------------------------------------------------------------------------------------------------------------
(iii) Subpart F income limitations. Even though (200u) of the
current year deficit is treated as a hovering deficit, the full (400u)
current year deficit in 2007 of foreign surviving corporation B meets
the requirements under section 952(c)(1)(C) and therefore is available
as a limitation on subpart F income, to the extent foreign corporation
A, which wholly owns foreign surviving corporation B, earns any subpart
F income in the 2007 taxable year. Any such offset under section
952(c)(1)(C) will have no effect on the earnings and profits and foreign
income tax accounts above of foreign surviving corporation B for
purposes of sections 316 and 902. Moreover, to the extent the hovering
deficit reduces subpart F income under section 952(c)(1)(C), it may not
also be taken into account under section 952(c)(1)(B).
(2) Reconciling taxable years. If a foreign acquiring corporation
and a foreign target corporation had taxable years ending on different
dates, then the pro rata distribution rules of paragraphs (e)(1)(ii) and
(e)(2)(ii) of this section shall apply with respect to the taxable years
that end within the same calendar year.
(3) Post-transaction change of status. If a foreign surviving
corporation that is subject to the rules of paragraph (c)(2) of this
section subsequently becomes a pooling corporation (by reason, for
example, of a reorganization, liquidation, or change of ownership), then
post-1986 undistributed earnings and post-1986 foreign income taxes that
were recharacterized as pre-1987 accumulated profits and pre-1987
foreign income taxes, respectively, under paragraph
[[Page 502]]
(e)(2)(i) of this section retain their characterization as a pre-pooling
annual layer.
(4) Ordering rule for multiple hovering deficits--(i) Rule. A
foreign surviving corporation shall apply the deficit rules of
paragraphs (d)(2), (e)(1)(iii), and (e)(2)(iii) of this section in that
order if more than one of such rules applies to the foreign surviving
corporation.
(ii) Example. The following example illustrates the principles of
this paragraph (f)(4). The example assumes the following facts: Foreign
corporation A has been a pooling corporation since its incorporation on
January 1, 1998. Foreign corporation B has been a nonpooling corporation
since its incorporation on January 1, 2000. Foreign corporations A and B
have always had calendar taxable years. Foreign corporations A and B
(and all of their respective qualified business units as defined in
section 989) maintain a ``u'' functional currency. All earnings and
profits of foreign corporation B are in the general category. Finally,
unless otherwise stated, any earnings and profits in the passive
category resulted from a look-through dividend that was paid by a lower-
tier CFC out of earnings accumulated when the CFC was a noncontrolled
section 902 corporation and that qualified for the subpart F same-
country exception under section 954(c)(3)(A). The example is as follows:
Example. (i) Facts. (A) On December 31, 2006, foreign corporations A
and B have the following earnings and profits and foreign income taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Foreign Corporation A Post-1986 Pool Separate
Category:
Passive......................................... 400u $160
General......................................... (300u) 25
-------------------
100u 185
Foreign Corporation B:
2006............................................ (300u) 50u
2005............................................ 100u 25u
-------------------
(200u) 75u
------------------------------------------------------------------------
(B) On January 1, 2007, foreign corporation B acquires the assets of
foreign corporation A in a reorganization described in section
368(a)(1)(C). Immediately following the foreign section 381 transaction,
foreign surviving corporation is a CFC.
(ii) Result. Under the rules described in paragraphs (d)(1), (d)(2),
(e)(1)(i), (e)(1)(ii), and (e)(1)(iii) of this section, foreign
surviving corporation has the following earnings and profits and foreign
income taxes:
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
taxes
Positive Hovering Foreign associated
E&P deficit taxes with
availabe hovering
deficit
----------------------------------------------------------------------------------------------------------------
Post-1986 pool separate category:
Passive................................................. 400u ........... $160 ...........
General................................................. ........... (300u) ........... $25
Carryforward pre-pooling deficit from Corp B............ ........... (200u) ........... 0
2006 (from Corp B)...................................... 0u ........... 50u ...........
2005 (from Corp B)...................................... 0u ........... 25u ...........
---------------------------------------------------
400u (500u) ........... $25
----------------------------------------------------------------------------------------------------------------
(iii) Post-transaction earnings. (A) In the taxable year ending on
December 31, 2007, foreign surviving corporation accumulates earnings
and profits and pays related foreign income taxes as follows:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Post-1986 pool separate category:
Passive......................................... 150u $40
General......................................... 400u 60
-------------------
550u 100
------------------------------------------------------------------------
(B) None of the earnings and profits qualify as subpart F income as
defined in section 952(a). Under paragraph (f)(4)(i) of this section,
the rules of paragraph (d)(2) of this section apply before the rules of
paragraph (e)(1)(iii) of this section. Accordingly, post-transaction
earnings in a separate category are first offset by a hovering deficit
in the same separate category in the post-1986 pool. Thus, foreign
surviving corporation's (300u) deficit in the general category offsets
300u of post-transaction earnings in the general category. After
application of paragraph (d)(2)
[[Page 503]]
of this section, the (200u) deficit in the general category carried
forward from foreign corporation B's pre-pooling aggregate deficit
offsets the remaining 100u of post-transaction earnings in the general
category. Accordingly, foreign surviving corporation has the following
earnings and profits and foreign income taxes at the end of 2007:
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
taxes
Positive Hovering Foreign associated
E&P deficit taxes with
available hovering
deficit
----------------------------------------------------------------------------------------------------------------
Post-1986 pool separate category:
Passive................................................. 550u ........... $200 ...........
General................................................. ........... ........... $85 ...........
Carryforward pre-pooling deficit from Corp B................ ........... (100u) ........... $0
2006 (from Corp B).......................................... 0u ........... 50u ...........
2005 (from Corp B).......................................... 0u ........... 25u ...........
---------------------------------------------------
550u (100u) ........... $0
----------------------------------------------------------------------------------------------------------------
(C) Under paragraph (d)(2)(iii) of this section, all of the $25 of
post-1986 foreign income taxes related to the (300u) hovering deficit in
the general category is added to the foreign surviving corporation's
post-1986 foreign income taxes of $60 in that category (because post-
transaction earnings in the general category have exceeded the deficit
in that category). Under paragraph (e)(1)(iii)(C) of this section, the
50u and 25u of foreign income taxes associated with foreign corporation
B's pre-1987 accumulated profits for 2006 and 2005 remain in those
layers. These foreign income taxes generally will not be reduced or
deemed paid unless a foreign tax refund restores a positive balance to
the associated earnings pursuant to section 905(c), and thus will be
trapped. See Sec. 1.902-2(b)(2).
(5) Pro rata rule for earnings and deficits during transaction year.
(i) For purposes of offsetting post-transaction earnings of a foreign
surviving corporation under the rules described in paragraphs (d)(2),
(e)(1)(iii), and (e)(2)(iii) of this section, the earnings and profits,
and any related foreign income taxes, in each separate category for the
taxable year of the foreign surviving corporation in which the
transaction occurs shall be deemed to have been accumulated after such
transaction in an amount which bears the same ratio to the undistributed
earnings and profits of the foreign surviving corporation for such
taxable year (computed without regard to any earnings and profits
carried over) as the number of days in the taxable year after the date
of transaction bears to the total number of days in the taxable year.
See, e.g., Sec. 1.381(c)(2)-1(a)(7) Example 2 (illustrating application
of this rule with respect to domestic corporations).
(ii) For purposes of determining the amount of pre-transaction
deficits described in paragraphs (d)(2), (e)(1)(iii), and (e)(2)(iii) of
this section, of a foreign surviving corporation that has a deficit in
earnings and profits in any separate category for its taxable year in
which the transaction occurs, unless the actual accumulated earnings and
profits, or deficit, as of such date can be shown, such pre-transaction
deficit, and any related foreign income taxes, shall be deemed to have
accumulated in a manner similar to that described in paragraph (f)(5)(i)
of this section. See, e.g., Sec. 1.381(c)(2)-1(a)(7) Example 4
(illustrating application of this rule with respect to domestic
corporations).
(g) Effective date. This section shall apply to section 367(b)
transactions that occur on or after November 6, 2006.
[T.D. 9273, 71 FR 44985, Aug. 8, 2006; 71 FR 57889, Oct. 2, 2006, as
amended at 71 FR 70876, Dec. 7, 2006]
Sec. 1.367(b)-8 Allocation of earnings and profits and foreign
income taxes in certain foreign corporate separations. [Reserved]
Sec. 1.367(b)-9 Special rule for F reorganizations and similar
transactions.
(a) Scope. This section applies to a foreign section 381 transaction
(as defined in Sec. 1.367(b)-7(a)) either--
(1) That is described in section 368(a)(1)(F); or
(2) That involves--
[[Page 504]]
(i) At least one foreign corporation that holds no property and has
no tax attributes immediately before the transaction, other than a
nominal amount of assets (and related tax attributes) to facilitate its
organization or preserve its existence as a corporation; and
(ii) No more than one foreign corporation that holds more than a
nominal amount of property or has more than a nominal amount of tax
attributes immediately before the transaction.
(b) Hovering deficit rules inapplicable. If a transaction is
described in paragraph (a) of this section, a foreign surviving
corporation shall succeed to earnings and profits, deficits in earnings
and profits, and foreign income taxes without regard to the hovering
deficit rules of Sec. 1.367(b)-7(d)(2), (e)(1)(iii), and (e)(2)(iii).
(c) Foreign divisive transactions. [Reserved]
(d) Examples. The following examples illustrate the principles of
this section:
Example 1. (i) Facts. (A) Foreign corporation A is and always has
been a wholly owned subsidiary of USP, a domestic corporation. Foreign
corporation A was incorporated in 1995, and has always had a calendar
taxable year. Foreign corporation A (and all of its respective qualified
business units as defined in section 989) maintains a ``u'' functional
currency. On December 31, 2006, foreign corporation A has the following
post-1986 undistributed earnings and post-1986 foreign income taxes:
------------------------------------------------------------------------
Foreign
Separate Category E&P taxes
------------------------------------------------------------------------
Passive............................................. (1,000u) $5
General............................................. 200u 200
-------------------
(800u) 205
------------------------------------------------------------------------
(B) On January 1, 2007, foreign corporation A moves its place of
incorporation from Country 1 to Country 2 in a reorganization described
in section 368(a)(1)(F).
(ii) Result. Under Sec. 1.367(b)-7(d), as modified by paragraph (b)
of this section, the pre-transaction deficit of foreign corporation A
will not hover. Accordingly, foreign surviving corporation has the
following post-1986 undistributed earnings and post-1986 foreign income
taxes immediately after the foreign section 381 transaction:
------------------------------------------------------------------------
Foreign
Separate category E&P taxes
------------------------------------------------------------------------
Passive............................................. (1,000u) $5
General............................................. 200u 200
-------------------
(800u) 205
------------------------------------------------------------------------
Example 2. (i) Facts. (A) Foreign corporations B, C and D are and
always have been wholly owned subsidiaries of USP, a domestic
corporation. Foreign corporation B was incorporated in 2000 and foreign
corporations C and D were incorporated in 2001. Foreign corporation B
does not own any significant property and has no earnings and profits or
foreign income taxes accounts. Both foreign corporations C and D have
always had a calendar taxable year. Foreign corporations C and D (and
all of their respective qualified business units as defined in section
989) maintain a ``u'' functional currency. On December 31, 2006, foreign
corporations C and D have the following post-1986 undistributed earnings
and post-1986 foreign income taxes:
------------------------------------------------------------------------
Foreign
E&P taxes
------------------------------------------------------------------------
Foreign corporation C Separate Category:
Passive......................................... (900u) $50
General......................................... (200u) 100
-------------------
(1100u) 150
===================
Foreign corporation D Separate Category:
Passive......................................... 1200u 400
General......................................... 400u 100
-------------------
1600u 500
------------------------------------------------------------------------
(B) On January 1, 2007, USP foreign corporations C and D merge into
foreign corporation B in a reorganization described in section
368(a)(1)(A).
(ii) Result. Although the merger is a foreign section 381
transaction involving a foreign corporation with no property or tax
attributes, paragraph (b) of this section does not apply because more
than one foreign corporation with significant tax attributes is involved
in the foreign section 381 transaction. Accordingly, under Sec.
1.367(b)-7(d), foreign surviving corporation B has the following post-
1986 undistributed earnings and post-1986 foreign income taxes
immediately after the foreign section 381 transaction:
[[Page 505]]
----------------------------------------------------------------------------------------------------------------
Earnings & profits Foreign taxes
---------------------------------------------------
Foreign
taxes
Separate Category Positive Hovering Foreign associated
E&P deficit taxes with
available hovering
deficit
----------------------------------------------------------------------------------------------------------------
General..................................................... 1200u (900u) $400 $50
Passive..................................................... 400u (200u) 100 100
---------------------------------------------------
1600u (1100u) 500 150
----------------------------------------------------------------------------------------------------------------
(e) Effective date. This section shall apply to section 367(b)
transactions that occur on or after November 6, 2006.
[T.D. 9273, 71 FR 44913, Aug. 8, 2006]
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 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
[[Page 506]]
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
[[Page 507]]
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.
(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.
[T.D. 9526, 76 FR 28893, May 19, 2011]
Sec. 1.367(b)-12 Subsequent treatment of amounts attributed
or included in income.
(a) In general. This section applies to distributions with respect
to, or a disposition of, stock--
(1) To which, in connection with an exchange occurring before
February 23, 2000, an amount has been attributed pursuant to Sec.
7.367(b)-9 or 7.367(b)-10 of this chapter (as in effect prior to
February 23, 2000, see 26 CFR part 1 revised as of April 1, 1999); or
(2) In respect of which, before February 23, 2000, an amount has
been included in income or added to earnings and profits pursuant to
Sec. 7.367(b)-7 or Sec. 7.367(b)-10 of this chapter (as in effect
prior to February 23, 2000, see 26 CFR part 1 revised as of April 1,
1999).
(b) Applicable rules. See Sec. 7.367(b)-12(b) through (e) of this
chapter (as in effect prior to January 11, 2001, see 26 CFR part 1
revised as of April 1, 2000) for purposes of applying paragraph (a) of
this section.
(c) Effective date. This section applies to distributions or
dispositions that occur on or after January 11, 2001.
[T.D. 8937, 66 FR 2257, Jan. 11, 2001]
Sec. 1.367(b)-13 Special rules for determining basis and holding
period.
(a) Scope and definitions--(1) Scope. This section provides special
basis and holding period rules to determine the basis and holding period
of stock of certain foreign surviving corporations held by a controlling
corporation whose stock is issued in an exchange under section 354 or
356 in a triangular reorganization. This section applies to transactions
that are subject to section 367(b) as well as section 367(a), including
transactions concurrently subject to sections 367(a) and (b).
[[Page 508]]
(2) Definitions. For purposes of this section, the following
definitions apply:
(i) A block of stock has the meaning provided in Sec. 1.1248-2(b).
(ii) The terms P, S, and T have the meanings set forth in Sec.
1.358-6(b)(1)(i), (ii), and (iii), respectively.
(iii) A triangular reorganization is a reorganization described in
Sec. 1.358-6(b)(2)(i), (ii), or (iii), or (v) (a forward triangular
merger, triangular C reorganization, reverse triangular merger, or
triangular G reorganization, respectively).
(b) Determination of basis for exchanges of foreign stock or
securities under section 354 or 356. For rules determining the basis of
stock or securities in a foreign corporation received in a section 354
or 356 exchange, see Sec. 1.358-2.
(c) Determination of basis and holding period for triangular
reorganizations--(1) Application. In the case of a triangular
reorganization described in paragraph (a)(2)(ii) of this section, this
paragraph (c) applies, if--
(i)(A) Immediately before the transaction, either P is a section
1248 shareholder with respect to S, or P is a foreign corporation and a
United States person is a section 1248 shareholder with respect to both
P and S; and
(B) In the case of a reverse triangular merger, P's exchange of S
stock is not described in Sec. 1.367(b)-3(a) and (b) or in Sec.
1.367(b)-4(b)(1)(i), (2)(i), or (3); or
(ii)(A) Immediately before the transaction, a shareholder of T is a
section 1248 shareholder with respect to T, or a shareholder of T is a
foreign corporation and a United States person is a section 1248
shareholder with respect to both such foreign corporation and T; and
(B) With respect to at least one of the exchanging shareholders
described in paragraph (c)(1)(ii)(A) of this section, the exchange of T
stock is not described in Sec. 1.367(b)-3(a) and (b) or in Sec.
1.367(b)-4(b)(1)(i), (2)(i), or (3).
(2) Basis and holding period rules. In the case of a triangular
reorganization described in paragraph (c)(1) of this section, each share
of stock of the surviving corporation (S or T) held by P must be divided
into portions attributable to the S stock and the T stock immediately
before the exchange. See paragraph (e) of this section Examples 1
through 4 for illustrations of this rule.
(i) Portions attributable to S stock--(A) In the case of a forward
triangular merger, a triangular C reorganization, or a triangular G
reorganization, the basis and holding period of the portion of each
share of surviving corporation stock attributable to the S stock is the
basis and holding period of such share of stock immediately before the
exchange.
(B) In the case of a reverse triangular merger, the basis and
holding period of the portion of each share of surviving corporation
stock attributable to the S stock is the basis and the holding period
immediately before the exchange of a proportionate amount of the S stock
to which the portion relates. If P is a shareholder described in
paragraph (c)(1)(i)(A) of this section with respect to S, and P
exchanges two or more blocks of S stock pursuant to the transaction,
then each share of the surviving corporation (T) attributable to the S
stock must be further divided into separate portions to account for the
separate blocks of stock in S.
(C) If the value of S stock immediately before the triangular
reorganization is less than one percent of the value of the surviving
corporation stock immediately after the triangular reorganization, then
P may determine its basis in the surviving corporation stock by applying
the rules of paragraph (c)(2)(ii) of this section to determine the basis
and holding period of the surviving corporation stock attributable to
the T stock, and then increasing the basis of each share of surviving
corporation stock by the proportionate amount of P's aggregate basis in
the S stock immediately before the exchange (without dividing the stock
of the surviving corporation into separate portions attributable to the
S stock).
(ii) Portions attributable to T stock--(A) If any exchanging
shareholder of T stock is described in paragraph (c)(1)(ii) of this
section, the basis and holding period of the portion of each share of
stock in the surviving corporation attributable to the T stock is the
basis and holding period immediately before the exchange of a
proportionate amount of the T stock to which such
[[Page 509]]
portion relates. If any exchanging shareholder of T stock is described
in paragraph (c)(1)(ii) of this section, and such shareholder exchanges
two or more blocks of T stock pursuant to the transaction, then each
share of surviving corporation stock attributable to the T stock must be
further divided into separate portions to account for the separate
blocks of T stock.
(B) If no exchanging shareholder of T stock is described in
paragraph (c)(1)(ii) of this section, the rules of Sec. 1.358-6 apply
to determine the basis of the portion of each share of the surviving
corporation attributable to T immediately before the exchange.
(d) Special rules applicable to divided shares of stock--(1) In
general--(i) Shares of stock in different blocks are aggregated into one
divided portion for basis purposes, if such shares immediately before
the exchange are owned by one or more shareholders that are--
(A) Not section 1248 shareholders with respect to the corporation;
or
(B) Foreign corporate shareholders, provided that no United States
persons are section 1248 shareholders with respect to both such foreign
corporate shareholders and the corporation.
(ii) For purposes of determining the amount of gain realized on the
sale or exchange of stock that has a divided portion pursuant to
paragraph (c) of this section, any amount realized on such sale or
exchange will be allocated to each divided portion of the stock based on
the relative fair market value of the stock to which the portion is
attributable at the time the portions were created. See paragraph (e)
Example 5 of this section.
(iii) Shares of stock will no longer be required to be divided if
section 1248 or section 964(e) would not apply to a disposition or
exchange of such stock.
(2) Pre-exchange earnings and profits. All earnings and profits (or
deficits) accumulated by a foreign corporation before the reorganization
and attributable to a share (or block) of stock for purposes of section
1248 are attributable to the divided portion of stock with the basis and
holding period of that share (or block). See Sec. 1.367(b)-4(d).
(3) Post-exchange earnings and profits. Any earnings and profits (or
deficits) accumulated by the surviving corporation subsequent to the
reorganization are attributed to each divided share of stock pursuant to
section 1248 and the regulations thereunder. The amount of earnings and
profits (or deficits) attributable to a divided share of stock is
further attributed to the divided portions of such share of stock based
on the relative fair market value of each divided portion of stock. See
paragraph (e) Example 5 of this section.
(e) Examples. The rules of this section are illustrated by the
following examples:
Example 1. Blocks of stock exchanged in a triangular reorganization.
(i) Facts. (A) US1, a domestic corporation, owns all the stock of F1, a
foreign corporation. F1 owns all the stock of FT, a foreign corporation,
with 100 shares of stock outstanding. Each share of FT stock is valued
at $10x. Because F1 acquired the stock of FT at two different dates, F1
owns two blocks of FT stock for purposes of section 1248. The first
block consists of 60 shares. The shares in the first block have a basis
of $300x ($5x per share), a holding period of 10 years, and $240x ($4x
per share) of earnings and profits attributable to the shares for
purposes of section 1248. The second block consists of 40 shares. The
shares in the second block have a basis of $600x ($15x per share), a
holding period of 2 years, and $80x ($2x per share) of earnings and
profits attributable to the shares for purposes of section 1248.
(B) US2, a domestic corporation, owns all of the stock of FP, a
foreign corporation, which owns all of the stock of FS, a foreign
corporation. FP owns two blocks of FS stock. Each block consists of 10
shares with a value of $200x ($20x per share). The shares in the first
block have a basis of $50x ($5x per share), a holding period of 10
years, and $50x ($5x per share) of earnings and profits attributable to
such shares for purposes of section 1248. The shares in the second block
had a basis of $100x ($10x per share), a holding period of 5 years, and
$20x ($2x per share) of earnings and profits attributable to such shares
for purposes of section 1248.
(C) FT merges into FS, with FS surviving, and F1 receives 50 shares
of FP stock with a value of $1,000x in exchange for its FT stock. The
merger of FT into FS qualifies as forward triangular merger, and
immediately after the exchange US1 is a section 1248 shareholder with
respect to F1, the exchanging shareholder, FP and FS, all of which are
controlled foreign corporations.
(ii) Basis and holding period determination. (1) US1 is a section
1248 shareholder of F1, the exchanging shareholder, and FT (both of
which are controlled foreign corporations)
[[Page 510]]
immediately before the transaction. Moreover, F1 is not required to
include amounts in income under Sec. 1.367(b)-3(b) or 1.367(b)-4(b) as
described in paragraph (c)(1)(ii)(B) of this section. Accordingly, the
basis and holding period of the FS stock held by FP immediately after
the triangular reorganization is determined pursuant to paragraph (c) of
this section.
(2) Pursuant to paragraph (c) of this section, each share of FS
stock is divided into portions attributable to the basis and holding
period of the FS stock held by FP immediately before the exchange (the
FS portion) and the FT stock held by F1 immediately before the exchange
(the FT portion). The basis and holding period of the FS portion is the
basis and holding period of the FS stock held by FP immediately before
the exchange. Thus, each share of FS stock in the first block has a
portion with a basis of $5x, a value of $20x, a holding period of 10
years, and $5x of earnings and profits attributable to such portion for
purposes of section 1248. Each share of FS stock in the second block has
a portion with a basis of $10x, a value of $20x, a holding period of 5
years, and $2x of earnings and profits attributable to such portion for
purposes of section 1248.
(3) Because the exchanging shareholder of FT stock (F1) has a
section 1248 shareholder (US1), the holding period and basis of the FT
portion is the holding period and the proportionate amount of the basis
of the FT stock immediately before the exchange to which such portion
relates. Further, because F1 exchanged two blocks of FT stock, the FT
portion must be divided into two separate portions attributable to the
two blocks of FT stock. Thus, each share of FS stock will have a second
portion with a basis of $15x ($300x basis / 20 shares), a value of $30x
($600x value / 20 shares), a holding period of 10 years, and $12x of
earnings and profits ($240x / 20 shares) attributable to such portion
for purposes of section 1248. Each share of FS stock will have a third
portion with a basis of $30x ($600x basis / 20 shares), a value of $20x
($400x value / 20 shares), a holding period of 2 years, and $4x of
earnings and profits ($80x / 20 shares) attributable to such portion for
purposes of section 1248.
(iii) Subsequent disposition--first block. Assume, immediately after
the transaction, FP disposes of a share of FS stock from the first
block. When FP disposes of any share of its FS stock, it is treated as
disposing of each divided portion of such share. With respect to the
first portion (attributable to the FS stock), FP recognizes a gain of
$15x ($20x value - $5x basis), $5x of which is treated as a dividend
under section 1248. With respect to the second portion (attributable to
the first block of FT stock), FP recognizes a gain of $15x ($30x value -
$15x basis), $12x of which is treated as a dividend under section 1248.
With respect to the third portion (attributable to the second block of
FT stock), FP recognizes a capital loss of $10x ($20x value - $30x
basis).
(iv) Subsequent disposition--second block. Assume further,
immediately after the transaction, FP also disposes of a share of stock
from the second block of FS stock. With respect to the first portion
(attributable to the FS stock), FP recognizes a gain of $10x ($20x value
- $10x basis), $2x of which is treated as a dividend under section 1248.
With respect to the second portion (attributable to the first block of
FT stock), FP recognizes a gain of $15x ($30x value - $15x basis), $12x
of which is treated as a dividend under section 1248. With respect to
the third portion (attributable to the second block of FT stock), FP
recognizes a capital loss of $10x ($20x value - $30x basis).
Example 2. (i) Facts. The facts are the same as in Example 1, except
that FS merges into FT with FT surviving in a reverse triangular merger.
Pursuant to the merger, F1 receives FP stock with a value of $1,000x in
exchange for its FT stock, and FP receives 10 shares of FT stock with a
value of $1,000x in exchange for its FS stock. Immediately after the
exchange, US1 is a section 1248 shareholder with respect to F1, the
exchanging shareholder, FP, and FT, all of which are controlled foreign
corporations.
(ii) Basis and holding period determination--(A) The basis and
holding period of the stock of the surviving corporation held by FP are
the same as in Example 1, except that each share of the surviving
corporation (FT, instead of FS) will be divided into four portions
instead of three portions. Because FP exchanges two blocks of FS stock,
the FS portion must be divided into two separate portions attributable
to the two blocks of FS stock. Because F1 exchanges two blocks of FT
stock, the FT portion must be divided into two separate portions
attributable to the two blocks of FT stock.
(B) Thus, each share of the surviving corporation (FT) will have a
first portion (attributable to the first block of FS stock) with a basis
of $5x ($50x / 10 shares), a value of $20x ($200x / 10 shares), a
holding period of 10 years, and $5x of earnings and profits ($50x / 10
shares) attributable to such portion for purposes of section 1248. Each
share of FT stock will have a second portion (attributable to the second
block of FS stock) with a basis of $10x ($100x / 10 shares), a value of
$20x ($200x / 10 shares), a holding period of 5 years, and $2x of
earnings and profits ($20x / 10 shares) attributable to such portion for
purposes of section 1248. Moreover, each share of FT stock will have a
third portion (attributable to the first block of FT stock) with a basis
of $30x ($300x basis / 10 shares), a value of $60x ($600x value / 10
shares), a holding period of 10 years, and $24x of earnings and profits
($240x / 10 shares) attributable to such portion for purposes of section
[[Page 511]]
1248. Lastly, each share of FT stock will have a fourth portion
(attributable to the second block of FT stock) with a basis of $60x
($600x basis / 10 shares), a value of $40x ($400x value / 10 shares), a
holding period of 2 years, and $8x of earnings and profits ($80x / 10
shares) attributable to such portion for purposes of section 1248.
Example 3. (i) Facts. USP, a domestic corporation, owns all the
stock of FS, a foreign corporation with 10 shares of stock outstanding.
Each share of FS stock has a value of $10x, a basis of $5x, a holding
period of 10 years, and $7x of earnings and profits attributable to such
share for purposes of section 1248. FP, a foreign corporation, owns the
stock of FT, another foreign corporation. FP and FT do not have any
section 1248 shareholders. FT has assets with a value of $100x, a basis
of $50x, and no liabilities. The FT stock held by FP has a value of
$100x and a basis of $75x. FT merges into FS with FS surviving in a
forward triangular merger. Pursuant to the reorganization, FP receives
USP stock with a value of $100x in exchange for its FT stock.
(ii) Basis and holding period determination--(A) Because USP is a
section 1248 shareholder of FS immediately before the transaction, the
basis and holding period of the FS stock held by USP immediately after
the triangular reorganization is determined pursuant to paragraph (c) of
this section.
(B) Pursuant to paragraph (c) of this section, each share of FS
stock is divided into portions attributable to the basis and holding
period of the FS stock held by USP immediately before the exchange (the
FS portion) and the FT portion immediately before the exchange. Because
FT does not have a section 1248 shareholder immediately before the
transaction, the rules of Sec. 1.358-6 apply to determine the basis of
the FT portion of each share of FS stock. Those rules determine the
basis of FS stock held by USP by reference to the basis of FT's net
assets. The basis and holding period of the FS portion is the basis and
holding period of the FS stock held by USP immediately before the
exchange. Thus, each share of FS stock has a portion with a basis of
$5x, a value of $10x, a holding period of 10 years, and $7x of earnings
and profits attributable to such portion for section 1248 purposes. The
basis of the FT portion is the basis of the FT assets to which such
portion relates. Thus, each share of FS stock has a second portion with
a basis of $5x ($50x basis in FT's assets / 10 shares) and a value of
$10x ($100x value of FT's assets / 10 shares). All of FS's earnings and
profits prior to the transaction ($70x) is attributed solely to the FS
portion in each share of FS stock. As a result of each share of stock
being divided into portions, the basis of the FS stock is not averaged
with the basis of the FT assets to increase the section 1248 amount with
respect to the stock of the surviving corporation (FS).
Example 4. (i) Facts. US, a domestic corporation, owns all of the
stock of FT, a foreign corporation. The FT stock held by US constitutes
a single block of stock with a value of $1,000x, a basis of $600x, and
holding period of 5 years. USP, a domestic corporation, forms FS, a
foreign corporation, pursuant to the plan of reorganization and
capitalizes it with $10x of cash. FS merges into FT with FT surviving in
a reverse triangular merger and a reorganization described in section
368(a)(1)(B). Pursuant to the reorganization, US receives USP stock with
a value of $1,000x in exchange for its FT stock, and USP receives 10
shares of FT stock with a value of $1,010x in exchange for its FS stock.
(ii) Basis and holding period determination. (A) US and USP are
section 1248 shareholders of FT and FS, respectively, immediately before
the transaction. Neither US nor USP is required to include amounts in
income under Sec. 1.367(b)-3(b) or 1.367(b)-4(b) as described in
paragraph (c)(1)(i)(B) or (c)(1)(ii)(B) of this section. The basis and
holding period of the FT stock held by USP is determined pursuant to
paragraph (c) of this section.
(B) Pursuant to paragraph (c) of this section, because the
exchanging shareholder of FT stock (US) is a section 1248 shareholder of
FT, each share of the surviving corporation (FT) has a proportionate
amount of the basis and holding period of the FT stock immediately
before the exchange to which such share relates. Thus, the portion of
each share of FT stock attributable to the FT stock has a basis of $60x
($600x basis / 10 shares), a value of $100x ($1,000x value / 10 shares),
and a holding period of 5 years. Because the value of FS stock
immediately before the triangular reorganization ($10x) is less than one
percent of the value of the surviving corporation (FT) immediately after
the triangular reorganization ($1,010x), USP may determine its basis in
the stock of the surviving corporation (FT) attributable to its FS stock
basis held prior to the reorganization by increasing the basis of each
share of FT stock by the proportionate amount of USP's aggregate basis
in the FS stock immediately before the exchange (without dividing each
share of FT stock into separate portions to account for FS and FT). If
USP so elects, USP's basis in each share of FT stock is increased by $1x
($10x basis in FS stock / 10 shares). As a result, each share of FT
stock has a basis of $61x, a value of $101x, and a holding period of 5
years.
Example 5. (i) Facts. US, a domestic corporation, owns all of the
stock of F1, a foreign corporation, which owns all the stock of FT, a
foreign corporation. The FT stock held by F1 constitutes one block of
stock with a basis of $170x, a value of $200x, a holding period of 5
years, and $10x of earnings and profits attributable to such stock for
purposes of
[[Page 512]]
section 1248. FP, a foreign corporation, owns all the stock of FS, a
foreign corporation. FS has 10 shares of stock outstanding. No United
States person is a section 1248 shareholder with respect to FP or FS.
The FS stock held by FP has a value of $100x and a basis of $50x ($5x
per share). FT merges into FS with FS surviving in a forward triangular
merger. Pursuant to the merger, F1 receives FP stock with a value of
$200x for its FT stock in an exchange that qualifies for non-recognition
under section 354. US is a section 1248 shareholder with respect to F1,
the exchanging shareholder, FP, and FS (all of which are controlled
foreign corporations) immediately after the exchange.
(ii) Basis and holding period determination. (A) Because US is a
section 1248 shareholder of F1, the exchanging shareholder, and FT
immediately before the transaction, and US is a section 1248 shareholder
of F1, FP, and FS immediately after the transactions, F1 is not required
to include amounts in income under Sec. Sec. 1.367(b)-3(b) and
1.367(b)-4(b) as described in paragraph (c)(1)(ii)(B) of this section.
Thus, the basis and holding period of the FS stock held by FP
immediately after the triangular reorganization is determined pursuant
to paragraph (c) of this section.
(B) Pursuant to paragraph (c) of this section, each share of FS
stock is divided into portions attributable to the basis and holding
period of the FS stock held by FP immediately before the exchange (the
FS portion) and the FT stock held by F1 immediately before the exchange
(the FT portion). The basis and holding period of the FS portion is the
basis and holding period of the FS stock held by FP immediately before
the exchange. Thus, each share of FS stock has a portion with a basis of
$5x and a value of $10x. Because the exchanging shareholder of FT stock
(F1) has a section 1248 shareholder of both F1 and FT, the basis and
holding period of the FT portion is the proportionate amount of the
basis and the holding period of the FT stock immediately before the
exchange to which such portion relates. Thus, each share of FS stock
will have a second portion with a basis of $17x ($170x basis / 10
shares), a value of $20x ($200x value / 10 shares), a holding period of
5 years, and $1x of earnings and profits ($10x earnings and profits / 10
shares) attributable to such portion for purposes of section 1248.
(iii) Subsequent disposition. (A) Several years after the merger, FP
disposes of all of its FS stock in a transaction governed by section
964(e). At the time of the disposition, FS stock has decreased in value
to $210x (a post-merger reduction in value of $90x), and FS has incurred
a post-merger deficit in earnings and profits of $30x.
(B) Pursuant to paragraph (d)(1)(ii) of this section, for purposes
of determining the amount of gain realized on the sale or exchange of
stock that has a divided portion, any amount realized on such sale or
exchange is allocated to each divided portion of the stock based on the
relative fair market value of the stock to which the portion is
attributable at the time the portions were created. Immediately before
the merger, the value of the FS stock in relation to the value of both
the FS stock and the FT stock was one-third ($100x / ($100x plus
$200x)). Likewise, immediately before the merger, the value of the FT
stock in relation to the value of both the FT stock and the FS stock was
two-thirds ($200x / $100x plus $200x). Accordingly, one-third of the
$210x amount realized is allocated to the FS portion of each share and
two-thirds to the FT portion of each share. Thus, the amount realized
allocated to the FS portion of each share is $7x (one-third of $210x
divided by 10 shares). The amount realized allocated to the FT portion
of each share is $14x (two-thirds of $210x divided by 10 shares).
(C) Pursuant to paragraph (d)(3) of this section, any earnings and
profits (or deficits) accumulated by the surviving corporation
subsequent to the reorganization are attributed to the divided portions
of shares of stock based on the relative fair market value of each
divided portion of stock. Accordingly, one-third of the post-merger
earnings and profits deficit of $30x is allocated to the FS portion of
each share and two-thirds to the FT portion of each share. Thus, the
deficit in earnings and profits allocated to the FS portion of each
share is $1x (one-third of $30x divided by 10 shares). The deficit in
earnings and profits allocated to the FT portion of each share is $2x
(two-thirds of $30x divided by 10 shares).
(D) When FP disposes of its FS stock, FP is treated as disposing of
each divided portion of a share of stock. With respect to the FS portion
of each share of stock, FP recognizes a gain of $2x ($7x value - $5x
basis), which is not recharacterized as a dividend because a deficit in
earnings and profits of $1x is attributable to such portion for purposes
of section 1248. With respect to the FT portion of each share of stock,
FP recognizes a loss of $3x ($14x value - $17x basis).
(f) Effective date. This section applies to exchanges occurring on
or after January 23, 2006.
[T.D. 9243, 71 FR 4289, Jan. 26, 2006, as amended by T.D. 9400, 73 FR
30303, May 27, 2008; T.D. 9446, 74 FR 6958, Feb. 11, 2009]
Sec. 1.367(d)-1 Transfers of intangible property to foreign
corporations.
(a) [Reserved]. For further guidance, see Sec. 1.367(d)-1T(a).
(b) Property subject to section 367(d). Section 367(d) and the rules
of this section apply to the transfer of intangible
[[Page 513]]
property, as defined in Sec. 1.367(a)-1(d)(5), by a U.S. person to a
foreign corporation in an exchange described in section 351 or 361. See
section 367(a) and the regulations thereunder for the rules that apply
to the transfer of any property other than intangible property.
(c)(1) through (2) [Reserved]. For further guidance, see Sec.
1.367(d)-1T(c)(1) and (2).
(3) Useful life--(i) In general. For purposes of determining the
period of inclusions for deemed payments under Sec. 1.367(d)-1T(c)(1),
the useful life of intangible property is the entire period during which
exploitation of the intangible property is reasonably anticipated to
affect the determination of taxable income, as of the time of transfer.
Exploitation of intangible property includes any direct or indirect use
or transfer of the intangible property, including use without further
development, use in the further development of the intangible property
itself (and any exploitation of the further developed intangible
property), and use in the development of other intangible property (and
any exploitation of the other developed intangible property).
(ii) Procedure to limit inclusions to 20 years. In cases where the
useful life of the transferred property is indefinite or is reasonably
anticipated to exceed twenty years, taxpayers may, in lieu of including
amounts during the entire useful life of the intangible property, choose
in the year of transfer to increase annual inclusions during the 20-year
period beginning with the first year in which the U.S. transferor takes
into account income pursuant to section 367(d), to reflect amounts that,
but for this paragraph (c)(3)(ii), would have been required to be
included following the end of the 20-year period. See Sec. 1.6038B-
1(d)(1)(iv) for guidance on reporting this choice of method. If the
taxpayer applies this method during the 20-year period, no adjustments
will be made for taxable years beginning after the conclusion of the 20-
year period. However, for purposes of determining whether amounts
included during the 20-year period are commensurate with the income
attributable to the transferred intangible property, the Commissioner
may take into account information with respect to taxable years after
that period, such as the income attributable to the transferred property
during those later years. The application of this paragraph (c)(3)(ii)
must be reflected in a statement (titled ``Application of 20-Year
Inclusion Period to Section 367(d) Transfers'') attached to a timely
filed original federal income tax return (including extensions) for the
year of the transfer. An increase to the deemed payment rate made
pursuant to this paragraph (c)(3)(ii) will be irrevocable, and a failure
to timely file the statement under this paragraph (c)(3)(ii) may not be
remedied.
(iii) Example. Property subject to section 367(d) is transferred
from USP, a domestic corporation, to FA, a foreign corporation wholly
owned by USP. The useful life of the transferred property, inclusive of
derivative works, at the time of transfer is indefinite but is
reasonably anticipated to exceed 20 years. In the first five years
following the transfer, sales related to the property are expected to be
$100x, $130x, $160x, $180x and $187.2x, respectively. Thereafter, for
the remainder of the property's useful life, sales are expected to grow
by four percent annually. In the first five years following the
transfer, operating profits attributable to the property are expected to
be $5x, $8x, $11x, $12.5x, and $13x, respectively. Thereafter, for the
remainder of the property's useful life, operating profits are expected
to grow by four percent annually. It is determined that the appropriate
discount rate for sales and operating profits is 10 percent. The present
value of operating profits through the property's indefinite useful life
is $185x. The present value of sales through the property's indefinite
useful life is $2698x. Accordingly, the sales based royalty rate during
the property's useful life is 6.8 percent ($185x/$2698x). The taxpayer
may choose to take income inclusions into account over a 20-year period.
The present value of sales through the 20-year period is $1787x.
Accordingly, the sales based royalty rate under the 20-year option is
increased to 10.3 percent ($185x/$1787x).
(c)(4) through (g)(2) (introductory text) [Reserved]. For further
guidance,
[[Page 514]]
see Sec. 1.367(d)-1T(c)(4) through (g)(2) (introductory text).
(g)(2)(i) The intangible property transferred constitutes an
operating intangible, as defined in Sec. 1.367(a)-1(d)(6).
(g)(2)(ii) through (iii)(D) [Reserved]. For further guidance, see
Sec. 1.367(d)-1T(g)(2)(ii) through (iii)(D).
(E) The transferred intangible property will be used in the active
conduct of a trade or business outside of the United States within the
meaning of Sec. 1.367(a)-2 and will not be used in connection with the
manufacture or sale of products in or for use or consumption in the
United States.
(g)(2)(iii) undesignated concluding paragraph [Reserved]. For
further guidance, see Sec. 1.367(d)-1T(g)(2)(iii) undesignated
concluding paragraph.
(3) Intangible property transferred from branch with previously
deducted losses. (i) If income is required to be recognized under
section 904(f)(3) and the regulations thereunder or under Sec.
1.367(a)-6 upon the transfer of intangible property of a foreign branch
that had previously deducted losses, then the income recognized under
those sections with respect to that property is credited against amounts
that would otherwise be required to be recognized with respect to that
same property under paragraphs (c) through (f) of this section in either
the current or future taxable years. The amount recognized under section
904(f)(3) or Sec. 1.367(a)-6 with respect to the transferred intangible
property is determined in accordance with the following formula:
[GRAPHIC] [TIFF OMITTED] TR16DE16.038
(ii) For purposes of the formula in paragraph (g)(3)(i) of this
section, the ``loss recapture income'' is the total amount required to
be recognized by the U.S. transferor pursuant to section 904(f)(3) or
Sec. 1.367(a)-6. The ``gain from intangible property'' is the total
amount of gain realized by the U.S. transferor pursuant to section
904(f)(3) and Sec. 1.367(a)-6 upon the transfer of items of property
that are subject to section 367(d). ``Gain from intangible property''
does not include gain realized with respect to intangible property by
reason of an election under paragraph (g)(2) of this section. The ``gain
from all branch assets'' is the total amount of gain realized by the
transferor upon the transfer of items of property of the branch for
which gain is realized.
(g)(4) through (i) [Reserved]. For further guidance, see Sec.
1.367(d)-1T(g)(4) through (i).
(j) Effective/applicability dates. This section applies to transfers
occurring on or after September 14, 2015, and to transfers occurring
before September 14, 2015, resulting from entity classification
elections made under Sec. 301.7701-3 that are filed on or after
September 14, 2015. For transfers occurring before this section is
applicable, see Sec. 1.367(d)-1T as contained in 26 CFR part 1 revised
as of April 1, 2016.
[T.D. 9803, 81 FR 91029, Dec. 16, 2016]
Sec. 1.367(d)-1T Transfers of intangible property to foreign
corporations (temporary).
(a) Purpose and scope. This section provides rules under section
367(d) concerning transfers of intangible property by U.S. persons to
foreign corporations pursuant to section 351 or 361. Paragraph (b) of
this section specifies the transfers that are subject to section 367(d)
and the rules of this section, while paragraph (c) provides rules
concerning the consequences of such a transfer. In general, the U.S.
transferor will be treated as receiving annual payments contingent on
productivity or use of the transferred property, over the useful life of
the property (regardless of whether such payments are in fact made by
the transferee). Paragraphs (d), (e), and (f) of this section provide
rules for cases in which there is a later direct or indirect disposition
of the intangible property transferred. In
[[Page 515]]
general, deemed annual license payments will continue if a transfer is
made to a related person, while gain must be recognized immediately if
the transfer is to an unrelated person. Paragraph (g) of this section
provides several special rules, including a rule allowing appropriate
adjustments where deemed payments under section 367(d) are not in fact
received by the U.S. transferor of the intangible property, and a rule
providing for a limited election to treat certain transfers of
intangible property as sales at fair market value (in lieu of applying
the general useful life-contingent payment rule). In addition, paragraph
(g) of this section provides rules coordinating the application of
section 367(d) with other relevant Code sections. Paragraph (h) of this
section defines the term related person for purposes of this section.
Finally, paragraph (i) of this section provides the effective date of
this section. For rules concerning transfers of intangible property
pursuant to section 332, see Sec. 1.367(a)-5T(e). For purposes of
determining whether a U.S. person has made a transfer of intangible
property that is subject to the rules of section 367(d), the rules of
Sec. 1.367(a)-1T(c) shall apply.
(b) [Reserved]
(c) Deemed payments upon transfer of intangible property to foreign
corporation--(1) In general. If a U.S. person transfers intangible
property that is subject to section 367(d) and the rules of this section
to a foreign corporation in an exchange described in section 351 or 361,
then such person shall be treated as having transferred that property in
exchange for annual payments contingent on the productivity or use of
the property. Such person shall, over the useful life of the property,
annually include in gross income an amount that represents an
appropriate arms-length charge for the use of the property. The
appropriate charge shall be determined in accordance with the provisions
of section 482 and regulations thereunder. See Sec. 1.482-2(d). The
amount of the deemed payment thus calculated shall be reduced by any
royalty or other periodic payment made or accrued by the transferee to
an unrelated person during that taxable year for the right to use the
intangible property. Amounts so included in the transferor's income
shall be treated as ordinary income from sources within the United
States. For purposes of computing estimated tax payments, deemed
payments under this paragraph (c) shall be treated as received by the
transferor on the last day of its taxable year.
(2) Required adjustments. The following adjustments shall be made
with respect to a U.S. person's recognition of a deemed payment for the
use of intangible property under this paragraph (c):
(i) For purposes of chapter 1 of the Code, the earnings and profits
of the transferee foreign corporation shall be reduced by the amount of
such deemed payment; and
(ii) For purposes of subpart F of part III of subchapter N of the
Code, the transferee foreign corporation may treat such deemed payment
as an expense (whether or not that amount is actually paid), properly
allocated and apportioned to gross income subject to subpart F, in
accordance with the provisions of Sec. Sec. 1.954-1(c) and 1.861-8.
No other special adjustments to earning the profits, basis, or gross
income shall be permitted by reason of the recognition of a deemed
payment under this paragraph (c). However, see paragraph (g)(1) of this
section for rules permitting the establishment of an account receivable
with respect to deemed payments not actually received by the U.S.
person.
(3) [Reserved]
(4) Blocked income. No deemed payment included in a taxpayer's
income under paragraph (c)(1) of this section shall be treated as
deferrable income for purposes of applying rules relating to blocked
foreign income. See Revenue Ruling 74-351, 1974-2 C.B. 144.
(d) Subsequent transfer of stock of transferee foreign corporation
to unrelated person--(1) Treatment as sale of intangible property. If a
U.S. person transfers intangible property that is subject to section
367(d) and the rules of this section to a foreign corporation in an
exchange described in section 351 or 361, and within the useful life of
the intangible property that U.S. transferor subsequently disposes of
the stock of the transferee foreign corporation to a
[[Page 516]]
person that is not a related person (within the meaning of paragraph (h)
of this section), then the U.S. transferor shall be treated as having
simultaneously sold the intangible property to the person acquiring the
stock of the transferee foreign corporation. The U.S. transferor shall
be required to recognize gain (but not loss) from sources within the
United States in an amount equal to the difference between the fair
market value of the transferred intangible property on the date of the
subsequent disposition and the U.S. transferor's former adjusted basis
in that property (determined as of the original transfer). If the U.S.
transferor's disposition of the stock of the transferee foreign
corporation is subject to U.S. tax other than by reason of this
paragraph (d), then the amount of gain otherwise required to be
recognized with respect to the stock of the transferee foreign
corporation shall be reduced by the amount of gain recognized with
respect to the intangible property pursuant to this paragraph (d).
(2) Required adjustments. If a U.S. person disposes of the stock of
a transferee foreign corporation, and under paragraph (d)(1) of this
section is treated as having simultaneously sold intangible property,
then, for purposes of computing basis and earnings and profits, the
person acquiring the stock of the transferee foreign corporation shall
be deemed to have purchased that property at fair market value and to
have immediately thereafter contributed it to the transferee foreign
corporation in a transaction not covered by section 367(d). Therefore,
for purposes of chapter 1 of the Code--
(i) The transferee foreign corporation's basis in the intangible
property will be equal to its fair market value (as calculated for
purposes of determining the gain required to be recognized by the U.S.
transferor);
(ii) The acquiring person's basis in the stock of the transferee
foreign corporation shall be determined as if no portion of the
consideration given by the acquiring person for the stock is
attributable to the intangible property; and
(iii) The earnings and profits of the transferee foreign corporation
will not be affected by the transfer of its stock or the deemed transfer
to it of the intangible property.
(e) Subsequent transfer of stock of transferee foreign corporation
to related person--(1) Transfer to related U.S. person treated as
disposition of intangible property. If a U.S. person transfers
intangible property that is subject to section 367(d) and the rules of
this section to a foreign corporation in an exchange described in
section 351 or 361 and, within the useful life of the transferred
intangible property, that U.S. transferor subsequently transfers the
stock of the transferee foreign corporation to U.S. persons that are
related to the transferor within the meaning of paragraph (h) of this
section, then the following rules shall apply:
(i) Each such related U.S. person shall be treated as having
received (with the stock of the transferee foreign corporation) a right
to receive a proportionate share of the contingent annual payments that
would otherwise be deemed to be received by the U.S. transferor under
paragraph (c) of this section.
(ii) Each such related U.S. person shall, over the useful life of
the property, annually include in gross income a proportionate share of
the amount that would have been included in the income of the U.S.
transferor pursuant to paragraph (c) of this section. Such amounts shall
be treated as ordinary income from sources within the United States.
(iii) The amount of income required to be recognized by the U.S.
transferor pursuant to the rule of paragraph (d)(1) of this section
shall be reduced to the amount determined in accordance with the
following formula:
(d)(1) amount x (100% - (e) percentage)
For purposes of the above formula, the (d)(1) amount is the income that
would otherwise be required to be recognized by the transferor
corporation pursuant to paragraph (d)(1) of this section, and the (e)
percentage is the percentage of the transferor corporation's total
deemed rights to receive contingent annual payments under paragraph (c)
of this section that is deemed to be transferred to related U.S. persons
under the rules of this paragraph (e).
[[Page 517]]
(iv) The rules of paragraphs (d) and (e) of this section shall be
reapplied in the case of any later transfer of the stock of the
transferee foreign corporation by a related U.S. person that received
such stock in a transfer that was subject to the rules of this paragraph
(e). For purposes of reapplying the rules of paragraphs (d) and (e),
each such related U.S. person shall be treated as a U.S. transferor of
intangible property to the transferee foreign corporation (to the extent
of the interest attributed to such person pursuant to subdivision (i) of
this paragraph (e)(1)).
(2) Required adjustments. If a U.S. person transfers stock of a
transferee foreign corporation to a U.S. related person in a transaction
that is subject to the rules of paragraph (e)(1) of this section, the
following adjustments shall be made:
(i) For purposes of chapter 1 of the Code, the earnings and profits
of the transferee foreign corporation shall be reduced by the amount of
any payment deemed to be received by a related U.S. person under
paragraph (e)(1)(ii) of this section;
(ii) For purposes of subpart F of part III of subchapter N of the
Code, the transferee foreign corporation may allocate and apportion such
deemed payments (whether or not such payments are actually made to gross
income subject to subpart F to the extent appropriate under the
provisions of Sec. Sec. 1.954-1(c) and 1.861-8;
(iii) For purposes of reapplying the rules of paragraph (d) and (e)
of this section, if the related U.S. person is deemed to have received a
right to contingent annual payments for the use of intangible property,
then the U.S. related person shall be deemed to have held a
proportionate share of the property with a basis equal to a
proportionate share of the U.S. transferor's adjusted basis plus the
gain, if any, recognized by the U.S. transferor on the earlier transfer
of the stock to the U.S. related person, and then to have transferred
that proportionate share of the property to the foreign corporation in a
transfer subject to section 367(d); and
(iv) If the U.S. transferor is itself required to recognize gain
upon the transfer by reason of the operation of paragraphs (d)(1) and
(e)(1)(iii) of this section (because stock of the transferee foreign
corporation is also transferred to unrelated persons), then those
unrelated persons shall be deemed to have purchased a proportionate
share of the transferred intangible property at fair market value and
immediately contributed that property to the transferee foreign
corporation, consistent with the general rule of paragraph (d)(2) of
this section concerning transfers of stock to unrelated persons.
Therefore, for purposes of chapter 1 of the Code--
(A) Each unrelated person's basis in the stock of the transferee
foreign corporation shall be increased to the extent of the gain
recognized by the U.S. transferor upon the deemed purchase of intangible
property by that person; and
(B) The transferee foreign corporation will receive an increase in
its basis in the transferred intangible property equal to the fair
market value of that portion of the intangible property deemed to be
contributed to the transferee foreign corporation by unrelated persons
(as calculated for purposes of determining the gain required to be
recognized by the U.S. transferor).
(3) Transfer to related foreign person not treated as disposition of
intangible property. If a U.S. person transfers intangible property that
is subject to section 367(d) and the rules of this section to a foreign
corporation in an exchange described in section 351 or 361, and within
the useful life of the transferred intangible property, that U.S.
transferor subsequently transfers any of the stock of the transferee
foreign corporation to one or more foreign persons that are related to
the transferor within the meaning of paragraph (h) of this section, then
the U.S. transferor shall continue to include in its income the deemed
payments described in paragraph (c) of this section in the same manner
as if the subsequent transfer of stock had not occurred. The rule of
this paragraph (e)(3) shall not apply with respect to the subsequent
transfer by the U.S. person of any of the remaining stock to any related
U.S. person or unrelated person.
(4) Proportionate share. For purposes of this paragraph (e), any
``proportionate share'' shall be determined by reference to the fair
market value (at
[[Page 518]]
the time of the original transfer) of the stock of the transferee
foreign corporation that was transferred by the U.S. transferor and the
fair market value of all of the stock of the transferee foreign
corporation originally received by the U.S. transferor.
(f) Subsequent disposition of transferred intangible property by
transferee foreign corporation--(1) In general. If a U.S. person
transfers intangible property that is subject to section 367(d) and the
rules of this section to a foreign corporation in an exchange described
in section 351 or 361, and within the useful life of the intangible
property that transferee foreign corporation subsequently disposes of
the intangible property to an unrelated person, then--
(i) The U.S. transferor of the intangible property (or any person
treated as such pursuant to paragraph (e)(1) of this section) shall be
required to recognize gain from U.S. sources (but not loss) in an amount
equal to the difference between the fair market value of the transferred
intangible property on the date of the subsequent disposition and the
U.S. transferor's former adjusted basis in that property (determined as
of the orginial transfer); and
(ii) The U.S. transferor shall be required to recognize a deemed
payment under paragraph (c) of this section for that part of its taxable
year that the intangible property was held by the transferee foreign
corporation and thereafter shall not be required to recognize any
further deemed payments under paragraph (c) or (e)(1) of this section
with respect to the transferred intangible property disposed of by the
transferee foreign corporation.
(2) Required adjustments. If a U.S. transferor is required to
recognize gain under paragraph (f)(1) of this section, then--
(i) For purposes of chapter 1 of the Code, the earnings and profits
of the transferee foreign corporation shall be reduced by the amount of
gain required to be recognized; and
(ii) The U.S. transferor's recognition of gain will permit the
establishment of an account receivable from the transferee foreign
corporation, in accordance with paragraph (g)(1) of this section.
(3) Subsequent transfer of intangible property to related person.
The requirement that a U.S. person recognize gain under paragraph (c) or
(e) of this section shall not be affected by the transferee foreign
corporation's subsequent disposition of the transferred intangible
property to a related person. For purposes of any required adjustments,
and of any accounts receivable created under paragraph (g)(1) of this
section, the related person that receives the intangible property shall
be treated as the transferee foreign corporation.
(g) Special rules--(1) Establishment of accounts receivable--(i) In
general. If a U.S. person is required to recognize income under the
provisions of paragraph (c), (e), or (f) of this section, and the amount
deemed to be received is not actually paid by the transferee foreign
corporation, then the U.S. person may establish an account receivable
from the transferee foreign corporation equal to the amount deemed paid
that was not actually paid. A separate account receivable must be
established for each taxable year in which payments deemed to be
received are not actually made. Payments received from the transferee
foreign corporation must be designated as payments upon a particular
account and must be deducted from that account. Accounts receivable
under this paragraph (g)(1) may be established and paid without further
U.S. income tax consequences to the U.S. transferor or the transferee
foreign corporation. No interest shall be paid or accrued on an account
receivable created under this paragraph (g)(1), nor shall any bad debt
deduction be allowed under section 166 with respect to any failure to
receive payment on an account.
(ii) Unpaid receivable treated as contribution to capital. If any
portion of an account receivable established under this paragraph (g)(1)
remains unpaid as of the last day of the third taxable year following
the taxable year to which the account relates, then--
(A) Such portion shall be deemed to have been paid on that date; and
(B) The U.S. person shall be deemed to have contributed an
equivalent amount to the capital of the foreign corporation, and the
U.S. person's basis in the stock of the foreign corporation
[[Page 519]]
shall, therefore, be increased by that amount.
(2) Election to treat transfer as sale. A U.S. person that transfers
intangible property to a foreign corporation in a transaction subject to
section 367(d) may elect to recognize income in accordance with the
rules of this paragraph (g)(2), if--
(i) [Reserved]
(ii) The transfer of the intangible property is either legally
required by the government of the country in which the transferee
corporation is organized as a condition of doing business in that
country, or compelled by a genuine threat of immediate expropriation by
the foreign government; or
(iii)(A) The U.S. person transferred the intangible property to the
foreign corporation within three months of the organization of that
corporation and as part of the original plan of capitalization of that
corporation;
(B) Immediately after the transfer, the U.S. person owns at least 40
percent but not more than 60 percent of the total voting power and total
value of the stock of the transferee foreign corporation;
(C) Immediately after the transfer, at least 40 percent of the total
voting power and total value of the stock of the transferee foreign
corporation is owned by foreign persons unrelated to the U.S. person;
(D) Intangible property constitutes at least 50 percent of the fair
market value of the property transferred to the foreign corporation by
the U.S. transferor; and
(E) [Reserved]
A person that makes the election under this paragraph (g)(2) shall not
be subject to the provisions of paragraphs (c) through (f) of this
section. Such person shall instead recognize in the year of the transfer
ordinary income from sources within the United States in an amount equal
to the difference between the fair market value of the intangible
property transferred and its adjusted basis. A U.S. person shall make an
election under this paragraph (g)(2) by notifying the Internal Revenue
Service of the election in accordance with the requirements of section
6038B and regulations thereunder, and subsequently including the
appropriate amounts in gross income in a timely filed tax return for the
year of the transfer.
(3) [Reserved]
(4) Coordination with section 482--(i) In general. Section 367(d)
and the rules of this section shall not apply in the case of an actual
sale or license of intangible property by a U.S. person to a foreign
corporation. If an adjustment under section 482 is required with respect
to an actual sale or license of intangible property, then section 367(d)
and the rules of this section shall not apply with respect to the
required adjustment. If a U.S. person transfers intangible property to a
related foreign corporation without consideration, or in exchange for
stock or securities of the transferee in a transaction described in
sections 351 or 361, no sale or license subject to adjustment under
section 482 will be deemed to have occurred. Instead, the U.S. person
shall be treated as having made a transfer of the intangible property
that is subject to section 367(d).
(ii) Sham licenses and sales. For purposes of paragraph (g)(4)(i) of
this section, a purported sale or license of intangible property may be
disregarded, and treated as a transfer subject to section 367(d) and the
rules of this section, if--
(A) The purported sale or license is made to a foreign corporation
in which the transferor holds (or is acquiring) an interest; and
(B) The terms of the purported sale or license differ so greatly
from the economic substance of the transaction or the terms that would
obtain between unrelated persons that the purported sale or license is a
sham.
The terms of a purported sale or license, for purposes of applying the
rule of this paragraph (g)(4)(ii), shall be determined by reference not
only to the nominal terms of the agreement but also to the actual
practice of the parties under that agreement. A sale or license of
intangible property shall not be disregarded under this paragraph
(g)(4)(ii) solely because other property of an integrated business is
simultaneously transferred to the foreign corporation by the U.S.
transferor in a transaction described in section 367(a)(1) or any
statutory or regulatory exception to section 367(a)(1).
[[Page 520]]
(5) Determination of fair market value. For purposes of determining
the gain required to be recognized immediately under paragraph (d), (f),
or (g)(2) of this section, the fair market value of transferred property
shall be the single payment arm's-length price that would be paid for
the property by an unrelated purchaser determined in accordance with the
principles of section 482 and regulations thereunder. The allocation of
a portion of the purchase price to intangible property agreed to by the
parties to the transaction shall not necessarily be controlling for this
purpose.
(6) Anti-abuse rule. If a U.S. person--
(i) Transfers intangible property to a domestic corporation with a
principal purpose of avoiding the effect of section 367(d) and the rules
of this section; and
(ii) Thereafter transfers the stock of that domestic corporation to
a related foreign corporation,
then solely for purposes of section 367(d) that U.S. person shall be
treated as having transferred the intangible property directly to the
foreign corporation. A U.S. person shall be presumed to have transferred
intangible property for a principal purpose of avoiding the effect of
section 367(d) if the property is transferred to the domestic
corporation less than two years prior to the transfer of the stock of
that domestic corporation to a foreign corporation. The presumption
created by the previous sentence may be rebutted by clear evidence that
the subsequent transfer of the stock of the domestic transferee
corporation was not contemplated at the time the intangible property was
transferred to that corporation and that avoidance of section 367(d) and
the rules of this section was not a principal purpose of the
transaction. A transfer may have more than one principal purpose.
(h) Related person. For purposes of this section, persons are
considered to be related if--
(1) They are partners or partnerships described in section 707(b)(1)
of the Code; or
(2) They are related within the meaning of section 267 (b), (c), and
(f) of the Code, except that--
(i) ``10 percent or more'' shall be substituted for ``more than 50
percent'' each place it appears; and
(ii) Section 1563 shall apply (for purposes of section 267(d)),
without regard to section 1563(b)(2).
(i) Effective date. Except as specifically provided to the contrary
elsewhere in this section, this section applies to transfers occurring
after December 31, 1984.
[T.D. 8087, 51 FR 17953, May 16, 1986, as amended by T.D. 8770, 63 FR
33568, June 19, 1998; T.D. 9803, 81 FR 91030, Dec. 16, 2016]
Sec. 1.367(e)-0 Outline of Sec. Sec. 1.367(e)-1 and 1.367(e)-2.
This section lists captioned paragraphs contained in Sec. Sec.
1.367(e)-1 and 1.367(e)-2 as follows:
Sec. 1.367(e)-1 Distributions described in section 367(e)(1).
(a) Purpose and scope.
(b) Gain recognition.
(1) General rule.
(2) Stock owned through partnerships, disregarded entities, trusts,
and estates.
(3) Gain computation.
(4) Treatment of distributee.
(c) Nonrecognition of gain.
(d) Determining whether distributees are qualified U.S. persons.
(1) General rule--presumption of foreign status.
(2) Non-publicly traded distributing corporations.
(3) Publicly traded distributing corporations.
(i) Five percent shareholders.
(ii) Other distributees.
(4) Qualified exchange or other market.
(e) Reporting under section 6038B.
(f) Effective date.
Sec. 1.367(e)-2 Distributions described in section 367(e)(2).
(a) Purpose and scope.
(1) In general.
(2) Nonapplicability of section 367(a).
(b) Distribution by a domestic corporation.
(1) General rule.
(i) Recognition of gain and loss.
(ii) Operating rules.
(A) General rule.
(B) Overall loss limitation.
(1) Overall loss limitation rule.
(2) Example.
(C) Special rules for built-in gains and losses attributable to
property received in liquidations and reorganizations.
(iii) Distribution of partnership interest.
(A) General rule.
(B) Gain or loss calculation. [Reserved]
[[Page 521]]
(C) Basis adjustments.
(D) Publicly traded partnerships.
(2) Exceptions.
(i) Distribution of property used in a U.S. trade or business.
(A) Conditions for nonrecognition.
(B) Qualifying property.
(C) Required statement.
(1) Declaration and certification.
(2) Property description.
(3) Distributee identification.
(4) Treaty benefits waiver.
(5) Statute of limitations extension.
(D) Failure to file statement.
(E) Operating rules.
(1) Gain or loss recognition by the foreign distributee corporation.
(i) Taxable dispositions.
(ii) Other triggering events.
(2) Gain recognition by the domestic liquidating corporation.
(i) General rule.
(ii) Amended return.
(iii) Interest.
(iv) Joint and several liability.
(3) Schedule for property no longer used in a U.S. trade or
business.
(4) Nontriggering events.
(i) Conversions, certain exchanges, and abandonment.
(ii) Amendment to Master Property Description
(5) Nontriggering transfers to qualified transferees.
(ii) Distribution of certain U.S. real property interests.
(iii) Distribution of stock of domestic subsidiary corporations.
(A) Conditions for nonrecognition.
(B) Exceptions when the liquidating corporation is a U.S. real
property holding corporation.
(C) Anti-abuse rule.
(D) Required statement.
(3) Other consequences.
(i) Distributee basis in property.
(ii) Reporting under section 6038B.
(iii) Other rules.
(c) Distribution by a foreign corporation.
(1) General rule--gain and loss not recognized.
(2) Exceptions.
(i) Property used in a U.S. trade or business.
(A) General rule.
(B) Ten-year active U.S. business exception.
(C) Required statement.
(D) Operating rules.
(ii) Property formerly used in a U.S. trade or business.
(3) Other consequences.
(i) Distributee basis in property.
(ii) Other rules.
(d) Anti-abuse rule.
(e) Effective date.
[T.D. 8834, 64 FR 43075, Aug. 9, 1999]
Sec. 1.367(e)-1 Distributions described in section 367(e)(1).
(a) Purpose and scope. This section provides rules for recognition
(and nonrecognition) of gain by a domestic corporation (distributing
corporation) on a distribution of stock or securities of a corporation
(controlled corporation) to foreign persons that is described in section
355. Paragraph (b) of this section contains the general rule that gain
is recognized on the distribution to the extent stock or securities of
controlled are distributed to foreign persons. Paragraph (c) of this
section provides an exception to the gain recognition rule for
distributions of stock or securities of a domestic corporation.
Paragraph (d) of this section contains rules for determining whether
distributees of stock or securities in a section 355 distribution are
qualified U.S. persons. Paragraph (e) of this section provides cross-
references. Finally, paragraph (f) of this section specifies the
effective date of this section.
(b) Gain recognition--(1) General rule. If a domestic corporation
makes a distribution of stock or securities of a corporation that
qualifies for nonrecognition under section 355 to a person who is not a
qualified U.S. person, then, except as provided in paragraph (c) of this
section, the distributing corporation shall recognize gain (but not
loss) on the distribution under section 367(e)(1). A distributing
corporation shall not recognize gain under this section with respect to
a section 355 distribution to a qualified U.S. person. For purposes of
this section, a qualified U.S. person is--
(A) A citizen or resident of the United States; or
(B) A domestic corporation.
(2) Stock owned through partnerships, disregarded entities, trusts,
and estates. For purposes of this section, distributing corporation
stock or securities owned by or for a partnership (whether foreign or
domestic) are owned proportionately by its partners. A partner's
proportionate share of the stock or securities of the distributing
corporation shall be equal to the partner's distributive share of the
gain that would have been recognized had the partnership
[[Page 522]]
sold the stock or securities (at a taxable gain) immediately before the
distribution. The partner's distributive share of gain shall be
determined under the rules and principles of sections 701 through 761
and the regulations thereunder. For purposes of this section, stock or
securities owned by or for an entity that is disregarded as an entity
separate from its owner (disregarded entity) under Sec. 301.7701-3 of
this chapter are owned directly by the owner of such disregarded entity.
For purposes of this section, stock or securities owned by or for a
trust or estate (whether foreign or domestic) are owned proportionately
by the persons who would be treated as owning such stock or securities
under section 318(a)(2)(A) and (B). In applying section 318(a)(2)(B)(i),
if a trust includes interests that are not actuarially ascertainable,
all such interests shall be considered to be owned by foreign persons.
In a case where an interest holder in a partnership, a disregarded
entity, trust, or estate that (directly or indirectly) owns stock of the
distributing corporation is itself a partnership, disregarded entity,
trust, or estate, the rules of this paragraph (b)(2) apply to such
interest holder.
(3) Gain computation. Gain recognized under paragraph (b)(1) of this
section shall be equal to the excess of the fair market value of the
stock or securities distributed to persons who are not qualified U.S.
persons (determined as of the time of the distribution) over the
distributing corporation's adjusted basis in the stock or securities
distributed to such distributees. For purposes of the preceding
sentence, the distributing corporation's adjusted basis in each unit of
each class of stock or securities distributed to a distributee shall be
equal to the distributing corporation's total adjusted basis in all of
the units of the respective class of stock or securities owned
immediately before the distribution, divided by the total number of
units of the class of stock or securities owned immediately before the
distribution.
(4) Treatment of distributee. If the distribution otherwise
qualifies for nonrecognition under section 355, each distributee shall
be considered to have received stock or securities in a distribution
qualifying for nonrecognition under section 355, even though the
distributing corporation may recognize gain on the distribution under
this section. Thus, the distributee shall not be considered to have
received a distribution described in section 301 or a distribution in an
exchange described in section 302(b) upon the receipt of the stock or
securities of the controlled corporation, and the domestic distributing
corporation shall have no withholding responsibilities under section
1441. Except where section 897(e)(1) and the regulations thereunder
cause gain to be recognized by the distributee, the basis of the
distributed domestic or foreign corporation stock in the hands of the
foreign distributee shall be the basis of the distributed stock
determined under section 358 without any increase for any gain
recognized by the domestic corporation on the distribution.
(c) Nonrecognition of gain. A domestic distributing corporation
shall not recognize gain under paragraph (b)(1) of this section on the
distribution of stock or securities of a domestic corporation.
(d) Determining whether distributees are qualified U.S. persons--(1)
General rule--presumption of foreign status. Except as provided in
paragraphs (d)(2) and (3) of this section, all distributions of stock or
securities in a distribution described in section 355 in which the
distributing corporation is domestic and the controlled corporation is
foreign are presumed to be to persons who are not qualified U.S.
persons, as defined in paragraph (b)(1) of this section.
(2) Non-publicly traded distributing corporations. If the class of
stock or securities of the distributing corporation (in respect to which
stock or securities of the controlled corporation are distributed) is
not regularly traded on a qualified exchange or other market (as defined
in paragraph (d)(4) of this section), then the distributing corporation
may only rebut the presumption contained in paragraph (d)(1) of this
section by identifying the qualified U.S. persons to which controlled
corporation stock or securities were distributed and by certifying the
amount of stock or securities that were distributed to the qualified
U.S. persons.
[[Page 523]]
(3) Publicly traded distributing corporations. If the class of stock
or securities of the distributing corporation (in respect to which stock
or securities of the controlled corporation are distributed) is
regularly traded on a qualified exchange or other market (as defined in
paragraph (d)(4) of this section), then the distributing corporation may
only rebut the presumption contained in paragraph (d)(1) of this section
as described in this paragraph (d)(3).
(i) Five percent shareholders. A publicly traded distributing
corporation may only rebut the presumption contained in paragraph (d)(1)
of this section with respect to distributees that are five percent
shareholders of the class of stock or securities of the distributing
corporation (in respect to which stock or securities of the controlled
corporation are distributed) by identifying the qualified U.S. persons
to which controlled corporation stock or securities were distributed and
by certifying the amount of stock or securities that were distributed to
the qualified U.S. persons. A five percent shareholder is a distributee
who is required under U.S. securities laws to file with the Securities
and Exchange Commission (SEC) a Schedule 13D or 13G under 17 CFR
240.13d-1 or 17 CFR 240.13d-2, and provide a copy of same to the
distributing corporation under 17 CFR 240.13d-7.
(ii) Other distributees. A distributing corporation that has made a
distribution described in paragraph (d)(3) of this section may rebut the
presumption contained in paragraph (d)(1) of this section with respect
to distributees that are not five percent shareholders (as defined in
this paragraph (d)(3)) by relying on and providing a reasonable analysis
of shareholder records and other relevant information that demonstrates
a number of distributees that are qualified U.S. persons. Taxpayers may
rely on such analysis, unless it is subsequently determined that there
are actually fewer distributees who are qualified U.S. persons than were
demonstrated in the analysis.
(4) Qualified exchange or other market. For purposes of paragraph
(d) of this section, the term qualified exchange or other market means,
for any taxable year--
(i) A national securities exchange which is registered with the SEC
or the national market system established pursuant to section 11A of the
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
(ii) A foreign securities exchange that is regulated or supervised
by a governmental authority of the country in which the market is
located and which has the following characteristics--
(A) The exchange has trading volume, listing, financial disclosure,
and other requirements designed to prevent fraudulent and manipulative
acts and practices, to remove impediments to and perfect the mechanism
of a free and open market, and to protect investors; and the laws of the
country in which the exchange is located and the rules of the exchange
ensure that such requirements are actually enforced; and
(B) The rules of the exchange ensure active trading of listed
stocks.
(e) Cross-references. For additional rules relating to the
distribution of the stock of a foreign corporation by a domestic
corporation, see Sec. Sec. 1.367(a)-3(e), 1.367(a)-7, 1.367(b)-5, and
1.1248(f)-1 through 1.1248(f)-3. See the regulations under section 6038B
for reporting requirements for distributions under this section.
(f) Effective/applicability date. This section shall be applicable
to distributions occurring in taxable years ending after August 8, 1999.
[T.D. 8834, 64 FR 43076, Aug. 9, 1999; 65 FR 14467, Mar. 3, 2000, as
amended by T.D. 9614, 78 FR 17041, Mar. 19, 2013; T.D. 9760, 81 FR
15169, Mar. 22, 2016]
Sec. 1.367(e)-2 Distributions described in section 367(e)(2).
(a) Purpose and scope--(1) In general. This section provides rules
requiring gain and loss recognition by a corporation on its distribution
of property to a foreign corporation in a complete liquidation described
in section 332. Paragraph (b)(1) of this section contains the general
rule that gain and loss are recognized when a domestic corporation makes
a distribution of property in complete liquidation under section 332
[[Page 524]]
to a foreign corporation that meets the stock ownership requirements of
section 332(b) with respect to stock in the domestic corporation.
Paragraph (b)(2) of this section provides the only exceptions to the
gain and loss recognition rule of paragraph (b)(1) of this section.
Paragraph (b)(3) of this section refers to other consequences of
distributions described in paragraphs (b)(1) and (2) of this section.
Paragraph (c)(1) of this section contains the general rule that gain and
loss are not recognized when a foreign corporation makes a distribution
of property in complete liquidation under section 332 to a foreign
corporation that meets the stock ownership requirements of section
332(b) with respect to stock in the foreign liquidating corporation.
Paragraph (c)(2) of this section provides the only exceptions to the
nonrecognition rule of paragraph (c)(1) of this section. Paragraph
(c)(3) of this section refers to other consequences of distributions
described in paragraphs (c)(1) and (2) of this section. Paragraph (d) of
this section contains an anti-abuse rule. Paragraph (e) of this section
provides rules regarding failures to file statements or other documents
required under this section or failures to comply with the requirements
of this section. Paragraph (f) of this section provides relief for
certain failures to file or comply. Finally, paragraph (g) of this
section specifies the effective/applicability dates for the rules of
this section. The rules of this section are issued pursuant to the
authority conferred by section 367(e)(2).
(2) Nonapplicability of section 367(a). Section 367(a) shall not
apply to a complete liquidation described in section 332 by a domestic
liquidating corporation into a foreign corporation that meets the stock
ownership requirements of section 332(b).
(b) Distribution by a domestic corporation--(1) General rule--(i)
Recognition of gain and loss. If a domestic corporation (domestic
liquidating corporation) makes a distribution of property in complete
liquidation under section 332 to a foreign corporation (foreign
distributee corporation) that meets the stock ownership requirements of
section 332(b) with respect to stock in the domestic liquidating
corporation, then--
(A) Section 337(a) and (b)(1) will not apply; and
(B) The domestic liquidating corporation will recognize gain or loss
on the distribution of property to the foreign distributee corporation,
except as provided in paragraph (b)(2) of this section.
(ii) Operating rules--(A) General rule. Except as provided in
paragraphs (b)(1)(ii) (B) and (C) of this section, the rules contained
in section 336 will apply to the gain and loss recognized pursuant to
this section.
(B) Overall loss limitation--(1) Overall loss limitation rule. Loss
in excess of gain from the distribution shall not be recognized. If
realized losses exceed recognized losses, the losses shall be recognized
on a pro rata basis with respect to the realized loss attributable to
each distributed loss asset in the category of assets (i.e., capital or
ordinary) to which the realized but unrecognized loss relates. For
additional limitations on the recognition of losses, see, e.g., section
1211.
(2) Example. The following example illustrates the overall loss
limitation rule, the pro rata loss allocation method, and the general
capital loss limitation rule in section 1211(a):
Example. F, a foreign corporation, owns all stock of US1, a domestic
corporation. US1 owns the following capital assets: Asset A, which has a
fair market value of $100 and an adjusted basis of $40; Asset B, which
has a fair market value of $60 and an adjusted basis of $80; and, Asset
C, which has a fair market value of $40 and an adjusted basis of $100.
US1 also owns the following business assets that will generate ordinary
income (or loss) upon disposition: Asset D, which has a fair market
value of $100 and an adjusted basis of $40; Asset E, which has a fair
market value of $60 and an adjusted basis of $100; and, Asset F, which
has a fair market value of $40 and an adjusted basis of $80. US1
liquidates into F and distributes all assets to F in liquidation. None
of the assets qualify for nonrecognition under paragraph (b)(2) of this
section. US1's total realized capital loss is $80, but it may only
recognize $60 of that loss. See section 1211(a). US1's total realized
ordinary loss is $80, but it may only recognize $60 of that loss. See
paragraph (b)(1)(ii)(B)(1) of this section. US1 will allocate $15 (60 x
.25) of the recognized capital loss to Asset B and will allocate the
remaining $45 (60 x .75) of recognized capital loss to
[[Page 525]]
Asset C. See paragraph (b)(1)(ii)(B)(1) of this section. US1 will
allocate $30 (60 x .50) of the recognized ordinary loss to Asset E and
will allocate the remaining $30 (60 x .50) to Asset F. See paragraph
(b)(1)(ii)(B)(1) of this section.
(C) Special rules for built-in gains and losses attributable to
property received in liquidations and reorganizations. Built-in losses
attributable to property received in a transaction described in sections
332 or 361 (during the two-year period ending on the date of the
distribution in liquidation covered by this section) shall not offset
gain from property not received in the same transaction. Built-in gains
attributable to property received in a transaction described in sections
332 or 361 (during the two-year period ending on the date of the
distribution in liquidation covered by this section) shall not be offset
by a loss from property not received in the same transaction. Built-in
gain or loss is that amount of gain or loss on property that existed at
the time the domestic liquidating corporation acquired such property.
See sections 336(d) and 382 for additional limitations on the
recognition of losses.
(iii) Distribution of partnership interest--(A) General rule. If a
domestic corporation distributes a partnership interest (whether foreign
or domestic) in a distribution described in paragraph (b)(1)(i) of this
section, then for purposes of applying this section the domestic
liquidating corporation shall be treated as having distributed a
proportionate share of partnership property. Accordingly, the
applicability of the recognition rules of paragraphs (b)(1) (i) and (ii)
of this section, and of any exception to recognition provided in this
section shall be determined with reference to the partnership property,
rather than to the partnership interest itself. Where the partnership
property includes an interest in a lower-tier partnership, the
applicability of any exception with respect to the interest in the
lower-tier partnership shall be determined with reference to the lower-
tier partnership property. In the case of multiple tiers of
partnerships, the applicability of an exception shall be determined with
reference to the property of each partnership, applying the rule
contained in the preceding sentence. A domestic liquidating
corporation's proportionate share of partnership property shall be
determined under the rules and principles of sections 701 through 761
and the regulations thereunder.
(B) Gain or loss calculation. [Reserved]
(C) Basis adjustments. The foreign distributee corporation's basis
in the distributed partnership interest shall be equal to the domestic
liquidating corporation's basis in such partnership interest immediately
prior to the distribution, increased by the amount of gain and reduced
by the amount of loss recognized by the domestic liquidating corporation
on the distribution of the partnership interest. Solely for purposes of
sections 743 and 754, the foreign distributee corporation shall be
treated as having purchased the partnership interest for an amount equal
to the foreign corporation's adjusted basis therein.
(D) Publicly traded partnerships. The distribution by a domestic
liquidating corporation of an interest in a publicly traded partnership
that is treated as a corporation for U.S. income tax purposes under
section 7704(a) shall not be subject to the rules of paragraphs
(b)(1)(iii) (A) and (B) of this section. Instead, the distribution of
such an interest shall be treated in the same manner as a distribution
of stock. Thus, a transfer of an interest in a publicly traded
partnership that is treated as a U.S. corporation for U.S. income tax
purposes shall be treated in the same manner as stock in a domestic
corporation, and a transfer of an interest in a publicly traded
partnership that is treated as a foreign corporation for U.S. income tax
purposes shall be treated in the same manner as stock in a foreign
corporation.
(2) Exceptions--(i) Distribution of property used in a U.S. trade or
business--(A) Conditions for nonrecognition. A domestic liquidating
corporation shall not recognize gain or loss under paragraph (b)(1) of
this section on its distribution of property (including inventory) used
by the domestic liquidating corporation in the conduct of a trade or
business within United States, if--
(1) The foreign distributee corporation, immediately thereafter and
for the ten-year period beginning on the
[[Page 526]]
date of the distribution of such property, uses the property in the
conduct of a trade or business within the United States;
(2) The domestic liquidating corporation attaches the statement
described in paragraph (b)(2)(i)(C) of this section to its timely filed
U.S. income tax returns for the taxable years that include the
distributions in liquidation; and
(3) The foreign distributee corporation attaches a copy of the
property description contained in paragraph (b)(2)(i)(C)(2) of this
section to its timely filed U.S. income tax returns for the tax year
that includes the date of distribution.
(B) Qualifying property. Property is used by the foreign distributee
corporation in the conduct of a trade or business in the United States
within the meaning of this paragraph (b)(2)(i) only if all income from
the use of the property and all income or gain from the sale or exchange
of the property would be subject to taxation under section 882(a) as
effectively connected income. Also, stock held by a dealer as inventory
or for sale in the ordinary course of its trade or business shall be
treated as inventory and not as stock in the hands of both the domestic
liquidating corporation and the distributee foreign corporation.
Notwithstanding the foregoing, the exception provided in this paragraph
(b)(2)(i) shall not apply to intangibles described in section
936(h)(3)(B).
(C) Required statement. The statement required by paragraph
(b)(2)(i)(A) of this section shall be entitled ``Required Statement
under Sec. 1.367(e)-2(b)(2)(i)'' and shall be prepared by the domestic
liquidating corporation and signed under penalties of perjury by an
authorized officer of the domestic liquidating corporation and by an
authorized officer of the foreign distributee corporation. The statement
shall contain the following items:
(1) A declaration that the distribution to the foreign distributee
corporation is one to which the rules of this paragraph (b)(2)(i) apply
and a certification that the domestic liquidating corporation and the
foreign distributee corporation agree to comply with all the conditions
and requirements of this section, including, as provided in paragraph
(e)(4)(ii)(B) of this section, to treat a failure to comply (as
described in paragraph (e)(4)(i) of this section) as extending the
period of limitations on assessment of tax for the taxable year in which
gain is required to be reported.
(2) Property description. A description of all property distributed
by the domestic liquidating corporation (irrespective of whether the
property qualifies for nonrecognition). Such description shall be
entitled ``Master Property Description'' and shall identify the property
that continues to be used by the foreign distributee corporation in the
conduct of a trade or business within the United States, including the
location, adjusted basis, estimated fair market value, a summary of the
method (including appraisals if any) used for determining such value,
and the date of distribution of such items of property. The description
shall also identify the property excepted from gain recognition under
paragraphs (b)(2)(ii) and (iii) of this section.
(3) Distributee identification. An identification of the foreign
distributee corporation, including its name and address, taxpayer
identification number, residence, and place of incorporation.
(4) Treaty benefits waiver. With respect to property entitled to
nonrecognition pursuant to this paragraph (b)(2)(i), a declaration by
the foreign distributee corporation that it irrevocably waives any right
under any treaty (whether or not currently in force at the time of the
liquidation) to sell or exchange any item of such property without U.S.
income taxation or at a reduced rate of taxation, or to derive income
from the use of any item of such property without U.S. income taxation
or at a reduced rate of taxation.
(5) Statute of limitations extension. An agreement by the domestic
liquidating corporation and the foreign distributee corporation to
extend the statute of limitations on assessments and collections (under
section 6501) with respect to the domestic liquidating corporation on
the distribution of each item of property until three years after the
date on which all such items of property have ceased to be used in a
trade or business within the United States, but in no event shall the
extension be
[[Page 527]]
for a period longer than 13 years from the filing of the original U.S.
income tax return for the taxable year of the last distribution of any
such item of property. The agreement to extend the statute of limitation
shall be executed on a Form 8838, ``Consent to Extend the Time to Assess
Tax Under Section 367--Gain Recognition Agreement.''
(D) Failure to file statement. If a domestic liquidating corporation
that would otherwise qualify for nonrecognition on the distribution of
property under this paragraph (b)(2)(i) fails to file the statement
described in paragraph (b)(2)(i)(C) of this section or files a statement
that does not comply with the requirements of paragraph (b)(2)(i)(C) of
this section, the Commissioner may treat the domestic liquidating
corporation as if it had claimed nonrecognition under this paragraph
(b)(2)(i) and met all the requirements of paragraph (b)(2)(i)(C) of this
section, if such treatment is necessary to prevent the domestic
liquidating corporation or the foreign distributee corporation from
otherwise deriving a tax benefit by such failure.
(E) Operating rules. By the domestic liquidating corporation's
claiming nonrecognition under this paragraph (b)(2)(i) and filing a
statement described in paragraph (b)(2)(i)(C) of this section, the
domestic liquidating corporation and the foreign distributee corporation
agree to be subject to the rules of this paragraph (b)(2)(i)(E).
(1) Gain or loss recognition by the foreign distributee
corporation--(i) Taxable dispositions. If, within the ten-year period
from the date of a distribution of qualifying property, the foreign
distributee corporation disposes of any qualifying property in a
transaction subject to tax under section 882(a), then the foreign
distributee corporation shall recognize such gain (or loss) and properly
report it on a timely filed U.S. income tax return. If the foreign
distributee corporation recognizes gain (or loss) under this paragraph
(b)(2)(i)(E)(1)(i) and properly reports such gain (or loss) on its U.S.
income tax return, then the domestic liquidating corporation shall not
recognize gain attributable to such property under paragraph
(b)(2)(i)(E)(2) of this section.
(ii) Other triggering events. If, within the ten-year period from
the date of distribution, any qualifying property ceases to be used by
the foreign distributee corporation in the conduct of a trade or
business in the United States (other than by reason of a taxable
disposition described in paragraph (b)(2)(i)(E)(1)(i) of this section, a
nontriggering event described in paragraph (b)(2)(i)(E)(4) of this
section, or a nontriggering transfer described in paragraph
(b)(2)(i)(E)(5) of this section), then the foreign distributee
corporation shall recognize gain (but not loss) attributable to such
property and properly report it on a timely filed U.S. income tax
return. If the foreign distributee corporation properly reports gain
under this paragraph (or if such qualified property is not gain property
on the date that it ceases to be used in the foreign distributee
corporation's U.S. trade or business), then the domestic liquidating
corporation shall not recognize gain attributable to such property under
paragraph (b)(2)(i)(E)(2) of this section. The gain recognized under
this paragraph (b)(2)(i)(E)(1)(ii) shall be an amount equal to the fair
market value of the property on the date it ceases to be used in the
foreign distributee corporation's U.S. trade or business less the
foreign distributee corporation's adjusted basis in such property.
(2) Gain recognition by the domestic liquidating corporation--(i)
General rule. If, within the ten-year period from the date of
distribution, any qualifying property described in paragraph
(b)(2)(i)(B) of this section ceases to be used by the foreign
distributee corporation (or a qualifying transferee described in
paragraph (b)(2)(i)(E)(5) of this section) in the conduct of a trade or
business in the United States for any reason (including but not limited
to the sale or exchange of such property or the removal of the property
from conduct of the trade or business), then, except to the extent gain
(or loss) is recognized under paragraph (b)(1)(i)(E)(1) of this section,
the domestic liquidating corporation shall recognize the gain (but not
loss) realized but not recognized upon the initial distribution of such
item of property. The domestic liquidating corporation
[[Page 528]]
shall recognize gain pursuant to this paragraph (b)(2)(i)(E)(2)(i) on
the amended U.S. income tax return described in paragraph
(b)(2)(i)(E)(2)(ii) of this section.
(ii) Amended return. If gain recognition is required pursuant to
paragraph (b)(2)(i)(E)(2)(i) of this section, the foreign distributee
corporation shall file an amended U.S. income tax return on behalf of
the domestic liquidating corporation for the year of the distribution of
such item of property. On the amended return, the domestic liquidating
corporation may use any losses (or credits) existing in the year of the
distribution to offset the gain recognized pursuant to paragraph
(b)(2)(i)(E)(2)(i) of this section (or the tax thereon), provided that
the losses (or credits) were otherwise available in the year
distribution and were not used in another year. The amended return shall
be filed no later than the due date (including extensions) for the
return of the foreign distributee corporation for the taxable year in
which the property ceases to be used by the foreign distributee
corporation in the conduct of a trade or business in the United States.
(iii) Interest. If the domestic liquidating corporation owes
additional tax pursuant to paragraph (b)(2)(i)(E)(2)(i) of this section
for the year of liquidation, then interest must be paid on that amount
at the rates determined under section 6621. The interest due will be
calculated from the due date of the domestic liquidating corporation's
U.S. income tax return for the year of the distribution to the date on
which the additional tax for that year is paid.
(iv) Joint and several liability. The foreign distributee
corporation shall be jointly and severally liable for any tax owed by
the domestic liquidating corporation as a result of the application of
this section, and shall succeed to the domestic liquidating
corporation's agreement to extend the statute of limitations on
assessments and collections under section 6501.
(3) Schedule for property no longer used in a U.S. trade or
business. If qualifying property (other than inventory) ceases to be
used by the foreign distributee corporation in the conduct of a U.S.
trade or business in the ten-year period beginning on the date of
distribution of such property from the domestic liquidating corporation
to the foreign distributee corporation, then the foreign distributee
corporation shall list on a separate schedule (attached to its timely
filed U.S. income tax returnfor the year of cessation) all such
qualifying property. For purposes of this paragraph (b)(2)(i)(E)(3),
property ceases to be used in a U.S. trade or business whenever such
property is sold, exchanged, or otherwise removed from the U.S. trade or
business, irrespective of whether the domestic liquidating corporation
filed an amended return under paragraph (b)(2)(i)(E)(2) of this section,
and irrespective of whether the property ceases to be used in the
foreign distributee corporation's U.S. trade or business by virtue of a
nontriggering event described in paragraph (b)(2)(i)(E)(4) of this
section or a nontriggering transfer described in paragraph
(b)(2)(i)(E)(5) of this section.
(4) Nontriggering events--(i) Conversions, certain exchanges, and
abandonment. Gain (or loss) under this paragraph (b)(2)(i)(E) shall not
be triggered if qualifying property described in paragraph (b)(2)(i)(B)
of this section is involuntarily converted into, or exchanged for,
similar qualifying property used in the conduct of a trade or business
in the United States, to the extent such conversion or exchange
qualifies for nonrecognition under section 1033 or 1031. Also, the
abandonment or disposal of worthless or obsolete property shall not
trigger gain (or loss) under this paragraph (b)(2)(i)(E).
(ii) Amendment to Master Property Description. If the foreign
distributee corporation acquires replacement property by virtue of a
conversion or exchange of the qualifying property under this paragraph
(b)(2)(i)(E)(4), then the foreign distributee corporation shall attach
to its timely filed U.S. income tax return for the year of the
acquisition such replacement property a schedule entitled ``Amendment to
Master Property Description Required by Sec. 1.367(e)-2(b)(2)(i)'' that
lists the replacement property and the property being replaced.
(5) Nontriggering transfers to qualified transferees. Gain (or loss)
under this
[[Page 529]]
paragraph (b)(2)(i)(E) will not be triggered if qualifying property
described in paragraph (b)(2)(i)(B) of this section is transferred to
another person (qualified transferee) in a transaction qualifying for
nonrecognition under the Internal Revenue Code (other than transactions
described in paragraphs (b)(2)(i)(E)(4)(i) and (c)(1) of this section),
if--
(i) The qualified transferee (and all other subsequent qualified
transferees), immediately thereafter and for the ten-year period
beginning on the date of the initial distribution of such qualifying
property from the domestic liquidating corporation to the foreign
distributee corporation, uses the property in the conduct of a trade or
business in the United States;
(ii) The foreign distributee corporation (or its successor in
interest) prepares and attaches to its timely filed U.S. income tax
return for the year of transfer a statement entitled ``Required
Statement under Sec. 1.367(e)-2(b)(2)(i)(E)(5) for Property Transferred
to a Qualified Transferee'' that is signed under penalties of perjury by
an authorized officer of the foreign distributee corporation and by a
person similarly authorized by the qualified transferee;
(iii) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of
this section shall contain a description of all qualifying property
transferred by the foreign distributee corporation (or qualified
transferee) to the qualified transferee (or subsequent qualified
transferee);
(iv) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of
this section shall also contain an identification of the qualified
transferee (or subsequent qualified transferee), including its name and
address, taxpayer identification number, residence, and place of
incorporation (if applicable);
(v) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of this
section shall also contain a declaration by the qualifying transferee
(or subsequent qualifying transferee) that it irrevocably waives any
right under any treaty (whether or not currently in force at the time of
the liquidation) to sell or exchange any item of such property without
U.S. income taxation or at a reduced rate of taxation, or to derive
income from the use of any item of such qualifying property without U.S.
income taxation or at a reduced rate of taxation; and
(vi) A declaration that the transfer to the qualifying transferee
(or subsequent qualifying transferee) is one to which the rules of this
paragraph (b)(2)(i)(E)(5) apply and a certification that the foreign
distributee corporation (or its successor in interest) and the
qualifying transferee (or subsequent qualifying transferee) agree to all
of the terms and conditions set forth in paragraph (b)(2)(i)(E)(1) of
this section, replacing ``foreign distributee corporation'' with
``qualifying transferee'' and replacing references to ``section 882(a)''
with ``section 871(b)'' (as the case may be).
(ii) Distribution of certain U.S. real property interests. A
domestic liquidating corporation shall not recognize gain (or loss)
under paragraph (b)(1) of this section on the distribution of a U.S.
real property interest (other than stock in a former U.S. real property
holding corporation that is treated as a U.S. real property interest for
five years under section 897(c)(1)(A)(ii)). If property distributed by
the domestic liquidating corporation is a U.S. real property interest
that qualifies for nonrecognition under this paragraph (b)(2)(ii) in
addition to nonrecognition provided by paragraph (b)(2)(i) of this
section, then the domestic liquidating corporation shall secure
nonrecognition pursuant to this paragraph (b)(2)(ii) and not pursuant to
the provisions of paragraph (b)(2)(i) of this section.
(iii) Distribution of stock of domestic subsidiary corporations--(A)
Conditions for nonrecognition. A domestic liquidating corporation shall
not recognize gain or loss under paragraph (b)(1) of this section on a
distribution of stock of an 80 percent domestic subsidiary corporation,
if the domestic liquidating corporation attaches a statement described
in paragraph (b)(2)(iii)(D) of this section to its timely filed U.S.
income tax return for the year of the distribution of such stock. For
purposes of this paragraph (b)(2)(iii), a corporation is an 80 percent
domestic subsidiary corporation, if--
[[Page 530]]
(1) The subsidiary corporation is a domestic corporation (but not a
foreign corporation that has made an election under section 897(i) to be
treated as a U.S. corporation for purposes of section 897);
(2) The domestic liquidating corporation owns (directly and without
regard to paragraph (b)(1)(iii) of this section) at least 80 percent of
the total voting power of the stock of such corporation; and
(3) The domestic liquidating corporation owns (directly and without
regard to paragraph (b)(1)(iii) of this section) at least 80 percent of
the total value of all stock of such corporation.
(B) Exceptions when the liquidating corporation is a U.S. real
property holding corporation. If the domestic liquidating corporation is
a U.S. real property holding corporation (as defined in section
897(c)(2)) at the time of liquidation (or is a former U.S. real property
holding corporation the stock of which is treated as a U.S. real
property interest for five years under section 897(c)(1)(A)(ii)), then
the exception in paragraph (b)(2)(iii)(A) of this section shall apply
only to the distribution of stock of an 80 percent domestic subsidiary
corporation that is a U.S. real property holding corporation (as defined
in section 897(c)(2)) at the time of the liquidation and immediately
thereafter.
(C) Anti-abuse rule. (1) The exception in paragraph (b)(2)(iii)(A)
of this section shall not apply, if a principal purpose of the
distribution of the 80 percent domestic subsidiary corporation's stock
is the avoidance of U.S. tax that would have been imposed on the
domestic liquidating corporation's disposition of such stock when taken
together to an unrelated party. A distribution may have a principal
purpose of tax avoidance even though the tax avoidance purpose is
outweighed by other purposes when taken together.
(2) For purposes of paragraph (b)(2)(iii)(C)(1) of this section, a
distribution of stock of the 80 percent domestic subsidiary corporation
will be deemed to have been made pursuant to a plan, one of the
principal purposes of which was the avoidance of U.S. tax, if the
foreign distributee corporation disposes of (whether in a recognition or
nonrecognition transaction) any such stock within two years of such
distribution. The rule in this paragraph (b)(2)(iii)(C)(2) will not
apply if the foreign distributee corporation can demonstrate to the
satisfaction of the Commissioner that the avoidance of U.S. tax was not
a principal purpose of the liquidation.
(D) Required statement. The statement required by paragraph
(b)(2)(iii)(A) of this section shall be entitled ``Required Statement
under Sec. 1.367(e)-2(b)(2)(iii) for Stock of 80 Percent Domestic
Subsidiary Corporations'' and shall be prepared by the domestic
liquidating corporation and shall be signed under penalties of perjury
by an authorized officer of the domestic liquidating corporation and by
an authorized officer of the foreign distributee corporation. The
required statement shall contain a certification that states that if the
foreign distributee corporation disposes of any stock subject to
paragraph (b)(2)(iii)(A) of this section in a transaction described in
paragraph (b)(2)(iii)(C) of this section, then the domestic liquidating
corporation shall recognize all realized gain attributable to the
distributed stock at the time of distribution, and the domestic
liquidating corporation (or the foreign distributee corporation on
behalf of the domestic liquidating corporation) shall file a U.S. income
tax return (or amended U.S. income tax return, as the case may be) for
the year of distribution reporting the gain attributable to such stock.
The required statement shall also state that the domestic liquidating
corporation agrees, as provided in paragraph (e)(4)(ii)(B) of this
section, to treat a failure to comply (as described in paragraph
(e)(4)(i) of this section) as extending the period of limitations on
assessment of tax for the taxable year in which gain is required to be
reported.
(3) Other consequences--(i) Distributee basis in property. The
foreign distributee corporation's basis in property subject to this
paragraph (b) shall be the same as the domestic liquidating
corporation's basis in such property immediately before the liquidation,
increased by any gain, or reduced by any loss recognized by the domestic
liquidating corporation on such property
[[Page 531]]
pursuant to paragraph (b)(1) of this section.
(ii) Reporting under section 6038B. Section 6038B and the
regulations thereunder apply to a domestic liquidating corporation's
transfer of property to a foreign distributee corporation under section
367(e)(2).
(iii) Other rules. For other rules that may apply, see sections 381,
897, 1248, and Sec. 1.482-1(f)(2)(i)(C).
(c) Distribution by a foreign corporation--(1) General rule--gain
and loss not recognized. If a foreign corporation (foreign liquidating)
makes a distribution of property in complete liquidation under section
332 to a foreign corporation (foreign distributee) that meets the stock
ownership requirements of section 332(b) with respect to stock in the
foreign liquidating corporation, then, except as provided in paragraph
(c)(2) of this section, section 337 (a) and (b)(1) shall apply and the
foreign liquidating corporation shall not recognize gain (or loss) on
the distribution under section 367(e)(2). If a foreign liquidating
corporation distributes a partnership interest (whether foreign or
domestic), then such corporation shall be treated as having distributed
a proportionate share of partnership property in accordance with the
principles of paragraph (b)(1)(iii) of this section.
(2) Exceptions--(i) Property used in a U.S. trade or business--(A)
General rule. A foreign liquidating corporation (including a corporation
that has made an effective election under section 897(i)) that makes a
distribution described in paragraph (c)(1) of this section shall
recognize gain (or loss in accordance with principles contained in
paragraph (b)(1)(ii) of this section) on the distribution of qualified
property, as described in paragraph (b)(2)(i)(B) of this section (other
than U.S. real property interests), that is used by the foreign
liquidating corporation in the conduct of a trade or business within the
United States at the time of distribution.
(B) Ten-year active U.S. business exception. A foreign liquidating
corporation shall not recognize gain under paragraph (c)(2)(i)(A) of
this section, if--
(1) The foreign distributee corporation, immediately thereafter and
for the ten-year period beginning on the date of the distribution of
such property, uses the property in the conduct of a trade or business
in the United States;
(2) The foreign distributee corporation is not entitled to benefits
under a comprehensive income tax treaty (this requirement shall apply
only if the foreign liquidating corporation (or predecessor corporation)
was not entitled to benefits under a comprehensive income tax treaty);
and
(3) The foreign liquidating corporation and foreign distributee
corporation attach the statement described in paragraph (c)(2)(i)(C) of
this section to their timely filed U.S. income tax returnsfor their
taxable years that include the distribution.
(C) Required statement. The statement required by paragraph
(c)(2)(i)(B)(3) of this section shall be entitled ``Required Statement
under Sec. 1.367(e)-2(c)(2)(i),'' shall be prepared by foreign
liquidating corporation, shall be signed under penalties of perjury by
an authorized officer of the foreign liquidating corporation and by an
authorized officer of the foreign distributee corporation, and shall be
identical to the statement described in paragraph (b)(2)(i)(C) of this
section, except that ``Sec. 1.367(e)-2(c)(2)(i)(B)'' shall be
substituted for references to ``Sec. 1.367(e)-2(b)(2)(i)'' and
``foreign liquidating corporation'' shall be substituted for ``domestic
liquidating corporation'' each time it appears. References in the rules
of paragraph (b)(2)(i)(C) of this section to various rules in paragraph
(b) of this section shall be applied as if such references were to this
paragraph (c). However, the statement described in this paragraph
(c)(2)(i)(C) shall be modified as follows:
(1) The foreign distributee corporation shall not be required to
waive its income tax treaty benefits as required by Sec. 1.367(e)-
2(b)(2)(i)(C)(4), unless--
(i) The foreign liquidating corporation was required to waive its
treaty benefits under paragraph (b)(2)(i)(C)(4) of this section in
connection with the distribution of such property in a prior liquidation
distribution subject to the provisions of this section; or (ii) The
foreign distributee corporation is entitled benefits under a treaty to
which
[[Page 532]]
the foreign liquidating corporation was not entitled.
(2) If the foreign distributee is required to waive treaty benefits
because of paragraph (c)(2)(i)(C)(1)(ii) of this section, then the
foreign distributee shall only be required to waive benefits that were
not available to the foreign liquidating corporation (or a predecessor
corporation) prior to liquidation.
(3) The property description described in paragraph (b)(2)(i)(C)(2)
of this section shall include only the qualified U.S. trade or business
property described in paragraph (c)(2)(i) of this section.
(D) Operating rules. By the foreign liquidating corporation's
claiming nonrecognition under paragraph (c)(2)(i)(B) of this section and
filing a statement described in paragraph (c)(2)(i)(C) of this section,
the foreign liquidating corporation and the foreign distributee
corporation agree to be subject to the rules of paragraph (c)(2)(i) of
this section, as well as the rules of paragraphs (b)(2)(i)(D) and (E) of
this section. In applying the rules of paragraphs (b)(2)(i)(D) and (E)
of this section, ``foreign liquidating corporation'' shall be used
instead of ``domestic liquidating corporation'' each time it appears.
References in the rules of paragraphs (b)(2)(i)(D) and (E) of this
section to various rules in paragraph (b) of this section shall be
applied as if such references were to this paragraph (c).
(ii) Property formerly used in a United States trade or business. A
foreign liquidating corporation that makes a distribution described in
paragraph (c)(1) of this section shall recognize gain (but not loss) on
the distribution of property (other than U.S. real property interests)
that had ceased to be used by the foreign liquidating corporation in the
conduct of a U.S. trade or business within the ten-year period ending on
the date of distribution and that would have been subject to section
864(c)(7) had it been disposed. Section 864(c)(7) shall govern the
treatment of any gain recognized on the distribution of assets described
in this paragraph as income effectively connected with the conduct of a
trade or business within the United States.
(3) Other consequences--(i) Distributee basis in property. The
foreign distributee corporation's basis in property subject to this
paragraph (c) shall be the same as the foreign liquidating corporation's
basis in such property immediately before the liquidation, increased by
any gain, or reduced by any loss recognized by the foreign liquidating
corporation on such property, pursuant to paragraph (c)(2) of this
section.
(ii) Other rules. For other rules that may apply, see sections
367(b) and 381.
(d) Anti-abuse rule. The Commissioner may require a domestic
liquidating corporation to recognize gain on a distribution in
liquidation described in paragraph (b) of this section (or treat the
liquidating corporation as if it had recognized loss on a distribution
in liquidation), if a principal purpose of the liquidation is the
avoidance of U.S. tax (including, but not limited to, the distribution
of a liquidating corporation's earnings and profits with a principal
purpose of avoiding U.S. tax). A liquidation may have a principal
purpose of tax avoidance even though the tax avoidance purpose is
outweighed by other purposes when taken together.
(e) Failures to file or failures to comply--(1) Scope. This
paragraph (e) provides rules regarding a failure to file an initial
liquidation document with respect to one or more liquidating
distributions by a domestic liquidating corporation that, absent such
failure, would qualify for nonrecognition treatment under paragraph
(b)(2)(i) or (iii) of this section, or with respect to one or more
liquidating distributions by a foreign liquidating corporation that,
absent such failure, would qualify for nonrecognition treatment under
paragraph (c)(2)(i)(B) of this section (failure to file). This paragraph
(e) also provides rules regarding failures to comply in all material
respects with the terms of this section with respect to one or more
liquidating distributions for which nonrecognition treatment was
initially claimed under paragraph (b)(2)(i), (b)(2)(iii), or
(c)(2)(i)(B) of this section, as applicable (failure to comply).
(2) Definitions. The following definitions apply for purposes of
this section.
[[Page 533]]
(i) An initial liquidation document means any statement, schedule,
or form required to be filed under this section in order for the
domestic liquidating corporation or foreign liquidating corporation, as
applicable, to initially qualify to claim nonrecognition treatment with
respect to one or more liquidating distributions described in this
section, including--
(A) The statement and attachments described in paragraph
(b)(2)(i)(C) of this section;
(B) The statement described in paragraph (b)(2)(iii)(D) of this
section; and
(C) The statement and attachments described in paragraph
(c)(2)(i)(C) of this section.
(ii) A subsequent liquidation document means any statement,
schedule, or form (other than an initial liquidation document) required
to be filed under this section in order for the domestic liquidating
corporation or foreign liquidating corporation, as applicable, to
continue to qualify for nonrecognition treatment with respect to one or
more liquidating distributions described in this section, including--
(A) The schedule described in paragraph (b)(2)(i)(E)(3) of this
section;
(B) The schedule described in paragraph (b)(2)(i)(E)(4)(ii) of this
section; and
(C) The statement and attachments described in paragraph
(b)(2)(i)(E)(5) of this section.
(iii) A timely filed U.S. income tax return means a Federal income
tax return filed on or before the last date prescribed for filing
(taking into account any extensions of time therefor) such return.
(3) Failure to file--(i) General rule. For purposes of this section
and except as provided in paragraph (b)(2)(i)(D) or (f) of this section,
there is a failure to file an initial liquidation document if--
(A) An initial liquidation document is not filed with the timely
filed U.S. income tax return specified under this section, or
(B) An initial liquidation document is not completed in all material
respects.
(ii) Consequences of a failure to file. If there is a failure to
file an initial liquidation document, then nonrecognition treatment
under paragraph (b)(2)(i), (b)(2)(iii), or (c)(2)(i)(B) of this section
(as appropriate) will not apply.
(4) Failure to comply--(i) General rule. For purposes of this
section and except as provided in paragraph (b)(2)(i)(D) or (f) of this
section, a failure to comply includes--
(A) A failure to report gain, or pay any additional tax or interest
due, in accordance with the requirements under this section; and
(B) A failure to file a subsequent liquidation document, as
determined by applying paragraph (e)(3)(i) of this section, but
replacing the term ``initial liquidation document'' with the term
``subsequent liquidation document.''
(ii) Consequences of a failure to comply. If there is a failure to
comply in any material respect with the terms of paragraph (b)(2)(i),
(b)(2)(iii), or (c)(2)(i) of this section, as applicable, then--
(A) Any gain (but not loss) that was not previously recognized by
the domestic liquidating corporation or foreign liquidating corporation,
as applicable, under paragraph (b)(2)(i), (b)(2)(iii), or (c)(2)(i)(B)
of this section must be recognized; and
(B) The period of limitations on assessment of tax for the taxable
year in which gain is required to be reported will be extended until the
close of the third full taxable year ending after the date on which the
domestic liquidating corporation, foreign distributee corporation, or
foreign liquidating corporation, as applicable, furnishes to the
Director of Field Operations, Cross Border Activities Practice Area of
Large Business & International (or any successor to the roles and
responsibilities of such position, as appropriate) (Director) the
information that should have been provided under this section.
(f) Relief for certain failures to file or failures to comply that
are not willful--(1) In general. This paragraph (f) provides relief if
there is a failure to file an initial liquidation document as described
in paragraph (e)(3)(i) of this section (failure to file), or a failure
to comply in any material respect with the terms of this section as
described in paragraph (e)(4)(i) of this section (failure to comply). A
failure to file or a failure to comply will be deemed not to have
occurred for purposes of paragraph (e)(3)(ii) or (e)(4)(ii) of this
section if
[[Page 534]]
the taxpayer demonstrates that the failure was not willful using the
procedure set forth in this paragraph (f). For this purpose, willful is
to be interpreted consistent with the meaning of that term in the
context of other civil penalties, which would include a failure due to
gross negligence, reckless disregard, or willful neglect. Whether a
failure to file or failure to comply was willful will be determined by
the Director (as described in paragraph (e)(4)(ii)(B) of this section)
based on all the facts and circumstances. The taxpayer must submit a
request for relief and an explanation as provided in paragraph (f)(2)(i)
of this section. Although a taxpayer whose failure to file or failure to
comply is determined not to be willful will not be subject to gain or
loss recognition under this section, the taxpayer will be subject to a
penalty under section 6038B if the taxpayer fails to satisfy the
reporting requirements, if any, under that section and does not
demonstrate that the failure was due to reasonable cause and not willful
neglect. See Sec. 1.6038B-1(e)(4) and (f). The determination of whether
the failure to file or failure to comply was willful under this section
has no effect on any request for relief made under Sec. 1.6038B-1(f).
(2) Procedures for establishing that a failure to file or failure to
comply was not willful--(i) Time and manner of submission. A taxpayer's
statement that a failure to file or failure to comply was not willful
will be considered only if, promptly after the taxpayer becomes aware of
the failure, an amended return is filed for the taxable year to which
the failure relates that includes the information that should have been
included with the original return for such taxable year or that
otherwise complies with the rules of this section, and that includes a
written statement explaining the reasons for the failure. In the case of
a liquidating distribution described in paragraph (b)(2)(iii) of this
section, the taxpayer must file, with the amended return, a Form 8838
extending the period of limitations on assessment of tax with respect to
the gain realized but not recognized with respect to the liquidating
distribution to the close of the third full taxable year ending after
the date on which the required information is provided to the Director.
In the case of a liquidating distribution described in paragraph
(b)(2)(i) or (c)(2)(i)(B) of this section, the taxpayer must file, with
the amended return, a Form 8838 extending the period of limitations on
the assessment of tax with respect to the gain realized but not
recognized with respect to the liquidating distribution to the later of:
the date provided in paragraph (b)(2)(i)(C)(5), taking into account
paragraph (c)(2)(i)(C) and (D), as applicable (date one); or, the close
of the third full taxable year ending after the date on which the
required information is provided to the Director (date two). However,
the taxpayer is not required to file a Form 8838 with the amended return
if both date one is later than date two and a Form 8838 was previously
filed extending the period of limitations on assessment of tax with
respect to the gain realized but not recognized with respect to the
liquidating distribution to date one. If a Form 8838 is not required to
be filed pursuant to the previous sentence, a copy of the previously
filed Form 8838 must be filed with the amended return. The amended
return and either a Form 8838 or a copy of the previously filed Form
8838, as the case may be, must be filed with the Internal Revenue
Service at the location where the taxpayer filed its original return.
The taxpayer may submit a request for relief from the penalty under
section 6038B as part of the same submission. See Sec. 1.6038B-1(f).
(ii) Notice requirement. In addition to the requirements of
paragraph (f)(2)(i) of this section, the taxpayer must comply with the
notice requirements of this paragraph (f)(2)(ii). If any taxable year of
the taxpayer is under examination when the amended return is filed, a
copy of the amended return and any information required to be included
with such return must be delivered to the Internal Revenue Service
personnel conducting the examination. If no taxable year of the taxpayer
is under examination when the amended return is filed, a copy of the
amended return and any information required to be included with such
return must be delivered to the Director.
(3) For illustrations of the application of the willfulness standard
of this
[[Page 535]]
paragraph (f), see the examples in Sec. 1.367(a)-8(p)(3).
(g) Effective/applicability dates. Except as otherwise provided,
this section applies to distributions occurring on or after September 7,
1999 or, if the taxpayer so elects, to distributions in taxable years
ending after August 8, 1999. The ninth, tenth, and eleventh sentences of
paragraph (a) of this section, and paragraphs (b)(1)(i),
(b)(2)(i)(A)(2), (b)(2)(i)(A)(3), (b)(2)(i)(E)(3), (b)(2)(i)(E)(4)(ii),
(b)(2)(i)(E)(5)(ii), (b)(2)(iii)(A), (c)(2)(i)(B)(3), (e), and (f) of
this section will apply to liquidation documents that are required to be
filed on or after November 19, 2014, as well as to requests for relief
submitted on or after November 19, 2014.
[T.D. 8834, 64 FR 43077, Aug. 9, 1999; 65 FR 11467, Mar. 3, 2000, as
amended by T.D. 9066, 68 FR 39452, July 2, 2003; T.D. 9704, 79 FR 68771,
Nov. 19, 2014; 80 FR 167, Jan. 5, 2015; T.D. 9803, 81 FR 91030, Dec. 16,
2016]
special rule; definitions
Sec. 1.368-1 Purpose and scope of exception of reorganization
exchanges.
(a) Reorganizations. As used in the regulations under parts I, II,
and III (section 301 and following), subchapter C, chapter 1 of the
Code, the terms reorganization and party to a reorganization mean only a
reorganization or a party to a reorganization as defined in subsections
(a) and (b) of section 368. In determining whether a transaction
qualifies as a reorganization under section 368(a), the transaction must
be evaluated under relevant provisions of law, including the step
transaction doctrine. But see Sec. Sec. 1.368-2 (f) and (k) and 1.338-
3(d). The preceding two sentences apply to transactions occurring after
January 28, 1998, except that they do not apply to any transaction
occurring pursuant to a written agreement which is binding on January
28, 1998, and at all times thereafter. With respect to insolvency
reorganizations, see part IV, subchapter C, chapter 1 of the Code.
(b) Purpose. Under the general rule, upon the exchange of property,
gain or loss must be accounted for if the new property differs in a
material particular, either in kind or in extent, from the old property.
The purpose of the reorganization provisions of the Code is to except
from the general rule certain specifically described exchanges incident
to such readjustments of corporate structures made in one of the
particular ways specified in the Code, as are required by business
exigencies and which effect only a readjustment of continuing interest
in property under modified corporate forms. Requisite to a
reorganization under the Internal Revenue Code are a continuity of the
business enterprise through the issuing corporation under the modified
corporate form as described in paragraph (d) of this section, and
(except as provided in section 368(a)(1)(D)) a continuity of interest as
described in paragraph (e) of this section. (For rules regarding the
continuity of interest requirement under section 355, see Sec. 1.355-
2(c).) For purposes of this section, the term issuing corporation means
the acquiring corporation (as that term is used in section 368(a)),
except that, in determining whether a reorganization qualifies as a
triangular reorganization (as defined in Sec. 1.358-6(b)(2)), the
issuing corporation means the corporation in control of the acquiring
corporation. The preceding three sentences apply to transactions
occurring after January 28, 1998, except that they do not apply to any
transaction occurring pursuant to a written agreement which is binding
on January 28, 1998, and at all times thereafter. The continuity of
business enterprise requirement is described in paragraph (d) of this
section. Notwithstanding the requirements of this paragraph (b), for
transactions occurring on or after February 25, 2005, a continuity of
the business enterprise and a continuity of interest are not required
for the transaction to qualify as a reorganization under section
368(a)(1)(E) or (F). The Code recognizes as a reorganization the
amalgamation (occurring in a specified way) of two corporate enterprises
under a single corporate structure if there exists among the holders of
the stock and securities of either of the old corporations the requisite
continuity of interest in the new corporation, but there is not a
reorganization if the holders of the stock and securities of the old
corporation are merely the holders of
[[Page 536]]
short-term notes in the new corporation. In order to exclude
transactions not intended to be included, the specifications of the
reorganization provisions of the law are precise. Both the terms of the
specifications and their underlying assumptions and purposes must be
satisfied in order to entitle the taxpayer to the benefit of the
exception from the general rule. Accordingly, under the Code, a short-
term purchase money note is not a security of a party to a
reorganization, an ordinary dividend is to be treated as an ordinary
dividend, and a sale is nevertheless to be treated as a sale even though
the mechanics of a reorganization have been set up.
(c) Scope. The nonrecognition of gain or loss is prescribed for two
specifically described types of exchanges, viz: The exchange that is
provided for in section 354(a)(1) in which stock or securities in a
corporation, a party to a reorganization, are, in pursuance of a plan of
reorganization, exchanged for the stock or securities in a corporation,
a party to the same reorganization; and the exchange that is provided
for in section 361(a) in which a corporation, a party to a
reorganization, exchanges property, in pursuance of a plan of
reorganization, for stock or securities in another corporation, a party
to the same reorganization. Section 368(a)(1) limits the definition of
the term reorganization to six kinds of transactions and excludes all
others. From its context, the term a party to a reorganization can only
mean a party to a transaction specifically defined as a reorganization
by section 368(a). Certain rules respecting boot received in either of
the two types of exchanges provided for in section 354(a)(1) and section
361(a) are prescribed in sections 356, 357, and 361(b). A special rule
respecting a transfer of property with a liability in excess of its
basis is prescribed in section 357(c). Under section 367 a limitation is
placed on all these provisions by providing that except under specified
conditions foreign corporations shall not be deemed within their scope.
The provisions of the Code referred to in this paragraph are
inapplicable unless there is a plan of reorganization. A plan of
reorganization must contemplate the bona fide execution of one of the
transactions specifically described as a reorganization in section
368(a) and for the bona fide consummation of each of the requisite acts
under which nonrecognition of gain is claimed. Such transaction and such
acts must be an ordinary and necessary incident of the conduct of the
enterprise and must provide for a continuation of the enterprise. A
scheme, which involves an abrupt departure from normal reorganization
procedure in connection with a transaction on which the imposition of
tax is imminent, such as a mere device that puts on the form of a
corporate reorganization as a disguise for concealing its real
character, and the object and accomplishment of which is the
consummation of a preconceived plan having no business or corporate
purpose, is not a plan of reorganization.
(d) Continuity of business enterprise--(1) General rule. Continuity
of business enterprise (COBE) requires that the issuing corporation (P),
as defined in paragraph (b) of this section, either continue the target
corporation's (T's) historic business or use a significant portion of
T's historic business assets in a business. The preceding sentence
applies to transactions occurring after January 28, 1998, except that it
does not apply to any transaction occurring pursuant to a written
agreement which is binding on January 28, 1998, and at all times
thereafter. The application of this general rule to certain
transactions, such as mergers of holding companies, will depend on all
facts and circumstances. The policy underlying this general rule, which
is to ensure that reorganizations are limited to readjustments of
continuing interests in property under modified corporate form, provides
the guidance necessary to make these facts and circumstances
determinations.
(2) Business continuity. (i) The continuity of business enterprise
requirement is satisfied if P continues T's historic business. The fact
P is in the same line of business as T tends to establish the requisite
continuity, but is not alone sufficient.
(ii) If T has more than one line of business, continuity of business
enterprise requires only that P continue a significant line of business.
[[Page 537]]
(iii) In general, a corporation's historic business is the business
it has conducted most recently. However, a corporation's historic
business is not one the corporation enters into as part of a plan of
reorganization.
(iv) All facts and circumstances are considered in determining the
time when the plan comes into existence and in determining whether a
line of business is ``significant''.
(3) Asset continuity. (i) The continuity of business enterprise
requirement is satisfied if P uses a significant portion of T's historic
business assets in a business.
(ii) A corporation's historic business assets are the assets used in
its historic business. Business assets may include stock and securities
and intangible operating assets such as good will, patents, and
trademarks, whether or not they have a tax basis.
(iii) In general, the determination of the portion of a
corporation's assets considered ``significant'' is based on the relative
importance of the assets to operation of the business. However, all
other facts and circumstances, such as the net fair market value of
those assets, will be considered.
(4) Acquired assets or stock held by members of the qualified group
or partnerships. The following rules apply in determining whether the
COBE requirement of paragraph (d)(1) of this section is satisfied:
(i) Businesses and assets of members of a qualified group. The
issuing corporation is treated as holding all of the businesses and
assets of all of the members of the qualified group, as defined in
paragraph (d)(4)(ii) of this section.
(ii) Qualified group. A qualified group is one or more chains of
corporations connected through stock ownership with the issuing
corporation, but only if the issuing corporation owns directly stock
meeting the requirements of section 368(c) in at least one other
corporation, and stock meeting the requirements of section 368(c) in
each of the corporations (except the issuing corporation) is owned
directly (or indirectly as provided in paragraph (d)(4)(iii)(D) of this
section) by one or more of the other corporations.
(iii) Partnerships--(A) Partnership assets. Each partner of a
partnership will be treated as owning the T business assets used in a
business of the partnership in accordance with that partner's interest
in the partnership.
(B) Partnership businesses. The issuing corporation will be treated
as conducting a business of a partnership if--
(1) Members of the qualified group, in the aggregate, own an
interest in the partnership representing a significant interest in that
partnership business; or
(2) One or more members of the qualified group have active and
substantial management functions as a partner with respect to that
partnership business.
(C) Conduct of the historic T business in a partnership. If a
significant historic T business is conducted in a partnership, the fact
that P is treated as conducting such T business under paragraph
(d)(4)(iii)(B) of this section tends to establish the requisite
continuity, but is not alone sufficient.
(D) Stock attributed from certain partnerships. Solely for purposes
of paragraph (d)(4)(ii) of this section, if members of the qualified
group own interests in a partnership meeting requirements equivalent to
section 368(c) (a section 368(c) controlled partnership), any stock
owned by the section 368(c) controlled partnership shall be treated as
owned by members of the qualified group. Solely for purposes of
determining whether a lower-tier partnership is a section 368(c)
controlled partnership, any interest in a lower-tier partnership that is
owned by a section 368(c) controlled partnership shall be treated as
owned by members of the qualified group.
(iv) Effective/applicability dates. Paragraphs (d)(4)(i) and
(d)(4)(iii) (other than paragraph (d)(4)(iii)(D)) of this section apply
to transactions occurring after January 28, 1998, except that they do
not apply to any transaction occurring pursuant to a written agreement
which is binding on January 28, 1998, and at all times thereafter.
Paragraphs (d)(4)(ii) and (d)(4)(iii)(D) of this section apply to
transactions occurring on or after October 25, 2007, except that they do
not apply to any transaction occurring pursuant to a written agreement
which is binding before October 25, 2007, and at all times after that.
[[Page 538]]
(5) Examples. The following examples illustrate this paragraph (d).
All the corporations have only one class of stock outstanding. The
preceding sentence and paragraph (d)(5) Example 6 and Example 8 through
Example 13 apply to transactions occurring after January 28, 1998,
except that they do not apply to any transaction occurring pursuant to a
written agreement which is binding on January 28, 1998, and at all times
thereafter. Paragraph (d)(5) Example 7, Example 14, and Example 15 apply
to transactions occurring on or after October 25, 2007, except that they
do not apply to any transaction occurring pursuant to a written
agreement which is binding before October 25, 2007, and at all times
after that. The examples read as follows:
Example 1. T conducts three lines of business: manufacture of
synthetic resins, manufacture of chemicals for the textile industry, and
distribution of chemicals. The three lines of business are approximately
equal in value. On July 1, 1981, T sells the synthetic resin and
chemicals distribution businesses to a third party for cash and
marketable securities. On December 31, 1981, T transfers all of its
assets to P solely for P voting stock. P continues the chemical
manufacturing business without interruption. The continuity of business
enterprise requirement is met. Continuity of business enterprise
requires only that P continue one of T's three significant lines of
business.
Example 2. P manufactures computers and T manufactures components
for computers. T sells all of its output to P. On January 1, 1981, P
decides to buy imported components only. On March 1, 1981, T merges into
P. P continues buying imported components but retains T's equipment as a
backup source of supply. The use of the equipment as a backup source of
supply constitutes use of a significant portion of T's historic business
assets, thus establishing continuity of business enterprise. P is not
required to continue T's business.
Example 3. T is a manufacturer of boys' and men's trousers. On
January 1, 1978, as part of a plan of reorganization, T sold all of its
assets to a third party for cash and purchased a highly diversified
portfolio of stocks and bonds. As part of the plan T operates an
investment business until July 1, 1981. On that date, the plan of
reorganization culminates in a transfer by T of all its assets to P, a
regulated investment company, solely in exchange for P voting stock. The
continuity of business enterprise requirement is not met. T's investment
activity is not its historic business, and the stocks and bonds are not
T's historic business assets.
Example 4. T manufactures children's toys and P distributes steel
and allied products. On January 1, 1981, T sells all of its assets to a
third party for $100,000 cash and $900,000 in notes. On March 1, 1981, T
merges into P. Continuity of business enterprise is lacking. The use of
the sales proceeds in P's business is not sufficient.
Example 5. T manufactures farm machinery and P operates a lumber
mill. T merges into P. P disposes of T's assets immediately after the
merger as part of the plan of reorganization. P does not continue T's
farm machinery manufacturing business. Continuity of business enterprise
is lacking.
Example 6. Use of a significant portion of T's historic business
assets by the qualified group. (i) Facts. T operates an auto parts
distributorship. P owns 80 percent of the stock of a holding company
(HC). HC owns 80 percent of the stock of ten subsidiaries, S-1 through
S-10. S-1 through S-10 each separately operate a full service gas
station. Pursuant to a plan of reorganization, T merges into P and the T
shareholders receive solely P stock. As part of the plan of
reorganization, P transfers T's assets to HC, which in turn transfers
some of the T assets to each of the ten subsidiaries. No one subsidiary
receives a significant portion of T's historic business assets. Each of
the subsidiaries will use the T assets in the operation of its full
service gas station. No P subsidiary will be an auto parts distributor.
(ii) Continuity of business enterprise. Under paragraph (d)(4)(i) of
this section, P is treated as conducting the ten gas station businesses
of S-1 through S-10 and as holding the historic T assets used in those
businesses. P is treated as holding all the assets and conducting the
businesses of all of the members of the qualified group, which includes
S-1 through S-10 (paragraphs (d)(4)(i) and (ii) of this section). No
member of the qualified group continues T's historic distributorship
business. However, subsidiaries S-1 through S-10 continue to use the
historic T assets in a business. Even though no one corporation of the
qualified group is using a significant portion of T's historic business
assets in a business, the COBE requirement of paragraph (d)(1) of this
section is satisfied because, in the aggregate, the qualified group is
using a significant portion of T's historic business assets in a
business.
Example 7. Transfers of acquired stock to members of the qualified
group--continuity of business enterprise satisfied. (i) Facts. The facts
are the same as Example 6, except that, instead of P acquiring the
assets of T, HC acquires all of the outstanding stock of T in exchange
solely for stock of P. In addition, as part of the plan of
reorganization, HC transfers 10 percent of the stock of T to each of
subsidiaries S-1 through S-10. T will continue to operate an auto parts
distributorship. Without regard to whether the transaction satisfies the
COBE requirement, the
[[Page 539]]
transaction qualifies as a triangular B reorganization (as defined in
Sec. 1.358-6(b)(2)(iv)).
(ii) Continuity of business enterprise. Under paragraph (d)(4)(i) of
this section, P is treated as holding the assets and conducting the
business of T because T is a member of the qualified group (as defined
in paragraph (d)(4)(ii) of this section). The COBE requirement of
paragraph (d)(1) of this section is satisfied.
Example 8. Continuation of the historic T business in a partnership
satisfies continuity of business enterprise. (i) Facts. T manufactures
ski boots. P owns all of the stock of S-1. S-1 owns all of the stock of
S-2, and S-2 owns all of the stock of S-3. T merges into P and the T
shareholders receive consideration consisting of P stock and cash. The T
ski boot business is to be continued and expanded. In anticipation of
this expansion, P transfers all of the T assets to S-1, S-1 transfers
all of the T assets to S-2, and S-2 transfers all of the T assets to S-
3. S-3 and X (an unrelated party) form a new partnership (PRS). As part
of the plan of reorganization, S-3 transfers all the T assets to PRS,
and S-3, in its capacity as a partner, performs active and substantial
management functions for the PRS ski boot business, including making
significant business decisions and regularly participating in the
overall supervision, direction, and control of the employees of the ski
boot business. S-3 receives a 20 percent interest in PRS. X transfers
cash in exchange for an 80 percent interest in PRS.
(ii) Continuity of business enterprise. Under paragraph
(d)(4)(iii)(B)(2) of this section, P is treated as conducting T's
historic business because S-3 performs active and substantial management
functions for the ski boot business in S-3's capacity as a partner. P is
treated as holding all the assets and conducting the businesses of all
of the members of the qualified group, which includes S-3 (paragraphs
(d)(4)(i) and (ii) of this section). The COBE requirement of paragraph
(d)(1) of this section is satisfied.
Example 9. Continuation of the historic T business in a partnership
does not satisfy continuity of business enterprise. (i) Facts. The facts
are the same as Example 8, except that S-3 transfers the historic T
business to PRS in exchange for a 1 percent interest in PRS.
(ii) Continuity of business enterprise. Under paragraph
(d)(4)(iii)(B)(2) of this section, P is treated as conducting T's
historic business because S-3 performs active and substantial management
functions for the ski boot business in S-3's capacity as a partner. The
fact that a significant historic T business is conducted in PRS, and P
is treated as conducting such T business under (d)(4)(iii)(B) tends to
establish the requisite continuity, but is not alone sufficient
(paragraph (d)(4)(iii)(C) of this section). The COBE requirement of
paragraph (d)(1) of this section is not satisfied.
Example 10. Continuation of the T historic business in a partnership
satisfies continuity of business enterprise. (i) Facts. The facts are
the same as Example 8, except that S-3 transfers the historic T business
to PRS in exchange for a 33\1/3\ percent interest in PRS, and no member
of P's qualified group performs active and substantial management
functions for the ski boot business operated in PRS.
(ii) Continuity of business enterprise. Under paragraph
(d)(4)(iii)(B)(1) of this section, P is treated as conducting T's
historic business because S-3 owns an interest in the partnership
representing a significant interest in that partnership business. P is
treated as holding all the assets and conducting the businesses of all
of the members of the qualified group, which includes S-3 (paragraphs
(d)(4)(i) and (ii) of this section). The COBE requirement of paragraph
(d)(1) of this section is satisfied.
Example 11. Use of T's historic business assets in a partnership
business. (i) Facts. T is a fabric distributor. P owns all of the stock
of S-1. T merges into P and the T shareholders receive solely P stock.
S-1 and X (an unrelated party) own interests in a partnership (PRS). As
part of the plan of reorganization, P transfers all of the T assets to
S-1, and S-1 transfers all the T assets to PRS, increasing S-1's
percentage interest in PRS from 5 to 33\1/3\ percent. After the
transfer, X owns the remaining 66\2/3\ percent interest in PRS. Almost
all of the T assets consist of T's large inventory of fabric, which PRS
uses to manufacture sportswear. All of the T assets are used in the
sportswear business. No member of P's qualified group performs active
and substantial management functions for the sportswear business
operated in PRS.
(ii) Continuity of business enterprise. Under paragraph
(d)(4)(iii)(A) of this section, S-1 is treated as owning 33\1/3\ percent
of the T assets used in the PRS sportswear manufacturing business. Under
paragraph (d)(4)(iii)(B)(1) of this section, P is treated as conducting
the sportswear manufacturing business because S-1 owns an interest in
the partnership representing a significant interest in that partnership
business. P is treated as holding all the assets and conducting the
businesses of all of the members of the qualified group, which includes
S-1 (paragraphs (d)(4)(i) and (ii) of this section). The COBE
requirement of paragraph (d)(1) of this section is satisfied.
Example 12. Aggregation of partnership interests among members of
the qualified group: use of T's historic business assets in a
partnership business. (i) Facts. The facts are the same as Example 11,
except that S-1 transfers all the T assets to PRS, and P and X each
transfer cash to PRS in exchange for partnership interests. After the
transfers, P owns 11 percent, S-1 owns 22\1/3\ percent, and X owns 66\2/
3\ percent of PRS.
(ii) Continuity of business enterprise. Under paragraph
(d)(4)(iii)(B)(1) of this section, P is
[[Page 540]]
treated as conducting the sportswear manufacturing business because
members of the qualified group, in the aggregate, own an interest in the
partnership representing a significant interest in that business. P is
treated as owning 11 percent of the assets directly, and S-1 is treated
as owning 22\1/3\ percent of the assets, used in the PRS sportswear
business (paragraph (d)(4)(iii)(A) of this section). P is treated as
holding all the assets of all of the members of the qualified group,
which includes S-1, and thus in the aggregate, P is treated as owning
33\1/3\ of the T assets (paragraphs (d)(4)(i) and (ii) of this section).
The COBE requirement of paragraph (d)(1) of this section is satisfied
because P is treated as using a significant portion of T's historic
business assets in its sportswear manufacturing business.
Example 13. Tiered partnerships: use of T's historic business assets
in a partnership business. (i) Facts. T owns and manages a commercial
office building in state Z. Pursuant to a plan of reorganization, T
merges into P, solely in exchange for P stock, which is distributed to
the T shareholders. P transfers all of the T assets to a partnership,
PRS-1, which owns and operates television stations nationwide. After the
transfer, P owns a 50 percent interest in PRS-1. P does not have active
and substantial management functions as a partner with respect to the
PRS-1 business. X, not a member of P's qualified group, owns the
remaining 50 percent interest in PRS-1. PRS-1, in an effort to expand
its state Z television operation, enters into a joint venture with U, an
unrelated party. As part of the plan of reorganization, PRS-1 transfers
all the T assets and its state Z television station to PRS-2, in
exchange for a 75 percent partnership interest. U contributes cash to
PRS-2 in exchange for a 25 percent partnership interest and oversees the
management of the state Z television operation. PRS-1 does not actively
and substantially manage PRS-2's business. PRS-2's state Z operations
are moved into the acquired T office building. All of the assets that P
acquired from T are used in PRS-2's business.
(ii) Continuity of business enterprise. Under paragraph
(d)(4)(iii)(A) of this section, PRS-1 is treated as owning 75 percent of
the T assets used in PRS-2's business. P, in turn, is treated as owning
50 percent of PRS-1's interest the T assets. Thus, P is treated as
owning 37\1/2\ percent (50 percent x 75 percent) of the T assets used in
the PRS-2 business. Under paragraph (d)(4)(iii)(B)(1) of this section, P
is treated as conducting PRS-2's business, the operation of the state Z
television station, and under paragraph (d)(4)(iii)(A) of this section,
P is treated as using 37\1/2\ percent of the historic T business assets
in that business. The COBE requirement of paragraph (d)(1) of this
section is satisfied because P is treated as using a significant portion
of T's historic business assets in its television business.
Example 14. Transfer of acquired stock to a partnership--continuity
of business enterprise satisfied. (i) Facts. Pursuant to a plan of
reorganization, the T shareholders transfer all of their T stock to a
subsidiary of P, S-1, solely in exchange for P stock. In addition, as
part of the plan of reorganization, S-1 transfers the T stock to its
subsidiary, S-2, and S-2 transfers the T stock to its subsidiary, S-3.
S-2 and S-3 form a new partnership, PRS. Immediately thereafter, S-3
transfers all of the T stock to PRS in exchange for an 80 percent
interest in PRS, and S-2 transfers cash to PRS in exchange for a 20
percent interest in PRS.
(ii) Continuity of business enterprise. Members of the qualified
group, in the aggregate, own all of the interests in PRS. Because these
interests in PRS meet requirements equivalent to section 368(c), under
paragraph (d)(4)(iii)(D) of this section, the T stock owned by PRS is
treated as owned by members of the qualified group. P is treated as
holding all of the businesses and assets of T because T is a member of
the qualified group (as defined in paragraph (d)(4)(ii) of this
section). The COBE requirement of paragraph (d)(1) of this section is
satisfied because P is treated as continuing T's business.
Example 15. Transfer of acquired stock to a partnership--continuity
of business enterprise not satisfied. (i) Facts. The facts are the same
as in Example 14, except that S-3 and U, an unrelated corporation, form
a new partnership, PRS, and, immediately thereafter, S-3 transfers all
of the T stock to PRS in exchange for a 50 percent interest in PRS, and
U transfers cash to PRS in exchange for a 50 percent interest in PRS.
(ii) Continuity of business enterprise. Members of the qualified
group, in the aggregate, own 50 percent of the interests in PRS. Because
these interests in PRS do not meet requirements equivalent to section
368(c), the T stock owned by PRS is not treated as owned by members of
the qualified group under paragraph (d)(4)(iii)(D) of this section. P is
not treated as holding all of the businesses and assets of T because T
has ceased to be a member of the qualified group (as defined in
paragraph (d)(4)(ii) of this section). The COBE requirement of paragraph
(d)(1) of this section is not satisfied because P is not treated as
continuing T's business or using T's historic business assets in a
business.
(e) Continuity of interest--(1) General rule. (i) The purpose of the
continuity of interest requirement is to prevent transactions that
resemble sales from qualifying for nonrecognition of gain or loss
available to corporate reorganizations. Continuity of interest requires
that in substance a substantial
[[Page 541]]
part of the value of the proprietary interests in the target corporation
be preserved in the reorganization. A proprietary interest in the target
corporation is preserved if, in a potential reorganization, it is
exchanged for a proprietary interest in the issuing corporation (as
defined in paragraph (b) of this section), it is exchanged by the
acquiring corporation for a direct interest in the target corporation
enterprise, or it otherwise continues as a proprietary interest in the
target corporation. However, a proprietary interest in the target
corporation is not preserved if, in connection with the potential
reorganization, it is acquired by the issuing corporation for
consideration other than stock of the issuing corporation, or stock of
the issuing corporation furnished in exchange for a proprietary interest
in the target corporation in the potential reorganization is redeemed.
All facts and circumstances must be considered in determining whether,
in substance, a proprietary interest in the target corporation is
preserved. See paragraph (e)(6) of this section for rules related to
when a creditor's claim against a target corporation is a proprietary
interest in the corporation. For purposes of the continuity of interest
requirement, a mere disposition of stock of the target corporation prior
to a potential reorganization to persons not related (as defined in
paragraph (e)(4) of this section determined without regard to paragraph
(e)(4)(i)(A) of this section) to the target corporation or to persons
not related (as defined in paragraph (e)(4) of this section) to the
issuing corporation is disregarded and a mere disposition of stock of
the issuing corporation received in a potential reorganization to
persons not related (as defined in paragraph (e)(4) of this section) to
the issuing corporation is disregarded.
(ii) For purposes of paragraph (e)(1)(i) of this section, a
proprietary interest in the target corporation (other than one held by
the acquiring corporation) is not preserved to the extent that
consideration received prior to a potential reorganization, either in a
redemption of the target corporation stock or in a distribution with
respect to the target corporation stock, is treated as other property or
money received in the exchange for purposes of section 356, or would be
so treated if the target shareholder also had received stock of the
issuing corporation in exchange for stock owned by the shareholder in
the target corporation. A proprietary interest in the target corporation
is not preserved to the extent that creditors (or former creditors) of
the target corporation that own a proprietary interest in the
corporation under paragraph (e)(6) of this section (or would be so
treated if they had received the consideration in the potential
reorganization) receive payment for the claim prior to the potential
reorganization and such payment would be treated as other property or
money received in the exchange for purposes of section 356 had it been a
distribution with respect to stock.
(2) Measuring continuity of interest--(i) In general. In determining
whether a proprietary interest in the target corporation is preserved,
the consideration to be exchanged for the proprietary interests in the
target corporation pursuant to a contract to effect the potential
reorganization shall be valued on the last business day before the first
date such contract is a binding contract (the pre-signing date), if such
contract provides for fixed consideration. If a portion of the
consideration provided for in such a contract consists of other property
identified by value, then this specified value of such other property is
used for purposes of determining the extent to which a proprietary
interest in the target corporation is preserved. If the contract does
not provide for fixed consideration, this paragraph (e)(2)(i) is not
applicable.
(ii) Binding contract--(A) In general. A binding contract is an
instrument enforceable under applicable law against the parties to the
instrument. The presence of a condition outside the control of the
parties (including, for example, regulatory agency approval) shall not
prevent an instrument from being a binding contract. Further, the fact
that insubstantial terms remain to be negotiated by the parties to the
contract, or that customary conditions remain to be satisfied, shall not
prevent an instrument from being a binding contract.
[[Page 542]]
(B) Modifications--(1) In general. If a term of a binding contract
that relates to the amount or type of the consideration the target
shareholders will receive in a potential reorganization is modified
before the closing date of the potential reorganization, and the
contract as modified is a binding contract, the date of the modification
shall be treated as the first date there is a binding contract.
(2) Modification of a transaction that preserves continuity of
interest. Notwithstanding paragraph (e)(2)(ii)(B)(1) of this section, a
modification of a term that relates to the amount or type of
consideration the target shareholders will receive in a transaction that
would have resulted in the preservation of a substantial part of the
value of the target corporation shareholders' proprietary interests in
the target corporation if there had been no modification will not be
treated as a modification if--
(i) The modification has the sole effect of providing for the
issuance of additional shares of issuing corporation stock to the target
corporation shareholders;
(ii) The modification has the sole effect of decreasing the amount
of money or other property to be delivered to the target corporation
shareholders; or
(iii) The modification has the effect of decreasing the amount of
money or other property to be delivered to the target corporation
shareholders and providing for the issuance of additional shares of
issuing corporation stock to the target corporation shareholders.
(3) Modification of a transaction that does not preserve continuity
of interest. Notwithstanding paragraph (e)(2)(ii)(B)(1) of this section,
a modification of a term that relates to the amount or type of
consideration the target shareholders will receive in a transaction that
would not have resulted in the preservation of a substantial part of the
value of the target corporation shareholders' proprietary interests in
the target corporation if there had been no modification will not be
treated as a modification if--
(i) The modification has the sole effect of providing for the
issuance of fewer shares of issuing corporation stock to the target
corporation shareholders;
(ii) The modification has the sole effect of increasing the amount
of money or other property to be delivered to the target corporation
shareholders; or
(iii) The modification has the effect of increasing the amount of
money or other property to be delivered to the target corporation
shareholders and providing for the issuance of fewer shares of issuing
corporation stock to the target corporation shareholders.
(C) Tender offers. For purposes of this paragraph (e)(2), a tender
offer that is subject to section 14(d) of the Securities and Exchange
Act of 1934 [15 U.S.C. 78n(d)(1)] and Regulation 14D (17 CFR 240.14d-1
through 240.14d-101) and is not pursuant to a binding contract, is
treated as a binding contract made on the date of its announcement,
notwithstanding that it may be modified by the offeror or that it is not
enforceable against the offerees. If a modification (not pursuant to a
binding contract) of such a tender offer is subject to the provisions of
Regulation 14d-6(c) (17 CFR 240.14d-6(c)) and relates to the amount or
type of the consideration received in the tender offer, then the date of
the modification shall be treated as the first date there is a binding
contract.
(iii) Fixed consideration--(A) In general. A contract provides for
fixed consideration if it provides the number of shares of each class of
stock of the issuing corporation, the amount of money, and the other
property (identified either by value or by specific description), if
any, to be exchanged for all the proprietary interests in the target
corporation, or to be exchanged for each proprietary interest in the
target corporation. A shareholder's election to receive a number of
shares of stock of the issuing corporation, money, or other property (or
some combination of stock of the issuing corporation, money, or other
property) in exchange for all of the shareholder's proprietary interests
in the target corporation, or each of the shareholder's proprietary
interests in the target corporation, will not prevent a contract from
satisfying the definition of fixed consideration provided for in this
paragraph (e)(2)(iii)(A).
[[Page 543]]
(B) Shareholder elections. A contract that provides a target
corporation shareholder with an election to receive a number of shares
of stock of the issuing corporation, money, or other property (or some
combination of stock of the issuing corporation, money, or other
property) in exchange for all of the shareholder's proprietary interests
in the target corporation, or each of the shareholder's proprietary
interests in the target corporation, provides for fixed consideration if
the determination of the number of shares of issuing corporation stock
to be provided to the target corporation shareholder is determined using
the value of the issuing corporation stock on the last business day
before the first date there is a binding contract. This is the case even
though the shareholder election may preclude a determination, prior to
the closing date, of the number of shares of each class of the issuing
corporation, the amount of money, and the other property (or the
combination of shares, money and other property) to be exchanged for
each proprietary interest in the target corporation.
(C) Contingent adjustments to the consideration--(1) In general.
Except as provided in paragraph (e)(2)(iii)(C)(2) of this section, a
contract that provides for contingent adjustments to the consideration
will be treated as providing for fixed consideration if it would satisfy
the requirements of paragraph (e)(2)(iii)(A) of this section without the
contingent adjustment provision.
(2) Exceptions. A contract will not be treated as providing for
fixed consideration if the contract provides for contingent adjustments
to the consideration that prevent (to any extent) the target corporation
shareholders from being subject to the economic benefits and burdens of
ownership of the issuing corporation stock after the last business day
before the first date the contract is a binding contract. For example, a
contract will not be treated as providing for fixed consideration if the
contract provides for contingent adjustments to the consideration in the
event that the value of the stock of the issuing corporation, the value
of the assets of the issuing corporation, or the value of any surrogate
for either the value of the stock of the issuing corporation or the
assets of the issuing corporation increases or decreases after the last
business day before the first date there is a binding contract.
Similarly, a contract will not be treated as providing for fixed
consideration if the contract provides for contingent adjustments to the
number of shares of the issuing corporation stock to be provided to the
target corporation shareholders computed using any value of the issuing
corporation shares after the last business day before the first date
there is a binding contract.
(D) Escrows. Placing part of the consideration to be exchanged for
proprietary interests in the target corporation in escrow to secure
target's performance of customary pre-closing covenants or customary
target representations and warranties will not prevent a contract from
being treated as providing for fixed consideration.
(E) Anti-dilution clauses. The presence of a customary anti-dilution
clause will not prevent a contract from being treated as providing for
fixed consideration. However, the absence of such a clause will prevent
a contract from being treated as providing for fixed consideration if
the issuing corporation alters its capital structure between the first
date there is an otherwise binding contract to effect the transaction
and the effective date of the transaction in a manner that materially
alters the economic arrangement of the parties to the binding contract.
If the number of shares of the issuing corporation to be issued to the
target corporation shareholders is altered pursuant to a customary anti-
dilution clause, the value of the shares determined under paragraph
(e)(2)(i) of this section must be adjusted accordingly.
(F) Dissenters' rights. The possibility that some shareholders may
exercise dissenters' rights and receive consideration other than that
provided for in the binding contract will not prevent the contract from
being treated as providing for fixed consideration.
(G) Fractional shares. The fact that money may be paid in lieu of
issuing fractional shares will not prevent a contract from being treated
as providing for fixed consideration.
[[Page 544]]
(iv) New issuances. For purposes of applying paragraph (e)(2)(i) of
this section, any class of stock, securities, or indebtedness that the
issuing corporation issues to the target corporation shareholders
pursuant to the potential reorganization and that does not exist before
the first date there is a binding contract to effect the potential
reorganization is deemed to have been issued on the last business day
before the first date there is a binding contract to effect the
potential reorganization.
(v) Examples. For purposes of the examples in this paragraph
(e)(2)(v), P is the issuing corporation, T is the target corporation, S
is a wholly owned subsidiary of P, all corporations have only one class
of stock outstanding, A is an individual, no transactions other than
those described occur, and the transactions are not otherwise subject to
recharacterization. The following examples illustrate the application of
this paragraph (e)(2):
Example 1. Application of signing date rule. On January 3 of year 1,
P and T sign a binding contract pursuant to which T will be merged with
and into P on June 1 of year 1. Pursuant to the contract, the T
shareholders will receive 40 P shares and $60 of cash in exchange for
all of the outstanding stock of T. Twenty of the P shares, however, will
be placed in escrow to secure customary target representations and
warranties. The P stock is listed on an established market. On January 2
of year 1, the value of the P stock is $1 per share. On June 1 of year
1, T merges with and into P pursuant to the terms of the contract. On
that date, the value of the P stock is $.25 per share. None of the stock
placed in escrow is returned to P. Because the contract provides for the
number of shares of P and the amount of money to be exchanged for all of
the proprietary interests in T, under this paragraph (e)(2), there is a
binding contract providing for fixed consideration as of January 3 of
year 1. Therefore, whether the transaction satisfies the continuity of
interest requirement is determined by reference to the value of the P
stock on the pre-signing date. Because, for continuity of interest
purposes, the T stock is exchanged for $40 of P stock and $60 of cash,
the transaction preserves a substantial part of the value of the
proprietary interest in T. Therefore, the transaction satisfies the
continuity of interest requirement.
Example 2. Treatment of forfeited escrowed stock. (i) Escrowed
stock. The facts are the same as in Example 1 except that T's breach of
a representation results in the escrowed consideration being returned to
P. Because the contract provides for the number of shares of P and the
amount of money to be exchanged for all of the proprietary interests in
T, under this paragraph (e)(2), there is a binding contract providing
for fixed consideration as of January 3 of year 1. Therefore, whether
the transaction satisfies the continuity of interest requirement is
determined by reference to the value of the P stock on the pre-signing
date. Pursuant to paragraph (e)(1)(i) of this section, for continuity of
interest purposes, the T stock is exchanged for $20 of P stock and $60
of cash, and the transaction does not preserve a substantial part of the
value of the proprietary interest in T. Therefore, the transaction does
not satisfy the continuity of interest requirement.
(ii) Escrowed stock and cash. The facts are the same as in paragraph
(i) of this Example 2 except that the consideration placed in escrow
consists solely of eight of the P shares and $12 of the cash. Because
the contract provides for the number of shares of P and the amount of
money to be exchanged for all of the proprietary interests in T, under
this paragraph (e)(2), there is a binding contract providing for fixed
consideration as of January 3 of year 1. Therefore, whether the
transaction satisfies the continuity of interest requirement is
determined by reference to the value of the P stock on the pre-signing
date. Pursuant to paragraph (e)(1)(i) of this section, for continuity of
interest purposes, the T stock is exchanged for $32 of P stock and $48
of cash, and the transaction preserves a substantial part of the value
of the proprietary interest in T. Therefore, the transaction satisfies
the continuity of interest requirement.
Example 3. Redemption of stock received pursuant to binding
contract. The facts are the same as in Example 1 except that A owns 50
percent of the outstanding stock of T immediately prior to the merger
and receives 10 P shares and $30 in the merger and an additional 10 P
shares upon the release of the stock placed in escrow. In connection
with the merger, A and S agree that, immediately after the merger, S
will purchase any P shares that A acquires in the merger for $1 per
share. Shortly after the merger, S purchases A's P shares for $20.
Because the contract provides for the number of shares of P and the
amount of money to be exchanged for all of the proprietary interests in
T, under this paragraph (e)(2), there is a binding contract providing
for fixed consideration as of January 3 of year 1. Therefore, whether
the transaction satisfies the continuity of interest requirement is
determined by reference to the value of the P stock on the pre-signing
date. In addition, S is a person related to P under paragraph
(e)(4)(i)(A) of this section. Accordingly, A is treated as exchanging
his T shares for $50 of cash. Because, for continuity of interest
purposes,
[[Page 545]]
the T stock is exchanged for $20 of P stock and $80 of cash, the
transaction does not preserve a substantial part of the value of the
proprietary interest in T. Therefore, the transaction does not satisfy
the continuity of interest requirement.
Example 4. Modification of binding contract--continuity not
preserved. The facts are the same as in Example 1 except that on April 1
of year 1, the parties modify their contract. Pursuant to the modified
contract, which is a binding contract, the T shareholders will receive
50 P shares (an additional 10 shares) and $75 of cash (an additional $15
of cash) in exchange for all of the outstanding T stock. On March 31 of
year 1, the value of the P stock is $.50 per share. Under this paragraph
(e)(2), although there was a binding contract providing for fixed
consideration as of January 3 of year 1, terms of that contract relating
to the consideration to be provided to the target shareholders were
modified on April 1 of year 1. The execution of the transaction without
modification would have resulted in the preservation of a substantial
part of the value of the target corporation shareholders' proprietary
interests in the target corporation if there had been no modification.
However, because the modified contract provides for additional P stock
and cash to be exchanged for all the proprietary interests in T, the
exception in paragraph (e)(2)(ii)(B)(2) of this section does not apply
to preserve the original signing date. Therefore, whether the
transaction satisfies the continuity of interest requirement is
determined by reference to the value of the P stock on March 31 of year
1. Because, for continuity of interest purposes, the T stock is
exchanged for $25 of P stock and $75 of cash, the transaction does not
preserve a substantial part of the value of the proprietary interest in
T. Therefore, the transaction does not satisfy the continuity of
interest requirement.
Example 5. Modification of binding contract disregarded--continuity
preserved. The facts are the same as in Example 4 except that, pursuant
to the modified contract, which is a binding contract, the T
shareholders will receive 60 P shares (an additional 20 shares as
compared to the original contract) and $60 of cash in exchange for all
of the outstanding T stock. In addition, on March 31 of year 1, the
value of the P stock is $.40 per share. Under this paragraph (e)(2),
although there was a binding contract providing for fixed consideration
as of January 3 of year 1, terms of that contract relating to the
consideration to be provided to the target shareholders were modified on
April 1 of year 1. Nonetheless, the modification has the sole effect of
providing for the issuance of additional P shares to the T shareholders.
In addition, the execution of the terms of the contract without regard
to the modification would have resulted in the preservation of a
substantial part of the value of the T shareholders' proprietary
interest in T because, for continuity of interest purposes, the T stock
would have been exchanged for $40 of P stock and $60 of cash. Pursuant
to paragraph (e)(2)(ii)(B)(2) of this section, the modification is not
treated as a modification for purposes of paragraph (e)(2)(ii)(B)(1) of
this section. Accordingly, whether the transaction satisfies the
continuity of interest requirement is determined by reference to the
value of the P stock on the pre-signing date. Because, for continuity of
interest purposes, the T stock is exchanged for $60 of P stock and $60
of cash, the transaction preserves a substantial part of the value of
the proprietary interest in T. Therefore the transaction satisfies the
continuity of interest requirement.
Example 6. New issuance. The facts are the same as in Example 1,
except that, instead of cash, the T shareholders will receive a new
class of P securities that will be publicly traded. In the aggregate,
the securities will have a stated principal amount of $60 and bear
interest at the average LIBOR (London Interbank Offered Rates) during
the 10 days prior to the potential reorganization. If the T shareholders
had been issued the P securities on January 2 of year 1, the P
securities would have had a value of $60 (determined by reference to the
value of comparable publicly traded securities). Whether the transaction
satisfies the continuity of interest requirement is determined by
reference to the value of the P stock and the P securities to be issued
to the T shareholders on January 2 of year 1. Under paragraph (e)(2)(iv)
of this section, for purposes of valuing the new P securities, they will
be treated as having been issued on the pre-signing date. Because, for
continuity of interest purposes, the T stock is exchanged for $40 of P
stock and $60 of other property, the transaction preserves a substantial
part of the value of the proprietary interest in T. Therefore, the
transaction satisfies the continuity of interest requirement.
Example 7. Fixed consideration--continuity not preserved. On January
3 of year 1, P and T sign a binding contract pursuant to which T will be
merged with and into P on June 1 of year 1. Pursuant to the contract, 60
shares of the T stock will be exchanged for $80 of cash and 40 shares of
the T stock will be exchanged for 20 shares of P stock. On January 2 of
year 1, the value of the P stock is $1 per share. On June 1 of year 1, T
merges with and into P pursuant to the terms of the contract. This
contract provides for fixed consideration and therefore whether the
transaction satisfies the continuity of interest requirement is
determined by reference to the value of the P stock on the pre-signing
date. However, applying the signing date rule, the P stock represents
only 20 percent of the value of the total consideration to be received
by
[[Page 546]]
the T shareholders. Accordingly, based on the economic realities of the
exchange, the transaction does not preserve a substantial part of the
value of the proprietary interest in T. Therefore, the transaction does
not satisfy the continuity of interest requirement.
Example 8. Anti-dilution clause. (i) Absence of anti-dilution
clause. On January 3 of year 1, P and T sign a binding contract pursuant
to which T will be merged with and into P on June 1 of year 1. Pursuant
to the contract, the T shareholders will receive 40 P shares and $60 of
cash in exchange for all of the outstanding stock of T. The contract
does not contain a customary anti-dilution provision. The P stock is
listed on an established market. On January 2 of year 1, the value of
the P stock is $1 per share. On April 10 of year 1, P issues its stock
to effect a stock split; each shareholder of P receives an additional
share of P for each P share that it holds. On April 11 of year 1, the
value of the P stock is $.50 per share. Because P altered its capital
structure between January 3 and June 1 of year 1 in a manner that
materially alters the economic arrangement of the parties, under
paragraph (e)(2)(iii)(E) of this section, the contract is not treated as
a binding contract that provides for fixed consideration. Accordingly,
whether the transaction satisfies the continuity of interest requirement
cannot be determined by reference to the value of the P stock on January
2 of year 1.
(ii) Adjustment for anti-dilution clause. The facts are the same as
in paragraph (i) of this Example 8 except that the contract contains a
customary anti-dilution provision, and the T shareholders receive 80 P
shares and $60 of cash in exchange for all of the outstanding stock of
T. Under paragraph (e)(2)(iii)(E) of this section, the contract is
treated as a binding contract that provides for fixed consideration as
of January 3 of year 1. Therefore, whether the transaction satisfies the
continuity of interest requirement is generally determined by reference
to the value of the P stock on January 2 of year 1. However, under
paragraph (e)(2)(iii)(E) of this section, the value of the P stock on
the pre-signing date must be adjusted to take the stock split into
account. For continuity of interest purposes, the T stock is exchanged
for $40 of P stock (($1/2) x 80) and $60 of cash. Therefore, the
transaction satisfies the continuity of interest requirement.
Example 9. Shareholder election. On January 3 of year 1, P and T
sign a binding contract pursuant to which T will be merged with and into
P on June 1 of year 1. On January 2 of year 1, the value of the P stock
and the T stock is $1 per share. Pursuant to the contract, at the
shareholders' election, each share of T's 100 shares will be exchanged
for cash of $1, or alternatively, P stock. The contract provides that
the determination of the number of shares of P stock to be exchanged for
a share of T stock is made using the value of the P stock on the last
business day before the first date there is a binding contract (that is,
$1 per share). The contract further provides that, in the aggregate, 40
shares of P stock and $60 will be delivered, and contains a proration
mechanism in the event that either item of consideration is
oversubscribed. On the closing date, the value of the P stock is $.20
per share, and all target shareholders elect to receive cash. Pursuant
to the proration provision, each target share is exchanged for $.60 of
cash and $.08 of P stock. Pursuant to paragraph (e)(2)(iii)(A) of this
section, the contract provides for fixed consideration because it
provides for the number of shares of P stock and the amount of money to
be exchanged for all the proprietary interests in the target
corporation. Furthermore, pursuant to paragraph (e)(2)(iii)(B) of this
section, the contract provides for fixed consideration because the
number of shares of issuing corporation stock to be provided to the
target corporation shareholders is determined using the pre-signing date
value of P stock. Accordingly, whether the transaction satisfies the
continuity of interest requirement is determined by reference to the
value of the P stock on January 2 of year 1. Because, for continuity
purposes, the T stock is exchanged for $40 of P stock and $60 of cash,
the transaction preserves a substantial part of the value of the
proprietary interest in T. Therefore, the transaction satisfies the
continuity of interest requirement.
Example 10. Contingent adjustment based on the value of the issuing
corporation stock--continuity not preserved. On January 3 of year 1, P
and T sign a binding contract pursuant to which T will be merged with
and into P on June 1 of year 1. On January 2 of year 1, the value of the
P stock is $1 per share. Pursuant to the contract, if the value of the P
stock does not decrease after January 2 of year 1, the T shareholders
will receive 40 P shares and $60 of cash in exchange for all of the
outstanding stock of T. Furthermore, the contract provides that the T
shareholders will receive $.16 of additional P shares and $.24 for every
$.01 decrease in the value of one share of P stock after January 2 of
year 1. On June 1 of year 1, T merges with and into P pursuant to the
terms of the contract. On that date, the value of the P stock is $.40
per share. Pursuant to the terms of the contract, the consideration is
adjusted so that the T shareholders receive 24 more P shares ((60 x
$.16)/$.40) and $14.40 more cash (60 x $.24) than they would absent an
adjustment. Accordingly, at closing the T shareholders receive 64 P
shares and $74.40 of cash. Because the contract provides that additional
P shares and cash will be delivered to the T shareholders if the value
of the stock of P decreases after January 2 of year 1, under paragraph
(e)(2)(iii)(C)(2) of this section, the contract is not treated as
providing for fixed
[[Page 547]]
consideration, and therefore whether the transaction satisfies the
continuity of interest requirement cannot be determined by reference to
the value of the P stock on January 2 of year 1. For continuity of
interest purposes, the T stock is exchanged for $25.60 of P stock (64 x
$.40) and $74.40 of cash and the transaction does not preserve a
substantial part of the value of the proprietary interest in T.
Therefore, the transaction does not satisfy the continuity of interest
requirement.
Example 11. Contingent adjustment to boot based on the value of the
target corporation stock--continuity not preserved. On January 3 of year
1, P and T sign a binding contract pursuant to which T will be merged
with and into P on June 1 of year 1. On January 2 of year 1, T has 100
shares outstanding, and each T share is worth $1. On January 2 of year
1, each P share is worth $1. Pursuant to the contract, if the value of
the T stock does not increase after January 3 of year 1, the T
shareholders will receive 40 P shares and $60 of cash in exchange for
all of the outstanding stock of T. Furthermore, the contract provides
that the T shareholders will receive $1 of additional cash for every
$.01 increase in the value of one share of T stock after January 3 of
year 1. On June 1 of year 1, the value of the T stock is $1.40 per share
and the value of the P stock is $.75 per share. Pursuant to the terms of
the contract, the consideration is adjusted so that the T shareholders
receive $40 more cash (40 x $1) than they would absent an adjustment.
Accordingly, at closing the T shareholders receive 40 P shares and $100
of cash. Because the contract provides the number of shares of P stock
and the amount of money to be exchanged for all the proprietary
interests in T, and the contingent adjustment to the cash consideration
is not based on changes in the value of the P stock, P assets, or any
surrogate thereof, after January 2 of year 1, there is a binding
contract providing for fixed consideration as of January 3 of year 1.
Therefore, whether the transaction satisfies the continuity of interest
requirement is determined by reference to the value of the P stock on
January 2 of year 1. For continuity of interest purposes, the T stock is
exchanged for $40 of P stock (40 x $1) and $100 of cash. Therefore, the
transaction does not satisfy the continuity of interest requirement.
Example 12. Contingent adjustment to stock based on the value of the
target corporation stock--continuity preserved. On January 3 of year 1,
P and T sign a binding contract pursuant to which T will be merged with
and into P on June 1 of year 1. On that date T has 100 shares
outstanding, and each T share is worth $1. On January 2 of year 1, each
P share is worth $1. Pursuant to the contract, if the value of the T
stock does not decrease after January 3 of year 1, the T shareholders
will receive 40 P shares and $60 of cash in exchange for all of the
outstanding stock of T. Furthermore, the contract provides that the T
shareholders will receive $.40 less P stock and $.60 less cash for every
$.01 decrease in the value of one share of T stock after January 3 of
year 1. The contract also provides that the number of P shares by which
the consideration will be reduced as a result of this adjustment will be
determined based on the value of the P stock on January 2 of year 1. On
June 1 of year 1, T merges with and into P pursuant to the terms of the
contract. On that date, the value of the T stock is $.70 per share and
the value of the P stock is $.75 per share. Pursuant to the terms of the
contract, the consideration is adjusted so that the T shareholders
receive 12 fewer P shares ((30 x $.40)/$1) and $18 less cash (30 x $.60)
than they would absent an adjustment. Accordingly, at closing the T
shareholders receive 28 P shares and $42 of cash. Because the contract
provides for the number of shares of P stock and the amount of money to
be exchanged for all of the proprietary interests in T, the contract
does not provide for contingent adjustments to the consideration based
on a change in value of the P stock, P assets, or any surrogate thereof,
after January 2 of year 1, and the adjustment to the number of P shares
the T shareholders receive is determined based on the value of the P
shares on January 2 of year 1, there is a binding contract providing for
fixed consideration as of January 3 of year 1. Therefore, whether the
transaction satisfies the continuity of interest requirement is
determined by reference to the value of the P stock on January 2 of year
1. For continuity of interest purposes, the T stock is exchanged for $28
of P stock (28 x $1) and $42 of cash. Accordingly, the transaction
satisfies the continuity of interest requirement.
(3) Related persons acquisitions. A proprietary interest in the
target corporation is not preserved if, in connection with a potential
reorganization, a person related (as defined in paragraph (e)(4) of this
section) to the issuing corporation acquires, for consideration other
than stock of the issuing corporation, either a proprietary interest in
the target corporation or stock of the issuing corporation that was
furnished in exchange for a proprietary interest in the target
corporation. The preceding sentence does not apply to the extent those
persons who were the direct or indirect owners of the target corporation
prior to the potential reorganization maintain a direct or indirect
proprietary interest in the issuing corporation.
[[Page 548]]
(4) Definition of related person--(i) In general. For purposes of
this paragraph (e), two corporations are related persons if either--
(A) The corporations are members of the same affiliated group as
defined in section 1504 (determined without regard to section 1504(b));
or
(B) A purchase of the stock of one corporation by another
corporation would be treated as a distribution in redemption of the
stock of the first corporation under section 304(a)(2) (determined
without regard to Sec. 1.1502-80(b)).
(ii) Special rules. The following rules apply solely for purposes of
this paragraph (e)(4):
(A) A corporation will be treated as related to another corporation
if such relationship exists immediately before or immediately after the
acquisition of the stock involved.
(B) A corporation, other than the target corporation or a person
related (as defined in paragraph (e)(4) of this section determined
without regard to paragraph (e)(4)(i)(A) of this section) to the target
corporation, will be treated as related to the issuing corporation if
the relationship is created in connection with the potential
reorganization.
(5) Acquisitions by partnerships. For purposes of this paragraph
(e), each partner of a partnership will be treated as owning or
acquiring any stock owned or acquired, as the case may be, by the
partnership in accordance with that partner's interest in the
partnership. If a partner is treated as acquiring any stock by reason of
the application of this paragraph (e)(5), the partner is also treated as
having furnished its share of any consideration furnished by the
partnership to acquire the stock in accordance with that partner's
interest in the partnership.
(6) Creditors' claims as proprietary interests--(i) In general. A
creditor's claim against a target corporation may be a proprietary
interest in the target corporation if the target corporation is in a
title 11 or similar case (as defined in section 368(a)(3)) or the amount
of the target corporation's liabilities exceeds the fair market value of
its assets immediately prior to the potential reorganization. In such
cases, if any creditor receives a proprietary interest in the issuing
corporation in exchange for its claim, every claim of that class of
creditors and every claim of all equal and junior classes of creditors
(in addition to the claims of shareholders) is a proprietary interest in
the target corporation immediately prior to the potential reorganization
to the extent provided in paragraph (e)(6)(ii) of this section.
(ii) Value of proprietary interest--(A) Claims of most senior class
of creditors receiving stock. A claim of the most senior class of
creditors receiving a proprietary interest in the issuing corporation
and a claim of any equal class of creditors will be treated as a
proprietary interest in accordance with the rules of this paragraph
(e)(6)(ii). For a claim of the most senior class of creditors receiving
a proprietary interest in the issuing corporation, and a claim of any
equal class of creditors, the value of the proprietary interest in the
target corporation represented by the claim is determined by multiplying
the fair market value of the claim by a fraction, the numerator of which
is the fair market value of the proprietary interests in the issuing
corporation that are received in the aggregate in exchange for the
claims of those classes of creditors, and the denominator of which is
the sum of the amount of money and the fair market value of all other
consideration (including the proprietary interests in the issuing
corporation) received in the aggregate in exchange for such claims. If
only one class (or one set of equal classes) of creditors receives
stock, such class (or set of equal classes) is treated as the most
senior class of creditors receiving stock. When only one class (or one
set of equal classes) of creditors receives issuing corporation stock in
exchange for a creditor's proprietary interest in the target
corporation, such stock will be counted for measuring continuity of
interest provided that the stock issued by the issuing corporation is
not de minimis in relation to the total consideration received by the
insolvent target corporation, its shareholders, and its creditors.
(B) Claims of junior classes of creditor receiving stock. The value
of a proprietary interest in the target corporation held by a creditor
whose claim is junior
[[Page 549]]
to the claims of other classes of target claims which are receiving
proprietary interests in the issuing corporation is the fair market
value of the junior creditor's claim.
(iii) Bifurcated claims. If a creditor's claim is bifurcated into a
secured claim and an unsecured claim pursuant to an order in a title 11
or similar case (as defined in section 368(a)(3)) or pursuant to an
agreement between the creditor and the debtor, the bifurcation of the
claim and the allocation of consideration to each of the resulting
claims will be respected in applying the rules of this paragraph (e)(6).
(iv) Effect of treating creditors as proprietors. The treatment of a
creditor's claim as a proprietary interest in the target corporation
shall not preclude treating shares of the target corporation as
proprietary interests in the target corporation.
(7) Successors and predecessors. For purposes of this paragraph (e),
any reference to the issuing corporation or the target corporation
includes a reference to any successor or predecessor of such
corporation, except that the target corporation is not treated as a
predecessor of the issuing corporation and the issuing corporation is
not treated as a successor of the target corporation.
(8) Examples. For purposes of the examples in this paragraph (e)(7),
P is the issuing corporation, T is the target corporation, S is a wholly
owned subsidiary of P, all corporations have only one class of stock
outstanding, A and B are individuals, PRS is a partnership, all
reorganization requirements other than the continuity of interest
requirement are satisfied, and the transaction is not otherwise subject
to recharacterization. The following examples illustrate the application
of this paragraph (e):
Example 1. Sale of stock to third party. (i) Sale of issuing
corporation stock after merger. A owns all of the stock of T. T merges
into P. In the merger, A receives P stock having a fair market value of
$50x and cash of $50x. Immediately after the merger, and pursuant to a
preexisting binding contract, A sells all of the P stock received by A
in the merger to B. Assume that there are no facts and circumstances
indicating that the cash used by B to purchase A's P stock was in
substance exchanged by P for T stock. Under paragraphs (e)(1) and (3) of
this section, the sale to B is disregarded because B is not a person
related to P within the meaning of paragraph (e)(4) of this section.
Thus, the transaction satisfies the continuity of interest requirement
because 50 percent of A's T stock was exchanged for P stock, preserving
a substantial part of the value of the proprietary interest in T.
(ii) Sale of target corporation stock before merger. The facts are
the same as paragraph (i) of this Example 1, except that B buys A's T
stock prior to the merger of T into P and then exchanges the T stock for
P stock having a fair market value of $50x and cash of $50x. The sale by
A is disregarded. The continuity of interest requirement is satisfied
because B's T stock was exchanged for P stock, preserving a substantial
part of the value of the proprietary interest in T.
Example 2. Relationship created in connection with potential
reorganization. Corporation X owns 60 percent of the stock of P and 30
percent of the stock of T. A owns the remaining 70 percent of the stock
of T. X buys A's T stock for cash in a transaction which is not a
qualified stock purchase within the meaning of section 338. T then
merges into P. In the merger, X exchanges all of its T stock for
additional stock of P. As a result of the issuance of the additional
stock to X in the merger, X's ownership interest in P increases from 60
to 80 percent of the stock of P. X is not a person related to P under
paragraph (e)(4)(i)(B) of this section, because a purchase of stock of P
by X would not be treated as a distribution in redemption of the stock
of P under section 304(a)(2). However, X is a person related to P under
paragraphs (e)(4)(i)(A) and (ii)(B) of this section, because X becomes
affiliated with P in the merger. The continuity of interest requirement
is not satisfied, because X acquired a proprietary interest in T for
consideration other than P stock, and a substantial part of the value of
the proprietary interest in T is not preserved. See paragraph (e)(3) of
this section.
Example 3. Participation by issuing corporation in post-merger sale.
A owns 80 percent of the T stock and none of the P stock, which is
widely held. T merges into P. In the merger, A receives P stock. In
addition, A obtains rights pursuant to an arrangement with P to have P
register the P stock under the Securities Act of 1933, as amended. P
registers A's stock, and A sells the stock shortly after the merger. No
person who purchased the P stock from A is a person related to P within
the meaning of paragraph (e)(4) of this section. Under paragraphs (e)(1)
and (3) of this section, the sale of the P stock by A is disregarded
because no person who purchased the P stock from A is a person related
to P within the meaning of paragraph (e)(4) of this section. The
transaction satisfies the continuity of interest requirement because
[[Page 550]]
A's T stock was exchanged for P stock, preserving a substantial part of
the value of the proprietary interest in T.
Example 4. Redemptions and purchases by issuing corporation or
related persons. (i) Redemption by issuing corporation. A owns 100
percent of the stock of T and none of the stock of P. T merges into S.
In the merger, A receives P stock. In connection with the merger, P
redeems all of the P stock received by A in the merger for cash. The
continuity of interest requirement is not satisfied, because, in
connection with the merger, P redeemed the stock exchanged for a
proprietary interest in T, and a substantial part of the value of the
proprietary interest in T is not preserved. See paragraph (e)(1) of this
section.
(ii) Purchase of target corporation stock by issuing corporation.
The facts are the same as paragraph (i) of this Example 4, except that,
instead of P redeeming its stock, prior to and in connection with the
merger of T into S, P purchases 90 percent of the T stock from A for
cash. The continuity of interest requirement is not satisfied, because
in connection with the merger, P acquired a proprietary interest in T
for consideration other than P stock, and a substantial part of the
value of the proprietary interest in T is not preserved. See paragraph
(e)(1) of this section. However, see Sec. 1.338-3(d) (which may change
the result in this case by providing that, by virtue of section 338,
continuity of interest is satisfied for certain parties after a
qualified stock purchase).
(iii) Purchase of issuing corporation stock by person related to
issuing corporation. The facts are the same as paragraph (i) of this
Example 4, except that, instead of P redeeming its stock, S buys all of
the P stock received by A in the merger for cash. S is a person related
to P under paragraphs (e)(4)(i)(A) and (B) of this section. The
continuity of interest requirement is not satisfied, because S acquired
P stock issued in the merger, and a substantial part of the value of the
proprietary interest in T is not preserved. See paragraph (e)(3) of this
section.
Example 5. Redemption in substance by issuing corporation. A owns
100 percent of the stock of T and none of the stock of P. T merges into
P. In the merger, A receives P stock. In connection with the merger, B
buys all of the P stock received by A in the merger for cash. Shortly
thereafter, in connection with the merger, P redeems the stock held by B
for cash. Based on all the facts and circumstances, P in substance has
exchanged solely cash for T stock in the merger. The continuity of
interest requirement is not satisfied, because in substance P redeemed
the stock exchanged for a proprietary interest in T, and a substantial
part of the value of the proprietary interest in T is not preserved. See
paragraph (e)(1) of this section.
Example 6. Purchase of issuing corporation stock through
partnership. A owns 100 percent of the stock of T and none of the stock
of P. S is an 85 percent partner in PRS. The other 15 percent of PRS is
owned by unrelated persons. T merges into P. In the merger, A receives P
stock. In connection with the merger, PRS purchases all of the P stock
received by A in the merger for cash. Under paragraph (e)(5) of this
section, S, as an 85 percent partner of PRS, is treated as having
acquired 85 percent of the P stock exchanged for A's T stock in the
merger, and as having furnished 85 percent of the cash paid by PRS to
acquire the P stock. S is a person related to P under paragraphs
(e)(4)(i)(A) and (B) of this section. The continuity of interest
requirement is not satisfied, because S is treated as acquiring 85
percent of the P stock issued in the merger, and a substantial part of
the value of the proprietary interest in T is not preserved. See
paragraph (e)(3) of this section.
Example 7. Exchange by acquiring corporation for direct interest. A
owns 30 percent of the stock of T. P owns 70 percent of the stock of T,
which was not acquired by P in connection with the acquisition of T's
assets. T merges into P. A receives cash in the merger. The continuity
of interest requirement is satisfied, because P's 70 percent proprietary
interest in T is exchanged by P for a direct interest in the assets of
the target corporation enterprise.
Example 8. Maintenance of direct or indirect interest in issuing
corporation. X, a corporation, owns all of the stock of each of
corporations P and Z. Z owns all of the stock of T. T merges into P. Z
receives P stock in the merger. Immediately thereafter and in connection
with the merger, Z distributes the P stock received in the merger to X.
X is a person related to P under paragraph (e)(4)(i)(A) of this section.
The continuity of interest requirement is satisfied, because X was an
indirect owner of T prior to the merger who maintains a direct or
indirect proprietary interest in P, preserving a substantial part of the
value of the proprietary interest in T. See paragraph (e)(3) of this
section.
Example 9. Preacquisition redemption by target corporation. T has
two shareholders, A and B. P expresses an interest in acquiring the
stock of T. A does not wish to own P stock. T redeems A's shares in T in
exchange for cash. No funds have been or will be provided by P for this
purpose. P subsequently acquires all the outstanding stock of T from B
solely in exchange for voting stock of P. The cash received by A in the
prereorganization redemption is not treated as other property or money
under section 356, and would not be so treated even if A had received
some stock of P in exchange for his T stock. The prereorganization
redemption by T does not affect continuity of interest,
[[Page 551]]
because B's proprietary interest in T is unaffected, and the value of
the proprietary interest in T is preserved.
Example 10. Creditors treated as owning a proprietary interest. (i)
More than one class of creditor receives issuing corporation stock. T
has assets with a fair market value of $150x and liabilities of $200x. T
has two classes of creditors: two senior creditors with claims of $25x
each; and one junior creditor with a claim of $150x. T transfers all of
its assets to P in exchange for $95x in cash and shares of P stock with
a fair market value of $55x. Each T senior creditor receives $20x in
cash and P stock with a fair market value of $5x in exchange for his
claim. The T junior creditor receives $55x in cash and P stock with a
fair market value of $45x in exchange for his claim. The T shareholders
receive no consideration in exchange for their T stock. Under paragraph
(e)(6) of this section, because the amount of T's liabilities exceeds
the fair market value of its assets immediately prior to the potential
reorganization, the claims of the creditors of T may be proprietary
interests in T. Because the senior creditors receive proprietary
interests in P in the transaction in exchange for their claims, their
claims and the claim of the junior creditor and the T stock are treated
as proprietary interests in T immediately prior to the transaction.
Under paragraph (e)(6)(ii)(A) of this section, the value of the
proprietary interest of each of the senior creditors' claims is $5x (the
fair market value of the senior creditor's claim, $25x, multiplied by a
fraction, the numerator of which is $10x, the fair market value of the
proprietary interests in the issuing corporation, P, received in the
aggregate in exchange for the claims of all the creditors in the senior
class, and the denominator of which is $50x, the sum of the amount of
money and the fair market value of all other consideration (including
the proprietary interests in P) received in the aggregate in exchange
for such claims). Accordingly, $5x of the stock that each of the senior
creditors receives is counted in measuring continuity of interest. Under
paragraph (e)(6)(ii)(B) of this section, the value of the junior
creditor's proprietary interest in T immediately prior to the
transaction is $100x, the value of his claim. Thus, the value of the
creditors' proprietary interests in total is $110x and the creditors
received $55x worth of P stock in total in exchange for their
proprietary interests. Therefore, P acquired 50 percent of the value of
the proprietary interests in T in exchange for P stock. Because a
substantial part of the value of the proprietary interests in T is
preserved, the continuity of interest requirement is satisfied.
(ii) One class of creditor receives issuing corporation stock and
cash in disproportionate amounts. T has assets with a fair market value
of $80x and liabilities of $200x. T has one class of creditor with two
creditors, A and B, each having a claim of $100x. T transfers all of its
assets to P for $60x in cash and shares of P stock with a fair market
value of $20x. A receives $40x in cash in exchange for its claim. B
receives $20x in cash and P stock with a fair market value of $20x in
exchange for its claim. The T shareholders receive no consideration in
exchange for their T stock. The P stock is not de minimis in relation to
the total consideration received. Under paragraph (e)(6) of this
section, because the amount of T's liabilities exceeds the fair market
value of its assets immediately prior to the potential reorganization,
the claims of the creditors of T may be proprietary interests in T.
Because the creditors of T received proprietary interests in P in the
transaction in exchange for their claims, their claims and the T stock
are treated as proprietary interests in T immediately prior to the
transaction. Under paragraph (e)(6)(ii)(A) of this section, the value of
the proprietary interest of each of the senior creditors is $10x (the
fair market value of a senior creditor's claim, $40x, multiplied by a
fraction, the numerator of which is $20x, the fair market value of the
proprietary interests in the issuing corporation, P, received in the
aggregate in exchange for the claims of all the creditors in the class,
and the denominator of which is $80x, the sum of the amount of money and
the fair market value of all other consideration (including the
proprietary interests in P) received in the aggregate in exchange for
such claims). Accordingly, $10x of the cash that was received by A and
$10x of the P stock that was received by B are counted in measuring
continuity of interest. Thus, the value of the creditors' proprietary
interests in total is $20x and the creditors received $10x worth of P
stock in total in exchange for their proprietary interests. Therefore, P
acquired 50 percent of the value of the proprietary interests in T in
exchange for P stock. Because a substantial part of the value of the
proprietary interests in T is preserved, the continuity of interest
requirement is satisfied.
(9) Effective/applicability dates--(i) In general. Paragraphs (e)(1)
and (e)(3) through (e)(7) of this section apply to transactions
occurring after January 28, 1998, except that they do not apply to any
transaction occurring pursuant to a written agreement which is binding
on January 28, 1998, and at all times thereafter. Paragraph (e)(1)(ii)
of this section, however, applies to transactions occurring after August
30, 2000, unless the transaction occurs pursuant to a written agreement
that is (subject to customary conditions) binding on that date and at
all times thereafter.
[[Page 552]]
Taxpayers who entered into a binding agreement on or after January 28,
1998, and before August 30, 2000, may request a private letter ruling
permitting them to apply the final regulations to their transaction. A
private letter ruling will not be issued unless the taxpayer establishes
to the satisfaction of the IRS that there is not a significant risk of
different parties to the transaction taking inconsistent positions, for
Federal tax purposes, with respect to the applicability of the final
regulations to the transaction. The sixth sentence of paragraph
(e)(1)(i) of this section, the last sentence of paragraph (e)(1)(ii) of
this section, paragraph (e)(3) of this section, paragraph (e)(6) of this
section, and Example 10 of paragraph (e)(8) of this section apply to
transactions occurring after December 12, 2008.
(ii) COI measurement date. Paragraph (e)(2) of this section applies
to transactions occurring pursuant to binding contracts entered into
after December 19, 2011. For transactions entered into after March 19,
2010, and occurring pursuant to binding contracts entered into on or
before December 19, 2011, the parties to the transaction may elect to
apply the provisions of Sec. 1.368-1T as contained in 26 CFR, Part 1,
Sec. Sec. 1.301-1.400, revised as of April 1, 2009. However, the target
corporation, the issuing corporation, the controlling corporation of the
acquiring corporation if stock thereof is provided as consideration in
the transaction, and any direct or indirect transferee of transferred
basis property from any of the foregoing, may not elect to apply the
provisions of Sec. 1.368-1T as contained in 26 CFR, Part 1, Sec. Sec.
1.301-1.400, revised as of April 1, 2009, unless all such taxpayers
elect to apply such provisions. This election requirement will be
satisfied if none of the specified parties adopts inconsistent
treatment. For transactions entered into on or before March 19, 2010,
see Sec. 1.368-1T as contained in 26 CFR, Part 1, Sec. Sec. 1.301-
1.400, revised as of April 1, 2009.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960]
Editorial Note: For Federal Register citations affecting Sec.
1.368-1, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
Sec. 1.368-2 Definition of terms.
(a) The application of the term reorganization is to be strictly
limited to the specific transactions set forth in section 368(a). The
term does not embrace the mere purchase by one corporation of the
properties of another corporation. The preceding sentence applies to
transactions occurring after January 28, 1998, except that it does not
apply to any transaction occurring pursuant to a written agreement which
is binding on January 28, 1998, and at all times thereafter. If the
properties are transferred for cash and deferred payment obligations of
the transferee evidenced by short-term notes, the transaction is a sale
and not an exchange in which gain or loss is not recognized.
(b)(1)(i) Definitions. For purposes of this paragraph (b)(1), the
following terms shall have the following meanings:
(A) Disregarded entity. A disregarded entity is a business entity
(as defined in Sec. 301.7701-2(a) of this chapter) that is disregarded
as an entity separate from its owner for Federal income tax purposes.
Examples of disregarded entities include a domestic single member
limited liability company that does not elect to be classified as a
corporation for Federal income tax purposes, a corporation (as defined
in Sec. 301.7701-2(b) of this chapter) that is a qualified REIT
subsidiary (within the meaning of section 856(i)(2)), and a corporation
that is a qualified subchapter S subsidiary (within the meaning of
section 1361(b)(3)(B)).
(B) Combining entity. A combining entity is a business entity that
is a corporation (as defined in Sec. 301.7701-2(b) of this chapter)
that is not a disregarded entity.
(C) Combining unit. A combining unit is composed solely of a
combining entity and all disregarded entities, if any, the assets of
which are treated as owned by such combining entity for Federal income
tax purposes.
(ii) Statutory merger or consolidation generally. For purposes of
section
[[Page 553]]
368(a)(1)(A), a statutory merger or consolidation is a transaction
effected pursuant to the statute or statutes necessary to effect the
merger or consolidation, in which transaction, as a result of the
operation of such statute or statutes, the following events occur
simultaneously at the effective time of the transaction--
(A) All of the assets (other than those distributed in the
transaction) and liabilities (except to the extent such liabilities are
satisfied or discharged in the transaction or are nonrecourse
liabilities to which assets distributed in the transaction are subject)
of each member of one or more combining units (each a transferor unit)
become the assets and liabilities of one or more members of one other
combining unit (the transferee unit); and
(B) The combining entity of each transferor unit ceases its separate
legal existence for all purposes; provided, however, that this
requirement will be satisfied even if, under applicable law, after the
effective time of the transaction, the combining entity of the
transferor unit (or its officers, directors, or agents) may act or be
acted against, or a member of the transferee unit (or its officers,
directors, or agents) may act or be acted against in the name of the
combining entity of the transferor unit, provided that such actions
relate to assets or obligations of the combining entity of the
transferor unit that arose, or relate to activities engaged in by such
entity, prior to the effective time of the transaction, and such actions
are not inconsistent with the requirements of paragraph (b)(1)(ii)(A) of
this section.
(iii) Examples. The following examples illustrate the rules of
paragraph (b)(1) of this section. In each of the examples, except as
otherwise provided, each of R, V, Y, and Z is a C corporation. X is a
domestic limited liability company. Except as otherwise provided, X is
wholly owned by Y and is disregarded as an entity separate from Y for
Federal income tax purposes. The examples are as follows:
Example 1. Divisive transaction pursuant to a merger statute. (i)
Facts. Under State W law, Z transfers some of its assets and liabilities
to Y, retains the remainder of its assets and liabilities, and remains
in existence for Federal income tax purposes following the transaction.
The transaction qualifies as a merger under State W corporate law.
(ii) Analysis. The transaction does not satisfy the requirements of
paragraph (b)(1)(ii)(A) of this section because all of the assets and
liabilities of Z, the combining entity of the transferor unit, do not
become the assets and liabilities of Y, the combining entity and sole
member of the transferee unit. In addition, the transaction does not
satisfy the requirements of paragraph (b)(1)(ii)(B) of this section
because the separate legal existence of Z does not cease for all
purposes. Accordingly, the transaction does not qualify as a statutory
merger or consolidation under section 368(a)(1)(A).
Example 2. Merger of a target corporation into a disregarded entity
in exchange for stock of the owner. (i) Facts. Under State W law, Z
merges into X. Pursuant to such law, the following events occur
simultaneously at the effective time of the transaction: all of the
assets and liabilities of Z become the assets and liabilities of X and
Z's separate legal existence ceases for all purposes. In the merger, the
Z shareholders exchange their stock of Z for stock of Y.
(ii) Analysis. The transaction satisfies the requirements of
paragraph (b)(1)(ii) of this section because the transaction is effected
pursuant to State W law and the following events occur simultaneously at
the effective time of the transaction: all of the assets and liabilities
of Z, the combining entity and sole member of the transferor unit,
become the assets and liabilities of one or more members of the
transferee unit that is comprised of Y, the combining entity of the
transferee unit, and X, a disregarded entity the assets of which Y is
treated as owning for Federal income tax purposes, and Z ceases its
separate legal existence for all purposes. Accordingly, the transaction
qualifies as a statutory merger or consolidation for purposes of section
368(a)(1)(A).
Example 3. Merger of a target S corporation that owns a QSub into a
disregarded entity. (i) Facts. The facts are the same as in Example 2,
except that Z is an S corporation and owns all of the stock of U, a
QSub.
(ii) Analysis. The deemed formation by Z of U pursuant to Sec.
1.1361-5(b)(1) (as a consequence of the termination of U's QSub
election) is disregarded for Federal income tax purposes. The
transaction is treated as a transfer of the assets of U to X, followed
by X's transfer of these assets to U in exchange for stock of U. See
Sec. 1.1361-5(b)(3) Example 9. The transaction will, therefore, satisfy
the requirements of paragraph (b)(1)(ii) of this section because the
transaction is effected pursuant to State W law and the following events
occur simultaneously at the effective time of the transaction: all of
the assets and liabilities of Z and U, the sole members of
[[Page 554]]
the transferor unit, become the assets and liabilities of one or more
members of the transferee unit that is comprised of Y, the combining
entity of the transferee unit, and X, a disregarded entity the assets of
which Y is treated as owning for Federal income tax purposes, and Z
ceases its separate legal existence for all purposes. Moreover, the
deemed transfer of the assets of U in exchange for U stock does not
cause the transaction to fail to qualify as a statutory merger or
consolidation. See Sec. 368(a)(2)(C). Accordingly, the transaction
qualifies as a statutory merger or consolidation for purposes of section
368(a)(1)(A).
Example 4. Triangular merger of a target corporation into a
disregarded entity. (i) Facts. The facts are the same as in Example 2,
except that V owns 100 percent of the outstanding stock of Y and, in the
merger of Z into X, the Z shareholders exchange their stock of Z for
stock of V. In the transaction, Z transfers substantially all of its
properties to X.
(ii) Analysis. The transaction is not prevented from qualifying as a
statutory merger or consolidation under section 368(a)(1)(A), provided
the requirements of section 368(a)(2)(D) are satisfied. Because the
assets of X are treated for Federal income tax purposes as the assets of
Y, Y will be treated as acquiring substantially all of the properties of
Z in the merger for purposes of determining whether the merger satisfies
the requirements of section 368(a)(2)(D). As a result, the Z
shareholders that receive stock of V will be treated as receiving stock
of a corporation that is in control of Y, the combining entity of the
transferee unit that is the acquiring corporation for purposes of
section 368(a)(2)(D). Accordingly, the merger will satisfy the
requirements of section 368(a)(2)(D).
Example 5. Merger of a target corporation into a disregarded entity
owned by a partnership. (i) Facts. The facts are the same as in Example
2, except that Y is organized as a partnership under the laws of State W
and is classified as a partnership for Federal income tax purposes.
(ii) Analysis. The transaction does not satisfy the requirements of
paragraph (b)(1)(ii)(A) of this section. All of the assets and
liabilities of Z, the combining entity and sole member of the transferor
unit, do not become the assets and liabilities of one or more members of
a transferee unit because neither X nor Y qualifies as a combining
entity. Accordingly, the transaction cannot qualify as a statutory
merger or consolidation for purposes of section 368(a)(1)(A).
Example 6. Merger of a disregarded entity into a corporation. (i)
Facts. Under State W law, X merges into Z. Pursuant to such law, the
following events occur simultaneously at the effective time of the
transaction: all of the assets and liabilities of X (but not the assets
and liabilities of Y other than those of X) become the assets and
liabilities of Z and X's separate legal existence ceases for all
purposes.
(ii) Analysis. The transaction does not satisfy the requirements of
paragraph (b)(1)(ii)(A) of this section because all of the assets and
liabilities of a transferor unit do not become the assets and
liabilities of one or more members of the transferee unit. The
transaction also does not satisfy the requirements of paragraph
(b)(1)(ii)(B) of this section because X does not qualify as a combining
entity. Accordingly, the transaction cannot qualify as a statutory
merger or consolidation for purposes of section 368(a)(1)(A).
Example 7. Merger of a corporation into a disregarded entity in
exchange for interests in the disregarded entity. (i) Facts. Under State
W law, Z merges into X. Pursuant to such law, the following events occur
simultaneously at the effective time of the transaction: all of the
assets and liabilities of Z become the assets and liabilities of X and
Z's separate legal existence ceases for all purposes. In the merger of Z
into X, the Z shareholders exchange their stock of Z for interests in X
so that, immediately after the merger, X is not disregarded as an entity
separate from Y for Federal income tax purposes. Following the merger,
pursuant to Sec. 301.7701-3(b)(1)(i) of this chapter, X is classified
as a partnership for Federal income tax purposes.
(ii) Analysis. The transaction does not satisfy the requirements of
paragraph (b)(1)(ii)(A) of this section because immediately after the
merger X is not disregarded as an entity separate from Y and,
consequently, all of the assets and liabilities of Z, the combining
entity of the transferor unit, do not become the assets and liabilities
of one or more members of a transferee unit. Accordingly, the
transaction cannot qualify as a statutory merger or consolidation for
purposes of section 368(a)(1)(A).
Example 8. Merger transaction preceded by distribution. (i) Facts. Z
operates two unrelated businesses, Business P and Business Q, each of
which represents 50 percent of the value of the assets of Z. Y desires
to acquire and continue operating Business P, but does not want to
acquire Business Q. Pursuant to a single plan, Z sells Business Q for
cash to parties unrelated to Z and Y in a taxable transaction, and then
distributes the proceeds of the sale pro rata to its shareholders. Then,
pursuant to State W law, Z merges into Y. Pursuant to such law, the
following events occur simultaneously at the effective time of the
transaction: all of the assets and liabilities of Z related to Business
P become the assets and liabilities of Y and Z's separate legal
existence ceases for all purposes. In the merger, the Z shareholders
exchange their Z stock for Y stock.
[[Page 555]]
(ii) Analysis. The transaction satisfies the requirements of
paragraph (b)(1)(ii) of this section because the transaction is effected
pursuant to State W law and the following events occur simultaneously at
the effective time of the transaction: all of the assets and liabilities
of Z, the combining entity and sole member of the transeferor unit,
become the assets and liabilities of Y, the combining entity and sole
member of the transferee unit, and Z ceases its separate legal existence
for all purposes. Accordingly, the transaction qualifies as a statutory
merger or consolidation for purposes of section 368(a)(1)(A).
Example 9. State law conversion of target corporation into a limited
liability company. (i) Facts. Y acquires the stock of V from the V
shareholders in exchange for consideration that consists of 50 percent
voting stock of Y and 50 percent cash. Immediately after the stock
acquisition, V files the necessary documents to convert from a
corporation to a limited liability company under State W law. Y's
acquisition of the stock of V and the conversion of V to a limited
liability company are steps in a single integrated acquisition by Y of
the assets of V.
(ii) Analysis. The acquisition by Y of the assets of V does not
satisfy the requirements of paragraph (b)(1)(ii)(B) of this section
because V, the combining entity of the transferor unit, does not cease
its separate legal existence. Although V is an entity disregarded from
its owner for Federal income tax purposes, it continues to exist as a
juridical entity after the conversion. Accordingly, Y's acquisition of
the assets of V does not qualify as a statutory merger or consolidation
for purposes of section 368(a)(1)(A).
Example 10. Dissolution of target corporation. (i) Facts. Y acquires
the stock of Z from the Z shareholders in exchange for consideration
that consists of 50 percent voting stock of Y and 50 percent cash.
Immediately after the stock acquisition, Z files a certificate of
dissolution pursuant to State W law and commences winding up its
activities. Under State W dissolution law, ownership and title to Z's
assets does not automatically vest in Y upon dissolution. Instead, Z
transfers assets to its creditors in satisfaction of its liabilities and
transfers its remaining assets to Y in the liquidation stage of the
dissolution. Y's acquisition of the stock of Z and the dissolution of Z
are steps in a single integrated acquisition by Y of the assets of Z.
(ii) Analysis. The acquisition by Y of the assets of Z does not
satisfy the requirements of paragraph (b)(1)(ii) of this section because
Y does not acquire all of the assets of Z as a result of Z filing the
certificate of dissolution or simultaneously with Z ceasing its separate
legal existence. Instead, Y acquires the assets of Z by reason of Z's
transfer of its assets to Y. Accordingly, Y's acquisition of the assets
of Z does not qualify as a statutory merger or consolidation for
purposes of section 368(a)(1)(A).
Example 11. Merger of corporate partner into a partnership. (i)
Facts. Y owns an interest in X, an entity classified as a partnership
for Federal income tax purposes, that represents a 60 percent capital
and profits interest in X. Z owns an interest in X that represents a 40
percent capital and profits interest. Under State W law, Z merges into
X. Pursuant to such law, the following events occur simultaneously at
the effective time of the transaction: all of the assets and liabilities
of Z become the assets and liabilities of X and Z ceases its separate
legal existence for all purposes. In the merger, the Z shareholders
exchange their stock of Z for stock of Y. As a result of the merger, X
becomes an entity that is disregarded as an entity separate from Y for
Federal income tax purposes.
(ii) Analysis. The transaction satisfies the requirements of
paragraph (b)(1)(ii) of this section because the transaction is effected
pursuant to State W law and the following events occur simultaneously at
the effective time of the transaction: all of the assets and liabilities
of Z, the combining entity and sole member of the transferor unit,
become the assets and liabilities of one or more members of the
transferee unit that is comprised of Y, the combining entity of the
transferee unit, and X, a disregarded entity the assets of which Y is
treated as owning for Federal income tax purposes immediately after the
transaction, and Z ceases its separate legal existence for all purposes.
Accordingly, the transaction qualifies as a statutory merger or
consolidation for purposes of section 368(a)(1)(A).
Example 12. State law consolidation. (i) Facts. Under State W law, Z
and V consolidate. Pursuant to such law, the following events occur
simultaneously at the effective time of the transaction: all of the
assets and liabilities of Z and V become the assets and liabilities of
Y, an entity that is created in the transaction, and the existence of Z
and V continues in Y. In the consolidation, the Z shareholders and the V
shareholders exchange their stock of Z and V, respectively, for stock of
Y.
(ii) Analysis. With respect to each of Z and V, the transaction
satisfies the requirements of paragraph (b)(1)(ii) of this section
because the transaction is effected pursuant to State W law and the
following events occur simultaneously at the effective time of the
transaction: all of the assets and liabilities of Z and V, respectively,
each of which is the combining entity of a transferor unit, become the
assets and liabilities of Y, the combining entity and sole member of the
transferee unit, and Z and V each ceases its separate legal existence
for all purposes. Accordingly, the transaction qualifies as the
statutory merger or consolidation of each of Z and V into Y for purposes
of section 368(a)(1)(A).
[[Page 556]]
Example 13. Transaction effected pursuant to foreign statutes. (i)
Facts. Z and Y are entities organized under the laws of Country Q and
classified as corporations for Federal income tax purposes. Z and Y
combine. Pursuant to statutes of Country Q the following events occur
simultaneously: all of the assets and liabilities of Z become the assets
and liabilities of Y and Z's separate legal existence ceases for all
purposes.
(ii) Analysis. The transaction satisfies the requirements of
paragraph (b)(1)(ii) of this section because the transaction is effected
pursuant to statutes of Country Q and the following events occur
simultaneously at the effective time of the transaction: all of the
assets and liabilities of Z, the combining entity of the transferor
unit, become the assets and liabilities of Y, the combining entity and
sole member of the transferee unit, and Z ceases its separate legal
existence for all purposes. Accordingly, the transaction qualifies as a
statutory merger or consolidation for purposes of section 368(a)(1)(A).
Example 14. Foreign law amalgamation using parent stock. (i) Facts.
Z and V are entities organized under the laws of Country Q and
classified as corporations for Federal income tax purposes. Z and V
amalgamate. Pursuant to statutes of Country Q, the following events
occur simultaneously: all the assets and liabilities of Z and V become
the assets and liabilities of R, an entity that is created in the
transaction and that is wholly owned by Y immediately after the
transaction, and Z's and V's separate legal existences cease for all
purposes. In the transaction, the Z and V shareholders exchange their Z
and V stock, respectively, for stock of Y.
(ii) Analysis. With respect to each of Z and V, the transaction
satisfies the requirements of paragraph (b)(1)(ii) of this section
because the transaction is effected pursuant to Country Q law and the
following events occur simultaneously at the effective time of the
transaction: all of the assets and liabilities of Z and V, respectively,
each of which is the combining entity of a transferor unit, become the
assets and liabilities of R, the combining entity and sole member of the
transferee unit, with regard to each of the above transfers, and Z and V
each ceases its separate legal existence for all purposes. Because Y is
in control of R immediately after the transaction, the Z shareholders
and the V shareholders will be treated as receiving stock of a
corporation that is in control of R, the combining entity of the
transferee unit that is the acquiring corporation for purposes of
section 368(a)(2)(D). Accordingly, the transaction qualifies as the
statutory merger or consolidation of each of Z and V into R, a
corporation controlled by Y, and is a reorganization under section
368(a)(1)(A) by reason of section 368(a)(2)(D).
(v) Effective date--(A) In general. This paragraph (b)(1) applies to
transactions occurring on or after January 23, 2006. For rules regarding
statutory mergers or consolidation occurring before January 23, 2006,
see Sec. 1.368-2T as contained in 26 CFR part 1, revised April 1, 2005,
and Sec. 1.368-2(b)(1) as in effect before January 24, 2003 (see 26 CFR
part 1, revised April 1, 2002).
(B) Transitional rule. A taxpayer may elect to apply the provisions
of Sec. 1.368-2T(b) as contained in 26 CFR part 1, revised April 1,
2005 (the temporary regulations), instead of the provisions of this
paragraph (b), to a transaction that occurs on or after January 23,
2006, pursuant to a written agreement which is (subject to customary
conditions) binding on January 22, 2006, and at all times thereafter, or
pursuant to a tender offer announced prior to January 23, 2006. However,
the combining entity of the transferor unit, the combining entity of the
transferee unit, any controlling corporation of the combining entity of
the transferee unit if stock thereof is provided as consideration in the
transaction, and any direct or indirect transferee of transferred basis
property from any of the foregoing, may not elect to apply the
provisions of the temporary regulations unless all such taxpayers elect
to apply the provisions of the temporary regulations.
(2) In order for the transaction to qualify under section
368(a)(1)(A) by reason of the application of section 368(a)(2)(D), one
corporation (the acquiring corporation) must acquire substantially all
of the properties of another corporation (the acquired corporation)
partly or entirely in exchange for stock of a corporation which is in
control of the acquiring corporation (the controlling corporation),
provided that (i) the transaction would have qualified under section
368(a)(1)(A) if the merger had been into the controlling corporation,
and (ii) no stock of the acquiring corporation is used in the
transaction. The foregoing test of whether the transaction would have
qualified under section 368(a)(1)(A) if the merger had been into the
controlling corporation means that the general requirements of a
reorganization under section 368(a)(1)(A) (such as a business purpose,
continuity of business enterprise, and continuity
[[Page 557]]
of interest) must be met in addition to the special requirements of
section 368(a)(2)(D). Under this test, it is not relevant whether the
merger into the controlling corporation could have been effected
pursuant to State or Federal corporation law. The term substantially all
has the same meaning as it has in section 368(a)(1)(C). Although no
stock of the acquiring corporation can be used in the transaction, there
is no prohibition (other than the continuity of interest requirement)
against using other property, such as cash or securities, of either the
acquiring corporation or the parent or both. In addition, the
controlling corporation may assume liabilities of the acquired
corporation without disqualifying the transaction under section
368(a)(2(D), and for purposes of section 357(a) the controlling
corporation is considered a party to the exchange. For example, if the
controlling corporation agrees to substitute its stock for stock of the
acquired corporation under an outstanding employee stock option
agreement, this assumption of liability will not prevent the transaction
from qualifying as a reorganization under section 368(a)(2)(D) and the
assumption of liability is not treated as money or other property for
purposes of section 361(b). Section 368(a)(2)(D) applies whether or not
the controlling corporation (or the acquiring corporation) is formed
immediately before the merger, in anticipation of the merger, or after
preliminary steps have been taken to merge directly into the controlling
corporation. Section 368(a)(2)(D) applies only to statutory mergers
occurring after October 22, 1968.
(3) For regulations under section 368(a)(2)(E), see paragraph (j) of
this section.
(c) In order to qualify as a ``reorganization'' under section
368(a)(1)(B), the acquisition by the acquiring corporation of stock of
another corporation must be in exchange solely for all or a part of the
voting stock of the acquiring corporation (or, in the case of
transactions occurring after December 31, 1963, solely for all or a part
of the voting stock of a corporation which is in control of the
acquiring corporation), and the acquiring corporation must be in control
of the other corporation immediately after the transaction. If, for
example, Corporation X in one transaction exchanges nonvoting preferred
stock or bonds in addition to all or a part of its voting stock in the
acquisition of stock of Corporation Y, the transaction is not a
reorganization under section 368(a)(1)(B). Nor is a transaction a
reorganization described in section 368(a)(1)(B) if stock is acquired in
exchange for voting stock both of the acquiring corporation and of a
corporation which is in control of the acquiring corporation. The
acquisition of stock of another corporation by the acquiring corporation
solely for its voting stock (or solely for voting stock of a corporation
which is in control of the acquiring corporation) is permitted tax-free
even though the acquiring corporation already owns some of the stock of
the other corporation. Such an acquisition is permitted tax-free in a
single transaction or in a series of transactions taking place over a
relatively short period of time such as 12 months. For example,
Corporation A purchased 30 percent of the common stock of Corporation W
(the only class of stock outstanding) for cash in 1939. On March 1,
1955, Corporation A offers to exchange its own voting stock for all the
stock of Corporation W tendered within 6 months from the date of the
offer. Within the 6-months' period Corporation A acquires an additional
60 percent of stock of Corporation W solely for its own voting stock, so
that it owns 90 percent of the stock of Corporation W. No gain or loss
is recognized with respect to the exchanges of stock of Corporation A
for stock of Corporation W. For this purpose, it is immaterial whether
such exchanges occurred before Corporation A acquired control (80
percent) of Corporation W or after such control was acquired. If
Corporation A had acquired 80 percent of the stock of Corporation W for
cash in 1939, it could likewise acquire some or all of the remainder of
such stock solely in exchange for its own voting stock without
recognition of gain or loss.
(d) In order to qualify as a reorganization under section
368(a)(1)(C), the transaction must be one described in subparagraph (1)
or (2) of this paragraph:
[[Page 558]]
(1) One corporation must acquire substantially all the properties of
another corporation solely in exchange for all or a part of its own
voting stock, or solely in exchange for all or a part of the voting
stock of a corporation which is in control of the acquiring corporation.
For example, Corporation P owns all the stock of Corporation A. All the
properties of Corporation W are transferred to Corporation A either
solely in exchange for voting stock of Corporation P or solely in
exchange for less than 80 percent of the voting stock of Corporation A.
Either of such transactions constitutes a reorganization under section
368(a)(1)(C). However, if the properties of Corporation W are acquired
in exchange for voting stock of both Corporation P and Corporation A,
the transaction will not constitute a reorganization under section
368(a)(1)(C). In determining whether the exchange meets the requirement
of ``solely for voting stock'', the assumption by the acquiring
corporation of liabilities of the transferor corporation, or the fact
that property acquired from the transferor corporation is subject to a
liability, shall be disregarded. Though such an assumption does not
prevent an exchange from being solely for voting stock for the purposes
of the definition of a reorganization contained in section 368(a)(1)(C),
it may in some cases, however, so alter the character of the transaction
as to place the transaction outside the purposes and assumptions of the
reorganization provisions. Section 368(a)(1)(C) does not prevent
consideration of the effect of an assumption of liabilities on the
general character of the transaction but merely provides that the
requirement that the exchange be solely for voting stock is satisfied if
the only additional consideration is an assumption of liabilities.
(2) One corporation:
(i) Must acquire substantially all of the properties of another
corporation in such manner that the acquisition would qualify under (1)
above, but for the fact that the acquiring corporation exchanges money,
or other property in addition to such voting stock, and
(ii) Must acquire solely for voting stock (either of the acquiring
corporation or of a corporation which is in control of the acquiring
corporation) properties of the other corporation having a fair market
value which is at least 80 percent of the fair market value of all the
properties of the other corporation.
(3) For the purposes of subparagraph (2)(ii) only, a liability
assumed or to which the properties are subject is considered money paid
for the properties. For example, Corporation A has properties with a
fair market value of $100,000 and liabilities of $10,000. In exchange
for these properties, Corporation Y transfers its own voting stock,
assumes the $10,000 liabilities, and pays $8,000 in cash. The
transaction is a reorganization even though a part of the properties of
Corporation A is acquired for cash. On the other hand, if the properties
of Corporation A worth $100,000, were subject to $50,000 in liabilities,
an acquisition of all the properties, subject to the liabilities, for
any consideration other than solely voting stock would not qualify as a
reorganization under this section since the liabilities alone are in
excess of 20 percent of the fair market value of the properties. If the
transaction would qualify under either subparagraph (1) or (2) of this
paragraph and also under section 368(a)(1)(D), such transaction shall
not be treated as a reorganization under section 368 (a)(1)(C).
(4)(i) For purposes of paragraphs (d)(1) and (2)(ii) of this
section, prior ownership of stock of the target corporation by an
acquiring corporation will not by itself prevent the solely for voting
stock requirement of such paragraphs from being satisfied. In a
transaction in which the acquiring corporation has prior ownership of
stock of the target corporation, the requirement of paragraph (d)(2)(ii)
of this section is satisfied only if the sum of the money or other
property that is distributed in pursuance of the plan of reorganization
to the shareholders of the target corporation other than the acquiring
corporation and to the creditors of the target corporation pursuant to
section 361(b)(3), and all of the liabilities of the target corporation
assumed by the acquiring corporation (including liabilities to which the
properties of the target corporation are subject), does not exceed 20
percent of the value of all of
[[Page 559]]
the properties of the target corporation. If, in connection with a
potential acquisition by an acquiring corporation of substantially all
of a target corporation's properties, the acquiring corporation acquires
the target corporation's stock for consideration other than the
acquiring corporation's own voting stock (or voting stock of a
corporation in control of the acquiring corporation if such stock is
used in the acquisition of the target corporation's properties), whether
from a shareholder of the target corporation or the target corporation
itself, such consideration is treated, for purposes of paragraphs (d)(1)
and (2) of this section, as money or other property exchanged by the
acquiring corporation for the target corporation's properties.
Accordingly, the transaction will not qualify under section 368(a)(1)(C)
unless, treating such consideration as money or other property, the
requirements of section 368(a)(2)(B) and paragraph (d)(2)(ii) of this
section are met. The determination of whether there has been an
acquisition in connection with a potential reorganization under section
368(a)(1)(C) of a target corporation's stock for consideration other
than an acquiring corporation's own voting stock (or voting stock of a
corporation in control of the acquiring corporation if such stock is
used in the acquisition of the target corporation's properties) will be
made on the basis of all of the facts and circumstances.
(ii) The following examples illustrate the principles of this
paragraph (d)(4):
Example 1. Corporation P (P) holds 60 percent of the Corporation T
(T) stock that P purchased several years ago in an unrelated
transaction. T has 100 shares of stock outstanding. The other 40 percent
of the T stock is owned by Corporation X (X), an unrelated corporation.
T has properties with a fair market value of $110 and liabilities of
$10. T transfers all of its properties to P. In exchange, P assumes the
$10 of liabilities, and transfers to T $30 of P voting stock and $10 of
cash. T distributes the P voting stock and $10 of cash to X and
liquidates. The transaction satisfies the solely for voting stock
requirement of paragraph (d)(2)(ii) of this section because the sum of
$10 of cash paid to X and the assumption by P of $10 of liabilities does
not exceed 20% of the value of the properties of T.
Example 2. The facts are the same as in Example 1 except that P
purchased the 60 shares of T for $60 in cash in connection with the
acquisition of T's assets. The transaction does not satisfy the solely
for voting stock requirement of paragraph (d)(2)(ii) of this section
because P is treated as having acquired all of the T assets for
consideration consisting of $70 of cash, $10 of liability assumption and
$30 of P voting stock, and the sum of $70 of cash and the assumption by
P of $10 of liabilities exceeds 20% of the value of the properties of T.
(iii) This paragraph (d)(4) applies to transactions occurring after
December 31, 1999, unless the transaction occurs pursuant to a written
agreement that is (subject to customary conditions) binding on that date
and at all times thereafter.
(e) A ``recapitalization'', and therefore a reorganization, takes
place if, for example:
(1) A corporation with $200,000 par value of bonds outstanding,
instead of paying them off in cash, discharges them by issuing preferred
shares to the bondholders;
(2) There is surrendered to a corporation for cancellation 25
percent of its preferred stock in exchange for no par value common
stock;
(3) A corporation issues preferred stock, previously authorized but
unissued, for outstanding common stock;
(4) An exchange is made of a corporation's outstanding preferred
stock, having certain priorities with reference to the amount and time
of payment of dividends and the distribution of the corporate assets
upon liquidation, for a new issue of such corporation's common stock
having no such rights;
(5) An exchange is made of an amount of a corporation's outstanding
preferred stock with dividends in arrears for other stock of the
corporation. However, if pursuant to such an exchange there is an
increase in the proportionate interest of the preferred shareholders in
the assets or earnings and profits of the corporation, then under Sec.
1.305-7(c)(2), an amount equal to the lesser of (i) the amount by which
the fair market value or liquidation preference, whichever is greater,
of the stock received in the exchange (determined immediately following
the recapitalization) exceeds the issue price of the preferred stock
surrendered, or
[[Page 560]]
(ii) the amount of the dividends in arrears, shall be treated under
section 305(c) as a deemed distribution to which sections 305(b)(4) and
301 apply.
(f) The term a party to a reorganization includes a corporation
resulting from a reorganization, and both corporations, in a transaction
qualifying as a reorganization where one corporation acquires stock or
properties of another corporation. If a transaction otherwise qualifies
as a reorganization, a corporation remains a party to the reorganization
even though stock or assets acquired in the reorganization are
transferred in a transaction described in paragraph (k) of this section.
If a transaction otherwise qualifies as a reorganization, a corporation
shall not cease to be a party to the reorganization solely by reason of
the fact that part or all of the assets acquired in the reorganization
are transferred to a partnership in which the transferor is a partner if
the continuity of business enterprise requirement is satisfied. See
Sec. 1.368-1(d). The preceding three sentences apply to transactions
occurring after January 28, 1998, except that they do not apply to any
transaction occurring pursuant to a written agreement which is binding
on January 28, 1998, and at all times thereafter. A corporation
controlling an acquiring corporation is a party to the reorganization
when the stock of such controlling corporation is used in the
acquisition of properties. Both corporations are parties to the
reorganization if, under statutory authority, Corporation A is merged
into Corporation B. All three of the corporations are parties to the
reorganization if, pursuant to statutory authority, Corporation C and
Corporation D are consolidated into Corporation E. Both corporations are
parties to the reorganization if Corporation F transfers substantially
all its assets to Corporation G in exchange for all or a part of the
voting stock of Corporation G. All three corporations are parties to the
reorganization if Corporation H transfers substantially all its assets
to Corporation K in exchange for all or a part of the voting stock of
Corporation L, which is in control of Corporation K. Both corporations
are parties to the reorganization if Corporation M transfers all or part
of its assets to Corporation N in exchange for all or a part of the
stock and securities of Corporation N, but only if (1) immediately after
such transfer, Corporation M, or one or more of its shareholders
(including persons who were shareholders immediately before such
transfer), or any combination thereof, is in control of Corporation N,
and (2) in pursuance of the plan, the stock and securities of
Corporation N are transferred or distributed by Corporation M in a
transaction in which gain or loss is not recognized under section 354 or
355, or is recognized only to the extent provided in section 356. Both
Corporation O and Corporation P, but not Corporation S, are parties to
the reorganization if Corporation O acquires stock of Corporation P from
Corporation S in exchange solely for a part of the voting stock of
Corporation O, if (1) the stock of Corporation P does not constitute
substantially all of the assets of Corporation S, (2) Corporation S is
not in control of Corporation O immediately after the acquisition, and
(3) Corporation O is in control of Corporation P immediately after the
acquisition. If a transaction otherwise qualifies as a reorganization
under section 368(a)(1)(B) or as a reverse triangular merger (as defined
in Sec. 1.358-6(b)(2)(iii)), the target corporation (in the case of a
transaction that otherwise qualifies as a reorganization under section
368(a)(1)(B)) or the surviving corporation (in the case of a transaction
that otherwise qualifies as a reverse triangular merger) remains a party
to the reorganization even though its stock or assets are transferred in
a transaction described in paragraph (k) of this section. If a
transaction otherwise qualifies as a forward triangular merger (as
defined in Sec. 1.358-6(b)(2)(i)), a triangular B reorganization (as
defined in Sec. 1.358-6(b)(2)(iv)), a triangular C reorganization (as
defined in Sec. 1.358-6(b)(2)(ii)), or a reorganization under section
368(a)(1)(G) by reason of section 368(a)(2)(D), the acquiring
corporation remains a party to the reorganization even though its stock
is transferred in a transaction described in paragraph (k) of this
section. The two preceding sentences apply to transactions occurring on
or after October 25, 2007, except
[[Page 561]]
that they do not apply to any transaction occurring pursuant to a
written agreement which is binding before October 25, 2007, and at all
times after that.
(g) The term plan of reorganization has reference to a consummated
transaction specifically defined as a reorganization under section
368(a). The term is not to be construed as broadening the definition of
reorganization as set forth in section 368(a), but is to be taken as
limiting the nonrecognition of gain or loss to such exchanges or
distributions as are directly a part of the transaction specifically
described as a reorganization in section 368(a). Moreover, the
transaction, or series of transactions, embraced in a plan of
reorganization must not only come within the specific language of
section 368(a), but the readjustments involved in the exchanges or
distributions effected in the consummation thereof must be undertaken
for reasons germane to the continuance of the business of a corporation
a party to the reorganization. Section 368(a) contemplates genuine
corporate reorganizations which are designed to effect a readjustment of
continuing interests under modified corporate forms.
(h) As used in section 368, as well as in other provisions of the
Internal Revenue Code, if the context so requires, the conjunction
``or'' denotes both the conjunctive and the disjunctive, and the
singular includes the plural. For example, the provisions of the statute
are complied with if ``stock and securities'' are received in exchange
as well as if ``stock or securities'' are received.
(i) [Reserved]
(j)(1) This paragraph (j) prescribes rules relating to the
application of section 368 (a)(2)(E).
(2) Section 368(a)(2)(E) does not apply to a consolidation.
(3) A transaction otherwise qualifying under section 368(a)(1)(A) is
not disqualified by reason of the fact that stock of a corporation (the
controlling corporation) which before the merger was in control of the
merged corporation is used in the transaction, if the conditions of
section 368(a)(2)(E) are satisfied. Those conditions are as follows:
(i) In the transaction, shareholders of the surviving corporation
must surrender stock in exchange for voting stock of the controlling
corporation. Further, the stock so surrendered must constitute control
of the surviving corporation. Control is defined in section 368(c). The
amount of stock constituting control is measured immediately before the
transaction. For purposes of this subdivision (i), stock in the
surviving corporation which is surrendered in the transaction (by any
shareholder except the controlling corporation) in exchange for
consideration furnished by the surviving corporation (and not by the
controlling corporation of the merged corporation) is considered not to
be outstanding immediately before the transaction. For effect on
``substantially all'' test of consideration furnished by the surviving
corporation, see paragraph (j)(3)(iii) of this section.
(ii) Except as provided in paragraph (k) of this section, the
controlling corporation must control the surviving corporation
immediately after the transaction.
(iii) After the transaction, the surviving corporation must hold
substantially all of its own properties and substantially all of the
properties of the merged corporation (other than stock of the
controlling corporation distributed in the transaction). The surviving
corporation may transfer such properties as provided in paragraph (k) of
this section. After the transaction, except as provided in paragraph
(k)(2) of this section, the surviving corporation must hold
substantially all of its own properties and substantially all of the
properties of the merged corporation (other than stock of the
controlling corporation distributed in the transaction). The term
substantially all has the same meaning as in section 368(a)(1)(C). The
``substantially all'' test applies separately to the merged corporation
and to the surviving corporation. In applying the ``substantially all''
test to the surviving corporation, consideration furnished in the
transaction by the surviving corporation in exchange for its stock is
property of the surviving corporation which it does not hold after the
transaction. In applying the ``substantially
[[Page 562]]
all'' test to the merged corporation, assets transferred from the
controlling corporation to the merged corporation in pursuance of the
plan of reorganization are not taken into account. Thus, for example,
money transferred from the controlling corporation to the merged
corporation to be used for the following purposes is not taken into
account for purposes of the ``substantially all'' test:
(A) To pay additional consideration to shareholders of the surviving
corporation;
(B) To pay dissenting shareholders of the surviving corporation;
(C) To pay creditors of the surviving corporation;
(D) To pay reorganization expenses; or
(E) To enable the merged corporation to satisfy state minimum
capitalization requirements (where the money is returned to the
controlling corporation as part of the transaction).
(iv) Paragraph (j)(3)(ii) and the first two sentences of paragraph
(j)(3)(iii) of this section apply to transactions occurring on or after
October 25, 2007, except that they do not apply to any transaction
occurring pursuant to a written agreement which is binding before
October 25, 2007, and at all times thereafter. The remainder of
paragraph (j)(3)(iii) of this section applies to transactions occurring
after January 28, 1998, except that it does not apply to any transaction
occurring pursuant to a written agreement which is binding on January
28, 1998, and at all times after that.
(4) The controlling corporation may assume liabilities of the
surviving corporation without disqualifying the transaction under
section 368(a)(2)(E). An assumption of liabilities of the surviving
corporation by the controlling corporation is a contribution to capital
by the controlling corporation to the surviving corporation. If, in
pursuance of the plan of reorganization, securities of the surviving
corporation are exchanged for securities of the controlling corporation,
or for other securities of the surviving corporation, see sections 354
and 356.
(5) In applying section 368(a)(2)(E), it makes no difference if the
merged corporation is an existing corporation, or is formed immediately
before the merger, in anticipation of the merger, or after preliminary
steps have been taken to otherwise acquire control of the surviving
corporation.
(6) The following examples illustrate the application of this
paragraph (j). In each of the examples, Corporation P owns all of the
stock of Corporation S and, except as otherwise stated, Corporation T
has outstanding 1,000 shares of common stock and no shares of any other
class. In each of the examples, it is also assumed that the transaction
qualifies under section 368(a)(1)(A) if the conditions of section
368(a)(2)(E) are satisfied.
Example 1. P owns no T stock. On January 1, 1981, S merges into T.
In the merger, T's shareholders surrender 950 shares of common stock in
exchange for P voting stock. The holders of the other 50 shares (who
dissent from the merger) are paid in cash with funds supplied by P.
After the transaction, T holds all of its own assets and all of S's
assets. Based on these facts, the transaction qualifies under section
368(a)(1)(A) by reason of the application of section 368(a)(2)(E). In
the transaction, former shareholders of T surrender, in exchange for P
voting stock, an amount of T stock (950/1,000 shares or 95 percent)
which constitutes control of T.
Example 2. The facts are the same as in Example (1) except that
holders of 100 shares in corporation T, who dissented from the merger,
are paid in cash with funds supplied by T (and not by P or S) and in the
merger, T's remaining shareholders surrender 720 shares of common stock
in exchange for P voting stock and 180 shares of common stock for cash
supplied by P. The requirements of section 368(a)(2)(E)(ii) are
satisfied since, in the transaction, former shareholders of T surrender,
in exchange for P voting stock, an amount of T stock (720/900 shares or
80 percent) which constitutes control of T. The T stock surrendered in
exchange for consideration furnished by T is not considered outstanding
for purposes of determining whether the amount of T stock surrendered by
T shareholders for P stock constitutes control of T.
Example 3. T has outstanding 1,000 shares of common stock, 100
shares of nonvoting preferred stock, and no shares of any other class.
On January 1, 1981, S merges into T. Prior to the merger, as part of the
transaction, T distributes its own cash in redemption of the 100 shares
of preferred stock. In the transaction, T's remaining shareholders
surrender their 1,000 shares of common stock in exchange for P voting
stock. The requirements of section 368(a)(2)(E)(ii) are satisfied
[[Page 563]]
since, in the transaction, former shareholders of T surrender, in
exchange for P voting stock, an amount of T stock (1,000/1,000 shares or
100 percent) which constitutes control of T. The preferred stock
surrendered in exchange for consideration furnished by T is not
considered outstanding for purposes of determining whether the amount of
T stock surrendered by T shareholders for P stock constitutes control of
T. However, the consideration furnished by T for its stock is property
of T which T does not hold after the transaction for purposes of the
substantially all test in paragraph (j)(3)(iii) of this section.
Example 4. On January 1, 1971, P purchased 201 shares of T's stock.
On January 1, 1981, S merges into T. In the merger, T's shareholders
(other than P) surrender 799 shares of T stock in exchange for P voting
stock. Based on these facts, in the transaction, former shareholders of
T do not surrender, in exchange for P voting stock, an amount of T stock
which constitutes control of T (799/1,000 shares being less than 80
percent). Therefore, the transaction does not qualify under section
368(a)(1)(A). However, if S is a transitory corporation, formed solely
for purposes of effectuating the transaction, the transaction may
qualify as a reorganization described in section 368(a)(1)(B) provided
all of the applicable requirements are satisfied.
Example 5. On January 1, 1971, P purchased 200 shares of T's stock.
On January 1, 1981, S merges into T. Prior to the merger, as part of the
transaction, T distributes its own cash in redemption of 1 share of T
stock from a T shareholder other than P. In the merger, T's remaining
shareholders (other than P) surrender 799 shares of T stock in exchange
for P voting stock. Based on these facts, in the transaction, former
shareholders of T do not surrender, in exchange for P voting stock, an
amount of T stock which constitutes control of T (799/999 shares being
less than 80 percent). Therefore, the transaction does not qualify under
section 368(a)(1)(A). However, if S is a transitory corporation, formed
for purposes of effectuating the transaction, the transaction may
qualify as a reorganization described in section 368(a)(1)(B) provided
all of the applicable requirements are satisfied.
Example 6. The stock of S has a value of $25,000. The stock of T has
a value of $75,000. On January 1, 1984, S merges into T. In the merger,
T's shareholders surrender all of their T stock in exchange for P voting
stock. After the transaction, T holds all of its own assets and all of
S's assets. Based on these facts, the transaction qualifies under
section 368(a)(1)(A) by reason of the application of section
368(a)(2)(E). In the transaction, former shareholders of T surrender, in
exchange for P voting stock, an amount of T stock (1,000/1,000 shares or
100 percent) which constitutes control of T. The stock of T received by
P in exchange for P's prior interest in S is not taken into account for
purposes of section 368(a)(2)(E)(ii) since the amount of T stock
constituting control of T is measured before the transaction.
Example 7. The stock of T has a value of $75,000. On January 1,
1984, S merges into T. In the merger, T's shareholders surrender all of
their T stock in exchange for P voting stock. As part of the
transaction, P contributes $25,000 to T in exchange for new shares of T
stock. None of the cash received by T is distributed or otherwise paid
out to former T shareholders. After the transaction, T holds all of its
own assets and all of S's assets. Based on these facts, the transaction
qualifies under section 368(a)(1)(A) by reason of the application of
section 368(a)(2)(E). In the transaction, former shareholders of T
surrender, in exchange for P voting stock, an amount of T stock (1,000/
1,000 shares or 100 percent) which constitutes control of T. The T stock
received by P in exchange for its contribution to T is not taken into
account for purposes of section 368(a)(2)(E)(ii) since the amount of T
stock constituting control of T is measured before the transaction.
Example 8. The facts are the same as in Example (7) except that, as
part of the transaction, corporation R, instead of P, contributes
$25,000 to T in exchange for T stock. Based on these facts, the
transaction does not qualify under section 368(a)(1)(A) by reason of
section 368(a)(2)(E) since P does not control T immediately after the
transaction.
Example 9. T stock has a value of $75,000. P owns 500 shares (\1/2\)
of that stock with a value of $37,500. The stock of S has a value of
$125,000. On January 1, 1984, S merges into T. In the merger, T's
shareholders (other than P) surrender their T stock in exchange for P
voting stock. Based on these facts, in the transaction, former
shareholders of T do not surrender, in exchange for P voting stock, an
amount of T stock which constitutes control of T (500/1,000 shares being
less than 80 percent). Therefore, the transaction does not qualify under
section 368(a)(1)(A). The stock of T received by P in exchange for P's
prior interest in S does not contribute to satisfaction of the
requirement of section 368(a)(2)(E)(ii).
(k) Certain transfers of assets or stock in reorganizations--(1)
General rule. A transaction otherwise qualifying as a reorganization
under section 368(a) shall not be disqualified or recharacterized as a
result of one or more subsequent transfers (or successive transfers) of
assets or stock, provided that the requirements of Sec. 1.368-1(d) are
satisfied and the transfer(s) are described in either paragraph
(k)(1)(i) or (k)(1)(ii) of this section. However, this paragraph (k)
shall not apply to a transfer to the former shareholders of
[[Page 564]]
the acquired corporation (other than a former shareholder that is also
the acquiring corporation) or the surviving corporation, as the case may
be, to the extent it constitutes the receipt of consideration for a
proprietary interest in the acquired corporation or the surviving
corporation, as the case may be. Similarly, this paragraph (k) shall not
apply to a transfer by the former shareholders of the acquired
corporation (other than a former shareholder that is also the acquiring
corporation) or the surviving corporation, as the case may be, of
consideration initially received in the potential reorganization to the
issuing corporation or a person related to the issuing corporation (see
definition of ``related person'' in Sec. 1.368-1(e)).
(i) Distributions. One or more distributions to shareholders
(including distribution(s) that involve the assumption of liabilities)
are described in this paragraph (k)(1)(i) if--
(A) The property distributed consists of--
(1) Assets of the acquired corporation, the acquiring corporation,
or the surviving corporation, as the case may be, or an interest in an
entity received in exchange for such assets in a transfer described in
paragraph (k)(1)(ii) of this section;
(2) Stock of the acquired corporation provided that such
distribution(s) of stock do not cause the acquired corporation to cease
to be a member of the qualified group (as defined in Sec. 1.368-
1(d)(4)(ii)); or
(3) A combination thereof; and
(B) The aggregate of such distributions does not consist of--
(1) An amount of assets of the acquired corporation, the acquiring
corporation (disregarding assets held prior to the potential
reorganization), or the surviving corporation (disregarding assets of
the merged corporation), as the case may be, that would result in a
liquidation of such corporation for Federal income tax purposes; or
(2) All of the stock of the acquired corporation that was acquired
in the transaction.
(ii) Transfers Other Than Distributions. One or more other transfers
are described in this paragraph (k)(1)(ii) if--
(A) The transfer(s) do not consist of one or more distributions to
shareholders;
(B) The property transferred consists of--
(1) Part or all of the assets of the acquired corporation, the
acquiring corporation, or the surviving corporation, as the case may be;
(2) Part or all of the stock of the acquired corporation, the
acquiring corporation, or the surviving corporation, as the case may be,
provided that such transfer(s) of stock do not cause such corporation to
cease to be a member of the qualified group (as defined in Sec. 1.368-
1(d)(4)(ii)); or
(3) A combination thereof; and
(C) The acquired corporation, the acquiring corporation, or the
surviving corporation, as the case may be, does not terminate its
corporate existence for Federal income tax purposes in connection with
the transfer(s).
(2) Examples. The following examples illustrate the application of
this paragraph (k). Except as otherwise noted, P is the issuing
corporation, and T is an unrelated target corporation. All corporations
have only one class of stock outstanding. T operates a bakery that
supplies delectable pastries and cookies to local retail stores. The
acquiring corporate group produces a variety of baked goods for
nationwide distribution. Except as otherwise noted, P owns all of the
stock of S-1 and 80 percent of the stock of S-4, S-1 owns 80 percent of
the stock of S-2 and 50 percent of the stock of S-5, S-2 owns 80 percent
of the stock of S-3, and S-4 owns the remaining 50 percent of the stock
of S-5. The examples are as follows:
Example 1. Transfers of acquired assets to members of the qualified
group after a reorganization under section 368(a)(1)(C). (i) Facts.
Pursuant to a plan of reorganization, T transfers all of its assets to
S-1 solely in exchange for P stock, which T distributes to its
shareholders, and S-1's assumption of T's liabilities. In addition,
pursuant to the plan, S-1 transfers all of the T assets to S-2, and S-2
transfers all of the T assets to S-3.
(ii) Analysis. Under this paragraph (k), the transaction, which
otherwise qualifies as a reorganization under section 368(a)(1)(C), is
not disqualified by the successive transfers of all of the T assets to
S-2 and from S-2 to S-3 because the transfers are not one or more
distributions to shareholders, the
[[Page 565]]
transfers consist of part or all of the assets of the acquiring
corporation, the acquiring corporation does not terminate its corporate
existence for Federal income tax purposes in connection with the
transfers, and the transaction satisfies the requirements of Sec.
1.368-1(d).
Example 2. Distribution of acquired assets to a member of the
qualified group after a reorganization under section 368(a)(1)(C). (i)
Facts. Pursuant to a plan of reorganization, T transfers all of its
assets to S-1 solely in exchange for P stock, which T distributes to its
shareholders, and S-1's assumption of T's liabilities. In addition,
pursuant to the plan, S-1 distributes half of the T assets to P, and P
assumes half of the T liabilities.
(ii) Analysis. Under this paragraph (k), the transaction, which
otherwise qualifies as a reorganization under section 368(a)(1)(C), is
not disqualified by the distribution of half of the T assets from S-1 to
P, or P's assumption of half of the T liabilities from S-1, because the
distribution consists of assets of the acquiring corporation, the
distribution does not consist of an amount of S-1's assets that would
result in a liquidation of S-1 for Federal income tax purposes
(disregarding S-1's assets held prior to the acquisition of T), and the
transaction satisfies the requirements of Sec. 1.368-1(d).
Example 3. Indirect distribution of acquired assets to a member of
the qualified group after a reorganization under section 368(a)(1)(C).
(i) Facts. The facts are the same as Example 2, except that, instead of
S-1 distributing half of the T assets to P and having P assume half of
the T liabilities, S-1 contributes half of the T assets to newly formed
S-6, S-6 assumes half of the T liabilities, and S-1 distributes all of
the S-6 stock to P.
(ii) Analysis. Under this paragraph (k), the transaction, which
otherwise qualifies as a reorganization under section 368(a)(1)(C), is
not disqualified by the transfer of half of the T assets to S-6 and the
distribution of the S-6 stock to P because the transfer of half of the T
assets to S-6 is described in paragraph (k)(1)(ii) of this section, the
distribution of the S-6 stock to P is an indirect distribution of assets
of the acquiring corporation, the distribution does not consist of an
amount of S-1's assets that would result in a liquidation of S-1 for
Federal income tax purposes (disregarding S-1's assets held prior to the
acquisition of T), and the transaction satisfies the requirements of
Sec. 1.368-1(d).
Example 4. Distribution of acquired stock to a controlled
partnership after a reorganization under section 368(a)(1)(B). (i)
Facts. P owns 80 percent of the stock of S-1, and an 80-percent interest
in PRS, a partnership. S-4 owns the remaining 20-percent interest in
PRS. PRS owns the remaining 20 percent of the stock of S-1. Pursuant to
a plan of reorganization, the T shareholders transfer all of their T
stock to S-1 solely in exchange for P stock. In addition, pursuant to
the plan, S-1 distributes 90 percent of the T stock to PRS in redemption
of 5 percent of the stock of S-1 owned by PRS.
(ii) Analysis. Under this paragraph (k), the transaction, which
otherwise qualifies as a reorganization under section 368(a)(1)(B), is
not disqualified by the distribution of 90 percent of the T stock from
S-1 to PRS because the distribution consists of less than all of the
stock of the acquired corporation that was acquired in the transaction,
the distribution does not cause T to cease to be a member of the
qualified group (as defined in Sec. 1.368-1(d)(4)(ii)), and the
transaction satisfies the requirements of Sec. 1.368-1(d).
Example 5. Transfer of acquired stock to a non-controlled
partnership. (i) Facts. Pursuant to a plan, the T shareholders transfer
all of their T stock to S-1 solely in exchange for P stock. In addition,
as part of the plan, T distributes half of its assets to S-1, S-1
assumes half of the T liabilities, and S-1 transfers the T stock to S-2.
S-2 and U, an unrelated corporation, form a new partnership, PRS.
Immediately thereafter, S-2 transfers all of the T stock to PRS in
exchange for a 50 percent interest in PRS, and U transfers cash to PRS
in exchange for a 50 percent interest in PRS.
(ii) Analysis. Under this paragraph (k), the transaction, which
otherwise qualifies as a reorganization under section 368(a)(1)(B), is
not disqualified by the distribution of half of the T assets from T to
S-1, or S-1's assumption of half of the T liabilities from T, because
the distribution consists of assets of the acquired corporation, the
distribution does not consist of an amount of T's assets that would
result in a liquidation of T for Federal income tax purposes, and the
transaction satisfies the requirements of Sec. 1.368-1(d). Further,
this paragraph (k) describes the transfer of the acquired stock from S-1
to S-2, but does not describe the transfer of the acquired stock from S-
2 to PRS because such transfer causes T to cease to be a member of the
qualified group (as defined in Sec. 1.368-1(d)(4)(ii)). Therefore, the
characterization of this transaction must be determined under the
relevant provisions of law, including the step transaction doctrine. See
Sec. 1.368-1(a). The transaction fails to meet the control requirement
of a reorganization described in section 368(a)(1)(B) because
immediately after the acquisition of the T stock, the acquiring
corporation does not have control of T.
Example 6. Transfers of acquired assets to members of the qualified
group after a reorganization under section 368(a)(1)(D). (i) Facts. P
owns all of the stock of T. Pursuant to a plan of reorganization, T
transfers all of its assets to S-1 solely in exchange for S-1 stock,
which T distributes to P, and S-1's assumption of T's liabilities. In
addition, pursuant to the plan, S-1 transfers all of the T assets
[[Page 566]]
to S-2, and S-2 transfers all of the T assets to S-3.
(ii) Analysis. Under this paragraph (k), the transaction, which
otherwise qualifies as a reorganization under section 368(a)(1)(D), is
not disqualified by the successive transfers of all the T assets from S-
1 to S-2 and from S-2 to S-3 because the transfers are not one or more
distributions to shareholders, the transfers consist of part or all of
the assets of the acquiring corporation, the acquiring corporation does
not terminate its corporate existence for Federal income tax purposes in
connection with the transfers, and the transaction satisfies the
requirements of Sec. 1.368-1(d).
Example 7. Transfer of stock of the acquiring corporation to a
member of the qualified group after a reorganization under section
368(a)(1)(A) by reason of section 368(a)(2)(D). (i) Facts. Pursuant to a
plan of reorganization, S-1 acquires all of the T assets in the merger
of T into S-1. In the merger, the T shareholders receive solely P stock.
Also, pursuant to the plan, P transfers all of the S-1 stock to S-4.
(ii) Analysis. Under this paragraph (k), the transaction, which
otherwise qualifies as a reorganization under section 368(a)(1)(A) by
reason of section 368(a)(2)(D), is not disqualified by the transfer of
all of the S-1 stock to S-4 because the transfer is not a distribution
to shareholders, the transfer consists of part or all of the stock of
the acquiring corporation, the transfer does not cause S-1 to cease to
be a member of the qualified group (as defined in Sec. 1.368-
1(d)(4)(ii)), the acquiring corporation does not terminate its corporate
existence for Federal income tax purposes in connection with the
transfer, and the transaction satisfies the requirements of Sec. 1.368-
1(d).
Example 8. Transfer of acquired assets to a partnership after a
reorganization under section 368(a)(1)(A) by reason of section
368(a)(2)(D). (i) Facts. Pursuant to a plan of reorganization, S-1
acquires all of the T assets in the merger of T into S-1. In the merger,
the T shareholders receive solely P stock. In addition, pursuant to the
plan, S-1 transfers all of the T assets to PRS, a partnership in which
S-1 owns a 33\1/3\-percent interest. PRS continues T's historic
business. S-1 does not perform active and substantial management
functions as a partner with respect to PRS' business.
(ii) Analysis. Under this paragraph (k), the transaction, which
otherwise qualifies as a reorganization under section 368(a)(1)(A) by
reason of section 368(a)(2)(D), is not disqualified by the transfer of T
assets from S-1 to PRS because the transfer is not a distribution to
shareholders, the transfer consists of part or all of the assets of the
acquiring corporation, the acquiring corporation does not terminate its
corporate existence for Federal income tax purposes in connection with
the transfers, and the transaction satisfies the requirements of Sec.
1.368-1(d).
Example 9. Sale of acquired assets to a member of the qualified
group after a reorganization under section 368(a)(1)(C). (i) Facts.
Pursuant to a plan of reorganization, T transfers all of its assets to
S-1 in exchange for P stock, which T distributes to its shareholders,
and S-1's assumption of T's liabilities. In addition, pursuant to the
plan, S-1 sells all of the T assets to S-5 for cash equal to the fair
market value of those assets.
(ii) Analysis. Under this paragraph (k), the transaction, which
otherwise qualifies as a reorganization under section 368(a)(1)(C), is
not disqualified by the sale of all of the T assets from S-1 to S-5
because the transfer is not a distribution to shareholders, the transfer
consists of part or all of the assets of the acquiring corporation, the
acquiring corporation does not terminate its corporate existence for
Federal income tax purposes in connection with the transfer, and the
transaction satisfies the requirements of Sec. 1.368-1(d).
(3) Effective/applicability dates. This paragraph (k) applies to
transactions occurring on or after May 9, 2008, except that it does not
apply to any transaction occurring pursuant to a written agreement which
is binding before May 9, 2008, and at all times after that.
(l) Certain transactions treated as reorganizations described in
section 368(a)(1)(D)--(1) General rule. In order to qualify as a
reorganization under section 368(a)(1)(D), a corporation (transferor
corporation) must transfer all or part of its assets to another
corporation (transferee corporation) and immediately after the transfer
the transferor corporation, or one or more of its shareholders
(including persons who were shareholders immediately before the
transfer), or any combination thereof, must be in control of the
transferee corporation; but only if, in pursuance of the plan, stock or
securities of the transferee are distributed in a transaction which
qualifies under section 354, 355, or 356.
(2) Distribution requirement--(i) In general. For purposes of
paragraph (l)(1) of this section, a transaction otherwise described in
section 368(a)(1)(D) will be treated as satisfying the requirements of
sections 368(a)(1)(D) and 354(b)(1)(B) notwithstanding that there is no
actual issuance of stock and/or securities of the transferee corporation
if the same person or persons own, directly or
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indirectly, all of the stock of the transferor and transferee
corporations in identical proportions. In cases where no consideration
is received or the value of the consideration received in the
transaction is less than the fair market value of the transferor
corporation's assets, the transferee corporation will be treated as
issuing stock with a value equal to the excess of the fair market value
of the transferor corporation's assets over the value of the
consideration actually received in the transaction. In cases where the
value of the consideration received in the transaction is equal to the
fair market value of the transferor corporation's assets, the transferee
corporation will be deemed to issue a nominal share of stock to the
transferor corporation in addition to the actual consideration exchanged
for the transferor corporation's assets. The nominal share of stock in
the transferee corporation will then be deemed distributed by the
transferor corporation to the shareholders of the transferor
corporation, as part of the exchange for the stock of such shareholders.
Where appropriate, the nominal share will be further transferred through
chains of ownership to the extent necessary to reflect the actual
ownership of the transferor and transferee corporations. Similar
treatment to that of the preceding two sentences shall apply where the
transferee corporation is treated as issuing stock with a value equal to
the excess of the fair market value of the transferor corporation's
assets over the value of the consideration actually received in the
transaction.
(ii) Attribution. For purposes of paragraph (l)(2)(i) of this
section, ownership of stock will be determined by applying the
principles of section 318(a)(2) without regard to the 50 percent
limitation in section 318(a)(2)(C). In addition, an individual and all
members of his family described in section 318(a)(1) shall be treated as
one individual.
(iii) De minimis variations in ownership and certain stock not taken
into account. For purposes of paragraph (l)(2)(i) of this section, the
same person or persons will be treated as owning, directly or
indirectly, all of the stock of the transferor and transferee
corporations in identical proportions notwithstanding the fact that
there is a de minimis variation in shareholder identity or
proportionality of ownership. Additionally, for purposes of paragraph
(l)(2)(i) of this section, stock described in section 1504(a)(4) is not
taken into account.
(iv) Exception. Paragraph (l)(2) of this section does not apply to a
transaction otherwise described in Sec. 1.358-6(b)(2).
(3) Examples. The following examples illustrate the principles of
paragraph (l) of this section. For purposes of these examples, each of
A, B, C, and D is an individual, T is the acquired corporation, S is the
acquiring corporation, P is the parent corporation, and each of S1, S2,
S3, and S4 is a direct or indirect subsidiary of P. Further, all of the
requirements of section 368(a)(1)(D) other than the requirement that
stock or securities be distributed in a transaction to which section 354
or 356 applies are satisfied. The examples are as follows:
Example 1. A owns all the stock of T and S. The T stock has a fair
market value of $100x. T sells all of its assets to S in exchange for
$100x of cash and immediately liquidates. Because there is complete
shareholder identity and proportionality of ownership in T and S, under
paragraph (l)(2)(i) of this section, the requirements of sections
368(a)(1)(D) and 354(b)(1)(B) are treated as satisfied notwithstanding
the fact that no S stock is issued. Pursuant to paragraph (l)(2)(i) of
this section, S will be deemed to issue a nominal share of S stock to T
in addition to the $100x of cash actually exchanged for the T assets,
and T will be deemed to distribute all such consideration to A. The
transaction qualifies as a reorganization described in section
368(a)(1)(D).
Example 2. The facts are the same as in Example 1 except that C, A's
son, owns all of the stock of S. Under paragraph (l)(2)(ii) of this
section, A and C are treated as one individual. Accordingly, there is
complete shareholder identity and proportionality of ownership in T and
S. Therefore, under paragraph (l)(2)(i) of this section, the
requirements of sections 368(a)(1)(D) and 354(b)(1)(B) are treated as
satisfied notwithstanding the fact that no S stock is issued. Pursuant
to paragraph (l)(2)(i) of this section, S will be deemed to issue a
nominal share of S stock to T in addition to the $100x of cash actually
exchanged for the T assets, and T will be deemed to distribute all such
consideration to A. A will be deemed to transfer the nominal share of S
stock to C. The transaction qualifies as a reorganization described in
section 368(a)(1)(D).
[[Page 568]]
Example 3. P owns all of the stock of S1 and S2. S1 owns all of the
stock of S3, which owns all of the stock of T. S2 owns all of the stock
of S4, which owns all of the stock of S. The T stock has a fair market
value of $70x. T sells all of its assets to S in exchange for $70x of
cash and immediately liquidates. Under paragraph (l)(2)(ii) of this
section, there is indirect, complete shareholder identity and
proportionality of ownership in T and S. Accordingly, the requirements
of sections 368(a)(1)(D) and 354(b)(1)(B) are treated as satisfied
notwithstanding the fact that no S stock is issued. Pursuant to
paragraph (l)(2)(i) of this section, S will be deemed to issue a nominal
share of S stock to T in addition to the $70x of cash actually exchanged
for the T assets, and T will be deemed to distribute all such
consideration to S3. S3 will be deemed to distribute the nominal share
of S stock to S1, which, in turn, will be deemed to distribute the
nominal share of S stock to P. P will be deemed to transfer the nominal
share of S stock to S2, which, in turn, will be deemed to transfer such
share of S stock to S4. The transaction qualifies as a reorganization
described in section 368(a)(1)(D).
Example 4. A, B, and C own 34%, 33%, and 33%, respectively, of the
stock of T. The T stock has a fair market value of $100x. A, B, and C
each own 33% of the stock of S. D owns the remaining 1% of the stock of
S. T sells all of its assets to S in exchange for $100x of cash and
immediately liquidates. For purposes of determining whether the
distribution requirement of sections 368(a)(1)(D) and 354(b)(1)(B) is
met, under paragraph (l)(2)(iii) of this section, D's ownership of a de
minimis amount of stock of S is disregarded and the transaction is
treated as if there is complete shareholder identity and proportionality
of ownership in T and S. Because there is complete shareholder identity
and proportionality of ownership in T and S, under paragraph (l)(2)(i)
of this section, the requirements of sections 368(a)(1)(D) and
354(b)(1)(B) are treated as satisfied notwithstanding the fact that no S
stock is issued. Pursuant to paragraph (l)(2)(i) of this section, S will
be deemed to issue a nominal share of S stock to T in addition to the
$100x of cash actually exchanged for the T assets, T will be deemed to
distribute all such consideration to A, B, and C, and the nominal S
stock will be deemed transferred among the S shareholders to the extent
necessary to reflect their actual ownership of S. The transaction
qualifies as a reorganization described in section 368(a)(1)(D).
Example 5. The facts are the same as in Example 4 except that A, B,
and C own 34%, 33%, and 33%, respectively, of the common stock of T and
S. D owns preferred stock in S described in section 1504(a)(4). For
purposes of determining whether the distribution requirement of sections
368(a)(1)(D) and 354(b)(1)(B) is met, under paragraph (l)(2)(iii) of
this section, D's ownership of S stock described in section 1504(a)(4)
is ignored and the transaction is treated as if there is complete
shareholder identity and proportionality of ownership in T and S.
Because there is complete shareholder identity and proportionality of
ownership in T and S, under paragraph (l)(2)(i) of this section, the
requirements of sections 368(a)(1)(D) and 354(b)(1)(B) are treated as
satisfied notwithstanding the fact that no S stock is issued. Pursuant
to paragraph (l)(2)(i) of this section, S will be deemed to issue a
nominal share of S stock to T in addition to the $100x of cash actually
exchanged for the T assets, and T will be deemed to distribute all such
consideration to A, B, and C. The transaction qualifies as a
reorganization described in section 368(a)(1)(D).
Example 6. A and B each own 50% of the stock of T. The T stock has a
fair market value of $100x. B and C own 90% and 10%, respectively, of
the stock of S. T sells all of its assets to S in exchange for $100x of
cash and immediately liquidates. Because complete shareholder identity
and proportionality of ownership in T and S does not exist, paragraph
(l)(2)(i) of this section does not apply. The requirements of sections
368(a)(1)(D) and 354(b)(1)(B) are not satisfied, and the transaction
does not qualify as a reorganization described in section 368(a)(1)(D).
(4) Effective/applicability date--(i) In general. This section
applies to transactions occurring on or after December 18, 2009. For
rules regarding transactions occurring before December 18, 2009, see
section 1.368-2T(l) as contained in 26 CFR part 1.
(ii) Transitional rule. A taxpayer may apply the provisions of these
regulations to transactions occurring before December 18, 2009. However,
the transferor corporation, the transferee corporation, any direct or
indirect transferee of transferred basis property from either of the
foregoing, and any shareholder of the transferor or transferee
corporation may not apply the provisions of these regulations unless all
such taxpayers apply the provisions of the regulations.
(m) Qualification as a reorganization under section 368(a)(1)(F)--
(1) Mere change. To qualify as a reorganization under section
368(a)(1)(F), a transaction must result in a mere change in identity,
form, or place of organization of one corporation, however effected (a
mere change). A mere change can consist of a transaction that involves
an actual or deemed transfer of property
[[Page 569]]
from one corporation (a transferor corporation) to one other corporation
(a resulting corporation). Such a transaction is a mere change and
qualifies as a reorganization under section 368(a)(1)(F) only if all the
requirements set forth in paragraphs (m)(1)(i) through (vi) of this
section are satisfied. For purposes of this paragraph (m), a transaction
or a series of related transactions that can be tested against the
requirements set forth in paragraphs (m)(1)(i) through (vi) of this
section (a potential F reorganization) begins when the transferor
corporation begins transferring (or is deemed to begin transferring) its
assets, directly or indirectly, to the resulting corporation, and it
ends when the transferor corporation has distributed (or is deemed to
have distributed) to its shareholders the consideration it receives (or
is deemed to receive) from the resulting corporation and has completely
liquidated for federal income tax purposes. For purposes of this
paragraph (m), deemed transfers include, for example, those provided in
Sec. 301.7701-3(g)(1)(iv) of this chapter (when an entity disregarded
as separate from its owner elects under paragraph Sec. 301.7701-
3(c)(1)(i) of this chapter to be classified as an association, the owner
of the entity is deemed to transfer all of the assets and liabilities of
the entity to the association in exchange for stock of the association).
Deemed transfers also include those resulting from the application of
step transaction principles. For example, step transaction principles
may disregard a transitory holding of property by an individual after a
liquidation of the transferor corporation and before a subsequent
transfer of the transferor corporation's property to the resulting
corporation. Step transaction principles may also treat a contribution
of all the stock of the transferor corporation to the resulting
corporation, followed by a liquidation (or deemed liquidation) of the
transferor corporation, as a deemed transfer of the transferor
corporation's property to the resulting corporation, followed by a
distribution of stock of the resulting corporation in complete
liquidation of the transferor corporation.
(i) Resulting corporation stock distributed in exchange for
transferor corporation stock. Immediately after the potential F
reorganization, all the stock of the resulting corporation, including
any stock of the resulting corporation issued before the potential F
reorganization, must have been distributed (or deemed distributed) in
exchange for stock of the transferor corporation in the potential F
reorganization. However, for purposes of this paragraph (m)(1)(i) and
paragraph (m)(1)(ii) of this section, a de minimis amount of stock
issued by the resulting corporation other than in respect of stock of
the transferor corporation to facilitate the organization of the
resulting corporation or maintain its legal existence is disregarded.
(ii) Identity of stock ownership. The same person or persons must
own all of the stock of the transferor corporation, determined
immediately before the potential F reorganization, and of the resulting
corporation, determined immediately after the potential F
reorganization, in identical proportions. However, this requirement is
not violated if one or more holders of stock in the transferor
corporation exchange stock in the transferor corporation for stock of
equivalent value in the resulting corporation, but having different
terms from those of the stock in the transferor corporation, or receive
a distribution of money or other property from either the transferor
corporation or the resulting corporation, whether or not in exchange for
stock in the transferor corporation or the resulting corporation.
(iii) Prior assets or attributes of resulting corporation. The
resulting corporation may not hold any property or have any tax
attributes (including those specified in section 381(c)) immediately
before the potential F reorganization. However, this requirement is not
violated if the resulting corporation holds or has held a de minimis
amount of assets to facilitate its organization or maintain its legal
existence, and has tax attributes related to holding those assets, or
holds the proceeds of borrowings undertaken in connection with the
potential F reorganization.
(iv) Liquidation of transferor corporation. The transferor
corporation must
[[Page 570]]
completely liquidate, for federal income tax purposes, in the potential
F reorganization. However, the transferor corporation is not required to
dissolve under applicable law and may retain a de minimis amount of
assets for the sole purpose of preserving its legal existence.
(v) Resulting corporation is the only acquiring corporation.
Immediately after the potential F reorganization, no corporation other
than the resulting corporation may hold property that was held by the
transferor corporation immediately before the potential F
reorganization, if such other corporation would, as a result, succeed to
and take into account the items of the transferor corporation described
in section 381(c).
(vi) Transferor corporation is the only acquired corporation.
Immediately after the potential F reorganization, the resulting
corporation may not hold property acquired from a corporation other than
the transferor corporation if the resulting corporation would, as a
result, succeed to and take into account the items of such other
corporation described in section 381(c).
(2) Non-application of continuity of interest and continuity of
business enterprise requirements. A continuity of the business
enterprise and a continuity of interest are not required for a potential
F reorganization to qualify as a reorganization under section
368(a)(1)(F). See Sec. 1.368-1(b).
(3) Related transactions--(i) Series of transactions. A potential F
reorganization consisting of a series of related transactions that
together result in a mere change of one corporation may qualify as a
reorganization under section 368(a)(1)(F), whether or not certain steps
in the series, viewed in isolation, could be subject to other Code
provisions, such as sections 304(a), 331, 332, or 351. However, see
paragraph (k) of this section for transactions that qualify as
reorganizations under section 368(a) and will not be recharacterized as
a mere change as a result of one or more subsequent transfers of assets
or stock.
(ii) Mere change within a larger transaction. A potential F
reorganization that qualifies as a reorganization under section
368(a)(1)(F) may occur before, within, or after other transactions that
effect more than a mere change, even if the resulting corporation has
only transitory existence. Related events that precede or follow the
potential F reorganization generally will not cause that potential F
reorganization to fail to qualify as a reorganization under section
368(a)(1)(F). Qualification of a potential F reorganization as a
reorganization under section 368(a)(1)(F) will not alter the character
of other transactions for federal income tax purposes, and step
transaction principles may be applied to other transactions without
regard to whether certain steps qualify as a reorganization or part of a
reorganization under section 368(a)(1)(F).
(iii) Distributions treated as separate transactions. As provided in
paragraph (m)(1)(ii) of this section, a potential F reorganization may
qualify as a mere change even though a holder of stock in the transferor
corporation receives a distribution of money or other property from
either the transferor corporation or the resulting corporation. If a
shareholder receives money or other property (including in exchange for
its shares) from the transferor corporation or the resulting corporation
in a potential F reorganization that qualifies as a reorganization under
section 368(a)(1)(F), then the receipt of money or other property
(including any exchanged for shares) is treated as an unrelated,
separate transaction from the reorganization, whether or not connected
in a formal sense. See Sec. 1.301-1(l).
(iv) Transactions also qualifying under other provisions of section
368(a)(1). In certain cases, a potential F reorganization would (but for
this paragraph (m)(3)(iv)) qualify both as a reorganization under
section 368(a)(1)(F) and as a reorganization or part of a reorganization
under another provision of section 368(a)(1). The following rules
determine which of these overlapping qualifications applies.
(A) If the potential F reorganization or a step thereof qualifies as
a reorganization or part of a reorganization under another provision of
section 368(a)(1), and if a corporation in control (within the meaning
of section 368(c)) of the resulting corporation is a party
[[Page 571]]
to such other reorganization (within the meaning of section 368(b)), the
potential F reorganization will not qualify as a reorganization under
section 368(a)(1)(F).
(B) Except as provided in paragraph (m)(3)(iv)(A) of this section,
if, but for this paragraph (m)(3)(iv)(B), the potential F reorganization
would qualify as a reorganization under both section 368(a)(1)(F) and
one or more of sections 368(a)(1)(A), 368(a)(1)(C), or 368(a)(1)(D),
then for all federal income tax purposes the potential F reorganization
will qualify as a reorganization only under section 368(a)(1)(F).
(4) Examples. The following examples illustrate the application of
this paragraph (m). Unless the facts otherwise indicate, A, B, and C are
domestic individuals; P, S, T, X, Y, and Z (and similar designations)
are domestic corporations; each transaction is entered into for a valid
business purpose; all persons and transactions are unrelated; and all
other relevant facts are set forth in the examples.
Example 1. Cash contribution and redemption--no mere change. C owns
all of the stock of X, a State A corporation. The net value of X's
assets and liabilities is $1,000,000. Y, a State B corporation, seeks to
acquire the assets of X for cash. To effect the acquisition, Y and X
enter into an agreement under which Y will contribute $1,000,000 to Z, a
newly formed corporation of which Y is the sole shareholder, in exchange
for Z stock and X will merge into Z. In the merger, C surrenders all of
the X stock and receives the $1,000,000 Y contributed to Z. C receives
no Z stock in the transaction. After the merger, Y holds all of the Z
stock, and Z holds all of the assets and liabilities previously held by
X. Z stock is not distributed to the shareholders of X in exchange for
their stock in X as required by paragraph (m)(1)(i) of this section, and
the transaction results in a change in the ownership of X that does not
result from an exchange or distribution described in paragraph
(m)(1)(ii) of this section. Therefore, the merger of X into Z is not a
mere change of X and does not qualify as a reorganization under section
368(a)(1)(F).
Example 2. Cash redemption--mere change. A owns 75%, and B owns 25%,
of the stock of X, a State A corporation. The management of X determines
that it would be in the best interest of X to reorganize under the laws
of State B. Accordingly, X forms Y, a State B corporation, and X and Y
enter into an agreement under which X will merge into Y. A does not wish
to own stock in Y. In the merger, A surrenders A's X stock and receives
cash, and B surrenders all of B's X stock and receives all the stock of
Y. The change in ownership caused by A's surrender of X stock results
from a distribution and exchange described in paragraph (m)(1)(ii) of
this section. Therefore, the merger of X into Y is a mere change of X
and qualifies as a reorganization under section 368(a)(1)(F). Under
paragraph (m)(3)(iii) of this section, A's surrender of X stock for cash
is treated as a transaction, separate from the reorganization, to which
section 302(a) applies.
Example 3. Pre-transaction de minimis stock issuance--mere change--
other provisions of section 368(a)(1). P owns all of the stock of S, a
Country A corporation. The management of P determines that it would be
in the best interest of S to change its place of incorporation to
Country B. Under Country B law, a corporation must have at least two
shareholders to enjoy limited liability. P is advised by its Country B
advisors that the new corporation should issue 1% of its stock to a
shareholder that is not P's nominee to assure satisfaction of the two-
shareholder requirement. As part of an integrated plan, C, an officer of
S, organizes Y, a Country B corporation with 1,000 shares of common
stock authorized, and contributes cash to Y in exchange for ten of the
common shares. S then merges into Y under the laws of Country A and
Country B. Pursuant to the plan of merger, P surrenders its shares of S
stock and receives 990 shares of Y common stock. The ten shares of Y
stock issued to C not in respect of the S stock are de minimis and are
used to facilitate the organization of Y within the meaning of paragraph
(m)(1)(i) of this section. Therefore, the issuance of this stock to a
new shareholder does not prevent the merger of S into Y from qualifying
as a mere change of S. Accordingly, the merger is a reorganization under
section 368(a)(1)(F). Without regard to the merger's qualification under
section 368(a)(1)(F), the merger would also qualify as a reorganization
under both section 368(a)(1)(A) and section 368(a)(1)(D). Under
paragraph (m)(3)(iv)(B) of this section, if a potential F reorganization
qualifies as a reorganization under section 368(a)(1)(F), and would also
qualify under one or more of sections 368(a)(1)(A) or 368(a)(1)(D), the
potential F reorganization qualifies only as a reorganization under
368(a)(1)(F), and neither section 368(a)(1)(A) nor section 368(a)(1)(D)
will apply.
Example 4. Pre-transaction assets, attributes--no mere change. A
owns all of the stock of P, and P owns all of the stock of S, which is
engaged in a manufacturing business. P has owned the stock of S for many
years. P owns no assets other than the stock of S. A decides to
eliminate the holding company structure by merging P into S. Because it
[[Page 572]]
operates a manufacturing business, the potential resulting corporation,
S, holds property and has tax attributes immediately before the
potential F reorganization. Therefore, under paragraph (m)(1)(iii) of
this section, the merger of P into S is not a mere change of P and does
not qualify as a reorganization under section 368(a)(1)(F). The same
result would occur under paragraph (m)(1)(iii) of this section if,
instead of P merging into S, S merged into P, because P, the potential
resulting corporation, holds property (the stock of S) and has tax
attributes immediately before the potential F reorganization.
Example 5. Series of related transactions--mere change. P owns all
of the stock of S1, a State A corporation. The management of P
determines that it would be in the best interest of S1 to change its
place of incorporation to State B. Accordingly, under an integrated
plan, P forms S2, a new State B corporation; P contributes the S1 stock
to S2; and S1 merges into S2 under the laws of State A and State B.
Under paragraph (m)(3)(i) of this section, a series of transactions that
together result in a mere change of one corporation may qualify as a
reorganization under section 368(a)(1)(F). The contribution of S1 stock
to S2 and the merger of S1 into S2 together constitute a mere change of
S1. Therefore, the potential F reorganization qualifies as a
reorganization under section 368(a)(1)(F). Without regard to its
qualification under section 368(a)(1)(F), the potential F reorganization
would also qualify as a reorganization under both section 368(a)(1)(A)
and section 368(a)(1)(D). Under paragraph (m)(3)(iv)(B) of this section,
if a potential F reorganization qualifies as a reorganization under
section 368(a)(1)(F) and would also qualify under one or more of
sections 368(a)(1)(A) or 368(a)(1)(D), it qualifies only as a
reorganization under 368(a)(1)(F), and neither section 368(a)(1)(A) nor
section 368(a)(1)(D) will apply. The result would be the same with
respect to qualification under section 368(a)(1)(F) if, instead of
merging into S2, S1 completely liquidates or is deemed to liquidate by
reason of a conversion in an entity disregarded as separate from its
owner under Sec. 301.7701-3 of this chapter.
Example 6. Post-transaction stock sale--mere change. P owns all of
the stock of S1, a State A corporation. The management of P determines
that it would be in the best interest of S1 to change its place of
incorporation to State B. Accordingly, P forms S2, a new State B
corporation. S1 then merges into S2 under the laws of State A and State
B. Immediately thereafter, and as part of the same plan, P sells all of
its stock in S2 to an unrelated party. Without regard to P's sale of S2
stock, the merger of S1 into S2 is a potential F reorganization that
qualifies as a mere change of S1 within the meaning of paragraph (m)(1)
of this section. Under paragraph (m)(3)(ii) of this section, related
events that occur before or after a potential F reorganization that
qualifies as a mere change generally do not cause that potential F
reorganization to fail to qualify as a reorganization under section
368(a)(1)(F). Therefore, P's sale of the S2 stock is disregarded in
determining whether the merger of S1 into S2 is a mere change of S1.
Accordingly, the merger of S1 into S2 qualifies as a reorganization
under section 368(a)(1)(F). The result would be the same if, instead of
the S2 stock being sold by P, S2 merges into a previously unrelated
corporation and terminates its separate existence.
Example 7. Post-transaction redemption--mere change. A owns all of
the stock of T. P owns all of the stock of S. Each of T and S is a State
A corporation engaged in a manufacturing business. The following
transactions occur pursuant to a single plan. Each of T, P, and S is a
State A corporation engaged in a manufacturing business. Second, P
changes its state of incorporation to State B by merging into newly
incorporated New P under the laws of State A and State B. Third, New P
redeems all the New P stock issued to A in respect of A's P stock
(initially issued to A in respect of A's T stock) for cash. Without
regard to the other steps, the merger of P into New P is a potential F
reorganization that qualifies as a reorganization under section
368(a)(1)(F). Under paragraph (m)(3)(ii) of this section, related events
that occur before or after a potential F reorganization that qualifies
as a mere change generally do not prevent that potential F
reorganization from qualifying as a reorganization under section
368(a)(1)(F). Therefore, the merger of P into New P qualifies as a
reorganization under section 368(a)(1)(F). Under paragraph (m)(3)(ii) of
this section, the qualification of the merger of P into New P as a
reorganization under section 368(a)(1)(F) does not alter the tax
treatment of the merger of T into S. Because the P shares received by A
in respect of the T shares (exchanged for New P shares in the mere
change of P into New P) are redeemed for cash pursuant to the plan, the
merger of T into S does not satisfy the continuity of interest
requirement of Sec. 1.368-1(e) and therefore does not qualify as a
reorganization under section 368(a).
Example 8. Series of related transactions--mere change. P owns all
of the stock of S, a State A corporation. The management of P determines
that it would be in the best interest of S to change its form from a
State A corporation to a State A limited partnership but to continue to
be treated as a corporation for federal tax purposes. Accordingly, P
contributes 1% of the S stock to newly formed LLC, a limited liability
company, in exchange for all of the membership interests in LLC. P is
the sole member of LLC. Under
[[Page 573]]
Sec. 301.7701-3 of this chapter, LLC is disregarded as an entity
separate from its owner, P. Then, under a State A statute, S converts to
a State A limited partnership. In the conversion, P's interest as a 99%
shareholder of S is converted into a 99% limited partner interest, and
LLC's interest as a 1% shareholder of S is converted into a 1% general
partner interest. S also elects, under Sec. 301.7701-3(c) of this
chapter, to be classified as a corporation for federal income tax
purposes, effective on the same day as the conversion. Under paragraph
(m)(3)(i) of this section, the conversion of S from a State A
corporation to a State A limited partnership, together with the election
to treat S as a corporation for federal tax purposes, results in a mere
change of S and qualifies as a reorganization under section
368(a)(1)(F).
Example 9. Other acquiring corporation--no mere change. P owns 80%,
and A owns 20%, of the stock of S. A and the management of P determine
that it would be in the best interest of S to completely liquidate while
A continues to operate part of the business of S in corporate form.
Accordingly, S distributes 80% of its assets to P and 20% of its assets
to A; S dissolves; and A contributes the assets it receives from S to
newly incorporated New S in exchange for all of the stock of New S. S's
distribution of 80% of its property to P as part of the complete
liquidation of S meets the requirements of section 332. Thus, section
381(a)(1) applies to P's acquisition of 80% of the property held by S
immediately before the transaction. Under paragraph (m)(1)(v) of this
section, the potential F reorganization in which 20% of the property
held by S immediately before the transaction is transferred to New S
cannot be a mere change of S, because section 381(a) applies to P's
acquisition of property held by S immediately before the potential F
reorganization. Accordingly, sections 331 and 336 apply to A's
acquisition of property from S and S's distribution of property to A,
and section 351 applies to A's contribution of that property to New S.
Example 10. Other acquiring corporation--no mere change. P owns all
of the stock of S1. The management of P determines that it would be in
the best interest of S1 to merge S1 into P. Accordingly, pursuant to a
state merger statute, S1 merges into P. Immediately afterward and as
part of the same plan, P contributes 50% of the former assets of S1 to
newly incorporated S2 in exchange for all of the stock of S2. The
transaction does not qualify as a complete liquidation of S1 under
section 332 (because of the reincorporation of some of S1's assets) but
does qualify as a reorganization under section 368(a)(1)(A) by reason of
section 368(a)(2)(C) and paragraph (k) of this section. Under paragraph
(m)(1)(v) of this section, the potential F reorganization in which some
of the former assets of S1 are transferred (in form) first to P, and
then to S2, is not a mere change of S1, because section 381(a) applies
to P's acquisition of property held by S1 immediately before the
potential F reorganization. Furthermore, under paragraph (m)(3)(iv)(A)
of this section, P, the corporation in control of S2 within the meaning
of section 368(c), is a party to the reorganization within the meaning
of section 368(b). Thus, the indirect transfer of property from S1 to S2
does not qualify under section 368(a)(1)(F).
Example 11. Other acquiring corporation--mere change. P owns all of
the stock of S1. S1's only asset is all of the equity interest in LLC2,
a domestic limited liability company. Under Sec. 301.7701-3 of this
chapter, LLC2 is disregarded as an entity separate from its owner, S1.
Pursuant to an integrated plan to undergo a reorganization under
368(a)(1)(F), S1 and LLC2 undergo the following two state law
conversions. First, under state law LLC2 converts into S2, a
corporation. Second, under state law S1 converts into LLC1, a domestic
limited liability company. Under Sec. 301.7701-3 of this chapter, LLC1
is disregarded as an entity separate from its owner, P. As a result of
the two conversions, S1 is deemed to transfer its assets to S2 in
exchange for all of the stock in S2 and then distribute the S2 stock to
P in complete liquidation of S1. The two conversions, viewed as a
potential F reorganization, constitute a mere change of S1, and that
potential F reorganization qualifies as a reorganization under section
368(a)(1)(F). The result would be the same if, instead of converting
into S2 pursuant to state law, LLC2 elected under Sec. 301.7701-3(c) to
change its classification for federal tax purposes and be treated as an
association taxable as a corporation, provided the effective date of the
election (and its resulting deemed transactions) occurs before the
conversion of S1.
Example 12. Other acquiring corporation--no mere change. The facts
are the same facts as in Example 11, except that S1 converts into LLC1
prior to the conversion of LLC2 into S2. As a result of these
conversions, S1 is deemed to distribute all of its assets to P in
exchange for all of P's S1 stock, and P is deemed to transfer all of
those assets to S2 in exchange for all of the stock in S2. The
transaction does not qualify as a complete liquidation of S1 under
section 332 (because of the reincorporation of S1's assets), but does
qualify as a reorganization under section 368(a)(1)(C) by reason of
section 368(a)(2)(C) and paragraph (k) of this section. Under paragraph
(m)(1)(v) of this section, the potential F reorganization in which the
former assets of S1 are deemed transferred, first by S1 to P, and then
by P to S2, is not a mere change of S1 because section 381(a) applies to
P's acquisition of property held by S1 immediately before the potential
F reorganization. Furthermore, the corporation in
[[Page 574]]
control of S2, within the meaning of section 368(c), is a party to the
reorganization within the meaning of section 368(b). Thus, the indirect
transfer of property from S1 to S2 does not qualify under section
368(a)(1)(F).
Example 13. Series of related transactions--no mere change. X owns
all of the stock of T. P acquires all of the stock of T in exchange for
consideration consisting of $50 cash and P voting stock with $50 value.
No election is made under section 338. Immediately thereafter and as
part of the same plan, P forms S as a wholly-owned subsidiary, and T is
merged into S. Viewed in isolation as a potential F reorganization, the
merger of T into S appears to constitute a mere change of T. However,
the acquisition of the T stock by P and the merger of T into S, viewed
together, qualify as a reorganization under section 368(a)(1)(A) by
reason of section 368(a)(2)(D). The step transaction doctrine is applied
treat the transaction as a statutory merger of T into S in exchange for
$50 cash and $50 of P's voting stock (and S's assumption of T's
liabilities), P's momentary ownership of T stock is disregarded. Under
paragraph (m)(3)(iv)(A) of this section, P, the corporation in control
of S, is a party to the reorganization within the meaning of section
368(b). Thus, the transfer of property from T to S does not qualify
under section 368(a)(1)(F).
Example 14. Multiple transferor corporations--no mere change. P owns
all the stock of S1 and S2. The management of P determines it would be
in the best interest of S1 and S2 to operate as a single corporation. P
forms S3 and, under applicable corporate law, S1 and S2 simultaneously
merge into S3. Immediately after the merger, P owns all the stock of S3.
Each of the mergers can be tested as a potential F reorganization.
However, immediately after the simultaneous mergers, the resulting
corporation, S3, holds property acquired from a corporation other than
the transferor corporation, and section 381(a) would apply to the
acquisition of such property. Therefore, under paragraph (m)(1)(vi) of
this section, neither potential F reorganization is a mere change, and
neither merger into S3 qualifies as a reorganization under section
386(a)(1)(F). The result would be different if the mergers were not
simultaneous. If S1 completed its merger into S3 before S2 began its
merger into S3, the merger of S1 into S3 would qualify as a
reorganization under section 368(a)(1)(F), but the merger of S2 into S3
would not so qualify (although it would qualify as a reorganization
under sections 368(a)(1)(A) and 368(a)(1)(D)).
(5) Effective/Applicability Date. This paragraph (m) applies to
transactions occurring on or after September 21, 2015.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960]
Editorial Note: For Federal Register citations affecting Sec.
1.368-2, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
Sec. 1.368-3 Records to be kept and information to be filed with
returns.
(a) Parties to the reorganization. The plan of reorganization must
be adopted by each of the corporations that are parties thereto. Each
such corporation must include a statement entitled, ``STATEMENT PURSUANT
TO Sec. 1.368-3(a) BY [INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER
(IF ANY) OF TAXPAYER], A CORPORATION A PARTY TO A REORGANIZATION,'' on
or with its return for the taxable year of the exchange. If any such
corporation is a controlled foreign corporation (within the meaning of
section 957), each United States shareholder (within the meaning of
section 951(b)) with respect thereto must include this statement on or
with its return. However, it is not necessary for any taxpayer to
include more than one such statement on or with the same return for the
same reorganization. The statement must include--
(1) The names and employer identification numbers (if any) of all
such parties;
(2) The date of the reorganization;
(3) The value and basis of the assets, stock or securities of the
target corporation transferred in the transaction, determined
immediately before the transfer and aggregated as follows--
(i) Importation property transferred in a loss importation
transaction, as defined in Sec. 1.362-3(c)(2) and (3), respectively;
(ii) Loss duplication property as defined in Sec. 1.362-4(g)(1);
(iii) Property with respect to which any gain or loss was recognized
on the transfer (without regard to whether such property is also
identified in paragraph (a)(3)(i) or (ii) of this section);
(iv) Property not described in paragraph (a)(3)(i), (ii), or (iii)
of this section; and
(4) The date and control number of any private letter ruling(s)
issued by the Internal Revenue Service in connection with this
reorganization.
[[Page 575]]
(b) Significant holders. Every significant holder, other than a
corporation a party to the reorganization, must include a statement
entitled, ``STATEMENT PURSUANT TO Sec. 1.368-3(b) BY [INSERT NAME AND
TAXPAYER IDENTIFICATION NUMBER (IF ANY) OF TAXPAYER], A SIGNIFICANT
HOLDER,'' on or with such holder's return for the taxable year of the
exchange. If a significant holder is a controlled foreign corporation
(within the meaning of section 957), each United States shareholder
(within the meaning of section 951(b)) with respect thereto must include
this statement on or with its return. The statement must include--
(1) The names and employer identification numbers (if any) of all of
the parties to the reorganization;
(2) The date of the reorganization; and
(3) The value and basis of all the stock or securities of the target
corporation held by the significant holder that is transferred in the
transaction and such holder's basis in that stock or securities,
determined immediately before the transfer and aggregated as follows--
(i) Stock and securities with respect to which an election is made
under section 362(e)(2)(C); and
(ii) Stock and securities not described in paragraph (b)(3)(i) of
this section.
(c) Definitions. For purposes of this section:
(1) Significant holder means--
(i) A holder of stock of the target corporation that receives stock
or securities in an exchange described in section 354 (or so much of
section 356 as relates to section 354) if, immediately before the
exchange, such holder--
(A) Owned at least five percent (by vote or value) of the total
outstanding stock of the target corporation if the stock owned by such
holder is publicly traded; or
(B) Owned at least one percent (by vote or value) of the total
outstanding stock of the target corporation if the stock owned by such
holder is not publicly traded; or
(ii) A holder of securities of the target corporation that receives
stock or securities in an exchange described in section 354 (or so much
of section 356 as relates to section 354) if, immediately before the
exchange, such holder owned securities in such target corporation with a
basis of $1,000,000 or more.
(2) Publicly traded stock means stock that is listed on--
(i) A national securities exchange registered under section 6 of the
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
(ii) An interdealer quotation system sponsored by a national
securities association registered under section 15A of the Securities
Exchange Act of 1934 (15 U.S.C. 78o-3).
(d) Substantiation information. Under Sec. 1.6001-1(e), taxpayers
are required to retain their permanent records and make such records
available to any authorized Internal Revenue Service officers and
employees. In connection with the reorganization described in this
section, these records should specifically include information regarding
the amount, basis, and fair market value of all transferred property,
and relevant facts regarding any liabilities assumed or extinguished as
part of such reorganization.
(e) Effective/applicability date. This section applies to any
taxable year beginning on or after May 30, 2006. However, taxpayers may
apply this section to any original Federal income tax return (including
any amended return filed on or before the due date (including
extensions) of such original return) timely filed on or after May 30,
2006. For taxable years beginning before May 30, 2006, see Sec. 1.368-3
as contained in 26 CFR part 1 in effect on April 1, 2006. Paragraphs
(a)(3) and (b)(3) of this section apply with respect to reorganizations
occurring on or after March 28, 2016, and also with respect to
reorganizations occurring before such date as a result of an entity
classification election under Sec. 301.7701-3 of this chapter filed on
or after March 28, 2016, unless such reorganization is pursuant to a
binding agreement that was in effect prior to March 28, 2016 and at all
times thereafter.
[T.D. 9329, 72 FR 32800, June 14, 2007, as amended by T.D. 9759, 81 FR
17083, Mar. 28, 2016]
[[Page 576]]
Insolvency Reorganizations
Carryovers
Sec. 1.381(a)-1 General rule relating to carryovers in certain
corporate acquisitions.
(a) Allowance of carryovers. Section 381 provides that a corporation
which acquires the assets of another corporation in certain liquidations
and reorganizations shall succeed to, and take into account, as of the
close of the date of distribution or transfer, the items described in
section 381(c) of the distributor or transferor corporation. These items
shall be taken into account by the acquiring corporation subject to the
conditions and limitations specified in sections 381, 382(b), and 383
and the regulations thereunder.
(b) Determination of transactions and items to which section 381
applies--(1) Qualified transactions. Except to the extent provided in
section 381(c)(20), relating to the carryover of unused pension trust
deductions in certain liquidations, the items described in section
381(c) are required by section 381 to be carried over to the acquiring
corporation (as defined in subparagraph (2) of this paragraph) only in
the following liquidations and reorganizations:
(i) The complete liquidation of a subsidiary corporation upon which
no gain or loss is recognized in accordance with the provisions of
section 332;
(ii) A statutory merger or consolidation qualifying under section
368(a)(1)(A) to which section 361 applies;
(iii) A reorganization qualifying under section 368(a)(1)(C);
(iv) A reorganization qualifying under section 368(a)(1)(D) if the
requirements of section 354(b)(1)(A) and (B) are satisfied; and
(v) A mere change in identity, form, or place of organization
qualifying under section 368(a)(1)(F).
(2) Acquiring corporation defined. (i) Only a single corporation may
be an acquiring corporation for purposes of section 381 and the
regulations thereunder. The corporation which acquires the assets of its
subsidiary corporation in a complete liquidation to which section
381(a)(1) applies is the acquiring corporation for purposes of section
381. In a transaction to which section 381(a)(2) applies, the acquiring
corporation is the corporation that, pursuant to the plan of
reorganization, directly acquires the assets transferred by the
transferor corporation, even if that corporation ultimately retains none
of the assets so transferred.
(ii) The application of this subparagraph may be illustrated by the
following examples:
Example 1. Y Corporation, a wholly-owned subsidiary of X
Corporation, directly acquired all the assets of Z Corporation solely in
exchange for voting stock of X Corporation in a transaction qualifying
under section 368(a)(1)(C). Y Corporation is the acquiring corporation
for purposes of section 381.
Example 2. X Corporation acquired all the assets of Z Corporation
solely in exchange for voting stock of X Corporation in a transaction
qualifying under section 368(a)(1)(C). Thereafter, pursuant to the plan
of reorganization X Corporation transferred all the assets so acquired
to Y Corporation, its wholly-owned subsidiary (see section
368(a)(2)(C)). X Corporation is the acquiring corporation for purposes
of section 381.
Example 3. X Corporation acquired all the assets of Z Corporation
solely in exchange for the voting stock of X Corporation in a
transaction qualifying under section 368(a)(1)(C). Thereafter, pursuant
to the plan of reorganization X Corporation transferred one-half of the
assets so acquired to Y Corporation, its wholly-owned subsidiary, and
retained the other half of such assets. X Corporation is the acquiring
corporation for purposes of section 381.
Example 4. X Corporation acquired all the assets of Z Corporation
solely in exchange for voting stock of X Corporation in a transaction
qualifying under section 368(a)(1)(C). Thereafter, pursuant to the plan
of reorganization X Corporation transferred one-half of the assets so
acquired to Y Corporation, its wholly-owned subsidiary, and the other
half of such assets to M Corporation, another wholly-owned subsidiary of
X Corporation. X Corporation is the acquiring corporation for purposes
of section 381.
(3) Transactions and items not covered by section 381. Section 381
does not apply to partial liquidations, divisive reorganizations, or
other transactions not described in subparagraph (1) of this paragraph.
Moreover, section 381 does not apply to the carryover of an item or tax
attribute not specified in subsection (c) thereof. In a case where
section 381 does not apply to a transaction, item, or tax attribute by
reason of either of the preceding sentences, no
[[Page 577]]
inference is to be drawn from the provisions of section 381 as to
whether any item or tax attribute shall be taken into account by the
successor corporation.
(c) Foreign corporations. For additional rules involving foreign
corporations, see Sec. Sec. 1.367(b)-7 through 1.367(b)-9.
(d) Internal Revenue Code of 1939. Any reference in the regulations
under section 381 to any provision of the Internal Revenue Code of 1954
shall, where appropriate, be deemed also to refer to the corresponding
provision of the Internal Revenue Code of 1939.
(e) Effective/applicability date. The rules of paragraph (b)(1)(i)
of this section apply to corporate reorganizations and tax-free
liquidations described in section 381(a) that occur on or after August
31, 2011. The last sentence of paragraph (b)(2)(i) of this section and
Example 2 of paragraph (b)(2)(ii) of this section apply to transactions
occurring on or after November 10, 2014.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7343, 40 FR
1698, Jan. 9, 1975; T.D. 9273, 71 FR 44914, Aug. 8, 2006; T.D. 9534, 76
FR 45675, Aug. 1, 2011; T.D. 9700; 79 FR 66617, Nov. 10, 2014]
Sec. 1.381(b)-1 Operating rules applicable to carryovers in certain
corporate acquisitions.
(a) Closing of taxable year--(1) In general. Except in the case of
certain reorganizations qualifying under section 368(a)(1)(F), the
taxable year of the distributor or transferor corporation shall end with
the close of the date of distribution or transfer. With regard to the
closing of the taxable year of the transferor corporation in certain
reorganizations under section 368(a)(1)(F) involving a foreign
corporation after December 31, 1986, see Sec. Sec. 1.367(a)-1(e) and
1.367(b)-2(f).
(2) Reorganizations under section 368(a)(1)(F). In the case of a
reorganization qualifying under section 368(a)(1)(F) (whether or not
such reorganization also qualifies under any other provision of section
368(a)(1)), the acquiring corporation shall be treated (for purposes of
section 381) just as the transferor corporation would have been treated
if there had been no reorganization. Thus, the taxable year of the
transferor corporation shall not end on the date of transfer merely
because of the transfer; a net operating loss of the acquiring
corporation for any taxable year ending after the date of transfer shall
be carried back in accordance with section 172(b) in computing the
taxable income of the transferor corporation for a taxable year ending
before the date of transfer; and the tax attributes of the transferor
corporation enumerated in section 381(c) shall be taken into account by
the acquiring corporation as if there had been no reorganization.
(b) Date of distribution or transfer. (1) The date of distribution
or transfer shall be that day on which are distributed or transferred
all those properties of the distributor or transferor corporation which
are to be distributed or transferred pursuant to a liquidation or
reorganization described in paragraph (b)(1) of Sec. 1.381(a)-1. If the
distribution or transfer of all such properties is not made on one day,
then, except as provided in subparagraph (2) of this paragraph, the date
of distribution or transfer shall be that day on which the distribution
or transfer of all such properties is completed.
(2) If the distributor or transferor and acquiring corporations file
the statements described in subparagraph (3) of this paragraph, the date
of distribution or transfer shall be that day as of which (i)
substantially all of the properties to be distributed or transferred
have been distributed or transferred, and (ii) the distributor or
transferor corporation has ceased all operations (other than liquidating
activities). Such day also shall be the date of distribution or transfer
if the completion of the distribution or transfer is unreasonably
postponed beyond the date as of which substantially all the properties
to be distributed or transferred have been distributed or transferred
and the distributor or transferor corporation has ceased all operations
other than liquidating activities. A corporation shall be considered to
have distributed or transferred substantially all of its properties to
be distributed or transferred even though it retains money or other
property in a reasonable amount to pay outstanding debts
[[Page 578]]
or preserve the corporation's legal existence. A corporation shall be
considered to have ceased all operations, other than liquidating
activities, when it ceases to be a going concern and its activities are
merely for the purpose of winding up its affairs, paying its debts, and
distributing any remaining balance of its money or other properties to
its shareholders.
(3) Election--(i) Content of statements. The statements referred to
in paragraph (b)(2) of this section must be entitled, ``ELECTION OF DATE
OF DISTRIBUTION OR TRANSFER PURSUANT TO Sec. 1.381(b)-1(b)(2),'' and
must include: [INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER (IF ANY)
OF DISTRIBUTOR OR TRANSFEROR CORPORATION] AND [INSERT NAME AND EMPLOYER
IDENTIFICATION NUMBER (IF ANY) OF ACQUIRING CORPORATION] ELECT TO
DETERMINE THE DATE OF DISTRIBUTION OR TRANSFER UNDER Sec. 1.381(b)-
1(b)(2). SUCH DATE IS [INSERT DATE (mm/dd/yyyy)].
(ii) Filing of statements. One statement must be included on or with
the timely filed Federal income tax return of the distributor or
transferor corporation for its taxable year ending with the date of
distribution or transfer. An identical statement must be included on or
with the timely filed Federal income tax return of the acquiring
corporation for its first taxable year ending after that date. If the
distributor or transferor corporation, or the acquiring corporation, is
a controlled foreign corporation (within the meaning of section 957),
each United States shareholder (within the meaning of section 951(b))
with respect thereto must include this statement on or with its return.
(4) If--
(i) The last day of the acquiring corporation's taxable year is a
Saturday, Sunday, or legal holiday, and
(ii) The day specified in subparagraph (1) or (2) of this paragraph
as the date of distribution or transfer is the last business day before
such Saturday, Sunday, or holiday,
then the last day of the acquiring corporation's taxable year shall be
the date of distribution or transfer for purposes of section 381(b) and
this section. For purposes of this subparagraph, the term business day
means a day which is not a Saturday, Sunday, or legal holiday, and also
means a Saturday, Sunday, or legal holiday if the date of distribution
or transfer determined under subparagraph (1) or (2) of this paragraph
is such Saturday, Sunday, or holiday.
(c) Return of distributor or transferor corporation. The distributor
or transferor corporation shall file an income tax return for the
taxable year ending with the date of distribution or transfer described
in paragraph (b) of this section. If the distributor or transferor
corporation remains in existence after such date of distribution or
transfer, it shall file an income tax return for the taxable year
beginning on the day following the date of distribution or transfer and
ending with the date on which the distributor or transferor
corporation's taxable year would have ended if there had been no
distribution or transfer.
(d) Carryback of net operating losses. For provisions relating to
the carryback of net operating losses of the acquiring corporation, see
paragraph (b) of Sec. 1.381(c)(1)-1.
(e) Effective/applicability date. Paragraph (b)(3) of this section
applies to any taxable year beginning on or after May 30, 2006. However,
taxpayers may apply paragraph (b)(3) of this section to any original
Federal income tax return (including any amended return filed on or
before the due date (including extensions) of such original return)
timely filed on or after May 30, 2006. For taxable years beginning
before May 30, 2006, see Sec. 1.381(b)-1 as contained in 26 CFR part 1
in effect on April 1, 2006.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended at T.D. 8280, 55 FR
1417, Jan. 16, 1990; T.D. 8862, 65 FR 3609, Jan. 24, 2000; T.D. 9264, 71
FR 30598, May 30, 2006; T.D. 9329, 72 FR 32801, June 14, 2007; T.D.
9739, 80 FR 56195, Sept. 21, 2015]
Sec. 1.381(c)(1)-1 Net operating loss carryovers in certain corporate
acquisitions.
(a) Carryover requirement. (1) Section 381(c)(1) requires the
acquiring corporation to succeed to, and take into account, the net
operating loss
[[Page 579]]
carryovers of the distributor or transferor corporation. To determine
the amount of these carryovers as of the close of the date of
distribution or transfer, and to integrate them with any carryovers and
carrybacks of the acquiring corporation for purposes of determining the
taxable income of the acquiring corporation for taxable years ending
after the date of distribution or transfer, it is necessary to apply the
provisions of section 172 in accordance with the conditions and
limitations of section 381(c)(1) and this section. See also section
382(b) and the regulations thereunder.
(2) The net operating loss carryovers and carrybacks of the
acquiring corporation determined as of the close of the date of
distribution or transfer shall be computed without reference to any net
operating loss of a distributor or transferor corporation. The net
operating loss carryovers of a distributor or transferor corporation as
of the close of the date of distribution or transfer shall be determined
without reference to any net operating loss of the acquiring
corporation.
(3) For purposes of the tax imposed under section 56, the acquiring
corporation succeeding to and taking into account any net operating loss
carryovers of the distributor or transferor corporation shall also
succeed to and take into account along with such net operating loss
carryforward any deferred tax liability under section 56(b) and the
regulations thereunder attributable to such net operating loss
carryover.
(b) Carryback of net operating losses. A net operating loss of the
acquiring corporation for any taxable year ending after the date of
distribution or transfer shall not be carried back in computing the
taxable income of a distributor or transferor corporation. However, a
net operating loss of the acquiring corporation for any such taxable
year shall be carried back in accordance with section 172(b) in
computing the taxable income of the acquiring corporation for a taxable
year ending on or before the date of distribution or transfer. If a
distributor or transferor corporation remains in existence after the
date of distribution or transfer, a net operating loss sustained by it
for any taxable year beginning after such date shall be carried back in
accordance with section 172(b) in computing the taxable income of such
corporation for a taxable year ending on or before that date, but may
not be carried back or over in computing the taxable income of the
acquiring corporation. This paragraph may be illustrated by the
following examples:
Example 1. On December 31, 1954, X Corporation merged into Y
Corporation in a statutory merger to which section 361 applies, and the
charter of Y Corporation continued after the merger. Y Corporation
sustained a net operating loss for the calendar year 1955. Y
Corporation's net operating loss for 1955 may not be carried back in
computing the taxable income of X Corporation but shall be carried back
in computing the taxable income of Y Corporation.
Example 2. On December 31, 1954, X Corporation and Y Corporation
transferred all their assets to Z Corporation in a statutory
consolidation to which section 361 applies. Z Corporation sustained a
net operating loss for the calendar year 1955. Z Corporation's net
operating loss for 1955 may not be carried back in computing the taxable
income of X Corporation or Y Corporation.
Example 3. On December 31, 1954, X Corporation ceased all operations
(other than liquidating activities) and transferred substantially all
its properties to Y Corporation in a reorganization qualifying under
section 368(a)(1)(C). Such properties comprised all of X Corporation's
properties which were to be transferred pursuant to the reorganization.
In the process of liquidating its assets and winding up its affairs, X
Corporation sustained a net operating loss for its taxable year
beginning on January 1, 1955. This net operating loss of X Corporation
shall be carried back in computing the taxable income of that
corporation but may not be carried back or over in computing the taxable
income of Y Corporation.
(c) First taxable year to which carryovers apply. (1) The net
operating loss carryovers available to the distributor or transferor
corporation as of the close of the date of distribution or transfer
shall first be carried to the first taxable year of the acquiring
corporation ending after that date. This rule applies irrespective of
whether the date of distribution or transfer is on the last day, or any
other day, of the acquiring corporation's taxable year. Thus, such net
operating loss carryovers shall first be used by the acquiring
corporation with respect to the
[[Page 580]]
computation of its net operating loss deduction under section 172(a),
and its taxable income determined under the provisions of section
172(b)(2), for such first taxable year. However, see paragraph (f) of
this section.
(2) The net operating loss carryovers available to the distributor
or transferor corporation as of the close of the date of distribution or
transfer shall be carried to the acquiring corporation without
diminution by reason of the fact that the acquiring corporation does not
acquire 100 percent of the assets of the distributor or transferor
corporation. Thus, if a parent corporation owning 80 percent of all
classes of stock of its subsidiary corporation were to acquire its share
of the assets of the subsidiary corporation upon a complete liquidation
described in paragraph (b)(1)(i) of Sec. 1.381(a)-1, then, subject to
the conditions and limitations of this section, 100 percent of the net
operating loss carryovers available to the subsidiary corporation as of
the close of the date of distribution would be carried over to the
parent corporation.
(d) Limitation on net operating loss deduction for first taxable
year ending after date of distribution or transfer. (1) That part of the
acquiring corporation's net operating loss deduction, determined in
accordance with sections 172(a) and 381(c)(1), for its first taxable
year ending after the date of distribution or transfer which is
attributable to the net operating loss carryovers of the distributor or
transferor corporation, is limited by section 381(c)(1)(B) and this
paragraph to an amount equal to the acquiring corporation's
postacquisition part year taxable income. Such postacquisition part year
taxable income is the amount which bears the same ratio to the acquiring
corporation's taxable income for the first taxable year ending after the
date of distribution or transfer (determined under section 63 without
regard to any net operating loss deduction but taking into account other
items to which the acquiring corporation succeeds under section 381) as
the number of days in such first taxable year which follow the date of
distribution or transfer bears to the total number of days in such
taxable year. Thus, if the date of distribution or transfer is the last
day of the acquiring corporation's taxable year, the net operating loss
carryovers of the distributor or transferor are allowed in full in
computing under section 172(a) the net operating loss deduction of the
acquiring corporation for its first taxable year ending after that date.
In such instance, the number of days in the first taxable year which
follow the date of distribution or transfer is the total number of days
in such taxable year.
(2) The limitation provided by section 381(c)(1)(B) applies solely
for the purpose of computing the net operating loss deduction of the
acquiring corporation under section 172(a) for the acquiring
corporation's first taxable year ending after the date of distribution
or transfer. The limitation does not apply for purposes of determining
the portion of any net operating loss (whether of the distributor,
transferor, or acquiring corporation) which may be carried to any
taxable year of the acquiring corporation following its first taxable
year ending after the date of distribution or transfer since such
determination is made pursuant to section 172(b) and section
381(c)(1)(C). See paragraphs (e) and (f) of this section.
(3) The limitation provided by section 381(c)(1)(B) shall be applied
to the aggregate of the allowable net operating loss carryovers of the
distributor or transferor corporation without reference to the taxable
years in which the net operating losses were sustained by such
corporation. If the acquiring corporation has acquired the assets of two
or more distributor or transferor corporations on the same date of
distribution or transfer, then the limitation provided by section
381(c)(1)(B) shall be applied to the aggregate of the net operating loss
carryovers from all of such distributor or transferor corporations.
(4) If the acquiring corporation succeeds to the net operating loss
carryovers of two or more distributor or transferor corporations on two
or more different dates of distribution or transfer within one taxable
year of the acquiring corporation, the limitation to be applied under
section 381(c)(1)(B) to the aggregate of such carryovers
[[Page 581]]
shall be governed by the rules prescribed in paragraph (b) of Sec.
1.381(c)(1)-2.
(5) Illustrations. The application of this paragraph may be
illustrated by the following examples:
Example 1. (i) X Corporation and Y Corporation were organized on
January 1, 1956, and make their returns on the calendar year basis. On
December 16, 1957, X Corporation transferred all its assets to Y
Corporation in a statutory merger to which section 361 applies. The net
operating losses and taxable income (computed without the net operating
loss deduction) of the two corporations are as follows, the assumption
being made that none of the modifications specified in section
172(b)(2)(A) apply to any taxable year:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1956......................................... ($35,000) ($5,000)
Ending 12-16-57.............................. (30,000) xxx
1957......................................... xxx 36,500
------------------------------------------------------------------------
(ii) The aggregate of the net operating loss carryovers of X
Corporation carried under section 381(c)(1)(A) to Y Corporation's
taxable year ending December 31, 1957, is $65,000; but pursuant to
section 381(c)(1)(B), only $1,500 of such aggregate amount ($36,500 x
15/365) may be used in computing the net operating loss deduction of Y
Corporation for such taxable year under section 172(a). This limitation
applies even though Y Corporation's own net operating loss carryover to
such year is only $5,000, with the result that Y Corporation has taxable
income under section 63 of $30,000 for its taxable year ending December
31, 1957, that is, $36,500 less the sum of $5,000 and $1,500.
(iii) For rules determining the portion of any given loss of X
Corporation or Y Corporation which may be carried to a taxable year of Y
Corporation following its taxable year ending December 31, 1957, see
sections 172(b)(2) and 381(c)(1)(C) and paragraph (f) of this section.
Example 2. (i) X Corporation was organized on January 1, 1954, and Y
Corporation was organized on January 1, 1956. Each corporation makes its
return on the basis of the calendar year. On December 31, 1956, X
Corporation transferred all its assets to Y Corporation in a statutory
merger to which section 361 applies. The net operating losses and the
taxable income (computed without any net operating loss deduction) of
the two corporations are as follows, the assumption being made that none
of the modifications specified in section 172(b)(2)(A) apply to any
taxable year:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1954......................................... ($5,000) xxx
1955......................................... (15,000) xxx
1956......................................... (10,000) $20,000
1957......................................... xxx 40,000
------------------------------------------------------------------------
(ii) The aggregate of the net operating loss carryovers of X
Corporation carried under section 381(c)(1)(A) to Y Corporation's
taxable year 1957 is $30,000, and the full amount of such carryovers is
allowed in such taxable year to Y Corporation as a deduction under
section 172(a), since such amount does not exceed the limitation
($40,000 x 365/365) for such taxable year under section 381(c)(1)(B).
Example 3. (i) X Corporation, Y Corporation, and Z Corporation were
organized on January 1, 1954, and each corporation makes its return on
the basis of the calendar year. On September 30, 1956, X Corporation and
Y Corporation transferred all their assets to Z Corporation in a
statutory merger to which section 361 applies. The net operating losses
and the taxable income (computed without any net operating loss
deduction) of the three corporations are as follows, the assumption
being made that none of the modifications specified in section
172(b)(2)(A) apply to any taxable year:
------------------------------------------------------------------------
X Y Z
Taxable year Corporation Corporation Corporation
(transferor) (transferor) (acquirer)
------------------------------------------------------------------------
1954........................... ($5,000) ($3,000) ($40,000)
1955........................... (4,000) (2,000) 10,000
Ending 9-30-56................. (1,000) (9,000) xxx
1956........................... xxx xxx 73,200
------------------------------------------------------------------------
(ii) The aggregate of the net operating loss carryovers of X
Corporation and Y Corporation carried under section 381(c)(1)(A) to Z
Corporation's taxable year 1956 is $24,000; but, pursuant to section
381(c)(1)(B), only $18,400 of such aggregate amount ($73,200 x 92/366)
may be used in computing the net operating loss deduction of Z
Corporation for such taxable year under section 172(a). For this
purpose, Z Corporation may not use the total of the aggregate carryovers
($10,000) from X Corporation plus the aggregate carryovers ($14,000)
from Y Corporation, even though each such aggregate of carryovers is
separately less than the limitation ($18,400) applicable under section
381(c)(1)(B) and this section.
(iii) For rules determining the portion of any given loss of X
Corporation, Y Corporation, or Z Corporation which may be carried to a
taxable year of Z Corporation following its taxable year ending December
31, 1956, see sections 172(b)(2) and 381(c)(1)(C) and paragraph (f) of
this section.
(e) Computation of carryovers and carrybacks; general rule--(1)
Sequence for
[[Page 582]]
applying losses and computation of taxable income. The portion of any
net operating loss which is carried back or carried over to any taxable
year is the excess, if any, of the amount of the loss over the sum of
the taxable income for each of the prior taxable years to which the loss
may be carried under sections 172(b)(1) and 381. In determining the
taxable income for each such prior taxable year for this purpose, the
various net operating loss carryovers and carrybacks to such prior
taxable year are considered to be applied in reduction of the taxable
income in the order of the taxable years in which the net operating
losses are sustained, beginning with the loss for the earliest taxable
year. The application of this rule to the taxable income of the
acquiring corporation for any taxable year ending after the date of
distribution or transfer involves the use of carryovers of the
distributor or transfer corporation, and of carryovers and carrybacks of
the acquiring corporation. In such instance, the sequence for the use of
loss years remains the same, and the requirement is to begin with the
net operating loss of the earliest taxable year, whether or not it is a
loss of the distributor, transferor, or acquiring corporation. The
taxable income of the acquiring corporation for any taxable year ending
after the date of distribution or transfer shall be determined in the
manner prescribed by section 172(b)(2), except that, if the date of
distribution or transfer is on a day other than the last day of a
taxable year of the acquiring corporation, the taxable income of such
corporation for the taxable year which includes such date shall be
computed in the special manner prescribed by section 381(c)(1)(C) and
paragraph (f) of this section.
(2) Loss year of transferor or distributor considered prior taxable
year. Section 381(c)(1)(C) provides that, for the purpose of determining
the net operating loss carryovers under section 172(b)(2), a net
operating loss for a loss year of a distributor or transferor
corporation which ends on or before the last day of a loss year of the
acquiring corporation shall be considered to be a net operating loss for
a year prior to such loss year of the acquiring corporation. In a case
where the acquiring corporation has acquired the assets of two or more
distributor or transferor corporations on the same date of distribution
or transfer, the loss years of the distributor or transferor
corporations shall be taken into account in the order in which such loss
years terminate; if any one of the loss years of a distributor or
transferor corporation ends on the same day as the loss year of another
distributor or transferor corporation, either loss year may be taken
into account before the other.
(3) Years to which losses may be carried. The taxable years to which
a net operating loss shall be carried back or carried over are
prescribed by section 172(b)(1). Since the taxable year of the
distributor or transferor corporation ends with the close of the date of
distribution or transfer, such taxable year and the first taxable year
of the acquiring corporation which ends after that date shall be
considered two separate taxable years to which a net operating loss of
the distributor or transferor corporation for any taxable year ending
before that date may be carried over. This rule applies even though the
taxable year of the distributor or transferor corporation which ends on
the date of distribution or transfer is a period of less than twelve
months. However, for the purpose of determining under section 172(b)(1)
the taxable years to which a net operating loss of the acquiring
corporation is carried over or carried back, the first taxable year of
the acquiring corporation which ends after the date of distribution or
transfer shall be treated as only one taxable year even though such
taxable year is considered under section 381(c)(1)(C) and paragraph
(f)(2) of this section as two taxable years. The application of this
subparagraph may be illustrated by the following example:
Example. X Corporation was organized on January 1, 1954, and
thereafter it sustained net operating losses in its calendar years 1954,
1955, and 1956. On June 30, 1957, X Corporation transferred all its
assets to Y Corporation, which was organized on January 1, 1955, in a
statutory merger to which section 361 applies. In its taxable year
ending June 30, 1957, X Corporation sustained a net operating loss. Y
Corporation sustained net operating losses in its calendar years 1955,
1956, and 1958, but had taxable income for the year
[[Page 583]]
1957. The years to which these losses of X Corporation and Y Corporation
shall be carried, and the sequence in which carried, are as follows:
------------------------------------------------------------------------
Loss year
------------------------------------------------------------------------
X 1954.................................. X 1955, X 1956, X 6/30/57, Y
1957, Y 1958.
X 1955.................................. X 1954, X 1956, X 6/30/57, Y
1957, Y 1958, Y 1959.
Y 1955.................................. Y 1956, Y 1957, Y 1958, Y
1959, Y 1960.
X 1956.................................. X 1954, X 1955, X 6/30/57, Y
1957, Y 1958, Y 1959, Y 1960.
Y 1956.................................. Y 1955, Y 1957, Y 1958, Y
1959, Y 1960, Y 1961.
X 6-30-57............................... X 1955, X 1956, Y 1957, Y
1958, Y 1959, Y 1960, Y 1961.
Y 1958.................................. Y 1955, Y 1956, Y 1957, Y
1959, Y 1960, Y 1961, Y 1962,
Y 1963.
------------------------------------------------------------------------
(4) Computation of carryovers in a case where the date of
distribution or transfer occurs on last day of acquiring corporation's
taxable year. The computation of the net operating loss carryovers from
the distributor or transferor corporation and from the acquiring
corporation in a case where the date of distribution or transfer occurs
on the last day of a taxable year of the acquiring corporation may be
illustrated by the following example:
Example. X Corporation and Y Corporation were organized on January
1, 1955, and each corporation makes its return on the basis of the
calendar year. On December 31, 1956, X Corporation transferred all its
assets to Y Corporation in a statutory merger to which section 361
applies. The net operating losses and the taxable income (computed
without any net operating loss deduction) of the two corporations are as
follows, the assumption being made that none of the modifications
specified in section 172(b)(2)(A) apply to any taxable year:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1955......................................... ($2,000) ($11,000)
1956......................................... (3,000) 10,000
1957......................................... xxx (15,000)
------------------------------------------------------------------------
The sequence in which the losses of X Corporation and Y Corporation are
applied, and the computation of the carryovers to Y Corporation's
calendar year 1958, may be illustrated as follows:
(i) X Corporation's 1955 loss. The carryover to 1958 is $2,000,
computed as follows:
Net operating loss.......................................... $2,000
Less:
X's 1956 taxable income........................ 0
Y's 1957 taxable income........................ 0
------------
......... 0
-----------
Carryover.................................................. 2,000
(ii) Y Corporation's 1955 loss. The carryover to 1958 is $1,000,
computed as follows:
Net operating loss.......................................... $11,000
Less:
Y's 1956 taxable income....................... $10,000
Y's 1957 taxable income....................... 0
-------------
.......... 10,000
-----------
Carryover.................................................. 1,000
(iii) X Corporation's 1956 loss. The carryover to 1958 is $3,000,
computed as follows:
Net operating loss........................................... $3,000
Less:
X's 1955 taxable income......................... 0
Y's 1957 taxable income......................... 0
------------
......... 0
----------
Carryover................................................... 3,000
(iv) Y Corporation's 1957 loss. The carryover to 1958 is $15,000,
computed as follows:
Net operating loss.......................................... $15,000
Less:
Y's 1955 taxable income.......................... 0
Y's 1956 taxable income before net $10,000
operating loss deduction............
Minus Y's 1956 net operating loss 11,000 0
deduction (i.e., Y's 1955 carryover)
-------------
.......... 0
----------
Carryover.................................................. 15,000
(v) Summary of carryovers to 1958. The aggregate of the net
operating loss carryovers to 1958 is $21,000, computed as follows:
X's 1955 loss................................................ $2,000
Y's 1955 loss................................................ 1,000
X's 1956 loss................................................ 3,000
Y's 1957 loss................................................ 15,000
----------
Total....................................................... 21,000
(f) Computation of carryovers and carrybacks when date of
distribution or transfer is not on last day of acquiring corporation's
taxable year--(1) General rule. Pursuant to the provisions of section
381(c)(1)(C), the taxable income of the acquiring corporation for its
taxable year which is a prior taxable year for purposes of section
172(b)(2) and paragraph (e) of this section shall be determined in the
manner prescribed in this paragraph, if the date of distribution or
transfer occurs within, but not on the last day of, such taxable year.
(2) Taxable year considered as two taxable years. Such taxable year
of the acquiring corporation shall be considered as though it were two
taxable years,
[[Page 584]]
but only for the limited purpose of applying section 172(b)(2). The
first of such two taxable years shall be referred to in this section as
the preacquisition part year; the second, as the postacquisition part
year. For purposes of section 172(b)(2), a net operating loss of the
acquiring corporation shall be carried to the preacquisition part year
and then to the postacquisition part year, whereas a net operating loss
of a distributor or transferor corporation shall be carried to the
postacquisition part year and then to the acquiring corporation's
subsequent taxable years. In determining under section 172(b)(2) and
this paragraph the portion of any net operating loss of a distributor or
transferor corporation which is carried to any taxable year of the
acquiring corporation ending after the postacquisition part year, the
taxable income (as determined under this paragraph) of the
postacquisition part year shall be taken into account but the taxable
income of the preacquisition part year (as so determined) shall not be
taken into account. Though considered as two separate taxable years for
purposes of section 172(b)(2), the preacquisition part year and the
postacquisition part year are treated as one taxable year in determining
the years to which a net operating loss is carried under section
172(b)(1). See paragraph (e)(3) of this section.
(3) Preacquisition part year. The preacquisition part year shall
begin with the beginning of such taxable year of the acquiring
corporation and shall end with the close of the date of distribution or
transfer.
(4) Postacquisition part year. The postacquisition part year shall
begin with the day following the date of distribution or transfer and
shall end with the close of such taxable year of the acquiring
corporation.
(5) Division of taxable income. The taxable income for such taxable
year (computed with the modifications specified in section 172(b)(2)(A)
but without any net operating loss deduction) of the acquiring
corporation shall be divided between the preacquisition part year and
the postacquisition part year in proportion to the number of days in
each. Thus, if in a statutory merger to which section 361 applies Y
Corporation acquires the assets of X Corporation on June 30, 1960, and Y
Corporation has taxable income (computed in the manner so prescribed) of
$36,600 for its calendar year 1960, then the preacquisition part year
taxable income would be $18,200 ($36,600 x 182/366) and the
postacquisition part year taxable income would be $18,400 ($36,600 x
184/366).
(6) Net operating loss deduction. After obtaining the taxable income
of the preacquisition part year and of the postacquisition part year in
the manner described in subparagraph (5) of this paragraph, it is
necessary to compute the net operating loss deduction for each such part
year. This deduction shall be determined in the manner prescribed by
section 172(b)(2)(B) but subject to the provisions of this subparagraph.
The net operating loss deduction for the preacquisition part year shall,
for purposes of section 172(b)(2) only, be determined in the same manner
as that prescribed by section 172(b)(2)(B) but shall be computed without
taking into account any net operating loss of the distributor or
transferor corporation. Therefore, only net operating loss carryovers
and carrybacks of the acquiring corporation to the preacquisition part
year shall be taken into account in computing the net operating loss
deduction for such part year. The net operating loss deduction for the
post- acquisition part year shall, for purposes of section 172(b)(2)
only, be determined in the same manner as that prescribed by section
172(b)(2)(B) and shall be computed by taking into account all the net
operating loss carryovers available to the distributor or transferor
corporation as of the close of the date of distribution or transfer, as
well as the net operating loss carryovers and carrybacks of the
acquiring corporation to the postacquisition part year. The sequence in
which the net operating losses of the two corporations shall be applied
for purposes of this subparagraph shall be determined in the manner
prescribed in paragraph (e) of this section.
(7) Limitation on taxable income. In no case shall the taxable
income of the preacquisition part year or the
[[Page 585]]
postacquisition part year, as computed under this paragraph, be
considered to be less than zero.
(8) Cross reference. If the acquiring corporation succeeds to the
net operating loss carryovers of two or more distributors or transferor
corporations on two or more dates of distribution or transfer during the
same taxable year of the acquiring corporation, the determination of the
taxable income of the acquiring corporation for such year pursuant to
section 381(c)(1)(C) shall be governed by the rules prescribed in
paragraph (c) of Sec. 1.381(c)(1)-2.
(9) Illustration. The application of this paragraph may be
illustrated by the following example:
Example. (i) Facts. X Corporation was organized on January 1, 1955,
and Y Corporation was organized on January 1, 1954. Each corporation
makes its return on the basis of the calendar year. On June 30, 1956, X
Corporation transferred all its assets to Y Corporation in a statutory
merger to which section 361 applies. The net operating losses and the
taxable income (computed without any net operating loss deduction) of
the two corporations are as follows, the assumption being made that none
of the modifications specified in section 172(b)(2)(A) apply to any
taxable year:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1954......................................... xxx ($5,000)
1955......................................... ($65,000) (20,000)
Ending June 30, 1956......................... 1,000 xxx
1956......................................... xxx 36,600
------------------------------------------------------------------------
(ii) Y Corporation's 1954 loss. The carryover to 1957 is $0,
computed as follows:
Net operating loss........................................... $5,000
Less:
Y's 1955 taxable income.................................... 0
-------------
Carryover to Y's preacquisition part year................ 5,000
Less:
Y's preacquisition part year taxable income $18,200
computed under subparagraph (5) of this
paragraph ($36,600 x 182/366).................
Minus Y's net operating loss deduction for xxx 18,200
preacquisition part year......................
----------------------
Carryover to Y's postacquisition part year and also to Y 0
1957....................................................
(iii) X Corporation's 1955 loss. The carryover to 1957 is $45,600,
computed as follows:
Net operating loss.......................................... $65,000
Less:
X's 6/30/56 year taxable income........................... 1,000
-------------
Carryover to Y's postacquisition part year.............. 64,000
Less:
Y's postacquisition part year taxable income $18,400
computed under subparagraph (5) of this
paragraph ($36,600 x 184/366)................
Minus Y's net operating loss deduction for .......... $18,400
postacquisition part year (i.e., Y's 1954
carryover of $0 to such part year)...........
-----------
Carryover to Y 1957..................................... 45,600
(iv) Y Corporation's 1955 loss. The carryover to 1957 is $6,800,
computed as follows:
Net operating loss.......................................... $20,000
Less:
Y's 1954 taxable income................................... 0
-------------
Carryover to Y's preacquisition part year............... 20,000
Less:
Y's preacquisition part year taxable income $18,200
computed under subparagraph (5) of this
paragraph....................................
Minus Y's net operating loss deduction for 5,000
preacquisition part year (i.e., Y's 1954
carryover to such part year).................
------------
.......... 13,200
-----------
Carryover to Y's postacquisition part year.............. 6,800
Less:
Y's postacquisition part year taxable income $18,400
computed under subparagraph (5) of this
paragraph....................................
Minus Y's net operating loss deduction for 64,000
postacquisition part year (i.e., Y's 1954
carryover of $0, and X's 1955 carryover of
$64,000, to such part year)..................
------------
.......... 0
-----------
Carryover to Y 1957..................................... 6,800
(v) Summary of carryovers to 1957. The aggregate of the net
operating loss carryovers to 1957 is $52,400, determined as follows:
Y's 1954 loss............................................... 0
X's 1955 loss............................................... $45,600
Y's 1955 loss............................................... 6,800
-----------
Total...................................................... 52,400
(g) Successive acquiring corporations. An acquiring corporation
which, in a distribution or transfer to which section 381(a) applies,
acquires the assets of a distributor or transferor corporation which
previously acquired the assets of another corporation in a transaction
to which section 381(a) applies, shall succeed to and take into account,
[[Page 586]]
subject to the conditions and limitations of sections 172 and 381, the
net operating loss carryovers available to the first acquiring
corporation under sections 172 and 381.
(h) Illustration. The application of this section may be further
illustrated by the following example:
Example. (1) Facts. X Corporation was organized on January 1, 1954,
and Y Corporation was organized on January 1, 1955. Each corporation
makes its return on the basis of the calendar year. On August 31, 1957,
X Corporation transferred all its assets to Y Corporation in a statutory
merger to which section 361 applies. The net operating losses and the
taxable income of the two corporations for the taxable years involved
are set forth in the tabulation below. The taxable income so shown is
computed without the modifications required by section 172(b)(2)(A) and
without the benefit of any net operating loss deduction. In its calendar
year 1957, Y Corporation had a deduction of $365 which is disallowed by
section 172(b)(2)(A).
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1954......................................... ($7,000) xxx
1955......................................... (10,000) ($10,000)
1956......................................... (25,000) (15,000)
Ending 8-31-57............................... 1,000 xxx
1957......................................... xxx 54,750
1958......................................... xxx (5,000)
1959......................................... xxx 50,000
------------------------------------------------------------------------
(2) Computation of carryovers and carrybacks. The sequence in which
the losses of X Corporation and Y Corporation are applied and the
computation of the carryovers to Y Corporation's calendar year 1959 may
be illustrated as follows:
(i) X Corporation's 1954 loss. The carryover to 1958, which is the
last year to which this loss may be carried, is $0, computed as follows:
Net operating loss.......................................... $7,000
Less:
X's 1955 taxable income....................... 0
X's 1956 taxable income....................... 0
------------
.......... 0
-----------
Carryover to X's 8/31/57-year........................... 7,000
Less:
X's 8/31/57-year taxable income........................... 1,000
-------------
Carryover to Y's postacquisition part year.............. 6,000
Less:
Y's postacquisition part year taxable income $18,422
computed under paragraph (f)(5) of this
section (($54,750 + $365) x 122/365).........
Minus Y's net operating loss deduction for xxx
postacquisition part year....................
------------
.......... 18,422
-----------
Carryover to Y 1958..................................... 0
(ii) X Corporation's 1955 loss. The carryover to 1959 is $0,
computed as follows:
Net operating loss.......................................... $10,000
Less:
X's 1954 taxable income....................... 0
X's 1956 taxable income....................... 0
------------
.......... 0
-----------
Carryover to X's 8/31/57-year........................... 10,000
Less:
X's 8/31/57-year taxable income before net $1,000
operating loss deduction.....................
Minus X's net operating loss deduction for 8/ 7,000
31/57-year (i.e., X's 1954 carryover)........
------------
.......... 0
-----------
Carryover to Y's postacquisition part year.............. 10,000
Less:
Y's postacquisition part year taxable income $18,422
computed under paragraph (f)(5) of this
section......................................
Minus Y's net operating loss deduction for 6,000
postacquisition part year (i.e., X's 1954
carryover to such part year).................
------------
.......... 12,422
-----------
Carryover to Y 1958 and Y 1959.......................... 0
(iii) Y Corporation's 1955 loss. The carryover to 1959 is $0,
computed as follows:
Net operating loss.......................................... $10,000
Less:
Y's 1956 taxable income................................... 0
-------------
Carryover to Y's preacquisition part year............... 10,000
Less:
Y's preacquisition part year taxable income $36,693
computed under paragraph (f)(5) of this
section (($54,750 + $365) x 243/365).........
Minus Y's net operating loss deduction for xxx
preacquisition part year.....................
------------
.......... 36,693
-----------
Carryover to Y's postacquisition part year, to Y 1958, 0
and to Y 1959..........................................
(iv) X Corporation's 1956 loss. The carryover to 1959 is $22,578,
computed as follows:
Net operating loss......................................... $25,000
Less:
X's 1954 taxable income....................... 0
X's 1955 taxable income....................... 0
[[Page 587]]
X's 8/31/57-year taxable income $1,000
before net operating loss
deduction........................
Minus X's net operating loss $17,000 0 0
deduction for 8/31/57-year (i.e.,
X's 1954 carryover of $7,000 and
X's 1955 carryover of $10,000)...
-----------------------------------
Carryover to Y's postacquisition part year............. $25,000
Less:
Y's postacquisition part year taxable income $18,422
computed under paragraph (f)(5) of this
section......................................
Minus Y's net operating loss deduction for 16,000
postacquisition part year (i.e., X's 1954
carryover of $6,000, X's 1955 carryover of
$10,000 and Y's 1955 carryover of $0, to such
part year)...................................
------------
......... 2,422
------------
Carryover to Y 1958.................................... 22,578
Less:
Y's 1958 taxable income.................................. 0
-------------
Carryover to Y 1959.................................... 22,578
(v) Y Corporation's 1956 loss. The carryover to 1959 is $0, computed
as follows:
Net operating loss.......................................... $15,000
Less:
Y's 1955 taxable income................................... 0
-------------
Carryover to Y's preacquisition part year............... 15,000
Less:
Y's preacquisition part year taxable income $36,693
computed under paragraph (f)(5) of this
section......................................
Minus Y's net operating loss deduction for 10,000
preacquisition part year (i.e., Y's 1955
carryover to such part year).................
------------
.......... 26,693
-----------
Carryover to Y's postacquisition part year, to Y 1958, 0
and to Y 1959..........................................
(vi) Y Corporation's 1958 loss. The carryover to 1959 is $0,
computed as follows:
Net operating loss........................................... $5,000
Less:
Y's 1955 taxable income \1\.................... 0
Y's 1956 taxable income........................ 0
------------
.......... 0
----------
Carryback to Y's preacquisition part year................ $5,000
Less:
Y's preacquisition part year taxable income $36,693
computed under paragraph (f)(5) of this
section.......................................
Minus Y's net operating loss deduction for 25,000
preacquisition part year (i.e., Y's 1955
carryover of $10,000, and Y's 1956 carryover
of $15,000, to such part year)................
-------------
.......... 11,693
Carryback to Y's postacquisition part year and carryover 0
to Y 1959...............................................
\1\ Three-year carryback in case of loss years ending after December 31,
1957.
(vii) Summary of carryovers to 1959. The aggregate of the net
operating loss carryovers to 1959 is $22,578, computed as follows:
X's 1955 loss............................................... 0
Y's 1955 loss............................................... 0
X's 1956 loss............................................... $22,578
Y's 1956 loss............................................... 0
Y's 1958 loss............................................... 0
-----------
Total...................................................... 22,578
(3) Net operating loss deduction for 1957. (i) The net operating
loss deduction available to Y Corporation under section 172(a) for the
calendar year 1957, determined in accordance with paragraph (d) of this
section, is $48,300, computed as follows:
Aggregate of the net operating loss carryovers
available to the transferor corporation as of
the close of August 31, 1957, but limited by
paragraph (d) of this section to $18,300 (Y's
1957 taxable income of $54,750, computed
without any net operating loss deduction,
multiplied by 122/365)
Carryover of X's 1954 loss.................... $6,000
Carryover of X's 1955 loss.................... 10,000
Carryover of X's 1956 loss.................... 25,000
-------------
$41,000
Aggregate of carryovers, limited as above................... $18,300
Carryover of Y's 1955 loss.................................. 10,000
Carryover of Y's 1956 loss.................................. 15,000
Carryback of Y's 1958 loss.................................. 5,000
-------------
Net operating loss deduction............................... 48,800
(ii) The taxable income under section 63 for 1957 is $6,450,
computed as follows:
Taxable income determined without any net operating loss $54,750
deduction..................................................
Less:
Net operating loss deduction for 1957, as determined under $48,300
subdivision (i) of this subparagraph.....................
-----------
Taxable income under section 63............................ 6,450
(4) Net operating loss deduction for 1959. The taxable income under
section 63 for 1959 is $27,422, computed as follows:
Taxable income determined without any net operating loss $50,000
deduction..................................................
Less:
Net operating loss deduction for 1959 (i.e., the aggregate 22,578
carryovers determined under subparagraph (2)(vii) of this
paragraph)...............................................
-----------
Taxable income under section 63............................ 27,422
[[Page 588]]
(5) Years to which losses may be carried. The taxable years to which
the losses of X Corporation and Y Corporation may be carried, and the
sequence in which carried, are as follows:
------------------------------------------------------------------------
Loss year Carried to
------------------------------------------------------------------------
X 1954............................ X 1955, X 1956, X 8/31/57, Y 1957, Y
1958.
X 1955............................ X 1954, X 1956, X 8/31/57, Y 1957, Y
1958, Y 1959.
Y 1955............................ Y 1956, Y 1957, Y 1958, Y 1959, Y
1960.
X 1956............................ X 1954, X 1955, X 8/31/57, Y 1957, Y
1958, Y 1959, Y 1960.
Y 1956............................ Y 1955, Y 1957, Y 1958, Y 1959, Y
1960, Y 1961.
Y 1958............................ Y 1955, Y 1956, Y 1957, Y 1959, Y
1960, Y 1961, Y 1962, Y 1963.
------------------------------------------------------------------------
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7564, 43 FR
40493, Sept. 12, 1978]
Sec. 1.381(c)(1)-2 Net operating loss carryovers; two or more dates
of distribution or transfer in the taxable year.
(a) In general. If the acquiring corporation succeeds to the net
operating loss carryovers of two or more distributor or transferor
corporations on two or more dates of distribution or transfer within one
taxable year of the acquiring corporation, the limitation to be applied
under section 381(c)(1)(B) to the aggregate of the net operating loss
carryovers to that taxable year from all of the distributor or
transferor corporations shall be determined by applying the rules
prescribed in paragraph (b) of this section, and the taxable income of
the acquiring corporation for that taxable year under sections
381(c)(1)(C) and 172(b)(2) shall be determined by applying the rules
prescribed in paragraph (c) of this section. For purposes of this
section, the term postacquisition income means postacquisition part year
taxable income determined under paragraph (d)(1) of Sec. 1.381(c)(1)-1
by treating the first date of distribution or transfer as though it were
the only date of distribution or transfer during the taxable year of the
acquiring corporation.
(b) Determination of limitation under section 381(c)(1)(B)--(1) In
general. If the acquiring corporation succeeds to the net operating loss
carryovers of two or more distributor or transferor corporations on two
or more dates of distribution or transfer during the same taxable year
of the acquiring corporation, and if the amount of the net operating
loss carryovers acquired on the first date of distribution or transfer
equals or exceeds the postacquisition income, then the limitation under
section 381(c)(1)(B) shall be an amount equal to such postacquisition
income. If the amount of the net operating loss carryovers acquired on
the first date of distribution or transfer is less than such
postacquisition income, then the limitation under section 381(c)(1)(B)
shall be determined as provided in subparagraphs (2) through (5) of this
paragraph.
(2) Allocation of postacquisition income among partial
postacquisition years. That part of the taxable year of the acquiring
corporation beginning on the day following the first date of
distribution or transfer and ending with the close of the taxable year
of the acquiring corporation shall be divided into the same number of
partial postacquisition years as the number of dates of distribution or
transfer on which the acquiring corporation succeeds to net operating
loss carryovers during its taxable year. The first partial
postacquisition year shall begin with the day following the first date
of distribution or transfer and shall end with the close of the second
date of distribution or transfer. The second and succeeding partial
postacquisition years shall begin with the day following the close of
the preceding such partial year and shall end with the close of the
succeeding date of distribution or transfer, or, if there is no such
succeeding date, then with the close of the taxable year of the
acquiring corporation. The postacquisition income of the acquiring
corporation shall be allocated among the partial postacquisition years
in proportion to the number of days in each such partial year.
(3) Two dates of distribution or transfer. If the acquiring
corporation succeeds to the net operating loss carryovers of two
distributor or transferor corporations on two dates of distribution or
transfer during the same taxable year of the acquiring corporation, and
if the amount of the net operating loss carryovers acquired on the first
date equals or exceeds the income for the first partial postacquisition
year, the limitation provided by section
[[Page 589]]
381(c)(1)(B) shall be the amount of the postacquisition income. If the
income for the first partial postacquisition year exceeds the net
operating loss carryovers acquired on the first date of distribution or
transfer, the limitation provided by section 381(c)(1)(B) shall be the
amount of the postacquisition income reduced by the amount of such
excess. The application of this subparagraph may be illustrated by the
following example:
Example. (i) X Corporation has taxable income (computed without any
net operating loss deduction) of $36,500 for its calendar year 1955.
During 1955, X Corporation acquires the assets of Y and Z Corporations
in statutory mergers to each of which section 361 applies, the dates of
transfer being January 1 and December 1, respectively. The net operating
loss carryovers of each transferor corporation and the income for each
partial postacquisition year are:
----------------------------------------------------------------------------------------------------------------
Income for
Corp. Carryovers partial years Reduction
----------------------------------------------------------------------------------------------------------------
Y............................................................... $1,000 $33,400 $32,400
($36,500 x 334/
365)
Z............................................................... 50,000 3,000 0
($36,500 x 30/
365)
-----------------------------------------------
51,000 36,400 32,400
----------------------------------------------------------------------------------------------------------------
(ii) The limitation provided by section 381(c)(1)(B) equals the
postacquisition income of $36,400 reduced by $32,400, the excess of the
income for the first partial year ($33,400) over the net operating loss
carryovers acquired on the first date of transfer ($1,000). Accordingly,
the limitation is $4,000 ($36,400 minus $32,400). Therefore, although X
Corporation acquired carryovers aggregating $51,000 during 1955, it can
utilize only $4,000 of such carryovers in computing its net operating
loss deduction for 1955.
(4) Three dates of distribution or transfer. If the acquiring
corporation succeeds to the net operating loss carryovers of three
distributor or transferor corporations on three dates of distribution or
transfer during the same taxable year of the acquiring corporation, and
if the amount of the net operating loss carryovers acquired on the first
date equals or exceeds the income for the first and second partial
postacquisition years, the limitation provided by section 381(c)(1)(B)
shall be the amount of the postacquisition income. If the amount of the
carryovers acquired on the first date equals or exceeds the income for
the first partial postacquisition year but does not equal or exceed the
income for the first and second partial postacquisition years, the
limitation shall be the amount of the postacquisition income reduced by
the excess of the income for the first and second partial
postacquisition years over the amount of carryovers acquired on the
first and second dates of distribution or transfer. If the income for
the first partial postacquisition year exceeds the carryovers acquired
on the first date, the limitation shall be the postacquisition income
reduced by the sum of the amount of such excess plus the amount, if any,
by which the income for the second partial postacquisition year exceeds
the carryovers acquired on the second date. This subparagraph may be
illustrated by the following examples:
Example 1. (i) X Corporation has taxable income (computed without
any net operating loss deduction) of $36,500 for its calendar year 1955.
During 1955, X Corporation acquires the assets of M, N, and Z
Corporations in statutory mergers to each of which section 361 applies,
the dates of transfer being January 1, January 31, and December 1,
respectively. The net operating loss carryovers of each transferor
corporation and the income for each partial postacquisition year are:
----------------------------------------------------------------------------------------------------------------
Income for
Corp. Carryovers partial years Reduction
----------------------------------------------------------------------------------------------------------------
M............................................................... $4,000 $3,000 $23,400
($36,500 x 30/
365)
N............................................................... 6,000 30,400
($36,500 x 304/
365)
Z............................................................... 50,000 3,000 0
($36,500 x 30/
365)
-----------------------------------------------
60,000 36,400 23,400
----------------------------------------------------------------------------------------------------------------
(ii) Since the carryovers of $4,000 acquired on the first date of
transfer exceed the income for the first partial year ($3,000), the
limitation provided by section 381(c)(1)(B) is the amount of the
postacquisition income ($36,400) reduced by the excess of the income for
the first and second partial years ($33,400) over the carryovers
acquired on the first and second dates of transfer ($10,000). Therefore,
the limitation is $13,000 ($36,400 less $23,400).
Example 2. (i) Assume the same facts as in Example (1) except that
the amount of the net operating loss carryovers acquired from M
Corporation is $1,000. The net operating
[[Page 590]]
loss carryovers of each transferor corporation and the income for each
partial postacquisition year are:
----------------------------------------------------------------------------------------------------------------
Income for
Corp. Carryovers partial years Reduction
----------------------------------------------------------------------------------------------------------------
M............................................................... $1,000 $3,000 $2,000
($36,500 x 30/
365)
N............................................................... 6,000 30,400 24,400
($36,500 x 304/
365)
Z............................................................... 50,000 3,000 0
($36,500 x 30/
365)
-----------------------------------------------
57,000 36,400 26,400
----------------------------------------------------------------------------------------------------------------
(ii) Since the income for the first partial year ($3,000) exceeds
the $1,000 of carryovers acquired on the first date by $2,000, the
limitation provided by section 381(c)(1)(B) is the postacquisition
income of $36,400 reduced by such excess and also reduced by the excess
of the income for the second partial year ($30,400) over the carryovers
acquired on the second date of transfer ($6,000). Therefore, the
limitation is $10,000 ($36,400 less the sum of $2,000 and $24,400).
Example 3. (i) Assume the same facts as in Example (2) except that
the carryovers acquired from N Corporation are $75,000. The net
operating loss carryovers of each transferor corporation and the income
for each partial postacquisition year are:
----------------------------------------------------------------------------------------------------------------
Income for
Corp. Carryovers partial years Reduction
----------------------------------------------------------------------------------------------------------------
M............................................................... $1,000 $3,000 $2,000
($36,500 x 30/
365)
N............................................................... 75,000 30,400 0
($36,500 x 304/
365)
Z............................................................... 50,000 3,000 0
($36,500 x 30/
365)
-----------------------------------------------
126,000 36,400 2,000
----------------------------------------------------------------------------------------------------------------
(ii) Since the income for the first partial year ($3,000) exceeds
the $1,000 of carryovers acquired on the first date by $2,000, the
limitation provided by section 381(c)(1)(B) is the postacquisition
income of $36,400 reduced by $2,000, or $34,400. No further reduction is
made since the income for the second partial year ($30,400) does not
exceed the carryovers of $75,000 acquired on the second date of
transfer.
(5) Four or more dates of distribution or transfer. If the acquiring
corporation succeeds to the net operating loss carryovers of four or
more distributor or transferor corporations on four or more dates of
distribution or transfer during the same taxable year of the acquiring
corporation, the limitation provided by section 381(c)(1)(B) shall be
determined consistently with the methods prescribed in subparagraphs (3)
and (4) of this paragraph. The application of this subparagraph may be
illustrated by the following example:
Example. (i) X Corporation has taxable income (computed without any
net operating loss deduction) of $36,500 for its calendar year 1955.
During 1955, X Corporation acquired the assets of M, N, O, Y, and Z
Corporations in statutory mergers to each of which section 361 applied,
the dates of transfer being, respectively, January 1, January 31, March
3, April 2, and December 1. The net operating loss carryovers of each
transferor corporation and the income for each partial postacquisition
year are:
----------------------------------------------------------------------------------------------------------------
Income for
Corp. Carryovers partial years Reduction
----------------------------------------------------------------------------------------------------------------
M............................................................... $1,000 $3,000 $2,000
($36,500 x 30/
365)
N............................................................... 4,000 3,100
($36,500 x 31/
365)
O............................................................... 1,000 3,000 1,100
($36,500 x 30/
365)
Y............................................................... 10,000 24,300 14,300
($36,500 x 243/
365)
Z............................................................... 20,000 3,000 0
($36,500 x 30/
365)
-----------------------------------------------
36,000 36,400 17,400
----------------------------------------------------------------------------------------------------------------
(ii) The limitation provided by section 381(c)(1)(B) equals the
postacquisition income of $36,400 reduced by the sum of (a) the $2,000
excess of the income for the first partial year ($3,000) over the
carryovers acquired from M Corporation ($1,000), (b) the $1,100 excess
of the income for the second and third partial years ($6,100) over the
carryovers acquired from N and O Corporations ($5,000), and (c) the
$14,300 excess of the income for the fourth partial year ($24,300) over
the carryovers acquired from Y Corporation ($10,000). Accordingly, the
limitation is $19,000 ($36,400 minus $17,400). Therefore, although X
Corporation acquired carryovers aggregating $36,000 during 1955, it can
utilize only $19,000 of such carryovers in computing its net operating
loss deduction for 1955.
(c) Determination of taxable income of acquiring corporation under
section 381(c)(1)(C)--(1) In general. If the acquiring corporation
succeeds to the net operating loss carryovers of two or more distributor
or transferor corporations on two or more dates of distribution or
[[Page 591]]
transfer within one taxable year of the acquiring corporation, then
pursuant to section 381(c)(1)(C) the taxable income of the acquiring
corporation for its taxable year which is a prior taxable year for
purposes of section 172(b)(2) and paragraph (e) of Sec. 1.381(c)(1)-1
shall be determined as provided in this paragraph.
(2) Division of taxable income. The taxable income of the acquiring
corporation (computed with the modifications specified in section
172(b)(2)(A) but without any net operating loss deduction) shall be
allocated proportionately on a daily basis among a preacquisition part
year (determined under paragraph (f)(3) of Sec. 1.381(c)(1)-1 by
treating the first date of distribution or transfer as though it were
the only date of distribution or transfer during the taxable year of the
acquiring corporation) and two or more partial postacquisition years
(determined as provided in paragraph (b)(2) of this section). The
preacquisition part year and each partial postacquisition year shall be
considered a separate taxable year, but only for the limited purpose of
applying sections 172(b)(2) and 381(c)(1)(C).
(3) Net operating loss deduction. The net operating loss deduction
of the preacquisition part year and the partial postacquisition years
shall be determined consistently with the manner described in paragraph
(f)(6) of Sec. 1.381(c)(1)-1 but by taking into account, in the case of
any partial postacquisition year, only the net operating loss carryovers
and carrybacks of the acquiring corporation and those net operating loss
carryovers from a distributor or transferor corporation which become
available to the acquiring corporation as of the close of those dates of
distribution or transfer which occur before the beginning of that
specific partial postacquisition year. The sequence in which the net
operating losses of the distributor or transferor and acquiring
corporations shall be applied for this purpose shall be determined in
the manner described in paragraph (e) of Sec. 1.381(c)(1)-1. Subject to
the preceding sentence, the net operating loss carryovers to any
specific partial postacquisition year, whether from a distributor,
transferor, or acquiring corporation, shall be taken into account in the
order of the taxable years in which the net operating losses arose,
beginning with the loss for the earliest taxable year.
(4) Illustration. The application of this paragraph may be
illustrated by the following example:
Example. (i) Facts. X Corporation, which was organized on January 1,
1957, sustained a net operating loss of $20,000 for its calendar year
1957 and had taxable income (computed without any net operating loss
deduction) of $36,500 for its calendar year 1958. During 1958, X
Corporation acquired the assets of Y and Z Corporations in statutory
mergers to each of which section 361 applied, the dates of transfer
being June 30 and September 30, respectively. None of the modifications
specified in section 172(b)(2)(A) apply to any of the corporations for
any taxable year. The taxable income (computed without any net operating
loss deduction) and net operating losses of Y and Z Corporations (which
were organized on January 1, 1957, and January 1, 1954, respectively)
are set forth below:
------------------------------------------------------------------------
Acquiring Transferor Transferor
Taxable year corporation corporation corporation
X Y Z
------------------------------------------------------------------------
1954............................. xxx xxx ($30,000)
1955............................. xxx xxx 1,000
1956............................. xxx xxx 1,000
1957............................. ($20,000) ($25,000) 1,000
Ending 6-30-58................... xxx 1,000 xxx
Ending 9-30-58................... xxx xxx 1,000
1958............................. 36,500 xxx xxx
------------------------------------------------------------------------
The sequence in which the losses of the acquiring corporation and the
transferor corporations are applied and the computation of the
carryovers to X Corporation's calendar year 1959 are illustrated in the
following subdivisions of this example.
(ii) Computation of taxable income. X Corporation's taxable income,
determined in the manner described in subparagraph (2) of this
paragraph, for the preacquisition part year and for the partial
postacquisition years is as follows:
------------------------------------------------------------------------
Taxable
Year income Computation
------------------------------------------------------------------------
Preacquisition part year................ $18,100 $36,500 x 181/365
Partial No. 1........................... 9,200 36,500 x 92/365
Partial No. 2........................... 9,200 36,500 x 92/365
------------------------------------------------------------------------
(iii) Z Corporation's 1954 loss. The carryover to 1959 is $0,
computed as follows:
------------------------------------------------------------------------
------------------------------------------------------------------------
Net operating loss......................................... $30,000
Less:
Z's 1955, 1956, 1957, and 9/30/58-3 year income.......... 4,000
------------
Net operating loss carryover to Partial No. 2 year......... 26,000
[[Page 592]]
Less:
Partial No. 2 year taxable income........................ 9,200
------------
16,800
------------------------------------------------------------------------
The balance of $16,800 is not carried over to 1959 since X Corporation's
taxable year 1958 is the last of the five years to which Z's 1954 loss
may be carried under section 172(b)(1).
(iv) Y Corporation's 1957 loss. The carryover to 1959 is $14,800,
computed as follows:
Net operating loss........................................... $25,000
Less:
Y's 6/30/58-year income.................................... 1,000
------------
Net operating loss carryover to Partial No. 1 year........... 24,000
Less:
Partial No. 1 year taxable income.......................... 9,200
------------
Carryover to Partial No. 2 year.......................... 14,800
Less:
X's Partial No. 2 year taxable income........... $9,200
Minus X's net operating loss deduction for 26,000
Partial No. 2 year (i.e., Z's 1954 carryover of
$26,000 to such partial year)..................
-----------
......... 0
----------
Carryover to 1959........................................ 14,800
(v) X Corporation's 1957 loss. The carryover to 1959 is $1,900,
computed as follows:
Net operating loss........................................... $20,000
Less:
X's preacquisition part year taxable income................ 18,100
------------
Carryover to Partial No. 1 year.......................... 1,900
Less:
Partial No. 1 year taxable income............... $9,200
Minus X's net operating loss deduction for 24,000
Partial No. 1 year (i.e., Y's 1957 carryover of
$24,000 to such partial year)..................
-----------
......... 0
----------
Carryover to Partial No. 2 year.......................... 1,900
Less:
Partial No. 2 year taxable income............... $9,200
Minus X's net operating loss deduction for 40,800
Partial No. 2 year (i.e., Z's 1954 carryover of
$26,000, and Y's 1957 carryover of $14,800, to
such partial year..............................
-----------
......... 0
----------
Carryover to 1959........................................ $1,900
(vi) Summary of carryovers to 1959. The aggregate of the net
operating loss carryovers to 1959 is $16,700, computed as follows:
Z's 1954 loss............................................... xxx
Y's 1957 loss............................................... $14,800
X's 1957 loss............................................... 91,900
-----------
Total...................................................... 16,700
Sec. 1.381(c)(2)-1 Earnings and profits.
(a) In general. (1) Section 381(c)(2) requires the acquiring
corporation in a transaction to which section 381(a) applies to succeed
to, and take into account, the earnings and profits, or deficit in
earnings and profits, of the distributor or transferor corporation as of
the close of the date of distribution or transfer. In determining the
amount of such earnings and profits, or deficit, to be carried over, and
the manner in which they are to be used by the acquiring corporation
after such date, the provisions of section 381(c)(2) and this section
shall apply. For purposes of section 381(c)(2) and this section, if the
distributor or transferor corporation accumulates earnings and profits,
or incurs a deficit in earnings and profits, after the date of
distribution or transfer and before the completion of the reorganization
or liquidation, such earnings and profits, or deficit, shall be deemed
to have been accumulated or incurred as of the close of the date of
distribution or transfer.
(2) If the distributor or transferor corporation has accumulated
earnings and profits as of the close of the date of distribution or
transfer, such earnings and profits shall (except as hereinafter
provided in this section) be deemed to be received by, and to become a
part of the accumulated earnings and profits of, the acquiring
corporation as of such time. Similarly, if the distributor or transferor
corporation has a deficit in accumulated earnings and profits as of the
close of the date of distribution or transfer, such deficit shall
(except as hereinafter provided in this section) be deemed to be
incurred by the acquiring corporation as of such time. In no event,
however, shall the accumulated earnings and profits, or deficit, of the
distribution or transferor corporation be taken into account in
determining earnings and profits of the acquiring corporation for the
taxable year during which occurs the date of distribution or transfer.
(3) Any part of the accumulated earnings and profits, or deficit in
accumulated earnings and profits, of the distributor or transferor
corporation which consists of earnings and profits, or deficits,
accumulated before March
[[Page 593]]
1, 1913, shall be deemed to become earnings and profits, or deficits, of
the acquiring corporation accumulated before March 1, 1913, and any part
of the accumulated earnings and profits of the distributor or transferor
corporation which consists of increase in value of property accrued
before March 1, 1913, shall be deemed to become earnings and profits of
the acquiring corporation consisting of increase in value of property
accrued before March 1, 1913.
(4) If the acquiring corporation and each distributor or transferor
corporation has accumulated earnings and profits as of the close of the
date of distribution or transfer, or if each of such corporations has a
deficit in accumulated earnings and profits as of such time, then the
accumulated earnings and profits (or deficit) of each such corporation
shall be consolidated as of the close of the date of distribution or
transfer in the accumulated earnings and profits account of the
acquiring corporation. See subparagraph (6) of this paragraph for
determination of the accumulated earnings and profits (or deficit) of
the acquiring corporation as of the close of the date of distribution or
transfer.
(5) If (i) one or more corporations a party to a distribution or
transfer has accumulated earnings and profits as of the close of the
date of distribution or transfer, and (ii) one or more of such
corporations has a deficit in accumulated earnings and profits as of
such time, the total of any such deficits shall be used only to offset
earnings and profits accumulated, or deemed to have been accumulated
under subparagraph (6) of this paragraph, by the acquiring corporation
after the date of distribution or transfer. In such instance, the
acquiring corporation will be considered as maintaining two separate
earnings and profits accounts after the date of distribution or
transfer. The first such account shall contain the total of the
accumulated earnings and profits as of the close of the date of
distribution or transfer of each corporation which has accumulated
earnings and profits as of such time, and the second such account shall
contain the total of the deficits in accumulated earnings and profits of
each corporation which has a deficit as of such time. The total deficit
in the second account may not be used to reduce the accumulated earnings
and profits in the first account (although such earnings and profits may
be offset by deficits incurred, or deemed to have been incurred, after
the date of distribution or transfer) but shall be used only to offset
earnings and profits accumulated, or deemed to have been accumulated
under subparagraph (6) of this paragraph, by the acquiring corporation
after the date of distribution or transfer.
(6) In any case in which it is necessary to compute the accumulated
earnings and profits, or the deficit in accumulated earnings and
profits, of the acquiring corporation as of the close of the date of
distribution or transfer and such date is a day other than the last day
of a taxable year of the acquiring corporation--
(i) If the acquiring corporation has earnings and profits for its
taxable year during which occurs the date of distribution or transfer,
such earnings and profits (a) shall be deemed to have accumulated as of
the close of such date in an amount which bears the same ratio to the
undistributed earnings and profits of such corporation for such year as
the number of days in the taxable year preceding the date following the
date of distribution or transfer bears to the total number of days in
the taxable year, and (b) shall be deemed to have accumulated after the
date of distribution or transfer in an amount which bears the same ratio
to the undistributed earnings and profits of such corporation for such
year as the number of days in the taxable year following such date bears
to the total number of days in such taxable year. For purposes of the
preceding sentence, the undistributed earnings and profits of the
acquiring corporation for such taxable year shall be the earnings and
profits for such taxable year reduced by any distributions made
therefrom during such taxable year.
(ii) If the acquiring corporation has an operating deficit for its
taxable year during which occurs the date of distribution or transfer,
then, unless the actual accumulated earnings and profits, or deficit, as
of such date can be
[[Page 594]]
shown, such operating deficit shall be deemed to have accumulated in a
manner similar to that described in subdivision (i) of this
subparagraph.
(7) This paragraph may be illustrated by the following examples, in
which it is assumed that none of the accumulated earnings and profits,
or deficits, consist of earnings and profits or deficits accumulated, or
increase in value of property accrued, before March 1, 1913.
Example 1. (i) M and N Corporations make their returns on the basis
of the calendar year. On June 30, 1959, M Corporation transfers all its
assets to N Corporation in a statutory merger to which section 361
applies. The books of the two corporations reveal the following
information:
------------------------------------------------------------------------
M N
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits at close of $100,000 $150,000
calendar year 1958..........................
Earnings and profits of taxable year ending 15,000 ...........
June 30, 1959...............................
Earnings and profits of calendar year 1959... ............ 36,500
Distributions during calendar year 1959...... 0 0
------------------------------------------------------------------------
(ii) As of the close of June 30, 1959, N acquires from M accumulated
earnings and profits of $115,000. Since M and N each has accumulated
earnings and profits as of the close of the date of transfer, M's
accumulated earnings and profits are added to N's accumulated earnings
and profits as of such time. However, no part of M's accumulated
earnings and profits is taken into account in determining N's earnings
and profits for the calendar year 1959. Therefore, N's earnings and
profits for the calendar year 1959 are $36,500.
Example 2. (i) X and Y Corporations make their returns on the basis
of the calendar year. On June 30, 1959, X Corporation transfers all its
assets to Y Corporation in a statutory merger to which section 361
applies. The books of the two corporations reveal the following
information:
------------------------------------------------------------------------
X Y
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits at close of $20,000 $100,000
calendar year 1958..........................
Deficit in earnings and profits for taxable 80,000 ...........
year ending June 30, 1959...................
Earnings and profits of calendar year 1959... ............ 36,500
Distributions during calendar year 1959...... 0 0
------------------------------------------------------------------------
(ii) As of the close of June 30, 1959, Y acquires from X a deficit
in accumulated earnings and profits in the amount of $60,000. This
deficit may be used only to reduce those earnings and profits of Y which
are accumulated, or deemed to have accumulated, after June 30, 1959.
Accordingly, as of December 31, 1959, the accumulated earnings and
profits of Y amount to $118,100; at such time Y also has a separate
deficit in accumulated earnings and profits in the amount of $41,600.
These amounts are determined as follows:
Accumulated earnings and profits of Y as of the close of $100,000
1958.......................................................
Add:
Portion of undistributed earnings and profits of Y for 18,100
1959 deemed to have accumulated as of close of June 30,
1959 ($36,500 x 181/365).................................
-----------
Accumulated earnings and profits of Y as of close of 118,100
June 30, 1959, and also as of Dec. 31, 1959............
===========
Portion of undistributed earnings and profits of Y for 18,400
1959 deemed to have accumulated after June 30, 1959
($36,500 x 184/365)......................................
Less:
Deficit in accumulated earnings and profits acquired by Y 60,000
from X Corporation as of close of June 30, 1959..........
-----------
Separate deficit in accumulated earnings and profits of 41,600
Y as of Dec. 31, 1959..................................
Example 3. Assume the same facts as in Example (2), except that on
September 15, 1959, Y Corporation makes a cash distribution of $96,500.
The entire distribution is a dividend: $36,500 from earnings and profits
for the taxable year 1959 and $60,000 from earnings and profits
accumulated as of December 31, 1958. Accordingly, as of December 31,
1959, Y has accumulated earnings and profits of $40,000, and also has a
separate deficit in accumulated earnings and profits of $60,000. These
amounts are determined as follows:
Earnings and profits of Y for calendar year 1959............. $36,500
Accumulated earnings and profits of Y as of close of 1958.... 100,000
----------
Total....................................................... 136,500
Less:
Distributions during 1959.................................. 96,500
----------
Accumulated earnings and profits of Y as of Dec. 31, 1959 40,000
==========
Deficit in accumulated earnings and profits acquired from X $60,000
as of close of June 30, 1959................................
Less:
Portion of Y's undistributed earnings and profits for 1959 0
deemed to have accumulated after June 30, 1959............
----------
Separate deficit in accumulated earnings and profits of Y 60,000
as of Dec. 31, 1959.....................................
Example 4. (i) M and N Corporations make their returns on the basis
of the calendar
[[Page 595]]
year. On June 30, 1959, M Corporation transfers all its assets to N
Corporation in a statutory merger to which section 361 applies. The
books of the two corporations reveal the following information:
------------------------------------------------------------------------
M N
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits at close of $100,000 $50,000
calendar year 1958..........................
Earnings and profits for taxable year ending 10,000
June 30, 1959...............................
Deficit in earnings and profits for calendar ............ 146,000
year 1959...................................
Distributions during calendar year 1959...... 0 0
------------------------------------------------------------------------
(ii) Assuming that N has not shown its actual accumulated earnings
and profits, or deficit, as of the close of June 30, 1959, N has a
deficit in accumulated earnings and profits at such time which amounts
to $22,400, determined as follows:
------------------------------------------------------------------------
------------------------------------------------------------------------
Accumulated earnings and profits of N as of close of 1958.... $50,000
Less:
Portion of deficit in earnings and profits of N for 1959 72,400
deemed to have accumulated as of close of June 30, 1959
($146,000 x 181/365)......................................
----------
Deficit in accumulated earnings and profits of N as of 22,400
close of June 30, 1959, and also as of Dec. 31, 1959....
------------------------------------------------------------------------
As of the close of June 30, 1959, N acquires from M accumulated earnings
and profits in the amount of $110,000, no part of which may be offset by
N's own deficit of $22,400; however, such earnings and profits may be
offset by deficits incurred, or deemed incurred, by N after June 30,
1959. Thus, as of December 31, 1959, N has the above-mentioned deficit
of $22,400; at such time N also has accumulated earnings and profits in
the amount of $36,400, determined as follows:
Accumulated earnings and profits acquired from M as of close $110,000
of June 30, 1959...........................................
Less:
Portion of deficit in earnings and profits of N for 1959 73,600
deemed to have accumulated after June 30, 1959 ($146,000
x 184/365)...............................................
-----------
Accumulated earnings and profits of N as of Dec. 31, 36,400
1959...................................................
Example 5. Assume the same facts as in Example (4), except that on
September 9, 1959, N Corporation makes a cash distribution of $100,000.
The amount of $82,000 is a dividend from accumulated earnings and
profits, computed as follows:
Accumulated earnings and profits acquired from M as of close $110,000
of June 30, 1959...........................................
Less:
Deficit in earnings and profits of N for 1959 deemed to 28,000
have accumulated from June 30 through Sept. 8, 1959
($146,000 x 70/365)......................................
-----------
Accumulated earnings and profits as of close of Sept. 8, 82,000
1959...................................................
As of December 31, 1959, N Corporation has a deficit in accumulated
earnings and profits of $68,000, computed as follows:
Deficit in accumulated earnings and profits of N as of close $22,400
of June 30, 1959............................................
Add:
Portion of N's deficit in earnings and profits for 1959 45,600
deemed to have accumulated after Sept. 8, 1959 ($146,000 x
114/365)..................................................
----------
Deficit in accumulated earnings and profits of N as of 68,000
Dec. 31, 1959...........................................
Example 6. (i) X, Y, and Z Corporations make their returns on the
basis of the calendar year. On June 30, 1959, X Corporation and Y
Corporation transfer all their assets to Z Corporation in a statutory
merger to which section 361 applies. The books of the three corporations
reveal the following information:
----------------------------------------------------------------------------------------------------------------
X Y Z
Description Corporation Corporation Corporation
(transferor) (transferor) (acquirer)
----------------------------------------------------------------------------------------------------------------
Accumulated earnings and profits (or deficit) at close of calendar year $35,000 ($25,000) ($20,000)
1958..................................................................
Earnings and profits (or deficit) for taxable year ended June 30, 1959. 5,000 (5,000)
Earnings and profits for calendar year 1959............................ ............ ............ 36,500
Distributions during 1959.............................................. 0 0 0
----------------------------------------------------------------------------------------------------------------
(ii) As of the close of June 30, 1959, Z acquires from Y a deficit
in accumulated earnings and profits of $30,000. As of such time, Z's own
deficit in accumulated earnings and profits amounts to $1,900,
determined as follows:
Deficit in accumulated earnings and profits of Z as of close $20,000
of 1958....................................................
Less:
Portion of undistributed earnings and profits of Z for 18,100
1959 deemed to have accumulated as of close of June 30,
1959 ($36,500 x 181/365).................................
-----------
Deficit in accumulated earnings and profits as of close 1,900
of June 30, 1959.......................................
[[Page 596]]
The total deficit of $31,900 may be used only to offset earnings and
profits of Z accumulated, or deemed to have accumulated, after June 30,
1959; such deficit may not be used to reduce the accumulated earnings
and profits of $40,000 acquired from X as of the close of June 30, 1959.
Thus, as of December 31, 1959, the accumulated earnings and profits of Z
amount to $40,000; at such time Z Corporation also has a separate
deficit in accumulated earnings and profits in the amount of $13,500,
determined as follows:
Deficit in accumulated earnings and profits as of close of $31,900
June 30, 1959..............................................
Less:
Portion of undistributed earnings and profits of Z for 18,400
1959 deemed to have accumulated after June 30, 1959
($36,500 x 184/365)......................................
-----------
Separate deficit in accumulated earnings and profits as 13,500
of Dec. 31, 1959.......................................
Example 7. X and Y Corporations make their returns on the basis of
the calendar year. On December 31, 1954, X transfers all its assets to Y
in a statutory merger to which section 361 applies. The books of the two
corporations reveal the following information:
------------------------------------------------------------------------
X Y
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits (or deficit) ($50,000) $210,000
at close of calendar year 1954..............
Earnings and profits (or deficit) for
calendar year:
1955....................................... ............ 5,000
1956....................................... ............ (20,000)
1957....................................... ............ 70,000
1958....................................... ............ 60,000
1959....................................... ............ 55,000
Cash distributions on:
Sept. 1, 1957.............................. ............ 80,000
Sept. 1, 1958.............................. ............ 40,000
Sept. 1, 1959.............................. ............ 30,000
------------------------------------------------------------------------
The balances in the accumulated earnings and profits account and the
separate deficit account of Y Corporation at the close of the taxable
year involved are as follows:
------------------------------------------------------------------------
Accumulated
Deficit earnings
Year acquired and profits
from X of Y
Corporation Corporation
------------------------------------------------------------------------
1954.......................................... $50,000 $210,000
1955.......................................... 45,000 210,000
1956.......................................... 45,000 190,000
1957.......................................... 45,000 180,000
1958.......................................... 25,000 180,000
1959.......................................... None 180,000
------------------------------------------------------------------------
(b) Successive acquisitions. (1) If, as of the date of distribution
or transfer, either the acquiring corporation, or the distributor or
transferor corporation, or both, is considered under paragraph (a) of
this section to be maintaining separate earnings and profits accounts as
the result of a prior transaction or transactions to which section
381(a) applied, the accumulated earnings and profits, or deficit in
accumulated earnings and profits, of each such corporation shall be
combined with the appropriate earnings and profits account of the other
such corporation. For example, if, as of the date of transfer, the
acquiring corporation and the transferor corporation are each
maintaining separate accounts, one containing accumulated earnings and
profits and the other containing a deficit in accumulated earnings and
profits, the amounts in the two accumulated earnings and profits
accounts shall be combined into one account, and the amounts in the two
deficit accounts shall be combined into a second account, and the amount
in one combined account may not be used to offset the amount in the
other combined account.
(2) This paragraph may be illustrated by the following examples, in
which it is assumed that none of the accumulated earnings and profits,
or deficits, consist of earnings and profits or deficits accumulated, or
increase in value of property accrued, before March 1, 1913.
Example 1. (i) X, Y, and Z Corporations make their returns on the
basis of the calendar year. On June 30, 1958, X Corporation transfers
all its assets to Z Corporation in a statutory merger to which section
361 applies, and on August 31, 1958, Y Corporation transfers all its
assets to Z Corporation in another statutory merger to which section 361
applies. The books of the three corporations reveal the following
information:
----------------------------------------------------------------------------------------------------------------
X Y Z
Description Corporation Corporation Corporation
(transferor) (transferor) (acquirer)
----------------------------------------------------------------------------------------------------------------
Accumulated earnings and profits (deficit) at close of calendar year ($40,000 $10,000 $60,000
1957..................................................................
Deficit in earnings and profits for taxable year ending June 30, 1958.. (5,000) ............ ...........
[[Page 597]]
Earnings and profits for taxable year ending Aug. 31, 1958............. ............ 2,000 ...........
Earnings and profits of calendar year 1958............................. ............ ............ 36,500
Distributions during calendar year 1958................................ 0 0 0
----------------------------------------------------------------------------------------------------------------
(ii) As of the close of June 30, 1958, Z acquires from X a deficit
in accumulated earnings and profits in the amount of $45,000, which
deficit may be used only to reduce those earnings and profits of Z which
are accumulated, or deemed to have been accumulated, after June 30,
1958. As of the close of August 31, 1958, Z acquires from Y earnings and
profits of $12,000, no portion of which may be reduced by the deficit
acquired by Z from X. Accordingly, as of December 31, 1958, Z has
accumulated earnings and profits of $90,100, and also has a separate
deficit in accumulated earnings and profits of $26,600. These amounts
are determined as follows:
Accumulated earnings and profits of Z as of Dec. 31, 1957... $60,000
Add:
Portion of undistributed earnings and profits of Z for 18,100
1958 deemed to have accumulated as of close of June 30,
1958 ($36,500 x 181/365).................................
-----------
Accumulated earnings and profits of Z as of June 30, 1958... 78,100
Add:
Accumulated earnings and profits acquired by Z from Y as 12,000
of close of Aug. 31, 1958................................
-----------
Accumulated earnings and profits of Z as of close of Aug. 90,100
31, 1958, and also as of Dec. 31, 1958.....................
===========
Deficit in accumulated earnings and profits acquired by Z 45,000
from X as of close of June 30, 1958........................
Less:
Portion of undistributed earnings and profits of Z for 6,200
1958 deemed to have accumulated from June 30 through Aug.
31, 1958 ($36,500 x 62/365)..............................
-----------
Separate deficit in accumulated earnings and profits of 38,800
Z as of Aug. 31, 1958..................................
Less:
Portion of undistributed earnings and profits of Z for 12,200
1958 deemed to have accumulated after Aug. 31, 1958
($36,500 x 122/365)......................................
-----------
Separate deficit in accumulated earnings and profits of 26,600
Z as of Dec. 31, 1958..................................
Example 2. (i) Assume the same facts as in Example (1), plus the
additional fact that on June 30, 1959, Z Corporation transfers all its
assets to M Corporation (which makes its return on the basis of the
calendar year) in a statutory merger to which section 361 applies, and
that as of such time M Corporation is considered to be maintaining
separate earnings and profits accounts as the result of a previous
transaction to which section 381(a) applied. The books of the two
corporations reveal the following information:
------------------------------------------------------------------------
Z M
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits as of Dec. $90,100 $50,000
31, 1958....................................
Separate deficit in accumulated earnings and 26,600 30,000
profits as of Dec. 31, 1958.................
Earnings and profits for taxable year ending 5,000 ...........
June 30, 1959...............................
Earnings and profits of calendar year 1959... ............ 36,500
Distributions during 1959.................... 0 0
------------------------------------------------------------------------
(ii) As of June 30, 1959, M acquires from Z accumulated earnings and
profits of $90,100, which amount is combined with M's own accumulated
earnings and profits of $50,000; M also acquires from Z a deficit in
accumulated earnings and profits of $21,600 ($26,600 minus $5,000),
which amount is combined with M's own deficit of $11,900. The total
deficit of $33,500 may be used only to reduce earnings and profits of M
which are accumulated, or deemed to have accumulated, after June 30,
1959. Accordingly, as of December 31, 1959, M has accumulated earnings
and profits of $140,100, and also has a separate deficit in accumulated
earnings and profits in the amount of $15,100. These amounts are
determined as follows:
Deficit of M as of Dec. 31, 1958............................ $30,000
Less:
Portion of M's undistributed earnings and profits for 1959 18,100
deemed to have accumulated as of close of June 30, 1959
($36,500 x 181/365)......................................
-----------
Deficit of M as of June 30, 1959........................ 11,900
Plus:
Deficit of Z as of June 30, 1959.......................... 21,600
-----------
Combined deficit of M as of close of June 30, 1959...... 33,500
Less:
Portion of M's undistributed earnings and profits for 1959 18,400
deemed to have accumulated after June 30, 1959 ($36,500 x
184/365).................................................
-----------
Separate deficit of M as of Dec. 31, 1959............... 15,100
===========
Accumulated earnings and profits of M as of Dec. 31, 1958, 50,000
and also as of June 30, 1959...............................
[[Page 598]]
Accumulated earnings and profits of Z as of Dec. 31, 1958, 90,100
and also as of June 30, 1959...............................
-----------
Combined accumulated earnings and profits of M as of 140,100
close of June 30, 1959, and also as of Dec. 31, 1959...
(c) Distribution of earnings and profits pursuant to reorganization
or liquidation. (1) If, in a reorganization to which section 381(a)(2)
applies, the transferor corporation pursuant to the plan of
reorganization distributes to its stockholders property consisting not
only of property permitted by section 354 to be received without
recognition of gain, but also of other property or money, then the
accumulated earnings and profits of the transferor corporation as of the
close of the date of transfer shall be computed by taking into account
the amount of earnings and profits properly applicable to the
distribution, regardless of whether such distribution occurs before or
after the close of the date of transfer.
(2) If, in a distribution to which section 381(a)(1) (relating to
certain liquidations of subsidiaries) applies, the acquiring corporation
receives less than 100 percent of the assets distributed by the
distributor corporation, then the accumulated earnings and profits of
the distributor corporation as of the close of the date of distribution
shall be computed by taking into account the amount of earnings and
profits properly applicable to the distributions to minority
stockholders, regardless of whether such distributions occur before or
after the close of the date of distribution.
[T.D. 6586, 26 FR 12550, Dec. 28, 1961, as amended by T.D. 6692, 28 FR
12817, Dec. 3, 1963; T.D. 9700, 79 FR 66617, Nov. 10, 2014]
Sec. 1.381(c)(3)-1 Capital loss carryovers.
(a) Carryover requirement. (1) Section 381(c)(3) requires the
acquiring corporation in a transaction to which section 381(a) applies
to succeed to, and take into account, the capital loss carryovers of the
distributor or transferor corporation. To determine the amount of these
carryovers as of the close of the date of distribution or transfer, and
to integrate them with the capital loss carryovers of the acquiring
corporation for purposes of determining the taxable income of the
acquiring corporation for taxable years ending after the date of
distribution or transfer, it is necessary to apply the provisions of
section 1212 in accordance with the conditions and limitations of
section 381(c)(3) and this section.
(2) The capital loss carryovers of the acquiring corporation as of
the close of the date of distribution or transfer shall be determined
without reference to any capital gains or capital losses of the
distributor or transferor corporation. The capital loss carryovers of a
distributor or transferor corporation as of the close of the date of
distribution or transfer shall be determined without reference to any
capital gains or capital losses of the acquiring corporation.
(3) This section contains rules applicable to capital loss
carryovers determined without reference to the amendment of section
1212(a) made by section 7 of the Act of September 2, 1964 (Public Law
88-571, 78 Stat. 860) in respect of foreign expropriation capital
losses. If the distributor, transferor, or acquiring corporation
sustains a net capital loss in a taxable year ending after December 31,
1958, any portion of which is attributable to a foreign expropriation
capital loss, such portion shall be carried over to each of the ten
succeeding taxable years consistently with the rules prescribed in this
section and paragraph (a)(2) of Sec. 1.1212-1.
(b) First taxable year to which carryovers apply. (1) The capital
loss carryovers available to the distributor or transferor corporation
as of the close of the date of distribution or transfer shall first be
carried to the first taxable year of the acquiring corporation ending
after that date. This rule applies irrespective of whether the date of
distribution or transfer is on the last day, or any other day, of the
acquiring corporation's taxable year.
(2) The capital loss carryovers available to the distributor or
transferor corporation as of the close of the date of distribution or
transfer shall be carried to the acquiring corporation without
diminution by reason of the fact that the acquiring corporation does not
acquire 100 percent of the assets of the distributor or transferor
corporation.
(c) Limitation on capital loss carryovers for first taxable year
ending after date of distribution or transfer. (1) Any capital
[[Page 599]]
loss carryover of a distributor or transferor corporation which is
available to the acquiring corporation as of the close of the date of
distribution or transfer shall be a short-term capital loss of the
acquiring corporation in each of the taxable years to which the net
capital loss giving rise to such carryover may be carried to the extent
provided in section 1212 and this section. However, in the first taxable
year of the acquiring corporation ending after the date of distribution
or transfer, the total capital loss carryovers of the distributor or
transferor corporation which may be treated in that year as short-term
capital losses of the acquiring corporation is limited by section
381(c)(3)(B) to an amount which bears the same ratio to the acquiring
corporation's capital gain net income (net capital gain for taxable
years beginning before January 1, 1977) for such first taxable year
(determined without regard to any capital loss carryovers) as the number
of days in such first taxable year which follow the date of distribution
or transfer bears to the total number of days in such taxable year.
Thus, if the date of distribution or transfer is the last day of the
acquiring corporation's taxable year, there is no limitation under
section 381(c)(3)(B) on the amount of such carryovers which may be
treated as short-term capital losses of the acquiring corporation for
its first taxable year ending after that date.
(2) The limitation provided by section 381(c)(3)(B) shall be applied
to the aggregate of the capital loss carryovers of the distributor or
transferor corporation without reference to the taxable years in which
the net capital losses giving rise to the carryovers were sustained. If
the acquiring corporation has acquired the assets of two or more
distributor or transferor corporations on the same date of distribution
or transfer, then the limitation provided by section 381(c)(3)(B) shall
be applied to the aggregate of the capital loss carryovers from all of
such distributor or transferor corporations.
(3) If the acquiring corporation succeeds to the capital loss
carryovers of two or more distributor or transferor corporations on two
or more dates of distribution or transfer during the same taxable year
of the acquiring corporation, the limitation to be applied under section
381(c)(3)(B) to the aggregate of such carryovers shall be determined
consistently with the rules prescribed in paragraph (b) of Sec.
1.381(c)(1)-2.
(4) The application of this paragraph may be illustrated by the
following example:
Example. (i) X and Y Corporations are organized on January 1, 1954,
and make their returns on the basis of the calendar year. On July 4,
1957, X Corporation transfers all its assets to Y Corporation in a
statutory merger to which section 361 applies. The net capital losses
and the net capital gains (capital gain net income for taxable years
beginning after Dec. 31, 1976), (computed without regard to any capital
loss carryovers) of the two corporations are as follows:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1954......................................... ($5,000) 0
1955......................................... (10,000) $5,000
1956......................................... (25,000) (7,000)
Ending 7-4-57................................ (8,000) ...........
1957......................................... ............ 36,500
------------------------------------------------------------------------
(ii) The capital loss carryovers of X Corporation which are
available to Y Corporation as of the close of July 4, 1957, amount to
$48,000 in the aggregate; but only $18,000 ($36,500 x 180/365) of such
amount may be treated as short-term capital losses of Y Corporation for
1957.
(d) Computation of carryovers; general rule--(1) Sequence for
applying losses and determination of capital gain net income. Section
1212 provides that a net capital loss sustained in any taxable year
(hereinafter referred to as the ``loss year'') shall be carried over to
each of the five succeeding taxable years and treated in each of such
succeeding years as a short-term capital loss to the extent not allowed
as a deduction against any capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) of any taxable years
intervening between the loss year and the taxable year to which such
loss is carried. For this purpose, the capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) of any
intervening taxable year is determined without regard to the net capital
loss for the loss year or for any taxable year thereafter, and the
various capital
[[Page 600]]
loss carryovers from taxable years preceding the loss year to any such
intervening taxable year are considered to be applied in reduction of
the capital gain net income (net capital gain for taxable years
beginning before January 1, 1977) for such year in the order of the
taxable years in which the losses were sustained, beginning with the
loss for the earliest preceding taxable year. The application of these
rules to the capital gain net income (net capital gain for taxable years
beginning before January 1, 1977) of the acquiring corporation for any
taxable year ending after the date of distribution or transfer involves
the use of carryovers of the distributor or transferor corporation and
of the acquiring corporation. In determining the order in which the
capital loss carryovers of the distributor or transferor and acquiring
corporations from taxable years ending on or before the date of
distribution or transfer are considered to be applied in reduction of
the capital gain net income (net capital gain for taxable years
beginning before January 1, 1977) of the acquiring corporation for any
intervening taxable year ending after such date, the following rules
shall apply:
(i) Each taxable year of the distributor or transferor and acquiring
corporations which, with respect to the first taxable year of the
acquiring corporation ending after the date of distribution or transfer,
constitutes a first preceding taxable year, shall be treated as if each
such year ended on the same day, whether or not such taxable years
actually end on the same day. In like manner, each taxable year of the
distributor or transferor and acquiring corporations which, with respect
to such first taxable year of the acquiring corporation ending after the
date of distribution or transfer, constitutes a second preceding taxable
year, shall be treated as if each such year ended on the same day
(whether or not such taxable years actually end on the same day), and a
similar rule shall be applied with respect to those taxable years of the
distributor or transferor and acquiring corporations which constitute
third, fourth, and fifth preceding taxable years;
(ii) If in the same preceding taxable year both the distributor or
transferor and acquiring corporations incurred a net capital loss which
is a carryover to an intervening taxable year of the acquiring
corporation ending after the date of distribution or transfer, then in
applying such losses in reduction of the capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) for
such an intervening year, either such loss may be taken into account
before the other; and
(iii) The rules of subdivisions (i) and (ii) of this subparagraph
shall apply regardless of the number of distributor or transferor
corporations the assets of which are acquired by the acquiring
corporation on the same date of distribution or transfer.
(2) Cross reference. If the date of distribution or transfer is a
day other than the last day of a taxable year of the acquiring
corporation, then in determining the capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) of the
acquiring corporation for its first taxable year ending after the date
of distribution or transfer, section 1212 and this paragraph shall be
applied in the special manner set forth in paragraph (e) of this
section.
(3) Years to which losses may be carried. The taxable years to which
a net capital loss shall be carried are prescribed by section 1212.
Since the taxable year of a distributor or transferor corporation ends
with the close of the date of distribution or transfer, such taxable
year and the first taxable year of the acquiring corporation which ends
after that date are considered two separate taxable years to which a net
capital loss of the distributor or transferor corporation for any
taxable year ending before that date shall be carried. This rule applies
even though the taxable year of the distributor or transferor
corporation which ends on the date of distribution or transfer is a
period of less than twelve months. However, the distribution or transfer
has no effect in determining under section 1212 the taxable years to
which a net capital loss of the acquiring corporation is carried. For
this purpose, the first taxable year of the acquiring corporation which
ends after the date of distribution or transfer constitutes only one
taxable year even though such
[[Page 601]]
taxable year is considered under paragraph (e) of this section as two
taxable years for certain purposes. The application of this subparagraph
may be illustrated by the following example:
Example. R and S Corporations are organized on January 1, 1954, and
both corporations make their returns on the basis of the calendar year.
R Corporation has net capital losses for its years 1954, 1955, and 1957,
and S Corporation has net capital losses for its years 1954 and 1956. On
June 30, 1958, R Corporation transfers all its assets to S Corporation
in a statutory merger to which section 361 applies. The taxable years to
which these losses of R and S Corporations may be carried are as
follows:
------------------------------------------------------------------------
Loss year Carried to
------------------------------------------------------------------------
R1954............................. R1955, R1956, R1957, R6/30/58,
S1958.
S1954............................. S1955, S1956, S1957, S1958, S1959.
R1955............................. R1956, R1957, R6/30/58, S1958,
S1959.
S1956............................. S1957, S1958, S1959, S1960, S1961.
R1957............................. R6/30/58, S1958, S1959, S1960,
S1961.
------------------------------------------------------------------------
(4) Computation of carryovers in case where date of distribution or
transfer occurs on last day of acquiring corporation's taxable year. The
computation of the capital loss carryovers from the distributor or
transferor corporation and from the acquiring corporation in a case
where the date of distribution or transfer occurs on the last day of a
taxable year of the acquiring corporation may be illustrated by the
following example:
Example. X and Y Corporations are organized on January 1, 1955, and
make their returns on the basis of the calendar year. On December 31,
1956, X Corporation transfers all its assets to Y Corporation in a
statutory merger to which section 361 applies. The net capital losses
and the net capital gains (capital gain net income for taxable years
beginning after December 31, 1976), (computed without regard to any
capital loss carryovers) of the two corporations are as follows:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1955......................................... ($20,000) ($2,000)
1956......................................... (10,000) (8,000)
1957......................................... ............ 25,000
1958......................................... ............ 10,000
------------------------------------------------------------------------
The sequence in which the net capital losses of X and Y Corporations are
applied, and the computation of the capital loss carryovers to Y
Corporation's taxable year 1959, may be illustrated as follows. (For
purposes of this example, the carryover from a preceding taxable year of
the transferor corporation will be applied before the carryover from the
same preceding taxable year of the acquiring corporation):
(i) X Corporation's 1955 loss. The carryover to 1959 is $0, computed
as follows:
Net capital loss............................................ $20,000
Less: Y's 1957 net capital gain (computed without regard to 25,000
any capital loss carryovers)...............................
-----------
Carryover to Y 1958 and Y 1959............................ 0
(ii) Y Corporation's 1955 loss. The carryover to 1959 is $0,
computed as follows:
Net capital loss............................................. $2,000
Less:
Y's 1957 net capital gain (computed without $25,000
regard to any capital loss carryovers)........
Minus capital loss carryovers to Y 1957 (i.e., 20,000
carryover of $20,000 from X 1955).............
------------
.......... 5,000
----------
Carryover to Y 1958 and Y 1959........................... 0
(iii) X Corporation's 1956 loss. The carryover to 1959 is $0,
computed as follows:
Net capital loss............................................ $10,000
Less:
Y's 1957 net capital gain (computed without $25,000
regard to any capital loss carryovers).......
Minus capital loss carryovers to Y 1957 (i.e., 22,000
carryovers of $20,000 from X 1955 and $2,000
from Y 1955).................................
------------
.......... 3,000
-----------
Carryover to Y 1958..................................... 7,000
Less:
Y's 1958 net capital gain (computed without $10,000
regard to any capital loss carryovers).......
Minus capital loss carryovers to Y 1958....... 0
------------
.......... 10,000
-----------
Carryover to Y 1959..................................... 0
(iv) Y Corporation's 1956 loss. The carryover to 1959 is $5,000,
computed as follows:
Net capital loss............................................. $8,000
Less:
Y's 1957 net capital gain (computed without $25,000
regard to any capital loss carryovers)........
Minus capital loss carryovers to Y 1957 (i.e., 32,000
carryovers of $20,000 from X 1955, $2,000 from
Y 1955, and $10,000 from X 1956)..............
------------
.......... 0
----------
Carryover to Y 1958...................................... 8,000
Less:
Y's 1958 net capital gain (computed without $10,000
regard to any capital loss carryovers)........
[[Page 602]]
Minus capital loss carryovers to Y 1958 (i.e., 7,000
carryover of $7,000 from X 1956)..............
------------
.......... 3,000
----------
Carryover to Y 1959...................................... 5,000
(e) Computation of carryovers when date of distribution or transfer
is not on last day of acquiring corporation's taxable year--(1) General
rule. If, in determining under paragraph (d) of this section the portion
of a net capital loss for any taxable year which is carried over to a
succeeding taxable year, an intervening taxable year is a taxable year
of the acquiring corporation which includes, but does not end on, the
date of distribution or transfer, the capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) of such
intervening year shall be determined by applying section 1212 in the
special manner provided by this paragraph.
(2) Taxable year considered as two taxable years. Such intervening
taxable year of the acquiring corporation shall be considered as though
it were two taxable years, but only for the limited purpose of computing
capital loss carryovers to subsequent taxable years. The first of such
two taxable years shall be referred to in this paragraph as the
preacquisition part year; the second, as the postacquisition part year.
Though considered as two separate taxable years for purposes of this
paragraph, the preacquisition part year and the postacquisition part
year are treated as one taxable year in determining the years to which a
net capital loss is carried under section 1212. See paragraph (d)(3) of
this section.
(3) Preacquisition part year. The preacquisition part year shall
begin with the beginning of such taxable year of the acquiring
corporation and shall end with the close of the date of distribution or
transfer.
(4) Postacquisition part year. The postacquisition part year shall
begin with the day following the date of distribution or transfer and
shall end with the close of such taxable year of the acquiring
corporation.
(5) Division of capital gain net income. The capital gain net income
(net capital gain for taxable years beginning before January 1, 1977)
for such intervening taxable year (computed without regard to any
capital loss carryovers) of the acquiring corporation shall be divided
between the preacquisition part year and the postacquisition part year
in proportion to the number of days in each. Thus, if in a statutory
merger to which section 361 applies Y Corporation acquires the assets of
X Corporation on June 30, 1956, and Y Corporation has net capital gain
(computed in the manner so prescribed) of $36,600 for its calendar year
1956, then the preacquisition part year capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) would
be $18,200 ($36,600 x 182/366) and the postacquisition part year capital
gain net income (net capital gain for taxable years beginning before
January 1, 1977) would be $18,400 ($36,600 x 184/366).
(6) Application of capital loss carryovers. After obtaining the
capital gain net income (net capital gain for taxable years beginning
before January 1, 1977) of the preacquisition part year and
postacquisition part year in the manner described in subparagraph (5) of
this paragraph, it is necessary to determine the capital loss carryovers
which are taken into account with respect to each such part year. The
carryovers to be taken into account and the sequence in which such
carryovers are applied, shall be determined in accordance with paragraph
(d)(1) of this section but subject to the provisions of this
subparagraph. With respect to the preacquisition part year, no capital
loss carryovers of the distributor or transferor corporation shall be
taken into account; that is, only capital loss carryovers of the
acquiring corporation shall be taken into account. With respect to the
postacquisition part year, capital loss carryovers of both the
distributor or transferor corporation and the acquiring corporation
shall be taken into account.
(7) Cross reference. If an intervening taxable year is a taxable
year of the acquiring corporation during which the acquiring corporation
succeeds to the capital loss carryovers of two or more distributor or
transferor corporations on two or more dates of distribution or
transfer, the capital gain net income
[[Page 603]]
(net capital gain for taxable years beginning before January 1, 1977) of
the acquiring corporation for such intervening taxable year shall be
determined consistently with the rules prescribed in paragraph (c) of
Sec. 1.381(c)(1)-2, except that the sequence in which the capital loss
carryovers of the distributor or transferor and acquiring corporations
shall be applied shall be determined under paragraph (d)(1) of this
section.
(8) Illustration. The application of this paragraph may be
illustrated as follows:
Example. X Corporation is organized on April 1, 1959, and makes its
return on the basis of the fiscal year ending March 31. Y Corporation is
organized on January 1, 1959, and makes its return on the basis of the
calendar year. On June 30, 1961, X Corporation transfers all its assets
to Y Corporation in a statutory merger to which section 361 applies. The
net capital losses and the net capital gains (capital gain net income
for taxable years beginning after December 31, 1976) (computed without
regard to any capital loss carryovers) of the two corporations are as
follows:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1959......................................... ............ ($24,000)
Ending 3-31-60............................... ($19,000)
1960......................................... ............ (6,000)
Ending 3-31-61............................... (5,000)
Ending 6-30-61............................... 0
1961......................................... ............ 36,500
1962......................................... ............ 12,000
------------------------------------------------------------------------
The following table shows those taxable years of the transferor and
acquiring corporations which, with respect to Y Corporation's calendar
year 1961, are first, second, and third preceding taxable years:
------------------------------------------------------------------------
Y
Taxable year X Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
First preceding year............... Ending June 30, 1961.. 1960
Second preceding year.............. Ending March 31, 1961. 1959
Third preceding year............... Ending March 31, 1960.
------------------------------------------------------------------------
The sequence in which the net capital losses of X and Y Corporations are
applied, and the computation of the capital loss carryovers to Y
Corporation's calendar year 1963, may be illustrated as follows. (For
purposes of this example, the carryover from a preceding taxable year of
the acquiring corporation will be applied before the carryover from the
same preceding taxable year of the transferor corporation):
(i) X Corporation's 3/31/60 loss. The carryover to 1963 is $0,
computed as follows:
Net capital loss............................................ $19,000
Less: Y's postacquisition part year net capital gain 18,400
computed under subparagraph (5) of this paragraph ($36,500
x 184/365).................................................
-----------
Carryover to Y 1962....................................... 600
Less: Y's 1962 net capital gain (computed without regard to 12,000
any capital loss carryovers)...............................
-----------
Carryover to Y 1963....................................... 0
(ii) Y Corporation's 1959 loss. The carryover to 1963 is $0,
computed as follows:
Net capital loss............................................ $24,000
Less: Y's preacquisition part year net capital gain computed 18,100
under subparagraph (5) of this paragraph ($36,500 x 181/
365).......................................................
-------------
Carryover to Y's postacquisition part year................ 5,900
Less:
Y's postacquisition part year net capital gain $18,400
computed under subparagraph (5) of this
paragraph....................................
Minus capital loss carryovers to 19,000 0
postacquisition part year (i.e., carryover of
$19,000 from X 3/31/60)......................
-----------------------
Carryover to Y 1962..................................... 5,900
Less:
Y's 1962 net capital gain (computed without $12,000
regard to any capital loss carryovers).......
Minus capital loss carryovers to Y 1962 (i.e., 600 11,400
carryover of $600 from X 3/31/60)............
-----------------------
Carryover to Y 1963..................................... 0
(iii) X Corporation's 3/31/61 loss. The carryover to 1963 is $0,
computed as follows:
Net capital loss............................................. $5,000
Less:
Y's postacquisition part year net capital gain $18,400
computed under subparagraph (5) of this
paragraph.....................................
Minus capital loss carryovers to 24,900
postacquisition part year (i.e., carryovers of
$19,000 from X 3/31/60 and $5,900 from Y 1959)
------------
.......... 0
----------
Carryover to Y 1962...................................... 5,000
Less:
Y's 1962 net capital gain (computed without $12,000
regard to any capital loss carryovers)........
Minus capital loss carryovers to Y 1962 (i.e., 6,500
carryovers of $600 from X 3/31/60 and $5,900
from Y 1959)..................................
------------
.......... 5,500
----------
Carryover to Y 1963...................................... 0
(iv) Y Corporation's 1960 loss. The carryover to 1963 is $5,500,
computed as follows:
Net capital loss............................................. $6,000
[[Page 604]]
Less:
Y's preacquisition part year net capital gain $18,100
computed under subparagraph (5) of this
paragraph.....................................
Minus capital loss carryovers to preacquisition 24,000
part year (i.e., carryover of $24,000 from Y
1959).........................................
------------
.......... 0
----------
Carryover to Y's postacquisition part year............... 6,000
Less:
Y's postacquisition part year net capital gain $18,400
computed under subparagraph (5) of this
paragraph.....................................
Minus capital loss carryovers to 29,900 0
postacquisition part year (i.e., carryovers of
$19,000 from X 3/31/60, $5,900 from Y 1959,
and $5,000 from X 3/31/61)....................
----------
.......... 0
----------
Carryover to Y 1962...................................... 6,000
Less:
Y's 1962 net capital gain (computed without $12,000
regard to any capital loss carryovers)........
Minus capital loss carryovers to Y 1962 (i.e., 11,5000
carryovers of $600 from X 3/31/60, $5,900 from
Y 1959, and $5,000 from X 3/31/61)............
------------
.......... $500
----------
Carryover to Y 1963...................................... 5,500
(f) Successive acquiring corporations. An acquiring corporation
which, in a transaction to which section 381(a) applies, acquires the
assets of a distributor or transferor corporation which previously
acquired the assets of another corporation in a transaction to which
section 381(a) applies, shall succeed to and take into account, subject
to the conditions and limitations of sections 1212 and 381, the capital
loss carryovers available to the first acquiring corporation under
sections 1212 and 381.
[T.D. 6552, 26 FR 1985, Mar. 8, 1961, as amended by T.D. 6867, 30 FR
15094, Dec. 12, 1965; T.D. 7728, 45 FR 72650, Nov. 3, 1980]
Sec. 1.381(c)(4)-1 Method of accounting.
(a) Introduction--(1) Purpose. This section provides guidance
regarding the method of accounting or combination of methods (other than
inventory and depreciation methods) an acquiring corporation must use
following a distribution or transfer to which sections 381(a) and
381(c)(4) apply and how to implement any associated change in method of
accounting. See Sec. 1.381(c)(5)-1 for guidance regarding the inventory
method an acquiring corporation must use following a distribution or
transfer to which sections 381(a) and 381(c)(5) apply. See Sec.
1.381(c)(6)-1 for guidance regarding the depreciation method an
acquiring corporation must use following a distribution or transfer to
which sections 381(a) and 381(c)(6) apply.
(2) Carryover method requirement for separate and distinct trades or
businesses. In a transaction to which section 381(a) applies, if an
acquiring corporation continues to operate a trade or business of the
parties to the section 381(a) transaction as a separate and distinct
trade or business after the date of distribution or transfer, the
acquiring corporation must use a carryover method as defined in
paragraph (b)(5) of this section for each continuing trade or business,
unless either the carryover method is impermissible and must be changed
under paragraph (a)(4) of this section or the acquiring corporation
changes the carryover method in accordance with paragraph (a)(5) of this
section. The carryover method requirement applies to the overall method
of accounting (for example, an accrual method of accounting) and any
special method of accounting (for example, the percentage of completion
method of accounting described in section 460) as defined in paragraph
(b)(2) of this section used by each trade or business after the date of
distribution or transfer. The acquiring corporation need not secure the
Commissioner's consent to continue a carryover method.
(3) Principal method requirement for trades or businesses not
operated as separate and distinct trades or businesses. In a transaction
to which section 381(a) applies, if an acquiring corporation does not
operate the trades or businesses of the parties to the section 381(a)
transaction as separate and distinct trades or businesses after the date
of distribution or transfer, the acquiring corporation must use a
principal method determined under paragraph (c) of this section, unless
either the principal method is impermissible and must be changed under
paragraph
[[Page 605]]
(a)(4) of this section or the acquiring corporation changes the
principal method in accordance with paragraph (a)(5) of this section.
The principal method requirement applies to the overall method of
accounting (for example, the cash receipts and disbursements method of
accounting) and any special method of accounting (for example, the
installment method under section 453) as defined in paragraph (b)(2) of
this section used by each integrated trade or business after the date of
distribution or transfer. The acquiring corporation must change to a
principal method in accordance with paragraph (d)(1) of this section for
each integrated trade or business and need not secure the Commissioner's
consent to use a principal method.
(4) Carryover method or principal method not a permissible method.
If a carryover method or principal method is not a permissible method of
accounting, the acquiring corporation must secure the Commissioner's
consent to change to a permissible method of accounting as provided in
paragraph (d)(2) of this section. If the acquiring corporation must use
a single method of accounting for a particular item after the date of
distribution or transfer regardless of the number of separate and
distinct trades or businesses operated on that date, the acquiring
corporation must use the principal method for that item as determined
under paragraph (c) of this section, unless either the principal method
is impermissible and must be changed under this paragraph (a)(4) or the
acquiring corporation changes the principal method in accordance with
paragraph (a)(5) of this section.
(5) Voluntary change. Any party to a section 381(a) transaction may
request permission under section 446(e) to change a method of accounting
for the taxable year in which the transaction occurs or is expected to
occur. For trades or businesses that will not operate as separate and
distinct trades or businesses after the date of distribution or
transfer, a change in method of accounting for the taxable year that
includes that date will be granted only if the requested method is the
method that the acquiring corporation must use after the date of
distribution or transfer. The time and manner of obtaining the
Commissioner's consent to change to a different method of accounting is
described in paragraph (d)(2) of this section.
(6) Examples. The following examples illustrate the rules of this
paragraph (a). Unless otherwise noted, the carryover method is a
permissible method of accounting.
Example (1). Carryover method for separate and distinct trades or
businesses after the date of distribution or transfer. (i) Facts. X
Corporation operates an employment agency that uses the overall cash
receipts and disbursements method of accounting. T Corporation operates
an educational institution that uses an overall accrual method of
accounting. X Corporation acquires the assets of T Corporation in a
transaction to which section 381(a) applies. After the date of
distribution or transfer, X Corporation operates the employment agency
as a trade or business that is separate and distinct from the
educational institution.
(ii) Conclusion. Because after the date of distribution or transfer
X Corporation operates the employment agency as a separate and distinct
trade or business, under paragraph (a)(2) of this section X Corporation
must use the carryover method for each continuing trade or business,
unless either the carryover method is impermissible and must be changed
under paragraph (a)(4) of this section or X Corporation changes the
carryover method in accordance with paragraph (a)(5) of this section. As
defined in paragraph (b)(5) of this section, the carryover method for
the employment agency is the cash receipts and disbursements method of
accounting and the carryover method for the educational institution is
the accrual method of accounting used by T Corporation immediately prior
to the date of distribution or transfer. There is no change in method of
accounting, and X Corporation need not secure the Commissioner's consent
to use either carryover method.
Example (2). Carryover method for a special method of accounting.
(i) Facts. X Corporation provides personal grooming consulting and T
Corporation provides weight management consulting. Both X Corporation
and T Corporation use the same overall accrual method of accounting. X
Corporation has elected to use the recurring item exception under Sec.
1.461-5. T Corporation does not use the recurring item exception. X
Corporation acquires the assets of T Corporation in a transaction to
which section 381(a) applies. After the date of distribution or
transfer, X Corporation operates the personal grooming consulting
business as a trade or business that is separate and distinct from the
weight management consulting business.
[[Page 606]]
(ii) Conclusion. Because after the date of distribution or transfer,
X Corporation operates the personal grooming consulting business as a
separate and distinct trade or business, under paragraph (a)(2) of this
section X Corporation must use a carryover method for each continuing
trade or business, unless either the carryover method is impermissible
and must be changed under paragraph (a)(4) of this section or X
Corporation changes the carryover method in accordance with paragraph
(a)(5) of this section. As defined in paragraph (b)(5) of this section,
the carryover method for the overall method of accounting for each trade
or business is the accrual method used immediately prior to the date of
distribution or transfer. The carryover method for the special method of
accounting for the personal grooming consulting business is the
recurring item exception under Sec. 1.461-5 while the carryover method
for the weight management consulting business is not to use the
recurring item exception under Sec. 1.461-5. There is no change in
method of accounting, and X Corporation need not secure the
Commissioner's consent to use the carryover methods of accounting.
Example (3). Carryover method for a special method of accounting not
permissible. (i) Facts. X Corporation is an engineering firm that uses
the overall cash receipts and disbursements method of accounting and has
elected under section 171 to amortize bond premium with respect to its
taxable bonds acquired at a premium. T Corporation is a manufacturer
that uses an overall accrual method of accounting and has not made a
section 171 election to amortize bond premium with respect to its
taxable bonds acquired at a premium. X Corporation acquires the assets
of T Corporation in a transaction to which section 381(a) applies. After
the date of distribution or transfer, X Corporation operates the
engineering firm as a trade or business that is separate and distinct
from the manufacturing business.
(ii) Conclusion. Because after the date of distribution or transfer
X Corporation operates the engineering firm as a separate and distinct
trade or business, under paragraph (a)(2) of this section X Corporation
must use a carryover method for each continuing trade or business,
unless either the carryover method is impermissible and must be changed
under paragraph (a)(4) of this section or X Corporation changes the
carryover method in accordance with paragraph (a)(5) of this section. As
defined in paragraph (b)(5) of this section, the carryover method for
the overall method of accounting for the engineering firm is the cash
receipts and disbursements method used by X Corporation immediately
prior to the date of distribution or transfer, and the carryover method
for the overall method of accounting for the manufacturing business is
the accrual method used by T Corporation immediately prior to the date
of distribution or transfer. There is no change in method of accounting,
and X Corporation need not secure the Commissioner's consent to use
either carryover method. Notwithstanding that after the date of
distribution or transfer X Corporation has two separate and distinct
trades or businesses, X Corporation is permitted only one method of
accounting for amortizable bond premium under section 171. Because after
the date of distribution or transfer X Corporation must use a single
method of accounting for bond premium for all trades or businesses, X
Corporation must use the principal method for that item as determined
under paragraph (c) of this section, unless either the principal method
is impermissible and must be changed under paragraph (a)(4) of this
section or X Corporation changes that method in accordance with
paragraph (a)(5) of this section. X Corporation must change to the
principal method in accordance with paragraph (d)(1) of this section. If
amortizing bond premium is not the principal method, X Corporation may
make an election to amortize bond premium to the extent permitted by
section 171. See paragraph (e)(2) of this section for rules on making
elections.
(b) Definitions. For purposes of this section--
(1) Method of accounting. A method of accounting has the same
meaning as provided in section 446 and any applicable Income Tax
Regulations.
(2) Special method of accounting. A special method of accounting is
a method expressly permitted or required by the Internal Revenue Code,
Income Tax Regulations, or administrative guidance published in the
Internal Revenue Bulletin that deviates from the normal application of
the cash receipts and disbursements method or an accrual method of
accounting. The installment method under section 453, the mark-to-market
method under section 475, the amortization of bond premium under section
171, the percentage of completion method under section 460, the
recurring item exception of Sec. 1.461-5, and the income deferral
methods under section 455 and Sec. 1.451-5 are examples of special
methods of accounting. See Sec. 1.446-1(c)(1)(iii).
(3) Adoption of a method of accounting. Adoption of a method of
accounting has the same meaning as provided in Sec. 1.446-1(e)(1).
(4) Change in method of accounting. A change in method of accounting
has the same meaning as provided in Sec. 1.446-1(e)(2).
[[Page 607]]
(5) Carryover method. A carryover method for the overall method of
accounting is the overall method of accounting that each party to a
section 381(a) transaction uses for each separate and distinct trade or
business immediately prior to the date of distribution or transfer. The
carryover method for a special method of accounting for an item is the
special method of accounting for that item that each party to a section
381(a) transaction uses for each separate and distinct trade or business
immediately prior to the date of distribution or transfer.
(6) Principal method. A principal method is an overall or special
method of accounting that is determined under paragraph (c) of this
section.
(7) Permissible method of accounting. A permissible method of
accounting is a method of accounting that is proper or permitted under
the Internal Revenue Code or any applicable Income Tax Regulations.
(8) Acquiring corporation. An acquiring corporation has the same
meaning as provided in Sec. 1.381(a)-1(b)(2).
(9) Distributor corporation. A distributor corporation means the
corporation, foreign or domestic, that distributes its assets to another
corporation described in section 332(b) in a distribution to which
section 332 (relating to liquidations of subsidiaries) applies.
(10) Transferor corporation. A transferor corporation means the
corporation, foreign or domestic, that transfers its assets to another
corporation in a transfer to which section 361 (relating to
nonrecognition of gain or loss to corporations) applies, but only if--
(i) The transfer is in connection with a reorganization described in
section 368(a)(1)(A), (a)(1)(C), or (a)(1)(F), or
(ii) The transfer is in connection with a reorganization described
in section 368(a)(1)(D) or (a)(1)(G), provided the requirements of
section 354(b) are met.
(11) Parties to the section 381(a) transaction. Parties to the
section 381(a) transaction means the acquiring corporation and the
distributor or transferor corporation that participate in a transaction
to which section 381(a) applies.
(12) Date of distribution or transfer. The date of distribution or
transfer has the same meaning as provided in section 381(b)(2) and Sec.
1.381(b)-1(b).
(13) Separate and distinct trades or businesses. Separate and
distinct trades or businesses has the same meaning as provided in Sec.
1.446-1(d).
(14) Gross receipts. Gross receipts means all the receipts,
including amounts that are excludible from gross income, that must be
taken into account under the method of accounting used in a
representative period (determined without regard to this section) for
federal income tax purposes. For example, gross receipts includes income
from investments, amounts received for services, rents, total sales (net
of returns and allowances), and both taxable and tax-exempt interest.
See paragraph (e)(5) of this section for rules on determining the
representative period.
(15) Audit protection. Audit protection means, for purposes of
paragraph (d)(1) of this section, that the IRS will not require an
acquiring corporation that is required to change a method of accounting
under paragraph (a)(3) of this section to change that method for a
taxable year ending prior to the taxable year that includes the date of
distribution or transfer.
(16) Section 481(a) adjustment. The section 481(a) adjustment means
an adjustment that must be taken into account as required under section
481(a) to prevent amounts from being duplicated or omitted when the
taxable income of an acquiring corporation is computed under a method of
accounting different from the method used to compute taxable income for
the preceding taxable year.
(17) Cut-off basis. A cut-off basis means a manner in which a change
in method of accounting is made without a section 481(a) adjustment and
under which only the items arising after the beginning of the year of
change (or, in the case of a change made under paragraph (d)(1) of this
section, after the date of distribution or transfer) are accounted for
under the new method of accounting.
(18) Adjustment period. The adjustment period means the number of
taxable years for taking into account the section 481(a) adjustment
required as a
[[Page 608]]
result of a change in method of accounting.
(19) Component trade or business. A component trade or business is a
trade or business of a party to the section 381(a) transaction that will
be combined and integrated with a trade or business of the other party
to the section 381 transaction. See paragraph (e)(4)(ii) of this section
for the determination of whether a trade or business is operated as a
separate and distinct trade or business after the date of distribution
or transfer.
(c) Principal method--(1) In general. For each integrated trade or
business, the principal method is generally the method of accounting
used by the component trade or business of the acquiring corporation
immediately prior to the date of distribution or transfer. If, however,
the component trade or business of the distributor or transferor
corporation is larger than the component trade or business of the
acquiring corporation on the date of distribution or transfer, the
principal method is the method used by the component trade or business
of the distributor or transferor corporation immediately prior to that
date. If the larger component trade or business does not have a special
method of accounting for a particular item immediately prior to the date
of distribution or transfer, the principal method for that item is the
method of accounting used by the component trade or business that does
have a special method of accounting for that item. See paragraph (e)(9)
of this section for special rules concerning methods of accounting that
are elected on a project-by-project, job-by-job, or other similar basis.
For each integrated trade or business, the component trade or business
of the distributor or transferor corporation is larger than the
component trade or business of the acquiring corporation on the date of
distribution or transfer if--
(i) The aggregate of the adjusted bases of the assets held by each
component trade or business of the distributor or transferor corporation
(determined under section 1011 and any applicable Income Tax
Regulations) exceeds the aggregate of the adjusted bases of the assets
of each component trade or business of the acquiring corporation
immediately prior to the date of distribution or transfer, and
(ii) The aggregate of the gross receipts for a representative period
of each component trade or business of the distributor or transferor
corporation exceeds the aggregate of the gross receipts for the same
period of each component trade or business of the acquiring corporation.
See paragraph (e)(5) of this section for rules on determining the
representative period.
(2) Multiple component trades or businesses with different principal
methods. If a party to the section 381(a) transaction has multiple
component trades or businesses and more than one principal overall
method of accounting or more than one principal special method of
accounting for an item, then the acquiring corporation may choose which
of the principal methods of accounting used by such component trades or
businesses will be the principal methods of the integrated trade or
business. The acquiring corporation must choose a principal method that
is a permissible method of accounting. In general, a change to a
principal method in a transaction to which section 381(a) and paragraph
(a)(3) of this section applies is made under paragraph (d)(1) of this
section.
(3) Examples. The following examples illustrate the rules of this
paragraph (c). Unless otherwise noted, the principal method is a
permissible method of accounting.
Example (1). Principal method is the method used by the acquiring
corporation. (i) Facts. X Corporation and T Corporation each operate an
employment agency. X Corporation uses the overall cash receipts and
disbursements method of accounting, and T Corporation uses an overall
accrual method of accounting. X Corporation acquires the assets of T
Corporation in a transaction to which section 381(a) applies. The
adjusted bases of the assets in X Corporation's employment agency
immediately prior to the date of distribution or transfer exceed the
adjusted bases of the assets in T Corporation's employment agency, and
the gross receipts in X Corporation's employment agency for the
representative period exceed the gross receipts of T Corporation's
employment agency for the period. After the date of distribution or
transfer, X Corporation's employment agency will not be operated as a
trade or business that is separate and distinct from T Corporation's
employment agency.
[[Page 609]]
(ii) Conclusion. Because after the date of distribution or transfer
X Corporation will not operate its employment agency as a separate and
distinct trade or business, X Corporation must use a principal method
under paragraph (a)(3) of this section, unless either the principal
method is impermissible and must be changed under paragraph (a)(4) of
this section or X Corporation changes the principal method in accordance
with paragraph (a)(5) of this section. Because on the date of
distribution or transfer T Corporation's employment agency is not larger
than X Corporation's employment agency, the principal method for the
overall method of accounting is the cash receipts and disbursements
method used by X Corporation's employment agency. X Corporation need not
secure the Commissioner's consent to use this method of accounting.
However, in accordance with paragraph (d)(1) of this section, X
Corporation must change the method of accounting for the employment
agency acquired from T Corporation to the cash receipts and
disbursements method.
Example (2). Principal method is the method used by the acquiring
corporation. (i) Facts. The facts are the same as in Example (1), except
that the gross receipts of T Corporation's employment agency for the
representative period exceed the gross receipts of X Corporation's
employment agency for the period.
(ii) Conclusion. The result is the same as in Example (1). Although
the gross receipts of T Corporation's employment agency exceed the gross
receipts of X Corporation's employment agency, T Corporation's
employment agency is not larger than X Corporation's employment agency
because the adjusted bases of the assets of T Corporation's employment
agency do not exceed the adjusted bases of the assets of X Corporation's
employment agency. Thus, the principal method for the overall method of
accounting is the cash receipts and disbursements method of accounting
used by X Corporation's employment agency immediately prior to the date
of distribution or transfer. X Corporation need not secure the
Commissioner's consent to use this method of accounting. However, in
accordance with paragraph (d)(1) of this section, X Corporation must
change the method of accounting for the employment agency business
acquired from T Corporation to the cash receipts and disbursements
method.
Example (3). Principal method is the method used by the distributor
or transferor corporation. (i) Facts. The facts are the same as in
Example (2), except that the adjusted bases of the assets held by T
Corporation's employment agency immediately prior to the date of
distribution or transfer exceed the adjusted bases of the assets held by
X Corporation's employment agency.
(ii) Conclusion. The principal method for the overall method of
accounting is the accrual method of accounting used by T Corporation's
employment agency immediately prior to the date of distribution or
transfer because on the date of distribution or transfer T Corporation's
employment agency is larger than X Corporation's employment agency. The
adjusted bases of the assets of T Corporation's employment agency exceed
the adjusted bases of the assets of X Corporation's employment agency,
and the gross receipts of T Corporation's employment agency exceed the
gross receipts of X Corporation's employment agency. X Corporation need
not secure the Commissioner's consent to use this method of accounting.
However, in accordance with paragraph (d)(1) of this section, X
Corporation must change the method of accounting for the employment
agency business it operated prior to the date of distribution or
transfer to the accrual method of accounting used by T Corporation's
employment agency immediately prior to the date of distribution or
transfer.
Example (4). Impermissible principal method. (i) Facts. The facts
are the same as in Example (1), except that X Corporation is prohibited
under section 448 from using the cash receipts and disbursements method
of accounting after the date of distribution or transfer.
(ii) Conclusion. Because section 448 prohibits X Corporation from
using the cash receipts and disbursements method of accounting, X
Corporation is not permitted to use the principal method for the overall
method of accounting as determined in Example (1). Because after the
date of distribution or transfer that method is not a permissible
method, under paragraph (a)(4) of this section X Corporation must secure
the Commissioner's consent to change to a permissible method in
accordance with the procedures set forth in paragraph (d)(2) of this
section.
Example (5). Voluntary change not allowable. (i) Facts. The facts
are the same as in Example (4), except that T Corporation wants to
discontinue using the overall accrual method of accounting for its
employment agency and change to the cash receipts and disbursements
method for the taxable year in which the section 381(a) transaction
occurs or is expected to occur.
(ii) Conclusion. Under paragraph (a)(5) of this section, the
Commissioner will grant a request to change a method of accounting for
the taxable year that includes the date of distribution or transfer only
if the requested method is the method that the acquiring corporation
must use after the date of distribution or transfer. The Commissioner
will not consent to a request by T Corporation to change to the cash
receipts and disbursements method for the taxable year in which the
section 381(a) transaction occurs or is expected to occur because X
Corporation cannot use the cash receipts and disbursements
[[Page 610]]
method after the date of distribution or transfer.
Example (6). Principal methods are the acquiring corporation's
methods. (i) Facts. X Corporation and T Corporation each publishes
magazines. X Corporation acquires the assets of T Corporation in a
transaction to which section 381(a) applies. Both X Corporation and T
Corporation use an overall accrual method of accounting. X Corporation
has elected to defer income from its subscription sales under section
455. T Corporation has not elected to defer income from its subscription
sales under section 455 and instead has recognized the income from these
sales in accordance with section 451. The adjusted bases of the assets
in X Corporation's publication business immediately prior to the date of
distribution or transfer exceed the adjusted bases of the assets in T
Corporation's publication business, and the gross receipts in X
Corporation's publication business for the representative period exceed
the gross receipts in T Corporation's publication business for the
representative period. After the date of distribution or transfer, X
Corporation will not operate its publication business as a trade or
business that is separate and distinct from T Corporation's publication
business.
(ii) Conclusion. Because after the date of distribution or transfer
X Corporation will not operate its publication business as a separate
and distinct trade or business, X Corporation must use the principal
method under paragraph (a)(3) of this section, unless either the
principal method is impermissible and must be changed under paragraph
(a)(4) of this section or X Corporation changes the principal method in
accordance with paragraph (a)(5) of this section. The adjusted bases of
the assets in T Corporation's publication business do not exceed the
adjusted bases of the assets in X Corporation's publication business,
and the gross receipts in T Corporation's publication business do not
exceed the gross receipts in X Corporation's publication business.
Because on the date of distribution or transfer T Corporation's
publication business is not larger than X Corporation's publication
business, the principal method for the overall method of accounting is
the accrual method used by X Corporation's publication business
immediately prior to the date of distribution or transfer. The principal
method for subscription sales is the section 455 deferral method used by
X Corporation immediately prior to the date of distribution or transfer.
X Corporation need not secure the Commissioner's consent to use the
principal method for either the overall method of accounting or the
special method of accounting. However, in accordance with paragraph
(d)(1) of this section, X Corporation must change both the overall
method of accounting and the special method of accounting for the
publication business acquired from T Corporation to the accrual method
and the section 455 deferral method used by X Corporation immediately
prior to the date of distribution or transfer.
Example (7). Principal methods are the acquiring corporation's
methods. (i) Facts. The facts are the same as in Example (6), except
that the adjusted bases of the assets in T Corporation's publication
business immediately prior to the date of distribution or transfer
exceed the adjusted bases of the assets in X Corporation's business.
(ii) Conclusion. The result is the same as in Example (6). Because
on the date of distribution or transfer T Corporation's publication
business is not larger than X Corporation's publication business, the
principal method for the overall method of accounting is the accrual
method used by X Corporation's publication business immediately prior to
the date of distribution or transfer. The principal method for
subscription sales is the section 455 deferral method used by X
Corporation immediately prior to the date of distribution or transfer. X
Corporation need not secure the Commissioner's consent to use the
principal method for either the overall method of accounting or the
special method of accounting. However, in accordance with paragraph
(d)(1) of this section, X Corporation must change both the overall
method of accounting and the special method of accounting for the
publication business acquired from T Corporation to the accrual method
and the section 455 deferral method used by X Corporation immediately
prior to the date of distribution or transfer.
Example (8). Principal method determination when larger component
trade or business does not have a special method of accounting. (i)
Facts. X Corporation and T Corporation both install ice skating rinks.
Both X Corporation and T Corporation use an overall accrual method of
accounting for their respective businesses. X Corporation completes its
installation contracts within the contracting year and uses an accrual
method of accounting to recognize the revenue from its installation
contracts. T Corporation's installation contracts are subject to section
460, and T Corporation recognizes the revenue from such contracts under
the percentage-of-completion method. X Corporation acquires the assets
of T Corporation in a transaction to which section 381(a) applies. The
adjusted bases of the assets in X Corporation's installation business
immediately prior to the date of distribution or transfer exceed the
adjusted bases of the assets in T Corporation's installation business,
and the gross receipts in X Corporation's installation business for the
representative period exceed the gross receipts in T Corporation's
installation business for the representative period. After the date of
distribution or transfer, X Corporation will not operate its
installation
[[Page 611]]
business as a trade or business that is separate and distinct from T
Corporation's installation business.
(ii) Conclusion. Because after the date of distribution or transfer
X Corporation will not operate its installation business as a separate
and distinct trade or business, X Corporation must use a principal
method under paragraph (a)(3) of this section, unless either the
principal method is impermissible and must be changed under paragraph
(a)(4) of this section or X Corporation changes the principal method in
accordance with paragraph (a)(5) of this section. The adjusted bases of
the assets in T Corporation's installation business do not exceed the
adjusted bases of the assets in X Corporation's installation business,
and the gross receipts in T Corporation's installation business do not
exceed the gross receipts in X Corporation's installation business.
Because on the date of distribution or transfer T Corporation's
installation business is not larger than X Corporation's installation
business, the principal method for the overall method of accounting is
the accrual method used by X Corporation's installation business
immediately prior to the date of distribution or transfer. X Corporation
need not secure the Commissioner's consent to use the principal method
for the overall method of accounting. However, in accordance with
paragraph (d)(1) of this section, X Corporation must change the overall
method of accounting for the installation business acquired from T
Corporation to the accrual method used by X Corporation. Under paragraph
(c) of this section, the principal method for T Corporation's long-term
contracts is the percentage-of-completion method used by T Corporation
immediately prior to the date of distribution or transfer because X
Corporation's installation business does not have a method of accounting
for long-term contracts. There is no change in method of accounting, and
X Corporation need not secure the Commissioner's consent to use T
Corporation's percentage-of-completion method.
Example (9). Principal method determination with a combined trade or
business and a separate and distinct trade or business. (i) Facts. X
Corporation operates a tennis academy as a trade or business that is
separate and distinct from its trade or business of operating a golf
academy. X Corporation uses the overall cash receipts and disbursements
method of accounting for the tennis academy and an overall accrual
method of accounting for the golf academy. T Corporation operates a
tennis academy and uses an accrual method of accounting for the overall
method. X Corporation acquires the assets of T Corporation in a
transaction to which section 381(a) applies. After the date of
distribution or transfer, X Corporation will not operate its tennis
academy as a trade or business that is separate and distinct from T
Corporation's tennis academy. X Corporation will continue to operate its
golf academy as a trade or business that is separate and distinct from
the operation of the tennis academy. The adjusted bases of the assets in
T Corporation's tennis academy exceed the adjusted bases of the assets
in X Corporation's tennis academy immediately prior to the date of
distribution or transfer. The gross receipts of T Corporation's tennis
academy for the representative period exceed the gross receipts of X
Corporation's tennis academy for that period.
(ii) Conclusion. Because after the date of distribution or transfer
X Corporation will not operate its tennis academy as a separate and
distinct trade or business, X Corporation must use a principal method
under paragraph (a)(3) of this section, unless either the principal
method is impermissible and must be changed under paragraph (a)(4) of
this section or X Corporation changes the principal method in accordance
with paragraph (a)(5) of this section. Because on the date of
distribution or transfer the tennis academy operated by T Corporation is
larger than the tennis academy operated by X Corporation, the principal
method for the overall method of accounting for the combined tennis
academy business is the accrual method used by T Corporation's tennis
academy immediately prior to the date of distribution or transfer. X
Corporation need not secure the Commissioner's consent to use the
principal method for the overall method of accounting. However, in
accordance with paragraph (d)(1) of this section, X Corporation must
change the method of accounting for its tennis academy to the accrual
method. Because X Corporation will operate the golf academy as a
separate trade or business, under paragraph (a)(2) of this section X
Corporation must continue to use the accrual method that it used
immediately prior to the date of distribution or transfer as the
carryover method for the golf academy. There is no change in method of
accounting, and X Corporation need not secure the Commissioner's consent
to use the carryover method.
Example (10). Principal method determination with multiple component
trades or businesses. (i) Facts. The facts are the same as in Example
(9), except that after the date of distribution or transfer X
Corporation will not operate its golf academy as a trade or business
that is separate and distinct from the tennis academy. In addition, X
Corporation's component trades or businesses are larger than T
Corporation's component trade or business: (1) the adjusted bases of the
assets of X Corporation's tennis academy and golf academy businesses, in
the aggregate, exceed the adjusted bases of the assets held by T
Corporation's tennis academy; and (2) the gross receipts for the
representative period of X Corporation's tennis academy and golf academy
businesses, in the aggregate, exceed the
[[Page 612]]
gross receipts in T Corporation's tennis academy.
(ii) Conclusion. Because on the date of distribution or transfer T
Corporation's tennis academy is not larger than X Corporation's combined
tennis academy and golf academy, the principal method for the overall
method of accounting is the method of accounting used by the component
trades or businesses of X Corporation that will be combined with T
Corporation's component trade or business on that date. Because on the
date of distribution or transfer X Corporation operates two component
trades or businesses with different overall methods of accounting that
will be integrated after the date of distribution or transfer, X
Corporation may choose under paragraph (c)(2) of this section which
overall method (and any special method of accounting) used by its
component trades or businesses will be the principal method. X
Corporation may choose to use either the accrual method used by the golf
academy or the cash receipts and disbursements method used by its tennis
academy as the principal method after the date of distribution or
transfer, if either method is a permissible method. In accordance with
paragraph (d)(1) of this section, X Corporation must change T
Corporation's overall method of accounting to the principal method.
Under paragraph (a)(3) of this section, X Corporation also must change
either its golf academy business or its tennis academy business,
depending on which principal method X Corporation selects, to the
principal method.
(d) Procedures for changing a method of accounting--(1) Change made
to principal method under paragraph (a)(3) of this section--(i) Section
481(a) adjustment--(A) In general. An acquiring corporation that changes
its method of accounting or the distributor or transferor corporation's
method of accounting under paragraph (a)(3) of this section does not
need to secure the Commissioner's consent to use the principal method.
To the extent the use of a principal method constitutes a change in
method of accounting, the change in method is treated as a change
initiated by the acquiring corporation for purposes of section
481(a)(2). Any change to a principal method, whether the change relates
to a trade or business of the acquiring corporation or a trade or
business of the distributor or transferor corporation, must be reflected
on the acquiring corporation's federal income tax return for the taxable
year that includes the date of distribution or transfer. The amount of
the section 481(a) adjustment and the adjustment period, if any,
necessary to implement a change to the principal method are determined
under Sec. 1.446-1(e) and the applicable administrative procedures that
govern voluntary changes in methods of accounting under section 446(e).
If the Internal Revenue Code, the Income Tax Regulations, or
administrative procedures require that a method of accounting be
implemented on a cut-off basis, the acquiring corporation must implement
the change on a cut-off basis as of the date of distribution or transfer
on its federal income tax return for the taxable year that includes the
date of distribution or transfer. If the Internal Revenue Code, the
Income Tax Regulations, or administrative procedures require a section
481(a) adjustment, the acquiring corporation must determine the section
481(a) adjustment and include the appropriate amount of the section
481(a) adjustment on its federal income tax return for the taxable year
that includes the date of distribution or transfer and subsequent
taxable year(s), as necessary. This adjustment is determined by the
acquiring corporation as of the beginning of the day that is immediately
after the date of distribution or transfer.
(B) Example. The following example illustrates the rules of this
paragraph (d)(1)(i):
Example. X Corporation uses the overall cash receipts and
disbursements method of accounting, and T Corporation uses an overall
accrual method of accounting. X Corporation acquires the assets of T
Corporation in a transaction to which section 381(a) applies. X
Corporation determines that under the rules of paragraph (c)(1) of this
section X Corporation must change the method of accounting for the
business acquired from T Corporation to the cash receipts and
disbursements method. X Corporation will determine the section 481(a)
adjustment pertaining to the change to the cash receipts and
disbursements method by consolidating the adjustments (whether the
amounts thereof represent increases or decreases in items of income or
deductions) arising with respect to balances in the various accounts,
such as accounts receivable, as of the beginning of the day that
immediately follows the day on which X Corporation acquires the assets
of T Corporation. X Corporation will reflect this adjustment, or an
appropriate part thereof, on its federal income tax return for the
taxable year that includes the date of distribution or transfer.
[[Page 613]]
(ii) Audit protection. Notwithstanding any other provision in any
other Income Tax Regulation or administrative procedure, no audit
protection is provided for any change in method of accounting under
paragraph (d)(1) of this section.
(iii) Other terms and conditions. Except as otherwise provided in
this section, other terms and conditions provided in Sec. 1.446-1(e)
and the applicable administrative procedures for voluntary changes in
method of accounting under section 446(e) apply to a change in method of
accounting under this section. Thus, for example, if the administrative
procedures for a particular change in method of accounting have a term
and condition that provides for the acceleration of the section 481(a)
adjustment period, this term and condition applies to a change made
under this paragraph (d)(1). However, any scope limitation in the
applicable administrative procedures will not apply for purposes of
making a change under this paragraph (d)(1). For example, if the
administrative procedures provide as a limitation that an identical
change in method of accounting is barred for a period of years, this
limitation will not bar a change to the principal method made under this
section.
(2) Change made to a method of accounting under paragraph (a)(4) or
(a)(5) of this section--(i) In general. A party to a section 381(a)
transaction that changes a method of accounting under either paragraph
(a)(4) or paragraph (a)(5) of this section must follow the provisions of
Sec. 1.446-(1)(e) and the applicable administrative procedures,
including scope limitations, for voluntary changes in method of
accounting under section 446(e), except as provided in paragraphs
(d)(2)(ii) and (d)(2)(iii) of this section. An application on Form 3115,
``Application for Change in Accounting Method,'' filed with the IRS to
change a method of accounting under this paragraph (d)(2) should be
labeled ``Filed under section 381(c)(4)'' at the top.
(ii) Final year limitation. Any scope limitation relating to the
final year of a trade or business will not apply to a taxpayer that
changes its method of accounting in the final year of a trade or
business that is terminated as the result of a section 381(a)
transaction.
(iii) Time to file. Under the authority of Sec. 1.446-1(e)(3)(ii),
for a change in method of accounting requiring advance consent, the
application for a change in method of accounting (for example, Form
3115) must be filed with the IRS on or before the later of--
(A) The due date for filing a Form 3115 as specified in Sec. 1.446-
1(e), for example, the last day of the taxable year in which the
distribution or transfer occurred, or
(B) The earlier of--
(1) The day that is 180 days after the date of distribution or
transfer, or
(2) The day on which the acquiring corporation files its federal
income tax return for the taxable year in which the distribution or
transfer occurred.
(e) Rules and procedures--(1) No method of accounting. If a party to
a section 381(a) transaction is not using a method of accounting, does
not have a method of accounting for a particular item, or came into
existence as a result of the transaction, the party will not be treated
as having a method of accounting different from that used by another
party to the section 381(a) transaction.
(2) Elections and adoptions allowed. If an election does not require
the Commissioner's consent, an acquiring corporation or a distributor or
transferor corporation is not precluded from making any election that is
otherwise permissible for the taxable year that includes the date of
distribution or transfer. For purposes of this section, a corporation
shall be deemed as having made any election as of the first day of the
taxable year that includes the date of distribution or transfer.
Similarly, where adoption is permissible, an acquiring corporation or a
distributor or transferor corporation may adopt any permissible method
of accounting for the taxable year that includes the date of
distribution or transfer.
(3) Elections continue after section 381(a) transaction--(i) General
rule. An acquiring corporation is not required to renew any election not
otherwise requiring renewal and previously made by it or by a
distributor or transferor corporation for a carryover method or
[[Page 614]]
a principal method if the acquiring corporation uses the method after
the section 381(a) transaction. If the acquiring corporation uses a
method after the date of distribution or transfer, an election made by
the acquiring corporation or by a distributor or transferor corporation
for that method that was in effect on the date of distribution or
transfer continues after the section 381(a) transaction as though the
distribution or transfer had not occurred.
(ii) Example. The following example illustrates the rules of this
paragraph (e)(3):
Example. The acquiring corporation, X Corporation, previously
elected to amortize bond premium under section 171. X Corporation
acquires the assets of T Corporation in a transaction to which section
381(a) applies. X Corporation determines under the rules of paragraph
(c)(1) of this section that X Corporation's method of amortizing bond
premium is the principal method. After the date of distribution or
transfer, X Corporation is not required to renew its bond premium
amortization election and is bound by it. Additionally, X Corporation
would not be required to renew its election to amortize bond premium if
the method were the carryover method under paragraph (a)(2) of this
section.
(4) Appropriate times for certain determinations--(i) Determining
the method of accounting. The method of accounting used by a party to a
section 381(a) transaction on the date of distribution or transfer is
the method of accounting used by that party as of the end of the day
that is immediately prior to the date of distribution or transfer.
(ii) Determining whether there are separate and distinct trades or
businesses after the date of distribution or transfer. Whether an
acquiring corporation will operate the trades or businesses of the
parties to a section 381(a) transaction as separate and distinct trades
or businesses after the date of distribution or transfer will be
determined as of the date of distribution or transfer based upon the
facts and circumstances. Intent to combine books and records of the
trades or businesses may be demonstrated by contemporaneous records and
documents or by other objective evidence that reflects the acquiring
corporation's ultimate plan of operation, even though the actual
combination of the books and records may extend beyond the end of the
taxable year that includes the date of distribution or transfer.
(5) Representative period for aggregating gross receipts. The
representative period for measuring gross receipts is generally the 12
consecutive months preceding the date of distribution or transfer. If a
component trade or business was not in existence for the 12 consecutive
months preceding the date of distribution or transfer, then all
component trades or businesses of each integrated trade or business will
compare their gross receipts for the period that such trade or business
was in existence. For example, if the acquiring corporation's component
trade or business was formed in August and the date of distribution or
transfer occurred in December of the same year, the gross receipts for
those five months will be compared with the gross receipts of the other
component trades or businesses for the same period.
(6) Establishing a method of accounting. A method of accounting used
by the distributor or transferor corporation immediately prior to the
date of distribution or transfer that continues to be used by the
acquiring corporation after the date of distribution or transfer is an
established method of accounting for purposes of section 446(e), whether
or not such method is proper or is permitted under the Internal Revenue
Code or any applicable Income Tax Regulations.
(7) Other applicable provisions. This section does not preempt any
other provision of the Internal Revenue Code or the Income Tax
Regulations that is applicable to the acquiring corporation's
circumstances. For example, income, deductions, credits, allowances, and
exclusions may be allocated among the parties to a section 381(a)
transaction and other taxpayers under sections 269 and 482, if
appropriate. Similarly, transfers of contracts accounted for using a
long-term contract method of accounting are governed by the rules
provided in Sec. 1.460-4(k). Further, if other paragraphs of section
381(c) apply for purposes of determining the methods of accounting to be
used following the date of distribution or transfer, section 381(c)(4)
and this Sec. 1.381(c)(4)-1 will not apply to the tax treatment of
[[Page 615]]
the items. For example, this section does not apply to inventories that
an acquiring corporation obtains in a transaction to which section
381(a) applies. Instead, the rules of section 381(c)(5) govern the
inventory method to be used by the acquiring corporation after the
distribution or transfer. Similarly, if the acquiring corporation
assumes an obligation of the distributor or transferor corporation that
gives rise to a liability after the date of distribution or transfer and
to which Sec. 1.381(c)(16)-1 applies, the deductibility of the item is
determined under this section only after the rules of section 381(c)(16)
are applied.
(8) Character of items of income and deduction. After the date of
distribution or transfer, items of income and deduction have the same
character in the hands of the acquiring corporation as they would have
had in the hands of the distributor or transferor corporation if no
distribution or transfer had occurred.
(9) Method of accounting selected by project or job. If other
sections of the Internal Revenue Code, Income Tax Regulations, or other
administrative guidance permit an acquiring corporation to elect a
method of accounting on a project-by-project, job-by-job, or other
similar basis, then for purposes of this section the method elected with
respect to each project or job is the established method only for that
project or job. For example, the election under section 460 to classify
a contract to perform both manufacturing and construction activities as
a long-term construction contract if at least 95 percent of the
estimated total allocable contract costs are reasonably allocated to the
construction activities is made on a contract-by-contract basis.
Accordingly, the method of accounting previously elected for a project
or job generally continues after the date of distribution or transfer.
However, if the trades or businesses of the parties to a section 381(a)
transaction are not operated as separate and distinct trades or
businesses after the date of distribution or transfer, and two or more
of the parties to the section 381(a) transaction previously worked on
the same project or job and used different methods of accounting for the
project or job immediately before the distribution or transfer, then the
acquiring corporation must determine the principal method for that
project or job under paragraph (c) of this section and make changes, if
necessary, to the principal method in accordance with paragraph (d)(1)
of this section.
(10) Impermissible method of accounting. This section does not limit
the Commissioner's ability under section 446(b) to determine whether a
taxpayer's method of accounting is an impermissible method or otherwise
fails to clearly reflect income. For example, an acquiring corporation
may not use the method of accounting determined under paragraph (a)(2)
of this section if the method fails to clearly reflect the acquiring
corporation's income within the meaning of section 446(b).
(f) Effective/applicability date. This section applies to corporate
reorganizations and tax-free liquidations described in section 381(a)
that occur on or after August 31, 2011.
[T.D. 9534, 76 FR 45675, Aug. 1, 2011]
Sec. 1.381(c)(5)-1 Inventory method.
(a) Introduction--(1) Purpose. This section provides guidance
regarding the inventory method an acquiring corporation must use
following a distribution or transfer to which sections 381(a) and
381(c)(5) apply and how to implement any associated change in method of
accounting. See Sec. 1.381(c)(4)-1 for guidance regarding the method of
accounting or combination of methods (other than inventory and
depreciation methods) an acquiring corporation must use following a
distribution or transfer to which sections 381(a) and 381(c)(4) apply.
See Sec. 1.381(c)(6)-1 for guidance regarding the depreciation method
an acquiring corporation must use following a distribution or transfer
to which sections 381(a) and 381(c)(6) apply.
(2) Carryover method requirement for separate and distinct trades or
businesses. In a transaction to which section 381(a) applies, if an
acquiring corporation continues to operate a trade or business of the
parties to the section 381(a) transaction as a separate and distinct
trade or business after the date of distribution or transfer, the
acquiring corporation must use a carryover
[[Page 616]]
method as defined in paragraph (b)(4) of this section for each
continuing trade or business, unless either the carryover method is
impermissible and must be changed under paragraph (a)(4) of this section
or the acquiring corporation changes the carryover method in accordance
with paragraph (a)(5) of this section. The acquiring corporation need
not secure the Commissioner's consent to continue a carryover method.
(3) Principal method requirement for trades or businesses not
operated as separate and distinct trades or businesses. In a transaction
to which section 381(a) applies, if an acquiring corporation does not
operate the trades or businesses of the parties to the section 381(a)
transaction as separate and distinct trades or businesses after the date
of distribution or transfer, the acquiring corporation must use a
principal method determined under paragraph (c) of this section, unless
either the principal method is impermissible and must be changed under
paragraph (a)(4) of this section or the acquiring corporation changes
the principal method in accordance with paragraph (a)(5) of this
section. The acquiring corporation must change to a principal method in
accordance with paragraph (d)(1) of this section for each integrated
trade or business and need not secure the Commissioner's consent to use
a principal method.
(4) Carryover method or principal method not a permissible method.
If a carryover method or principal method is not a permissible inventory
method, the acquiring corporation must secure the Commissioner's consent
to change to a permissible inventory method as provided in paragraph
(d)(2) of this section. If the acquiring corporation must use a single
inventory method for a particular type of goods after the date of
distribution or transfer regardless of the number of separate and
distinct trades or businesses operated on that date, the acquiring
corporation must use the principal method for that type of goods as
determined under paragraph (c) of this section, unless either the
principal method is impermissible and must be changed under this
paragraph (a)(4) or the acquiring corporation changes the principal
method in accordance with paragraph (a)(5) of this section.
(5) Voluntary change. Any party to a section 381(a) transaction may
request permission under section 446(e) to change an inventory method
for the taxable year in which the transaction occurs or is expected to
occur. For trades or businesses that will not operate as separate and
distinct trades or businesses after the date of distribution or
transfer, a change in method of accounting for the taxable year that
includes that date will be granted only if the requested inventory
method is the method that the acquiring corporation must use after the
date of distribution or transfer. The time and manner of obtaining the
Commissioner's consent to change to a different inventory method is
described in paragraph (d)(2) of this section.
(6) Examples. The following examples illustrate the rules of this
paragraph (a). Unless otherwise noted, the carryover method is a
permissible inventory method.
Example (1). Carryover method for separate and distinct trades or
businesses after the date of distribution or transfer. (i) Facts. X
Corporation manufactures radios and television sets. X Corporation uses
the first-in, first-out (FIFO) method of inventory identification, the
cost method of valuing its inventories, and capitalizes inventory costs
in accordance with section 263A. T Corporation manufactures washing
machines and dryers. T Corporation uses the last-in, first-out (LIFO)
method of inventory identification, the cost method of valuing its
inventories, and capitalizes inventory costs under section 263A using
methods other than those used by X Corporation. X Corporation acquires
the inventory of T Corporation in a transaction to which section 381(a)
applies. After the date of distribution or transfer, X Corporation
operates its radio and television manufacturing business as a trade or
business that is separate and distinct from its washing machines and
dryers manufacturing business.
(ii) Conclusion. Because after the date of distribution or transfer
X Corporation operates its manufacturing businesses as separate and
distinct trades or businesses, under paragraph (a)(2) of this section X
Corporation must use the carryover methods for each continuing trade or
business, unless either the carryover methods are impermissible and must
be changed under paragraph (a)(4) of this section or X Corporation
changes the carryover methods in accordance with paragraph (a)(5) of
this section. As defined in paragraph (b)(4) of this section,
[[Page 617]]
the carryover methods for the radios and television sets manufacturing
business are the FIFO method, the cost basis of valuation, and X
Corporation's methods of accounting for section 263A costs immediately
prior to the date of distribution or transfer. The carryover methods for
the washing machines and dryers manufacturing business are the LIFO
method, the cost basis of valuation, and T Corporation's methods of
accounting for section 263A costs immediately prior to the date of
distribution or transfer. There is no change in method of accounting,
and X Corporation need not secure the Commissioner's consent to use any
carryover method.
Example (2). Carryover method not permissible. (i) Facts. X
Corporation manufactures food and beverages and uses the FIFO method of
inventory identification, the cost method of valuing its inventories,
and capitalizes costs in accordance with section 263A. T Corporation
sells sporting equipment. T Corporation uses the FIFO method of
inventory identification and the cost method of valuing its inventories.
T Corporation does not capitalize costs under section 263A because it
meets the small reseller exception under section 263A. X Corporation
acquires the inventory of T Corporation in a transaction to which
section 381(a) applies. After the date of distribution or transfer, X
Corporation operates the food and beverages business as a trade or
business that is separate and distinct from the sporting equipment
business, and X Corporation does not qualify for the small reseller
exception under section 263A for its sporting equipment business.
(ii) Conclusion. Because after the date of distribution or transfer
X Corporation operates the food and beverages business as a separate and
distinct trade or business, under paragraph (a)(2) of this section X
Corporation must use the carryover methods for each continuing trade or
business, unless either the carryover methods are impermissible and must
be changed under paragraph (a)(4) of this section or X Corporation
changes the carryover methods in accordance with paragraph (a)(5) of
this section. As defined in paragraph (b)(4) of this section, the
carryover methods for the food and beverages business are the FIFO
method, the cost basis of valuation, and X Corporation's methods of
capitalizing costs under section 263A immediately prior to the date of
distribution or transfer. The carryover methods for the sporting
equipment business are the FIFO method and the cost basis of valuation.
There is no change in method of accounting, and X Corporation need not
secure the Commissioner's consent to use any carryover method. However,
because X Corporation does not qualify for the small reseller exception
under section 263A for its sporting equipment business, X Corporation's
method of not capitalizing additional section 263A costs is an
impermissible carryover method under paragraph (a)(4) of this section. X
Corporation must secure the Commissioner's consent to change to a
permissible method of capitalizing costs under section 263A for the
sporting equipment business as provided in paragraph (d)(2) of this
section.
(b) Definitions. For purposes of this section--
(1) Inventory method. An inventory method is a method of accounting
used to account for merchandise on hand (including finished goods, work
in process, and raw materials) at the beginning of a year for purposes
of computing taxable income for that year. The term includes not only
the method for identifying inventory, for example, the FIFO inventory
method or the LIFO inventory method, but also all other methods
necessary to account for merchandise.
(2) Adoption of a method of accounting. Adoption of a method of
accounting has the same meaning as provided in Sec. 1.446-1(e)(1).
(3) Change in method of accounting. A change in method of accounting
has the same meaning as provided in Sec. 1.446-1(e)(2).
(4) Carryover method. A carryover method is an inventory method that
each party to a section 381(a) transaction uses for each separate and
distinct trade or business immediately prior to the date of distribution
or transfer.
(5) Principal method. A principal method is an inventory method that
is determined under paragraph (c) of this section.
(6) Permissible method of accounting. A permissible method of
accounting is a method of accounting that is proper or permitted under
the Internal Revenue Code or any applicable Income Tax Regulations.
(7) Acquiring corporation. An acquiring corporation has the same
meaning as provided in Sec. 1.381(a)-1(b)(2).
(8) Distributor corporation. A distributor corporation means the
corporation, foreign or domestic, that distributes its assets to another
corporation described in section 332(b) in a distribution to which
section 332 (relating to liquidations of subsidiaries) applies.
[[Page 618]]
(9) Transferor corporation. A transferor corporation means the
corporation, foreign or domestic, that transfers its assets to another
corporation in a transfer to which section 361 (relating to
nonrecognition of gain or loss to corporations) applies, but only if--
(i) The transfer is in connection with a reorganization described in
section 368(a)(1)(A), (a)(1)(C), or (a)(1)(F), or
(ii) The transfer is in connection with a reorganization described
in section 368(a)(1)(D) or (a)(1)(G), provided the requirements of
section 354(b) are met.
(10) Parties to the section 381(a) transaction. Parties to the
section 381(a) transaction means the acquiring corporation and the
distributor or transferor corporation that participate in a transaction
to which section 381(a) applies.
(11) Date of distribution or transfer. The date of distribution or
transfer has the same meaning as provided in section 381(b)(2) and Sec.
1.381(b)-1(b).
(12) Separate and distinct trades or businesses. Separate and
distinct trades or businesses has the same meaning as provided in Sec.
1.446-1(d).
(13) Audit protection. Audit protection means, for purposes of
paragraph (d)(1) of this section, that the IRS will not require an
acquiring corporation that is required to change a method of accounting
under paragraph (a)(3) of this section to change that method for a
taxable year ending prior to the taxable year that includes the date of
distribution or transfer.
(14) Section 481(a) adjustment. The section 481(a) adjustment means
an adjustment that must be taken into account as required under section
481(a) to prevent amounts from being duplicated or omitted when the
taxable income of an acquiring corporation is computed under a method of
accounting different from the method used to compute taxable income for
the preceding taxable year.
(15) Cut-off basis. A cut-off basis means a manner in which a change
in method of accounting is made without a section 481(a) adjustment and
under which only the items arising after the beginning of the year of
change (or, in the case of a change made under paragraph (d)(1) of this
section, after the date of distribution or transfer) are accounted for
under the new method of accounting. When it implements the change on a
cut-off basis, a taxpayer using the LIFO inventory method to identify
its inventory goods that makes a change in method of accounting within
the LIFO inventory method from one LIFO method or sub-method to another
LIFO method or sub-method uses the new LIFO inventory method to
determine its current-year cost and base-year cost of ending inventories
for the year of change, but does not recompute the cost of beginning
inventories for the year of change using the new LIFO inventory method.
(16) Adjustment period. The adjustment period means the number of
taxable years for taking into account the section 481(a) adjustment
required as a result of a change in method of accounting.
(17) Component trade or business. A component trade or business is a
trade or business of a party to the section 381(a) transaction that will
be combined and integrated with a trade or business of the other party
to the section 381 transaction. See paragraph (e)(7)(ii) of this section
for the determination of whether a trade or business is operated as a
separate and distinct trade or business after the date of distribution
or transfer.
(c) Principal method--(1) In general. For each integrated trade or
business, the principal method for a particular type of goods is
generally the inventory method used by the component trade or business
of the acquiring corporation immediately prior to the date of
distribution or transfer for that type of goods. If, however, on the
date of distribution or transfer the component trade or business of the
distributor or transferor corporation holds more inventory of a type of
goods than the component trade or business of the acquiring corporation,
the principal method for such goods is the inventory method used by the
component trade or business of the distributor or transferor corporation
immediately prior to that date. For each integrated trade or business,
the component trade or business of the distributor or transferor
corporation holds more inventory if, for a particular type of goods, the
aggregate of the fair market value of the
[[Page 619]]
goods held by each component trade or business of the distributor or
transferor corporation exceeds the aggregate of the fair market value of
the goods held by each component trade or business of the acquiring
corporation immediately prior to the date of distribution or transfer.
Alternatively, as a simplifying convention, the acquiring corporation
may elect to apply the preceding sentence to the aggregate fair market
value of the entire inventories, held by each component trade or
business of the acquiring corporation and each component trade or
business of the distributor or transferor corporation, that will be
integrated after the date of distribution or transfer. If the component
trade or business with the larger aggregate fair market value of the
entire inventories does not have an inventory method for a particular
type of goods immediately prior to the date of distribution or transfer,
the principal method for that type of goods is the inventory method used
by the component trade or business that does have an inventory method
for that type of goods.
(2) Multiple component trades or businesses with different principal
methods. If a party to the section 381(a) transaction has multiple
component trades or businesses and more than one principal inventory
method for a particular type of goods, then the acquiring corporation
may choose which of the inventory methods used by such component trades
or businesses will be the principal method of the integrated trade or
business. The acquiring corporation must choose a principal method that
is a permissible method of accounting. In general, a change to a
principal method in a transaction to which section 381(a) and paragraph
(a)(3) of this section apply is made under paragraph (d)(1) of this
section.
(3) Examples. The following examples illustrate the rules of this
paragraph (c). Unless otherwise noted, the principal method is a
permissible inventory method.
Example (1). Principal methods are the methods used by the acquiring
corporation. (i) Facts. X Corporation and T Corporation each manufacture
tennis equipment. X Corporation's manufacturing business uses the FIFO
method of inventory identification, the cost method of valuing
inventories, and allocates indirect costs to the property produced using
the burden rate method provided in Sec. 1.263A-1(f)(3)(i). T
Corporation's manufacturing business uses the LIFO method of inventory
identification, the cost method of valuing its inventories, and
allocates indirect costs to the property it produces using the standard
cost method provided in Sec. 1.263A-1(f)(3)(ii). X Corporation acquires
the inventory of T Corporation in a transaction to which section 381(a)
applies. The fair market value of each particular type of goods held by
X Corporation's manufacturing business immediately prior to the date of
distribution or transfer exceeds the fair market value of each
particular type of goods held by T Corporation's manufacturing business
on that date. After the date of distribution or transfer, X Corporation
will not operate its manufacturing business as a trade or business that
is separate and distinct from T Corporation's manufacturing business.
(ii) Conclusion. Because after the date of distribution or transfer
X Corporation will not operate its manufacturing business as a separate
and distinct trade or business, X Corporation must use the principal
methods under paragraph (a)(3) of this section, unless either the
principal methods are impermissible and must be changed under paragraph
(a)(4) of this section or X Corporation changes the principal methods in
accordance with paragraph (a)(5) of this section. The fair market value
of each particular type of goods held by T Corporation's manufacturing
business immediately prior to the date of distribution or transfer does
not exceed the fair market value of each particular type of goods held
by X Corporation's manufacturing business on that date. Because on the
date of distribution or transfer T Corporation's manufacturing business
does not hold more inventory than X Corporation's manufacturing
business, the principal methods are the FIFO method of inventory
identification, the cost method of valuation, and X Corporation's method
of allocating indirect costs under section 263A using the burden rate
method. X Corporation need not secure the Commissioner's consent to use
these methods. However, in accordance with paragraph (d)(1) of this
section, X Corporation must change the inventory methods for the
manufacturing business acquired from T Corporation to the principal
methods.
Example (2). Principal methods are the methods used by the acquiring
corporation. (i) Facts. The facts are the same as in Example (1), except
that the fair market value of each particular type of goods held by X
Corporation's manufacturing business immediately prior to the date of
distribution or transfer is identical to the fair market value of each
particular type of goods held by T Corporation's manufacturing business
on that date.
[[Page 620]]
(ii) Conclusion. The result is the same as in Example (1). The
principal methods are the FIFO method of inventory identification, the
cost method of valuation, and X Corporation's method of allocating
indirect costs under section 263A using the burden rate method. X
Corporation need not secure the Commissioner's consent to use the
principal methods. However, in accordance with paragraph (d)(1) of this
section, X Corporation must change the inventory methods for the
manufacturing business acquired from T Corporation to the principal
methods.
Example (3). Principal methods are the methods used by the
distributor or transferor corporation. (i) Facts. The facts are the same
as in Example (1), except that the fair market value of each particular
type of goods held by T Corporation's manufacturing business immediately
prior to the date of distribution or transfer exceeds the fair market
value of each particular type of goods held by X Corporation's
manufacturing business on that date.
(ii) Conclusion. Because after the date of distribution or transfer
X Corporation will not operate its manufacturing business as a separate
and distinct trade or business, X Corporation must use the principal
methods under paragraph (a)(3) of this section, unless either the
principal methods are impermissible and must be changed under paragraph
(a)(4) of this section or X Corporation changes the principal methods in
accordance with paragraph (a)(5) of this section. The fair market value
of each particular type of goods held by T Corporation's manufacturing
business immediately prior to the date of distribution or transfer
exceeds the fair market value of each particular type of goods held by X
Corporation's manufacturing business on that date. Because on the date
of distribution or transfer T Corporation's manufacturing business holds
more inventory than X Corporation's manufacturing business, the
principal methods are the LIFO method of inventory identification, the
cost method of valuation, and T Corporation's method of allocating
indirect costs under section 263A using the standard cost method. X
Corporation need not secure the Commissioner's consent to use the
principal methods. However, in accordance with paragraph (d)(1) of this
section, X Corporation must change the inventory methods for the
manufacturing business operated by X Corporation prior to the date of
distribution or transfer to the principal methods.
Example (4). Voluntary change allowable. (i) Facts. The facts are
the same as in Example (1), except that T Corporation wants to
discontinue using the LIFO method for its manufacturing business and
change to the FIFO method for the taxable year in which the section
381(a) transaction occurs or is expected to occur.
(ii) Conclusion. Under paragraph (a)(5) of this section, the
Commissioner will grant a request to change a method of accounting for
the taxable year that includes the date of distribution or transfer only
if the requested method is the method that the acquiring corporation
must use after the date of distribution or transfer. The Commissioner
will consent to a request by T Corporation to change to the FIFO method
for the taxable year in which the section 381(a) transaction occurs or
is expected to occur because X Corporation will use this method after
the date of distribution or transfer.
Example (5). Principal method determination when larger component
trade or business does not have a method of accounting for a particular
type of goods. (i) Facts. The facts are the same as in Example (1),
except that T Corporation's manufacturing business has a particular type
of goods that is not held by X Corporation's manufacturing business.
(ii) Conclusion. The result is similar to Example (1). In general,
the principal methods are the FIFO method of inventory identification,
the cost method of valuation, and X Corporation's method of allocating
indirect costs to the property produced using the burden rate method. X
Corporation need not secure the Commissioner's consent to use the
principal methods. However, in accordance with paragraph (d)(1) of this
section, X Corporation must change the inventory methods for the
manufacturing business acquired from T Corporation to the principal
methods. Under paragraph (c) of this section, the principal methods for
the particular type of goods held only by T Corporation's manufacturing
business are the LIFO method of inventory identification, the cost
method of valuation, and T Corporation's method of allocating indirect
costs to the property it produces using the standard cost method. X
Corporation must determine whether the principal methods for the type of
goods previously held by T Corporation are permissible given that such
methods are different than the principal methods that must be used by X
for all other goods. If X Corporation's use of the standard cost method
would be impermissible after the date of distribution or transfer, X
Corporation must change to a permissible method under section 263A for
those goods in accordance with paragraph (a)(4) of this section.
Example (6). Inventory convention elected. (i) Facts. X Corporation
manufactures planes and T Corporation manufactures planes and
communications satellites. X Corporation's manufacturing business uses
the FIFO method of inventory identification and values its inventories
at cost or market, whichever is lower, while T Corporation's
manufacturing business uses the LIFO method of inventory identification
and values its inventories at cost. X Corporation's manufacturing
business and T Corporation's manufacturing
[[Page 621]]
business use the same methods to capitalize costs under section 263A. X
Corporation acquires the inventory of T Corporation in a transaction to
which section 381(a) applies. In lieu of determining the fair market
value of each particular type of goods held on the date of distribution
or transfer, X Corporation elects to value the entire inventories of its
manufacturing business and the entire inventories of T Corporation's
manufacturing business in accordance with paragraph (c)(1) of this
section. The fair market value of the inventory held by T Corporation's
manufacturing business immediately prior to the date of distribution or
transfer does not exceed the fair market value of the inventory held by
X Corporation's manufacturing business on that date. After the date of
distribution or transfer, X Corporation will not operate its
manufacturing business as a trade or business that is separate and
distinct from T Corporation's manufacturing business.
(ii) Conclusion. Because after the date of distribution or transfer
X Corporation will not operate its manufacturing business as a separate
and distinct trade or business, X Corporation must use the principal
methods under paragraph (a)(3) of this section, unless either the
principal methods are impermissible and must be changed under paragraph
(a)(4) of this section or X Corporation changes the principal methods in
accordance with paragraph (a)(5) of this section. The fair market value
of the entire inventory held by T Corporation's manufacturing business
immediately prior to the date of distribution or transfer does not
exceed the fair market value of the entire inventory of X Corporation's
manufacturing business on that date. Because on the date of distribution
or transfer T Corporation's manufacturing business does not hold more
inventory than X Corporation's manufacturing business, the principal
methods are the FIFO method, the cost or market, whichever is lower,
method of valuation, and X Corporation's method of capitalizing costs
under section 263A on the date of distribution or transfer. X
Corporation need not secure the Commissioner's consent to use the
principal methods. However, in accordance with paragraph (d)(1) of this
section, X Corporation must change the inventory methods for the
manufacturing business acquired from T Corporation to the principal
methods.
Example (7). Principal method determination with a combined trade or
business and a separate and distinct trade or business. (i) Facts. X
Corporation manufactures tennis equipment in a trade or business that is
separate and distinct from its trade or business of manufacturing golf
equipment. X Corporation uses the FIFO method of inventory
identification for its tennis equipment and the LIFO method of inventory
identification for its golf equipment. X Corporation values the goods in
both inventories at cost and allocates indirect costs to the property
produced using the burden rate method provided in Sec. 1.263A-
1(f)(3)(i). T Corporation manufactures tennis equipment. T Corporation's
manufacturing business uses the FIFO method of inventory identification,
values inventories at cost, and allocates indirect costs to the property
it produces using the standard cost method provided in Sec. 1.263A-
1(f)(3)(ii). X Corporation acquires the inventory of T Corporation in a
transaction to which section 381(a) applies. Immediately prior to the
date of distribution or transfer, the fair market value of T
Corporation's inventories in the tennis equipment manufacturing business
exceeds the fair market value of the inventories held by X Corporation's
tennis equipment manufacturing business. After the date of distribution
or transfer, X Corporation will not operate its tennis equipment
manufacturing business as a trade or business that is separate and
distinct from T Corporation's tennis equipment manufacturing business,
but X Corporation will operate its golf equipment manufacturing business
as a trade or business that is separate and distinct from the tennis
equipment manufacturing business.
(ii) Conclusion. Because after the date of distribution or transfer
X Corporation will not operate its tennis equipment manufacturing
business as a separate and distinct trade or business, X Corporation
must use the principal methods under paragraph (a)(3) of this section,
unless either the principal methods are impermissible and must be
changed under paragraph (a)(4) of this section or X Corporation changes
the principal methods in accordance with paragraph (a)(5) of this
section. Under paragraph (c)(1) of this section, X Corporation elects to
compare the fair market values of the entire inventories of the
component trades or businesses on the date of distribution or transfer
to determine whether T Corporation holds more inventory than X
Corporation. The fair market value of the inventory held by T
Corporation's tennis equipment manufacturing business exceeds the fair
market value of the tennis equipment held by X Corporation's tennis
equipment manufacturing business. Because on the date of distribution or
transfer T Corporation's tennis equipment manufacturing business holds
more inventory than X Corporation's tennis equipment manufacturing
business, the principal methods for the combined tennis equipment
business are the FIFO method of inventory identification, the cost basis
of valuation, and T Corporation's methods of allocating indirect costs
under section 263A using the standard cost method provided in Sec.
1.263A-1(f)(3)(ii). X Corporation need not secure the Commissioner's
consent to use the principal methods. However, in accordance with
paragraph (d)(1) of this section, X Corporation must change the methods
of accounting for its tennis equipment manufacturing business to the
principal
[[Page 622]]
methods. Under paragraph (a)(2) of this section, because X Corporation
will operate the golf equipment manufacturing business as a separate
trade or business, for the inventories held by the golf equipment
manufacturing business X Corporation must continue to use the LIFO
method of inventory identification, use the cost basis of valuation, and
allocate indirect costs under section 263A using the burden rate method
provided in Sec. 1.263A-1(f)(3)(i). There are no changes in method of
accounting for the golf manufacturing business, and X Corporation need
not secure the Commissioner's consent to use these carryover methods.
Example (8). Principal method determination with multiple component
trades or businesses. (i) Facts. The facts are the same as in Example
(7), except that after the date of distribution or transfer X
Corporation will not operate the golf equipment manufacturing business
as a trade or business that is separate and distinct from the tennis
equipment manufacturing business. In addition, the fair market value of
the inventories of X Corporation's tennis equipment manufacturing
business and golf equipment manufacturing business, in the aggregate,
exceed the fair market value of the inventories of T Corporation's
tennis equipment manufacturing business.
(ii) Conclusion. Because on the date of distribution or transfer T
Corporation's tennis equipment manufacturing business does not hold more
inventory than X Corporation's tennis equipment manufacturing business
and golf equipment manufacturing business, in the aggregate, the
principal method for identifying inventory is the method used by X
Corporation's component trade or business on the date of distribution or
transfer. However, because on the date of distribution or transfer X
Corporation operates two separate and distinct trades or businesses with
different inventory identification methods that will be combined after
the date of distribution or transfer, X Corporation may choose under
paragraph (c)(2) of this section which method used by its component
trades or businesses will be the principal method. After the date of
distribution or transfer, X Corporation may use either the FIFO method
of inventory identification used by the tennis equipment manufacturing
business or the LIFO method of inventory identification used by the golf
equipment manufacturing business as the principal method of
identification, if either method is a permissible method. For the
integrated trade or business, X Corporation will use the cost method of
valuation and allocate indirect costs under section 263A using the
burden rate method provided in Sec. 1.263A-1(f)(3)(i). In accordance
with paragraph (d)(1) of this section, X Corporation must change the
inventory methods of T Corporation's manufacturing business to the
principal methods. Under paragraph (a)(3) of this section, X Corporation
also must change either its golf equipment manufacturing business or its
tennis equipment manufacturing business, depending on which principal
method X Corporation selects, to the principal method.
(d) Procedures for changing a method of accounting--(1) Change made
to principal method under paragraph (a)(3) of this section--(i) Section
481(a) adjustment--(A) In general. An acquiring corporation that changes
its method of accounting or the distributor or transferor corporation's
method of accounting under paragraph (a)(3) of this section does not
need to secure the Commissioner's consent to use a principal method. To
the extent the use of a principal method constitutes a change in method
of accounting, the change in method is treated as a change initiated by
the acquiring corporation for purposes of section 481(a)(2). Any change
to a principal method, whether the change relates to a trade or business
of the acquiring corporation or a trade or business of the distributor
or transferor corporation, must be reflected on the acquiring
corporation's federal income tax return for the taxable year that
includes the date of distribution or transfer. The amount of the section
481(a) adjustment and the adjustment period, if any, necessary to
implement a change to the principal method are determined under Sec.
1.446-1(e) and the applicable administrative procedures that govern
voluntary changes in methods of accounting under section 446(e). If the
Internal Revenue Code, the Income Tax Regulations, or administrative
procedures require that a method of accounting be implemented on a cut-
off basis, the acquiring corporation must implement the change, on a
cut-off basis as of the date of distribution or transfer, on its federal
income tax return for the taxable year that includes the date of
distribution or transfer. If the Internal Revenue Code, the Income Tax
Regulations, or administrative procedures require a section 481(a)
adjustment, the acquiring corporation must determine the section 481(a)
adjustment and include the appropriate amount of the section 481(a)
adjustment on its federal income
[[Page 623]]
tax return for the taxable year that includes the date of distribution
or transfer and subsequent taxable year(s), as necessary. This
adjustment is determined by the acquiring corporation as of the
beginning of the day that is immediately after the date of distribution
or transfer.
(B) Example. The following example illustrates the rules of this
paragraph (d)(1)(i):
Example. X Corporation uses the FIFO method of inventory
identification, and T Corporation uses the LIFO method of inventory
identification. X Corporation acquires the inventory of T Corporation in
a transaction to which section 381(a) applies. X Corporation determines
that under the rules of paragraph (c)(1) of this section, X Corporation
must change the inventory method for the business acquired from T
Corporation to the FIFO method. X Corporation will determine the section
481(a) adjustment pertaining to the change to the FIFO method (whether
the amounts thereof represent increases or decreases in income) as of
the beginning of the day that immediately follows the day on which X
Corporation acquires the inventory of T Corporation. X Corporation will
reflect this adjustment, or an appropriate part thereof, on its federal
income tax return for the taxable year that includes the date of
distribution or transfer.
(ii) Audit protection. Notwithstanding any other provision in any
other Income Tax Regulation or administrative procedure, no audit
protection is provided for any change in method of accounting under
paragraph (d)(1) of this section.
(iii) Other terms and conditions. Except as otherwise provided in
this section, other terms and conditions provided in Sec. 1.446-1(e)
and the applicable administrative procedures for voluntary changes in
method of accounting under section 446(e) apply to a change in method of
accounting under this section. Thus, for example, if the administrative
procedures for a particular change in method of accounting have a term
and condition that provides for the acceleration of the section 481(a)
adjustment period, this term and condition applies to a change made
under this paragraph (d)(1). However, any scope limitation in the
applicable administrative procedures will not apply for purposes of
making a change under this paragraph (d)(1). For example, if the
administrative procedures provide as a limitation that an identical
change in method of accounting is barred for a period of years, this
limitation will not bar a change to the principal method made under this
section.
(2) Change made to a method of accounting under paragraph (a)(4) or
(a)(5) of this section--(i) In general. A party to a section 381(a)
transaction that changes a method of accounting under either paragraph
(a)(4) or paragraph (a)(5) of this section must follow the provisions of
Sec. 1.446-(1)(e) and the applicable administrative procedures,
including scope limitations, for voluntary changes in method of
accounting under section 446(e), except as provided in paragraphs
(d)(2)(ii) and (d)(2)(iii) of this section. An application on Form 3115,
``Application for Change in Accounting Method,'' filed with the IRS to
change a method of accounting under this paragraph (d)(2) should be
labeled ``Filed under section 381(c)(5)'' at the top.
(ii) Final year limitation. Any scope limitation relating to the
final year of a trade or business will not apply to a taxpayer that
changes its method of accounting in the final year of a trade or
business that is terminated as the result of a section 381(a)
transaction.
(iii) Time to file. Under the authority of Sec. 1.446-1(e)(3)(ii),
for a change in method of accounting requiring advance consent, the
application for a change in method of accounting (for example, Form
3115), must be filed with the IRS on or before the later of--
(A) The due date for filing a Form 3115 as specified in Sec. 1.446-
1(e), for example, the last day of the taxable year in which the
distribution or transfer occurred, or
(B) The earlier of--
(1) The day that is 180 days after the date of distribution or
transfer, or
(2) The day on which the acquiring corporation files its federal
income tax return for the taxable year in which the distribution or
transfer occurred.
(e) Rules and procedures--(1) Inventory method selected for a
particular type of goods. If other sections of the Internal Revenue Code
or Income Tax Regulations allow a taxpayer to elect an inventory method
for a particular type of goods, the method elected with respect
[[Page 624]]
to those goods is the established inventory method only for those goods.
For example, an election to use the LIFO inventory method to identify
specified goods in inventory, such as certain products in finished
goods, is the inventory method only for those products.
(2) No method of accounting. If a party to a section 381(a)
transaction is not using an inventory method, does not have an inventory
method for a particular type of goods, or came into existence as a
result of the transaction, the party will not be treated as having an
inventory method different from that used by another party to the
section 381(a) transaction.
(3) Elections and adoptions allowed. If an election does not require
the Commissioner's consent, an acquiring corporation or a distributor or
transferor corporation is not precluded from making any election that is
otherwise permissible for the taxable year that includes the date of
distribution or transfer. For example, an acquiring corporation may
elect to identify its inventory using the LIFO inventory method in the
year of the distribution or transfer. For purposes of this section, a
corporation shall be deemed as having made any election as of the first
day of the taxable year that includes the date of distribution or
transfer. Similarly, where adoption is permissible, an acquiring
corporation or a distributor or transferor corporation may adopt any
permissible method of accounting for the taxable year that includes the
date of distribution or transfer.
(4) Elections continue after section 381(a) transaction--(i) General
rule. An acquiring corporation is not required to renew any election not
requiring renewal and previously made by it or by a distributor or
transferor corporation for a carryover method or a principal method if
the acquiring corporation uses the method after the section 381(a)
transaction. If the acquiring corporation uses a method after the date
of distribution or transfer, an election made by the acquiring
corporation or by a distributor or transferor corporation for that
method that was in effect on the date of distribution or transfer
continues after the section 381(a) transaction as though the
distribution or transfer had not occurred.
(ii) Example. The following example illustrates the rules of
paragraph (e)(4):
Example. Since its incorporation in 1982, X Corporation elected to
use the LIFO inventory method under section 472 to identify its
inventory of tennis balls. Since its incorporation in 2002, T
Corporation elected to use the FIFO inventory method to identify its
inventory of tennis balls. X Corporation acquires the assets of T
Corporation in a transaction to which section 381(a) applies.
Immediately prior to the date of distribution or transfer, the fair
market value of X Corporation's inventory in its tennis balls exceeds
the fair market value of the tennis balls inventory held by T
Corporation. After the date of distribution or transfer, X Corporation
will not operate its business as a trade or business that is separate
and distinct from T Corporation's business. Because on the date of
distribution or transfer T Corporation does not hold more inventory than
X Corporation, the principal method for identifying inventory is the
method used by X Corporation on the date of distribution or transfer.
After the date of distribution or transfer, X Corporation need not renew
its election to identify inventory using the LIFO inventory method, and
X Corporation is bound by the election.
(5) Adopting the LIFO inventory method. A party to a section 381(a)
transaction will be deemed to be using the LIFO inventory method for a
particular type of goods on the date of distribution or transfer if that
party elects under section 472 to adopt that inventory method with
respect to those goods for its taxable year within which the date of
distribution or transfer occurs. See section 472 for the requirements to
adopt the LIFO inventory method.
(6) Inventory layers treatment--(i) Adjustments required after a
section 381(a) transaction. An acquiring corporation that determines the
principal method of taking an inventory after a section 381(a)
transaction under paragraphs (a)(3) and (c) of this section after the
date of distribution or transfer may need to integrate inventories and
make appropriate adjustments as provided in paragraphs (e)(6)(ii) and
(e)(6)(iii) of this section.
(ii) LIFO inventory method used after the section 381(a)
transaction--(A) LIFO inventory method used by the acquiring
[[Page 625]]
corporation and the distributor or transferor corporation--(1) Principal
method is the dollar-value LIFO method. If, under paragraphs (a)(3) and
(c) of this section, the acquiring corporation changes its inventory
method or the inventory method of the distributor or transferor
corporation from the specific goods LIFO method of pricing inventories
to the dollar-value LIFO method of pricing inventories (dollar-value
LIFO method) for a particular type of goods, the inventory accounted for
under the specific goods method shall be placed on the dollar-value
method as provided in Sec. 1.472-8(f), and then the inventory shall be
integrated with the inventory previously accounted for under the dollar-
value LIFO method. If pools of each corporation are permitted or
required to be combined, the pools must be combined as provided in Sec.
1.472-8(g)(2). For purposes of combining pools, all base year
inventories or layers of increment that occur in taxable years including
the same December 31 shall be combined. A base year inventory or layer
of increment occurring in any short taxable year of a distributor or
transferor corporation shall be merged with and considered a layer of
increment of its immediately preceding taxable year.
(2) Principal method is the specific goods LIFO method. If, under
paragraphs (a)(3) and (c) of this section, the acquiring corporation
changes its inventory method or the inventory method of the distributor
or transferor corporation from the dollar-value LIFO method of pricing
inventories to the specific goods LIFO method of pricing inventories,
the acquiring corporation shall treat the inventory being changed to the
specific goods LIFO method as having the same acquisition dates and
costs as such inventory had under the dollar-value LIFO method.
(B) Change from the FIFO inventory method to either the specific
goods LIFO method or the dollar-value LIFO method. If, under paragraphs
(a)(3) and (c) of this section, the acquiring corporation changes its
inventory method or the inventory method of the distributor or
transferor corporation from the FIFO inventory method to either the
specific goods LIFO method or the dollar-value method of pricing LIFO
inventories, the inventory accounted for under the FIFO inventory method
shall be treated by the acquiring corporation as having been acquired at
their average unit cost in a single transaction on the date of the
distribution or transfer. Thus, if an inventory of a particular type of
goods is combined in an existing dollar-value pool, the goods shall be
treated as if they were purchased by the acquiring corporation at the
average unit cost on the date of the distribution or transfer with
respect to such pool. Alternatively, if the goods are not combined in an
existing pool, the goods will be treated as if they were purchased by
the acquiring corporation at the average unit cost on the date of the
distribution or transfer with respect to a new pool, with the base-year
being the year of the section 381(a) transaction. Adjustments resulting
from a restoration to cost of any write-down to market value of the
inventories shall be taken into account by the acquiring corporation
ratably in each of the three taxable years beginning with the taxable
year that includes the date of the distribution or transfer. See section
472(d).
(iii) FIFO inventory method used after the section 381(a)
transaction--(A) FIFO inventory method used by the acquiring corporation
and the distributor or transferor corporation. If, under paragraphs
(a)(3) and (c) of this section, the FIFO inventory method is the
principal method and the component trades or businesses of both the
acquiring corporation and the distributor or transferor corporation use
the FIFO method immediately prior to the distribution or transfer, the
acquiring corporation must treat the inventory that must change to the
principal method as having the same acquisition dates and costs as such
inventory had immediately prior to the date of distribution or transfer.
However, if the principal method of valuing inventories is the cost or
market, whichever is lower, method, the acquiring corporation must treat
the inventories that must change to the principal method as having been
acquired at cost or market, whichever is lower.
(B) Change from either the specific goods LIFO method or the dollar-
value LIFO method to the FIFO inventory
[[Page 626]]
method. If, under paragraphs (a)(3) and (c) of this section, the
acquiring corporation changes its inventory method or the inventory
method of the distributor or transferor corporation from either the
specific goods LIFO method or the dollar-value LIFO method to the FIFO
inventory method, the acquiring corporation must treat the inventory
accounted for under the LIFO method as having the same acquisition dates
and costs that the inventory would have had if the FIFO inventory method
had been used on the date of distribution or transfer. However, if the
principal method of valuing inventories is the cost or market, whichever
is lower, method, the acquiring corporation must treat the inventories
accounted for under the LIFO method as having been acquired at cost or
market, whichever is lower.
(7) Appropriate times for certain determinations--(i) Determining
the inventory method. The inventory method used by a party to a section
381(a) transaction on the date of distribution or transfer is the method
used by that party as of the end of the day that is immediately prior to
the date of distribution or transfer.
(ii) Determining whether there are separate and distinct trades or
businesses after the date of distribution or transfer. Whether an
acquiring corporation will operate the trades or businesses of the
parties to a section 381(a) transaction as separate and distinct trades
or businesses after the date of distribution or transfer will be
determined as of the date of distribution or transfer based upon the
facts and circumstances. Intent to combine books and records of the
trades or businesses may be demonstrated by contemporaneous records and
documents or by other objective evidence that reflects the acquiring
corporation's ultimate plan of operation, even though the actual
combination of the books and records may extend beyond the end of the
taxable year that includes the date of distribution or transfer.
(8) Establishing an inventory method. An inventory method used by
the distributor or transferor corporation immediately prior to the date
of distribution or transfer that continues to be used by the acquiring
corporation after the date of distribution or transfer is an established
method of accounting for purposes of section 446(e), whether or not such
method is proper or is permitted under the Internal Revenue Code or any
applicable Income Tax Regulations.
(9) Other applicable provisions. This section does not preempt any
other provision of the Internal Revenue Code or the Income Tax
Regulations that is applicable to the acquiring corporation's
circumstances. Section 381(c)(5) and this Sec. 1.381(c)(5)-1 determine
only the inventory method to be used after a section 381(a) transaction.
If other paragraphs of section 381(c) apply for purposes of determining
the methods of accounting to be used following the date of distribution
or transfer, section 381(c)(5) and this Sec. 1.381(c)(5)-1 will not
apply to the tax treatment of the items. Specifically, section 381(c)(5)
and this Sec. 1.381(c)(5)-1 do not apply to assets other than inventory
that an acquiring corporation obtains in a transaction to which section
381(a) applies.
(10) Use of the cash receipts and disbursements method of
accounting. If immediately prior to the date of distribution or
transfer, an acquiring corporation or a distributor or transferor
corporation uses the cash receipts and disbursements method of
accounting within the meaning of section 446(c)(1) and Sec. 1.446-
1(c)(1)(i), or is not required to use an inventory method for its goods,
section 381(c)(5) and Sec. 1.381(c)(5)-1 do not apply. Instead, section
381(c)(4) and Sec. 1.381(c)(4)-1 must be applied to determine the
methods of accounting that continue after the transaction.
(11) Character of items of income and deduction. After the date of
distribution or transfer, items of income and deduction have the same
character in the hands of the acquiring corporation as they would have
had in the hands of the distributor or transferor corporation if no
distribution or transfer had occurred.
(12) Impermissible inventory method. This section does not limit the
Commissioner's ability under section 446(b) to determine whether a
taxpayer's inventory method is an impermissible
[[Page 627]]
method or otherwise fails to clearly reflect income. For example, an
acquiring corporation may not use the method of accounting determined
under paragraph (a)(2) of this section if the method fails to clearly
reflect the acquiring corporation's income within the meaning of section
446(b).
(f) Effective/applicability date. This section applies to corporate
reorganizations and tax-free liquidations described in section 381(a)
that occur on or after August 31, 2011.
[T.D. 9534, 76 FR 45682, Aug. 1, 2011; 76 FR 53820, Aug. 30, 2011]
Sec. 1.381(c)(6)-1 Depreciation method.
(a) Carryover requirement--(1) Distributions in taxable years ending
before July 25, 1969. (i) Section 381(c)(6) provides that if, in a
transaction in a taxable year which ends before July 25, 1969, to which
section 381(a) applies, an acquiring corporation acquires depreciable
property from a distributor or transferor corporation which computes its
allowance for the depreciation of the property under section 167(b)(2),
(3), or (4), the acquiring corporation shall compute its depreciation
allowance by the same method used by the distributor or transferor
corporation with respect to such property. Thus, if the distributor or
transferor corporation used the sum of the years-digits method under
section 167(b)(3) with respect to an asset distributed or transferred to
an acquiring corporation, the acquiring corporation will be required to
use the sum of the years-digits method with respect to such asset
acquired. The computation of the depreciation allowance with respect to
the property acquired shall be made under the provisions of section 167
and the regulations thereunder.
(ii) The rules provided in section 381(c)(6) and subdivision (i) of
this subparagraph will apply only with respect to that part or all of
the basis of the property in the hands of the acquiring corporation
immediately after the date of distribution or transfer as does not
exceed the basis of the property in the hands of the distributor or
transferor corporation on the date of the distribution or transfer. For
this purpose, the basis of the property in the hands of the distributor
or transferor corporation shall be the adjusted basis provided in
section 1011 for the purpose of determining gain on the sale or other
disposition of such property. For provisions defining the date of
distribution or transfer see Sec. 1.381(b)-1(b).
(2) Distributions in taxable years ending after July 24, 1969. (i)
Section 381(c)(6) provides that if, in a transaction in a taxable year
ending after July 24, 1969, to which section 381(a) applies, an
acquiring corporation acquires depreciable property from a distributor
or transferor corporation which computes its allowances for the
depreciation of the property under subsection (b), (j), or (k) of
section 167, the acquiring corporation shall compute its depreciation
allowance by the same method used by the distributor or transferor
corporation with respect to such property. Thus, if the distributor or
transferor corporation used the straight line method under section
167(b)(1) with respect to an asset distributed or transferred to an
acquiring corporation, the acquiring corporation will be required to use
the straight line method with respect to such asset. Similarly, if the
distributor or transferor corporation elected to compute depreciation
under section 167(k) with respect to property attributable to
rehabilitation expenditures, and such property is transferred to an
acquiring corporation, the acquiring corporation will be required to
compute depreciation under section 167(k) with respect to the property
acquired. The computation of the depreciation allowance with respect to
the property acquired shall be made under the provisions of section 167
and the regulations thereunder.
(ii) The rules provided in section 381(c)(6) and subdivision (i) of
this subparagraph shall apply only with respect to that part or all of
the basis of the property in the hands of the acquiring corporation
immediately after the date of distribution or transfer as does not
exceed the basis of the property in the hands of the distributor or
transferor corporation on the date of the distribution or transfer. For
this purpose, the basis of the property in the hands of the distributor
or transferor corporation shall be the adjusted basis provided in
section 1011 for the purpose of determining gain on the sale or
[[Page 628]]
other disposition of such property. For provisions defining the date of
distribution or transfer see Sec. 1.38(b)-1(b).
(b) Portion in excess of distributor or transferor corporation's
basis--(1) General rule. With respect to that part of the basis of the
depreciable property (other than certain section 1250 property described
in subparagraph (2) of this paragraph) which in the hands of the
acquiring corporation exceeds the adjusted basis to the distributor or
transferor corporation, the acquiring corporation may use any reasonable
method of computing depreciation, other than the methods provided in
section 167(b)(2), (3), or (4). See paragraph (b) of Sec. 1.167(b)-0
for methods which are acceptable under section 167(a) with respect to
such property. See also sections 334(b)(1) and 362(b) for the
determination of basis of property in the hands of the acquiring
corporation in connection with a transaction to which section 381(a)
applies.
(2) Section 1250 property. With respect to that part of the basis of
section 1250 property acquired after July 24, 1969, which in the hands
of the acquiring corporation exceeds the adjusted basis to the
distributor or transferor corporation, the acquiring corporation shall
be subject to the limitations contained in section 167(j)(4) (relating
to used section 1250 property) or 167(j)(5) (relating to used
residential rental property). Thus, for example, if section 1250
property which is not residential rental property is acquired in a
section 381(a) transaction after July 24, 1969, the straight line method
of depreciation (or other method allowable under section 167(j)(4)(B))
is the only acceptable method with respect to that portion of the basis
of the property which, in the hands of the acquiring corporation,
exceeds the adjusted basis to the transferor or distributor corporation.
(c) Records required. Records shall be maintained in sufficient
detail to identify any depreciable property to which this section
applies, and to establish the basis thereof.
(d) Agreement under section 167(d). To the extent not inconsistent
with paragraph (b) of this section, an acquiring corporation shall be
treated as the distributor or transferor corporation in the case of an
agreement between the distributor or transferor corporation and the
district director under section 167(d) and Sec. 1.167(d)-1 with respect
to property to which section 381(c)(6) and this section apply. Thus, in
the case where the basis of an asset in the hands of an acquiring
corporation exceeds the basis of such asset in the hands of the
distributor or the transferor corporation, such an agreement will not
have the effect of permitting the acquiring corporation to compute its
depreciation allowance with respect to such excess basis under the
methods provided in section 167(b)(2), (3), or (4). However, the
provisions of the agreement will continue to apply with respect to the
useful life of the asset.
(e) Change of method of depreciation. Although the acquiring
corporation is required to use the method of computing depreciation used
by the distributor or transferor with respect to depreciable property to
which this section applies, such acquiring corporation may use another
method with respect to such property if consent of the Commissioner is
obtained in accordance with paragraph (e) of Sec. 1.446-1. Further,
subject to the provisions of paragraph (b) of Sec. 1.167(e)-1 the
acquiring corporation may change from the declining balance method
described in section 167(b)(2) to the straight line method without
consent of the Commissioner.
(f) Successive transactions to which section 381(a) applies. The
provisions of this section shall apply in the case of successive
transactions to which section 381(a) applies. Thus, for example, if X
Corporation, a transferor corporation, used the sum of the years-digits
method under section 167(b)(3) with respect to an asset transferred to Y
Corporation, an acquiring corporation, in a transaction to which section
381(a) applies, and subsequently Y Corporation, using the same method,
transfers such asset to Z Corporation in a transaction to which section
381(a) also applies, then Z Corporation shall be required to use the sum
of the years-digits method with respect to such asset.
(g) Illustration. The application of this section may be illustrated
by the following example:
[[Page 629]]
Example. M and N Corporations compute their taxable incomes on the
basis of the calendar year. On December 31, 1959, M Corporation
transfers all of its assets to N Corporation in a transaction to which
section 381(a) applies. Included among these assets is an item of
depreciable property which on that date has an adjusted basis (for
determining gain) of $800,000 after M Corporation takes into account for
1959 its allowance for depreciation under section 167(b)(2). The basis
attributable to the asset under section 362(b) is determined to be
$900,000 in the hands of N Corporation. Under the provisions of section
381(c)(6) and paragraph (a) of this section, N Corporation is required
to compute its allowance for the depreciation of the asset under section
167(b)(2) for 1960 and subsequent years but only in respect of $800,000
of its basis. N Corporation may use any reasonable method other than the
methods provided in section 167(b)(2), (3), or (4) in computing its
depreciation allowance of the remaining $100,000.
[T.D. 6559, 26 FR 2983, Apr. 7, 1961, as amended by T.D. 7166, 37 FR
5246, Mar. 11, 1972; 37 FR 6400, Mar. 29, 1972]
Sec. 1.381(c)(8)-1 Installment method.
(a) Carryover requirement. (1) Section 381(c)(8) provides that if,
in a transaction to which section 381(a) applies, an acquiring
corporation acquires installment obligations, the income from which the
distributor or transferor corporation has elected under section 453 and
the regulations thereunder to report on the installment method, then the
acquiring corporation shall be treated as the distributor or transferor
corporation would have been treated under section 453 had it not
transferred the installment obligations. Thus, if the distributor or
transferor corporation had properly elected to return income from the
sale or other disposition of property giving rise to the obligations on
the installment method, then the acquiring corporation shall be required
to return the income from all such installment obligations in the same
manner and to the same extent as the distributor or transferor
corporation, unless consent of the Commissioner to use another method is
obtained in accordance with paragraph (e) of Sec. 1.446-1. Amounts
received by the acquiring corporation on or after the date of
distribution or transfer with respect to an installment sale made by the
distributor or transferor corporation will not be taken into account in
applying the limitation under section 453(b)(2) with respect to the
amount of payments received in the year of sale or other disposition.
(2) Section 381(c)(8) and this section have no application to sales
or other dispositions of property made by the acquiring corporation on
or after the date of distribution or transfer. For provisions defining
the date of distribution or transfer, see Sec. 1.381(b)-1(b). See
section 381(c)(4) and the regulations thereunder for rules relating to
the proper method or combination of methods of accounting to be used by
the acquiring corporation.
(b) Basis of obligations. The basis in the hands of an acquiring
corporation of installment obligations described in section 381(c)(8)
and paragraph (a) of this section shall be the same as in the hands of
the distributor or transferor corporation.
(c) Repossession of property sold in prior years. If the acquiring
corporation repossesses property, previously sold by the distributor or
transferor corporation, by reason of default by the purchaser in payment
of the acquired installment obligations, then the acquiring corporation
shall be treated as though it were the vendor corporation for purposes
of determining, under section 453 and the regulations thereunder, the
gain, loss, income, or deduction with respect to the property
repossessed.
[T.D. 6559, 26 FR 2983, Apr. 7, 1961]
Sec. 1.381(c)(9)-1 Amortization of bond discount or premium.
(a) Carryover requirement. If, in a transaction to which section
381(a) applies, the acquiring corporation assumes liability for the
payment of bonds of a distributor or transferor corporation which were
issued at a discount or premium, then under the provisions of section
381(c)(9) the acquiring corporation is to be treated as the distributor
or transferor corporation after the date of distribution or transfer for
purposes of determining the amount of amortization allowable, or
includible, with respect to such discount or premium in computing
taxable income. Thus, if subsequent to February 28, 1913, a distributor
or transferor corporation issues bonds at
[[Page 630]]
a premium and the liability for them is assumed by the acquiring
corporation in a transaction to which section 381(a) applies, then the
net amount of the premium is income which should be prorated or
amortized over the life of the bonds, including the period during which
the acquiring corporation is liable upon the obligations assumed. On the
other hand, if a distributor or transferor corporation issues bonds at a
discount and the liability for them is assumed by the acquiring
corporation in a transaction to which section 381(a) applies, then the
net amount of the discount is deductible in computing taxable income but
should be prorated or amortized over the life of the bonds, including
the period during which the acquiring corporation is liable upon the
obligations assumed.
(b) Expense incurred upon issuance of bonds. If, in a transaction to
which section 381(a) applies, the acquiring corporation assumes
liability for bonds of a distributor or transferor corporation which
were issued at a discount or premium, the acquiring corporation shall be
treated as the distributor or transferor corporation after the date of
distribution or transfer with respect to the expense incurred upon the
issuance of such bonds.
(c) Purchase of bonds. If, in a transaction to which section 381(a)
applies, the acquiring corporation assumes liability for bonds of a
distributor or transferor corporation which were issued at a discount or
premium and if the acquiring corporation subsequently purchases such
bonds, then the acquiring corporation shall be treated as the
distributor or transferor corporation for the purpose of determining the
amount of any income or deduction resulting from the purchase. See
paragraph (c) of Sec. 1.61-12. For rules relating to the exchange or
substitution of bonds issued by the acquiring corporation for bonds of a
distributor or transferor corporation, see paragraph (d) of this
section.
(d) Exchange of new for old bonds. Notwithstanding any other
provision of this section, if--
(1) In a transaction to which section 381(a) applies, bonds of the
acquiring corporation are exchanged or substituted for bonds of a
distributor or transferor corporation which were issued at a discount or
premium, or
(2) Bonds of the acquiring corporation are exchanged or substituted
for bonds of a distributor or transferor corporation which were issued
at a discount or premium and in respect of which the acquiring
corporation has assumed the liability in a transaction to which section
381(a) applies,
then, with respect to any unamortized discount, premium, or expense of
issuance attributable to such bonds of the distributor or transferor
corporation, the acquiring corporation shall be treated as the
distributor or transferor corporation.
(e) Bonds of a distributor or transferor corporation. For purposes
of applying section 381(c)(9), the term bonds of a distributor or
transferor corporation includes not only bonds issued by the distributor
or transferor corporation but also bonds for which the distributor or
transferor corporation has assumed liability. Thus, if the distributor
or transferor corporation has assumed liability for bonds in a
transaction in which any unamortized discount or premium attributable to
such bonds carried over to such corporation, then the acquiring
corporation assuming liability for the bonds shall be treated as the
distributor or transferor corporation after the date of distribution or
transfer for purposes of determining the amount of amortization
allowable, or includible, with respect to such discount or premium. On
the other hand, if the distributor or transferor corporation has assumed
liability for bonds in a transaction in which any unamortized discount
or premium attributable to such bonds did not carry over to such
corporation, then there can be no carryover to the acquiring corporation
under this section.
[T.D. 6532, 26 FR 405, Jan. 19, 1961]
Sec. 1.381(c)(10)-1 Deferred exploration and development expenditures.
(a) Carryover requirement. (1) If for any taxable year a distributor
or transferor corporation has elected under section 615 or section 616
(or corresponding provisions of prior law) to defer and deduct on a
ratable basis any exploration or development expenditures made in
connection with any ore,
[[Page 631]]
mineral, mine, or other natural deposit transferred to the acquiring
corporation in a transaction described in section 381(a), then under the
provisions of section 381(c)(10) the acquiring corporation shall be
entitled to deduct such expenditures on a ratable basis in the same
manner, and to the same extent, as they would have been deductible by
the distributor or transferor corporation in the absence of the
distribution or transfer. For this purpose, the acquiring corporation
shall be treated as though it were the distributor or transferor
corporation. The principles set forth in paragraph (e) of Sec. 1.615-3
and paragraph (f) of Sec. 1.616-2 are applicable in computing the
amount of the deduction allowable to the acquiring corporation in
respect of expenditures deferred by a distributor or transferor
corporation.
Example. X and Y Corporations are both organized on January 1, 1955,
and both corporations compute their taxable income on the basis of the
calendar year. During 1955, X Corporation purchases a mineral property
which it begins to develop in 1956. During 1956, X Corporation incurs
development expenditures of $500,000 in respect of such property which
it elects to defer under section 616(b). On December 31, 1956, Y
Corporation acquires all of the assets of X Corporation in a
reorganization to which section 381(a) applies, no gain being recognized
to X Corporation on the transfer. In 1957, Y Corporation sells 150,000
units of produced ore benefited by the development expenditures incurred
and deferred by X Corporation, and the number of units remaining as of
the end of 1957, plus the number of units sold during that year, is
estimated to be 1,000,000. In addition to its deduction for depletion, Y
Corporation is, in 1957, entitled to a deduction under sections 616(b)
and 381(c)(10) of $75,000 of the development expenditures previously
deferred by X Corporation, that is, $500,000 x 150,000/1,000,000.
(2) If a distributor or transferor corporation has elected under
section 615 or section 616 (or corresponding provisions of prior law) to
defer exploration or development expenditures in respect of a mine or
other natural deposit which it subsequently disposes of except for a
retained economic interest therein, such as the right to royalty income
or in-ore payments, and such retained economic interest is transferred
to the acquiring corporation in a transaction to which section 381(a)
applies, then the acquiring corporation shall be entitled to deduct such
deferred expenditures attributable to the economic interest retained on
a ratable basis to the same extent they would have been deductible by
the distributor or transferor corporation in the absence of the
distribution or transfer. See paragraph (c) of Sec. 1.615-3 and
paragraph (c) of Sec. 1.616-2.
(3) For purposes of this section, the terms exploration expenditures
and development expenditures shall have the same meaning as that
ascribed to them in the regulations under sections 615 and 616 of the
Internal Revenue Code of 1954, or under sections 23(cc) and 23(ff) of
the Internal Revenue Code of 1939, whichever applies. See, for example,
paragraph (a) of Sec. 1.615-1 and paragraph (a) of Sec. 1.616-1.
(b) Effect and identification of election previously made. (1) The
election made by a distributor or transferor corporation under the
provisions of section 615 or section 616 (or corresponding provisions of
prior law) to defer exploration or development expenditures in respect
of any taxable year may not be revoked by the acquiring corporation for
any reason whatsoever.
(2) When filing its return for the first taxable year for which it
deducts exploration or development expenditures which were deferred
under section 615 or section 616 (or corresponding provisions of prior
law) by a distributor or transferor corporation, the acquiring
corporation shall attach thereto a statement properly identifying the
taxable year for which the election to defer was made by the distributor
or transferor corporation, the name of the corporation which made the
election, and the district director with whom the election was filed.
(3) It is unnecessary for an acquiring corporation to renew an
election to defer exploration or development expenditures which was made
by a distributor or transferor corporation.
(c) Successive transactions to which section 381(a) applies. If, by
virtue of section 381(c)(10), the acquiring corporation is entitled to
deduct exploration or development expenditures deferred by a distributor
or transferor corporation, then such acquiring corporation
[[Page 632]]
shall be deemed to have made the election to defer such expenditures for
purposes of applying section 381(c)(10) to any subsequent transaction in
which such acquiring corporation is a distributor or transferor
corporation.
(d) Carryover of limitation requirements. (1) If a distributor or
transferor corporation transfers any mineral property to the acquiring
corporation in a transaction described in section 381(a) and the
acquiring corporation pays or incurs exploration expenditures in a
taxable year ending after the date of the distribution or transfer, then
in applying the 4-year or $400,000 limitations described in section
615(c) and paragraphs (a) and (b) of Sec. 1.615-4, whichever is
applicable, the acquiring corporation shall be deemed to have been
allowed any deduction which, for any taxable year ending on or before
the date of distribution or transfer, was allowed to the distributor or
transferor corporation under section 615(a), or under section 23(ff)(1)
of the Internal Revenue Code of 1939, or to have made any election
which, for any such preceding year, was made by the distributor or
transferor corporation under section 615(b), or under section 23(ff)(2)
of the Internal Revenue Code of 1939. Thus, in such instance, the
acquiring corporation shall take into account the years in which the
distributor or transferor corporation exercised the election to deduct
or defer exploration expenditures and any amounts so deducted or
deferred. For this purpose, it is immaterial whether the deduction has
been allowed to, or the election has been made by, the distributor or
transferor corporation with respect to the specific mineral property
transferred by that corporation to the acquiring corporation.
(2) Generally, for purposes of applying the 4-year limitation
described in paragraph (a) of Sec. 1.615-4, if there are two or more
distributor or transferor corporations that transfer any mineral
property to the acquiring corporation, each taxable year of any such
corporation ending on or before the date of distribution or transfer in
which exploration expenditures were deducted or deferred shall be
treated as a separate taxable year regardless of the fact that the
taxable years of two or more such corporations normally end on the same
date. However, if the date of distribution or transfer is the same with
respect to more than one distributor or transferor corporation, then the
taxable years of such corporations ending on the same date of
distribution or transfer shall be considered as one taxable year for
purposes of applying the 4-year limitation even though more than one
such corporation deducted or deferred exploration expenditures for such
taxable years.
(3) For purposes of applying the $400,000 limitation described in
paragraph (b) of Sec. 1.615-4, if there are two or more distributor or
transferor corporations that transfer any mineral property to the
acquiring corporation, any exploration expenditures which were deducted
or treated as deferred expenses by such corporations for taxable years
ending after December 31, 1950, shall be taken into account by the
acquiring corporation.
(4) If a distributor or transferor corporation that transfers any
mineral property to the acquiring corporation was required to take into
account any taxable years or amounts of its transferor, as provided by
paragraph (e) of Sec. 1.615-4, for purposes of either the 4-year
limitation described in paragraph (a) of Sec. 1.615-4 or the $400,000
limitation described in paragraph (b) of Sec. 1.615-4, then the
acquiring corporation shall also take these taxable years and amounts
into account in applying the same limitations.
(5) The provisions of this paragraph may be illustrated by the
following examples:
Example 1. M and N Corporations were organized on January 1, 1956,
and each corporation computes its taxable income on the basis of the
calendar year. For each of its taxable years 1956 and 1957, M
Corporation expended $60,000 for exploration expenditures and exercised
the option to deduct such amounts under section 615(a). N Corporation
made no exploration expenditures during its taxable years 1956 and 1957.
On December 31, 1957, M Corporation transferred all of its assets to N
Corporation in a transaction to which section 381(a) applies, no gain
being recognized to the transferor corporation on the transfer. N
Corporation made exploration expenditures of $100,000, $120,000,
$110,000, and $100,000 for the years 1958, 1959, 1960, and 1961,
respectively, which expenditures it desired to deduct under section
[[Page 633]]
615(a) to the extent allowable. On the basis of these facts, N
Corporation may deduct up to $100,000 for each of the years 1958 and
1959. No deduction or deferral is allowable for 1960 since the benefits
of section 615(c) were previously availed of for 4 taxable years.
However, N Corporation may deduct $80,000 for 1961 (the 4-year
limitation not applying to such year) but, if such deduction is made, N
Corporation will not be allowed any further deductions or deferrals
since the $400,000 limitation of paragraph (b) of Sec. 1.615-4 will
have been reached.
Example 2. R and S Corporations were organized on January 1, 1955,
and each corporation computes its income on the basis of the calendar
year. For the 1955 taxable year neither corporation made any exploration
expenditures under section 615(a). On June 30, 1956, R Corporation
transferred all its assets to S Corporation in a transaction to which
section 381(a) applies, no gain being recognized to the transferor
corporation on the transfer. During its short taxable year ending June
30, 1956, R Corporation made exploration expenditures of $60,000 which
it elected to deduct under section 615. For its taxable year ending
December 31, 1956, S Corporation may deduct or defer exploration
expenditures up to $100,000 since this is a separate election for
purposes of utilizing section 615 and is not affected by the $60,000
previously deducted by R Corporation. Assuming S Corporation exercises
an election under section 615 for its taxable year ending December 31,
1956, S Corporation may elect to apply the benefits of section 615 to
exploration expenditures for two more taxable years. However, for
taxable years beginning after July 6, 1960 (the 4-year limitation not
applying), S Corporation is entitled under section 615 to deduct or
defer exploration expenditures made in such years to the extent that the
combined deductions and deferrals by R and S Corporations in prior years
did not exceed $400,000.
Example 3. O and P Corporations were organized on January 1, 1955,
and each corporation computes its taxable income on the basis of the
calendar year. For their taxable years 1955, 1956, and 1957, each
corporation deducted exploration expenditures made in such years under
section 615(a). On June 30, 1958, O Corporation transferred all its
assets to P Corporation in a transaction to which section 381(a)
applies, no gain being recognized to the transferor corporation on the
transfer. If, during its short taxable year ending June 30, 1958, O
Corporation made additional exploration expenditures, it may deduct or
defer such expenditures (up to $100,000) under section 615 since O
Corporation has utilized section 615 in only three previous taxable
years. For its taxable years ending after June 30, 1958, and beginning
before July 7, 1960, P Corporation may not deduct or defer exploration
expenditures under section 615, since the benefits of that section were
utilized by O and P Corporations for 4 taxable years. However, for
taxable years beginning after July 6, 1960 (the 4-year limitation not
applying), P is entitled under section 615 to deduct or defer
exploration expenditures made in such years to the extent that the
combined deductions and deferrals by O and P Corporations in prior years
do not exceed $400,000. See paragraph (b) of Sec. 1.615-4.
Example 4. X, Y, and Z Corporations were organized on January 1,
1955, and each corporation computes its taxable income on the basis of
the calendar year. For their taxable years ending December 31, 1955, X
and Y Corporations each deferred $100,000 for exploration expenditures
made in such taxable years under section 615(b). Z Corporation made no
exploration expenditures during its taxable year ending December 31,
1955. On March 31, 1956, X and Y Corporations transferred all their
assets to Z Corporation in a transaction to which section 381(a)
applies, no gain being recognized to the transferor corporations on the
transfer. X and Y Corporations each made exploration expenditures of
$75,000 during their short taxable years ending March 31, 1956, which
they deducted under section 615(a). For purposes of taxable years
beginning before July 7, 1960, Z Corporation must take into account the
taxable years in which X and Y Corporations deducted or deferred
exploration expenditures. In so doing, each taxable year in which
exploration expenditures were deducted or deferred must be taken into
account except that the taxable years of X and Y Corporations ending on
March 31, 1956, shall be considered as one taxable year. Therefore, Z
Corporation may deduct or defer exploration expenditures in accordance
with section 615 for any one taxable year ending after March 31, 1956,
and beginning before July 7, 1960. However, for taxable years beginning
after July 6, 1960 (the 4-year limitation not applying), Z Corporation
must take into account for purposes of the $400,000 limitation all of
the $350,000 of exploration expenditures deducted or deferred by X, Y,
and Z Corporations during taxable years ending after December 31, 1950.
Therefore, Z Corporation, assuming it has not deducted or deferred any
exploration expenditures, is entitled under section 615 to deduct or
defer in taxable years beginning after July 6, 1960, up to $50,000 for
exploration expenditures made in such years.
Example 5. For purposes of this example, assumethat each taxpayer
computes taxable income on the basis of the calendar year. Taxpayer A,
an individual who has deducted exploration expenditures of $75,000 under
section 23(ff) of the Internal Revenue Code of 1939 for each of his
taxable years 1952 and 1953, transferred a mineral property to K
[[Page 634]]
Corporation on January 1, 1954, in a transaction in which the basis of
the mineral property in the hands of K Corporation is determined under
section 362(a). For its taxable year 1954 and pursuant to section
615(a)., K Corporation deducted exploration expenditures of $100,000
which it made in such year. K Corporation had made no exploration
expenditures in any preceding taxable year. On December 31, 1954, K
Corporation transferred all its assets to L Corporation in a
reorganization to which section 381(a) applies, no gain being recognized
to the transferor corporation on the transfer. Assuming that L
Corporation has not deducted or deferred exploration expenditures in any
preceding taxable year, L Corporation may deduct or defer exploration
expenditures (up to $100,000) in accordance with section 615 for any one
taxable year ending after December 31, 1954, and beginning before July
7, 1960, in view of the 4-year limitation. However, if L Corporation
does not deduct or defer exploration expenditures in that period, then
for taxable years beginning after July 6, 1960 (the 4-year limitation
not applying), L Corporation is entitled to deduct or defer up to
$150,000 (but not to exceed $100,000 per year) for exploration
expenditures made in such years. See paragraph (b) of Sec. 1.615-4.
[T.D. 6552, 26 FR 1988, Mar. 8, 1961, as amended by T.D. 6685, 28 FR
11406, Oct. 24, 1963]
Sec. 1.381(c)(11)-1 Contributions to pension plan, employees'
annuity plans, and stock bonus and profit-sharing plans.
(a) Carryover requirement. Section 381(c)(11) provides that, for
purposes of determining amounts deductible under section 404 for any
taxable year, the acquiring corporation shall be considered after the
date of distribution or transfer to be the distributor or transferor
corporation in respect of any pension, annuity, stock bonus, or profit-
sharing plan.
(b) Nature of carryover. (1) Primarily, section 381(c)(11) and this
section apply to the amount of any unused deductions or excess
contributions carryovers which, in the absence of the transaction
causing section 381 to apply, would have been available to the
distributor or transferor corporation under section 404. Thus, for
example, this section applies to unused deductions under a profit-
sharing or stock bonus trust which, in accordance with the second
sentence of section 404(a)(3)(A) and Sec. 1.404(a)-9, would have been
available in succeeding taxable years to the transferor corporation if
the transfer of assets to the acquiring corporation had not occurred.
(2) Section 381(c)(11) also permits or requires the acquiring
corporation to be treated as though it were the distributor or
transferor corporation for the purpose of satisfying any conditions
which would have been required of the distributor or transferor
corporation in the absence of the distribution or transfer, so that it
may be determined whether the distributor or transferor corporation, or
the acquiring corporation, is entitled to take a deduction under section
404 in respect of a trust or plan established by the distributor or
transferor corporation. Thus, for example, in a case when the taxable
year of the transferor corporation ends on the date of transfer pursuant
to section 381(b)(1), that corporation is entitled, pursuant to the
provisions of section 404(a)(6) and paragraph (c) of Sec. 1.404(a)-1,
to a deduction in such taxable year for a payment to a qualified trust
of that corporation made by the acquiring corporation after the close of
such taxable year but within the time specified in section 404(a)(6). In
further illustration, if the transferor corporation were to establish a
qualified plan, and if the plan were maintained as a qualified plan by
the acquiring corporation, then any contributions paid under the plan by
the acquiring corporation (other than those which are deductible by the
transferor corporation by reason of section 404(a)(6)) would be
deductible under section 404 by the acquiring corporation even though
the plan were exclusively for the benefit of former employees of the
transferor corporation. Also, for example, if the transferor corporation
were to adopt an annuity plan during its taxable year ending on the date
of transfer, the acquiring corporation would be entitled, subject to the
provisions of section 401(b) and Sec. 1.401-5, to amend the plan so as
to make it retroactively satisfy the requirements of section 401(a)(3),
(4), (5), and (6) for the period beginning with the date on which the
plan was put into effect.
(c) Taxable year of deduction. The first taxable year of the
acquiring corporation in which any amount shall be allowed as a
deduction to that corporation by reason of section 381(c)(11) and
[[Page 635]]
this section shall be its first taxable year ending after the date of
distribution or transfer.
(d) Requirements for deductions. (1) In order for any amount paid by
the acquiring corporation (other than amounts deductible under section
404(a)(5)) to be deductible by the acquiring corporation by reason of
this section in respect of a trust or nontrusteed annuity plan which is
established by a distributor or transferor corporation and maintained by
the acquiring corporation, the contributions must be paid (or deemed to
have been paid under section 404(a)(6)) by the acquiring corporation in
a taxable year of that corporation which ends with or within a year of
the trust for which it is exempt under section 501(a), or, in the case
of a nontrusteed annuity plan, for which it meets the requirements of
section 404(a)(2). See, however, section 404(a)(4) and Sec. 1.404(a)-11
for rules relating to deductions for contributions to foreign-situs
trusts. The trust or plan which is established by the distributor or
transferor corporation and maintained by the acquiring corporation may
separately satisfy the requirements of section 401(a) or section
404(a)(2) or may, together with other trusts or plans of the acquiring
corporation, constitute a single plan which qualifies under section
401(a) or meets the requirements of section 404(a)(2).
(2) Excess contributions paid under a qualified trust or plan
established by the transferor or distributor corporation may be carried
over and, subject to the applicable limitations, deducted by the
acquiring corporation in a taxable year ending after the date of
distribution or transfer regardless of whether the trust is exempt, or
the plan meets the requirements of section 404(a)(2), during such
taxable year. There are, however, special rules for computing the
limitations on the amount of excess contributions which are deductible
in a taxable year ending after the trust or plan has terminated (see
Sec. 1.404(a)-7, paragraph (e) of Sec. 1.404(a)-9, and paragraph (a)
of Sec. 1.404(a)-13). For this purpose, the pension, annuity, stock
bonus, or profit-sharing plan of the distributor or transferor
corporation under which the excess contributions were made shall be
considered continued (and not terminated) by the acquiring corporation
if, after the date of distribution or transfer, the acquiring
corporation continues the plan as a separate and distinct plan of its
own which continues to qualify under section 401(a), or to meet the
requirements of section 404(a)(2), or consolidates or replaces that plan
with a comparable plan. See subparagraph (4) of this paragraph for rules
relating to what constitutes a ``comparable'' plan.
(3) In order for any amount paid by the acquiring corporation to be
deductible by the acquiring corporation as an unused deduction carried
over from a qualified profit-sharing or stock bonus trust established by
a distributor or transferor corporation, the acquiring corporation must
continue such trust established by the distributor or transferor
corporation as a separate and distinct trust of its own which continues
to qualify under section 401(a), or must consolidate or replace that
trust with a comparable trust. In addition, the amount paid by the
acquiring corporation will be deductible as an unused deduction carried
over from the transferor or distributor corporation only if it is paid
into the profit-sharing or stock bonus trust established by the
transferor or distributor corporation, or the comparable trust, in a
taxable year of the acquiring corporation which ends with or within a
year of such trust (or such comparable trust) for which it meets the
requirements of section 401(a) and is exempt under section 501(a). See
subparagraph (4) of this paragraph for rules relating to what
constitutes a ``comparable'' trust.
(4) For purposes of subparagraphs (2) and (3) of this paragraph, a
plan under which deductions are determined pursuant to paragraph (1) or
(2) of section 404(a) shall be considered comparable to another plan
under which deductions are determined pursuant to either of those
paragraphs, and a plan under which deductions are determined pursuant to
paragraph (3) of section 404(a) shall be considered comparable to
another plan under which deductions are determined pursuant to such
paragraph (3). Thus, a profit-sharing plan (which qualifies under
section
[[Page 636]]
401(a)) established by the transferor or distributor corporation shall,
for purposes of subparagraphs (2) and (3) of this paragraph, be
considered terminated if, after the date of distribution or transfer,
the acquiring corporation transfers the funds accumulated under the
profit-sharing plan into a pension plan covering the same employees. In
such a case, excess contributions paid under the profit-sharing plan by
the distributor or transferor corporation may be carried over and
deducted by the acquiring corporation in a taxable year ending after the
date of distribution or transfer subject to the limitations in section
404(a)(3)(A) computed in accordance with the rules in paragraph (e)(2)
of Sec. 1.404(a)-9 for computing limitations when a profit-sharing plan
has terminated. On the other hand, unused deductions attributable to the
profit sharing plan may not be carried over and used by the acquiring
corporation as a basis for deducting amounts contributed by it to the
pension plan.
(e) Effect of consolidation or replacement of plan on prior
contributions. If a pension, annuity, stock bonus, or profit-sharing
plan which was established by a distributor or transferor corporation is
terminated after the date of distribution or transfer because of
consolidation or replacement with a comparable plan of the acquiring
corporation, then the contributions paid to or under its plan by the
distributor or transferor corporation on or before the date of
distribution or transfer shall not be disallowed under section 404
merely because of the termination of the plan which was established by
that corporation, provided that the termination does not cause the plan
to fail to qualify under section 401(a).
(f) Amounts deductible under section 404. Section 381(c)(11) and
this section apply only to amounts which are otherwise deductible under
section 404 and the regulations thereunder. See Sec. Sec. 1.404(a)-1
through 1.404(d)-1. Thus, to be deductible by reason of this section,
contributions paid by the acquiring corporation must be expenses which
otherwise satisfy the conditions of section 162 (relating to trade or
business expenses). No deduction shall be allowed by reason of section
381(c)(11) and this section for a contribution which is allowable under
section 162 but is not allowable under section 404. Thus, the acquiring
corporation shall not be allowed a deduction by reason of this section
in respect of a plan established by a distributor or transferor
corporation if the contribution would not otherwise be deductible under
section 404 by reason of section 404(c) and Sec. 1.404(c)-1. On the
other hand, any unused deductions or excess contributions of a
distributor or transferor corporation which are carried over from 1939
Code years shall be deductible by the acquiring corporation if the
requirements of this section, section 404(d), and Sec. 1.404(d)-1 are
satisfied.
(g) Cost of past service credits. In computing the cost of past
service credits under a plan with respect to employees of the
distributor or transferor corporation, the acquiring corporation may
include the cost of credits for periods during which the employees were
in the service of the distributor or transferor corporation.
(h) Separate carryovers required. The excess contributions which are
available to a distributor or transferor corporation under the
provisions of section 404(a)(1)(D) and section 404(a)(3)(A) at the close
of the date of distribution or transfer and are carried over to the
acquiring corporation under this section shall be kept separate and
distinct from each other and from any excess contributions which are
available to the distributor or transferor corporation at that time
under the provisions of section 404(a)(7) and are carried over to the
acquiring corporation under this section. If there are excess
contributions carried over to the acquiring corporation from more than
one transferor or distributor corporation, the excess contributions of
each transferor or distributor corporation shall be kept separate and
distinct from those of the other transferor or distributor corporations
and, with respect to each such transferor or distributor corporation,
shall be kept separate and distinct as provided in the preceding
sentence. See, however, paragraph (i) of this section for rules for
applying the provisions of section 404(a)(3)(A) when the acquiring
corporation maintains two or more profit-sharing or stock bonus
[[Page 637]]
trusts, one or more of which was established by a distributor or
transferor corporation. The requirements in this paragraph shall apply
with respect to any excess contributions which are carried over to the
acquiring corporation from a distributor or transferor corporation under
the provisions of section 404(d) and this section.
(i) Limitations applicable to profit-sharing or stock bonus trusts.
When contributions are paid by the acquiring corporation after the date
of distribution or transfer to two or more profit-sharing or stock bonus
trusts, and one or more of such trusts was established by a distributor
or transferor corporation, such trusts shall be considered as a single
trust in applying the provisions of section 404(a)(3)(A) under this
section. Accordingly, in determining its secondary limitation, and its
excess contributions carryover, under section 404(a)(3)(A) and Sec.
1.404(a)-9 in any taxable year ending after the date of distribution or
transfer, the acquiring corporation shall take into accounts its primary
limitations, and the deductions allowed or allowable to it, for all
prior years under the limitations provided in those sections, and also
the primary limitations of, and deductions allowed or allowable to, the
distributor or transferor corporation or corporations for all prior
years under the limitations provided in those sections.
(j) Successive carryovers. The provisions of section 381(c)(11) and
this section shall apply to an acquiring corporation which, in a
distribution or transfer to which section 381(a) applies acquires the
assets of a distributor or transferor corporation which has previously
acquired the assets of another corporation in a transaction to which
section 381(a) applies, even though, in computing an unused deductions
or excess contributions carryover to the second acquiring corporation,
it is necessary to take into account contributions paid by, and
limitations applicable to, the first distributor or transferor
corporation.
(k) Information to be furnished by acquiring corporation. The
acquiring corporation shall furnish such information with respect to a
plan established by a distributor or transferor corporation as will,
consistently with the principles of section 404, establish that the
provisions of such section and this section apply. For purposes of this
section, the district director may require any other information that he
considers necessary to determine deductions allowable under section 404
and this section or qualification under section 401. Any unused
deductions or excess contributions carried over from a distributor or
transferor corporation pursuant to this section shall be properly
identified with the corporation which would have been permitted to use
those deductions or contributions in the absence of the transaction
causing section 381 to apply.
(l) Illustration. The application of this section may be illustrated
by the following example:
Example. In 1955, X Corporation, which makes its return on the basis
of the calendar year, paid $400,000 to completely fund past service
credits under a qualified pension plan and deducted 10 percent ($40,000)
of that cost in each of the taxable years 1955, 1956, and 1957. The
pension plan established by X Corporation had an anniversary date of
January 1. On December 31, 1957, on which date the undeducted part of
the cost amounted to $280,000, X Corporation transferred all its assets
to Y Corporation in a statutory merger to which section 361 applies. Y
Corporation, which also makes its return on the basis of the calendar
year, had a qualified pension plan and trust which also had an
anniversary date of January 1. Since Y Corporation had many more
employees than X Corporation on the date of transfer, it covered the
former employees of X Corporation under its own plan. Y Corporation is
entitled to deductions under section 404(a)(1)(D) and this section in
1958 and succeeding taxable years, in order of time, with respect to the
undeducted balance of $280,000, to the extent of the difference between
the amount paid and deductible by that corporation in each such taxable
year and the maximum amount deductible by that corporation for such
taxable year in accordance with the applicable limitations of section
404(a)(1). In computing the maximum amount deductible by Y Corporation
for 1958 and 1959 under section 404(a)(1)(C), that corporation may
include $40,000 for each year, the amount that X Corporation could have
included for each of those years in computing the maximum amount that
would have been deductible by X Corporation under section 404(a)(1)(C)
if the merger had not occurred. Thus, assuming that Y Corporation's
appropriate limitation so computed under section 404(a)(1)(C) is
$1,000,000 (including the $40,000 carried over from X Corporation under
this section) for each of those taxable
[[Page 638]]
years, and that Y Corporation contributed $925,000 to its trust in 1958
and $975,000 in 1959, then Y Corporation is entitled under section
404(a)(1)(D) and this section to deduct in 1958 $75,000, and in 1959
$25,000, of the amount ($280,000) carried over from X Corporation. The
undeducted balance of such amount ($180,000) available to Y Corporation
on December 31, 1959, would be deductible by that corporation in
succeeding taxable years in accordance with section 404(a)(1)(D) and
this section.
[T.D. 6556, 26 FR 2405, Mar. 22, 1961, as amended by T.D. 7168, 37 FR
5024, Mar. 9, 1972]
Sec. 1.381(c)(12)-1 Recovery of bad debts, prior taxes,
or delinquency amounts.
(a) Carryover requirement. (1) If, as a result of a distribution or
transfer to which section 381(a) applies, the acquiring corporation is
entitled to the recovery of a bad debt, prior tax, or delinquency amount
on account of which a deduction or credit was allowed to a distributor
or transferor corporation for a prior taxable year, and such debt, tax,
or amount is recovered by the acquiring corporation after the date of
distribution or transfer, then under the provisions of section
381(c)(12) the acquiring corporation is required to include in its gross
income for the taxable year of recovery the same amount of income
attributable to the recovery as the distributor or transferor
corporation would have been required to include under section 111 and
the regulations thereunder had the distribution or transfer not
occurred.
(2) The rule prescribed by paragraph (a)(1) of this section and by
section 381(c)(12) with respect to bad debts, prior taxes, and
delinquency amounts applies equally with respect to the recovery by the
acquiring corporation of all other losses, expenditures, and accruals
made on the basis of deductions from the gross income of a distributor
or transferor corporation for prior taxable years, including war losses
referred to in section 127 of the Internal Revenue Code of 1939, but not
including deductions with respect to depreciation, depletion,
amortization, or amortizable bond premiums. An item which is not a
``section 111 item'' for purposes of the regulations under section 111
is not subject to the provisions of section 381(c)(12). The provisions
of section 111(c) shall be applied with respect to a recovery by the
acquiring corporation in the same manner as they would have been applied
by the distributor or transferor corporation.
(b) Amount of recovery exclusion allowable for year of recovery. For
the year of any recovery by the acquiring corporation, the amount of the
recovery exclusion for the original taxable year shall be determined in
accordance with paragraph (b) of Sec. 1.111-1. For the purpose of this
paragraph and section 381(c)(12), the recovery exclusion for any year
with respect to section 111 items of the acquiring corporation shall be
kept separate from the recovery exclusion for any year with respect to
section 111 items of each distributor or transferor corporation. The
recovery by the acquiring corporation of any section 111 item of such
corporation after the date of the distribution or transfer shall be
considered separately from recoveries by the acquiring corporation of
any such item which was deducted or credited by a distributor or
transferor corporation. Any recovery by the acquiring corporation of a
section 111 item shall be excluded from the gross income of the
acquiring corporation to the extent of the recovery exclusion (1)
determined for the original year for which that item was deducted or
credited by the specific corporation which claimed the deduction or
credit and (2) reduced by the excludable recoveries (whether made by the
acquiring corporation, or by the distributor or transferor corporation)
in intervening years with respect to the recovery exclusion of such
corporation for such original year. There shall be taken into account
the effect of net operating loss carryovers and carrybacks or capital
loss carryovers.
(c) Illustration of carryover of recovery exclusion--(1) Facts. (i)
The application of section 381(c)(12) may be illustrated by the
following example. M and N Corporations are both organized on January 1,
1957, and both corporations compute their taxable income on the basis of
the calendar year. On December 31, 1959, M Corporation transfers all its
assets to N Corporation in a reorganization to which section 381(a)
applies.
(ii) The section 111 items of the two corporations for the following
taxable
[[Page 639]]
years are as follows, identification of such items being made by an
appropriate letter:
------------------------------------------------------------------------
M N
Taxable year of deduction or credit Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1957......................................... $500(g) $200(h)
1958......................................... 300(i) 400(j)
1959......................................... 600(k) 100(m)
------------------------------------------------------------------------
(iii) The recovery exclusions in respect of such taxable years,
computed in accordance with Sec. 1.111-1(b)(2), are assumed to be as
follows:
------------------------------------------------------------------------
M N
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1957......................................... $400 $150
1958......................................... 200 300
1959......................................... 500 75
------------------------------------------------------------------------
(iv) The recoveries of the above-mentioned section 111 items by the
two corporations are as follows:
------------------------------------------------------------------------
M N
Taxable year of recovery Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1958......................................... $25 (g) $50 (h)
1959......................................... 50 (g) 20 (h)
30 (i) 15 (j)
1960......................................... ............ 350 (g)
225 (i)
550 (k)
100 (h)
350 (j)
85 (m)
------------------------------------------------------------------------
(2) M Corporation's 1958 recovery.
Total recovery of section 111 items for 1957..................... $25
Less: Recovery exclusion for 1957.............................. 400
------
Amount included in gross income of M Corporation for 1958.... 0
------
(3) M Corporation's 1959 recoveries.
(i) Total recovery of section 111 items for 1957................. $50
Less: Recovery exclusion for 1957....................... $400
Minus excludable recovery............................... 25
-------
..... 375
Amount included in gross income of M Corporation for 1959.... 0
(ii) Total recovery of section 111 items for 1958................ 30
Less: Recovery exclusion for 1958.............................. 200
--------
Amount included in gross income of M Corporation for 1959.... 0
(4) N Corporation's 1958 recovery.
Total recovery of section 111 items for 1957..................... $50
Less: Recovery exclusion for 1957.............................. 150
------
Amount included in gross income of N Corporation for 1958.... 0
(5) N Corporation's 1959 recoveries.
(i) Total recovery of section 111 items for 1957................. $20
Less: Recovery exclusion for 1957....................... $150
Minus excludable recovery in 1958....................... 50
-------
..... 100
Amount included in gross income of N Corporation for 1959.... 0
(ii) Total recovery of section 111 items for 1958................ 15
Less: Recovery exclusion for 1958.............................. 300
--------
Amount included in gross income of N Corporation for 1959.... 0
(6) N Corporation's 1960 recoveries.
(i) Total recovery of section 111 items of M Corporation for 1957 $350
Less: Recovery exclusion of M Corporation for 1957............. $400
Minus:
Excludable recovery in 1959.................. $50
Excludable recovery in 1958.................. 25
-------
..... 75
..... ..... 325
Amount included in gross income of N Corporation for 1960.. 25
(ii) Total recovery of section 111 items of M Corporation for 225
1958............................................................
Less: Recovery exclusion of M Corporation for 1958...... $200
Minus excludable recovery in 1959..................... 30
-------
..... 170
Amount included in gross income of N Corporation for 1960.. 55
(iii) Total recovery of section 111 items of M Corporation for 550
1959............................................................
Less: Recovery exclusion of M Corporation for 1959............. 500
--------
Amount included in gross income of N Corporation for 1960.. 50
(iv) Total recovery of section 111 items of N Corporation for 100
1957............................................................
Less: Recovery exclusion of N Corporation for 1957...... $150
Minus:
Excludable recovery in 1959.................. $20
Excludable recovery in 1958.................. 50
-------
..... 70
..... ..... 80
Amount included in gross income of N Corporation for 1960 20
(v) Total recovery of section 111 items of N Corporation for 1958 $350
Less: Recovery exclusion of N Corporation for 1958...... $300
Minus excludable recovery in 1959....................... 15
-------
..... 285
Amount included in gross income of N Corporation for 1960.... 65
(vi) Total recovery of section 111 items of N Corporation for 85
1959............................................................
Less: Recovery exclusion of N Corporation for 1959............. 75
--------
Amount included in gross income of N Corporation for 1960.... 10
[[Page 640]]
(7) Summary of recoveries included in gross income of N Corporation
for 1960.
(i) Recovery of M Corporation items for:
1957.................................................... $25
1958.................................................... 55
1959.................................................... 50
--------
..... $130
------
(ii) Recovery of N corporation items for:
1957.................................................... 20
1958.................................................... 65
1959.................................................... 10
--------
..... 95
------
Total amount included in gross income........................ 225
[T.D. 6559, 26 FR 2984, Apr. 7, 1961]
Sec. 1.381(c)(13)-1 Involuntary conversions.
(a) Carryover requirement--(1) General rule. Section 381(c)(13)
requires that after the date of distribution or transfer the acquiring
corporation, in a transaction to which section 381(a) applies, shall be
treated as the distributor or transferor corporation for purposes of
applying section 1033, relating to involuntary conversions. This rule
shall apply even though the property similar or related in service or
use to the property converted, or the stock of a corporation owning such
similar property, is purchased by the acquiring corporation after the
date of distribution or transfer and is not received from the
distributor or transferor corporation in the transaction to which
section 381(a) applies. Accordingly, if any factor essential to the
application of section 1033 occurs on or before the date of distribution
or transfer and any other such factor also occurs after that date, then,
in accordance with section 381(c)(13) and this section, the provisions
of section 1033 shall apply to the acquiring corporation in the same
manner that they would have applied to the distributor or transferor
corporation in the absence of the distribution or transfer. For purposes
of this section, the terms involuntary conversion and disposition of the
converted property shall have the meaning ascribed to them by the
regulations under section 1033.
(2) Application to other transactions. The provisions of this
section shall apply to any transaction which, under provisions of the
Internal Revenue Code of 1954, is treated as though it were an
involuntary conversion within the meaning of section 1033. See, for
example, section 1071, relating to gain from a sale or exchange to
effectuate the policies of the Federal Communications Commission; and
sections 1332(b)(3) and 1333(3), relating to war loss recoveries.
(b) Conversion into similar property. Section 1033(a)(1) provides
that no gain shall be recognized if property is involuntarily converted
only into property which is similar or related in service or use to the
property so converted. If there is a disposition of property of a
distributor or transferor corporation and, subsequent to the date of
distribution or transfer, property similar or related in service or use
to the property disposed of is received by the acquiring corporation as
compensation for the property so disposed of, then no gain shall be
recognized to the acquiring corporation, provided that no gain would
have been recognized under section 1033(a)(1) if the similar property
had been received directly by the distributor or transferor corporation.
Example. Property of S Corporation with an adjusted basis of $100 is
condemned by the local government. Shortly after the property is so
condemned, S Corporation liquidates and distributes its assets to P
Corporation in a distribution to which section 381(a) applies.
Subsequent to the date of distribution, P Corporation receives from the
government (in settlement of the condemnation proceedings) property with
a market value of $500 which is similar or related in service or use to
the property so condemned. No gain is recognized to either corporation
upon P Corporation's receipt of the similar property, and the property
so received has a basis of $100 in the hands of P Corporation on the
date of its acquisition.
(c) Conversion into money or dissimilar property when disposition
occurs after December 31, 1950--(1) General rule. Section 1033(a)(3) and
Sec. 1.1033(a)-2 provide rules for involuntary conversions of property
into money or dissimilar property where the disposition of the converted
property occurs after December 31, 1950. In such a case, the gain on the
conversion, if any, shall be recognized, at the election of the
taxpayer, only to the extent that the
[[Page 641]]
amount realized on the conversion exceeds the cost of other property
purchased by the taxpayer which is similar or related in service or use
to the property so converted, or exceeds the cost of stock purchased by
the taxpayer in the acquisition of control of a corporation owning such
other property, provided (i) the taxpayer purchases such other property
or stock for the purpose of replacing the property so converted and (ii)
the purchase occurs during the period of time specified in section
1033(a)(3)(B). The provisions of this paragraph shall apply to
involuntary conversions where the disposition of the property occurs
after December 31, 1950, and where the election to have section
1033(a)(3) apply to the treatment of the gain upon the conversion is
contingent upon activities of both the distributor or transferor
corporation and the acquiring corporation. For purposes of section
381(c)(13), the period of time specified in section 1033(a)(3)(B) shall
be determined by taking into account taxable years of, and extensions of
time granted to, both the distributor or transferor corporation and the
acquiring corporation.
(2) Replacement period. The period during which the purchase of
similar property or stock must be made in order to prevent the
recognition of gain on the involuntary conversion terminates 2 years
(or, in the case of a disposition occurring before Dec. 31, 1969, 1
year) after the close of the first taxable year in which any part of the
gain upon the conversion is realized, or at the close of such later date
as may be designated pursuant to an application of the taxpayer. See
paragraph (c)(3) of Sec. 1.1033(a)-2. Therefore, if, in a case to which
this subparagraph applies, the first taxable year in which gain is
realized is the taxable year of the distributor or transferor
corporation ending with the close of the date of distribution or
transfer, the acquiring corporation will have a maximum of only 2 years
(or, in the case of a disposition occurring before Dec. 31, 1969, 1
year) after that date in which to purchase the similar property or
stock, unless an extension of time has been granted upon application by
the distributor, transferor, or acquiring corporation within the time
prescribed. See paragraph (a) of Sec. 1.381(b)-1 as to the termination
of the taxable year of the distributor or transferor corporation. See
paragraph (c)(3) of Sec. 1.1033(a)-2 as to applications to extend the
period within which to replace the converted property. In addition to
the information otherwise required under paragraph (c)(3) of Sec.
1.1033(a)-2, the application shall contain sufficient detail in
connection with the distribution or transfer to establish that section
381(c)(13) applies to the involuntary conversion involved.
(3) Examples. The application of this paragraph may be illustrated
by the following examples:
Example 1. A and B Corporations compute their taxable income on the
basis of the calendar year, and both corporations use the cash method of
accounting. During 1970 property of A Corporation is destroyed by fire,
and in January 1971, A Corporation receives $15,000 from an insurance
company as compensation for its loss of property. The adjusted basis of
the property on the date of destruction is $10,000; as a consequence, A
Corporation realizes a gain of $5,000 on the involuntary conversion. On
June 30, 1971, B Corporation acquires all of the assets of A Corporation
in a reorganization to which section 381(a) applies. In accordance with
paragraph (c)(2) of Sec. 1.1033(a)-2, A Corporation reports in its
return for the short taxable year ending June 30, 1971, all the details
in connection with the involuntary conversion but does not include the
realized gain in gross income, thereby electing to have the gain
recognized only to the extent provided in section 1033(a)(3). On June
15, 1973, B Corporation purchases for $20,000 property which is similar
or related in service or use to the property previously destroyed. In
its return for 1973, B Corporation reports all of the details in
connection with its replacement of the property, as required by
paragraph (c)(2) of Sec. 1.1033(a)-2. As a result of this replacement
by B Corporation, none of the gain realized by A Corporation is
recognized. The replacement property which is purchased by B Corporation
has a basis to that corporation of $15,000 on the date of its purchase,
that is, the cost of such property ($20,000) decreased by the amount of
gain not recognized to A Corporation on the involuntary conversion
($5,000).
Example 2. Assume the same facts as in Example (1), except that B
Corporation does not purchase similar property on or before June 30,
1973, and does not apply on or before that date (in accordance with
paragraph (c)(3) of Sec. 1.1033(a)-2) for an extension of time in which
to make a replacement. In such event,
[[Page 642]]
the gain realized by A Corporation is recognized to that corporation for
its taxable year ending June 30, 1971. A Corporation's tax liability for
such taxable year must be recomputed in accordance with paragraph (c)(2)
of Sec. 1.1033(a)-2 in order to reflect this additional income.
Example 3. Assume the same facts as in Example (1), except that the
property of A Corporation is destroyed in 1968, A Corporation receives
the $15,000 from an insurance company in January 1969, B Corporation
acquires all of the assets of A Corporation on June 30, 1969, and A
Corporation's return is filed for the short taxable year ending June 30,
1969. B Corporation would have to purchase property which is similar or
related in service or use to the property previously destroyed by June
30, 1970, in order to take advantage of the provisions of section 1033.
Example 4. M and N Corporations compute their taxable income on the
basis of the calendar year, and both corporations use the cash method of
accounting. During 1970, property of M Corporation is destroyed by fire.
The adjusted basis of the property on the date of destruction is
$10,000. The property is insured against loss by fire, but the insurance
claim is not satisfied on or before June 30, 1971, the date on which N
Corporation acquires all of the assets (including the insurance claim)
of M Corporation in a reorganization to which section 381(a) applies. On
September 1, 1972, N Corporation receives $15,000 from the insurance
company as compensation for the fire loss suffered by M Corporation.
Upon receipt of the insurance proceeds, N Corporation realizes a gain of
$5,000 upon the involuntary conversion; however, in its return for 1972,
N Corporation elects under the provisions of paragraph (c)(2) of Sec.
1.1033(a)-2 to have the gain recognized only to the extent provided by
section 1033(a)(3). On December 30, 1974, N Corporation purchases for
$20,000 property which is similar or related in service or use to the
property previously destroyed in the hands of M Corporation. As a result
of this replacement by N Corporation, none of the gain realized by N
Corporation in 1972 is recognized. The replacement property which is
purchased by N Corporation has a basis to that corporation of $15,000 on
the date of its purchase, that is, the cost of such property ($20,000)
decreased by the amount of gain not recognized to N Corporation on the
involuntary conversion ($5,000).
Example 5. R and S Corporations compute their taxable income on the
basis of the calendar year, and both corporations use the cash method of
accounting. During 1970 property of R Corporation is destroyed by fire.
The adjusted basis of the property on the date of destruction is
$10,000. In anticipation of taking the benefit of section 1033(a)(3), R
Corporation purchases for $20,000 on June 1, 1971, property which is
similar or related in service or use to the destroyed property. In its
return for 1971, R Corporation reports all of the details in connection
with the replacement of the property, as required by paragraph (c)(2) of
Sec. 1.1033(a)-2. The property destroyed in 1970 is insured against
loss by fire, but the insurance claim is not satisfied on or before
March 1, 1972, the date on which S Corporation acquires all of the
assets (including the insurance claim) of R Corporation in a
reorganization to which section 381(a) applies. On October 1, 1972, S
Corporation receives $12,000 from the insurance company as compensation
for the fire loss suffered by R Corporation. Upon receipt of the
insurance proceeds, S Corporation realizes a gain of $2,000 upon the
involuntary conversion; however, in its return for 1972, S Corporation
elects under the provisions of paragraph (c)(2) of Sec. 1.1033(a)-2 to
have the gain recognized only to the extent provided by section
1033(a)(3). As a result of the replacement by R Corporation, none of the
gain realized by S Corporation in 1972 is recognized. Assuming there are
no adjustments for depreciation, the replacement property has a basis on
October 1, 1972, of $18,000, that is, the cost of such property
($20,000) decreased by the amount of gain not recognized to S
Corporation on the involuntary conversion ($2,000)
(d) Conversion into money when disposition occurs before January 1,
1951. Section 1033(a)(2) provides that, if property is disposed of in an
involuntary conversion before January 1, 1951, and money is received as
compensation for the conversion, no gain shall be recognized if such
money is forthwith expended in the acquisition of other property similar
or related in service or use to the property so converted, or in the
acquisition of control of a corporation owning such other property, or
in the establishment of a replacement fund. That section also provides
that, if any part of the money is not so expended, the gain, if any,
shall be recognized to the extent of the money which is not so expended.
For example, if, pursuant to section 381(c)(13) and section 1033(a)(2),
property of a distributor or transferor corporation is disposed of
before January 1, 1951, in an involuntary conversion, and the proceeds
from the conversion are received by the acquiring corporation so that
the gain on the conversion is realized by that corporation, the
acquiring corporation may avoid recognition of the gain if it complies
with the provisions of section 1033(a)(2) for nonrecognition of gain.
Thus, the
[[Page 643]]
acquiring corporation must forthwith expend the proceeds in the
acquisition of similar property or stock, or in the establishment of a
replacement fund, in order to avoid recognition of the gain, if the
disposition occurred before January 1, 1951. See the provisions of
Sec. Sec. 1.1033(a)-3 and 1.1033(a)-4 relating to involuntary
conversions and replacement funds when disposition of the converted
property occurred before January 1, 1951.
(e) Successive acquiring corporations. An acquiring corporation
which, in a transaction to which section 381(a) applies, acquires the
assets of a corporation which previously acquired the assets of another
corporation in a transaction to which section 381(a) applies, shall be
treated as such other corporation for purposes of applying sections
381(c)(13) and 1033 (relating to involuntary conversions). Thus, for
example, if any factor essential to the application of section 1033
occurs on or before the date of distribution or transfer in one
transaction to which section 381(a) applies, and any other such factor
occurs after the date of distribution or transfer in a subsequent
transaction to which section 381(a) applies, then the acquiring
corporation in such subsequent transaction shall be treated as the first
distributor or transferor corporation subject to the rules and
limitations of this section for purposes of sections 381(c)(13) and
1033.
[T.D. 6552, 26 FR 1989, Mar. 8, 1961, as amended by T.D. 7075, 35 FR
17995, Nov. 24, 1970]
Sec. 1.381(c)(14)-1 Dividend carryover to personal holding company.
(a) Carryover requirement. Section 381(c)(14) provides that an
acquiring corporation shall succeed to and take into account the
dividend carryover (described in section 564) of a distributor or
transferor corporation in computing its dividends paid deduction under
section 561 for taxable years ending after the date of distribution or
transfer for which the acquiring corporation is a personal holding
company under section 542. To determine the amount of such dividend
carryover and to integrate it with the dividend carryover of the
acquiring corporation in computing the dividends paid deduction for
taxable years ending after the date of distribution or transfer, it is
necessary to apply the provisions of section 564 and Sec. 1.564-1 in
accordance with this section.
(b) Manner of computing dividend carryover--(1) Preceding taxable
years. If the acquiring corporation is a personal holding company under
section 542 for its first taxable year ending after the date of
distribution or transfer, the taxable year of the distributor or
transferor corporation ending with such date is a first preceding
taxable year for purposes of section 564, and the taxable year of the
distributor or transferor corporation immediately preceding such first
preceding year is a second preceding taxable year for purposes of
section 564. If the acquiring corporation is a personal holding company
for its second taxable year ending after the date of distribution or
transfer, the taxable year of the distributor or transferor corporation
ending with such date is a second preceding taxable year for purposes of
section 564.
(2) Determination of dividends paid deduction and taxable income.
The dividends paid deduction of any distributor or transferor
corporation (determined under section 561 but without regard to any
dividend carryover) and the taxable income of any such corporation
(adjusted as provided in section 545(b)) for any taxable year ending on
or before the date of distribution or transfer shall be determined
without reference to any dividends paid deduction, or taxable income, of
the acquiring corporation or any other distributor or transferor
corporation; in like manner, the dividends paid deduction and the
taxable income of the acquiring corporation for any such taxable year
shall be determined without reference to any dividends paid deduction,
or taxable income, of a distributor or transferor corporation.
(3) Computation of dividend carryover. (i) For the purpose of
determining the dividend carryover to the first taxable year of the
acquiring corporation ending after the date of distribution or transfer,
the amount of the dividend carryover from the distributor or transferor
corporation shall be determined under section 564 without reference to
the dividends paid deduction
[[Page 644]]
or taxable income of the acquiring corporation or any other corporation.
If two or more transactions to which section 381(a) applies have the
same date of distribution or transfer, or if a particular taxable year
of the acquiring corporation is the first taxable year ending after the
dates of distribution or transfer of two or more such transactions
occurring on different dates, the amount of the dividend carryover from
each distributor or transferor corporation shall be determined
separately as provided in the preceding sentence. Except as provided in
subdivision (iii) of this subparagraph, the aggregate of the dividend
carryovers from each distributor or transferor corporation and the
dividend carryover of the acquiring corporation (computed without regard
to this section) shall constitute the dividend carryover under section
561(a)(3) of the acquiring corporation for its first taxable year ending
after the date (or dates) of distribution or transfer.
(ii) For the purpose of determining the dividend carryover to the
second taxable year of the acquiring corporation ending after the date
(or dates) of distribution or transfer, the excess, if any, of the
dividends paid deduction (determined under section 561 without regard to
any dividend carryover) over the taxable income (adjusted as provided in
section 545(b)) for the taxable year of each distributor or transferor
corporation and the acquiring corporation referred to as a second
preceding taxable year shall be determined separately without reference
to the dividends paid deduction or taxable income of any other of such
corporations. The excesses thus determined shall be aggregated, and such
aggregate shall be--
(a) Increased by the excess of the dividends paid deduction
(determined without regard to any dividend carryover) over the taxable
income (adjusted as provided in section 545(b)), or
(b) Reduced by the excess of the taxable income (adjusted as
provided in section 545(b)) over the dividends paid deduction
(determined without regard to any dividend carryover),
for the first preceding taxable year of the acquiring corporation.
Except as provided in subdivision (iii) of this subparagraph, the amount
thus determined shall constitute the dividend carryover under section
561(a)(3) of the acquiring corporation for its second taxable year
ending after the date (or dates) of distribution or transfer.
(iii) If a particular taxable year of the acquiring corporation is
its first taxable year ending after the date (or dates) of distribution
or transfer of one or more transactions to which section 381(a) applies,
and if the same taxable year of the acquiring corporation is also its
second taxable year ending after the date (or dates) of distribution or
transfer of one or more other transactions to which section 381(a)
applies, then, for the purpose of determining the dividend carryover to
such taxable year of the acquiring corporation, the rules contained in
both subdivisions (i) and (ii) of this subparagraph shall be applied.
Insofar as such taxable year constitutes the first taxable year ending
after the date (or dates) of distribution or transfer of any
transaction, the amount of the dividend carryover from any distributor
or transferor corporation involved in such transaction shall be
determined separately as provided in subdivision (i) of this
subparagraph. Insofar as such taxable year constitutes the second
taxable year ending after the date (or dates) of distribution or
transfer of any transaction, the amount of the dividend carryover from
any distributor or transferor corporation involved in the transaction
and the acquiring corporation shall be determined as provided in
subdivision (ii) of this subparagraph. The aggregate of the dividend
carryovers thus determined shall constitute the dividend carryover under
section 561(a)(3) of the acquiring corporation for such taxable year.
See Example (4) in paragraph (c) of this section.
(c) Illustrations. The rules set forth in paragraphs (a) and (b) of
this section may be illustrated by the following examples:
Example 1. (i) Facts. N Corporation acquired on June 30, 1960, all
the assets of M Corporation in a reorganization to which section 381(a)
applies. Both corporations compute taxable income on the basis of the
calendar year. N Corporation is a personal holding company for its
taxable years ending December 31, 1960, and December 31, 1961.
[[Page 645]]
(ii) Dividend carryover to N Corporation's taxable year ending
December 31, 1960. With respect to N Corporation's taxable year ending
December 31, 1960, the taxable years referred to as first preceding
taxable years and second preceding taxable years are--
(a) M Corporation's taxable years ending June 30, 1960, and December
31, 1959, respectively; and
(b) N Corporation's taxable years ending December 31, 1959, and
December 31, 1958, respectively.
The dividend carryover to N Corporation's taxable year ending December
31, 1960, is $22,000 computed as follows, assuming the dividends paid
deduction before dividend carryovers, and the taxable income after
section 545(b) adjustments, to be as stated in the computation:
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
M Corporation N Corporation
Second preceding taxable year:
Dividends paid deduction.................................. $25,000 ........... $12,000
Taxable income............................................ 15,000 ........... 13,000
============= -------------
Excess dividends paid deduction........................................ $10,000
First preceding taxable year:
Dividends paid deduction.................................. 23,000 ........... 20,000
Taxable income............................................ 21,000 ........... 10,000
============= -------------
Excess dividends paid deduction........................... 2,000 ........... $10,000
Separate dividend carryovers................................ 12,000 ........... 10,000
----------------------------------------------------------------------------------------------------------------
The aggregate dividend carryover of $22,000 is the sum of $12,000 (the
separate dividend carryover from M Corporation) and $10,000 (the
separate dividend carryover from N Corporation's own preceding taxable
years).
(iii) Dividend carryover to N Corporation's taxable year ending
December 31, 1961. With respect to N Corporation's taxable year ending
December 31, 1961, the first preceding taxable year is N Corporation's
taxable year ending December 31, 1960; and the taxable years referred to
as second preceding taxable years are M Corporation's taxable year
ending June 30, 1960, and N Corporation's taxable year ending December
31, 1959. The dividend carryover to N Corporation's taxable year ending
December 31, 1961, is $17,000 computed as follows, assuming the
dividends paid deduction before dividend carryovers, and the taxable
income after section 545(b) adjustments, to be as stated in the
computation:
------------------------------------------------------------------------
M N
Second preceding taxable year Corporation Corporation
------------------------------------------------------------------------
Dividends paid deduction...................... $23,000 $20,000
Taxable income................................ 21,000 10,000
-------------------------
Separate excess of dividends paid deduction 2,000 10,000
over taxable income..........................
------------------------------------------------------------------------
The aggregate excess of dividends paid deduction over taxable income for
the second preceding taxable year is $12,000, the sum of $2,000
(separate excess from N Corporation) and $10,000 (separate excess from N
Corporation). Such aggregate excess is increased by the excess dividends
paid deduction, or is reduced by the excess of taxable income, for the
first preceding taxable year as follows:
------------------------------------------------------------------------
------------------------------------------------------------------------
Aggregate excess of dividends paid deduction for .......... $12,000
second preceding taxable year..................
Dividends paid deduction of N Corporation for $50,000
first preceding taxable year...................
Taxable income of N Corporation for first 45,000
preceding taxable year.........................
------------
.......... $5,000
Dividend carryover to N Corporation's taxable .......... 17,000
year ending December 31, 1961..................
------------------------------------------------------------------------
Example 2. (i) Facts. X Corporation is organized on May 1, 1956, and
computes its taxable income on the basis of the fiscal year ending April
30. Y Corporation and Z Corporation are both organized on January 1,
1955, and both compute their taxable income on the basis of the calendar
year. On July 31, 1957, X Corporation and Y Corporation transfer all
their assets to Z Corporation in a statutory merger to which section
381(a) applies. For its taxable years ending December 31, 1957, and
December 31, 1958, Z Corporation is a personal holding company.
(ii) Dividend carryover to Z Corporation's taxable year ending
December 31, 1957. With respect to Z Corporation's taxable year ending
December 31, 1957, the taxable years referred to as first preceding
taxable years and second preceding taxable years are--
(a) X Corporation's taxable years ending July 31, 1957, and April
30, 1957, respectively;
(b) Y Corporation's taxable years ending July 31, 1957, and December
31, 1956, respectively; and
(c) Z Corporation's taxable years ending December 31, 1956, and
December 31, 1955, respectively.
The dividend carryover to Z Corporation's taxable year ending December
31, 1957, is
[[Page 646]]
$40,000 computed as follows, assuming the dividends paid deduction
before dividend carryovers, and the taxable income after section 545(b)
adjustments, to be as stated in the computation:
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
X Corporation Y Corporation Z Corporation
Second preceding taxable year:
Dividends paid deduction........ $56,000 ........... $19,000 ........... $6,000
Taxable income.................. 24,000 ........... 17,000 ........... 5,000 ...........
------------- ------------- -------------
Excess..................................... $32,000 ........... $2,000 ........... $1,000
First preceding taxable year:
Dividends paid deduction........ 9,000 ........... 4,000 ........... 10,000
Taxable income.................. 7,000 ........... 8,000 ........... 5,000
------------- ------------- -------------
Excess..................................... 2,000 ........... (4,000) ........... 5,000
------------- ------------- --------------
Separate dividend carryovers................... 34,000 ........... 0 ........... 6,000
----------------------------------------------------------------------------------------------------------------
The aggregate dividend carryover of $40,000 is the sum of $34,000 (the separate dividend carryover from X
Corporation) and $6,000 (the separate dividend carryover from Z Corporation's own preceding taxable years).
(iii) Dividend carryover to Z Corporation's taxable year ending
December 31, 1958. With respect to Z Corporation's taxable year ending
December 31, 1958, the first preceding taxable year is Z Corporation's
taxable year ending December 31, 1957; and the taxable years referred to
as second preceding taxable years are X Corporation's taxable year
ending July 31, 1957, Y Corporation's taxable year ending July 31, 1957,
and Z Corporation's taxable year ending December 31, 1956. The dividend
carryover to Z Corporation's taxable year ending December 31, 1958, is
$1,000 computed as follows, assuming the dividends paid deduction before
dividend carryovers, and the taxable income after section 545(b)
adjustments, to be as stated in the computation:
------------------------------------------------------------------------
X Y Z
Corporation Corporation Corporation
------------------------------------------------------------------------
Second preceding taxable year:
Dividends paid deduction....... $9,000 $4,000 $10,000
Taxable income................. 7,000 8,000 5,000
--------------------------------------
Separate excess of dividends paid 2,000 0 5,000
deduction over taxable income...
------------------------------------------------------------------------
The aggregate excess of dividends paid deduction over taxable income for
the second preceding taxable year is $7,000, the sum of $2,000 (separate
excess from X Corporation) and $5,000 (separate excess from Z
Corporation). Such aggregate excess is increased by the excess dividends
paid deduction, or is reduced by the excess of taxable income, for the
first preceding taxable year as follows:
Aggregate excess of dividends paid deduction for .......... $7,000
second preceding taxable year.....................
Dividends paid deduction of Z Corporation for first $102,000
preceding taxable year............................
Taxable income of Z Corporation for first preceding 108,000 (6,000)
taxable year......................................
--------------------
Dividend carryover to Z Corporation's taxable year .......... 1,000
ending December 31, 1958..........................
Example 3. Assume the facts stated in Example (2), except that Y
Corporation transferred all its assets to Z Corporation on May 31, 1957.
Assume also that the facts for Y Corporation's taxable year ending May
31, 1957, are otherwise the same as those stated for its taxable year in
Example (2) ending July 31, 1957. In such case, the dividend carryovers
to Z Corporation's taxable years ending on December 31, 1957, and
December 31, 1958, are the same as in Example (2) notwithstanding the
fact that the transfers from X Corporation and Y Corporation occurred on
the different dates.
Example 4. (i) Facts. T Corporation acquired on June 30, 1960, all
the assets of U Corporation in a statutory merger to which section
381(a) applies, and in a like transaction acquired on June 30, 1961, all
the assets of V Corporation. Such corporations all compute taxable
income on the basis of the calendar year. T Corporation is a personal
holding company for its taxable years 1960 and 1961.
(ii) Dividend carryover to T Corporation's taxable year 1960. With
respect to T Corporation's taxable year ending December 31, 1960, the
taxable years referred to as first preceding taxable years and second
preceding taxable years are--
(a) U Corporation's taxable years ending June 30, 1960, and December
31, 1959, respectively; and
[[Page 647]]
(b) T Corporation's taxable years ending December 31, 1959, and
December 31, 1958, respectively.
The dividend carryover to T Corporation's taxable year ending December
31, 1960, is $7,000 computed as follows, assuming the dividends paid
deduction before dividend carryovers, and the taxable income after
section 545(b) adjustments, to be as stated in the computation:
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
U Corporation T Corporation
Second preceding taxable year:
Dividends paid deduction.................................. $16,000 ........... $10,000
Taxable income............................................ 12,000 ........... 13,000
------------- -------------
Excess............................................................... $4,000 ........... 0
First preceding taxable year:
Dividends paid deduction.................................. 7,000 ........... 17,000
Taxable income............................................ 5,000 ........... 16,000
------------- -------------
Excess............................................................... 2,000 ........... $1,000
------------- --------------
Separate dividend carryovers............................................. 6,000 ........... 1,000
----------------------------------------------------------------------------------------------------------------
The aggregate dividend carryover of $7,000 is the sum of $6,000 (the
separate dividend carryover from U Corporation) and $1,000 (the separate
dividend carryover from T Corporation's own first preceding taxable
year).
(iii) Dividend carryover to T Corporation's taxable year 1961.
Inasmuch as T Corporation's taxable year 1961 is the second taxable year
ending after the date of distribution or transfer from U Corporation,
paragraph (b)(3)(ii) of this section governs the determination of the
dividend carryover from taxable years of T Corporation and U
Corporation. On the other hand, inasmuch as T Corporation's taxable year
1961 is the first taxable year ending after the date of distribution or
transfer from V Corporation, paragraph (b)(3)(i) governs the
determination of the dividend carryover from taxable years of V
Corporation.
(a) Application of paragraph (b)(3)(ii) of this section. With
respect to T Corporation's taxable year 1961, the first preceding
taxable year is T Corporation's taxable year ending December 31, 1960;
and the taxable years referred to as second preceding taxable year are T
Corporation's taxable year ending December 31, 1959, and U Corporation's
taxable year ending June 30, 1960. The dividend carryover from taxable
years of T Corporation and U Corporation is $1,500 computed as follows,
assuming the dividends paid deduction before dividend carryovers, and
the taxable income after section 545(b) adjustments, to be as stated in
the computation:
------------------------------------------------------------------------
U T
Second preceding taxable year Corporation Corporation
------------------------------------------------------------------------
Dividends paid deduction...................... $7,000 $17,000
Taxable income................................ 5,000 16,000
-------------------------
Separate excess of dividends paid deduction 2,000 1,000
over taxable income..........................
------------------------------------------------------------------------
The aggregate excess of dividends paid deduction over taxable income for
the second preceding taxable year is $3,000, the sum of $2,000 (separate
excess from U Corporation) and $1,000 (separate excess from T
Corporation). Such aggregate is increased by the excess dividends paid
deduction, or is reduced by the excess of taxable income, for the first
preceding taxable year as follows:
T
Corporation
Aggregate excess of dividends paid deduction for second $3,000
preceding taxable year....................................
First preceding taxable year:
Dividends paid deduction of T Corporation.... $21,000
Taxable income of T Corporation.............. 22,500
Excess taxable income.................................... (1,500)
-------------
Separate dividend carryover (without regard to V 1,500
Corporation)..............................................
(b) Application of paragraph (b)(3)(i) of this section. With respect
to T Corporation's taxable year 1961, V Corporation's taxable year
ending June 30, 1961, is a first preceding taxable year, and its taxable
year ending December 31, 1960, is a second preceding taxable year. The
separate dividend carryover from V Corporation is $8,000 computed as
follows, assuming the dividends paid deduction before dividend
carryovers, and the taxable income after section 545(b) adjustments, to
be as stated in the computation:
V Corporation
Second preceding taxable year
Dividends paid deduction......................... $11,000
Taxable income................................... 6,000
Excess......................................... .......... $5,000
First preceding taxable year:
Dividends paid deduction....................... $9,000
Taxable income................................. 6,000
------------
Excess......................................... 3,000
----------
Separate dividend carryover from V Corporation... .......... 8,000
[[Page 648]]
(c) Dividend carryover. The dividend carryover to T Corporation's
taxable year 1961 is $9,500, the sum of $8,000 (the separate dividend
carryover from V Corporation) and $1,500 (the aggregate dividend
carryover from T Corporation and U Corporation).
(d) Successive carryovers. The provisions of this section shall
apply for the purpose of determining a dividend carryover to an
acquiring corporation which, in a distribution or transfer to which
section 381(a) applies, acquires the assets of a distributor or
transferor corporation which has previously acquired the assets of
another corporation in a transaction to which section 381(a) applies;
even though, in computing the dividend carryover to such second
acquiring corporation, it is necessary to take into account the
deduction for dividends paid, and the adjusted taxable income, of the
first distributor or transferor corporation.
(e) Acquiring corporation not receiving all the assets. The dividend
carryover acquired from a distributor or transferor corporation by an
acquiring corporation in a transaction to which section 381(a) applies
is not reduced by reason of the fact that the acquiring corporation does
not acquire 100 percent of the assets of the distributor or transferor
corporation.
(f) Dividends paid after the close of taxable year. A transaction to
which section 381(a) applies does not prevent the application of section
563(b) to a dividend paid by a distributor or transferor corporation
after the close of its taxable year ending with the date of distribution
or transfer but on or before the 15th day of the third month following
the close of such taxable year. However, dividends paid by the acquiring
corporation may not be taken into account under section 563(b) for the
purpose of determining the dividends paid deduction of the distributor
or transferor corporation for its taxable year ending with the date of
distribution or transfer.
[T.D. 6532, 26 FR 406, Jan. 19, 1961]
Sec. 1.381(c)(15)-1 Indebtedness of certain personal holding
companies.
(a) Qualified indebtedness--(1) Carryover requirement. If, in a
transaction to which section 381(a) applies, the acquiring corporation
assumes liability for any indebtedness which was qualified indebtedness
(as defined in section 545(c) and Sec. 1.545-3) in the hands of the
distributor or transferor corporation immediately before the assumption
of such indebtedness, then, under section 381(c)(15), in computing its
undistributed personal holding company income for any taxable year
beginning after December 31, 1963, and ending after the date of
distribution or transfer, the acquiring corporation shall be considered
the distributor or transferor corporation for purposes of computing the
deduction under section 545(c) and Sec. 1.545-3. Such deduction shall
be allowed to the acquiring corporation in accordance with section
545(c) and Sec. 1.545-3.
(2) Successive transactions to which section 381(a) applies. If in a
transaction to which section 381(a) applies, an acquiring corporation
assumes liability for qualified indebtedness, such acquiring corporation
shall be deemed to have incurred such qualified indebtedness for the
purpose of applying section 381(c)(15) to any subsequent transaction in
which such acquiring corporation is the distributor or transferor
corporation.
(b) Pre-1934 indebtedness--(1) Carryover requirement. If, in a
transaction to which section 381(a) applies, the acquiring corporation
assumes liability for any indebtedness incurred, or assumed, before
January 1, 1934, by a distributor or transferor corporation, then under
section 381(c)(15) the acquiring corporation shall be allowed, in
computing its undistributed personal holding company income for any
taxable year ending after the date of distribution or transfer, a
deduction under section 545(b)(7) for amounts used or irrevocably set
aside to pay or to retire such indebtedness. Such deduction shall be
allowed to the acquiring corporation in accordance with section
545(b)(7) and paragraph (g) of Sec. 1.545-2 as though the indebtedness
had been incurred, or assumed, by the acquiring corporation before
January 1, 1934.
(2) Successive transactions to which section 381(a) applies. If, in
a transaction to which section 381(a) applies, an acquiring corporation
assumes liability for indebtedness described in subparagraph (1) of this
paragraph, such acquiring corporation shall be deemed to
[[Page 649]]
have incurred the indebtedness before January 1, 1934, for the purpose
of applying section 381(c)(15) to any subsequent transaction in which
such acquiring corporation is the distributor or transferor corporation.
(c) Special rule. For purposes of this section, if, in a transaction
otherwise described in this section, an acquiring corporation acquires
real estate--(1) of which the distributor or transferor corporation is
the legal or equitable owner immediately before the acquisition, and (2)
which is subject to indebtedness that, with respect to the distributor
or transferor corporation, is indebtedness described in this section
immediately before the acquisition, then the acquiring corporation will
be treated as having assumed such indebtedness, provided it shows to the
satisfaction of the Commissioner that under all the facts and
circumstances it bears the burden of discharging such indebtedness.
[T.D. 6949, 33 FR 5524, Apr. 9, 1968; 33 FR 6091, Apr. 20, 1968]
Sec. 1.381(c)(16)-1 Obligations of distributor or transferor
corporation.
(a) Deduction allowed to acquiring corporation. (1) If, in a
transaction to which section 381(a) applies, the acquiring corporation
assumes an obligation of a distributor or transferor corporation which
gives rise to a liability after the date of distribution or transfer and
if the distributor or transferor corporation would be entitled to deduct
such liability in computing taxable income were it paid or accrued after
that date by such corporation, then, under the provisions of section
381(c)(16) and this section, the acquiring corporation shall be entitled
to deduct such liability as if it were the distributor or transferor
corporation. However, in the case of a transaction to which section
381(a)(2) applies, section 381(c)(16) shall not apply to an obligation
which is reflected in the amount of consideration, that is, the stock,
securities, or other property, transferred by the acquiring corporation
to a transferor corporation or its shareholders in exchange for the
property of that transferor corporation. An obligation which is so
reflected in the amount of consideration will be treated as an item or
tax attribute not specified in section 381(c)(16). Such an obligation is
subject to section 381(c)(4). See subparagraph (2) of this paragraph.
Any deduction allowed under section 381(c)(16) to the acquiring
corporation shall be taken by that corporation in the taxable year
ending after the date of distribution or transfer in which the liability
is paid or accrued by that corporation, as the case may be.
(2) In order to determine whether, in the case of obligations of a
distributor or transferor corporation assumed by an acquiring
corporation, section 381(c)(16) and this section, or section 381(c)(4)
and the regulations thereunder, apply, the following rules shall govern:
(i) If the obligation gave rise to a liability before the date of
distribution or transfer, see section 381(c)(4) and the regulations
thereunder.
(ii) If the obligation gives rise to a liability after the date of
distribution or transfer, and the obligation was not reflected in the
amount of consideration transferred by the acquiring corporation to the
distributor or transferor corporation or its shareholders in exchange
for the property of the distributor or transferor corporation, then
section 381(c)(16) and this section shall apply.
(iii) In the case of a transaction to which section 381(a)(1)
applies, if the obligation gives rise to a liability after the date of a
distribution, and the obligation was reflected in the amount of
consideration transferred by the acquiring corporation to the
distributor corporation or its shareholders in exchange for the property
of the distributor corporation, then section 381(c)(16) and this section
shall apply.
(iv) In the case of a transaction to which section 381(a)(2)
applies, if the obligation gives rise to a liability after the date of a
transfer, and the obligation was reflected in the amount of
consideration transferred by the acquiring corporation to the transferor
corporation or its shareholders in exchange for the property of the
transferor corporation, then see section 381(c)(4) and the regulations
thereunder.
(3) The rules of this section apply to obligations assumed by
agreement of
[[Page 650]]
the parties as well as by operation of law.
(4) For purposes of this section, an obligation of a distributor or
transferor corporation gives rise to a liability when the liability
would be accruable by a taxpayer using the accrual method of accounting
notwithstanding the fact that the distributor or transferor corporation
is not using the accrual method of accounting. See paragraph (a)(2) of
Sec. 1.461-1.
(5) In the case of a transaction to which section 381(a)(2) applies,
the determination as to whether or not an obligation was reflected in
the amount of consideration transferred by the acquiring corporation to
the transferor corporation or its shareholders in exchange for the
property of the transferor corporation shall be made on the basis of all
the facts of each particular transfer. Where, on the date of
distribution or transfer, the parties were aware of the existence of a
specific obligation and reduced the amount of consideration to be
transferred by the acquiring corporation by a specific amount because of
the existence of such obligation, then such obligation shall be
considered to have been reflected in the amount of consideration
transferred. In the absence of such facts, it shall be presumed that the
obligation was not reflected in the amount of consideration transferred.
(b) Distribution or transfer occurring under the Internal Revenue
Code of 1939. Subject to the provisions of section 381(c)(16) and this
section, a corporation which would have been an acquiring corporation
(under the provisions of paragraph (b) of Sec. 1.381(a)-1) in a
transaction to which section 381(a) applies if the date of distribution
or transfer had occurred on or after the effective date of the
provisions of subchapter C, chapter 1 of the Internal Revenue Code of
1954, applicable to a liquidation or reorganization, as the case may be,
shall be entitled to take a deduction for amounts paid or accrued in any
taxable year beginning after December 31, 1953, in respect of any
obligation which it has assumed from a corporation which would have been
a distributor or transferor corporation in such transaction. However,
this paragraph shall have no application to a situation described in
paragraph (a)(2)(iv) of this section.
(c) Examples. The application of the foregoing rules may be
illustrated by the following examples:
Example 1. X Corporation and Y Corporation compute their taxable
income on the basis of the calendar year, and both corporations use an
accrual method of accounting. On December 31, 1954, Y Corporation
acquires the assets of X Corporation in a transfer to which section
381(a)(2) applies. By reason of State law, Y Corporation assumes
responsibility for all of the obligations for which X Corporation is
then, or may become, liable. The parties have no knowledge of any
specific obligations of X Corporation which are not yet fixed and
ascertainable, but it is agreed to reduce the amount of consideration
that Y Corporation is to transfer in exchange for the assets of X
Corporation by $5,000 to reflect any unforeseen contingent liabilities
of X Corporation for which Y Corporation might subsequently become
liable. After the date of the transfer, a claim for damages on account
of the alleged negligence of an alleged agent of X Corporation is filed.
After commencement of legal action by the claimant and in order to
eliminate the possibility of injury to its business, Y Corporation
settles the claim in 1955 by paying the claimant the amount of $3,000.
Assuming that such sum would have been deductible under section 162 if
paid by X Corporation, Y Corporation is entitled to deduct such sum in
accordance with the provisions of section 381(c)(16) and this section in
computing its taxable income for 1955, since the claim gave rise to a
liability after the date of transfer, the parties were not aware of a
specific obligation, and the specific obligation was not reflected in
the consideration transferred by Y Corporation in exchange for the
assets of X Corporation.
Example 2. Assume the same facts as in Example (1), except that the
claim for damages was filed prior to the transfer of X Corporation's
assets to Y Corporation, but the parties considered the chances for
recovery by the claimant so remote that no specific amount other than
the $5,000 reduction in consideration for all contingent liabilities as
a whole is reflected in the consideration transferred by Y Corporation
in exchange for the assets of X Corporation. Assuming that such sum
would have been deductible under section 162 if paid by X Corporation,
the $3,000 paid by Y Corporation in 1955 is deductible in accordance
with the provisions of section 381(c)(16) and this section in 1955.
Example 3. Assume the same facts as in Example (1), except that the
parties consider the chances of recovery by the claimant of
[[Page 651]]
sufficient probability that Y Corporation reduces the amount of
consideration it transfers in exchange for the assets of X Corporation
by $1,000 in addition to the $5,000 reduction for all other contingent
liabilities. The $3,000 paid by Y Corporation in 1955 is not deductible
under section 381(c)(16) and this section, since the specific obligation
was reflected in the consideration transferred by Y Corporation in
exchange for the assets of X Corporation. The deductibility of the
payment is accordingly governed by the provisions of section 381(c)(4)
and the regulations thereunder. Similarly, if in this case Y Corporation
had transferred $10,000 less in consideration for the assets of X
Corporation because of this particular claim, Y Corporation would not be
entitled to any deduction for the $3,000 paid in 1955 under section
381(c)(16) and this section, and the deductibility of the payment would
be governed by the provisions of section 381(c)(4) and the regulations
thereunder. If the date of transfer of X Corporation's assets had
occurred prior to the effective date of subchapter C, chapter 1 of the
Internal Revenue Code of 1954, applicable to a reorganization, no
deduction would be allowed to Y Corporation under that section.
[T.D. 6750, 29 FR 11267, Aug. 5, 1964]
Sec. 1.381(c)(17)-1 Deficiency dividend of personal holding company.
(a) Carryover requirement. If a determination (as defined in section
547(c)) establishes that a distributor or transferor corporation in a
transaction to which section 381(a) applies is liable for personal
holding company tax imposed by section 541 (or by a corresponding
provision of prior income tax law) for any taxable year ending on or
before the date of distribution or transfer, then in computing such tax
the deduction described in section 547 shall be allowed pursuant to
section 381(c)(17) to such corporation for the amount of deficiency
dividends paid by the acquiring corporation with respect to the
distributor or transferor corporation. Except as otherwise provided in
this section, the provisions of section 547 and the regulations
thereunder apply with respect to a deficiency dividend deduction
allowable pursuant to section 381(c)(17).
(b) Deficiency dividends paid by the acquiring corporation with
respect to the distributor or transferor corporation. A deficiency
dividend paid by the acquiring corporation with respect to the
distributor or transferor corporation is a distribution that would
satisfy the definition of a deficiency dividend under section 547(d)(1)
if paid by the distributor or transferor corporation to its own
shareholders except that it shall be paid by the acquiring corporation
to its own shareholders and shall be paid after the date of distribution
or transfer and on, or within 90 days after, the date of the
determination but before the acquiring corporation files claim under
paragraph (c) of this section.
(c) Claim for deduction. A claim for a deduction under this section
shall be made by the acquiring corporation on Form 976, and shall be
filed within 120 days after the date of the determination. The form
shall contain, or be accompanied by, the information required under
paragraph (b)(2) of Sec. 1.547-2 in sufficient detail to properly
identify the facts with the distributor or transferor corporation and
the acquiring corporation. The statement required with respect to the
shareholders on the date of payment of the deficiency dividend shall
relate to the shareholders of the acquiring corporation, and the
required certified copy of the resolution authorizing the payment of the
dividend shall be that of the board of directors, or other authority, of
the acquiring corporation. Necessary changes may be made in Form 976 in
order to carry out the provisions of this paragraph. The claim shall be
filed with the district director for the internal revenue district in
which the return of the distributor or transferor corporation to which
such claim relates was filed.
(d) Effect on dividends paid deduction. A deficiency dividend paid
by the acquiring corporation, which is allowable as a deduction to a
distributor or transferor corporation pursuant to section 381(c)(17),
shall not become a part of the dividends paid deduction of the acquiring
corporation under section 561 for any taxable year.
(e) Successive transactions to which section 381(a) applies. The
provisions of this section shall apply in the case of successive
transactions to which section 381(a) applies. Thus, if X Corporation
transfers its assets to Y Corporation in a transaction to which section
381(a) applies and if Y Corporation transfers its assets to Z
Corporation in
[[Page 652]]
a subsequent transaction to which section 381(a) applies, then, subject
to the provisions of this section, X Corporation may take a deficiency
dividend deduction for the amount of deficiency dividends paid by Z
Corporation with respect to X Corporation.
(f) Example. The provisions of this section may be illustrated by
the following example:
Example. M Corporation, a personal holding company, computes its
taxable income on the basis of the calendar year. On December 31, 1956,
N Corporation acquires the assets of M Corporation in a transaction to
which section 381(a) applies. On July 31, 1958, a determination (as
defined in section 547(c)) establishes that M Corporation is liable for
the taxable year 1955 for personal holding company tax in the amount of
$35,500 based on undistributed personal holding company income of
$42,000 for such taxable year. N Corporation complies with the
provisions of this section and on September 30, 1958, distributes
$42,000 to its shareholders as deficiency dividends with respect to M
Corporation's taxable year 1955. The distribution of $42,000 by N
Corporation is a taxable dividend under section 316(b)(2) regardless of
whether N Corporation is a personal holding company for the taxable year
1958 or whether it had any current or accumulated earnings and profits.
See Example (3) in paragraph (e) of Sec. 1.316-1. Because N Corporation
has paid deficiency dividends of $42,000 in accordance with this
section, M Corporation is entitled to a deficiency dividend deduction of
$42,000 for the taxable year 1955 and is thus relieved of its liability
for personal holding company tax of $35,500 for such taxable year. To
prevent a duplication of deductions, the amount distributed by N
Corporation in 1958 does not become a part of N Corporation's dividends
paid deduction under section 561 for any taxable year.
[T.D. 6532, 26 FR 409, Jan. 19, 1961, as amended by T.D. 7604, 44 FR
18661, Mar. 29, 1979; T.D. 7767, 45 FR 11264, Feb. 6, 1981]
Sec. 1.381(c)(18)-1 Depletion on extraction of ores or minerals from
the waste or residue of prior mining.
(a) Carryover requirement. Section 381(c)(18) provides that the
acquiring corporation in a transaction described in section 381(a) shall
be considered as though it were the distributor or transferor
corporation after the date of distribution or transfer for the purpose
of determining the applicability of section 613(c)(3) (relating to
extraction of ores or minerals from the ground). Thus, an acquiring
corporation which has acquired the waste or residue of prior mining from
a distributor or transferor corporation in a transaction described in
section 381(a) shall be entitled, after the date of distribution or
transfer, to an allowance for depletion under section 611 in respect of
ores or minerals extracted from such waste or residue if the distributor
or transferor corporation would have been entitled to such an allowance
for depletion in the absence of the distribution or transfer. See
paragraph (f) of Sec. 1.613-4 to determine whether a distributor or
transferor corporation is entitled to an allowance for depletion with
respect to the waste or residue of prior mining.
(b) Application of section 614 to waste or residue of prior mining.
If, in a transaction described in section 381(a), the acquiring
corporation acquires waste or residue of prior mining from a distributor
or transferor corporation, then the acquiring corporation shall be
considered as though it were the distributor or transferor corporation
for the purpose of applying section 614 and the regulations thereunder
to the waste or residue so acquired. Thus, if the distributor or
transferor corporation was required under paragraph (c) of Sec. 1.614-1
to treat the waste or residue as part of the mineral deposit from which
it was extracted and if the acquiring corporation acquires both the
waste or residue and the mineral deposit from which it was extracted in
a transaction described in section 381(a), then such waste or residue
shall be treated as a part of such mineral deposit in the hands of the
acquiring corporation. On the other hand, if the waste or residue was
required to be treated as a separate mineral deposit in the hands of the
distributor or transferor corporation, such waste or residue shall be
treated as a separate mineral deposit in the hands of the acquiring
corporation.
[T.D. 6552, 26 FR 1991, Mar. 8, 1961, as amended by T.D. 7170, 37 FR
5373, Mar. 15, 1972]
Sec. 1.381(c)(19)-1 Charitable contribution carryovers in certain
acquisitions.
(a) Carryover requirement. Section 381(c)(19) provides that, in
computing taxable income for its taxable years
[[Page 653]]
which begin after the date of distribution or transfer to which section
381(a) applies, the acquiring corporation shall take into account any
charitable contributions made by a distributor or transferor corporation
during the taxable year ending on the date of distribution or transfer,
and in certain immediately preceding taxable years, which are in excess
of the maximum amount deductible for those taxable years under section
170(b)(2) in the following manner:
(1) If the taxable year of the distributor or transferor corporation
ending on the date of distribution or transfer begins before January 1,
1962, the acquiring corporation shall, in computing taxable income for
its first 2 taxable years which begin after the date of such
distribution or transfer, take into account the excess contributions
made by the distributor or transferor corporation in the taxable year
ending on the date of distribution or transfer and in the immediately
preceding taxable year;
(2) If the taxable year of the distributor or transferor corporation
ending on the date of distribution or transfer begins after December 31,
1961, the acquiring corporation shall, in computing taxable income for
certain taxable years which begin after the date of distribution or
transfer, take into account the excess contributions made by the
distributor or transferor corporation in the taxable year ending on such
date of distribution or transfer and in any of the four taxable years
immediately preceding such taxable year but excluding any taxable year
beginning before January 1, 1962 (see paragraph (c)(3) of this section).
Notwithstanding the preceding sentence, if the taxable year of the
distributor or transferor corporation ending on the date of distribution
or transfer begins after December 31, 1961, and before January 1, 1963,
the acquiring corporation shall, in computing taxable income for its
first taxable year which begins after the date of distribution or
transfer, also take into account the excess contributions made by the
distributor or transferor corporation in the taxable year immediately
preceding the taxable year of the distributor or transferor corporation
ending on the date of distribution or transfer (see paragraph (c)(2) of
this section).
To determine the amount of excess contributions made by a distributor or
transferor corporation and to integrate them with contributions made by
the acquiring corporation for the purpose of determining the charitable
contributions deductible by the acquiring corporation for its taxable
years beginning immediately after the date of distribution or transfer,
it is necessary to apply the provisions of section 170(b)(2) and Sec.
1.170-3 (or, if applicable, section 170(b)(2) and (d)(2) and Sec.
1.170A-11) in accordance with the conditions and limitations of section
381(c)(19) and this section. For taxable years beginning before January
1, 1970, see section 170 for provisions of section 170(b)(2) as referred
to in this section. For taxable years beginning after December 31, 1969,
see section 170A for provisions of section 170(b)(2) or (d)(2) as
referred to in this section. For special rules for applying section
170(d)(2) with respect to contributions paid, or treated as paid, in
taxable years beginning before January 1, 1970, see paragraph (d) of
Sec. 1.170A-11.
(b) Manner of computing excess charitable contribution carryovers.
(1) The amount of any charitable contribution made by a distributor or
transferor corporation in any taxable year ending on or before the date
of distribution or transfer, or made by the acquiring corporation in any
taxable year before its taxable year beginning after the date of
distribution or transfer, in excess of the amount allowable as a
deduction to such corporation for such taxable year under section
170(b)(2) shall be determined by taking into account the taxable income
of, and the contributions made by, that corporation only.
(2) An acquiring corporation which, in a distribution or transfer to
which section 381(a) applies, acquires the assets of a distributor or
transferor corporation which previously acquired the assets of another
corporation in a transaction to which section 381(a) applies, shall
succeed to and take into account, subject to the conditions and
limitations of sections 170 and 381, the charitable contribution
carryovers
[[Page 654]]
available to the first acquiring corporation under sections 170 and 381,
including those derived by such first acquiring corporation from its
distributor or transferor corporation.
(3) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year ending on the date of
distribution or transfer and in certain immediately preceding taxable
years (see paragraph (c) of this section) which are not deductible by
the distributor or transferor corporation because of the 5-percent
limitation of section 170(b)(2) shall be available to the acquiring
corporation without diminution by reason of the fact that the acquiring
corporation does not acquire 100 percent of the assets of the
distributor or transferor corporation. Thus, if a parent corporation
owning 80 percent of all classes of stock of its subsidiary corporation
were to acquire its share of the assets of the subsidiary corporation
upon a complete liquidation described in paragraph (b)(1)(i) of Sec.
1.381(a)-1, then, subject to the conditions and limitations of this
section, 100 percent of the excess contributions made by the subsidiary
corporation would be available to the acquiring corporation.
(c) Taxable years to which carryovers apply and amount deductible--
(1) Taxable years beginning before January 1, 1962. If the taxable year
of the distributor or transferor corporation ending on the date of
distribution or transfer begins before January 1, 1962:
(i) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year immediately preceding that
ending on the date of distribution or transfer, to the extent not
deductible by it because of the limitations of section 170(b)(2) in its
taxable year ending on that date, shall be deductible by the acquiring
corporation to the extent prescribed by section 170(b)(2) in its first
taxable year beginning after the date of distribution or transfer. Any
portion of such excess which is not deductible under this section by the
acquiring corporation in such first taxable year shall not be deducted
by that corporation in any other taxable year.
(ii) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year ending on the date of
distribution or transfer shall first be deductible by the acquiring
corporation to the extent prescribed by section 170(b)(2) and this
section in its first taxable year beginning after that date and then, to
the extent prescribed by section 170(b)(2) and this section, in its
second taxable year beginning after that date. Any portion of such
excess which is not deductible under this section by the acquiring
corporation in such first and second taxable years shall not be deducted
by that corporation in any other taxable year.
(2) Taxable years beginning in 1962. If the taxable year of the
distributor or transferor corporation ending on the date of distribution
or transfer begins after December 31, 1961, and before January 1, 1963:
(i) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year immediately preceding that
ending on the date of distribution or transfer, to the extent not
deductible by it because of the limitations of section 170(b)(2) in its
taxable year ending on that date, shall be deductible by the acquiring
corporation to the extent prescribed by section 170(b)(2) in its first
taxable year beginning after the date of distribution or transfer. Any
portion of such excess which is not deductible under this section by the
acquiring corporation in such first year shall not be deducted by that
corporation in any other taxable year.
(ii) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year ending on the date of
distribution or transfer and beginning after December 31, 1961, and
before January 1, 1963, shall first be deductible by the acquiring
corporation to the extent prescribed by section 170(b)(2) and this
section in its first taxable year beginning after that date and then, to
the extent prescribed by section 170(b)(2) and this section, in its
second, third, fourth, and fifth taxable year, in order of time,
beginning after that date. Any portion of such excess which is not
deductible under this section by the acquiring corporation in such 5
taxable years shall
[[Page 655]]
not be deducted by that corporation in any other taxable year.
(3) Taxable years beginning after December 31, 1962. (i) If the
taxable year of the distributor or transferor corporation ending on the
date of distribution or transfer begins after December 31, 1962, the
excess charitable contributions made by a distributor or transferor
corporation in its taxable year ending on the date of distribution or
transfer and in each of its four immediately preceding taxable years
(excluding any taxable year beginning before January 1, 1962), to the
extent not deductible by it because of the limitations of section
170(b)(2) in its taxable year ending on the date of distribution or
transfer or its prior taxable years, shall be deductible by the
acquiring corporation to the extent prescribed by section 170(b)(2) (or,
if applicable, section 170(d)(2)) and subdivision (ii) of this
subparagraph, in its taxable years which begin after the date of
distribution or transfer. However, any portion of the excess charitable
contributions made by a distributor or transferor corporation in a
particular taxable year, to which this subparagraph is applicable, which
is not deductible under this section within the 5 taxable years
immediately following the taxable year in which the contribution was
paid by the distributor or transferor corporation shall not be
deductible by the acquiring corporation in any other taxable year.
(ii) For purposes of determining the 5 taxable years in which the
excess contributions may be deducted, all taxable years of the
distributor or transferor corporation subsequent to the taxable year in
which the excess contribution was made, including the taxable year
ending on the date of distribution or transfer shall be treated as
taxable years of the acquiring corporation.
(iii) The provisions of this subparagraph may be illustrated by the
following example:
Example. X Corporation and Y Corporation both compute taxable income
on the calendar year basis. X Corporation has excess charitable
contributions for 1962 and 1964. On December 31, 1966, X Corporation
distributes all its assets to Y Corporation in a complete liquidation to
which section 381(a) applies. The excess 1962 charitable contributions
of X Corporation (to the extent not deductible by X because of the
limitations of section 170(b)(2) in its taxable years 1963 through 1966)
may be deducted by Y Corporation only in 1967. Y Corporation's taxable
year 1967 is the fifth taxable year succeeding the taxable year 1962
(the year in which the excess contributions were made), and the portion
of such excess contributions which is not deductible in the 5 taxable
years immediately succeeding 1962 (1963 through 1967) is not deductible
by Y Corporation in any other taxable year. Any excess charitable
contributions for 1964 to which Y Corporation may be entitled must be
deducted by Y Corporation (if deductible at all) in 1967, 1968, and 1969
since such years are the third, fourth, and fifth taxable years
succeeding the taxable year 1964 (the year in which the excess
contributions were paid).
(4) General rules. No excess charitable contributions made by a
distributor or transferor corporation shall be deductible by the
acquiring corporation in its taxable year which includes the date of
distribution or transfer. In addition, an excess charitable contribution
made by a distributor or transferor corporation in a taxable year prior
to the taxable year of the transfer is only deductible by the
distributor or transferor corporation, subject to the limitations of
section 170(b)(2) (or, if applicable, section 170(d)(2)), in its
subsequent taxable years which begin on or before the date of
distribution or transfer, and by the acquiring corporation in its
taxable year or years beginning after the date of distribution or
transfer.
(d) Rules governing amounts deductible by acquiring corporations.
(1) In applying the provisions of section 170(b)(2) (or, if applicable,
section 170(d)(2)) for the purpose of determining the amount of excess
charitable contributions which are deductible by the acquiring
corporation in its taxable years beginning after the date of
distribution or transfer, all taxable years of the distributor or
tranferor and acquiring corporations which, with respect to a particular
taxable year beginning after the date of distribution or transfer,
constitute the same numbered preceding taxable year shall together be
considered as a 1 taxable year even though the taxable years involved
may not end on the same date. Thus, for example, all taxable years of
the distributor or transferor and acquiring corporations which, with
respect to the first taxable year of the acquiring corporation beginning
[[Page 656]]
after the date of distribution or transfer, constitutes the second
preceding taxable year shall together be considered as 1 taxable year
even though the taxable years involved may not end on the same date. Any
excess charitable contributions carried over from preceding taxable
years which are considered as 1 taxable year shall be taken into account
by the acquiring corporation as one amount, without regard to the extent
to which the contributions were made by a distributor or transferor
corporation or the acquiring corporation.
(2) For purposes of this paragraph, each taxable year of the
distributor or transferor corporation beginning on or before the date of
distribution or transfer shall be treated as a preceding taxable year
with reference to the acquiring corporation's taxable years beginning
after such date. For example, the taxable year of a distributor or
transferor corporation which ends on the date of distribution or
transfer shall be considered a first preceding taxable year with
reference to the acquiring corporation's first taxable year beginning
after that date, a second preceding taxable year with reference to the
acquiring corporation's second taxable year beginning after that date,
and so forth with respect to succeeding taxable years of the acquiring
corporation. Also, for example, the taxable year of a distributor or
transferor corporation which immediately precedes its taxable year
ending on the date of distribution or transfer shall be considered a
second preceding taxable year with reference to the acquiring
corporation's first taxable year beginning after that date.
(e) Illustration. The application of this section may be illustrated
by the following example:
Example. (i) X Corporation is organized on April 1, 1956, and
computes its taxable income on the basis of the fiscal year ending March
31. Y Corporation is organized on July 1, 1955, and computes its taxable
income on the basis of the fiscal year ending June 30. Z Corporation is
organized on January 1, 1956, and computes its taxable income on the
basis of the calendar year. On June 30, 1957, X Corporation distributes
all its assets to Y Corporation in a complete liquidation to which
section 381(a) applies. On November 30, 1957, Y Corporation transfers
all its assets to Z Corporation in a statutory merger to which section
381(a) applies.
(ii) The 5-percent limitation (computed in the manner prescribed by
section 170(b)(2)), the charitable contributions actually paid, and the
excess contributions with respect to each such corporation during the
taxable years involved are as follows:
Name of corporation X X
Taxable year ending 3-31-57 6-30-57
5-percent limitation................... $20,000 $9,000
Current contributions.................. 32,000 15,000
----------------------
(Excess contributions)............... (12,000) (6,000)
------------------------------------------------------------------------
Name of corporation Y Y Y
Taxable year ending 6-30-56 6-30-57 11-30-57
5-percent limitation................... $15,000 $10,000 $18,000
Current contributions.................. 29,000 0 17,000
-----------
(Excess contributions)............... (14,000) ......... .........
---------------------
Balance of 5-percent limitation...... ......... 10,000 1,000
------------------------------------------------------------------------
Name of corporation Z Z Z
Taxable year ending 12-31-56 12-31-57 12-31-58
5-percent limitation................... $10,000 $30,000 $58,000
Current contributions.................. 40,000 28,000 92,000
-----------
(Excess contributions)............... (30,000) ......... .........
---------------------
Balance of 5-percent limitation...... ......... 2,000 56,000
(iii) X Corporation was in existence for two taxable years, in each
of which it made charitable contributions in excess of the maximum
amount deductible for those years under section 170(b)(2). The excess
contributions made in the year ending March 31, 1957, of $12,000, are
deductible by X Corporation in its short taxable year ending June 30,
1957, and then by Y Corporation in its short taxable year ending
November 30, 1957, in each instance in the manner and to the extent
prescribed by section 170(b)(2) and this section. The excess
contributions made by X Corporation in the year ending June 30, 1957, of
$6,000, are deductible by Y Corporation in its short taxable year ending
November 30, 1957, and then by Z Corporation in its taxable year 1958,
in each instance in the manner and to the extent prescribed by section
170(b)(2) and this section.
(iv) Y Corporation was in existence for three taxable years. In the
year ended June 30, 1956, its contributions in excess of the amount
deductible for that year under section 170(b)(2) amounted to $14,000.
Such excess is deductible by Y Corporation in its taxable year ending
June 30, 1957, and, together with X Corporation's excess contributions
of $18,000, in its short taxable year ending November 30, 1957, in each
instance in the manner and to the extent prescribed by section 170(b)(2)
and this section. Accordingly, since Y Corporation made no contributions
in its taxable year ending June 30, 1957, its deduction for that year on
account of excess contributions carried over is $10,000, an
[[Page 657]]
amount equal to the 5-percent limitation of section 170(b)(2). The
deduction is attributable to excess contributions made by Y Corporation
in the taxable year ended June 30, 1956; thus, the excess of those
contributions over $10,000, namely, $4,000, is deductible by Y
Corporation in its short taxable year ending November 30, 1957, in the
manner and to the extent prescribed by section 170(b)(2) and this
section. With respect to the short taxable year ending November 30,
1957, the excess contributions of the second preceding year are X
Corporation's excess contributions of $12,000 made in the year ending
March 31, 1957, and Y Corporation's excess contributions of $4,000 made
in the year ending June 30, 1956, which were not deductible by Y
Corporation in the taxable year ending June 30, 1957, because of the 5-
percent limitation prescribed by section 170(b)(2), an aggregate of
$16,000. Inasmuch as Y Corporation's limitation for the short taxable
year ended November 30, 1957, exceeds the contributions made in that
year by $1,000, the excess contributions of the second preceding taxable
year are deductible in the taxable year ending November 30, 1957, to the
extent of $1,000 and the remainder ($15,000) is not deductible by any
corporation in any taxable year. The excess contributions of the first
preceding taxable year, namely, X Corporation's excess contributions
made in the short taxable year ending June 30, 1957, are deductible by Z
Corporation in its taxable year 1958, in the manner and to the extent
prescribed in section 170(b)(2) and this section.
(v) Z Corporation has been in existence for 3 taxable years. The
contributions made in 1956 in excess of the amount deductible for that
year under section 170(b)(2) amounted to $30,000. Such excess is
deductible by Z Corporation in its taxable year 1957 and, together with
X Corporation's excess contributions of $6,000 (derived through Y
Corporation) made in the taxable year ending June 30, 1957, in the
taxable year 1958, in each instance in the manner and to the extent
prescribed by section 170(b)(2) and this section. Thus, $2,000 of the
$30,000 excess contributions made in the year 1956 are deducted in 1957
and the remainder ($28,000), together with X Corporation's excess
contributions of $6,000 made in the short taxable year ending June 30,
1957, are deducted in 1958 since the aggregate of such amounts plus the
contributions actually made in that year does not exceed the 5-percent
limitation prescribed by section 170(b)(2).
[T.D. 6552, 26 FR 1992, Mar. 8, 1961, as amended by T.D. 6900, 31 FR
14642, Nov. 17, 1966; T.D. 7207, 37 FR 20795, Oct. 5, 1972]
Sec. 1.381(c)(21)-1 Pre-1954 adjustments resulting from change
in method of accounting.
(a) Carryover requirement. Section 381(c)(21) provides that, in a
transaction to which section 381(a) applies, an acquiring corporation
shall take into account the net amount of any adjustments described in
section 481(b)(4) (relating to adjustments arising from changes in
accounting methods initiated by the taxpayer attributable to pre-1954
Code years) of the distributor or transferor corporation to the extent
that such net amount of such adjustments has not been taken into account
in any taxable year, including a short taxable year, by the distributor
or transferor corporation. The acquiring corporation shall take into
account in each taxable year beginning with the taxable year ending
after the date of distribution or transfer the net amount of such
adjustments in the same manner and at the same time as such net amount
would have been taken into account by the distributor or transferor
corporation. Thus, the amount of any such adjustment which the acquiring
corporation shall take into account in each taxable year shall be the
same amount that would have been taken into account in each taxable year
by the distributor or transferor corporation.
(b) This section may be illustrated by the following example:
Example. On January 1, 1960, X Corporation, a calendar year
taxpayer, voluntarily changed its method of accounting giving rise to a
$50,000 adjustment under section 481(a), of which $20,000 is
attributable to pre-1954 Code years. Under section 481(b)(4) the $20,000
adjustment is to be spread over 1960 and the following 9 years at the
rate of $2,000 each year. On November 1, 1963, all the assets of X
Corporation are acquired by Y Corporation in a transaction to which
section 381(a) applies. Y Corporation reports its income on a fiscal
year ending June 30. X and Y Corporations must take into account the
$20,000 adjustment at the rate of $2,000 in each taxable year in the
following time and manner:
X Corporation
Calendar years 1960-62 ($2,000 x 3)............... $6,000
Short taxable year ending Nov. 1, 1963 ($2,000 x 2,000 $8,000
1)...............................................
-----------
Y Corporation
Fiscal years ending:
June 30, 1964 ($2,000 x 1)...................... 2,000
[[Page 658]]
June 30, 1965-69 ($2,000 x 5)................... 10,000 12,000
---------------------
......... 20,000
(c) Successive transactions to which section 381(a) applies. The
provisions of this section shall apply in the case of successive
transactions to which section 381(a) applies. Thus, if R Corporation,
which was taking into account adjustments described in section
481(b)(4), distributes or transfers its assets to S Corporation in a
transaction to which section 381(a) applies, and S Corporation was
required to take into account any remaining portion of such adjustments
under section 381(c)(21) and this section, and if subsequently S
Corporation distributes or transfers its assets to T Corporation in a
transaction to which section 381(a) applies, then T Corporation, under
section 381(c)(21) and this section, shall take into account any
remaining portion of such adjustments not previously taken into account
by R and S Corporations.
(d) Acquiring corporation not receiving all the assets. The
adjustments described in this section acquired from a distributor or
transferor corporation by an acquiring corporation in a transaction to
which section 381(a) applies is not reduced by reason of the fact that
the acquiring corporation does not acquire 100 percent of the assets of
the distributor or transferor corporation.
[T.D. 6553, 26 FR 2171, Mar. 15, 1961]
Sec. 1.381(c)(22)-1 Successor life insurance company.
(a) Carryover requirement. If in a taxable year beginning after
December 31, 1957, a distributor or transferor corporation which is an
insurance company is acquired by a corporation which is an insurance
company in a transaction to which section 381(a) applies, section
381(c)(22) provides that the acquiring corporation shall take into
account the appropriate items which the distributor or transferor
corporation was required to take into account for purposes of part I,
subchapter L, chapter 1 of the Internal Revenue Code. Furthermore,
except as otherwise provided by this section, the acquiring corporation
shall take into account the items described in paragraphs (2) through
(21), other than paragraphs (14), (15), and (17), of section 381(c) and
the regulations thereunder. For example, the acquiring corporation shall
take into account the reserves described in section 810(c) distributed
or transferred to it as of the close of the date of distribution or
transfer by the distributor or transferor corporation in accordance with
the provisions of section 381(c)(4) and the regulations thereunder. For
provisions defining the date of distribution or transfer, see paragraph
(b) of Sec. 1.381(b)-1.
(b) Items required to be taken into account by acquiring
corporation. If a transaction meets the requirements of paragraph (a) of
this section, the acquiring corporation shall, except as otherwise
provided, take into account as of the close of the date of distribution
or transfer the following items of the distributor or transferor
corporation:
(1) The operations loss carryovers (as determined under section
812), subject to conditions and limitations consistent with the
conditions and limitations prescribed in section 381(c)(1) and the
regulations thereunder. For example, a loss from operations for a loss
year of a distributor or transferor corporation which ends on or before
the last day of a loss year of the acquiring corporation shall be
considered to be a loss from operations for a year prior to such loss
year of the acquiring corporation. All references in section 381(c)(1)
and the regulations thereunder to section 172 shall be construed as
referring to the appropriate corresponding provisions of section 812.
Thus, a reference to section 172(b) shall be construed as referring to
section 812 (b) and (d). In determining the span of years for which a
loss from operations may be carried, the number of taxable years for
which the distributor or transferor corporation was authorized to do
business as an insurance company shall be taken into account. For
purposes of this determination, the taxable year of the distributor or
transferor corporation which ends on the date of distribution or
transfer shall be taken into account even though such taxable year is a
period of less than 12 months.
(2)(i) The investment yield and the beginning of the year asset
balance for
[[Page 659]]
the distributor or transferor corporation's taxable year ending with the
close of the date of distribution or transfer. Such items shall be
integrated with the investment yield and beginning of the year asset
balance of the acquiring corporation for its first taxable year ending
after such date of distribution or transfer for purposes of determining
the current earnings rate of the acquiring corporation for such taxable
year. Furthermore, for purposes of determining the average earnings rate
of the acquiring corporation, the investment yield and mean of the
assets of the distributor or transferor corporation for its 4 taxable
years immediately preceding its taxable year which closes with the date
of distribution or transfer shall be integrated with the investment
yield and mean of the assets of the acquiring corporation for such
corresponding taxable years.
(ii) The provisions of this subparagraph may be illustrated by the
following examples:
Example 1. X qualified as a life insurance company in 1949. Y
qualified as a life insurance company in 1951. On June 30, 1961, at
which time both X and Y were life insurance companies (as defined in
section 801(a)), X transferred all its assets to Y in a statutory merger
to which section 361 applies. For its taxable year ending on June 30,
1961, X had investment yield of $15 and assets at the beginning of such
taxable year of $450. For purposes of determining its current earnings
rate for its taxable year ending on December 31, 1961, Y had investment
yield of $45 (including the $15 of investment yield of X), assets at the
beginning of such taxable year of $1,250 (including the $450 of X's
assets at the beginning of its taxable year 1961), and assets at the end
of such taxable year of $1,750 (after the application of section
806(a)). Under the provisions of subdivision (i) of this subparagraph,
the current earnings rate of Y for the taxable year 1961 would be 3
percent, determined by dividing the investment yield of Y, $45, by the
mean of the assets of Y, $1,500 ($1,250 + $1,750 / 2). In order to
determine its average earnings rate and adjusted reserves rate for the
taxable year 1961, Y would make up the following schedule:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Investment yield Mean of assets Current
-------------------------------------------------------------------------------------------------------------------------------------------- earnings
Column 3 Column 6 rate of Y
(Col. 1 + (Col. 4 + ------------
Col. 2) Col. 5)
Taxable year Column 1--X Column 2--Y integrated Column 4--X Column 5--Y integrated Column 7
investment means of (Col. 3 /
yield assets Col. 6)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1960......................................................... $16 $26 $42 $400 $800 $1,200 3.5
1959......................................................... 16 24 40 500 750 1,250 3.2
1958......................................................... 17 22 39 650 650 1,300 3.0
1957......................................................... 19 21 40 700 500 1,200 3.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
For the taxable year 1961, Y would have an average earnings rate of 3.2
percent, computed by taking into account the current earnings rates for
the taxable year 1961 and each of the 4 taxable years immediately
preceding such taxable year. The adjusted reserves rate for such taxable
year would be 3 percent since the current earnings rate of 3 percent for
1961 is lower than the average earnings rate of 3.2 percent.
Example 2. The facts are the same as in Example (1), except that the
taxable year in issue is 1962, and the current earnings rate of Y for
such taxable year was 3.8 percent. For the taxable year 1962, Y would
have an average earnings rate of 3.3 percent, computed by taking into
account only the current earnings rates for the taxable year 1962 and
each of the 4 taxable years immediately preceding such taxable year. The
adjusted reserves rate for such taxable year would be 3.3 percent since
the average earnings rate of 3.3 percent is lower than the 1962 current
earnings rate of 3.8 percent.
(3) To the extent there are any amounts accrued for discounts in the
nature of interest which have not been included as interest paid under
section 805(e)(3), the acquiring corporation shall be treated as the
distributor or transferor corporation for purposes of including such
amounts as interest paid.
(4) Any adjustment required by section 806(b) with respect to an
item described in section 810(c) shall be made by the acquiring
corporation in its first taxable year which begins after the date of
distribution or transfer.
(5) The amount of the deduction provided by section 809(d)(6), as
limited by section 809(f), for all taxable years of
[[Page 660]]
the distributor or transferor corporation which end on and before the
date of distribution or transfer (irrespective of whether or not the
distributor or transferor corporation claimed this deduction for such
taxable years) for the purpose of determining the limitation under
section 809(d)(6).
(6)(i) To the extent there are any remaining net increases or net
decreases in reserves required to be taken into account by the
distributor or transferor corporation under section 810(d)(1), the
acquiring corporation shall be treated as the distributor or transferor
corporation as of its first taxable year which begins after the date of
distribution or transfer.
(ii) The provisions of this subparagraph may be illustrated by the
following example:
Example. Assume that the amount of an item described in section
810(c) of X, a life insurance company, at the beginning of the taxable
year 1959 is $100. Assume that at the end of the taxable year 1959, as a
result of a change in the basis used in computing such item during the
taxable year, the amount of the item (computed on the new basis) is $200
but computed on the old basis would have been $150. Since the amount of
the item at the end of the taxable year computed on the new basis, $200,
exceeds the amount of the item at the end of the taxable year computed
on the old basis, $150, by $50, section 810(d)(1) provides that one-
tenth of the amount of such excess, or $5, shall be taken into account
by X as a net increase referred to in section 809(d)(2) and paragraph
(a)(2) of Sec. 1.809-5 in determining gain or loss from operations for
each of the 10 taxable years immediately following the taxable year
1959. Assume further that on June 30, 1961, X transferred all its assets
to Y, a life insurance company, in a statutory merger to which section
361 applies. Under the provisions of section 810(d)(1), X would include
$5 as a net increase under section 809(d)(2) and paragraph (a)(2) of
Sec. 1.809-5 in determining gain or loss from operations for its
taxable years 1960 and 1961. Thus, the remaining net increase to be
taken into account by X under section 810(d)(1) is $40 (eight-tenths of
$50). Accordingly, Y shall take into account $5 as a net increase
referred to in section 809(d)(2) and paragraph (a)(2) of Sec. 1.809-5
in determining gain or loss from operations for each of its 8 taxable
years beginning in 1962 ($5 x 8 = $40).
(7)(i) The dollar balances in the shareholders surplus account,
policyholders surplus account, and other accounts provided, however,
that the acquiring corporation is a stock life insurance company. The
dollar balance in the policyholders surplus account shall reflect the
amount (if any) treated as a subtraction from such account by reason of
the application of the limitation provided under section 815(d)(4)
immediately prior to the close of the date of distribution or transfer.
To the extent that any amount must be added to the shareholders surplus
account as a result of the application of the limitation provided under
section 815(d)(4), the acquiring corporation shall be treated as the
distributor or transferor corporation as of its first taxable year which
begins after the date of distribution or transfer. However, any amounts
attributable to money or other property not permitted to be received
without the recognition of gain (i.e., boot) distributed to a person
other than the acquiring corporation under section 381(a) shall be
treated as a distribution under section 815.
(ii) Notwithstanding paragraph (b)(7)(i) of this section, if the
distributor or transferor corporation distributes or transfers less than
50 percent of its insurance business to the acquiring corporation, then
the acquiring corporation shall succeed to a ratable portion of the
dollar balances in the distributor's or transferor's shareholders
surplus account, policyholders surplus account, and other accounts. The
percentage of the accounts to which the acquiring corporation succeeds
is determined by the ratio of the distributor's or transferor's
insurance reserves for the contracts transferred to the acquiring
corporation, as maintained under section 816(b), to the distributor's or
transferor's reserves for all of its contracts maintained under section
816(b) immediately before the earlier of the distribution or transfer or
the adoption of the plan of liquidation or reorganization. For
transactions in which the distributor liquidates pursuant to an election
under section 338(h)(10), see Sec. 1.338-11(f) for the treatment of its
remaining policyholders surplus account. For all other transactions
subject to this paragraph, the distributor or transferor must take into
account as income its
[[Page 661]]
remaining policyholders surplus account to the extent the fair market
value of its assets (net of liabilities) distributed or transferred to
the acquiring corporation or to the transferor's shareholders pursuant
to the plan of liquidation or reorganization exceeds the distributor's
or transferor's remaining shareholders surplus account.
(iii) If, pursuant to a plan in existence at the time of the
liquidation or reorganization, the acquiring corporation transfers any
insurance or annuity contract it received in the liquidation or
reorganization to another person, then, for purposes of paragraph
(b)(7)(ii) of this section, that contract shall be deemed to have been
transferred by the transferor to that other person after the adoption of
the plan of liquidation or reorganization. If the transferor is an old
target within the meaning of Sec. 1.338(h)(10)-1(d)(2), any transfer by
the acquiring corporation to the purchasing corporation (as defined in
Sec. 1.338-2(c)(11)) or to any person related to the purchasing
corporation within the meaning of section 197(f)(9)(C) within two years
of the transfer described in section 381(a) will be presumed to have
been pursuant to a plan in existence at the time of the liquidation or
reorganization.
(iv) If the acquiring corporation is a mutual life insurance
company, the dollar balances in the shareholders surplus account,
policyholders surplus account, and other accounts shall not be taken
into account by such acquiring corporation and the distributor or
transferor corporation shall be subject to the provisions of section
815(d)(2)(A) as of the close of the date of distribution or transfer.
(v) The provisions of this paragraph (b)(7) are illustrated by the
following examples:
Example 1. P buys the stock of insurance company target, T, from S
for $16, and P and S make a section 338(h)(10) election for T. T
transfers no insurance contracts to S, or any related party, in
connection with the transaction. Further, assume that T had $10 in its
policyholders surplus account and no balance in its shareholders surplus
account or other accounts. Immediately before the deemed asset sale, old
T is required to include as ordinary income the $10 in the policyholders
surplus account.
Example 2. Assume the same facts as in Example 1, except that T
holds a block of life insurance contracts P does not wish to acquire,
and, immediately before the sale of T stock, S causes T to distribute
the unwanted block of insurance contracts to S. Further, assume that S
is an insurance company, that the distribution of contracts is one of
series of distributions in complete cancellation or redemption of all of
its stock (the others occurring under Sec. 1.338(h)(10)-1(d)(4)(i))
that qualifies as a complete liquidation under section 332, and that old
T's tax reserves with respect to the distributed contracts represent
one-tenth of old T's tax reserves with respect to all of its life
insurance contracts. Because T transfers less than 50 percent of its
life insurance business to S in a transaction to which section 381(a)
applies, S succeeds to a ratable portion of old T's policyholders
surplus account ($1), and old T includes as ordinary income the
remaining $9 of that account.
Example 3. Assume the same facts as in Example 2, except that 14
months after the deemed asset sale, S and X, a person related to new T
under section 197(f)(9)(C), engage in an indemnity reinsurance
transaction involving the contracts transferred to S from old T. Because
X is related to the purchasing corporation (P) under section
197(f)(9)(C), and X receives contracts from the acquiring corporation
(S) that S acquired from old T within two years of the transfer from old
T to S, the contracts are presumed to have been transferred pursuant to
a plan in existence at the time of old T's liquidation. If S cannot
establish otherwise, old T is treated as having distributed the
remainder of its policyholders surplus account. In that case, in the
taxable year of the indemnity reinsurance transaction, S takes into
account as ordinary income the portion of the old T's accounts ($1) that
old T or S has not previously taken into account as income.
(8) To the extent that any amount must be added to the shareholders
surplus account as a result of an election made under section 815(d)(1)
by the distributor or transferor corporation, the acquiring corporation
shall be treated as the distributor or transferor corporation as of its
first taxable year which begins after the date of distribution or
transfer.
(9) The amount of the life insurance reserves at the end of 1958,
but only for the purpose of applying the limitation provided under
section 815(d)(4)(B).
(10) To the extent there are amounts subject to the provisions of
section 817(d), the acquiring corporation shall be treated as the
distributor or transferor corporation.
[[Page 662]]
(11) To the extent there are any installments of tax imposed by
section 818(e)(3)(A) remaining to be paid, the acquiring corporation
shall be treated as the distributor or transferor corporation for the
purpose of paying such installments.
(12) The capital loss carryovers, subject to conditions and
limitations consistent with the conditions and limitations prescribed in
section 381(c)(3) and the regulations thereunder, except that any net
capital loss of the distributor or transferor corporation for a taxable
year beginning before January 1, 1959, shall not be taken into account.
See section 817(c).
(13)(i) The transferor's unamortized policy acquisition expenses or
positive or negative capitalization requirements on its specified
insurance contracts.
(ii) Notwithstanding paragraph (b)(13)(i) of this section, if the
distributor or transferor corporation transfers less than 50 percent of
its insurance business to the acquiring corporation, then the acquiring
corporation shall succeed to a ratable portion of the transferor's
unamortized policy acquisition expenses or positive or negative
capitalization requirements on its specified insurance contracts. The
percentage of such acquisition expenses or positive or negative
capitalization requirements to which the acquiring corporation succeeds
is determined by the ratio of the distributor's or transferor's
insurance reserves for the contracts transferred to the acquiring
corporation, as maintained under section 816(b), to the distributor's or
transferor's reserves for all of its contracts maintained under section
816(b) immediately before the earlier of the distribution or transfer or
the adoption of the plan of liquidation or reorganization. For amounts
of the distributor's or transferor's unamortized policy acquisition
expenses or positive or negative capitalization requirements on its
specified insurance contracts to which the acquirer does not succeed to
under this paragraph, and, for transactions in which the transferor
liquidates pursuant to an election under section 338(h)(10), see Sec.
1.338-11(f) for the treatment of its capitalized amounts under section
848.
(iii) If, pursuant to a plan in existence at the time of the
liquidation or reorganization, the acquiring corporation transfers any
insurance or annuity contract it received in the liquidation or
reorganization to another person, then, for purposes of paragraph
(b)(13)(ii) of this section, that contract shall be deemed to have been
transferred by the transferor to that other person after the adoption of
the plan of liquidation or reorganization. If the transferor is an old
target within the meaning of Sec. 1.338(h)(10)-1(d)(2), any transfer by
the acquiring corporation to the purchasing corporation (as defined in
Sec. 1.338-2(c)(11)) or to any person related to the purchasing
corporation within the meaning of section 197(f)(9)(C) within two years
of the transfer described in section 381(a) will be presumed to have
been pursuant to a plan in existence at the time of the liquidation or
reorganization.
(14) The special loss discount account, provided, however, that the
acquiring corporation will succeed to the special loss discount account
only to the extent that it is attributable to the portion of the
transferor's insurance business acquired by the acquiring corporation in
the section 381 transaction.
(c) Effective dates--(1) In general. This section applies to the
acquisition of assets of an insurance company by another insurance
company in a transaction to which section 381 applies for taxable years
beginning after December 31, 1957.
(2) Special rules for section 381 transactions. Paragraphs (a),
(b)(7), (b)(13), and (b)(14) of this section apply to the acquisition of
assets of an insurance company by another insurance company in a
transaction to which section 381 applies on or after April 10, 2006.
(3) Joint retroactive election. The distributor or transferor and
the acquiring corporation may jointly make an irrevocable election to
apply paragraphs (a), (b)(7), (b)(13), and (b)(14) of this section to a
transaction to which section 381 applies occurring before April 10, 2006
provided that the taxable year that includes the acquisition and all
subsequent affected taxable years of both the distributor or transferor
and the acquiring corporation are years for which an assessment of
deficiency or a
[[Page 663]]
refund for overpayment is not prevented by any law or rule of law.
(4) Time and manner of making the joint election. The distributor or
transferor and the acquiring corporation may make an election described
in paragraph (c)(2) of this section by each attaching a statement to its
original or amended income tax return for the taxable year that includes
the acquisition of assets in a transaction to which section 381 applies.
The statement must be entitled ``Election to retroactively apply the
rules of section 1.381(c)(22)-1 to a transaction completed before April
10, 2006'' and must include the following information--
(i) The name and EIN of the distributor or transferor and the
acquiring corporation; and
(ii) The following declaration (or a substantially similar
declaration): The distributor or transferor and the acquiring
corporation have each amended its income tax returns for the taxable
year that includes the acquisition of assets in a transaction to which
section 381 applies and for all affected subsequent years to reflect the
rules in paragraphs (a), (b)(7), (b)(13), and (b)(14) of section
1.381(c)(22)-1.
[T.D. 6625, 27 FR 12541, Dec. 19, 1962, as amended by T.D. 9257, 71 FR
18004, Apr. 10, 2006; T.D. 9377, 73 FR 3873, Jan. 23, 2007]
Sec. 1.381(c)(23)-1 Investment credit carryovers in certain corporate
acquisitions.
(a) Carryover requirement. (1) Section 381(c)(23) requires the
acquiring corporation in a transaction to which section 381 applies to
succeed to and take into account under such regulations as may be
prescribed by the Secretary or his delegate, the investment credit
carryovers of the distributor or transferor corporation. To determine
the amount of these carryovers as of the close of the date of
distribution or transfer, and to integrate them with any carryovers and
carrybacks of the acquiring corporation for purposes of determining the
amount of credit allowed by section 38 to the acquiring corporation for
taxable years ending after the date of distribution or transfer, it is
necessary to apply the provisions of sections 46, 47, and 48 in
accordance with the conditions and limitations of this section.
(2) The investment credit carryovers and carrybacks of the acquiring
corporation determined as of the close of the date of distribution or
transfer shall be computed without reference to any unused credit of a
distributor or transferor corporation. The investment credit carryovers
of a distributor or transferor corporation as of the close of the date
of distribution or transfer shall be determined without reference to any
unused credit of the acquiring corporation.
(b) Carryback of unused credits. An unused credit of the acquiring
corporation for any taxable year ending after the date of distribution
or transfer shall not be carried back in computing the credit allowed by
section 38 to a distributor or transferor corporation. However, an
unused credit of the acquiring corporation for any such taxable year
shall be carried back in accordance with section 46(b)(1) in computing
the credit allowed to the acquiring corporation for a taxable year
ending on or before the date of distribution or transfer. If a
distributor or transferor corporation remains in existence after the
date of distribution or transfer, an unused credit sustained by it for
any taxable year beginning after such date shall be carried back in
accordance with section 46(b)(1) in computing the credit allowed by
section 38 to such corporation for a taxable year ending on or before
that date, but may not be carried back or over in computing the credit
allowed by section 38 to the acquiring corporation.
(c) Computation of carryovers and carrybacks. (1) Subject to the
modifications set forth in this paragraph, the provisions of Sec. 1.46-
2 shall apply in computing carryovers and carrybacks of unused credits
to taxable years of the acquiring corporation.
(2)(i) The investment credit carryovers available to the distributor
or transferor corporation as of the close of the date of distribution or
transfer shall first be carried to the first taxable year of the
acquiring corporation ending after that date. This rule applies whether
the date of distribution or transfer is on the last day,
[[Page 664]]
or any other day, of the acquiring corporation's taxable year.
(ii) The investment credit carryovers available to the distributor
or transferor corporation as of the close of the date of distribution or
transfer shall be carried to the acquiring corporation without
diminution by reason of the fact that the acquiring corporation does not
acquire 100 percent of the assets of the distributor or transferor
corporation.
(3) An unused credit of a distributor or transferor corporation for
a taxable year which ends on or before the last day of a taxable year of
the acquiring corporation shall be considered to be an unused credit for
a year prior to such taxable year of the acquiring corporation. If the
acquiring corporation has acquired the assets of two or more distributor
or transferor corporations on the same date of distribution or transfer,
the unused credit years of the distributor or transferor corporations
shall be taken into account in the order in which such years terminate.
If any one of the unused credit years of a distributor or transferor
corporation ends on the same day as the unused credit year of another
distributor or transferor corporation, either unused credit year may be
taken into account before the other.
(4) The extent to which an investment credit carryover of a
distributor or transferor corporation or of an acquiring corporation
from an unused credit year ending before January 1, 1971, may be taken
into account by the acquiring corporation for a taxable year beginning
after December 31, 1970, shall be determined without regard to the
credit earned by the acquiring corporation for such year. Thus, in such
a case, the amount of unused credit from such unused credit years which
may be taken into account in a taxable year of the acquiring corporation
beginning after December 31, 1970, shall be determined solely with
reference to the limitation based on amount of tax for such taxable year
(without reduction for the credit earned for such year).
(d) Computation of carryovers when date of distribution or transfer
occurs on last day of acquiring corporation's taxable year. The
computation of the investment credit carryovers from the distributor or
transferor corporation and from the acquiring corporation in a case
where the date of distribution or transfer occurs on the last day of a
taxable year of the acquiring corporation may be illustrated by the
following example:
Example. X Corporation and Y Corporation were organized on January
1, 1971, and each corporation files its return on the calendar year
basis. On December 31, 1972, X transfers all its assets to Y in a
statutory merger to which section 361 applies. X's credit earned and its
limitation based on amount of tax for its taxable years 1971 and 1972
are as follows:
------------------------------------------------------------------------
Limitation
X Corporation's taxable year Credit earned based on amount
of tax
------------------------------------------------------------------------
1971.................................. $10,000 $5,000
1972.................................. 5,000 3,000
------------------------------------------------------------------------
Y's credit earned and its limitation based on amount of tax for its
taxable years 1971 through 1973 are as follows:
------------------------------------------------------------------------
Limitation
Y Corporation's Credit earned based on amount
of tax
------------------------------------------------------------------------
1971.................................. $6,000 $5,000
1972.................................. 5,000 3,000
1973.................................. 3,000 10,000
------------------------------------------------------------------------
The sequence for the allowance of unused credits of X Corporation and Y
Corporation, and the computation of the carryovers to Y Corporation's
calendar year 1974, may be illustrated as follows:
(1) X Corporation's 1971 unused credit. The carryover to Y 1974 is
$0, computed as follows:
Unused credit................................................ $5,000
Excess of X's 1972 limitation based on tax over credit 0
earned....................................................
----------
Carryover to Y's year 1973................................... 5,000
Excess of Y's 1973 limitation based on tax over credit 7,000
earned....................................................
----------
Carryover to Y's year 1974................................... 0
(2) Y Corporation's 1971 unused credit. The carryover to Y 1974 is
$0, computed as follows:
Unused credit................................................ $1,000
Excess of Y's 1972 limitation based on tax over credit 0
earned....................................................
----------
Carryover to Y's year 1973................................... 1,000
==========
Excess of Y's 1973 limitation based on tax over credit 7,000
earned....................................................
Less: X's $5,000 carryover from 1971....................... 5,000
----------
2,000
==========
Carryover to Y's year 1974................................... 0
[[Page 665]]
(3) X Corporation's 1972 unused credit. The carryover to Y 1974 is
$1,000, computed as follows:
Unused credit................................................ $2,000
==========
Excess of Y's 1973 limitation based on tax over credit 7,000
earned....................................................
Less: X's $5,000 carryover from 1971 and Y's $1,000 6,000
carryover from 1971.......................................
----------
1,000
==========
Carryover to Y's year 1974................................. 1,000
(4) Y Corporation's 1972 unused credit. The carryover to Y 1974 is
$2,000, computed as follows:
Unused credit................................................ $2,000
==========
Excess of Y's 1973 limitation based on tax over credit earned 7,000
Less: X's $5,000 carryover from 1971 Y's $1,000 carryover 7,000
from 1971 and X's $1,000 carryover from 1972................
----------
0
==========
Carryover to Y's year 1974................................... 2,000
(5) The aggregate of the investment credit carryovers to Y's year
1974 is $3,000, computed as follows:
X's 1972 unused credit....................................... $1,000
Y's 1972 unused credit....................................... 2,000
----------
Total.................................................... 3,000
(e) Computation of carryovers when date of distribution or transfer
is not on last day of acquiring corporation's taxable year. (1) If the
date of distribution or transfer occurs on any day other than the last
day of a taxable year of the acquiring corporation, the amount which may
be added to the amount allowable as a credit by section 38 for the first
taxable year of the acquiring corporation ending after the date of
distribution or transfer (hereinafter called the ``year of
acquisition'') shall be determined in the following manner. The year of
acquisition shall be considered as though it were 2 taxable years. The
first of such 2 taxable years shall be referred to in this paragraph as
the preacquisition part year and shall begin with the beginning of the
year of acquisition and end with the close of the date of distribution
or transfer. The second of such 2 taxable years shall be referred to in
this paragraph as the postacquisition part year and shall begin with the
day following the date of distribution or transfer and shall end with
the close of the year of acquisition.
(2) The excess limitation for the year of acquisition (i.e., the
excess of the limitation based on the amount of tax for such year over
the amount of credit earned for such year) shall be divided between the
preacquisition part year and the postacquisition part year in proportion
to the number of days in each. Thus, if in a statutory merger to which
section 361 applies Y Corporation, a calendar year taxpayer, acquires
the assets of X Corporation on June 30, 1975, and Y Corporation has an
excess limitation of $36,500 for its calendar year 1975, then the excess
limitation for the preacquisition part year would be $18,100 ($36,500 x
181/365) and the excess limitation for the postacquisition part year
would be $18,400 ($36,500 x 184/365).
(3) An unused credit of the acquiring corporation shall be carried
to and applied against the excess limitation for the preacquisition part
year and then carried to and applied against the excess limitation for
the postacquisition part year, whereas an unused credit of the
distributor or transferor corporation shall not be carried to the
preacquisition part year but shall only be carried to and applied
against the excess limitation for the postacquisition part year. For
special rule relating to carryovers from taxable years ending before
January 1, 1971, to taxable years beginning after December 31, 1970, see
subparagraph (6) of this paragraph.
(4) Though considered as two separate taxable years for purposes of
this paragraph, the preacquisition part year and the postacquisition
part year are treated as one taxable year in determining the years to
which an unused credit is carried under section 46(b)(1).
(5) The preceding subparagraphs may be illustrated by the following
example:
Example. X Corporation and Y Corporation were organized on January
1, 1971, and each corporation files its return on the calendar year
basis. On May 1, 1972, X transfers all its assets to Y in a statutory
merger to which section 361 applies. X's credit earned and its
limitation based on amount of tax for its taxable years 1971 and ending
May 1, 1972, are as follows:
[[Page 666]]
------------------------------------------------------------------------
Limitation
X Corporation's taxable year Credit earned based on amount
of tax
------------------------------------------------------------------------
1971.................................. $11,000 $5,000
Ending 5-1-72......................... 3,000 6,000
------------------------------------------------------------------------
Y's credit earned and its limitation based on amount of tax for its
taxable years 1971 and 1972 are as follows:
------------------------------------------------------------------------
Limitation
Y Corporation's taxable year Credit earned based on amount
of tax
------------------------------------------------------------------------
1971.................................. $7,000 $3,000
1972.................................. 3,000 9,000
------------------------------------------------------------------------
The sequence for the allowance of unused credits of X Corporation and Y
Corporation, and the computation of carryovers to Y Corporation's
calendar year 1973, may be illustrated as follows:
(i) X Corporation's 1971 unused credit. The carryover to Y 1973 is
$0, computed as follows:
Unused credit................................................ $6,000
Excess of X's 5-1-72 limitation based on tax over credit 3,000
earned....................................................
----------
Carryover to Y's postacquisition part year 1972.............. 3,000
Excess limitation for Y's postacquisition part year ($6,000 4,000
x 244/366)................................................
==========
Carryover to Y's year 1973................................... 0
(ii) Y Corporation's 1971 unused credit. The carryover to Y 1973 is
$1,000, computed as follows:
Unused credit................................................ $4,000
Excess limitation for Y's preacquisition part year ($6,000 2,000
x 122/ 366)...............................................
----------
Carryover to Y's postacquisition part year................... 2,000
==========
Excess limitation for Y's postacquisition part year ($6,000 4,000
x 244/366)................................................
Less: X's $3,000 carryover from 1971....................... 3,000
----------
1,000
==========
Carryover to Y's year 1973................................. 1,000
(iii) The aggregate of the investment credit carryovers to Y's year
1973 is $1,000, computed as follows:
X's 1971 unused credit....................................... 0
Y's 1971 unused credit....................................... $1,000
----------
Total.................................................... 1,000
(6) If the year of acquisition is a taxable year beginning after
December 31, 1970, and if there is an unused credit of the distributor
or transferor corporation or of the acquiring corporation arising in an
unused credit year ending before January 1, 1971, which may be carried
to such year of acquisition (see paragraph (c)(4) of this section), then
in applying subparagraphs (1), (2), and (3) of this paragraph, in lieu
of dividing the excess limitation for the year of acquisition between
the preacquisition and postacquisition part years, only the limitation
based on the amount of tax for such year (i.e., without reduction for
the credit earned) shall be divided between the preacquisition and
postacquisition part years. If there is also an unused credit arising in
an unused credit year ending after December 31, 1970, which may be
carried to the year of acquisition, then for the purpose of determining
the amount of such unused credit which may be taken into account for
such year of acquisition, the credit earned for the year of acquisition
shall first be applied against the limitation based on amount of tax for
the preacquisition part year (reduced by any investment credit
carryovers to such part year from unused credit years ending before
January 1, 1971) and the excess, if any, shall then be applied against
the limitation based on amount of tax for the postacquisition part year
(also reduced by any investment credit carryovers to such part year from
unused credit years ending before January 1, 1971).
(7) Subparagraph (6) of this paragraph may be illustrated by the
following example:
Example. X Corporation and Y Corporation were organized on January
1, 1970, and each corporation files its return on the calendar year
basis. On May 1, 1972, X transfers all its assets to Y in a statutory
merger to which section 361 applies. X's credit earned and its
limitation based on amount of tax for its taxable years 1970, 1971, and
ending May 1, 1972, are as follows:
------------------------------------------------------------------------
Limitation
X Corporation's taxable year Credit earned based on amount
of tax
------------------------------------------------------------------------
1970.................................. $300
1971.................................. 100
Ending 5-1-72......................... 200
------------------------------------------------------------------------
Y's credit earned and its limitation based on amount of tax for its
taxable years 1970 through 1972 are as follows:
------------------------------------------------------------------------
Limitation
Y Corporation's taxable year Credit earned based on amount
of tax
------------------------------------------------------------------------
1970.................................. $100
1971.................................. 200
1972.................................. 300 $900
------------------------------------------------------------------------
The sequence for the allowance of unused credits of X Corporation and Y
Corporation,
[[Page 667]]
and the computation of carryovers to Y Corporation's calendar year 1973,
may be illustrated as follows:
(i) X Corporation's 1970 unused credit. The carryover to Y 1973 is
$0, computed as follows:
Unused credit................................................ $300
==========
X Corporation's 1971 limitation based on tax............... 0
X Corporation's 5-1-72 limitation based on tax............. 0
----------
Carryover to Y's postacquisition part year 1972............ 300
==========
Limitation based on tax for Y's postacquisition part year 600
1972 ($900 x 244/366).....................................
==========
Carryover to Y's year 1973................................... 0
(ii) Y Corporation's 1970 unused credit. The carryover to Y 1973 is
$0, computed as follows:
Unused credit................................................ $100
Y Corporation's 1971 limitation based on tax............... 0
----------
Carryover to Y's preacquisition part year 1972............... 100
==========
Limitation based on tax for Y's preacquisition part year 300
1972 ($900 x 122/366).....................................
==========
Carryover to Y's postacquisition part year 1972.............. 0
(iii) Y Corporation's credit earned for 1972. The carryover to Y
1973 is $0, computed as follows:
Credit earned................................................ $300
==========
Limitation based on tax for preacquisition part year 1972 300
($900 x 122/366)..........................................
Less: Y's $100 carryover from 1970......................... 100
----------
$200
==========
Carryover to Y's postacquisition part year 1972.............. 100
==========
Limitation based on tax for postacquisition part year 1972 600
($900 x 244/366)..........................................
Less: X's $300 carryover from 1970......................... $300
----------
300
==========
Carryover to Y's year 1973................................... 0
(iv) X Corporation's 1971 unused credit. The carryover to Y 1973 is
$0, computed as follows:
Unused credit................................................ $100
Excess of X's 1972 limitation based on tax over credit 0
earned....................................................
----------
Carryover to Y's postacquisition part year 1972.............. 100
Limitation based on tax for postacquisition part year 1972 600
($900 x 244/366)..........................................
==========
Less:
X's $300 carryover from 1970............................. 300
Y's 1972 credit earned for postacquisition part year..... 100
----------
400
==========
200
==========
Carryover to Y's year 1973................................... 0
(v) Y Corporation's 1971 unused credit. The carryover to Y 1973 is
$100, computed as follows:
Unused credit................................................ $200
==========
Limitation based on tax for preacquisition part year 1972 300
($900 x 122/366)..........................................
==========
Less:
Y's $100 carryover from 1970............................. 100
----------
Y's 1972 credit earned for preacquisition part year 1972. 200
----------
300
==========
0
==========
Carryover to Y's postacquisition part year................... 200
==========
Limitation based on tax for postacquisition part year 1972 600
($900 x 244/366)..........................................
==========
Less:
X's $300 carryover from 1970............................. 300
Y's 1972 credit earned for postacquisition part year 1972 100
X's $100 carryover from 1971............................. 100
----------
500
==========
100
==========
Carryover to Y's year 1973................................... 100
(vi) X Corporation's 5-1-72 unused credit. The carryover to Y 1973
is $200, computed as follows:
Unused credit................................................ $200
==========
Limitation based on tax for postacquisition part year 1972 600
($900 x 244/366)..........................................
==========
Less:
X's $300 carryover from 1970............................. 300
Y's 1972 credit earned for postacquisition part year 1972 100
X's $100 carryover from 1971, and Y's $100 carryover from 200
1971....................................................
----------
600
==========
0
==========
Carryover to Y's year 1973................................... 200
(vii) The aggregate of the investment credit carryovers to Y 1973 is
$300, computed as follows:
Y's 1971 unused credit....................................... $100
X's 1972 unused credit....................................... 200
----------
Total.................................................... 300
(8) If the year of acquisition is a taxable year to which the
limitation provided in Sec. 1.46-2(b)(2) (relating to 20- percent
limitation on carryovers and carrybacks to certain taxable years)
applies, then for purposes of applying such limitation the
preacquisition part year and the postacquisition part year shall each be
considered a fractional
[[Page 668]]
part of a year, but, if the date of distribution or transfer is not on
the last day of a month, the entire month in which the date of
distribution or transfer occurs shall be considered as included in the
preacquisition part year and no portion thereof shall be considered as
included in the postacquisition part year.
(9) If the acquiring corporation succeeds to the investment credit
carryovers of two or more distributor or transferor corporations on two
or more dates of distribution or transfer during the same taxable year
of the acquiring corporation, the manner in which the unused credits of
the distributor or transferor corporations shall be applied shall be
determined consistently with the rules prescribed in paragraph (c) of
Sec. 1.381(c)(1)-2.
(f) Successive acquiring corporations. An acquiring corporation
which, in a distribution or transfer to which section 381(a) applies,
acquires the assets of a distributor or transferor corporation which
previously acquired the assets of another corporation in a transaction
to which section 381(a) applies, shall succeed to and take into account,
subject to the conditions and limitations of Sec. 1.46-2 and this
section, the investment credit carryovers available to the first
acquiring corporation under Sec. 1.46-2 and this section.
(g) Recomputation of credit allowed by section 38 on certain
property of acquiring corporation. If section 38 property acquired by an
acquiring corporation in a transaction to which section 381(a) applies
is disposed of, or otherwise ceases to be section 38 property (or
becomes public utility property) with respect to the acquiring
corporation, before the close of the estimated useful life which was
taken into account in computing the distributor or transferor
corporation's qualified investment, see paragraph (e) of Sec. 1.47-3.
(h) Electing small business corporation. An unused credit of a
distributor or transferor corporation arising in an unused credit year
for which such corporation is not an electing small business corporation
(as defined in section 1371(b)) may not be carried over in a transaction
to which section 381 applies to a taxable year of the acquiring
corporation for which such corporation is an electing small business
corporation and may not be added to the amount allowable as a credit
under section 38 to the shareholders of the acquiring corporation for
such taxable year. However, in such a case, a taxable year for which the
acquiring corporation is an electing small business corporation shall be
counted as a taxable year for purposes of determining the taxable years
to which such unused credit may be carried.
(i) [Reserved]
(j) Carryover of operating capacity for qualified intercity bus. For
rules for determining an acquiring corporation's qualified investment
for the energy credit for a qualified intercity bus, see Sec. 1.48-
9(q)(11).
(Sec. 38(b) (76 Stat. 963, 26 U.S.C. 38(b)), 48(l)(16) (94 Stat. 264, 26
U.S.C. 48(l)(16)), and 7805 (68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7289, 38 FR 30554, Nov. 6, 1973, as amended by T.D. 7982, 49 FR
39544, Oct. 9, 1984; 49 FR 41246, Oct. 22, 1984]
Sec. 1.381(c)(24)-1 Work incentive program credit carryovers
in certain corporate acquisitions.
The computation of carryovers and carrybacks of unused WIN credits
in a transaction to which section 381 applies shall be made under the
principles of Sec. 1.381(c)(23)-1 (relating to the computation of
carryovers and carrybacks of unused investment credits), except that the
provisions of paragraph (c)(4) and paragraph (e)(6), (7), and (8) of
such section shall not apply.
(Secs. 381(c)(23), 76 Stat. 971 (26 U.S.C. 381(c)(23), 381(c)(24)) 85
Stat. 557 (26 U.S.C. 381(c)(24)), 7805, 68A Stat. 917 (26 U.S.C. 7805))
[T.D. 7289, 38 FR 30557, Nov. 6, 1973]
Sec. 1.381(c)(25)-1 Deficiency dividend of a qualified investment
entity.
(a) Carryover requirement. If a distributor or transferor
corporation in a transaction to which section 381(a) applies--
(1) Was a qualified investment entity (within the meaning of section
860(b)) for any taxable year ending on or before the date of
distribution or transfer, and
(2) A determination (as defined in section 860(e)) establishes that
the transferor or distributor corporation is
[[Page 669]]
liable for the tax imposed by section 11(a), 56(a), 852(b), 857(b)(1),
857(b)(3)(A), or 1201(a) for such taxable year,then in determining the
liability for such tax the deduction described in section 860 shall be
allowed pursuant to section 381(c)(25) to such corporation for the
amount of deficiency dividends paid by the acquiring corporation with
respect to the distributor or transferor corporation. Except as
otherwise provided in this section, the provisions of section 860 and
the regulations thereunder apply with respect to a deficiency dividend
deduction allowable pursuant to section 381(c)(25).
(b) Deficiency dividends paid by the acquiring corporation with
respect to the distributor or transferor corporation. A deficiency
dividend paid by the acquiring corporation with respect to the
distributor or transferor corporation must be a distribution that would
satisfy the definition of a deficiency dividend under section 860(f) if
paid by the distributor or transferor corporation to its own
shareholders. The distribution, however, shall be paid by the acquiring
corporation to its own shareholders. The distribution also shall be paid
after the date of distribution or transfer and on, or within 90 days
after, the date of the determination but before the acquiring
corporation files a claim under paragraph (c) of this section.
(c) Claim for deduction. A claim for deduction under this section
shall be made by the acquiring corporation on Form 976 and shall be
filed within 120 days after the date of the determination. The form
shall contain, or be accompanied by, the information required under
Sec. 1.860-2(b)(2) in sufficient detail to properly identify the facts
with respect to the distributor or transferor corporation and the
acquiring corporation. The required certified copy of the resolution
authorizing the payment of the dividend shall be that of the trustees,
board of directors, or other authority, of the acquiring corporation.
Necessary changes may be made in Form 976 in order to carry out the
provisions of this paragraph. The claim shall be filed with the district
director, or director of the internal revenue service center, with whom
the return of the distributor or transferor corporation to which the
claim relates was filed.
(d) Effect on dividends paid deduction. A deficiency dividend paid
by the acquiring corporation that is allowable as a deduction to a
distributor or transferor corporation pursuant to section 381(c)(25)
shall not become a part of the dividends paid deduction of the acquiring
corporation under section 561 for any taxable year.
(e) Successive transactions to which section 381(a) applies. The
provisions of this section shall apply in the case of successive
transactions to which section 381(a) applies. Thus, if X corporation
transfers its assets to Y corporation in a transaction to which section
381(a) applies and if Y corporation transfers its assets to Z
corporation in a subsequent transaction to which section 381(a) applies,
then, subject to the provisions of this section, X corporation may take
a deficiency dividend deduction for the amount of deficiency dividends
paid by Z corporation with respect to X corporation.
(Sec. 860(l) (92 Stat. 2849, 26 U.S.C. 860(l)); sec. 860(g) (92 Stat.
2850, 26 U.S.C. 860(g)); and sec. 7805 (68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7767, 46 FR 11264, Feb. 6, 1981, as amended by T.D. 7936, 49 FR
2106, Jan. 18, 1984]
Sec. 1.381(c)(26)-1 Credit for employment of certain new employees.
(a) Carryovers and carrybacks. For taxable years beginning before
January 1, 1984, the computation of carryovers and carrybacks of unused
targeted jobs credit (new jobs credit in the case of wages paid before
1979) under section 44B (as in effect prior to enactment of the Tax
Reform Act of 1984) in a transaction to which section 381(a) applies
shall be made under the principles of Sec. 1.381(c)(23)-1 (relating to
the computation of carryovers and carrybacks of unused investment
credit), except that the provisions of paragraph (c)(4) and paragraph
(e)(6), (7) and (8) of such section shall not apply.
(b) Other items. See Sec. 1.51-1(h) for a rule that applies to
certain transfers of a trade or business in which a member of a targeted
group is employed.
[T.D. 8062, 50 FR 46003, Nov. 6, 1985]
[[Page 670]]
Sec. 1.381(d)-1 Operations loss carryovers of life insurance
companies.
For the application of part V, subchapter C, chapter 1 of the Code
to operations loss carryovers of life insurance companies, see section
812(f) and Sec. 1.812-7 and section 381(c)(22) and Sec. 1.381(c)(22)-
1.
[T.D. 6625, 27 FR 12543, Dec. 19, 1962]
Sec. 1.382-1 Table of contents.
This section lists the captions that appear in the regulations for
Sec. Sec. 1.382-2 through 1.382-11.
Sec. 1.382-2 General rules for ownership change.
(a) Certain definitions for purposes of sections 382 and 383 and the
regulations thereunder.
(1) Loss corporation.
(i) In general.
(ii) Distributor of transferor loss corporation in a transaction
under section 381.
(iii) Separate accounting required for losses and credits of an
acquiring corporation and a distributor or transferor loss corporation.
(iv) End of separate accounting for losses and credits of
distributor or transferor corporation.
(v) Application to other successor corporations.
(2) Pre-change loss.
(3) Stock.
(i) In general.
(ii) Convertible stock.
(4) Testing date.
(i) In general.
(ii) Exceptions.
(5) Successor corporation.
(6) Predecessor corporation.
(b) Effective dates.
(1) In general. [Reserved]
(2) Rules provided in paragraph (a)(3)(ii) of this section.
(i) In general.
(ii) Certain convertible preferred stock.
(3) Rules provided in paragraph (a)(4) of this section.
Sec. 1.382-3 Definitions and rules relating to a 5-percent shareholder.
(a) Definitions.
(1) Entity.
(i) In general.
(ii) Examples.
(iii) Effective date.
(A) In general
(B) Special rule.
(C) Example.
(2) [Reserved]
(b)-(i) [Reserved]
(j) Modification of the segregation rules of Sec. 1.382-
2T(j)(2)(iii) in the case of certain issuances of stock.
(1) Introduction.
(2) Small issuance exception.
(i) In general.
(ii) Small issuance defined.
(iii) Small issuance limitation.
(A) In general.
(B) Class of stock defined.
(C) Adjustments for stock splits and similar transactions.
(D) Exception.
(iv) Short taxable years.
(3) Other issuances of stock for cash.
(i) In general.
(ii) Solely for cash.
(A) In general.
(B) Related issuances.
(iii) Coordination with paragraph (j)(2) of this section.
(4) Limitation on exempted stock.
(5) Proportionate acquisition of exempted stock.
(i) In general.
(ii) Actual knowledge of greater overlapping ownership.
(6) Exception for equity structure shifts.
(7) Transitory ownership by underwriter disregarded.
(8) Certain related issuances.
(9) Application to options.
(10) Issuance of stock pursuant to the exercise of certain options.
(11) Application to first tier and higher tier entities.
(12) Certain non-stock ownership interests.
(13) Examples.
(14) Effective date.
(i) In general.
(ii) Effective date for paragraph (j)(10) of this section.
(iii) Election to apply this paragraph (j) retroactively.
(A) Election.
(B) Amended returns.
(C) Revised information statements.
(k) Special rules for certain regulated investment companies.
(1) In general.
(2) Effective date.
(i) General rule.
(ii) Election to apply prospectively.
Sec. 1.382-4 Constructive ownership of stock.
(a) In general. [Reserved]
(b) Attribution from corporations, partnerships, estates and trusts.
(1) [Reserved]
(2) Limitation.
(c) Attribution to corporations, partnerships, estates and trusts.
[Reserved]
(d) Treatment of options as exercised.
(1) General rule.
(2) Options treated as exercised.
(i) Issuance or transfer.
(ii) Subsequent testing dates.
[[Page 671]]
(3) The ownership test.
(4) The control test.
(i) In general.
(ii) Operating rules.
(A) Person and related persons.
(B) Indirect ownership interest.
(5) The income test.
(6) Application of the ownership, control, and income tests.
(i) In general.
(ii) Application of ownership test.
(iii) Application of control test.
(iv) Application of income test.
(7) Safe harbors.
(i) Contracts to acquire stock.
(ii) Escrow, pledge, or other security agreements.
(iii) Compensatory options.
(iv) Options exercisable only upon death, disability, mental
incompetency or retirement.
(v) Rights of first refusal.
(vi) Options designated in the Internal Revenue Bulletin.
(8) Additional rules.
(i) Contracts to acquire stock.
(ii) Indirect transfer of an option.
(iii) Options related to interests in non-corporate entities.
(iv) Puts.
(9) Definition of option.
(i) In general.
(ii) Convertible stock.
(iii) Series of options.
(iv) General principles of tax law.
(10) Subsequent treatment of options treated as exercised on a
change date.
(i) In general.
(ii) Alternative look-back rule for options exercised within 3 years
after change date.
(11) Transfers not subject to deemed exercise.
(12) Certain rules regarding non-stock interests as stock.
(e) Stock transferred under certain agreements. [Reserved]
(f) Family attribution. [Reserved]
(g) Definitions.
(h) Effective date.
(1) In general. [Reserved]
(2) Option attribution rules.
(i) General rule.
(ii) Special rule for control test.
(iii) Convertible stock issued prior to July 20, 1988.
(A) In general.
(B) Exceptions.
(1) Nonvoting convertible preferred stock.
(2) Other convertible stock.
(iv) Convertible stock issued on or after July 20, 1988, and before
November 5, 1992.
(v) Certain options in existence immediately before and after an
ownership change.
(vi) Election to apply Sec. 1.382-2T(h)(4).
(A) In general.
(B) Additional consequences of election.
(C) Time and manner of making the election.
(D) Amended returns.
(3) Special rule for options subject to attribution under Sec.
1.382-2T(h)(4).
Sec. 1.382-5 Section 382 limitation.
(a) Scope.
(b) Computation of value.
(c) Short taxable year.
(d) Successive ownership changes and absorption of a section 382
limitation.
(1) In general.
(2) Recognized built-in gains and losses.
(3) Effective date.
(e) Controlled groups.
(f) Effective date.
Sec. 1.382-6 Allocation of income and loss to periods before and after
the change date for purposes of section 382.
(a) General rule.
(b) Closing-of-the-books election.
(1) In general.
(2) Making the closing-of-the-books election.
(i) Time and manner.
(ii) Election irrevocable.
(3) Special rules relating to consolidated and controlled groups.
(i) Consolidated groups.
(ii) Controlled groups.
(c) Operating rules for determining net operating loss, taxable
income, net capital loss, modified capital gain net income, and special
allocations.
(1) In general.
(2) Adjustment to net operating loss.
(i) Determination of remaining capital gain.
(ii) Reduction of net operating loss by remaining capital gain.
(d) Coordination with rules relating to the allocation of income
under Sec. 1.1502-76(b).
(e) Allocation of certain credits.
(f) Examples.
(g) Definitions and nomenclature.
(1) Change year.
(2) Pre-change period.
(3) Post-change period.
(4) Modified capital gain net income.
(h) Effective date.
Sec. 1.382-7 Built-in gains and losses.
(a) Treatment of prepaid income.
(b) Effective/applicability dates.
Sec. 1.382-8 Controlled groups.
(a) Introduction.
(b) Controlled group loss and controlled group with respect to a
controlled group loss.
(1) In general.
(2) Presumption regarding net unrealized built-in loss.
(c) Computation of value.
[[Page 672]]
(1) Reduction in value by the amount restored.
(2) Restoration of value.
(3) Reduction in value by the amount restored.
(4) Appropriate adjustments.
(5) Certain reductions in the value of members of a controlled
group.
(d) No double reduction.
(e) Definitions and nomenclature.
(1) Definitions in Section 382 and the regulations thereunder.
(2) Controlled group.
(3) Component member.
(4) Foreign component member.
(i) In general.
(ii) Exception.
(5) Predecessor and successor corporation.
(f) Coordination between consolidated groups and controlled groups.
(g) Examples.
(h) Time and manner of filing election to restore.
(1) Statements required.
(i) Filing by loss corporation.
(ii) Filing by electing member.
(iii) Agreement.
(2) Special rule for foreign component members.
(i) Deemed election to restore full value.
(ii) Election not to restore full value.
(iii) Agreement.
(3) Revocation of election.
(i) [Reserved]
(j) Effective date.
(1) In general.
(2) Transition rule.
(i) In general.
(ii) Special transition rules for controlled groups that had
ownership changes before January 29, 1991.
(3) Amended returns.
(4) Effective/applicability date.
Sec. 1.382-9 Special rules under section 382 for corporations under the
jurisdiction of a court in a title 11 or similar case.
(a) Introduction.
(b) Application of section 382(1)(5).
(c) [Reserved]
(d) Rules for determining whether stock of the loss corporation is
owned as a result of being a qualified creditor.
(1) Qualified creditor.
(2) General rules for determining whether indebtedness is qualified
indebtedness.
(i) Definition.
(ii) Determination of beneficial ownership.
(iii) Duty of inquiry.
(iv) Ordinary course indebtedness.
(3) Treatment of certain indebtedness as continuously owned by the
same owner.
(i) In general.
(ii) Operating rules.
(iii) Indebtedness owned by beneficial owner who becomes a 5-percent
shareholder or 5-percent entity.
(iv) Example.
(4) Special rule if indebtedness is a large portion of creditor's
assets.
(i) In general.
(ii) Applicable period.
(iii) Determination of ownership change.
(iv) Reliance on statement.
(5) Tacking of ownership periods.
(i) Transferee treated as owning indebtedness for period owned by
transferor.
(ii) Qualified transfer.
(iii) Exception.
(iv) Debt-for-debt exchanges.
(6) Effective date.
(i) In general.
(ii) Elections and amended returns.
(A) Election to apply this paragraph (d) retroactively.
(B) Election to revoke section 382(l)(5)(H) election.
(C) Amended returns.
(e) Option attribution for purposes of determining stock ownership
under section 382(1)(5)(A)(ii).
(1) In general.
(2) Special rules.
(i) Lapse or forfeiture of options deemed exercised.
(ii) Actual exercise of options not deemed exercised.
(iii) Amended returns.
(3) Examples.
(4) Effective dates.
(i) In general.
(ii) Special rule for interest or dividends.
(f)-(h) [Reserved]
(i) Election not to apply section 382(l)(5).
(j) Value of the loss corporation in an ownership change to which
section 382(l)(6) applies.
(k) Rules for determining the value of the stock of the loss
corporation.
(1) Certain ownership interests treated as stock.
(2) Coordination with section 382(e)(2).
(3) Coordination with section 382(e)(3).
(4) Coordination with section 382(l)(1).
(5) Coordination with section 382(l)(4).
(6) Special rule for stock not subject to the risk of corporate
business operations.
(i) In general.
(ii) Coordination of special rule and other rules affecting value.
(7) Limitation on value of stock.
(l) Rules for determining the value of the loss corporation's pre-
change assets.
(1) In general.
(2) Coordination with section 382(e)(2).
(3) Coordination with section 382(e)(3).
(4) Coordination with section 382(l)(1).
(5) Coordination with section 382(l)(4).
(m) Continuity of business requirement.
(1) Under section 382(1)(5).
(2) Under section 382(l)(6).
(n) Ownership change in a title 11 or similar case succeeded by
another ownership change within two years.
[[Page 673]]
(1) Section 382(l)(5) applies to the first ownership change.
(2) Section 382(l)(6) applies to the first ownership change.
(o) Options not subject to attribution.
(p) Effective date for rules relating to section 382(l)(6).
(1) In general.
(2) Ownership change to which section 382(l)(6) applies occurring
before March 17, 1994.
Sec. 1.382-10 Special rules for determining time and manner of
acquisition of an interest in a loss corporation.
Sec. 1.382-11 Reporting requirements.
(a) Information statement required.
(b) Effective/applicability date.
Sec. 1.382-12 Determination of adjusted Federal long-term rate.
(a) In general.
(b) Adjusted Federal long-term rate.
(c) Adjustment factor.
(d) Effective/applicability date.
[T.D. 8149, 52 FR 29674, Aug. 11, 1987. Redesignated by T.D. 8440, 57 FR
45711, Oct. 5, 1992, as amended by T.D. 9487, 75 FR 33992, June 16,
2010; T.D. 9763, 81 FR 24483, Apr. 26, 2016]
Editorial Note: For Federal Register citations affecting Sec.
1.382-1, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
Sec. 1.382-1T Table of contents (temporary).
This section lists the captions that appear in the regulations for
Sec. 1.382-2T.
1.382-2T Definition of ownership change under section 382, as amended by
the Tax Reform Act of 1986 (temporary).
(a) Ownership change.
(1) In general.
(2) Events requiring a determination of whether an ownership change
has occurred.
(i) Testing dates prior to November 5, 1992.
(ii) [Reserved]
(iii) Records to be maintained by loss corporation.
(b) Nomenclature and assumptions.
(c) Computing the amount of increases in percentage ownership.
(1) In general.
(2) Example.
(3) Related and unrelated increases in percentage stock ownership.
(4) Example.
(d) Testing period.
(1) In general.
(2) Effect of a prior ownership change.
(3) Commencement of the testing period.
(i) In general.
(ii) Exception for corporations with net unrealized built-in loss.
(4) Disregarding testing dates.
(5) Example.
(e) Owner shift and equity structure shift.
(1) Owner shift.
(i) Defined.
(ii) Transactions between persons who are not 5-percent shareholders
disregarded.
(iii) Examples.
(2) Equity structure shift.
(i) Tax-free reorganizations.
(ii) Transactions designated under section 382(g)(3)(B) treated as
equity structure shifts.
(iii) Overlap of owner shift and equity structure shift.
(iv) Examples.
(f) Definitions.
(1) Loss corporation.
(2) Old loss corporation.
(3) New loss corporation.
(4) Successor corporation.
(5) Predecessor corporation.
(6) Shift.
(7) Entity.
(8) Direct ownership interest.
(9) First tier entity.
(10) 5-percent owner.
(11) Public shareholder.
(12) Public owner.
(13) Public group.
(14) Higher tier entity.
(15) Indirect ownership interest.
(16) Highest tier entity.
(17) Next lower tier entity.
(18) Stock.
(i) In general.
(ii) Treating stock as not stock.
(iii) Treating interests not constituting stock as stock.
(iv) Stock of the loss corporation.
(19) Change date.
(20) Year.
(21) Old section 382.
(22) Pre-change loss.
(23) Unrelated.
(24) Percentage ownership interest.
(g) 5-percent shareholder.
(1) In general.
(2) Determination of whether a person is a 5-percent shareholder.
(3) Determination of the percentage stock ownership interest of a 5-
percent shareholder.
(4) Examples.
(5) Stock ownership presumptions in connection with certain
acquisitions and dispositions of loss corporation stock.
(i) In general.
(ii) Example.
(h) Constructive ownership of stock.
(1) In general.
(2) Attribution from corporations, partnerships, estates and trusts.
(i) In general.
[[Page 674]]
(ii) Limitation on attribution from entities with respect to certain
interests.
(iii) Limitation on attribution from certain entities.
(iv) Examples.
(3) Attribution to corporations, partnerships, estates and trusts.
(4) Option attribution.
(i) In general.
(ii) Examples.
(iii) Contingencies.
(iv) Series of options.
(v) Interests that are similar to options.
(vi) Actual exercise of options.
(A) In general.
(B) Actual exercise within 120 days of deemed exercise.
(vii) Effect of deemed exercise of options on the outstanding stock
of the loss corporation.
(A) Right of obligation to issue stock.
(B) Right or obligation to acquire outstanding stock by the loss
corporation.
(C) Effect on value of old loss corporation.
(viii) Options that lapse or are forfeited.
(ix) Option rule inapplicable if pre-change losses are de minimis.
(x) Options not subject to attribution
(A) Long-held options with respect to actively traded stock.
(B) Right to receive or obligation to issue a fixed dollar amount of
value of stock upon maturity of certain debt.
(C) Right or obligation to redeem stock of the loss corporation.
(D) Options exercisable only upon death, disability or mental
incompetency.
(E) Right to receive or obligation to issue stock as interest or
dividends.
(F) Options outstanding following an ownership change.
(1) In general.
(2) Example.
(G) Right to acquire loss corporation stock pursuant to a default
under loan agreement.
(H) Agreement to acquire or sell stock owned by certain shareholders
upon retirement.
(I) [Reserved]
(J) Title 11 of similar case.
(K)-(Y) [Reserved]
(xi) Certain transfers of options disregarded.
(xii) Exercise of an option that has not been treated as stock.
(xiii) Effective date.
(5) Stock transferred under certain agreements.
(6) Family attribution.
(i) [Reserved]
(j) Aggregation and segregation rules.
(1) Aggregation of public shareholders and public owners into public
groups.
(i) Public group.
(ii) Treatment of public group that is a 5-percent shareholder.
(iii) Presumption of no cross-ownership.
(iv) Identification of the public groups treated as 5-percent
shareholders.
(A) Analysis of highest tier entities.
(B) Analysis of other higher tier entities and first tier entities.
(C) Aggregation of the public shareholders.
(v) Appropriate adjustments.
(vi) Examples.
(2) Segregation rules applicable to transactions involving the loss
corporation.
(i) In general.
(ii) Direct public group.
(iii) Transactions to which segregation rules apply.
(A) In general.
(B) Certain equity structure shifts and transactions to which
section 1032 applies.
(1) In general.
(2) Examples.
(C) Redemption-type transactions.
(1) In general.
(2) Examples.
(D) Acquisition of loss corporation stock as the result of the
ownership of a right to acquire stock.
(1) In general.
(2) Example.
(E) Transactions identified in the Internal Revenue Bulletin.
(F) Issuance of rights to acquire loss corporation stock.
(1) In general.
(2) Example.
(iv) Combination of de minimis public groups.
(A) In general.
(B) Example.
(v) Multiple transactions.
(A) In general.
(B) Example.
(vi) Acquisitions made by either a 5-percent shareholder or the loss
corporation following application of the segregation rules.
(3) Segregation rules applicable to transactions involving first
tier entities or higher tier entities.
(i) Dispositions.
(ii) Example.
(iii) Other transactions affecting direct public groups of a first
tier entity or higher tier entity.
(iv) Examples.
(v) Acquisitions made by a 5-percent shareholder, a higher tier
entity, or a first tier entity following application of the segregation
rules.
(k) Operating rules.
(1) Presumptions regarding stock ownership.
(i) Stock subject to regulation by the Securities and Exchange
Commission.
(ii) Statements under penalties of perjury.
(2) Actual knowledge regarding stock ownership.
(3) Duty to inquire as to actual stock ownership in the loss
corporation.
[[Page 675]]
(4) Ownership interests structured to avoid the section 382
limitation.
(5) Example.
(6) First tier entity or higher tier entity that is a foreign
corporation or entity. [Reserved]
(l) Changes in percentage ownership which are attributable to
fluctuations in value. [Reserved]
(m) Effective date.
(1) In general.
(2) Plan of reorganization.
(3) Earliest commencement of the testing period.
(4) Transitional rules.
(i) Rules provided in paragraph (j) of this section for testing
dates before September 4, 1987.
(ii) Example.
(iii) Rules provided in paragraph (j) of this section for testing
dates on or after September 4, 1987.
(iv) Rules provided in paragraphs (f)(18)(ii) and (iii) of this
section.
(v) Rules provided in paragraph (a)(2)(ii) of this section.
(vi) Rules provided in paragraph (h)(4) of this section.
(vii) Rules provided in paragraph (a)(2)(i) of this section.
(5) Bankruptcy proceedings.
(i) In general.
(ii) Example.
(6) Transactions of domestic building and loan associations.
(7) Transactions not subject to section 382.
(i) Application of old section 382.
(ii) Effect on testing period.
(iii) Termination of old section 382. [Reserved]
(8) Options issued or transferred before January 1, 1987.
(i) Options issued before May 6, 1986.
(ii) Options issued on or after May 6, 1986 and before September 18,
1986.
(iii) Options issued on or after September 18, 1986 and before
January 1, 1987.
(9) Examples.
[T.D. 9487, 75 FR 33991, June 16, 2010]
Sec. 1.382-2 General rules for ownership change.
(a) Certain definitions for purposes of sections 382 and 383 and the
regulations thereunder. The following definitions apply for purposes of
sections 382 and 383 and the regulations thereunder.
(1) Loss corporation--(i) In general. The term loss corporation
means a corporation which--
(A) Is entitled to use a net operating loss carryforward, a capital
loss carryover, a carryover of excess foreign taxes under section
904(c), a carryforward of a general business credit under section 39, or
a carryover of a minimum tax credit under section 53,
(B) For the taxable year that includes a testing date, as defined in
paragraph (a)(4) of this section or Sec. 1.382-2T(a)(2)(i), whichever
is applicable (determined for purposes of this paragraph (a)(1) without
regard to whether the corporation is a loss corporation), has a net
operating loss, a net capital loss, excess foreign taxes under section
904(c), unused general business credits under section 38, or an unused
minimum tax credit under section 53, or
(C) Has a net unrealized built-in loss (determined for purposes of
this paragraph (a)(1) by treating the date on which such determination
is made as the change date). See section 382(h)(3) for the definition of
net unrealized built-in loss.
See section 383 and Sec. 1.383-1 for rules relating to a loss
corporation that has an ownership change and has capital losses, excess
foreign taxes, general business credits or minimum tax credits. Any
predecessor or successor to a loss corporation described in this
paragraph (a)(1) is also a loss corporation.
(ii) Distributor or transferor loss corporation in a transaction
under section 381. Notwithstanding that a loss corporation ceases to
exist under state law, if its net operating loss carryforwards, excess
foreign taxes, or other items described in section 381(c) are succeeded
to and taken into account by an acquiring corporation in a transaction
described in section 381(a), such loss corporation shall be treated as
continuing in existence until--
(A) Any pre-change losses (excluding pre-change credits described in
Sec. 1.383-1(c)(3)), determined as if the date of such transaction were
the change date, are fully utilized or expire under either section 172
or section 1212,
(B) Any net unrealized built-in losses, determined as if the date of
such transaction were the change date, may no longer be treated as pre-
change losses, and
(C) Any pre-change credits (described in Sec. 1.383-1(c)(3)),
determined as if the date of such transaction were the
[[Page 676]]
change date, are fully utilized or expire under sections 39, 53, or
904(c).
Following a transaction described in the preceding sentence, the stock
of the acquiring corporation shall be treated as the stock of the loss
corporation for purposes of determining whether an ownership change
occurs with respect to the pre-change losses and net unrealized built-in
losses that may be treated as pre-change losses of the distributor or
transferor corporation.
(iii) Separate accounting required for losses and credits of an
acquiring corporation and a distributor or transferor loss corporation.
Except as provided in paragraph (a)(1)(iv) of this section, pre-change
losses (determined as if the testing date were the change date and
treating the amount of any net unrealized built-in loss as a pre-change
loss), that are succeeded to and taken into account by an acquiring
corporation in a transaction to which section 381(a) applies must be
accounted for separately from losses and credits of the acquiring
corporation for purposes of applying this section. See Example (2) of
Sec. 1.382-2T(e)(2)(iv) of this section.
(iv) End of separate accounting for losses and credits of
distributor or transferor loss corporation. The separate tracking of
owner shifts of the stock of an acquiring corporation required by
paragraph (a)(1)(iii) of this section with respect to the net operating
loss carryovers and other attributes described in paragraph (a)(1)(ii)
of this section ends when a fold-in event occurs. A fold-in event is
either an ownership change of the distributor or transferor corporation
in connection with, or after, the transaction to which section 381(a)
applies, or a period of 5 consecutive years following the section 381(a)
transaction during which the distributor or transferor corporation has
not had an ownership change. Starting on the day after the earlier of
the change date (but not earlier than the day of the section 381(a)
transaction) or the last day of the 5 consecutive year period, the
losses and other attributes of the distributor or transferor corporation
are treated as losses and attributes of the acquiring corporation for
purposes of determining whether an ownership change occurs with respect
to such losses. Also, for purposes of determining the beginning of the
acquiring corporation's testing period, such losses are considered to
arise either in a taxable year that begins not earlier than the later of
the day following the change date or the day of the section 381(a)
transaction, or in a taxable year that begins 3 years before the end of
the 5 consecutive year period. Pre-change losses of a distributor or
transferor corporation that are subject to a limitation under section
382 continue to be subject to the limitation notwithstanding the
occurrence of a fold-in event. Any ownership change that occurs in
connection with, or subsequent to, the section 381 transaction may
result in an additional, lesser limitation with respect to such pre-
change losses. This paragraph (a)(1)(iv) applies to any testing date
occurring on or after January 29, 1991.
(v) Application to other successor corporations. This paragraph
(a)(1) also applies, as the context may require, to successor
corporations other than successors in section 381(a) transactions. For
example, if a corporation receives assets from the loss corporation that
have basis in excess of value, the recipient corporation's basis for the
assets is determined, directly or indirectly, in whole or in part, by
reference to the loss corporation's basis, and the amount by which basis
exceeds value is material, the recipient corporation is a successor
corporation subject to this paragraph (a)(1). This paragraph (a)(1)(v)
applies to any testing date occurring on or after January 1, 1997.
(2) Pre-change loss. The term pre-change loss means--
(i) Any net operating loss carryforward of the old loss corporation
to the taxable year ending on the change date or in which the change
date occurs,
(ii) Any net operating loss of the old loss corporation for the
taxable year in which the ownership change occurs to the extent such
loss is allocable to the period in such year on or before the change
date.
(iii) Any recognized built-in loss for any recognition period
taxable year (within the meaning of 382(h)),
(iv) Any pre-change capital losses described in Sec. 1.383-
1T(c)(2)(i) and (ii), and
[[Page 677]]
(v) Any pre-change credits described in 1.383-1T(c)(3).
(3) Stock--(i) In general. Except as provided in this paragraph
(a)(3)(i) and Sec. 1.382-2T(f)(18)(ii) and (iii), the term stock means
stock other than stock described in section 1504(a)(4). Notwithstanding
the preceding sentence, stock that is not described in section
1504(a)(4) solely because it is entitled to vote as a result of dividend
arrearages shall be treated as so described and thus shall not be
considered stock. Stock described in section 1504(a)(4), however, is not
excluded for purposes of determining the value of the loss corporation
under section 382(e). The determination of the percentage of stock of
any corporation owned by any person shall be made on the basis of the
relative fair market value of the stock owned by such person to the
total fair market value of the outstanding stock of the corporation.
Solely for purposes of determining the percentage of stock owned by a
person, each share of all the outstanding shares of stock that have the
same material terms is treated as having the same value. Thus, for
example, a control premium or blockage discount is disregarded in
determining the percentage of stock owned by any person. The previous
two sentences of this paragraph (a)(3)(i) apply to any testing date
occurring on or after January 29, 1991.
(ii) Convertible stock. The term stock includes any convertible
stock. For rules regarding the treatment of certain convertible stock as
an option, see Sec. 1.382-4(d)(9)(ii).
(4) Testing date--(i) In general. Except as provided in paragraph
(a)(4)(ii) of this section, a loss corporation is required to determine
whether an ownership change has occurred immediately after any owner
shift, or issuance or transfer (including an issuance or transfer
described in Sec. 1.382-4(d)(8)(i) or (ii)) of an option with respect
to stock of the loss corporation that is treated as exercised under
Sec. 1.382-4(d)(2). Each date on which a loss corporation is required
to make a determination of whether an ownership change has occurred is
referred to as a testing date. All computations of increases in
percentage ownership are to be made as of the close of the testing date
and any transactions described in this paragraph (a)(4) that occur on
that date are treated as occurring simultaneously at the close of the
testing date. See Sec. 1.382-2T(e)(1) for the definition of owner
shift. The term option, as used in this paragraph (a)(4), includes
interests that are treated as options under Sec. 1.382-4(d)(9). For
rules regarding the determination of whether dates prior to November 5,
1992, are testing dates, see Sec. 1.382-2T(a)(2)(i).
(ii) Exceptions. A loss corporation is not required to determine
whether an ownership change has occurred immediately after--
(A) Any transfer of stock, or an option with respect to stock, of
the loss corporation in any of the circumstances described in section
382(l)(3)(B) (death, gift, divorce, etc.); or
(B) The transfer of an option described in Sec. 1.382-4(d)(11)(i)
or (ii) (relating to transfers between persons who are not 5-percent
shareholders or between members of certain public groups).
(5) Successor corporation. A successor corporation is a distributee
or transferee corporation that succeeds to and takes into account items
described in section 381(c) from a corporation as the result of an
acquisition of assets described in section 381(a). A successor
corporation also includes, as the context may require, a corporation
which receives an asset or assets from another corporation if the
corporation's basis for the asset(s) is determined, directly or
indirectly, in whole or in part, by reference to the other corporation's
basis and the amount by which basis differs from value is, in the
aggregate, material. The previous sentence of this paragraph (a)(5)
applies to any testing date occurring on or after January 1, 1997.
(6) Predecessor corporation. A predecessor corporation is a
distributor or transferor corporation that distributes or transfers its
assets to an acquiring corporation in a transaction described in section
381(a). A predecessor corporation also includes, as the context may
require, a corporation which transfers an asset or assets to another
corporation if the transferee's basis for
[[Page 678]]
the asset(s) is determined, directly or indirectly, in whole or in part,
by reference to the corporation's basis and the amount by which basis
differs from value is, in the aggregate, material. The previous sentence
of this paragraph (a)(6) applies to any testing date occurring on or
after January 1, 1997.
(b) Effective dates--(1) In general. [Reserved]
(2) Rules provided in paragraph (a)(3)(ii) of this section--(i) In
general. Except as provided in paragraph (b)(2)(ii) of this section, the
rules provided in paragraph (a)(3)(ii) of this section apply with
respect to any convertible stock.
(ii) Certain convertible preferred stock. Convertible stock that,
when issued, would be described in section 1504(a)(4) by disregarding
subparagraph (D) thereof and by ignoring the potential participation in
corporate growth that the conversion feature may offer is treated as
stock described in that section (and thus is not treated as stock for
the purpose of determining whether an ownership change occurs, but is
taken into account for the purpose of determining the value of the loss
corporation immediately before an ownership change; see sections
382(e)(1) and 382(k)(6)(A)) if--
(A) The stock was issued on or after July 20, 1988, and prior to
November 5, 1992; or
(B) The stock was issued prior to July 20, 1988, and the loss
corporation makes the election described in Notice 88-67, 1988-1 C.B.
555, (see Sec. 601.601(d)(2)(ii)(b) of this chapter for availability of
Cumulative Bulletins (C.B.)) on or before the earlier of the date
prescribed in the Notice or December 7, 1992.
(3) Rules provided in paragraph (a)(4) of this section. The rules
provided in paragraph (a)(4) of this section apply to determine whether
dates on or after November 5, 1992, are testing dates.
[T.D. 8352, 56 FR 29434, June 27, 1991, as amended by T.D. 8405, 57 FR
10740, Mar. 30, 1992; 57 FR 24188, June 8, 1992; T.D. 8531, 59 FR 12836,
Mar. 18, 1994; T.D. 8679, 61 FR 33315, June 27, 1996; T.D. 8825, 64 FR
36177, 36178, July 2, 1999]
Sec. 1.382-2T Definition of ownership change under section 382,
as amended by the Tax Reform Act of 1986 (temporary).
(a) Ownership change--(1) In general. A corporation is a new loss
corporation and thus subject to limitation under section 382 only if an
ownership change has occurred with respect to such corporation. An
ownership change occurs with respect to a corporation if it is a loss
corporation on a testing date and, immediately after the close of the
testing date, the percentage of stock of the corporation owned by one or
more 5-percent shareholders has increased by more than 50 percentage
points over the lowest percentage of stock of such corporation owned by
such shareholders at any time during the testing period. See paragraph
(a)(2)(i) of this section for the definition of testing date. See
paragraph (d) of this section for the definition of testing period. See
Sec. 1.382-2(a)(1) and paragraph (f)(3) of this section for the
respective definition of loss corporation and new loss corporation. See
paragraph (g) of this section for the definition of 5-percent
shareholder. See section 383 and Sec. 1.383-1 for rules relating to
loss corporations that have an ownership change and have capital loss
carryovers, excess foreign taxes carried over under section 904(c),
carryovers of general business credits under section 39, or unused
minimum tax credits under section 53.
(2) Events requiring a determination of whether an ownership change
has occurred--(i) Testing dates prior to November 5, 1992. Except as
otherwise provided in this paragraph (a)(2)(i), a loss corporation is
required to determine whether an ownership change has occurred
immediately after any owner shift, any equity structure shift, or any
transaction in which an option with respect to stock of the loss
corporation is--
(A) Transferred to (or by) a 5-percent shareholder (or a person who
would be 5-percent shareholder if the option were treated as exercised),
or
(B) Issued by the loss corporation, a first tier entity, or a higher
tier entity that owns five percent or more of the loss corporation
(determined without regard to the application of paragraph
[[Page 679]]
(h)(2)(i)(A) of this section). Notwithstanding the preceding sentence,
any transfer of stock of the loss corporation (or an option with respect
to such stock) in any of the circumstances described in section
382(l)(3)(B), or any equity structure shift that is not also an owner
shift, is not an event that requires the loss corporation to make a
determination of whether an ownership change has occurred. For purposes
of this section, each date on which a loss corporation is required to
make a determination of whether an ownership change has occurred is
referred to as a testing date, all computations of increases in
percentage ownership are to be made as of the close of the testing date,
and any transactions described in this paragraph (a)(2)(i) that occur on
that date are treated as occurring simultaneously at the close of the
testing date. See paragraphs (e)(1) and (2) of this section for the
respective definitions of owner shift and equity structure shift. See
paragraphs (f)(9) and (14) of this section for the respective
definitions of first tier entity and higher tier entity. See paragraph
(m)(4)(vii) of this section for special rules regarding the effective
date of the provisions of this paragraph (a)(2)(i).
(ii) [Reserved]. For further guidance, see Sec. 1.382-11(a).
(iii) Records to be maintained by loss corporation. A loss
corporation shall keep such records as are necessary to determine: (A)
The identity of its 5-percent shareholders, (B) the percentage of its
stock owned by each such 5-percent shareholder, and (C) whether the
section 382 limitation is applicable. Such records shall be retained so
long as they may be material in the administration of any internal
revenue law.
(b) Nomenclature and assumptions. For purposes of the example in
this section--
(1) L is a loss corporation, and, if there is more than one loss
corporation, they are designated as L1, L2,
L3, etc.
(2) P is a corporation that is not a loss corporation, and, if there
is more than one such corporation, they are designated as P1,
P2, P3, etc.
(3) HC is a corporation whose assets consist solely of the stock of
other corporations.
(4) E is an entity other than a corporation (e.g., a partnership),
and, if there is more than one such entity, they are designated as
E1, E2, E3, etc.
(5) Unless otherwise stated--
(i) A, B, C, D, AA, BB, CC, and DD are unrelated individuals who own
interests in corporations or other entities only to the extent expressly
stated,
(ii) All corporations have one class of stock outstanding and each
share of stock has the same fair market value as each other share,
(iii) The capital structure of the loss corporation and its business
do not change over time, and
(iv) The rules of paragraphs (k)(2) and (4) of this section are not
applicable.
(6) Public L represents a group of unrelated individuals and
entities that own direct (and not indirect) stock ownership interests in
loss corporation L, each of whom owns less than five percent of the
stock of the loss corporation, and, if there is more than one loss
corporation, such groups are designated as Public L1, Public
L2, Public L3, etc.
(7) Public P represents a group of unrelated individuals and
entities that own direct (and not indirect) stock ownership interests in
corporation P, each of whom owns less than five percent of the stock of
the corporation, and, if there is more than one corporation, such groups
are designated as Public P1, P2, P3,
etc.
(8) Public E represents a group of unrelated individuals and
entities that own direct (and not indirect) ownership interests in
entity E, each of whom owns less than five percent of the entity, and,
if there is more than one entity, such groups are designated as Public
E1, Public E2, Public E3, etc.
(c) Computing the amount of increases in percentage ownership--(1)
In general. In order to determine whether an ownership change has
occurred on a testing date, the loss corporation must identify each 5-
percent shareholder whose percentage of stock ownership in the loss
corporation immediately after the close of the testing date has
increased, compared to such shareholder's lowest percentage of stock
ownership in such corporation at any time during the
[[Page 680]]
testing period. The amount of the increase in the percentage of stock
ownership in the loss corporation of each 5-percent shareholder must be
computed separately by comparing the percentage ownership of each such
5-percent shareholder immediately after the close of the testing date to
such shareholder's lowest percentage ownership at any time during the
testing period. Each such increase in the percentage ownership of a 5-
percent shareholder is then added together with any other such increases
of other 5-percent shareholders to determine whether an ownership change
has occurred. Because only those 5-percent shareholders whose
percentages of stock ownership have increased are taken into account, a
5-percent shareholder is disregarded if his percentage of stock
ownership, immediately after the close of the testing date, has
decreased (or has remained the same), compared to his lowest percentage
ownership interest on any previous date during the testing period.
(2) Example.
Example. (i) A and B each own 40 percent of the outstanding L stock.
The remaining 20 percent of the L stock is owned by 100 unrelated
individuals, none of whom own as much as five percent of L stock
(``Public L''). C negotiates with A and B to purchase all their stock in
L.
(ii) The acquisitions from both A and B are completed on September
13, 1990. C's acquisition of 80 percent of L stock results in an
ownership change because C's percentage ownership has increased by 80
percentage points as of the testing date, compared to his lowest
percentage ownership in L at any time during the testing period (0
percent).
(3) Related and unrelated increases in percentage stock ownership.
The determination whether an ownership change has occurred is made
without regard to whether the changes in stock ownership of the loss
corporation (by one or more 5-percent shareholders) result from related
or unrelated events.
(4) Example.
Example. (i) L has outstanding 200 shares of common stock. A, B and
C respectively own 100, 50 and 50 shares of the L stock. On January 2,
1988, A sells 60 shares of L stock to B. Thus, B's percentage ownership
interest in L increases by 30 percentage points, from 50 shares to 110
shares. On January 1, 1989, A purchases C's entire interest in L. Thus,
A's percentage ownership interest in L increases by 25 percentage
points, compared to his lowest percentage ownership interest in L, from
40 shares immediately following the January 2, 1988 sale to B to 90
shares. Even though A's ownership interest in L as of January 1, 1989
has decreased, compared to his 50 percent ownership interest at the
beginning of the testing period, A is a 5-percent shareholder who must
be taken into account for purposes of the computation required under
paragraph (c)(1) of this section because his interest in L on that
testing date (45 percent) has increased, compared to his lowest
percentage ownership interest in L at any time during the testing period
(20 percent following the sale to B).
(ii) Accordingly, although A and B jointly have increased their
aggregate total ownership interest in L between January 2, 1988 and
January 1, 1989 by only 25 percentage points (i.e., the total ownership
interest in L held by A and B at all times is not less than a 75 percent
interest), the total of their separate increases in the percentage stock
ownership of L, compared to their respective lowest percentage ownership
interests at any time during the testing period, is 55 percentage
points. Thus, an ownership change occurs as a result of A's acquisition
of L stock on January 1, 1989.
(d) Testing period--(1) In general. Except as otherwise provided in
paragraphs (d) and (m) of this section, the testing period for any
testing date is the three-year period ending on the testing date. See
paragraph (a)(2)(i) of this section for the definition of testing date.
(2) Effect of a prior ownership change. Following an ownership
change, the testing period for determining whether a subsequent
ownership change has occurred shall begin no earlier than the first day
following the change date of the most recent ownership change. See
paragraph (f)(19) of this section for the definition of change date.
(3) Commencement of the testing period--(i) In general. Except as
otherwise provided in paragraph (d)(3)(ii) of this section, the testing
period for any loss corporation shall not begin before the earlier of
the first day of either--
(A) The first taxable year from which there is a loss or excess
credit carryforward to the first taxable year ending after the testing
date, or
(B) The taxable year in which the testing date occurs.
(ii) Exception for corporations with net unrealized built-in loss.
Paragraph
[[Page 681]]
(d)(3)(i) of this section shall not apply if the corporation has a net
unrealized built-in loss (determined after application of section
382(h)(3)(B)) on the testing date, unless the loss corporation
establishes the taxable year in which the net unrealized built-in loss
first accrued.
In that event, the testing period shall not begin before the earlier
of--
(A) The first day of the taxable year in which the net unrealized
built-in loss first accrued, or
(B) The day described in paragraph (d)(3)(i) of this section. See
section 382(h) for the definition of net unrealized built-in loss.
(4) Disregarding testing dates. Any testing date that occurs before
the beginning of the testing period shall be disregarded for purposes of
this section.
(5) Example.
Example. (i) A owns all 100 outstanding shares of L stock. A sells
40 shares to B on January 1, 1988. C purchases 20 shares of L stock from
A on July 1, 1991. In determining if an ownership change occurs on the
July 1, 1991 testing date, B's acquisition of L stock is disregarded
because it occurred before the testing period that ends on such testing
date. Thus, B's ownership interest in L does not increase during the
testing period, and no ownership change results from C's acquisition.
(ii) The facts are the same as in (i), except that throughout the
period during which B negotiated his stock purchase transaction with A,
B knew that C intended to attempt to acquire a significant stock
interest in L. Also, B and C have been partners in a number of
significant business ventures. The result is the same as in (i).
(e) Owner shift and equity structure shift--(1) Owner shift--(i)
Defined. For purposes of this section, an owner shift is any change in
the ownership of the stock of a loss corporation that affects the
percentage of such stock owned by any 5-percent shareholder. See
paragraph (g) of this section for the definition of a 5-percent
shareholder. An owner shift includes, but is not limited to, the
following transactions:
(A) A purchase of disposition of loss corporation stock by a 5-
percent shareholder,
(B) A section 351 exchange that affects the percentage of stock
owned by a 5-percent shareholder,
(C) A redemption or a recapitalization that affects the percentage
of stock owned by a 5-percent shareholder,
(D) An issuance of loss corporation stock that affects the
percentage of stock owned by a 5-percent shareholder, and
(E) An equity structure shift that affects the percentage of stock
owned by a 5-percent shareholder.
(ii) Transactions between persons who are not 5-percent shareholders
disregarded. Transfers of loss corporation stock between persons who are
not 5-percent shareholders of such corporation (and between members of
separate public groups resulting from the application of the segregation
rules of paragraphs (j)(2) and (3)(iii) of this section) are not owner
shifts and thus are not taken into account. See paragraph (h)(4)(xi) of
this section for a similar rule applicable to transfers of options.
(iii) Examples.
Example 1. A has owned all 1000 shares of outstanding L stock for
more than three years. On June 15, 1988, A sells 300 of his L shares to
B. This transaction is an owner shift. No other 5-percent shareholder
has increased his percentage ownership of L stock during the testing
period. Thus, the owner shift resulting from B's acquisition does not
result in an ownership change, because B has increased his stock
ownership in L by only 30 percentage points.
Example 2. The facts are the same as in Example (1). In addition, on
June 15, 1989, L issues 100 shares to each of C, D and AA. The stock
issuance is an owner shift. The transaction, however, does not result in
an ownership change, because B, C, D and AA (the 5-percent shareholders
whose stock ownership has increased as of the testing date, compared to
any other time during the testing period) have increased their
percentage of stock ownership in L by a total of only 46.2 percentage
points during the testing period (by 23.1 percentage points [300 shares/
1300 shares] for B, and 7.7 percentage points [100 shares/1300 shares]
for each of C, D and AA).
Example 3. All 1000 shares of L stock are owned by a group of 100
unrelated individuals, none of whom own as much as five percent of L
stock (``Public L''). Several of the members of Public L sell their L
stock, amounting to a 30 percent ownership interest in L, to B on June
15, 1988. The sale of stock to B is an owner shift. Between June 16,
1988 and June 15, 1989, each of the remaining individuals in Public L
sells his stock to another person who is not a 5-percent shareholder.
Under paragraph (e)(1)(ii) of this section,
[[Page 682]]
trading activity among the members of Public L is disregarded and does
not result in an owner shift. On June 15, 1989, L issues 100 shares to
each of C, D and AA. The only sale transactions by members of Public L
that are taken into account in determining whether an ownership change
occurs on June 15, 1989 are the sales to B on June 15, 1988. Because B,
C, D and AA together have increased their percentage ownership of L
stock as a result of B's purchase and the stock issuance by an amount
not in excess of 50 percentage points during the testing period ending
on June 15, 1988, an ownership change does not occur on that date.
Example 4. The facts are the same as in Example (2). In addition, on
December 15, 1989, L redeems 200 of the L shares from A. The redemption
is an owner shift that results in an ownership change, because B, C, D
and AA are 5-percent shareholders whose percentage ownership of L
increase by a total of 54.6 percentage points during the testing period
(by 27.3 percentage points [300 shares/1100 shares] for B and 9.1
percentage points [100 shares/1100 shares] for each of C, D and AA).
Example 5. L is owned entirely by 10,000 unrelated shareholders,
none of whom owns as much as five percent of the stock of L (``Public
L''). Accordingly, Public L is L's only 5-percent shareholder. See
paragraph (j)(1) of this section. There are one million shares of common
stock outstanding. On December 1, 1988, L issues two million new shares
of its common stock to members of the public, none of whom owned any L
stock prior to the issuance. Following the public offering, no
shareholder of L owns, directly or indirectly, five percent or more of L
stock. Under paragraph (j)(2) of this section, however, all of the newly
issued stock is treated as acquired by a 5-percent shareholder (``Public
NL'') that is unrelated to Public L. Therefore, the public offering
constitutes an owner shift that results in an ownership change because
Public NL's percentage of stock ownership in L increased by 66\2/3\
percentage points (two million shares acquired in the public offering/
three million shares outstanding following the offering) over its lowest
percentage ownership during the testing period (0 percent prior to the
offering).
Example 6. The facts are the same as in Example (5), except that L
issues only 500,000 new shares of L stock on December 1, 1988, and
Public NL's percentage ownership interest in L increases by only 33\1/3\
percentage points (500,000 shares acquired in the public offering/1.5
million shares outstanding following the offering). During the two years
following December 2, 1988, 14 percent of the stock outstanding on that
date is sold over a public stock exchange. On December 3, 1990, A
purchases five percent of L stock (75,000 shares) over a public stock
exchange. The purchase of five percent of L stock by A is an owner shift
and is presumed to have been made proportionately from Public L and
Public NL under paragraph (j)(1)(vi) of this section. Under paragraph
(e)(1)(ii) of this section, transfers of L stock in transactions not
involving A (i.e., in transactions among or between members of separate
public groups resulting from the application of paragraphs (j)(2) and
(3) of this section) are not taken into account, and do not constitute
owner shifts. (Transfers between members of Public NL and Public L,
which are treated as separate 5-percent shareholders solely by virtue of
paragraph (j)(2) of this section, are disregarded even if L has actual
knowledge of any such transfers.) A and Public NL, the only 5-percent
shareholders whose interests in L have increased during the testing
period, have increased their respective stock ownership by only 36\2/3\
percentage points--five percentage points for A [75,000 shares/1.5
million shares outstanding] and 31\2/3\ percentage points for Public NL
[((500,000 shares issued in the public offering)-(5 percent x 500,000
shares presumed to have been acquired by A)) /1.5 million shares
outstanding]. Accordingly, there is no ownership change with respect to
L notwithstanding that, taking into account the public trading, a change
of more than 50 percentage points in the ultimate beneficial ownership
of L stock occurred during the three-year period ending on the December
3, 1990 testing date.
Example 7. The facts are the same as in Example 6, except that five
percent of the L stock has always been owned by P which, in turn, has
always been owned by Public P. On December 6, 1990, P sells all of its L
stock over a public stock exchange. Although the trading of P stock
among persons that are not 5-percent share-holders (without regard to
the segregation rules of paragraph (j) of this section) are disregarded
under paragraph (e)(1)(ii) of this section, the disposition of the L
stock by P is not disregarded because the L stock is transferred in a
transaction that is subject to paragraph (j)(3)(i) of this section.
(2) Equity structure shift--(i) Tax-free reorganizations. An equity
structure shift is any reorganization within the meaning of section 368
with respect to which the loss corporation is a party to the
reorganization, except that such term does not include a reorganization
described in--
(A) Section 368(a)(1)(D) or (G) unless the requirements of section
354(b)(1) are met, or
(B) Section 368(a)(1)(F).
(ii) Transactions designated under section 382(g)(3)(B) treated as
equity structure shifts. [Reserved]
[[Page 683]]
(iii) Overlap of owner shift and equity structure shift. Any equity
structure shift that affects the percentage of loss corporation stock
owned by a 5-percent shareholder also constitutes an owner shift. See
paragraph (e)(i)(E) of this section
(iv) Examples.
Example 1. A owns all of the stock of L and B owns all of the stock
of P. On October 13, 1988, L merges into P in a reorganization described
in section 368a(1)(A). As a result of the merger, A and B own 25 and 75
percent, respectively, of the stock of P. The merger is an equity
structure shift (and, because it affects the percentage of L stock owned
by 5-percent shareholders, it also constitutes an owner shift). On the
October 13, 1988 testing date, B is a 5-percent shareholder whose stock
ownership in the loss corporation following the merger has increased by
75 percentage points over his lowest percentage of stock ownership in L
at any time during the testing period (0 percent prior to the merger).
Accordingly, an ownership change occurs as a result of the merger. P is
thus a new loss corporation and L's pre-change losses are subject to
limitation under section 382.
Example 2. (i) A owns 100 percent of L1 stock and B owns
100 percent of L2 stock. On January 1, 1988, L1
merges into L2 in a reorganization described in section
368(a)(1)(A). Immediately after the merger, A and B own 40 percent and
60 percent, respectively, of the L2 stock. There is an equity
structure shift (as well as an owner shift) with respect to both
L1 and L2 on January 1, 1988.
(ii) Because the percentage of L2 stock owned by B
immediately after the merger (60 percent) increases by more than 50
percentage points over the lowest percentage of the stock of
L1 owned by B during the testing period (0 percent prior to
the merger), there is an ownership change with respect to L1.
L2 is a new loss corporation and thus, under Sec. 1.382-
2(a)(1)(iii) of this section, the pre-change losses of L1
must be accounted for separately by L2 from the losses of
L2 (immediately before the ownership change) and are subject
to limitation under section 382. See Sec. 1.382-2(a)(1)(iv) of this
section for rules that end separate accounting for L1's pre-
change losses on any testing date occurring on or after January 29,
1991.
(iii) L2 is a new loss corporation because it is a
successor corporation to L1. There is no ownership change
with respect to L2, however, because A's stock ownership in
L2 increased by only 40 percentage points (to 40 percent)
over the amount owned by A prior to the merger (0 percent). Therefore,
the pre-change losses of L2 are not limited under section 382
as a result of the merger.
Example 3. The result in Example (2) would be the same if
L1 had survived the merger (i.e., L2 merged into
L1) with A and B owning 40 and 60 percent, respectively, of
L1 stock. L1's pre-change losses would be
accounted for separately and limited under section 382 and the pre-
change losses of L2 would be accounted for separately under
Sec. 1.382-2(a)(1)(iii) of this section, but would not be limited under
section 382. See Sec. 1.382-2(a)(1)(ii) for the treatment of
L2 following the transaction.
Example 4. The facts are the same as Example (2), except, instead of
acquiring L1 in a merger, L2 acquires all of the
L1 stock from A on January 1, 1988, solely in exchange for
stock representing a 40 percent interest in L2, in a
reorganization described in section 368(a)(1)(B). The acquisition of
stock by L2 is an equity structure shift (as well as an owner
shift) with respect to L1 that results in an ownership change
with respect to L1 because the percentage of L1
stock owned by B immediately after the reorganization (60 percent, by
virtue of B's ownership of L2, through the operation of the
constructive ownership rules of paragraph (h) of this section) increases
by more than 50 percentage points over the lowest percentage of
L1 stock owned by B at any time during the testing period (0
percent prior to the reorganization). The acquisition also results in an
equity structure shift and an owner shift with respect to L2,
but L2 incurs no ownership change, because A's stock
ownership in L2 increased by only 40 percentage points over
the percentage of L2 stock owned by A prior to the
reorganization (0 percent).
(f) Definitions. For purposes of this section--
(1) Loss corporation. See section 382 and Sec. 1.382-2(a)(1) for
the definition of a loss corporation.
(2) Old loss corporation. The term old loss corporation means any
corporation with respect to which there is an ownership change and that
was a loss corporation immediately before the ownership change.
(3) New loss corporation. The term new loss corporation means a
corporation with respect to which there is an ownership change if,
immediately after such change, it is a loss corporation. A successor
corporation to the corporation described in the preceding sentence also
is a new loss corporation.
(4) Successor corporation. See Sec. 1.382-2(a)(5) for the
definition of successor corporation.
(5) Predecessor corporation. See Sec. 1.382-2(a)(6) for the
definitions of predecessor corporation.
[[Page 684]]
(6) Shift. As the context may require, a shift means an equity
structure shift, an owner shift or both.
(7) Entity. See Sec. 1.382-3(a)(1) for the definition of an entity.
(8) Direct ownership interest. A direct ownership interest means the
interest a person owns in an entity, including a loss corporation,
without regard to the constructive ownership rules of paragraph (h) of
this section.
(9) First tier entity. A first tier entity is an entity that, at any
time during the testing period, owns a five percent or more direct
ownership interest in the loss corporation.
(10) 5-percent owner. A 5-percent owner is any individual that, at
any time during the testing period, owns a five percent or more direct
ownership interest in a first tier entity or a higher tier entity. See
paragraph (g) of this section for rules to determine whether, as a
result of the constructive ownership rules of paragraph (h) of this
section, a 5-percent owner is a 5-percent shareholder.
(11) Public shareholder. A public shareholder is any individual,
entity, or other person with a direct ownership interest in a loss
corporation of less than five percent at all times during the testing
period.
(12) Public owner. A public owner is any individual, entity, or
other person that, at all times during the testing period, owns less
than a five percent direct ownership interest in a first tier entity or
any higher tier entity.
(13) Public group. A public group is a group of individuals,
entities, or other persons each of whom owns, directly or
constructively, less than five percent of the loss corporation. See
paragraphs (g) and (j) of this section for the rules applicable to
identify public groups and to determine whether a public group is a 5-
percent shareholder.
(14) Higher tier entity. A higher tier entity is any entity that, at
any time during the testing period, owns a five percent or more direct
ownership interest in a first tier entity or in any higher tier entity.
(15) Indirect ownership interest. An indirect ownership is an
interest a person owns in an entity determined solely as a result of the
application of the constructive ownership rules of paragraph (h) of this
section and without regard to any direct ownership interest (or other
beneficial ownership interest) in the entity.
(16) Highest tier entity. A highest tier entity is a first tier
entity or a higher tier entity that is not owned, in whole or in part,
at any time during the testing period by a higher tier entity.
(17) Next lower tier entity. The next lower tier entity with respect
to a first tier entity is the loss corporation. The next lower tier
entity with respect to a higher tier entity is any first tier entity or
other higher tier entity in which the higher tier entity owns, at any
time during the testing period, a five percent or more direct ownership
interest.
(18) Stock--(i) In general. For further guidance, see Sec. 1.382-
2(a)(3)(i).
(ii) Treating stock as not stock. Any ownership interest that
otherwise would be treated as stock under paragraph (f)(18)(i) of this
section shall not be treated as stock if--
(A) As of the time of its issuance or transfer to (or by) a 5-
percent shareholder, the likely participation of such interest in future
corporate growth is disproportionately small when compared to the value
of such stock as a proportion of the total value of the outstanding
stock of the corporation,
(B) Treating the interest as not constituting stock would result in
an ownership change, and
(C) The amount of the pre-change loss (determined as if the testing
date were the change and treating the amount of any net unrealized
built-in loss as a pre-change loss) is more than twice the amount
determined by multiplying
(1) the value of the loss corporation (as determined under section
382(e)) on the testing date, by
(2) the long-term tax exempt rate (as defined in section 382(f)) for
the calendar month in which the testing date occurs.
Stock that is not treated as stock under this paragraph (f)(18)(ii),
however, is taken into account for purposes of determining the value of
the loss corporation under section 382(e).
(iii) Treating interests not constituting stock as stock. Any
ownership interest that would not be treated as stock
[[Page 685]]
under paragraph (f)(18)(i) of this section (other than an option that is
subject to paragraph (h)(4) of this section) shall be treated as
constituting stock if--
(A) As of the time of its issuance or transfer to (or by) a 5-
percent shareholder (or a person who would be a 5-percent shareholder if
the interest not constituting stock were treated as stock), such
interest offers a potential significant participation in the growth of
the corporation,
(B) Treating the interest as constituting stock would result in an
ownership change, and
(C) The amount of the pre-change losses (determined as if the
testing date were the change date and treating the amount of any net
unrealized built-in loss as a pre-change loss) is more than twice the
amount determined by multiplying
(1) The value of the loss corporation (as determined under section
382(e)) on the testing date, by
(2) The long-term tax exempt rate (as defined in section 382(f)) for
the calendar month in which the testing date occurs.
An ownership interest is that treated as stock under this paragraph
(f)(18)(iii) is taken into account for purposes of determining the value
of the loss corporation under section 382(e). See Sec. 1.382-4(d)(12)
for rules that apply with respect to options and this paragraph
(f)(18)(iii).
(iv) Stock of the loss corporation. The stock of the loss
corporation means stock of such corporation within the meaning of this
paragraph (f)(18) and, as the context may require, includes any indirect
ownership interest in the loss corporation.
(19) Change date. The change date means the date on which a shift
(or any other transaction described in paragraph (a)(2)(i) of this
section) that is the last component of an ownership change occurs.
(20) Year. A year, or any multiple thereof, means a 365-day period
(or a 366-day period in the case of a leap year), or any multiple
thereof, unless the year is specifically identified as a taxable year.
(21) Old section 382. ``Old section 382'' means section 382, as in
effect prior to the effective date of section 382 in the Tax Reform Act
of 1986 (the ``Act''), but taking into account section 621(f)(2) of the
Act.
(22) Pre-change loss. See section 382 and Sec. 1.382-2(a)(2) for
the definition of pre-change loss.
(23) Unrelated. Any two persons are unrelated if the constructive
ownership rules of paragraph (h) of this section do not apply to treat
either person as owning stock that is owned, directly or constructively,
by the other person.
(24) Percentage ownership interest. A person's percentage ownership
interest in--
(i) A corporation shall be determined under the rules of this
section that are applicable to the determination of a shareholder's
percentage stock ownership interest in a loss corporation (see
paragraphs (f)(18)(i) through (iii) of this section),
(ii) A partnership shall be equal to the relative fair market value
of such person's partnership interest to the total fair market value of
all outstanding partnership interests, determined without regard to any
limited and preferred partnership interest that is described in
paragraph (h)(2)(ii)(C) of this section,
(iii) A trust shall be determined in accordance with the principles
of section 318(a)(2)(B) for determining the constructive ownership of
stock,
(iv) An estate shall be determined in accordance with the principles
of section 318(a)(2)(A) for determining the constructive ownership of
stock, and
(v) All other entities shall be determined by reference to the
person's relative economic interest in the entity, taking into account
all of the relevant facts and circumstances.
(g) 5-percent shareholder--(1) In general. Subject to the rules of
paragraphs (k)(2) and (4) of this section, the term 5-percent
shareholder means--
(i) An individual that owns, at any time during the testing period,
(A) A direct ownership interest in the stock of the loss corporation
of five percent or more or
(B) An indirect ownership interest in the stock of the loss
corporation of five percent or more by virtue of an ownership interest
in any one first tier entity or higher tier entity,
[[Page 686]]
(ii) A public group, of either a first tier entity or a higher tier
entity, identified as a 5-percent shareholder under paragraph
(j)(1)(iv)(A) or (B) of this section,
(iii) A public group of the loss corporation identified as a 5-
percent shareholder under paragraph (j)(1)(iv)(C) of this section, and
(iv) A public group, of the loss corporation, a first tier entity or
a higher tier entity, identified as a 5-percent shareholder under
paragraph (j)(2) or (3) of this section. An individual owning five
percent or more of the stock of the loss corporation at any time during
the testing period is a 5-percent shareholder notwithstanding that the
individual may own less than five percent of the stock of the loss
corporation on the testing date. See paragraph (g)(5)(i)(B) of this
section for rules permitting a loss corporation to make an adjustment in
cases described in the preceding sentence.
(2) Determination of whether a person is a 5-percent shareholder.
Except as provided in paragraphs (k)(2) and (4) of this section, a
person shall be treated as constructively owning stock of the loss
corporation pursuant to paragraph (h)(2) of this section only if the
loss corporation stock is attributed to such person in the person's
capacity as a higher tier entity or a 5-percent owner of the first tier
entity or higher tier entity from which such stock is attributed. See
paragraph (k)(3) of this section for rules explaining the extent of the
obligation of the loss corporation to determine the identity of its 5-
percent shareholders. Nothing in this paragraph (g)(2), however, shall
limit the attribution of loss corporation stock under section 318(a)(2)
and paragraph (h) of this section to a public owner.
(3) Determination of the percentage stock ownership interest of a 5-
percent shareholder. Subject to the rules of paragraphs (k)(2) and (4)
of this section, in determining a 5-percent shareholder's percentage
ownership interest in the loss corporation, the shareholder's direct
ownership interest, if any, and each indirect ownership interest that he
may have in the loss corporation in his capacity as a 5-percent owner of
any one first tier entity or higher tier entity, if any, are required to
be added together and taken into account with respect to such
shareholder only to the extent that each such direct or indirect
ownership interest constitutes five percent or more of the stock of the
loss corporation.
(4) Examples.
Example 1. (i) Twenty percent of L stock is owned by A, 10 percent
is owned by P1, 20 percent is owned by E, a joint venture,
and the remaining 50 percent of L stock is owned by Public L.
P1 is owned 15 percent by B and 85 percent by Public
P1. E is owned 30 percent by P2 and 70 percent by
P3, which, in turn, are owned by Public P2 and
Public P3, respectively.
(ii) The ownership structure of L is illustrated by the following
chart:
[[Page 687]]
[GRAPHIC] [TIFF OMITTED] TC17OC91.002
(iii) P1 and E, each of which has a direct ownership
interest in L of five percent or more, are first tier entities. The
shareholders with direct ownership interests in L who individually own
less than five percent of L are public shareholders (Public L). B, who
has a direct ownership interest of five percent or more in
P1, is a 5-percent owner of P. P2 and
P3, and P3, each of which has a direct ownership
interest in a first tier entity (E) of five percent or more, are higher
tier entities with respect to L and, because neither entity is owned at
any time during the testing period by a higher tier entity, they also
are highest tier entities. The shareholders of P2 and
P3 (Public P2 and Public P3,
respectively) are public owners of such entities, because none of those
shareholders own five percent or more of either entity at any time
during the testing period.
(iv) A, who has a 20 percent direct ownership interest in L, is a 5-
percent shareholder of L. Because, by application of the constructive
ownership rules of paragraph (h) of this section, B owns only 1.5
percent of L stock in his capacity as a 5-percent owner of P1
(15 percent ownership of P1 x 10 percent ownership of L), B
is not a 5-percent shareholder of L, even though he is a 5-percent owner
of P1. Under the rules of paragraph (j) of this section,
therefore, B is treated as a member of Public P1. See Example
(3) of paragraph (j)(1)(vi) of this section for a determination of which
public owners and public shareholders constitute public groups that are
treated as 5-percent shareholders of L.
Example 2. (i) The facts are the same as in Example (1), except that
P3 is owned 60 percent by C, 30 percent by P4, and
10 percent by Public P3. The stock of P4 is owned
by a group of persons (Public P4), none of whom own five
percent or more of the stock of P4.
(ii) The ownership structure of L is illustrated by the following
chart:
[[Page 688]]
[GRAPHIC] [TIFF OMITTED] TC17OC91.003
(iii) The defined terms are the same as in Example (1), except that
P3 is a higher tier entity, not a highest tier entity,
because five percent or more of P3 is, in turn, owned by
another entity (P4). P4, which owns five percent
or more of a higher tier entity (P3), also is a higher tier
entity and, because it is not owned at any time during any testing
period by any entity that is also a higher tier entity, P4 is
a highest tier entity. All of the shareholders of P4, none of
which own a direct ownership interest of five percent or more in
P4, are public owners of P4.
(iv) C is a 5-percent owner of P3 and, under the
constructive ownership rules of paragraph (h) of this section, C
indirectly owns 8.4 percent of L ([60 percent ownership of
P3] x [70 percent ownership of E] x [20 percent ownership of
L]), in his capacity as a 5-percent owner of P3. B is a 5-
percent owner of P1 and, under the constructive ownership
rules of paragraph (h) of his section, B owns 1.5 percent of L ([15
percent ownership of P1] x [10 percent ownership of L]) in
his capacity as a 5-percent owner of P1. Therefore, C is a 5-
percent shareholder of L, but B is not a 5-percent shareholder of L,
even though he is a 5-percent owner of P1. See Example (4) of
[[Page 689]]
paragraph (j)(1)(vi) of this section for a determination of which public
owners and public shareholders constitute public groups that are treated
as separate 5-percent shareholders of L.
Example 3. (i) L is owned 30 percent by A and 70 percent by P. A
owns six percent of P stock and the balance (94 percent) is owned
equally by 500 unrelated shareholders (``Public P'').
(ii) A is a 5-percent shareholder because he directly owns 30
percent of L. Even though A is a 5-percent owner of P, A's 4.2 percent
indirect ownership interest in L (six percent ownership interest in P x
P's 70 percent ownership of L) is generally not taken into account in
determining A's ownership interest, because such indirect ownership
interest is less than five percent. Instead, A's 4.2 percent indirect
interest is treated under paragraph (j)(1)(iv) of this section as owned
by Public P. If, however, L has actual knowledge of A's less-than-five-
percent indirect ownership interest in L and is thus subject to
paragraph (k)(2) of this section, or paragraph (k)(4) of this section
otherwise applies, L must take A's total 34.2 percent ownership interest
into account in determining A's percentage ownership in L.
Example 4. The facts are the same as in Example (3), except that A
owns ten percent of P's stock. Because A's indirect ownership interest
in L in his capacity as a 5-percent owner of P is five percent or more,
both A's 30 percent direct ownership interest in L and his seven percent
indirect ownership interest in L (10 percent ownership interest in P x
P's 70 percent ownership of L) are taken into account in determining his
ownership interest in L, without regard to L's actual knowledge or
whether paragraph (k)(4) of this section applies.
Example 5. See Sec. 1.382-3(a)(1)(ii) for additional examples with
respect to the definition of an entity.
(5) Stock ownership presumptions in connection with certain
acquisitions, and dispositions of loss corporation stock--(i) In
general. For purposes of this section--
(A) If an individual owns less than five percent of the stock of a
loss corporation during the testing period (excluding the testing date)
and acquires an amount of such stock so that the individual becomes a 5-
percent shareholder on the testing date, the loss corporation may treat
any interest in the loss corporation owned by such individual prior to
that acquisition as owned by a public group during the period of such
individual's ownership of that interest and as not owned by the 5-
percent shareholder during the same period, and
(B) If a 5-percent shareholder's percentage ownership interest in
the loss corporation is reduced to less than five percent, the loss
corporation may presume that the remaining stock owned by such 5-percent
shareholder immediately after such reduction is the stock owned by such
shareholder for each subsequent testing date having a testing period
that includes the date on which the reduction occurred as long as such
shareholder continues to own less than five percent of the stock of the
loss corporation. In that event, such ownership interest shall be
treated as owned by a separate public group for purposes of the rules of
paragraph (j)(2)(vi) of this section.
(ii) Example.
Example. L has 100,000 shares of stock outstanding. All of the L
stock is owned equally by 40 unrelated, individual shareholders,
including A (who owns 2.5 percent of L stock). Because no person owns as
much as five percent of L stock, Public L is the only 5-percent
shareholder of L. See paragraph (j)(1) of this section. A purchases
5,000 shares of L stock over a public stock exchange on June 8, 1989.
The purchase is an owner shift. When added to his ownership interest
before that date (the testing date), A owns 7,500 shares of L stock (7.5
percent). Under paragraph (g)(5)(i)(A) of this section, L may treat A
and Public L as having owned 0 percent and 100 percent, respectively, at
all times prior to June 8, 1989 (rather than having owned 2.5 percent by
A and 97.5 percent by Public L, even if L has actual knowledge of A's
less than five percent ownership interest). The increase in A's stock
ownership of L as of June 8, 1989 thus would be 7.5 percentage points,
rather than 5.0 percentage points, for purposes of determining whether
an ownership change occurs on that testing date and any subsequent
testing date.
(h) Constructive ownership of stock--(1) In general. Subject to
certain modifications set forth in this section and section 382(l)(3),
the constructive ownership rules of section 318(a) generally apply for
purposes of determining ownership of loss corporation stock.
(2) Attribution from corporations, partnerships, estates and
trusts--(i) In general. Stock owned (directly or indirectly) by an
entity shall be attributed to its owners--
[[Page 690]]
(A) Except as otherwise provided in this section, by treating the
stock attributed pursuant to section 318(a)(2) as no longer being owned
by the entity from which it is attributed, and
(B) If attribution is from a corporation, without regard to the 50
percent stock ownership limitation contained in section 318(a)(2)(C).
(ii) Limitation on attribution from entities with respect to certain
interests. Section 318(a)(2) shall not apply to treat the stock of the
loss corporation that is owned directly by a first tier entity (or
indirectly by any higher tier entity) as being indirectly owned by any
person that has an ownership interest in the first tier entity (or any
higher tier entity) to the extent that such interest is (or is
attributable to)--
(A) Stock of any such entity that is described in section
1504(a)(4),
(B) Any ownership interest in any such entity that does not
constitute stock under paragraph (f)(18)(ii) of this section, or
(C) If the entity is not a corporation, any ownership interest in
any such entity that has characteristics similar to the interests
described in paragraph (h)(2)(ii)(A) or (B) of this section.
The ownership interests described in this paragraph (h)(2)(ii) shall not
be taken into account in determining a person's percentage ownership
interest in an entity under paragraph (f)(24) of this section.
(iii) Limitation on attribution from certain entities. For purposes
of this section, except as provided in paragraphs (k)(2) and (4) of this
section, each of the following shall be treated as an individual who is
unrelated to any other owner (direct or indirect) of the loss
corporation--
(A) Any entity other than a higher tier entity that owns five
percent or more of the loss corporation stock (determined without regard
to paragraph (h)(2)(i)(A) of this section) on a testing date, a first
tier entity or the loss corporation,
(B) A qualified trust described in section 401(a),
(C) Any State, any possession of the United States, the District of
Columbia, the United States (or any agency or instrumentality thereof),
any foreign government, or any political subdivision of any of the
foregoing, and
(D) Any other person designated by the Internal Revenue Service in
the Internal Revenue Bulletin.
Stock of a loss corporation that is owned by any such person shall thus
not be attributed to any other person for purposes of this section. See
paragraph (g)(2) of this section limiting attribution from a first tier
entity or a higher tier entity to any person that is not a 5-percent
owner or a higher tier entity.
(iv) Examples.
Example 1. All the stock of L is owned by A. B and C respectively
own 70 and 30 percent of the outstanding P stock. P acquires 60 percent
of the outstanding L stock from A on July 1, 1988 (a testing date).
After the acquisition, P is a first tier entity and a higher tier entity
of L. B and C are each 5-percent owners of P and also are 5-percent
shareholders of L having a 42 percent and 18 percent stock ownership
interest in L, respectively, through the operation of the constructive
ownership rules of paragraph (h) of this section. Because B and C
together have increased their ownership in L by more than 50 percentage
points during the testing period ending on the testing date (60 percent
on the testing date and 0 percent prior thereto), an ownership change
occurs with respect to L on July 1, 1988.
Example 2. The facts are the same as in Example (1), except that B
and C are not shareholders in a corporation, but instead are partners in
a general partnership, E. B and C respectively own 70 percent and 30
percent of E. E acquires 60 percent of the L stock on July 1, 1988. The
results are the same as in Example (1).
Example 3. The facts are the same as in Example (1), except that the
acquisition is accomplished in a transaction that qualifies under
section 351(a). In that transaction, HC is formed through (i) a
contribution of money by P in exchange for 60 shares of HC common stock
and (ii) a contribution of all the outstanding shares of L stock plus
cash by A in exchange for 40 shares of HC common stock and 30 shares of
HC preferred stock that is described in section 1504(a)(4). The
respective values of each share of HC stock, common and preferred, are
equal. The stock of L is attributed to A through his interest in HC
common stock, but not through his interest in HC preferred stock (see
paragraph (h)(2)(ii)(A) of this section). Thus, A is treated as owning
indirectly only 40 percent of L. B and C are 5-percent shareholders of L
having indirect ownership interests in L of 42 percent and 18 percent,
respectively, through their ownership of HC common stock. The
[[Page 691]]
results are therefore the same as in Example (1).
(3) Attribution to corporations, partnerships, estates and trusts.
Except as otherwise provided by regulation under section 382 or by the
Internal Revenue Service in the Internal Revenue Bulletin, the rules of
section 318(a)(3) shall not apply in determining the ownership of stock
under this section.
(4) Option attribution--(i) In general. Solely for the purpose of
determining whether there is an ownership change on any testing date,
stock of the loss corporation that is subject to an option shall be
treated as acquired on any such date, pursuant to an exercise of the
option by its owner on that date, if such deemed exercise would result
in an ownership change. The preceding sentence shall be applied
separately with respect to--
(A) Each class of options (i.e., options with terms that are
identical, issued by the same issuer, and issued on the same date) owned
by each 5-percent shareholder (or person who would be a 5-percent
shareholder if the option were treated as exercised), and
(B) Each 5-percent shareholder, each owner of an option who would be
a 5-percent shareholder if the option were treated as exercised, and
each combination of such persons.
(ii) Examples.
Example 1. (i) A owns all of the 100 shares of outstanding L stock.
A grants options for the purchase of his L stock, exercisable for 10
years from the date of issuance, in the following transactions: An
option to B for four shares (issued January 1, 1988), an option to C for
six shares (issued June 1, 1989), and an option to D for 15 shares
(issued July 30, 1989). On July 30, 1990, A sells 41 shares of his L
stock to BB.
(ii) Pursuant to paragraph (a)(2)(i) of this section, the date on
which each option is acquired is a testing date. The issuance of options
to acquire L stock to each of B, C, and D is not treated as an
acquisition of the underlying stock on any such testing date since such
treatment with respect to any one of the option owners (or any
combination thereof) would not have resulted in an ownership change on
any of those testing dates.
(iii) The date on which BB acquires 41 shares also is a testing
date. BB's acquisition of 41 percent of the L stock, taken together with
the shift in ownership that would result if the options held by B, C and
D were exercised, would result in an ownership change, because the stock
owned or treated as owned by Public L (a group including only B, the
sole shareholder who owns less than five percent of L stock), C, D and
BB would have increased by 66 percentage points (four, six, 15, and 41
percentage points, respectively) during the testing period. Subject to
paragraph (h)(4)(ix) of this section, the options are treated as
exercised and an ownership change occurs on July 30, 1990, pursuant to
paragraph (h)(4)(i) of this section. Accordingly, no new testing period
can begin before July 31, 1990. Under paragraph (h)(4)(x)(F) of this
section, the option attribution rules of paragraph (h)(4)(i) of this
section shall not be applicable with respect to any of the options owned
by B, C, and D immediately before the ownership change until such time,
if any, that such options are transferred to (or by) 5-percent
shareholder (or a person who would be a 5-percent shareholder if such
option were exercised). In addition, the subsequent exercise of any of
those options by A, B, or C (the persons owning such options immediately
before the ownership change) is disregarded. See paragraph (h)(4)(vi) of
this section. Also see paragraph (h)(4)(viii) of this section for the
treatment of options that lapse or are forfeited.
(iv) The facts are the same as in (i), except that the sale of A's
41 shares of L stock to BB occurs on July 30, 1995. Because the options
are treated as exercised and the related stock is treated as acquired on
the July 30, 1995 testing date, the results are the same as described in
(iii).
Example 2. (i) A owns all of the outstanding 100 shares of the stock
of L. On July 22, 1988, the value of A's stock in L is $500 and the
following agreements are entered into: (i) A sells 40 shares of his L
stock to B for $200, (ii) in exchange for $10, A grants B an option to
acquire the balance of his L stock for $305 at any time before July 22,
1992, and (iii) L grants A an option to acquire 100 shares of L stock at
a price of $600 exercisable until such time as B's option is no longer
outstanding.
(ii) If the stock subject to the options owned by both A and B were
treated as acquired on the July 22, 1988 testing date, B would have
increased his ownership interest in L by only 50 percentage points to 50
percent ([40 shares purchased + 60 shares acquired pursuant to the
option]/200 outstanding shares of L stock, including 100 shares deemed
outstanding pursuant to the option issued to A by L) as compared with 0
percent prior to July 22, 1988. In determining whether the options with
respect to the stock of L would, if exercised, result in an ownership
change, paragraph (h)(4)(i)(B) of this section requires that such
options be treated as exercised separately with respect to each 5-
percent shareholder, each person who would be a 5-percent shareholder if
the option were treated as exercised or each combination of such
persons. Therefore, by
[[Page 692]]
treating the option owned by A as not having been exercised and the
option owned by B as having been exercised, B's interest in L increases
by 100 percentage points during the testing period. An ownership change
with respect to L therefore results from the transactions occurring on
July 22, 1988.
(iii) Contingencies. Except as provided in paragraph (h)(4)(x)(D) of
this section, the extent to which an option is contingent or otherwise
not currently exercisable shall be disregarded for purposes of this
section.
(iv) Series of options. For purposes of this section, an option to
acquire an option with respect to the stock of the loss corporation, and
each one of a series of such options, shall be considered as an option
to acquire such stock.
(v) Interests that are similar to options. For purposes of this
section,
(A) An interest that is similar to an option includes, but is not
limited to, a warrant, a convertible debt instrument, an instrument
other than debt that is convertible into stock, a put, a stock interest
subject to risk of forfeiture, and a contract to acquire or sell stock,
and
(B) Any such interest shall be treated as an option.
(vi) Actual exercise of options--(A) In general. The actual exercise
of any option in existence immediately before and after an ownership
change, whether or not the option was treated as exercised in connection
with the ownership change under paragraph (h)(4)(i) of this section,
shall be disregarded for purposes of this section, but only if the
option is exercised by the 5-percent shareholder (or person who would
have been a 5-percent shareholder if the options owned by such person
had been exercised immediately before the ownership change) who owned
the option immediately before and after such ownership change.
(B) Actual exercise within 120 days of deemed exercise. If the
actual exercise of an option occurs on or before the end of the period
which is 120 days after the date on which the option is treated as
exercised under paragraph (h)(4)(i) of this section, the loss
corporation may elect to treat paragraphs (h)(4)(i) and (vi)(A) of this
section as not applying to such option and take into account only the
acquisition of loss corporation stock resulting from the actual exercise
of the option. An election under this paragraph (h)(4)(vi)(B) shall have
no effect on the determination of whether an ownership change occurs,
but shall apply only for the purpose of determining the date on which
the change date occurs. An election under this paragraph (h)(4)(vi)(B)
shall be made in the statement described in Sec. 1.382-11(a).
(vii) Effect of deemed exercise of options on the outstanding stock
of the loss corporation--(A) Right or obligation to issue stock. Solely
for purposes of determining whether an ownership change has occurred
under paragraph (h)(4)(i) of this section, the deemed exercise of an
option with respect to unissued stock (or treasury stock) of a
corporation shall result in a corresponding increase in the amount of
its total outstanding stock.
(B) Right or obligation to acquire outstanding stock by the loss
corporation. Solely for purposes of determining whether an ownership
change has occurred under paragraph (h)(4)(i) of this section, the
deemed exercise of a right to transfer outstanding stock to the issuing
corporation (or a right of the issuing corporation to acquire its stock)
shall result in a corresponding decrease in the amount of its total
outstanding stock.
(C) Effect on value of old loss corporation. The deemed exercise of
an option with respect to unissued stock (or treasury stock) under
paragraph (h)(4)(i) of this section shall have no effect on the
determination of the value of the old loss corporation and the
computation of the section 382 limitation. See section 382(l)(1)(B)
disregarding capital contributions made during the two-year period
preceding the change date for purposes of computing the section 382
limitation.
(viii) Options that lapse or are forfeited. If an option that is
treated as exercised under paragraph (h)(4)(i) of this section lapses
unexercised or the owner of such option irrevocably forfeits his right
to acquire stock pursuant to the option, the option shall be treated for
purposes of this section as if it never had been issued. In that case,
the loss corporation may file an amended return for prior years (subject
to any applicable statute of limitations) if the
[[Page 693]]
section 382 limitation was thus inapplicable. If paragraph (h)(4)(i) of
this section applied to an option (or options) with respect to a taxable
year for which an income tax return has not been filed by the date that
the option (or options) lapses or is irrevocably forfeited, the loss
corporation may treat paragraph (h)(4)(i) of this section as
inapplicable to such option (or options).
(ix) Option rule inapplicable if pre-change losses are de minimis.
Paragraph (h)(4)(i) of this section shall not apply to treat the stock
of the loss corporation as acquired by the owner of an option if, on a
testing date, the amount of pre-change losses (determined as if the
testing date were a change date and treating the amount of any net
unrealized built-in loss as a pre-change loss) is less than twice the
amount determined by multiplying.
(A) The value of the loss corporation (as determined under section
382(e)) on the testing date, by
(B) The long-term tax exempt rate (as defined in section 382(f)) for
the calendar month in which the testing date occurs.
(x) Options not subject to attribution. Paragraph (h)(4)(i) of this
section shall not apply to--
(A) Long-held options with respect to actively traded stock. Any
option with respect to stock of the loss corporation which stock is
actively traded on an established securities market (within the meaning
of section 1273(b)) for which market quotations are readily available,
if such option has been continuously owned by the same 5-percent
shareholder (or a person who would be a 5-percent shareholder if such
option were exercised) for at least three years, but only until the
earlier of such time as--
(1) The option is transferred by or to a 5-percent shareholder (or a
person who would be a 5-percent shareholder if such option were
exercised), or
(2) The fair market value of the stock that is subject to the option
exceeds the exercise price for such stock on the testing date. For
purposes of this paragraph (h)(4)(x)(A), options with respect to the
stock of a loss corporation that are assumed (or substituted) in a
reorganization and converted into options with respect to the stock of
another party to the reorganization shall not be treated as transferred,
provided that there are no changes in the terms of the options, other
than that the stock that may be acquired pursuant to the option is that
of another party to the reorganization and that the amount of stock
subject to the option is adjusted only to reflect the exchange ratio for
the exchange of stock of the loss corporation in the reorganization.
(B) Right to receive or obligation to issue a fixed dollar amount of
value of stock upon maturity of certain debt. Any right to receive or
obligation to issue stock pursuant to the terms of a debt instrument
that, in economic terms, is equivalent to nonconvertible debt because
the right to receive stock of the issuer of a fixed dollar amount is
based upon the fair market value for such stock determined at or about
the date the stock is transferred pursuant to such right or obligation
(i.e., the amount of the stock transferred pursuant to the option is
equal to a fixed dollar amount, divided by the value of each share of
such stock at or about the date of the stock transfer). This paragraph
(h)(4)(x)(B) shall not apply if the method for determining the fair
market value of the stock of the issuer is intended to or, in fact,
provides the owner of the debt instrument with a participation in any
appreciation of any stock of the issuer.
(C) Right or obligation to redeem stock of the loss corporation. Any
right or obligation of the loss corporation to redeem any of its stock
at the time such stock is issued, but only to the extent such stock is
issued to persons who are not 5-percent shareholders immediately before
the issuance.
(D) Options exercisable only upon death, disability or mental
incompetency. Any option entered into between owners of the same entity
(or an owner and the entity in which the owner has a direct ownership
interest) with respect to such owner's ownership interest in the entity
that is exercisable only upon the death, complete disability or mental
incompetency of such owner.
(E) Right to receive or obligation to issue stock as interest or
dividends. Any right to receive or obligation to issue stock of a
corporation in payment of interest or dividends by the issuing
[[Page 694]]
corporation. (For an example illustrating this exception, see paragraph
(j)(2)(iv)(B) of this section.)
(F) Options outstanding following an ownership change--(1) In
general. Any option in existence immediately before and after an
ownership change, whether or not the option was treated as exercised in
connection with the ownership change under paragraph (h)(4)(i) of this
section, but only so long as the option continues to be owned by the 5-
percent shareholder (or person who was treated as a 5-percent
shareholder) who owned the option immediately before and after such
ownership change.
(2) Example (i) A, B, C and D own all of the outstanding stock of L.
A owns 70 shares of L stock and each of B, C and D own 10 shares of L
stock. On July 12, 1988, L issues warrants to each of its shareholders
entitling them to acquire an additional 8.5 shares of L stock for each
share of stock owned.
(ii) If B, C and D, but not A, each exercise their respective rights
to acquire an additional 85 shares of L stock (10 shares x 8.5 shares
that may be acquired for each share owned) on July 12, 1988, their
combined ownership interest in L on that date would exceed 80 percent
(255 shares deemed to be acquired + 30 shares actually owned)/355 shares
outstanding (actual and deemed)). B, C and D thus would increase their
ownership interest in L by 50.3 percentage points during the testing
period, causing an ownership change, because, under paragraph
(h)(4)(i)(B) of this section, the options are treated as exercised if
the exercise would cause an ownership change.
(iii) Following the ownership change, paragraph (h)(4)(i) of this
section applies to prevent A's right to acquire 595 shares of L stock
(70 shares x 8.5 shares that may be acquired for each share owned) or
the rights held by B, C, or D, to be treated as exercised on any
subsequent testing date, except to the extent that those rights are
transferred. To the extent any of those options are transferred
following the ownership change, paragraph (h)(4)(i) of this section will
apply to any such options on the date of the transfer and on any
subsequent testing date.
(G) Right to acquire loss corporation stock pursuant to a default
under a loan agreement. Any right to acquire stock of a corporation by a
bank (as that term is defined in section 581), an insurance company (as
that term is defined in Sec. 1.801-3(a)), or a trust qualified under
section 401(a) solely as the result of a default under a loan agreement
entered into in the ordinary course of the trade or business of such
bank, life insurance company or qualified trust.
(H) Agreement to acquire or sell stock owned by certain shareholders
upon retirement. Any option entered into between noncorporate owners of
the same entity (or a noncorporate owner and the entity in which the
owner has a direct ownership interest) with respect to such owner's
ownership interest in the entity, but only if each of such owners
actively participate in the management of the entity's trade or
business, the option is issued at a time that the loss corporation is
not a loss corporation and the option is exercisable solely upon the
retirement of such owner. An option with terms described in both this
paragraph (h)(4)(x)(H) and in paragraph (h)(4)(x)(D) of this section
shall also not be subject to paragraph (h)(4)(i) of this section.
(I) [Reserved]
(J) Title 11 or similar case. See Sec. 1.382-9(o) which excepts
certain options created by or under a plan of reorganization in a title
11 or similar case from the operation of paragraph (h)(4)(i) of this
section.
(K)-(Y) [Reserved]
(xi) Certain transfers of options disregarded. Transfers of options
between persons who are not 5-percent shareholders (and between members
of separate public groups resulting from the application of the
segregation rules of paragraphs (j)(2) and (3)(iii) of this section) are
not taken into account. Transfers of options in any of the circumstances
described in section 382(l)(3)(B) are also disregarded and the
transferee shall be treated as having owned the option for the period
that it was owned by the transferor.
(xii) Exercise of an option that has not been treated as stock. The
acquisition of stock pursuant to the actual exercise of an option (other
than an option described in paragraph (h)(4)(vi)(A) of this section)
shall not be disregarded.
[[Page 695]]
(xiii) Effective date. See paragraph (m)(4)(vi) of this section for
special rules regarding the effective date of the provisions of this
paragraph (h)(4).
(5) Stock transferred under certain agreements. Notwithstanding
paragraph (h)(4) of this section, no shift results solely because under
section 1058(a)--
(i) A shareholder transfers stock of a corporation pursuant to an
agreement that meets the requirements of section 1058(b), or
(ii) A person having rights under such an agreement exchanges those
rights for stock identical to the stock transferred pursuant to the
agreement.
(6) Family attribution. For purposes of this section--
(i) Paragraphs (1) and (5)(B) of section 318(a) shall not apply,
(ii) An individual and all members of his family described in
section 318(a)(1) shall be treated as one individual,
(iii) Subject to paragraph (k)(2) of this section, paragraph
(h)(6)(ii) of this section shall not apply to members of a family who,
without regard to that paragraph (h)(6)(ii), would not be 5-percent
shareholders, and
(iv) If under paragraph (h)(6)(ii) of this section, an individual
may be treated as a member of more than one family, and each family that
is treated as one individual is a 5-percent shareholder (or would be
treated as a 5-percent shareholder if such individual were treated as a
member of such family), then such individual shall be treated only as a
member of the family that results in the smallest increase in the total
percentage stock ownership of the 5-percent shareholders on the testing
date and shall not be treated as the member of any other family.
(i) [Reserved]
(j) Aggregation and segregation rules. For purposes of this section,
except as provided in paragraphs (k)(2) and (4) of this section--
(1) Aggregation of public shareholders and public owners into public
groups--(i) Public group. Under this paragraph (j), a loss corporation
or other entity can be treated as owned, in whole or in part, by one or
more public groups. A public group can include public shareholders,
public owners, and 5-percent owners who are not 5-percent shareholders
of the loss corporation.
(ii) Treatment of a public group that is a 5-percent shareholder.
Each public group that is treated as a 5-percent shareholder under
paragraph (g)(1)(ii), (iii) or (iv) of this section shall be treated as
one individual. See paragraph (j)(2)(iv) for a rule combining certain de
minimis public groups.
(iii) Presumption of no cross-ownership. The public owners, 5-
percent owners who are not 5-percent shareholders and public
shareholders in any public group, subject to paragraphs (j)(2)(iii),
(k)(2) and (k)(4) of this section, are presumed not to be members of any
other public group. It also is presumed that each such person is
unrelated to all other shareholders (direct and indirect) of the loss
corporation. See paragraph (h)(6)(iii) of this section. The members of a
public group that exists by virtue of its direct ownership interest in
an entity are presumed not to be members (and not to be related to a
member) of any other public group that exists at any time by virtue of
its direct ownership interest in any other entity. To the extent that
the presumptions adopted in this paragraph (j)(1)(iii) are not
applicable because the loss corporation has actual knowledge of facts to
the contrary and is thus subject to paragraph (k)(2) of this section,
public shareholders, public owners and 5-percent owners who are not 5-
percent shareholders may be aggregated into additional public groups.
(iv) Identification of the public groups treated as 5-percent
shareholders--(A) Analysis of highest tier entities. The loss
corporation must identify first tier entities and higher tier entities
in order to identify any highest tier entities that must be identified
under paragraph (k)(3) of this section. The loss corporation must then
identify any 5-percent owners of each such highest tier entity who
indirectly own, at any time during the testing period, five percent or
more of the loss corporation through the ownership interest in such
highest tier entity. Under paragraph (g)(1)(i)(B) of this section, any
such 5-percent owner is a 5-percent shareholder. See paragraph (k)(3) of
this section for rules explaining the extent of the obligation of the
loss corporation
[[Page 696]]
to determine the identity of its shareholders. Each person who has an
ownership interest in any highest tier entity and who is not treated as
a 5-percent shareholder (i.e., persons who are public owners or 5-
percent owners who are not 5-percent shareholders) is a member of the
public group of that highest tier entity. A public group, so identified,
that indirectly owns five percent or more of the loss corporation on the
testing date is treated under paragraph (g)(1)(ii) of this section as a
5-percent shareholder. If the public group so identified owns less than
five percent of the loss corporation on the testing date, such public
group is treated as part of the public group of the next lower tier
entity.
(B) Analysis of other higher tier entities and first tier entities.
The analysis and aggregation of public groups described in paragraph
(j)(1)(iv)(A) of this section is repeated for any next lower tier entity
and successively for any next lower tier entity of any entity described
in this paragraph (j)(1)(iv)(B) until applied to each first tier entity.
(C) Aggregation of the public shareholders. The public shareholders
are aggregated and, under paragraph (g)(1)(iii) of this section, are
treated as a public group that is a 5-percent shareholder without regard
to whether such group, at any time during the testing period, owns five
percent or more of the loss corporation. For this purpose, if the public
group of any first tier entity indirectly owns less than five percent of
the loss corporation on the testing date, and is thus not treated as a
5-percent shareholder, but is treated as part of the public group of the
loss corporation under paragraph (j)(1)(iv)(A) or (B) of this section,
the ownership interest of that group is included in the public group of
the loss corporation referred to in the preceding sentence.
(v) Appropriate adjustments. A loss corporation may apply the
principles of paragraph (g)(5) of this section with respect to--
(A) Any public group that is treated as a 5-percent shareholder on
the testing date if such public group, at any time during the testing
period, was treated as part of the public group of the next lower tier
entity, or
(B) Any public group that is treated as part of the public group of
a next lower tier entity if such public group, at any time during the
testing period, was part of the public group of a higher tier entity
that was treated as a 5-percent shareholder and had a direct or indirect
ownership interest in such lower tier entity.
(vi) Examples.
Example 1. (i) All of the stock of L is owned by 1,000 shareholders,
none of whom own as much as five percent of L stock (``Public L''). All
of the stock of P is owned by 150,000 shareholders, none of whom own as
much as five percent of P stock (``Public P''). Between July 12, 1988
and August 13, 1988, P purchases all of the L stock through a series of
transactions on the public stock exchange. P's percentage of direct
stock ownership in L increases from 4.9 percent to five percent on July
15, 1988, and from 50 percent to 51 percent on July 30, 1988.
(ii) Before July 15, 1988, P is a public shareholder of L. On and
after July 15, 1988, P is a first tier entity (and a highest tier
entity) of L. Accordingly, under the rules of paragraph (j)(1) of this
section, Public P, on and after July 15, 1988, is treated as a public
group that is a 5-percent shareholder. Each acquisition by P on and
after such date affects the percentage of L stock that is owned by
Public P and thus constitutes an owner shift.
(iii) Immediately after the transaction on July 30, 1988, P owns 51
percent of L stock. Under paragraph (j)(1)(iv)(A) of this section,
Public P thus owns 51 percent of L. Under paragraph (j)(1)(iv)(C) of
this section, Public L, the public group that includes the public
shareholders of L, is treated as a 5-percent shareholder that owns 49
percent of L. Under paragraph (j)(1)(iii) of this section, Public L and
Public P are presumed not to have any common members and it is also
presumed that no member of either public group is related to any other
member of either of the two public groups.
(iv) Assuming that the presumption provided in paragraph (j)(1)(iii)
of this section (i.e., that no person owns stock in both P and L) is not
rebutted to any extent, Public P is treated as a 5-percent shareholder
whose stock ownership in L, as of the July 30, 1988 testing date, has
increased by 51 percentage points over its lowest percentage of stock
ownership in L at any time during the testing period (0 percent prior to
July 12, 1988). Accordingly, an ownership change with respect to L
occurs as a result of P's acquisition on July 30, 1988. L is thus a new
loss corporation and its pre-change losses are subject to limitation
under section 382.
Example 2. (i) All of the stock of P is owned by 1,000 unrelated
shareholders, none of
[[Page 697]]
whom owns as much as five percent of P stock. L1 is a wholly
owned subsidiary of P. On January 2, 1988, P distributes all of the
L1 stock pro rata to its shareholders.
(ii) Prior to the stock distribution, the public owners of P are
members of a public group (``Public P'') that is treated as a 5-percent
shareholder owning 100 percent of the stock of L1.
See paragraph (j)(1)(iv)(A) of this section. Following the stock
distribution to the P shareholders, L1 is owned by 1,000
public shareholders that are members of a public group (``Public
L1'') that is treated as a 5-percent shareholder owning 100
percent of the stock of L1. See paragraph (j)(1)(iv)(C) of
this section.
(iii) Public P and Public L1 are treated as unrelated,
individual 5-percent shareholders under paragraph (j)(1)(iii) of this
section. Although the members of one public group are presumed not to be
members of any other public group under paragraph (j)(1)(iii) of this
section, L1 has actual knowledge that all of its public
shareholders immediately following the distribution (Public
L1) received L1 stock pro rata in respect to the
outstanding P stock and thus were also members of Public P. Applying
paragraph (k)(2) of this section, the loss corporation may take into
account the identity of ownership interests between Public L1
and Public P to establish that Public L1 did not increase its
percentage ownership in L1. Accordingly, the transaction
would not constitute an owner shift.
Example 3. (i) The facts are the same as in Example 1 of paragraph
(g)(4) of this section. Thus, 20 percent of L stock is owned by A, 10
percent is owned by P1, 20 percent is owned by E, a joint
venture, and the remaining 50 percent of L stock is owned by Public L.
P1 is owned 15 percent by B and 85 percent by Public
P1. E is owned 30 percent by P2 and 70 percent by
P3, which are owned by Public P2 and Public
P3, respectively. See Example (1)(ii) of paragraph (g)(4) of
this section for a chart illustrating this ownership structure.
(ii) The public owners of P2 and P3 (Public
P2 and Public P3, respectively), are public groups
that are treated as 5-percent shareholders of L, because each such
public group indirectly owns five percent or more of L stock (six
percent by Public P2 [(30 percent ownership of E) x (20
percent ownership of L)] and 14 percent by Public P3 [(70
percent ownership of E) x (20 percent ownership of L)]). The public
owners of P1 (``Public P1''), who indirectly own
8.5 percent of L stock [(85 percent ownership of P1) x (10
percent ownership of L)] and B, who indirectly owns 1.5 percent of L and
is thus included in Public P1 under paragraph (j)(1)(iv)(A)
of this section, are members of a public group that is treated as a 5-
percent shareholder of L that owns ten percent of L stock. Finally, the
public group of L (``Public L'') is a 5-percent shareholder that owns 50
percent of L. Accordingly, A, Public L, Public P1 (including
B), Public P2, and Public P3 are the only 5-
percent shareholders of L.
Example 4. (i) The facts are the same as Example 3 above, except
that P3 is owned 60 percent by C, 30 percent by
P4, and 10 percent by P3. The stock of
P4 is publicly traded and is owned by Public P4.
The facts are thus the same as in Example (2) in paragraph (g)(4) of
this section. See Example (2)(ii) of paragraph (g)(4) of this section
for a chart illustrating this ownership structure.
(ii) The public owners of P4 (a highest tier entity) are
members of a public group that indirectly owns 4.2 percent of L ([30
percent ownership of P3] x [70 percent ownership of E] x [20
percent ownership of L]). For purposes of identifying public groups that
are 5-.percent shareholders, L is not required to identify P4
as a highest tier entity under paragraph (k)(3) of this section because
P4 does not own five percent or more of L stock. Moreover,
under paragraph (h)(2)(iii) of this section, P4 generally is
treated as an individual from which there is no attribution of loss
corporation stock. The public group of P3 (including
P4) indirectly owns 5.6 percent of L ([40 percent of
P3] x [70 percent ownership of E] x [20 percent of L]), and
is thus a 5-percent shareholder of L. The public groups of P2
and P1 (both Public P1 and B), respectively, also
own five percent or more of L stock and are thus 5-percent shareholders
of L. In addition, the public group of L is a 5-percent shareholder
regardless of whether it owns five percent of L stock. Accordingly, A,
Public L, Public P3 (including P4), Public
P2, and Public P1 (including B), are the only 5-
percent shareholders of L.
Example 5(i) On September 4, 1987, L is owned 14 percent by each of
A and B, 30 percent by each of P1 and P2, four
percent by each of C and P3, and two percent by each of D and
AA. P1 is owned 30 percent by each of A, B, and P4
and 10 percent by D. P2 is owned 70 percent by A, 10 percent
by each of B and D, six percent by DD and four percent by C. AA owns 100
percent of the stock of P3. P4 is owned 60 percent
by C and 20 percent by each of BB and CC.
(ii) The ownership structure of L is illustrated by the following
chart:
[[Page 698]]
[GRAPHIC] [TIFF OMITTED] TC17OC91.004
(iii) In order to identify L's 5-percent shareholders and their
respective ownership interests in L on September 4, 1987, the rules of
paragraph (j)(1) of this section apply to identify the public groups
that are treated as separate 5-percent shareholders. Analysis begins
with any highest tier entity, such as P4. Each of
P4's shareholders is a 5-percent owner of P4.
C4 owns 5.4 percent of L in his capacity as a 5-percent owner
of P4 and therefore is a 5-percent shareholder.
Notwithstanding that C actually owns, directly and by attribution, 10.6
percent of L (four percent directly, 5.4 percent indirectly through
P4, and 1.2 percent through P2), C's ownership
interest in L as a 5-percent shareholder is presumed to include only the
5.4 percent indirect ownership through P4. (Under paragraphs
(g) and (k)(2) of this section, however, L must account for C's direct
and indirect ownership interests in determining whether an ownership
change occurs on any testing date if it has actual knowledge of such
ownership on or berfore the date that its income tax return is filed for
the taxable year that includes the testing date). Although BB and CC are
each 5-percent owners of P4, they are not 5-percent
shareholders and therefore are members of the public group of
P4. Because the public group of P4 indirectly owns
only 3.6 percent of L, it is treated under paragraph (j)(1)(iv)(A) of
this section as part of the public group of the next lower tier entity,
P1.
(iv) With respect to P1, a first tier entity, each of its
shareholders are 5-percent owners. Because A and B each indirectly own
nine percent of L as 5-percent owners of P1 and A indirectly
owns 21 percent of L as a 5-percent owner of P2, they are
each 5-percent shareholders without regard to their direct
[[Page 699]]
ownership interests in L. A's ownership interest in L as a 5-percent
shareholder is 44 percent (14 percent directly, nine percent in his
capacity as a 5-percent owner of P1, and 21 percent in his
capacity as a 5-percent owner of P2). B's ownership interest
in L as a 5-percent shareholder is 23 percent (14 percent directly and
nine percent in his capacity as a 5-percent and nine percent in his
capacity as a 5-percent owner of P1). B's ownership interest
as a 5-percent shareholder does not include the three percent interest
he owns indirectly through P2. (Under paragraphs (g) and
(k)(2) of this section, however, L must account for B's direct and
indirect ownership interests, including his three percent interest
through P2, in determining whether an ownership change occurs
on any testing date if L has actual knowledge of such ownership on or
before the date that its income tax return is filed for the taxable year
that includes the testing date.) D is a 5-percent owner of
P1. Although D owns eight percent of L (two percent directly,
three percent indirectly through P1, and three percent
indirectly through P2), he is not a 5-percent shareholder
because he does not own five percent or more of L stock either directly
or in his capacity as a 5-percent owner of either P1 or
P2. (Under paragraphs (g) and (k)(2) of this section,
however, L must account for D's direct and indirect ownership interests
in determining whether an ownership change occurs on any testing date to
the extent L has actual knowledge of such ownership amounting to five
percent or more of L stock before the date that its income tax return is
filed for the taxable year that includes the testing date.) The public
group of P1 (comprised of the public group of P4
and D's direct ownership interest in P1) has a 6.6 percent
interest in L and is therefore treated as a separate 5-percent
shareholder.
(v) With respect to highest tier entity P2, D is a 5-
percent owner who is not a 5-percent shareholder for the reason
described in the preceding subdivision. DD is a 5-percent owner of
P2, who is not a 5-percent shareholder, because DD indirectly
owns only 1.8 percent of L. Assuming that L does not have actual
knowledge of B's and C's direct ownership interest in P2,
those interests are accounted for in computing the ownership interest
are accounted for in computing the ownership interest of the public
group of P2. Therefore, each of P2's shareholders,
except A who is a 5-percent shareholder in his capacity as a 5-percent
owner of P2, are treated as members of the public group of
P2 that owns nine percent of L and is thus treated as a
separate 5-percent shareholder.
(vi) Because the direct ownership interest of P3 is less
than five percent, it is a public shareholder. Therefore, assuming that
L does not have actual knowledge of C's, D's, or AA's direct and/or
indirect ownership interests in L, the public group of L is a separate
5-percent shareholder owning 12 percent of L (comprised of the direct
ownership interests of C, D, AA and P3).
(2) Segregation rules applicable to transactions involving the loss
corporation--(i) In general. For purposes of this section, if--
(A) A transaction is described in paragraph (j)(2)(iii) of this
section, and
(B) The loss corporation has one or more direct public groups
immediately before and after the transaction,
the stock owned by such direct public group or groups is subject to the
segregation rules described in paragraph (j)(2)(iii) of this section for
purposes of determining whether an ownership change has occurred on the
date of the transaction (and on any subsequent testing date with a
testing period that includes the date of such transaction). See
paragraph (j)(3) of this section for the application of the rules of
this paragraph (j)(2) to transactions involving first tier entities or
higher tier entities.
(ii) Direct public group. For purposes of this section, a direct
public group is any public group of the loss corporation described in
paragraph (j)(1)(iv)(C) of this section or any public group of the loss
corporation resulting from the application of paragraph (j)(2)(iii) or
(j)(3)(i) of this section.
(iii) Transactions to which segregation rules apply--(A) In general.
The segregation rules of this paragraph (j)(2)(iii) apply to any
transaction described in paragraph (j)(2)(iii)(B), (C), (D), (E), or (F)
of this section in the manner specified. The presumptions adopted by
this paragraph (j)(2)(iii) shall not apply only if, and to the extent
that, the loss corporation either has actual knowledge of facts to the
contrary regarding its stock ownership and is thus subject to paragraph
(k)(2) of this section, or is subject to paragraph (k)(4) of this
section. Any direct public group that is required to be identified as a
result of a transaction described in paragraph (j)(2)(iii) of this
section shall be treated as a 5-percent shareholder under paragraph
(g)(1)(iv) of this section without regard to whether such group, at any
time during the testing period, owns five percent or more of the loss
corporation stock. To the extent that the presumptions are rebutted, the
public
[[Page 700]]
shareholders, public owners and 5-percent owners who are not 5-percent
shareholders may be aggregated into additional public groups. For an
exception applicable to certain regulated investment companies, see
Sec. 1.382-3(k)(1).
(B) Certain equity structure shifts and transactions to which
section 1032 applies--(1) In general. In the case of--
(i) A transaction that is an equity structure shift that also is
described in section 381(a)(2) and in which the loss corporation is a
party to the reorganization, or
(ii) A transfer of the stock of the loss corporation (including
treasury stock) by the loss corporation in any other transaction to
which section 1032 applies,
each direct public group that exists immediately after such transaction
shall be segregated so that each direct public group that existed
immediately before the transaction is treated separately from the direct
public group that acquires stock of the loss corporation in the
transaction. The direct public group that acquires stock of the loss
corporation in the transaction is presumed not to include any members of
any direct public group that existed immediately before the transaction.
For purposes of this paragraph (j)(2)(iii)(B), a person is treated as
acquiring stock of the loss corporation in a reorganization as the
result of the person's ownership interest in another corporation that
succeeds to the loss corporation's pre-change losses (determined as if
the testing date were the change date and treating the amount of any net
unrealized built-in loss as a pre-change loss) in a transaction to which
section 381(a)(2) applies. In determining whether a transaction is
described in section 1032 for purposes of this paragraph (j)(2)(iii)(B),
the transfer by the loss corporation of any interest not constituting
stock that is treated as stock under paragraph (f)(18)(iii) of this
section shall be treated as the transfer of stock. See Sec. 1.382-3(j)
for exceptions to the segregation rules of this paragraph
(j)(2)(iii)(B)(1).
(2) Examples.
Example 1. (i) P1 owns 60 percent of the stock of L. The
remaining L stock (40 percent) is owned by Public L. A owns 40 percent
of the P1 stock. The remaining P1 stock (60
percent) is owned by Public P1. P2 is a publicly
traded corporation owned by shareholders who each own less than five
percent of P2 stock (Public P2).
(ii) On May 22, 1988, L merges into P2 in a transaction
described in section 368(a)(1)(A), with the shareholders of L receiving
an amount of P2 stock equal to 70 percent of the value of
P2 immediately after the reorganization.
(iii) Immediately before the merger, L's 5-percent shareholders were
Public L (40 percent), Public P1 (36 percent), and A (24
percent). Although the shareholders of P2 (immediately before
the merger) do not acquire any stock in the merger, they are treated as
acquiring a direct ownership interest in the loss corporation in the
reorganization because P2 succeeds to the pre-change losses
of L in a transaction to which section 381(a)(2) applies. As a result of
the merger, which constitutes a transaction described in
(j)(2)(iii)(B)(1) of this section, L's direct public group, Public L,
must be segregated from the direct public group that would otherwise
exist after the transaction (Public L and Public P2). Public
L, the direct public group that exists before the merger, has a
continuing 28 percent interest in the loss corporation [70 percent of
P2 shares received in the merger x 40 percent shares of L
owned prior to the merger] that must be segregated from the interests
acquired by Public P2.
(iv) In addition, Public P1, which owns five percent or
more of the stock of P2 through P1's ownership
interest in P2, also is segregated from any other public
group (i.e., both Public L and Public P2) under paragraph
(j)(1) of this section. Therefore, under paragraphs (j)(1) and (2) of
this section, Public P2 (excluding the members of Public L
and Public P1 immediately before the merger) is treated as a
separate public group and 5-percent shareholder.
(v) The only 5-percent shareholder whose interest in the loss
corporation, P2, has increased during the testing period is
Public P2. Its interest has increased by 30 percentage
points. Accordingly, no ownership change results from the merger. For
purposes of measuring the shift in ownership of P2 on any
subsequent testing date with a testing period that includes May 22, 1988
(the date on which L merged into P2), Public P2
will continue to be treated as a direct public group, separate from
Public L (the members of which own P2 stock as a result of
the merger) and Public P1.
Example 2. (i) P and L are each owned by 21 equal shareholders. Each
of 14 of the shareholders of P and L are owners of both corporations
(``common owners''). L has actual knowledge of this cross ownership.
therefore, as a group, these persons own 66\2/3\ percent of each of P
and L. P stock has a value of $600 and L stock has a value of $400.
[[Page 701]]
(ii) P merges into L under section 368(a)(1)(A) on June 10, 1988.
Ordinarily, the direct public group of L that exists immediately before
the transaction would be segregated from the direct public group that
acquires stock in the merger (the public group of P immediately before
the merger). In view of the common ownership of P and L, however, a
third group may be created under paragraph (j)(2)(iii)(A) of this
section so that L's owners following the merger would be: The common
owners (66\2/3\ percent), Public L, less the common owners, 13\1/3\
percent), and Public P, less the common owners (20 percent).
Accordingly, the only 5-percent shareholder increasing its ownership
interest by 20 percentage points and no ownership change occurs as a
result of the merger.
Example 3. (i) L is entirely owned by Public L. L commences and
completes a public offering of common stock on January 22, 1988, with
the result that its outstanding stock increases from 100,000 shares to
300,000 shares. No person owns as much as five percent of L stock
following the public offering.
(ii) The public offering of L stock is a transaction to which
section 1032 applies. Immediately before the public offering, L's only
5-percent shareholder was Public L, a direct public group. Therefore,
Public L (as in existence immediately before the transaction) must be
segregated from the direct public group that would otherwise exist
immediately after the transaction. Under paragraph (j)(2)(iii)(B)(1) of
this section, the acquisition of 200,000 shares of L stock in the public
offering must be treated as acquired by a direct public group (``New
Public L'') that is separate from Public L. Each such public group is
treated as an individual that is a separate 5-percent shareholder. See
paragraphs (g)(1)(iv) and (j)(1)(ii) of this section.
(iii) As a result of the public offering, L has two 5-percent
shareholders, Public L and New Public L, which own 33\1/3\ percent and
66\2/3\ percent of the stock of L, respectively. Because the members of
New Public L are presumed not to be members of Public L (and not to be
related to any such members), the ownership interest of New Public L
immediately prior to the offering of stock was 0 percent.
(iv) New Public L is a 5-percent shareholder that has increased its
ownership interest in L by more than 50 percentage points during the
testing period (by 66\2/3\ percentage points). Thus, there is an
ownership change with respect to L. For purposes of subsequent
transactions, Public L and New Public L will not be segregated into two
public groups because a new testing period commences on the day
following the change date, January 23, 1988 (i.e., any subsequent
testing date will not have a testing period that includes the date of
the public offering).
Example 4. The facts are the same as in Example 3, but L establishes
that 60,000 shares of the newly issued L stock were acquired by its
shareholders of record on the date of the stock issuance (i.e., members
of Public L, referred to as Acquiring Public L) by persons owning 27
percent of the L stock immediately before the stock issuance.
Accordingly, L has actual knowledge that New Public L acquired no more
than 140,000 shares of L stock in the public offering. Under paragraphs
(j)(2)(iii) and (k)(2) of this section, New Public L may be treated as
having increased its ownership interest in L by 46\2/3\ percentage
points (140,000 shares acquired in the offering/300,000 shares
outstanding). L also has actual knowledge that the members of Public L
owning 27 percent of L stock immediately before the stock issuance
(27,000 shares/100,000 shares outstanding) own 29 percent of L stock
immediately after such issuance ([27,000 shares + 60,000 shares acquired
in the offering]/300,000 shares outstanding). Assuming that L chooses to
take its actual knowledge into account for purposes of determining
whether an ownership change occurred on January 22, 1988, Public L is
segregated into two direct public groups immediately before the stock
issuance so that the two percentage point increase in the ownership
interest in L by Acquiring Public L is taken into account. The total
increased ownership interest in L by New Public L and Acquiring Public L
on the testing date over their lowest ownership interest during the
testing period is 48\2/3\ percent. Thus, no ownership change occurs with
respect to L.
Example 5. (i) L is owned entirely by 10,000 unrelated individuals,
none of whom own as much as five percent of L stock (``Public L''). P is
owned entirely by 1,500 unrelated individuals, none of whom own as much
as five percent of P stock (``Public P''). On December 22, 1988, L
acquires all of the P stock from Public P in exchange for L stock
representing 25 percent of the value of L, in a transaction described in
section 368(a)(1)(B).
(ii) Under paragraph (j)(2)(iii)(B)(1) of this section, Public L,
the direct public group that owns L stock immediately before and after
the transaction to which section 1032 applies, is treated separately
from Public P, the direct public group that acquires L stock in the
transaction. Because Public P's percentage ownership interest in L
increases to only 25 percent (as compared with 0 percent before the
acquisition), no ownership change occurs. For purposes of determining
whether an ownership change occurs on any testing date with a testing
period that includes December 22, 1988, Public L and Public P will
continue to be treated as separate 5-percent shareholders.
(iii) See Example (4) in paragraph (j)(3)(iv) of this section for
the application of paragraph (j)(2)(iii)(B) of this section to a
reorganization under section 368(a)(1)(B) in which the loss corporation
is acquired.
[[Page 702]]
(C) Redemption-type transactions--(1) In general. In the case of a
transaction in which the loss corporation acquires its stock in exchange
for property, each direct public group that exists immediately before
the transaction shall be segregated at that time (and thereafter) so
that the stock that is acquired in the transaction is treated as owned
by a separate public group from each public group that owns the stock
that is not acquired. For purposes of the preceding sentence, the term
property shall include stock described in section 1504(a)(4) and stock
described in paragraph (f)(18)(ii) of this section. Each direct public
group that owned the stock that is acquired in the transaction is
presumed not to own any such stock immediately after the transaction.
(2) Examples.
Example 1. L is entirely owned by Public L. There are 500,000 shares
of L stock outstanding. On July 12, 1988, L acquires 150,000 shares of
its stock for cash. Because L's acquisition is a redemption, Public L is
segregated into two different public groups immediately before the
transaction (and thereafter) so that the redeemed interests (``Public
RL'') are treated as part of a public group that is separate from the
ownership interests that are not redeemed (``Public CL''). Therefore, as
a result of the redemption, Public CL's interest in L increases by 30
percentage points (from 70 percent (350,000/500,000) to 100 percent) on
the July 12, 1988 testing date. Because the resulting increase is not
more than 50 percentage points, no ownership change occurs. For purposes
of determining whether an ownership change occurs on any subsequent
testing date having a testing period that includes such redemption,
Public CL is treated as a 5-percent shareholder whose percentage
ownership interests in L increased by 30 percentage points as a result
of the redemption.
Example 2. L is entirely owned by Public L. There are 250,000 shares
of L common stock outstanding. On April 22, 1988, L acquires 100,000
shares of its outstanding common stock in exchange for 100,000 shares of
preferred stock described in section 1504(a)(4). (The transaction thus
constitutes a recapitalization within the meaning of section
368(a)(1)(E).) As a result of the recapitalization, which is a
transaction described in paragraph (j)(2)(iii)(C) of this section,
Public L is segregated into two different public groups immediately
before the transaction (and thereafter) so that the stock acquired by L
is treated as owned by a public group (``Public RL'') that is separate
from the public group that owns the stock that is not so acquired
(``Public CL''). Therefore, as a result of the transaction, Public CL's
interest in L increases by 40 percentage points (from 60 percent to 100
percent). Because the resulting increase is not more than 50 percentage
points, no ownership change occurs. For purposes of determining whether
an ownership change occurs on any subsequent testing date with a testing
period that includes the date of the recapitalization, Public CL is
treated as a separate 5-percent shareholder whose percentage ownership
interest increased by 40 percentage points as a result of the redemption
type transaction.
(D) Acquisition of loss corporation stock as the result of the
ownership of a right to acquire stock--(1) In general. In the case of a
deemed acquisition of stock of the loss corporation as the result of the
ownership of a right issued by the loss corporation to acquire such
stock (see paragraph (h)(4) of this section), each direct public group
that exists immediately after such acquisition shall be segregated so
that each direct public group that existed immediately before the
transaction is treated separately from the direct public group that is
deemed to acquire stock of the loss corporation as a result of the
ownership of the right to acquire such stock. The direct public group
that is treated as acquiring stock of the loss corporation in the
transaction is presumed not to include any members of any direct public
group that existed immediately before the transaction. In applying the
rules of paragraph (h)(4) of this section, the segregation rules of this
paragraph (j)(2)(iii)(D) shall apply before making the determination
required under that paragraph (h)(4) of this section. See Sec. 1.382-
3(j)(9) for rules relating to this paragraph (j)(2)(iii)(D).
(2) Example.
Example. (i) L has 700,000 shares of common stock outstanding.
Public L owns all of the outstanding L common stock. On May 20, 1988, L
issues a class of debentures to the public that, in the aggregate, may
be converted into 300,000 shares of L common stock. On September 7,
1988, P1 acquires 210,000 shares of L common stock over a
public stock exchange. None of the L debentures have been converted as
of that date.
(ii) By virtue of L's issuance of convertible debentures, May 20,
1988 is a testing date. See paragraph (a)(2)(i) of this section.
Immediately before the issuance of the convertible debentures, L's only
5-percent shareholder
[[Page 703]]
was Public L, a direct public group. Therefore, under paragraph
(j)(2)(iii)(D) of this section, Public L must be segregated from the
direct public group that would otherwise exist immediately after the
transaction for the purpose of applying paragraph (h)(4) of this
section, so that any acquisition of L stock through the conversion of
L's debentures is treated as made by a public group other than Public L
(``New Public L''). Assuming the largest increase in the total
percentage stock ownership of New Public L on the testing date (see
paragraph (h)(4) of this section), New Public L would have increased its
ownership interest in L by 30 percentage points. Therefore, the stock of
L would not be treated as acquired pursuant to a deemed conversion of
the L debentures on May 20, 1988, under paragraph (h)(4) of this
section, because the conversion would not cause an ownership change.
(iii) P1's acquisition of L common stock results in
second testing date. For the purpose of applying paragraph (h)(4) of
this section, Public L must again be segregated from the direct public
group that would otherwise result from conversion of the debentures, so
that a deemed acquisition of L stock through the conversion of L's
debentures on September 7, 1988 is treated as made by a public group
other than Public L (``New Public L''). As on the previous testing date,
New Public L would have increased its ownership interest in L by 30
percentage points if it were treated as having acquired L common stock
pursuant to the conversion of the L debentures. The increase in New
Public L's ownership, taken together with P1's 21 percentage
point ownership increase in L during the testing period [210,000 shares
deemed converted/(700,000 (actual) + 300,000 (deemed) shares
outstanding)], results in an ownership change.
(E) Transactions identified in the Internal Revenue Bulletin. Any
transaction that is designated by the International Revenue Service in
the Internal Revenue Bulletin shall be subject to the rules, as provided
in such bulletin, similar to the rules described in this paragraph
(j)(2)(iii).
(F) Issuance of rights to acquire loss corporation stock--(1) In
general. In the case of any transaction that is described in paragraph
(j)(2)(iii)(B), (D) or (E) of this section in which the loss corporation
issues rights to acquire its stock to the members of more than one
public group, those rights shall be presumed to be exercised pro rata by
each such public group as those rights are actually exercised. See Sec.
1.382-3(j)(10) for an exception to the application of the rule of this
paragraph (j)(2)(iii)(F)(1) to stock issued on the exercise of a
transferable option.
(2) Example.
Example. (i) L, which has six million shares outstanding, is owned
entirely by Public L and P is owned entirely by Public P. On November
30, 1988, P merges into L in a transaction qualifying under section
368(a)(1)(A) with Public P receiving four million shares of L stock as a
result of the reorganization. Under paragraph (j)(2)(iii)(B) of this
section, Public L and Public P continue to be treated as separate public
groups following the merger. Pursuant to the plan of reorganization, L
also issues an amount of warrants in L stock pro rata to Public L and
Public P that, if exercised, would result in the issuance of an
additional two million shares of L stock. On November 30, 1989, when
only one-half of the outstanding warrants have been exercised, A
acquires all of the unexercised warrants.
(ii) Without regard to the warrants distributed in reorganization,
Public P's ownership interest in L increases by 40 percentage points on
November 30, 1988, relative to its lowest ownership interest in L at any
time during the testing period (0 percent prior to the merger). For
purposes of determining whether an ownership change occurs on November
30, 1988, the segregation rules of paragraphs (j)(2)(iii)(B) and (D) of
this section does not require that a third direct public group be
separately identified and treated as acquiring the warrants, because L
has actual knowledge that Public L and Public P acquired the distributed
warrants in proportion to their respective ownership interests in L
stock. Because the largest increase in the ownership of L on the testing
date results from treating only Public P as exercising the distributing
warrants, in which event, its ownership interest would increase by 44.4
percentage points ([four million shares acquired in the merger + 800,000
shares deemed acquired]/10.8 million (actual and deemed) shares
outstanding), the issuance of the warrants by L does not cause an
ownership change on November 30, 1988.
(iii) Under paragraph (j)(2)(iii)(F)(1) of this section, each actual
exercise of warrants to acquire one million shares of L stock between
November 30, 1988 and November 30, 1989 is treated as made pro rata by
Public L and Public P (600,000 shares to Public L and 400,000 shares to
Public P). Accordingly, as a result of the actual exercises of warrants
during that period the ownership interests of the only 5-percent
shareholders, Public L and Public P, are proportionately increased.
(iv) A's acquisition of the all of the outstanding warrants on
November 30, 1989 requires the determination whether there has been an
ownership change with respect to L, because A would be 5-percent
shareholder
[[Page 704]]
under paragraph (g)(1)(i) of this section owning 8\1/3\ percent of the L
stock if the acquired warrants were exercised (one million shares deemed
acquired/12 million (actual and deemed) shares outstanding). See
paragraph (a)(2)(i) of this section. Under paragraph (h)(4)(i) of this
section, A is not treated as having exercised those warrants, because an
ownership change would not results. (Public P's 36\2/3\ percentage point
increase [(four million shares acquired in the merger + 400,000 shares
deemed acquired)/12 million (actual and deemed) shares outstanding] and
A's 8\1/3\ percentage point increase is not greater than 50 percentage
points).
(iv) Combination of de minimis public groups--(A) In general.
Notwithstanding paragraph (j)(2)(iii)(A) of this section, any public
group first identified during a taxable year, as a result of any
transaction described in paragraph (j)(2)(iii)(B), (D), (E), or (F) of
this section, that owns less than five percent of loss corporation stock
may be combined, at the option of the loss corporation, with any other
such groups also first identified as a result of any such transaction
that occurs during such taxable year.
(B) Example.
Example. (i) L is widely held with no person owning as much as five
percent of the L stock at any time (``Public L''). L's taxable year ends
on December 31. On January 1, 1989, L issues a class of debt maturing on
December 31, 2019 (``Class A Debentures'') with respect to which it will
semi-annually issue L stock in discharge of its interest obligation. In
addition, L issues an amount of L stock to the public in two separate
transactions during 1989. As a percentage of the L stock outstanding at
the close of L's taxable year on December 31, 1989, L issued .45 percent
of its stock on each of two dates in payment of interest with respect to
the Class A Debentures, 4.5 percent of its stock in the first stock
offering and six percent of its stock in the second stock offering.
During 1990, L did not issue stock other than in payment of interest
with respect to the Class A Debentures. As a percentage of L stock
outstanding on December 31, 1990, L issued .41 percent of its stock on
each of two dates during 1990 with respect to its outstanding debt.
(ii) Under paragraph (h)(4)(x)(E) of this section, L's obligation to
issue stock in satisfaction of the interest with respect to the Class A
Debentures until December 31, 2019, is not subject to paragraph
(h)(4)(i) of this section and thus is taken into account only as such
stock is issued.
(iii) The application of the segregation rules of paragraphs
(j)(2)(iii)(B) and (iv) of this section require the identification of at
least two additional, separate direct public groups during 1989. First,
the persons who acquire six percent of L stock in a public offering to
which section 1032 applies must be treated as a separate 5-percent
shareholder (``Public 1L''). See paragraph (j)(2)(iii)(B) of this
section. Even though this group was first identified in 1989, it may not
be combined with other public groups also first identified in 1989
because it owns five percent or more of L stock. Second, although each
of the three other issuances of L stock during the year ordinarily
result in the identification of an additional, separate direct public
group, each such direct public group may be combined with the two other
such groups into a single public group (``Public 2L''). As of the end of
1989, Public 2L would own a total of 5.4 percent of the stock of L.
(iv) The application of the segregation rules of paragraphs
(j)(2)(iii)(B) and (iv) of this section require the identification of at
least one additional, direct public group during 1990. Because each
additional, direct public group first identified in 1990 acquires less
than five percent of L stock, they may be combined into a single public
group (``Public 3L'') owning .82 percent of the stock of L. Public 3L is
treated as a five percent shareholder even though it owns less than five
percent of the stock of L. See paragraph (j)(2)(iv)(A) of this section.
(v) Multiple transactions--(A) In general. If a transaction (or any
part thereof) is described by more than one subdivision of paragraph
(j)(2)(iii) of this section, each such subdivision shall apply to the
transaction (or each part of the transaction) in the manner that results
in the largest increase in the percentage stock ownership by the 5-
percent shareholders.
(B) Example.
Example. (i) All of the common stock of L is owned by 1,000
unrelated persons, none of whom owns as much as five percent of the L
stock (``Public CL''). L has outstanding a class of preferred stock
described in section 1504(a)(4) that is owned in equal amounts by 500
unrelated persons (``Public PL'').
(ii) On September 4, 1988, L rearranges its capital structure by
redeeming 70 percent of the common stock owned by 700 of the
shareholders in exchange for cash. In addition, all of the preferred
stock is exchanged for a new class of common stock (nonvoting)
representing 40 percent of the value of L.
(iii) With respect to the part of the transaction that is treated as
a redemption under paragraph (j)(2)(iii)(C) of this section (the
exchange of common stock for cash), Public CL is segregated into two
different public groups immediately before the transaction (and
[[Page 705]]
thereafter) so that the owners of the redeemed stock (``Public RCL'')
are treated as part of a public group that is separate from the public
group comprised of the owners of the stock that is not redeemed
(``Public CCL''). As a result of the redemption, Public CCL's percentage
ownership interest in L thus increases by 30 percentage points from 30
percent to 60 percent (taking into account all transactions occurring on
the testing date, because the change in ownership is measured under
paragraph (a)(1)(i) of this section by reference to each 5-percent
shareholder's ownership interest immediately after the testing date). In
addition, the exchange of preferred stock for nonvoting common stock is
a transaction to which section 1032 applies. Under paragraph (j)(2)(v)
of this section, the part of the transaction to which section 1032
applies is also subject to the segregation rules in the manner specified
in paragraph (j)(2)(iii)(B) of this section. Accordingly, Public PL, the
direct public group that acquires L nonvoting common stock in exchange
for L preferred stock, must be treated as a separate public group from
the other direct public groups, Public CCL and Public RCL. As a separate
public group, Public PL's percentage stock ownership in L increases by
40 points (as compared to 0 percent prior to the transaction).
(iv) In summary, Public CCL increases its percentage ownership in L
by 30 percentage points and Public PL increases its percentage ownership
by 40 percentage points. Consequently, an ownership change occurs with
respect to L on September 4, 1988.
(vi) Acquisitions made by either a 5-percent shareholder or the loss
corporation following application of the segregation rules. Unless a
different proportion is established by either the loss corporation or
the Internal Revenue Service, the acquisition of loss corporation stock
by either a 5-percent shareholder or the loss corporation on any date on
which more than one public group of the loss corporation exists by
virtue of the application of the rules of this paragraph (j)(2) shall be
treated as being made proportionately from each public group existing
immediately before such acquisition. See paragraph (g)(5)(i)(B) of this
section for the application of this paragraph to the ownership interest
of a 5-percent shareholder that owns less than five percent of the stock
of the loss corporation on the testing date.
(3) Segregation rules applicable to transactions involving first
tier entities or higher tier entities--(i) Dispositions. If a loss
corporation is owned, in whole or in part, by a public group (or
groups), the rules of paragraphs (j)(2)(iii)(B) and (iv) of this section
shall apply to any transaction in which a first tier entity or an
individual that owns a direct ownership interest in the loss corporation
of five percent or more transfers a direct ownership interest in the
loss corporation to public shareholders. Therefore, each direct public
group that exists immediately after such a disposition shall be
segregated so that the ownership interests of each public group that
existed immediately before the transaction are treated separately from
the public group that acquires stock of the loss corporation as a result
of the disposition by the individual or first tier entity. The
principles of this paragraph (j)(3)(i) shall also apply to transactions
in which an ownership interest in a higher tier entity that owns five
percent or more of the loss corporation (determined without regard to
the application of paragraph (h)(2)(i)(A) of this section) or a first
tier entity is transferred to a public owner or 5-percent owner who is
not a 5-percent shareholder.
(ii) Example.
Example. (A) L is owned equally by Public L, P and E. Public L
consists of 150 equal, unrelated shareholders. P is owned by Public P, a
group consisting of 1,500 equal, unrelated shareholders. E is a
partnership and none of its partners are 5-percent owners. On October
22, 1988, E sells its entire interest in L over a public stock exchange.
No individual or entity acquires as much as five percent of L's stock as
the result of E's disposition of the L stock.
(B) The disposition of the L stock by E is a transaction that causes
the segregation of L's direct public group that exists immediately
before the transaction (Public L) from the direct public group that
acquires L stock in the transaction (Public EL). As a result, L has
three 5-percent shareholders, Public L, Public P (through the
application of paragraph (j)(1) of this section) and Public EL, each of
which owns 33\1/3\ percent of L stock. Therefore, Public EL is a 5-
percent shareholder that has increased its ownership interest in L by
33\1/3\ percentage points during the testing period. For purposes of
subsequent transactions, Public L and Public EL will continue to be
treated as separate direct public groups until any subsequent testing
date that does not have a testing period that includes E's disposition
of L stock.
[[Page 706]]
(iii) Other transactions affecting direct public groups of a first
tier entity or higher tier entity. The rules of paragraphs (j)(2)(i),
(iii), (iv) and (v) of this section shall apply to transactions
described in such paragraphs that involve either a higher tier entity
that owns five percent or more of the loss corporation (determined
without regard to the application of paragraph (h)(2)(i)(A) of this
section) or a first tier entity. In applying those rules for purposes of
this paragraph (j)(3)(iii), each direct public group of a first tier
entity or a higher tier entity is any public group of any such entity
identified in paragraph (j)(1)(iv)(A) or (B) of this section or
resulting from the application of this paragraph (j)(3)(iii). The
principles of paragraph (j)(2)(iii)(C) of this section also shall apply
to any transaction that has the effect of a redemption-type transaction
(e.g., an acquisition by the loss corporation of stock in a first tier
entity).
(iv) Examples.
Example 1. The facts are the same as in Example 1 of paragraph
(j)(2)(iii)(B)(2) of this section, except that Public L and
P1 own 40 percent and 60 percent, respectively, of the stock
of HC which, in turn, owns 100 percent of L and HC merges into
P2. Under paragraph (j)(3)(iii) of this section, the rules of
paragraph (j)(2)(iii)(B) of this section apply to segregate HC's direct
public group (Public L) immediately before the merger from the direct
public group (Public P2) that acquires loss corporation stock
in the merger. The consequences of the merger of HC into P2
are thus the same as in Example (1) of paragraph (j)(2)(iii)(B)(2) of
this section.
Example 2. (i) Twenty-five individual shareholders each own four
percent of L (``Public L''). Public L is therefore the only 5-percent
shareholder of L. Each of the shareholders of L contribute their L stock
to a newly formed corporation, HC. In exchange for their contribution of
L stock, HC issues 100 percent of each of its two classes of common
stock (voting and nonvoting).
(ii) The formation of HC, a first tier entity of L, is a transaction
to which section 1032 applies. Under paragraph (j)(3)(iii) of this
section, the rules of paragraphs (j)(1)(iii) and (j)(2)(iii)(B) of this
section are applied to this transaction with the result that the
shareholders of HC, immediately after the issuance of HC stock, are
presumed not to include any persons that previously had a direct or
indirect ownership interest in L. The presumption underlying those
rules, however, is rebutted by establishing that all of the HC stock
outstanding immediately after the transaction was issued solely in
exchange for L stock. Thus, Public HC (immediately after the
transaction) and Public L (immediately before the transaction) would be
treated owned by the same direct public group.
Example 3. (i) All of the stock of L is owned by unrelated
shareholders, none of whom owns as much as five percent of L stock. P
also is owned by unrelated shareholders, none of whom owns as much as
five percent of P stock. On November 22, 1988, P incorporates
P1 with a contribution of P stock. Immediately thereafter,
P1 acquires all of the properties of L in exchange for its P
stock in a forward triangular merger qualifying under sections 368
(a)(1)(A) and (a)(2)(D). The P stock transferred by P1 equals
45 percent of the total outstanding P stock.
(ii) Immediately before the merger of L into P1, P's only
5-percent shareholder was Public P, a direct public group of P. The
rules of paragraph (j)(2)(iii)(B) of this section thus apply to the
transaction under paragraph (j)(3)(i) of this section since P, a first
tier entity, is a party to the reorganization described in such
paragraph. Although Public P does not acquire any stock in the merger,
it is treated as acquiring stock in the loss corporation, P1,
because such corporation succeeds to the pre-change losses of L in a
transaction to which 381(a) applies. As a result of the merger, Public
P, the direct public group of P that exists immediately before the
merger, must be segregated from the direct public groups acquiring P
stock in the reorganization. Public P is, therefore, treated as
acquiring 55 percent of the outstanding stock of the loss corporation,
P1, in the transaction. The transaction, therefore, results
in an ownership change for P1.
Example 4. (i) L is owned 20 percent by A and 80 percent by 1,000
unrelated individuals and entities, none of whom owns as much as five
percent of L stock (``Public L''). P is owned 10 percent by B, 40
percent by E, and 50 percent by 5,000 unrelated individuals, none of
whom owns as much as five percent of P stock (``Public P''). E is owned
30 percent by C and 70 percent by 30 unrelated individuals, none of whom
owns as much as five percent of E (``Public E'').
(ii) On October 31, 1987, P acquires all of the L stock from A and
Public L in exchange for P stock representing 20 percent of the value of
P (determined immediately after the acquisition) in a transaction
described in section 368(a)(1)(B). After the acquisition, P is owned
eight percent by B, 32 percent by E, four percent by A, and 56 percent
by 6,000 unrelated individuals, none of whom owns as much as five
percent of P. Because L is wholly owned by P immediately after the
acquisition, L, under paragraph (j)(1) of this section, is treated as
owned as follows: Eight percent by B, 9.6 percent by C (through C's
ownership
[[Page 707]]
interest in E, a highest tier entity, and E's ownership interest in P, a
first tier entity), 22.4 percent by Public E (through its ownership
interest in E and E's ownership interest in P), four percent by A, and
56 percent by the shareholders who each own less than five percent of L
through their ownership interest in P.
(iii) Under paragraph (j)(3)(iii) of this section, the rules of
paragraph (j)(2)(iii)(B) of this section apply to the reorganization
since the transaction involved a first tier entity of L. Thus, the
direct public group of P that exists immediately after the transaction
must be segregated into two public groups--the direct public group of P
that existed immediately before the acquisition (Public P) is treated
separately from the direct public group consisting of the persons who
acquire P stock in the transaction (Public L). Accordingly, immediately
after the reorganization, Public P and Public L own 40 percent and 16
percent of L, respectively. See paragraph (h) of this section. (Under
paragraph (g)(5)(ii)(B) of this section, L may treat the four percent of
L stock owned by A immediately after the reorganization as the amount of
L stock owned by A for each subsequent testing date having a testing
period that includes the reorganization.)
(iv) In summary, after applying the rules of paragraphs (j)(1) and
(3) of this section, L is treated as owned as follows:
------------------------------------------------------------------------
Percentage
5-percent shareholder ownership
interest
------------------------------------------------------------------------
A......................................................... 4.0
B......................................................... 8.0
C......................................................... 9.6
Public E.................................................. 22.4
Public P.................................................. 40.0
Public L.................................................. 16.0
------------------------------------------------------------------------
(v) The reorganization results in an ownership change, because B, C,
Public E and Public P, all of whom are 5-percent shareholders, together
have increased their percentage ownership in L by 80 percentage points
as compared to their lowest percentage ownership in L at any time during
the testing period (0 percent prior to the acquisition).
(v) Acquisitions made by a 5-percent shareholder, a higher tier
entity, or a first tier entity following application of the segregation
rules. The rules of paragraph (j)(2)(vi) of this section shall apply to
the acquisition of an ownership interest in a first tier entity (or
higher tier entity) if more than one direct public group of any such
entity are segregated under the rules of this paragraph (j)(3).
Accordingly, an acquisition by such an entity or a 5-percent shareholder
of any ownership interest in such an entity shall be treated as made
proportionately from the direct public groups resulting from the
application of this paragraph (j)(3).
(k) Operating rules--(1) Presumptions regarding stock ownership.
Subject to paragraphs (k)(2) and (4) of this section, for purposes of
applying paragraphs (f), (g), (h), and (j)(1) of this section--
(i) Stock subject to regulation by the Securities and Exchange
Commission. With respect to loss corporation stock that is described in
Rule 13d-1(d) of Regulation 13D-G (or any rule or regulation to
generally the same effect), promulgated by the Securities and Exchange
Commission under the Securities and Exchange Act of 1934 (``registered
stock''), a loss corporation may rely on the existence and absence of
filings of Schedules 13D and 13G (or any similar schedules) as of any
date to identify all of the corporation's shareholders who have a direct
ownership interest of five percent or more (both individuals and first
tier entities) on such date. A loss corporation may similarly rely on
the existence and absence of such filings as of any date with respect to
registered stock of any first tier entity or any higher tier entity to
identify the 5-percent owners of any such entities on such date who
indirectly own five percent or more of the loss corporation stock, and
are thus 5-percent shareholders, and to identify any higher tier
entities of such entities.
(ii) Statements under penalties of perjury. A loss corporation may
rely on a statement, signed under penalties of perjury, by an officer,
director, partner, trustee, executor or similar responsible person, on
behalf of a first tier entity or a higher tier entity to establish the
extent, if any, to which the ownership interests of any 5-percent owners
or higher tier entities with respect to such entities have changed
during a testing period. A loss corporation may not rely on such a
statement (A) that it knows to be false or (B) that is made by either a
first tier entity or higher tier entity that owns 50 percent or more of
the stock of the loss corporation. For purposes of the preceding
sentence, any first tier entities and higher tier entities that are
known by the loss corporation to be members of
[[Page 708]]
the same controlled group (within the meaning of section 267(f)) shall
be treated as one corporation.
(2) Actual knowledge regarding stock ownership. For purposes of this
section (other than paragraphs (g)(5) and (j)(1)(v) of this section), to
the extent that the loss corporation has actual knowledge of stock
ownership on any testing date (or acquires such knowledge before the
date that the income tax return is filed for the taxable year in which
the testing date occurs) by--
(i) An individual who would be a 5-percent shareholder, but for the
application of paragraphs (h)(2)(iii), (h)(6)(iii) or (g)(2) of this
section, or
(ii) A 5-percent shareholder that would be taken into account, but
for paragraphs (h)(2)(iii), (h)(6)(iii) or (g)(3) of this section,
the loss corporation must take such stock ownership into account for
purposes of determining whether an ownership change has occurred on that
testing date. If a loss corporation acquires such knowledge after such
income tax return is filed, the loss corporation may take such ownership
into account for purposes of determining whether an ownership change
occurred on that testing date and, if appropriate, file an amended
income tax return (subject to any applicable statute of limitations). To
the extent the loss corporation has actual knowledge on or after any
testing date regarding the ownership interest in the loss corporation by
members of one public group (described in paragraphs (g)(1)(ii), (iii)
or (iv) of this section) and the ownership interest of those members in
the loss corporation as members in another such public group, the loss
corporation may take such ownership into account for purposes of
determining whether an ownership change occurred on that testing date.
(3) Duty to inquire as to actual stock ownership in the loss
corporation. For purposes of this section, the loss corporation is
required to determine the stock ownership on each testing date (and,
except as otherwise provided in this section, the changes in the stock
ownership during the testing period) of--
(i) Any individual shareholder who has a direct ownership interest
of five percent or more in the loss corporation,
(ii) Any first tier entity,
(iii) Any higher tier entity that has an indirect ownership interest
of five percent or more in the loss corporation (determined without
regard to paragraph (h)(2)(i)(A) of this section), and
(iv) Any 5-percent owner who indirectly owns five percent or more of
the stock of the loss corporation in his capacity as a 5-percent owner
in any one first tier entity or higher tier entity.
The loss corporation does not have any obligation to inquire or to
determine facts relating to the stock ownership of any shareholders
other than those described in the preceding sentence. In addition, the
loss corporation does not have any obligation to inquire or to determine
if the actual facts relating to the stock ownership of any shareholder
are consistent with the ownership interests of the loss corporation as
determined by applying the presumptions and other rules of paragraphs
(g), (h), (j) or (k)(1) of this section.
(4) Ownership interest structured to avoid the section 382
limitation. For purposes of this section, if the ownership interests in
a loss corporation are structured by a person with a direct or indirect
ownership interest in the loss corporation to avoid treating a person as
a 5-percent shareholder (or to permit the loss corporation to rely on
the presumption provided in paragraph (g)(5)(i)(B) of this section) for
a principal purpose of circumventing the section 382 limitation, then--
(i) Paragraph (h)(2)(iii) of this section shall not apply with
respect to the ownership interests so structured and the constructive
ownership rules of paragraph (h)(2)(i) of this section shall thus apply
to attribute stock from any entity without regard to the amount of stock
it owns in the loss corporation or any other corporation,
(ii) Paragraphs (g)(2) and (3) of this section shall be modified
with respect to the ownership interests so structured so that the
ownership interest of a person includes all of an individual's direct
and indirect ownership in the loss corporation, without regard to
whether each such interest represents five percent or more of the stock
of the loss corporation, and
[[Page 709]]
(iii) Paragraph (g)(5)(i)(B) of this section shall not apply with
respect to the ownership interests so structured so that the ownership
interest of a person takes into account his actual ownership interest in
the loss corporation.
This paragraph (k)(4) shall apply, however, only if application would
result in an ownership change.
(5) Example.
Example. L is owned by 25 individuals who each own four percent of
the outstanding L stock. A purchases 40 percent of L stock from such
shareholders on August 13, 1988. Thereafter, B plans to acquire 15
percent of the L stock. B is advised concerning the potential
application of section 382 to L. On February 1, 1989, B acquires a 15
percent interest in L pursuant to a program in which each of four
corporations, P1 through P4, each of which is
wholly-owned by B, acquire a 3.75 percent interest in L. A principal
purpose of acquiring the L stock through four corporations is to avoid
treating B as owning any ownership interest in L amounting to as much as
five percent, and thus to circumvent the section 382 limitation by
avoiding an ownership change. Under paragraph (k)(4) of this section,
the limitation on the constructive ownership rules of paragraph
(h)(2)(iii) of this section are disregarded and B is treated as a 5-
percent shareholder owning 15 percent of the stock of L by virtue of his
ownership interests in P1 through P4,
notwithstanding paragraph (g)(2) of this section. Accordingly, an
ownership change occurs with respect to L.
(6) First tier entity or higher tier entity that is a foreign
corporation or entity. [Reserved]
(l) Changes in percentage ownership which are attributable to
fluctuations in value. [Reserved]
(m) Effective date--(1) In general. Except as provided in this
paragraph (m), section 382 shall apply to any ownership change that
occurs immediately after an owner shift or an equity structure shift
that occurs after December 31, 1986, or any other event occurring after
such date that requires the determination of whether an ownership change
has occurred under paragraph (a)(2)(i) of this section. In the case of
an equity structure shift (including an equity structure shift that also
constitutes an owner shift), any equity structure shift completed
pursuant to a plan of reorganization adopted before January 1, 1987,
shall be treated as occurring on the date such plan was adopted.
Therefore, section 382 shall apply to any ownership change occurring
immediately after--
(i) An owner shift (excluding an owner shift that also constitutes
an equity structure shift) that occurs on or after January 1, 1987,
(ii) An equity structure shift that occurs after December 31, 1986,
if it is completed pursuant to a plan of reorganization adopted on or
after January 1, 1987, or
(iii) Any transfer or issuance of an option, or other interest that
is similar to an option, that occurs on or after January l, 1987 and
that is taken into account under paragraph (a)(2)(i) of this section.
With respect to equity structure shifts completed pursuant to plans
adopted before January 1, 1987, section 382 shall be inapplicable only
if the equity structure shift that is treated as occurring on the date
the plan of reorganization for such shift was adopted (or other event
occurring after the adoption of such plan) results in an ownership
change before January 1, 1987. In that event, a new testing period for
the loss corporation shall begin on the day after such ownership change.
(2) Plan of reorganization. For purposes of paragraph (m)(1) of this
section, a plan of reorganization shall be treated as adopted on the
earlier of--
(i) The first date that the boards of directors of all the parties
to the reorganization have adopted the plan or have recommended adoption
to their shareholders, or
(ii) The date the shareholders approve such reorganization.
If there is an ownership change with respect to a subsidiary as the
result of a reorganization of the parent, the treatment of the
subsidiary under this paragraph (m)(2) shall be governed by the
classification of the parent-level transaction. For purposes of the
preceding sentence, a corporation shall be treated as a subsidiary of
another corporation only if the other corporation owns stock in that
corporation meeting the requirements of section 1504(a)(2).
(3) Earliest commencement of the testing period. For purposes of
determining if an ownership change has occurred at any time after May 5,
1986, the testing
[[Page 710]]
period shall begin no earlier than May 6, 1986. Under paragraph (d)(4)
of this section, therefore, shifts in the ownership of stock of the loss
corporation prior to May 6, 1986 are disregarded.
(4) Transitional rules--(i) Rules provided in paragraph (j) of this
section for testing dates before September 4, 1987. For purposes of
determining whether an ownership change occurs for any testing date
before September 4, 1987.
(A) The rules of paragraph (j)(1) of this section shall apply only
to stock of the loss corporation acquired after May 5, 1986, by any
first tier entity or higher tier entity and shall not apply to any stock
acquired by such an entity on or before that date,
(B) The rules of paragraph (j)(2) of this section shall apply only
to equity structure shifts in which more than one corporation is a party
to the reorganization and shall not apply to any other transactions, and
(C) The rules of paragraph (j)(3) of this section shall apply only
to--
(1) Dispositions of stock acquired by an individual, a first tier
entity or higher tier entity after May 5, 1986 (and shall not apply to
dispositions of stock acquired on or before such date), and
(2) Equity structure shifts in which more than one corporation is a
party to the reorganization (and shall not apply to any other
transactions).
For any testing date before September 4, 1987, however, the loss
corporation is permitted to apply all of the rules of paragraph (j) of
this section. A loss corporation that applies the rules of paragraph (j)
of this section under the preceding sentence must apply all of the rules
of such paragraph in determining whether any ownership change occurs on
any testing dates after May 5, 1986.
(ii) Example.
Example. (i) L is owned entirely by 10,000 unrelated individuals,
none of whom owns as much as five percent of the stock of L (``Public
L''). P is owned entirely by 1,000 unrelated individuals, none of whom
owns as much as five percent of the stock of P (``Public P'').
(ii) Between March 1, 1987 and June 1, 1987, P acquires 45 percent
of L stock in a series of transactions. On June 15, 1987, L redeems 20
percent of the L stock from Public L.
(iii) Under paragraph (m)(4)(i)(A) of this section, the rules of
paragraph (j)(1) of this section apply to the acquisitions made by P,
because they occurred after May 5, 1986. Accordingly, following those
acquisitions, the stock of L is owned 45 percent by Public P and 55
percent by Public L. Because the increase in the percentage ownership by
Public P as a result of P's stock purchases is not more than 50 percent,
no ownership change occurs as the result of P's purchases.
(iv) On or after September 4, 1987, the rules of paragraph
(j)(2)(iii)(C) of this section apply to treat any L stock that is
redeemed as owned by a public group that is separate from the public
group owning the stock that is not redeemed. (Under paragraph
(j)(2)(iii)(C) of this section, the continuing shareholders of Public L,
who owned 35 percent of the stock of L before the redemption ([55
percent--20 percent]/100 percent) increase their ownership interest in L
by 8.8 percentage points as a result of such redemption (43.8 percent--
35 percent)). Those rules, however, do not apply to the June 15, 1987
redemption because it occurs before the date that paragraph (j)(2)(iii)
of this section generally is effective. (Until September 4, 1987,
paragraph (j)(2)(iii) of this section generally is effective only for
equity structure shifts in which more than one corporation is a party to
the reorganization.) Solely because of the application of paragraph
(j)(1) of this section to P's acquisitions of L stock, Public P's
ownership interest in L as a result of the redemption has increased from
45 percentage points to 56.2 percentage points which, compared to its
lowest percentage ownership interest at any time during the testing
period (0 percent prior to March 1, 1987), is a more than 50 percentage
point increase thus causing an ownership change with respect to L on
June 15, 1987.
(iii) Rules provided in paragraph (j) of this section for testing
dates on or after September 4, 1987. For purposes of determining whether
an ownership change occurs for any testing date on or after September 4,
1987, the rules of paragraphs (j)(2) and (3) of this section shall not
apply to identify any public group resulting from--
(A) Any transaction described in such paragraphs (j)(2) and (3),
unless that transaction is also described in paragraph (m)(4)(i)(B) or
(C) of this section, or
(B) Any disposition of stock acquired on or before May 5, 1986, but
only if such disposition or other transaction occurs before September 4,
1987. Thus, for example, the rules of paragraph (j)(2)(iii)(D) of this
section shall apply only to rights to acquire stock of the loss
corporation issued on or after such date.
[[Page 711]]
(iv) Rules provided in paragraphs (f)(18)(ii) and (iii) of this
section. For purposes of determining whether an ownership change occurs
for any testing date, the rules of paragraphs (f)(18)(ii) and (iii) of
this section apply only to stock (or any other ownership interest) that
is--
(A) Issued on or after September 4, 1987, or
(B) Transferred to (or by) a person who is a 5-percent shareholder
(or would be a 5-percent shareholder if paragraph (f)(18)(iii) of this
section were applicable) on or after September 4, 1987.
(v) Rules provided in paragraph (a)(2)(ii) of this section. The
information statement required under paragraph (a)(2)(ii) of this
section is not required to be filed with respect to any taxable year for
which the due date (including extensions) of the income tax return of
the loss corporation is on or before October 5, 1987.
(vi) Rules provided in paragraph (h)(4) of this section. The rules
provided in paragraph (h)(4) of this section do not apply on any testing
date on or after November 5, 1992. The rule provided in paragraph
(h)(4)(viii) of this section applies to the lapse or forfeiture of any
option treated as exercised under paragraph (h)(4)(i) of this section.
If an option is treated as exercised under paragraph (h)(4)(i) of this
section, and the option is actually exercised on a day that is within
120 days after the date on which the option is treated as exercised, the
rule provided in paragraph (h)(4)(vi)(B) of this section applies (even
if the actual exercise of the option occurs on a date on which the rules
of paragraph (h)(4) of this section would not otherwise apply). Thus, in
such a case, the loss corporation may elect to treat paragraphs
(h)(4)(i) and (vi)(A) of this section as not applying to the option and
take into account only the acquisition of loss corporation stock
resulting from the actual exercise of the option.
(vii) Rules provided in paragraph (a)(2)(i) of this section. The
rules provided in paragraph (a)(2)(i) of this section apply to determine
whether dates prior to November 5, 1992, are testing dates. For rules
regarding the determination of whether dates on or after November 5,
1992, are testing dates, see Sec. 1.382-2(a)(4).
(5) Bankruptcy proceedings--(i) In general. In the case of a
reorganization described in section 368(a)(1)(G) or an exchange of debt
for stock in a title 11 or similar case (within the meaning of section
368(a)(3)), section 382 shall not apply to any ownership change
resulting from such a reorganization or proceeding if a petition in such
case was filed with the court before August 14, 1986. Accordingly, any
shift in ownership in the loss corporation arising out of such
reorganization or proceeding shall not be taken into account for
purposes of determining whether an ownership change occurs on any
testing date that occurs after December 31, 1986.
(ii) Example.
Example. (i) L filed a petition in bankruptcy on September 29, 1985.
As a result of a title 11 bankruptcy reorganization of L that is
confirmed by a court on February 2, 1988, there is a shift in the
ownership of L so that JK increased her interest in L by 24 percentage
points relative to her lowest ownership interest in L during the testing
period. JK is the only 5-percent shareholder of L following the
reorganization whose interest in L increased as a result of the
transaction. On December 25, 1988, GK purchases 42 percent of the
outstanding stock of L from shareholders other than JK.
(ii) There is no ownership change on December 25, 1988 because the
24 percentage point increase in JK's ownership interest in L is not
taken into account under paragraph (m)(6)(i) of this section.
(iii) The facts are the same as in (i), except that the acquisitions
by JK and GK occurred on August 5, 1986 and September 26, 1986,
respectively. Because paragraph (m)(6)(i) of this section is only
applicable with respect to the determination of whether an ownership
change has occurred on any testing date that occurs after December 31,
1986, there is an ownership change as a result of GK's acquisition on
September 26, 1986. Accordingly, section 382 is inapplicable to such
ownership change under paragraph (m)(1) of this section because it
occurred prior to January 1, 1987. Under paragraph (d)(2) of this
section, the testing period for determining whether an ownership change
occurs on any subsequent testing date shall commence no earlier than
September 27, 1986.
(6) Transactions of domestic building and loan associations. The
rules of paragraph (j)(2)(iii)(B) of this section (and the application
of those rules by virtue
[[Page 712]]
of paragraph (j)(3) of this section) shall not apply to a public
offering of stock by a domestic building and loan association described
in section 591 (or any corporation that owns stock in the association
meeting the requirements of section 1504(a)(2)) prior to January 1,
1989. In the case of any transaction described in the preceding
sentence, any transitory ownership of stock by any entity that is an
underwriter shall be disregarded so that the rules of paragraph (j)(1)
of this section shall not apply to treat such stock as owned by the
owners of the underwriter and thus the rules of paragraph (j)(3)(i) of
this section shall not apply to the disposition of such stock by the
underwriter. For purposes of this paragraph (m)(7)--
(i) Ownership shall be considered transitory only with respect to an
underwriter acquiring stock in a firm commitment underwriting to the
extent the stock is disposed of pursuant to the offer (but in no event
later than sixty (60) days after the initial offering) and,
(ii) To the extent a transaction may be described both by paragraph
(j)(2)(iii)(B) of this section and any other provision of paragraph
(j)(2)(iii) or (3) of this section, paragraph (j)(2)(v)(A) of this
section shall not apply and the transaction shall be treated as
described solely by paragraph (j)(2)(iii)(B) of this section.
(7) Transactions not subject to section 382--(i) Application of old
section 382. Old section 382 shall not apply to a loss corporation on or
after the date on which an ownership change occurs, but only if such
ownership change results in the application of the section 382
limitation (as defined in section 382(b)) with respect to the loss
corporation.
(ii) Effect on testing period. The application of old section 382 to
a transaction is disregarded for purposes of paragraph (d)(2) of this
section unless the transaction that results in such application is the
last component of an ownership change after May 5, 1986 that is not
subject to section 382 under the effective date rules of this paragraph
(m) (e.g., an ownership change occurring as the result of an
individual's purchase of more than 50 percent of L stock on any date on
or before December 31, 1986).
(iii) Termination of old section 382. [Reserved]
(8) Options issued or transferred before January 1, 1987--(i)
Options issued before May 6, 1986. An option issued before May 6, 1986,
is subject to the rules of paragraph (h)(4) of this section only if it
is transferred by (or to) a 5-percent shareholder (or a person who would
be a 5-percent shareholder if the option were treated as exercised) on
or after such date. In all other cases, such an option shall not be
subject to paragraph (h)(4)(i) of this section, but shall be subject to
paragraph (h)(4)(xii) of this section. Thus, for example, a warrant to
acquire stock of the loss corporation issued before May 6, 1986 shall
not be subject to paragraph (h)(4) of this section unless the warrant is
transferred by (or to) a 5-percent shareholder. The exercise of such a
warrant, however, would be taken into account as required by this
paragraph (m)(8)(i) and paragraph (h)(4)(xii) of this section.
(ii) Options issued on or after May 6, 1986 and before September 18,
1986. An option issued or transferred on or after May 6, 1986, and
before September 18, 1986, is subject to the rules of paragraph (h)(4)
of this section.
(iii) Options issued on or after September 18, 1986 and before
January 1, 1987. An option issued or transferred on or after September
18, 1986, and before January 1, 1987, is subject to the rules of
paragraph (h)(4) of this section, except that the option shall be
treated for purposes of this section as if it never had been issued in
the event that either--
(A) The option lapses unexercised or is irrevocably forfeited by the
holder thereof, or
(B) On the date the option was issued, there was no significant
likelihood that such option would be exercised within the five-year
period from the date of such issuance and a purpose for the issuance of
the option was to cause an ownership change prior to January 1, 1987.
(9) Examples. The rules of this paragraph (m) may be illustrated by
the following examples.
Example 1. (i) A owns all 100 outstanding shares of L stock. A sells
11 shares to B on January 1, 1986. The January 1, 1986 testing
[[Page 713]]
date is disregarded under paragraph (m)(3) of this section. A sells
another 40 shares to B on January 1, 1988. B's second stock purchase is
an owner shift that does not result in an ownership change. B's
percentage ownership interest on the testing date (51 percent) is only
40 percentage points greater than the lowest percentage of L stock owned
by B at any time during the testing period (11 percent on and after May
6, 1986).
(ii) The facts are the same as in (i). In addition A sells 20 shares
of his L stock to C on July 1, 1990. C's stock purchase is an owner
shift. Because B and C together have increased their respective
ownership interests in L by 40 and 20 percentage points relative to
their lowest percentage stock ownership interests in L at any time
during the testing period, C's purchase causes an ownership change. The
testing period for any subsequent ownership change begins on the first
day following C's acquisition, July 2, 1990.
Example 2. (i) C has owned 100 percent of L since March 22, 1980. On
October 13, 1986, P merges into L. As a result of the merger, 40 percent
of L stock is acquired by A, the sole shareholder of P. The merger of P
into L is both an equity structure shift and an owner shift. The
transaction, however, is not an ownership change with respect to L,
because A's percentage ownership interest has increased by only 40
percentage points. On August 22, 1987, B purchases 15 percent of the L
stock from C. B's purchase constitutes an owner shift resulting in an
ownership change that is subject to section 382 because the aggregate
increases in percentage ownership by B and C (respectively 40 percent
and 15 percent) is more than 50 percentage points.
(ii) The facts are the same as in (i), except that the plan of
reorganization is adopted on October 13, 1986, and the merger is
completed on July 22, 1987. The result is the same as in (i).
(iii) The facts are the same as in (ii), except that the
reorganization is completed on August 22, 1987, and B's purchase of the
L stock occurs one month earlier, on July 22, 1987. Assume that after
the reorganization on August 22, 1987, A and B own 40 percent and 15
percent, respectively, of L stock. Although the merger occurred pursuant
to a plan of reorganization adopted before 1987, L is subject to section
382 following the equity structure shift, because the merger would not
have caused an ownership change if it had been completed in 1986 after
the commencement of the L's testing period.
(iv) The facts are the same as in (ii), except that B's purchase
occurs on June 7, 1986. Assume that immediately after the reorganization
on August 22, 1987, A and B own 40 percent and 15 percent, respectively,
of L stock. Since the reorganization pursuant to a plan adopted before
1987, taken together with the other shifts in the ownership of L's stock
between May 5, 1986, and December 31, 1986, would have caused an
ownership change, section 382 does not apply as a result of the merger.
Since an ownership change occurs as a result of the merger, L's testing
period for purposes of any subsequent ownership change begins on October
14, 1986.
(v) The facts are the same as in (iv), except that B makes an
additional purchase from C of one percent of L's stock on February 14,
1987. The result is the same as in (iv). B's additional purchase,
however, is taken into account for the purpose of determining whether
there is a second ownership change with respect to L.
[T.D. 8149, 52 FR 29675, Aug. 11, 1987]
Editorial Note: For Federal Register citations affecting Sec.
1.382-2T, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
Sec. 1.382-3 Definitions and rules relating to a 5-percent
shareholder.
(a) Definitions--(1) Entity--(i) In general. An entity is any
corporation, estate, trust, association, company, partnership or similar
organization. An entity includes a group of persons who have a formal or
informal understanding among themselves to make a coordinated
acquisition of stock. A principal element in determining if such an
understanding exists is whether the investment decision of each member
of a group is based upon the investment decision of one or more other
members. However, the participation by creditors in formulating a plan
for an insolvency workout or a reorganization in a title 11 or similar
case (whether as members of a creditors' committee or otherwise) and the
receipt of stock by creditors in satisfaction of indebtedness pursuant
to the workout or reorganization do not cause the creditors to be
considered an entity.
(ii) Examples. The following examples illustrate the provisions of
paragraph (a)(1)(i) of this section.
Example 1. (i) L corporation has 1,000 shares of common stock
outstanding. For the three-year period ending on October 1, 1992, L's
stock was owned by unrelated individuals, none of whom owned five
percent or more of L. A group of 20 individuals who previously owned no
stock (the ``Group'') agree among themselves to acquire more than 5
percent of L's stock. The Group is not a corporation, trust,
association, partnership or company.
[[Page 714]]
On October 1, 1992, pursuant to their understanding, the members of the
Group purchase 600 shares of L common stock from the old shareholders of
L (a total of 60 percent of L stock), with each member purchasing 30
shares.
(ii) Before the members of the Group acquired L's stock on October
1, 1992, no individual or entity owned, directly or indirectly, five
percent or more of the stock of L. As a result, all shareholders were
aggregated into a public group and L was considered to be owned by a
single 5-percent shareholder (``Public L'') in accordance with Sec.
1.382-2T (g)(1) and (j)(1).
(iii) Under paragraph (a)(1)(i) of this section, the members of the
Group have a formal or informal understanding among themselves to make a
coordinated acquisition of stock and, therefore, the Group is an entity.
Thus, the acquisition of more than five percent of the stock of L on
October 1, 1992, by members of the Group is not disregarded under Sec.
1.382-2T(e)(1)(ii). Because no member of the Group owns, directly or
indirectly, five percent or more of the stock of L, Sec. Sec. 1.382-2T
(g)(1) and (j)(1) require that the members of the Group be aggregated
into a separate public group, which will be presumed to consist of
persons unrelated to the members of Public L. Because there is a shift
of more than fifty percentage points in the ownership of L stock during
the three-year testing period ending on October 1, 1992, an ownership
change occurs on October 1, 1992, as a result of the Group's purchase of
the 600 shares.
Example 2. (i) Prior to October 1, 1992, L's 1,000 shares of
outstanding stock were owned by unrelated individuals, none of whom
owned five percent or more of the stock of L. L's management is
concerned that L may become subject to a takeover bid. In separate
meetings, L's management meets with potential investors who own no stock
and are friendly to management to convince them to acquire L's stock
based on an understanding that L will assemble a group that in the
aggregate will acquire more than 50 percent of L's stock. On October 1,
1992, 15 of these investors each purchase 4 percent of L's stock.
(ii) Under paragraph (a)(1)(i) of this section, the 15 investors
(the ``Group'') are treated as an entity because the members of the
Group purchase L stock pursuant to a formal or informal understanding
among themselves to make a coordinated acquisition of stock. Sections
1.382-2T (g)(1) and (j)(1) require that on October 1, 1992, the Group be
aggregated into a separate public group, which has increased its
ownership of L stock by 60 percentage points over its lowest level of
ownership in the three-year period ending on October 1, 1992.
Accordingly, an ownership change occurs on that date.
Example 3. (i) Prior to October 1, 1992, L's 1,000 shares of
outstanding stock were owned by unrelated individuals, none of whom
owned five percent or more of the stock of L. On October 1, 1992, an
investment advisor advises its clients that it believes L's stock is
undervalued and recommends that they acquire L stock. Acting on the
investment advisor's recommendation, 20 unrelated individuals purchase 6
percent of L's stock in aggregate, with each individual purchasing less
than 5 percent. Each client's decision was not based upon the investment
decisions made by one or more other clients.
(ii) Because there is no formal or informal understanding among the
clients to make a coordinated acquisition of L stock, their purchase of
stock is not made by an entity under paragraph (a)(1)(i) of this
section. As a result, they remain part of the public group which owns L
stock, and no owner shift results upon their purchase of L stock under
Sec. 1.382-2T(e)(1)(ii).
(iii) The result in this example would be the same under paragraph
(a)(3)(i) of this section if the only additional fact was that the
investment advisor is also the underwriter (without regard to whether it
is a firm commitment or best efforts underwriting) for a primary or
secondary offering of L stock.
(iv) Assume that the facts are the same except that, instead of an
investment advisor recommending that clients purchase L stock, the
trustee of several trusts qualified under section 401(a) sponsored by
unrelated corporations causes each trust to purchase the L stock. In
this case, the result is the same, so long as the investment decision
made on behalf of each trust was not based on the investment decision
made on behalf of one or more of the other trusts.
(iii) Effective date. (A) In general. The second, third and fourth
sentences of paragraph (a)(1)(i) of this section and Examples 1, 2 and 3
of paragraph (a)(1)(ii) of this section apply to testing dates
(determined by applying such sentence and examples) on or after November
20, 1990, but with respect to any group of persons that pursuant to a
formal or informal understanding among themselves makes a coordinated
acquisition of stock before November 20, 1990, only if the group
increases or decreases its ownership of stock of the loss corporation
relative to its percentage ownership interest at the close of November
19, 1990, by five percentage points or more on or after November 20,
1990.
(B) Special rule. If pursuant to a formal or informal understanding
among themselves a group consisting only of regulated investment
companies under
[[Page 715]]
section 851, qualified trusts under section 401, common trust funds
under section 584, or trusts or estates that are clients of a trust
department of a bank under section 581, make a coordinated acquisition
of stock before November 20, 1990, the second, third and fourth
sentences of paragraph (a)(1)(i) of this section and Examples 1, 2, and
3 of paragraph (a)(1)(ii) of this section apply for testing dates
(determined by applying such sentences and examples) on or after
November 20, 1990, only if the group increases its ownership of stock of
the loss corporation relative to its percentage ownership interest at
the close of November 19, 1990, by five percentage points or more on or
after November 20, 1990.
(C) Example. The following example illustrates the provisions of
paragraph (a)(1)(iii) of this section.
Example. Prior to November 1, 1990, L, a loss, corporation, is owned
entirely by 1,000 unrelated individuals, none of whom owns as much as 5
percent of the stock of L (``Public L''). On November 1, 1990, 15
individuals (the ``Group'') each acquired 3 percent, or 45 percent, in
total, of L stock pursuant to an understanding among themselves to make
a coordinated acquisition of stock. The Group is not a corporation,
trust, association, partnership or company. On March 1, 1992, six
members of the Group each purchased an additional one percent of L
stock, or 6 percent, in total, pursuant to the understanding.
Accordingly, the Group increased its ownership in L stock by 51
percentage points during the three-year testing period ending on March
1, 1992. As a result, an ownership change of L occurs on March 1, 1992.
(2) [Reserved]
(b)-(i) [Reserved]
(j) Modification of the segregation rules of Sec. 1.382-
2T(j)(2)(iii) and (3)--(1) Introduction. This paragraph (j) exempts, in
whole or in part, certain transfers of stock from the segregation rules
of Sec. 1.382-2T(j)(2)(iii) and (3). Terms and nomenclature used in
this paragraph (j), and not otherwise defined herein, have the same
meanings as in section 382 and the regulations issued under section 382.
(2) Small issuance exception--(i) In general. Section 1.382-
2T(j)(2)(iii)(B) does not apply to a small issuance (as defined in
paragraph (j)(2)(ii) of this section), except to the extent that the
total amount of stock issued in that issuance and all other small
issuances previously made in the same taxable year (determined in each
case on issuance) exceeds the small issuance limitation. This paragraph
(j)(2) does not apply to an issuance of stock that, by itself, exceeds
the small issuance limitation.
(ii) Small issuance defined. ``Small issuance'' means an issuance
(other than an issuance described in paragraph (j)(6) of this section)
by the loss corporation of an amount of stock not exceeding the small
issuance limitation. For purposes of this paragraph (j)(2)(ii), all
stock issued in the issuance is taken into account, including stock
owned immediately after the issuance by a 5-percent shareholder that is
not a direct public group.
(iii) Small issuance limitation--(A) In general. For each taxable
year, the loss corporation may, at its option, apply this paragraph
(j)(2)--
(1) On a corporation-wide basis, in which case the small issuance
limitation is 10 percent of the total value of the loss corporation's
stock outstanding at the beginning of the taxable year (excluding the
value of stock described in section 1504(a)(4)); or
(2) On a class-by-class basis, in which case the small issuance
limitation is 10 percent of the number of shares of the class
outstanding at the beginning of the taxable year.
(B) Class of stock defined. For purposes of this paragraph
(j)(2)(iii), a class of stock includes all stock with the same material
terms.
(C) Adjustments for stock splits and similar transactions.
Appropriate adjustments to the number of shares of a class outstanding
at the beginning of a taxable year must be made to take into account any
stock split, reverse stock split, stock dividend to which section 305(a)
applies, recapitalization, or similar transaction occurring during the
taxable year.
(D) Exception. The loss corporation may not apply this paragraph
(j)(2)(iii) on a class-by-class basis if, during the taxable year, more
than one class of stock is issued in a single issuance (or in two or
more issuances that are treated as a single issuance under paragraph
(j)(8)(ii) of this section).
(iv) Short taxable years. In the case of a taxable year that is less
than 365
[[Page 716]]
days, the small issuance limitation is reduced by multiplying it by a
fraction, the numerator of which is the number of days in the taxable
year, and the denominator of which is 365.
(3) Other issuances of stock for cash--(i) In general. If the loss
corporation issues stock solely for cash, Sec. 1.382-2T(j)(2)(iii)(B)
does not apply to such stock in an amount equal (as a percentage of the
total stock issued) to one-half of the aggregate percentage ownership
interest of direct public groups immediately before the issuance.
(ii) Solely for cash--(A) In general. A share of stock is not issued
solely for cash if--
(1) The acquiror, as a condition of acquiring that share for cash,
is required to purchase other stock for consideration other than cash;
or
(2) The share is acquired upon the exercise of an option that was
not issued solely for cash or was not distributed with respect to stock.
(B) Related issuances. Paragraph (j)(8)(i) of this section (relating
to the treatment of one or more issuances as a single issuance) does not
apply in determining whether stock is issued solely for cash.
(iii) Coordination with paragraph (j)(2) of this section. This
paragraph (j)(3) does not apply to a small issuance exempted in whole
from Sec. 1.382-2T(j)(2)(iii)(B) under paragraph (j)(2) of this
section. In the case of a small issuance exempted in part from Sec.
1.382-2T(j)(2)(iii)(B) under paragraph (j)(2) of this section, this
paragraph (j)(3) applies only to the portion of the issuance not so
exempted, and that portion is treated as a separate issuance for
purposes of this paragraph (j)(3).
(4) Limitation on exempted stock. The total amount of stock that is
exempted from the application of Sec. 1.382-2T(j)(2)(iii)(B) under
paragraphs (j)(2) and (j)(3) of this section cannot exceed the total
amount of stock issued in the issuance less the amount of that stock
owned by a 5-percent shareholder (other than a direct public group)
immediately after the issuance. Except to the extent that the loss
corporation has actual knowledge to the contrary, any increase in the
amount of the loss corporation's stock owned by a 5-percent shareholder
on the day of the issuance is considered to be attributable to an
acquisition of stock in the issuance.
(5) Proportionate acquisition of exempted stock--(i) In general.
Each direct public group that exists immediately before an issuance to
which paragraph (j)(2) or (j)(3) of this section applies is treated as
acquiring its proportionate share of the amount of stock exempted from
the application of Sec. 1.382-2T(j)(2)(iii)(B) under paragraph (j)(2)
or (j)(3) of this section.
(ii) Actual knowledge of greater overlapping ownership. Under the
last sentence of Sec. 1.382-2T(k)(2), the loss corporation may treat
direct public groups existing immediately before an issuance to which
paragraph (j)(2) or (j)(3) of this section applies as acquiring in the
aggregate more stock than the amount determined under paragraph
(j)(5)(i) of this section, but only if the loss corporation actually
knows that the aggregate amount acquired by those groups in the issuance
exceeds the amount so determined.
(6) Exception for equity structure shifts. This paragraph (j) does
not apply to any issuance of stock in an equity structure shift, except
that paragraph (j)(2) of this section applies (if its requirements are
met) to the issuance of stock in a recapitalization under section
368(a)(1)(E).
(7) Transitory ownership by underwriter disregarded. For purposes of
Sec. 1.382-2T(g)(1) and (j), and this paragraph (j), the transitory
ownership of stock by an underwriter of the issuance is disregarded.
(8) Certain related issuances. For purposes of this paragraph (j),
two or more issuances (including issuances of stock by first tier or
higher tier entities) are treated as a single issuance if--
(i) The issuances occur at approximately the same time pursuant to
the same plan or arrangement; or
(ii) A principal purpose of issuing the stock in separate issuances
rather than in a single issuance is to minimize or avoid an owner shift
under the rules of this paragraph (j).
(9) Application to options. The principles of this paragraph (j)
apply for purposes of applying Sec. 1.382-2T(j)(2)(iii)(D) (relating to
the deemed
[[Page 717]]
acquisition of stock as a result of the ownership of an option).
(10) Issuance of stock pursuant to the exercise of certain options.
If stock is issued on the exercise of a transferable option issued by
the loss corporation, Sec. 1.382-2T(j)(2)(iii)(F) does not apply and,
in applying the last sentence of Sec. 1.382-2T(k)(2), the loss
corporation must take into account any transfers of the option
(including transfers described in Sec. 1.382-2T(h)(4)(xi)). Therefore,
even if transferable options are distributed pro rata to members of
existing public groups, the actual knowledge exception of Sec. 1.382-
2T(k)(2) applies only to the extent that the loss corporation actually
knows that the persons acquiring stock on exercise of the options are
members of a pre-existing public group. Moreover, if transferable
options are issued to more than one public group, Sec. 1.382-
2T(j)(2)(iii)(F) does not apply to treat the options as exercised pro
rata by each such public group as the options are actually exercised.
(11) Application to first tier and higher tier entities--(i) In
general. The principles of paragraphs (j)(1) through (10) and paragraph
(j)(12) apply to issuances of stock by a first tier entity or a higher
tier entity that owns 5 percent or more of the loss corporation's stock
(determined without regard to Sec. 1.382-2T(h)(2)(1)(A)).
(ii) Small issuance limitation. In applying paragraph (j)(2) of this
section to any issuance of stock by a first tier or higher tier entity,
the small issuance limitations of paragraph (j)(2)(iii)(A) and (B) of
this section are computed by reference to the stock value and the stock
classes of the issuing corporation.
(12) Certain non-stock ownership interests. As the context may
require, a non-stock ownership interest in an entity other than a
corporation is treated as stock for purposes of this paragraph (j).
(13) Secondary transfer exception. The segregation rules of Sec.
1.382-2T(j)(3)(i) will not apply to the transfer of a direct ownership
interest in the loss corporation by a first tier entity or an individual
that owns five percent or more of the loss corporation to public
shareholders. Instead, each public group existing at the time of the
transfer will be treated under Sec. 1.382-2T(j)(3)(i) as acquiring its
proportionate share of the stock exempted from the application of Sec.
1.382-2T(j)(3)(i). The segregation rules also will not apply if an
ownership interest in an entity that owns five percent or more of the
loss corporation (determined without regard to the application of Sec.
1.382-2T(h)(2)(i)(A)) is transferred to a public owner or a 5-percent
owner who is not a 5-percent shareholder of the loss corporation.
Instead, provided that the transferor is either a 5-percent owner that
is a 5-percent shareholder of the loss corporation or a higher tier
entity owning five percent or more of the loss corporation (determined
without regard to the application of section 1.382-2T(h)(2)(i)(A)), each
public group of the entity existing at the time of the transfer is
treated under Sec. 1.382-2T(j)(3)(i) as acquiring its proportionate
share of the transferred ownership interest. With regard to a transferor
that is neither a 5-percent shareholder of the loss corporation nor a
higher tier entity owning five percent or more of the loss corporation
(determined without regard to the application of Sec. 1.382-
2T(h)(2)(i)(A)), see generally Sec. 1.382-2T(e)(1)(ii) (disregarding
these transactions if the transferee is not a 5-percent shareholder).
(14) Small redemption exception--(i) In general. Section 1.382-
2T(j)(2)(iii)(C) does not apply to a small redemption (as defined in
paragraph (j)(14)(ii) of this section), except to the extent that the
total amount of stock redeemed in that redemption and all other small
redemptions previously made in the same taxable year (determined in each
case on redemption) exceeds the small redemption limitation. This
paragraph (j)(14) does not apply to a redemption of stock that, by
itself, exceeds the small redemption limitation.
(ii) Small redemption defined. Small redemption means a redemption
of public shareholders by the loss corporation of an amount of stock not
exceeding the small redemption limitation.
(iii) Small redemption limitation--(A) In general. For each taxable
year, the loss corporation may, at its option, apply this paragraph
(j)(14)--
(1) On a corporation-wide basis, in which case the small redemption
limitation is 10 percent of the total value
[[Page 718]]
of the loss corporation's stock outstanding at the beginning of the
taxable year (excluding the value of stock described in section
1504(a)(4)); or
(2) On a class-by-class basis, in which case the small redemption
limitation is 10 percent of the number of shares of the class redeemed
that are outstanding at the beginning of the taxable year.
(B) Class of stock defined. For purposes of this paragraph
(j)(14)(iii), a class of stock includes all stock with the same material
terms.
(C) Adjustments for stock splits and similar transactions.
Appropriate adjustments to the number of shares of a class outstanding
at the beginning of a taxable year must be made to take into account any
stock split, reverse stock split, stock dividend to which section 305(a)
applies, recapitalization, or similar transaction occurring during the
taxable year.
(D) Exception. The loss corporation may not apply this paragraph
(j)(14)(iii) on a class-by-class basis if, during the taxable year, more
than one class of stock is redeemed in a single redemption (or in two or
more redemptions that are treated as a single redemption under paragraph
(j)(14)(v) of this section).
(E) Short taxable years. In the case of a taxable year that is less
than 365 days, the small redemption limitation is reduced by multiplying
it by a fraction, the numerator of which is the number of days in the
taxable year, and the denominator of which is 365.
(iv) Proportionate redemption of exempted stock--(A) In general.
Each direct public group that exists immediately before a redemption to
which this paragraph (j)(14) applies is treated as having been redeemed
of its proportionate share of the amount of stock exempted from the
application of Sec. 1.382-2T(j)(2)(iii)(C) under this paragraph
(j)(14).
(B) Actual knowledge of greater redemption. Under the last sentence
of Sec. 1.382-2T(k)(2), the loss corporation may treat direct public
groups existing immediately before a redemption to which this paragraph
(j)(14) applies as having been redeemed of more stock than the amount
determined under paragraph (j)(14)(iv)(A) of this section, but only if
the loss corporation actually knows that the amount redeemed from those
groups in the redemption exceeds the amount so determined.
(v) Certain related redemptions. For purposes of this paragraph
(j)(14), two or more redemptions (including redemptions of stock by
first tier or higher tier entities) are treated as a single redemption
if--
(A) The redemptions occur at approximately the same time pursuant to
the same plan or arrangement; or
(B) A principal purpose of redeeming the stock in separate
redemptions rather than in a single redemption is to minimize or avoid
an owner shift under the rules of this paragraph (j)(14).
(vi) Certain non-stock ownership interests. As the context may
require, a non-stock ownership interest in an entity other than a
corporation is treated as stock for purposes of this paragraph (j)(14).
(vii) Application to first tier and higher tier entities--(A) In
general. The principles of this paragraph (j)(14) apply to redemptions
of stock by a first tier entity or a higher tier entity that owns 5
percent of the loss corporation stock (determined without regard to
Sec. 1.382-2T(h)(2)(i)(A)).
(B) Small redemption limitation. In applying this paragraph (j)(14)
to any redemption of stock by a first tier or a higher tier entity, the
small redemption limitations of paragraph (j)(14)(iii)(A) of this
section are computed by reference to the stock value and the stock
classes of the redeeming corporation.
(15) Exception for first tier and higher tier entities--(i) In
general. The segregation rules of Sec. 1.382-2T(j)(3)(iii) will not
apply to a transaction involving stock in a first tier or a higher tier
entity if, after taking into account the results of such transaction and
all other transactions occurring on that date, the first tier or higher
tier entity owns 10 percent or less (by value) of all the outstanding
stock (without regard to Sec. 1.382-2(a)(3)) of the loss corporation.
(ii) Anti-avoidance rule. The rules of paragraph (j)(15)(i) of this
section do not apply to a transaction involving an ownership interest in
a first tier or higher tier entity if the loss corporation, directly or
through one or more
[[Page 719]]
persons, has participated in planning or structuring the transaction
with a view to avoiding the application of the segregation rules. For
this purpose, a transaction includes any event that would result in
segregation under Sec. 1.382-2T(j)(3)(iii), absent the application of
this paragraph (j)(15), and any event (for example, the formation of a
holding company) occurring as part of the same plan that includes the
event that would result in segregation (without the application of this
paragraph (j)(15)). Other anti-avoidance rules continue to be
applicable. See, for example, Sec. Sec. 1.382-2T(k)(4) and 1.382-
3(a)(1).
(iii) Special rules. If application of paragraph (j)(15)(i) of this
section results in the combination of public groups, then--
(A) The amount of increase in the percentage of stock ownership of
the continuing public group will be the sum of its increase and a
proportionate amount of any increase by any public group that is
combined with the continuing public group (the former public group); and
(B) The continuing public group's lowest percentage ownership will
be the sum of its lowest percentage ownership and a proportionate amount
of the former public group's lowest percentage ownership.
(iv) Ownership of the loss corporation. In making the determination
under paragraph (j)(15)(i) of this section--
(A) The rules of Sec. 1.382-2T(h)(2) will not apply;
(B) The entity will be treated as owning the loss corporation stock
that it actually owns, and any other loss corporation stock if that
other stock would be attributed to the entity under section 318(a)
(without regard to paragraph (4) thereof) unless an option is treated as
exercised under Sec. 1.382-4(d)); and
(C) The operating rules of paragraph (j)(15)(v) of this section will
apply.
(v) Operating rules. Subject to the principles of Sec. 1.382-
2T(k)(4), a loss corporation may establish the ownership limitation of
paragraph (j)(15)(i) of this section through either--
(A) Actual knowledge; or
(B) Absent actual knowledge to the contrary, the presumptions
regarding stock ownership in Sec. 1.382-2T(k)(1).
(16) Examples. The provisions of this paragraph (j) are illustrated
by the following examples:
Example 1. (i) L corporation is a calendar year taxpayer. On January
1, 1994, L has 1,000 shares of a single class of common stock
outstanding, all of which are owned by a single direct public group
(Public L). On February 1, 1994, L issues to employees as compensation
60 new common shares of the same class. On May 1, 1994, L issues 50 new
common shares of the same class solely for cash. Following each
issuance, L's stock is owned entirely by public shareholders. No other
changes in the ownership of L's stock occur prior to May 1, 1994. L
chooses to determine its small issuance limitation for 1994 on a class-
by-class basis under paragraph (j)(2)(iii)(A)(2) of this section.
(ii) The February issuance is a small issuance because the number of
shares issued (60) does not exceed 100, the small issuance limitation
(10 percent of the number of common shares outstanding on January 1,
1994). Under paragraph (j)(2) of this section, the segregation rules of
Sec. 1.382-2T(j)(2)(iii)(B) do not apply to the February issuance.
Under paragraph (j)(5) of this section, Public L is treated as acquiring
all 60 shares issued.
(iii) The May issuance is a small issuance because the number of
shares issued (50) does not exceed 100, the small issuance limitation
(10 percent of the number of common shares outstanding on January 1,
1994). However, under paragraph (j)(2) of this section, only 40 of the
50 shares issued are exempted from the segregation rules of Sec. 1.382-
2T(j)(2)(iii)(B) because the total number of shares of common stock
issued in the February and May issuances exceeds 100, the small issuance
limitation, by 10. Because the May issuance is solely for cash,
paragraph (j)(3) of this section exempts 5 of the 10 remaining shares
from the segregation rules of Sec. 1.382-2T(j)(2)(iii)(B) (10 shares
multiplied by 50 percent, one-half of Public L's 100 percent ownership
interest immediately before the May issuance--1,060 shares/1,060
shares). Accordingly, under paragraph (j)(5) of this section, Public L
is treated as acquiring 45 shares in the May issuance. Section 1.382-
2T(j)(2)(iii)(B) applies to the remaining 5 shares issued, which are
treated as acquired by a direct public group separate from Public L.
Each such public group is treated as an individual who is a separate 5-
percent shareholder. See Sec. 1.382-2T (g)(1)(iv) and (j)(1)(ii).
(iv) Assume that L actually knows that at least 10 shares of the May
issuance are acquired by members of Public L. The result is the same.
See paragraph (j)(5)(ii) of this section.
(v) Assume instead that L actually knows that all 50 shares of the
May issuance are acquired by members of Public L. Under paragraph
(j)(5)(ii) of this section, L may treat
[[Page 720]]
Public L as acquiring 50 shares in the May issuance.
Example 2. (i) L corporation is a calendar year taxpayer. On January
1, 1995, L has 1,000 shares of Class A common stock outstanding, the
aggregate value of which is $1,000. Five hundred shares are owned by one
direct public group (Public 1), and 500 shares are owned by another
direct public group (Public 2). On August 1, 1995, L issues 200 shares
of Class B common stock for $200 cash. A, an individual, acquires 120
Class B shares in the transaction. The remaining 80 Class B shares are
acquired by public shareholders. No other changes in ownership of L's
stock occur prior to August 1, 1995.
(ii) The August issuance is not a small issuance. The total value of
the Class B stock issued ($200) exceeds $100, the small issuance
limitation as calculated under paragraph (j)(2)(iii)(A)(1) of this
section (10 percent of the value of L's stock on January 1, 1995). The
total number of Class B shares issued (200) exceeds 0, the small
issuance limitation as calculated under paragraph (j)(2)(iii)(A)(2) of
this section (10 percent of the number of Class B shares outstanding on
January 1, 1995). Accordingly, paragraph (j)(2) of this section does not
apply to the August issuance.
(iii) Paragraph (j)(3) of this section, as limited by paragraph
(j)(4) of this section, exempts 80 Class B shares from the segregation
rule of Sec. 1.382-2T(j)(2)(iii)(B). Paragraph (j)(3) of this section,
without regard to paragraph (j)(4) of this section, would exempt 100
Class B shares: the product of the 200 Class B shares issued and 50
percent (one-half of the combined 100 percent pre-issuance ownership
interest of Public 1 and Public 2). Paragraph (j)(4), however, limits
the total number of Class B shares that may be excluded to 80 Class B
shares: the difference between the 200 shares issued and the 120 shares
acquired by A. Under paragraph (j)(5) of this section, Public 1 and
Public 2 are treated as acquiring the 80 exempted Class B shares.
Because Public 1 and Public 2 each owned 500 Class A shares prior to the
issuance, Public 1 and Public 2 are considered to acquire 40 Class B
shares each.
Example 3. (i) L has 1,000 shares of a single class of common stock
outstanding, all of which are owned by a direct public group (Public L).
At the same time pursuant to the same plan, L issues 500 shares of its
stock to its creditors in exchange for its outstanding debt and 500
shares of its stock to the public for cash. Assume that the separate
issuances of stock for debt and stock for cash do not have a principal
purpose of minimizing or avoiding an owner shift. L has no individual 5-
percent shareholders immediately after the issuances.
(ii) The 500 shares of stock issued by L to its former creditors
were not issued solely for cash. Therefore, paragraph (j)(3) of this
section does not apply to those 500 shares, which are treated as owned
by a public group separate from Public L. See Sec. 1.382-
2T(j)(2)(iii)(B)(1)(ii).
(iii) Paragraph (j)(3) of this section applies to the 500 shares of
stock issued by L to the public because that stock was issued solely for
cash. Because the two issuances occur at the same time pursuant to the
same plan, they are generally treated as a single issuance for purposes
of this paragraph (j). See paragraph (j)(8)(i) of this section. The
treatment of the two issuances as a single issuance does not apply,
however, for the purpose of determining whether the stock issued to the
public was issued solely for cash. See paragraph (j)(3)(ii)(B) of this
section.
(iv) Paragraph (j)(3) of this section applies to exempt 250 of the
500 shares issued solely for cash from the segregation rules of Sec.
1.382-2T(j)(2)(iii)(B) (the product of the 500 shares issued for cash
and 50 percent (one-half of the 100 percent pre-issuance ownership
interest of Public L)). The creditors that receive stock in exchange for
their debt would not be treated as acquiring any of the 250 exempted
shares even if their exchange of debt for stock occurs prior to the cash
issuance. Paragraph (j)(5)(i) of this section allocates exempted shares
among the direct public groups that exist immediately before an
issuance. Because the issuance for cash and the issuance for debt are
generally treated as a single issuance, the public group comprised of
the former creditors of L was not a public group that existed
immediately before the issuance.
(v) Three public groups owning L stock exist immediately after the
two issuances. Public L owns 1,250 shares--the 1,000 shares it owned
prior to the issuances plus the 250 shares it is treated as acquiring in
the cash issuance. A separate group comprised of the former creditors of
L owns the 500 shares issued for debt. A third public group owns the 250
shares that are not treated as acquired by Public L in the cash
issuance.
Example 4. (i) L has 1,000 shares of a single class of common stock
outstanding, all of which are owned by a direct public group (Public L).
L issues 1,000 shares pursuant to an offer under which 500 shares must
be acquired in exchange for debt and the remainder may be acquired for
cash. Under the terms of the offer, only persons that acquire stock for
debt are eligible to acquire stock for cash. L has no 5-percent
shareholders other than direct public groups immediately after the
issuance.
(ii) As a condition of acquiring shares for cash, the creditors are
required to purchase stock for debt. Therefore, paragraph (j)(3) of this
section does not apply to any part of the issuance because it is not an
issuance of stock solely for cash. The segregation rules of Sec. 1.382-
2T(j)(2)(iii)(B) apply to treat all
[[Page 721]]
1,000 shares as acquired by a new public group separate from Public L.
Example 5. Secondary transfer exception to segregation rules--no new
public group. (i) Facts. L is owned 60 percent by one public group
(Public L1) and 40 percent by another public group (Public
L2). On July 1, 2014, individual A acquires 10 percent of L's
stock over a public stock exchange. On December 31, 2014, A sells all of
his L stock over a public stock exchange. No individual or entity
acquires as much as five percent of L's stock as a result of A's
disposition of his L stock. On January 3, 2015, individual B acquires 10
percent of L's stock over a public stock exchange. On June 30, 2015, B
sells all of her L stock over a public stock exchange. No individual or
entity acquires as much as five percent of L's stock as a result of B's
disposition of her L stock.
(ii) Analysis. The dispositions of the L stock by A and B are not
transactions that cause the segregation of L's direct public groups that
exist immediately before the transaction (Public L1 and
Public L2). When A and B sell their shares to public
shareholders over the public stock exchange, the shares are treated as
being reacquired by Public L1 and Public L2. As a
result, Public L1's ownership interest is treated as
increasing from 54 percent to 60 percent during the testing period, and
Public L2's ownership interest is treated as increasing from
36 percent to 40 percent during the testing period.
Example 6. Secondary transfer exception--first tier entity. (i)
Facts. L has a single class of common stock outstanding that is owned 60
percent by a direct public group (Public L) and 40 percent by P. P is
owned 20 percent by individual A and 80 percent by a direct public group
(Public P). On October 6, 2014, A sells 50 percent of his interest in P
to B, an individual who is, and remains, a member of Public P.
(ii) Analysis. P is an entity that owns five percent or more of L. A
is a 5-percent owner of P that is a 5-percent shareholder of L. Because
A's sale of the P stock is to a member of Public P, the disposition of
the P stock by A is not a transaction that causes the segregation of P's
direct public group that exists immediately before the transaction
(Public P). See paragraph (j)(13) of this section. When A sells his
shares to B, the shares are treated as being acquired by Public P. As a
result, Public P's ownership interest in L is treated as increasing from
32 percent to 36 percent during the testing period.
Example 7. Small redemption exception. (i) Facts. L is a calendar
year taxpayer. On January 1, 2014, L has 1,060 shares of a single class
of common stock outstanding, all of which are owned by a single direct
public group (Public L). On July 1, 2014, L acquires 60 shares of its
stock for cash. On December 31, 2014, in an unrelated redemption, L
acquires 90 more shares of its stock for cash. Following each
redemption, L's stock is owned entirely by public shareholders. No other
changes in the ownership of L's stock occur prior to December 31, 2014.
(ii) Analysis--(A) July redemption. The July redemption is a small
redemption because the number of shares redeemed (60) does not exceed
106, the small redemption limitation (10 percent of the number of common
shares outstanding on January 1, 2014). Under paragraph (j)(14) of this
section, the segregation rules of Sec. 1.382-2T(j)(2)(iii)(C) do not
apply to the July redemption. Under paragraph (j)(14)(iv) of this
section, Public L is treated as having all 60 shares redeemed.
(B) December redemption. The December redemption is a small
redemption because the number of shares redeemed (90) does not exceed
106, the small redemption limitation (10 percent of the number of common
shares outstanding on January 1, 2014). However, under paragraph
(j)(14)(i) of this section, only 46 of the 90 shares redeemed are
exempted from the segregation rules of Sec. 1.382-2T(j)(2)(iii)(C)
because the total number of shares of common stock redeemed in the July
and December redemptions exceeds 106, the small redemption limitation,
by 44. Accordingly, under paragraph (j)(14)(iv) of this section, Public
L is treated as having 46 shares redeemed in the December redemption.
Section 1.382-2T(j)(2)(iii)(C) applies to the remaining 44 shares
redeemed. Accordingly, Public L is segregated into two different public
groups immediately before the transaction (and thereafter) so that the
redeemed interests (Public RL) are treated as part of a public group
that is separate from the ownership interests that are not redeemed
(Public CL). Therefore, as a result of the December redemption, Public
CL's interest in L increases by 4.4 percentage points (from 95.6 percent
(956/1,000) to 100 percent (910/910)) on the December 31, 2014 testing
date. For purposes of determining whether an ownership change occurs on
any subsequent testing date having a testing period that includes the
December redemption, Public CL is treated as a 5-percent shareholder
whose percentage ownership interests in L increased by 4.4 percentage
points as a result of such redemption.
Example 8. Segregation rules inapplicable--proportionate amount. (i)
Facts. P1 is a corporation that owns 8 percent of the stock
of
[[Page 722]]
L. The remaining L stock (92 percent) is owned by Public L.
P1 is entirely owned by Public P1. P2
is a corporation owned 90 percent by individual A and 10 percent by a
public group (Public P2). On May 22, 2014, P1
merges into P2 with the shareholders of P1
receiving an amount of P2 stock equal to 25 percent of the
value of P2 immediately after the reorganization. L was owned
92 percent by Public L and 8 percent by P1 throughout the
testing period ending on the date of the merger.
(ii) Analysis. Assuming L can establish that P2 owns 10
percent or less (by value) of L on May 22, 2014 pursuant to the
operating rules of paragraph (j)(15)(v) of this section, the segregation
rules of Sec. 1.382-2T(j)(3)(iii) will not apply to segregate
P1's direct public group (Public P1) immediately
before the merger from P2's direct public group (Public
P2). Thus, following the merger, P2 is owned 67.5
percent (90 percent x 75 percent) by A and 32.5 percent (25 percent +
(10 percent x 75 percent)) by Public P2. Pursuant to
paragraph (j)(15)(iii)(B) of this section, Public P2's lowest
percentage of ownership is the sum of its lowest percentage of ownership
(zero) and a proportionate amount of former Public P1's
lowest ownership percentage of L of 2.6 percent (32.5 percent x 8
percent). P2 will be treated as having one public group whose
ownership interest in L was 2.6 percent before the merger and remains
2.6 percent after the merger. Because Public P2 owns less
than 5 percent of L, Public P2 is treated as part of Public
L. See Sec. 1.382-2T(j)(1)(iv). Thus, pursuant to paragraph
(j)(15)(iii)(B) of this section, Public L's lowest ownership percentage
of L during the testing period is 94.6 percent.
Example 9. Segregation rules inapplicable--prior increase in
ownership by former public group during testing period. (i) Facts. The
facts are the same as Example 8, except that P1 acquired its
8 percent interest in L during the testing period that includes the
merger.
(ii) Analysis. Pursuant to the rules of paragraph (j)(15)(iii)(A)
of this section, the amount of increase in the percentage of stock
ownership by Public P2 is the sum of its increase (zero) and
a proportionate amount of the increase by former Public P1 of
2.6 percent (32.5 percent x 8 percent). Pursuant to paragraph
(j)(15)(iii)(B) of this section, Public P2's lowest
percentage of ownership is zero, because both former Public
P1 and Public P2 owned no L stock at the beginning
of the testing period. Accordingly, Public P2, the continuing
public group, is treated as having increased its ownership interest by
2.6 percent. Because Public P2 is treated as part of Public
L, Public L is treated as increasing its ownership interest by 2.6
percent.
Example 10. Ownership limitation based upon fair market value. (i)
Facts. L has one class of common stock and one class of preferred stock
outstanding. The preferred stock is stock within the meaning of Sec.
1.382-2(a)(3). Before December 23, 2014, a direct public group (Public
L) owns all of the common stock of L. On December 23, 2014, P purchases
all of the preferred stock of L and a portion of the common stock of L.
On the date of purchase, the value of the L common stock held by P was
greater than 5 percent of the value of L, and the total value of L
common and L preferred stock held by P was less than 10 percent of the
value of all stock of L. P has one class of common stock outstanding,
all of which is owned by a direct public group (Public P). On October 7,
2015, P redeems 30 percent of its single outstanding class of common
stock. On the redemption date of the P stock, due to a decline in the
relative value of the common stock of L, the preferred stock of L owned
by P represents 40 percent of the value of all the outstanding stock of
L. No ownership change of L occurs between December 23, 2014, and
October 7, 2015.
(ii) Analysis. The rules of paragraph (j)(15) of this section do not
apply to the redemption because P owns more than 10 percent of L (by
value) on that date.
Example 11. Ownership limitation--fair market value includes
preferred stock. The facts are the same as in Example 10, except that
the preferred stock is not stock within the meaning of Sec. 1.382-
2(a)(3). Although the preferred stock is not stock for the purpose of
determining owner shifts, the value of that stock is taken into account
in computing the 10-percent limitation of paragraph (j)(15)(i) of this
section. Therefore, the results are the same as in Example 10.
Example 12. Ownership limitation--application of attribution rules.
(i) Facts. Individual A owns all the outstanding stock of X. A also owns
preferred stock in Y that is not stock within the meaning Sec. 1.382-
2(a)(3), which represents 50 percent of the value of Y. All the Y common
stock is owned by public owners. Each of X and Y own 6 percent of the
single class of L stock outstanding. On October 6, 2014, Y redeems 15
percent of its common stock.
(ii) Analysis. In determining satisfaction of the ownership
limitation of paragraph (j)(15)(i) of this section, the attribution
rules of section 318(a) apply. Pursuant to section 318(a)(2), A is
treated as owning the L stock owned by X. Pursuant to section 318(a)(3),
Y is treated as owning the L stock that A indirectly owns. Because Y's
ownership of L exceeds the 10 percent ownership limitation of paragraph
(j)(15)(i) of this section, the rules of paragraph (j)(15) of this
section do not apply.
Example 13. Anti-avoidance rule. (i) Facts. P1 is a
corporation that owns 10 percent of the stock of L. P1 is
owned entirely by a direct public group (Public P). L has had owner
shifts of 45 percentage points in its current
[[Page 723]]
testing period. P1 is planning to merge into P2, a
corporation which has a public group. Advisers to L, upon learning of
the proposed merger, asked the management of P1 for details
of the proposed merger, including the stock ownership of P2
after P1 merges into P2. After finding out that
information, L or L's advisers did not request any changes in the
planned transaction.
(ii) Analysis. The anti-avoidance rule of paragraph (j)(15)(ii) of
this section does not apply because L did not participate in planning or
structuring the transaction. Pursuant to paragraph (j)(15)(i) of this
section, Sec. 1.382-2T(j)(3)(iii) does not apply to cause the
segregation of P1's public group from P2's public
group.
(17) Effective/applicability date. This paragraph (j) generally
applies to issuances or deemed issuances of stock in taxable years
beginning on or after November 4, 1992. However, paragraphs (j)(11)(ii)
and (j)(13) through (15) of this section and Examples 5 through 13 of
paragraph (j)(16) of this section apply to testing dates occurring on or
after October 22, 2013, other than with respect to the sale of a Program
Instrument by the Treasury Department. For purposes of this paragraph
(j)(17), a Program Instrument is an instrument issued pursuant to a
Program, as defined in Internal Revenue Service Notice 2010-2 (2010-2
IRB 251 (December 16, 2009)) (see Sec. 601.601(a)(2)(ii)(b) of this
chapter), or a Covered Instrument, as defined in that Notice. Taxpayers
may apply paragraphs (j)(11)(ii) and (j)(13) through (15) of this
section and Examples 5 through 13 of paragraph (j)(16) of this section
in their entirety (other than with respect to a sale of a Program
Instrument by the Treasury Department) to all testing dates that are
included in a testing period beginning before and ending on or after
October 22, 2013. However, the provisions described in the preceding
sentence may not be applied to any date on or before the date of any
ownership change that occurred before October 22, 2013, under the
regulations in effect before October 22, 2013, and they may not be
applied as described in the preceding sentence if such application would
result in an ownership change occurring on a date before October 22,
2013, that did not occur under the regulations in effect before October
22, 2013. See Sec. 1.382-3(j)(14)(ii) and (iii), as contained in 26 CFR
part 1 revised as of April 1, 1994 for the application of paragraph
(j)(10) of this section to stock issued on the exercise of certain
options exercised on or after November 4, 1992, and for an election to
apply paragraphs (j)(1) through (12) of this section retroactively to
certain issuances and deemed issuances of stock occurring in taxable
years prior to November 4, 1992.
(k) Special rules for certain regulated investment companies--(1) In
general. The segregation rules of Sec. 1.382-2T(j)(2) do not apply to
the issuance (as described in Sec. 1.382-2T(j)(2)(iii)(B)(1)(ii)) or
the redemption (as described in Sec. 1.382-2T(j)(2)(iii)(C)) of any
redeemable security, as defined in 15 U.S.C. 80a-2(a)(32), by a
regulated investment company in the ordinary course of business.
(2) Effective date--(i) General rule. Paragraph (k)(1) of this
section applies to testing dates after December 31, 1986. A corporation
may file an amended return for taxable years ending before August 21,
1992 (subject to any applicable statute of limitations) to take into
account paragraph (k)(1) of this section only if corresponding
adjustments are made in amended returns for all affected taxable years
ending after December 31, 1986 (subject to any applicable statute of
limitations).
(ii) Election to apply prospectively. A corporation may elect to
apply paragraph (k)(1) of this section only to testing dates on or after
October 29, 1991. The election must be made on the first return which is
filed after October 20, 1992 by stating on such return, ``This is an
Election To Apply Sec. 1.382-3(k)(1) Only to Testing Dates on or After
October 29, 1991.''
[T.D. 8428, 57 FR 38282, Aug. 24, 1992. Redesignated by T.D. 8440, 57 FR
45712, Oct. 5, 1992; 57 FR 52827, Nov. 5, 1992; T.D. 8490, 59 FR 51573,
Oct. 4, 1993; T.D. 9638, 78 FR 62423, Oct. 22, 2013; T.D. 9685, 79 FR
44282, July 31, 2014; T.D. 9721, 80 FR 31997, June 5, 2015]
Sec. 1.382-4 Constructive ownership of stock.
(a) In general. [Reserved]
(b) Attribution from corporations, partnerships, estates and trusts.
(1) [Reserved].
(2) Limitation. Section 1.382-2T(h)(2)(i)(A) applies solely for
purposes of determining whether a loss corporation has an ownership
change.
[[Page 724]]
(c) Attribution to corporations, partnerships, estates and trusts.
[Reserved]
(d) Treatment of options as exercised--(1) General rule. Except as
provided in paragraph (d)(2) of this section, an option is not treated
as exercised under section 382(l)(3)(A).
(2) Options treated as exercised--(i) Issuance or transfer. For
purposes of determining whether an ownership change occurs, an option is
treated as exercised on the date of its issuance or transfer if, on that
date, the option satisfies--
(A) The ownership test of paragraph (d)(3) of this section,
(B) The control test of paragraph (d)(4) of this section, or
(C) The income test of paragraph (d)(5) of this section.
(ii) Subsequent testing dates. Except as provided in paragraph
(d)(10) of this section, an option that is treated as exercised on the
date of its issuance or transfer is treated as exercised on any
subsequent testing date (as defined in Sec. 1.382-2(a)(4)) for purposes
of determining whether an ownership change occurs.
(3) The ownership test. An option satisfies the ownership test if a
principal purpose of the issuance, transfer, or structuring of the
option (alone or in combination with other arrangements) is to avoid or
ameliorate the impact of an ownership change of the loss corporation by
providing the holder of the option, prior to its exercise or transfer,
with a substantial portion of the attributes of ownership of the
underlying stock.
(4) The control test--(i) In general. An option satisfies the
control test if--
(A) A principal purpose of the issuance, transfer, or structuring of
the option (alone or in combination with other arrangements) is to avoid
or ameliorate the impact of an ownership change of the loss corporation,
and
(B) The holder of the option and any persons related to the option
holder have, in the aggregate, a direct and indirect ownership interest
in the loss corporation of more than 50 percent (determined as if the
increase in such persons' percentage ownership interest that would
result from the exercise of the option in question and any other options
to acquire stock held by such persons, and any other intended increases
in such persons' percentage ownership interest, actually occurred on the
date the option is issued or transferred).
(ii) Operating rules--(A) Person and related persons. For purposes
of this paragraph (d)(4)--
(1) The term person includes an individual or entity, but not a
public group, as defined in Sec. 1.382-2T(f)(13), and
(2) Persons are related if they bear a relationship specified in
section 267(b) or 707(b) or if they have a formal or informal
understanding among themselves to make a coordinated acquisition of
stock, within the meaning of Sec. 1.382-3(a)(1)(i).
(B) Indirect ownership interest. The indirect ownership interest
that the holder of the option and any persons related to the holder have
in the loss corporation is determined by applying the constructive
ownership rules of Sec. 1.382-2T(h), other than Sec. 1.382-
2T(h)(2)(i)(A) (which treats stock attributed pursuant to section
318(a)(2) as no longer being owned by the entity from which it is
attributed) and Sec. 1.382-2T(h)(4) (which treats options as exercised
in certain circumstances). If, however, the application of such
constructive ownership rules without regard to Sec. 1.382-
2T(h)(2)(i)(A) would result in the same stock of the loss corporation
being owned by two or more such persons, appropriate adjustments must be
made so that such stock is not counted more than once in computing the
aggregate ownership interests of such persons.
(5) The income test. An option satisfies the income test if a
principal purpose of the issuance, transfer, or structuring of the
option (alone or in combination with other arrangements) is to avoid or
ameliorate the impact of an ownership change of the loss corporation by
facilitating the creation of income (including accelerating income or
deferring deductions) or value (including unrealized built-in gains)
prior to the exercise or transfer of the option.
(6) Application of the ownership, control, and income tests--(i) In
general. Whether an option satisfies the ownership, control, or income
test depends on all the relevant facts and circumstances. Among the
factors that
[[Page 725]]
are relevant in applying all three tests are any business purposes for
the issuance, transfer, or structure of the option, the likelihood of
exercise of the option (taking into account, for example, any
contingencies to its exercise), transactions related to the issuance or
transfer of the option, and the consequences of treating the option as
exercised.
An option is not treated as exercised under any of the three tests,
however, if a principal purpose of its issuance, transfer, or
structuring is to avoid an ownership change by having it treated as
exercised. Paragraphs (d)(6)(ii), (iii) and (iv) of this section
describe additional examples of factors that are relevant in applying
each test. The weight given to any factor depends on all the facts and
circumstances. The presence or absence of any factor described in this
paragraph (d)(6) does not create a presumption.
(ii) Application of ownership test. Among the additional factors
that are taken into account in applying the ownership test are the
relationship, at the time of issuance or transfer of the option, between
the exercise price of the option and the value of the underlying stock,
whether the option provides its holder or a related person with the
right to participate in the management of the loss corporation or with
other rights that ordinarily would be afforded to owners of the
underlying stock, and the existence of reciprocal options (e.g., a call
option held by the prospective purchaser and a corresponding put option
held by the prospective seller). The ability of the holder of an option
with a fixed exercise price to share in future appreciation of the
underlying stock is also a relevant factor, but is not sufficient, by
itself, for the option to satisfy the ownership test. Conversely, the
fact that the holder of such an option does not bear the risk of loss
due to declines in value of the underlying stock does not preclude the
option from satisfying the ownership test.
(iii) Application of control test. Among the additional factors that
are taken into account in applying the control test are the economic
interests in the loss corporation of the option holder or related
persons and the influence of those persons over the management of the
loss corporation (in either case, through the option or a related
arrangement, or through rights in stock).
(iv) Application of income test. Among the additional factors that
are taken into account in applying the income test are whether, in
connection with the issuance or transfer of the option, the loss
corporation engages in income acceleration transactions or the holder of
the option or a related person purchases stock (including section
1504(a)(4) stock) from, or makes a capital contribution or loan to, the
loss corporation that can reasonably be expected to avoid or ameliorate
the impact of an ownership change. Examples of income acceleration
transactions are those outside the ordinary course of the loss
corporation's business that accelerate income or gain into the period
prior to the exercise of the option (or defer deductions to the period
after the exercise of the option). A stock purchase, capital
contribution, or loan is more probative toward an option satisfying the
income test the larger the amount received by the loss corporation in
the transaction or related transactions. A stock purchase, capital
contribution, or loan is generally not taken into account in applying
the income test if it is made to enable the loss corporation to continue
basic operations of its business (e.g., to meet the monthly payroll or
fund other operating expenses of the loss corporation).
(7) Safe harbors. Except as provided in paragraph (d)(7)(i) of this
section, an option described in this paragraph (d)(7) is not treated as
exercised pursuant to the ownership, control, or income test. The
failure of an option to be described in this paragraph (d)(7) does not
affect the determination of whether the option satisfies the ownership,
income, or control test. The following options are described in this
paragraph (d)(7):
(i) Contracts to acquire stock. A stock purchase agreement or a
similar arrangement, the terms of which are commercially reasonable, in
which the parties' obligations to complete the transaction are subject
only to reasonable closing conditions, and which is closed on a change
date within one year after it is entered into. An option
[[Page 726]]
is not exempt from the income test of paragraph (d)(5) of this section
solely by reason of its description in this paragraph (d)(7)(i).
(ii) Escrow, pledge, or other security agreements. An option that is
part of a security arrangement in a typical lending transaction
(including a purchase money loan), if the arrangement is subject to
customary commercial conditions. For this purpose, a security
arrangement includes, for example, an agreement for holding stock in
escrow or under a pledge or other security agreement, or an option to
acquire stock contingent upon a default under a loan.
(iii) Compensatory options. An option to acquire stock in a
corporation with customary terms and conditions provided to an employee,
director, or independent contractor in connection with the performance
of services for the corporation or a related person (and that is not
excessive by reference to the services performed) and which--
(A) Is nontransferable within the meaning of Sec. 1.83-3(d); and
(B) Does not have a readily ascertainable fair market value as
defined in Sec. 1.83-7(b) on the date the option is issued.
(iv) Options exercisable only upon death, disability, mental
incompetency, or retirement. An option entered into between stockholders
of a corporation (or a stockholder and the corporation) with respect to
stock of either stockholder, that is exercisable only upon the death,
disability, mental incompetency of the stockholder, or, in the case of
stock acquired in connection with the performance of services for the
corporation or a related person (and that is not excessive by reference
to the services performed), the stockholder's retirement.
(v) Rights of first refusal. A bona fide right of first refusal with
customary terms, entered into between stockholders of a corporation (or
between the corporation and a stockholder), and regarding the
corporation's stock.
(vi) Options designated in the Internal Revenue Bulletin. An option
designated by the Internal Revenue Service in the Internal Revenue
Bulletin as being exempt from one or more of the ownership, control, or
income tests. See Sec. 601.601(d)(2)(ii) of this chapter (relating to
the Internal Revenue Bulletin).
(8) Additional rules--(i) Contracts to acquire stock. For purposes
of this paragraph (d), a contract is considered to be issued or
transferred on the date it is entered into or assigned, respectively.
(ii) Indirect transfer of an option. If an entity is formed or
availed of for a principal purpose of facilitating an indirect transfer
of an option by issuing or transferring interests in the entity, an
issuance or transfer of an interest in the entity will be treated as a
transfer of the option for purposes of applying the ownership, control,
and income tests of paragraphs (d)(3) through (5) of this section.
(iii) Options related to interests in non-corporate entities. The
rules of this paragraph (d) apply, with appropriate adjustments, to
options to acquire or transfer interests in non-corporate entities.
(iv) Puts. In applying the rules of this section to puts,
appropriate adjustments must be made to take into account that the put
provides its holder with a right to transfer, instead of acquire, stock.
(9) Definition of option--(i) In general. Any contingent purchase,
warrant, convertible debt, put, stock subject to a risk of forfeiture,
contract to acquire stock, or similar interest is treated as an option
for purposes of this paragraph (d), regardless of whether it is
contingent or otherwise not currently exercisable.
(ii) Convertible stock. Convertible stock is treated as an option
for purposes of this paragraph (d) (in addition to being treated as
stock under Sec. 1.382-2(a)(3)(ii)) only if the terms of the conversion
feature permit or require consideration other than the stock being
converted.
(iii) Series of options. For purposes of this paragraph (d), an
option to acquire an option with respect to the stock of the loss
corporation, and each one of a series of such options, is treated as an
option to acquire such stock.
(iv) General principles of tax law. This paragraph (d) does not
affect the determination under general principles of tax law (such as
substance over form) of whether an instrument is an option or stock.
[[Page 727]]
(10) Subsequent treatment of options treated as exercised on a
change date--(i) In general. The following rules apply to options that
are treated as exercised under paragraph (d)(2) of this section on a
change date:
(A) The option is not treated as exercised under paragraph (d)(2) of
this section on any testing date after the change date and prior to a
transfer of the option that would itself (i.e., without regard to the
purposes for the issuance or any prior transfers of the option) cause
the option to satisfy the ownership test of paragraph (d)(3) of this
section, the control test of paragraph (d)(4) of this section, or the
income test of paragraph (d)(5) of this section; and
(B) The exercise of the option, if by the person who owned the
option immediately after the ownership change (or by a transferee of the
option who acquired the option, directly or indirectly, from that person
in one or more transfers described in paragraph (d)(11) of this
section), does not contribute to another ownership change on any testing
date on or after the date of exercise.
(ii) Alternative look-back rule for options exercised within 3 years
after change date. If a loss corporation, on its return, as originally
filed, for a taxable year that includes a change date, properly treats
an option as exercised under paragraph (d)(2) of this section on the
change date, and the option is actually exercised within three years
after the change date, the loss corporation may treat the rules of
paragraph (d)(10)(i) of this section as inapplicable to the option and
instead treat the option as having been exercised on the change date for
the purpose of determining whether an ownership change occurs on any and
all testing dates after the change date (filing such amended returns as
may be necessary for taxable years ending after the change date and
before the date of exercise of the option). A transfer after the change
date of an option to which this paragraph (d)(10)(ii) applies is treated
as a transfer of the stock subject to the option. The exercise of an
option to which this paragraph (d)(10)(ii) applies is not taken into
account for the purpose of determining whether an ownership change
occurs on or after the date of exercise.
(11) Transfers not subject to deemed exercise. Paragraph (d)(2) of
this section does not apply to the transfer of an option (including a
transfer described in paragraph (d)(8)(i) or (ii) of this section), if--
(i) Neither the transferor nor the transferee is a 5-percent
shareholder and neither person would be a 5-percent shareholder if all
options held by that person to acquire stock were treated as exercised;
(ii) The transfer is between members of separate public groups
resulting from the application of the segregation rules of Sec. 1.382-
2T(j)(2) and (3)(iii); or
(iii) The transfer occurs in any of the circumstances described in
section 382(l)(3)(B) (relating to stock acquired by reason of death,
gift, divorce, separation, etc.).
(12) Certain rules regarding non-stock interests as stock. Section
1.382-2T(f)(18)(iii) does not apply to treat an option (whether or not
treated as exercised under this paragraph (d)) as stock.
(e) Stock transferred under certain agreements. [Reserved]
(f) Family attribution. [Reserved]
(g) Definitions. The terms and nomenclature used in this section,
and not otherwise defined herein, have the same meaning as in section
382 and the regulations thereunder.
(h) Effective date--(1) In general. [Reserved]
(2) Option attribution rules--(i) General rule. The rules of
paragraph (d) of this section apply, instead of the rules of Sec.
1.382-2T(h)(4), on any testing date on or after November 5, 1992. See
paragraph (h)(2)(vi) of this section for an election relating to the
effective date.
(ii) Special rule for control test. An option issued on or before
March 17, 1994, or an option issued within 60 days after that date
pursuant to a plan existing before that date, is not treated as
exercised under the control test provided in paragraph (d)(4) of this
section on any testing date prior to a transfer of the option after
March 17, 1994 that would itself cause the option to satisfy the control
test.
(iii) Convertible stock issued prior to July 20, 1988--(A) In
general. Except as
[[Page 728]]
provided in paragraph (h)(2)(iii)(B) of this section, convertible stock
issued prior to July 20, 1988, is not treated as an option subject to
the rules of Sec. 1.382-2T(h)(4) or paragraph (d)(2) of this section.
(B) Exceptions--(1) Nonvoting convertible preferred stock.
Convertible stock issued prior to July 20, 1988, is treated as an option
subject to the rules of Sec. 1.382-2T(h)(4) or paragraph (d)(2) of this
section if--
(i) The stock, when issued, would be described in section 1504(a)(4)
by disregarding subparagraph (D) thereof and by ignoring the potential
participation in corporate growth that the conversion feature may offer;
and
(ii) The loss corporation makes the election described in Notice 88-
67, 1988-1 C.B. 555 (see Sec. 601.601(d)(2)(ii)(b) of this chapter for
availability of Cumulative Bulletins (C.B.)), on or before the earlier
of the date prescribed in Notice 88-67 or December 7, 1992.
(2) Other convertible stock. Convertible stock issued prior to July
20, 1988, is treated as an option subject to the rules of Sec. 1.382-
2T(h)(4) or paragraph (d)(2) of this section if--
(i) The terms of the conversion feature permit or require the tender
of consideration other than the stock being converted; and
(ii) The loss corporation makes the election described in Notice 88-
67 on or before the date prescribed in the Notice.
(iv) Convertible stock issued on or after July 20, 1988, and before
November 5, 1992. Convertible stock issued on or after July 20, 1988,
and before November 5, 1992, is treated as an option subject to the
rules of Sec. 1.382-2T(h)(4) or paragraph (d) of this section only if--
(A) The stock, when issued, would be described in section 1504(a)(4)
by disregarding subparagraph (D) thereof and by ignoring the potential
participation in corporate growth that the conversion feature may offer;
or
(B) The terms of the conversion feature permit or require the tender
of consideration other than the stock being converted.
(v) Certain options in existence immediately before and after an
ownership change. If an option existed immediately before and after an
ownership change occurring on a testing date to which Sec. 1.382-
2T(h)(4) applies--
(A) The option is not treated as exercised under paragraph (d)(2) of
this section on any testing date after the change date and prior to a
transfer of the option that would itself cause the option to satisfy the
ownership test of paragraph (d)(3) of this section, the control test of
paragraph (d)(4) of this section, or the income test of paragraph (d)(5)
of this section; and
(B) Except as provided in Sec. 1.382-2T(m)(4)(vi) (which relates to
the effective date of the rules provided in Sec. 1.382-2T(h)(4) and
includes a special rule related to options that are actually exercised
within 120 days after they are treated as exercised under that section),
the actual exercise of the option, if by the person who owned the option
immediately after the ownership change (or by a transferee of the option
who acquired the option, directly or indirectly, from that person in one
or more transfers described in paragraph (d)(11) of this section), will
not contribute to an ownership change on any testing date on or after
the date of exercise.
(vi) Election to apply Sec. 1.382-2T(h)(4)--(A) In general. If a
loss corporation makes an election under this paragraph (h)(2)(vi),
Sec. Sec. 1.382-2T(a)(2)(i) and (h)(4) (relating to testing dates and
option attribution) apply (instead of the definition of testing date in
Sec. 1.382-2(a)(4) and paragraph (d) of this section) for the purpose
of determining whether an ownership change occurs--
(1) On any testing date on or before May 17, 1994, or
(2) In the case of a loss corporation that is under the jurisdiction
of a court in a title 11 or similar case filed on or before May 17,
1994, subject to Sec. 1.382-9(o)(1), on any testing date at or before
the time the plan of reorganization becomes effective.
(B) Additional consequences of election. If a loss corporation makes
an election under this paragraph (h)(2)(vi)--
(1) In determining whether any convertible preferred stock issued by
the loss corporation during the period that the election is in effect is
treated as stock or as an option, the convertible preferred stock is
treated as if it were issued on November 4, 1992, and
[[Page 729]]
(2) The special effective date for the control test provided in
paragraph (h)(2)(ii) of this section does not apply to any option with
respect to stock of the loss corporation.
(C) Time and manner of making the election. The election described
in paragraph (h)(2)(vi)(A) of this section is made by attaching a
statement to the loss corporation's income tax return for the first
taxable year ending after November 4, 1992, in which a testing date
(within the meaning of Sec. 1.382-2T(a)(2)(i)) occurs, or if such
return is filed on or before May 17, 1994, with its first return filed
after May 17, 1994. However, a loss corporation that is under the
jurisdiction of a court in a title 11 or similar case filed on or before
May 17, 1994, may make the election described in paragraph (h)(2)(vi)(A)
by attaching a statement to its tax return for its first taxable year
ending after that date. The statement must say ``THIS IS AN ELECTION
UNDER Sec. 1.382-4(h)(2)(vi) TO APPLY Sec. 1.382-2T(h)(4) ON OR AFTER
NOVEMBER 5, 1992.'' Any amended returns required by paragraph
(h)(2)(vi)(D) of this section must accompany the return with which the
election is made. An election under paragraph (h)(2)(vi)(A) of this
section is irrevocable.
(D) Amended returns. If an election under this paragraph (h)(2)(vi)
affects the amount of taxable income or loss for a prior taxable year,
the loss corporation (or the common parent of any consolidated group of
which the loss corporation was a member for the year) must file an
amended return for the year that reflects the effect of the election.
(3) Special rule for options subject to attribution under Sec.
1.382-2T(h)(4). Section Sec. 1.382-2T(h)(4)(i) does not apply to any
option designated by the Internal Revenue Service in the Internal
Revenue Bulletin as being excepted from the operation of Sec. 1.382-
2T(h)(4)(i).
[T.D. 8531, 59 FR 12837, Mar. 18, 1994, as amended by T.D. 8825, 64 FR
36178, July 2, 1999]
Sec. 1.382-5 Section 382 limitation.
(a) Scope. Following an ownership change, the section 382 limitation
for any post-change year is an amount equal to the value of the loss
corporation multiplied by the long-term tax-exempt rate that applies
with respect to the ownership change, and adjusted as required by
section 382 and the regulations thereunder. See, for example, section
382(b)(2) (relating to the carryforward of unused section 382
limitation), section 382(b)(3)(B) (relating to the section 382
limitation for the post-change year that includes the change date),
section 382(m)(2) (relating to short taxable years), and section 382(h)
(relating to recognized built-in gains and section 338 gains).
(b) Computation of value. [Reserved]
(c) Short taxable year. The section 382 limitation for any post-
change year that is less than 365 days is the amount that bears the same
ratio to the section 382 limitation determined under section 382(b)(1)
as the number of days in the post-change year bears to 365. The section
382 limitation, as so determined, is adjusted as required by section 382
and the regulations thereunder. This paragraph (c) does not apply to a
52-53 week taxable year that is less than 365 days unless a return is
required under section 443 (relating to short periods) for such year.
(d) Successive ownership changes and absorption of a section 382
limitation--(1) In general. If a loss corporation has two (or more)
ownership changes, any losses attributable to the period preceding the
earlier ownership change are treated as pre-change losses with respect
to both ownership changes. Thus, the later ownership change may result
in a lesser (but never in a greater) section 382 limitation with respect
to such losses. In any case, the amount of taxable income for any post-
change year that can be offset by pre-change losses may not exceed the
section 382 limitation for such ownership change, reduced by the amount
of taxable income offset by pre-change losses subject to any earlier
ownership change(s).
(2) Recognized built-in gains and losses. [Reserved]
(3) Effective date. This paragraph (d) applies to taxable years of a
loss corporation beginning on or after January 1, 1997.
(e) Controlled groups. See Sec. 1.382-8 for rules for determining
the value of a
[[Page 730]]
loss corporation that is a member of a controlled group.
(f) Effective date. Except as otherwise provided, this section
applies to a loss corporation that has an ownership change to which
section 382(a), as amended by the Tax Reform Act of 1986, applies.
[T.D. 8679, 61 FR 33316, June 27, 1996, as amended by T.D. 8825, 64 FR
36178, July 2, 1999]
Sec. 1.382-6 Allocation of income and loss to periods before and
after the change date for purposes of section 382.
(a) General rule. Except as provided in paragraphs (b) and (d) of
this section, a loss corporation must allocate its net operating loss or
taxable income (see section 382(k)(4)), and its net capital loss (see
section 1222(10)) or modified capital gain net income (as defined in
paragraph (g)(4) of this section), for the change year between the pre-
change period and the post-change period by ratably allocating an equal
portion to each day in the year.
(b) Closing-of-the-books election--(1) In general. Subject to
paragraphs (b)(3)(ii) and (d) of this section, a loss corporation may
elect to allocate its net operating loss or taxable income and its net
capital loss or modified capital gain net income for the change year
between the pre-change period and the post-change period as if the loss
corporation's books were closed on the change date. An election under
this paragraph (b)(1) does not terminate the loss corporation's taxable
year as of the change date (e.g., the change year is a single tax year
for purposes of section 172).
(2) Making the closing-of-the-books election--(i) Time and manner. A
loss corporation makes the closing-of-the-books election by including
the following statement on the information statement required by Sec.
1.382-11(a) for the change year: ``THE CLOSING-OF-THE-BOOKS ELECTION
UNDER Sec. 1.382-6(b) IS HEREBY MADE WITH RESPECT TO THE OWNERSHIP
CHANGE OCCURRING ON [INSERT DATE].'' The election must be made on or
before the due date (including extensions) of the loss corporation's
income tax return for the change year.
(ii) Election irrevocable. An election under this paragraph (b) is
irrevocable.
(3) Special rules relating to consolidated and controlled groups--
(i) Consolidated groups. If an election under this paragraph (b) is made
with respect to an ownership change occurring in a consolidated return
year, all allocations under this section with respect to that ownership
change must be consistent with the election.
(ii) Controlled groups. If paragraph (b)(3)(i) of this section does
not apply, and if, as part of the same plan or arrangement, two or more
members of a controlled group (as defined in section 1563(a), determined
by substituting ``50 percent'' for ``80 percent'' each place that it
appears, and without regard to section 1563(a)(4)), have ownership
changes and continue to be members of the controlled group (or become
members of the same other controlled group), a closing-of-the-books
election applies only if the election is made by all members having the
ownership changes.
(c) Operating rules for determining net operating loss, taxable
income, net capital loss, modified capital gain net income, and special
allocations. For purposes of this section, for the change year--
(1) In general--(i) Net operating loss or taxable income is
determined without regard to gains or losses on the sale or exchange of
capital assets; and
(ii) Net operating loss or taxable income and net capital loss or
modified capital gain net income are determined without regard to the
section 382 limitation and do not include the following items, which are
allocated entirely to the post-change period--
(A) Any income, gain, loss, or deduction to which section
382(h)(5)(A) applies; and
(B) Any income or gain recognized on the disposition of assets
transferred to the loss corporation during the post-change period for a
principal purpose of ameliorating the section 382 limitation.
(2) Adjustment to net operating loss--(i) Determination of remaining
capital gain. The amount of modified capital gain net income (defined in
paragraph (g)(4) of this section) allocated to each period is offset by
capital losses to which section 382(h)(5)(A) applies and capital
[[Page 731]]
loss carryovers, subject to the section 382 limitation (in the case of
modified capital gain net income allocated to the post-change period).
(ii) Reduction of net operating loss by remaining capital gain. The
amount of net operating loss allocated to each period is reduced (but
not below zero) without regard to the section 382 limitation, first by
the modified capital gain net income remaining in the same period, and
then by the modified capital gain net income remaining in the other
period.
(d) Coordination with rules relating to the allocation of income
under Sec. 1.1502-76(b). If Sec. 1.1502-76 applies (relating to the
taxable year of members of a consolidated group), an allocation of items
under paragraph (a) or (b) of this section is determined after applying
Sec. 1.1502-76. Thus, if a short taxable year under Sec. 1.1502-76 is
a change year for which an allocation under this section is to be made,
the allocation under this section applies only to the items allocated to
that short taxable year under Sec. 1.1502-76.
(e) Allocation of certain credits. The principles of this section
apply for purposes of allocating, under section 383, excess foreign
taxes under section 904(c), current year business credits under section
38, and the minimum tax credit under section 53. The loss corporation
must use the same method of allocation (ratable allocation or closing-
of-the-books) for purposes of sections 382 and 383.
(f) Examples. The rules of this section are illustrated by the
following examples:
Example 1. (i) Assume that the loss corporation, L, a calendar year
taxpayer with a May 26, 1995, change date, determines a section 382
limitation under section 382(b)(1) of $100,000. Thus, for the change
year, its section 382 limitation is $100,000 x (219/365) = $60,000. L
makes the closing-of-the- books election under paragraph (b) of this
section.
(ii) Assume that L has a $150,000 capital loss carryover (from its
1994 taxable year) and a $300,000 net operating loss carryover (from its
1994 taxable year) to the change year. L recognizes, in the pre-change
period, $200,000 of ordinary loss, and, in the post-change period,
$150,000 of capital gain and $100,000 of ordinary income. Assume that
section 382(h) does not apply to the capital gain or the ordinary
income.
(iii) L has a $100,000 net operating loss for the change year
($200,000 pre-change loss less $100,000 post-change income), as
determined under paragraph (c)(1)(i) of this section. Because L has no
current year capital losses, L's $150,000 capital gain recognized in the
post-change period is its modified capital gain net income for the
change year (as defined at paragraph (g)(4) of this section). L
allocates $100,000 of net operating loss to the pre-change period and
$150,000 of modified capital gain net income to the post-change period.
(iv) Under paragraph (c)(2)(i) of this section, L uses its capital
loss carryover to offset its modified capital gain net income allocated
to the post-change period, subject to its section 382 limitation. L's
section 382 limitation is $60,000, so L uses $60,000 of its capital loss
carryover to offset $60,000 of its $150,000 modified capital gain net
income. L has absorbed its entire section 382 limitation for the change
year and has $90,000 of modified capital gain net income remaining in
the post-change period.
(v) Under paragraph (c)(2)(ii) of this section, L offsets its
$100,000 net operating loss allocated to the pre-change period by the
$90,000 of modified capital gain net income remaining in the post-change
period, without regard to the section 382 limitation, thereby reducing
its pre-change net operating loss to $10,000.
(vi) From its 1994 taxable year, L will carry over $90,000 of
capital loss and $300,000 of net operating loss to its 1996 taxable
year. From its 1995 taxable year, L will carry over $10,000 of net
operating loss subject to the section 382 limitation to its 1996 taxable
year.
Example 2. (i) Assume the facts of Example 1, except that L does not
make the closing-of-the-books election under paragraph (b) of this
section.
(ii) L ratably allocates its $100,000 net operating loss and its
$150,000 of modified capital gain net income for the change year.
$40,000 of net operating loss ($100,000 x (146/365)) and $60,000 of
modified capital gain net income ($150,000 x (146/365)) are allocated to
the pre-change period. $60,000 of net operating loss ($100,000 x (219/
365)) and $90,000 of modified capital gain net income ($150,000 x (219/
365)) are allocated to the post-change period.
(iii) Under paragraph (c)(2)(i) of this section, L uses its capital
loss carryovers to offset modified capital gain net income. The capital
loss carryovers offset the $60,000 modified capital gain net income
allocated to the pre-change period without limitation. Subject to the
section 382 limitation, the remaining $90,000 of capital loss carryovers
offset the modified capital gain net income allocated to the post-change
period. Accordingly, L uses $60,000 of its capital loss carryovers to
offset $60,000 of its $90,000 modified capital gain net income allocated
to the post-change period. L has absorbed its
[[Page 732]]
entire section 382 limitation for the change year.
(iv) Under paragraph (c)(2)(ii) of this section, L's $60,000 net
operating loss allocated to the post-change period is offset by its
remaining $30,000 of post-change modified capital gain net income,
reducing its post-change net operating loss to $30,000.
(v) From its 1994 taxable year, L will carry over $30,000 of capital
loss and $300,000 of net operating loss to its 1996 taxable year. From
its 1995 taxable year, L will carry over $70,000 of net operating loss
($40,000 pre-change + $30,000 post-change) to its 1996 taxable year. The
$40,000 pre-change portion of that carryover is subject to the section
382 limitation.
(g) Definitions and nomenclature. The terms and nomenclature used in
this section and not otherwise defined herein have the same meanings as
in sections 382 and 383 and the regulations thereunder. For purposes of
this section:
(1) Change year. A loss corporation's taxable year that includes the
change date is its change year.
(2) Pre-change period. The pre-change period is the portion of the
change year ending on the close of the change date.
(3) Post-change period. The post-change period is the portion of the
change year beginning with the day after the change date.
(4) Modified capital gain net income. A loss corporation's modified
capital gain net income is the excess of the gains from sales or
exchanges of capital assets over the losses from such sales or exchanges
for the change year, determined by excluding any short-term capital
losses under section 1212.
(h) Effective date. This section applies to ownership changes
occurring on or after June 22, 1994.
[T.D. 8546, 59 FR 32080, June 22, 1994, as amended by T.D. 9264, 71 FR
30607, May 30, 2006; T.D. 9329, 72 FR 32808, June 14, 2007]
Sec. 1.382-7 Built-in gains and losses.
(a) Treatment of prepaid income. For purposes of section 382(h),
prepaid income is not recognized built-in gain. The term prepaid income
means any amount received prior to the change date that is attributable
to performance occurring on or after the change date. Examples to which
this paragraph (a) will apply include, but are not limited to, income
received prior to the change date that is deferred under section 455,
Sec. 1.451-5, or Rev. Proc. 2004-34 (2004-1 CB 991 (June 1, 2004)) (or
any successor revenue procedure) (see Sec. 601.601(d)(2)(ii)(b)).
(b) Effective/applicability dates. This section applies to loss
corporations that have undergone an ownership change on or after June
11, 2010. For loss corporations that have undergone an ownership change
before June 11, 2010, see Sec. 1.382-7T as contained in 26 CFR part 1,
revised April 1, 2009.
[T.D. 9487, 75 FR 33992, June 16, 2010]
Sec. 1.382-8 Controlled groups.
(a) Introduction. This section provides rules to adjust the value of
a loss corporation that is a member of a controlled group of
corporations on a change date so that the same value is not included
more than once in computing the limitations under section 382 for the
loss corporations that are members of the controlled group. In general,
the adjustment is made under paragraph (c) of this section by reducing
the value of the loss corporation by the value of the stock of each
component member of the controlled group that the loss corporation owns
immediately after the ownership change. The loss corporation's value
may, however, be increased under paragraph (c) of this section by any
amount of value that the other member elects to restore to the loss
corporation.
(b)(1) Controlled group loss and controlled group with respect to a
controlled group loss--(1) In general. A controlled group loss is a pre-
change loss (or a net unrealized built-in loss) of a loss corporation
that is attributable to a taxable year of the corporation with respect
to which the corporation is a component member of a controlled group (as
defined by paragraphs (e)(2) and (3) of this section). The controlled
group with respect to each controlled group loss is composed of the loss
corporation and each other corporation that is a component member of a
controlled group that includes the loss corporation both--
(1)(i) With respect to the taxable year to which the controlled
group loss is attributable; and
(1)(ii) On the date the loss corporation has an ownership change.
[[Page 733]]
(2) Presumption regarding net unrealized built-in loss. For purposes
of determining whether a net unrealized built-in loss of a loss
corporation is attributable to a taxable year (the determination year)
with respect to which the corporation is a component member of a
controlled group, the built-in loss in a prior change date asset is
deemed to be attributable to a period ending before the determination
year. A prior change date asset is any asset held by the loss
corporation at all times during the period beginning on the change date
of its most recent ownership change after 1986 (the first change date),
and ending on the first day of the determination year. The built-in loss
in a prior change date asset is the amount by which the adjusted basis
of the asset on the first change date exceeds the fair market value of
the asset on that date. The principles of this paragraph (b)(2) also
apply to items described in section 382(h)(6)(B).
(c) Computation of value. For purposes of computing the limitation
under section 382 with respect to each controlled group loss, the value
of the stock of each component member of the controlled group with
respect to that loss is determined immediately before the ownership
change, and is adjusted by applying the following rules:
(1) Reduction in value. The value of the stock of each component
member is reduced by the value (immediately before the ownership change
and without regard to any restoration of value or other adjustment under
this section) of the stock of any other component member directly owned
by the component member immediately after the ownership change.
(2) Restoration of value. After the value of the stock of each
component member is reduced pursuant to paragraph (c)(1) of this
section, the value of the stock of each component member is increased by
the amount of value, if any, restored to the component member by another
component member (the electing member) pursuant to this paragraph
(c)(2). The electing member may elect (or may be deemed to elect under
paragraph (h)(2)(i) of this section in the case of a foreign component
member) to restore value to another component member in an amount that
does not exceed the lesser of--
(i) The sum of--
(A) The value, determined immediately before the ownership change,
of the electing member's stock (after adjustment under paragraph (c)(1)
of this section and before any restoration of value under this paragraph
(c)(2)); plus
(B) Any amount of value restored to the electing member by another
component member under this paragraph (c)(2); or
(ii) The value, determined immediately before any ownership change,
of the electing member's stock (without regard to any adjustment under
this section) that is directly owned by the other component member
immediately after the ownership change.
(3) Reduction in value by the amount restored. The value of the
stock of the electing member is reduced by any amount of value that the
electing member elects to restore under paragraph (c)(2) of this section
to another component member.
(4) Appropriate adjustments. Appropriate additional adjustments
consistent with paragraphs (c)(1), (2), and (3) of this section must be
made to prevent any duplication of value. Thus, for example, adjustments
must be made to reflect--
(i) Any indirect ownership interest in another component member;
(ii) Any cross ownership of stock by component members of the
controlled group with respect to the controlled group loss; and
(iii) Any value used to determine a limitation under section 382
with respect to controlled group losses from the same period.
(5) Certain reductions in the value of members of a controlled
group. A loss corporation that has an ownership change is required to
make adjustments consistent with this paragraph (c) with respect to its
stock if the stock of another corporation in which it had a direct or
indirect ownership interest was disposed of before the ownership change,
and;
(i) Both corporations were component members of a controlled group--
(A) With respect to a taxable year to which a controlled group loss
of the loss corporation is attributable; and
[[Page 734]]
(B) At any time during the 2 year period before the ownership
change; and
(ii) Both corporations are component members of a controlled group
at any time during the 2 year period following the ownership change.
(d) No double reduction. To the extent consistent with the purposes
of this section, section 382 and this section shall not be applied to
duplicate a reduction in the value of a loss corporation. Thus, for
example, if the value of a loss corporation is reduced under section
382(l)(1) to reflect a capital contribution of stock of a component
member, it is not again reduced by such amount under paragraph (c)(1) of
this section. If this paragraph (d) applies to prevent a reduction in
value from being duplicated, the application of the other rules of this
section, such as those relating to the restoration of value, is
correspondingly limited in a manner consistent with the principles of
this section.
(e) Definitions and nomenclature--(1) Definitions in section 382 and
the regulations thereunder. Except as otherwise provided, the
definitions and nomenclature contained in section 382 and the
regulations thereunder apply to this section.
(2) Controlled group. Controlled group has the same meaning as in
section 1563(a), determined by substituting ``50 percent'' for ``80
percent'' each place that it appears, and without regard to section
1563(a)(4).
(3) Component member. Component member has the same meaning as in
section 1563(b), determined by substituting ``December 31 (or the change
date, if earlier)'' for ``December 31'' each place it appears, and
without regard to section 1563 (b)(2), (b)(3)(C), and (b)(4).
(4) Foreign component member--(i) In general. Except as provided in
paragraph (e)(4)(ii) of this section, foreign component member means a
component member that is a foreign corporation.
(ii) Exception. A foreign component member shall not include a
foreign corporation that has items treated as connected with the conduct
of a trade or business in the United States that it takes into account
in determining its value pursuant to section 382(e)(3).
(5) Predecessor and successor corporation. As the context may
require, a reference to a corporation, or component member includes a
reference to a predecessor or successor corporation.
(f) Coordination between consolidated groups and controlled groups.
Some or all of the component members of a controlled group may also be
members of a consolidated group, and a controlled group loss may be
subject to a consolidated section 382 limitation or subgroup section 382
limitation determined under Sec. 1.1502-93. Except as otherwise
provided in this paragraph (f) and Sec. Sec. 1.1502-91 through 1.1502-
99, Sec. 1.1502-93 applies instead of this section when both sections,
by their terms, are otherwise applicable. This section is applicable and
may require an adjustment to value if a member of a consolidated group,
a loss group, or loss subgroup (as those terms are defined in Sec. Sec.
1.1502-1(h) and 1.1502-91) is also a component member of a controlled
group with respect to a controlled group loss. Solely for purposes of
applying this section, a consolidated group, loss group, or loss
subgroup is treated as a single corporation. Thus to determine the
limitation with respect to any portion of the pre-change consolidated
attributes or pre-change subgroup attributes of the loss group or loss
subgroup that is a controlled group loss, the consolidated section 382
limitation or subgroup section 382 limitation is computed by treating
the loss group or the loss subgroup as a single corporation, and
adjusting value in accordance with paragraph (c) of this section. See
paragraph (g) Example 4 of this section.
(g) Examples. For purposes of the examples in this section, unless
otherwise stated, the nomenclature and assumptions of the examples in
Sec. 1.382-2T(b) apply, all corporations file separate income tax
returns on a calendar year basis, the only 5-percent shareholder of a
corporation is a public group, and the facts set forth the only owner
shifts with respect to the corporations during the testing period.
Example 1. Controlled group with respect to a controlled group loss.
(a) Public L owns all of the L stock, L and Public L1 own 30 percent and
70 percent, respectively, of the L1 stock, and L1 owns all of the
corporation T stock.
[[Page 735]]
L1 has a net operating loss arising in Year 1 that is carried over to
Year 4. L has a net operating loss arising in Year 2 that is carried
over to Year 4. On August 1, Year 3, L acquires 30 percent of the stock
of L1, thereby increasing its percentage ownership interest in L1 to 60
percent. On December 1, Year 3, L1 purchases all of the stock of
corporation S from Public S. On November 1, Year 4, P acquires all of
the L stock. The acquisition by P of all of the L stock on November 1,
Year 4, causes ownership changes of both L and L1 under the rules of
Sec. 1.382-2T. The following is a graphic illustration of these facts.
[[Page 736]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.019
(b)(1) Under paragraph (b) of this section, the Year 1 net operating
loss carryover of L1 is a controlled group loss because L1 is a
component member of a controlled group with respect to Year 1, the year
to which the loss is attributable. L1 and T compose a controlled group
with respect to the net operating loss carryover because L1 and T are
[[Page 737]]
component members of a controlled group both--
(A) With respect to the taxable year to which L1's net operating
loss carryover is attributable (i.e., Year 1); and
(B) On November 1, Year 4, L1's change date. Although L and S are
component members of L1's controlled group on L1's change date, they are
not component members of the controlled group with respect to the Year 1
net operating loss carryover because they were not component members
with respect to the year to which the net operating loss carryover is
attributable.
(2) The value of L1's stock must therefore be adjusted in accordance
with paragraph (c) of this section to take into account an adjustment
with respect to the T stock (but not the S stock) in computing L1's
limitation under section 382 with respect to its net operating loss
carryover.
(c) Although L is a member of a controlled group composed of L, L1,
S, and T on November 1, Year 4, L's change date, it is not a component
member of a controlled group with respect to Year 2, the taxable year to
which its net operating loss carryover is attributable. Therefore, L's
Year 2 net operating loss carryover is not a controlled group loss under
paragraph (b) of this section and the value of L's stock is not adjusted
in accordance with paragraph (c) of this section to compute L's
limitation under section 382 with respect to the Year 2 net operating
loss carryover.
Example 2. Adjustments to value of the controlled group members. (a)
Since Year 1, A has owned all of the stock of L, L and B have owned 80
percent and 20 percent, respectively, of the stock of corporation P, and
P and C have owned 75 percent and 25 percent, respectively, of the stock
of L1. L and L1 each has a net operating loss for the Year 6 taxable
year that is carried over to its respective Year 7 taxable year. On
December 1, Year 7, A sells all of the L stock to D. The sale results in
ownership changes of both L and L1. Immediately before the ownership
changes, the total value of the L1 stock is $40, the total value of the
P stock (including the value of its L1 stock) is $100, and the total
value of the L stock (including the value of the P stock) is $200. The
following is a graphic illustration of these facts.
[[Page 738]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.020
(b) Under paragraph (b) of this section, the Year 6 net operating
loss carryovers of each of L and L1 are controlled group losses because
each of L and L1 is a component member of a controlled group with
respect to Year 6, the year to which the losses are attributable. L, P,
and L1 compose controlled groups with respect to both Year 6 net
operating loss carryovers because L, P, and L1 are component members of
a controlled group both--
(1) With respect to the taxable years to which the net operating
loss carryovers are attributable (i.e., Year 6); and
(2) On December 1, Year 7, the change date.
(c) The value of the stock of L1 for purposes of determining its
limitation under section 382 with respect to its net operating loss
carryover from Year 6 is $40. L1 does not elect to restore any value to
P paragraph (c)(2) of this section.
(d) The value of the stock of P ($100) is reduced under paragraph
(c)(1) of this section by the value of the stock of L1 that it directly
owns, $30 (75% x $40). Following the adjustment, the value of the stock
of P is $70. P elects to restore this entire $70 of value to L.
(e) The value of the stock of L, $200, is reduced under paragraph
(c)(1) of this section by the value of the stock of P it directly owns,
i.e., $80 (80% x $100), and increased paragraph (c)(2) of this section
by the amount P elects to restore to L, i.e., $70. Thus, the value of
the L stock for purposes of determining L's limitation under section 382
with respect to its net operating loss carryover from Year 6 is $190
($200-$80 + $70).
Example 3. Limitation on restoration of value. (a) The facts are the
same as in Example 2, except that L1 elects to restore $20 to P. For
purposes of determining L1's limitation under section 382 with respect
to the Year 6 net operating loss carryover, the value of the stock of L1
is $20 ($40-$20) because the value of its stock is reduced under
paragraph (c)(3) of this section by the $20 of value it elects to
restore to P.
[[Page 739]]
(b) The value of the stock of P ($100) is reduced under paragraph
(c)(1) of this section by the value of the L1 stock it directly owns
($30), and is increased paragraph (c)(2) of this section by the value
that L1 elects to restore to P ($20). Thus, the value of the P stock is
$90 ($100-$30 + $20).
(c)(1) P elects to restore to L the maximum value permitted under
this section. The value of the stock of L, $200, is reduced under
paragraph (c)(1) of this section by the value of the P stock it directly
owns ($80), and is increased by the value that P elects to restore to L.
P may elect to restore to L the lesser of--
(A) The sum of the value of its stock immediately after adjustment
under paragraph (c)(1) of this section (i.e., $70) plus the value
restored to it by L1 (i.e., $20) (a total of $90); or
(B) The value of the P stock (without regard to the adjustment
required by paragraph (c)(1) and (2) of this section) that is directly
owned by L immediately before the ownership change (i.e., $80).
(2) Thus, $80 is the maximum amount that P may elect to restore to
L. Following the restoration of value by P, the value of the L stock for
purposes of determining L's limitation under section 382 is $200 ($200 -
$80 + $80).
Example 4. Coordination with consolidated return regulations. (a) P
and its wholly owned subsidiary L file a consolidated return. L owns 79
percent of the outstanding stock of L1. P acquired the stock of L in
Year 1 and L acquired the stock of L1 in Year 2. The P consolidated
group has a consolidated net operating loss arising in the Year 6
consolidated return year that is carried over to Year 8. L1 has a net
operating loss arising in its Year 6 taxable year that is also carried
over to Year 8. On January 1, Year 8, the P consolidated group has an
ownership change under Sec. 1.1502-92(b)(1)(i) and L1 has an ownership
change under Sec. 1.382-2T.
(b)(1) Under paragraph (b) of this section, the Year 6 net operating
loss carryover of the P group is a controlled group loss because P, L,
and L1 are component members of a controlled group with respect to Year
6, the year to which the loss is attributable. P, L, and L1 compose a
controlled group with respect to the Year 6 net operating loss carryover
of the P loss group because they are component members of a controlled
group both--
(A) With respect to the taxable years to which the net operating
loss carryover is attributable (i.e., Year 6); and
(B) On January 1, Year 8, the P group's change date.
(2) Because P and L compose a loss group (within the meaning of
Sec. 1.1502-91(c)) with respect to its Year 6 net operating loss
carryover, the P loss group must compute a consolidated section 382
limitation with respect to its Year 6 net operating loss carryover as a
result of the ownership change.
(c) In computing the consolidated section 382 limitation under Sec.
1.1502-93 with respect to the Year 6 net operating loss carryover, the
value of the P stock immediately before the ownership change is reduced
under paragraphs (c)(1) and (f) of this section by the value immediately
before the ownership change of the L1 stock directly owned by L
immediately after the ownership change. L1 may, however, elect to
restore such value to the P consolidated group to the extent permitted
under paragraph (c)(2) of this sectionSec. 1.382-8T.
Example 5. Appropriate adjustments for indirect ownership interest.
(a) Individual A owns all of the stock of L, L owns an 80 percent
interest in the capital and profits of partnership PS, and PS owns 75
percent of the stock of L1. Both L and L1 have net operating losses for
the Year 1 taxable year that are carried over to their respective Year 2
taxable years. On December 19, Year 2, A sells all of the L stock to an
unrelated individual. The sale results in an ownership change of L and
L1.
(b) Under paragraph (b) of this section, the Year 1 net operating
loss carryovers of each of L and L1 are controlled group losses because
each of L and L1 is a component member of a controlled group with
respect to Year 1, the year to which the losses are attributable. L and
L1 compose controlled groups with respect to each corporation's net
operating loss carryovers because L and L1 are component members of a
controlled group both--
(1) With respect to the taxable years to which the net operating
loss carryovers are attributable (i.e., Year 1); and
(2) On December 19, Year 2, the change date.
(c) L has an indirect ownership interest in L1 which, under
paragraph (c)(4) of this section, must be taken into account in applying
this section. As a result, the value of the L stock for purposes of
determining its limitation under section 382 with respect to the Year 1
net operating loss carryover must be reduced by the value of L's
indirect ownership interest in the L1 stock (60 percent) that it owns
through PS immediately before the ownership change, and is increased by
the amount (if any) that L1 elects to restore to L under paragraph
(c)(2) of this section. The value of L1 is reduced under paragraph
(c)(3) of this section to the extent that L1 elects to restore value to
L.
(h) Time and manner of filing election to restore--(1) Statements
required--(i) Filing by loss corporation. The election to restore value
described in paragraph (c)(2) of this section must be in the form set
forth in this paragraph
[[Page 740]]
(h)(1)(i). It must be filed by the loss corporation by including a
statement on or with its income tax return for the taxable year in which
the ownership change occurs (or with an amended return for that year
filed on or before the due date (including extensions) of the income tax
return of any component member with respect to the taxable year in which
the ownership change occurs). The common parent of a consolidated group
must make the election on behalf of the group. The election is made in
the form of a statement entitled, ``STATEMENT PURSUANT TO Sec. 1.382-
8(h)(1) TO ELECT TO RESTORE ALL OR PART OF THE VALUE OF [INSERT NAME AND
EMPLOYER IDENTIFICATION NUMBER (IF ANY) OF THE ELECTING MEMBER] TO
[INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER (IF ANY) OF THE
CORPORATION TO WHICH VALUE IS RESTORED].'' The statement must include
the amount of the value being restored and must also indicate that an
agreement signed and dated by both parties, as described in paragraph
(h)(1)(iii) of this section, has been entered into. Each such party must
retain either the original or a copy of this agreement as part of its
records. See Sec. 1.6001-1(e).
(ii) Filing by electing member. An electing member must include a
statement identical to the one described in paragraph (h)(1)(i) of this
section on or with its income tax return (or with an amended return for
that year filed on or before the due date (including extensions) of the
income tax return of any component member with respect to the taxable
year in which the ownership change occurs) (if any) for the taxable year
which includes the change date in connection with which the election
described in paragraph (c)(2) of this section is made. If the electing
member is a controlled foreign corporation (within the meaning of
section 957), each United States shareholder (within the meaning of
section 951(b)) with respect thereto must include this statement on or
with its return. It is not necessary for the electing member (or the
United States shareholder, as the case may be) to include this statement
on or with its return if the loss corporation includes an identical
statement on or with the same return for the same election.
(iii) Agreement. Both the electing member and the corporation to
which value is restored must sign and date an agreement. The agreement
must--
(A) Identify the change date for the loss corporation in connection
with which the election is made;
(B) State the value of the electing member's stock (without regard
to any adjustment under paragraph (c) of this section) immediately
before the ownership change;
(C) State the amount of any reduction required under paragraph
(c)(1) of this section with respect to stock of the electing member that
is owned directly or indirectly by the corporation to which value is
restored;
(D) State the amount of value that the electing member elects to
restore to the corporation; and
(E) State whether the value of either component member's stock was
adjusted pursuant to paragraph (c)(4) of this section.
(2) Special rule for foreign component members--(i) Deemed election
to restore full value. Unless the election described in paragraph
(h)(2)(ii) of this section is made for a foreign component member, each
foreign component member of the controlled group is deemed to have
elected to restore to each other component member the maximum value
allowable under paragraph (c)(2) of this section, taking into account
the limitations of this section.
(ii) Election not to restore full value. (A) A loss corporation may
elect to reduce the amount of value restored from a foreign component
member (the electing foreign component member) to another component
member under paragraph (h)(2)(i) of this section in the form set forth
in this paragraph (h)(2)(ii). It must be filed by the loss corporation
by including a statement on or with its income tax return for the
taxable year in which the ownership change occurs (or with an amended
return for that year filed on or before the due date (including
extensions) of the income tax return of any component member with
respect to the taxable year in which the ownership change occurs). The
common parent of a consolidated group must make the
[[Page 741]]
election on behalf of the group. The election is made in the form of a
statement entitled, ``STATEMENT PURSUANT TO Sec. 1.382-8(h)(2)(ii) TO
ELECT NOT TO RESTORE FULL VALUE OF [INSERT NAME AND EMPLOYER
IDENTIFICATION NUMBER (IF ANY) OF ELECTING FOREIGN COMPONENT MEMBER] TO
[INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER (IF ANY) OF THE
CORPORATION TO WHICH SUCH VALUE IS NOT TO BE RESTORED].'' The statement
must include the amount of the value not being restored and must also
indicate that an agreement signed and dated by both parties, as
described in paragraph (h)(2)(iii) of this section, has been entered
into. Each such party must retain either the original or a copy of the
agreement as part of its records. See Sec. 1.6001-1(e).
(B) An electing foreign component member must include a statement
identical to the one described in paragraph (h)(2)(ii)(A) of this
section on or with its income tax return (or with an amended return for
that year filed on or before the due date (including extensions) of the
income tax return of any component member with respect to the taxable
year in which the ownership change occurs) (if any) for the taxable year
which includes the change date in connection with which the election
described in paragraph (h)(2)(ii)(A) of this section is made. If the
electing foreign component member is a controlled foreign corporation
(within the meaning of section 957), each United States shareholder
(within the meaning of section 951(b)) with respect thereto must include
this statement on or with its return. It is not necessary for the
electing foreign component member (or United States shareholder, as the
case may be) to include this statement on or with its return if the loss
corporation includes an identical statement on or with the same return
for the same election.
(iii) Agreement. Both the electing foreign component member and the
corporation to which full value is not restored must sign and date an
agreement. The agreement must--
(A) Identify the change date for the loss corporation in connection
with which the election is made;
(B) State the value of the electing foreign component member's stock
(without regard to any adjustment under paragraph (c) of this section)
immediately before the ownership change;
(C) State the amount of any reduction required under paragraph
(c)(1) of this section with respect to stock of the electing foreign
component member that is owned directly or indirectly by the corporation
to which value is not restored;
(D) State the amount of value that the electing foreign component
member elects not to restore to the corporation; and
(E) State whether the value of either component member's stock was
adjusted pursuant to paragraph (c)(4) of this section.
(3) Revocation of election. An election (other than the deemed
election described in paragraph (h)(2)(i) of this section) made under
this section is revocable only with the consent of the Commissioner.
(i) References to former temporary regulations. As the context
requires, a reference in this section to Sec. 1.382-8 includes a
reference to Sec. 1.382-8T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised as of April 1, 1999, a reference to
Sec. Sec. 1.1502-91, 1.1502-92, 1.1502-93, and Sec. Sec. 1.1502-91
through 1.1502-99 includes a reference to Sec. Sec. 1.1502-91A, 1.1502-
92A, 1.1502-93A and Sec. Sec. 1.1502-91A through 1.1502-99A.
(j) Effective date--(1) In general. This section applies to a loss
corporation that has an ownership change with respect to a controlled
group loss on or after January 1, 1997.
(2) Transition rule--(i) In general. The members of a controlled
group on January 1, 1997, that have had an ownership change with respect
to a controlled group loss before January 1, 1997, must determine the
limitations under section 382 for any post-change year with respect to
controlled group losses by using a reasonable method to preclude the
value of stock of a component member that was owned directly or
indirectly by another member immediately after an ownership change from
being taken into account more than once in determining the limitations
under section 382 with respect to
[[Page 742]]
controlled group losses. If such a reasonable method was not used for a
post-change year, subject to the exception in paragraph (j)(3) of this
section, the members of the controlled group described in the preceding
sentence must reduce their limitations under section 382 for post-change
years for which the income tax return is filed after January 1, 1997, to
recapture, as quickly as possible, any limitation that members took into
account in excess of the amount that would be allowable under this
section.
(ii) Special transition rule for controlled groups that had
ownership changes before January 29, 1991. For purposes of this section,
in the case of an ownership change occurring before January 29, 1991,
the controlled group with respect to a controlled group loss does not
include a corporation that is not a component member of the controlled
group on January 29, 1991. Thus, in the case of an ownership change
occurring before January 29, 1991, paragraph (c) of this section does
not require that a loss corporation that is a component member of a
controlled group to disregard the value of stock of another corporation
directly owned immediately after the ownership change in determining the
value of its own stock unless the other corporation is a component
member of the controlled group on January 29, 1991.
(3) Amended returns. A taxpayer that has had an ownership change
before January 1, 1997, may file an amended return for any taxable year
to modify the amount of a limitation under section 382 with respect to a
controlled group loss only if--
(i) The modification complies with the rules contained in this
section for computing a limitation under section 382;
(ii) Any other component member of the controlled group with respect
to the controlled group loss who elects to restore value and whose
taxable income is affected by the election to restore value also files
amended returns that comply with such rules; and
(iii) Corresponding adjustments are made in amended returns for all
taxable years ending after December 31, 1986.
(4) Effective/applicability date. Paragraphs (c)(2), (e)(4) and (h)
of this section apply to any taxable year beginning on or after May 30,
2006. However, taxpayers may apply paragraphs (c)(2), (e)(4) and (h) of
this section to any original Federal income tax return (including any
amended return filed on or before the due date (including extensions) of
such original return) timely filed on or after May 30, 2006. For taxable
years beginning before May 30, 2006, see Sec. 1.382-8 as contained in
26 CFR part 1 in effect on April 1, 2006.
[T.D. 8679, 61 FR 33316, June 27, 1996, as amended by T.D. 8825, 64 FR
36178, July 2, 1999; T.D. 9264, 71 FR 30599, 30607, May 30, 2006; T.D.
9329, 72 FR 32801, June 14, 2007]
Sec. 1.382-9 Special rules under section 382 for corporations under
the jurisdiction of a court in a title 11 or similar case.
(a) Introduction. Either section 382(l)(5) or section 382(l)(6) may
apply to an ownership change which occurs in a title 11 or similar case
(as defined in section 368(a)(3)(A)) if the transaction resulting in the
ownership change is ordered by the court or is pursuant to a plan
approved by the court. Terms and nomenclature used in this section, and
not otherwise defined herein (including the nomenclature and assumptions
in Sec. 1.382-2T(b) relating to the examples) have the same respective
meanings as in section 382 and the regulations thereunder.
(b) Application of section 382(l)(5). section 382(a) does not apply
to any ownership change if--
(1) The old loss corporation is (immediately before the ownership
change) under the jurisdiction of the court in a title 11 or similar
case; and
(2) The pre-change shareholders and qualified creditors of the old
loss corporation (determined immediately before the ownership change)
own (after the ownership change and as a result of being pre-change
shareholders or qualified creditors immediately before the ownership
change) stock of the new loss corporation (or stock of a controlling
corporation if also in bankruptcy) that meets the requirements of
section 1504(a)(2) (determined by substituting ``50 percent'' for ``80
percent'' each place it appears).
[[Page 743]]
(c) [Reserved]
(d) Rules for determining whether stock of the loss corporation is
owned as a result of being a qualified creditor--(1) Qualified creditor.
A qualified creditor is the beneficial owner, immediately before the
ownership change, of qualified indebtedness of the loss corporation. A
qualified creditor owns stock of the new loss corporation (or a
controlling corporation) as a result of being a qualified creditor only
to the extent that the qualified creditor receives stock in full or
partial satisfaction of qualified indebtedness (including interest
accrued on such indebtedness) in a transaction that is ordered by the
court or is pursuant to a plan approved by the court in a title 11 or
similar case. For purposes of this paragraph (d)(1), ownership of stock
after the ownership change is determined without applying the
attribution rules generally applicable under section 382(l)(3)(A) or
Sec. 1.382-2T(h).
(2) General rules for determining whether indebtedness is qualified
indebtedness--(i) Definition. Indebtedness of the loss corporation is
qualified indebtedness if it--
(A) Has been owned by the same beneficial owner since the date that
is 18 months before the date of the filing of the title 11 or similar
case; or
(B) Arose in the ordinary course of the trade or business of the
loss corporation and has been owned at all times by the same beneficial
owner.
(ii) Determination of beneficial ownership. For purposes of
paragraph (d)(2)(i) of this section, beneficial ownership of
indebtedness is determined without applying attribution rules.
(iii) Duty of inquiry. The loss corporation must determine that
indebtedness that the loss corporation treats as qualified indebtedness,
other than indebtedness to which paragraph (d)(3)(i) of this section
applies, has been owned for the requisite period by the beneficial owner
who owns the indebtedness immediately before the ownership change. The
loss corporation may rely on a statement, signed under penalties of
perjury, by a beneficial owner regarding the amount of indebtedness the
beneficial owner owns and the length of time that the beneficial owner
has owned the indebtedness.
(iv) Ordinary course indebtedness. For purposes of this paragraph
(d)(2), indebtedness arises in the ordinary course of the loss
corporation's trade or business only if the indebtedness is incurred by
the loss corporation in connection with the normal, usual, or customary
conduct of business, determined without regard to whether the
indebtedness funds ordinary or capital expenditures of the loss
corporation. For example, indebtedness (other than indebtedness acquired
for a principal purpose of being exchanged for stock) arises in the
ordinary course of the loss corporation's trade or business if it is
trade debt; a tax liability; a liability arising from a past or present
employment relationship, a past or present business relationship with a
supplier, customer, or competitor of the loss corporation, a tort, a
breach of warranty, or a breach of statutory duty; or indebtedness
incurred to pay an expense deductible under section 162 or included in
the cost of goods sold. A claim that arises upon the rejection of a
burdensome contract or lease pursuant to the title 11 or similar case is
treated as arising in the ordinary course of the loss corporation's
trade or business if the contract or lease so arose.
(3) Treatment of certain indebtedness as continuously owned by the
same owner--(i) In general. For purposes of paragraph (d)(2) of this
section, a loss corporation may treat indebtedness as always having been
owned by the beneficial owner of the indebtedness immediately before the
ownership change if the beneficial owner is not, immediately after the
ownership change, either a 5-percent shareholder or an entity through
which a 5-percent shareholder owns an indirect ownership interest in the
loss corporation (a 5-percent entity). This paragraph (d)(3)(i) does not
apply to indebtedness beneficially owned by a person whose participation
in formulating a plan of reorganization makes evident to the loss
corporation (whether or not the loss corporation had previous knowledge)
that the person has not owned the indebtedness for the requisite period.
(ii) Operating rules. For purposes of paragraph (d)(3)(i) of this
section: (A) If
[[Page 744]]
a loss corporation has actual knowledge of a coordinated acquisition of
its indebtedness by a group of persons, through a formal or informal
understanding among themselves, for a principal purpose of exchanging
the indebtedness for stock, the indebtedness (and any stock received in
exchange therefor) is treated as owned by an entity. A principal element
in determining if an understanding exists among members of a group is
whether the investment decision of each member is based upon the
investment decision of one or more other members.
(B) If the loss corporation has actual knowledge regarding stock
ownership described in Sec. 1.382-2T(k)(2), the loss corporation must
take that ownership into account in determining which beneficial owners
of indebtedness are, immediately after the ownership change, 5-percent
shareholders or 5-percent entities. The loss corporation is not required
to take into account an ownership interest described in Sec. 1.382-
2T(k)(4) unless the loss corporation has actual knowledge of the
ownership interest.
(C) The term 5-percent shareholder includes any person who is a 5-
percent shareholder of the loss corporation within the meaning of Sec.
1.382-2T(g), without regard to the option attribution rules of section
382(l)(3)(A) or Sec. 1.382-4(d) (or, if applicable, Sec. 1.382-
2T(h)(4)).
(D) Paragraph (d)(3)(i) of this section does not apply to
indebtedness if the loss corporation has actual knowledge immediately
after the ownership change that the exercise of an option to acquire or
dispose of stock of the loss corporation would cause the beneficial
owner of the indebtedness immediately before the ownership change to be,
after the ownership change, either a 5-percent shareholder or a 5-
percent entity. An interest that is treated as an option under Sec.
1.382-4(d)(9) (or Sec. 1.382-2T(h)(4)(v) if applicable) is treated as
an option for purposes of this paragraph (d)(3)(ii)(D).
(iii) Indebtedness owned by beneficial owner who becomes a 5-percent
shareholder or 5-percent entity. If the beneficial owner of indebtedness
immediately before the ownership change is a 5-percent shareholder or 5-
percent entity immediately after the ownership change, the general rules
of paragraph (d)(2) of this section apply to determine whether the
indebtedness has been owned for the requisite period by the beneficial
owner.
(iv) Example. The following example illustrates paragraph (d)(3) of
this section.
Example. (A)(1) L is a loss corporation in a title 11 case. The plan
of reorganization of L approved by the bankruptcy court provides for the
satisfaction of claims by the issuance of new L common stock to its
creditors as follows:
A--2 percent
B--7.5 percent
C--2.5 percent
P1--3 percent
P2--10 percent
P3--4.9 percent
P4--4.9 percent
P5--4.9 percent
(2) P2 is owned by Public P2. B owns 10 percent of the stock of P1
and L has no actual knowledge of this ownership. L has actual knowledge
that D owns P3, P4 and P5. In addition, L has actual knowledge,
immediately after the ownership change, that C owns an option to acquire
newly-issued stock of L that, if exercised, would increase C's
percentage ownership of L stock from 2.5 percent to 8 percent. An
ownership change of L occurs on the date the plan becomes effective.
(B) Under paragraph (d)(3)(i) of this section, L may treat the
indebtedness owned by A and P1 immediately before the ownership change
as always having been owned by A and P1. Neither A nor P1 is a 5-percent
shareholder immediately after the ownership change. Further, because P1
owns less than 5 percent of the L stock (and L has no actual knowledge
of B's ownership interest in P1), P1 is treated as an individual, and
the L stock owned by P1 is not attributed to any other person, including
B. See Sec. 1.382-2T(h)(2)(iii). Therefore, P1 is not a 5-percent
entity.
(C) Paragraph (d)(3)(i) of this section does not apply to the
indebtedness owned by B, C, P2, P3, P4, or P5. B is a 5-percent
shareholder immediately after the ownership change. L has actual
knowledge immediately after the ownership change that the exercise of
C's option would cause C to be a 5-percent shareholder immediately after
the ownership change. (L does not take into account the effect of the
exercise of the option, however, in determining the percentage stock
ownership of any person other than C because the deemed exercise would
not cause any other person to be a 5-percent shareholder or a 5-percent
entity after the ownership change.) P2 is a 5-percent entity, because
Public P2, a
[[Page 745]]
5-percent shareholder, owns an indirect ownership interest in L through
P2. P3, P4, and P5 are 5-percent entities because D, a 5-percent
shareholder, owns an indirect ownership interest in L through P3, P4,
and P5. Because L has actual knowledge that D would be a 5-percent
shareholder but for the application of Sec. 1.382-2T(h)(2)(iii), that
section does not apply to P3, P4, or P5. See Sec. 1.382-2T(k)(2). Thus,
under Sec. 1.382-2T(h)(2)(i), the L stock owned by P3, P4, and P5 is
attributed to D, and D is a 5-percent shareholder. Because paragraph
(d)(3)(i) of this section does not apply to the indebtedness owned by B,
C, P2, P3, P4, and P5, L may treat as qualified indebtedness only
indebtedness that it determines had been owned by such persons for the
requisite period. See paragraph (d)(2)(iii) of this section.
(4) Special rule if indebtedness is a large portion of creditor's
assets--(i) In general. Indebtedness is not qualified indebtedness if--
(A) The beneficial owner of the indebtedness is a corporation or
other entity that had an ownership change on any day during the
applicable period;
(B) The indebtedness represents more than 25 percent of the fair
market value of the total gross assets (excluding cash or cash
equivalents) of the beneficial owner on its change date; and
(C) The beneficial owner is a 5-percent entity immediately after the
ownership change of the loss corporation (determined by applying the
rules of paragraph (d)(3) of this section).
(ii) Applicable period. For purposes of paragraph (d)(4)(i) of this
section, the term applicable period means the period beginning on the
day 18 months before the filing of the title 11 or similar case (or the
day on which the beneficial owner acquired the indebtedness, if later)
and ending with the change date of the loss corporation.
(iii) Determination of ownership change. For purposes of paragraph
(d)(4)(i) of this section, the determination whether a beneficial owner
of indebtedness has an ownership change is made under the principles of
section 382 and the regulations thereunder, without regard to whether
the beneficial owner is a loss corporation and by beginning the testing
period no earlier than the latest of the day three years before the
change date, the day 18 months before the filing of the title 11 or
similar case, or the day on which the beneficial owner acquired the
indebtedness.
(iv) Reliance on statement. Paragraph (d)(4)(i) of this section does
not apply to indebtedness if the loss corporation obtains a statement,
signed under penalties of perjury, by the beneficial owner of the
indebtedness that states that paragraph (d)(4)(i) of this section does
not apply to the indebtedness.
(5) Tacking of ownership periods--(i) Transferee treated as owning
indebtedness for period owned by transferor. To determine whether
indebtedness transferred in a qualified transfer is qualified
indebtedness, the transferee is treated as having owned the indebtedness
for the period that it was owned by the transferor.
(ii) Qualified transfer. For purposes of paragraph (d)(5)(i) of this
section, a transfer of indebtedness is a qualified transfer if--
(A) The transfer is between parties who bear a relationship to each
other described in section 267(b) or 707(b) (substituting at least 80
percent for more than 50 percent each place it appears in section 267(b)
(and section 267(f)(1)) or 707(b));
(B) The transfer is a transfer of a loan within 90 days after its
origination, pursuant to a customary syndication transaction;
(C) The transfer is a transfer of newly incurred indebtedness by an
underwriter that owned the indebtedness for a transitory period pursuant
to an underwriting;
(D) The transferee's basis in the indebtedness is determined under
section 1014, 1015, or 1022 or with reference to the transferor's basis
in the indebtedness;
(E) The transfer is in satisfaction of a right to receive a
pecuniary bequest;
(F) The transfer is pursuant to any divorce or separation instrument
(within the meaning of section 71(b)(2));
(G) The transfer is pursuant to a subrogation in which the
transferee acquires a claim against the loss corporation by reason of a
payment to the claimant pursuant to an insurance policy or a guarantee,
letter of credit or similar security arrangement; or
(H) The transfer is a transfer of an account receivable in a
customary
[[Page 746]]
commercial factoring transaction made within 30 days after the account
arose to a transferee that regularly engages in such transactions.
(iii) Exception. A transfer of indebtedness is not a qualified
transfer for purposes of paragraph (d)(5)(i) of this section if the
transferee acquired the indebtedness for a principal purpose of
benefiting from the losses of the loss corporation by--
(A) Exchanging the indebtedness for stock of the loss corporation
pursuant to the title 11 or similar case; or
(B) Selling the indebtedness at a profit that reflects the
expectation that, by reason of section 382(l)(5), section 382(a) will
not apply to any ownership change resulting from the title 11 or similar
case.
(iv) Debt-for-debt exchanges. If the loss corporation satisfies its
indebtedness with new indebtedness, either through an exchange of new
indebtedness for old indebtedness or a change in the terms of
indebtedness that results in an exchange under section 1001--
(A) The owner of the new indebtedness is treated as having owned
that indebtedness for the period that it owned the old indebtedness; and
(B) The new indebtedness is treated as having arisen in the ordinary
course of the trade or business of the loss corporation if the old
indebtedness so arose.
(6) Effective date--(i) In general. This paragraph (d) applies to
ownership changes occurring on or after March 17, 1994. The provisions
of paragraph (d)(5)(ii)(D) of this section relating to section 1022 are
effective on and after January 19, 2017.
(ii) Elections and amended returns--(A) Election to apply this
paragraph (d) retroactively. A loss corporation may elect to apply this
paragraph (d) to an ownership change occurring prior to March 17, 1994.
This election must be made by the later of the due date (including any
extensions of time) of the loss corporation's tax return for the taxable
year which includes the change date or the date that the loss
corporation files its first tax return after May 16, 1994. The election
is made by attaching the following statement to the return: ``This is an
Election to Apply Sec. 1.382-9(d) Retroactively with Respect to the
Ownership Change on [Insert Date of Ownership Change] That Occurred in
Connection with the title 11 or Similar Case filed on [Insert Date of
Filing].'' This statement must be accompanied by the amended returns
described in paragraph (d)(6)(ii)(C) of this section. An election under
this paragraph (d)(6) is irrevocable.
(B) Election to revoke section 382(l)(5)(H) election. A loss
corporation may elect to revoke a prior election made under section
382(l)(5)(H) with respect to an ownership change occurring before March
17, 1994 by including the following statement with its election to apply
Sec. 1.382-9(d) retroactively: ``This is an Election to Revoke a Prior
Election Made Under Section 382(l)(5)(H) With Respect to the Ownership
Change on [Insert Date of Ownership Change] That Occurred in Connection
With the title 11 or Similar Case Filed on [Insert Date of Filing].''
(C) Amended returns. If the retroactive application of this
paragraph (d) affects the amount of taxable income or loss for a prior
taxable year, then, except as precluded by the applicable statute of
limitations, the loss corporation (or the common parent of any
consolidated group of which the loss corporation was a member for the
year) must file an amended return for the year that reflects the effects
of the retroactive application of the rules of this paragraph (d). If
the statute of limitations precludes the filing of an amended return for
one or more such prior taxable years, the loss corporation (or the
common parent) must make appropriate adjustments under the principles of
section 382(l)(2)(A) in subsequent taxable years to reflect the
difference between the losses and credits actually used in such prior
taxable years and the amount that would have been used in those years
applying the rules of this paragraph (d).
(e) Option attribution for purposes of determining stock ownership
under section 382(l)(5)(A)(ii)--(1) In general. Solely for purposes of
determining whether the stock ownership requirements of section
382(l)(5)(A)(ii) are satisfied at the time of an ownership change, stock
of the loss corporation (or of a controlling corporation if also in
bankruptcy) that is subject to an option is treated
[[Page 747]]
as acquired at that time, pursuant to an exercise of the option by its
owner, if such deemed exercise would cause the pre-change shareholders
and qualified creditors of the loss corporation to own (after such
ownership change and as a result of being pre-change shareholders or
qualified creditors immediately before such change) less than an amount
of such stock sufficient to satisfy the ownership requirements of
section 382(l)(5)(A)(ii). An option that is owned as a result of being a
pre-change shareholder or qualified creditor and that, if exercised,
would result in the ownership of stock by a pre-change shareholder or
qualified creditor is not treated as exercised under this paragraph (e).
For purposes of this paragraph (e)(1), rules similar to those option
attribution rules under Sec. 1.382-2T(h)(4)(iii), (iv), (v), (vii), and
(x)(A), (B) (except with respect to a debt instrument that was issued
after the filing of the petition in the title 11 or similar case), (D),
(E) (except with respect to a right to receive or obligation to issue
stock as interest or dividends on a debt instrument or stock that was
issued after the filing of the petition in the title 11 or similar
case), (G), (H), and (Z), apply.
(2) Special rules--(i) Lapse or forfeiture of options deemed
exercised. A loss corporation may apply rules similar to the rules of
Sec. 1.382-2T(h)(4)(viii) with respect to an option except to the
extent any person owning the option at any time on or after the change
date acquires additional stock or an option to acquire additional stock
during the period of time on or after the ownership change and on or
before the lapse or forfeiture of the option.
(ii) Actual exercise of options not deemed exercised. In determining
whether the ownership change pursuant to the plan of reorganization
qualifies under section 382(l)(5), a loss corporation may take into
account stock acquired pursuant to the actual exercise of an option
issued pursuant to the plan of reorganization if that option was not
deemed exercised under paragraph (e)(1) of this section. However, this
paragraph (e)(2)(ii) applies only if the option is actually exercised
within the 3 years of the ownership change by the 5-percent shareholder
who, as a result of being a pre-change shareholder or qualified
creditor, acquired the option under the plan.
(iii) Amended returns. A loss corporation may file an amended return
for a prior taxable year (subject to any applicable statute of
limitations) if it determines that section 382(l)(5) applies to an
ownership change as a result of the operation of paragraph (e)(2)(i) or
(ii) of this section, but only if the loss corporation makes
corresponding adjustments on amended returns for all affected taxable
years (subject to any applicable statute of limitations).
(3) Examples. In each of the examples in this paragraph (e)(3),
assume that there is an ownership change of loss corporation L on the
date the plan of reorganization is effective.
Example 1. L is a loss corporation in a title 11 case. The plan of
reorganization of L approved by the bankruptcy court provides for the
cancellation of all existing L stock, the issuance of 100 shares of new
L common stock to qualified creditors, and the issuance of an option to
a new investor to acquire, at any time during the next 3 years, 90
shares of new L common stock from L at its fair market value on the date
the plan becomes effective. Under paragraph (e)(1) of this section, on
the date the plan becomes effective, the option held by the new investor
is deemed exercised if the exercise would cause the qualified creditors
of L to own less than 50 percent of the total voting power or value of
the L stock after the ownership change. Because the qualified creditors
would receive at least 50 percent of the voting power and value of the
new L common stock even if the option were deemed exercised, the stock
ownership requirements of section 382(l)(5)(A)(ii) are satisfied.
Example 2. The facts are the same as in Example 1, except that L
issues an option to the new investor to acquire 110 shares of new L
common stock. This option is deemed exercised under paragraph (e)(1) of
this section on the date the plan becomes effective, because, as a
result of the deemed exercise, the qualified creditors would own only
100 of 210 shares of the new L common stock (approximately 48 percent)
after the ownership change. Accordingly, the stock ownership
requirements of section 382(l)(5)(A)(ii) are not satisfied and section
382(a) applies to the ownership change.
Example 3. (a) L is a loss corporation in a title 11 case. The plan
of reorganization of L approved by the bankruptcy court provides for the
cancellation of all existing L stock, the issuance of new L common stock
and 5-year options to acquire L common stock as follows:
[[Page 748]]
(i) To qualified creditors--100 shares of stock and options to
acquire 50 shares;
(ii) To a new investor--options to acquire 110 shares.
(b) Under paragraph (e)(1) of this section, the option held by the
new investor is deemed exercised on the date the plan becomes effective
because the exercise would cause the qualified creditors of L to own
less than 50 percent of the total voting power and value of the L stock
after the ownership change (100 of 210 shares or approximately 48
percent). Accordingly, the stock ownership requirements of section
382(l)(5)(A)(ii) are not satisfied initially and section 382(a) applies
to the ownership change.
(c) Assume, however, that the qualified creditors actually exercise
enough options that were acquired pursuant to the plan of reorganization
to purchase 30 additional shares during the 3 year period after the plan
becomes effective. Under paragraph (e)(2)(ii) of this section, L may
take into account the 30 shares purchased by the qualified creditors by
the exercise of the options in determining whether the stock ownership
requirements of section 382(l)(5)(A)(ii) were satisfied on the date the
plan of reorganization became effective. If L takes such purchases into
account, the qualified creditors of L are deemed to own as of the date
of the ownership change more than 50 percent of the total voting power
or value of the L stock after the ownership change (130 of 240 shares or
approximately 54 percent), with the result that the stock ownership
requirements of section 382(l)(5)(A)(ii) are satisfied and section
382(l)(5) applies to the ownership change as of the effective date of
the plan.
(d) Assume instead that the qualified creditors acquire 30
additional shares by exercise of options more than 3 years after the
plan becomes effective. Such exercise is not taken into account under
paragraph (e)(2)(ii) of this section for purposes of determining whether
the stock ownership requirements of section 382(l)(5)(A)(ii) are
satisfied as of the effective date of the plan. Thus, the qualified
creditors are deemed to own less than 50 percent of the total voting
power and value of the L stock after the ownership change (100 of 210
shares) and section 382(l)(5) does not apply to the ownership change.
(e) Assume instead that, during the 3 year period after the plan
becomes effective, the new investor exercises part of his option and
purchases 105 shares of stock. The exercise causes a lapse of the rights
to acquire the remaining 5 shares of stock. Also during that time, the
qualified creditors exercise part of their options and acquire 6
additional shares of stock. Under paragraph (e)(2)(i) of this section, L
may treat the lapse of that part of the new investor's option to acquire
5 shares of stock as if that part of the option had never been issued
for purposes of determining whether the stock ownership requirements of
section 382(l)(5)(A)(ii) are satisfied as of the effective date of the
plan. Also, under paragraph (e)(2)(ii) of this section, L may take into
account the 6 shares purchased by the qualified creditors by the
exercise of the options in determining whether the stock ownership
requirements of section 382(l)(5)(A)(ii) are satisfied as of the
effective date of the plan. If L takes all of this information into
account, the qualified creditors are deemed to own more than 50 percent
of the total voting power or value of the L stock after the ownership
change (106 of 211 shares or approximately 50.2 percent) and section
382(l)(5) applies to the ownership change as of the effective date of
the plan.
(4) Effective dates--(i) In general. This paragraph (e) applies to
ownership changes occurring on or after September 5, 1990.
(ii) Special rule for interest or dividends. Rules similar to the
rules of Sec. 1.382-2T(h)(4)(x)(E) (relating to option attribution for
purposes of determining whether an ownership change occurs) apply to a
right to receive or obligation to issue stock as interest or dividends
on a debt instrument or stock that was issued after the filing of the
petition in the title 11 or similar case for ownership changes occurring
before April 8, 1992.
(f)-(h) [Reserved]
(i) Election not to apply section 382(l)(5). Under section
382(l)(5)(H), a loss corporation may elect not to have the provisions of
section 382(l)(5) apply to an ownership change in a title 11 or similar
case. This election is irrevocable and must be made by the due date
(including any extensions of time) of the loss corporation's tax return
for the taxable year which includes the change date. The election is to
be made by attaching the following statement to the tax return of the
loss corporation for that taxable year: ``This is an Election Under
Sec. 1.382-9(i) not to Apply the Provisions of Section 382(l)(5) to the
Ownership Change Occurring Pursuant to a Plan of Reorganization
Confirmed by the Court on [Insert Confirmation Date].''
(j) Value of the loss corporation in an ownership change to which
section 382(l)(6) applies. Section 382(l)(6) applies to any ownership
change occurring pursuant to a plan of reorganization in a title 11 or
similar case to which section 382(l)(5) does not apply. In such case,
the value of the loss corporation
[[Page 749]]
under section 382(e) is equal to the lesser of--
(1) The value of the stock of the loss corporation immediately after
the ownership change (determined under the rules of paragraph (k) of
this section); or
(2) The value of the loss corporation's pre-change assets
(determined under the rules of paragraph (l) of this section).
(k) Rules for determining the value of the stock of the loss
corporation--(1) Certain ownership interests treated as stock. For
purposes of paragraph (j)(1) of this section--
(i) Stock includes stock described in section 1504(a)(4) and any
stock that is not treated as stock under Sec. 1.382-2T(f)(18)(ii) for
purposes of determining whether a loss corporation has an ownership
change; and
(ii) Stock does not include an ownership interest that is treated as
stock under Sec. 1.382-2T(f)(18)(iii) for purposes of determining
whether a loss corporation has an ownership change.
(2) Coordination with section 382(e)(2). In the case of a redemption
or other corporate contraction occurring after and in connection with
the ownership change, the value of the stock of the loss corporation
under paragraph (j)(1) of this section is reduced under section
382(e)(2).
(3) Coordination with section 382(e)(3). If the loss corporation is
a foreign corporation, in determining the value of the stock under
paragraph (j)(1) of this section, only items treated as connected with
the conduct of a trade or business in the United States are taken into
account.
(4) Coordination with section 382(l)(1). Section 382(l)(1) does not
apply in determining the value of the stock of the loss corporation
under paragraph (j)(1) of this section.
(5) Coordination with section 382(l)(4). If, immediately after the
ownership change, the loss corporation has substantial nonbusiness
assets (as determined under section 382(l)(4)(B) taking into account
only those assets the loss corporation held immediately before the
ownership change), the value of the stock of the loss corporation under
paragraph (j)(1) of this section is reduced by the excess of the value
of such nonbusiness assets over those assets' share of the loss
corporation's indebtedness (determined under section 382(l)(4)(D) taking
into account the loss corporation's assets and liabilities immediately
after the ownership change).
(6) Special rule for stock not subject to the risk of corporate
business operations--(i) In general. The value of the stock of the loss
corporation under paragraph (j)(1) of this section is reduced by the
value of stock that is issued as part of a plan one of the principal
purposes of which is to increase the section 382 limitation without
subjecting the investment to the entrepreneurial risks of corporate
business operations.
(ii) Coordination of special rule and other rules affecting value.
If the value of the loss corporation is modified under another rule
affecting value, appropriate adjustments are to be made so that such
modification is not duplicated under this paragraph (k)(6).
(7) Limitation on value of stock. For purposes of paragraph (j)(1)
of this section, the value of stock of the loss corporation issued in
connection with the ownership change cannot exceed the cash and the
value of any property (including indebtedness of the loss corporation)
received by the loss corporation in consideration for the issuance of
that stock.
(l) Rules for determining the value of the loss corporation's pre-
change assets--(1) In general. Except as otherwise provided in this
paragraph (l), the value of the loss corporation's pre-change assets is
the value of its assets (determined without regard to liabilities)
immediately before the ownership change.
(2) Coordination with section 382(e)(2). Section 382(e)(2) does not
apply in determining the value of the pre-change assets of the loss
corporation under paragraph (j)(2) of this section.
(3) Coordination with section 382(e)(3). If the loss corporation is
a foreign corporation, in determining the value of the pre-change assets
under paragraph (j)(2) of this section, only assets treated as connected
with the conduct of a trade or business in the United States are taken
into account.
(4) Coordination with section 382(l)(1). For purposes of paragraph
(j)(2) of this
[[Page 750]]
section, the value of the pre-change assets of the loss corporation is
determined without regard to the amount of any capital contribution to
which section 382(l)(1) applies. For purposes of applying this paragraph
(l)(4), the receipt of cash or property by the loss corporation in
exchange for the issuance of indebtedness is considered a capital
contribution if it is part of a plan one of the principal purposes of
which is to increase the value of the loss corporation under paragraph
(j) of this section.
(5) Coordination with section 382(l)(4). If, immediately after the
ownership change, the loss corporation has substantial nonbusiness
assets (as determined under section 382(l)(4)(B) taking into account
only those assets the loss corporation held immediately before the
ownership change), the value of the loss corporation's pre-change assets
is reduced by the value of the nonbusiness assets.
(m) Continuity of business requirement--(1) Under section 382(l)(5).
If section 382(l)(5) applies to an ownership change of a loss
corporation, section 382(c) and the regulations thereunder do not apply
with respect to the ownership change.
(2) Under section 382(l)(6). If section 382(l)(6) applies to an
ownership change of a loss corporation, section 382(c) and the
regulations thereunder apply to the ownership change.
(n) Ownership change in a title 11 or similar case succeeded by
another ownership change within two years--(1) Section 382(l)(5) applies
to the first ownership change. If section 382(l)(5) applies to an
ownership change and, within the two-year period immediately following
such ownership change, a second ownership change occurs, section
382(l)(5) cannot apply to the second ownership change and the section
382(a) limitation with respect to the second ownership change is zero.
(2) Section 382(l)(6) applies to the first ownership change. If the
value of a loss corporation in an ownership change was determined under
section 382(l)(6) and a second ownership change occurs within the two-
year period immediately following the first ownership change, the value
of the loss corporation under section 382(e) with respect to the second
ownership change is not reduced under section 382(l)(1) for any increase
in value of the loss corporation previously taken into account under
section 382(l)(6) with respect to the first ownership change.
(o) Treatment of certain options for ownership change purposes--(1)
Neither Sec. 1.382-2T(h)(4)(i) nor Sec. 1.382-4(d) (relating to the
treatment of options as exercised) applies to the following options to
acquire stock of a loss corporation reorganized pursuant to a plan of
reorganization that is confirmed in a title 11 or similar case (within
the meaning of section 368(a)(3)(A)) but only until the time the plan
becomes effective--
(i) Any option created by the solicitation or receipt of acceptances
to the plan;
(ii) The option created by the confirmation of the plan; and
(iii) Any option created under the plan.
(2) This paragraph (o) generally applies to any testing date
occurring on or after September 5, 1990. However, this paragraph (o)
does not apply on any testing date occurring on or after April 8, 1992,
if, in connection with the plan of reorganization, the loss corporation
issues stock (including stock described in section 1504(a)(4)) or
otherwise receives a capital contribution before the effective date of
the plan for a principal purpose of using before the effective date
losses and credits that would be subject to limitation under section
382(a) or would be eliminated under section 382(l)(5)(B) or (C) if this
paragraph (o) did not apply on the testing date. A loss corporation may
elect to apply this paragraph (o) to any testing date occurring before
September 5, 1990, by filing a statement substantially similar to the
following with its income tax return: ``THIS IS AN ELECTION TO APPLY
Sec. 1.382-3(o) (OR Sec. 1.382-9(o) AFTER REDESIGNATION) FOR TESTING
DATES PRIOR TO SEPTEMBER 5, 1990, TO OPTIONS CREATED BY OR UNDER A PLAN
OF REORGANIZATION CONFIRMED IN A TITLE 11 OR SIMILAR CASE.'' A loss
corporation may elect to not apply this paragraph (o) to testing dates
occurring on or after September 5, 1990, to April 8, 1992, by filing a
statement substantially similar to the following with
[[Page 751]]
its income tax return: ``THIS IS AN ELECTION TO NOT APPLY Sec. 1.382-
3(o) (OR Sec. 1.382-9(o) AFTER REDESIGNATION) FOR TESTING DATES
OCCURRING ON OR AFTER SEPTEMBER 5, 1990, TO APRIL 8, 1992, TO OPTIONS
CREATED BY OR UNDER A PLAN OF REORGANIZATION CONFIRMED IN A TITLE 11 OR
SIMILAR CASE.''
(p) Effective date for rules relating to section 382(l)(6)--(1) In
general. Paragraphs (i), (j), (k), (l), (m)(2), and (n)(2) of this
section apply to any ownership change occurring on or after March 17,
1994.
(2) Ownership change to which section 382(l)(6) applies occurring
before March 17, 1994. In the case of an ownership change occurring
before March 17, 1994, the loss corporation may elect to apply the rules
of paragraphs (j), (k), (l), (m)(2), and (n)(2) of Sec. 1.382-9 in
their entirety. The election must be made by the later of the due date
(including any extensions of time) of the loss corporation's tax return
for the taxable year which includes the change date or the date that the
loss corporation files its first tax return after May 16, 1994. The
election is made by attaching the following statement to the return:
``This is an Election to Apply Sec. Sec. 1.382-9 (j), (k), (l), (m)(2),
and (n)(2) of the Income Tax Regulations to the Ownership Change
Occurring Pursuant to a Plan of Reorganization Confirmed by the Court on
[Insert Confirmation Date].'' In connection with making this election,
on the same return the loss corporation may also elect not to apply
section 382(l)(5) to the ownership change under paragraph (i) of this
section (if the loss corporation has not already done so pursuant to
Sec. 301.9100-7T(a) of this chapter). If, under the applicable statute
of limitations, the loss corporation may file amended returns for the
year of the ownership change and all subsequent years (an open year), an
electing loss corporation must file an amended return for each prior
affected year to reflect the elections. If, under the applicable statute
of limitations, the loss corporation may not file an amended return for
the year of the ownership change or any subsequent year (a closed year),
an electing loss corporation must file an amended return for each
affected open year to reflect the elections and the section 382
limitation resulting from the ownership change must be appropriately
adjusted for the earliest open year (or years) to reflect the difference
between the amount of pre-change losses actually used in closed years
and the amount of pre-change losses that would have been used in such
years applying the rules of paragraphs (j), (k), (l), (m)(2), (n)(2) of
this section to the ownership change.
[T.D. 8388, 57 FR 346, Jan. 6, 1992; T.D. 8407, 57 FR 12210, Apr. 9,
1992. Redesignated by T.D. 8440, 57 FR 45712, 45713, Oct. 5, 1992; 57 FR
52827, Nov. 5, 1992; T.D. 8531, 59 FR 12840, Mar. 18, 1994; T.D. 8530,
59 FR 12843, Mar. 18, 1994; T.D. 8529, 59 FR 12846, Mar. 18, 1994; T.D.
9811, 82 FR 6237, Jan. 19, 2017]
Sec. 1.382-10 Special rules for determining time and manner of
acquisition of an interest in a loss corporation.
(a) Distributions from qualified trusts--(1) In general. For
purposes of Sec. 1.382-2T, if a qualified trust described in section
401(a) (qualified trust) distributes an ownership interest in an entity
(as defined in Sec. 1.382-3(a)(1)), then for testing dates on or after
the date of the distribution, the distributed ownership interest is
treated as having been acquired by the distributee on the date and in
the manner acquired by the trust and not as having been acquired or
disposed of by the trust. The distribution does not cause the day of the
distribution to be a testing date.
(2) Accounting for dispositions--(i) General rule. For purposes of
this paragraph (a), in order to determine which ownership interest in an
entity is distributed from a qualified trust, a loss corporation must
either specifically identify the ownership interests that are the
subject of all dispositions by the qualified trust of ownership
interests in an entity, or apply the first-in, first-out (FIFO) method
to all such dispositions.
(ii) Special rules. For purposes of this paragraph (a)(2):
(A) The FIFO method must be applied on a class-by-class basis; and
(B) The term dispositions includes distributions, sales, and other
transfers.
[[Page 752]]
(3) Examples. The following examples illustrate the principles of
this paragraph (a). For purposes of these examples, unless otherwise
stated, the nomenclature and assumptions of the examples in Sec. 1.382-
2T(b) apply, all corporations file separate income tax returns on a
calendar year basis, the only 5-percent shareholder of a loss
corporation is a public group, and the facts set forth the only
acquisitions of stock by any participants in a qualified plan and the
only owner shifts with respect to the loss corporation during the
testing period. The examples are as follows:
Example 1. (i) Facts. In 1994, E, a qualified trust established
under Plan F, acquires 10 percent of L stock. A is a participant in Plan
F. On January 1, 2002, A acquires 4 percent of L stock, and B, who is
not a participant or a beneficiary of a participant in Plan F, acquires
5 percent of L stock. On January 1, 2004, E distributes 2 percent of L
stock to A. On July 1, 2004, A acquires 1 percent of L stock.
(ii) Analysis. January 1, 2002, is a testing date because B's
acquisition of 5 percent of L stock causes an increase in the percentage
ownership of B, a 5-percent shareholder. As of the close of that testing
date, A is treated as owning only 4 percent of L stock. Therefore, A is
treated as a member of the public group of L. In addition, E is treated
as owning 10 percent of L stock that it acquired in 1994.
(iii) As a result of the application of paragraph (a)(1) of this
section to E's distribution of 2 percent of L stock to A on January 1,
2004, for testing dates on and after January 1, 2004, A is treated as
having acquired that 2 percent interest in L in 1994, and E is treated
as having acquired only 8 percent of L stock in 1994. Because there are
no owner shifts on January 1, 2004, that date is not a testing date.
(iv) July 1, 2004, is a testing date because on that date A, a 5-
percent shareholder, acquires 1 percent of L stock. As of the close of
that testing date, A's percentage of ownership of L stock is 7 percent,
and A's lowest percentage of ownership of L stock at any time within the
testing period is 2 percent (deemed acquired in 1994), representing an
increase of 5 percentage points. In addition, as of the close of July 1,
2004, B's percentage of ownership of L stock is 5 percent, and B's
lowest percentage of ownership of L stock at any time within the testing
period is 0 percent, representing an increase of 5 percentage points.
Thus, on July 1, 2004, L must take into account an increase of 10 (5 +
5) percentage points in determining whether it has an ownership change.
Example 2. (i) Facts. E is a qualified trust established under Plan
F. L, a publicly traded corporation, has 100x shares of stock
outstanding. As of January 1, 2006, C owns 5x shares of L stock and is
not a participant or beneficiary of a participant in Plan F. At all
times prior to January 1, 2006, E owns no L stock. On January 1, 2006, E
acquires 10x shares of L stock from members of the public group of L. On
December 1, 2007, E distributes 5x shares of L stock to some of the
participants in Plan F. No one participant acquires all 5x shares as a
result of the distribution. On February 1, 2008, C purchases 1x shares
of L stock from the public group of L.
(ii) Analysis. Because E's acquisition of 10x shares of L stock on
January 1, 2006, is an owner shift, that date is a testing date. As of
the close of that date, E's percentage of stock ownership in L has
increased by 10 percentage points.
(iii) As a result of the application of paragraph (a)(1) of this
section to E's distribution of 5x shares of L stock to some Plan F
participants on December 1, 2007, for testing dates on and after
December 1, 2007, those distributees are treated as having acquired
those shares of stock on January 1, 2006, from members of the public
group of L, and E is not treated as having acquired those shares on that
date. E's distribution of the 5x shares is not an owner shift.
Therefore, December 1, 2007, is not a testing date.
(iv) February 1, 2008, is a testing date because on that date an
owner shift results from C's purchase of 1x shares of L stock. As of the
close of that testing date, the distributees of 5x shares of L stock are
treated as members of the public group of L having acquired 5x shares of
L stock from other members of the public group of L on January 1, 2006.
Because those acquisitions are not by 5-percent shareholders, L does not
take them into account. In addition, as of the close of February 1,
2008, E's percentage of stock ownership in L is 5 percent, and E's
lowest percentage of stock ownership in L at any time within the testing
period is 0 percent, representing an increase of 5 percentage points. In
addition, as of the close of February 1, 2008, C's percentage of stock
ownership in L is 6 percent, and C's lowest percentage of stock
ownership in L at any time within the testing period is 5 percent,
representing an increase of 1 percentage point. Therefore, on February
1, 2008, L must take into account an increase of 6 (5 + 1) percentage
points in determining whether it has an ownership change.
(4) Effective dates. This section applies to all distributions after
June 23, 2006. For distributions on or before
[[Page 753]]
June 23, 2006, see Sec. 1.382-10T as contained in 26 CFR part 1,
revised April 1, 2006.
(b) [Reserved]
[T.D. 9269, 71 FR 36677, June 28, 2006]
Sec. 1.382-11 Reporting requirements.
(a) Information statement required. A loss corporation must include
a statement entitled, ``STATEMENT PURSUANT TO Sec. 1.382-11(a) BY
[INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER OF TAXPAYER], A LOSS
CORPORATION,'' on or with its income tax return for each taxable year
that it is a loss corporation in which an owner shift, equity structure
shift or other transaction described in Sec. 1.382-2T(a)(2)(i) occurs.
The statement must include the date(s) of any owner shifts, equity
structure shifts, or other transactions described in Sec. 1.382-
2T(a)(2)(i), the date(s) on which any ownership change(s) occurred, and
the amount of any attributes described in Sec. 1.382-2(a)(1)(i) that
caused the corporation to be a loss corporation. A loss corporation may
also be required to include certain elections on this statement,
including--
(1) An election made under Sec. 1.382-2T(h)(4)(vi)(B) to disregard
the deemed exercise of an option if the actual exercise of that option
occurred within 120 days of the ownership change; and
(2) An election made under Sec. 1.382-6(b)(2) to close the books of
the loss corporation for purposes of allocating income and loss to
periods before and after the change date for purposes of section 382.
(b) Effective/applicability date. This section applies to any
taxable year beginning on or after May 30, 2006. However, taxpayers may
apply this section to any original Federal income tax return (including
any amended return filed on or before the due date (including
extensions) of such original return) timely filed on or after May 30,
2006. For taxable years beginning before May 30, 2006, see Sec. 1.382-
2T as contained in 26 CFR part 1 in effect on April 1, 2006.
[T.D. 9329, 72 FR 32803, June 14, 2007]
Sec. 1.382-12 Determination of adjusted Federal long-term rate.
(a) In general. The long-term tax-exempt rate for an ownership
change is the highest of the adjusted Federal long-term rates in effect
for any month in the 3-calendar-month period ending with the calendar
month in which the change date occurs. For purposes of the previous
sentence, the adjusted Federal long-term rate is the Federal long-term
rate determined under section 1274(d) (without regard to paragraphs (2)
and (3) thereof), adjusted for differences between rates on long-term
taxable and tax-exempt obligations. The Secretary calculates the
adjusted Federal long-term rate as provided in paragraph (b) of this
section. The Internal Revenue Service publishes the long-term tax-exempt
rate and the adjusted Federal long-term rate for each month in the
Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii) of this chapter).
(b) Adjusted Federal long-term rate. The adjusted Federal long-term
rate for a calendar month is the product of the Federal long-term rate
determined under section 1274(d) for that month, based on annual
compounding, multiplied by the adjustment factor described in paragraph
(c) of this section.
(c) Adjustment factor. The adjustment factor is a percentage equal
to--
(1) The excess of 100 percent, over
(2) The product of--
(i) 59 percent, and
(ii) The sum of the maximum rate in effect under section 1
applicable to individuals and the maximum rate in effect under section
1411 applicable to individuals for the month to which the adjusted
applicable Federal rate applies.
(d) Effective/applicability date. The rules of this section apply to
the determination of the long-term tax-exempt rate and the adjusted
Federal long-term rate beginning with the rates determined during August
2016 that apply during September 2016.
[T.D. 9763, 81 FR 24483, Apr. 26, 2016]
Sec. 1.383-0 Effective date.
(a) The regulations under section 383 (other than the regulations
described in paragraph (b) of this section) reflect
[[Page 754]]
the amendments made to sections 382 and 383 by the Tax Reform Act of
1986. See Sec. 1.383-1(j) for effective date rules.
(b) Sections 1.383-1A, 1.383-2A, and 1.383-3A do not reflect the
amendments made to sections 382 and 383 by the Tax Reform Act of 1986.
[T.D. 8352, 56 FR 29434, June 27, 1991]
Sec. 1.383-1 Special limitations on certain capital losses and
excess credits.
(a) Outline of topics. In order to facilitate the use of this
section, this paragraph lists the paragraphs, subparagraphs and
subdivisions contained in this section.
(a) Outline of topics.
(b) In general.
(c) Definitions.
(1) Coordination with definitions and nomenclature used in section
382.
(2) Pre-change capital loss.
(3) Pre-change credit.
(4) Pre-change loss.
(5) Regular tax liability.
(6) Section 383 credit limitation.
(i) Definition.
(ii) Example.
(d) Limitation on use of pre-change losses and pre-change credits.
(1) In general.
(2) Ordering rules for utilization of pre-change losses and pre-
change credits and for absorption of the section 382 limitation and the
section 383 credit limitation.
(3) Coordination with other limitations.
(i) In general.
(ii) Examples.
(e) Carryforward of unused section 382 limitation.
(1) Computation of carryforward amount.
(2) Section 383 credit reduction amount.
(3) Computation of section 383 credit reduction amount; illustration
using tax rates and brackets in effect for calendar year 1988.
(4) Special rules for determining the section 383 credit reduction
amount.
(i) Ordering rules.
(ii) Special rule for credits under section 38(a).
(f) Examples.
(g) Coordination with section 382 and the regulations thereunder.
(h) Alternative minimum tax.
(i) [Reserved]
(j) Effective date.
(k) Transitional rules regarding information statements
(b) In general. Under section 383, if an ownership change occurs
with respect to a loss corporation, the section 382 limitation and the
section 383 credit limitation (as defined in paragraph (c)(6) of this
section) for a post-change year shall apply to limit the amount of
taxable income and regular tax liability, respectively, that can be
offset by pre-change capital losses and pre-change credits of the new
loss corporation. The section 383 credit limitation for a post-change
year bears a direct relationship to the amount, if any, of the section
382 limitation that remains after taking into account the reduction in
the loss corporation's taxable income during a post-change year as a
result of its pre-change losses (as defined in paragraph (c)(4) of this
section). In general, the section 383 credit limitation is an amount
equal to the tax liability of the new loss corporation for the post-
change year which is attributable to so much of the corporation's
taxable income that would be reduced by allowing as a deduction its
section 382 limitation remaining after accounting for the use of pre-
change losses. As pre-change losses and pre-change credits of a
corporation are used, they absorb the section 382 limitation and the
section 383 credit limitation, respectively, in the manner prescribed by
paragraph (d) of this section. See also section 382 and the regulations
thereunder.
(c) Definitions--(1) Coordination with definitions and nomenclature
used in section 382. Terms and nomenclature used in this section, and
not otherwise defined herein, shall have the same respective meanings as
in section 382 and the regulations thereunder, taking into account that
the limitations of section 383 and this section apply to pre-change
capital losses and pre-change credits.
(2) Pre-change capital loss. The term pre-change capital loss
means--
(i) Any capital loss carryover under section 1212 of the old loss
corporation to the taxable year ending on the change date or in which
the change date occurs,
(ii) Any net capital loss of the old loss corporation for the
taxable year in which the ownership change occurs, to the extent such
loss is allocable to the period in such year ending on or before the
change date, and
(iii) If the old loss corporation has a net unrealized built-in
loss, any recognized built-in loss for any recognition
[[Page 755]]
period taxable year (within the meaning of section 382(h)) that is a
capital loss.
(3) Pre-change credit. The term pre-change credit means--
(i) Any excess foreign taxes under section 904(c) of the old loss
corporation--
(A) carried forward to the taxable year ending on the change date or
in which the change date occurs, or
(B) carried forward from the taxable year that includes the change
date, to the extent such credit is allocable to the period in such year
ending on or before the change date,
(ii) Any credit under section 38 of the old loss corporation--
(A) carried forward to the taxable year ending on the change date or
in which the change date occurs, or
(B) carried forward from a taxable year that includes the change
date to the extent such credit is allocable to the period in such year
ending on or before the change date, and
(iii) The available minimum tax credit of the old loss corporation
under section 53 to the extent attributable to periods ending on or
before the change date.
(4) Pre-change loss. Solely for purposes of this section, the term
prechange loss means any pre-change loss described in Sec. 1.382-
2(a)(2) other than pre-change credits described in paragraph (c)(3) of
this section.
(5) Regular tax liability. For purposes of this section, the term
regular tax liability has the same meaning as provided in section 26(b).
(6) Section 383 credit limitation--(i) Definition. The section 383
credit limitation for a post-change year of a new loss corporation is an
amount equal to the excess of--
(A) The new loss corporation's regular tax liability for the post-
change year, over
(B) The new loss corporation's regular tax liability for the post-
change year computed, for this purpose, by allowing as an additional
deduction an amount equal to the section 382 limitation remaining after
the application of paragraphs (d)(2)(i) through (iv) of this section.
(ii) Example.
Example. L, a new loss corporation, is a calendar year taxpayer. L
has an ownership change on December 31, 1987. For 1988, L has taxable
income (prior to the use of any pre-change losses) of $100,000. In
addition, L has a section 382 limitation of $25,000, a pre-change net
operating loss carryover of $12,000, a pre-change minimum tax credit of
$50,000, and no pre-change capital losses. L's section 383 credit
limitation is the excess of its regular tax liability computed after
allowing a $12,000 net operating loss deduction (taxable income of
$88,000; regular tax liability of $18,170), over its regular tax
liability computed after allowing an additional deduction in the amount
of L's section 382 limitation remaining after the application of
paragraphs (d)(2)(i) through (iv) of this section, or $13,000 (taxable
income of $75,000; regular tax liability of $13,750). L's section 383
credit limitation is therefore $4,420 ($18,170 minus $13,750).
(d) Limitation on use of pre-change losses and pre-change credits--
(1) In general. The amount of taxable income of a new loss corporation
for any post-change year that may be offset by pre-change losses shall
not exceed the amount of the section 382 limitation for the post-change
year. The amount of the regular tax liability of a new loss corporation
for any post-change year that may be offset by pre-change credits shall
not exceed the amount of the section 383 credit limitation for the post-
change year.
(2) Ordering rules for utilization of pre-change losses and pre-
change credits and for absorption of the section 382 limitation and the
section 383 credit limitation. Pre-change losses described in any
subdivision of this paragraph (d)(2) can offset taxable income in a
post-change year only to the extent that the section 382 limitation for
that year has not been absorbed by pre-change losses described in any
lower-numbered subdivisions. Pre-change credits described in any
subdivision of this paragraph (d)(2) can offset regular tax liability in
a post-change year only to the extent that the section 383 credit
limitation for that year has not been absorbed by pre-change credits
described in any lower numbered subdivisions. The section 382 limitation
is absorbed by one dollar for each dollar of pre-change loss that is
used to offset taxable income. The section 383 credit limitation is
absorbed by one dollar for each dollar of pre-change credit that is used
to offset
[[Page 756]]
regular tax liability. For each post-change year, the section 382
limitation and the section 383 credit limitation of a new loss
corporation are absorbed by such corporation's pre-change losses and
pre-change credits in the following order:
(i) Pre-change capital losses described in paragraph (c)(2)(iii) of
this section that are recognized and are subject to the section 382
limitation in such post-change year,
(ii) Pre-change capital losses described in paragraphs (c)(2)(i) and
(ii) of this section,
(iii) Pre-change losses that are described in Sec. 1.382-2(a)(2)
(other than losses that are pre-change capital losses) that are
recognized and are subject to the section 382 limitation in such post-
change year,
(iv) Pre-change losses not described in paragraphs (d)(2)(i) through
(iii) of this section,
(v) Pre-change credits described in paragraph (c)(3)(i) of this
section (excess foreign taxes),
(vi) Pre-change credits described in paragraph (c)(3)(ii) of this
section (business credits), and
(vii) Pre-change credits described in paragraph (c)(3)(iii) of this
section (minimum tax credit).
(3) Coordination with other limitations--(i) In general. Paragraphs
(d)(1) and (2) of this section shall be applied after the application of
all other limitations contained in subtitle A which are applicable to
the use of a pre-change loss or pre-change credit in a post-change year.
Thus, only otherwise currently allowable pre-change losses and pre-
change credits will result in the absorption of the section 382
limitation and the section 383 credit limitation.
(ii) Examples:
Example 1. L is a calendar year taxpayer and has an ownership change
on December 31, 1987. For 1988, L has taxable income of $300,000, a
regular tax liability of $100,250 and a tentative minimum tax of
$90,000. L has no pre-change losses, but has a business credit
carryforward from 1985 of $25,000, no portion of which is due to the
regular percentage of the investment tax credit under section 46. L has
a section 382 limitation for 1988 of $50,000. L's section 383 credit
limitation is $19,500, i.e., an amount equal to the excess of L's
regular tax liability ($100,250) over its regular tax liability
calculated by allowing an additional deduction of $50,000. Pursuant to
the limitation contained in section 38(c), however, L is entitled to use
only $10,250 of its business credit carryforward in 1988. The unabsorbed
portion of L's section 382 limitation (computed pursuant to paragraph
(e) of this section) is carried forward under section 382(b)(2). The
unused portion of L's business credit carryforward, $14,750, is carried
forward to the extent provided in section 39.
Example 2. Assume the same facts as in Example (1), except that L's
tentative minimum tax is $70,000. L's use of its investment tax credit
carryforward is no longer limited by section 38(c); however, pursuant to
section 383 and this section, L is entitled to use only $19,500 of its
business credit carryforward in 1988. The unused portion of L's business
credit carryforward, $5,500, is carried forward to the extent provided
in section 39. There is no unused section 382 limitation to be carried
forward.
(e) Carryforward of unused section 382 limitation--(1) Computation
of carryforward amount. The section 382 limitation that can be carried
forward under section 382(b)(2) is the excess, if any, of (i) the
section 382 limitation for the post-change year remaining after the
application of paragraphs (d)(2)(i) through (iv) of this section, over
(ii) the section 383 credit reduction amount for that post-change year.
(2) Section 383 credit reduction amount. The section 383 credit
reduction amount for a post-change year is equal to the amount of
taxable income attributable to the portion of the new loss corporation's
regular tax liability for the year that is offset by pre-change credits.
Each dollar of regular tax liability that is offset by a dollar of pre-
change credit is divided by the effective marginal rate at which that
dollar of tax was imposed to determine the amount of taxable income that
resulted in that particular dollar of regular tax liability. The sum of
these ``grossed-up'' amounts for the taxable year is the section 383
credit reduction amount. In determining the effective marginal rate at
which a dollar of tax was imposed, special rules regarding rates of tax
(e.g., sections 11(b)(2) and (15) or taxable income brackets (e.g.,
section 1561), or both, shall be taken into account. See Example (3) in
paragraph (f) of this section illustrating the effect of section
1561(a). Paragraph (e)(3) of this section illustrates the
[[Page 757]]
gross-up computation of the section 383 credit reduction amount based on
the tax table and the rates of tax prescribed by section 11(b) as in
effect for taxable years beginning on January 1, 1988.
(3) Computation of section 383 credit reduction amount; illustration
using tax rates and brackets in effect for calendar year 1988. (i)
Assuming no special rules regarding rates of tax or taxable income
brackets apply, the section 383 credit reduction amount for a new loss
corporation is the sum of the amounts determined under paragraphs
(e)(3)(ii), (iii), (iv), (v), and (vi) of this section.
(ii) The amount determined under this subdivision (ii) is the amount
(if any) by which pre-change credits offset so much of the new loss
corporation's regular tax liability as exceeds $113,900, divided by
0.34.
(iii) The amount determined under this subdivision (e)(3)(iii) is
the amount (if any) by which pre-change credits offset so much of the
new loss corporation's regular tax liability as exceeds $22,250 (but
does not exceed $113,900), divided by 0.39.
(iv) The amount determined under this subdivision (e)(3)(iv) is the
amount (if any) by which pre-change credits offset so much of the new
loss corporation's regular tax liability as exceeds $13,750 (but does
not exceed $22,250), divided by 0.34.
(v) The amount determined under this subdivision (e)(3)(v) is the
amount (if any) by which pre-change credits offset so much of the new
loss corporation's regular tax liability as exceeds $7,500 (but does not
exceed $13,750), divided by 0.25.
(vi) The amount determined under this subdivision (e)(3)(vi) is the
amount (if any) by which pre-change credits offset so much of the new
loss corporation's regular tax liability as does not exceed $7,500,
divided by 0.15.
(4) Special rules for determining the section 383 credit reduction
amount--(i) Ordering rules. For purposes of this paragraph (e), credits,
including pre-change credits, are considered to offset regular tax
liability in the order that such credits are applied under the ordering
rules of part IV of subchapter A of chapter 1 and section 904. For
example, for purposes of this paragraph (e), excess foreign taxes
carried over under section 904(c) (whether or not a pre-change credit)
are considered (under section 38(c)) to offset regular tax liability
before the general business credit carryovers to the taxable year are
considered (under section 39) to offset regular tax liability before
general business credits arising in the taxable year.
(ii) Special rule for credits under section 38(a). For purposes of
applying this paragraph (e), credits under section 38(a) that, under
section 38(c)(2) as applicable, taking into account amendments made by
section 11813 of the Revenue Reconciliation Act of 1990, effectively
offset both regular tax liability and the tax imposed by section 55
(relating to minimum tax), are considered to offset regular tax
liability.
(f) Examples. The following examples illustrate the operation of
paragraphs (b) through (e) of this section. For purposes of these
examples, the term modified tax liability means the amount determined
under paragraph (c)(6)(i)(B) of this section.
Example 1. (i) L, a calendar year taxpayer, has an ownership change
on December 31, 1987. Before the application of carryovers, L, a new
loss corporation, has $60,000 of capital gain, $100,000 of ordinary
taxable income and a section 382 limitation of $100,000 for its first
post-change year beginning after the change date. L's only carryovers
are an $80,000 capital loss carryover and a $100,000 net operating loss
carryover. Both carryovers are from taxable years ending before the
change date and thus are pre-change losses.
(ii) L first uses $60,000 of its pre-change capital loss carryover
to offset its capital gain. This reduces its section 382 limitation to
$40,000 (i.e., $100,000-$60,000). L's pre-change net operating loss
carryover can therefore be used only to the extent of $40,000. L's
remaining $20,000 pre-change capital loss carryover and remaining
$60,000 pre-change net operating loss carryover are carried to later
years to the extent permitted under this section and sections 172,
382(l)(2) and 1212.
Example 2. (i) L, a calendar year taxpayer, has an ownership change
on December 31, 1987. L has $750,000 of ordinary taxable income (before
the application of carryovers) and a section 382 limitation of
$1,500,000 for 1988. L's only carryovers are from pre-1987 taxable years
and consist of a $500,000 net operating loss (``NOL'') carryover and a
$200,000 foreign tax credit carryover, all of which may be used under
the section 904 limitation.
[[Page 758]]
The NOL carryover is a pre-change loss, and the foreign tax credit
carryover is a pre-change credit. L has no other credits which can be
used for 1988 and is not liable for an alternative minimum tax for 1988.
(ii) The following computation illustrates the application of this
section for 1988:
1. Taxable income before carryovers....................... $750,000
2. Pre-change NOL carryover............................... 500,000
3. Section 382 limitation................................. 1,500,000
4. Amount of pre-change NOL carryover that can be used 500,000
(lesser of line 1, 2, or 3)...............................
5. Taxable income (line 1 minus line 4)................... 250,000
6. Section 382 limitation remaining (line 3 minus line 4). 1,000,000
7. Pre-change credit carryover............................ 200,000
8. Regular tax liability (line 5 x section 11 rates):
$50,000 x 0.15 = $7,500
25,000 x 0.25 = 6,250
25,000 x 0.34 = 8,500
150,000 x 0.39 = 58,500................................ 80,750
9. Modified tax liability (line 5 minus line 6 (but not 0
less than zero)) x section 11 rates)......................
10. Section 383 credit limitation (line 8 minus line 9).... 80,750
11. Amount of pre-change credits that can be used (lesser 80,750
of line 7 or line 10).....................................
12. Amount of pre-change credits to be carried over to 1989 119,250
under section 904(c) (line 7 minus line 11)...............
13. Section 383 credit reduction amount:
($80,750 minus $22,250) / 0.39 = $150,000
($22,250 minus $13,750) / 0.34 = 25,000
($13,750 minus $7,500) / 0.25 = 25,000
$7,500 / 0.15 = 50,000................................. 250,000
14. Section 382 limitation to be carried to 1989 under 750,000
section 382(b)(2) (Line 6 minus line 13)..................
Example 3. (i) Assume the same facts as in Example (2), except that,
for purposes of section 1561(a), L is a component member of a controlled
group of corporations and the taxable income of the controlled group of
corporations for 1988 is $2,000,000.
(ii) The following computation illustrates the application of this
section for 1988:
1. Taxable income before carryovers....................... $750,000
2.Pre-change NOL carryover................................ 500,000
3. Section 382 limitation................................. 1,500,000
4. Amount of pre-change NOL carryover that can be used 500,000
(lesser of line 1, 2, or 3)...............................
5. Taxable income (line 1 minus line 4)................... 250,000
6. Section 382 limitation remaining (line 3 minus line 4). 1,000,000
7. Pre-change credit carryover............................ 200,000
8. Regular tax liability (line 5 x 0.34 (the effective 85,000
section 11 rate under section 1561(a)))...................
9. Modified tax liability (line 5 minus line 6 (but not 0
less than zero)) x section 11 rates)......................
10. Section 383 credit limitation (line 8 minus line 9).... 85,000
11. Amount of pre-change credits that can be used (lesser 85,000
of line 7 or line 10).....................................
12. Amount of pre-change credits to be carried over to 1989 115,000
under section 904(c) (line 7 minus line 11)...............
13. Section 383 credit reduction amount (line 11 divided by 250,000
0.34).....................................................
14. Section 383 limitation to be carried to 1989 under 750,000
section 382(b)(2) (line 6 minus line 13)..................
Example 4. (i) L, a calendar year taxpayer, has an ownership change
on December 31, 1987. L has $80,000 of ordinary taxable income (before
the application of carryovers) and a section 382 limitation of $25,000
for 1988, a post-change year. L's only carryover is from a pre-1987
taxable year and is a general business credit carryforward under section
39 in the amount of $10,000 (no portion of which is attributable to the
investment tax credit under section 46). The general business credit
carryforward is a pre-change credit. L has no other credits which can be
used for 1988 and is not liable for an alternative minimum tax for 1988.
(ii) The following computation illustrates the application of this
section:
1. Taxable income.......................................... $80,000
2. Section 382 limitation.................................. 25,000
3. Pre-change credit carryover............................. 10,000
4. Regular tax liability (line 1 x section 11 rates):
$50,000 x 0.15 = $7,500
25,000 x 0.25 = 6,250
5,000 x 0.34 = 1,700................................... 15,450
5. Modified tax liability ((line 1 minus line 2) x section
11 rates):
$50,000 x 0.15 = $7,500
5,000 x 0.25 = 1,250................................... 8,750
6. Section 383 credit limitation (line 4 minus line 5)..... 6,700
7. Amount of pre-change credits that can be used (lesser of 6,700
line 3 or line 6).........................................
8. Amount of pre-change credits to be carried over to 1989 3,300
under sections 39 and 382(l)(2) (line 3 minus line 7).....
9. Regular tax payable (line 4 minus line 7)............... 8,750
10. Section 383 credit reduction amount:
($15,450 minus $13,750) / 0.34 = $5,000
($13,750 minus $8,750) / 0.25 = 20,000................. 25,000
11. Section 382 limitation to be carried to 1989 under 0
section 382(b)(2) (line 2 minus line 10)
(g) Coordination with section 382 and the regulations thereunder.
The rules and principles of section 382 (including, for example, section
382(b)(3) and section 382(l)(2)) and the regulations thereunder shall
also apply with respect to section 383 and this section. To the extent
section 382(h)(6) applies to credits, the principles of this section
apply to such credits. In applying the rules and principles of section
382 and the regulations thereunder, appropriate adjustments shall be
made to take into account that section 383 and this section apply to
pre-change capital losses and pre-change credits. For example, in
applying Sec. 1.382-2T (f)(18)(ii)(C), (f)(18)(iii)(C) and (h)(4)(ix),
any pre-change credits, as defined in paragraph (c)(3) of this section,
must be converted to a deduction equivalent
[[Page 759]]
by dividing the amount of such credits by the maximum effective rate of
tax provided for under section 11 (e.g., 0.34 for taxable years
beginning in 1989).
(h) Alternative minimum tax. See Sec. 1.383-2T for the application
of the limitations contained in sections 382 and 383 in computing the
alternative minimum tax under section 55.
(i) [Reserved]
(j) Effective date. Subject to any exception from the application of
section 382 or the section 382 limitation with respect to a loss
corporation, section 383 and this section apply to any loss corporation
with respect to which an ownership change occurs after December 31,
1986. See Sec. 1.382-2T(m) for effective date rules relating to
ownership changes. If section 383 was not taken into account or was
applied other than in accordance with this section in a prior taxable
year with respect to which section 383 applies, the taxpayer should,
within the period of limitation, file an amended return and pay any
additional tax due plus interest.
(k) Transitional rules regarding information statements--(1)
Exception. An information statement described in Sec. 1.382-
2T(a)(2)(ii) of this section that would be required to be filed solely
by reason of the loss corporation having pre-change capital losses (as
defined in Sec. 1.382-2T (a)(2)(ii)(A) and (B) or pre-change credits
(as defined in paragraph (c)(3) of this section) is not required to be
filed with the income tax return of the loss corporation for any taxable
year for which the due date (including extensions) of the income tax
return is on or before November 20, 1989, or for which the income tax
return is filed on or before October 10, 1989.
(2) Statement with respect to prior periods. A corporation which is
a loss corporation for any taxable year ending in 1987, 1988 or 1989
solely because it has pre-change capital losses (as defined in
paragraphs (c)(2)(i) and (ii) of this section or pre-change credits (as
defined in paragraph (c)(3) of this section) must attach a separate
information statement to its 1988 and 1989 income tax returns. Such
information statement must (i) include the information specified in
Sec. 1.382-2T (a)(2)(ii)(A) and (B) (without regard to testing dates
before May 6, 1986) for each taxable year ending on or after May 6, 1986
for which the corporation was a loss corporation, (ii) state whether and
to what extent pre-change capital losses (as defined in paragraphs
(c)(2)(i) and (ii) of this section) or pre-change credits (as defined in
paragraph (c)(3) of this section) utilized by the corporation in a
taxable year to which the section 382 limitation applied, exceeded the
amount permitted under this section, and (iii) be labeled ``Information
Statement with Respect to Transition Periods.'' For purposes of the
preceding sentence, information previously reported in an information
statement, including a statement filed with a 1988 return, may be
excluded. The requirements of this paragraph (k)(2) apply only with
respect to 1988 and 1989 taxable years with respect to which the due
date of the income tax return (including extensions) is after November
20, 1989, and for which the income tax return is not filed on or before
October 10, 1989.
[T.D. 8264, 54 FR 38668, Sept. 20, 1989; T.D. 8264, 54 FR 46187, Nov. 1,
1989; T.D. 8264, 54 FR 50043, Dec. 4, 1989. Redesignated and amended by
T.D. 8352, 56 FR 29434, June 27, 1991]
Sec. 1.383-2 Limitations on certain capital losses and excess credits
in computing alternative minimum tax. [Reserved]
Sec. 1.385-1 General provisions.
(a) Overview of section 385 regulations. This section and Sec. Sec.
1.385-2 through 1.385-4T (collectively, the section 385 regulations)
provide rules under section 385 to determine the treatment of an
interest in a corporation as stock or indebtedness (or as in part stock
and in part indebtedness) in particular factual situations. Paragraph
(b) of this section provides the general rule for determining the
treatment of an interest based on provisions of the Internal Revenue
Code and on common law, including the factors prescribed under common
law. Paragraphs (c), (d), and (e) of this section provide definitions
and rules of general application for purposes of the section 385
regulations. Section 1.385-2 provides additional guidance regarding the
application of certain factors in determining the federal tax treatment
of an interest in a corporation that is held by a member of the
corporation's expanded group.
[[Page 760]]
Section 1.385-3 sets forth additional factors that, when present,
control the determination of whether an interest in a corporation that
is held by a member of the corporation's expanded group is treated (in
whole or in part) as stock or indebtedness. Section 1.385-3T(f) provides
rules on the treatment of debt instruments issued by certain
partnerships. Section 1.385-4T provides rules regarding the application
of the factors set forth in Sec. 1.385-3 and the rules in Sec. 1.385-
3T to transactions described in those sections as they relate to
consolidated groups.
(b) General rule. Except as otherwise provided in the Internal
Revenue Code and the regulations thereunder, including the section 385
regulations, whether an interest in a corporation is treated for
purposes of the Internal Revenue Code as stock or indebtedness (or as in
part stock and in part indebtedness) is determined based on common law,
including the factors prescribed under such common law.
(c) Definitions. The definitions in this paragraph (c) apply for
purposes of the section 385 regulations. For additional definitions that
apply for purposes of their respective sections, see Sec. Sec. 1.385-
2(d), 1.385-3(g), and 1.385-4T(e).
(1) Controlled partnership. The term controlled partnership means,
with respect to an expanded group, a partnership with respect to which
at least 80 percent of the interests in partnership capital or profits
are owned, directly or indirectly, by one or more members of the
expanded group. For purposes of identifying a controlled partnership,
indirect ownership of a partnership interest is determined by applying
the principles of paragraph (c)(4)(iii) of this section. Such
determination is separate from the determination of the status of a
corporation as a member of an expanded group. An unincorporated
organization described in Sec. 1.761-2 that elects to be excluded from
all of subchapter K of chapter 1 of the Internal Revenue Code is not a
controlled partnership.
(2) Covered member. The term covered member means a member of an
expanded group that is--
(i) A domestic corporation; and
(ii) [Reserved]
(3) Disregarded entity. The term disregarded entity means a business
entity (as defined in Sec. 301.7701-2(a) of this chapter) that is
disregarded as an entity separate from its owner for federal income tax
purposes under Sec. Sec. 301.7701-1 through 301.7701-3 of this chapter.
(4) Expanded group--(i) In general. The term expanded group means
one or more chains of corporations (other than corporations described in
section 1504(b)(8)) connected through stock ownership with a common
parent corporation not described in section 1504(b)(6) or (b)(8) (an
expanded group parent), but only if--
(A) The expanded group parent owns directly or indirectly stock
meeting the requirements of section 1504(a)(2) (modified by substituting
``or'' for ``and'' in section 1504(a)(2)(A)) in at least one of the
other corporations; and
(B) Stock meeting the requirements of section 1504(a)(2) (modified
by substituting ``or'' for ``and'' in section 1504(a)(2)(A)) in each of
the other corporations (except the expanded group parent) is owned
directly or indirectly by one or more of the other corporations.
(ii) Definition of stock. For purposes of paragraph (c)(4)(i) of
this section, the term stock has the same meaning as ``stock'' in
section 1504 (without regard to Sec. 1.1504-4) and all shares of stock
within a single class are considered to have the same value. Thus,
control premiums and minority and blockage discounts within a single
class are not taken into account.
(iii) Indirect stock ownership. For purposes of paragraph (c)(4)(i)
of this section, indirect stock ownership is determined by applying the
constructive ownership rules of section 318(a) with the following
modifications:
(A) Section 318(a)(1) and (a)(3) do not apply except as set forth in
paragraph (c)(4)(v) of this section;
(B) Section 318(a)(2)(C) applies by substituting ``5 percent'' for
``50 percent;'' and
(C) Section 318(a)(4) only applies to options (as defined in Sec.
1.1504-4(d)) that are reasonably certain to be exercised as described in
Sec. 1.1504-4(g).
(iv) Member of an expanded group or expanded group member. The
expanded
[[Page 761]]
group parent and each of the other corporations described in paragraphs
(c)(4)(i)(A) and (c)(4)(i)(B) of this section is a member of an expanded
group (also referred to as an expanded group member). For purposes of
the section 385 regulations, a corporation is a member of an expanded
group if it is described in this paragraph (c)(4)(iv) of this section
immediately before the relevant time for determining membership (for
example, immediately before the issuance of an EGI (as defined in Sec.
1.385-2(d)(3)) or a debt instrument (as defined in Sec. 1.385-3(g)(4))
or immediately before a distribution or acquisition that may be subject
to Sec. 1.385-3(b)(2) or (3)).
(v) Brother-sister groups with non-corporate owners. [Reserved]
(vi) Special rule for indirect ownership through options for certain
members of consolidated groups. In the case of an option of which a
member of a consolidated group, other than the common parent, is the
issuing corporation (as defined in Sec. 1.1504-4(c)(1)), section
318(a)(4) only applies (for purposes of applying paragraph
(c)(4)(iii)(C) of this section) to the option if the option is treated
as stock or as exercised under Sec. 1.1504-4(b) for purposes of
determining whether a corporation is a member of an affiliated group.
(vii) Examples. The following examples illustrate the rules of this
paragraph (c)(4). Except as otherwise stated, for purposes of the
examples in this paragraph (c)(4)(vii), all persons described are
corporations that have a single class of stock outstanding and file
separate federal tax returns and are not described in section 1504(b)(6)
or (b)(8). In addition, the stock of each publicly traded corporation is
widely held such that no person directly or indirectly owns stock in the
publicly traded corporation meeting the requirements of section
1504(a)(2) (as modified by this paragraph (c)(4)).
Example 1. Two different expanded group parents. (i) Facts. P has
two classes of common stock outstanding: Class A and Class B. X, a
publicly traded corporation, directly owns all shares of P's Class A
common stock, which is high-vote common stock representing 85% of the
vote and 15% of the value of the stock of P. Y, a publicly traded
corporation, directly owns all shares of P's Class B common stock, which
is low-vote common stock representing 15% of the vote and 85% of the
value of the stock of P. P directly owns 100% of the stock of S1.
(ii) Analysis. X owns directly 85% of the vote of the stock of P,
which is stock meeting the requirements of section 1504(a)(2) (as
modified by paragraph (c)(4)(i)(A) of this section). Therefore, X is an
expanded group parent described in paragraph (c)(4)(i) of this section
with respect to P. Y owns 85% of the value of the stock of P, which is
stock meeting the requirements of section 1504(a)(2) (as modified by
paragraph (c)(4)(i)(A) of this section). Therefore, Y is also an
expanded group parent described in paragraph (c)(4)(i) of this section
with respect to P. P owns directly 100% of the voting power and value of
the stock of S1, which is stock meeting the requirements of section
1504(a)(2) (as modified by paragraph (c)(4)(i)(B) of this section).
Therefore, X, P, and S1 constitute an expanded group as defined in
paragraph (c)(4)(i) of this section. Additionally, Y, P, and S1
constitute an expanded group as defined in paragraph (c)(4) of this
section. X and Y are not members of the same expanded group under
paragraph (c)(4) of this section because X does not directly or
indirectly own any of the stock of Y and Y does not directly or
indirectly own any of the stock of X, such that X and Y do not comprise
a chain of corporations described in paragraph (c)(4)(i) of this
section.
Example 2. Inclusion of a REIT within an expanded group. (i) Facts.
All of the stock of P is publicly traded. In addition to other assets
representing 85% of the value of its total assets, P directly owns all
of the stock of S1. S1 owns 99% of the stock of S2. The remaining 1% of
the stock of S2 is owned by 100 unrelated individuals. In addition to
other assets representing 85% of the value of its total assets, S2 owns
all of the stock of S3, which has elected to be treated as a taxable
REIT subsidiary of S2 under section 856(l)(1). Both P and S2 are real
estate investment trusts described in section 1504(b)(6).
(ii) Analysis. P directly owns 100% of the stock of S1. However,
under paragraph (c)(4)(i) of this section, P cannot be the expanded
group parent because P is a real estate investment trust described in
section 1504(b)(6). Because no other corporation owns stock in P meeting
the requirements described in paragraph (c)(4)(i) of this section, P is
not an expanded group member. S1 directly owns 99% of the stock of S2,
which is stock meeting the requirements of section 1504(a)(2) (as
modified by paragraph (c)(4)(i)(A) of this section). Although S2 is a
corporation described in section 1504(b)(6), a corporation described in
section 1504(b)(6) may be a member of an expanded group described under
paragraph (c)(4)(i) of this section provided the corporation is not the
expanded group parent. In this case, S1 is the expanded group parent. S2
directly owns
[[Page 762]]
100% of the stock of S3, which is stock meeting the requirements of
section 1504(a)(2) (as modified by paragraph (c)(4)(i)(B) of this
section). Therefore, S1, S2, and S3 constitute an expanded group as
defined in paragraph (c)(4) of this section.
Example 3. Attribution of hook stock. (i) Facts. P, a publicly
traded corporation, directly owns 50% of the stock of S1. S1 directly
owns 100% of the stock of S2. S2 directly owns the remaining 50% of the
stock of S1.
(ii) Analysis. (A) P directly owns 50% of the stock of S1. Under
paragraph (c)(4)(iii) of this section (which applies section 318(a)(2)
with modifications), P constructively owns 50% of the stock of S2
because P directly owns 50% of the stock of S1, which directly owns 100%
of S2. Under section 318(a)(5)(A), stock constructively owned by P by
reason of the application of section 318(a)(2) is, for purposes of
section 318(a)(2), considered as actually owned by P.
(B) S2 directly owns 50% of the stock of S1. Thus, under paragraph
(c)(4)(iii) of this section, P is treated as constructively owning an
additional 25% of the stock of S1. For purposes of determining the
expanded group, P's ownership must be recalculated treating the
additional 25% of S1 stock as actually owned. Under the second
application of section 318(a)(2)(C) as modified by paragraph (c)(4)(iii)
of this section, P constructively owns an additional 12.5% of the stock
of S1 as follows: 25% (P's new attributed ownership of S1) x 100% (S1's
ownership of S2) x 50% (S2's ownership of S1) = 12.5%. After two
iterations, P's ownership in S1 is 87.5% (50% direct ownership + 25%
first order constructive ownership + 12.5% second order constructive
ownership) and thus S1 is a member of the expanded group that includes P
and S2. Subsequent iterative calculations of P's ownership, treating
constructive ownership as actual ownership, would demonstrate that P
owns, directly and indirectly, 100% of the stock of S1. P, S1, and S2
therefore constitute an expanded group as defined in paragraph (c)(4) of
this section and P is the expanded group parent.
Example 4. Attribution of hook stock when an intermediary has
multiple owners. (i) Facts. The facts are the same as in Example 3,
except that P directly owns only 25% of the stock of S1. X, a
corporation unrelated to P, also directly owns 25% of the stock of S1.
(ii) Analysis. (A) P and X each directly owns 25% of the stock of
S1. Under paragraph (c)(4)(iii) of this section, P and X each
constructively owns 25% of the stock of S2 because P and X each directly
owns 25% of the stock of S1, which directly owns 100% of the stock of
S2. Under section 318(a)(5)(A), stock constructively owned by P or X by
reason of the application of section 318(a)(2) is, for purposes of
section 318(a)(2), considered as actually owned by P or X, respectively.
(B) S2 directly owns 50% of the stock of S1. Thus, under paragraph
(c)(4)(iii) of this section, P and X each is treated as constructively
owning an additional 12.5% of the stock of S1. Under a second
application of section 318(a)(2)(C) as modified by paragraph (c)(4)(iii)
of this section, P and X each constructively owns an additional 6.25% of
the stock of S1 as follows: 12.5% (each of P's and X's new attributed
ownership of S1) x 100% (S1's ownership of S2) x 50% (S2's ownership of
S1) = 6.25%. After two iterations, each of P's and X's ownership in S1
is 43.75% (25% direct ownership + 12.5% first order constructive
ownership + 6.25% second order constructive ownership). Subsequent
iterative calculations of each of P's and X's ownership, treating
constructive ownership as actual ownership, would demonstrate that P and
X each owns, directly and indirectly, 50% of the stock of S1.
(C) S1 and S2 constitute an expanded group as defined under
paragraph (c)(4)(i) of this section because S1 directly owns 100% of the
stock of S2. S1 is the expanded group parent of the expanded group and
neither P nor X are a member of the expanded group that includes S1 and
S2.
(5) Regarded owner. The term regarded owner means a person (which
cannot be a disregarded entity) that is the single owner (within the
meaning of Sec. 301.7701-2(c)(2)(i) of this chapter) of a disregarded
entity.
(d) Treatment of deemed exchanges--(1) Debt instrument deemed to be
exchanged for stock--(i) In general. If a debt instrument (as defined in
Sec. 1.385-3(g)(4)) or an EGI (as defined in Sec. 1.385-2(d)(3)) is
deemed to be exchanged under the section 385 regulations, in whole or in
part, for stock, the holder is treated for all federal tax purposes as
having realized an amount equal to the holder's adjusted basis in that
portion of the debt instrument or EGI as of the date of the deemed
exchange (and as having basis in the stock deemed to be received equal
to that amount), and, except as provided in paragraph (d)(1)(iv)(B) of
this section, the issuer is treated for all federal tax purposes as
having retired that portion of the debt instrument or EGI for an amount
equal to its adjusted issue price as of the date of the deemed exchange.
In addition, neither party accounts for any accrued but unpaid qualified
stated interest on the debt instrument or EGI or any foreign exchange
gain or loss with respect to that accrued but unpaid qualified stated
interest (if any) as of
[[Page 763]]
the deemed exchange. This paragraph (d)(1)(i) does not affect the rules
that otherwise apply to the debt instrument or EGI prior to the date of
the deemed exchange (for example, this paragraph (d)(1)(i) does not
affect the issuer's deduction of accrued but unpaid qualified stated
interest otherwise deductible prior to the date of the deemed exchange).
Moreover, the stock issued in the deemed exchange is not treated as a
payment of accrued but unpaid original issue discount or qualified
stated interest on the debt instrument or EGI for federal tax purposes.
(ii) Section 988. Notwithstanding the first sentence of paragraph
(d)(1)(i) of this section, the rules of Sec. 1.988-2(b)(13) apply to
require the holder and the issuer of a debt instrument or an EGI that is
deemed to be exchanged under the section 385 regulations, in whole or in
part, for stock to recognize any exchange gain or loss, other than any
exchange gain or loss with respect to accrued but unpaid qualified
stated interest that is not taken into account under paragraph (d)(1)(i)
of this section at the time of the deemed exchange. For purposes of this
paragraph (d)(1)(ii), in applying Sec. 1.988-2(b)(13) the exchange gain
or loss under section 988 is treated as the total gain or loss on the
exchange.
(iii) Section 108(e)(8). For purposes of section 108(e)(8), if the
issuer of a debt instrument or EGI is treated as having retired all or a
portion of the debt instrument or EGI in exchange for stock under
paragraph (d)(1)(i) of this section, the stock is treated as having a
fair market value equal to the adjusted issue price of that portion of
the debt instrument or EGI as of the date of the deemed exchange.
(iv) Issuer of stock deemed exchanged for debt. For purposes of
applying paragraph (d)(1)(i) of this section--
(A) A debt instrument that is issued by a disregarded entity is
deemed to be exchanged for stock of the regarded owner under Sec. Sec.
1.385-2(e)(4) and 1.385-3T(d)(4);
(B) A debt instrument that is issued by a partnership that becomes a
deemed transferred receivable, in whole or in part, is deemed to be
exchanged by the holder for deemed partner stock under Sec. 1.385-
3T(f)(4) and the partnership is therefore not treated for any federal
tax purpose as having retired any portion of the debt instrument; and
(C) A debt instrument that is issued in any situation not described
in paragraph (d)(1)(iv)(A) or (B) of this section is deemed to be
exchanged for stock of the issuer of the debt instrument.
(2) Stock deemed to be exchanged for newly-issued debt instrument--
(i) EGIs. If an EGI treated as stock under Sec. 1.385-2(e)(1) ceases to
be an EGI and is deemed to be exchanged pursuant to Sec. 1.385-2(e)(2),
in whole or in part, for a newly-issued debt instrument, the issue price
of the newly-issued debt instrument is determined under either section
1273(b)(4) or 1274, as applicable.
(ii) Debt instruments recharacterized under Sec. 1.385-3. If a debt
instrument treated as stock under Sec. 1.385-3(b) is deemed to be
exchanged under Sec. 1.385-3(d)(2), in whole or in part, for a newly-
issued debt instrument, the issue price of the newly-issued debt
instrument is determined under either section 1273(b)(4) or 1274, as
applicable.
(e) Indebtedness in part. [Reserved]
(f) Applicability date. This section applies to taxable years ending
on or after January 19, 2017.
[T.D. 9790, 81 FR 72950, Oct. 21, 2016, as amended by T.D. 9790, 82 FR
8166, Jan. 24, 2017]
Sec. 1.385-2 Treatment of certain interests between members of an
expanded group.
(a) In general--(1) Scope. This section provides rules for the
preparation and maintenance of the documentation and information
necessary for the determination of whether certain instruments will be
treated as indebtedness for federal tax purposes. It also prescribes
presumptions and factors as well as the weighting of certain factors to
be taken into account in the making of that determination. For
definitions applicable to this section, including the terms ``applicable
interest'' and ``expanded group interest'' (EGI), see paragraph (d) of
this section.
(2) Purpose. The rules in this section have two principal purposes.
The first is to provide guidance regarding the documentation and other
information that must be prepared, maintained, and
[[Page 764]]
provided to be used in the determination of whether an instrument
subject to this section will be treated as indebtedness for federal tax
purposes. The second is to establish certain operating rules,
presumptions, and factors to be taken into account in the making of any
such determination. Thus, compliance with this section does not
establish that an interest is indebtedness; it serves only to satisfy
the minimum documentation for the determination to be made under general
federal tax principles.
(3) Applicability of section. The application of this section is
subject to the following limitations:
(i) Covered member. An EGI is subject to this section only if it is
issued by a covered member, as defined in Sec. 1.385-1(c)(2), or by a
disregarded entity, as defined in Sec. 1.385-1(c)(3), that has a
regarded owner that is a covered member.
(ii) Threshold limitation--(A) In general. An EGI is subject to this
section only if on the date that an applicable interest first becomes an
EGI--
(1) The stock of any member of the expanded group is traded on (or
subject to the rules of) an established financial market within the
meaning of Sec. 1.1092(d)-1(b);
(2) Total assets exceed $100 million on any applicable financial
statement (as defined in paragraph (d)(1) of this section) or
combination of applicable financial statements; or
(3) Annual total revenue exceeds $50 million on any applicable
financial statement or combination of applicable financial statements.
(B) Non-U.S. dollar applicable financial statements. If an
applicable financial statement is denominated in a currency other than
the U.S. dollar, the amount of total assets is translated into U.S.
dollars at the spot rate (as defined in Sec. 1.988-1(d)) as of the date
of the applicable financial statement. The amount of annual total
revenue is translated into U.S. dollars at the weighted average exchange
rate (as defined in Sec. 1.989(b)-1) for the year for which the annual
total revenue was calculated.
(C) Integration and combination of multiple applicable financial
statements--(1) In general. If there are multiple applicable financial
statements that reflect the assets, portion of the assets, or annual
total revenue of different members of the expanded group, the aggregate
amount of total assets and annual total revenue must be used to
determine whether the threshold limitation in paragraph (a)(3)(ii)(A) of
this section applies. For this purpose, the use of the aggregate amount
of total assets or annual total revenue in different applicable
financial statements is required except to the extent that two or more
applicable financial statements reflect the total assets and annual
total revenue of a member of the expanded group.
(2) Overlapping applicable financial statements. To the extent that
two or more applicable financial statements reflect the total assets or
annual total revenue of the same expanded group member, the applicable
financial statement with the higher amount of total assets must be used
for purposes of paragraph (a)(3)(ii) of this section.
(3) Overlapping assets and revenue. If there are multiple applicable
financial statements that reflect the assets, portion of the assets, or
revenue of the same expanded group member, any duplication (by stock,
consolidation, or otherwise) of that expanded group member's assets or
revenue may be disregarded for purposes of paragraph (a)(3)(ii) of this
section such that the total assets or annual total revenue of that
expanded group member is only reflected once.
(4) Coordination with other rules of law--(i) Substance of
transaction controls. Nothing in this section prevents the Commissioner
from asserting that the substance of a transaction involving an EGI (or
the EGI itself) is different from the form of the transaction (or the
EGI) or treating the transaction (or the EGI) in accordance with its
substance for federal tax purposes, which may involve disregarding the
transaction (or the EGI).
(ii) Commissioner's authority under section 7602 unaffected. This
section does not otherwise affect the authority of the Commissioner
under section 7602 to request and obtain documentation and information
regarding transactions and instruments that purport to create an
interest in a corporation.
[[Page 765]]
(iii) Covered debt instruments. If the requirements of this section
are satisfied or otherwise do not apply, see Sec. Sec. 1.385-3 and
1.385-4T for additional rules for determining whether and the extent to
which an interest otherwise treated as indebtedness under general
federal tax principles is recharacterized as stock for federal tax
purposes.
(5) Consistency rule--(i) In general. If an issuer (as defined in
paragraph (d)(4) of this section) characterizes an EGI as indebtedness,
the issuer and the holder are each required to treat the EGI as
indebtedness for all federal tax purposes. For purposes of this
paragraph (a)(5)(i), an issuer is considered to have characterized an
EGI as indebtedness if the legal form of the EGI is debt, as described
in paragraph (d)(2)(i)(A) of this section. An issuer is also considered
to have characterized an EGI as indebtedness if the issuer claims any
federal income tax benefit with respect to an EGI resulting from
characterizing the EGI as indebtedness for federal tax purposes, such as
by claiming an interest deduction under section 163 with respect to
interest paid or accrued on the EGI on a federal income tax return (or,
if the issuer is a member of a consolidated group, the issuer or the
common parent of the consolidated group claims a federal income tax
benefit by claiming such an interest deduction), or if the issuer
reports the EGI as indebtedness or amounts paid or accrued on the EGI as
interest on an applicable financial statement. Pursuant to section
385(c)(1), the Commissioner is not bound by the issuer's
characterization of an EGI.
(ii) EGI characterized as stock. The consistency rule in paragraph
(a)(5)(i) of this section and section 385(c)(1) does not apply with
respect to an EGI to the extent that the EGI is treated as stock under
this section or Sec. 1.385-3, or it has been determined that the EGI is
treated as stock under applicable federal tax principles. In such case,
the issuer and the holder are each required to treat the EGI as stock
for all federal tax purposes.
(b) Documentation rules and weighting of indebtedness factors--(1)
General rule. Documentation and information evidencing the indebtedness
factors set forth in paragraph (c) of this section must be prepared and
maintained in accordance with the provisions of this section with
respect to each EGI. If the documentation and information described in
paragraph (c) of this section are prepared and maintained as required by
this section, the determination of whether an EGI is properly treated as
indebtedness (or otherwise) for federal tax purposes will be made under
general federal tax principles. If the documentation and information
described in paragraph (c) of this section are not prepared and
maintained with respect to an EGI in accordance with this section, and
no exception listed in paragraph (b)(2) of this section applies, the EGI
is treated as stock for all federal tax purposes. If a taxpayer
characterizes an EGI as indebtedness but fails to provide the
documentation and information described in paragraph (c)(2) of this
section upon request by the Commissioner, the Commissioner will treat
such documentation and information as not prepared or maintained.
(2) Exceptions from per se treatment--(i) Rebuttable presumption
rules--(A) General rule. If documentation and information evidencing the
indebtedness factors set forth in paragraph (c) of this section are not
prepared and maintained with respect to a particular EGI but a taxpayer
demonstrates that with respect to an expanded group of which the issuer
and holder of the EGI are members such expanded group is otherwise
highly compliant with the documentation rules (as such compliance is
described in paragraph (b)(2)(i)(B) of this section), the EGI is not
automatically treated as stock but is presumed, subject to rebuttal, to
be stock for federal tax purposes. A taxpayer can overcome the
presumption that an EGI is stock if the taxpayer clearly establishes
that there are sufficient common law factors present to treat the EGI as
indebtedness, including that the issuer intended to create indebtedness
when the EGI was issued.
(B) High percentage of EGIs compliant with this section as evidence
that the expanded group is highly compliant with the documentation
rules. The rebuttable presumption in paragraph (b)(2)(i)(A) of this
section applies if an expanded group of which the issuer and holder are
members has a high percentage of
[[Page 766]]
EGIs compliant with paragraph (c) of this section. For this purpose, an
expanded group is treated as having a high percentage of EGIs compliant
with paragraph (c) of this section if during the calendar year in which
an EGI does not meet the requirements of paragraph (c) of this section--
(1) The average total adjusted issue price of all EGIs that are
undocumented (as defined in paragraph (b)(2)(i)(B)(3) of this section)
and outstanding as of the close of each calendar quarter is less than 10
percent of the average amount of total adjusted issue price of all EGIs
that are outstanding as of the close of each calendar quarter; or
(2) If no EGI that is undocumented during the calendar year has an
issue price in excess of--
(i) $100,000,000, the average total number of EGIs that are
undocumented and outstanding as of the close of each calendar quarter is
less than 5 percent of the average total number of all EGIs that are
outstanding as of the close of each calendar quarter; or
(ii) $25,000,000, the average total number of EGIs that are
undocumented and outstanding as of the close of each calendar quarter is
less than 10 percent of the average total number of all EGIs that are
outstanding as of the close of each calendar quarter.
(3) Undocumented EGI. For purposes of paragraph (b)(2)(i)(B) of this
section, an undocumented EGI is an EGI for which documentation has not
been both prepared and maintained for one or more of the indebtedness
factors in paragraph (c)(2) of this section by the time required under
paragraph (c)(4) of this section.
(4) Anti-stuffing rule. If a member of the expanded group increases
the adjusted issue price of EGIs outstanding on a quarterly testing date
with a principal purpose of satisfying the requirements of paragraph
(b)(2)(i)(B)(1) of this section or increases the number of EGIs
outstanding on a quarterly testing date with a principal purpose of
satisfying the requirements of paragraph (b)(2)(ii)(B)(2) of this
section, such increase will not be taken into account in calculating
whether a taxpayer has met these requirements.
(5) EGIs subject to this section. For purposes of determining
whether the requirements of paragraph (b)(2)(i)(B)(1) or (b)(2)(i)(B)(2)
of this section are met, only EGIs subject to the rules of this section
are taken into account. Thus, for example, an EGI issued by an issuer
other than a covered member is not taken into account.
(C) Application of federal tax principles if presumption rebutted.
If the presumption of stock treatment for federal tax purposes under
paragraph (b)(2)(i)(A) of this section is rebutted, the determination of
whether an EGI is properly treated as indebtedness (or otherwise) for
federal tax purposes will be made under general federal tax principles.
See paragraph (b)(3) of this section for the weighting of factors that
must be made in this determination.
(ii) Reasonable cause--(A) In general. To the extent a taxpayer
establishes that there was reasonable cause for a failure to comply, in
whole or in part, with the requirements of this section, such failure
will not be taken into account in determining whether the requirements
of this section have been satisfied, and the character of the EGI will
be determined under general federal tax principles. The principles of
Sec. 301.6724-1 of this chapter apply in interpreting whether
reasonable cause exists in any particular case.
(B) Requirement to document once reasonable cause established. If a
taxpayer establishes that there was reasonable cause for a failure to
comply, in whole or in part, with the requirements of this section, the
documentation and information required under paragraph (c) of this
section must be prepared within a reasonable time and maintained for the
EGIs for which such reasonable cause was established.
(iii) Taxpayer discovery and remedy of ministerial or non-material
failure or error. If a taxpayer discovers and corrects a ministerial or
non-material failure or error in complying with this section prior to
the Commissioner's discovery of the failure or error, such failure or
error will not be taken into account in determining whether the
requirements of this section have been satisfied.
(3) Weighting of indebtedness factors. In applying federal tax
principles to the
[[Page 767]]
determination of whether an EGI is indebtedness or stock, the
indebtedness factors in paragraph (c)(2) of this section are significant
factors to be taken into account. Other relevant factors are taken into
account in the determination as lesser factors, with the relative
weighting of each lesser factor based on facts and circumstances.
(c) Documentation and information to be prepared and maintained--(1)
In general--(i) Application. The indebtedness factors and the
documentation and information that evidence each indebtedness factor are
set forth in paragraph (c)(2) of this section. The requirement to
prepare and maintain documentation and information with respect to each
indebtedness factor applies to each EGI separately, but the same
documentation and information may satisfy the requirements of this
section for more than one EGI (see paragraph (c)(2)(iii)(B) of this
section for rules relating to documentation that may be applicable to
multiple EGIs issued by the same issuer for purposes of the indebtedness
factor in paragraph (c)(2)(iii) of this section and paragraph (c)(3)(i)
of this section for rules relating to certain master arrangements).
Documentation must include complete copies of all instruments,
agreements, subordination agreements, and other documents evidencing the
material rights and obligations of the issuer and the holder relating to
the EGI, and any associated rights and obligations of other parties,
such as guarantees. For documents that are executed, such copies must be
copies of documents as executed. Additional documentation and
information may be provided to supplement, but not substitute for, the
documentation and information required under this section.
(ii) Market standard safe harbor. Documentation of a kind
customarily used in comparable third-party transactions treated as
indebtedness for federal tax purposes may be used to satisfy the
indebtedness factors in paragraphs (c)(2)(i) and (c)(2)(ii) of this
section. Thus, for example, documentation of a kind that a taxpayer uses
for trade payables with unrelated parties will generally satisfy the
documentation requirements of this paragraph (c) for documenting trade
payables with members of the expanded group.
(iii) EGIs with terms required by certain regulators.
Notwithstanding any other provision in this paragraph (c), an EGI that
is described in this paragraph (c)(1)(iii) is treated as meeting the
documentation and information requirements described in this paragraph
(c), provided that documentation necessary to establish that the EGI is
an instrument described in this paragraph (c)(1)(iii) is prepared and
maintained in accordance with paragraph (b) of this section. An EGI
described in this paragraph (c)(1)(iii) is--
(A) An EGI issued by an excepted regulated financial company (as
defined in Sec. 1.385-3(g)(3)(iv)) that contains terms required by a
regulator of that company in order for the EGI to satisfy regulatory
capital or similar rules that govern resolution or orderly liquidation
of the excepted regulated financial company (including rules that
require an excepted regulated financial company to issue EGIs in the
form of Total Loss-Absorbing Capacity), provided that at the time of
issuance it is expected that the EGI will be paid in accordance with its
terms; and
(B) An EGI issued by a regulated insurance company (as defined in
Sec. 1.385-3(g)(3)(v)) that requires the issuer to receive approval or
consent of an insurance regulatory authority prior to making payments of
principal or interest on the EGI, provided that at the time of issuance
it is expected that the EGI will be paid in accordance with its terms.
(2) Indebtedness factors relating to documentation and information
to be prepared and maintained in support of indebtedness. The
indebtedness factors that must be documented to establish that an EGI is
indebtedness for federal tax purposes, and the documentation and
information that must be prepared and maintained with respect to each
such factor, are described in paragraphs (c)(2)(i) through (c)(2)(iv) of
this section.
(i) Unconditional obligation to pay a sum certain. There must be
written documentation establishing that the issuer has entered into an
unconditional and legally binding obligation to
[[Page 768]]
pay a fixed or determinable sum certain on demand or at one or more
fixed dates.
(ii) Creditor's rights. There must be written documentation
establishing that the holder has the rights of a creditor to enforce the
obligation. The rights of a creditor typically include, but are not
limited to, the right to cause or trigger an event of default or
acceleration of the EGI (when the event of default or acceleration is
not automatic) for non-payment of interest or principal when due under
the terms of the EGI and the right to sue the issuer to enforce payment.
The rights of a creditor must include rights that superior to the rights
of shareholders (other than holders of interests treated as stock solely
by reason of Sec. 1.385-3 and holders of interests with creditor's
rights under commercial law treated as stock under this section) to
receive assets of the issuer in case of dissolution. An EGI that is a
nonrecourse obligation has creditor's rights for this purpose if it
provides sufficient remedies against a specified subset of the issuer's
assets. For purposes of this paragraph (c)(2)(ii), creditor's rights may
be provided either in the legal agreements that contain the terms of the
EGI or under local law. If local law provides for creditor's rights
under an EGI even if such rights are not specified in the legal
agreements that contain the terms of the EGI, such creditor's rights do
not need to be included in the EGI provided that written documentation
for purposes of this paragraph (c)(2)(ii) contains a reference to the
provisions of local law providing such rights.
(iii) Reasonable expectation of ability to repay EGI--(A) In
general. There must be written documentation containing information
establishing that, as of the date of issuance of the applicable interest
and taking into account all relevant circumstances (including all other
obligations incurred by the issuer as of the date of issuance of the
applicable interest or reasonably anticipated to be incurred after the
date of issuance of the applicable interest), the issuer's financial
position supported a reasonable expectation that the issuer intended to,
and would be able to, meet its obligations pursuant to the terms of the
applicable interest. Documentation with respect to an EGI that is
nonrecourse under its terms must include information on any cash and
property that secures the EGI, including--
(1) The fair market value of publicly traded property that is
recourse property with respect to the EGI; and
(2) An appraisal (if any) of recourse property that was prepared
pursuant to the issuance of the EGI or within the three years preceding
the issuance of the EGI. Thus, the documentation required by this
paragraph (c)(2)(iii)(A) does not require that an appraisal be prepared
for non-publicly traded property that secures nonrecourse debt, but does
require that the documentation include any appraisal that was prepared
for any purpose.
(B) Documentation of ability to pay applicable to multiple EGIs
issued by same issuer--(1) In general. Written documentation that
applies to more than one EGI issued by a single issuer may be prepared
on an annual basis to satisfy the requirements in paragraph
(c)(2)(iii)(A) of this section (an annual credit analysis). An annual
credit analysis can be used to support the reasonable expectation that
the issuer has the ability to repay multiple EGIs, including a specified
combined amount of indebtedness, provided any such EGIs are issued on
any day within the 12-month period beginning on the date the analysis in
the annual credit analysis is based on (an analysis date). An annual
credit analysis must establish that, as of its analysis date and taking
into account all relevant circumstances (including all other obligations
incurred by the issuer as of such analysis date or reasonably
anticipated to be incurred after such analysis date), the issuer's
financial position supported a reasonable expectation that the issuer
would be able to pay interest and principal in respect of the amount of
indebtedness set forth in the annual credit analysis.
(2) Material event of the issuer. If there is a material event (as
defined in paragraph (d)(5) of this section) with respect to the issuer
within the year beginning on the analysis date for written documentation
described in paragraph (c)(2)(iii)(B)(1) of this section,
[[Page 769]]
such written documentation may not be used to satisfy the requirements
in paragraph (c)(2)(iii)(A) of this section for EGIs with relevant dates
(as described in paragraph (c)(4) of this section) on or after the date
of the material event. However, an additional set of written
documentation described in paragraph (c)(2)(iii)(B)(1) of this section
may be prepared with an analysis date on or after the date of the
material event of the issuer.
(C) Third party reports or analysis. If any member of an expanded
group relied on any report or analysis prepared by a third party in
analyzing whether the issuer would be able to meet its obligations
pursuant to the terms of the EGI, the documentation must include the
report or analysis. If the report or analysis is protected or privileged
under law governing an inquiry or proceeding with respect to the EGI and
the protection or privilege is asserted, neither the existence nor the
contents of the report or analysis is taken into account in determining
whether the requirements of this section are satisfied.
(D) EGI issued by disregarded entity. For purposes of this paragraph
(c)(2)(iii), if a disregarded entity is the issuer of an EGI, and the
owner of the disregarded entity has limited liability within the meaning
of Sec. 301.7701-3(b)(2)(ii) of this chapter, only the assets and
liabilities and the financial position of the disregarded entity are
relevant for purposes of paragraph (c)(2)(iii)(A) of this section. If
the owner of such a disregarded entity does not have limited liability
within the meaning of Sec. 301.7701-3(b)(2)(ii) of this chapter
(including by reason of a guarantee, keepwell, or other agreement), all
of the assets and liabilities, and the financial position of the
disregarded entity and the owner are relevant for purposes of paragraph
(c)(2)(iii)(A) of this section.
(E) Acceptable documentation. The documentation required under this
paragraph (c)(2)(iii) may include cash flow projections, financial
statements, business forecasts, asset appraisals, determination of debt-
to-equity and other relevant financial ratios of the issuer in relation
to industry averages, and other information regarding the sources of
funds enabling the issuer to meet its obligations pursuant to the terms
of the applicable interest. For this purpose, such documentation may
assume that the principal amount of an EGI may be satisfied with the
proceeds of another borrowing by the issuer, provided that such
assumption is reasonable. Documentation required under paragraph (c)(2)
of this section may be prepared by employees of expanded group members,
by agents of expanded group members, or by third parties.
(F) Third party financing terms. Documentation required under this
paragraph (c)(2)(iii) may include evidence that a third party lender
would have made a loan to the issuer with the same or substantially
similar terms as the EGI.
(iv) Actions evidencing debtor-creditor relationship--(A) Payments
of principal and interest. If an issuer made any payment of interest or
principal with respect to the EGI (whether in accordance with the terms
of the EGI or otherwise, including prepayments), and such payment is
claimed to support the treatment of the EGI as indebtedness under
federal tax principles, documentation must include written evidence of
such payment. Such evidence could include, for example, a wire transfer
record or a bank statement. Such evidence could also include a netting
of payables or receivables between the issuer and holder, or payments of
interest, evidenced by journal entries in a centralized cash management
system or in the accounting system of the expanded group (or a subset of
the members of the expanded group) reflecting the payment.
(B) Events of default and similar events--(1) Enforcement of
creditor's rights. If the issuer did not make a payment of interest or
principal that was due and payable under the terms of the EGI, or if any
other event of default or similar event has occurred, there must be
written documentation evidencing the holder's reasonable exercise of the
diligence and judgment of a creditor. Such documentation may include
evidence of the holder's assertion of its rights under the terms of the
EGI, including the parties' efforts to renegotiate the EGI or to
mitigate the breach of an obligation under the EGI, or any change in
material terms of the EGI,
[[Page 770]]
such as maturity date, interest rate, or obligation to pay interest or
principal.
(2) Non-enforcement of creditor's rights. If the holder does not
enforce its rights with respect to a payment of principal or interest,
or with respect to an event of default or similar event, there must be
documentation that supports the holder's decision to refrain from
pursuing any actions to enforce payment as being consistent with the
reasonable exercise of the diligence and judgment of a creditor. For
example, if the issuer is unable to make a timely payment of principal
or interest and the holder reasonably believes that the issuer's
business or cash flow will improve such that the issuer will be able to
comply with the terms of the EGI, the holder may be exercising the
reasonable diligence and judgment of a creditor by granting an extension
of time for the issuer to pay such interest or principal. However, if a
holder fails to enforce its rights and there is no documentation
explaining this failure, the holder will not be treated as exercising
the reasonable due diligence and judgment of a creditor. See, however,
Sec. 1.1001-3(c)(4)(ii) for rules regarding when a forbearance may be a
modification of a debt instrument and therefore may result in an
exchange subject to Sec. 1.1001-1(a).
(3) Special documentation rules--(i) Agreements that cover multiple
EGIs--(A) Revolving credit, omnibus, umbrella, master, cash pool, and
similar agreements--(1) In general. If an EGI is not evidenced by a
separate note or other writing executed with respect to the initial
principal balance or any increase in principal balance (for example, an
EGI documented as a revolving credit agreement, a cash pool agreement,
an omnibus or umbrella agreement that governs open account obligations
or any other identified set of payables or receivables, or a master
agreement that sets forth general terms of an EGI with an associated
schedule or ticket that sets forth the specific terms of an EGI), the
EGI is subject to the special rules of this paragraph (c)(3)(i)(A). A
notional cash pool is subject to the rules of this paragraph (c)(3)(i)
to the extent that the notional cash pool would be treated as an EGI
issued directly between expanded group members.
(2) Special rules with respect to paragraphs (c)(2)(i) and
(c)(2)(ii) of this section regarding unconditional obligation to pay a
sum certain and creditor's rights. An EGI subject to the special rules
of paragraph (c)(3)(i)(A) of this section satisfies the requirements of
paragraphs (c)(2)(i) and (c)(2)(ii) of this section only if the material
documentation associated with the EGI, including all relevant enabling
documents, is prepared and maintained in accordance with the
requirements of this section. Relevant enabling documents may include
board of directors' resolutions, credit agreements, omnibus agreements,
security agreements, or agreements prepared in connection with the
execution of the legal documents governing the EGI as well as any
relevant documentation executed with respect to an initial principal
balance or increase in the principal balance of the EGI.
(3) Special rules under paragraph (c)(2)(iii) of this section
regarding reasonable expectation of ability to repay--(i) In general. If
an EGI is issued under an agreement described in paragraph (c)(3)(i)(A)
of this section, written documentation must be prepared with respect to
the analysis date and written documentation with a new analysis date
must be prepared at least annually to satisfy the requirements in
paragraph (c)(2)(iii) of this section for EGIs issued under such an
agreement on or after the most recent analysis date. Such written
documentation satisfies the requirements in paragraph (c)(2)(iii) of
this section with respect to EGIs issued under such an agreement on any
day within the year beginning on the analysis date of the annual credit
analysis. Such written documentation must contain information
establishing that, as of the analysis date of the annual credit analysis
and taking into account all relevant circumstances (including all other
obligations incurred by the issuer as of the analysis date of the
written documentation or reasonably anticipated to be incurred after the
analysis date of the written documentation), the issuer's financial
position supported a reasonable expectation that the issuer
[[Page 771]]
would be able to pay interest and principal in respect of the maximum
principal amount permitted under the terms of the revolving credit
agreement, omnibus, umbrella, master, cash pool or similar agreement.
Notwithstanding the foregoing, written documentation described in
paragraph (c)(2)(iii)(B) of this section can be used to satisfy the
requirements in paragraph (c)(2)(iii)(A) of this section with respect to
such EGIs.
(ii) Material event of the issuer. If there is a material event with
respect to the issuer within the year beginning on the analysis date for
the written documentation described in paragraph (c)(3)(i)(A)(3) of this
section, such written documentation may not be used to satisfy the
requirements in paragraph (c)(3)(i)(A)(3) of this section for EGIs with
relevant dates (as described in paragraph (c)(4) of this section) on or
after the date of the material event. However, an additional set of
written documentation as described in paragraph (c)(3)(i)(A)(3) of this
section may be prepared with an analysis date on the date of the
material event of the issuer or if subsequent EGIs are issued, with
respect to those issuances.
(B) Additional requirements for cash pooling arrangements.
Notwithstanding paragraphs (c)(2)(i) and (c)(2)(ii) of this section, and
in addition to the requirements in paragraph (c)(3)(i)(A)(2) of this
section, if an EGI is issued pursuant to a cash pooling arrangement
(including a notional cash pooling arrangement) or internal banking
service that involves account sweeps, revolving cash advance facilities,
overdraft set-off facilities, operational facilities, or similar
features, the EGI satisfies the requirements of paragraphs (c)(2)(i) and
(c)(2)(ii) of this section only if the material documentation governing
the ongoing operations of the cash pooling arrangement or internal
banking service, including any agreements with entities that are not
members of the expanded group, are also prepared and maintained in
accordance with the requirements of this section. Such documentation
must contain the relevant legal rights and obligations of any members of
the expanded group and any entities that are not members of the expanded
group in conducting the operation of the cash pooling arrangement or
internal banking service.
(ii) Debt not in form. [Reserved]
(4) Timely preparation requirement--(i) General rule. Documentation
and information required under this section must be timely prepared. For
purposes of this section, documentation is treated as timely prepared if
it is completed no later than the time for filing the issuer's federal
income tax return (taking into account any applicable extensions) for
the taxable year that includes the relevant date for such documentation
or information, as specified in paragraph (c)(4)(ii) of this section.
(ii) Relevant date. For purposes of this paragraph (c)(4), the term
relevant date has the following meaning:
(A) Issuer's obligation, creditor's rights. For documentation and
information described in paragraphs (c)(2)(i) and (ii) of this section
(relating to an issuer's unconditional obligation to repay and
establishment of holder's creditor's rights), the relevant date is the
date on which a covered member becomes an issuer of a new or existing
EGI. A relevant date for such documentation and information does not
include the date of any deemed issuance of the EGI resulting from as
exchange under Sec. 1.1001-3 unless such deemed issuance relates to an
alteration in the terms of the EGI reflected in an express written
agreement or written amendment to the EGI. In the case of an applicable
interest that becomes an EGI subsequent to issuance, including an
intercompany obligation, as defined in Sec. 1.1502-13(g)(2)(ii), that
ceases to be an intercompany obligation, the relevant date is the date
on which the applicable interest becomes an EGI.
(B) Reasonable expectation of payment--(1) In general. For
documentation and information described in paragraph (c)(2)(iii) of this
section (relating to reasonable expectation of issuer's repayment), each
date on which a covered member of the expanded group becomes an issuer
with respect to an EGI and any later date on which an issuance is deemed
to occur under Sec. 1.1001-3, and any date described in the special
rules in paragraph (c)(4)(ii)(E) of this section, is a relevant date for
that EGI. In the case of an applicable
[[Page 772]]
interest that becomes an EGI subsequent to issuance, the relevant date
is the date on which the applicable interest becomes an EGI and any
relevant date after the date that the applicable interest becomes an
EGI.
(2) Annual credit analysis--(i) In general. With respect to
documentation described in paragraph (c)(2)(iii)(B) of this section
(documentation of ability to pay applicable to multiple EGIs issued by
same issuer), the relevant date is the date used for the analysis in the
annual credit analysis that is first prepared and the annual anniversary
of such date unless a material event has occurred in respect of the
issuer.
(ii) Material event. With respect to the documentation described in
paragraph (c)(2)(iii)(B) of this section, the date on which a material
event has occurred in respect of an issuer is also a relevant date. If
the precise date on which a material event occurred is uncertain, a
taxpayer may choose a date on which the taxpayer reasonably believes
that the material event occurred. If documentation described in
paragraph (c)(2)(iii)(B) of this section is prepared with the relevant
date of a material event, the next relevant date will be the annual
anniversary of that relevant date (unless another material event occurs
in respect of the issuer).
(C) Subsequent actions--(1) Payment. For documentation and
information described in paragraph (c)(2)(iv)(A) of this section
(relating to payments of principal and interest), each date on which a
payment of interest or principal is due, taking into account all
additional time permitted under the terms of the EGI before there is (or
holder can declare) an event of default for nonpayment, is a relevant
date.
(2) Default. For documentation and information described in
paragraph (c)(2)(iv)(B) of this section (relating to events of default
and similar events), each date on which an event of default,
acceleration event or similar event occurs under the terms of the EGI is
a relevant date. For example, if the terms of the EGI require the issuer
to maintain a certain financial ratio, any date on which the issuer
fails to maintain the specified financial ratio (and such failure
results in an event of default under the terms of the EGI) is a relevant
date.
(D) Applicable interest that becomes an EGI. In the case of an
applicable interest that becomes an EGI subsequent to issuance, no date
before the applicable interest becomes an EGI is a relevant date.
(E) Revolving credit, omnibus, umbrella, master, cash pool, and
similar agreements--(1) Relevant dates for purposes of indebtedness
factors in paragraphs (c)(2)(i) and (c)(2)(ii) of this section for
overall arrangements. In the case of an arrangement described in
paragraph (c)(3)(i)(A) of this section for purposes of the indebtedness
factors in paragraphs (c)(2)(i) and (c)(2)(ii) of this section, each of
the following dates is a relevant date:
(i) The date of the execution of the legal documents governing the
overall arrangement.
(ii) The date of any amendment to those documents that provides for
an increase in the maximum amount of principal.
(iii) The date of any amendment to those documents that permits an
additional entity to borrow under the documents (but only with respect
to EGIs issued by that entity).
(2) Relevant dates for purposes of indebtedness factor in paragraph
(c)(2)(iii) of this section for overall arrangements. The relevant dates
with respect to the arrangements described in paragraph (c)(3)(i)(A) of
this section for purposes of the indebtedness factor in paragraph
(c)(2)(iii) of this section are--
(i) Each anniversary of the date of execution of the legal documents
during the life of the legal documents; and
(ii) The date that a material event has occurred in respect of an
issuer, unless the precise date on which a material event occurred is
uncertain, in which case a taxpayer may use a date on which the taxpayer
reasonably believes that the material event occurred.
(3) Relevant dates for EGIs documented under an overall arrangement.
A relevant date of an EGI under paragraphs (c)(4)(ii)(A) through (C) of
this section is also a relevant date for each EGI documented under an
overall arrangement described in paragraph (c)(3) of this section.
[[Page 773]]
(5) Maintenance requirements. The documentation and information
described in paragraph (c) of this section must be maintained for all
taxable years that the EGI is outstanding and until the period of
limitations expires for any federal tax return with respect to which the
treatment of the EGI is relevant. See section 6001 (requirement to keep
books and records).
(d) Definitions. For purposes of this section, the following
definitions apply:
(1) Applicable financial statement. The term applicable financial
statement means a financial statement that is described in paragraphs
(d)(1)(i) through (iii) of this section, that includes the assets,
portion of the assets, or annual total revenue of any member of the
expanded group, and that is prepared as of any date within 3 years prior
to the date the applicable interest at issue first becomes an EGI. The
financial statement may be a separate company financial statement of any
member of the expanded group, if done in the ordinary course; otherwise,
it is the consolidated financial statement that includes the assets,
portion of the assets, or annual total revenue of any member of the
expanded group. A financial statement includes--
(i) A financial statement required to be filed with the Securities
and Exchange Commission (the Form 10-K or the Annual Report to
Shareholders);
(ii) A certified audited financial statement that is accompanied by
the report of an independent certified public accountant (or in the case
of a foreign entity, by the report of a similarly qualified independent
professional) that is used for--
(A) Credit purposes;
(B) Reporting to shareholders, partners, or similar persons; or
(C) Any other substantial non-tax purpose; or
(iii) A financial statement (other than a tax return) required to be
provided to the federal, state, or foreign government or any federal,
state, or foreign agency.
(2) Applicable interest--(i) In general. Except to the extent
provided in paragraph (d)(2)(ii) and (iii) of this section, the term
applicable interest means--
(A) Any interest that is issued or deemed issued in the legal form
of a debt instrument (including a draw or separate amount borrowed under
an overall arrangement described in paragraph (c)(3) of this section
regardless of whether a separate legal document is issued in connection
with the draw or separate amount borrowed), which therefore does not
include, for example, a sale-repurchase agreement treated as
indebtedness under federal tax principles; or
(B) An intercompany payable and receivable documented as debt in a
ledger, accounting system, open account intercompany debt ledger, trade
payable, journal entry or similar arrangement if no written legal
instrument or written legal arrangement governs the legal treatment of
such payable and receivable.
(ii) Certain intercompany obligations and statutory or regulatory
debt instruments excluded. The term applicable interest does not
include--
(A) An intercompany obligation as defined in Sec. 1.1502-
13(g)(2)(ii) or an interest issued by a member of a consolidated group
and held by another member of the same consolidated group, but only for
the period during which both parties are members of the same
consolidated group; for this purpose, a member includes any disregarded
entity owned by a member;
(B) Production payments treated as a loan under section 636(a) or
(b);
(C) A ``regular interest'' in a real estate mortgage investment
conduit described in section 860G(a)(1);
(D) A debt instrument that is deemed to arise under Sec. 1.482-
1(g)(3) (including adjustments made pursuant to Revenue Procedure 99-32,
1999-2 C.B. 296); or
(E) Any other instrument or interest that is specifically treated as
indebtedness for federal tax purposes under a provision of the Internal
Revenue Code or the regulations thereunder.
(iii) Interests issued before January 1, 2018. The term applicable
interest does not include any interest issued or deemed issued before
January 1, 2018.
(3) Expanded Group Interest (EGI). The term expanded group interest
(EGI) means an applicable interest the issuer of which is a member of an
expanded group (or a disregarded entity whose
[[Page 774]]
regarded owner is a member of an expanded group) and the holder of which
is another member of the same expanded group, a disregarded entity whose
regarded owner is another member of the same expanded group, or a
controlled partnership (as defined in Sec. 1.385-1(c)(1)) with respect
to the same expanded group.
(4) Issuer. Solely for purposes of this section, the term issuer
means a person (including a disregarded entity defined in Sec. 1.385-
1(c)(3)) that is obligated to satisfy any material obligations created
under the terms of an EGI. A person can be an issuer if that person is
expected to satisfy a material obligation under an EGI, even if that
person is not the primary obligor. A guarantor, however, is not an
issuer unless the guarantor is expected to be the primary obligor. An
issuer may include a person that, after the date that the EGI is issued,
becomes obligated to satisfy a material obligation created under the
terms of an EGI. For example, a person that becomes a co-obligor on an
EGI after the date of issuance of the EGI is an issuer of the EGI for
purposes of this section if such person is expected to satisfy the
obligations thereunder without indemnification.
(5) Material event. The term material event means, with respect to
an entity--
(i) The entity comes under the jurisdiction of a court in a case
under--
(A) Title 11 of the United States Code (relating to bankruptcy); or
(B) A receivership, foreclosure, or similar proceeding in a federal
or state court;
(ii) The entity becomes insolvent within the meaning of section
108(d)(3);
(iii) The entity materially changes its line of business;
(iv) The entity sells, alienates, distributes, leases, or otherwise
disposes of 50 percent or more of the total fair market value of its
included assets; or
(v) The entity consolidates or merges into another person and the
person formed by or surviving such merger or consolidation does not
assume liability for any of the entity's outstanding EGIs as of the time
of the merger or consolidation.
(6) Included assets. The term included assets means, with respect to
an entity all assets other than--
(i) Inventory sold in the ordinary course of business;
(ii) Assets contributed to another entity in exchange for equity in
such entity; and
(iii) Investment assets such as portfolio stock investments to the
extent that other investment assets or cash of equivalent value is
substituted.
(7) Regarded owner. For purposes of this section, the term regarded
owner means a person (that is that is not a disregarded entity) that is
the single owner (within the meaning of Sec. 301.7701-2(c)(2) of this
chapter) of a disregarded entity.
(e) Operating rules--(1) Applicable interest that becomes an EGI. If
an applicable interest that is not an EGI becomes an EGI, this section
applies to the applicable interest immediately after the applicable
interest becomes an EGI and at all times thereafter during which the
applicable interest remains an EGI.
(2) EGI treated as stock ceases to be an EGI. If an EGI treated as
stock due to the application of this section ceases to be an EGI, the
character of the applicable interest is determined under general federal
tax principles at the time that the applicable interest ceases to be an
EGI. If the applicable interest is characterized as indebtedness under
general federal tax principles, the issuer is treated for federal tax
purposes as issuing a new debt instrument to the holder in exchange for
the EGI immediately before the transaction that causes the EGI to cease
to be treated as an EGI in a transaction that is disregarded for
purposes of Sec. 1.385-3(b)(2) and (3). See Sec. 1.385-1(d).
(3) Date of characterizations under this section--(i) In general. If
an applicable interest that is an EGI when issued is determined to be
stock due to the application of this section, the EGI is treated as
stock from the date it was issued. However, if an applicable interest
that is not an EGI when issued subsequently becomes an EGI and is then
determined to be stock due to the application of this section, the EGI
is treated as stock as of the date it becomes an EGI.
[[Page 775]]
(ii) Recharacterization of EGI based on behavior of issuer or holder
after issuance. Notwithstanding paragraph (e)(3)(i) of this section, if
an EGI initially treated as indebtedness is recharacterized as stock as
a result of failing to satisfy paragraph (c)(2)(iv) of this section
(actions evidencing debtor-creditor relationship), the EGI will cease to
be treated as indebtedness as of the time the facts and circumstances
regarding the behavior of the issuer or the holder with respect to the
EGI cease to evidence a debtor-creditor relationship. For purposes of
determining whether an EGI originally treated as indebtedness ceases to
be treated as indebtedness by reason of this section, the rules of this
section apply before the rules of Sec. 1.1001-3. Thus, an EGI initially
treated as indebtedness may be recharacterized as stock regardless of
whether the indebtedness is altered or modified (as defined in Sec.
1.1001-3(c)) and, in determining whether indebtedness is recharacterized
as stock, Sec. 1.1001-3(f)(7)(ii)(A) does not apply.
(4) Disregarded entities of regarded corporate owners. This
paragraph (e)(4) applies to an EGI issued by a disregarded entity, the
regarded owner of which is a covered member, if such EGI would, absent
the application of this paragraph (e)(4), be treated as stock under this
section. In this case, rather than the EGI being treated as stock, the
covered member that is the regarded owner of the disregarded entity is
deemed to issue its stock in the manner described in this paragraph
(e)(4). If the EGI would have been recharacterized as stock from the
date it was issued under paragraph (e)(3)(i) of this section, then the
covered member is deemed to issue its stock to the actual holder to
which the EGI was, in form, issued. If the EGI would have been
recharacterized as stock at any other time, then the covered member is
deemed to issue its stock to the holder of the EGI in exchange for the
EGI. In each case, the covered member that is the regarded owner of the
disregarded entity is treated as the holder of the EGI issued by the
disregarded entity, and the actual holder is treated as the holder of
the stock deemed to be issued by the regarded owner. Under federal tax
principles, the EGI issued by the disregarded entity generally is
disregarded. The stock deemed issued is deemed to have the same terms as
the EGI issued by the disregarded entity, other than the identity of the
issuer, and payments on the stock are determined by reference to
payments made on the EGI issued by the disregarded entity.
(f) Anti-avoidance. If an applicable interest that is not an EGI is
issued with a principal purpose of avoiding the application of this
section, the applicable interest is treated as an EGI subject to this
section.
(g) Affirmative use. [Reserved]
(h) Example. The following example illustrates the rules of this
section. Except as otherwise stated, the following facts are assumed for
purposes of the example in this paragraph (h):
(1) FP is a foreign corporation that owns 100% of the stock of USS1,
a domestic corporation, and 100% of the stock of USS2, a domestic
corporation.
(2) USS1 and USS2 file separate federal income tax returns and have
a calendar year taxable year.
(3) USS1 and USS2 timely file their federal income tax returns on
September 15 of the calendar year following each taxable year.
(4) FP is traded on an established financial market within the
meaning of Sec. 1.1092(d)-1(b).
Example. Application of paragraphs (c)(2)(iii) and (c)(4) of this
section to an EGI--(i) Facts. USS1 issues an EGI (EGI A) to FP on Date A
in Year 1. USS1 issues an EGI (EGI B) to USS2 on Date B in Year 1. Date
B is after Date A. USS1 issues another EGI (EGI C) to FP on Date A in
Year 2. USS1 prepares documentation sufficient to meet the requirements
of paragraphs (c)(2)(i) and (ii) of this section on or before September
15 of Year 2. USS1, FP and USS2 also contemporaneously document the
timely payment of interest by USS1 on EGI A and EGI B sufficient to meet
the requirements of paragraph (c)(2)(iv) of this section. USS1 prepares
documentation on Date C in Year 2, which is prior to September 15, to
satisfy the requirements of paragraph (c)(2)(iii)(B) of this section
(the credit analysis). The credit analysis concludes that as of Date B
in Year 1, USS1 would be able to pay interest and principal on an amount
greater than the combined principal amounts of EGI A, EGI B and EGI C.
(ii) Analysis. (A) P, USS1, and USS2 are members of an expanded
group. Because FP is traded on an established financial market
[[Page 776]]
within the meaning of Sec. 1.1092(d)-1(b) and USS1 is a covered member,
EGI A, EGI B, and EGI C are subject to the rules of this section.
(B) The documentation evidencing USS1's obligation to pay a sum
certain and the creditor's rights of the holders was prepared by
September 15, Year 2, which is the time for filing USS1's federal income
tax return (taking into account any applicable extensions) for the
taxable year that includes the relevant date specified in paragraph
(c)(4)(ii)(A) of this section. Thus, USS1 is treated as having timely
documented its obligation to pay a sum certain and the creditor's rights
of the holders of EGI A and EGI B for purposes of paragraph (c)(4)(i) of
this section.
(C) The credit analysis was prepared with an analysis date of Date B
of Year 1. EGI A was issued prior to Date B in Year 1. Under paragraph
(c)(4)(ii)(B) of this section, the date when USS1 became an issuer of
EGI A (Date A of Year 1) is a relevant date for the documentation and
information described in paragraph (c)(2)(iii) of this section. As a
result, EGI A does not satisfy the indebtedness factor in paragraph
(c)(2)(iii) of this section (reasonable expectation of ability to repay
EGI).
(D) Similarly, under paragraph (c)(4)(ii)(B) of this section, the
date when USS1 became an issuer of EGI B (Date B of Year 1) is a
relevant date for the documentation and information described in
paragraph (c)(2)(iii) of this section. The credit analysis was timely
prepared under paragraph (c)(4)(i) of this section because it was
prepared before the filing of the USS1 federal income tax return for
Year 1. As a result, EGI B does satisfy the indebtedness factor in
paragraph (c)(2)(iii) of this section (reasonable expectation of ability
to repay EGI).
(E) Finally, the date when USS1 became an issuer of EGI C (Date A of
Year 2) is also a relevant date for the documentation and information
described in paragraph (c)(2)(iii) of this section. Under paragraph
(c)(2)(iii)(B) of this section, the credit analysis can be used to
support the reasonable expectation that USS1 has the ability to repay
multiple EGIs issued on any day within the 12-month period following the
analysis date. Date A of Year 2 is within the 12-month period following
the analysis date. The credit analysis was timely prepared under
paragraph (c)(4)(i) of this section because it was prepared before the
filing of the USS1 federal income tax return for Year 2. As a result,
EGI C does satisfy the indebtedness factor in paragraph (c)(2)(iii) of
this section (reasonable expectation of ability to repay EGI).
(i) Applicability date. This section applies to taxable years ending
on or after January 19, 2017.
[T.D. 9792, 81 FR 72952, Oct. 21, 2016, as amended by T.D. 9790, 82 FR
8166, Jan. 24, 2017]
Sec. 1.385-3 Transactions in which debt proceeds are distributed
or that have a similar effect.
(a) Scope. This section sets forth factors that control the
determination of whether an interest is treated as stock or
indebtedness. Specifically, this section addresses the issuance of a
covered debt instrument to a related person as part of a transaction or
series of transactions that does not result in new investment in the
operations of the issuer. Paragraph (b) of this section sets forth rules
for determining when these factors are present, such that a covered debt
instrument is treated as stock under this section. Paragraph (c) of this
section provides exceptions to the application of paragraph (b) of this
section. Paragraph (d) of this section provides operating rules.
Paragraph (e) of this section reserves on the affirmative use of this
section. Paragraph (f) of this section provides rules for the aggregate
treatment of controlled partnerships. Paragraph (g) of this section
provides definitions. Paragraph (h) of this section provides examples
illustrating the application of the rules of this section. Paragraph (j)
of this section provides dates of applicability. For rules regarding the
application of this section to members of a consolidated group, see
generally Sec. 1.385-4T.
(b) Covered debt instrument treated as stock--(1) Effect of
characterization as stock. Except as otherwise provided in paragraph
(d)(7) of this section, to the extent a covered debt instrument is
treated as stock under paragraphs (b)(2), (3), or (4) of this section,
it is treated as stock for all federal tax purposes.
(2) General rule. Except as otherwise provided in paragraphs (c) and
(e) of this section, a covered debt instrument is treated as stock to
the extent the covered debt instrument is issued by a covered member to
a member of the covered member's expanded group in one or more of the
following transactions:
[[Page 777]]
(i) In a distribution;
(ii) In exchange for expanded group stock, other than in an exempt
exchange; or
(iii) In exchange for property in an asset reorganization, but only
to the extent that, pursuant to the plan of reorganization, a
shareholder in the transferor corporation that is a member of the
issuer's expanded group immediately before the reorganization receives
the covered debt instrument with respect to its stock in the transferor
corporation.
(3) Funding rule--(i) In general. Except as otherwise provided in
paragraphs (c) and (e) of this section, a covered debt instrument that
is not a qualified short-term debt instrument (as defined in paragraph
(b)(3)(vii) of this section) is treated as stock to the extent that it
is both issued by a covered member to a member of the covered member's
expanded group in exchange for property and, pursuant to paragraph
(b)(3)(iii) or (b)(3)(iv) of this section, treated as funding a
distribution or acquisition described in one or more of paragraphs
(b)(3)(i)(A) through (C) of this section. A covered member that makes a
distribution or acquisition described in paragraphs (b)(3)(i)(A) through
(C) is referred to as a ``funded member,'' regardless of when it issues
a covered debt instrument in exchange for property.
(A) A distribution of property by the funded member to a member of
the funded member's expanded group, other than in an exempt
distribution;
(B) An acquisition of expanded group stock, other than an exempt
exchange, by the funded member from a member of the funded member's
expanded group in exchange for property other than expanded group stock;
or
(C) An acquisition of property by the funded member in an asset
reorganization but only to the extent that, pursuant to the plan of
reorganization, a shareholder in the transferor corporation that is a
member of the funded member's expanded group immediately before the
reorganization receives other property or money within the meaning of
section 356 with respect to its stock in the transferor corporation.
(ii) Transactions described in more than one paragraph. For purposes
of this section, to the extent that a distribution or acquisition by a
funded member is described in more than one of paragraphs (b)(3)(i)(A)
through (C) of this section, the funded member is treated as making only
a single distribution or acquisition described in paragraph (b)(3)(i) of
this section. In the case of an asset reorganization, to the extent an
acquisition by the transferee corporation is described in paragraph
(b)(3)(i)(C) of this section, a distribution or acquisition by the
transferor corporation is not also described in paragraph (b)(3)(i)(A)
through (C) of this section. For purposes of this paragraph (b)(3)(ii),
whether a distribution or acquisition is described in paragraphs
(b)(3)(i)(A) through (C) of this section is determined without regard to
paragraph (c) of this section.
(iii) Per se funding rule--(A) In general. A covered debt instrument
is treated as funding a distribution or acquisition described in
paragraphs (b)(3)(i)(A) through (C) of this section if the covered debt
instrument is issued by a funded member during the period beginning 36
months before the date of the distribution or acquisition, and ending 36
months after the date of the distribution or acquisition (per se
period).
(B) Multiple interests. If, pursuant to paragraph (b)(3)(iii)(A) of
this section, two or more covered debt instruments may be treated as
stock by reason of this paragraph (b)(3), the covered debt instruments
are tested under paragraph (b)(3)(iii)(A) of this section based on the
order in which they are issued, with the earliest issued covered debt
instrument tested first. See paragraph (h)(3) of this section, Example
6, for an illustration of this rule.
(C) Multiple distributions or acquisitions. If, pursuant to
paragraph (b)(3)(iii)(A) of this section, a covered debt instrument may
be treated as funding more than one distribution or acquisition
described in paragraphs (b)(3)(i)(A) through (C) of this section, the
covered debt instrument is treated as funding one or more distributions
or acquisitions based on the order in which the distributions or
acquisitions occur, with the earliest distribution or acquisition
treated as the first distribution or acquisition that is funded.
[[Page 778]]
See paragraph (h)(3) of this section, Example 9, for an illustration of
this rule.
(D) Transactions that straddle different expanded groups--(1) In
general. For purposes of paragraph (b)(3)(iii)(A) of this section, a
covered debt instrument is not treated as issued by a funded member
during the per se period with respect to a distribution or acquisition
described in paragraphs (b)(3)(i)(A) through (C) of this section if all
of the conditions described in paragraphs (b)(3)(iii)(D)(1)(i) through
(iii) of this section are satisfied.
(i) The distribution or acquisition occurs prior to the issuance of
the covered debt instrument by the funded member or, if the funded
member is treated as making the distribution or acquisition of a
predecessor or a successor, the predecessor or successor is not a member
of the expanded group of which the funded member is a member on the date
on which the distribution or the acquisition occurs.
(ii) The distribution or acquisition is made by the funded member
when the funded member is a member of an expanded group that does not
have an expanded group parent that is the funded member's expanded group
parent when the covered debt instrument is issued. For purposes of the
preceding sentence, a reference to an expanded group parent includes a
reference to a predecessor or successor of the expanded group parent.
(iii) On the date of the issuance of the covered debt instrument,
the recipient member (as defined in paragraph (b)(3)(iii)(D)(2) of this
section) is neither a member nor a controlled partnership of an expanded
group of which the funded member is a member.
(2) Recipient member. For purposes of this paragraph (b)(3)(iii)(D),
the term recipient member means, with respect to a distribution or
acquisition by a funded member described in paragraphs (b)(3)(i)(A)
through (C) of this section, the expanded group member that receives a
distribution of property, property in exchange for expanded group stock,
or other property or money within the meaning of section 356 with
respect to its stock in the transferor corporation. For purposes of this
paragraph (b)(3)(iii)(D), a reference to the recipient member includes a
predecessor or successor of the recipient member or one or more other
entities that, in the aggregate, acquire substantially all of the
property of the recipient member.
(E) Modifications of a covered debt instrument--(1) In general. For
purposes of paragraph (b)(3)(iii)(A) of this section, if a covered debt
instrument is treated as exchanged for a modified covered debt
instrument pursuant to Sec. 1.1001-3(b), the modified covered debt
instrument is treated as issued on the original issue date of the
covered debt instrument.
(2) Effect of certain modifications. Notwithstanding paragraph
(b)(3)(iii)(E)(1) of this section, if a covered debt instrument is
treated as exchanged for a modified covered debt instrument pursuant to
Sec. 1.1001-3(b) and the modification, or one of the modifications,
that results in the deemed exchange includes the substitution of an
obligor on the covered debt instrument, the addition or deletion of a
co-obligor on the covered debt instrument, or the material deferral of
scheduled payments due under the covered debt instrument, then the
modified covered debt instrument is treated as issued on the date of the
deemed exchange for purposes of paragraph (b)(3)(iii)(A) of this
section.
(3) Additional principal amount. For purposes of paragraph
(b)(3)(iii)(A) of this section, if the principal amount of a covered
debt instrument is increased, the portion of the covered debt instrument
attributable to such increase is treated as issued on the date of such
increase.
(iv) Principal purpose rule. For purposes of this paragraph (b)(3),
a covered debt instrument that is not issued by a funded member during
the per se period with respect to a distribution or acquisition
described in paragraphs (b)(3)(i)(A) through (C) of this section is
treated as funding the distribution or acquisition to the extent that it
is issued by a funded member with a principal purpose of funding a
distribution or acquisition described in paragraphs (b)(3)(i)(A) through
(C) of this section. Whether a covered debt instrument is issued with a
principal purpose of funding a distribution or acquisition described in
paragraphs (b)(3)(i)(A)
[[Page 779]]
through (C) of this section is determined based on all the facts and
circumstances. A covered debt instrument may be treated as issued with a
principal purpose of funding a distribution or acquisition described in
paragraphs (b)(3)(i)(A) through (C) of this section regardless of
whether it is issued before or after the distribution or acquisition.
(v) Predecessors and successors--(A) In general. Subject to the
limitations in paragraph (b)(3)(v)(B) of this section, for purposes of
this paragraph (b)(3), references to a funded member include references
to any predecessor or successor of such member. See paragraph (h)(3) of
this section, Examples 9 and 10, for illustrations of this rule.
(B) Limitations to the application of the per se funding rule. For
purposes of paragraph (b)(3)(iii)(A) of this section, a covered debt
instrument issued by a funded member that satisfies the condition
described in paragraph (b)(3)(iii)(A) with respect to a distribution or
acquisition described in paragraphs (b)(3)(i)(A) through (C) of this
section made by a predecessor or successor of the funded member is not
treated as issued during the per se period with respect to the
distribution or acquisition unless the conditions described in
paragraphs (b)(3)(v)(B)(1) and (2) of this section are satisfied:
(1) The covered debt instrument is issued by the funded member
during the period beginning 36 months before the date of the transaction
in which the predecessor or successor becomes a predecessor or successor
and ending 36 months after the date of the transaction.
(2) The distribution or acquisition is made by the predecessor or
successor during the period beginning 36 months before the date of the
transaction in which the predecessor or successor becomes a predecessor
or successor of the funded member and ending 36 months after the date of
the transaction.
(vi) Treatment of funded transactions. When a covered debt
instrument is treated as stock pursuant to paragraph (b)(3) of this
section, the distribution or acquisition described in paragraphs
(b)(3)(i)(A) through (C) of this section that is treated as funded by
such covered debt instrument is not recharacterized as a result of the
treatment of the covered debt instrument as stock.
(vii) Qualified short-term debt instrument. [Reserved]. For further
guidance, see Sec. 1.385-3T(b)(3)(vii).
(viii) Distributions or acquisitions occurring before April 5, 2016.
A distribution or acquisition that occurs before April 5, 2016, is not
taken into account for purposes of applying this paragraph (b)(3).
(4) Anti-abuse rule. If a member of an expanded group enters into a
transaction with a principal purpose of avoiding the purposes of this
section or Sec. 1.385-3T, an interest issued or held by that member or
another member of the member's expanded group may, depending on the
relevant facts and circumstances, be treated as stock. Paragraphs
(b)(4)(i) and (ii) of this section include a non-exhaustive list of
transactions that could result in an interest being treated as stock
under this paragraph (b)(4).
(i) Interests. An interest is treated as stock if it is issued with
a principal purpose of avoiding the purposes of this section or Sec.
1.385-3T. Interests subject to this paragraph (b)(4)(i) may include:
(A) An interest that is not a covered debt instrument for purposes
of this section (for example, a contract to which section 483 applies
that is not otherwise a covered debt instrument or a non-periodic swap
payment that is not otherwise a covered debt instrument).
(B) A covered debt instrument issued to a person that is not a
member of the issuer's expanded group, if the covered debt instrument is
later acquired by a member of the issuer's expanded group or such person
later becomes a member of the issuer's expanded group.
(C) A covered debt instrument issued to an entity that is not
taxable as a corporation for federal tax purposes.
(D) A covered debt instrument issued in connection with a
reorganization or similar transaction.
(E) A covered debt instrument issued as part of a plan or a series
of transactions to expand the applicability of the transition rules
described in Sec. 1.385-3(j)(2) or Sec. 1.385-3T(k)(2).
(ii) Other transactions. A covered debt instrument is treated as
stock if the funded member or any member of the
[[Page 780]]
expanded group engages in a transaction (including a distribution or
acquisition) with a principal purpose of avoiding the purposes of this
section or Sec. 1.385-3T. Transactions subject to this paragraph
(b)(4)(ii) may include:
(A) A member of the issuer's expanded group is substituted as a new
obligor or added as a co-obligor on an existing covered debt instrument.
(B) A covered debt instrument is transferred in connection with a
reorganization or similar transaction.
(C) A covered debt instrument funds a distribution or acquisition
where the distribution or acquisition is made by a member other than the
funded member and the funded member acquires the assets of the other
member in a transaction that does not make the other member a
predecessor to the funded member.
(D) Members of a consolidated group engage in transactions as part
of a plan or a series of transactions through the use of the
consolidated group rules set forth in Sec. 1.385-4T, including through
the use of the departing member rules.
(5) Coordination between general rule and funding rule. For purposes
of this section, a distribution or acquisition described in paragraph
(b)(2) of this section is not also described in paragraph (b)(3)(i) of
this section. In the case of an asset reorganization, an acquisition
described in paragraph (b)(2)(iii) of this section by the transferee
corporation is not also a distribution or acquisition described in
paragraph (b)(3)(i) of this section by the transferor corporation. For
purposes of this paragraph (b)(5), whether a distribution or acquisition
is described in paragraphs (b)(2)(i) through (iii) of this section is
determined without regard to paragraph (c) of this section.
(6) Non-duplication. Except as otherwise provided in paragraph
(d)(2) of this section, to the extent a distribution or acquisition
described in paragraphs (b)(3)(i)(A) through (C) of this section is
treated as funded by a covered debt instrument under paragraph (b)(3) of
this section, the distribution or acquisition is not treated as funded
by another covered debt instrument and the covered debt instrument is
not treated as funding another distribution or acquisition for purposes
of paragraph (b)(3).
(c) Exceptions--(1) In general. This paragraph (c) provides
exceptions for purposes of applying paragraphs (b)(2) and (b)(3) of this
section to a covered member. These exceptions are applied in the
following order: First, paragraph (c)(2) of this section; second,
paragraph (c)(3) of this section; and, third, paragraph (c)(4) of this
section. The exceptions under Sec. 1.385-3(c)(2) and (c)(3) apply to
distributions and acquisitions that are otherwise described in paragraph
(b)(2) or (b)(3)(i) of this section after applying paragraphs (b)(3)(ii)
and (b)(5) of this section. Except as otherwise provided, the exceptions
are applied by taking into account the aggregate treatment of controlled
partnerships described in Sec. 1.385-3T(f).
(2) Exclusions for transactions otherwise described in paragraph
(b)(2) or (b)(3)(i) of this section--(i) Exclusion for certain
acquisitions of subsidiary stock--(A) In general. An acquisition of
expanded group stock (including by issuance) is not treated as described
in paragraph (b)(2)(ii) or (b)(3)(i)(B) of this section if, immediately
after the acquisition, the covered member that acquires the expanded
group stock (acquirer) controls the member of the expanded group from
which the expanded group stock is acquired (seller), and the acquirer
does not relinquish control of the seller pursuant to a plan that
existed on the date of the acquisition, other than in a transaction in
which the seller ceases to be a member of the expanded group of which
the acquirer is a member. For purposes of the preceding sentence, an
acquirer and seller do not cease to be members of the same expanded
group by reason of a complete liquidation described in section 331.
(B) Control. For purposes of this paragraph (c)(2)(i) and paragraph
(c)(3)(ii)(E) of this section, control of a corporation means the direct
or indirect ownership of more than 50 percent of the total combined
voting power of all classes of stock of the corporation entitled to vote
and more than 50 percent of the total value of the stock of the
corporation. For purposes of the preceding sentence, indirect ownership
[[Page 781]]
is determined by applying the principles of section 958(a) without
regard to whether an intermediate entity is foreign or domestic.
(C) Rebuttable presumption. For purposes of paragraph (c)(2)(i)(A)
of this section, the acquirer is presumed to have a plan to relinquish
control of the seller on the date of the acquisition if the acquirer
relinquishes control of the seller within the 36-month period following
the date of the acquisition. The presumption created by the previous
sentence may be rebutted by facts and circumstances clearly establishing
that the loss of control was not contemplated on the date of the
acquisition and that the avoidance of the purposes of this section or
Sec. 1.385-3T was not a principal purpose for the subsequent loss of
control.
(ii) Exclusion for compensatory stock acquisitions. An acquisition
of expanded group stock is not treated as described in paragraph
(b)(2)(ii) or (b)(3)(i)(B) of this section if the expanded group stock
is delivered to individuals that are employees, directors, or
independent contractors in consideration for services rendered by such
individuals to a member of the expanded group or a controlled
partnership in which a member of the expanded group is an expanded group
partner.
(iii) Exclusion for distributions or acquisitions resulting from
transfer pricing adjustments. A distribution or acquisition deemed to
occur under Sec. 1.482-1(g) (including adjustments made pursuant to
Revenue Procedure 99-32, 1999-2 C.B. 296) is not treated as described in
paragraph (b)(3)(i)(A) or (B) of this section.
(iv) Exclusion for acquisitions of expanded group stock by a dealer
in securities. An acquisition of expanded group stock by a dealer in
securities (within the meaning of section 475(c)(1)), or by an expanded
group partner treated as acquiring expanded group stock pursuant to
Sec. 1.385-3T(f)(2) if the relevant controlled partnership is a dealer
in securities, is not treated as described in paragraph (b)(2)(ii) or
(b)(3)(i)(B) of this section to the extent the expanded group stock is
acquired in the ordinary course of the dealer's business of dealing in
securities. The preceding sentence applies solely to the extent that--
(A) The dealer accounts for the stock as securities held primarily
for sale to customers in the ordinary course of business;
(B) The dealer disposes of the stock within a period of time that is
consistent with the holding of the stock for sale to customers in the
ordinary course of business, taking into account the terms of the stock
and the conditions and practices prevailing in the markets for similar
stock during the period in which it is held; and
(C) The dealer does not sell or otherwise transfer the stock to a
person in the same expanded group, other than in a sale to a dealer that
in turn satisfies the requirements of paragraph (c)(2)(iv) of this
section.
(v) Exclusion for certain acquisitions of expanded group stock
resulting from application of this section. The following deemed
acquisitions are not treated as acquisitions of expanded group stock
described in paragraph (b)(3)(i)(B) of this section, provided that they
are not part of a plan or arrangement to prevent the application of
paragraph (b)(3)(i) to a covered debt instrument:
(A) An acquisition of a covered debt instrument that is treated as
stock by means of paragraph (b)(3) of this section.
(B) An acquisition of stock of a regarded owner that is deemed to be
issued under Sec. 1.385-3T(d)(4).
(C) An acquisition of deemed partner stock pursuant to a deemed
transfer or a specified event described in Sec. 1.385-3T(f)(4) or (5).
(3) Reductions for transactions described in paragraph (b)(2) or
(b)(3)(i) of this section--(i) Reduction for expanded group earnings--
(A) In general. The aggregate amount of any distributions or
acquisitions by a covered member described in paragraph (b)(2) or
(b)(3)(i) of this section in a taxable year during the covered member's
expanded group period is reduced by the covered member's expanded group
earnings account (as defined in paragraph (c)(3)(i)(B) of this section)
for the expanded group period as of the close of the taxable year. The
reduction described in this paragraph (c)(3)(i)(A) applies to one or
more distributions or acquisitions based on the order in which the
distributions or
[[Page 782]]
acquisitions occur, regardless of whether any distribution or
acquisition would be treated as funded by a covered debt instrument
without regard to this paragraph (c)(3).
(B) Expanded group earnings account. The term expanded group
earnings account means, with respect to a covered member and an expanded
group period (as defined in paragraph (c)(3)(i)(E) of this section) of
the covered member, the excess, if any, of the covered member's expanded
group earnings (as defined in paragraph (c)(3)(i)(C) of this section)
for the expanded group period over the covered member's expanded group
reductions (as defined in paragraph (c)(3)(i)(D) of this section) for
the expanded group period.
(C) Expanded group earnings--(1) In general. The term expanded group
earnings means, with respect to a covered member and an expanded group
period of the covered member, the earnings and profits accumulated by
the covered member during the expanded group period, computed as of the
close of the taxable year of the covered member, without diminution by
reason of any distributions or acquisitions by the covered member
described in paragraphs (b)(2) and (b)(3)(i) of this section.
Notwithstanding the preceding sentence, the expanded group earnings of a
covered member do not include earnings and profits accumulated by the
covered member in any taxable year ending before April 5, 2016.
(2) Special rule for change in expanded group within a taxable year.
For purposes of calculating a covered member's expanded group earnings
for a taxable year that is not wholly included in an expanded group
period, the covered member's expanded group earnings are ratably
allocated among the portion of the taxable year included in the expanded
group period and the portion of the taxable year not included in the
expanded group period. For purposes of the preceding sentence, the
expanded group period is determined by excluding the day on which the
covered member becomes a member of an expanded group with the same
expanded group parent and including the day on which the covered member
ceases to be a member of an expanded group with the same expanded group
parent.
(3) Look-through rule for dividends--(i) In general. For purposes of
paragraph (c)(3)(i)(C)(1) of this section, a dividend from a member of
the same expanded group (distributing member) is not taken into account
for purposes of calculating a covered member's expanded group earnings,
except to the extent the dividend is attributable to earnings and
profits accumulated by the distributing member in a taxable year ending
after April 4, 2016, during its expanded group period (qualified
earnings and profits). For purposes of the preceding sentence, a
dividend received from a member (intermediate distributing member) is
not taken into account for purposes of calculating the qualified
earnings and profits of a distributing member (or another intermediate
distributing member), except to the extent the dividend is attributable
to qualified earnings and profits of the intermediate distributing
member. A dividend from a distributing member or an intermediate
distributing member is considered to be attributable to qualified
earnings and profits to the extent thereof. If the distributing member
or the intermediate distributing member is not a covered member, the
expanded group period of the member is determined under the principles
of paragraph (c)(3)(i)(E) of this section. If a controlled partnership
receives a dividend from a distributing member and a portion of the
dividend is allocated (including through one or more partnerships) to a
covered member, then, for purposes of this paragraph (c)(3)(i)(C)(3),
the covered member is treated as receiving the dividend from the
distributing member.
(ii) Dividend. For purposes of paragraph (c)(3)(i)(C)(3)(i) of this
section, the term dividend has the meaning specified in section 316,
including the portion of gain recognized under section 1248 that is
treated as a dividend and deemed dividends under section 367(b) and the
regulations thereunder. In addition, the term dividend includes
inclusions with respect to stock (for example, inclusions under sections
951(a) and 1293).
(4) Effect of interest deductions. For purposes of calculating the
expanded
[[Page 783]]
group earnings of a covered member for a taxable year, expanded group
earnings are calculated without regard to the application of this
section during the taxable year to a covered debt instrument issued by
the covered member that was not treated as stock under paragraph (b) of
this section as of the close of the preceding taxable year, or, if the
covered member is an expanded group partner in a controlled partnership
that is the issuer of a debt instrument, without regard to the
application of Sec. 1.385-3T(f)(4)(i) during the taxable year with
respect to the covered member's share of the debt instrument. To the
extent that the application of this paragraph (c)(3)(i)(C)(4) reduces
the expanded group earnings of the covered member for the taxable year,
the expanded group earnings of the covered member are increased as of
the beginning of the succeeding taxable year during the expanded group
period.
(D) Expanded group reductions. The term expanded group reductions
means, with respect to a covered member and an expanded group period of
the covered member, the amounts by which acquisitions or distributions
described in paragraph (b)(2) or (b)(3)(i) of this section were reduced
by reason of paragraph (c)(3)(i)(A) of this section during the portion
of the expanded group period preceding the taxable year.
(E) Expanded group period--(1) In general. For purposes of this
paragraph (c)(3)(i) and paragraph (c)(3)(ii) of this section, the term
expanded group period means, with respect to a covered member, the
period during which a covered member is a member of an expanded group
with the same expanded group parent.
(2) Mere change. For purposes of paragraph (c)(3)(i)(E)(1) of this
section, an expanded group parent that is a resulting corporation
(within the meaning of Sec. 1.368-2(m)(1)) in a reorganization
described in section 368(a)(1)(F) is treated as the same expanded group
parent as an expanded group parent that is a transferor corporation
(within the meaning of Sec. 1.368-2(m)(1)) in the same reorganization,
provided that either--
(i) The transferor corporation is not a covered member; or
(ii) Both the transferor corporation and the resulting corporation
are covered members.
(F) Special rules for certain corporate transactions--(1) Reduction
for expanded group earnings in an asset reorganization. For purposes of
applying paragraph (c)(3)(i) of this section, a distribution or
acquisition described in paragraph (b)(2) or (b)(3)(i) of this section
that occurs pursuant to a reorganization described in section 381(a)(2)
is reduced solely by the expanded group earnings account of the
acquiring member after taking into account the adjustment to its
expanded group earnings account provided in paragraph
(c)(3)(i)(F)(2)(ii) of this section.
(2) Effect of certain corporate transactions on the calculation of
expanded group earnings account--(i) In general. Section 381 and Sec.
1.312-10 are not taken into account for purposes of calculating a
covered member's expanded group earnings account for an expanded group
period. The expanded group earnings account that a covered member
succeeds to under paragraphs (c)(3)(i)(F)(2)(ii) through (iv) of this
section is attributed to the covered member's expanded group period as
of the close of the date of the distribution or transfer.
(ii) Section 381 transactions. If a covered member (acquiring
member) acquires the assets of another covered member (acquired member)
in a transaction described in section 381(a), and, immediately before
the transaction, both corporations are members of the same expanded
group, then the acquiring member succeeds to the expanded group earnings
account of the acquired member, if any, determined after application of
paragraph (c)(3)(i) of this section with respect to the final taxable
year of the acquired member.
(iii) Section 1.312-10(a) transactions. If a covered member
(transferor member) transfers property to another covered member
(transferee member) in a transaction described in Sec. 1.312-10(a), the
expanded group earnings account of the transferor member is allocated
between the transferor member and the transferee member in the same
proportion as the earnings and profits of the
[[Page 784]]
transferor member are allocated between the transferor member and the
transferee member under Sec. 1.312-10(a).
(iv) Section 1.312-10(b) transactions. If a covered member
(distributing member) distributes the stock of another covered member
(controlled member) in a transaction described in Sec. 1.312-10(b), the
expanded group earnings account of the distributing member is decreased
by the amount that the expanded group earnings account of the
distributing member would have been decreased under paragraph
(c)(3)(i)(F)(2)(iii) of this section if the distributing member had
transferred the stock of the controlled member to a newly formed
corporation in a transaction described in Sec. 1.312-10(a). If the
amount of the decrease described in the preceding sentence exceeds the
expanded group earnings account of the controlled member immediately
before the transaction described in Sec. 1.312-10(b), then the expanded
group earnings account of the controlled member after the transaction is
equal to the amount of the decrease.
(G) Overlapping expanded groups. A covered member that is a member
of two expanded groups at the same time has a single expanded group
earnings account with respect to a single expanded group period. In this
case, the expanded group period is determined by reference to the
shorter of the two periods during which the covered member is a member
of an expanded group with the same expanded group parent.
(ii) Reduction for qualified contributions--(A) In general. The
amount of a distribution or acquisition by a covered member described in
paragraph (b)(2) or (b)(3)(i) of this section is reduced by the
aggregate fair market value of the stock issued by the covered member in
one or more qualified contributions (as defined in paragraph
(c)(3)(ii)(B) of this section) during the qualified period (as defined
in paragraph (c)(3)(ii)(C) of this section), but only to the extent the
qualified contribution or qualified contributions have not reduced
another distribution or acquisition. The reduction described in this
paragraph (c)(3)(ii)(A) applies to one or more distributions or
acquisitions based on the order in which the distributions or
acquisitions occur, regardless of whether any distribution or
acquisition would be treated as funded by a covered debt instrument
without regard to this paragraph (c)(3).
(B) Qualified contribution. The term qualified contribution means,
with respect to a covered member, except as provided in paragraph
(c)(3)(ii)(E) of this section, a contribution of property, other than
excluded property (defined in paragraph (c)(3)(ii)(D) of this section),
to the covered member by a member of the covered member's expanded group
(or by a controlled partnership of the expanded group) in exchange for
stock.
(C) Qualified period. The term qualified period means, with respect
to a covered member, a qualified contribution, and a distribution or
acquisition described in paragraph (b)(2) or (b)(3)(i) of this section,
the period beginning on the later of the beginning of the periods
described in paragraphs (c)(3)(ii)(C)(1) and (2) of this section, and
ending on the earlier of the ending of the periods described in
paragraphs (c)(3)(ii)(C)(1) and (2) of this section or the date
described in paragraph (c)(3)(ii)(C)(3) of this section.
(1) The period beginning 36 months before the date of the
distribution or acquisition, and ending 36 months after the date of the
distribution or acquisition.
(2) The covered member's expanded group period (as defined in
paragraph (c)(3)(i)(E) of this section) that includes the distribution
or acquisition.
(3) The last day of the first taxable year that a covered debt
instrument issued by the covered member would, absent the application of
this paragraph (c)(3)(ii) with respect to the distribution or
acquisition, be treated, in whole or in part, as stock under paragraph
(b) of this section or, in the case of a covered debt instrument issued
by a controlled partnership in which the covered member is an expanded
group partner, the covered debt instrument would be treated, in whole or
in part, as a specified portion.
(D) Excluded property. The term excluded property means--
(1) Expanded group stock;
(2) Property acquired by the covered member in an asset
reorganization from a member of the expanded group
[[Page 785]]
of which the covered member is a member;
(3) A covered debt instrument of any member of the same expanded
group, including a covered debt instrument issued by the covered member;
(4) Property acquired by the covered member in exchange for a
covered debt instrument issued by the covered member that is
recharacterized under paragraph (b)(3) of this section;
(5) A debt instrument issued by a controlled partnership of the
expanded group of which the covered member is a member, including the
portion of such a debt instrument that is a deemed transferred
receivable or a retained receivable; and
(6) Any other property acquired by the covered member with a
principal purpose to avoid the purposes of this section or Sec. 1.385-
3T, including a transaction involving an indirect transfer of property
described in paragraphs (c)(3)(ii)(D)(1) through (5) of this section.
(E) Excluded contributions--(1) Upstream contributions from certain
subsidiaries. For purposes of paragraph (c)(3)(ii)(B) of this section, a
contribution of property from a corporation (controlled member) that the
covered member controls, within the meaning of paragraph (c)(2)(i)(B) of
this section, is not a qualified contribution.
(2) Contributions to a predecessor or successor. For purposes of
paragraph (c)(3)(ii)(B) of this section, a contribution of property to a
covered member from a corporation of which the covered member is a
predecessor or successor, or from a corporation controlled by that
corporation within the meaning of paragraph (c)(2)(i)(B) of this
section, is not a qualified contribution.
(3) Contributions that do not increase fair market value. A
contribution of property to a covered member that is not described in
paragraph (c)(3)(ii)(E)(1) or (2) of this section is not a qualified
contribution to the extent that the contribution does not increase the
aggregate fair market value of the outstanding stock of the covered
member immediately after the transaction and taking into account all
related transactions, other than distributions and acquisitions
described in paragraphs (b)(2) and (b)(3)(i) of this section.
(4) Contributions that become excluded contributions after the date
of the contribution. If a contribution of property described in
paragraph (c)(3)(ii)(E)(1) or (2) of this section occurs before the
covered member acquires control of the controlled member described in
paragraph (c)(3)(ii)(E)(1) or before the transaction in which the
corporation described in paragraph (c)(3)(ii)(E)(2) becomes a
predecessor or successor to the covered member, the contribution of
property ceases to be a qualified contribution on the date that the
covered member acquires control of the controlled member or on the date
of the transaction in which the corporation becomes a predecessor or
successor to the covered member (transaction date). If the contribution
of property occurs within 36 months before the transaction date, the
covered member is treated as making a distribution described in
paragraph (b)(3)(i)(A) of this section on the transaction date equal to
the amount by which any distribution or acquisition described in
paragraph (b)(2) or (b)(3)(i) of this section was reduced under
paragraph (c)(3)(ii)(A) of this section because the contribution of
property was treated as a qualified contribution.
(F) Special rules for certain corporate transactions--(1) Reduction
for qualified contributions in an asset reorganization. For purposes of
applying paragraph (c)(3)(ii)(A) of this section, a distribution or
acquisition described in paragraph (b)(2) or (b)(3)(i) of this section
that occurs pursuant to a reorganization described in section 381(a)(2)
is reduced solely by the qualified contributions of the acquiring member
after taking into account the adjustment to its qualified contributions
provided in paragraph (c)(3)(ii)(F)(2) of this section.
(2) Effect of certain corporate transactions on the calculation of
qualified contributions--(i) In general. This paragraph (c)(3)(ii)(F)(2)
provides rules for allocating or reducing the qualified contributions of
a covered member as a result of certain corporation transactions. For
purposes of paragraph (c)(3)(ii)(C)(1) of this section, a qualified
contribution that a covered member succeeds to under paragraphs
[[Page 786]]
(c)(3)(ii)(F)(2)(ii) and (iii) of this section is treated as made to the
covered member on the date on which the qualified contribution was made
to the covered member that received the qualified contribution. For
purposes of paragraph (c)(3)(ii)(C)(2) of this section, a qualified
contribution that a covered member succeeds to under paragraphs
(c)(3)(ii)(F)(2)(ii) and (iii) of this section is attributed to the
covered member's expanded group period as of the close of the date of
the distribution or transfer. For purposes of paragraph (c)(3)(ii)(C)(3)
of this section, a qualified contribution a covered member succeeds to
under paragraphs (c)(3)(ii)(F)(2)(ii) and (iii) of this section is
treated as made to the covered member as of the close of the date of the
distribution or transfer.
(ii) Section 381 transactions. If a covered member (acquiring
member) acquires the assets of another covered member (acquired member)
in a transaction described in section 381(a), and, immediately before
the transaction, both corporations are members of the same expanded
group, the acquiring member succeeds to the qualified contributions of
the acquired member, if any, adjusted for the application of paragraph
(c)(3)(ii)(E)(4) of this section.
(iii) Section 1.312-10(a) transactions. If a covered member
(transferor member) transfers property to another covered member
(transferee member) in a transaction described in Sec. 1.312-10(a),
each qualified contribution of the transferor member is allocated
between the transferor member and the transferee member in the same
proportion as the earnings and profits of the transferor member are
allocated between the transferor member and the transferee member under
Sec. 1.312-10(a).
(iv) Section 1.312-10(b) transactions. If a covered member
(distributing member) distributes the stock of another covered member
(controlled member) in a transaction described in Sec. 1.312-10(b),
each qualified contribution of the distributing member is decreased by
the amount that each qualified contribution of the distributing member
would have been decreased under paragraph (c)(3)(ii)(F)(2)(iii) of this
section if the distributing member had transferred the stock of the
controlled member to a newly formed corporation in a transaction
described in Sec. 1.312-10(a). No amount of the qualified contributions
of the distributing member is allocated to the controlled member.
(iii) Predecessors and successors. For purposes of this paragraph
(c)(3), references to a covered member do not include references to any
corporation of which the covered member is a predecessor or successor.
Accordingly, a distribution or acquisition by a covered member described
in paragraphs (b)(3)(i)(A) through (C) is reduced solely by the expanded
group earnings account of the covered member (taking into account the
application of paragraph (c)(3)(i)(F)(2) of this section) and the
qualified contributions of the covered member (taking into account the
application of paragraph (c)(3)(ii)(F)(2) of this section),
notwithstanding that the distribution or acquisition is treated as made
by a funded member of which the covered member is a predecessor or
successor.
(iv) Ordering rule. The exceptions described in this paragraph
(c)(3) are applied in the following order: First, paragraph (c)(3)(i) of
this section; and, second, paragraph (c)(3)(ii) of this section.
(4) Threshold exception. A covered debt instrument is not treated as
stock under this section if, immediately after the covered debt
instrument would be treated as stock under this section but for the
application of this paragraph (c)(4), the aggregate adjusted issue price
of covered debt instruments held by members of the issuer's expanded
group that would be treated as stock under this section but for the
application of this paragraph (c)(4) does not exceed $50 million. To the
extent a debt instrument issued by a controlled partnership would be
treated as a specified portion (as defined in paragraph (g)(23) of this
section) but for the application of this paragraph (c)(4), the debt
instrument is treated as a covered debt instrument described in the
preceding sentence for purposes of this paragraph (c)(4). To the extent
that, immediately after a covered debt instrument would be treated as
stock under this section but for the application of this paragraph
(c)(4), the aggregate adjusted issue price of covered debt instruments
[[Page 787]]
held by members of the issuer's expanded group that would be treated as
stock under this section but for the application of this paragraph
(c)(4) exceeds $50 million, only the amount of the covered debt
instrument in excess of $50 million is treated as stock under this
section. For purposes of this rule, any covered debt instrument that is
not denominated in U.S. dollars is translated into U.S. dollars at the
spot rate (as defined in Sec. 1.988-1(d)) on the date that the covered
debt instrument is issued.
(d) Operating rules--(1) Timing. This paragraph (d)(1) provides
rules for determining when a covered debt instrument is treated as stock
under paragraph (b) of this section. For special rules regarding the
treatment of a deemed exchange of a covered debt instrument that occurs
pursuant to paragraphs (d)(1)(ii), (d)(1)(iii), or (d)(1)(iv) of this
section, see Sec. 1.385-1(d).
(i) General timing rule. Except as otherwise provided in this
paragraph (d)(1), when paragraph (b) of this section applies to treat a
covered debt instrument as stock, the covered debt instrument is treated
as stock when the covered debt instrument is issued. When paragraph
(b)(3) of this section applies to treat a covered debt instrument as
stock when the covered debt instrument is issued, see also paragraph
(b)(3)(vi) of this section.
(ii) Exception when a covered debt instrument is treated as funding
a distribution or acquisition that occurs after the issuance of the
covered debt instrument. When paragraph (b)(3)(iii) of this section
applies to treat a covered debt instrument as funding a distribution or
acquisition described in paragraph (b)(3)(i)(A) through (C) of this
section that occurs after the covered debt instrument is issued, the
covered debt instrument is deemed to be exchanged for stock on the date
that the distribution or acquisition occurs. See paragraph (h)(3) of
this section, Examples 4 and 9, for an illustration of this rule.
(iii) Exception for certain predecessor and successor transactions.
To the extent that a covered debt instrument would not be treated as
stock but for the fact that a funded member is treated as the
predecessor or successor of another expanded group member under
paragraph (b)(3)(v) of this section, the covered debt instrument is
deemed to be exchanged for stock on the later of the date that the
funded member completes the transaction causing it to become a
predecessor or successor of the other expanded group member or the date
that the covered debt instrument would be treated as stock under
paragraph (d)(1)(i) or (ii) of this section.
(iv) Exception when a covered debt instrument is re-tested under
paragraph (d)(2) of this section. When paragraph (b)(3)(iii) of this
section applies to treat a covered debt instrument as funding a
distribution or acquisition described in paragraphs (b)(3)(i)(A) through
(C) of this section as a result of a re-testing described in paragraph
(d)(2)(ii) of this section that occurs in a taxable year subsequent to
the taxable year in which the covered debt instrument is issued, the
covered debt instrument is deemed to be exchanged for stock on the later
of the date of the re-testing or the date that the covered debt
instrument would be treated as stock under paragraph (d)(1)(i) or (ii)
of this section. See paragraph (h)(3) of this section, Example 7, for an
illustration of this rule.
(2) Covered debt instrument treated as stock that leaves the
expanded group--(i) Events that cause a covered debt instrument to cease
to be treated as stock. Subject to paragraph (b)(4) of this section,
this paragraph (d)(2)(i) applies with respect to a covered debt
instrument that is treated as stock under this section when the holder
and issuer of a covered debt instrument cease to be members of the same
expanded group, either because the covered debt instrument is
transferred to a person that is not a member of the expanded group that
includes the issuer or because the holder or the issuer ceases to be a
member of the same expanded group, or in the case of a holder that is a
controlled partnership, when the holder ceases to be a controlled
partnership with respect to the expanded group of which the issuer is a
member, either because the partnership ceases to be a controlled
partnership or because the issuer ceases to be a member of the same
expanded group with respect to which the holder is a controlled
partnership. In such a case, the covered
[[Page 788]]
debt instrument ceases to be treated as stock under this section. For
this purpose, immediately before the transaction that causes the holder
and issuer of the covered debt instrument to cease to be members of the
same expanded group, or, if the holder is a controlled partnership, that
causes the holder to cease to be a controlled partnership with respect
to the expanded group of which the issuer is a member, the issuer is
deemed to issue a new covered debt instrument to the holder in exchange
for the covered debt instrument that was treated as stock in a
transaction that is disregarded for purposes of paragraphs (b)(2) and
(b)(3) of this section.
(ii) Re-testing of covered debt instruments and certain
distributions and acquisitions--(A) General rule. For purposes of
paragraph (b)(3)(iii) of this section, when paragraph (d)(2)(i) of this
section or Sec. 1.385-4T(c)(2) causes a covered debt instrument that
previously was treated as stock pursuant to paragraph (b)(3) of this
section to cease to be treated as stock, all other covered debt
instruments of the issuer that are not treated as stock on the date that
the transaction occurs that causes paragraph (d)(2)(i) of this section
to apply are re-tested to determine whether those other covered debt
instruments are treated as funding the distribution or acquisition that
previously was treated as funded by the covered debt instrument that
ceases to be treated as stock pursuant to paragraph (d)(2)(i) of this
section. In addition, a covered debt instrument that is issued after an
application of paragraph (d)(2)(i) of this section and within the per se
period may also be treated as funding that distribution or acquisition.
See paragraph (h)(3) of this section, Example 7, for an illustration of
this rule.
(B) Re-testing upon a specified event with respect to a debt
instrument issued by a controlled partnership. If, with respect to a
covered member that is an expanded group partner and a debt instrument
issued by the controlled partnership, there is reduction in the covered
member's specified portion under Sec. 1.385-3T(f)(5)(i) by reason of a
specified event, the covered member must re-test its debt instruments as
described in paragraph (d)(2)(ii)(A) of this section.
(3) Inapplicability of section 385(c)(1). Section 385(c)(1) does not
apply with respect to a covered debt instrument to the extent that it is
treated as stock under this section.
(4) Treatment of disregarded entities. [Reserved]. For further
guidance, see Sec. 1.385-3T(d)(4).
(5) Payments with respect to partially recharacterized covered debt
instruments--(i) General rule. Except as otherwise provided in paragraph
(d)(5)(ii) of this section, a payment with respect to an instrument that
is partially recharacterized as stock is treated as made pro rata to the
portion treated as stock and to the portion treated as indebtedness.
(ii) Special rule for payments not required pursuant to the terms of
the instrument. A payment with respect to an instrument that is
partially recharacterized as stock and that is a payment that is not
required to be made pursuant to the terms of the instrument (for
example, a prepayment of principal) may be designated by the issuer and
the holder as with respect to the portion treated as stock or to the
portion treated as indebtedness, in whole or in part. In the absence of
such designation, see paragraph (d)(5)(i) of this section.
(6) Treatment of a general rule transaction to which an exception
applies. To the extent a covered member would, absent the application of
paragraph (c)(2) or (c)(3) of this section, be treated as making a
distribution or acquisition described in paragraph (b)(2) of this
section, then, solely for purposes of applying paragraph (b)(3) of this
section, the covered member is treated as issuing the covered debt
instrument issued in the distribution or acquisition to a member of the
covered member's expanded group in exchange for property.
(7) Treatment for purposes of section 1504(a)--(i) Debt instruments
treated as stock. A covered debt instrument that is treated as stock
under paragraph (b)(2), (3), or (4) of this section and that is not
described in section 1504(a)(4) is
[[Page 789]]
not treated as stock for purposes of determining whether the issuer is a
member of an affiliated group (within the meaning of section 1504(a)).
(ii) Deemed partner stock and stock deemed issued by a regarded
owner. If deemed partner stock or stock that is deemed issued by a
regarded owner under Sec. 1.385-3T(d)(4) is not described in section
1504(a)(4), then that stock is not treated as stock for purposes of
determining whether the issuer of the stock is a member of an affiliated
group (within the meaning of section 1504(a)).
(e) No affirmative use. [Reserved]
(f) Treatment of controlled partnerships. [Reserved]. For further
guidance, see Sec. 1.385-3T(f).
(g) Definitions. The definitions in this paragraph (g) apply for
purposes of this section and Sec. Sec. 1.385-3T and 1.385-4T.
(1) Asset reorganization. The term asset reorganization means a
reorganization described in section 368(a)(1)(A), (C), (D), (F), or (G).
(2) Consolidated group. The term consolidated group has the meaning
specified in Sec. 1.1502-1(h).
(3) Covered debt instrument--(i) In general. The term covered debt
instrument means a debt instrument issued after April 4, 2016, that is
not a qualified dealer debt instrument (as defined in paragraph
(g)(3)(ii) of this section) or an excluded statutory or regulatory debt
instrument (as defined in paragraph (g)(3)(iii) of this section), and
that is issued by a covered member that is not an excepted regulated
financial company (as defined in paragraph (g)(3)(iv) of this section)
or a regulated insurance company (as defined in paragraph (g)(3)(v) of
this section).
(ii) Qualified dealer debt instrument. For purposes of this
paragraph (g)(3), the term qualified dealer debt instrument means a debt
instrument that is issued to or acquired by an expanded group member
that is a dealer in securities (within the meaning of section 475(c)(1))
in the ordinary course of the dealer's business of dealing in
securities. The preceding sentence applies solely to the extent that--
(A) The dealer accounts for the debt instruments as securities held
primarily for sale to customers in the ordinary course of business;
(B) The dealer disposes of the debt instruments (or the debt
instruments mature) within a period of time that is consistent with the
holding of the debt instruments for sale to customers in the ordinary
course of business, taking into account the terms of the debt
instruments and the conditions and practices prevailing in the markets
for similar debt instruments during the period in which it is held; and
(C) The dealer does not sell or otherwise transfer the debt
instrument to a member of the dealer's expanded group unless that sale
or transfer is to a dealer that satisfies the requirements of this
paragraph (g)(3)(ii).
(iii) Excluded statutory or regulatory debt instrument. For purposes
of this paragraph (g)(3), the term excluded statutory or regulatory debt
instrument means a debt instrument that is described in any of the
following paragraphs:
(A) Production payments treated as a loan under section 636(a) or
(b).
(B) A ``regular interest'' in a real estate mortgage investment
conduit described in section 860G(a)(1).
(C) A debt instrument that is deemed to arise under Sec. 1.482-
1(g)(3) (including adjustments made pursuant to Revenue Procedure 99-32,
1999-2 C.B. 296).
(D) A stripped bond or coupon described in section 1286, unless such
instrument was issued with a principal purpose of avoiding the purposes
of this section or Sec. 1.385-3T.
(E) A lease treated as a loan under section 467.
(iv) Excepted regulated financial company. For purposes of this
paragraph (g)(3), the term excepted regulated financial company means a
covered member that is a regulated financial company (as defined in
paragraph (g)(3)(iv)(A) of this section) or a member of a regulated
financial group (as defined in paragraph (g)(3)(iv)(B) of this section).
(A) Regulated financial company. For purposes of paragraph
(g)(3)(iv), the term regulated financial company means--
(1) A bank holding company, as defined in 12 U.S.C. 1841;
(2) A covered savings and loan holding company, as defined in 12 CFR
217.2;
[[Page 790]]
(3) A national bank;
(4) A bank that is a member of the Federal Reserve System and is
incorporated by special law of any State, or organized under the general
laws of any State, or of the United States, including a Morris Plan
bank, or other incorporated banking institution engaged in a similar
business;
(5) An insured depository institution, as defined in 12 U.S.C.
1813(c)(2);
(6) A nonbank financial company subject to a determination under 12
U.S.C. 5323(a)(1) or (b)(1);
(7) A U.S. intermediate holding company formed by a foreign banking
organization in compliance with 12 CFR 252.153;
(8) An Edge Act corporation organized under section 25A of the
Federal Reserve Act (12 U.S.C. 611-631);
(9) Corporations having an agreement or undertaking with the Board
of Governors of the Federal Reserve System under section 25 of the
Federal Reserve Act (12 U.S.C. 601-604a);
(10) A supervised securities holding company, as defined in 12
U.S.C. 1850a(a)(5);
(11) A broker or dealer that is registered with the Securities and
Exchange Commission under 15 U.S.C. 78o(b);
(12) A futures commission merchant, as defined in 7 U.S.C. 1a(28);
(13) A swap dealer, as defined in 7 U.S.C. 1a(49);
(14) A security-based swap dealer, as defined in 15 U.S.C.
78c(a)(71);
(15) A Federal Home Loan Bank, as defined in 12 U.S.C. 1422(1)(A);
(16) A Farm Credit System Institution chartered and subject to the
provisions of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.); or
(17) A small business investment company, as defined in 15 U.S.C.
662(3).
(B) Regulated financial group--(1) General rule. For purposes of
paragraph (g)(3)(iv) of this section, except as otherwise provided in
paragraph (g)(3)(iv)(B)(2) of this section, the term regulated financial
group means any expanded group of which a covered member that is a
regulated financial company within the meaning of paragraphs
(g)(3)(iv)(A)(1) through (10) of this section would be the expanded
group parent if no person owned, directly or indirectly (as defined in
Sec. 1.385-1(c)(4)(iii)), the regulated financial company. A domestic
eligible entity (within the meaning of Sec. 301.7701-5(a) of this
chapter) treated as a partnership or disregarded as an entity separate
from its owner is, for purposes of this paragraph (g)(3)(iv)(B), also
treated as a covered member.
(2) Exception for certain non-financial entities. A corporation is
not a member of a regulated financial group if it is held by a regulated
financial company pursuant to 12 U.S.C. 1843(k)(1)(B), 12 U.S.C.
1843(k)(4)(H), or 12 U.S.C. 1843(o).
(v) Regulated insurance company. For purposes of this paragraph
(g)(3), the term regulated insurance company means a covered member that
is--
(A) Subject to tax under subchapter L of chapter 1 of the Internal
Revenue Code;
(B) Domiciled or organized under the laws of one of the 50 states or
the District of Columbia (for purposes of paragraph (g)(3)(v) of this
section, each being a ``state'');
(C) Licensed, authorized, or regulated by one or more states to sell
insurance, reinsurance, or annuity contracts to persons other than
related persons (within the meaning of section 954(d)(3)) in such
states, but in no case will a corporation satisfy the requirements of
this paragraph (g)(3)(v)(C) if a principal purpose for obtaining such
license, authorization, or regulation was to qualify the issuer as a
regulated insurance company; and
(D) Engaged in regular issuances of (or subject to ongoing liability
with respect to) insurance, reinsurance, or annuity contracts with
persons that are not related persons (within the meaning of section
954(d)(3)).
(4) Debt instrument. The term debt instrument means an interest that
would, but for the application of this section, be treated as a debt
instrument as defined in section 1275(a) and Sec. 1.1275-1(d), provided
that the interest is not recharacterized as stock under Sec. 1.385-2.
(5) Deemed holder. [Reserved]. For further guidance, see Sec.
1.385-3T(g)(5).
(6) Deemed partner stock. [Reserved]. For further guidance, see
Sec. 1.385-3T(g)(6).
[[Page 791]]
(7) Deemed transfer. [Reserved]. For further guidance, see Sec.
1.385-3T(g)(7).
(8) Deemed transferred receivable. [Reserved]. For further guidance,
see Sec. 1.385-3T(g)(8).
(9) Distribution. The term distribution means any distribution made
by a corporation with respect to its stock.
(10) Exempt distribution. The term exempt distribution means
either--
(i) A distribution of stock that is permitted to be received without
the recognition of gain or income under section 354(a)(1) or 355(a)(1),
or, if section 356 applies, that is not treated as other property or
money described in section 356; or
(ii) A distribution of property in a complete liquidation under
section 336(a) or 337(a).
(11) Exempt exchange. The term exempt exchange means an acquisition
of expanded group stock in which either--
(i) In a case in which the transferor and transferee of the expanded
group stock are parties to an asset reorganization, either--
(A) Section 361(a) or (b) applies to the transferor of the expanded
group stock and the stock is not transferred by issuance; or
(B) Section 1032 or Sec. 1.1032-2 applies to the transferor of the
expanded group stock and the stock is distributed by the transferee
pursuant to the plan of reorganization;
(ii) The transferor of the expanded group stock is a shareholder
that receives property in a complete liquidation to which section 331 or
332 applies; or
(iii) The transferor of the expanded group stock is an acquiring
entity that is deemed to issue the stock in exchange for cash from an
issuing corporation in a transaction described in Sec. 1.1032-3(b).
(12) Expanded group partner. The term expanded group partner means,
with respect to a controlled partnership of an expanded group, a member
of the expanded group that is a partner (directly or indirectly through
one or more partnerships).
(13) Expanded group stock. The term expanded group stock means, with
respect to a member of an expanded group, stock of a member of the same
expanded group.
(14) Funded member. The term funded member has the meaning provided
in paragraph (b)(3)(i) of this section.
(15) Holder-in-form. [Reserved]. For further guidance, see Sec.
1.385-3T(g)(15).
(16) Issuance percentage. [Reserved]. For further guidance, see
Sec. 1.385-3T(g)(16).
(17) Liquidation value percentage. [Reserved]. For further guidance,
see Sec. 1.385-3T(g)(17).
(18) Member of a consolidated group. The term member of a
consolidated group means a corporation described in Sec. 1.1502-1(b).
(19) Per se period. The term per se period has the meaning provided
in paragraph (b)(3)(iii)(A) of this section.
(20) Predecessor--(i) In general. Except as otherwise provided in
paragraph (g)(20)(ii) of this section, the term predecessor means, with
respect to a corporation--
(A) The distributor or transferor corporation in a transaction
described in section 381(a) in which the corporation is the acquiring
corporation; or
(B) The distributing corporation in a distribution or exchange to
which section 355 (or so much of section 356 that relates to section
355) applies in which the corporation is a controlled corporation.
(ii) Predecessor ceasing to be a member of the same expanded group
as corporation. The term predecessor does not include the distributing
corporation described in paragraph (g)(20)(i)(B) of this section from
the date that the distributing corporation ceases to be a member of the
expanded group of which the controlled corporation is a member.
(iii) Multiple predecessors. A corporation may have more than one
predecessor, including by reason of a predecessor of the corporation
having a predecessor or successor. Accordingly, references to a
corporation also include references to a predecessor or successor of a
predecessor of the corporation.
(21) Property. The term property has the meaning specified in
section 317(a).
(22) Retained receivable. [Reserved]. For further guidance, see
Sec. 1.385-3T(g)(22).
(23) Specified portion. [Reserved]. For further guidance, see Sec.
1.385-3T(g)(23).
(24) Successor--(i) In general. Except as otherwise provided in
paragraph
[[Page 792]]
(g)(24)(iii) of this section, the term successor means, with respect to
a corporation--
(A) The acquiring corporation in a transaction described in section
381(a) in which the corporation is the distributor or transferor
corporation;
(B) A controlled corporation in a distribution or exchange to which
section 355 (or so much of section 356 that relates to section 355)
applies in which the corporation is the distributing corporation; or
(C) Subject to the rules in paragraph (g)(24)(ii) of this section, a
seller in an acquisition described in paragraph (c)(2)(i)(A) of this
section in which the corporation is the acquirer.
(ii) Special rules for certain acquisitions of subsidiary stock. The
following rules apply with respect to a successor described in paragraph
(g)(24)(i)(C) of this section:
(A) The seller is a successor to the acquirer only to the extent of
the value (adjusted as described in paragraph (g)(24)(ii)(C) of this
section) of the expanded group stock acquired from the seller in
exchange for property (other than expanded group stock) in the
acquisition described in paragraph (c)(2)(i)(A) of this section.
(B) A distribution or acquisition by either the seller or a
successor seller to or from either the acquirer, the seller, or a
successor seller is not treated as described in paragraph (b)(3) of this
section for purposes of applying paragraph (b)(3) of this section to a
covered debt instrument of the acquirer. For purposes of the preceding
sentence, the term successor seller means a member of the expanded group
that receives property (other than expanded group stock) in a
distribution or acquisition from the seller or another successor seller
and is controlled by the acquirer as determined under the principles of
paragraph (c)(2)(i) of this section. A successor seller is treated as a
successor to the acquirer to the extent of the value of the property
received in a distribution or acquisition described in the preceding
sentence and, for purposes of applying this paragraph (g)(24)(ii)(B).
(C) To the extent that a covered debt instrument of the acquirer is
treated as funding a distribution or acquisition by the seller or
successor seller described in paragraphs (b)(3)(i)(A) through (C) of
this section, or would be treated but for the exceptions described in
paragraphs (c)(3)(i) and (ii) of this section, the value of the expanded
group stock described in paragraph (g)(24)(ii)(A) of this section is
reduced by an amount equal to the distribution or acquisition for
purposes of any further application of paragraph (g)(24)(ii)(A) of this
section with respect to the acquirer and seller.
(iii) Successor ceasing to be a member of the same expanded group as
corporation. The term successor does not include a controlled
corporation described in paragraph (g)(24)(i)(B) of this section with
respect to a distributing corporation or a seller described in paragraph
(g)(24)(i)(C) of this section with respect to an acquirer from the date
that the controlled corporation or the seller ceases to be a member of
the expanded group of which the controlled corporation or acquirer,
respectively, is a member.
(iv) Multiple successors. A corporation may have more than one
successor, including by reason of a successor of the corporation having
a predecessor or successor. Accordingly, references to a corporation
also include references to a predecessor or successor of a successor of
the corporation.
(25) Taxable year. The term taxable year refers to the taxable year
of the issuer of the covered debt instrument.
(h) Examples--(1) Assumed facts. Except as otherwise stated, the
following facts are assumed for purposes of the examples in paragraph
(h)(3) of this section:
(i) FP is a foreign corporation that owns 100% of the stock of USS1,
a covered member, 100% of the stock of USS2, a covered member, and 100%
of the stock of FS, a foreign corporation;
(ii) USS1 owns 100% of the stock of DS, a covered member, and CFC,
which is a controlled foreign corporation within the meaning of section
957;
(iii) At the beginning of Year 1, FP is the common parent of an
expanded group comprised solely of FP, USS1, USS2, FS, DS, and CFC (the
FP expanded group);
[[Page 793]]
(iv) The FP expanded group has more than $50 million of covered debt
instruments described in paragraph (c)(4) of this section at all times;
(v) No issuer of a covered debt instrument has a positive expanded
group earnings account within the meaning of paragraph (c)(3)(i)(B) of
this section or has received qualified contributions within the meaning
of paragraph (c)(3)(ii) of this section;
(vi) All notes are covered debt instruments (as defined in paragraph
(g)(3) of this section) and are not qualified short-term debt
instruments (as defined in paragraph (b)(3)(vii) of this section);
(vii) Each entity has as its taxable year the calendar year;
(viii) PRS is a partnership for federal income tax purposes;
(ix) No corporation is a member of a consolidated group;
(x) No domestic corporation is a United States real property holding
corporation within the meaning of section 897(c)(2);
(xi) Each note is issued with adequate stated interest (as defined
in section 1274(c)(2)); and
(xii) Each transaction occurs after January 19, 2017.
(2) No inference. Except as otherwise provided in this section, it
is assumed for purposes of the examples in paragraph (h)(3) of this
section that the form of each transaction is respected for federal tax
purposes. No inference is intended, however, as to whether any
particular note would be respected as indebtedness or as to whether the
form of any particular transaction described in an example in paragraph
(h)(3) of this section would be respected for federal tax purposes.
(3) Examples. The following examples illustrate the rules of this
section.
Example 1. Distribution of a covered debt instrument. (i) Facts. On
Date A in Year 1, FS lends $100x to USS1 in exchange for USS1 Note A. On
Date B in Year 2, USS1 issues USS1 Note B, which is has a value of
$100x, to FP in a distribution.
(ii) Analysis. USS1 Note B is a covered debt instrument that is
issued by USS1 to FP, a member of the expanded group of which USS1 is a
member, in a distribution. Accordingly, USS1 Note B is treated as stock
under paragraph (b)(2)(i) of this section. Under paragraph (d)(1)(i) of
this section, USS1 Note B is treated as stock when it is issued by USS1
to FP on Date B in Year 2. Accordingly, USS1 is treated as distributing
USS1 stock to its shareholder FP in a distribution that is subject to
section 305. Under paragraph (b)(5) of this section, because the
distribution of USS1 Note B is described in paragraph (b)(2)(i) of this
section, the distribution of USS1 Note B is not treated as a
distribution of property described in paragraph (b)(3)(i)(A) of this
section. Accordingly, USS1 Note A is not treated as funding the
distribution of USS1 Note B for purposes of paragraph (b)(3)(i)(A) of
this section.
Example 2. Covered debt instrument issued for expanded group stock
that is exchanged for stock in a corporation that is not a member of the
same expanded group. (i) Facts. UST is a publicly traded domestic
corporation. On Date A in Year 1, USS1 issues USS1 Note to FP in
exchange for FP stock. Subsequently, on Date B of Year 1, USS1 transfers
the FP stock to UST's shareholders, which are not members of the FP
expanded group, in exchange for all of the stock of UST.
(ii) Analysis. (A) Because USS1 and FP are both members of the FP
expanded group, USS1 Note is treated as stock when it is issued by USS1
to FP in exchange for FP stock on Date A in Year 1 under paragraphs
(b)(2)(ii) and (d)(1)(i) of this section. This result applies even
though, pursuant to the same plan, USS1 transfers the FP stock to
persons that are not members of the FP expanded group. The exchange of
USS1 Note for FP stock is not an exempt exchange within the meaning of
paragraph (g)(11) of this section.
(B) Because USS1 Note is treated as stock for federal tax purposes
when it is issued by USS1, pursuant to section Sec. 1.367(b)-
10(a)(3)(ii) (defining property for purposes of Sec. 1.367(b)-10) there
is no potential application of Sec. 1.367(b)-10(a) to USS1's
acquisition of the FP stock.
Example 3. Issuance of a note in exchange for expanded group stock.
(i) Facts. On Date A in Year 1, USS1 issues USS1 Note to FP in exchange
for 40% of the FS stock owned by FP.
(ii) Analysis. (A) Because USS1 and FP are both members of the FP
expanded group, USS1 Note is treated as stock when it is issued by USS1
to FP in exchange for FS stock on Date A in Year 1 under paragraphs
(b)(2)(ii) and (d)(1)(i) of this section. The exchange of USS1 Note for
FS stock is not an exempt exchange within the meaning of paragraph
(g)(11) of this section.
(B) Because USS1 Note is treated as stock for federal tax purposes
when it is issued by USS1, USS1 Note is not treated as property for
purposes of section 304(a) because it is not property within the meaning
specified in section 317(a). Therefore, USS1's acquisition of FS stock
from FP in exchange for USS1 Note is not an acquisition described in
section 304(a)(1).
[[Page 794]]
Example 4. Funding occurs in same taxable year as distribution. (i)
Facts. On Date A in Year 1, FP lends $200x to DS in exchange for DS Note
A. On Date B in Year 1, DS distributes $400x of cash to USS1 in a
distribution.
(ii) Analysis. Under paragraph (b)(3)(iii)(A) of this section, DS
Note A is treated as funding the distribution by DS to USS1 because DS
Note A is issued to a member of the FP expanded group during the per se
period with respect to DS's distribution to USS1. Accordingly, under
paragraphs (b)(3)(i)(A) and (d)(1)(ii) of this section, DS Note A is
treated as stock on Date B in Year 1.
Example 5. Additional funding. (i) Facts. The facts are the same as
in Example 4 of this paragraph (h)(3), except that, in addition, on Date
C in Year 2, FP lends an additional $300x to DS in exchange for DS Note
B.
(ii) Analysis. The analysis is the same as in Example 4 of this
paragraph (h)(3) with respect to DS Note A. DS Note B is also issued to
a member of the FP expanded group during the per se period with respect
to DS's distribution to USS1. Under paragraphs (b)(3)(iii)(A) and (b)(6)
of this section, DS Note B is treated as funding only the remaining
portion of DS's distribution to USS1, which is $200x. Accordingly, $200x
of DS Note B is treated as stock under paragraph (b)(3)(i)(A) of this
section. Under paragraph (d)(1)(i) of this section, $200x of DS Note B
is treated as stock when it is issued by DS to FP on Date C in Year 2.
The remaining $100x of DS Note B continues to be treated as
indebtedness.
Example 6. Funding involving multiple interests. (i) Facts. On Date
A in Year 1, FP lends $300x to USS1 in exchange for USS1 Note A. On Date
B in Year 2, USS1 distributes $300x of cash to FP. On Date C in Year 3,
FP lends another $300x to USS1 in exchange for USS1 Note B.
(ii) Analysis. (A) Under paragraph (b)(3)(iii)(B) of this section,
USS1 Note A is tested under paragraph (b)(3) of this section before USS1
Note B is tested. USS1 Note A is issued during the per se period with
respect to USS1's $300x distribution to FP and, therefore, is treated as
funding the distribution under paragraph (b)(3)(iii)(A) of this section.
Beginning on Date B in Year 2, USS1 Note A is treated as stock under
paragraphs (b)(3)(i)(A) and (d)(1)(ii) of this section.
(B) Under paragraph (b)(3)(iii)(B) of this section, USS1 Note B is
tested under paragraph (b)(3) of this section after USS1 Note A is
tested. Because USS1 Note A is treated as funding the entire $300x
distribution by USS1 to FP, USS1 Note B will continue to be treated as
indebtedness. See paragraph (b)(6) of this section.
Example 7. Re-testing. (i) Facts. The facts are the same as in
Example 6 of this paragraph (h)(3), except that on Date D in Year 4, FP
sells USS1 Note A to Bank.
(ii) Analysis. (A) Under paragraph (d)(2)(i) of this section, USS1
Note A ceases to be treated as stock when FP sells USS1 Note A to Bank
on Date D in Year 4. Immediately before FP sells USS1 Note A to Bank,
USS1 is deemed to issue a debt instrument to FP in exchange for USS1
Note A in a transaction that is disregarded for purposes of paragraphs
(b)(2) and (b)(3) of this section.
(B) Under paragraph (d)(2)(ii) of this section, after USS1 Note A is
deemed exchanged for a new debt instrument, USS1's other covered debt
instruments that are not treated as stock as of Date D in Year 4 (USS1
Note B) are re-tested for purposes of paragraph (b)(3)(iii) of this
section to determine whether the instruments are treated as funding the
$300x distribution by USS1 to FP on Date B in Year 2. USS1 Note B was
issued by USS1 to FP during the per se period. Accordingly, USS1 Note B
is re-tested under paragraph (b)(3)(iii) of this section. Under
paragraph (b)(3)(iii) of this section, USS1 Note B is treated as funding
the distribution on Date C in Year 3 and, accordingly, is treated as
stock under paragraph (b)(3)(i)(A) of this section. USS1 Note B is
deemed to be exchanged for stock on Date D in Year 4, the re-testing
date, under paragraph (d)(1)(iv) of this section. See Sec. 1.385-1(d)
for rules regarding the treatment of this deemed exchange.
Example 8. Distribution of expanded group stock and covered debt
instrument in a reorganization that qualifies under section 355. (i)
Facts. On Date A in Year 1, FP lends $200x to USS2 in exchange for USS2
Note. In a transaction that is treated as independent from the
transaction on Date A in Year 1, on Date B in Year 2, USS2 transfers a
portion of its assets to DS2, a newly formed domestic corporation, in
exchange for all of the stock of DS2 and DS2 Note. Immediately
afterwards, USS2 distributes all of the DS2 stock and the DS2 Note to FP
with respect to FP's USS2 stock in a transaction that qualifies under
section 355. USS2's transfer of a portion of its assets to DS2 qualifies
as a reorganization described in section 368(a)(1)(D). The DS2 stock has
a value of $150x and DS2 Note has a value of $50x. The DS2 stock is not
non-qualified preferred stock as defined in section 351(g)(2). Absent
the application of this section, DS2 Note would be treated by FP as
other property within the meaning of section 356.
(ii) Analysis. (A) The contribution and distribution transaction is
a reorganization described in section 368(a)(1)(D) involving a transfer
of property by USS2 to DS2 in exchange for DS2 stock and DS2 Note. The
transfer of property by USS2 to DS2 is a contribution of excluded
property described in paragraph (c)(3)(ii)(D)(2) of this section and an
excluded contribution described in paragraph (c)(3)(ii)(E)(2) of this
section. Accordingly, USS2's contribution of property to
[[Page 795]]
DS2 is not a qualified contribution described in paragraph (c)(3)(ii)(B)
of this section.
(B) DS2 Note is a covered debt instrument that is issued by DS2 to
USS2, both members of the FP expanded group, in exchange for property of
USS2 in an asset reorganization (as defined in paragraph (g)(1) of this
section), and received by FP, another FP expanded group member
immediately before the reorganization, as other property with respect to
FP's USS2 stock. Accordingly, the transaction is described in paragraph
(b)(2)(iii) of this section, and DS2 Note is treated as stock when it is
issued by DS2 to USS2 on Date B in Year 2 pursuant to paragraphs
(b)(2)(iii) and (d)(1)(i) of this section.
(C) Because the issuance of DS2 Note by DS2 in exchange for the
property of USS2 in an asset reorganization is described in paragraph
(b)(2)(iii) of this section, the distribution and acquisition of DS2
Note by USS2 is not treated as a distribution or acquisition described
in paragraph (b)(3)(i) of this section. Accordingly, USS2 Note is not
treated as funding the distribution of DS2 Note for purposes of
paragraph (b)(3)(i) of this section.
(D) USS2's acquisition of DS2 stock is not an acquisition described
in paragraph (b)(3)(i)(B) of this section because it is an exempt
exchange (as defined in paragraph (g)(11) of this section). USS2's
acquisition of DS2 stock is an exempt exchange because USS2 and DS2 are
both parties to a reorganization that is an asset reorganization,
section 1032 applies to DS2, the transferor of the expanded group stock,
and the DS2 stock is distributed by USS2, the transferee of the expanded
group stock, pursuant to the plan of reorganization.
(E) USS2's distribution of $150x of the DS2 stock is a distribution
of stock that is permitted to be received by FP without recognition of
gain under section 355(a)(1). Accordingly, USS2's distribution of the
DS2 stock (other than the DS2 Note) to FP is an exempt distribution, and
is not described in paragraph (b)(3)(i)(A) of this section.
(F) Because USS2 has not made a distribution or acquisition that is
described in paragraph (b)(3)(i)(A), (B), or (C) of this section, USS2
Note is not treated as stock.
Example 9. Funding a distribution by a successor to funded member.
(i) Facts. The facts are the same as in Example 8 of this paragraph
(h)(3), except that on Date C in Year 3, DS2 distributes $200x of cash
to FP and, subsequently, on Date D in Year 3, USS2 distributes $100x of
cash to FP.
(ii) Analysis. (A) USS2 is a predecessor of DS2 under paragraph
(g)(20)(i)(B) of this section and DS2 is a successor to USS2 under
paragraph (g)(24)(i)(B) of this section because USS2 is the distributing
corporation and DS2 is the controlled corporation in a distribution to
which section 355 applies. Accordingly, under paragraph (b)(3)(v) of
this section, a distribution by DS2 is treated as a distribution by
USS2. Under paragraphs (b)(3)(iii)(A) and (b)(3)(v)(B) of this section,
USS2 Note is treated as funding the distribution by DS2 to FP because
USS2 Note was issued during the per se period with respect to DS2's
$200x cash distribution, and because both the issuance of USS2 Note and
the distribution by DS2 occur during the per se period with respect to
the section 355 distribution. Accordingly, under paragraphs (b)(3)(i)(A)
and (d)(1)(ii) of this section, USS2 Note is treated as stock beginning
on Date C in Year 3. See Sec. 1.385-1(d) for rules regarding the
treatment of this deemed exchange.
(B) Because the entire amount of USS2 Note is treated as funding
DS2's $200x distribution to FP, under paragraph (b)(3)(iii)(C) of this
section, USS2 Note is not treated as funding the subsequent distribution
by USS2 on Date D in Year 3.
Example 10. Asset reorganization; section 354 qualified property.
(i) Facts. On Date A in Year 1, FS lends $100x to USS2 in exchange for
USS2 Note. On Date B in Year 2, in a transaction that qualifies as a
reorganization described in section 368(a)(1)(D), USS2 transfers all of
its assets to USS1 in exchange for stock of USS1 and the assumption by
USS1 of all of the liabilities of USS2, and USS2 distributes to FP, with
respect to FP's USS2 stock, all of the USS1 stock that USS2 receives. FP
does not recognize gain under section 354(a)(1).
(ii) Analysis. (A) USS1 is a successor to USS2 under paragraph
(g)(24)(i)(A) of this section. For purposes of paragraph (b)(3) of this
section, USS2 and, under paragraph (b)(3)(v)(A) of this section, its
successor, USS1, are funded members with respect to USS2 Note. Although
USS2, a funded member, distributes property (USS1 stock) to its
shareholder, FP, pursuant to the reorganization, the distribution of
USS1 stock is not described in paragraph (b)(3)(i)(A) of this section
because the stock is distributed in an exempt distribution (as defined
in paragraph (g)(10) of this section). In addition, neither USS1's
acquisition of the assets of USS2 nor USS2's acquisition of USS1 stock
is described in paragraph (b)(3)(i)(C) of this section because FP does
not receive other property within the meaning of section 356 with
respect to its stock in USS2.
(B) USS2's acquisition of USS1 stock is not an acquisition described
in paragraph (b)(3)(i)(B) of this section because it is an exempt
exchange (as defined in paragraph (g)(11) of this section). USS2's
acquisition of USS1 stock is an exempt exchange because USS1 and USS2
are both parties to an asset reorganization, section 1032 applies to
USS1, the transferor of the USS1 stock, and the USS1 stock is
distributed by USS2, the transferee, pursuant to the plan of
reorganization. Furthermore, USS2's acquisition of its own stock from FS
is not an acquisition
[[Page 796]]
described in paragraph (b)(3)(i)(B) of this section because USS2
acquires its stock in exchange for USS1 stock.
(C) Because neither USS1 nor USS2 has made a distribution or
acquisition described in paragraph (b)(3)(i)(A), (B), or (C) of this
section, USS2 Note is not treated as stock under paragraph
(b)(3)(iii)(A) of this section.
Example 11. Distribution of a covered debt instrument and issuance
of a covered debt instrument with a principal purpose of avoiding the
purposes of this section. (i) Facts. On Date A in Year 1, USS1 issues
USS1 Note A, which has a value of $100x, to FP in a distribution. On
Date B in Year 1, with a principal purpose of avoiding the purposes of
this section, FP sells USS1 Note A to Bank for $100x of cash and lends
$100x to USS1 in exchange for USS1 Note B.
(ii) Analysis. USS1 Note A is a covered debt instrument that is
issued by USS1 to FP, a member of USS1's expanded group, in a
distribution. Accordingly, under paragraphs (b)(2)(i) and (d)(1)(i) of
this section, USS1 Note A is treated as stock when it is issued by USS1
to FP on Date A in Year 1. Accordingly, USS1 is treated as distributing
USS1 stock to FP. Because the distribution of USS1 Note A is described
in paragraph (b)(2)(i) of this section, the distribution of USS1 Note A
is not described in paragraph (b)(3)(i)(A) of this section under
paragraph (b)(5) of this section. Under paragraph (d)(2)(i) of this
section, USS1 Note A ceases to be treated as stock when FP sells USS1
Note A to Bank on Date B in Year 1. Immediately before FP sells USS1
Note A to Bank, USS1 is deemed to issue a debt instrument to FP in
exchange for USS1 Note A in a transaction that is disregarded for
purposes of paragraphs (b)(2) and (b)(3)(i) of this section. USS1 Note B
is not treated as stock under paragraph (b)(3)(i)(A) of this section
because the funded member, USS1, has not made a distribution of
property. However, because the transactions occurring on Date B of Year
1 were undertaken with a principal purpose of avoiding the purposes of
this section, USS1 Note B is treated as stock on Date B of Year 1 under
paragraph (b)(4) of this section.
Example 12. [Reserved]. For further guidance, see Sec. 1.385-
3T(h)(3), Example 12.
Example 13. [Reserved]. For further guidance, see Sec. 1.385-
3T(h)(3), Example 13.
Example 14. [Reserved]. For further guidance, see Sec. 1.385-
3T(h)(3), Example 14.
Example 15. [Reserved]. For further guidance, see Sec. 1.385-
3T(h)(3), Example 15.
Example 16. [Reserved]. For further guidance, see Sec. 1.385-
3T(h)(3), Example 16.
Example 17. [Reserved]. For further guidance, see Sec. 1.385-
3T(h)(3), Example 17.
Example 18. [Reserved]. For further guidance, see Sec. 1.385-
3T(h)(3), Example 18.
Example 19. [Reserved]. For further guidance, see Sec. 1.385-
3T(h)(3), Example 19.
(i) [Reserved]
(j) Applicability date and transition rules--(1) In general. This
section applies to taxable years ending on or after January 19, 2017.
(2) Transition rules--(i) Transition rule for covered debt
instruments that would be treated as stock in taxable years ending
before January 19, 2017. If paragraphs (b) and (d)(1) of this section,
taking into account Sec. Sec. 1.385-1, 1.385-3T, and 1.385-4T, would
have treated a covered debt instrument as stock in a taxable year ending
before January 19, 2017 but for the application of paragraph (j)(1) of
this section, to the extent that the covered debt instrument is held by
a member of the expanded group of which the issuer is a member
immediately after January 19, 2017, then the covered debt instrument is
deemed to be exchanged for stock immediately after January 19, 2017.
(ii) Transition rule for certain covered debt instruments treated as
stock in taxable years ending on or after January 19, 2017. If
paragraphs (b) and (d)(1) of this section, taking into account
Sec. Sec. 1.385-1, 1.385-3T, and 1.385-4T, would treat a covered debt
instrument as stock on or before January 19, 2017 but in a taxable year
ending on or after January 19, 2017, that covered debt instrument is not
treated as stock during the 90-day period after October 21, 2016.
Instead, to the extent that the covered debt instrument is held by a
member of the expanded group of which the issuer is a member immediately
after January 19, 2017, the covered debt instrument is deemed to be
exchanged for stock immediately after January 19, 2017.
(iii) Transition funding rule. When a covered debt instrument would
be recharacterized as stock after April 4, 2016, and on or before
January 19, 2017 (the transition period), but that covered debt
instrument is not recharacterized as stock on such date due to the
application of paragraph (j)(1), (j)(2)(i), or (j)(2)(ii) of this
section, any payments made with respect to such covered debt instrument
(other than stated interest), including pursuant to a refinancing, after
the date that the covered debt instrument would have been
recharacterized as stock and through the remaining portion of the
transition period are treated as distributions for
[[Page 797]]
purposes of applying paragraph (b)(3) of this section for taxable years
ending on or after January 19, 2017. In addition, to the extent that the
holder and the issuer of the covered debt instrument cease to be members
of the same expanded group during the transition period, the
distribution or acquisition that would have caused the covered debt
instrument to be treated as stock is available to be treated as funded
by other covered debt instruments of the issuer for purposes of
paragraph (b)(3) of this section (to the extent provided in paragraph
(b)(3)(iii) of this section). The prior sentence is applied in a manner
that is consistent with the rules set forth in paragraph (d)(2) of this
section.
(iv) Coordination between the general rule and funding rule. When a
covered debt instrument would be recharacterized as stock pursuant to
paragraph (b)(2) of this section after April 4, 2016, and on or before
January 19, 2017, but that covered debt instrument is not
recharacterized as stock on such date due to the application of
paragraph (j)(1), (j)(2)(i), or (j)(2)(ii) of this section, the issuance
of such covered debt instrument is not treated as a distribution or
acquisition described in Sec. 1.385-3(b)(3)(i), but only to the extent
that the covered debt instrument is held by a member of the expanded
group of which the issuer is a member immediately after January 19,
2017.
(v) Option to apply proposed regulations. In lieu of applying
Sec. Sec. 1.385-1, 1.385-3, 1.385-3T, and 1.385-4T, taxpayers may apply
the provisions matching Sec. Sec. 1.385-1, 1.385-3, and 1.385-4 from
the Internal Revenue Bulletin (IRB) 2016-17 (https://www.irs.gov/pub/
irs-irbs/irb16-17.pdf) to all debt instruments issued by a particular
issuer (and members of its expanded group that are covered members)
after April 4, 2016, and before October 13, 2016, solely for purposes of
determining whether a debt instrument is treated as stock, provided that
those sections are consistently applied.
[T.D. 9790, 81 FR 72960, Oct. 21, 2016, as amended by T.D. 9790, 82 FR
8167, Jan. 24, 2017]
Sec. 1.385-3T Certain distributions of debt instruments and similar
transactions (temporary).
(a) [Reserved]. For further guidance, see Sec. 1.385-3(a).
(b)(1) through (b)(2). [Reserved]. For further guidance, see Sec.
1.385-3(b)(1) through (b)(2).
(b)(3)(i) through (vi). [Reserved]. For further guidance, see Sec.
1.385-3(b)(3)(i) through (vi).
(vii) Qualified short-term debt instrument. The term qualified
short-term debt instrument means a covered debt instrument that is
described in paragraph (b)(3)(vii)(A), (b)(3)(vii)(B), (b)(3)(vii)(C),
or (b)(3)(vii)(D) of this section.
(A) Short-term funding arrangement. A covered debt instrument is
described in this paragraph (b)(3)(vii)(A) if the requirements of the
specified current assets test described in paragraph (b)(3)(vii)(A)(1)
of this section or the 270-day test described in paragraph
(b)(3)(vii)(A)(2) of this section (the alternative tests) are satisfied,
provided that an issuer may only claim the benefit of one of the
alternative tests with respect to covered debt instruments issued by the
issuer in the same taxable year.
(1) Specified current assets test--(i) In general. The requirements
of this paragraph (b)(3)(vii)(A)(1) are satisfied with respect to a
covered debt instrument if the requirement of paragraph
(b)(3)(vii)(A)(1)(ii) of this section is satisfied, but only to the
extent the requirement of paragraph (b)(3)(vii)(A)(1)(iii) of this
section is satisfied.
(ii) Maximum interest rate. The rate of interest charged with
respect to the covered debt instrument does not exceed an arm's length
interest rate, as determined under section 482 and the regulations
thereunder, that would be charged with respect to a comparable debt
instrument of the issuer with a term that does not exceed the longer of
90 days and the issuer's normal operating cycle.
(iii) Maximum outstanding balance. The amount owed by the issuer
under covered debt instruments issued to members of the issuer's
expanded group that satisfy the requirements of paragraph
(b)(3)(vii)(A)(1)(ii),
[[Page 798]]
(b)(3)(vii)(A)(2) (if the covered debt instrument was issued in a prior
taxable year), (b)(3)(vii)(B), or (b)(3)(vii)(C) of this section
immediately after the covered debt instrument is issued does not exceed
the maximum of the amounts of specified current assets reasonably
expected to be reflected, under applicable accounting principles, on the
issuer's balance sheet as a result of transactions in the ordinary
course of business during the subsequent 90-day period or the issuer's
normal operating cycle, whichever is longer. For purposes of the
preceding sentence, in the case of an issuer that is a qualified cash
pool header, the amount owed by the issuer shall not take into account
deposits described in paragraph (b)(3)(vii)(D) of this section.
Additionally, the amount owed by any issuer shall be reduced by the
amount of the issuer's deposits with a qualified cash pool header, but
only to the extent of amounts borrowed from the same qualified cash pool
header that satisfy the requirements of paragraph (b)(3)(vii)(A)(2) (if
the covered debt instrument was issued in a prior taxable year) or
(b)(3)(vii)(A)(1)(ii) of this section.
(iv) Specified current assets. For purposes of paragraph
(b)(3)(vii)(A)(1)(iii) of this section, the term specified current
assets means assets that are reasonably expected to be realized in cash
or sold (including by being incorporated into inventory that is sold)
during the normal operating cycle of the issuer, other than cash, cash
equivalents, and assets that are reflected on the books and records of a
qualified cash pool header.
(v) Normal operating cycle. For purposes of paragraph
(b)(3)(vii)(A)(1) of this section, the term normal operating cycle means
the issuer's normal operating cycle as determined under applicable
accounting principles, except that if the issuer has no single clearly
defined normal operating cycle, then the normal operating cycle is
determined based on a reasonable analysis of the length of the operating
cycles of the multiple businesses and their sizes relative to the
overall size of the issuer.
(vi) Applicable accounting principles. For purposes of paragraph
(b)(3)(vii)(A)(1) of this section, the term applicable accounting
principles means the financial accounting principles generally accepted
in the United States, or an international financial accounting standard,
that is applicable to the issuer in preparing its financial statements,
computed on a consistent basis.
(2) 270-day test--(i) In general. A covered debt instrument is
described in this paragraph (b)(3)(vii)(A)(2) if the requirements of
paragraphs (b)(3)(vii)(A)(2)(ii) through (b)(3)(vii)(A)(2)(iv) of this
section are satisfied.
(ii) Maximum term and interest rate. The covered debt instrument
must have a term of 270 days or less or be an advance under a revolving
credit agreement or similar arrangement and must bear a rate of interest
that does not exceed an arm's length interest rate, as determined under
section 482 and the regulations thereunder, that would be charged with
respect to a comparable debt instrument of the issuer with a term that
does not exceed 270 days.
(iii) Lender-specific indebtedness limit. The issuer is a net
borrower from the lender for no more than 270 days during the taxable
year of the issuer, and in the case of a covered debt instrument
outstanding during consecutive tax years, the issuer is a net borrower
from the lender for no more than 270 consecutive days, in both cases
taking into account only covered debt instruments that satisfy the
requirement of paragraph (b)(3)(vii)(A)(2)(ii) of this section other
than covered debt instruments described in paragraph (b)(3)(vii)(B) or
(b)(3)(vii)(C) of this section.
(iv) Overall indebtedness limit. The issuer is a net borrower under
all covered debt instruments issued to members of the issuer's expanded
group that satisfy the requirements of paragraphs (b)(3)(vii)(A)(2)(ii)
and (iii) of this section, other than covered debt instruments described
in paragraph (b)(3)(vii)(B) or (b)(3)(vii)(C) of this section, for no
more than 270 days during the taxable year of the issuer, determined
without regard to the identity of the lender under such covered debt
instruments.
(v) Inadvertent error. An issuer's failure to satisfy the 270-day
test will be
[[Page 799]]
disregarded if the failure is reasonable in light of all the facts and
circumstances and the failure is promptly cured upon discovery. A
failure to satisfy the 270-day test will be considered reasonable if the
taxpayer maintains due diligence procedures to prevent such failures, as
evidenced by having written policies and operational procedures in place
to monitor compliance with the 270-day test and management-level
employees of the expanded group having undertaken reasonable efforts to
establish, follow, and enforce such policies and procedures.
(B) Ordinary course loans. A covered debt instrument is described in
this paragraph (b)(3)(vii)(B) if the covered debt instrument is issued
as consideration for the acquisition of property other than money in the
ordinary course of the issuer's trade or business, provided that the
obligation is reasonably expected to be repaid within 120 days of
issuance.
(C) Interest-free loans. A covered debt instrument is described in
this paragraph (b)(3)(vii)(C) if the instrument does not provide for
stated interest or no interest is charged on the instrument, the
instrument does not have original issue discount (as defined in section
1273 and the regulations thereunder), interest is not imputed under
section 483 or section 7872 and the regulations thereunder, and interest
is not required to be charged under section 482 and the regulations
thereunder.
(D) Deposits with a qualified cash pool header--(1) In general. A
covered debt instrument is described in this paragraph (b)(3)(vii)(D) if
it is a demand deposit received by a qualified cash pool header
described in paragraph (b)(3)(vii)(D)(2) of this section pursuant to a
cash-management arrangement described in paragraph (b)(3)(vii)(D)(3) of
this section. This paragraph (b)(3)(vii)(D) does not apply if a purpose
for making the demand deposit is to facilitate the avoidance of the
purposes of this section or Sec. 1.385-3 with respect to a qualified
business unit (as defined in section 989(a) and the regulations
thereunder) (QBU) that is not a qualified cash pool header.
(2) Qualified cash pool header. The term qualified cash pool header
means an expanded group member, controlled partnership, or QBU described
in Sec. 1.989(a)-1(b)(2)(ii), that has as its principal purpose
managing a cash-management arrangement for participating expanded group
members, provided that the excess (if any) of funds on deposit with such
expanded group member, controlled partnership, or QBU (header) over the
outstanding balance of loans made by the header is maintained on the
books and records of the header in the form of cash or cash equivalents,
or invested through deposits with, or the acquisition of obligations or
portfolio securities of, persons that do not have a relationship to the
header (or, in the case of a header that is a QBU described in Sec.
1.989(a)-1(b)(2)(ii), its owner) described in section 267(b) or section
707(b).
(3) Cash-management arrangement. The term cash-management
arrangement means an arrangement the principal purpose of which is to
manage cash for participating expanded group members. For purposes of
the preceding sentence, managing cash means borrowing excess funds from
participating expanded group members and lending funds to participating
expanded group members, and may also include foreign exchange
management, clearing payments, investing excess cash with an unrelated
person, depositing excess cash with another qualified cash pool header,
and settling intercompany accounts, for example through netting centers
and pay-on-behalf-of programs.
(b)(viii) [Reserved]. For further guidance, see Sec. 1.385-
3(b)(viii).
(c) [Reserved]. For further guidance, see Sec. 1.385-3(c).
(d)(1) through (d)(3) [Reserved]. For further guidance, see Sec.
1.385-3(d)(1) through (d)(3).
(4) Treatment of disregarded entities. This paragraph (d)(4) applies
to the extent that a covered debt instrument issued by a disregarded
entity, the regarded owner of which is a covered member, would, absent
the application of this paragraph (d)(4), be treated as stock under
Sec. 1.385-3. In this case, rather than the covered debt instrument
being treated as stock to such extent (applicable portion), the covered
member that is the regarded owner of the disregarded entity is deemed to
issue its stock in the manner described in
[[Page 800]]
this paragraph (d)(4). If the applicable portion otherwise would have
been treated as stock under Sec. 1.385-3(b)(2), then the covered member
is deemed to issue its stock to the expanded group member to which the
covered debt instrument was, in form, issued (or transferred) in the
transaction described in Sec. 1.385-3(b)(2). If the applicable portion
otherwise would have been treated as stock under Sec. 1.385-3(b)(3)(i),
then the covered member is deemed to issue its stock to the holder of
the covered debt instrument in exchange for a portion of the covered
debt instrument equal to the applicable portion. In each case, the
covered member that is the regarded owner of the disregarded entity is
treated as the holder of the applicable portion of the debt instrument
issued by the disregarded entity, and the actual holder is treated as
the holder of the remaining portion of the covered debt instrument and
the stock deemed to be issued by the regarded owner. Under federal tax
principles, the applicable portion of the debt instrument issued by the
disregarded entity generally is disregarded. This paragraph (d)(4) must
be applied in a manner that is consistent with the principles of
paragraph (f)(4) of this section. Thus, for example, stock deemed issued
is deemed to have the same terms as the covered debt instrument issued
by the disregarded entity, other than the identity of the issuer, and
payments on the stock are determined by reference to payments made on
the covered debt instrument issued by the disregarded entity. See Sec.
1.385-4T(b)(3) for additional rules that apply if the regarded owner of
the disregarded entity is a member of a consolidated group. If the
regarded owner of a disregarded entity is a controlled partnership, then
paragraph (f) of this section applies as though the controlled
partnership were the issuer in form of the debt instrument.
(d)(5) through (d)(7). [Reserved]. For further guidance, see Sec.
1.385-3(d)(5) through (d)(7).
(e) [Reserved]. For further guidance, see Sec. 1.385-3(e).
(f) Treatment of controlled partnerships--(1) In general. For
purposes of this section and Sec. Sec. 1.385-3 and 1.385-4T, a
controlled partnership is treated as an aggregate of its partners in the
manner described in this paragraph (f). Paragraph (f)(2) of this section
sets forth rules concerning the aggregate treatment when a controlled
partnership acquires property from a member of the expanded group.
Paragraph (f)(3) of this section sets forth rules concerning the
aggregate treatment when a controlled partnership issues a debt
instrument. Paragraph (f)(4) of this section deems a debt instrument
issued by a controlled partnership to be held by an expanded group
partner rather than the holder-in-form in certain cases. Paragraph
(f)(5) of this section sets forth the rules concerning events that cause
the deemed results described in paragraph (f)(4) of this section to
cease. Paragraph (f)(6) of this section exempts certain issuances of a
controlled partnership's debt to a partner and a partner's debt to a
controlled partnership from the application of this section and Sec.
1.385-3. For definitions applicable for this section, see paragraph (g)
of this section and Sec. 1.385-3(g). For examples illustrating the
application of this section, see paragraph (h) of this section.
(2) Acquisitions of property by a controlled partnership--(i)
Acquisitions of property when a member of the expanded group is a
partner on the date of the acquisition--(A) Aggregate treatment. Except
as otherwise provided in paragraphs (f)(2)(i)(C) and (f)(6) of this
section, if a controlled partnership, with respect to an expanded group,
acquires property from a member of the expanded group (transferor
member), then, for purposes of this section and Sec. 1.385-3, a member
of the expanded group that is an expanded group partner on the date of
the acquisition is treated as acquiring its share (as determined under
paragraph (f)(2)(i)(B) of this section) of the property. The expanded
group partner is treated as acquiring its share of the property from the
transferor member in the manner (for example, in a distribution, in an
exchange for property, or in an issuance), and on the date on which, the
property is actually acquired by the controlled partnership from the
transferor member. Accordingly, this section and Sec. 1.385-3 apply to
a member's acquisition of property described in this paragraph
(f)(2)(i)(A) in
[[Page 801]]
the same manner as if the member actually acquired the property from the
transferor member, unless explicitly provided otherwise.
(B) Expanded group partner's share of property. For purposes of
paragraph (f)(2)(i)(A) of this section, a partner's share of property
acquired by a controlled partnership is determined in accordance with
the partner's liquidation value percentage (as defined in paragraph
(g)(17) of this section) with respect to the controlled partnership. The
liquidation value percentage is determined on the date on which the
controlled partnership acquires the property.
(C) Exception if transferor member is an expanded group partner. If
a transferor member is an expanded group partner in the controlled
partnership, paragraph (f)(2)(i)(A) of this section does not apply to
such partner.
(ii) Acquisitions of expanded group stock when a member of the
expanded group becomes a partner after the acquisition--(A) Aggregate
treatment. Except as otherwise provided in paragraph (f)(2)(ii)(C) of
this section, if a controlled partnership, with respect to an expanded
group, owns expanded group stock, and a member of the expanded group
becomes an expanded group partner in the controlled partnership, then,
for purposes of this section and Sec. 1.385-3, the member is treated as
acquiring its share (as determined under paragraph (f)(2)(ii)(B) of this
section) of the expanded group stock owned by the controlled
partnership. The member is treated as acquiring its share of the
expanded group stock on the date on which the member becomes an expanded
group partner. Furthermore, the member is treated as if it acquires its
share of the expanded group stock from a member of the expanded group in
exchange for property other than expanded group stock, regardless of the
manner in which the partnership acquired the stock and in which the
member acquires its partnership interest. Accordingly, this section and
Sec. 1.385-3 apply to a member's acquisition of expanded group stock
described in this paragraph (f)(2)(ii)(A) in the same manner as if the
member actually acquired the stock from a member of the expanded group
in exchange for property other than expanded group stock, unless
explicitly provided otherwise.
(B) Expanded group partner's share of expanded group stock. For
purposes of paragraph (f)(2)(ii)(A) of this section, a partner's share
of expanded group stock owned by a controlled partnership is determined
in accordance with the partner's liquidation value percentage with
respect to the controlled partnership. The liquidation value percentage
is determined on the date on which a member of the expanded group
becomes an expanded group partner in the controlled partnership.
(C) Exception if an expanded group partner acquires its interest in
a controlled partnership in exchange for expanded group stock. Paragraph
(f)(2)(ii)(A) of this section does not apply to a member of an expanded
group that acquires its interest in a controlled partnership either from
another partner in exchange solely for expanded group stock or upon a
partnership contribution to the controlled partnership comprised solely
of expanded group stock.
(3) Issuances of debt instruments by a controlled partnership to a
member of an expanded group--(i) Aggregate treatment. If a controlled
partnership, with respect to an expanded group, issues a debt instrument
to a member of the expanded group, then, for purposes of this section
and Sec. 1.385-3, a covered member that is an expanded group partner is
treated as the issuer with respect to its share (as determined under
paragraph (f)(3)(ii) of this section) of the debt instrument issued by
the controlled partnership. This section and Sec. 1.385-3 apply to the
portion of the debt instrument treated as issued by the covered member
as described in this paragraph (f)(3)(i) in the same manner as if the
covered member actually issued the debt instrument to the holder-in-
form, unless otherwise provided. See paragraph (f)(4) of this section,
which deems a debt instrument issued by a controlled partnership to be
held by an expanded group partner rather than the holder-in-form in
certain cases.
(ii) Expanded group partner's share of a debt instrument issued by a
controlled partnership--(A) General rule. An expanded group partner's
share of a debt
[[Page 802]]
instrument issued by a controlled partnership is determined on each date
on which the partner makes a distribution or acquisition described in
Sec. 1.385-3(b)(2) or (b)(3)(i) (testing date). An expanded group
partner's share of a debt instrument issued by a controlled partnership
to a member of the expanded group is determined in accordance with the
partner's issuance percentage (as defined in paragraph (g)(16) of this
section) on the testing date. A partner's share determined under this
paragraph (f)(3)(ii)(A) is adjusted as described in paragraph
(f)(3)(ii)(B) of this section.
(B) Additional rules if there is a specified portion with respect to
a debt instrument--(1) An expanded group partner's share (as determined
under paragraph (f)(3)(ii)(A) of this section) of a debt instrument
issued by a controlled partnership is reduced, but not below zero, by
the sum of all of the specified portions (as defined in paragraph
(g)(23) of this section), if any, with respect to the debt instrument
that correspond to one or more deemed transferred receivables (as
defined in paragraph (g)(8) of this section) that are deemed to be held
by the partner.
(2) If the aggregate of all of the expanded group partners' shares
(as determined under paragraph (f)(3)(ii)(A) of this section and reduced
under paragraph (f)(3)(ii)(B)(1) of this section) of the debt instrument
exceeds the adjusted issue price of the debt, reduced by the sum of all
of the specified portions with respect to the debt instrument that
correspond to one or more deemed transferred receivables that are deemed
to be held by one or more expanded group partners (excess amount), then
each expanded group partner's share (as determined under paragraph
(f)(3)(ii)(A) of this section and reduced under paragraph
(f)(3)(ii)(B)(1) of this section) of the debt instrument is reduced. The
amount of an expanded group partner's reduction is the excess amount
multiplied by a fraction, the numerator of which is the partner's share,
and the denominator of which is the aggregate of all of the expanded
group partners' shares.
(iii) Qualified short-term debt instrument. The determination of
whether a debt instrument is a qualified short-term debt instrument for
purposes of Sec. 1.385-3(b)(3)(vii) is made at the partnership-level
without regard to paragraph (f)(3)(i) of this section.
(4) Recharacterization when there is a specified portion with
respect to a debt instrument issued by a controlled partnership--(i)
General rule. A specified portion, with respect to a debt instrument
issued by a controlled partnership and an expanded group partner, is not
treated as stock under Sec. 1.385-3(b)(2) or (b)(3)(i). Except as
otherwise provided in paragraphs (f)(4)(ii) and (f)(4)(iii) of this
section, the holder-in-form (as defined in paragraph (g)(15) of this
section) of the debt instrument is deemed to transfer a portion of the
debt instrument (a deemed transferred receivable, as defined in
paragraph (g)(8) of this section) with a principal amount equal to the
adjusted issue price of the specified portion to the expanded group
partner in exchange for stock in the expanded group partner (deemed
partner stock, as defined in paragraph (g)(6) of this section) with a
fair market value equal to the principal amount of the deemed
transferred receivable. Except as otherwise provided in paragraph
(f)(4)(vi) of this section (concerning the treatment of a deemed
transferred receivable for purposes of section 752) and paragraph (f)(5)
of this section (concerning specified events subsequent to the deemed
transfer), the deemed transfer described in this paragraph (f)(4)(i) is
deemed to occur for all federal tax purposes.
(ii) Expanded group partner is the holder-in-form of a debt
instrument. If the specified portion described in paragraph (f)(4)(i) of
this section is with respect to an expanded group partner that is the
holder-in-form of the debt instrument, then paragraph (f)(4)(i) of this
section will not apply with respect to that specified portion except
that only the first sentence of paragraph (f)(4)(i) of this section is
applicable.
(iii) Expanded group partner is a consolidated group member. This
paragraph (f)(4)(iii) applies when one or more expanded group partners
is a member of a consolidated group that files (or is required to file)
a consolidated U.S. federal income tax return. In this case,
notwithstanding Sec. 1.385-4T(b)(1) (which
[[Page 803]]
generally treats members of a consolidated group as one corporation for
purposes of this section and Sec. 1.385-3), the holder-in-form of the
debt instrument issued by the controlled partnership is deemed to
transfer the deemed transferred receivable or receivables to the
expanded group partner or partners that are members of a consolidated
group that make, or are treated as making under paragraph (f)(2) of this
section, the regarded distributions or acquisitions (within the meaning
of Sec. 1.385-4T(e)(5)) described in Sec. 1.385-3(b)(2) or (b)(3)(i)
in exchange for deemed partner stock in such partner or partners. To the
extent those regarded distributions or acquisitions are made by a member
of the consolidated group that is not an expanded group partner (excess
amount), the holder-in-form is deemed to transfer a portion of the
deemed transferred receivable or receivables to each member of the
consolidated group that is an expanded group partner in exchange for
deemed partner stock in the expanded group partner. The portion is the
excess amount multiplied by a fraction, the numerator of which is the
portion of the consolidated group's share (as determined under paragraph
(f)(3)(ii) of this section) of the debt instrument issued by the
controlled partnership that would have been the expanded group partner's
share if the partner was not a member of a consolidated group, and the
denominator of which is the consolidated group's share of the debt
instrument issued by the controlled partnership.
(iv) Rules regarding deemed transferred receivables and deemed
partner stock--(A) Terms of deemed partner stock. Deemed partner stock
has the same terms as the deemed transferred receivable with respect to
the deemed transfer, other than the identity of the issuer.
(B) Treatment of payments with respect to a debt instrument for
which there is one or more deemed transferred receivables. When a
payment is made with respect to a debt instrument issued by a controlled
partnership for which there is one or more deemed transferred
receivables, then, if the amount of the retained receivable (as defined
in paragraph (g)(22) of this section) held by the holder-in-form is zero
and a single deemed holder is deemed to hold all of the deemed
transferred receivables, the entire payment is allocated to the deemed
transferred receivables held by the single deemed holder. If the amount
of the retained receivable held by the holder-in-form is greater than
zero or there are multiple deemed holders of deemed transferred
receivables, or both, the payment is apportioned among the retained
receivable, if any, and each deemed transferred receivable in proportion
to the principal amount of all the receivables. The portion of a payment
allocated or apportioned to a retained receivable or a deemed
transferred receivable reduces the principal amount of, or accrued
interest with respect to, as applicable depending on the payment, the
retained receivable or deemed transferred receivable. When a payment
allocated or apportioned to a deemed transferred receivable reduces the
principal amount of the receivable, the expanded group partner that is
the deemed holder with respect to the deemed transferred receivable is
deemed to redeem the same amount of deemed partner stock, and the
specified portion with respect to the debt instrument is reduced by the
same amount. When a payment allocated or apportioned to a deemed
transferred receivable reduces accrued interest with respect to the
receivable, the expanded group partner that is the deemed holder with
respect to the deemed transferred receivable is deemed to make a
matching distribution in the same amount with respect to the deemed
partner stock. The controlled partnership is treated as the paying agent
with respect to the deemed partner stock.
(v) Holder-in-form transfers debt instrument in a transaction that
is not a specified event. If the holder-in-form transfers the debt
instrument (which is disregarded for federal tax purposes) to a member
of the expanded group or a controlled partnership (and therefore the
transfer is not a specified event described in paragraph (f)(5)(iii)(F)
of this section), then, for federal tax purposes, the holder-in-form is
deemed to transfer the retained receivable and the deemed partner stock
to the transferee.
(vi) Allocation of deemed transferred receivable under section 752.
A partnership
[[Page 804]]
liability that is a debt instrument with respect to which there is one
or more deemed transferred receivables is allocated for purposes of
section 752 without regard to any deemed transfer.
(5) Specified events affecting ownership following a deemed
transfer--(i) General rule. If a specified event (within the meaning of
paragraph (f)(5)(iii) of this section) occurs with respect to a deemed
transfer, then, immediately before the specified event, the expanded
group partner that is both the issuer of the deemed partner stock and
the deemed holder of the deemed transferred receivable is deemed to
distribute the deemed transferred receivable (or portion thereof, as
determined under paragraph (f)(5)(iv) of this section) to the holder-in-
form in redemption of the deemed partner stock (or portion thereof, as
determined under paragraph (f)(5)(iv) of this section) deemed to be held
by the holder-in-form. The deemed distribution is deemed to occur for
all federal tax purposes, except that the distribution is disregarded
for purposes of Sec. 1.385-3(b). Except when the deemed transferred
receivable (or portion thereof, as determined under paragraph (f)(5)(iv)
of this section) is deemed to be retransferred under paragraph
(f)(5)(ii) of this section, the principal amount of the retained
receivable held by the holder-in-form is increased by the principal
amount of the deemed transferred receivable, the deemed transferred
receivable ceases to exist for federal tax purposes, and the specified
portion (or portion thereof) that corresponds to the deemed transferred
receivable (or portion thereof) ceases to be treated as a specified
portion for purposes of this section and Sec. 1.385-3.
(ii) New deemed transfer when a specified event involves a
transferee that is a covered member that is an expanded group partner.
If the specified event is described in paragraph (f)(5)(iii)(E) of this
section, the holder-in-form of the debt instrument is deemed to
retransfer the deemed transferred receivable (or portion thereof, as
determined under paragraph (f)(5)(iv) of this section) that the holder-
in-form is deemed to have received pursuant to paragraph (f)(5)(i) of
this section, to the transferee expanded group partner in exchange for
deemed partner stock issued by the transferee expanded group partner
with a fair market value equal to the principal amount of the deemed
transferred receivable (or portion thereof) that is retransferred. For
purposes of this section, this deemed transfer is treated in the same
manner as a deemed transfer described in paragraph (f)(4)(i) of this
section.
(iii) Specified events. A specified event, with respect to a deemed
transfer, occurs when, immediately after the transaction and taking into
account all related transactions:
(A) The controlled partnership that is the issuer of the debt
instrument either ceases to be a controlled partnership or ceases to
have an expanded group partner that is a covered member.
(B) The holder-in-form is a member of the expanded group immediately
before the transaction, and the holder-in-form and the deemed holder
cease to be members of the same expanded group for the reasons described
in Sec. 1.385-3(d)(2).
(C) The holder-in-form is a controlled partnership immediately
before the transaction, and the holder-in-form ceases to be a controlled
partnership.
(D) The expanded group partner that is both the issuer of deemed
partner stock and the deemed holder transfers (directly or indirectly
through one or more partnerships) all or a portion of its interest in
the controlled partnership to a person that neither is a covered member
nor a controlled partnership with an expanded group partner that is a
covered member. If there is a transfer of only a portion of the
interest, see paragraph (f)(5)(iv) of this section.
(E) The expanded group partner that is both the issuer of deemed
partner stock and the deemed holder transfers (directly or indirectly
through one or more partnerships) all or a portion of its interest in
the controlled partnership to a covered member or a controlled
partnership with an expanded group partner that is a covered member. If
there is a transfer of only a portion of the interest, see paragraph
(f)(5)(iv) of this section.
(F) The holder-in-form transfers the debt instrument (which is
disregarded
[[Page 805]]
for federal tax purposes) to a person that is neither a member of the
expanded group nor a controlled partnership. See paragraph (f)(4)(v) of
this section if the holder-in-form transfers the debt instrument to a
member of the expanded group or a controlled partnership.
(iv) Specified event involving a transfer of only a portion of an
interest in a controlled partnership. If, with respect to a specified
event described in paragraph (f)(5)(iii)(D) or (E) of this section, an
expanded group partner transfers only a portion of its interest in a
controlled partnership, then, only a portion of the deemed transferred
receivable that is deemed to be held by the expanded group partner is
deemed to be distributed in redemption of an equal portion of the deemed
partner stock. The portion of the deemed transferred receivable referred
to in the preceding sentence is equal to the product of the entire
principal amount of the deemed transferred receivable deemed to be held
by the expanded group partner multiplied by a fraction, the numerator of
which is the portion of the expanded group partner's capital account
attributable to the interest that is transferred, and the denominator of
which is the expanded group partner's capital account with respect to
its entire interest, determined immediately before the specified event.
(6) Issuance of a partnership's debt instrument to a partner and a
partner's debt instrument to a partnership. If a controlled partnership,
with respect to an expanded group, issues a debt instrument to an
expanded group partner, or if a covered member that is an expanded group
partner issues a covered debt instrument to a controlled partnership,
and in each case, no partner deducts or receives an allocation of
expense with respect to the debt instrument, then this section and
1.385-3 do not apply to the debt instrument.
(g)(1) through (4) [Reserved]. For further guidance, see Sec.
1.385-3(g)(1) through (4).
(5) Deemed holder. The term deemed holder means, with respect to a
deemed transfer, the expanded group partner that is deemed to hold a
deemed transferred receivable by reason of the deemed transfer.
(6) Deemed partner stock. The term deemed partner stock means, with
respect to a deemed transfer, the stock deemed issued by an expanded
group partner as described in paragraphs (f)(4)(i), (f)(4)(iii), and
(f)(5)(ii) of this section. The amount of deemed partner stock is
reduced as described in paragraphs (f)(4)(iv)(B) and (f)(5)(i) of this
section.
(7) Deemed transfer. The term deemed transfer means, with respect to
a specified portion, the transfer described in paragraph (f)(4)(i),
(f)(4)(iii), or (f)(5)(ii) of this section.
(8) Deemed transferred receivable. The term deemed transferred
receivable means, with respect to a deemed transfer, the portion of the
debt instrument described in paragraph (f)(4)(i), (f)(4)(iii), or
(f)(5)(ii) of this section. The deemed transferred receivable is reduced
as described in paragraphs (f)(4)(iv)(B) and (f)(5)(i) of this section.
(g)(9) through (14) [Reserved]. For further guidance, see Sec.
1.385-3(g)(9) through (14).
(15) Holder-in-form. The term holder-in-form means, with respect to
a debt instrument issued by a controlled partnership, the person that,
absent the application of paragraph (f)(4) of this section, would be the
holder of the debt instrument for federal tax purposes. Therefore, the
term holder-in-form does not include a deemed holder (as defined in
paragraph (g)(5) of this section).
(16) Issuance percentage. The term issuance percentage means, with
respect to a controlled partnership and an expanded group partner, the
ratio (expressed as a percentage) of the partner's reasonably
anticipated distributive share of all the partnership's interest expense
over a reasonable period, divided by all of the partnership's reasonably
anticipated interest expense over that same period, taking into account
any and all relevant facts and circumstances. The relevant facts and
circumstances include, without limitation, the term of the debt
instrument; whether the partnership anticipates issuing other debt
instruments; and the partnership's anticipated section 704(b) income and
expense, and the partners' respective anticipated allocation
percentages, taking into account
[[Page 806]]
anticipated changes to those allocation percentages over time resulting,
for example, from anticipated contributions, distributions,
recapitalizations, or provisions in the controlled partnership
agreement.
(17) Liquidation value percentage. The term liquidation value
percentage means, with respect to a controlled partnership and an
expanded group partner, the ratio (expressed as a percentage) of the
liquidation value of the expanded group partner's interest in the
partnership divided by the aggregate liquidation value of all the
partners' interests in the partnership. The liquidation value of an
expanded group partner's interest in a controlled partnership is the
amount of cash the partner would receive with respect to the interest if
the partnership (and any partnership through which the partner
indirectly owns an interest in the controlled partnership) sold all of
its property for an amount of cash equal to the fair market value of the
property (taking into account section 7701(g)), satisfied all of its
liabilities (other than those described in Sec. 1.752-7), paid an
unrelated third party to assume all of its Sec. 1.752-7 liabilities in
a fully taxable transaction, and then the partnership (and any
partnership through which the partner indirectly owns an interest in the
controlled partnership) liquidated.
(g)(18) through (g)(21) [Reserved]. For further guidance, see Sec.
1.385-3(g)(18) through (g)(21).
(22) Retained receivable. The term retained receivable means, with
respect to a debt instrument issued by a controlled partnership, the
portion of the debt instrument that is not transferred by the holder-in-
form pursuant to one or more deemed transfers. The retained receivable
is adjusted for decreases described in paragraph (f)(4)(iv)(B) of this
section and increases described in paragraph (f)(5)(i) of this section.
(23) Specified portion. The term specified portion means, with
respect to a debt instrument issued by a controlled partnership and a
covered member that is an expanded group partner, the portion of the
debt instrument that is treated under paragraph (f)(3)(i) of this
section as issued on a testing date (within the meaning of paragraph
(f)(3)(ii) of this section) by the covered member and that, absent the
application of paragraph (f)(4)(i) of this section, would be treated as
stock under Sec. 1.385-3(b)(2) or (b)(3)(i) on the testing date. A
specified portion is reduced as described in paragraphs (f)(4)(iv)(B)
and (5)(i) of this section.
(g)(24) through (25) [Reserved]. For further guidance, see Sec.
1.385-3(g)(24) through (25).
(h) Introductory text through (h)(3), Example 11 [Reserved]. For
further guidance, see Sec. 1.385-3(h) introductory text through (h)(3),
Example 11.
Example 12. Distribution of a covered debt instrument to a
controlled partnership. (i) Facts. CFC and FS are equal partners in PRS.
PRS owns 100% of the stock in X Corp, a domestic corporation. On Date A
in Year 1, X Corp issues X Note to PRS in a distribution.
(ii) Analysis. (A) Under Sec. 1.385-1(c)(4), in determining whether
X Corp is a member of the FP expanded group that includes CFC and FS,
CFC and FS are each treated as owning 50% of the X Corp stock held by
PRS. Accordingly, 100% of X Corp's stock is treated as owned by CFC and
FS, and X Corp is a member of the FP expanded group.
(B) Together CFC and FS own 100% of the interests in PRS capital and
profits, such that PRS is a controlled partnership under Sec. 1.385-
1(c)(1). CFC and FS are both expanded group partners on the date on
which PRS acquired X Note. Therefore, pursuant to paragraph (f)(2)(i)(A)
of this section, each of CFC and FS is treated as acquiring its share of
X Note in the same manner (in this case, by a distribution of X Note),
and on the date on which, PRS acquired X Note. Likewise, X Corp is
treated as issuing to each of CFC and FS its share of X Note. Under
paragraph (f)(2)(i)(B) of this section, each of CFC's and FS's share of
X Note, respectively, is determined in accordance with its liquidation
value percentage determined on Date A in Year 1, the date X Corp
distributed X Note to PRS. On Date A in Year 1, pursuant to paragraph
(g)(17) of this section, each of CFC's and FS's liquidation value
percentages is 50%. Accordingly, on Date A in Year 1, under paragraph
(f)(2)(i)(A) of this section, for purposes of this section and Sec.
1.385-3, CFC and FS are each treated as acquiring 50% of X Note in a
distribution.
(C) Under Sec. 1.385-3(b)(2)(i) and (d)(1)(i), X Note is treated as
stock on the date of issuance, which is Date A in Year 1. Under
paragraph (f)(2)(i)(A) of this section, each of CFC and FS are treated
as acquiring 50% of X Note in a distribution for purposes of this
section and Sec. 1.385-3. Therefore, X Corp is treated as distributing
its stock to PRS in a distribution described in section 305.
[[Page 807]]
Example 13. Loan to a controlled partnership; proportionate
distributions by expanded group partners. (i) Facts. DS, USS2, and USP
are partners in PRS. USP is a domestic corporation that is not a member
of the FP expanded group. Each of DS and USS2 own 45% of the interests
in PRS profits and capital, and USP owns 10% of the interests in PRS
profits and capital. The PRS partnership agreement provides that all
items of PRS income, gain, loss, deduction, and credit are allocated in
accordance with the percentages in the preceding sentence. On Date A in
Year 1, FP lends $200x to PRS in exchange for PRS Note with stated
principal amount of $200x, which is payable at maturity. PRS Note also
provides for annual payments of interest that are qualified stated
interest. Subsequently, on Date B in Year 1, DS distributes $90x to
USS1, USS2 distributes $90x to FP, and USP distributes $20x to its
shareholder. Each of DS's and USS2's issuance percentage is 45% on Date
B in Year 1, the date of the distributions and therefore a testing date
under paragraph (f)(3)(ii)(A) of this section.
(ii) Analysis. (A) DS and USS2 together own 90% of the interests in
PRS profits and capital and therefore PRS is a controlled partnership
under Sec. 1.385-1(c)(1). Under Sec. 1.385-1(c)(2), each of DS and
USS2 is a covered member.
(B) Under paragraph (f)(3)(i) of this section, each of DS and USS2
is treated as issuing its share of PRS Note, and under paragraph
(f)(3)(ii)(A) of this section, DS's and USS2's share is each $90x (45%
of $200x). USP is not an expanded group partner and therefore has no
issuance percentage and is not treated as issuing any portion of PRS
Note.
(C) The $90x distributions made by DS to USS1 and by USS2 to FP are
described in Sec. 1.385-3(b)(3)(i)(A). Under Sec. 1.385-
3(b)(3)(iii)(A), the portions of PRS Note treated as issued by each of
DS and USS2 are treated as funding the distribution made by DS and USS2
because the distributions occurred within the per se period with respect
to PRS Note. Under Sec. 1.385-3(b)(3)(i), the portions of PRS Note
treated as issued by each of DS and USS2 would, absent the application
of (f)(4)(i) of this section, be treated as stock of DS and USS2 on Date
B in Year 1, the date of the distributions. See Sec. 1.385-3(d)(1)(ii).
Under paragraph (g)(23) of this section, each of the $90x portions is a
specified portion.
(D) Under paragraph (f)(4)(i) of this section, the specified
portions are not treated as stock under Sec. 1.385-3(b)(3)(i). Instead,
FP is deemed to transfer a portion of PRS Note with a principal amount
equal to $90x (the adjusted issue price of the specified portion with
respect to DS) to DS in exchange for deemed partner stock in DS with a
fair market value of $90x. Similarly, FP is deemed to transfer a portion
of PRS Note with a principal amount equal to $90x (the adjusted issue
price of the specified portion with respect to USS2) to USS2 in exchange
for deemed partner stock in USS2 with a fair market value of $90x. The
principal amount of the retained receivable held by FP is $20x ($200x--
$90x--$90x).
Example 14. Loan to a controlled partnership; disproportionate
distributions by expanded group partners. (i) Facts. The facts are the
same as in Example 13 of this paragraph (h)(3), except that on Date B in
Year 1, DS distributes $45x to USS1 and USS2 distributes $135x to FP.
(ii) Analysis. (A) The analysis is the same as in paragraph (ii)(A)
of Example 13 of this paragraph (h)(3).
(B) The analysis is the same as in paragraph (ii)(B) of Example 13
of this paragraph (h)(3).
(C) The $45x and $135x distributions made by DS to USS1 and by USS2
to FP, respectively, are described in Sec. 1.385-3(b)(3)(i)(A). Under
Sec. 1.385-3(b)(3)(iii)(A), the portion of PRS Note treated as issued
by DS is treated as funding the distribution made by DS because the
distribution occurred within the per se period with respect to PRS Note,
but under Sec. 1.385-3(b)(3)(i), only to the extent of DS's $45x
distribution. USS2 is treated as issuing $90x of PRS Note, all of which
is treated as funding $90x of USS2's $135x distribution under Sec.
1.385-3(b)(3)(iii)(A). Under Sec. 1.385-3(b)(3)(i), absent the
application of (f)(4)(i) of this section, $45x of PRS Note would be
treated as stock of DS and $90x of PRS Note would be treated as stock of
USS2 on Date B in Year 1, the date of the distributions. See Sec.
1.385-3(d)(1)(ii). Under paragraph (g)(23) of this section, $45x of PRS
Note is a specified portion with respect to DS and $90x of PRS Note is a
specified portion with respect to USS2.
(D) Under paragraph (f)(4)(i) of this section, the specified
portions are not treated as stock under Sec. 1.385-3(b)(3)(i). Instead,
FP is deemed to transfer a portion of PRS Note with a principal amount
equal to $45x (the adjusted issue price of the specified portion with
respect to DS) to DS in exchange for stock of DS with a fair market
value of $90x. Similarly, FP is deemed to transfer a portion of PRS Note
with a principal amount equal to $90x (the adjusted issue price of the
specified portion with respect to USS2) to USS2 in exchange for stock of
USS2 with a fair market value of $90x. The principal amount of the
retained receivable held by FP is $65x ($200x-$45x-$90x).
Example 15. Loan to partnership; distribution in later year. (i)
Facts. The facts are the same as in Example 13 of this paragraph (h)(3),
except that USS2 does not distribute $90x to FP until Date C in Year 2,
which is less than 36 months after Date A in Year 1. On Date C in Year
2, DS's, USS2's, and USP's issuance percentages under paragraph (g)(16)
of this
[[Page 808]]
section are unchanged at 45%, 45%, and 10%, respectively.
(ii) Analysis. (A) The analysis is the same as in paragraph (ii)(A)
of Example 13 of this paragraph (h)(3).
(B) The analysis is the same as in paragraph (ii)(B) of Example 13
of this paragraph (h)(3).
(C) With respect to the distribution made by DS, the analysis is the
same as in paragraph (ii)(C) of Example 13 of this paragraph (h)(3).
(D) With respect to the deemed transfer to DS, the analysis is the
same as in paragraph (ii)(D) of Example 13 of this paragraph (h)(3).
Accordingly, the amount of the retained receivable held by FP as of Date
B in Year 1 is $110x ($200x-$90x).
(E) Under paragraph (f)(3)(ii)(A) of this section, USS2's share of
PRS Note is determined on Date C in Year 2. On Date C in Year 2, DS's,
USS2's, and USP's respective shares of PRS Note under paragraph
(f)(3)(ii)(A) of this section $90x, $90x, and $20x. However, because DS
is treated as the issuer with respect to a $90x specified portion of PRS
Note, DS's share of PRS Note is reduced by $90x to $0 under paragraph
(f)(3)(ii)(B)(1) of this section. No reduction to either of USS2's or
USP's share of PRS Note is required under paragraph (f)(3)(ii)(B)(2) of
this section because the aggregate of DS's, USS2's, and USP's shares of
PRS Note as reduced is $110x (DS has a $0 share, USS2 has a $90x share,
and USP has a $20x share), which does not exceed $110x (the $200x
adjusted issue price of PRS Note reduced by the $90x specified portion
with respect to DS). Under paragraph (f)(3)(i) of this section, USS2 is
treated as issuing its share of PRS Note.
(F) The $90x distribution made by USS2 to FP is described in Sec.
1.385-3(b)(3)(i)(A). Under Sec. 1.385-3(b)(3)(iii)(A), the portion of
PRS Note treated as issued by USS2 is treated as funding the
distribution made by USS2, because the distribution occurred within the
per se period with respect to PRS Note. Accordingly, the portion of PRS
Note treated as issued by USS2 would, absent the application of
paragraph (f)(4)(i) of this section, be treated as stock of USS2 under
Sec. 1.385-3(b)(3)(i) on Date C in Year 2. See Sec. 1.385-3(d)(1)(ii).
Under paragraph (g)(23) of this section, the $90x portion is a specified
portion.
(G) Under paragraph (f)(4)(i) of this section, the specified portion
of PRS Note treated as issued by USS2 is not treated as stock under
Sec. 1.385-3(b)(3)(i). Instead, on Date C in Year 2, FP is deemed to
transfer a portion of PRS Note with a principal amount equal to $90x
(the adjusted issue price of the specified portion with respect to USS2)
to USS2 in exchange for stock in USS2 with a fair market value of $90x.
The principal amount of the retained receivable held by FP is reduced
from $110x to $20x.
Example 16. Loan to a controlled partnership; partnership ceases to
be a controlled partnership. (i) Facts. The facts are the same as in
Example 13 of this paragraph (h)(3), except that on Date C in Year 4,
USS2 sells its entire interest in PRS to an unrelated person.
(ii) Analysis. (A) On date C in Year 4, PRS ceases to be a
controlled partnership with respect to the FP expanded group under Sec.
1.385-1(c)(1). This is the case because DS, the only remaining partner
that is a member of the FP expanded group, only owns 45% of the total
interest in PRS profits and capital. Because PRS ceases to be a
controlled partnership, a specified event (within the meaning of
paragraph (f)(5)(iii)(A) of this section) occurs with respect to the
deemed transfers with respect to each of DS and USS2.
(B) Under paragraph (f)(5)(i) of this section, on Date C in Year 4,
immediately before PRS ceases to be a controlled partnership, each of DS
and USS2 is deemed to distribute its deemed transferred receivable to FP
in redemption of FP's deemed partner stock in DS and USS2. The specified
portion that corresponds to each of the deemed transferred receivables
ceases to be treated as a specified portion. Furthermore, the deemed
transferred receivables cease to exist, and the retained receivable held
by FP increases from $20x to $200x.
Example 17. Transfer of an interest in a partnership to a covered
member. (i) Facts. The facts are the same as in Example 13 of this
paragraph (h)(3), except that on Date C in Year 4, USS2 sells its entire
interest in PRS to USS1.
(ii) Analysis. (A) After USS2 sells its interest in PRS to USS1, DS
and USS1 together own 90% of the interests in PRS profits and capital
and therefore PRS continues to be a controlled partnership under Sec.
1.385-1(c)(1). A specified event (within the meaning of paragraph
(f)(5)(iii)(E) of this section) occurs as result of the sale only with
respect to the deemed transfer with respect to USS2.
(B) Under paragraph (f)(5)(i) of this section, on Date C in Year 4,
immediately before USS2 sells its entire interest in PRS to USS1, USS2
is deemed to distribute its deemed transferred receivable to FP in
redemption of FP's deemed partner stock in USS2. Because the specified
event is described in paragraph (f)(5)(iii)(E) of this section, under
paragraph (f)(5)(ii) of this section, FP is deemed to retransfer the
deemed transferred receivable deemed received from USS2 to USS1 in
exchange for deemed partner stock in USS1 with a fair market value equal
to the principal amount of the deemed transferred receivable that is
retransferred to USS1.
Example 18. Loan to partnership and all partners are members of a
consolidated group. (i) Facts. USS1 and DS are equal partners in PRS.
USS1 and DS are members of a consolidated group, as defined in Sec.
1.1502-1(h). The
[[Page 809]]
PRS partnership agreement provides that all items of PRS income, gain,
loss, deduction, and credit are allocated equally between USS1 and DS.
On Date A in Year 1, FP lends $200x to PRS in exchange for PRS Note. PRS
uses all $200x in its business and does not distribute any money or
other property to any partner. On Date B in Year 1, DS distributes $200x
to USS1, and USS1 distributes $200x to FP. If neither of USS1 or DS were
a member of the consolidated group, each would have an issuance
percentage under paragraph (g)(16) of this section, determined as of
Date A in Year 1, of 50%.
(ii) Analysis. (A) Pursuant to Sec. 1.385-4T(b)(6), PRS is treated
as a partnership for purposes of Sec. 1.385-3. Under Sec. 1.385-
4T(b)(1), DS and USS1 are treated as one corporation for purposes of
this section and Sec. 1.385-3, and thus a single covered member under
Sec. 1.385-1(c)(2). For purposes of this section, the single covered
member owns 100% of the PRS profits and capital and therefore PRS is a
controlled partnership under Sec. 1.385-1(c)(1). Under paragraph
(f)(3)(i) of this section, the single covered member is treated as
issuing all $200x of PRS Note to FP, a member of the same expanded group
as the single covered member. DS's distribution to USS1 is a disregarded
distribution because it is a distribution between members of a
consolidated group that is disregarded under the one-corporation rule
described in Sec. 1.385-4T(b)(1). However, under Sec. 1.385-
3(b)(3)(iii)(A), PRS Note, treated as issued by the single covered
member, is treated as funding the distribution by USS1 to FP, which is
described in Sec. 1.385-3(b)(3)(i)(A) and which is a regarded
distribution. Accordingly, PRS Note, absent the application of (f)(4)(i)
of this section, would be treated as stock under Sec. 1.385-3(b) on
Date B in Year 1. Thus, pursuant to paragraph (g)(23) of this section,
the entire PRS Note is a specified portion.
(B) Under paragraphs (f)(4)(i) and (iii) of this section, the
specified portion is not treated as stock and, instead, FP is deemed to
transfer PRS Note with a principal amount equal to $200x to USS1 in
exchange for stock of USS1 with a fair market value of $200x. Under
paragraph (f)(4)(iii) of this section, FP is deemed to transfer PRS Note
to USS1 because only USS1 made a regarded distribution described in
Sec. 1.385-3(b)(3)(i).
Example 19. (i) Facts. DS owns DRE, a disregarded entity within the
meaning of Sec. 1.385-1(c)(3). On Date A in Year 1, FP lends $200x to
DRE in exchange for DRE Note. Subsequently, on Date B in Year 1, DS
distributes $100x of cash to USS1.
(ii) Analysis. Under Sec. 1.385-3(b)(3)(iii)(A), $100x of DRE Note
would be treated as funding the distribution by DS to USS1 because DRE
Note is issued to a member of the FP expanded group during the per se
period with respect to DS's distribution0 to USS1. Accordingly, under
Sec. 1.385-3(b)(3)(i)(A) and (d)(1)(ii), $100x of DRE Note would be
treated as stock on Date B in Year 1. However, under paragraph (d)(4) of
this section, DS, as the regarded owner, within the meaning of Sec.
1.385-1(c)(5), of DRE is deemed to issue its stock to FP in exchange for
a portion of DRE Note equal to the $100x applicable portion (as defined
in paragraph (d)(4) of this section). Thus, DS is treated as the holder
of $100x of DRE Note, which is disregarded, and FP is treated as the
holder of the remaining $100x of DRE Note. The $100x of stock deemed
issued by DS to FP has the same terms as DRE Note, other than the
issuer, and payments on the stock are determined by reference to
payments on DRE Note.
(i) through (j) [Reserved]
(k) Applicability date--(1) In general. This section applies to
taxable years ending on or after January 19, 2017.
(2) Transition rules--(i) Transition rule for covered debt
instruments issued by partnerships that would have had a specified
portion in taxable years ending before January 19, 2017. If the
application of paragraphs (f)(3) through (5) of this section and Sec.
1.385-3 would have resulted in a covered debt instrument issued by a
controlled partnership having a specified portion in a taxable year
ending before January 19, 2017 but for the application of paragraph
(k)(1) of this section and Sec. 1.385-3(j)(1), then, to the extent of
the specified portion immediately after January 19, 2017, there is a
deemed transfer immediately after January 19, 2017.
(ii) Transition rule for certain covered debt instruments treated as
having a specified portion in taxable years ending on or after January
19, 2017. If the application of paragraphs (f)(3) through (5) of this
section and Sec. 1.385-3 would treat a covered debt instrument issued
by a controlled partnership as having a specified portion that gives
rise to a deemed transfer on or before January 19, 2017 but in a taxable
year ending on or after January 19, 2017, that specified portion does
not give rise to a deemed transfer during the 90-day period after
October 21, 2016. Instead, to the extent of the specified portion
immediately after January 19, 2017, there is a deemed transferred
immediately after January 19, 2017.
(iii) Transition funding rule. This paragraph (k)(2)(iii) applies if
the application of paragraphs (f)(3) through (5) of this section and
Sec. 1.385-3 would have resulted in a deemed transfer with
[[Page 810]]
respect to a specified portion of a debt instrument issued by a
controlled partnership on a date after April 4, 2016, and on or before
January 19, 2017 (the transition period) but for the application of
paragraph (k)(1), (k)(2)(i), or (k)(2)(ii) of this section and Sec.
1.385-3(j). In this case, any payments made with respect to the covered
debt instrument (other than stated interest), including pursuant to a
refinancing, a portion of which would be treated as made with respect to
deemed partner stock if there would have been a deemed transfer, after
the date that there would have been a deemed transfer and through the
remaining portion of the transition period are treated as distributions
for purposes of applying Sec. 1.385-3(b)(3) for taxable years ending on
or after January 19, 2017. In addition, if an event occurs during the
transition period that would have been a specified event with respect to
the deemed transfer described in the preceding sentence but for the
application of paragraph (k)(1) of this section and Sec. 1.385-3(j),
the distribution or acquisition that would have resulted in the deemed
transfer is available to be treated as funded by other covered debt
instruments of the covered member for purposes of Sec. 1.385-3(b)(3)
(to the extent provided in Sec. 1.385-3(b)(3)(iii)). The prior sentence
shall be applied in a manner that is consistent with the rules set forth
in paragraph (f)(5) of this section and Sec. 1.385-3(d)(2)(ii).
(iv) Coordination between the general rule and funding rule. This
paragraph (k)(2)(iv) applies when a covered debt instrument issued by a
controlled partnership in a transaction described in Sec. 1.385-3(b)(2)
would have resulted in a specified portion that gives rise to a deemed
transfer on a date after April 4, 2016, and on or before January 19,
2017, but there is not a deemed transfer on such date due to the
application of paragraph (k)(1), (k)(2)(i), or (k)(2)(ii) of this
section and Sec. 1.385-3(j). In this case, the issuance of such covered
debt instrument is not treated as a distribution or acquisition
described in Sec. 1.385-3(b)(3)(i), but only to the extent of the
specified portion immediately after January 19, 2017.
(v) Option to apply proposed regulations. See Sec. 1.385-
3(j)(2)(v).
(l) Expiration date. This section expires on October 13, 2019.
[T.D. 9790, 81 FR 72972, Oct. 21, 2016, as amended by T.D 9790, 82 FR
8168, Jan. 24, 2017]
Sec. 1.385-4T Treatment of consolidated groups.
(a) Scope. This section provides rules for applying Sec. Sec.
1.385-3 and 1.385-3T to members of consolidated groups. Paragraph (b) of
this section sets forth rules concerning the extent to which, solely for
purposes of applying Sec. Sec. 1.385-3 and 1.385-3T, members of a
consolidated group that file (or that are required to file) a
consolidated U.S. federal income tax return are treated as one
corporation. Paragraph (c) of this section sets forth rules concerning
the treatment of a debt instrument that ceases to be, or becomes, a
consolidated group debt instrument. Paragraph (d) of this section
provides rules for applying the funding rule of Sec. 1.385-3(b)(3) to
members that depart a consolidated group. For definitions applicable to
this section, see paragraph (e) of this section and Sec. Sec. 1.385-
1(c) and 1.385-3(g). For examples illustrating the application of this
section, see paragraph (f) of this section.
(b) Treatment of consolidated groups--(1) Members treated as one
corporation. For purposes of this section and Sec. Sec. 1.385-3 and
1.385-3T, and except as otherwise provided in this section and Sec.
1.385-3T, all members of a consolidated group (as defined in Sec.
1.1502-1(h)) that file (or that are required to file) a consolidated
U.S. federal income tax return are treated as one corporation. Thus, for
example, when a member of a consolidated group issues a covered debt
instrument that is not a consolidated group debt instrument, the
consolidated group generally is treated as the issuer of the covered
debt instrument for purposes of this section and Sec. Sec. 1.385-3 and
1.385-3T. Also, for example, when one member of a consolidated group
issues a covered debt instrument that is not a consolidated group debt
instrument and therefore is treated as issued by the consolidated group,
and another member of the consolidated group makes a distribution or
acquisition described in Sec. 1.385-3(b)(3)(i)(A) through (C) with an
expanded group member that is not a
[[Page 811]]
member of the consolidated group, Sec. 1.385-3(b)(3)(i) may treat the
covered debt instrument as funding the distribution or acquisition made
by the consolidated group. In addition, except as otherwise provided in
this section, acquisitions and distributions described in Sec. 1.385-
3(b)(2) and (b)(3)(i) in which all parties to the transaction are
members of the same consolidated group both before and after the
transaction are disregarded for purposes of this section and Sec. Sec.
1.385-3 and 1.385-3T.
(2) One-corporation rule inapplicable to expanded group member
determination. The one-corporation rule described in paragraph (b)(1) of
this section does not apply in determining the members of an expanded
group. Notwithstanding the previous sentence, an expanded group does not
exist for purposes of this section and Sec. Sec. 1.385-3 and 1.385-3T
if it consists only of members of a single consolidated group.
(3) Application of Sec. 1.385-3 to debt instruments issued by
members of a consolidated group--(i) Debt instrument treated as stock of
the issuing member of a consolidated group. If a covered debt instrument
treated as issued by a consolidated group under the one-corporation rule
described in paragraph (b)(1) of this section is treated as stock under
Sec. Sec. 1.385-3 or 1.385-3T, the covered debt instrument is treated
as stock in the member of the consolidated group that would be the
issuer of such debt instrument without regard to this section. But see
Sec. 1.385-3(d)(7) (providing that a covered debt instrument that is
treated as stock under Sec. 1.385-3(b)(2), (3), or (4) and that is not
described in section 1504(a)(4) is not treated as stock for purposes of
determining whether the issuer is a member of an affiliated group
(within the meaning of section 1504(a)).
(ii) Application of the covered debt instrument exclusions. For
purposes of determining whether a debt instrument issued by a member of
a consolidated group is a covered debt instrument, each test described
in Sec. 1.385-3(g)(3) is applied on a separate member basis without
regard to the one-corporation rule described in paragraph (b)(1) of this
section.
(iii) Qualified short-term debt instrument. The determination of
whether a member of a consolidated group has issued a qualified short-
term debt instrument for purposes of Sec. 1.385-3(b)(3)(vii) is made on
a separate member basis without regard to the one-corporation rule
described in paragraph (b)(1) of this section.
(4) Application of the reductions of Sec. 1.385-3(c)(3) to members
of a consolidated group--(i) Application of the reduction for expanded
group earnings--(A) In general. A consolidated group maintains one
expanded group earnings account with respect to an expanded group
period, and only the earnings and profits, determined in accordance with
Sec. 1.1502-33 (without regard to the application of Sec. 1.1502-
33(b)(2), (e), and (f)), of the common parent (within the meaning of
section 1504) of the consolidated group are considered in calculating
the expanded group earnings for the expanded group period of the
consolidated group. Accordingly, a regarded distribution or acquisition
made by a member of a consolidated group is reduced to the extent of the
expanded group earnings account of the consolidated group.
(B) Effect of certain corporate transactions on the calculation of
expanded group earnings--(1) Consolidation. A consolidated group
succeeds to the expanded group earnings account of a joining member
under the principles of Sec. 1.385-3(c)(3)(i)(F)(2)(ii).
(2) Deconsolidation--(i) In general. Except as otherwise provided in
paragraph (b)(4)(i)(B)(2)(ii) of this section, no amount of the expanded
group earnings account of a consolidated group for an expanded group
period, if any, is allocated to a departing member. Accordingly,
immediately after leaving the consolidated group, the departing member
has no expanded group earnings account with respect to its expanded
group period.
(ii) Allocation of expanded group earnings to a departing member in
a distribution described in section 355. If a departing member leaves
the consolidated group by reason of an exchange or distribution to which
section 355 (or so much of section 356 that relates to section 355)
applies, the expanded group earnings account of the consolidated group
is allocated between the consolidated group and the departing member
[[Page 812]]
in proportion to the earnings and profits of the consolidated group and
the earnings and profits of the departing member immediately after the
transaction.
(ii) Application of the reduction for qualified contributions--(A)
In general. For purposes of applying Sec. 1.385-3(c)(3)(ii)(A) to a
consolidated group--
(1) A qualified contribution to any member of a consolidated group
that remains a member of the consolidated group immediately after the
qualified contribution from a person other than a member of the same
consolidated group is treated as made to the one corporation described
in paragraph (b)(1) of this section;
(2) A qualified contribution that causes a member of a consolidated
group to become a departing member of that consolidated group is treated
as made to the departing member and not to the consolidated group of
which the departing member was a member immediately prior to the
qualified contribution; and
(3) No contribution of property by a member of a consolidated group
to any other member of the consolidated group is a qualified
contribution.
(B) Effect of certain corporate transactions on the calculation of
qualified contributions--(1) Consolidation. A consolidated group
succeeds to the qualified contributions of a joining member under the
principles of Sec. 1.385-3(c)(3)(ii)(F)(2)(ii).
(2) Deconsolidation--(i) In general. Except as otherwise provided in
paragraph (b)(4)(ii)(B)(2)(ii) of this section, no amount of the
qualified contributions of a consolidated group for an expanded group
period, if any, is allocated to a departing member. Accordingly,
immediately after leaving the consolidated group, the departing member
has no qualified contributions with respect to its expanded group
period.
(ii) Allocation of qualified contributions to a departing member in
a distribution described in section 355. If a departing member leaves
the consolidated group by reason of an exchange or distribution to which
section 355 (or so much of section 356 that relates to section 355)
applies, each qualified contribution of the consolidated group is
allocated between the consolidated group and the departing member in
proportion to the earnings and profits of the consolidated group and the
earnings and profits of the departing member immediately after the
transaction.
(5) Order of operations. For purposes of this section and Sec. Sec.
1.385-3 and 1.385-3T, the consequences of a transaction involving one or
more members of a consolidated group are determined as provided in
paragraphs (b)(5)(i) and (ii) of this section.
(i) First, determine the characterization of the transaction under
federal tax law without regard to the one-corporation rule described in
paragraph (b)(1) of this section.
(ii) Second, apply this section and Sec. Sec. 1.385-3 and 1.385-3T
to the transaction as characterized to determine whether to treat a debt
instrument as stock, treating the consolidated group as one corporation
under paragraph (b)(1) of this section, unless otherwise provided.
(6) Partnership owned by a consolidated group. For purposes of this
section and Sec. Sec. 1.385-3 and 1.385-3T, and notwithstanding the
one-corporation rule described in paragraph (b)(1) of this section, a
partnership that is wholly owned by members of a consolidated group is
treated as a partnership. Thus, for example, if members of a
consolidated group own all of the interests in a controlled partnership
that issues a debt instrument to a member of the consolidated group,
such debt instrument would be treated as a consolidated group debt
instrument because, under Sec. 1.385-3T(f)(3)(i), for purposes of this
section and Sec. 1.385-3, a consolidated group member that is an
expanded group partner is treated as the issuer with respect to its
share of the debt instrument issued by the partnership.
(7) Predecessor and successor--(i) In general. Pursuant to paragraph
(b)(5) of this section, the determination as to whether a member of an
expanded group is a predecessor or successor of another member of the
consolidated group is made without regard to paragraph (b)(1) of this
section. For purposes of Sec. 1.385-3(b)(3), if a consolidated group
member is a predecessor or successor of a member of the same expanded
group that is not a member of
[[Page 813]]
the same consolidated group, the consolidated group is treated as a
predecessor or successor of the expanded group member (or the
consolidated group of which that expanded group member is a member).
Thus, for example, a departing member that departs a consolidated group
in a distribution or exchange to which section 355 applies is a
successor to the consolidated group and the consolidated group is a
predecessor of the departing member.
(ii) Joining members. For purposes of Sec. 1.385-3(b)(3), the term
predecessor also means, with respect to a consolidated group, a joining
member and the term successor also means, with respect to a joining
member, a consolidated group.
(c) Consolidated group debt instruments--(1) Debt instrument ceases
to be a consolidated group debt instrument but continues to be issued
and held by expanded group members--(i) Consolidated group member leaves
the consolidated group. For purposes of this section and Sec. Sec.
1.385-3 and 1.385-3T, when a debt instrument ceases to be a consolidated
group debt instrument as a result of a transaction in which the member
of the consolidated group that issued the instrument (the issuer) or the
member of the consolidated group holding the instrument (the holder)
ceases to be a member of the same consolidated group but both the issuer
and the holder continue to be members of the same expanded group, the
issuer is treated as issuing a new debt instrument to the holder in
exchange for property immediately after the debt instrument ceases to be
a consolidated group debt instrument. To the extent the newly-issued
debt instrument is a covered debt instrument that is treated as stock
under Sec. 1.385-3(b)(3), the covered debt instrument is then
immediately deemed to be exchanged for stock of the issuer. For rules
regarding the treatment of the deemed exchange, see Sec. 1.385-1(d).
For examples illustrating this rule, see paragraph (f) of this section,
Examples 4 and 5.
(ii) Consolidated group debt instrument that is transferred outside
of the consolidated group. For purposes of this section and Sec. Sec.
1.385-3 and 1.385-3T, when a member of a consolidated group that holds a
consolidated group debt instrument transfers the debt instrument to an
expanded group member that is not a member of the same consolidated
group (transferee expanded group member), the debt instrument is treated
as issued by the consolidated group to the transferee expanded group
member immediately after the debt instrument ceases to be a consolidated
group debt instrument. Thus, for example, for purposes of this section
and Sec. Sec. 1.385-3 and 1.385-3T, the sale of a consolidated group
debt instrument to a transferee expanded group member is treated as an
issuance of the debt instrument by the consolidated group to the
transferee expanded group member in exchange for property. To the extent
the newly-issued debt instrument is a covered debt instrument that is
treated as stock upon being transferred, the covered debt instrument is
deemed to be exchanged for stock of the member of the consolidated group
treated as the issuer of the debt instrument (determined under paragraph
(b)(3)(i) of this section) immediately after the covered debt instrument
is transferred outside of the consolidated group. For rules regarding
the treatment of the deemed exchange, see Sec. 1.385-1(d). For examples
illustrating this rule, see paragraph (f) of this section, Examples 2
and 3.
(iii) Overlap transactions. If a debt instrument ceases to be a
consolidated group debt instrument in a transaction to which both
paragraphs (c)(1)(i) and (ii) of this section apply, then only the rules
of paragraph (c)(1)(ii) of this section apply with respect to such debt
instrument.
(iv) Subgroup exception. A debt instrument is not treated as ceasing
to be a consolidated group debt instrument for purposes of paragraphs
(c)(1)(i) and (ii) of this section if both the issuer and the holder of
the debt instrument are members of the same consolidated group
immediately after the transaction described in paragraph (c)(1)(i) or
(ii) of this section.
(2) Covered debt instrument treated as stock becomes a consolidated
group debt instrument. When a covered debt instrument that is treated as
stock under Sec. 1.385-3 becomes a consolidated group debt instrument,
then immediately after the covered debt instrument becomes a
consolidated group debt instrument, the issuer is deemed to issue
[[Page 814]]
a new covered debt instrument to the holder in exchange for the covered
debt instrument that was treated as stock. In addition, in a manner
consistent with Sec. 1.385-3(d)(2)(ii)(A), when the covered debt
instrument that previously was treated as stock becomes a consolidated
group debt instrument, other covered debt instruments issued by the
issuer of that instrument (including a consolidated group that includes
the issuer) that are not treated as stock when the instrument becomes a
consolidated group debt instrument are re-tested to determine whether
those other covered debt instruments are treated as funding the regarded
distribution or acquisition that previously was treated as funded by the
instrument (unless such distribution or acquisition is disregarded under
paragraph (b)(1) of this section). Further, also in a manner consistent
with Sec. 1.385-3(d)(2)(ii)(A), a covered debt instrument that is
issued by the issuer (including a consolidated group that includes the
issuer) after the application of this paragraph and within the per se
period may also be treated as funding that regarded distribution or
acquisition.
(3) No interaction with the intercompany obligation rules of Sec.
1.1502-13(g). The rules of this section do not affect the application of
the rules of Sec. 1.1502-13(g). Thus, any deemed satisfaction and
reissuance of a debt instrument under Sec. 1.1502-13(g) and any deemed
issuance and deemed exchange of a debt instrument under this paragraph
(c) that arise as part of the same transaction or series of transactions
are not integrated. Rather, each deemed satisfaction and reissuance
under the rules of Sec. 1.1502-13(g), and each deemed issuance and
exchange under the rules of this section, are respected as separate
steps and treated as separate transactions.
(d) Application of the funding rule of Sec. 1.385-3(b)(3) to
members departing a consolidated group. This paragraph (d) provides
rules for applying the funding rule of Sec. 1.385-3(b)(3) when a
departing member ceases to be a member of a consolidated group, but only
if the departing member and the consolidated group are members of the
same expanded group immediately after the deconsolidation.
(1) Continued application of the one-corporation rule. A disregarded
distribution or acquisition by any member of the consolidated group
continues to be disregarded when the departing member ceases to be a
member of the consolidated group.
(2) Continued recharacterization of a departing member's covered
debt instrument as stock. A covered debt instrument of a departing
member that is treated as stock of the departing member under Sec.
1.385-3(b) continues to be treated as stock when the departing member
ceases to be a member of the consolidated group.
(3) Effect of issuances of covered debt instruments that are not
consolidated group debt instruments on the departing member and the
consolidated group. If a departing member has issued a covered debt
instrument (determined without regard to the one-corporation rule
described in paragraph (b)(1) of this section) that is not a
consolidated group debt instrument and that is not treated as stock
immediately before the departing member ceases to be a consolidated
group member, then the departing member (and not the consolidated group)
is treated as issuing the covered debt instrument on the date and in the
manner the covered debt instrument was issued. If the departing member
is not treated as the issuer of a covered debt instrument pursuant to
the preceding sentence, then the consolidated group continues to be
treated as issuing the covered debt instrument on the date and in the
manner the covered debt instrument was issued.
(4) Treatment of prior regarded distributions or acquisitions. This
paragraph (d)(4) applies when a departing member ceases to be a
consolidated group member in a transaction other than a distribution to
which section 355 (or so much of section 356 as relates to section 355)
applies, and the consolidated group has made a regarded distribution or
acquisition. In this case, to the extent the distribution or acquisition
has not caused a covered debt instrument of the consolidated group to be
treated as stock under Sec. 1.385-3(b) on or before the date the
departing member leaves the consolidated group, then--
[[Page 815]]
(i) If the departing member made the regarded distribution or
acquisition (determined without regard to the one-corporation rule
described in paragraph (b)(1) of this section), the departing member
(and not the consolidated group) is treated as having made the regarded
distribution or acquisition.
(ii) If the departing member did not make the regarded distribution
or acquisition (determined without regard to the one-corporation rule
described in paragraph (b)(1) of this section), then the consolidated
group (and not the departing member) continues to be treated as having
made the regarded distribution or acquisition.
(e) Definitions. The definitions in this paragraph (e) apply for
purposes of this section.
(1) Consolidated group debt instrument. The term consolidated group
debt instrument means a covered debt instrument issued by a member of a
consolidated group and held by a member of the same consolidated group.
(2) Departing member. The term departing member means a member of an
expanded group that ceases to be a member of a consolidated group but
continues to be a member of the same expanded group. In the case of
multiple members leaving a consolidated group as a result of a single
transaction that continue to be members of the same expanded group, if
such members are treated as one corporation under paragraph (b)(1) of
this section immediately after the transaction, that one corporation is
a departing member with respect to the consolidated group.
(3) Disregarded distribution or acquisition. The term disregarded
distribution or acquisition means a distribution or acquisition
described in Sec. 1.385-3(b)(2) or (b)(3)(i) between members of a
consolidated group that is disregarded under the one-corporation rule
described in paragraph (b)(1) of this section.
(4) Joining member. The term joining member means a member of an
expanded group that becomes a member of a consolidated group and
continues to be a member of the same expanded group. In the case of
multiple members joining a consolidated group as a result of a single
transaction that continue to be members of the same expanded group, if
such members were treated as one corporation under paragraph (b)(1) of
this section immediately before the transaction, that one corporation is
a joining member with respect to the consolidated group.
(5) Regarded distribution or acquisition. The term regarded
distribution or acquisition means a distribution or acquisition
described in Sec. 1.385-3(b)(2) or (b)(3)(i) that is not disregarded
under the one-corporation rule described in paragraph (b)(1) of this
section.
(f) Examples--(1) Assumed facts. Except as otherwise stated, the
following facts are assumed for purposes of the examples in paragraph
(f)(3) of this section:
(i) FP is a foreign corporation that owns 100% of the stock of USS1,
a covered member, and 100% of the stock of FS, a foreign corporation;
(ii) USS1 owns 100% of the stock of DS1 and DS3, both covered
members;
(iii) DS1 owns 100% of the stock of DS2, a covered member;
(iv) FS owns 100% of the stock of UST, a covered member;
(v) At the beginning of Year 1, FP is the common parent of an
expanded group comprised solely of FP, USS1, FS, DS1, DS2, DS3, and UST
(the FP expanded group);
(vi) USS1, DS1, DS2, and DS3 are members of a consolidated group of
which USS1 is the common parent (the USS1 consolidated group);
(vii) The FP expanded group has outstanding more than $50 million of
debt instruments described in Sec. 1.385-3(c)(4) at all times;
(viii) No issuer of a covered debt instrument has a positive
expanded group earnings account, within the meaning of Sec. 1.385-
3(c)(3)(i)(B), or has received a qualified contribution, within the
meaning of Sec. 1.385-3(c)(3)(ii)(B);
(ix) All notes are covered debt instruments, within the meaning of
Sec. 1.385-3(g)(3), and are not qualified short-term debt instruments,
within the meaning of Sec. 1.385-3(b)(3)(vii);
(x) All notes between members of a consolidated group are
intercompany obligations within the meaning of Sec. 1.1502-
13(g)(2)(ii);
(xi) Each entity has as its taxable year the calendar year;
(xii) No domestic corporation is a United States real property
holding
[[Page 816]]
corporation within the meaning of section 897(c)(2);
(xiii) Each note is issued with adequate stated interest (as defined
in section 1274(c)(2)); and
(xiv) Each transaction occurs after January 19, 2017.
(2) No inference. Except as otherwise provided in this section, it
is assumed for purposes of the examples in paragraph (f)(3) of this
section that the form of each transaction is respected for federal tax
purposes. No inference is intended, however, as to whether any
particular note would be respected as indebtedness or as to whether the
form of any particular transaction described in an example in paragraph
(f)(3) of this section would be respected for federal tax purposes.
(3) Examples. The following examples illustrate the rules of this
section.
Example 1. Order of operations. (i) Facts. On Date A in Year 1, UST
issues UST Note to USS1 in exchange for DS3 stock representing less than
20% of the value and voting power of DS3.
(ii) Analysis. UST is acquiring the stock of DS3, the non-common
parent member of a consolidated group. Pursuant to paragraph (b)(5)(i)
of this section, the transaction is first analyzed without regard to the
one-corporation rule described in paragraph (b)(1) of this section, and
therefore UST is treated as issuing a covered debt instrument in
exchange for expanded group stock. The exchange of UST Note for DS3
stock is not an exempt exchange within the meaning of Sec. 1.385-
3(g)(11) because UST and USS1 are not parties to an asset
reorganization. Pursuant to paragraph (b)(5)(ii), Sec. 1.385-3
(including Sec. 1.385-3(b)(2)(ii)) is then applied to the transaction,
thereby treating UST Note as stock for federal tax purposes when it is
issued by UST to USS1. The UST Note is not treated as property for
purposes of section 304(a) because it is not property within the meaning
specified in section 317(a). Therefore, UST's acquisition of DS3 stock
from USS1 in exchange for UST Note is not an acquisition described in
section 304(a)(1).
Example 2. Distribution of consolidated group debt instrument. (i)
Facts. On Date A in Year 1, DS1 issues DS1 Note to USS1 in a
distribution. On Date B in Year 2, USS1 distributes DS1 Note to FP.
(ii) Analysis. Under paragraph (b)(1) of this section, the USS1
consolidated group is treated as one corporation for purposes of Sec.
1.385-3. Accordingly, when DS1 issues DS1 Note to USS1 in a distribution
on Date A in Year 1, DS1 is not treated as issuing a debt instrument to
another member of DS1's expanded group in a distribution for purposes of
Sec. 1.385-3(b)(2), and DS1 Note is not treated as stock under Sec.
1.385-3. When USS1 distributes DS1 Note to FP, DS1 Note is deemed
satisfied and reissued under Sec. 1.1502-13(g)(3)(ii), immediately
before DS1 Note ceases to be an intercompany obligation. Under paragraph
(c)(1)(ii) of this section, when USS1 distributes DS1 Note to FP, the
USS1 consolidated group is treated as issuing DS1 Note to FP in a
distribution on Date B in Year 2. Accordingly, DS1 Note is treated as
stock under Sec. 1.385-3(b)(2)(i). Under paragraph (c)(1)(ii) of this
section, DS1 Note is deemed to be exchanged for stock of the issuing
member, DS1, immediately after DS1 Note is transferred outside of the
USS1 consolidated group. Under paragraph (c)(3) of this section, the
deemed satisfaction and reissuance under Sec. 1.1502-13(g)(3)(ii) and
the deemed issuance and exchange under paragraph (c)(1)(ii) of this
section, are respected as separate steps and treated as separate
transactions.
Example 3. Sale of consolidated group debt instrument. (i) Facts. On
Date A in Year 1, DS1 lends $200x of cash to USS1 in exchange for USS1
Note. On Date B in Year 2, USS1 distributes $200x of cash to FP.
Subsequently, on Date C in Year 2, DS1 sells USS1 Note to FS for $200x.
(ii) Analysis. Under paragraph (b)(1) of this section, the USS1
consolidated group is treated as one corporation for purposes of Sec.
1.385-3. Accordingly, when USS1 issues USS1 Note to DS1 for property on
Date A in Year 1, the USS1 consolidated group is not treated as a funded
member, and when USS1 distributes $200x to FP on Date B in Year 2, that
distribution is a transaction described in Sec. 1.385-3(b)(3)(i)(A),
but does not cause USS1 Note to be recharacterized under Sec. 1.385-
3(b)(3). When DS1 sells USS1 Note to FS, USS1 Note is deemed satisfied
and reissued under Sec. 1.1502-13(g)(3)(ii), immediately before USS1
Note ceases to be an intercompany obligation. Under paragraph (c)(1)(ii)
of this section, when the USS1 Note is transferred to FS for $200x on
Date C in Year 2, the USS1 consolidated group is treated as issuing USS1
Note to FS in exchange for $200x on that date. Because USS1 Note is
issued by the USS1 consolidated group to FS within the per se period as
defined in Sec. 1.385-3(g)(19) with respect to the distribution by the
USS1 consolidated group to FP, USS1 Note is treated as funding the
distribution under Sec. 1.385-3(b)(3)(iii)(A) and, accordingly, is
treated as stock under Sec. 1.385-3(b)(3). Under Sec. 1.385-3(d)(1)(i)
and paragraph (c)(1)(ii) of this section, USS1 Note is deemed to be
exchanged for stock of the issuing member, USS1, immediately after USS1
Note is transferred outside of the USS1 consolidated group. Under
paragraph (c)(3) of this section, the deemed satisfaction and reissuance
under Sec. 1.1502-13(g)(3)(ii) and the deemed issuance
[[Page 817]]
and exchange under paragraph (c)(1)(ii) of this section, are respected
as separate steps and treated as separate transactions.
Example 4. Treatment of consolidated group debt instrument and
departing member's regarded distribution or acquisition when the issuer
of the instrument leaves the consolidated group. (i) Facts. The facts
are the same as provided in paragraph (f)(1) of this section, except
that USS1 and FS own 90% and 10% of the stock of DS1, respectively. On
Date A in Year 1, DS1 distributes $80x of cash and newly-issued DS1
Note, which has a value of $10x, to USS1. Also on Date A in Year 1, DS1
distributes $10x of cash to FS. On Date B in Year 2, FS purchases all of
USS1's stock in DS1 (90% of the stock of DS1), resulting in DS1 ceasing
to be a member of the USS1 consolidated group.
(ii) Analysis. Under paragraph (b)(1) of this section, the USS1
consolidated group is treated as one corporation for purposes of Sec.
1.385-3. Accordingly, DS1's distribution of $80x of cash to USS1 on Date
A in Year 1 is a disregarded distribution or acquisition, and under
paragraph (d)(1) of this section, continues to be a disregarded
distribution or acquisition when DS1 ceases to be a member of the USS1
consolidated group. In addition, when DS1 issues DS1 Note to USS1 in a
distribution on Date A in Year 1, DS1 is not treated as issuing a debt
instrument to a member of DS1's expanded group in a distribution for
purposes of Sec. 1.385-3(b)(2)(i), and DS1 Note is not treated as stock
under Sec. 1.385-3(b)(2)(i). DS1's issuance of DS1 Note to USS1 is also
a disregarded distribution or acquisition, and under paragraph (d)(1) of
this section, continues to be a disregarded distribution or acquisition
when DS1 ceases to be a member of the USS1 consolidated group. The
distribution of $10x cash by DS1 to FS on Date A in Year 1 is a regarded
distribution or acquisition. When FS purchases 90% of the stock of DS1's
from USS1 on Date B in Year 2 and DS1 ceases to be a member of the USS1
consolidated group, DS1 Note is deemed satisfied and reissued under
Sec. 1.1502-13(g)(3)(ii), immediately before DS1 Note ceases to be an
intercompany obligation. Under paragraph (c)(1)(i) of this section, for
purposes of Sec. 1.385-3, DS1 is treated as issuing a new debt
instrument to USS1 in exchange for property immediately after DS1 Note
ceases to be a consolidated group debt instrument. Under paragraph
(d)(4)(i) of this section, the departing member, DS1 (and not the USS1
consolidated group) is treated as having distributed $10x to FS on Date
A in Year 1 (a regarded distribution or acquisition) for purposes of
applying Sec. 1.385-3(b)(3) after DS1 ceases to be a member of the USS1
consolidated group. Because DS1 Note is reissued by DS1 to USS1 within
the per se period (as defined in Sec. 1.385-3(g)(19)) with respect to
DS1's regarded distribution to FS, DS1 Note is treated as funding the
distribution under Sec. 1.385-3(b)(3)(iii)(A) and, accordingly, is
treated as stock under Sec. 1.385-3(b)(3). Under Sec. 1.385-3(d)(1)(i)
and paragraph (c)(1)(i) of this section, DS1 Note is immediately deemed
to be exchanged for stock of DS1 on Date B in Year 2. Under paragraph
(c)(3) of this section, the deemed satisfaction and reissuance under
Sec. 1.1502-13(g)(3)(ii) and the deemed issuance and exchange under
paragraph (c)(1)(i) of this section are respected as separate steps and
treated as separate transactions. Under Sec. 1.385-3(d)(7)(i), after
DS1 Note is treated as stock held by USS1, DS1 Note is not treated as
stock for purposes of determining whether DS1 is a member of the USS1
consolidated group.
Example 5. Treatment of consolidated group debt instrument and
consolidated group's regarded distribution or acquisition. (i) Facts. On
Date A in Year 1, DS1 issues DS1 Note to USS1. On Date B in Year 2, USS1
distributes $100x of cash to FP. On Date C in Year 3, USS1 sells all of
its interest in DS1 to FS, resulting in DS1 ceasing to be a member of
the USS1 consolidated group.
(ii) Analysis. Under paragraph (b)(1) of this section, the USS1
consolidated group is treated as one corporation for purposes of Sec.
1.385-3. Accordingly, when DS1 issues DS1 Note to USS1 in a distribution
on Date A in Year 1, DS1 is not treated as issuing a debt instrument to
a member of DS1's expanded group in a distribution for purposes of Sec.
1.385-3(b)(2)(i), and DS1 Note is not treated as stock under Sec.
1.385-3(b)(2)(i). DS1's issuance of DS1 Note to USS1 is also a
disregarded distribution or acquisition, and under paragraph (d)(1) of
this section, continues to be a disregarded distribution or acquisition
when DS1 ceases to be a member of the USS1 consolidated group. The
distribution of $100x cash by DS1 to USS1 on Date B in Year 2 is a
regarded distribution or acquisition. When FS purchases all of the stock
of DS1 from USS1 on Date C in Year 3 and DS1 ceases to be a member of
the USS1 consolidated group, DS1 Note is deemed satisfied and reissued
under Sec. 1.1502-13(g)(3)(ii), immediately before DS1 Note ceases to
be an intercompany obligation. Under paragraph (c)(1)(i) of this
section, for purposes of Sec. 1.385-3, DS1 is treated as issuing a new
debt instrument to USS1 in exchange for property immediately after DS1
Note ceases to be a consolidated group debt instrument. Under paragraph
(d)(4)(ii) of this section, the USS1 consolidated group (and not DS1) is
treated as having distributed $100x to FP on Date B in Year 2 (a
regarded distribution or acquisition) for purposes of applying Sec.
1.385-3(b)(3) after DS1 ceases to be a member of the USS1 consolidated
group. Because DS1 has not engaged in a regarded distribution or
acquisition that would have been treated as funded by the reissued DS1
Note, the reissued DS1 Note is not treated as stock.
[[Page 818]]
Example 6. Treatment of departing member's issuance of a covered
debt instrument. (i) Facts. On Date A in Year 1, FS lends $100x of cash
to DS1 in exchange for DS1 Note. On Date B in Year 2, USS1 distributes
$30x of cash to FP. On Date C in Year 2, USS1 sells all of its DS1 stock
to FP, resulting in DS1 ceasing to be a member of the USS1 consolidated
group.
(ii) Analysis. Under paragraph (b)(1) of this section, the USS1
consolidated group is treated as one corporation for purposes of Sec.
1.385-3. Accordingly, on Date A in Year 1, the USS1 consolidated group
is treated as issuing DS1 Note to FS, and on Date B in Year 2, the USS1
consolidated group is treated as distributing $30x of cash to FP.
Because DS1 Note is issued by the USS1 consolidated group to FS within
the per se period as defined in Sec. 1.385-3(g)(19) with respect to the
distribution by the USS1consoldiated group of $30x cash to FP, $30x of
DS1 Note is treated as funding the distribution under Sec. 1.385-
3(b)(3)(iii)(A), and, accordingly, is treated as stock on Date B in Year
2 under Sec. 1.385-3(b)(3) and Sec. 1.385-3(d)(1)(ii). Under paragraph
(d)(3) of this section, DS1 (and not the USS1 consolidated group) is
treated as the issuer of the remaining portion of DS1 Note for purposes
of applying Sec. 1.385-3(b)(3) after DS1 ceases to be a member of the
USS1 consolidated group.
(g) Applicability date. This section applies to taxable years ending
on or after January 19, 2017.
(h) Expiration date. This section expires on October 13, 2019.
[T.D. 9790, 81 FR 72979, Oct. 21, 2016, as amended by T.D 9790, 82 FR
8168, Jan. 24, 2017]
Sec. Sec. 1.386-1.400 [Reserved]
[[Page 819]]
FINDING AIDS
--------------------------------------------------------------------
A list of CFR titles, subtitles, chapters, subchapters and parts and
an alphabetical list of agencies publishing in the CFR are included in
the CFR Index and Finding Aids volume to the Code of Federal Regulations
which is published separately and revised annually.
Table of CFR Titles and Chapters
Alphabetical List of Agencies Appearing in the CFR
Table of OMB Control Numbers
List of CFR Sections Affected
[[Page 821]]
Table of CFR Titles and Chapters
(Revised as of April 1, 2018)
Title 1--General Provisions
I Administrative Committee of the Federal Register
(Parts 1--49)
II Office of the Federal Register (Parts 50--299)
III Administrative Conference of the United States (Parts
300--399)
IV Miscellaneous Agencies (Parts 400--599)
VI National Capital Planning Commission (Parts 600--699)
Title 2--Grants and Agreements
Subtitle A--Office of Management and Budget Guidance
for Grants and Agreements
I Office of Management and Budget Governmentwide
Guidance for Grants and Agreements (Parts 2--199)
II Office of Management and Budget Guidance (Parts 200--
299)
Subtitle B--Federal Agency Regulations for Grants and
Agreements
III Department of Health and Human Services (Parts 300--
399)
IV Department of Agriculture (Parts 400--499)
VI Department of State (Parts 600--699)
VII Agency for International Development (Parts 700--799)
VIII Department of Veterans Affairs (Parts 800--899)
IX Department of Energy (Parts 900--999)
X Department of the Treasury (Parts 1000--1099)
XI Department of Defense (Parts 1100--1199)
XII Department of Transportation (Parts 1200--1299)
XIII Department of Commerce (Parts 1300--1399)
XIV Department of the Interior (Parts 1400--1499)
XV Environmental Protection Agency (Parts 1500--1599)
XVIII National Aeronautics and Space Administration (Parts
1800--1899)
XX United States Nuclear Regulatory Commission (Parts
2000--2099)
XXII Corporation for National and Community Service (Parts
2200--2299)
XXIII Social Security Administration (Parts 2300--2399)
XXIV Department of Housing and Urban Development (Parts
2400--2499)
XXV National Science Foundation (Parts 2500--2599)
XXVI National Archives and Records Administration (Parts
2600--2699)
[[Page 822]]
XXVII Small Business Administration (Parts 2700--2799)
XXVIII Department of Justice (Parts 2800--2899)
XXIX Department of Labor (Parts 2900--2999)
XXX Department of Homeland Security (Parts 3000--3099)
XXXI Institute of Museum and Library Services (Parts 3100--
3199)
XXXII National Endowment for the Arts (Parts 3200--3299)
XXXIII National Endowment for the Humanities (Parts 3300--
3399)
XXXIV Department of Education (Parts 3400--3499)
XXXV Export-Import Bank of the United States (Parts 3500--
3599)
XXXVI Office of National Drug Control Policy, Executive
Office of the President (Parts 3600--3699)
XXXVII Peace Corps (Parts 3700--3799)
LVIII Election Assistance Commission (Parts 5800--5899)
LIX Gulf Coast Ecosystem Restoration Council (Parts 5900--
5999)
Title 3--The President
I Executive Office of the President (Parts 100--199)
Title 4--Accounts
I Government Accountability Office (Parts 1--199)
Title 5--Administrative Personnel
I Office of Personnel Management (Parts 1--1199)
II Merit Systems Protection Board (Parts 1200--1299)
III Office of Management and Budget (Parts 1300--1399)
IV Office of Personnel Management and Office of the
Director of National Intelligence (Parts 1400--
1499)
V The International Organizations Employees Loyalty
Board (Parts 1500--1599)
VI Federal Retirement Thrift Investment Board (Parts
1600--1699)
VIII Office of Special Counsel (Parts 1800--1899)
IX Appalachian Regional Commission (Parts 1900--1999)
XI Armed Forces Retirement Home (Parts 2100--2199)
XIV Federal Labor Relations Authority, General Counsel of
the Federal Labor Relations Authority and Federal
Service Impasses Panel (Parts 2400--2499)
XVI Office of Government Ethics (Parts 2600--2699)
XXI Department of the Treasury (Parts 3100--3199)
XXII Federal Deposit Insurance Corporation (Parts 3200--
3299)
XXIII Department of Energy (Parts 3300--3399)
XXIV Federal Energy Regulatory Commission (Parts 3400--
3499)
XXV Department of the Interior (Parts 3500--3599)
XXVI Department of Defense (Parts 3600--3699)
[[Page 823]]
XXVIII Department of Justice (Parts 3800--3899)
XXIX Federal Communications Commission (Parts 3900--3999)
XXX Farm Credit System Insurance Corporation (Parts 4000--
4099)
XXXI Farm Credit Administration (Parts 4100--4199)
XXXIII Overseas Private Investment Corporation (Parts 4300--
4399)
XXXIV Securities and Exchange Commission (Parts 4400--4499)
XXXV Office of Personnel Management (Parts 4500--4599)
XXXVI Department of Homeland Security (Parts 4600--4699)
XXXVII Federal Election Commission (Parts 4700--4799)
XL Interstate Commerce Commission (Parts 5000--5099)
XLI Commodity Futures Trading Commission (Parts 5100--
5199)
XLII Department of Labor (Parts 5200--5299)
XLIII National Science Foundation (Parts 5300--5399)
XLV Department of Health and Human Services (Parts 5500--
5599)
XLVI Postal Rate Commission (Parts 5600--5699)
XLVII Federal Trade Commission (Parts 5700--5799)
XLVIII Nuclear Regulatory Commission (Parts 5800--5899)
XLIX Federal Labor Relations Authority (Parts 5900--5999)
L Department of Transportation (Parts 6000--6099)
LII Export-Import Bank of the United States (Parts 6200--
6299)
LIII Department of Education (Parts 6300--6399)
LIV Environmental Protection Agency (Parts 6400--6499)
LV National Endowment for the Arts (Parts 6500--6599)
LVI National Endowment for the Humanities (Parts 6600--
6699)
LVII General Services Administration (Parts 6700--6799)
LVIII Board of Governors of the Federal Reserve System
(Parts 6800--6899)
LIX National Aeronautics and Space Administration (Parts
6900--6999)
LX United States Postal Service (Parts 7000--7099)
LXI National Labor Relations Board (Parts 7100--7199)
LXII Equal Employment Opportunity Commission (Parts 7200--
7299)
LXIII Inter-American Foundation (Parts 7300--7399)
LXIV Merit Systems Protection Board (Parts 7400--7499)
LXV Department of Housing and Urban Development (Parts
7500--7599)
LXVI National Archives and Records Administration (Parts
7600--7699)
LXVII Institute of Museum and Library Services (Parts 7700--
7799)
LXVIII Commission on Civil Rights (Parts 7800--7899)
LXIX Tennessee Valley Authority (Parts 7900--7999)
LXX Court Services and Offender Supervision Agency for the
District of Columbia (Parts 8000--8099)
LXXI Consumer Product Safety Commission (Parts 8100--8199)
LXXIII Department of Agriculture (Parts 8300--8399)
[[Page 824]]
LXXIV Federal Mine Safety and Health Review Commission
(Parts 8400--8499)
LXXVI Federal Retirement Thrift Investment Board (Parts
8600--8699)
LXXVII Office of Management and Budget (Parts 8700--8799)
LXXX Federal Housing Finance Agency (Parts 9000--9099)
LXXXIII Special Inspector General for Afghanistan
Reconstruction (Parts 9300--9399)
LXXXIV Bureau of Consumer Financial Protection (Parts 9400--
9499)
LXXXVI National Credit Union Administration (Parts 9600--
9699)
XCVII Department of Homeland Security Human Resources
Management System (Department of Homeland
Security--Office of Personnel Management) (Parts
9700--9799)
XCVIII Council of the Inspectors General on Integrity and
Efficiency (Parts 9800--9899)
XCIX Military Compensation and Retirement Modernization
Commission (Parts 9900--9999)
C National Council on Disability (Parts 10000--10049)
Title 6--Domestic Security
I Department of Homeland Security, Office of the
Secretary (Parts 1--199)
X Privacy and Civil Liberties Oversight Board (Parts
1000--1099)
Title 7--Agriculture
Subtitle A--Office of the Secretary of Agriculture
(Parts 0--26)
Subtitle B--Regulations of the Department of
Agriculture
I Agricultural Marketing Service (Standards,
Inspections, Marketing Practices), Department of
Agriculture (Parts 27--209)
II Food and Nutrition Service, Department of Agriculture
(Parts 210--299)
III Animal and Plant Health Inspection Service, Department
of Agriculture (Parts 300--399)
IV Federal Crop Insurance Corporation, Department of
Agriculture (Parts 400--499)
V Agricultural Research Service, Department of
Agriculture (Parts 500--599)
VI Natural Resources Conservation Service, Department of
Agriculture (Parts 600--699)
VII Farm Service Agency, Department of Agriculture (Parts
700--799)
VIII Grain Inspection, Packers and Stockyards
Administration (Federal Grain Inspection Service),
Department of Agriculture (Parts 800--899)
IX Agricultural Marketing Service (Marketing Agreements
and Orders; Fruits, Vegetables, Nuts), Department
of Agriculture (Parts 900--999)
[[Page 825]]
X Agricultural Marketing Service (Marketing Agreements
and Orders; Milk), Department of Agriculture
(Parts 1000--1199)
XI Agricultural Marketing Service (Marketing Agreements
and Orders; Miscellaneous Commodities), Department
of Agriculture (Parts 1200--1299)
XIV Commodity Credit Corporation, Department of
Agriculture (Parts 1400--1499)
XV Foreign Agricultural Service, Department of
Agriculture (Parts 1500--1599)
XVI Rural Telephone Bank, Department of Agriculture (Parts
1600--1699)
XVII Rural Utilities Service, Department of Agriculture
(Parts 1700--1799)
XVIII Rural Housing Service, Rural Business-Cooperative
Service, Rural Utilities Service, and Farm Service
Agency, Department of Agriculture (Parts 1800--
2099)
XX Local Television Loan Guarantee Board (Parts 2200--
2299)
XXV Office of Advocacy and Outreach, Department of
Agriculture (Parts 2500--2599)
XXVI Office of Inspector General, Department of Agriculture
(Parts 2600--2699)
XXVII Office of Information Resources Management, Department
of Agriculture (Parts 2700--2799)
XXVIII Office of Operations, Department of Agriculture (Parts
2800--2899)
XXIX Office of Energy Policy and New Uses, Department of
Agriculture (Parts 2900--2999)
XXX Office of the Chief Financial Officer, Department of
Agriculture (Parts 3000--3099)
XXXI Office of Environmental Quality, Department of
Agriculture (Parts 3100--3199)
XXXII Office of Procurement and Property Management,
Department of Agriculture (Parts 3200--3299)
XXXIII Office of Transportation, Department of Agriculture
(Parts 3300--3399)
XXXIV National Institute of Food and Agriculture (Parts
3400--3499)
XXXV Rural Housing Service, Department of Agriculture
(Parts 3500--3599)
XXXVI National Agricultural Statistics Service, Department
of Agriculture (Parts 3600--3699)
XXXVII Economic Research Service, Department of Agriculture
(Parts 3700--3799)
XXXVIII World Agricultural Outlook Board, Department of
Agriculture (Parts 3800--3899)
XLI [Reserved]
XLII Rural Business-Cooperative Service and Rural Utilities
Service, Department of Agriculture (Parts 4200--
4299)
[[Page 826]]
Title 8--Aliens and Nationality
I Department of Homeland Security (Immigration and
Naturalization) (Parts 1--499)
V Executive Office for Immigration Review, Department of
Justice (Parts 1000--1399)
Title 9--Animals and Animal Products
I Animal and Plant Health Inspection Service, Department
of Agriculture (Parts 1--199)
II Grain Inspection, Packers and Stockyards
Administration (Packers and Stockyards Programs),
Department of Agriculture (Parts 200--299)
III Food Safety and Inspection Service, Department of
Agriculture (Parts 300--599)
Title 10--Energy
I Nuclear Regulatory Commission (Parts 0--199)
II Department of Energy (Parts 200--699)
III Department of Energy (Parts 700--999)
X Department of Energy (General Provisions) (Parts
1000--1099)
XIII Nuclear Waste Technical Review Board (Parts 1300--
1399)
XVII Defense Nuclear Facilities Safety Board (Parts 1700--
1799)
XVIII Northeast Interstate Low-Level Radioactive Waste
Commission (Parts 1800--1899)
Title 11--Federal Elections
I Federal Election Commission (Parts 1--9099)
II Election Assistance Commission (Parts 9400--9499)
Title 12--Banks and Banking
I Comptroller of the Currency, Department of the
Treasury (Parts 1--199)
II Federal Reserve System (Parts 200--299)
III Federal Deposit Insurance Corporation (Parts 300--399)
IV Export-Import Bank of the United States (Parts 400--
499)
V Office of Thrift Supervision, Department of the
Treasury (Parts 500--599)
VI Farm Credit Administration (Parts 600--699)
VII National Credit Union Administration (Parts 700--799)
VIII Federal Financing Bank (Parts 800--899)
IX Federal Housing Finance Board (Parts 900--999)
X Bureau of Consumer Financial Protection (Parts 1000--
1099)
XI Federal Financial Institutions Examination Council
(Parts 1100--1199)
XII Federal Housing Finance Agency (Parts 1200--1299)
[[Page 827]]
XIII Financial Stability Oversight Council (Parts 1300--
1399)
XIV Farm Credit System Insurance Corporation (Parts 1400--
1499)
XV Department of the Treasury (Parts 1500--1599)
XVI Office of Financial Research (Parts 1600--1699)
XVII Office of Federal Housing Enterprise Oversight,
Department of Housing and Urban Development (Parts
1700--1799)
XVIII Community Development Financial Institutions Fund,
Department of the Treasury (Parts 1800--1899)
Title 13--Business Credit and Assistance
I Small Business Administration (Parts 1--199)
III Economic Development Administration, Department of
Commerce (Parts 300--399)
IV Emergency Steel Guarantee Loan Board (Parts 400--499)
V Emergency Oil and Gas Guaranteed Loan Board (Parts
500--599)
Title 14--Aeronautics and Space
I Federal Aviation Administration, Department of
Transportation (Parts 1--199)
II Office of the Secretary, Department of Transportation
(Aviation Proceedings) (Parts 200--399)
III Commercial Space Transportation, Federal Aviation
Administration, Department of Transportation
(Parts 400--1199)
V National Aeronautics and Space Administration (Parts
1200--1299)
VI Air Transportation System Stabilization (Parts 1300--
1399)
Title 15--Commerce and Foreign Trade
Subtitle A--Office of the Secretary of Commerce (Parts
0--29)
Subtitle B--Regulations Relating to Commerce and
Foreign Trade
I Bureau of the Census, Department of Commerce (Parts
30--199)
II National Institute of Standards and Technology,
Department of Commerce (Parts 200--299)
III International Trade Administration, Department of
Commerce (Parts 300--399)
IV Foreign-Trade Zones Board, Department of Commerce
(Parts 400--499)
VII Bureau of Industry and Security, Department of
Commerce (Parts 700--799)
VIII Bureau of Economic Analysis, Department of Commerce
(Parts 800--899)
IX National Oceanic and Atmospheric Administration,
Department of Commerce (Parts 900--999)
[[Page 828]]
XI National Technical Information Service, Department of
Commerce (Parts 1100--1199)
XIII East-West Foreign Trade Board (Parts 1300--1399)
XIV Minority Business Development Agency (Parts 1400--
1499)
Subtitle C--Regulations Relating to Foreign Trade
Agreements
XX Office of the United States Trade Representative
(Parts 2000--2099)
Subtitle D--Regulations Relating to Telecommunications
and Information
XXIII National Telecommunications and Information
Administration, Department of Commerce (Parts
2300--2399) [Reserved]
Title 16--Commercial Practices
I Federal Trade Commission (Parts 0--999)
II Consumer Product Safety Commission (Parts 1000--1799)
Title 17--Commodity and Securities Exchanges
I Commodity Futures Trading Commission (Parts 1--199)
II Securities and Exchange Commission (Parts 200--399)
IV Department of the Treasury (Parts 400--499)
Title 18--Conservation of Power and Water Resources
I Federal Energy Regulatory Commission, Department of
Energy (Parts 1--399)
III Delaware River Basin Commission (Parts 400--499)
VI Water Resources Council (Parts 700--799)
VIII Susquehanna River Basin Commission (Parts 800--899)
XIII Tennessee Valley Authority (Parts 1300--1399)
Title 19--Customs Duties
I U.S. Customs and Border Protection, Department of
Homeland Security; Department of the Treasury
(Parts 0--199)
II United States International Trade Commission (Parts
200--299)
III International Trade Administration, Department of
Commerce (Parts 300--399)
IV U.S. Immigration and Customs Enforcement, Department
of Homeland Security (Parts 400--599) [Reserved]
Title 20--Employees' Benefits
I Office of Workers' Compensation Programs, Department
of Labor (Parts 1--199)
II Railroad Retirement Board (Parts 200--399)
[[Page 829]]
III Social Security Administration (Parts 400--499)
IV Employees' Compensation Appeals Board, Department of
Labor (Parts 500--599)
V Employment and Training Administration, Department of
Labor (Parts 600--699)
VI Office of Workers' Compensation Programs, Department
of Labor (Parts 700--799)
VII Benefits Review Board, Department of Labor (Parts
800--899)
VIII Joint Board for the Enrollment of Actuaries (Parts
900--999)
IX Office of the Assistant Secretary for Veterans'
Employment and Training Service, Department of
Labor (Parts 1000--1099)
Title 21--Food and Drugs
I Food and Drug Administration, Department of Health and
Human Services (Parts 1--1299)
II Drug Enforcement Administration, Department of Justice
(Parts 1300--1399)
III Office of National Drug Control Policy (Parts 1400--
1499)
Title 22--Foreign Relations
I Department of State (Parts 1--199)
II Agency for International Development (Parts 200--299)
III Peace Corps (Parts 300--399)
IV International Joint Commission, United States and
Canada (Parts 400--499)
V Broadcasting Board of Governors (Parts 500--599)
VII Overseas Private Investment Corporation (Parts 700--
799)
IX Foreign Service Grievance Board (Parts 900--999)
X Inter-American Foundation (Parts 1000--1099)
XI International Boundary and Water Commission, United
States and Mexico, United States Section (Parts
1100--1199)
XII United States International Development Cooperation
Agency (Parts 1200--1299)
XIII Millennium Challenge Corporation (Parts 1300--1399)
XIV Foreign Service Labor Relations Board; Federal Labor
Relations Authority; General Counsel of the
Federal Labor Relations Authority; and the Foreign
Service Impasse Disputes Panel (Parts 1400--1499)
XV African Development Foundation (Parts 1500--1599)
XVI Japan-United States Friendship Commission (Parts
1600--1699)
XVII United States Institute of Peace (Parts 1700--1799)
Title 23--Highways
I Federal Highway Administration, Department of
Transportation (Parts 1--999)
[[Page 830]]
II National Highway Traffic Safety Administration and
Federal Highway Administration, Department of
Transportation (Parts 1200--1299)
III National Highway Traffic Safety Administration,
Department of Transportation (Parts 1300--1399)
Title 24--Housing and Urban Development
Subtitle A--Office of the Secretary, Department of
Housing and Urban Development (Parts 0--99)
Subtitle B--Regulations Relating to Housing and Urban
Development
I Office of Assistant Secretary for Equal Opportunity,
Department of Housing and Urban Development (Parts
100--199)
II Office of Assistant Secretary for Housing-Federal
Housing Commissioner, Department of Housing and
Urban Development (Parts 200--299)
III Government National Mortgage Association, Department
of Housing and Urban Development (Parts 300--399)
IV Office of Housing and Office of Multifamily Housing
Assistance Restructuring, Department of Housing
and Urban Development (Parts 400--499)
V Office of Assistant Secretary for Community Planning
and Development, Department of Housing and Urban
Development (Parts 500--599)
VI Office of Assistant Secretary for Community Planning
and Development, Department of Housing and Urban
Development (Parts 600--699) [Reserved]
VII Office of the Secretary, Department of Housing and
Urban Development (Housing Assistance Programs and
Public and Indian Housing Programs) (Parts 700--
799)
VIII Office of the Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Section 8 Housing Assistance
Programs, Section 202 Direct Loan Program, Section
202 Supportive Housing for the Elderly Program and
Section 811 Supportive Housing for Persons With
Disabilities Program) (Parts 800--899)
IX Office of Assistant Secretary for Public and Indian
Housing, Department of Housing and Urban
Development (Parts 900--1699)
X Office of Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Interstate Land Sales
Registration Program) (Parts 1700--1799)
XII Office of Inspector General, Department of Housing and
Urban Development (Parts 2000--2099)
XV Emergency Mortgage Insurance and Loan Programs,
Department of Housing and Urban Development (Parts
2700--2799) [Reserved]
XX Office of Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Parts 3200--3899)
[[Page 831]]
XXIV Board of Directors of the HOPE for Homeowners Program
(Parts 4000--4099) [Reserved]
XXV Neighborhood Reinvestment Corporation (Parts 4100--
4199)
Title 25--Indians
I Bureau of Indian Affairs, Department of the Interior
(Parts 1--299)
II Indian Arts and Crafts Board, Department of the
Interior (Parts 300--399)
III National Indian Gaming Commission, Department of the
Interior (Parts 500--599)
IV Office of Navajo and Hopi Indian Relocation (Parts
700--899)
V Bureau of Indian Affairs, Department of the Interior,
and Indian Health Service, Department of Health
and Human Services (Parts 900--999)
VI Office of the Assistant Secretary, Indian Affairs,
Department of the Interior (Parts 1000--1199)
VII Office of the Special Trustee for American Indians,
Department of the Interior (Parts 1200--1299)
Title 26--Internal Revenue
I Internal Revenue Service, Department of the Treasury
(Parts 1--End)
Title 27--Alcohol, Tobacco Products and Firearms
I Alcohol and Tobacco Tax and Trade Bureau, Department
of the Treasury (Parts 1--399)
II Bureau of Alcohol, Tobacco, Firearms, and Explosives,
Department of Justice (Parts 400--699)
Title 28--Judicial Administration
I Department of Justice (Parts 0--299)
III Federal Prison Industries, Inc., Department of Justice
(Parts 300--399)
V Bureau of Prisons, Department of Justice (Parts 500--
599)
VI Offices of Independent Counsel, Department of Justice
(Parts 600--699)
VII Office of Independent Counsel (Parts 700--799)
VIII Court Services and Offender Supervision Agency for the
District of Columbia (Parts 800--899)
IX National Crime Prevention and Privacy Compact Council
(Parts 900--999)
XI Department of Justice and Department of State (Parts
1100--1199)
[[Page 832]]
Title 29--Labor
Subtitle A--Office of the Secretary of Labor (Parts
0--99)
Subtitle B--Regulations Relating to Labor
I National Labor Relations Board (Parts 100--199)
II Office of Labor-Management Standards, Department of
Labor (Parts 200--299)
III National Railroad Adjustment Board (Parts 300--399)
IV Office of Labor-Management Standards, Department of
Labor (Parts 400--499)
V Wage and Hour Division, Department of Labor (Parts
500--899)
IX Construction Industry Collective Bargaining Commission
(Parts 900--999)
X National Mediation Board (Parts 1200--1299)
XII Federal Mediation and Conciliation Service (Parts
1400--1499)
XIV Equal Employment Opportunity Commission (Parts 1600--
1699)
XVII Occupational Safety and Health Administration,
Department of Labor (Parts 1900--1999)
XX Occupational Safety and Health Review Commission
(Parts 2200--2499)
XXV Employee Benefits Security Administration, Department
of Labor (Parts 2500--2599)
XXVII Federal Mine Safety and Health Review Commission
(Parts 2700--2799)
XL Pension Benefit Guaranty Corporation (Parts 4000--
4999)
Title 30--Mineral Resources
I Mine Safety and Health Administration, Department of
Labor (Parts 1--199)
II Bureau of Safety and Environmental Enforcement,
Department of the Interior (Parts 200--299)
IV Geological Survey, Department of the Interior (Parts
400--499)
V Bureau of Ocean Energy Management, Department of the
Interior (Parts 500--599)
VII Office of Surface Mining Reclamation and Enforcement,
Department of the Interior (Parts 700--999)
XII Office of Natural Resources Revenue, Department of the
Interior (Parts 1200--1299)
Title 31--Money and Finance: Treasury
Subtitle A--Office of the Secretary of the Treasury
(Parts 0--50)
Subtitle B--Regulations Relating to Money and Finance
I Monetary Offices, Department of the Treasury (Parts
51--199)
II Fiscal Service, Department of the Treasury (Parts
200--399)
IV Secret Service, Department of the Treasury (Parts
400--499)
V Office of Foreign Assets Control, Department of the
Treasury (Parts 500--599)
[[Page 833]]
VI Bureau of Engraving and Printing, Department of the
Treasury (Parts 600--699)
VII Federal Law Enforcement Training Center, Department of
the Treasury (Parts 700--799)
VIII Office of Investment Security, Department of the
Treasury (Parts 800--899)
IX Federal Claims Collection Standards (Department of the
Treasury--Department of Justice) (Parts 900--999)
X Financial Crimes Enforcement Network, Department of
the Treasury (Parts 1000--1099)
Title 32--National Defense
Subtitle A--Department of Defense
I Office of the Secretary of Defense (Parts 1--399)
V Department of the Army (Parts 400--699)
VI Department of the Navy (Parts 700--799)
VII Department of the Air Force (Parts 800--1099)
Subtitle B--Other Regulations Relating to National
Defense
XII Defense Logistics Agency (Parts 1200--1299)
XVI Selective Service System (Parts 1600--1699)
XVII Office of the Director of National Intelligence (Parts
1700--1799)
XVIII National Counterintelligence Center (Parts 1800--1899)
XIX Central Intelligence Agency (Parts 1900--1999)
XX Information Security Oversight Office, National
Archives and Records Administration (Parts 2000--
2099)
XXI National Security Council (Parts 2100--2199)
XXIV Office of Science and Technology Policy (Parts 2400--
2499)
XXVII Office for Micronesian Status Negotiations (Parts
2700--2799)
XXVIII Office of the Vice President of the United States
(Parts 2800--2899)
Title 33--Navigation and Navigable Waters
I Coast Guard, Department of Homeland Security (Parts
1--199)
II Corps of Engineers, Department of the Army, Department
of Defense (Parts 200--399)
IV Saint Lawrence Seaway Development Corporation,
Department of Transportation (Parts 400--499)
Title 34--Education
Subtitle A--Office of the Secretary, Department of
Education (Parts 1--99)
Subtitle B--Regulations of the Offices of the
Department of Education
I Office for Civil Rights, Department of Education
(Parts 100--199)
[[Page 834]]
II Office of Elementary and Secondary Education,
Department of Education (Parts 200--299)
III Office of Special Education and Rehabilitative
Services, Department of Education (Parts 300--399)
IV Office of Career, Technical and Adult Education,
Department of Education (Parts 400--499)
V Office of Bilingual Education and Minority Languages
Affairs, Department of Education (Parts 500--599)
[Reserved]
VI Office of Postsecondary Education, Department of
Education (Parts 600--699)
VII Office of Educational Research and Improvement,
Department of Education (Parts 700--799)
[Reserved]
Subtitle C--Regulations Relating to Education
XI (Parts 1100--1199) [Reserved]
XII National Council on Disability (Parts 1200--1299)
Title 35 [Reserved]
Title 36--Parks, Forests, and Public Property
I National Park Service, Department of the Interior
(Parts 1--199)
II Forest Service, Department of Agriculture (Parts 200--
299)
III Corps of Engineers, Department of the Army (Parts
300--399)
IV American Battle Monuments Commission (Parts 400--499)
V Smithsonian Institution (Parts 500--599)
VI [Reserved]
VII Library of Congress (Parts 700--799)
VIII Advisory Council on Historic Preservation (Parts 800--
899)
IX Pennsylvania Avenue Development Corporation (Parts
900--999)
X Presidio Trust (Parts 1000--1099)
XI Architectural and Transportation Barriers Compliance
Board (Parts 1100--1199)
XII National Archives and Records Administration (Parts
1200--1299)
XV Oklahoma City National Memorial Trust (Parts 1500--
1599)
XVI Morris K. Udall Scholarship and Excellence in National
Environmental Policy Foundation (Parts 1600--1699)
Title 37--Patents, Trademarks, and Copyrights
I United States Patent and Trademark Office, Department
of Commerce (Parts 1--199)
II U.S. Copyright Office, Library of Congress (Parts
200--299)
III Copyright Royalty Board, Library of Congress (Parts
300--399)
IV National Institute of Standards and Technology,
Department of Commerce (Parts 400--599)
[[Page 835]]
Title 38--Pensions, Bonuses, and Veterans' Relief
I Department of Veterans Affairs (Parts 0--199)
II Armed Forces Retirement Home (Parts 200--299)
Title 39--Postal Service
I United States Postal Service (Parts 1--999)
III Postal Regulatory Commission (Parts 3000--3099)
Title 40--Protection of Environment
I Environmental Protection Agency (Parts 1--1099)
IV Environmental Protection Agency and Department of
Justice (Parts 1400--1499)
V Council on Environmental Quality (Parts 1500--1599)
VI Chemical Safety and Hazard Investigation Board (Parts
1600--1699)
VII Environmental Protection Agency and Department of
Defense; Uniform National Discharge Standards for
Vessels of the Armed Forces (Parts 1700--1799)
VIII Gulf Coast Ecosystem Restoration Council (Parts 1800--
1899)
Title 41--Public Contracts and Property Management
Subtitle A--Federal Procurement Regulations System
[Note]
Subtitle B--Other Provisions Relating to Public
Contracts
50 Public Contracts, Department of Labor (Parts 50-1--50-
999)
51 Committee for Purchase From People Who Are Blind or
Severely Disabled (Parts 51-1--51-99)
60 Office of Federal Contract Compliance Programs, Equal
Employment Opportunity, Department of Labor (Parts
60-1--60-999)
61 Office of the Assistant Secretary for Veterans'
Employment and Training Service, Department of
Labor (Parts 61-1--61-999)
62--100 [Reserved]
Subtitle C--Federal Property Management Regulations
System
101 Federal Property Management Regulations (Parts 101-1--
101-99)
102 Federal Management Regulation (Parts 102-1--102-299)
103--104 [Reserved]
105 General Services Administration (Parts 105-1--105-999)
109 Department of Energy Property Management Regulations
(Parts 109-1--109-99)
114 Department of the Interior (Parts 114-1--114-99)
115 Environmental Protection Agency (Parts 115-1--115-99)
128 Department of Justice (Parts 128-1--128-99)
129--200 [Reserved]
Subtitle D--Other Provisions Relating to Property
Management [Reserved]
[[Page 836]]
Subtitle E--Federal Information Resources Management
Regulations System [Reserved]
Subtitle F--Federal Travel Regulation System
300 General (Parts 300-1--300-99)
301 Temporary Duty (TDY) Travel Allowances (Parts 301-1--
301-99)
302 Relocation Allowances (Parts 302-1--302-99)
303 Payment of Expenses Connected with the Death of
Certain Employees (Part 303-1--303-99)
304 Payment of Travel Expenses from a Non-Federal Source
(Parts 304-1--304-99)
Title 42--Public Health
I Public Health Service, Department of Health and Human
Services (Parts 1--199)
ii--III [Reserved]
IV Centers for Medicare & Medicaid Services, Department
of Health and Human Services (Parts 400--699)
V Office of Inspector General-Health Care, Department of
Health and Human Services (Parts 1000--1099)
Title 43--Public Lands: Interior
Subtitle A--Office of the Secretary of the Interior
(Parts 1--199)
Subtitle B--Regulations Relating to Public Lands
I Bureau of Reclamation, Department of the Interior
(Parts 400--999)
II Bureau of Land Management, Department of the Interior
(Parts 1000--9999)
III Utah Reclamation Mitigation and Conservation
Commission (Parts 10000--10099)
Title 44--Emergency Management and Assistance
I Federal Emergency Management Agency, Department of
Homeland Security (Parts 0--399)
IV Department of Commerce and Department of
Transportation (Parts 400--499)
Title 45--Public Welfare
Subtitle A--Department of Health and Human Services
(Parts 1--199)
Subtitle B--Regulations Relating to Public Welfare
II Office of Family Assistance (Assistance Programs),
Administration for Children and Families,
Department of Health and Human Services (Parts
200--299)
[[Page 837]]
III Office of Child Support Enforcement (Child Support
Enforcement Program), Administration for Children
and Families, Department of Health and Human
Services (Parts 300--399)
IV Office of Refugee Resettlement, Administration for
Children and Families, Department of Health and
Human Services (Parts 400--499)
V Foreign Claims Settlement Commission of the United
States, Department of Justice (Parts 500--599)
VI National Science Foundation (Parts 600--699)
VII Commission on Civil Rights (Parts 700--799)
VIII Office of Personnel Management (Parts 800--899)
IX Denali Commission (Parts 900--999)
X Office of Community Services, Administration for
Children and Families, Department of Health and
Human Services (Parts 1000--1099)
XI National Foundation on the Arts and the Humanities
(Parts 1100--1199)
XII Corporation for National and Community Service (Parts
1200--1299)
XIII Administration for Children and Families, Department
of Health and Human Services (Parts 1300--1399)
XVI Legal Services Corporation (Parts 1600--1699)
XVII National Commission on Libraries and Information
Science (Parts 1700--1799)
XVIII Harry S. Truman Scholarship Foundation (Parts 1800--
1899)
XXI Commission of Fine Arts (Parts 2100--2199)
XXIII Arctic Research Commission (Parts 2300--2399)
XXIV James Madison Memorial Fellowship Foundation (Parts
2400--2499)
XXV Corporation for National and Community Service (Parts
2500--2599)
Title 46--Shipping
I Coast Guard, Department of Homeland Security (Parts
1--199)
II Maritime Administration, Department of Transportation
(Parts 200--399)
III Coast Guard (Great Lakes Pilotage), Department of
Homeland Security (Parts 400--499)
IV Federal Maritime Commission (Parts 500--599)
Title 47--Telecommunication
I Federal Communications Commission (Parts 0--199)
II Office of Science and Technology Policy and National
Security Council (Parts 200--299)
III National Telecommunications and Information
Administration, Department of Commerce (Parts
300--399)
[[Page 838]]
IV National Telecommunications and Information
Administration, Department of Commerce, and
National Highway Traffic Safety Administration,
Department of Transportation (Parts 400--499)
V The First Responder Network Authority (Parts 500--599)
Title 48--Federal Acquisition Regulations System
1 Federal Acquisition Regulation (Parts 1--99)
2 Defense Acquisition Regulations System, Department of
Defense (Parts 200--299)
3 Department of Health and Human Services (Parts 300--
399)
4 Department of Agriculture (Parts 400--499)
5 General Services Administration (Parts 500--599)
6 Department of State (Parts 600--699)
7 Agency for International Development (Parts 700--799)
8 Department of Veterans Affairs (Parts 800--899)
9 Department of Energy (Parts 900--999)
10 Department of the Treasury (Parts 1000--1099)
12 Department of Transportation (Parts 1200--1299)
13 Department of Commerce (Parts 1300--1399)
14 Department of the Interior (Parts 1400--1499)
15 Environmental Protection Agency (Parts 1500--1599)
16 Office of Personnel Management, Federal Employees
Health Benefits Acquisition Regulation (Parts
1600--1699)
17 Office of Personnel Management (Parts 1700--1799)
18 National Aeronautics and Space Administration (Parts
1800--1899)
19 Broadcasting Board of Governors (Parts 1900--1999)
20 Nuclear Regulatory Commission (Parts 2000--2099)
21 Office of Personnel Management, Federal Employees
Group Life Insurance Federal Acquisition
Regulation (Parts 2100--2199)
23 Social Security Administration (Parts 2300--2399)
24 Department of Housing and Urban Development (Parts
2400--2499)
25 National Science Foundation (Parts 2500--2599)
28 Department of Justice (Parts 2800--2899)
29 Department of Labor (Parts 2900--2999)
30 Department of Homeland Security, Homeland Security
Acquisition Regulation (HSAR) (Parts 3000--3099)
34 Department of Education Acquisition Regulation (Parts
3400--3499)
51 Department of the Army Acquisition Regulations (Parts
5100--5199)
52 Department of the Navy Acquisition Regulations (Parts
5200--5299)
53 Department of the Air Force Federal Acquisition
Regulation Supplement (Parts 5300--5399)
[Reserved]
[[Page 839]]
54 Defense Logistics Agency, Department of Defense (Parts
5400--5499)
57 African Development Foundation (Parts 5700--5799)
61 Civilian Board of Contract Appeals, General Services
Administration (Parts 6100--6199)
99 Cost Accounting Standards Board, Office of Federal
Procurement Policy, Office of Management and
Budget (Parts 9900--9999)
Title 49--Transportation
Subtitle A--Office of the Secretary of Transportation
(Parts 1--99)
Subtitle B--Other Regulations Relating to
Transportation
I Pipeline and Hazardous Materials Safety
Administration, Department of Transportation
(Parts 100--199)
II Federal Railroad Administration, Department of
Transportation (Parts 200--299)
III Federal Motor Carrier Safety Administration,
Department of Transportation (Parts 300--399)
IV Coast Guard, Department of Homeland Security (Parts
400--499)
V National Highway Traffic Safety Administration,
Department of Transportation (Parts 500--599)
VI Federal Transit Administration, Department of
Transportation (Parts 600--699)
VII National Railroad Passenger Corporation (AMTRAK)
(Parts 700--799)
VIII National Transportation Safety Board (Parts 800--999)
X Surface Transportation Board (Parts 1000--1399)
XI Research and Innovative Technology Administration,
Department of Transportation (Parts 1400--1499)
[Reserved]
XII Transportation Security Administration, Department of
Homeland Security (Parts 1500--1699)
Title 50--Wildlife and Fisheries
I United States Fish and Wildlife Service, Department of
the Interior (Parts 1--199)
II National Marine Fisheries Service, National Oceanic
and Atmospheric Administration, Department of
Commerce (Parts 200--299)
III International Fishing and Related Activities (Parts
300--399)
IV Joint Regulations (United States Fish and Wildlife
Service, Department of the Interior and National
Marine Fisheries Service, National Oceanic and
Atmospheric Administration, Department of
Commerce); Endangered Species Committee
Regulations (Parts 400--499)
V Marine Mammal Commission (Parts 500--599)
[[Page 840]]
VI Fishery Conservation and Management, National Oceanic
and Atmospheric Administration, Department of
Commerce (Parts 600--699)
[[Page 841]]
Alphabetical List of Agencies Appearing in the CFR
(Revised as of April 1, 2018)
CFR Title, Subtitle or
Agency Chapter
Administrative Committee of the Federal Register 1, I
Administrative Conference of the United States 1, III
Advisory Council on Historic Preservation 36, VIII
Advocacy and Outreach, Office of 7, XXV
Afghanistan Reconstruction, Special Inspector 5, LXXXIII
General for
African Development Foundation 22, XV
Federal Acquisition Regulation 48, 57
Agency for International Development 2, VII; 22, II
Federal Acquisition Regulation 48, 7
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Agriculture Department 2, IV; 5, LXXIII
Advocacy and Outreach, Office of 7, XXV
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Animal and Plant Health Inspection Service 7, III; 9, I
Chief Financial Officer, Office of 7, XXX
Commodity Credit Corporation 7, XIV
Economic Research Service 7, XXXVII
Energy Policy and New Uses, Office of 2, IX; 7, XXIX
Environmental Quality, Office of 7, XXXI
Farm Service Agency 7, VII, XVIII
Federal Acquisition Regulation 48, 4
Federal Crop Insurance Corporation 7, IV
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Forest Service 36, II
Grain Inspection, Packers and Stockyards 7, VIII; 9, II
Administration
Information Resources Management, Office of 7, XXVII
Inspector General, Office of 7, XXVI
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
National Institute of Food and Agriculture 7, XXXIV
Natural Resources Conservation Service 7, VI
Operations, Office of 7, XXVIII
Procurement and Property Management, Office of 7, XXXII
Rural Business-Cooperative Service 7, XVIII, XLII
Rural Development Administration 7, XLII
Rural Housing Service 7, XVIII, XXXV
Rural Telephone Bank 7, XVI
Rural Utilities Service 7, XVII, XVIII, XLII
Secretary of Agriculture, Office of 7, Subtitle A
Transportation, Office of 7, XXXIII
World Agricultural Outlook Board 7, XXXVIII
Air Force Department 32, VII
Federal Acquisition Regulation Supplement 48, 53
Air Transportation Stabilization Board 14, VI
Alcohol and Tobacco Tax and Trade Bureau 27, I
Alcohol, Tobacco, Firearms, and Explosives, 27, II
Bureau of
AMTRAK 49, VII
American Battle Monuments Commission 36, IV
American Indians, Office of the Special Trustee 25, VII
[[Page 842]]
Animal and Plant Health Inspection Service 7, III; 9, I
Appalachian Regional Commission 5, IX
Architectural and Transportation Barriers 36, XI
Compliance Board
Arctic Research Commission 45, XXIII
Armed Forces Retirement Home 5, XI
Army Department 32, V
Engineers, Corps of 33, II; 36, III
Federal Acquisition Regulation 48, 51
Bilingual Education and Minority Languages 34, V
Affairs, Office of
Blind or Severely Disabled, Committee for 41, 51
Purchase from People Who Are
Broadcasting Board of Governors 22, V
Federal Acquisition Regulation 48, 19
Career, Technical and Adult Education, Office of 34, IV
Census Bureau 15, I
Centers for Medicare & Medicaid Services 42, IV
Central Intelligence Agency 32, XIX
Chemical Safety and Hazardous Investigation 40, VI
Board
Chief Financial Officer, Office of 7, XXX
Child Support Enforcement, Office of 45, III
Children and Families, Administration for 45, II, III, IV, X, XIII
Civil Rights, Commission on 5, LXVIII; 45, VII
Civil Rights, Office for 34, I
Council of the Inspectors General on Integrity 5, XCVIII
and Efficiency
Court Services and Offender Supervision Agency 5, LXX
for the District of Columbia
Coast Guard 33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage) 46, III
Commerce Department 2, XIII; 44, IV; 50, VI
Census Bureau 15, I
Economic Analysis, Bureau of 15, VIII
Economic Development Administration 13, III
Emergency Management and Assistance 44, IV
Federal Acquisition Regulation 48, 13
Foreign-Trade Zones Board 15, IV
Industry and Security, Bureau of 15, VII
International Trade Administration 15, III; 19, III
National Institute of Standards and Technology 15, II; 37, IV
National Marine Fisheries Service 50, II, IV
National Oceanic and Atmospheric 15, IX; 50, II, III, IV,
Administration VI
National Technical Information Service 15, XI
National Telecommunications and Information 15, XXIII; 47, III, IV
Administration
National Weather Service 15, IX
Patent and Trademark Office, United States 37, I
Secretary of Commerce, Office of 15, Subtitle A
Commercial Space Transportation 14, III
Commodity Credit Corporation 7, XIV
Commodity Futures Trading Commission 5, XLI; 17, I
Community Planning and Development, Office of 24, V, VI
Assistant Secretary for
Community Services, Office of 45, X
Comptroller of the Currency 12, I
Construction Industry Collective Bargaining 29, IX
Commission
Consumer Financial Protection Bureau 5, LXXXIV; 12, X
Consumer Product Safety Commission 5, LXXI; 16, II
Copyright Royalty Board 37, III
Corporation for National and Community Service 2, XXII; 45, XII, XXV
Cost Accounting Standards Board 48, 99
Council on Environmental Quality 40, V
Court Services and Offender Supervision Agency 5, LXX; 28, VIII
for the District of Columbia
Customs and Border Protection 19, I
Defense Contract Audit Agency 32, I
Defense Department 2, XI; 5, XXVI; 32,
Subtitle A; 40, VII
Advanced Research Projects Agency 32, I
[[Page 843]]
Air Force Department 32, VII
Army Department 32, V; 33, II; 36, III;
48, 51
Defense Acquisition Regulations System 48, 2
Defense Intelligence Agency 32, I
Defense Logistics Agency 32, I, XII; 48, 54
Engineers, Corps of 33, II; 36, III
National Imagery and Mapping Agency 32, I
Navy Department 32, VI; 48, 52
Secretary of Defense, Office of 2, XI; 32, I
Defense Contract Audit Agency 32, I
Defense Intelligence Agency 32, I
Defense Logistics Agency 32, XII; 48, 54
Defense Nuclear Facilities Safety Board 10, XVII
Delaware River Basin Commission 18, III
Denali Commission 45, IX
District of Columbia, Court Services and 5, LXX; 28, VIII
Offender Supervision Agency for the
Drug Enforcement Administration 21, II
East-West Foreign Trade Board 15, XIII
Economic Analysis, Bureau of 15, VIII
Economic Development Administration 13, III
Economic Research Service 7, XXXVII
Education, Department of 2, XXXIV; 5, LIII
Bilingual Education and Minority Languages 34, V
Affairs, Office of
Career, Technical and Adult Education, Office 34, IV
of
Civil Rights, Office for 34, I
Educational Research and Improvement, Office 34, VII
of
Elementary and Secondary Education, Office of 34, II
Federal Acquisition Regulation 48, 34
Postsecondary Education, Office of 34, VI
Secretary of Education, Office of 34, Subtitle A
Special Education and Rehabilitative Services, 34, III
Office of
Career, Technical, and Adult Education, Office 34, IV
of
Educational Research and Improvement, Office of 34, VII
Election Assistance Commission 2, LVIII; 11, II
Elementary and Secondary Education, Office of 34, II
Emergency Oil and Gas Guaranteed Loan Board 13, V
Emergency Steel Guarantee Loan Board 13, IV
Employee Benefits Security Administration 29, XXV
Employees' Compensation Appeals Board 20, IV
Employees Loyalty Board 5, V
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Endangered Species Committee 50, IV
Energy, Department of 2, IX; 5, XXIII; 10, II,
III, X
Federal Acquisition Regulation 48, 9
Federal Energy Regulatory Commission 5, XXIV; 18, I
Property Management Regulations 41, 109
Energy, Office of 7, XXIX
Engineers, Corps of 33, II; 36, III
Engraving and Printing, Bureau of 31, VI
Environmental Protection Agency 2, XV; 5, LIV; 40, I, IV,
VII
Federal Acquisition Regulation 48, 15
Property Management Regulations 41, 115
Environmental Quality, Office of 7, XXXI
Equal Employment Opportunity Commission 5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary 24, I
for
Executive Office of the President 3, I
Environmental Quality, Council on 40, V
Management and Budget, Office of 2, Subtitle A; 5, III,
LXXVII; 14, VI; 48, 99
National Drug Control Policy, Office of 2, XXXVI; 21, III
National Security Council 32, XXI; 47, 2
[[Page 844]]
Presidential Documents 3
Science and Technology Policy, Office of 32, XXIV; 47, II
Trade Representative, Office of the United 15, XX
States
Export-Import Bank of the United States 2, XXXV; 5, LII; 12, IV
Family Assistance, Office of 45, II
Farm Credit Administration 5, XXXI; 12, VI
Farm Credit System Insurance Corporation 5, XXX; 12, XIV
Farm Service Agency 7, VII, XVIII
Federal Acquisition Regulation 48, 1
Federal Aviation Administration 14, I
Commercial Space Transportation 14, III
Federal Claims Collection Standards 31, IX
Federal Communications Commission 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of 41, 60
Federal Crop Insurance Corporation 7, IV
Federal Deposit Insurance Corporation 5, XXII; 12, III
Federal Election Commission 5, XXXVII; 11, I
Federal Emergency Management Agency 44, I
Federal Employees Group Life Insurance Federal 48, 21
Acquisition Regulation
Federal Employees Health Benefits Acquisition 48, 16
Regulation
Federal Energy Regulatory Commission 5, XXIV; 18, I
Federal Financial Institutions Examination 12, XI
Council
Federal Financing Bank 12, VIII
Federal Highway Administration 23, I, II
Federal Home Loan Mortgage Corporation 1, IV
Federal Housing Enterprise Oversight Office 12, XVII
Federal Housing Finance Agency 5, LXXX; 12, XII
Federal Housing Finance Board 12, IX
Federal Labor Relations Authority 5, XIV, XLIX; 22, XIV
Federal Law Enforcement Training Center 31, VII
Federal Management Regulation 41, 102
Federal Maritime Commission 46, IV
Federal Mediation and Conciliation Service 29, XII
Federal Mine Safety and Health Review Commission 5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration 49, III
Federal Prison Industries, Inc. 28, III
Federal Procurement Policy Office 48, 99
Federal Property Management Regulations 41, 101
Federal Railroad Administration 49, II
Federal Register, Administrative Committee of 1, I
Federal Register, Office of 1, II
Federal Reserve System 12, II
Board of Governors 5, LVIII
Federal Retirement Thrift Investment Board 5, VI, LXXVI
Federal Service Impasses Panel 5, XIV
Federal Trade Commission 5, XLVII; 16, I
Federal Transit Administration 49, VI
Federal Travel Regulation System 41, Subtitle F
Financial Crimes Enforcement Network 31, X
Financial Research Office 12, XVI
Financial Stability Oversight Council 12, XIII
Fine Arts, Commission of 45, XXI
Fiscal Service 31, II
Fish and Wildlife Service, United States 50, I, IV
Food and Drug Administration 21, I
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Foreign Assets Control, Office of 31, V
Foreign Claims Settlement Commission of the 45, V
United States
Foreign Service Grievance Board 22, IX
Foreign Service Impasse Disputes Panel 22, XIV
Foreign Service Labor Relations Board 22, XIV
Foreign-Trade Zones Board 15, IV
Forest Service 36, II
General Services Administration 5, LVII; 41, 105
[[Page 845]]
Contract Appeals, Board of 48, 61
Federal Acquisition Regulation 48, 5
Federal Management Regulation 41, 102
Federal Property Management Regulations 41, 101
Federal Travel Regulation System 41, Subtitle F
General 41, 300
Payment From a Non-Federal Source for Travel 41, 304
Expenses
Payment of Expenses Connected With the Death 41, 303
of Certain Employees
Relocation Allowances 41, 302
Temporary Duty (TDY) Travel Allowances 41, 301
Geological Survey 30, IV
Government Accountability Office 4, I
Government Ethics, Office of 5, XVI
Government National Mortgage Association 24, III
Grain Inspection, Packers and Stockyards 7, VIII; 9, II
Administration
Gulf Coast Ecosystem Restoration Council 2, LIX; 40, VIII
Harry S. Truman Scholarship Foundation 45, XVIII
Health and Human Services, Department of 2, III; 5, XLV; 45,
Subtitle A
Centers for Medicare & Medicaid Services 42, IV
Child Support Enforcement, Office of 45, III
Children and Families, Administration for 45, II, III, IV, X, XIII
Community Services, Office of 45, X
Family Assistance, Office of 45, II
Federal Acquisition Regulation 48, 3
Food and Drug Administration 21, I
Indian Health Service 25, V
Inspector General (Health Care), Office of 42, V
Public Health Service 42, I
Refugee Resettlement, Office of 45, IV
Homeland Security, Department of 2, XXX; 5, XXXVI; 6, I; 8,
I
Coast Guard 33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage) 46, III
Customs and Border Protection 19, I
Federal Emergency Management Agency 44, I
Human Resources Management and Labor Relations 5, XCVII
Systems
Immigration and Customs Enforcement Bureau 19, IV
Transportation Security Administration 49, XII
HOPE for Homeowners Program, Board of Directors 24, XXIV
of
Housing and Urban Development, Department of 2, XXIV; 5, LXV; 24,
Subtitle B
Community Planning and Development, Office of 24, V, VI
Assistant Secretary for
Equal Opportunity, Office of Assistant 24, I
Secretary for
Federal Acquisition Regulation 48, 24
Federal Housing Enterprise Oversight, Office 12, XVII
of
Government National Mortgage Association 24, III
Housing--Federal Housing Commissioner, Office 24, II, VIII, X, XX
of Assistant Secretary for
Housing, Office of, and Multifamily Housing 24, IV
Assistance Restructuring, Office of
Inspector General, Office of 24, XII
Public and Indian Housing, Office of Assistant 24, IX
Secretary for
Secretary, Office of 24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of 24, II, VIII, X, XX
Assistant Secretary for
Housing, Office of, and Multifamily Housing 24, IV
Assistance Restructuring, Office of
Immigration and Customs Enforcement Bureau 19, IV
Immigration Review, Executive Office for 8, V
Independent Counsel, Office of 28, VII
Independent Counsel, Offices of 28, VI
Indian Affairs, Bureau of 25, I, V
Indian Affairs, Office of the Assistant 25, VI
Secretary
[[Page 846]]
Indian Arts and Crafts Board 25, II
Indian Health Service 25, V
Industry and Security, Bureau of 15, VII
Information Resources Management, Office of 7, XXVII
Information Security Oversight Office, National 32, XX
Archives and Records Administration
Inspector General
Agriculture Department 7, XXVI
Health and Human Services Department 42, V
Housing and Urban Development Department 24, XII, XV
Institute of Peace, United States 22, XVII
Inter-American Foundation 5, LXIII; 22, X
Interior Department 2, XIV
American Indians, Office of the Special 25, VII
Trustee
Endangered Species Committee 50, IV
Federal Acquisition Regulation 48, 14
Federal Property Management Regulations System 41, 114
Fish and Wildlife Service, United States 50, I, IV
Geological Survey 30, IV
Indian Affairs, Bureau of 25, I, V
Indian Affairs, Office of the Assistant 25, VI
Secretary
Indian Arts and Crafts Board 25, II
Land Management, Bureau of 43, II
National Indian Gaming Commission 25, III
National Park Service 36, I
Natural Resource Revenue, Office of 30, XII
Ocean Energy Management, Bureau of 30, V
Reclamation, Bureau of 43, I
Safety and Enforcement Bureau, Bureau of 30, II
Secretary of the Interior, Office of 2, XIV; 43, Subtitle A
Surface Mining Reclamation and Enforcement, 30, VII
Office of
Internal Revenue Service 26, I
International Boundary and Water Commission, 22, XI
United States and Mexico, United States
Section
International Development, United States Agency 22, II
for
Federal Acquisition Regulation 48, 7
International Development Cooperation Agency, 22, XII
United States
International Joint Commission, United States 22, IV
and Canada
International Organizations Employees Loyalty 5, V
Board
International Trade Administration 15, III; 19, III
International Trade Commission, United States 19, II
Interstate Commerce Commission 5, XL
Investment Security, Office of 31, VIII
James Madison Memorial Fellowship Foundation 45, XXIV
Japan-United States Friendship Commission 22, XVI
Joint Board for the Enrollment of Actuaries 20, VIII
Justice Department 2, XXVIII; 5, XXVIII; 28,
I, XI; 40, IV
Alcohol, Tobacco, Firearms, and Explosives, 27, II
Bureau of
Drug Enforcement Administration 21, II
Federal Acquisition Regulation 48, 28
Federal Claims Collection Standards 31, IX
Federal Prison Industries, Inc. 28, III
Foreign Claims Settlement Commission of the 45, V
United States
Immigration Review, Executive Office for 8, V
Independent Counsel, Offices of 28, VI
Prisons, Bureau of 28, V
Property Management Regulations 41, 128
Labor Department 2, XXIX; 5, XLII
Employee Benefits Security Administration 29, XXV
Employees' Compensation Appeals Board 20, IV
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Federal Acquisition Regulation 48, 29
Federal Contract Compliance Programs, Office 41, 60
of
[[Page 847]]
Federal Procurement Regulations System 41, 50
Labor-Management Standards, Office of 29, II, IV
Mine Safety and Health Administration 30, I
Occupational Safety and Health Administration 29, XVII
Public Contracts 41, 50
Secretary of Labor, Office of 29, Subtitle A
Veterans' Employment and Training Service, 41, 61; 20, IX
Office of the Assistant Secretary for
Wage and Hour Division 29, V
Workers' Compensation Programs, Office of 20, I, VII
Labor-Management Standards, Office of 29, II, IV
Land Management, Bureau of 43, II
Legal Services Corporation 45, XVI
Library of Congress 36, VII
Copyright Royalty Board 37, III
U.S. Copyright Office 37, II
Local Television Loan Guarantee Board 7, XX
Management and Budget, Office of 5, III, LXXVII; 14, VI;
48, 99
Marine Mammal Commission 50, V
Maritime Administration 46, II
Merit Systems Protection Board 5, II, LXIV
Micronesian Status Negotiations, Office for 32, XXVII
Military Compensation and Retirement 5, XCIX
Modernization Commission
Millennium Challenge Corporation 22, XIII
Mine Safety and Health Administration 30, I
Minority Business Development Agency 15, XIV
Miscellaneous Agencies 1, IV
Monetary Offices 31, I
Morris K. Udall Scholarship and Excellence in 36, XVI
National Environmental Policy Foundation
Museum and Library Services, Institute of 2, XXXI
National Aeronautics and Space Administration 2, XVIII; 5, LIX; 14, V
Federal Acquisition Regulation 48, 18
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
National and Community Service, Corporation for 2, XXII; 45, XII, XXV
National Archives and Records Administration 2, XXVI; 5, LXVI; 36, XII
Information Security Oversight Office 32, XX
National Capital Planning Commission 1, IV, VI
National Commission for Employment Policy 1, IV
National Commission on Libraries and Information 45, XVII
Science
National Council on Disability 5, C; 34, XII
National Counterintelligence Center 32, XVIII
National Credit Union Administration 5, LXXXVI; 12, VII
National Crime Prevention and Privacy Compact 28, IX
Council
National Drug Control Policy, Office of 2, XXXVI; 21, III
National Endowment for the Arts 2, XXXII
National Endowment for the Humanities 2, XXXIII
National Foundation on the Arts and the 45, XI
Humanities
National Geospatial-Intelligence Agency 32, I
National Highway Traffic Safety Administration 23, II, III; 47, VI; 49, V
National Imagery and Mapping Agency 32, I
National Indian Gaming Commission 25, III
National Institute of Food and Agriculture 7, XXXIV
National Institute of Standards and Technology 15, II; 37, IV
National Intelligence, Office of Director of 5, IV; 32, XVII
National Labor Relations Board 5, LXI; 29, I
National Marine Fisheries Service 50, II, IV
National Mediation Board 29, X
National Oceanic and Atmospheric Administration 15, IX; 50, II, III, IV,
VI
National Park Service 36, I
National Railroad Adjustment Board 29, III
National Railroad Passenger Corporation (AMTRAK) 49, VII
National Science Foundation 2, XXV; 5, XLIII; 45, VI
[[Page 848]]
Federal Acquisition Regulation 48, 25
National Security Council 32, XXI
National Security Council and Office of Science 47, II
and Technology Policy
National Telecommunications and Information 15, XXIII; 47, III, IV, V
Administration
National Transportation Safety Board 49, VIII
Natural Resources Conservation Service 7, VI
Natural Resource Revenue, Office of 30, XII
Navajo and Hopi Indian Relocation, Office of 25, IV
Navy Department 32, VI
Federal Acquisition Regulation 48, 52
Neighborhood Reinvestment Corporation 24, XXV
Northeast Interstate Low-Level Radioactive Waste 10, XVIII
Commission
Nuclear Regulatory Commission 2, XX; 5, XLVIII; 10, I
Federal Acquisition Regulation 48, 20
Occupational Safety and Health Administration 29, XVII
Occupational Safety and Health Review Commission 29, XX
Ocean Energy Management, Bureau of 30, V
Oklahoma City National Memorial Trust 36, XV
Operations Office 7, XXVIII
Overseas Private Investment Corporation 5, XXXIII; 22, VII
Patent and Trademark Office, United States 37, I
Payment From a Non-Federal Source for Travel 41, 304
Expenses
Payment of Expenses Connected With the Death of 41, 303
Certain Employees
Peace Corps 2, XXXVII; 22, III
Pennsylvania Avenue Development Corporation 36, IX
Pension Benefit Guaranty Corporation 29, XL
Personnel Management, Office of 5, I, XXXV; 5, IV; 45,
VIII
Human Resources Management and Labor Relations 5, XCVII
Systems, Department of Homeland Security
Federal Acquisition Regulation 48, 17
Federal Employees Group Life Insurance Federal 48, 21
Acquisition Regulation
Federal Employees Health Benefits Acquisition 48, 16
Regulation
Pipeline and Hazardous Materials Safety 49, I
Administration
Postal Regulatory Commission 5, XLVI; 39, III
Postal Service, United States 5, LX; 39, I
Postsecondary Education, Office of 34, VI
President's Commission on White House 1, IV
Fellowships
Presidential Documents 3
Presidio Trust 36, X
Prisons, Bureau of 28, V
Privacy and Civil Liberties Oversight Board 6, X
Procurement and Property Management, Office of 7, XXXII
Public Contracts, Department of Labor 41, 50
Public and Indian Housing, Office of Assistant 24, IX
Secretary for
Public Health Service 42, I
Railroad Retirement Board 20, II
Reclamation, Bureau of 43, I
Refugee Resettlement, Office of 45, IV
Relocation Allowances 41, 302
Research and Innovative Technology 49, XI
Administration
Rural Business-Cooperative Service 7, XVIII, XLII
Rural Development Administration 7, XLII
Rural Housing Service 7, XVIII, XXXV
Rural Telephone Bank 7, XVI
Rural Utilities Service 7, XVII, XVIII, XLII
Safety and Environmental Enforcement, Bureau of 30, II
Saint Lawrence Seaway Development Corporation 33, IV
Science and Technology Policy, Office of 32, XXIV
Science and Technology Policy, Office of, and 47, II
National Security Council
Secret Service 31, IV
[[Page 849]]
Securities and Exchange Commission 5, XXXIV; 17, II
Selective Service System 32, XVI
Small Business Administration 2, XXVII; 13, I
Smithsonian Institution 36, V
Social Security Administration 2, XXIII; 20, III; 48, 23
Soldiers' and Airmen's Home, United States 5, XI
Special Counsel, Office of 5, VIII
Special Education and Rehabilitative Services, 34, III
Office of
State Department 2, VI; 22, I; 28, XI
Federal Acquisition Regulation 48, 6
Surface Mining Reclamation and Enforcement, 30, VII
Office of
Surface Transportation Board 49, X
Susquehanna River Basin Commission 18, VIII
Tennessee Valley Authority 5, LXIX; 18, XIII
Thrift Supervision Office, Department of the 12, V
Treasury
Trade Representative, United States, Office of 15, XX
Transportation, Department of 2, XII; 5, L
Commercial Space Transportation 14, III
Emergency Management and Assistance 44, IV
Federal Acquisition Regulation 48, 12
Federal Aviation Administration 14, I
Federal Highway Administration 23, I, II
Federal Motor Carrier Safety Administration 49, III
Federal Railroad Administration 49, II
Federal Transit Administration 49, VI
Maritime Administration 46, II
National Highway Traffic Safety Administration 23, II, III; 47, IV; 49, V
Pipeline and Hazardous Materials Safety 49, I
Administration
Saint Lawrence Seaway Development Corporation 33, IV
Secretary of Transportation, Office of 14, II; 49, Subtitle A
Transportation Statistics Bureau 49, XI
Transportation, Office of 7, XXXIII
Transportation Security Administration 49, XII
Transportation Statistics Bureau 49, XI
Travel Allowances, Temporary Duty (TDY) 41, 301
Treasury Department 2, X;5, XXI; 12, XV; 17,
IV; 31, IX
Alcohol and Tobacco Tax and Trade Bureau 27, I
Community Development Financial Institutions 12, XVIII
Fund
Comptroller of the Currency 12, I
Customs and Border Protection 19, I
Engraving and Printing, Bureau of 31, VI
Federal Acquisition Regulation 48, 10
Federal Claims Collection Standards 31, IX
Federal Law Enforcement Training Center 31, VII
Financial Crimes Enforcement Network 31, X
Fiscal Service 31, II
Foreign Assets Control, Office of 31, V
Internal Revenue Service 26, I
Investment Security, Office of 31, VIII
Monetary Offices 31, I
Secret Service 31, IV
Secretary of the Treasury, Office of 31, Subtitle A
Thrift Supervision, Office of 12, V
Truman, Harry S. Scholarship Foundation 45, XVIII
United States and Canada, International Joint 22, IV
Commission
United States and Mexico, International Boundary 22, XI
and Water Commission, United States Section
U.S. Copyright Office 37, II
Utah Reclamation Mitigation and Conservation 43, III
Commission
Veterans Affairs Department 2, VIII; 38, I
Federal Acquisition Regulation 48, 8
Veterans' Employment and Training Service, 41, 61; 20, IX
Office of the Assistant Secretary for
Vice President of the United States, Office of 32, XXVIII
Wage and Hour Division 29, V
Water Resources Council 18, VI
[[Page 850]]
Workers' Compensation Programs, Office of 20, I, VII
World Agricultural Outlook Board 7, XXXVIII
[[Page 851]]
Table of OMB Control Numbers
The OMB control numbers for chapter I of title 26 were consolidated into
Sec. Sec. 601.9000 and 602.101 at 50 FR 10221, Mar. 14, 1985. At 61 FR
58008, Nov. 12, 1996, Sec. 601.9000 was removed. Section 602.101 is
reprinted below for the convenience of the user.
PART 602_OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT--Table of Contents
Sec. 602.101 OMB Control numbers.
(a) Purpose. This part collects and displays the control numbers
assigned to collections of information in Internal Revenue Service
regulations by the Office of Management and Budget (OMB) under the
Paperwork Reduction Act of 1980. The Internal Revenue Service intends
that this part comply with the requirements of Sec. Sec. 1320.7(f),
1320.12, 1320.13, and 1320.14 of 5 CFR part 1320 (OMB regulations
implementing the Paperwork Reduction Act), for the display of control
numbers assigned by OMB to collections of information in Internal
Revenue Service regulations. This part does not display control numbers
assigned by the Office of Management and Budget to collections of
information of the Bureau of Alcohol, Tobacco, and Firearms.
(b) Display.
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
1.1(h)-1(e)................................................ 1545-1654
1.23-5..................................................... 1545-0074
1.25-1T.................................................... 1545-0922
1545-0930
1.25-2T.................................................... 1545-0922
1545-0930
1.25-3T.................................................... 1545-0922
1545-0930
1.25-4T.................................................... 1545-0922
1.25-5T.................................................... 1545-0922
1.25-6T.................................................... 1545-0922
1.25-7T.................................................... 1545-0922
1.25-8T.................................................... 1545-0922
1.25A-1.................................................... 1545-1630
1.28-1..................................................... 1545-0619
1.31-2..................................................... 1545-0074
1.32-2..................................................... 1545-0074
1.32-3..................................................... 1545-1575
1.36B-5.................................................... 1545-2232
1.37-1..................................................... 1545-0074
1.37-3..................................................... 1545-0074
1.41-2..................................................... 1545-0619
1.41-3..................................................... 1545-0619
1.41-4A.................................................... 1545-0074
1.41-4 (b) and (c)......................................... 1545-0074
1.41-8(b).................................................. 1545-1625
1.41-8(d).................................................. 1545-0732
1.41-9..................................................... 1545-0619
1.42-1T.................................................... 1545-0984
1545-0988
1.42-2..................................................... 1545-1005
1.42-5..................................................... 1545-1357
1.42-6..................................................... 1545-1102
1.42-8..................................................... 1545-1102
1.42-10.................................................... 1545-1102
1.42-13.................................................... 1545-1357
1.42-14.................................................... 1545-1423
1.42-17.................................................... 1545-1357
1.42-18.................................................... 1545-2088
1.43-3(a)(3)............................................... 1545-1292
1.43-3(b)(3)............................................... 1545-1292
1.44B-1.................................................... 1545-0219
1.45D-1.................................................... 1545-1765
1.45G-1.................................................... 1545-2031
1.46-1..................................................... 1545-0123
1545-0155
1.46-3..................................................... 1545-0155
1.46-4..................................................... 1545-0155
1.46-5..................................................... 1545-0155
1.46-6..................................................... 1545-0155
1.46-8..................................................... 1545-0155
1.46-9..................................................... 1545-0155
1.46-10.................................................... 1545-0118
1.46-11.................................................... 1545-0155
1.47-1..................................................... 1545-0155
1545-0166
1.47-3..................................................... 1545-0155
1545-0166
1.47-4..................................................... 1545-0123
1.47-5..................................................... 1545-0092
1.47-6..................................................... 1545-0099
1.48-3..................................................... 1545-0155
1.48-4..................................................... 1545-0155
1545-0808
1.48-5..................................................... 1545-0155
1.48-6..................................................... 1545-0155
1.48-12.................................................... 1545-0155
1545-1783
1.50A-1.................................................... 1545-0895
1.50A-2.................................................... 1545-0895
1.50A-3.................................................... 1545-0895
1.50A-4.................................................... 1545-0895
1.50A-5.................................................... 1545-0895
1.50A-6.................................................... 1545-0895
1.50A-7.................................................... 1545-0895
1.50B-1.................................................... 1545-0895
1.50B-2.................................................... 1545-0895
1.50B-3.................................................... 1545-0895
[[Page 852]]
1.50B-4.................................................... 1545-0895
1.50B-5.................................................... 1545-0895
1.51-1..................................................... 1545-0219
1545-0241
1545-0244
1545-0797
1.52-2..................................................... 1545-0219
1.52-3..................................................... 1545-0219
1.56-1..................................................... 1545-0123
1.56(g)-1.................................................. 1545-1233
1.56A-1.................................................... 1545-0227
1.56A-2.................................................... 1545-0227
1.56A-3.................................................... 1545-0227
1.56A-4.................................................... 1545-0227
1.56A-5.................................................... 1545-0227
1.57-5..................................................... 1545-0227
1.58-1..................................................... 1545-0175
1.58-9(c)(5)(iii)(B)....................................... 1545-1093
1.58-9(e)(3)............................................... 1545-1093
1.59-1..................................................... 1545-1903
1.61-2..................................................... 1545-0771
1.61-2T.................................................... 1545-0771
1.61-4..................................................... 1545-0187
1.61-15.................................................... 1545-0074
1.62-2..................................................... 1545-1148
1.63-1..................................................... 1545-0074
1.66-4..................................................... 1545-1770
1.67-2T.................................................... 1545-0110
1.67-3..................................................... 1545-1018
1.67-3T.................................................... 1545-0118
1.71-1T.................................................... 1545-0074
1.72-4..................................................... 1545-0074
1.72-6..................................................... 1545-0074
1.72-9..................................................... 1545-0074
1.72-17.................................................... 1545-0074
1.72-17A................................................... 1545-0074
1.72-18.................................................... 1545-0074
1.74-1..................................................... 1545-1100
1.79-2..................................................... 1545-0074
1.79-3..................................................... 1545-0074
1.83-2..................................................... 1545-0074
1.83-5..................................................... 1545-0074
1.83-6..................................................... 1545-1448
1.103-10................................................... 1545-0123
1545-0940
1.103-15AT................................................. 1545-0720
1.103-18................................................... 1545-1226
1.103(n)-2T................................................ 1545-0874
1.103(n)-4T................................................ 1545-0874
1.103A-2................................................... 1545-0720
1.105-4.................................................... 1545-0074
1.105-5.................................................... 1545-0074
1.105-6.................................................... 1545-0074
1.108-4.................................................... 1545-1539
1.108-5.................................................... 1545-1421
1.108-7.................................................... 1545-2155
1.108(i)-1................................................. 1545-2147
1.108(i)-2................................................. 1545-2147
1.110-1.................................................... 1545-1661
1.117-5.................................................... 1545-0869
1.118-2.................................................... 1545-1639
1.119-1.................................................... 1545-0067
1.120-3.................................................... 1545-0057
1.121-1.................................................... 1545-0072
1.121-2.................................................... 1545-0072
1.121-3.................................................... 1545-0072
1.121-4.................................................... 1545-0072
1545-0091
1.121-5.................................................... 1545-0072
1.127-2.................................................... 1545-0768
1.132-1T................................................... 1545-0771
1.132-2.................................................... 1545-0771
1.132-2T................................................... 1545-0771
1.132-5.................................................... 1545-0771
1.132-5T................................................... 1545-0771
1545-1098
1.132-9(b)................................................. 1545-1676
1.141-1.................................................... 1545-1451
1.141-12................................................... 1545-1451
1.142-2.................................................... 1545-1451
1.142(f)(4)-1.............................................. 1545-1730
1.148-0.................................................... 1545-1098
1.148-1.................................................... 1545-1098
1.148-2.................................................... 1545-1098
1545-1347
1.148-3.................................................... 1545-1098
1545-1347
1.148-4.................................................... 1545-1098
1545-1347
1.148-5.................................................... 1545-1098
1545-1490
1.148-6.................................................... 1545-1098
1545-1451
1.148-7.................................................... 1545-1098
1545-1347
1.148-8.................................................... 1545-1098
1.148-11................................................... 1545-1098
1545-1347
1.149(e)-1................................................. 1545-0720
1.150-1.................................................... 1545-1347
1.151-1.................................................... 1545-0074
1.152-3.................................................... 1545-0071
1545-1783
1.152-4.................................................... 1545-0074
1.152-4T................................................... 1545-0074
1.162-1.................................................... 1545-0139
1.162-2.................................................... 1545-0139
1.162-3.................................................... 1545-0139
1.162-4.................................................... 1545-0139
1.162-5.................................................... 1545-0139
1.162-6.................................................... 1545-0139
1.162-7.................................................... 1545-0139
1.162-8.................................................... 1545-0139
1.162-9.................................................... 1545-0139
1.162-10................................................... 1545-0139
1.162-11................................................... 1545-0139
1.162-12................................................... 1545-0139
1.162-13................................................... 1545-0139
1.162-14................................................... 1545-0139
1.162-15................................................... 1545-0139
1.162-16................................................... 1545-0139
1.162-17................................................... 1545-0139
1.162-18................................................... 1545-0139
1.162-19................................................... 1545-0139
1.162-20................................................... 1545-0139
1.162-24................................................... 1545-2115
1.162-27................................................... 1545-1466
1.163-5.................................................... 1545-0786
1545-1132
1.163-8T................................................... 1545-0995
1.163-10T.................................................. 1545-0074
1.163-13................................................... 1545-1491
1.163(d)-1................................................. 1545-1421
1.165-1.................................................... 1545-0177
1.165-2.................................................... 1545-0177
1.165-3.................................................... 1545-0177
1.165-4.................................................... 1545-0177
1.165-5.................................................... 1545-0177
1.165-6.................................................... 1545-0177
1.165-7.................................................... 1545-0177
1.165-8.................................................... 1545-0177
1.165-9.................................................... 1545-0177
1.165-10................................................... 1545-0177
1.165-11................................................... 1545-0074
[[Page 853]]
1545-0177
1545-0786
1.165-12................................................... 1545-0786
1.166-1.................................................... 1545-0123
1.166-2.................................................... 1545-1254
1.166-4.................................................... 1545-0123
1.166-10................................................... 1545-0123
1.167(a)-5T................................................ 1545-1021
1.167(a)-7................................................. 1545-0172
1.167(a)-11................................................ 1545-0152
1545-0172
1.167(a)-12................................................ 1545-0172
1.167(d)-1................................................. 1545-0172
1.167(e)-1................................................. 1545-0172
1.167(f)-11................................................ 1545-0172
1.167(l)-1................................................. 1545-0172
1.168(d)-1................................................. 1545-1146
1.168(f)(8)-1T............................................. 1545-0923
1.168(i)-1................................................. 1545-1331
1.168-5.................................................... 1545-0172
1.169-4.................................................... 1545-0172
1.170-1.................................................... 1545-0074
1.170-2.................................................... 1545-0074
1.170-3.................................................... 1545-0123
1.170A-1................................................... 1545-0074
1.170A-2................................................... 1545-0074
1.170A-4(A)(b)............................................. 1545-0123
1.170A-8................................................... 1545-0074
1.170A-9................................................... 1545-0052
1545-0074
1.170A-11.................................................. 1545-0074
1545-0123
1545-1868
1.170A-12.................................................. 1545-0020
1545-0074
1.170A-13.................................................. 1545-0074
1545-0754
1545-0908
1545-1431
1.170A-13(f)............................................... 1545-1464
1.170A-14.................................................. 1545-0763
1.171-4.................................................... 1545-1491
1.171-5.................................................... 1545-1491
1.172-1.................................................... 1545-0172
1.172-13................................................... 1545-0863
1.173-1.................................................... 1545-0172
1.174-3.................................................... 1545-0152
1.174-4.................................................... 1545-0152
1.175-3.................................................... 1545-0187
1.175-6.................................................... 1545-0152
1.177-1.................................................... 1545-0172
1.179-2.................................................... 1545-1201
1.179-3.................................................... 1545-1201
1.179-5.................................................... 1545-0172
1545-1201
1.179B-1T.................................................. 1545-2076
1.179C-1................................................... 1545-2103
1.179C-1T.................................................. 1545-2103
1.180-2.................................................... 1545-0074
1.181-1.................................................... 1545-2059
1.181-2.................................................... 1545-2059
1.181-3.................................................... 1545-2059
1.182-6.................................................... 1545-0074
1.183-1.................................................... 1545-0195
1.183-2.................................................... 1545-0195
1.183-3.................................................... 1545-0195
1.183-4.................................................... 1545-0195
1.190-3.................................................... 1545-0074
1.194-2.................................................... 1545-0735
1.194-4.................................................... 1545-0735
1.195-1.................................................... 1545-1582
1.197-1T................................................... 1545-1425
1.197-2.................................................... 1545-1671
1.199-6.................................................... 1545-1966
1.213-1.................................................... 1545-0074
1.215-1T................................................... 1545-0074
1.217-2.................................................... 1545-0182
1.243-3.................................................... 1545-0123
1.243-4.................................................... 1545-0123
1.243-5.................................................... 1545-0123
1.248-1.................................................... 1545-0172
1.261-1.................................................... 1545-1041
1.263(a)-1................................................. 1545-2248
1.263(a)-3................................................. 1545-2248
1.263(a)-5................................................. 1545-1870
1.263(e)-1................................................. 1545-0123
1.263A-1................................................... 1545-0987
1.263A-1T.................................................. 1545-0187
1.263A-2................................................... 1545-0987
1.263A-3................................................... 1545-0987
1.263A-8(b)(2)(iii)........................................ 1545-1265
1.263A-9(d)(1)............................................. 1545-1265
1.263A-9(f)(1)(ii)......................................... 1545-1265
1.263A-9(f)(2)(iv)......................................... 1545-1265
1.263A-9(g)(2)(iv)(C)...................................... 1545-1265
1.263A-9(g)(3)(iv)......................................... 1545-1265
1.265-1.................................................... 1545-0074
1.265-2.................................................... 1545-0123
1.266-1.................................................... 1545-0123
1.267(f)-1................................................. 1545-0885
1.268-1.................................................... 1545-0184
1.274-1.................................................... 1545-0139
1.274-2.................................................... 1545-0139
1.274-3.................................................... 1545-0139
1.274-4.................................................... 1545-0139
1.274-5.................................................... 1545-0771
1.274-5A................................................... 1545-0139
1545-0771
1.274-5T................................................... 1545-0074
1545-0172
1545-0771
1.274-6.................................................... 1545-0139
1545-0771
1.274-6T................................................... 1545-0074
1545-0771
1.274-7.................................................... 1545-0139
1.274-8.................................................... 1545-0139
1.279-6.................................................... 1545-0123
1.280C-4................................................... 1545-1155
1.280F-3T.................................................. 1545-0074
1.280G-1................................................... 1545-1851
1.281-4.................................................... 1545-0123
1.302-4.................................................... 1545-0074
1.305-3.................................................... 1545-0123
1.305-5.................................................... 1545-1438
1.307-2.................................................... 1545-0074
1.312-15................................................... 1545-0172
1.316-1.................................................... 1545-0123
1.331-1.................................................... 1545-0074
1.332-4.................................................... 1545-0123
1.332-6.................................................... 1545-2019
1.336-2.................................................... 1545-2125
1.336-4.................................................... 1545-2125
1.337(d)-1................................................. 1545-1160
1.337(d)-2................................................. 1545-1160
1545-1774
1.337(d)-4................................................. 1545-1633
1.337(d)-5................................................. 1545-1672
1.337(d)-6................................................. 1545-1672
1.337(d)-7................................................. 1545-1672
1.338-2.................................................... 1545-1658
1.338-5.................................................... 1545-1658
1.338-10................................................... 1545-1658
1.338-11................................................... 1545-1990
[[Page 854]]
1.338(h)(10)-1............................................. 1545-1658
1.338(i)-1................................................. 1545-1990
1.341-7.................................................... 1545-0123
1.351-3.................................................... 1545-2019
1.355-5.................................................... 1545-2019
1.362-2.................................................... 1545-0123
1.362-4.................................................... 1545-2247
1.367(a)-1T................................................ 1545-0026
1.367(a)-2T................................................ 1545-0026
1.367(a)-3................................................. 1545-0026
1545-1478
1.367(a)-3T................................................ 1545-2183
1.367(a)-6T................................................ 1545-0026
1.367(a)-7................................................. 1545-2183
1.367(a)-7T................................................ 1545-2183
1.367(a)-8................................................. 1545-1271
1545-2056
1545-2183
1.367(b)-1................................................. 1545-1271
1.367(b)-3T................................................ 1545-1666
1.367(d)-1T................................................ 1545-0026
1.367(e)-1................................................. 1545-1487
1.367(e)-2................................................. 1545-1487
1.368-1.................................................... 1545-1691
1.368-3.................................................... 1545-2019
1.371-1.................................................... 1545-0123
1.371-2.................................................... 1545-0123
1.374-3.................................................... 1545-0123
1.381(b)-1................................................. 1545-0123
1.381(c)(4)-1.............................................. 1545-0123
1545-0152
1545-0879
1.381(c)(5)-1.............................................. 1545-0123
1545-0152
1.381(c)(6)-1.............................................. 1545-0123
1545-0152
1.381(c)(8)-1.............................................. 1545-0123
1.381(c)(10)-1............................................. 1545-0123
1.381(c)(11)-1(k).......................................... 1545-0123
1.381(c)(13)-1............................................. 1545-0123
1.381(c)(17)-1............................................. 1545-0045
1.381(c)(22)-1............................................. 1545-1990
1.381(c)(25)-1............................................. 1545-0045
1.382-1T................................................... 1545-0123
1.382-2.................................................... 1545-0123
1.382-2T................................................... 1545-0123
1.382-3.................................................... 1545-1281
1545-1345
1.382-4.................................................... 1545-1120
1.382-6.................................................... 1545-1381
1.382-8.................................................... 1545-1434
1.382-9.................................................... 1545-1120
1545-1260
1545-1275
1545-1324
1.382-11................................................... 1545-2019
1.382-91................................................... 1545-1260
1545-1324
1.383-1.................................................... 1545-0074
1545-1120
1.401-1.................................................... 1545-0020
1545-0197
1545-0200
1545-0534
1545-0710
1.401(a)-11................................................ 1545-0710
1.401(a)-20................................................ 1545-0928
1.401(a)-31................................................ 1545-1341
1.401(a)-50................................................ 1545-0710
1.401(a)(9)-1.............................................. 1545-1573
1.401(a)(9)-3.............................................. 1545-1466
1.401(a)(9)-4.............................................. 1545-1573
1.401(a)(9)-6.............................................. 1545-2234
1.401(a)(31)-1............................................. 1545-1341
1.401(b)-1................................................. 1545-0197
1.401(f)-1................................................. 1545-0710
1.401(k)-1................................................. 1545-1039
1545-1069
1545-1669
1545-1930
1.401(k)-2................................................. 1545-1669
1.401(k)-3................................................. 1545-1669
1.401(k)-4................................................. 1545-1669
1.401(m)-3................................................. 1545-1699
1.401-12(n)................................................ 1545-0806
1.401-14................................................... 1545-0710
1.402(c)-2................................................. 1545-1341
1.402(f)-1................................................. 1545-1341
1545-1632
1.402A-1................................................... 1545-1992
1.403(b)-1................................................. 1545-0710
1.403(b)-3................................................. 1545-0996
1.403(b)-7................................................. 1545-1341
1.403(b)-10................................................ 1545-2068
1.404(a)-4................................................. 1545-0710
1.404(a)-12................................................ 1545-0710
1.404A-2................................................... 1545-0123
1.404A-6................................................... 1545-0123
1.408-2.................................................... 1545-0390
1.408-5.................................................... 1545-0747
1.408-6.................................................... 1545-0203
1545-0390
1.408-7.................................................... 1545-0119
1.408(q)-1................................................. 1545-1841
1.408A-2................................................... 1545-1616
1.408A-4................................................... 1545-1616
1.408A-5................................................... 1545-1616
1.408A-7................................................... 1545-1616
1.410(a)-2................................................. 1545-0710
1.410(d)-1................................................. 1545-0710
1.411(a)-11................................................ 1545-1471
1545-1632
1.411(d)-4................................................. 1545-1545
1.411(d)-6................................................. 1545-1477
1.412(b)-5................................................. 1545-0710
1.412(c)(1)-2.............................................. 1545-0710
1.412(c)(2)-1.............................................. 1545-0710
1.412(c)(3)-2.............................................. 1545-0710
1.414(c)-5................................................. 1545-0797
1.414(r)-1................................................. 1545-1221
1.415-2.................................................... 1545-0710
1.415-6.................................................... 1545-0710
1.417(a)(3)-1.............................................. 1545-0928
1.417(e)-1................................................. 1545-1471
1545-1724
1.417(e)-1T................................................ 1545-1471
1.419A(f)(6)-1............................................. 1545-1795
1.422-1.................................................... 1545-0820
1.430(f)-1................................................. 1545-2095
1.430(g)-1................................................. 1545-2095
1.430(h)(2)-1.............................................. 1545-2095
1.432(e)(9)-1T............................................. 1545-2260
1.436-1.................................................... 1545-2095
1.441-2.................................................... 1545-1748
1.442-1.................................................... 1545-0074
1545-0123
1545-0134
1545-0152
1545-0820
1545-1748
1.443-1.................................................... 1545-0123
1.444-3T................................................... 1545-1036
1.444-4.................................................... 1545-1591
1.446-1.................................................... 1545-0074
[[Page 855]]
1545-0152
1.446-4(d)................................................. 1545-1412
1.448-1(g)................................................. 1545-0152
1.448-1(h)................................................. 1545-0152
1.448-1(i)................................................. 1545-0152
1.448-2.................................................... 1545-1855
1.448-2T................................................... 1545-0152
1545-1855
1.451-1.................................................... 1545-0091
1.451-4.................................................... 1545-0123
1.451-5.................................................... 1545-0074
1.451-6.................................................... 1545-0074
1.451-7.................................................... 1545-0074
1.453-1.................................................... 1545-0152
1.453-2.................................................... 1545-0152
1.453-8.................................................... 1545-0152
1545-0228
1.453-10................................................... 1545-0152
1.453A-1................................................... 1545-0152
1545-1134
1.453A-2................................................... 1545-0152
1545-1134
1.453A-3................................................... 1545-0963
1.454-1.................................................... 1545-0074
1.455-2.................................................... 1545-0152
1.455-6.................................................... 1545-0123
1.456-2.................................................... 1545-0123
1.456-6.................................................... 1545-0123
1.456-7.................................................... 1545-0123
1.457-8.................................................... 1545-1580
1.458-1.................................................... 1545-0879
1.458-2.................................................... 1545-0152
1.460-1.................................................... 1545-1650
1.460-6.................................................... 1545-1031
1545-1572
1545-1732
1.461-1.................................................... 1545-0074
1.461-2.................................................... 1545-0096
1.461-4.................................................... 1545-0917
1.461-5.................................................... 1545-0917
1.463-1T................................................... 1545-0916
1.465-1T................................................... 1545-0712
1.466-1T................................................... 1545-0152
1.466-4.................................................... 1545-0152
1.468A-3................................................... 1545-1269
1545-1378
1545-1511
1.468A-3(h), 1.468A-7, and 1.468A-8(d)..................... 1545-2091
1.468A-4................................................... 1545-0954
1.468A-7................................................... 1545-0954
1545-1511
1.468A-8................................................... 1545-1269
1.468B-1................................................... 1545-1631
1.468B-1(j)................................................ 1545-1299
1.468B-2(k)................................................ 1545-1299
1.468B-2(l)................................................ 1545-1299
1.468B-3(b)................................................ 1545-1299
1.468B-3(e)................................................ 1545-1299
1.468B-5(b)................................................ 1545-1299
1.468B-9................................................... 1545-1631
1.469-1.................................................... 1545-1008
1.469-2T................................................... 1545-0712
1545-1091
1.469-4T................................................... 1545-0985
1545-1037
1.469-7.................................................... 1545-1244
1.471-2.................................................... 1545-0123
1.471-5.................................................... 1545-0123
1.471-6.................................................... 1545-0123
1.471-8.................................................... 1545-0123
1.471-11................................................... 1545-0123
1545-0152
1.472-1.................................................... 1545-0042
1545-0152
1.472-2.................................................... 1545-0152
1.472-3.................................................... 1545-0042
1.472-5.................................................... 1545-0152
1.472-8.................................................... 1545-0028
1545-0042
1545-1767
1.475(a)-4................................................. 1545-1945
1.475(b)-4................................................. 1545-1496
1.481-4.................................................... 1545-0152
1.481-5.................................................... 1545-0152
1.482-1.................................................... 1545-1364
1.482-4.................................................... 1545-1364
1.482-7.................................................... 1545-1364
1545-1794
1.482-9(b)................................................. 1545-2149
1.501(a)-1................................................. 1545-0056
1545-0057
1.501(c)(3)-1.............................................. 1545-0056
1.501(c)(9)-5.............................................. 1545-0047
1.501(c)(17)-3............................................. 1545-0047
1.501(e)-1................................................. 1545-0814
1.501(r)-3................................................. 1545-0047
1.501(r)-4................................................. 1545-0047
1.501(r)-6................................................. 1545-0047
1.503(c)-1................................................. 1545-0047
1545-0052
1.505(c)-1T................................................ 1545-0916
1.506-1T................................................... 1545-2268
1.507-1.................................................... 1545-0052
1.507-2.................................................... 1545-0052
1.508-1.................................................... 1545-0052
1545-0056
1.509(a)-3................................................. 1545-0047
1.509(a)-4................................................. 1545-2157
1.509(a)-5................................................. 1545-0047
1.509(c)-1................................................. 1545-0052
1.512(a)-1................................................. 1545-0687
1.512(a)-4................................................. 1545-0047
1545-0687
1.521-1.................................................... 1545-0051
1545-0058
1.527-2.................................................... 1545-0129
1.527-5.................................................... 1545-0129
1.527-6.................................................... 1545-0129
1.527-9.................................................... 1545-0129
1.528-8.................................................... 1545-0127
1.533-2.................................................... 1545-0123
1.534-2.................................................... 1545-0123
1.542-3.................................................... 1545-0123
1.545-2.................................................... 1545-0123
1.545-3.................................................... 1545-0123
1.547-2.................................................... 1545-0045
1545-0123
1.547-3.................................................... 1545-0123
1.551-4.................................................... 1545-0074
1.552-3.................................................... 1545-0099
1.552-4.................................................... 1545-0099
1.552-5.................................................... 1545-0099
1.556-2.................................................... 1545-0704
1.561-1.................................................... 1545-0044
1.561-2.................................................... 1545-0123
1.562-3.................................................... 1545-0123
1.563-2.................................................... 1545-0123
1.564-1.................................................... 1545-0123
1.565-1.................................................... 1545-0043
1545-0123
1.565-2.................................................... 1545-0043
1.565-3.................................................... 1545-0043
1.565-5.................................................... 1545-0043
1.565-6.................................................... 1545-0043
[[Page 856]]
1.585-1.................................................... 1545-0123
1.585-3.................................................... 1545-0123
1.585-8.................................................... 1545-1290
1.586-2.................................................... 1545-0123
1.593-1.................................................... 1545-0123
1.593-6.................................................... 1545-0123
1.593-6A................................................... 1545-0123
1.593-7.................................................... 1545-0123
1.595-1.................................................... 1545-0123
1.597-2.................................................... 1545-1300
1.597-4.................................................... 1545-1300
1.597-6.................................................... 1545-1300
1.597-7.................................................... 1545-1300
1.611-2.................................................... 1545-0099
1.611-3.................................................... 1545-0007
1545-0099
1545-1784
1.612-4.................................................... 1545-0074
1.612-5.................................................... 1545-0099
1.613-3.................................................... 1545-0099
1.613-4.................................................... 1545-0099
1.613-6.................................................... 1545-0099
1.613-7.................................................... 1545-0099
1.613A-3................................................... 1545-0919
1.613A-3(e)................................................ 1545-1251
1.613A-3(l)................................................ 1545-0919
1.613A-5................................................... 1545-0099
1.613A-6................................................... 1545-0099
1.614-2.................................................... 1545-0099
1.614-3.................................................... 1545-0099
1.614-5.................................................... 1545-0099
1.614-6.................................................... 1545-0099
1.614-8.................................................... 1545-0099
1.617-1.................................................... 1545-0099
1.617-3.................................................... 1545-0099
1.617-4.................................................... 1545-0099
1.631-1.................................................... 1545-0007
1.631-2.................................................... 1545-0007
1.641(b)-2................................................. 1545-0092
1.642(c)-1................................................. 1545-0092
1.642(c)-2................................................. 1545-0092
1.642(c)-5................................................. 1545-0074
1.642(c)-6................................................. 1545-0020
1545-0074
1545-0092
1.642(g)-1................................................. 1545-0092
1.642(i)-1................................................. 1545-0092
1.645-1.................................................... 1545-1578
1.663(b)-2................................................. 1545-0092
1.664-1.................................................... 1545-0196
1.664-1(a)(7).............................................. 1545-1536
1.664-1(c)................................................. 1545-2101
1.664-2.................................................... 1545-0196
1.664-3.................................................... 1545-0196
1.664-4.................................................... 1545-0020
1545-0196
1.665(a)-0A through
1.665(g)-2A................................................ 1545-0192
1.666(d)-1A................................................ 1545-0092
1.671-4.................................................... 1545-1442
1.671-5.................................................... 1545-1540
1.701-1.................................................... 1545-0099
1.702-1.................................................... 1545-0074
1.703-1.................................................... 1545-0099
1.704-2.................................................... 1545-1090
1.706-1.................................................... 1545-0074
1545-0099
1545-0134
1.706-1T................................................... 1545-0099
1.706-4(f)................................................. 1545-0123
1.707-3(c)(2).............................................. 1545-1243
1.707-5(a)(7)(ii).......................................... 1545-1243
1.707-6(c)................................................. 1545-1243
1.707-8.................................................... 1545-1243
1.708-1.................................................... 1545-0099
1.732-1.................................................... 1545-0099
1545-1588
1.736-1.................................................... 1545-0074
1.743-1.................................................... 1545-0074
1545-1588
1.751-1.................................................... 1545-0074
1545-0099
1545-0941
1.752-2.................................................... 1545-1905
1.752-5.................................................... 1545-1090
1.752-7.................................................... 1545-1843
1.754-1.................................................... 1545-0099
1.755-1.................................................... 1545-0099
1.761-2.................................................... 1545-1338
1.801-1.................................................... 1545-0123
1545-0128
1.801-3.................................................... 1545-0123
1.801-5.................................................... 1545-0128
1.801-8.................................................... 1545-0128
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1.6035-1................................................... 1545-0704
1.6035-2................................................... 1545-0704
1.6035-3................................................... 1545-0704
1.6037-1................................................... 1545-0130
1545-1023
1.6038-2................................................... 1545-1617
1545-2020
1.6038-3................................................... 1545-1617
1.6038A-2.................................................. 1545-1191
1.6038A-3.................................................. 1545-1191
1545-1440
1.6038B-1.................................................. 1545-1617
1545-2183
1.6038B-1T................................................. 1545-0026
1545-2183
1.6038B-2.................................................. 1545-1617
1.6039-2................................................... 1545-0820
1.6041-1................................................... 1545-0008
1545-0108
1545-0112
1545-0115
1545-0120
1545-0295
1545-0350
1545-0367
1545-0387
1545-0441
1545-0957
1545-1705
1.6041-2................................................... 1545-0008
1545-0119
1545-0350
1545-0441
1545-1729
1.6041-3................................................... 1545-1148
1.6041-4................................................... 1545-0115
1545-0295
1545-0367
1545-0387
1545-0957
1.6041-5................................................... 1545-0295
1545-0367
1545-0387
1545-0957
1.6041-6................................................... 1545-0008
[[Page 861]]
1545-0115
1.6041-7................................................... 1545-0112
1545-0295
1545-0350
1545-0367
1545-0387
1545-0441
1545-0957
1.6042-1................................................... 1545-0110
1.6042-2................................................... 1545-0110
1545-0295
1545-0367
1545-0387
1545-0957
1.6042-3................................................... 1545-0295
1545-0367
1545-0387
1545-0957
1.6042-4................................................... 1545-0110
1.6043-1................................................... 1545-0041
1.6043-2................................................... 1545-0041
1545-0110
1545-0295
1545-0387
1.6043-3................................................... 1545-0047
1.6044-1................................................... 1545-0118
1.6044-2................................................... 1545-0118
1.6044-3................................................... 1545-0118
1.6044-4................................................... 1545-0118
1.6044-5................................................... 1545-0118
1.6045-1................................................... 1545-0715
1545-1705
1.6045-1(c)(3)(xi)(C)...................................... 1545-2186
1.6045-1(n)(5)............................................. 1545-2186
1.6045A-1.................................................. 1545-2186
1.6045-2................................................... 1545-0115
1.6045-4................................................... 1545-1085
1.6046-1................................................... 1545-0704
1545-0794
1545-1317
1.6046-2................................................... 1545-0704
1.6046-3................................................... 1545-0704
1.6046A.................................................... 1545-1646
1.6047-1................................................... 1545-0119
1545-0295
1545-0387
1.6047-2................................................... 1545-2234
1.6049-1................................................... 1545-0112
1545-0117
1545-0295
1545-0367
1545-0387
1545-0597
1545-0957
1.6049-2................................................... 1545-0117
1.6049-3................................................... 1545-0117
1.6049-4................................................... 1545-0096
1545-0112
1545-0117
1545-1018
1545-1050
1.6049-5................................................... 1545-0096
1545-0112
1545-0117
1.6049-6................................................... 1545-0096
1.6049-7................................................... 1545-1018
1.6049-7T.................................................. 1545-0112
1545-0117
1545-0118
1.6050A-1.................................................. 1545-0115
1.6050B-1.................................................. 1545-0120
1.6050D-1.................................................. 1545-0120
1545-0232
1.6050E-1.................................................. 1545-0120
1.6050H-1.................................................. 1545-0901
1545-1380
1.6050H-1T................................................. 1545-0901
1.6050H-2.................................................. 1545-0901
1545-1339
1545-1380
1.6050I-2.................................................. 1545-1449
1.6050J-1T................................................. 1545-0877
1.6050K-1.................................................. 1545-0941
1.6050S-1.................................................. 1545-1678
1.6050S-2.................................................. 1545-1729
1.6050S-3.................................................. 1545-1678
1.6050S-4.................................................. 1545-1729
1.6052-1................................................... 1545-0008
1.6052-2................................................... 1545-0008
1.6055-1................................................... 1545-2252
1.6055-2................................................... 1545-2252
1.6060-1................................................... 1545-0074
1.6060-1(a)(1)............................................. 1545-1231
1.6061-1................................................... 1545-0123
1.6062-1................................................... 1545-0123
1.6063-1................................................... 1545-0123
1.6065-1................................................... 1545-0123
1.6071-1................................................... 1545-0123
1545-0810
1.6072-1................................................... 1545-0074
1.6072-2................................................... 1545-0123
1545-0807
1.6073-1................................................... 1545-0087
1.6073-2................................................... 1545-0087
1.6073-3................................................... 1545-0087
1.6073-4................................................... 1545-0087
1.6074-1................................................... 1545-0123
1.6074-2................................................... 1545-0123
1.6081-1................................................... 1545-0066
1545-0148
1545-0233
1545-1057
1545-1081
1.6081-2................................................... 1545-0148
1545-1036
1545-1054
1.6081-3................................................... 1545-0233
1.6081-4................................................... 1545-0188
1545-1479
1.6081-6................................................... 1545-0148
1545-1054
1.6081-7................................................... 1545-0148
1545-1054
1.6091-3................................................... 1545-0089
1.6107-1................................................... 1545-0074
1545-1231
1.6109-1................................................... 1545-0074
1.6109-2................................................... 1545-2176
1.6115-1................................................... 1545-1464
1.6151-1................................................... 1545-0074
1.6153-1................................................... 1545-0087
1.6153-4................................................... 1545-0087
1.6161-1................................................... 1545-0087
1.6162-1................................................... 1545-0087
1.6164-1................................................... 1545-0135
1.6164-2................................................... 1545-0135
1.6164-3................................................... 1545-0135
1.6164-5................................................... 1545-0135
1.6164-6................................................... 1545-0135
1.6164-7................................................... 1545-0135
1.6164-8................................................... 1545-0135
1.6164-9................................................... 1545-0135
1.6302-1................................................... 1545-0257
1.6302-2................................................... 1545-0098
[[Page 862]]
1545-0257
1.6411-1................................................... 1545-0098
1545-0135
1545-0582
1.6411-2................................................... 1545-0098
1545-0582
1.6411-3................................................... 1545-0098
1545-0582
1.6411-4................................................... 1545-0582
1.6414-1................................................... 1545-0096
1.6425-1................................................... 1545-0170
1.6425-2................................................... 1545-0170
1.6425-3................................................... 1545-0170
1.6654-1................................................... 1545-0087
1545-0140
1.6654-2................................................... 1545-0087
1.6654-3................................................... 1545-0087
1.6654-4................................................... 1545-0087
1.6655(e)-1................................................ 1545-1421
1.6662-3(c)................................................ 1545-0889
1.6662-4(e) and (f)........................................ 1545-0889
1.6662-6................................................... 1545-1426
1.6694-1................................................... 1545-0074
1.6694-2................................................... 1545-0074
1.6694-2(c)................................................ 1545-1231
1.6694-2(c)(3)............................................. 1545-1231
1.6694-3(e)................................................ 1545-1231
1.6695-1................................................... 1545-0074
1545-1385
1.6696-1................................................... 1545-0074
1545-0240
1.6851-1................................................... 1545-0086
1545-0138
1.6851-2................................................... 1545-0086
1545-0138
1.7476-1................................................... 1545-0197
1.7476-2................................................... 1545-0197
1.7519-2T.................................................. 1545-1036
1.7520-1................................................... 1545-1343
1.7520-2................................................... 1545-1343
1.7520-3................................................... 1545-1343
1.7520-4................................................... 1545-1343
1.7701(l)-3................................................ 1545-1642
1.7872-15.................................................. 1545-1792
1.9100-1................................................... 1545-0074
1.9101-1................................................... 1545-0008
2.1-4...................................................... 1545-0123
2.1-5...................................................... 1545-0123
2.1-6...................................................... 1545-0123
2.1-10..................................................... 1545-0123
2.1-11..................................................... 1545-0123
2.1-12..................................................... 1545-0123
2.1-13..................................................... 1545-0123
2.1-20..................................................... 1545-0123
2.1-22..................................................... 1545-0123
2.1-26..................................................... 1545-0123
3.2........................................................ 1545-0123
4.954-1.................................................... 1545-1068
4.954-2.................................................... 1545-1068
5.6411-1................................................... 1545-0042
1545-0074
1545-0098
1545-0129
1545-0172
1545-0582
1545-0619
5c.44F-1................................................... 1545-0619
5c.128-1................................................... 1545-0123
5c.168(f)(8)-1............................................. 1545-0123
5c.168(f)(8)-2............................................. 1545-0123
5c.168(f)(8)-6............................................. 1545-0123
5c.168(f)(8)-8............................................. 1545-0123
5c.305-1................................................... 1545-0110
5c.442-1................................................... 1545-0152
5f.103-1................................................... 1545-0720
5f.103-3................................................... 1545-0720
5f.6045-1.................................................. 1545-0715
6a.103A-2.................................................. 1545-0123
1545-0720
6a.103A-3.................................................. 1545-0720
7.465-1.................................................... 1545-0712
7.465-2.................................................... 1545-0712
7.465-3.................................................... 1545-0712
7.465-4.................................................... 1545-0712
7.465-5.................................................... 1545-0712
7.936-1.................................................... 1545-0217
7.999-1.................................................... 1545-0216
7.6039A-1.................................................. 1545-0015
7.6041-1................................................... 1545-0115
11.410-1................................................... 1545-0710
11.412(c)-7................................................ 1545-0710
11.412(c)-11............................................... 1545-0710
12.7....................................................... 1545-0190
12.8....................................................... 1545-0191
12.9....................................................... 1545-0195
14a.422A-1................................................. 1545-0123
15A.453-1.................................................. 1545-0228
16.3-1..................................................... 1545-0159
16A.126-2.................................................. 1545-0074
16A.1255-1................................................. 1545-0184
16A.1255-2................................................. 1545-0184
18.1371-1.................................................. 1545-0130
18.1378-1.................................................. 1545-0130
18.1379-1.................................................. 1545-0130
18.1379-2.................................................. 1545-0130
20.2010-2.................................................. 1545-0015
20.2011-1.................................................. 1545-0015
20.2014-5.................................................. 1545-0015
1545-0260
20.2014-6.................................................. 1545-0015
20.2016-1.................................................. 1545-0015
20.2031-2.................................................. 1545-0015
20.2031-3.................................................. 1545-0015
20.2031-4.................................................. 1545-0015
20.2031-6.................................................. 1545-0015
20.2031-7.................................................. 1545-0020
20.2031-10................................................. 1545-0015
20.2032-1.................................................. 1545-0015
20.2032A-3................................................. 1545-0015
20.2032A-4................................................. 1545-0015
20.2032A-8................................................. 1545-0015
20.2039-4.................................................. 1545-0015
20.2051-1.................................................. 1545-0015
20.2053-3.................................................. 1545-0015
20.2053-9.................................................. 1545-0015
20.2053-10................................................. 1545-0015
20.2055-1.................................................. 1545-0015
20.2055-2.................................................. 1545-0015
1545-0092
20.2055-3.................................................. 1545-0015
20.2056(b)-4............................................... 1545-0015
20.2056(b)-7............................................... 1545-0015
1545-1612
20.2056A-2................................................. 1545-1443
20.2056A-3................................................. 1545-1360
20.2056A-4................................................. 1545-1360
20.2056A-10................................................ 1545-1360
20.2106-1.................................................. 1545-0015
20.2106-2.................................................. 1545-0015
20.2204-1.................................................. 1545-0015
20.2204-2.................................................. 1545-0015
20.6001-1.................................................. 1545-0015
20.6011-1.................................................. 1545-0015
20.6018-1.................................................. 1545-0015
[[Page 863]]
1545-0531
20.6018-2.................................................. 1545-0015
20.6018-3.................................................. 1545-0015
20.6018-4.................................................. 1545-0015
1545-0022
20.6036-2.................................................. 1545-0015
20.6060-1(a)(1)............................................ 1545-1231
20.6061-1.................................................. 1545-0015
20.6065-1.................................................. 1545-0015
20.6075-1.................................................. 1545-0015
20.6081-1.................................................. 1545-0015
1545-0181
1545-1707
20.6091-1.................................................. 1545-0015
20.6107-1.................................................. 1545-1231
20.6161-1.................................................. 1545-0015
1545-0181
20.6161-2.................................................. 1545-0015
1545-0181
20.6163-1.................................................. 1545-0015
20.6166-1.................................................. 1545-0181
20.6166A-1................................................. 1545-0015
20.6166A-3................................................. 1545-0015
20.6324A-1................................................. 1545-0754
20.7520-1.................................................. 1545-1343
20.7520-2.................................................. 1545-1343
20.7520-3.................................................. 1545-1343
20.7520-4.................................................. 1545-1343
22.0....................................................... 1545-0015
25.2511-2.................................................. 1545-0020
25.2512-2.................................................. 1545-0020
25.2512-3.................................................. 1545-0020
25.2512-5.................................................. 1545-0020
25.2512-9.................................................. 1545-0020
25.2513-1.................................................. 1545-0020
25.2513-2.................................................. 1545-0020
1545-0021
25.2513-3.................................................. 1545-0020
25.2518-2.................................................. 1545-0959
25.2522(a)-1............................................... 1545-0196
25.2522(c)-3............................................... 1545-0020
1545-0196
25.2523(a)-1............................................... 1545-0020
1545-0196
25.2523(f)-1............................................... 1545-0015
25.2701-2.................................................. 1545-1241
25.2701-4.................................................. 1545-1241
25.2701-5.................................................. 1545-1273
25.2702-5.................................................. 1545-1485
25.2702-6.................................................. 1545-1273
25.6001-1.................................................. 1545-0020
1545-0022
25.6011-1.................................................. 1545-0020
25.6019-1.................................................. 1545-0020
25.6019-2.................................................. 1545-0020
25.6019-3.................................................. 1545-0020
25.6019-4.................................................. 1545-0020
25.6060-1(a)(1)............................................ 1545-1231
25.6061-1.................................................. 1545-0020
25.6065-1.................................................. 1545-0020
25.6075-1.................................................. 1545-0020
25.6081-1.................................................. 1545-0020
25.6091-1.................................................. 1545-0020
25.6091-2.................................................. 1545-0020
25.6107-1.................................................. 1545-1231
25.6151-1.................................................. 1545-0020
25.6161-1.................................................. 1545-0020
25.7520-1.................................................. 1545-1343
25.7520-2.................................................. 1545-1343
25.7520-3.................................................. 1545-1343
25.7520-4.................................................. 1545-1343
26.2601-1.................................................. 1545-0985
26.2632-1.................................................. 1545-0985
1545-1892
26.2642-1.................................................. 1545-0985
26.2642-2.................................................. 1545-0985
26.2642-3.................................................. 1545-0985
26.2642-4.................................................. 1545-0985
26.2642-6.................................................. 1545-1902
26.2652-2.................................................. 1545-0985
26.2654-1.................................................. 1545-1902
26.2662-1.................................................. 1545-0015
1545-0985
26.2662-2.................................................. 1545-0985
26.6060-1(a)(1)............................................ 1545-1231
26.6107-1.................................................. 1545-1231
31.3102-3.................................................. 1545-0029
1545-0059
1545-0065
31.3121(b)(19)-1........................................... 1545-0029
31.3121(d)-1............................................... 1545-0004
31.3121(i)-1............................................... 1545-0034
31.3121(k)-4............................................... 1545-0137
31.3121(r)-1............................................... 1545-0029
31.3121(s)-1............................................... 1545-0029
31.3121(v)(2)-1............................................ 1545-1643
31.3302(a)-2............................................... 1545-0028
31.3302(a)-3............................................... 1545-0028
31.3302(b)-2............................................... 1545-0028
31.3302(e)-1............................................... 1545-0028
31.3306(c)(18)-1........................................... 1545-0029
31.3401(a)-1............................................... 1545-0029
31.3401(a)(6).............................................. 1545-1484
31.3401(a)(6)-1............................................ 1545-0029
1545-0096
1545-0795
31.3401(a)(7)-1............................................ 1545-0029
31.3401(a)(8)(A)-1 ........................................ 1545-0029
1545-0666
31.3401(a)(8)(C)-1 ........................................ 1545-0029
31.3401(a)(15)-1........................................... 1545-0182
31.3401(c)-1............................................... 1545-0004
31.3402(b)-1............................................... 1545-0010
31.3402(c)-1............................................... 1545-0010
31.3402(f)(1)-1............................................ 1545-0010
31.3402(f)(2)-1............................................ 1545-0010
1545-0410
31.3402(f)(3)-1............................................ 1545-0010
31.3402(f)(4)-1............................................ 1545-0010
31.3402(f)(4)-2............................................ 1545-0010
31.3402(f)(5)-1............................................ 1545-0010
1545-1435
31.3402(h)(1)-1............................................ 1545-0029
31.3402(h)(3)-1............................................ 1545-0010
1545-0029
31.3402(h)(4)-1............................................ 1545-0010
31.3402(i)-(1)............................................. 1545-0010
31.3402(i)-(2)............................................. 1545-0010
31.3402(k)-1............................................... 1545-0065
31.3402(l)-(1)............................................. 1545-0010
31.3402(m)-(1)............................................. 1545-0010
31.3402(n)-(1)............................................. 1545-0010
31.3402(o)-2............................................... 1545-0415
31.3402(o)-3............................................... 1545-0008
1545-0010
1545-0415
1545-0717
31.3402(p)-1............................................... 1545-0415
1545-0717
31.3402(q)-1............................................... 1545-0238
1545-0239
31.3404-1.................................................. 1545-0029
31.3405(c)-1............................................... 1545-1341
31.3406(a)-1............................................... 1545-0112
[[Page 864]]
31.3406(a)-2............................................... 1545-0112
31.3406(a)-3............................................... 1545-0112
31.3406(a)-4............................................... 1545-0112
31.3406(b)(2)-1............................................ 1545-0112
31.3406(b)(2)-2............................................ 1545-0112
31.3406(b)(2)-3............................................ 1545-0112
31.3406(b)(2)-4............................................ 1545-0112
31.3406(b)(2)-5............................................ 1545-0112
31.3406(b)(3)-1............................................ 1545-0112
31.3406(b)(3)-2............................................ 1545-0112
31.3406(b)(3)-3............................................ 1545-0112
31.3406(b)(3)-4............................................ 1545-0112
31.3406(b)(4)-1............................................ 1545-0112
31.3406(c)-1............................................... 1545-0112
31.3406(d)-1............................................... 1545-0112
31.3406(d)-2............................................... 1545-0112
31.3406(d)-3............................................... 1545-0112
31.3406(d)-4............................................... 1545-0112
31.3406(d)-5............................................... 1545-0112
31.3406(e)-1............................................... 1545-0112
31.3406(f)-1............................................... 1545-0112
31.3406(g)-1............................................... 1545-0096
1545-0112
1545-1819
31.3406(g)-2............................................... 1545-0112
31.3406(g)-3............................................... 1545-0112
31.3406(h)-1............................................... 1545-0112
31.3406(h)-2............................................... 1545-0112
31.3406(h)-3............................................... 1545-0112
31.3406(i)-1............................................... 1545-0112
31.3501(a)-1T.............................................. 1545-0771
31.3503-1.................................................. 1545-0024
31.3504-1.................................................. 1545-0029
31.6001-1.................................................. 1545-0798
31.6001-2.................................................. 1545-0034
1545-0798
31.6001-3.................................................. 1545-0798
31.6001-4.................................................. 1545-0028
31.6001-5.................................................. 1545-0798
31.6001-6.................................................. 1545-0029
1459-0798
31.6011(a)-1............................................... 1545-0029
1545-0034
1545-0035
1545-0059
1545-0074
1545-0256
1545-0718
1545-2097
31.6011(a)-2............................................... 1545-0001
1545-0002
31.6011(a)-3............................................... 1545-0028
31.6011(a)-3A.............................................. 1545-0955
31.6011(a)-4............................................... 1545-0034
1545-0035
1545-0718
1545-1413
1545-2097
31.6011(a)-5............................................... 1545-0028
1545-0718
1545-2097
31.6011(a)-6............................................... 1545-0028
31.6011(a)-7............................................... 1545-0074
31.6011(a)-8............................................... 1545-0028
31.6011(a)-9............................................... 1545-0028
31.6011(a)-10.............................................. 1545-0112
31.6011(b)-1............................................... 1545-0003
31.6011(b)-2............................................... 1545-0029
31.6051-1.................................................. 1545-0008
1545-0182
1545-0458
1545-1729
31.6051-2.................................................. 1545-0008
31.6051-3.................................................. 1545-0008
31.6053-1.................................................. 1545-0029
1545-0062
1545-0064
1545-0065
1545-1603
31.6053-2.................................................. 1545-0008
31.6053-3.................................................. 1545-0065
1545-0714
31.6053-4.................................................. 1545-0065
1545-1603
31.6060-1(a)(1)............................................ 1545-1231
31.6065(a)-1............................................... 1545-0029
31.6071(a)-1............................................... 1545-0001
1545-0028
1545-0029
31.6071(a)-1A.............................................. 1545-0955
31.6081(a)-1............................................... 1545-0008
1545-0028
31.6091-1.................................................. 1545-0028
1545-0029
31.6107-1.................................................. 1545-1231
31.6157-1.................................................. 1545-0955
31.6205-1.................................................. 1545-0029
1545-2097
31.6301(c)-1AT............................................. 1545-0035
1545-0112
1545-0257
31.6302-1.................................................. 1545-1413
31.6302-2.................................................. 1545-1413
31.6302-3.................................................. 1545-1413
31.6302-4.................................................. 1545-1413
31.6302(c)-2............................................... 1545-0001
1545-0257
31.6302(c)-2A.............................................. 1545-0955
31.6302(c)-3............................................... 1545-0257
31.6402(a)-2............................................... 1545-0256
1545-2097
31.6413(a)-1............................................... 1545-0029
1545-2097
31.6413(a)-2............................................... 1545-0029
1545-0256
1545-2097
31.6413(c)-1............................................... 1545-0029
1545-0171
31.6414-1.................................................. 1545-0029
1545-2097
32.1....................................................... 1545-0029
1545-0415
32.2....................................................... 1545-0029
35a.3406-2................................................. 1545-0112
35a.9999-5................................................. 1545-0029
36.3121(l)(1)-1............................................ 1545-0137
36.3121(l)(1)-2............................................ 1545-0137
36.3121(l)(3)-1............................................ 1545-0123
36.3121(1)(7)-1............................................ 1545-0123
36.3121(1)(10)-1........................................... 1545-0029
36.3121(1)(10)-3........................................... 1545-0029
36.3121(1)(10)-4........................................... 1545-0257
40.6060-1(a)(1)............................................ 1545-1231
40.6107-1.................................................. 1545-1231
40.6302(c)-3(b)(2)(ii)..................................... 1545-1296
40.6302(c)-3(b)(2)(iii).................................... 1545-1296
40.6302(c)-3(e)............................................ 1545-1296
40.6302(c)-3(f)(2)(ii)..................................... 1545-1296
41.4481-1.................................................. 1545-0143
41.4481-2.................................................. 1545-0143
41.4483-3.................................................. 1545-0143
41.6001-1.................................................. 1545-0143
41.6001-2.................................................. 1545-0143
41.6001-3.................................................. 1545-0143
[[Page 865]]
41.6060-1(a)(1)............................................ 1545-1231
41.6071(a)-1............................................... 1545-0143
41.6081(a)-1............................................... 1545-0143
41.6091-1.................................................. 1545-0143
41.6107-1.................................................. 1545-1231
41.6109-1.................................................. 1545-0143
41.6151(a)-1............................................... 1545-0143
41.6156-1.................................................. 1545-0143
41.6161(a)(1)-1............................................ 1545-0143
44.4401-1.................................................. 1545-0235
44.4403-1.................................................. 1545-0235
44.4412-1.................................................. 1545-0236
44.4901-1.................................................. 1545-0236
44.4905-1.................................................. 1545-0236
44.4905-2.................................................. 1545-0236
44.6001-1.................................................. 1545-0235
44.6011(a)-1............................................... 1545-0235
1545-0236
44.6060-1(a)(1)............................................ 1545-1231
44.6071-1.................................................. 1545-0235
44.6091-1.................................................. 1545-0235
44.6107-1.................................................. 1545-1231
44.6151-1.................................................. 1545-0235
44.6419-1.................................................. 1545-0235
44.6419-2.................................................. 1545-0235
46.4371-4.................................................. 1545-0023
46.4374-1.................................................. 1545-0023
46.4375-1.................................................. 1545-2238
46.4376-1.................................................. 1545-2238
46.4701-1.................................................. 1545-0023
1545-0257
48.4041-4.................................................. 1545-0023
48.4041-5.................................................. 1545-0023
48.4041-6.................................................. 1545-0023
48.4041-7.................................................. 1545-0023
48.4041-9.................................................. 1545-0023
48.4041-10................................................. 1545-0023
48.4041-11................................................. 1545-0023
48.4041-12................................................. 1545-0023
48.4041-13................................................. 1545-0023
48.4041-18................................................. 1545-0023
48.4041-19................................................. 1545-0023
48.4041-20................................................. 1545-0023
48.4041-21................................................. 1545-1270
48.4042-2.................................................. 1545-0023
48.4052-1.................................................. 1545-1418
48.4061(a)-1............................................... 1545-0023
48.4061(a)-2............................................... 1545-0023
48.4061(b)-3............................................... 1545-0023
48.4064-1.................................................. 1545-0014
1545-0242
48.4071-1.................................................. 1545-0023
48.4073-1.................................................. 1545-0023
48.4073-3.................................................. 1545-0023
1545-1074
1545-1087
48.4081-2.................................................. 1545-1270
1545-1418
48.4081-3.................................................. 1545-1270
1545-1418
1545-1897
48.4081-4(b)(2)(ii)........................................ 1545-1270
48.4081-4(b)(3)(i)......................................... 1545-1270
48.4081-4(c)............................................... 1545-1270
48.4081-6(c)(1)(ii)........................................ 1545-1270
48.4081-7.................................................. 1545-1270
1545-1418
48.4082-1T................................................. 1545-1418
48.4082-2.................................................. 1545-1418
48.4082-6.................................................. 1545-1418
48.4082-7.................................................. 1545-1418
48.4091-3.................................................. 1545-1418
48.4101-1.................................................. 1545-1418
48.4101-1T................................................. 1545-1418
48.4101-2.................................................. 1545-1418
48.4161(a)-1............................................... 1545-0723
48.4161(a)-2............................................... 1545-0723
48.4161(a)-3............................................... 1545-0723
48.4161(b)-1............................................... 1545-0723
48.4216(a)-2............................................... 1545-0023
48.4216(a)-3............................................... 1545-0023
48.4216(c)-1............................................... 1545-0023
48.4221-1.................................................. 1545-0023
48.4221-2.................................................. 1545-0023
48.4221-3.................................................. 1545-0023
48.4221-4.................................................. 1545-0023
48.4221-5.................................................. 1545-0023
48.4221-6.................................................. 1545-0023
48.4221-7.................................................. 1545-0023
48.4222(a)-1............................................... 1545-0014
1545-0023
48.4223-1.................................................. 1545-0023
1545-0257
1545-0723
48.6302(c)-1............................................... 1545-0023
1545-0257
48.6412-1.................................................. 1545-0723
48.6416(a)-1............................................... 1545-0023
1545-0723
48.6416(a)-2............................................... 1545-0723
48.6416(a)-3............................................... 1545-0723
48.6416(b)(1)-1............................................ 1545-0723
48.6416(b)(1)-2............................................ 1545-0723
48.6416(b)(1)-3............................................ 1545-0723
48.6416(b)(1)-4............................................ 1545-0723
48.6416(b)(2)-1............................................ 1545-0723
48.6416(b)(2)-2............................................ 1545-0723
48.6416(b)(2)-3............................................ 1545-0723
1545-1087
48.6416(b)(2)-4............................................ 1545-0723
48.6416(b)(3)-1............................................ 1545-0723
48.6416(b)(3)-2............................................ 1545-0723
48.6416(b)(3)-3............................................ 1545-0723
48.6416(b)(4)-1............................................ 1545-0723
48.6416(b)(5)-1............................................ 1545-0723
48.6416(c)-1............................................... 1545-0723
48.6416(e)-1............................................... 1545-0023
1545-0723
48.6416(f)-1............................................... 1545-0023
1545-0723
48.6416(g)-1............................................... 1545-0723
48.6416(h)-1............................................... 1545-0723
48.6420(c)-2............................................... 1545-0023
48.6420(f)-1............................................... 1545-0023
48.6420-1.................................................. 1545-0162
1545-0723
48.6420-2.................................................. 1545-0162
1545-0723
48.6420-3.................................................. 1545-0162
1545-0723
48.6420-4.................................................. 1545-0162
1545-0723
48.6420-5.................................................. 1545-0162
1545-0723
48.6420-6.................................................. 1545-0162
1545-0723
48.6421-0.................................................. 1545-0162
1545-0723
48.6421-1.................................................. 1545-0162
1545-0723
48.6421-2.................................................. 1545-0162
1545-0723
48.6421-3.................................................. 1545-0162
1545-0723
[[Page 866]]
48.6421-4.................................................. 1545-0162
1545-0723
48.6421-5.................................................. 1545-0162
1545-0723
48.6421-6.................................................. 1545-0162
1545-0723
48.6421-7.................................................. 1545-0162
1545-0723
48.6424-0.................................................. 1545-0723
48.6424-1.................................................. 1545-0723
48.6424-2.................................................. 1545-0723
48.6424-3.................................................. 1545-0723
48.6424-4.................................................. 1545-0723
48.6424-5.................................................. 1545-0723
48.6424-6.................................................. 1545-0723
48.6427-0.................................................. 1545-0723
48.6427-1.................................................. 1545-0023
1545-0162
1545-0723
48.6427-2.................................................. 1545-0162
1545-0723
48.6427-3.................................................. 1545-0723
48.6427-4.................................................. 1545-0723
48.6427-5.................................................. 1545-0723
48.6427-8.................................................. 1545-1418
48.6427-9.................................................. 1545-1418
48.6427-10................................................. 1545-1418
48.6427-11................................................. 1545-1418
49.4251-1.................................................. 1545-1075
49.4251-2.................................................. 1545-1075
49.4251-4(d)(2)............................................ 1545-1628
49.4253-3.................................................. 1545-0023
49.4253-4.................................................. 1545-0023
49.4264(b)-1............................................... 1545-0023
1545-0224
1545-0225
1545-0226
1545-0230
1545-0257
1545-0912
49.4271-1(d)............................................... 1545-0685
49.5000B-1................................................. 1545-2177
51.2(f)(2)(ii)............................................. 1545-2209
51.7....................................................... 1545-2209
52.4682-1(b)(2)(iii)....................................... 1545-1153
52.4682-2(b)............................................... 1545-1153
1545-1361
52.4682-2(d)............................................... 1545-1153
1545-1361
52.4682-3(c)(2)............................................ 1545-1153
52.4682-3(g)............................................... 1545-1153
52.4682-4(f)............................................... 1545-0257
1545-1153
52.4682-5(d)............................................... 1545-1361
52.4682-5(f)............................................... 1545-1361
53.4940-1.................................................. 1545-0052
1545-0196
53.4942(a)-1............................................... 1545-0052
53.4942(a)-2............................................... 1545-0052
53.4942(a)-3............................................... 1545-0052
53.4942(b)-3............................................... 1545-0052
53.4945-1.................................................. 1545-0052
53.4945-4.................................................. 1545-0052
53.4945-5.................................................. 1545-0052
53.4945-6.................................................. 1545-0052
53.4947-1.................................................. 1545-0196
53.4947-2.................................................. 1545-0196
53.4948-1.................................................. 1545-0052
53.4958-6.................................................. 1545-1623
53.4961-2.................................................. 1545-0024
53.4963-1.................................................. 1545-0024
53.6001-1.................................................. 1545-0052
53.6011-1.................................................. 1545-0049
1545-0052
1545-0092
1545-0196
53.6060-1(a)(1)............................................ 1545-1231
53.6065-1.................................................. 1545-0052
53.6071-1.................................................. 1545-0049
53.6081-1.................................................. 1545-0066
1545-0148
53.6107-1.................................................. 1545-1231
53.6161-1.................................................. 1545-0575
54.4972-1.................................................. 1545-0197
54.4975-7.................................................. 1545-0575
54.4977-1T................................................. 1545-0771
54.4980B-6................................................. 1545-1581
54.4980B-7................................................. 1545-1581
54.4980B-8................................................. 1545-1581
54.4980F-1................................................. 1545-1780
54.4981A-1T................................................ 1545-0203
54.6011-1.................................................. 1545-0575
54.6011-1T................................................. 1545-0575
54.6060-1(a)(1)............................................ 1545-1231
54.6107-1.................................................. 1545-1231
54.9801-3.................................................. 1545-1537
54.9801-4.................................................. 1545-1537
54.9801-5.................................................. 1545-1537
54.9801-6.................................................. 1545-1537
54.9812-1T................................................. 1545-2165
54.9815-1251T.............................................. 1545-2178
54.9815-2711T.............................................. 1545-2179
54.9815-2712T.............................................. 1545-2180
54.9815-2714T.............................................. 1545-2172
54.9815-2715............................................... 1545-2229
54.9815-2719AT............................................. 1545-2181
54.9815-2719T.............................................. 1545-2182
55.6001-1.................................................. 1545-0123
55.6011-1.................................................. 1545-0123
1545-0999
1545-1016
55.6060-1(a)(1)............................................ 1545-1231
55.6061-1.................................................. 1545-0999
55.6071-1.................................................. 1545-0999
55.6107-1.................................................. 1545-1231
56.4911-6.................................................. 1545-0052
56.4911-7.................................................. 1545-0052
56.4911-9.................................................. 1545-0052
56.4911-10................................................. 1545-0052
56.6001-1.................................................. 1545-1049
56.6011-1.................................................. 1545-1049
56.6060-1(a)(1)............................................ 1545-1231
56.6081-1.................................................. 1545-1049
56.6107-1.................................................. 1545-1231
56.6161-1.................................................. 1545-0257
1545-1049
57.2(e)(2)(i).............................................. 1545-2249
145.4051-1................................................. 1545-0745
145.4052-1................................................. 1545-0120
1545-0745
1545-1076
145.4061-1................................................. 1545-0224
1545-0230
1545-0257
1545-0745
156.6001-1................................................. 1545-1049
156.6011-1................................................. 1545-1049
156.6060-1(a)(1)........................................... 1545-1231
156.6081-1................................................. 1545-1049
156.6107-1................................................. 1545-1231
156.6161-1................................................. 1545-1049
157.6001-1................................................. 1545-1824
157.6011-1................................................. 1545-1824
157.6060-1(a)(1)........................................... 1545-1231
[[Page 867]]
157.6081-1................................................. 1545-1824
157.6107-1................................................. 1545-1231
157.6161-1................................................. 1545-1824
301.6011-2................................................. 1545-0225
1545-0350
1545-0387
1545-0441
1545-0957
301.6011(g)-1.............................................. 1545-2079
301.6017-1................................................. 1545-0090
301.6034-1................................................. 1545-0092
301.6035-1................................................. 1545-0123
301.6036-1................................................. 1545-0013
1545-0773
301.6047-1................................................. 1545-0367
1545-0957
301.6056-1................................................. 1545-2251
301.6056-2................................................. 1545-2251
301.6057-1................................................. 1545-0710
301.6057-2................................................. 1545-0710
301.6058-1................................................. 1545-0710
301.6059-1................................................. 1545-0710
301.6103(c)-1.............................................. 1545-1816
301.6103(n)-1.............................................. 1545-1841
301.6103(p)(2)(B)-1........................................ 1545-1757
301.6104(a)-1.............................................. 1545-0495
301.6104(a)-5.............................................. 1545-0056
301.6104(a)-6.............................................. 1545-0056
301.6104(b)-1.............................................. 1545-0094
1545-0742
301.6104(d)-1.............................................. 1545-1655
301.6104(d)-2.............................................. 1545-1655
301.6104(d)-3.............................................. 1545-1655
301.6109-1................................................. 1545-0003
1545-0295
1545-0367
1545-0387
1545-0957
1545-1461
1545-2242
301.6109-3................................................. 1545-1564
301.6110-3................................................. 1545-0074
301.6110-5................................................. 1545-0074
301.6111-1T................................................ 1545-0865
1545-0881
301.6111-2................................................. 1545-0865
1545-1687
301.6112-1................................................. 1545-0865
1545-1686
301.6112-1T................................................ 1545-0865
1545-1686
301.6114-1................................................. 1545-1126
1545-1484
301.6222(a)-2.............................................. 1545-0790
301.6222(b)-1.............................................. 1545-0790
301.6222(b)-2.............................................. 1545-0790
301.6222(b)-3.............................................. 1545-0790
301.6223(b)-1.............................................. 1545-0790
301.6223(c)-1.............................................. 1545-0790
301.6223(e)-2.............................................. 1545-0790
301.6223(g)-1.............................................. 1545-0790
301.6223(h)-1.............................................. 1545-0790
301.6224(b)-1.............................................. 1545-0790
301.6224(c)-1.............................................. 1545-0790
301.6224(c)-3.............................................. 1545-0790
301.6227(c)-1.............................................. 1545-0790
301.6227(d)-1.............................................. 1545-0790
301.6229(b)-2.............................................. 1545-0790
301.6230(b)-1.............................................. 1545-0790
301.6230(e)-1.............................................. 1545-0790
301.6231(a)(1)-1........................................... 1545-0790
301.6231(a)(7)-1........................................... 1545-0790
301.6231(c)-1.............................................. 1545-0790
301.6231(c)-2.............................................. 1545-0790
301.6241-1T................................................ 1545-0130
301.6316-4................................................. 1545-0074
301.6316-5................................................. 1545-0074
301.6316-6................................................. 1545-0074
301.6316-7................................................. 1545-0029
301.6324A-1................................................ 1545-0015
301.6361-1................................................. 1545-0024
1545-0074
301.6361-2................................................. 1545-0024
301.6361-3................................................. 1545-0074
301.6402-2................................................. 1545-0024
1545-0073
1545-0091
301.6402-3................................................. 1545-0055
1545-0073
1545-0091
1545-0132
1545-1484
301.6402-5................................................. 1545-0928
301.6404-1................................................. 1545-0024
301.6404-2T................................................ 1545-0024
301.6404-3................................................. 1545-0024
301.6405-1................................................. 1545-0024
301.6501(c)-1.............................................. 1545-1241
1545-1637
301.6501(d)-1.............................................. 1545-0074
1545-0430
301.6501(o)-2.............................................. 1545-0728
301.6511(d)-1.............................................. 1545-0024
1545-0582
301.6511(d)-2.............................................. 1545-0024
1545-0582
301.6511(d)-3.............................................. 1545-0024
1545-0582
301.6652-2................................................. 1545-0092
301.6685-1................................................. 1545-0092
301.6689-1T................................................ 1545-1056
301.6707-1T................................................ 1545-0865
1545-0881
301.6708-1T................................................ 1545-0865
301.6712-1................................................. 1545-1126
301.6723-1A(d)............................................. 1545-0909
301.6903-1................................................. 1545-0013
1545-1783
301.6905-1................................................. 1545-0074
301.7001-1................................................. 1545-0123
301.7101-1................................................. 1545-1029
301.7207-1................................................. 1545-0092
301.7216-2................................................. 1545-0074
301.7216-2(o).............................................. 1545-1209
301.7425-3................................................. 1545-0854
301.7430-2(c).............................................. 1545-1356
301.7502-1................................................. 1545-1899
301.7507-8................................................. 1545-0123
301.7507-9................................................. 1545-0123
301.7513-1................................................. 1545-0429
301.7517-1................................................. 1545-0015
301.7605-1................................................. 1545-0795
301.7623-1................................................. 1545-0409
1545-1534
301.7654-1................................................. 1545-0803
301.7701-3................................................. 1545-1486
301.7701-4................................................. 1545-1465
301.7701-7................................................. 1545-1600
301.7701-16................................................ 1545-0795
301.7701(b)-1.............................................. 1545-0089
301.7701(b)-2.............................................. 1545-0089
301.7701(b)-3.............................................. 1545-0089
301.7701(b)-4.............................................. 1545-0089
301.7701(b)-5.............................................. 1545-0089
[[Page 868]]
301.7701(b)-6.............................................. 1545-0089
301.7701(b)-7.............................................. 1545-0089
1545-1126
301.7701(b)-9.............................................. 1545-0089
301.7705-1T................................................ 1545-2266
301.7705-2T................................................ 1545-2266
301.7805-1................................................. 1545-0805
301.9000-5................................................. 1545-1850
301.9001-1................................................. 1545-0220
301.9100-2................................................. 1545-1488
301.9100-3................................................. 1545-1488
301.9100-4T................................................ 1545-0016
1545-0042
1545-0074
1545-0129
1545-0172
1545-0619
301.9100-6T................................................ 1545-0872
301.9100-7T................................................ 1545-0982
301.9100-8................................................. 1545-1112
301.9100-11T............................................... 1545-0123
301.9100-12T............................................... 1545-0026
1545-0074
1545-0172
1545-1027
301.9100-14T............................................... 1545-0046
301.9100-15T............................................... 1545-0046
301.9100-16T............................................... 1545-0152
302.1-7.................................................... 1545-0024
305.7701-1................................................. 1545-0823
305.7871-1................................................. 1545-0823
404.6048-1................................................. 1545-0160
420.0-1.................................................... 1545-0710
Part 509................................................... 1545-0846
Part 513................................................... 1545-0834
Part 514................................................... 1545-0845
Part 521................................................... 1545-0848
601.104.................................................... 1545-0233
601.105.................................................... 1545-0091
601.201.................................................... 1545-0019
1545-0819
601.204.................................................... 1545-0152
601.401.................................................... 1545-0257
601.504.................................................... 1545-0150
601.601.................................................... 1545-0800
601.602.................................................... 1545-0295
1545-0387
1545-0957
601.702.................................................... 1545-0429
------------------------------------------------------------------------
(26 U.S.C. 7805)
[T.D. 8011, 50 FR 10222, Mar. 14, 1985]
Editorial Note: For Federal Register citations affecting Sec.
602.101, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
[[Page 869]]
List of CFR Sections Affected
All changes in this volume of the Code of Federal Regulations (CFR) that
were made by documents published in the Federal Register since January
1, 2013 are enumerated in the following list. Entries indicate the
nature of the changes effected. Page numbers refer to Federal Register
pages. The user should consult the entries for chapters, parts and
subparts as well as sections for revisions.
For changes to this volume of the CFR prior to this listing, consult the
annual edition of the monthly List of CFR Sections Affected (LSA). The
LSA is available at www.fdsys.gov. For changes to this volume of the CFR
prior to 2001, see the ``List of CFR Sections Affected, 1949-1963, 1964-
1972, 1973-1985, and 1986-2000'' published in 11 separate volumes. The
``List of CFR Sections Affected 1986-2000'' is available at
www.fdsys.gov.
2013
26 CFR
78 FR
Page
Chapter I
1.336-0 Added......................................................28474
1.336-1 Added......................................................28474
1.336-2 Added......................................................28474
(b)(1)(i)(C) and (h)(8) Example 2 (ii) correctly revised.......53027
1.336-3 Added......................................................28474
1.336-4 Added......................................................28474
1.336-5 Added......................................................28474
1.337(d)-7 (a)(2), (d)(1), (e) and (f) revised; (d)(3) and (4)
added......................................................46806
1.338-0 Amended....................................................28489
1.338-1 (a)(1) and (c)(1) amended; (e) added.......................28489
1.338-5 (d)(3)(ii) amended; (h) added..............................28489
1.358-2 (a)(2)(viii) revised; (d) amended..........................54160
1.362-4 Heading and (a)(1) revised; (b) through (j) added..........54160
1.367(a)-1 (b)(4)(i)(B) and (g)(4) added...........................17030
1.367(a)-1T (b)(4)(i)(B) revised; (b)(4)(i)(C) and (g)(4) added....17031
1.367(a)-3 (a)(3), (d)(2)(vi)(D)(2), (3) Example 8, Example 8B,
Example 8C, Example 10 and Example 12 amended; (b)(1),
(c)(1), (d)(3) Example 6A, Example 11, Example 16, (g)
heading, (1)(v)(A) and (B) revised.........................17031
(d)(2)(vi)(B), (3) Examples 6B, 6C and 9, (e) and
(g)(1)(vii)(A) revised; (g)(1)(ix) and (k) added...................17055
1.367(a)-3T Added..................................................17056
1.367(a)-6T (e)(4) amended; (j) added..............................17063
1.367(a)-7 Added...................................................17032
1.367(a)-7T Added..................................................17063
1.367(a)-8 (c)(6) added; (j)(9) amended............................17039
1.367(b)-0 Amended.................................................17039
1.367(b)-4 (a), (b)(1)(i)(B)(2), (ii) and (iii) Example 4 revised;
(b)(1)(iii) Example 5 added................................17039
1.367(b)-6 Heading and (a)(1) revised..............................17041
1.367(e)-1 (a) amended; (e) and (f) heading revised................17041
1.382-3 (j)(13) and (14) redesignated as (j)(16) and (17); (j)
heading, (1), (11) and new (17) revised; new (j)(13),
(14), (15) and (16) Examples 5 through 13 added............62423
1.382-3 (j)(13) and (14) redesignated as (j)(16) and (17); (j)
heading, (1), (11) and new (17) revised; new (j)(13),
(14), (15) and (16) Examples 5 through 13 added............62423
[[Page 870]]
2014
26 CFR
79 FR
Page
Chapter I
1.312-11 (a) revised; (e) added....................................66617
1.358-2 (a)(2)(iii) and (d) revised; (c) Examples 15 and 16 added
67062
1.358-2T Removed...................................................67063
1.367(a)-2 (f) added...............................................68766
1.367(a)-3 (c)(6)(i)(F)(3)(i) and (ii) amended; (c)(6)(ii)
revised; (f) and (g)(1)(x) added...........................68767
1.367(a)-3T (d)(2)(vi)(B)(1)(ii) and (g)(1)(ix) amended............68767
1.367(a)-7 (a) amended; (e)(2) and (j) revised.....................68767
1.367(a)-7T Removed................................................68768
1.367(a)-8 (a) and (r)(1)(i) amended; (b)(1)(iv) through (xv)
redesignated as (b)(1)(v) and (vii) through (xvii); new
(b)(1)(iv), (vi) and (r)(3) added; new (b)(1)(xiii),
(xiv), (xv), (c)(2)(iii), (d)(1), (j)(8) and (p) revised
68768
1.367(e)-2 (a), (b)(2)(i)(A)(2), (3), (E)(3), (4)(ii), (5)(ii),
(iii)(A), (D) and (c)(2)(i)(B)(3) amended; (b)(1)(i),
(2)(i)(C)(1) and (e) revised; (f) and (g) added............68771
1.381(a)-1 (b)(2)(i), (ii) and (e) amended; (b)(3)(i) redesignated
as (b)(3); (b)(3)(ii) removed..............................66617
1.381(c)(2)-1 (d) removed..........................................66617
1.382-3 (j)(17) revised............................................44282
1.382-3T Added.....................................................44282
2015
26 CFR
80 FR
Page
Chapter I
1.337(d)-3T Added..................................................33408
(c)(2)(i) and (f)(2)(ii) correctly revised.....................38940
1.338-1 (b)(2)(viii) amended.......................................17318
1.367(a)-1 (d)(4), (5), (g)(1), (2) and (3) revised; (e) and (f)
added; (g)(4) amended......................................56912
1.367(a)-1T (e) and (f) revised....................................56912
1.367(e)-2 (e)(4)(i) introductory text revised.......................167
1.368-2 (m) added..................................................56912
(m)(4) Example 5 and Example 7 correctly amended...............76205
1.381(b)-1 (a)(1) amended..........................................56915
1.382-3 (j)(17) revised............................................31997
1.382-3T Removed...................................................31998
2016
26 CFR
81 FR
Page
Chapter I
1 Authority citation amended.......................................91021
1.304-6 Added......................................................20882
1.304-7T Added.....................................................20882
(f) correctly revised..........................................40810
1.332-2 (a) amended; (f) added.....................................17071
1.332-6 (a)(3) revised; (e) amended................................17071
1.332-7 Amended....................................................17071
1.334-1 Revised....................................................17071
1.337-1 Added......................................................17074
1.337(d)-7 (b)(4), (c)(6) and (f) redesignated as (b)(5), (c)(7)
and (g); (a)(1), (b)(2)(iii), (c)(1) and new (g)(2)
revised; (a)(2)(vi), (vii), new (b)(4), new (c)(6) and new
(f) added; (b)(1)(ii), (d)(2)(iii) and new (g)(1) amended
36797
1.337(d)-7T Added..................................................36797
(f)(3)(iii) correctly revised..................................41800
1.351-1 (a) heading, (1) heading, (2) heading, (b) heading, (2)
heading and (d) added; (a)(1) introductory text amended;
(a)(1)(i), (ii) and (b)(1) revised; undesignated text
following (a)(1)(ii) removed...............................17074
1.351-3 (a)(3) and (b)(3) revised; (f) added.......................17074
1.355-0 Introductory text revised; amended.........................91747
1.355-8T Added.....................................................91747
1.358-6 (a) and (f)(3) amended; (c)(4) introductory text and (e)
revised; (f)(4) added......................................17074
1.362-3 Added......................................................17075
1.362-4 (c) heading, (h) introductory text and Example 11 revised;
(c)(3) added; (h) Example 4 and (j) amended................17082
1.367(a)-0 Added...................................................91021
1.367(a)-1 Revised.................................................91022
1.367(a)-1T (a), (b)(1), (2), (3), (4)(i)(A), (ii), (c)(3)(ii)(A),
(d) introductory text, (1), (2), (4) and (5) removed.......91024
1.367(a)-2 Revised.................................................91024
1.367(a)-2T (a)(2) amended.........................................15169
Removed........................................................91027
1.367(a)-3 (d)(2)(vi)(B), (3) Examples 6B, 6C, 9, (e) and
(g)(1)(vii)(A) revised; (g)(1)(ix) added...................15161
(d)(3) Example 12 amended......................................15169
[[Page 871]]
(c)(11) redesignated as (c)(11)(i); (c)(3)(iii)(B) heading and
new (11)(i) heading revised; (c)(3)(iii)(C), (11) heading and (ii)
added; (c)(11)(i) amended..........................................20883
(a)(3), (c)(3)(i)(A), (ii)(B), (4)(i), (5)(iv), (d)(3)
Examples 7A and 13 amended.........................................91027
1.367(a)-3T Removed................................................15169
Added..........................................................20883
(k) correctly revised..........................................40810
1.367(a)-4 Revised.................................................91027
1.367(a)-4T (d) amended............................................15169
Removed........................................................91028
1.367(a)-5 Removed.................................................91028
1.367(a)-5T Removed................................................91028
1.367(a)-6 Added...................................................15169
Revised........................................................91028
1.367(a)-6T (e)(4) and (j) removed.................................15169
(b)(2), (c)(2) and (4) removed.................................91028
1.367(a)-7 (c) introductory text, (2)(i)(A), (ii)(A)(1), (v),
(4)(ii), (e)(1), (4)(i), (ii), (5)(i), (ii), (f)(4)
introductory text, (i), (ii), (iii), (g) introductory text
and (h) amended............................................15169
(f)(11) revised; (j) redesignated as (j)(1) and amended;
(j)(2) added; (a), (c), (2)(i)(B), (ii)(A)(2), (e)(1), (2)(i),
(4)(ii), (5), (i), (ii), (f)(4)(ii), (g), Examples 1 and 2 and (h)
amended............................................................91028
1.367(a)-8 (c)(6) and (j)(9) amended...............................15169
(b)(1)(xvii), (c)(3)(viii), (4)(iv), (j)(3) and (8) amended....91029
1.367(b)-4 (b)(1)(iii) Examples 4 and 5 amended....................15169
(a), (b) introductory text and (d)(1) revised; (b)(1)(i)(A)(2)
and (B)(2) amended; (b)(1)(i)(C) and (h) added.....................20883
(b)(1)(i)(B)(2), (ii)(A), (2)(i)(A), (B), (C), (3)(i) and
(d)(2) Example corrected...........................................40811
1.367(b)-4T Revised................................................20883
(d)(1) corrected...............................................40811
1.367(d)-1 Added...................................................91029
1.367(d)-1T (b), (c)(3), (g)(2)(i), (iii)(E) and (3) removed.......91030
1.367(e)-1 (e) amended.............................................15169
1.367(e)-2 (b)(3)(iii) and (e)(4)(ii)(B) revised...................91030
1.368-3 (a)(3) and (b)(3) revised; (e) added.......................17083
1.382-1 Introductory text revised; amended.........................24483
1.382-12 Added.....................................................24483
1.385-1 Added......................................................72950
1.385-2 Added......................................................72952
1.385-3 Added......................................................72960
1.385-3T Added.....................................................72972
1.385-4T Added.....................................................72979
2017
(Regulations published from January 1, 2017, through April 1, 2017)
26 CFR
82 FR
Page
Chapter I
1.306-3 (e) amended.................................................6237
1.306-4 Added.......................................................6237
1.336-1 (b)(5)(i)(A) revised........................................6237
1.336-5 Heading revised; amended....................................6237
1.337(d)-7 (b)(2)(iii) and (g)(2)(iii) revised......................5388
1.337(d)-7T (b)(1), (2), (3) and (g)(2)(iii) revised................5388
1.355-6 (d)(1)(i)(A)(2) and (g) revised.............................6237
1.367(a)-1 Corrected...............................................52848
1.381(c)(2)-1 (d) removed..........................................42938
1.382-1 Amended.....................................................6237
1.382-9 (d)(5)(ii)(D) and (6)(i) revised............................6237
1.385-1 (c)(4)(vii) Example 2 correctly amended.....................8166
1.385-2 (a)(3)(ii)(C)(3), (c)(3)(i)(A) heading, (4)(ii)(E)
heading, (3) and (d)(2)(i)(A) correctly revised;
(a)(5)(i), (ii), (b)(1), (c)(2)(ii), (iii)(A), (E),
(3)(i)(A)(3)(i), (4)(ii)(A), (B)(1), (e)(3)(ii), (h)(4)
Example, (ii)(A) and (C) corrected; (c)(4)(ii)(B)(2)(i)
heading correctly added.....................................8166
1.385-3 (b)(3)(iii)(E)(2), (5) heading, (c)(3)(i)(C)(3) heading,
(i), (g)(3)(iv)(B)(1), (24)(ii)(B) and (C) correctly
revised; (c)(3)(i)(C)(1) correctly amended; (g)(3)(ii)
introductory text heading, (iii) introductory text
heading, (iv) introductory text heading and (g)(3)(v)
heading correctly added.....................................8167
[[Page 872]]
1.385-3T (b)(3)(vii)(A)(1)(iii), (h) Examples 13, 14, 15 and 18
correctly amended; (l) correctly revised....................8168
1.385-4T (b)(2), (3)(i), (6), (c)(1)(i), (d)(3) and (4)
introductory text, (f)(3) Examples 1, 4, and 5 corrected;
(b)(3)(ii), (iii), (4)(ii)(A)(1), (5)(i), (d)(4)(i), (ii),
(e)(3), (5) and (h) correctly revised.......................8168
2018
(No regulations published)
[all]