[Federal Register Volume 81, Number 243 (Monday, December 19, 2016)]
[Rules and Regulations]
[Pages 91738-91755]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30160]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9805]
RIN 1545-BN18


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations that provide 
guidance regarding the distribution by a distributing corporation of 
stock or securities of a controlled corporation without the recognition 
of income, gain, or loss. The temporary regulations provide guidance in 
determining whether a corporation is a predecessor or successor of a 
distributing or controlled corporation for purposes of the exception 
under section 355(e) of the Internal Revenue Code (Code) to the 
nonrecognition treatment afforded qualifying distributions, and they 
provide certain limitations on the recognition of gain in certain cases 
involving a predecessor of a distributing corporation. The temporary 
regulations also provide rules regarding the extent to which section 
355(f) of the Code causes a distributing corporation (and in certain 
cases its shareholders) to recognize income or gain on the distribution 
of stock or securities of a controlled corporation. These temporary 
regulations affect corporations that distribute the stock or securities 
of controlled corporations and the shareholders or security holders of 
those distributing corporations. The text of these temporary 
regulations also serves as the text of the proposed regulations in the 
related notice of proposed rulemaking (REG-140328-15) set forth in the 
Proposed Rules section in this issue of the Federal Register.

DATES: Effective date: These temporary regulations are effective on 
December 19, 2016.
    Applicability date: For dates of applicability see Sec.  1.355-
8T(i) and (j).

FOR FURTHER INFORMATION CONTACT: Richard K. Passales, (202) 317-5024 or 
Marie C. Milnes-Vasquez, (202) 317-7700 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

1. Overview

    On November 22, 2004, the Department of the Treasury (Treasury 
Department) and the IRS published in the Federal Register (69 FR 67873) 
a notice of proposed rulemaking (REG-145535-02) containing proposed 
regulations under section 355(e)(4)(D) of the Code (the proposed 
regulations). After considering the comments received on the proposed 
regulations and taking into account subsequently issued guidance as 
described in part 3. of this preamble, the Treasury Department and the 
IRS are issuing temporary regulations that adopt the proposed 
regulations with significant modifications based on the comments 
received on the proposed regulations. The temporary regulations also 
serve as the text of new proposed regulations in the related notice of 
proposed rulemaking (REG-140328-15) published in the Proposed Rules 
section in this issue of the Federal Register.
    The temporary regulations amend 26 CFR part 1 under section 355 to 
provide necessary guidance under section 355(e)(4)(D) regarding the 
identity of predecessor and successor corporations of distributing and 
controlled corporations and to enable taxpayers to utilize the benefit 
of certain gain limitation rules. The temporary regulations also 
provide guidance regarding the extent to which section 355(f) precludes 
the application of section 355 to certain distributions and exchanges 
between members of an affiliated group. Finally, the regulations 
provide guidance regarding the application of section 336(e) to certain 
distributions of controlled stock to which section 355(e) applies.
A. Section 355 in General
    Section 355(a) generally provides that if a distributing 
corporation (Distributing) distributes stock or securities of a 
controlled corporation (Controlled) to Distributing's shareholders or 
security holders and certain requirements are met, then no gain or loss 
is recognized by (and no amount is includible in the income of) 
Distributing's shareholders or security holders upon their receipt of 
the Controlled stock. Section 355(c) generally provides that 
Distributing does not recognize gain or loss on any distribution of 
qualified property to which section 355 (or so much of section 356 as 
relates to section 355) applies. Similar rules under section 361(c) 
apply in the case of a divisive reorganization under section

[[Page 91739]]

368(a)(1)(D) (a divisive D reorganization). Controlled stock or 
securities are qualified property under section 355(c)(2)(B) (or 
section 361(c)(2)(B)(ii) in the case of a divisive D reorganization), 
unless certain exceptions apply.
B. Sections 355(e) and (f)
    One exception to treating Controlled stock or securities as 
qualified property is provided under section 355(e), which was enacted 
as part of the Taxpayer Relief Act of 1997, Public Law 105-34, section 
1012(a), 111 Stat. 788. Under section 355(e), stock or securities of 
Controlled generally will not be treated as qualified property under 
sections 355(c)(2) or 361(c)(2) if the stock or securities are 
distributed as part of a plan or series of related transactions (a 
Plan) pursuant to which one or more persons acquire directly or 
indirectly stock representing a 50-percent or greater interest in the 
stock of Distributing or Controlled (a Planned 50-percent Acquisition). 
Section 1.355-7 of the Income Tax Regulations provides additional 
guidance on the meaning of a Plan.
    Under section 355(e)(2)(C), the existence of a purported Plan that 
includes a Planned 50-percent Acquisition will not prevent Controlled 
stock or securities from being treated as qualified property for 
purposes of section 355(c)(2) or section 361(c)(2) if, immediately 
after the completion of such Plan, Distributing and each Controlled are 
members of a single affiliated group, as defined in section 1504 
without regard to section 1504(b) (an Expanded Affiliated Group or 
EAG). As a result, section 355(e) generally does not apply to a 
distribution between members of the same EAG unless the distribution 
precedes a distribution of Controlled stock or securities outside of 
the EAG (an External Distribution) so that Controlled and Distributing 
are not members of the same EAG after completion of the Plan.
    Section 355(f) provides a special rule that applies to certain 
distributions between certain related corporations that do not qualify 
for the exception from section 355(e) under section 355(e)(2)(C). In 
particular, section 355(f) provides that, except as provided in 
regulations, section 355 (or so much of section 356 as relates to 
section 355) does not apply to the distribution of stock from one 
member of an affiliated group (as defined in section 1504(a)) to 
another member of the group if the distribution is part of a Plan that 
includes a Planned 50-percent Acquisition and is not described in 
section 355(e)(2)(C). For example, assume that a Planned 50-percent 
Acquisition of stock of a corporation (a Higher-Tier Distributing) that 
is the common parent of an affiliated group, as defined in section 
1504(a), occurs when the Higher-Tier Distributing owns all of the stock 
of a subsidiary member (a Lower-Tier Distributing), which in turn owns 
all of the stock of Controlled (also a member of the affiliated group). 
Under the Plan, the Lower-Tier Distributing distributes Controlled 
stock to the Higher-Tier Distributing (an Internal Distribution), and 
the Higher-Tier Distributing then distributes the Controlled stock in 
an External Distribution. Under these facts, section 355(e) would apply 
to the Internal Distribution of all of Controlled's stock by the Lower-
Tier Distributing to the Higher-Tier Distributing because the 
distribution is part of a Plan (after application of any exceptions to 
section 355(e), including section 355(e)(2)(C)). However, section 
355(f) provides that section 355 (or so much of section 356 as applies 
to section 355) would not apply to such an Internal Distribution. 
Therefore, the Internal Distribution would be taxable to the Lower-Tier 
Distributing under section 311 and to the Higher-Tier Distributing 
under section 301 (subject to any available dividends received 
deduction and section 1059) or subject to the special rules of Sec.  
1.1502-13(f) for distributions between members of the same consolidated 
group.
    Without the application of section 355(f), the Lower-Tier 
Distributing would recognize any gain in the Controlled stock by reason 
of section 355(e) (section 355(e) gain) in the Internal Distribution, 
but the Higher-Tier Distributing would be afforded nonrecognition 
treatment under section 355(a) on the receipt of Controlled stock. As a 
result, the Higher-Tier Distributing would not take a fair market value 
basis in the Controlled stock under section 301(d), but a basis 
determined under section 358(g), despite the Lower-Tier Distributing's 
recognition of section 355(e) gain. The Higher-Tier Distributing would 
also likely recognize additional section 355(e) gain on the subsequent 
External Distribution of the Controlled stock. Section 355(f) is 
intended to provide a benefit to such an affiliated group by 
effectively ensuring that the group recognizes section 355(e) gain only 
once at the lowest-tier Distributing, rather than at multiple levels. 
In addition, application of section 355(f) may eliminate duplicated 
loss, in some cases.
    Section 355(e)(3)(B) provides that, if the assets of Distributing 
or any Controlled are acquired by a successor corporation in a 
reorganization under section 368(a)(1)(A), (C), or (D), or any other 
transaction specified in regulations by the Secretary, the shareholders 
(immediately before the acquisition) of the corporation acquiring such 
assets are treated as acquiring stock in the corporation from which the 
assets were acquired.
    Section 355(e)(4)(D) provides that, for purposes of section 355(e), 
any reference to Controlled or Distributing includes a reference to any 
predecessor or successor of such corporation. As a result, Controlled 
stock or securities generally will not be treated as qualified property 
under section 355(c)(2) or 361(c)(2) if there is a Planned 50-percent 
Acquisition of the stock of a predecessor or successor of Distributing 
or Controlled.

2. Summary of Proposed Regulations

    Section 355(e) does not provide a definition of a predecessor or 
successor of Distributing or Controlled. The proposed regulations 
generally defined the terms predecessor and successor for purposes of 
section 355(e) and provided guidance regarding the acquisition or 
deemed acquisition of the stock of predecessors of Distributing and 
certain other acquisitions. As more fully described in part 2.E. of 
this preamble, the proposed regulations also limited Distributing's 
recognition of gain in two cases and provided an overall gain 
limitation. Parts 2.A. through 2.F. of this preamble describe the 
proposed regulations, which the temporary regulations largely adopt 
with the modifications described in part 3. of this preamble.
A. Predecessor of Distributing
    The preamble to the proposed regulations stated that the definition 
of a Predecessor of Distributing (a POD) in those regulations was 
intended to reflect the fact that section 355(e) generally denies tax-
free treatment under sections 355(c)(1) and 361(c)(1) if there is a 
division of Distributing's assets to which section 355(a) applies that 
is coupled with a Planned 50-percent Acquisition of Distributing or 
Controlled. The proposed regulations attempted to provide a similar 
result in cases in which the ownership of a POD's assets (rather than 
those of Distributing) would otherwise be divided tax-free as part of a 
Plan that included a Planned 50-percent Acquisition of a POD or 
Distributing.
    The proposed regulations generally defined a POD as a corporation 
that transferred its property in a transaction to which section 381(a) 
applies (section

[[Page 91740]]

381 transaction) to Distributing (a combining transfer) but only if 
Distributing then transferred some, but not all, of the property 
acquired in the combining transfer to Controlled in a transferred basis 
transaction before the distribution (a separating transfer). The 
definition was slightly different if Controlled stock was an asset 
transferred in the combining transfer. In addition, under the proposed 
regulations, no corporation could have been a predecessor of a POD.
    In addition, the proposed regulations provided three operating 
rules relating to the determination of predecessor status. The first 
was a substitute asset rule that prevented a corporation from avoiding 
treatment as a POD simply because property received by Distributing in 
a combining transfer (or by Controlled in a separating transfer) was 
transferred by Distributing before the separating transfer (or by 
Controlled before the distribution) in exchange for other property in a 
nonrecognition transaction. The second rule provided that the 
transferor corporation and resulting corporation in a reorganization 
under section 368(a)(1)(F) (an F reorganization) would be treated as 
the same entity for purposes of determining whether a corporation is a 
POD or a Predecessor of Controlled (POC), as described in part 2.B. of 
this preamble. Without such a rule, a corporation could circumvent the 
proposed regulations by engaging in an F reorganization, because the 
proposed regulations did not take into account predecessors of a POD or 
POC. The third rule provided that there may be more than one POD, for 
example, if multiple corporations merged directly with and into 
Distributing in distinct transactions to which section 381 applied.
    Under the proposed regulations, the definition of a POD was not 
tied to the existence of a Plan. Accordingly, a combining transfer and 
a separating transfer would be taken into account in identifying a POD 
even if neither transfer was part of a Plan; as a result, taxpayers 
would have been required to track the assets of any potential POD for 
an unlimited period prior to the distribution. In addition, once a POD 
had been identified, it would have been necessary to determine whether 
the distribution and any acquisitions (deemed or actual) of stock of 
the POD were part of a Plan, although the proposed regulations included 
no guidance relating to whether acquisitions of the stock of a POD and 
the distribution were part of a Plan.
B. Predecessor of Controlled
    The proposed regulations defined a POC as a corporation that 
transferred its assets to Controlled in a section 381 transaction 
before the distribution. However, whether a corporation was a POC was 
only taken into account for very limited purposes: (1) The definition 
of a POD, (2) the gain limitation rules described in part 2.E. of this 
preamble, and (3) the application of section 355(e)(2)(C), which is 
described in part 2.F. of this preamble. Other than for those limited 
purposes, a corporation would not be a POC under the proposed 
regulations. Further, no corporation could have been a predecessor of a 
POC.
C. Successor of Distributing and Controlled
    The proposed regulations defined a Successor of Distributing or 
Controlled as a corporation to which Distributing or Controlled, 
respectively, transferred its assets in a section 381 transaction after 
the distribution (a Successor Transaction). If, after the distribution, 
Distributing transferred its assets to a Successor in a Successor 
Transaction, the proposed regulations provided that the shareholders of 
the Successor immediately before the transaction would be deemed to 
acquire Distributing stock (and stock of any POD) in the Successor 
Transaction. Subsequent acquisitions of stock of the Successor would be 
treated as acquisitions of Distributing (and any PODs).
D. Special Rules for Measuring Acquisitions
    Under the proposed regulations, the determination of whether there 
was a Planned 50-percent Acquisition was made separately with respect 
to Distributing and the POD. Therefore, Distributing may have been 
required to recognize section 355(e) gain if there was a Planned 50-
percent Acquisition of a POD, but not of Distributing, and vice versa.
    The proposed regulations provided special rules to determine 
whether there had been an acquisition of the stock of a POD in 
connection with and after a combining transfer from a POD to 
Distributing. Consistent with section 355(e)(3)(B), the proposed 
regulations provided that each person that owned an interest in 
Distributing immediately before the combining transfer would be treated 
as acquiring stock of the POD in the transaction. For example, if 
Distributing acquired the assets of a POD in a statutory merger 
qualifying as a reorganization under section 368(a)(1)(A) (an A 
reorganization), and individual A owned stock of Distributing 
immediately before the merger, A would be treated as acquiring stock of 
the POD in the transaction. In addition, an acquisition of Distributing 
that occurred after Distributing's combination with a POD would be 
treated not only as an acquisition of Distributing, but also as an 
acquisition of the POD. For example, if Distributing acquired the 
assets of a POD in a statutory merger qualifying as an A reorganization 
and, after the merger, individual B acquired stock of Distributing, B 
would be treated as acquiring not only stock of Distributing, but also 
stock of the POD. Similar rules applied with respect to Controlled 
except that there was no provision for a deemed acquisition of the 
stock of a POC because such acquisitions were of no consequence under 
the proposed regulations.
    In addition, the proposed regulations provided that acquisitions of 
the stock of a corporation and its Successors would be combined to 
determine whether there had been a Planned 50-percent Acquisition of 
the corporation. For example, planned acquisitions of the stock of a 
POD, Distributing, and Distributing's Successors would be combined to 
determine whether there had been a Planned 50-percent Acquisition of 
the POD. Similarly, planned acquisitions of the stock of Distributing 
and its Successors would be combined to determine whether there had 
been a Planned 50-percent Acquisition of Distributing. In addition, 
planned acquisitions of the stock of Controlled and its Successors 
would be combined to determine whether there had been a Planned 50-
percent Acquisition of Controlled.
E. Limitations on Gain Recognition
    Generally, if there is a Planned 50-percent Acquisition of 
Distributing (or a POD), Controlled, or their Successors, then section 
355(e) requires Distributing to recognize the full amount of the built-
in gain in the Controlled stock on the date of the distribution under 
section 355(c)(2) or section 361(c)(2), as applicable. The proposed 
regulations provided two gain limitation rules limiting the amount of 
gain that Distributing must recognize in certain cases in which there 
was a POD and a third gain limitation rule providing an overall 
limitation on Distributing's gain.
    The first gain limitation rule applied when there was a Planned 50-
percent Acquisition of one or more PODs. In those cases, the 
calculation of the section 355(e) gain focused on assets of the POD(s) 
that were transferred to

[[Page 91741]]

Controlled and any Controlled stock transferred by the POD(s) to 
Distributing. Specifically, the proposed regulations limited the 
section 355(e) gain recognized by Distributing to the amount of gain, 
if any, that any PODs would have recognized if, immediately before the 
distribution each POD had (1) transferred the property that was 
transferred to Controlled (and any stock of Controlled that the POD 
transferred to Distributing) to a newly-formed, wholly-owned 
corporation solely for stock of such corporation in an exchange to 
which section 351 applied (section 351 exchange), and (2) then sold the 
stock of that corporation to an unrelated person in exchange for cash 
equal to its fair market value. In applying this first gain limitation 
rule, the proposed regulations provided four operating rules. The first 
operating rule was a substitute asset rule (similar to that described 
in part 2.A. of this preamble) that applied if property received by 
Distributing in a combining transfer had been exchanged tax-free. In 
such case, the property Distributing received in the exchange would be 
treated as property received in the combining transfer. The second 
operating rule provided that (other than Controlled stock) the only 
property taken into account for purposes of the first gain limitation 
rule would be property that was transferred to Controlled in the 
separating transfer (or a substitute asset received in a tax-free 
exchange for property received in the separating transfer) and held by 
Controlled at the time of the distribution. Under the third operating 
rule, the basis and value of the property (other than Controlled stock) 
would be determined as of the date of the distribution. The fourth 
operating rule provided that the basis and value of any Controlled 
stock that the POD transferred to Distributing would be measured on the 
date of the combining transfer.
    The second gain limitation rule applied if a section 381 
transaction (for example, an A reorganization of a POD into 
Distributing) caused a Planned 50-percent Acquisition of Distributing 
stock. Under those circumstances, the second gain limitation rule 
effectively limited the amount of section 355(e) gain that Distributing 
would recognize to the excess of the amount described in section 
355(c)(2) or section 361(c)(2), as applicable, over any section 355(e) 
gain that Distributing would have been required to recognize if there 
had been a Planned 50-percent Acquisition of one or more PODs (but not 
Distributing). The section 355(e) gain computed on the hypothetical 
Planned 50-percent Acquisition of Distributing would take into account 
the first gain limitation rule.
    The third gain limitation rule was an overall limitation on gain 
recognition. This rule limited the total amount of section 355(e) gain 
that could be recognized by Distributing as a result of the 
distribution to the amount of the built-in gain in the Controlled stock 
that, without regard to the first and second gain limitation rules, 
would be taken into account under section 355(c)(2) or section 
361(c)(2).
F. Special Rule for Affiliated Groups
    As described in part 1.B. of this preamble, section 355(e)(2)(C) 
provides that section 355(e) does not apply to a distribution between 
members of an EAG if, immediately after completion of the Plan, 
Distributing and Controlled both remain members of the same EAG. The 
proposed regulations included a special rule that would rationalize the 
application of section 355(e)(2)(C) within an EAG, following a section 
381 transaction. The proposed regulations provided that, for purposes 
of section 355(e)(2)(C), a POD or POC that was a member of the same EAG 
as Distributing or Controlled (as relevant) at the time of the section 
381 transaction would be treated as continuing in existence within the 
EAG following its transfer of property to Distributing or Controlled in 
the section 381 transaction. Similarly, Distributing or Controlled 
would be treated as continuing in existence following a transfer of 
property to a Successor that was a member of the same EAG. Without this 
rule, for example, because a POD that was a historic member of the EAG 
would not continue to exist for Federal income tax purposes after 
transferring property to Distributing in a combining transfer, section 
355(e)(2)(C) would not prevent section 355(e) from applying to a 
Planned 50-percent Acquisition of the stock of a POD, even if 
Distributing and Controlled remained members of the same EAG 
immediately after completion of the Plan.

3. Summary of Comments and Modifications Adopted in the Temporary 
Regulations

    The Treasury Department and the IRS received formal and informal 
comments regarding the proposed regulations. The comments and 
modifications to the proposed regulations adopted in the temporary 
regulations are discussed here. The temporary regulations retain many 
of the rules of the proposed regulations; however, in response to 
comments, the temporary regulations modify some provisions and add new 
provisions, as discussed in parts 3.A. through 3.D. of this preamble. 
In addition, the temporary regulations include certain non-substantive 
modifications to the organization of the rules of the proposed 
regulations.
A. Comments Regarding Definition of POD
i. Scope of Definition of a POD and Application of Sec.  1.355-7 Plan 
Rules
    The Treasury Department and the IRS received a comment regarding 
the narrow scope of the definition of a POD in the proposed 
regulations. Under the proposed regulations, the definition of a POD 
was limited to a corporation that, before the distribution, transferred 
property to Distributing in a section 381 transaction. Further, 
following the transfer from a POD, Distributing must have transferred 
some (but not all) of the acquired property to Controlled (or to a POC, 
as described below), and the basis of such property immediately after 
the transfer to Controlled (or a POC) must have been determined in 
whole or in part by reference to the basis of the property in the hands 
of Distributing immediately before the transfer. The commenter noted 
that the results contemplated by the definition of a POD of the 
proposed regulations (the tax-free separation of the POD's assets in 
the distribution, coupled with a potential 50-percent acquisition of 
the POD's stock) could be effectively replicated in a manner that would 
circumvent that definition and thereby avoid the application of section 
355(e) in substantially similar transactions. For example, assume that 
corporation D2 owns 100 percent of both classes (voting class A and 
voting class B) of corporation D1's stock, and D1 owns all of the stock 
of corporation C. The three corporations together file a consolidated 
return (the D2 group). Assume that the following steps occur as part of 
a Plan: D2 acquires all of the stock of unrelated corporation P in 
exchange for 10 percent of D2's only class of outstanding stock in a 
reorganization under section 368(a)(1)(B). After joining the D2 group, 
P transfers an asset to D1 for less than 20 percent of D1's voting 
class A stock in a section 351 exchange by application of Sec.  1.1502-
34. D1 then transfers the asset to C and distributes all the C stock 
with respect to its voting class B stock to D2 in a transaction 
qualifying under section 355(a). D2 in turn distributes all the C stock 
to its shareholders in a transaction qualifying under section 355(a). 
In such a case, P's assets have been divided tax-free as a result of 
the distribution of C stock, and P has undergone a 50-percent 
acquisition of

[[Page 91742]]

its stock, but section 355(e) would not apply because P did not engage 
in a section 381 transaction, although all steps occurred under a Plan.
    Commenters also expressed concern that the definition of a POD in 
the proposed regulations would apply without regard to whether the 
combining transfer or separating transfer were part of a Plan. These 
commenters further noted that the Plan rules of Sec.  1.355-7, which 
were published after the proposed regulations, did not provide express 
guidance regarding their application in cases involving an acquisition 
of a POD's stock that could implicate section 355(e). The commenters 
recommended that the proposed regulations be modified to include: (1) A 
rule stating that a corporation can satisfy the definition of a POD 
only if both the combining transfer and the separating transfer are 
part of a Plan, and (2) express guidance regarding the application of 
the Sec.  1.355-7 Plan rules in cases involving an acquisition of a 
POD's stock. The comments indicated that, absent the requirement that 
the combining transfer and the separating transfer both be part of a 
Plan, there could be uncertainty as to whether section 355(e) would 
apply to the acquisition of a potential POD if there is no Plan in 
existence at the time of the section 381 transaction. Further, this 
uncertainty would burden taxpayers by requiring assets acquired by 
Distributing in any section 381 transaction at any time to be tracked 
through the date of the distribution without knowing whether section 
355(e) would apply.
    The Treasury Department and the IRS have determined that the normal 
construct of the Plan rules in Sec.  1.355-7 generally should apply to 
acquisitions of POD stock (as well as to acquisitions of the stock of 
Distributing, Controlled, and their Successors). Accordingly, the 
temporary regulations provide a general rule that references in Sec.  
1.355-7 to Distributing or Controlled are treated as references to a 
POD, POC, or Successor of Distributing or Controlled, as the context 
may require. Further, a reference to a distribution generally includes 
a reference to a distribution and other related pre-distribution 
transactions that together effect a division of the assets of a POD. 
However, special rules apply with regard to the actions taken into 
account in determining whether a 50-percent acquisition of a POD occurs 
as part of Plan. Although a 50-percent acquisition of a POD may occur 
contemporaneously with a distribution made by Distributing, the 
acquisition and distribution might occur as part of a Plan of the POD, 
but without the participation (or even the knowledge) of Distributing. 
Because Distributing would be the corporation that could recognize 
section 355(e) gain, the Treasury Department and the IRS have 
determined that it is not appropriate to apply the rules of Sec.  
1.355-7 by imputing to Distributing the actions of a POD or its 
shareholders. Accordingly, these temporary regulations provide that any 
agreement, understanding, arrangement, or substantial negotiations with 
regard to the acquisition of a POD is analyzed under Sec.  1.355-7 by 
taking into account 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 the implicit or explicit permission of one of those parties. The 
actions of officers or directors of a POD and other parties that might 
be relevant with regard to an analysis under Sec.  1.355-7 if the POD 
were an actual Distributing are not considered unless those actions 
otherwise would be examined under the preceding sentence (for example, 
if a POD or its shareholder is a controlling shareholder of 
Distributing).
    In addition, the Treasury Department and the IRS agree with the 
comment that the definition of a POD in the proposed regulations, with 
its exclusive application to transferors in section 381 transactions, 
did not adequately address section 355(e) policy concerns regarding the 
use of section 355 to facilitate tax-free dispositions of assets. The 
Treasury Department and the IRS also agree with commenters that the 
existence of a Plan should be relevant to the determination of whether 
a corporation is a POD, to minimize the burden of tracking a 
corporation's assets prior to the distribution. Therefore, as described 
in the following paragraphs, the modified definition of a POD contained 
in the temporary regulations takes into account both of these comments.
ii. Modifications to Definition of a POD
a. Synthetic Spin-Off Analysis
    Study by the Treasury Department and the IRS arising from 
consideration of the comments received on the proposed regulations has 
led to the identification of a variety of pre-distribution transactions 
that taxpayers could use to achieve results substantially similar to a 
combining transfer and separating transfer. For example, as described 
in part 3.A.i. of this preamble, a corporation could transfer some, but 
not all, of its assets to Distributing in a section 351 exchange, with 
those assets ultimately being held by Controlled when its stock is 
distributed by Distributing. However, under the proposed regulations, 
POD status would not attach to the transferor because the division of 
the transferor's assets would be accomplished using a section 351 
exchange and not in a section 381 transaction (that is, a combining 
transfer).
    The Treasury Department and the IRS have reviewed the major goal of 
the proposed regulations, as discussed at part 2.A. of this preamble: 
To apply section 355(e) in cases in which, as part of a Plan, a tax-
free division of the ownership of the POD's assets would otherwise be 
achieved through the use of a section 355 distribution. Although not 
discussed in depth in the preamble of the proposed regulations, the 
overarching theory was to apply section 355(e) to a section 355 
distribution if, as part of a Plan, some of the assets of a POD were 
transferred to Controlled without full recognition of gain, and the 
distribution accomplished a division of the POD's assets. The Treasury 
Department and the IRS viewed (and continue to view) this type of 
transaction as a vehicle for achieving, as a result of the distribution 
of Controlled stock, the tax-free separation of the assets that the POD 
transferred to Distributing that are further transferred to Controlled 
(a synthetic spin-off). The POD might have separated those assets in a 
divisive D reorganization, without the intervention of Distributing. 
However, in that case, section 355(e) may have applied to the section 
355 distribution, whereas, absent treatment as a POD, a synthetic spin-
off of the POD's assets would not be subject to section 355(e).
    The proposed regulations defined a POD narrowly, so that a 
corporation that transferred some of its assets to Controlled would be 
a POD only if it first transferred those assets to Distributing in a 
section 381 transaction. To achieve the goal of applying section 355(e) 
to synthetic spin-offs more effectively, these temporary regulations 
have both broadened and limited the scope of the definition of a POD. 
As discussed in greater detail in part 3.A.ii.b. of this preamble, the 
temporary regulations eliminate the formalistic requirements of a 
combining transfer followed by a separating transfer and generally 
identify as a POD any corporation whose assets are divided as part of a 
Plan as a result of some but not all of those assets being transferred 
to Controlled without the recognition of all of the built-in gain on 
the transferred assets before the distribution. No specific 
transactional form is required with regard to the transfer(s) of assets 
to

[[Page 91743]]

Controlled, although such transfers must be made as part of a Plan. 
Thus, Distributing may recognize section 355(e) gain on a distribution 
of Controlled stock if Controlled acquired assets of any corporation 
identified as a POD, and the POD experiences a Planned 50-percent 
Acquisition of its stock.
b. Definition of a POD in the Temporary Regulations
    Consistent with the synthetic spin-off analysis described in part 
3.A.ii.a. of this preamble, the temporary regulations focus in a more 
conceptual manner on the division of property of any corporation other 
than Distributing or Controlled (a Potential Predecessor) as part of a 
Plan. Certain property of a Potential Predecessor (Relevant Property) 
is required to be tracked for the purpose of determining whether a 
division of the Potential Predecessor's property has occurred. Relevant 
Property is defined as any property held, directly or indirectly, by 
the Potential Predecessor at any point during the Plan Period. The Plan 
Period, in turn, is defined as 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. The 
temporary regulations generally do not treat as Relevant Property any 
property of a Potential Predecessor that was held directly or 
indirectly by Distributing or Controlled before a Plan existed. Rather, 
the definition of Relevant Property of a Potential Predecessor excludes 
any property held directly or indirectly by Distributing unless that 
property was directly or indirectly transferred to Distributing as part 
of a Plan, and it was Relevant Property of the Potential Predecessor 
before the transfer.
    Because POD status under the temporary regulations depends in large 
part upon the division of the Relevant Property of a Potential 
Predecessor, Relevant Property must be carefully defined and transfers 
of Relevant Property as part of a Plan must be tracked to achieve the 
goals of the temporary regulations. Thus, although the modified 
definition of a POD is conceptual in nature, it is implemented through 
application of a set of defined terms. In addition to Relevant Property 
and Plan Period, the following defined terms are integral to applying 
the modified definition of a POD:
    Relevant Stock--Stock that is a Potential Predecessor's Relevant 
Property.
    Substitute Asset--In general, any property that is held directly or 
indirectly by Distributing during the Plan Period and that was received 
in exchange for Relevant Property that was acquired directly or 
indirectly by Distributing if all gain on the transferred Relevant 
Property is not recognized in the exchange. 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.
    Separated Property--Each item of Relevant Property that is 
transferred to Controlled as part of a Plan and is held by Controlled 
immediately before the distribution. Also, Controlled stock that is 
Relevant Property and that is transferred to, and distributed by, 
Distributing as part of a Plan.
    Underlying Property--Property directly or indirectly held by a 
corporation that is the issuer of Relevant Stock.
    The definition of a POD, which focuses on the division of Relevant 
Property as part of a Plan, requires the satisfaction of both pre-
distribution and post-distribution requirements. There are two pre-
distribution requirements: A Relevant Property requirement and a 
reflection of basis requirement. The Relevant Property requirement may 
be satisfied in two ways. The Relevant Property requirement may be 
satisfied if, before the distribution and as part of a Plan, 
Distributing directly or indirectly acquires Controlled stock in 
exchange for a direct or indirect interest in Relevant Property. In 
addition, Controlled must directly or indirectly hold Relevant Property 
immediately before the distribution, and the gain in the Relevant 
Property must not have been fully recognized as part of the Plan. The 
Relevant Property requirement also may be satisfied if any Controlled 
stock that is distributed as part of the Plan is Relevant Property, and 
the full amount of gain on that Controlled stock is not recognized as 
part of the Plan. In either case and as discussed earlier in this part 
3.A.ii.b., for purposes of determining POD status, a Potential 
Predecessor will not be treated as an indirect owner of property that 
is directly or indirectly held by Distributing unless that property was 
transferred to Distributing as part of a Plan.
    The reflection of basis requirement is satisfied only if any 
Controlled stock distributed in the distribution reflects the basis of 
any Separated Property. This requirement ensures that there is a 
connection between the gain in the property of a POD and the gain that 
would be included under an application of section 355(e) and these 
temporary regulations. For example, under this rule, if section 355(e) 
applies to each of two sequential distributions of Controlled stock, 
the Controlled stock that is distributed in the second distribution 
might not reflect any gain in Separated Property of a Potential 
Predecessor of the first Distributing. In that case, the Potential 
Predecessor will not be treated as a POD for purposes of the second 
distribution, even though that Potential Predecessor may have been a 
POD for purposes of the first distribution.
    In addition to the two pre-distribution requirements, a single 
post-distribution requirement applies: Immediately after the 
distribution, direct or indirect ownership of Relevant Property must 
have 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 the preceding sentence, 
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. If all of the Relevant Property of a Potential Predecessor 
is transferred to Controlled before the distribution, that Potential 
Predecessor is not a POD because its assets have not been divided.
    Special rules apply to ensure that the occurrence of a 
reorganization under section 368(a)(1)(E) or (F) to which Distributing 
is a party does not affect the analysis of whether Distributing stock 
or Distributing's direct and indirect assets are treated as Relevant 
Property.
    The definition of a POD under the temporary regulations captures 
many of the same transactions that would have been captured under the 
proposed regulations without modification. For example, the merger of a 
Potential Predecessor into Distributing as part of a Plan, followed by 
the transfer of some (but not all) of the assets of the Potential 
Predecessor to Controlled as part of the Plan would result in the 
Potential Predecessor being treated as a POD under both regulations. 
However, the definition of a POD under the temporary regulations will 
reach a number of other Potential Predecessors, including indirect 
transferors, particularly because, under the modified definition, 
Relevant Property expressly includes

[[Page 91744]]

both the directly and indirectly-held property of a Potential 
Predecessor. Therefore, in determining whether Relevant Property has 
been divided (and, thus, whether a POD exists), the temporary 
regulations consider an expanded pool of Potential Predecessors. For 
example, if a Potential Predecessor transfers Relevant Property to 
Distributing in a section 351 exchange as part of a Plan, the Potential 
Predecessor may be a POD, as may be a direct or indirect corporate 
shareholder of the Potential Predecessor (an indirect owner of the 
Relevant Property during the Plan Period), if the Potential 
Predecessor's Relevant Property (directly or indirectly held) is 
ultimately divided, as part of the Plan, as a result of the 
distribution. As another example, a Potential Predecessor that merges 
into Distributing in a forward triangular merger as part of a Plan may 
be a POD, as well as a direct or indirect corporate shareholder of the 
Potential Predecessor during the Plan Period. However, as discussed 
earlier in this part 3.A.ii.b., in either case, the Potential 
Predecessor's Relevant Property ultimately must be divided as part of 
the Plan to satisfy the post-distribution requirement.
    As discussed earlier in this part 3.A.ii.b., the temporary 
regulations require the tracking of assets for purposes of identifying 
PODs; as discussed further in part 3.B. of this preamble, the temporary 
regulations also require asset tracking for purposes of application of 
the gain limitation rules. However, to alleviate this burden (as 
identified in the comments received on the proposed regulations), the 
temporary regulations provide that only direct or indirect transfers of 
Relevant Property (including Controlled stock) by a Potential 
Predecessor to Distributing (or to a POD (see discussion in part 
3.A.iii. of this preamble)) that occur as part of a Plan are relevant 
in determining whether a Potential Predecessor is treated as a POD or a 
predecessor of a POD (the Plan Limitation). Similarly, only assets 
transferred as part of a Plan are relevant for application of the gain 
limitation rules. If no transfer of property of a Potential Predecessor 
to Distributing or Controlled occurs as part of a Plan, there is no 
requirement for taxpayers to track assets of any Potential Predecessor 
under the temporary regulations.
    The Treasury Department and the IRS recognize that there may be 
potential difficulties in applying section 355(e) to a POD that does 
not cease to exist as a result of the transaction in which it becomes a 
POD. However, it is expected that in many (if not most) cases, a POD 
will cease to exist as a result of the transaction in which it becomes 
a POD. Further, under the first gain limitation rule of the temporary 
regulations, Distributing will recognize section 355(e) gain on the 
division of Relevant Property only if there has been a Planned 50-
percent Acquisition of a POD. Because only acquisitions of a POD's 
stock that occur as part of a Plan are relevant to these inquiries, 
Distributing should be in possession of the necessary information to 
determine whether section 355(e) will apply. The Treasury Department 
and the IRS request comments regarding the integration of the Plan 
Limitation rule and the definition of a POD under the temporary 
regulations.
iii. Substitute Assets and POCs
    As discussed in part 3.A.ii.b. of this preamble, the POD status 
under these temporary regulations depends in large part upon the 
division of Relevant Property of a Potential Predecessor as part of a 
Plan. Therefore, to better effectuate the tracking of Relevant Property 
(and, by extension, Separated Property), these temporary regulations 
broaden the definition of a Substitute Asset, which is treated as 
Relevant Property. Under these temporary regulations, a Substitute 
Asset is any property that is held directly or indirectly by 
Distributing during the Plan Period and was received 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. Controlled stock may constitute a 
Substitute Asset (and thus, Relevant Property) only if that Controlled 
stock received (or deemed received) in the exchange reflects the basis 
of Relevant Stock and the issuer of that Relevant Stock ceases to exist 
for Federal income tax purposes under the Plan. Treatment of this type 
of Controlled stock as Relevant Property eliminates the need for 
application of the POC concept for purposes of determining POD status 
and computing gain limitations. Accordingly, these temporary 
regulations reduce the scope of the POC rule to apply solely for 
purposes of applying the affiliated group rule of section 355(e)(2)(C).
iv. Successive Predecessors
    The Treasury Department and the IRS have determined that the Plan 
Limitation rule described in part 3.A.ii.b. of this preamble mitigates 
much of the burden associated with tracking successive PODs. Thus, the 
temporary regulations treat a predecessor of a POD as a POD. A 
corporation is a predecessor of a POD if it transfers assets to the POD 
as part of a Plan, and all additional pre- and post-distribution 
requirements are satisfied with respect to its assets. The temporary 
regulations include a similar rule with respect to a predecessor of a 
POC. Because the temporary regulations recognize successive 
predecessors of Distributing and Controlled, it is no longer necessary 
to include the general operating rule contained in the proposed 
regulations that would have treated the resulting corporation in an F 
reorganization as the same corporation that engaged in the 
reorganization. Accordingly, the temporary regulations eliminate this 
operating rule.
B. Special Rules for Gain Recognition
    The gain limitation rules of the proposed regulations are 
incorporated in the temporary regulations, with modifications to 
address certain concerns of commenters. Commenters expressed three main 
concerns with respect to the first gain limitation in the proposed 
regulations, which applies if there is a Planned 50-percent Acquisition 
of a POD.
    First, commenters stated that the hypothetical section 351 exchange 
construct used in the first gain limitation rule to determine 
Distributing's section 355(e) gain on a Planned 50-percent Acquisition 
of a POD was unnecessarily complicated because of its reliance on rules 
ancillary to section 351. Specifically, commenters were uncertain as to 
whether (or how) the loss importation rules under then-recently-enacted 
section 362(e) would apply to the hypothetical section 351 exchange. 
Commenters requested that, in lieu of the hypothetical section 351 
exchange, gain be limited to the difference between the aggregate basis 
in the POD's assets actually transferred to Controlled and the 
aggregate fair market value of those assets immediately before the 
distribution.
    The second main concern of commenters was that the proposed 
regulations imposed a tracking burden with respect to a POD's assets. 
Third, commenters noted that measuring the value of Controlled stock 
acquired by Distributing from a POD at the time of the combining 
transfer (as opposed to at the time of the distribution, as is the case 
with other property) could be burdensome.
    With regard to the first concern, the Treasury Department and the 
IRS do not agree with the commenters' suggestion that the first gain 
limitation rule applicable to a Planned 50-percent Acquisition of a POD 
should be measured solely by reference to the

[[Page 91745]]

difference between the aggregate basis and the aggregate fair market 
value in a POD's assets transferred to Controlled. Outside of the POD 
context, application of section 355(e) results in the recognition of 
gain on Controlled stock, rather than on assets held by Controlled. As 
discussed in part 3.A.ii.a. of this preamble, the policy underlying the 
proposed regulations was to apply section 355(e) to result in section 
355(e) gain equivalent to that obtained if some of the assets of a POD 
had been transferred to a hypothetical Controlled without full 
recognition of gain, and a division of the POD's assets were 
accomplished through a hypothetical distribution to which section 
355(e) applied. That theory continues to underlie these temporary 
regulations. Therefore, the Treasury Department and the IRS have 
determined that a limitation on section 355(e) gain equal to the gain 
in the stock of a hypothetical Controlled following a transfer of POD 
assets is appropriate. In addition, the commenters' concerns regarding 
the possible application of section 362(e), highlighted by the use of a 
hypothetical section 351 and sale construct in the proposed 
regulations, should be eased by the intervening promulgation of final 
regulations under section 362(e)(1) and (2). See Sec. Sec.  1.362-3 and 
1.362-4. However, to avoid confusion regarding the applicable Code 
provisions to be applied in determining the appropriate amount of 
section 355(e) gain to be recognized by Distributing, these temporary 
regulations modify the first and second gain limitation rules to result 
in section 355(e) gain that would have been present in hypothetical 
Controlled stock, had Distributing transferred assets to a hypothetical 
Controlled and distributed its stock in a hypothetical reorganization 
under section 368(a)(1)(D) and section 355(e) (a Hypothetical D/355(e) 
Reorganization), rather than a section 351 exchange followed by a 
hypothetical sale. This formulation will more closely reflect the 
policy underlying the proposed regulations and these temporary 
regulations.
    With regard to the second concern, as discussed in part 3.A.ii.b. 
of this preamble, these temporary regulations mitigate the burden of 
tracking assets by providing that a Potential Predecessor can be a POD 
only if the assets of the Potential Predecessor are transferred as part 
of a Plan. If such a transfer occurs as part of a Plan, the required 
tracking burden is knowable by Distributing; if there is no Plan, there 
is no requirement to track any assets of a Potential Predecessor under 
the temporary regulations. In addition, the Treasury Department and the 
IRS continue to view the burden of tracking a POD's assets imposed by 
the first gain limitation rule as preferable to requiring Distributing 
to recognize the full amount of section 355(e) gain that Distributing 
would otherwise recognize under section 355(c)(2) or 361(c)(2) (the 
Statutory Recognition Amount) in the absence of such a rule. 
Nevertheless, the temporary regulations provide that Distributing may 
choose not to apply the first or second gain limitation rules to a 
distribution, and instead may recognize the Statutory Recognition 
Amount, by reporting the Statutory Recognition Amount on its original 
or amended Federal income tax return for the year of the distribution.
    With regard to the measurement of gain on Controlled stock that is 
Separated Property, the Treasury Department and the IRS agree that it 
is preferable to measure this gain as of the time of the distribution. 
Using the date of the distribution to measure the gain attributable to 
the POD's Controlled stock allows for investment adjustments to be made 
with respect to such stock if Distributing is a member of a 
consolidated group. Such adjustments often will mitigate the effect of 
multiple layers of taxation on the same economic gain. Accordingly, 
these temporary regulations include modifications to the proposed 
regulations that address the commenters' concerns.
    The temporary regulations implement the modifications discussed 
using terminology that is consistent with the modification of the 
definition of a POD. Thus, the temporary regulations provide that the 
first gain limitation rule applicable to a Planned 50-percent 
Acquisition of a POD equals the amount of section 355(e) gain 
Distributing would have recognized if, immediately before the 
distribution, Distributing had transferred all the Separated Property 
received from the POD to a newly-formed corporation in exchange solely 
for stock of such corporation in a Hypothetical D/355(e) 
Reorganization.
    With regard to situations in which there is a Planned 50-percent 
Acquisition of Distributing, the temporary regulations modify the 
language of the second gain limitation rule to conform to the modified 
definition of a POD. However, the substance of the rule remains: If the 
Planned 50-percent Acquisition of Distributing stock occurs in a 
section 381 transaction in which a POD transfers its assets to 
Distributing, the amount of section 355(e) gain recognized is limited. 
This rule is intended to minimize the Federal income tax impact of 
directionality between economically equivalent section 381 
transactions. That is, the same result should obtain under the 
temporary regulations regardless of which party to the section 381 
transaction is the transferor corporation and which is the acquiring 
corporation.
    Because the temporary regulations require the tracking of both the 
direct and indirect assets of PODs, the Treasury Department and the IRS 
have determined that certain additional limitations on the recognition 
of gain are appropriate. First, the definition of Separated Property 
excludes property indirectly held by a POD if the stock of the 
corporation that directly owns the property is Separated Property (and 
thus is already taken into account for gain recognition purposes). 
Thus, a corporation's Underlying Property is excluded from the gain 
recognition computation if the corporation's stock is Relevant Stock 
transferred to Controlled as part of a Plan and held by Controlled 
immediately before the distribution. The temporary regulations also 
provide a prohibition on counting the same asset as Relevant Property 
of successive PODs, as well as a more general anti-duplication rule, 
which ensures that the same economic gain is not captured multiple 
times under section 355(e) and these regulations.
C. Section 336(e) Election
    Effective for certain sales, exchanges, or distributions of stock 
made by a domestic corporation on or after May 15, 2013, regulations 
under section 336(e) permit, in certain circumstances, a domestic 
corporation to elect to treat a sale, exchange, or distribution of the 
stock of a corporation as an asset sale. See Sec. Sec.  1.336-1 through 
1.336-5. The temporary regulations clarify that Distributing may elect 
to apply the regulations under section 336(e) to a distribution of 
Controlled stock to which the temporary regulations apply, provided 
that the transaction otherwise satisfies the requirements of the 
regulations under section 336(e), and Distributing would otherwise be 
required under these temporary regulations to recognize the Statutory 
Recognition Amount with respect to the Controlled stock its 
distributes.
D. Successors
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comments regarding whether transferees 
of the property of Distributing or Controlled in transactions other 
than section 381 transactions should be considered Successors. One 
comment on the

[[Page 91746]]

proposed regulations endorsed treating a transferee in a section 351 or 
section 721 transaction as a Successor, but only in limited 
circumstances. Although the Treasury Department and the IRS continue to 
study this issue, the temporary regulations treat as a Successor for 
section 355(e) purposes only a transferee to which Distributing or 
Controlled transferred its assets in a section 381 transaction after a 
distribution.
E. Section 355(f)
    As described in part 1.B. of this preamble, by operation of section 
355(e)(2)(C), section 355(e) does not apply to an Internal Distribution 
if immediately after the Plan Distributing and each Controlled remain 
members of the same Expanded Affiliated Group. Also, as described in 
part 1.B. of this preamble, section 355(f) prevents section 355 from 
applying to an Internal Distribution if section 355(e) would otherwise 
apply to such distribution (that is, if after the Plan, Controlled or 
the Lower-Tier Distributing is not a member of the affiliated group as 
a result of an External Distribution). Because section 355 would not 
apply, the Internal Distribution would be taxable, and the shareholder 
or security holder would take the Controlled stock or securities with a 
fair market value basis under section 301(d). Upon the subsequent 
External Distribution, there typically no longer would be built-in gain 
in the Controlled stock or securities to result in additional section 
355(e) gain.
    The Treasury Department and the IRS have determined that the 
application of section 355(f) may frustrate the policy underlying the 
first and second gain limitation rules of these temporary regulations 
in certain cases. Specifically, if there is a Planned 50-percent 
Acquisition of only a predecessor of the Lower-Tier Distributing (and 
not of Controlled or the Lower-Tier Distributing), the stock or 
securities of Controlled are distributed in an Internal Distribution by 
the Lower-Tier Distributing, and each of the acquisition(s) and the 
Internal Distribution precedes an External Distribution of Controlled 
as part of the same Plan, then section 355(f) would be expected to 
apply to the Internal Distribution. If section 355(f) were to apply, no 
part of section 355 would apply (including the gain limitation rules 
under these temporary regulations). Without application of the first 
and second gain limitation rules, the full amount of built-in gain in 
the Controlled stock or securities would be recognized by the Lower-
Tier Distributing under section 311 on its distribution of Controlled 
stock, even though section 355(f) would have applied only as a result 
of a Planned 50-percent Acquisition of a predecessor of the Lower-Tier 
Distributing (and not of Controlled or the Lower-Tier Distributing). 
However, there may be circumstances under which taxpayers wish to apply 
section 355(f) to such distributions instead of the first or second 
gain limitation rules provided by these temporary regulations.
    Accordingly, these temporary regulations provide that section 
355(f) does not apply if there is a Planned 50-percent Acquisition of 
the stock of a predecessor of a Lower-Tier Distributing but not of the 
stock of the Lower-Tier Distributing or Controlled. As a result, 
section 355(e), including the first and second gain limitation rules in 
these temporary regulations, applies to the Internal Distribution. 
However, the temporary regulations provide that a Lower-Tier 
Distributing may choose to apply section 355(f) to an Internal 
Distribution it makes without any limitation on the gain it recognizes, 
but only if each member of the affiliated group (as defined in section 
1504(a)) of which the Lower-Tier Distributing is a member reports the 
Federal income tax consequences of the Internal Distribution consistent 
with the application of section 355(f).

Effective/Applicability Date

    These temporary regulations apply to distributions that occur after 
January 18, 2017. However, these regulations do not apply to a 
distribution that is: (1) Made pursuant to a binding agreement in 
effect on or before December 16, 2016, and at all times thereafter, (2) 
described in a ruling request submitted to the IRS on or before 
December 16, 2016 for a transaction that is not modified after such 
date, or (3) described on or before December 16, 2016 in a public 
announcement or in a filing with the Securities and Exchange 
Commission. In addition, Distributing and any affiliated group of which 
it is a member may consistently apply these regulations in their 
entirety to any distribution occurring after November 22, 2004. If so, 
taxpayers must consistently apply this section in its entirety to all 
distributions occurring after November 22, 2004, that are part of the 
same Plan.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. These temporary regulations are necessary to provide 
necessary guidance regarding the identity of predecessor and successor 
corporations of distributing and controlled corporations, to enable 
taxpayers to utilize the benefit of certain gain limitation rules with 
respect to certain section 355(e) transactions, and to enable taxpayers 
to choose to apply or not to apply section 355(f). These subjects were 
framed for discussion in a prior notice of proposed rulemaking (REG-
145535-02) and modifications to the proposed regulations in these 
temporary regulations either flow directly from comments received 
relating to the definition of a Predecessor of Distributing set forth 
in that notice of proposed rulemaking or permit taxpayers to 
effectively elect the tax consequences of transactions subject to the 
proposed regulations. For this reason, it has been determined, pursuant 
to 5 U.S.C. 553(b)(B), that good cause exists for dispensing with the 
notice and public comment procedures. However, to minimize their effect 
on pending transactions, these regulations apply only to distributions 
occurring 30 days or more after the date this Treasury decision is 
published in the Federal Register. For the applicability of the 
Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special 
Analyses section of the preamble of the cross-referenced notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register. Pursuant to section 7805(f) of the 
Internal Revenue Code, this regulation has been submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small businesses.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

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


[[Page 91747]]


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

    Section 1.355-8T also issued under 26 U.S.C. 336(e) and 
355(e)(5).


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


Sec.  1.355-0   Outline of sections.

    In order to facilitate the use of Sec. Sec.  1.355-1 through 1.355-
8T, this section lists the major paragraphs in those sections as 
follows:
* * * * *
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.
    (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.


0
Par. 3. Section 1.355-8T is added to read as follows:


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

[[Page 91748]]

(e) of this section also provides guidance 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.
    (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

[[Page 91749]]

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, 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 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

[[Page 91750]]

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 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 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

[[Page 91751]]

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):

    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

[[Page 91752]]

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 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 
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

[[Page 91753]]

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 
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 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

[[Page 91754]]

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 $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,

[[Page 91755]]

Distributing may claim the benefit of the transition rule of paragraph 
(i)(2) of this section only 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.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.

    Approved: December 1, 2016.

Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-30160 Filed 12-16-16; 8:45 am]
 BILLING CODE 4830-01-P