Proposed Rule2023-22061
Guidance Under Section 367(b) Related to Certain Triangular Reorganizations and Inbound Nonrecognition Transactions
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Published
October 6, 2023
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document proposes regulations announced and described in Notice 2014-32 and Notice 2016-73, with modifications. The proposed regulations relate to the treatment of property used to acquire parent stock or securities in connection with certain triangular reorganizations involving one or more foreign corporations; the consequences to persons that receive parent stock or securities pursuant to such reorganizations; and the treatment of certain subsequent inbound nonrecognition transactions following such reorganizations and certain other transactions. The proposed regulations affect corporations engaged in certain triangular reorganizations involving one or more foreign corporations, certain shareholders of foreign corporations acquired in such reorganizations, and foreign corporations that participate in certain inbound nonrecognition transactions.
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[Federal Register Volume 88, Number 193 (Friday, October 6, 2023)]
[Proposed Rules]
[Pages 69559-69578]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-22061]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-117614-14]
RIN 1545-BM19
Guidance Under Section 367(b) Related to Certain Triangular
Reorganizations and Inbound Nonrecognition Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document proposes regulations announced and described in
Notice 2014-32 and Notice 2016-73, with modifications. The proposed
regulations relate to the treatment of property used to acquire parent
stock or securities in connection with certain triangular
reorganizations involving one or more foreign corporations; the
consequences to persons that receive parent stock or securities
pursuant to such reorganizations; and the treatment of certain
subsequent inbound nonrecognition transactions following such
reorganizations and certain other transactions. The proposed
regulations affect corporations engaged in certain triangular
reorganizations involving one or more foreign corporations, certain
shareholders of foreign corporations acquired in such reorganizations,
and foreign corporations that participate in certain inbound
nonrecognition transactions.
DATES: Written or electronic comments and requests for a public hearing
must be received by December 5, 2023. Requests for a public hearing
must be submitted as prescribed in the ``Comments and Request for
Public Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-117614-
14) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury (Treasury Department) and
the IRS will publish for public availability any comments submitted
electronically and on paper, to its public docket. Send paper
submissions to: CC:PA:LPD:PR (REG-117614-14), Room 5203, Internal
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC
20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Brady Plastaras at (202) 317-6937; concerning submission of comments,
requests for a public hearing, and access to a public hearing, Vivian
Hayes at (202) 317-5306 (not toll-free numbers) or by email at
<a href="/cdn-cgi/l/email-protection#7d0d081f11141e15181c0f14131a0e3d140f0e531a120b"><span class="__cf_email__" data-cfemail="38484d5a54515b505d594a51565f4b78514a4b165f574e">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Background
On May 19, 2011, the Treasury Department and the IRS published
final regulations (TD 9526) in the Federal Register (76 FR 28890) under
section 367(b) that relate to the treatment of property used to acquire
parent stock or securities in certain triangular reorganizations
involving one or more foreign corporations (the Final Regulations). On
April 25, 2014, the Treasury Department and the IRS issued Notice 2014-
32 (2014-20 IRB 1006), which identified transactions designed to
exploit certain aspects of the Final Regulations and announced that
regulations would be issued under section 367 to address these
transactions. On December 2, 2016, the Treasury Department and the IRS
issued Notice 2016-73 (2016-52 IRB 908), which identified other
transactions designed to exploit the Final Regulations, as modified by
the rules announced in Notice 2014-32, and announced that additional
regulations would be issued under section 367. The Treasury Department
and the IRS believe that the transactions described in each notice
raise significant policy concerns.
This document sets forth the regulations described in Notice 2014-
32 and Notice 2016-73, modified as discussed in this preamble. In
response to a request for comments in Notice 2016-73, one comment was
received and is discussed in this preamble. No comments were received
on Notice 2014-32.
Explanation of Provisions; Summary of Comment in Response to Notice
2016-73
I. Overview
A. Section 367--In General
Section 367(a)(1) provides that if, in connection with any exchange
described in section 332, 351, 354, 356, or 361, a United States person
transfers property to a foreign corporation, such foreign corporation
shall not, for purposes of determining the extent to which gain shall
be recognized on such transfer, be considered to be a corporation.
Under section 367(a)(5), the Secretary has broad authority to exempt
transactions from the application of section 367(a)(1) in order to
carry out the purposes of section 367(a).
Section 367(b)(1) provides that, in the case of any exchange
described in section 332, 351, 354, 355, 356, or 361 in connection with
which there is no transfer of property described in section 367(a)(1),
a foreign corporation shall be considered to be a corporation except to
the extent provided in regulations prescribed by the Secretary which
are necessary or appropriate to prevent the avoidance of Federal income
taxes. Section 367(b)(2) provides that the regulations prescribed
pursuant to section 367(b)(1) shall include (but shall not be limited
to) regulations dealing with the sale or exchange of stock or
securities in a foreign corporation by a United States person,
including regulations providing the circumstances under which gain is
recognized currently, amounts are included in gross income as a
dividend, or both; and the extent to which adjustments are made to
earnings and profits, the basis of stock or securities, and the basis
of assets.
B. Policies of Section 367(b)
Section 367(b) was enacted to help ensure that international tax
considerations are adequately addressed when the provisions in chapter
1, subchapter C, of subtitle A of the Internal Revenue Code (the Code)
apply to an exchange involving a foreign corporation. Thus, the
regulations under section 367(b) require that adjustments or inclusions
be made to prevent the material distortions of income that can occur
when the subchapter C provisions apply to an exchange involving a
foreign corporation.
The legislative history to section 367(b) describes Congress's
particular concern with the need ``to protect against tax avoidance . .
. upon the repatriation of previously untaxed foreign earnings'' and
its intent to grant the Treasury Department broad authority to
promulgate regulations to prevent the avoidance of Federal income
taxes. H.R. Rep. No. 94-658, at 241 (1975). Moreover, Congress
specifically identified ``transfers constituting a repatriation of
foreign earnings'' as a type of transfer to be covered by such
regulations. Id. at 245. The Final Regulations were promulgated in part
to address these concerns. More specifically, one of the purposes of
the Final Regulations is to require adjustments to address the
avoidance of U.S. tax, including the repatriation of foreign earnings
without
[[Page 69560]]
being subject to U.S. tax, through the separation of earnings and
profits of a corporation from property distributed by such corporation
in connection with certain triangular reorganizations.
C. Effect of the Tax Cuts and Jobs Act
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA) (Pub. L.
115-97), which added and amended a number of international tax
provisions. One effect of these new provisions, and in particular
sections 951A and 965, was to increase the amount of foreign earnings
or income subject to immediate U.S. taxation. Section 965 imposed a
one-time transition tax on certain earnings and profits of foreign
corporations, and section 951A subjects certain income of a controlled
foreign corporation (CFC) (as defined in section 957(a)) to current
U.S. taxation in the hands of the CFC's United States shareholders (as
defined in section 951(b)). The TCJA also generally retained the
existing anti-deferral rules in subpart F of the Code (sections 951
through 965, as amended), under which, for example, a CFC's passive
income, subject to certain exceptions, is similarly subject to current
U.S. taxation. The combined effect of sections 951, 951A, and 965 is
that an increased amount of foreign earnings and profits will have been
subject to U.S. tax regardless of whether the earnings and profits are
in fact repatriated. Under section 959, such previously taxed earnings
and profits (PTEP) are not again subject to U.S. tax upon their
repatriation.
The TCJA also added section 245A to the Code, under which certain
United States shareholders of a specified 10-percent owned foreign
corporation (SFC) (as defined in section 245A(b)(1)) generally are
entitled to a 100-percent dividends received deduction with respect to
dividends received from the SFC. As a result of the TCJA, an increased
amount of earnings and profits of foreign corporations are thus not
taxable when distributed--either because the earnings and profits
constitute PTEP or give rise to dividends (including deemed dividends
under section 367(b)) that are eligible for the section 245A dividends
received deduction.
Although as a result of the TCJA a lesser amount of earnings and
profits of foreign corporations may give rise to taxable dividends when
distributed, the Final Regulations remain necessary to carry out the
policies of section 367(b). The adjustments required by the Final
Regulations are intended to ensure that property transfers that are in
substance distributions are treated as such, and thus give rise to
income, capital gain, or a reduction in basis under section 301(c).
Furthermore, incentives to avoid treating property transfers as
distributions remain. For example, a taxpayer may seek to avoid
distribution treatment because the distribution would not qualify for
the section 245A dividends received deduction due to the application of
the hybrid dividend rules under section 245A(e) or the extraordinary
disposition rules under Sec. 1.245A-5, or because the taxpayer seeks
to, for example, preserve PTEP or other earnings and profits to cover a
future distribution.
D. The Final Regulations
The Final Regulations apply to certain triangular reorganizations
in which a subsidiary (S) purchases, in connection with the
reorganization, stock or securities of its parent corporation (P) in
exchange for property and exchanges the stock or securities of P for
the stock or property of a target corporation (T), but only if P or S
(or both) is a foreign corporation. The Final Regulations and this
preamble refer to such exchange of stock or securities of P for
property as the ``P acquisition.'' This preamble also refers to the P
acquisition together with the related triangular reorganization as an
``applicable triangular reorganization.''
When applicable, the Final Regulations require that adjustments be
made that have the effect of a distribution of property from S to P
under section 301 (deemed distribution), followed by a contribution
from P to S of an amount equal to the deemed distribution (deemed
contribution). The amount of the deemed distribution is the sum of the
amount of money transferred by S, the amount of any liabilities that
are assumed by S and constitute property, and the fair market value of
other property that S transferred to P in the P acquisition. The deemed
distribution is treated as a dividend to the extent of S's earnings and
profits.
There are several exceptions to the application of the Final
Regulations. Under Sec. 1.367(b)-10(a)(2)(iii) (the section 367(a)
priority rule), the Final Regulations do not apply to transactions
otherwise described in the Final Regulations if the amount of gain that
T's shareholders would recognize under section 367(a)(1) is at least
equal to the sum of the amount of the deemed distribution that P would
treat as a dividend under section 301(c)(1) and the amount of the
deemed distribution that P would treat as gain under section 301(c)(3)
were the Final Regulations to apply. This preamble refers to the
hypothetical amount of gain recognized under section 367(a)(1) and the
hypothetical amount of the deemed distribution treated either as
dividend or gain under section 301(c) as ``section 367(a) income'' and
``section 367(b) income,'' respectively. Section 1.367(a)-3(a)(2)(iv)
provides a similar priority rule (the section 367(b) priority rule)
that turns off the application of section 367(a)(1) with respect to
transactions described in the Final Regulations if the amount of
section 367(a) income that T's shareholders would otherwise recognize
under section 367(a)(1) (without regard to any exceptions thereto) is
less than the amount of section 367(b) income that would result from
the deemed distribution. In this way, the priority rules subject an
applicable triangular reorganization to whichever section 367 regime
would give rise to the most income under section 367.
Section 1.367(b)-10(a)(2)(ii) provides another exception to the
application of the Final Regulations. Under this exception, the Final
Regulations generally do not apply if S is a domestic corporation and P
would not be subject to U.S. tax on a dividend received from S. This
preamble refers to this exception as the ``no-U.S.-tax exception.''
The Final Regulations also contain a broad anti-abuse rule under
which appropriate adjustments are made if, in connection with a
triangular reorganization, a transaction is engaged in with a view to
avoid the purpose of the Final Regulations. See Sec. 1.367(b)-10(d).
The anti-abuse rule contains an example illustrating that the earnings
and profits of S may, under certain circumstances, be deemed to include
the earnings and profits of a corporation related to P or S for
purposes of determining the consequences of the adjustments provided
for in the Final Regulations.
E. Notice 2014-32
Notice 2014-32 identified transactions designed to exploit certain
aspects of the Final Regulations. In particular, Notice 2014-32
described transactions in which taxpayers applied the section 367(a)
and (b) priority rules and no-U.S.-tax exception in a manner that,
contrary to their intended operation, resulted in the taxpayer being
subject to the more favorable of the section 367(a) or (b) regimes.
Notice 2014-32 accordingly announced that regulations would be issued
under section 367(b) to (i) modify the priority rules such that only
section 367(b) income that would actually be subject to U.S. tax would
be considered and (ii) narrow the scope of the no-U.S.-tax exception.
Notice 2014-32 further
[[Page 69561]]
announced that regulations would be issued to remove the deemed
contribution rule in Sec. 1.367(b)-10(b)(2) and clarify the broad
application of the anti-abuse rule in Sec. 1.367(b)-10(d).
F. Notice 2016-73
Notice 2016-73 identified additional transactions designed to
exploit the Final Regulations, as modified by the rules announced in
Notice 2014-32. The transactions identified in Notice 2016-73 include,
as one example, a two-step transaction where an applicable triangular
reorganization is followed by a purportedly unrelated inbound
nonrecognition transaction to which Sec. 1.367(b)-3 applies.
In that example, USP, a domestic corporation, owns all of the stock
of FP, and FP owns all of the stock of FS. Both FP and FS are foreign
corporations. USP also owns all of the stock of USS, a domestic
corporation, and USS owns all of the stock of FT, a foreign
corporation. In step one of the example transaction, FP, FS, and FT
engage in an applicable triangular reorganization that is designed to
result in no section 367(b) income and only a de minimis amount of
section 367(a) income. Specifically, FS acquires newly issued stock of
FP for property and transfers the stock of FP to USS in exchange for
all the stock of FT in a triangular reorganization described in section
368(a)(1)(B). In addition, USS files a gain recognition agreement with
respect to its transfer of the stock of FT. The taxpayer takes the
position that the section 367(a) priority rule applies to turn off the
Final Regulations with respect to the applicable triangular
reorganization and therefore does not treat FP as having received a
deemed distribution. Under this position, the effect of this first step
of the transaction is a transfer of property from FS to FP without a
distribution that would result in a corresponding decrease in the
earnings and profits of FS and increase in the earnings and profits of
FP associated with that property.
In step two of the example transaction, on a later date FP
transfers its assets (including the cash, note, or other property
received from FS) to USP or a domestic corporation whose stock is owned
directly or indirectly by USP in a nonrecognition transaction described
in Sec. 1.367(b)-3. The taxpayer asserts that USP accordingly includes
in its income a deemed dividend of the ``all earnings and profits
amount'' (as described in Sec. 1.367(b)-2(d)) with respect to its
stock in FP, but, because that amount does not take into account the
earnings and profits of lower-tier foreign corporations, the deemed
dividend does not include the earnings and profits associated with the
property that FP received from FS in the P acquisition (because such
earnings and profits remain at FS under the position taken by the
taxpayer). The desired effect of the overall transaction is a
repatriation of property from FS to USP (or a domestic corporation held
by USP) without a corresponding income inclusion attributable to
untaxed earnings and profits of FS.
Notice 2016-73 announced that additional regulations would be
issued under section 367(b) to address transactions such as these types
of two-step transactions. To address step one of the transaction, the
regulations would, in addition to the modifications described in Notice
2014-32, prevent the section 367(a) priority rule from applying where T
is foreign and instead subject certain T shareholders to rules under
Sec. 1.367(b)-4 that could result in an income inclusion or gain
recognition with respect to their exchange of T stock. To address step
two of the transaction, the regulations would subject any inbound
nonrecognition transaction to a new set of ``excess asset basis'' (EAB)
rules to be issued under Sec. 1.367(b)-3 that, for purposes of
determining the all earnings and profits amount, would take into
account certain earnings and profits of lower-tier foreign
corporations. Step two of the transaction was subject to the EAB rules
because a taxpayer may have completed an applicable triangular
reorganization described in step one (but not yet an inbound
nonrecognition transaction described in step two) before the issuance
of Notice 2016-73. Such partially completed transactions would go
unaddressed if the regulations were limited to modifying the section
367(a) priority rule. Notice 2016-73 further announced that the EAB
rules would apply to any inbound nonrecognition transaction, regardless
of whether the taxpayer had previously engaged in an applicable
triangular reorganization, out of concern that transactions other than
applicable triangular reorganizations might also position taxpayers to
achieve an improper repatriation of property through a subsequent
inbound nonrecognition transaction.
Notice 2016-73 also described a variation of the foregoing two-step
transaction where the P acquisition is between FP and USP. In this
variation of the transaction, FP (which has no earnings and profits)
acquires stock of USP in exchange for nonqualified preferred stock of
FP, and FP uses the stock of USP to acquire the stock of FT in an
applicable triangular reorganization. After the applicable triangular
reorganization, the taxpayer causes FP to redeem its nonqualified
preferred stock from USP in exchange for cash or a note. The taxpayer
takes the position that (i) the Final Regulations do not apply to FP's
transfer of nonqualified preferred stock to USP because nonqualified
preferred stock is not ``property'' under the Final Regulations, and
(ii) FP's redemption of the nonqualified preferred stock does not cause
USP to have an income inclusion because FP has no earnings and profits.
The desired effect of this variation is similarly a repatriation of
property from FP to USP at no U.S. tax cost.
To address this type of transaction, Notice 2016-73 announced that
future regulations would modify the definition of property in Sec.
1.367(b)-10(a)(3)(ii) to include stock of S that is nonqualified
preferred stock (as defined in section 351(g)(2)).
II. Rules Applicable to Inbound Nonrecognition Transactions
A. Sec. 1.367(b)-3 and Notice 2016-73
Section 1.367(b)-3 generally applies to an acquisition by a
domestic corporation (the domestic acquiring corporation) of the assets
of a foreign corporation (the foreign acquired corporation) in a
liquidation described in section 332 or an asset acquisition described
in section 368(a)(1) (in each case, an inbound nonrecognition
transaction). Upon an inbound nonrecognition transaction, Sec.
1.367(b)-3 requires certain shareholders of the foreign acquired
corporation to include in income as a deemed dividend the all earnings
and profits amount with respect to their stock in the foreign acquired
corporation.\1\ Under Sec. 1.367(b)-2(d), that amount is generally
determined under the principles of section 1248 when computing the
amount of earnings and profits attributable to stock, subject to
certain adjustments. For example, the all earnings and profits amount
does not take into account earnings and profits of subsidiaries of the
foreign acquired corporation notwithstanding section 1248(c)(2). See
Sec. 1.367(b)-2(d)(3)(ii).
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\1\ Certain other shareholders of the foreign acquired
corporation may be required to recognize realized gain with respect
to their exchanged stock. See Sec. 1.367(b)-3(c)(2).
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Section 1.367(b)-3 is intended to ensure the appropriate carryover
of tax attributes from the foreign acquired corporation to the domestic
acquiring corporation. The preamble to proposed regulations issued in
1991 describes the section 367(b) principles relevant to inbound
nonrecognition transactions and specifically identifies the
[[Page 69562]]
prevention of ``the repatriation of earnings and profits without tax''
as one such principle. 56 FR 41993, 41996. The 1991 proposed
regulations accordingly introduced the concept of including in income
the all earnings and profits amount, which was intended to reflect
``the proper measure of the earnings and profits [of the foreign
acquired corporation] that should be subject to tax.'' Id. The preamble
to final regulations issued in 2000 further explained that the
inclusion of the all earnings and profit amount ``generally ensures
that the section 381 carryover basis reflects an after-tax amount'' and
describes ``the appropriate carryover of attributes from foreign to
domestic corporations'' as ``the principal policy consideration of
section 367(b) with respect to inbound nonrecognition transactions.''
TD 8862, 65 FR 3589, 3590. Section 1.367(b)-3 therefore ensures that
when asset basis is repatriated the basis either reflects after-tax
earnings and profits or is accompanied by an income inclusion
attributable to the untaxed earnings and profits that gave rise to that
basis.
As illustrated in Notice 2016-73 and summarized above in Part I.F
of the Explanation of Provisions section of this preamble, there are
some circumstances where the earnings and profits of the foreign
acquired corporation do not accurately reflect the basis in its assets.
In particular, the earnings and profits of the foreign acquired
corporation may be insufficient to the extent that earnings and profits
that gave rise to the foreign acquired corporation's asset basis reside
in lower-tier foreign corporations as a result of an applicable
triangular reorganization that does not give rise to a deemed
distribution. Because the all earnings and profits amount does not
account for the earnings and profits of lower-tier foreign
corporations, a deemed dividend of the all earnings and profits amount
will not have the intended effect of ensuring the appropriate carryover
of asset basis in such cases.
To address this concern, Notice 2016-73 announced that Sec.
1.367(b)-3 would be modified to require certain shareholders of the
foreign acquired corporation to adjust their all earnings and profits
amount upon an inbound nonrecognition transaction. Specifically, an
exchanging shareholder that exchanges stock in a foreign acquired
corporation with respect to which there is EAB would increase its all
earnings and profits amount by certain earnings and profits of lower-
tier foreign corporations, referred to in Notice 2016-73 as ``specified
earnings.'' Notice 2016-73 defined EAB as the amount by which the
inside asset basis of the foreign acquired corporation exceeded the sum
of its earnings and profits, its outside stock basis, and its
liabilities assumed by the domestic acquiring corporation. The EAB
concept is in furtherance of a balanced tax-basis balance sheet. In
other words, the EAB concept recognizes that the tax basis in a
corporation's assets generally is derived from these three sources,
with outside stock basis serving as a proxy for contributed capital.
While basis derived from contributed capital reflects after-tax amounts
(or, in the case of liabilities assumed by the domestic acquiring
corporation, is expected to be satisfied by after-tax amounts of the
domestic acquiring corporation), basis derived from a foreign
corporation's untaxed earnings and profits might not be subject to U.S.
tax until those earnings are repatriated. For this reason, a foreign
corporation's untaxed earnings and profits are subject to tax via a
deemed dividend of the all earnings and profits amount. This deemed
dividend inclusion in effect requires that the exchanging shareholder
``pay for'' the tax basis in repatriated assets before that basis is
used within the U.S. tax system.
Specified earnings are defined in Notice 2016-73 as the least of
the following amounts: (i) the aggregate earnings and profits of
foreign subsidiaries of the foreign acquired corporation attributable
to the exchanging shareholder, (ii) the amount of the foreign acquired
corporation's EAB attributable to the exchanging shareholder, and (iii)
the exchanging shareholder's built-in gain in the stock of the foreign
acquired corporation. The addition of specified earnings to the all
earnings and profits amount is thereby intended to correct the basis
imbalance of the foreign acquired corporation by taking into account
certain earnings and profits residing in foreign subsidiaries that are
presumed to have given rise to the EAB. Thus, the all earnings and
profits amount, after taking into account specified earnings, should
more accurately reflect the asset basis of the foreign acquired
corporation that is repatriated pursuant to the inbound nonrecognition
transaction.
The proposed regulations generally would adopt the rules described
in Notice 2016-73, modified as discussed in the remainder of this
preamble. This preamble uses the term ``EAB rules'' to refer
collectively to the modifications that are proposed to be made to Sec.
1.367(b)-3.
B. General Scope of the EAB Rules
As described in Notice 2016-73, the EAB rules would apply to any
inbound nonrecognition transaction regardless of whether the taxpayer
had previously engaged in an applicable triangular reorganization. This
scope reflected the possibility that EAB policy concerns could arise as
a result of other transactions and that taxpayers may attempt to
achieve similar results through such other transactions.
The comment recommended that the EAB rules be applied to a narrower
set of transactions, citing, among other reasons, the significant
compliance burden that would otherwise be imposed on legitimate
business transactions. The comment thus recommended that the EAB rules
be applied only to taxpayers that had completed an applicable
triangular reorganization before the issuance of Notice 2016-73 that
involved a foreign target corporation; did not make adjustments that
have the effect of a distribution of property from S to P; and engage
in a future inbound nonrecognition transaction. If narrowed in this
way, the comment further suggested that the EAB rules apply on only a
transitional basis; for example, for the 10-year period following
Notice 2016-73. The comment asserted that a broader application of the
EAB rules would be unnecessary in light of Notice 2016-73's proposed
modification to the section 367(a) priority rule, which, by requiring
adjustments for a deemed distribution whenever the target is a foreign
corporation, should prevent taxpayers from separating basis from
earnings and profits in future transactions. As an alternative, the
comment suggested that the EAB rules be applied only to inbound
nonrecognition transactions that follow an applicable triangular
reorganization or other specifically enumerated transactions.
The Treasury Department and the IRS agree that it would be
appropriate to narrow the scope of the EAB rules for the reasons noted
in the comment. In general, the proposed regulations accordingly would
limit the application of the EAB rules to those inbound nonrecognition
transactions where (i) S previously acquired stock or securities of P
in exchange for property in connection with a triangular reorganization
and (ii) adjustments were not made that have the effect of a
distribution of property from S to P under section 301. See proposed
Sec. 1.367(b)-3(g)(1)(i). However, to address avoidance situations
that would have been subject to the EAB rules under the broad scope
announced in Notice 2016-73 (which did not predicate the application of
the EAB rules on there having been an applicable
[[Page 69563]]
triangular reorganization), the proposed regulations would also provide
that the EAB rules apply to inbound nonrecognition transactions where
EAB was previously created in connection with a transaction other than
a triangular reorganization if the principal purpose of such other
transaction was to create EAB. See proposed Sec. 1.367(b)-3(g)(1)(ii).
This more limited application of the EAB rules is anticipated to
relieve taxpayers from the need to comply with the EAB rules with
respect to non-tax motivated transactions while still addressing the
policy concerns identified in Notice 2016-73.
The proposed regulations would not adopt the comment's suggestion
to apply the EAB rules only to situations where an applicable
triangular reorganization involving a foreign target was completed
before the issuance of Notice 2016-73. The Treasury Department and the
IRS are concerned that such a limitation would prevent the application
of the EAB rules to future transactions designed to create EAB. For
example, a subsequent applicable triangular reorganization could give
rise to EAB where the target corporation is domestic because the
section 367(a) priority rule continues to apply in that context. EAB
could thus arise if the section 367(a) priority rule applies to prevent
the application of the Final Regulations and P and S are both foreign
corporations. An ongoing application of the EAB rules is also necessary
to address the case where the target is a foreign corporation but the
taxpayer asserts that its transaction is not subject to Sec. 1.367(b)-
10 under a novel or unforeseen theory. For this reason, the proposed
regulations also would not condition the applicability of the EAB rules
on the taxpayer having participated in an applicable triangular
reorganization. The proposed regulations instead would provide that the
EAB rules may apply to EAB created by any triangular reorganization
(provided that the other conditions described in the preceding
paragraph are met--that is, S acquired stock or securities of P for
property in connection with the reorganization, and adjustments were
not made that have the effect of a distribution of property from S to P
under section 301) and to EAB created in other transactions that have a
principal purpose of creating EAB. See proposed Sec. 1.367(b)-3(g)(1).
C. EAB Reduction Rule
Under Notice 2016-73, all EAB with respect to a foreign acquired
corporation is taken into account upon an inbound nonrecognition
transaction, regardless of how the EAB arose. However, if the taxpayer
could demonstrate that EAB was not attributable to property provided by
a foreign subsidiary, then EAB is reduced to the extent of such EAB
(the EAB reduction rule).
The comment asserted that the EAB reduction rule amounted to a
presumption that all EAB originated from the earnings and profits of
foreign subsidiaries. The comment stated that overcoming this
presumption would place a significant burden on taxpayers because it
would require a comprehensive review of the foreign acquired
corporation's historic transactions to determine the extent to which
EAB should be reduced. The comment therefore recommended that the EAB
rules be revised such that taxpayers be permitted to take into account
only the EAB created by an applicable triangular reorganization (or any
other specifically identified transaction).
The Treasury Department and the IRS expect that the more limited
scope of the EAB rules set forth in the proposed regulations would
address the concern reflected in the comment. As proposed in these
regulations and discussed in Part II.B of the Explanation of Provisions
section of this preamble, the EAB rules would apply only to those
inbound nonrecognition transactions that follow certain triangular
reorganizations (or other transactions having a principal purpose of
creating EAB) as opposed to any inbound nonrecognition transaction.
This narrower scope would substantially reduce the burden of complying
with the proposed EAB rules by eliminating the need for many taxpayers
to determine whether EAB exists with respect to a foreign acquired
corporation.
This narrowed scope also would obviate the rationale for the EAB
reduction rule, which was intended to provide relief where a taxpayer
could demonstrate that EAB was not attributable to an avoidance
transaction. Such a relief measure would not be appropriate under the
proposed regulations, however, because the proposed regulations would
apply only to tax-motivated transactions. The EAB reduction rule would
therefore be removed with respect to transactions completed after the
issuance of the proposed regulations. But see the EAB reduction rule in
proposed Sec. 1.367(b)-3(g)(7)(ii)(C) for certain transactions
completed before the issuance of the proposed regulations. The proposed
regulations accordingly would provide that a taxpayer subject to the
EAB rules by reason of having engaged in a triangular reorganization
must take into account all EAB with respect to the foreign acquired
corporation, regardless of how that EAB arose and without the ability
to reduce EAB to the extent it is not attributable, directly or
indirectly, to property provided by a foreign subsidiary of the foreign
acquired corporation.
D. Treatment of Unrelated Minority Shareholders
As discussed in Part II.A of the Explanation of Provisions section
of this preamble, one element of the EAB computation is the amount of
aggregate outside basis in the stock of the foreign acquired
corporation. An exchanging shareholder that would be subject to the EAB
rules would thus potentially need to identify the outside bases of
other, unrelated shareholders of the foreign acquired corporation to
calculate the amounts of EAB and specified earnings. The comment
asserted that it may not be possible for an exchanging shareholder to
obtain this information and accordingly suggested that the outside
bases of such unrelated minority shareholders be disregarded (along
with any related share of inside basis, liabilities, and earnings and
profits) when calculating EAB and specified earnings.
The Treasury Department and the IRS recognize that the presence of
unrelated minority shareholders may create some uncertainty but expect
that narrowing the application of the EAB rules to only a limited set
of inbound nonrecognition transactions would appropriately address the
concern reflected in the comment. The transactions of which the
Treasury Department and the IRS are aware, and which the proposed
regulations are generally intended to address, are typically internal
restructurings that by their nature are unlikely to involve unrelated
shareholders. See Notice 2016-73, Section 3. Moreover, modifying the
EAB rules as the comment suggests would require additional rules to
specify how an exchanging shareholder would disregard unrelated
minority shareholders, thereby adding complexity to the EAB
calculations to accommodate an unlikely fact pattern. Therefore, the
proposed regulations would not adopt this suggestion.
E. Computation of Specified Earnings
As discussed in Part II.A of the Explanation of Provisions section
of this preamble, the rules described in Notice 2016-73 seek to correct
the basis imbalance of the foreign acquired corporation by increasing
an exchanging shareholder's all earnings and profits amount by the
amount of ``specified
[[Page 69564]]
earnings.'' Specified earnings are limited, in part, to the sum of the
earnings and profits with respect to each foreign subsidiary of the
foreign acquired corporation that are attributable under section
1248(c)(2) to the stock of the foreign acquired corporation that is
exchanged pursuant to the inbound nonrecognition transaction.
Accordingly, specified earnings under the notice are not sourced from
PTEP of foreign subsidiaries of the foreign acquired corporation
because PTEP is not included in earnings and profits for purposes of
section 1248. See section 1248(d)(1). In other words, the rules
described in Notice 2016-73 would not allow the foreign acquired
corporation's basis imbalance to be corrected by a deemed distribution
of lower-tier PTEP, even though a taxpayer may have created EAB by
separating asset basis from earnings and profits that are characterized
as PTEP.
In light of the TCJA, which increased the prevalence of PTEP, the
Treasury Department and the IRS are of the view that the policies of
the EAB rules are better served if, instead of adjusting an exchanging
shareholder's all earnings and profits amount as described in Notice
2016-73, the foreign acquired corporation is treated as receiving a
deemed distribution under section 301 from its foreign subsidiaries,
and the exchanging shareholder then accounts for the effects of the
deemed distribution in the inbound nonrecognition transaction. Such a
deemed distribution more accurately addresses the basis imbalance of
the foreign acquired corporation because the deemed distribution may be
sourced from both PTEP and non-PTEP earnings and profits, reflecting
that the basis imbalance may be associated with either type of earnings
and profits. A deemed distribution from a foreign subsidiary to the
foreign acquired corporation is also more likely to align the EAB rules
with the substance of the taxpayer's transaction because EAB generally
arises where a taxpayer fails to treat a property transfer as a
distribution under section 301. Furthermore, taking into account the
effects of a section 301 distribution is consistent with the Final
Regulations, which address applicable triangular reorganizations by
taking into account the effects of a deemed distribution under section
301 from S to P.
The proposed regulations accordingly would modify the EAB rules by
providing that an exchanging shareholder of the foreign acquired
corporation computes its all earnings and profits amount after
accounting for the effects of a deemed distribution from the foreign
subsidiaries of the foreign acquired corporation to the foreign
acquired corporation. See proposed Sec. 1.367(b)-3(g)(1). The deemed
distribution, which occurs immediately before the inbound
nonrecognition transaction, would be equal to the amount of ``specified
earnings.'' The term specified earnings would be defined under the
proposed regulations as the lesser of (i) the aggregate earnings and
profits of foreign subsidiaries of the foreign acquired corporation
(with no exclusion for those earnings and profits characterized as
PTEP) (collectively, lower-tier earnings), and (ii) the EAB of the
foreign acquired corporation. See proposed Sec. 1.367(b)-2(g)(2)(vii).
The limitations on specified earnings described in Notice 2016-73 and
Part II.A of the Explanation of Provisions section of this preamble
(other than the EAB limitation, which is retained with modification)
are removed because those limitations, which were designed in part to
approximate a reasonable allocation of EAB among the shareholders of
the foreign acquired corporation, are not necessary where the foreign
acquired corporation's basis imbalance is addressed by a deemed
distribution. Thus, for example, the definition of specified earnings
in the proposed regulations would not be limited to the earnings and
profits of each foreign subsidiary attributable under section
1248(c)(2) to the stock of the foreign acquired corporation exchanged,
but instead would include all of the earnings and profits of lower-tier
foreign subsidiaries (and therefore does not exclude PTEP). The
proposed regulations would adopt this approach because under the deemed
distribution model all such earnings and profits would be available to
increase the earnings and profits of the foreign acquired corporation
if actually distributed to it through the chain of ownership.
Where specified earnings are drawn from multiple foreign
subsidiaries, specified earnings would be drawn from all foreign
subsidiaries on a pro rata basis (in proportion to each foreign
subsidiary's share of aggregate earnings and profits of the foreign
subsidiaries). See proposed Sec. 1.367(b)-3(g)(3). In addition, and
consistent with Sec. 1.367(b)-2(e)(2), specified earnings drawn from
foreign subsidiaries would be treated as being distributed to the
foreign acquired corporation through all tiers of intermediate owners,
rather than directly to the foreign acquired corporation. See proposed
Sec. 1.367(b)-3(g)(1).
The Treasury Department and the IRS are aware that limiting the
amount of the deemed distribution by the amount of lower-tier earnings
would preclude the deemed distribution from giving rise to a return of
basis under section 301(c)(2) or gain recognition under section
301(c)(3) and in that respect would differ from the deemed distribution
described in the Final Regulations. See Sec. 1.367(b)-10(b). The
approach taken in the proposed regulations reflects administrability
concerns that could arise from adopting a more complete distribution
model which could require, for example, rules to allocate the
appropriate amount of basis recovery and section 301(c)(3) gain among
tiers of foreign subsidiaries. That additional complexity may not be
justified when balanced against the limited application of the EAB
rules, which apply only where a taxpayer has previously engaged in a
transaction described in proposed Sec. 1.367(b)-3(g)(1). The Treasury
Department and the IRS continue to study transactions that could give
rise to EAB, including whether EAB principles should be applied to
other types of inbound nonrecognition transactions.
F. Definition of Foreign Subsidiary
Notice 2016-73 used, but did not define, the term ``foreign
subsidiary'' when referring to entities held by the foreign acquired
corporation for purposes of computing specified earnings and making
adjustments to EAB. The proposed regulations similarly use the term
``foreign subsidiary'' for purposes of the EAB rules and would define
the term based, in part, on the ownership rules in section
1248(c)(2)(B). See proposed Sec. 1.367(b)-3(g)(2)(ii).
G. EAB Anti-Abuse Rule and Prohibition Against Affirmative Use
Notice 2016-73 announced that an anti-abuse rule would address
transactions engaged in with a view to avoid the purposes of the EAB
rules. As described in Notice 2016-73, the anti-abuse rule would
provide for adjustments, including disregarding the effects of
transactions, to carry out the purposes of the EAB rules. As one
example, the anti-abuse rule stated that a transaction engaged in with
a view to reduce EAB would be disregarded for purposes of computing
EAB.
The comment requested that the Treasury Department and the IRS
clarify the scope of the anti-abuse rule and purpose of the EAB rules.
While the comment acknowledged that Sec. 1.367(b)-3 is intended to
ensure that a domestic acquiring corporation does not succeed
[[Page 69565]]
to the asset basis of the foreign acquired corporation unless the
earnings and profits associated with such basis have been subject to
U.S. tax, the comment asserted that it was unclear if certain
transactions that would reduce EAB would violate this purpose. The
comment provided several examples of such transactions, including a
section 332 liquidation of a foreign subsidiary into the foreign
acquired corporation. The comment explained that, if the liquidated
subsidiary has high outside basis in its stock but low inside basis in
its assets, then the liquidation would reduce the foreign acquired
corporation's EAB because the subsidiary's high outside stock basis
would be eliminated and replaced with its low inside asset basis.
The Treasury Department and the IRS are of the view that the more
limited scope of the EAB rules set forth in the proposed regulations
would largely mitigate the concern reflected in the comment, because
under the proposed regulations, the EAB rules would apply only where a
taxpayer has created EAB in an earlier tax-motivated transaction,
thereby significantly narrowing the context in which the anti-abuse
rule may apply. With respect to the limited cases that would be subject
to the EAB rules, the Treasury Department and the IRS continue to see a
need to prevent transactions engaged in with a view to reducing EAB,
which could lead to results inconsistent with the purposes articulated
in Notice 2016-73 and in Part II.A of the Explanation of Provisions
section of this preamble; that is, ensuring the appropriate carryover
of tax attributes from the foreign acquired corporation to the domestic
acquiring corporation.
The Treasury Department and the IRS are also aware of transactions
that may attempt to affirmatively apply the EAB rules to avoid Federal
income tax. The proposed regulations accordingly would provide that a
taxpayer may not apply the EAB rules to a transaction if the taxpayer
created EAB with a principal purpose of avoiding any tax imposed under
the Code. See proposed Sec. 1.367(b)-3(g)(5).
H. Notice Reporting
Section 1.367(b)-1(c) requires that certain participants to a
``section 367(b) exchange'' (as defined in Sec. 1.367(b)-1(a))
disclose information concerning such exchange on a statement attached
to a timely filed Federal tax return or Form 5471 (Information Return
of U.S. Persons With Respect to Certain Foreign Corporations), as
applicable, in the taxable year in which income is realized in the
exchange (such statement, the section 367(b) notice). To enhance
compliance and administration with respect to the EAB rules, the
proposed regulations would require that the section 367(b) notice
include certain information related to EAB, including how it arose and
how the amount was determined. See proposed Sec. 1.367(b)-1(c)(4)(ix).
The proposed regulations also would extend the section 367(b) notice
requirement to participants in transactions that implicate Sec.
1.367(b)-10, as discussed in Part III.E of the Explanation of
Provisions section of this preamble.
I. Exchange Gain or Loss With Respect to PTEP
In general, Sec. 1.367(b)-2(j)(2)(ii) provides that, if an
exchanging shareholder that is a foreign corporation includes in income
a deemed dividend of either the all earnings and profits amount under
Sec. 1.367(b)-3 or the section 1248 amount under Sec. 1.367(b)-4, the
exchanging shareholder is treated as receiving a deemed distribution of
PTEP from the appropriate foreign corporation (deemed PTEP
distribution). However, if the exchanging shareholder that has an
income inclusion is a United States person, the exchanging shareholder
is treated as receiving the deemed PTEP distribution solely for the
purpose of computing exchange gain or loss under section 986(c). See
Sec. 1.367(b)-2(j)(2)(i). Because the deemed PTEP distribution is
created where there is an income inclusion, however, a taxpayer might
assert that no exchange gain or loss is recognized under Sec.
1.367(b)-2(j)(2)(i) where the all earnings and profits amount or
section 1248 amount is zero, even though the exchange gain or loss
would have been recognized had all the earnings and profits or the
section 1248 amount been a positive number. The proposed regulations
therefore would clarify that there is a deemed PTEP distribution under
Sec. 1.367(b)-2(j)(2)(i) regardless of whether the all earnings and
profits amount or the section 1248 amount is greater than zero. A
similar change would be made to Sec. 1.367(b)-2(j)(2)(ii).
The Treasury Department and the IRS are studying more broadly the
treatment of section 986(c) amounts and PTEP in transactions subject to
section 367(b) and request comments on the application of Sec.
1.367(b)-2(j)(2) more generally.
J. Calculation of Net Investment Income Under Section 1411
The Treasury Department and the IRS are also concerned that in
certain exchanges subject to section 367(b), earnings and profits that
are characterized as PTEP might not be taken into account for purposes
of calculating net investment income (NII) under section 1411. In cases
where an exchanging shareholder does not make the election described in
Sec. 1.1411-10(g), a distribution that would otherwise constitute a
distribution of PTEP under section 959(a)--and thus would not be
treated as a dividend for purposes of chapter 1 of the Code under
section 959(d)--generally is treated as a dividend for purposes of
calculating NII. See Sec. 1.1411-10(c)(1)(i)(A)(1). This rule seeks to
preserve the NII tax base, as amounts that are characterized as PTEP
will not also have been previously taxed under section 1411 (absent the
election in Sec. 1.1411-10(g)) and so should be included in NII.
The NII tax base may not be fully preserved, however, in certain
exchanges subject to section 367(b). For example, an inbound asset
reorganization subject to Sec. 1.367(b)-3 will eliminate earnings and
profits that are characterized as PTEP without creating a deemed
distribution of those earnings, because PTEP is excluded from the all
earnings and profits amount. See Sec. 1.367(b)-2(d)(2)(ii). An
exchanging shareholder would thus never recognize a dividend of those
earnings for purposes of calculating NII; further, gain that the
exchanging shareholder may recognize on a subsequent sale of stock of
the domestic acquiring corporation may be netted against certain losses
(as NII includes net gains, but gross income from dividends). Certain
foreign-to-foreign transactions described in Sec. 1.367(b)-4, or
section 355 distributions described in Sec. 1.367(b)-5, could
similarly fail to preserve the NII tax base because PTEP is also
excluded from the section 1248 amount. See Sec. 1.367(b)-2(c)(1). For
example, while an exchanging shareholder's annual PTEP accounts would
not be eliminated as a result of a foreign-to-foreign transaction that
results in a loss of section 1248 shareholder or CFC status, an
exchanging shareholder could nevertheless distort the character of its
NII by selling its stock in the foreign acquiror before its PTEP is
distributed. The proposed regulations therefore would modify Sec.
1.1411-10(c)(3) such that (with respect to stock of a foreign
corporation for which an election under Sec. 1.1411-10(g) is not in
effect) the all earnings and profits amount and the section 1248 amount
include PTEP for purposes of section 1411, consistent with how section
1248 is applied in this context. See proposed Sec. 1.1411-
10(c)(3)(ii). The proposed regulations
[[Page 69566]]
also would provide for conforming basis adjustments for purposes of
section 1411. See proposed Sec. 1.1411-10(d)(5).\2\
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\2\ The Treasury Department and the IRS recognize that certain
rules in Sec. 1.1411-10 involving domestic partnerships and certain
S corporations have not been updated to reflect changes made to the
application of Sec. 1.958-1 pursuant to TD 9866, 84 FR 29288, and
TD 9960, 87 FR 3648, and intend to update them in a future guidance
project.
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III. Rules Applicable to Triangular Reorganizations
A. Priority Rules
As discussed in Notice 2016-73 and summarized in Part I.F of the
Explanation of Provisions section of this preamble, the Treasury
Department and the IRS are aware of transactions that are designed to
repatriate basis without a corresponding repatriation of the earnings
and profits associated with that basis. As part of these transactions,
the taxpayer exploits the section 367(a) priority rule by filing a gain
recognition agreement with respect to all, or all but a de minimis
amount, of the foreign target corporation stock exchanged in the
applicable triangular reorganization. The taxpayer accordingly
recognizes no, or a de minimis amount of, section 367(a) income with
respect to the target stock. Because the taxpayer also takes the
position that a deemed distribution would not result in any section
367(b) income, the taxpayer applies the section 367(a) priority rule to
prevent the application of the Final Regulations. The taxpayer also
takes the position that the anti-abuse rule would not apply to cause
this transaction to be subject to Sec. 1.367(b)-10 and therefore does
not make adjustments that have the effect of a distribution of property
from S to P, with the result that S would have transferred property to
P without a corresponding transfer of the earnings and profits
associated with that property.
Notice 2016-73 announced that future regulations would modify the
section 367(a) priority rule such that it would not apply to an
applicable triangular reorganization involving a foreign target
corporation. Any such applicable triangular reorganization would thus
be subject to the Final Regulations with the result that adjustments
would be made that have the effect of a distribution of property from S
to P under section 301. A similar modification was announced with
respect to the section 367(b) priority rule.
The comment supported the proposed modification to the section
367(a) priority rule. As an alternative, the comment suggested that the
existing formulation of the section 367(a) priority rule (that is,
without taking into account the modifications described in Notice 2014-
32 that would limit the ``amount'' of section 367(a) income to the
amount giving rise to U.S. tax) be retained in cases where the target
is a foreign corporation. Under that formulation, the ``amount'' of
section 367(a) income is compared to the ``amount'' of section 367(b)
income, regardless of whether such amounts are subject to U.S. tax. The
comment asserted that this formulation would cause a greater amount of
section 367(b) income to be taken into account, thereby making it more
difficult for taxpayers to exploit the section 367(a) priority rule to
avoid the Final Regulations.
The Treasury Department and the IRS expect that the modification to
the section 367(a) priority rule described in Notice 2016-73 would best
address such exploitation by ensuring that adjustments that have the
effect of a deemed distribution of property from S to P are made
whenever the target is a foreign corporation. This result would
reinforce one of the purposes of the Final Regulations by ensuring that
property transfers that are in substance distributions are treated as
such, thereby preventing the separation of property from the earnings
and profits associated with that property. The comment's alternative
approach could also, as the comment acknowledged, invite the avoidance
of section 301(c)(2) basis reduction in situations where a small amount
of section 367(a) income is compared to a large amount of section
301(c)(2) basis reduction. Because a return of basis is not considered
section 367(b) income, a small amount of section 367(a) income could be
sufficient to trigger the section 367(a) priority rule. Accordingly,
the proposed regulations would adopt the modifications to the section
367(a) and section 367(b) priority rules described in Notice 2016-73.
See proposed Sec. Sec. 1.367(a)-3(a)(2)(iv) and 1.367(b)-
10(a)(2)(iii).
As discussed in Part I.E of the Explanation of Provisions section
of this preamble, Notice 2014-32 announced that the section 367(a) and
section 367(b) priority rules would be modified to take into account
only the portion of a distribution that would be actually subject to
U.S. tax, including the extent to which a distribution would give rise
to an inclusion under section 951(a) that would be subject to U.S. tax.
In light of the TCJA, the proposed regulations also would modify the
priority rules to take into account the extent to which a distribution
would give rise to an inclusion under section 951A(a) that would be
subject to U.S. tax (even though it is unlikely that a distribution
from S to P would give rise to a section 951A(a) inclusion).
B. Sec. 1.367(b)-4 and Notice 2016-73
1. Overview
Notice 2016-73 announced that regulations to be issued under Sec.
1.367(b)-4 would apply to the exchange of a foreign target
corporation's stock that occurs in connection with an applicable
triangular reorganization. As described in Notice 2016-73, the
regulations under Sec. 1.367(b)-4 would require all shareholders of
the target corporation to both include in income as a deemed dividend
the section 1248 amount with respect to the target stock exchanged and,
after taking into account the increase in basis resulting from such
deemed dividend, recognize all realized gain with respect to such stock
that would not otherwise be recognized. This treatment would be
required only to the extent that the target shareholders exchanged
target stock for P stock or securities that S previously acquired for
property in the P acquisition (tainted P stock or securities); section
367(a) would continue to apply to the exchange of target stock to the
extent the target shareholders did not receive such tainted P stock or
securities. The proposed regulations would adopt the rules as described
in Notice 2016-73 without significant modification. See proposed Sec.
1.367(b)-4(g).
2. Authority Under Section 367
The comment questioned whether section 367(b) could be applied to
an applicable triangular reorganization in a manner that both requires
adjustments that have the effect of a distribution of property from S
to P and requires the shareholders of a foreign target corporation to
recognize the full amount of gain with respect to the target
corporation stock that is exchanged for tainted P stock or securities.
The comment asserted that this application of section 367(b)
effectively achieves the same result as if the applicable triangular
reorganization were concurrently subject to taxation under both section
367(b) (with respect to the P acquisition) and section 367(a) (with
respect to the target shareholders' exchange of target stock).
According to the comment, section 367 may not apply to cause such
concurrent taxation because the statutory language in section 367(b)(1)
provides that section 367(b) may apply only where there is no transfer
of property described in section 367(a). The comment cited to Sec.
1.367(a)-3(b)(2), under which transactions that could be subject to tax
under both
[[Page 69567]]
section 367(a) and (b) are subject to taxation under only one of those
sections. The comment also noted that the section 367(a) and (b)
priority rules, as currently effective, likewise operate in a manner
that results in only one or the other of section 367(a) or (b) applying
to an applicable triangular reorganization.
The Treasury Department and the IRS are of the view that the
proposed application of Sec. 1.367(b)-4 is appropriate and within
section 367's statutory grant of authority. Under section 367(a)(5),
the Secretary has broad authority to exempt certain transactions from
the application of section 367(a)(1) in order to carry out the purposes
of section 367(a). Deliberately failing to file a gain recognition (or
filing a partial gain recognition agreement) to exploit the section
367(a) priority rule is inconsistent with the purposes of section
367(a), and section 367(b) is better suited to address these
transactions. Accordingly, it is appropriate to exercise the authority
in section 367(a)(5) to make the section 367(a) priority rule
inapplicable to certain exchanges of target stock. Section 367(b) may
therefore apply to the target shareholders' exchange of target stock
because the exchange, by virtue of section 367(a)(5), is not described
in section 367(a)(1). See section 367(b)(1). Furthermore, section
367(b)(1) is clear that the Secretary may issue any regulations ``which
are necessary or appropriate to prevent the avoidance of Federal income
taxes.'' Section 367(b)(2) provides that such regulations ``shall
include . . . the circumstances under which gain shall be recognized
currently, or amounts included in gross income currently as a dividend,
or both . . . .'' Nothing within this broad grant of rulemaking
authority prevents section 367(b) from concurrently applying to both
the P acquisition and the exchange of target stock such that both of
these components of an applicable triangular reorganization give rise
to income or gain.
3. Section 367(b) Policy
The comment further asserted that requiring adjustments that have
the effect of a distribution of property from S to P where the target
is a foreign corporation sufficiently addresses the concerns raised in
Notice 2016-73 and thus questioned the rationale in also subjecting the
target shareholders to current taxation under Sec. 1.367(b)-4.
According to the comment, the target shareholders remain subject to
U.S. taxing jurisdiction through their carryover basis in the stock of
P and continued indirect equity interest in the target. The comment
claimed that historic section 367(b) policy has recognized the
permissibility of deferral where U.S. taxing rights remain intact, and
in particular where section 1248 amounts are preserved.
The Treasury Department and the IRS maintain that it is appropriate
for the proposed regulations to require all target shareholders to
recognize the full amount of their gain with respect to the stock of
target exchanged for tainted stock or securities of P. As noted above,
section 367(b) provides the Secretary with a broad grant of authority
to issue regulations applicable to nonrecognition transactions that are
subject to section 367(b), and the exercise of this broad rulemaking
authority is not conditioned on addressing a particular or historic
policy concern. The Treasury Department and the IRS further note that
applicable triangular reorganizations have long been identified as tax-
motivated transactions, not only with respect to S's acquisition of the
stock of P but also with respect to the exchange of stock of T. See
Notice 2006-85; Notice 2014-32 (addressing situations where taxpayers
attempted to manipulate the section 367(b) priority rule to effectuate
an inversion without the T shareholders being subject to Sec.
1.367(a)-3(c)). Moreover, a more limited application of the rules under
section 367 has led to repeated attempts by taxpayers to structure
around the rules. Requiring all target shareholders to recognize the
full amount of their gain in the stock of the target corporation in
connection with such transactions limits opportunities to selectively
trigger this gain.
C. Deemed Contribution Rule
Initially proposed in Notice 2007-48 (2007-25 IRB 1428), the deemed
contribution rule in Sec. 1.367(b)-10(b)(2) was intended to address
the scenario where S purchases P stock or securities from a person
other than P (for example, from the public on the open market) instead
of directly from P itself. In such cases, the adjustments required by
the deemed distribution effectively adopt a ``consent dividend'' model,
which would treat P as receiving a distribution of property from S even
though P did not actually receive the property transferred in the P
acquisition. The deemed contribution rule, under this model, accounts
for P's lack of property by requiring adjustments that have the effect
of a contribution of property (with no built-in gain or loss) by P to S
in an amount equal to the amount of the deemed distribution. In
particular, these adjustments require that P increase its basis in its
S stock by the amount of the deemed contribution. Under the Final
Regulations, the deemed contribution rule applies regardless of whether
S acquires P stock or securities from P or from a person other than P.
As discussed in Notice 2014-32, the Treasury Department and the IRS
are aware of transactions designed to avoid U.S. tax by exploiting the
deemed contribution rule. In one such transaction, for example, S has
no earnings and profits but a high outside stock basis. The taxpayer
effects an applicable triangular reorganization where the amount of
property transferred to P in the P acquisition is less than the amount
of the outside stock basis in S. The taxpayer applies the Final
Regulations to make the adjustments required by the deemed
distribution, which results solely in a return of the outside stock
basis in S under section 301(c)(2). The adjustments required by the
deemed contribution rule, however, immediately restore that basis. The
applicable triangular reorganization thus does not result in a net
reduction to the outside stock basis in S, effectively negating the
intended consequences of the deemed distribution. Further, the taxpayer
could attempt to repeatedly effect applicable triangular
reorganizations to transfer property from S to P with no net reduction
to the outside stock basis in S despite each transaction being treated
as a deemed distribution. As a result, and consistent with the
regulations announced in Notice 2014-32, the proposed regulations
remove the deemed contribution rule.
D. Anti-Abuse Rule
The Final Regulations contain an anti-abuse rule under which
appropriate adjustments are made if, in connection with a triangular
reorganization, a transaction is engaged in with a view to avoid the
purpose of the Final Regulations. See Sec. 1.367(b)-10(d). The anti-
abuse rule contains an example illustrating that the earnings and
profits of S may, under certain circumstances, be deemed to include the
earnings and profits of a corporation related to P or S for purposes of
determining the consequences of the adjustments provided for in the
Final Regulations.
As illustrated in Notice 2014-32 and Notice 2016-73, taxpayers have
taken the position that the anti-abuse rule does not apply to a given
transaction under the theory that the one example provided by the anti-
abuse rule does not explicitly describe the transaction. Notice 2014-32
accordingly announced that future regulations would clarify
[[Page 69568]]
that the anti-abuse rule may apply broadly to support a variety of
adjustments, including adjusting earnings and profits between
previously unrelated corporations. The proposed regulations would
implement the clarifications to the anti-abuse rule described in Notice
2014-32.
To illustrate the broad application of the anti-abuse rule, the
proposed regulations would include additional examples. First, the
proposed regulations would add an example illustrating that the anti-
abuse rule may apply to a ``downstream'' transfer of property made in
connection with a triangular reorganization. Because a downstream
transfer (whereby property being separated from earnings and profits is
initially transferred downstream, rather than upstream from S to P) can
be structured so as not to fall within the literal application of the
Final Regulations, which equate the P acquisition with a section 301
distribution, taxpayers otherwise might assert that a downstream
transfer of property made in connection with a triangular
reorganization cannot be subject to the Final Regulations. See proposed
Sec. 1.367(b)-10(d)(3) (Example 2). The proposed regulations also
would add an example illustrating that certain debt exchanges may
implicate the anti-abuse rule. See proposed Sec. 1.367(b)-10(d)(4)
(Example 3).
For the avoidance of doubt, the application of the anti-abuse rule
is not limited to the particular fact patterns described in the
examples. In addition, the proposed regulations would not modify the
operative text of the anti-abuse rule, which remains unchanged from the
Final Regulations, such that the examples included in the proposed
regulations would illustrate transactions subject to the anti-abuse
rule.
E. Other Rules
Notice 2014-32 described transactions designed to avoid the
application of the no-U.S.-tax exception in Sec. 1.367(b)-10(a)(2)(ii)
and also expressed a concern that taxpayers may attempt to interpret
that exception in a narrower manner than was intended or is
appropriate. Notice 2014-32 accordingly announced that future
regulations would modify the no-U.S.-tax exception, in part to clarify
its scope. The proposed regulations would adopt the modifications to
the no-U.S.-tax exception described in Notice 2014-32. See proposed
Sec. 1.367(b)-10(a)(2)(ii).
As noted above in Part I.F of the Explanation of Provisions section
of this preamble, Notice 2016-73 announced that the definition of
``property'' in Sec. 1.367(b)-10(a)(3)(ii) would be modified to
include nonqualified preferred stock of S. The proposed regulations
would adopt this rule without modification. See proposed Sec.
1.367(b)-10(a)(3)(ii)(C).
Section 1.367(b)-10(b)(3) provides that the deemed distribution is
generally treated as occurring immediately before the P acquisition,
and Notice 2016-73 requested comments on whether this rule should be
modified in light of the modifications announced in the notice. The
comment suggested that the current rule be retained because no reason
has been identified to warrant its modification. The Treasury
Department and the IRS agree with the comment and therefore no changes
would be made with respect to this rule.
The proposed regulations also would modify the reporting
requirements under Sec. 1.367(b)-1(c) to require corporations that
acquire stock or securities of P in a transaction described in the
Final Regulations to disclose such acquisitions by attaching a section
367(b) notice (within the meaning of Sec. 1.367(b)-1(c)) to the
corporation's tax return (or Form 5471, as applicable) for the year in
which the stock or securities of P are acquired. See proposed Sec.
1.367(b)-1(c)(2)(vi). Under the proposed regulations, corporations
would be required to describe the circumstances of the acquisition of
stock or securities of P, any related transactions involving the
acquired stock or securities, and whether any adjustments were made
pursuant to Sec. 1.367(b)-10. See proposed Sec. 1.367(b)-
1(c)(4)(viii). The information required to be disclosed would
supplement (rather than replace) any information already required to be
disclosed in the section 367(b) notice.
IV. Applicability Dates
With respect to those rules described in Notice 2014-32, the
proposed regulations generally would be applicable to transactions
completed on or after April 25, 2014, subject to limited exceptions.
See proposed Sec. Sec. 1.367(a)-3(g)(1)(viii) and 1.367(b)-10(e)(2).
With respect to those rules described in Notice 2016-73, the
proposed regulations generally would be applicable to transactions
completed on or after December 2, 2016. See proposed Sec. Sec.
1.367(a)-3(g)(1)(viii), 1.367(b)-3(g)(7)(i), 1.367(b)-4(i), and
1.367(b)-10(e)(3). To the extent the proposed regulations contain rules
not previously announced in Notice 2016-73, the proposed regulations
would be applicable to transactions completed on or after the date the
proposed regulations are filed in the Federal Register. See proposed
Sec. Sec. 1.367(b)-3(g)(7)(i), 1.367(b)-6(a)(1)(v) and (vi), and
1.1411-10(i); see also proposed Sec. 1.367(b)-3(g)(7)(ii) for
transition rules for certain transactions completed before the issuance
of the proposed regulations.
Taxpayers and their related parties (within the meaning of sections
267(b) and 707(b)(1)) may choose to apply the rules of Notice 2014-32
and Notice 2016-73 or the proposed regulations to any open taxable year
beginning before the date the proposed regulations are filed as final
regulations in the Federal Register, provided that taxpayers and their
related parties consistently apply either the entirety of Notice 2014-
32 and Notice 2016-73 or the entirety of the proposed regulations for
such years and each subsequent taxable year beginning before the date
the proposed regulations are filed as final regulations in the Federal
Register.
The comment requested that the Treasury Department and IRS
reconsider the December 2, 2016, applicability date given that Notice
2016-73 proposed to apply the EAB rules to all inbound nonrecognition
transactions, regardless of whether the taxpayer had previously
effected an applicable triangular reorganization. The comment did,
however, recognize the immediate need for the EAB rules to apply to
already-completed applicable triangular reorganizations where the
taxpayer did not apply the Final Regulations. Because the proposed
regulations would apply the EAB rules only to those inbound
nonrecognition transactions that follow certain triangular
reorganizations and other transactions designed to create EAB, the
Treasury Department and IRS maintain that the December 2, 2016,
effective date is appropriate.
No inference is intended regarding the treatment of applicable
triangular reorganizations, transactions undertaken with a principal
purpose of creating EAB, or subsequent inbound nonrecognition
transactions completed before the applicability date of the proposed
regulations. Such transactions may be subject to challenge before the
applicability dates, for example, under the anti-abuse rule in Sec.
1.367(b)-10(d), applicable Code provisions, or judicial doctrines.
Effect on Other Documents
The proposed regulations would, as of the date they are filed as
final regulations with the Federal Register, obsolete Notice 2014-32
and Notice 2016-73. Until such time, taxpayers may continue to rely on
Notice 2014-32 and Notice 2016-73 as noted in Part IV
[[Page 69569]]
of the Explanation of Provisions section of this preamble.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
requires that a Federal agency obtain the approval of the OMB before
collecting information from the public, whether such collection of
information is mandatory, voluntary, or required to obtain or retain a
benefit.
The collections of information in the proposed regulations are in
proposed Sec. 1.367(b)-1(c)(4)(viii) and (ix) and apply to taxpayers
that engage in transactions described in Sec. 1.367(b)-3(g) or Sec.
1.367(b)-10. This information is necessary for the IRS's audit and
examination purposes, and in particular to identify transactions that
should be subject to the proposed regulations. The proposed information
collection is a statement by corporations attached to their timely
filed Federal tax returns (or Form 5471, as applicable) that describes
certain transactions and computations relevant to the proposed
regulations. Because such statements have not been required for
transactions that predate the proposed regulations, the Treasury
Department and the IRS are limited in their ability to estimate how
many taxpayers are likely to be affected by the proposed information
collection. Based on available data and the profile of taxpayers that
have historically undertaken the types of transactions at issue (large,
publicly traded corporations), it is estimated that no more than 50
taxpayers would be affected by the proposed information collection in a
given year. The likely respondents are foreign and domestic
corporations.
Because the collections of information in proposed Sec. 1.367(b)-
1(c)(4)(viii) and (ix) are proposed to apply to taxable years ending on
or after the date the proposed regulations are filed with the Federal
Register, the Treasury Department and the IRS have submitted the
collection of information in proposed Sec. 1.367(b)-1(c)(4)(viii) and
(ix) to the OMB for review in accordance with the PRA and requested a
temporary OMB control number (1545-NEW). After the rulemaking is
finalized, burdens associated with the proposed information collection
will be incorporated into OMB control number 1545-0123. OMB control
number 1545-0123 represents a total estimated burden time for all forms
and schedules and regulations for corporations. REG-117614-14 will be
included in the future; however, the burden estimates in 1545-0123 will
not isolate the estimated burden for the information collection
contained in these proposed, and subsequent final, regulations. The
Treasury Department and the IRS estimate burdens based on a taxpayer-
type basis rather than a provision-specific basis.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Commenters are strongly encouraged to submit public comments
electronically. Comments and recommendations for the proposed
information collection should be sent to <a href="http://www.reginfo.gov/public/do/PRAMain">www.reginfo.gov/public/do/PRAMain</a>, with electronic copies to the IRS at <a href="/cdn-cgi/l/email-protection#760604175815191b1b13180205361f040558111900"><span class="__cf_email__" data-cfemail="a2d2d0c38cc1cdcfcfc7ccd6d1e2cbd0d18cc5cdd4">[email protected]</span></a>
(indicate ``REG-117614-14'' on the subject line). This particular
information collection can be found by selecting ``Currently under
Review--Open for Public Comments'' then by using the search function.
Comments can also be mailed to OMB, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies mailed to the IRS, Attn: IRS
Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224.
Comments on the collection of information should be received by
December 5, 2023.
III. Regulatory Flexibility Act
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the agency ``to
prepare and make available for public comment an initial regulatory
flexibility analysis'' that will ``describe the impact of the proposed
rule on small entities.'' See 5 U.S.C. 603(a). Section 605 of the RFA
provides an exception to this requirement if the agency certifies that
the proposed rulemaking will not have a significant economic impact on
a substantial number of small entities. A small entity is defined as a
small business, small nonprofit organization, or small governmental
jurisdiction. See 5 U.S.C. 601(3) through (6).
The Treasury Department and the IRS do not have data readily
available to assess the number of small entities potentially affected
by the proposed regulations. However, the taxpayers affected by the
proposed regulations would generally be domestic and foreign
corporations that participate in certain triangular reorganizations.
The triangular reorganizations at issue represent a narrow set of
abusive transactions that have typically been engaged in by large,
publicly traded corporations. Such transactions are highly
sophisticated and are thus unlikely to involve small domestic entities.
Therefore, the Treasury Department and the IRS certify that the
proposed regulations would not have a significant economic impact on a
substantial number of small entities. The Treasury Department and the
IRS invite the public to comment on the impact of these regulations on
small entities.
IV. Section 7805(f)
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
business.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. This proposed rule does not include any Federal mandate that
may result in expenditures by State, local, or Tribal governments, or
by the private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. This proposed rule does not have
federalism implications, does not impose substantial direct compliance
costs on State and local governments, and does not preempt State law
within the meaning of the Executive order.
[[Page 69570]]
Comments and Requests for Public Hearing
Before the proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES section.
The Treasury Department and the IRS request comments on all aspects of
the proposed rules. The Treasury Department and the IRS also invite
comments on section 367(b) more generally, including whether, and if
so, how, any of the existing regulations issued under section 367(b)
should be modified in light of the Tax Cuts and Jobs Act. Any
electronic or paper comments submitted will be made available at
<a href="http://www.regulations.gov">www.regulations.gov</a> or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are encouraged to be made electronically. If a public
hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices, and other
guidance cited in this document are published in the Internal Revenue
Bulletin or Cumulative Bulletin and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at <a href="http://www.irs.gov">http://www.irs.gov</a>.
Drafting Information
The principal author of the proposed regulations is Brady Plastaras
of the Office of the Associate Chief Counsel (International). However,
other personnel from the Treasury Department and the IRS participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry for Sec. 1.1411-10 in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.1411-10 also issued under 26 U.S.C. 367(b).
* * * * *
0
Par. 2. Section 1.367(a)-3 is amended by revising paragraphs (a)(2)(iv)
and (g)(1)(viii) to read as follows:
Sec. 1.367(a)-3 Treatment of transfers of stock or securities to
foreign corporations.
(a) * * *
(2) * * *
(iv) Certain triangular reorganizations described in Sec.
1.367(b)-10. If, in an exchange under section 354 or 356, one or more
U.S. persons exchange stock or securities of T (as defined in Sec.
1.367(b)-10(a)(3)(i)) in connection with a transaction described in
Sec. 1.367(b)-10 (applying to certain acquisitions of parent stock or
securities for property in triangular reorganizations), section
367(a)(1) does not apply to such U.S. persons with respect to the
exchange of the stock or securities of T if the condition in paragraph
(a)(2)(iv)(A) or (B) of this section is satisfied. See Sec. 1.367(b)-
10(a)(2)(iii) (providing a similar rule that excludes certain
transactions from the application of Sec. 1.367(b)-10).
(A) The amount of gain in the T stock or securities that would
otherwise be recognized under section 367(a)(1) (without regard to any
exceptions thereto) pursuant to the indirect stock transfer rules of
paragraph (d) of this section is less than the sum of the amount of the
deemed distribution under Sec. 1.367(b)-10 that would be treated and
subject to U.S. tax as a dividend under section 301(c)(1) (or would
give rise to an inclusion under section 951(a)(1)(A) or 951A(a) that
would be subject to U.S. tax) and the amount of such deemed
distribution that would be treated and subject to U.S. tax as gain from
the sale or exchange of property under section 301(c)(3) (or would give
rise to an inclusion under section 951(a)(1)(A) or 951A(a) that would
be subject to U.S. tax) if Sec. 1.367(b)-10 would otherwise apply to
the triangular reorganization.
(B) T is a foreign corporation, but only to the extent that the
stock or securities of T are exchanged for stock or securities of P
that were acquired by S in exchange for property in the P acquisition
(as the terms P, S, property, and P acquisition are defined in Sec.
1.367(b)-10(a)). Such exchange of T stock or securities is subject to
the rules under Sec. 1.367(b)-4(g). Section 367(a) applies to the
exchange of T stock or securities to the extent that such stock or
securities are exchanged for P stock or securities that were not
acquired by S in exchange for property in the P acquisition.
* * * * *
(g) * * *
(1) * * *
(viii) Except as provided in this paragraph (g)(1)(viii), paragraph
(a)(2)(iv) of this section applies to exchanges occurring on or after
May 17, 2011. For exchanges that occur prior to May 17, 2011, see Sec.
1.367(a)-3T(b)(2)(i)(C) as contained in 26 CFR part 1 revised as of
April 1, 2011. Paragraph (a)(2)(iv)(A) of this section, to the extent
it relates to amounts that would be subject to U.S. tax or give rise to
an inclusion under section 951(a)(1)(A) that would be subject to U.S.
tax, applies to triangular reorganizations that are completed on or
after April 25, 2014, unless T was not related to P or S (within the
meaning of section 267(b)) immediately before the triangular
reorganization; the triangular reorganization was entered into either
pursuant to a written agreement that was (subject to customary
conditions) binding before April 25, 2014, and at all times afterwards,
or pursuant to a tender offer announced before April 25, 2014, that is
subject to section 14(d) of the Securities and Exchange Act of 1934 (15
U.S.C. 78n(d)(1)) and Regulation 14(D) (17 CFR 240.14d-1 through
240.14d-101) or that is subject to comparable foreign laws; and to the
extent the P acquisition that occurs pursuant to the plan of
reorganization is not completed before April 25, 2014, the P
acquisition was included as part of the plan before April 25, 2014.
Paragraph (a)(2)(iv)(B) of this section applies to transactions
completed on or after December 2, 2016. Paragraph (a)(2)(iv)(A) of this
section, to the extent it relates to amounts that would give rise to an
inclusion under section 951A(a) that would be subject to U.S. tax,
applies to triangular reorganizations that are completed on or after
October 5, 2023.
* * * * *
0
Par. 3. Section 1.367(b)-1 is amended by:
0
1. Removing the language ``and'' at the end of paragraph (c)(2)(iv)(B);
0
2. Removing the period at the end of paragraph (c)(2)(v) and adding the
language ``; and'' in its place;
0
3. Adding paragraph (c)(2)(vi);
0
4. In paragraph (c)(3)(ii)(A), removing the language ``paragraph
(c)(2)(i) or (v)'' and adding in its place the language ``paragraph
(c)(2)(i), (v), or (vi)'';
0
5. Revising paragraph (c)(4)(v);
0
6. Removing the language ``and'' at the end of paragraph (c)(4)(vi);
0
7. Removing the period at the end of paragraph (c)(4)(vii)(B) and
adding a semicolon in its place; and
[[Page 69571]]
0
8. Adding paragraphs (c)(4)(viii) and (ix).
The additions and revision read as follows:
Sec. 1.367(b)-1 Other transfers.
* * * * *
(c) * * *
(2) * * *
(vi) A domestic or foreign corporation (S) that acquires stock or
securities of another corporation (P) in a transaction described in
Sec. 1.367(b)-10(a)(1), without regard to the exceptions in Sec.
1.367(b)-10(a)(2).
* * * * *
(4) * * *
(v) Any information that is or would be required to be furnished
with a Federal income tax return pursuant to regulations or other
guidance under section 332, 351, 354, 355, 356, 361, 368, or 381
(whether or not a Federal income tax return is required to be filed),
if such information has not otherwise been provided by the person
filing the section 367(b) notice;
* * * * *
(viii) In the case of a corporation (S) described in paragraph
(c)(2)(vi) of this section, the rules of this paragraph (c)(4) apply by
treating the acquisition of the stock or securities of P in exchange
for property as the section 367(b) exchange referred to in paragraph
(a) of this section. The section 367(b) notice must also include a
complete description of the acquisition of the stock or securities of P
in exchange for property, including a description of the property
provided in exchange for the stock or securities and any related
transactions involving the acquisition of the stock or securities. The
section 367(b) notice must describe any adjustments made pursuant to
Sec. 1.367(b)-10 or, if no adjustments are made, explain why no such
adjustments were made; and
(ix) In the case of an exchange to which Sec. 1.367(b)-3(g)
applies, a statement describing how any excess asset basis (as defined
in Sec. 1.367(b)-3(g)(2)(i)) arose, the amount of excess asset basis,
and a description of the computation of the amount of excess asset
basis.
* * * * *
0
Par. 4. Section 1.367(b)-2 is amended by:
0
1. In paragraph (c)(1), adding a sentence after the current first
sentence;
0
2. Adding a sentence to the end of paragraph (d)(2)(ii);
0
3. In paragraph (d)(3)(ii), removing the language ``subsidiaries of''
and adding in its place the language ``corporations owned by'';
0
4. Adding a sentence to the end of paragraph (d)(3)(ii);
0
5. In paragraph (e)(4) Example 2, removing the language ``foreign
subsidiary'' and adding in its place the language ``foreign
corporation''; and
0
6. In paragraphs (j)(2)(i) and (ii), removing the language ``is
required to include in income either the all earnings and profits
amount or the section 1248 amount under the provisions of Sec.
1.367(b)-3 or 1.367(b)-4'' and adding in its place the language
``exchanges stock pursuant to a transaction described in Sec.
1.367(b)-3 or Sec. 1.367(b)-4(b)(1)(i), (b)(2)(i), (b)(3), (e), or
(g)''.
The additions read as follows:
Sec. 1.367(b)-2 Definitions and special rules.
* * * * *
(c) * * *
(1) * * * But see Sec. 1.1411-10(c)(3)(ii), which for certain
exchanges modifies the section 1248 amount for purposes of section
1411. * * *
* * * * *
(d) * * *
(2) * * *
(ii) * * * But see Sec. 1.1411-10(c)(3)(ii), which for certain
exchanges modifies the all earnings and profits amount for purposes of
section 1411.
* * * * *
(3) * * *
(ii) * * * But see Sec. 1.367(b)-3(g)(1), which adjusts the all
earnings and profits amount through a deemed distribution of certain
earnings and profits of foreign subsidiaries owned by the foreign
acquired corporation.
* * * * *
0
Par. 5. Section 1.367(b)-3 is amended by adding paragraph (g) to read
as follows:
Sec. 1.367(b)-3 Repatriation of foreign corporate assets in certain
nonrecognition transactions.
* * * * *
(g) All earnings and profits amount adjusted for excess asset
basis--(1) General rule. If there is excess asset basis with respect to
a foreign acquired corporation and the condition described in paragraph
(g)(1)(i) or (ii) of this section is satisfied, then, except as
provided in paragraph (g)(5) of this section, an exchanging shareholder
to which paragraph (b)(3)(i) of this section applies must compute the
all earnings and profits amount with respect to its stock in the
foreign acquired corporation as if the foreign acquired corporation had
received a distribution of property from a foreign subsidiary under
section 301 in an amount equal to the specified earnings, immediately
before the inbound nonrecognition transaction. The deemed distribution
described in the preceding sentence is treated as occurring for all
purposes of the Internal Revenue Code. For purposes of this paragraph
(g)(1), the amount of the distribution from a foreign subsidiary is
equal to the amount of earnings and profits of that foreign subsidiary
that is designated as specified earnings under paragraph (g)(3) of this
section. In the case of a foreign subsidiary the stock of which is not
held directly by the foreign acquired corporation, the distribution is
treated as being made through any intermediate owners. For purposes of
this paragraph (g)(1), references to the foreign acquired corporation,
S, and a foreign subsidiary include any predecessor corporation.
(i) S previously acquired in exchange for property stock or
securities of the foreign acquired corporation in connection with a
triangular reorganization described in Sec. 1.358-6(b)(2), and the
foreign acquired corporation and S did not make adjustments that have
the effect of a distribution of property from S to the foreign acquired
corporation under Sec. 1.367(b)-10(b)(1).
(ii) The excess asset basis is attributable, directly or
indirectly, to property previously provided by a foreign subsidiary of
the foreign acquired corporation in connection with a transaction not
described in paragraph (g)(1)(i) of this section and undertaken with a
principal purpose to create such excess asset basis.
(2) Definitions. The following definitions apply for purposes of
this paragraph (g).
(i) Excess asset basis. The term excess asset basis means, with
respect to a foreign acquired corporation, the amount by which the
inside asset basis of that corporation exceeds the sum of the following
amounts:
(A) The earnings and profits of the foreign acquired corporation
attributable to its outstanding stock. For purposes of paragraph
(g)(2)(i) of this section, such earnings and profits are determined
under the principles of Sec. 1.367(b)-2(d) but without regard to
whether the exchanging shareholder is described in paragraph (b)(1) of
this section or whether the exchanging shareholder is a U.S. person or
a foreign person; and such earnings and profits include amounts
described in section 1248(d)(3) or (4).
(B) The aggregate basis in the outstanding stock of the foreign
acquired corporation determined immediately before the nonrecognition
transaction described in paragraph (a) of this section (the inbound
nonrecognition transaction) and therefore without regard to any basis
increase described in Sec. 1.367(b)-
[[Page 69572]]
2(e)(3)(ii) resulting from such inbound nonrecognition transaction.
(C) The aggregate amount of liabilities of the foreign acquired
corporation that are assumed (determined under the principles of
section 357(d)) by the domestic acquiring corporation in the inbound
nonrecognition transaction.
(ii) Foreign subsidiary. The term foreign subsidiary means, with
respect to a foreign acquired corporation, a foreign corporation with
respect to which the foreign acquired corporation satisfies the
ownership requirements of section 1248(c)(2)(B) but for this purpose
treating the foreign acquired corporation as the United States person
referred to in section 1248(c)(2)(B).
(iii) Inbound nonrecognition transaction. The term inbound
nonrecognition transaction has the meaning set forth in paragraph
(g)(2)(i)(B) of this section.
(iv) Inside asset basis. The term inside asset basis means, with
respect to a foreign acquired corporation, the aggregate of the
adjusted basis of all the assets of that corporation in the hands of
the domestic acquiring corporation determined immediately after the
inbound nonrecognition transaction.
(v) Lower-tier earnings. The term lower-tier earnings means, with
respect to a foreign acquired corporation, the sum of the earnings and
profits (including deficits) of each foreign subsidiary.
(vi) S. The term S has the same meaning as in Sec. 1.367(b)-
10(a)(3)(i).
(vii) Specified earnings. The term specified earnings means, with
respect to a foreign acquired corporation, the lesser of the following
amounts:
(A) Lower-tier earnings; and
(B) The excess asset basis of the foreign acquired corporation.
(viii) Property. The term property has the same meaning as in Sec.
1.367(b)-10(a)(3)(ii).
(3) Designation of specified earnings. If lower-tier earnings
exceed specified earnings, then the portion of lower-tier earnings that
is designated as specified earnings is determined by reference to the
earnings and profits of each foreign subsidiary on a pro rata basis in
proportion to each subsidiary's share of lower-tier earnings.
(4) Anti-abuse rule. Appropriate adjustments are made pursuant to
this section if a transaction is engaged in with a view to avoid the
purposes of this paragraph (g). For example, if a transaction is
engaged in with a view to reduce excess asset basis, including by
increasing the basis in the stock of the foreign acquired corporation
without a corresponding increase in the basis of the assets of the
foreign acquired corporation, that increase in the basis in the stock
of the foreign acquired corporation will be disregarded for purposes of
computing excess asset basis.
(5) Prohibition against affirmative use. This paragraph (g) does
not apply to an inbound nonrecognition transaction if a transaction
described in paragraph (g)(1) of this section was entered into with a
principal purpose of subjecting the inbound nonrecognition transaction
to this paragraph (g). For example, this paragraph (g) will not apply
to an inbound nonrecognition transaction if a taxpayer engaged in a
transaction described in paragraph (g)(1) of this section with a
principal purpose of accessing tax attributes of lower-tier foreign
subsidiaries by reason of a deemed distribution of lower-tier earnings
of the foreign acquired corporation.
(6) Examples. The application of this paragraph (g) is illustrated
by the examples in this paragraph (g)(6). In each example, all
corporations have a calendar year-end and use the United States dollar
as their functional currency.
(i) Example 1--(A) Facts. USP, a domestic corporation, owns all of
the stock of USS, also a domestic corporation, and 80 percent of the
stock of FP, a foreign corporation. USS owns the remaining 20 percent
of the stock of FP. FP owns all of the stock of FS1, which in turn owns
all of the stock of FS2. Both FS1 and FS2 are foreign corporations. In
a reorganization described in section 368(a)(1)(F) (F reorganization),
US Newco, a newly formed domestic corporation, acquires all of the
assets of FP solely in exchange for stock of US Newco, which FP
distributes to USP and USS in liquidation. Immediately before the F
reorganization, the stock of FP owned by USP has a fair market value of
$80x and an adjusted basis of $4x. The stock of FP owned by USS has a
fair market value of $20x and an adjusted basis of $1x. The all
earnings and profits amounts with respect to USP's stock of FP and
USS's stock of FP, determined before any adjustments required by
paragraph (g) of this section, are $32x and $8x, respectively. FP holds
assets with an adjusted basis of $95x, has no liabilities, and has $40x
of earnings and profits attributable to its outstanding stock. FS1 and
FS2 have $30x and $70x of earnings and profits, respectively, all of
which are described in section 959(c)(3). Dividends paid by FS2 to FS1,
and by FS1 to FP, would qualify for the exception to foreign personal
holding company income under section 954(c)(6). Before the
applicability date described in paragraph (g)(7)(i) of this section,
and separate from the F reorganization, FS1 provided property to FP in
exchange for stock of FP in connection with a triangular reorganization
described in Sec. 1.358-6(b)(2), and neither FP nor FS1 made
adjustments that had the effect of a distribution of property from FS1
to FP under Sec. 1.367(b)-10(b)(1).
(B) Analysis--(1) All earnings and profits amount. The F
reorganization is an asset acquisition described in section 368(a)(1)
and is thus subject to section 367(b) and this section. Under paragraph
(b)(3) of this section, USP and USS each must include in income as a
deemed dividend the all earnings and profits amount with respect to
their stock of FP. Because there is excess asset basis with respect to
FP (as determined in paragraph (g)(6)(i)(B)(2) of this section), USP
and USS must compute the all earnings and profits amounts attributable
to their stock of FP as if FP had received a distribution of specified
earnings, immediately before the F reorganization. Because the stock of
FS2 is indirectly owned by FP, to the extent the specified earnings are
determined by reference to the earnings and profits of FS2, FS2 is
treated as making a distribution to FS1 under section 301, and FS1 is
then treated as making a distribution to FP under section 301 in an
amount equal to the sum of the amount of specified earnings determined
by reference to the earnings and profits of FS1 (determined without
regard to the deemed distribution from FS2) and the amount of the
deemed distribution received from FS2.
(2) Excess asset basis. The amount of excess asset basis is $50x,
calculated as the amount by which FP's inside asset basis ($95x)
exceeds the sum of FP's earnings and profits ($40x), the aggregate
basis in the outstanding stock of FP ($5x), and the amount of
liabilities of FP assumed by US Newco in the F reorganization ($0).
(3) Deemed distribution of specified earnings. The amount of
specified earnings equals $50x, the lesser of the following amounts:
$100x, the sum of the earnings and profits of FS1 and FS2; and $50x,
the amount of excess asset basis with respect to FP. FP is accordingly
treated as receiving a distribution of $50x from FS1. Under paragraph
(g)(3) of this section, $15x ($50x x ($30x/$100x)) of FS1's earnings
and profits and $35x ($50x x ($70x/$100x)) of FS2's earnings and
profits are designated as specified earnings. FS2 is treated as
distributing $35x to FS1. Under sections 301(c)(1) and 954(c)(6), the
$35x deemed distribution from FS2 to FS1 is treated as a dividend that
does
[[Page 69573]]
not give rise to foreign personal holding company income. FS1 must
accordingly increase its earnings and profits described in section
959(c)(3) by $35x to $65x, and FS2 must decrease its earnings and
profits described in section 959(c)(3) by the same amount. FS1 is then
treated as making a distribution of $50x to FP. Under sections
301(c)(1) and 954(c)(6), the $50x deemed distribution is also treated
as a dividend that does not give rise to foreign personal holding
company income. FP must accordingly increase its earnings and profits
described in section 959(c)(3) by $50x to $90x, and FS1 must decrease
its earnings and profits described in section 959(c)(3) by the same
amount.
(4) Adjusted all earnings and profits amount attributable to USP's
FP stock. Under paragraph (g)(1) of this section, USP must compute the
all earnings and profits amount attributable to its stock of FP after
taking into account the $50x increase to FP's earnings and profits that
resulted from the deemed distribution of specified earnings. Because
USP owns 80% of the stock of FP, $40x (calculated as 80% of $50x) of
the specified earnings are attributable to USP's stock of FP and are
included in the all earnings and profits amount attributable to USP's
stock of FP. The all earnings and profits amount that USP must include
in income as a deemed dividend is therefore $72x ($32x + $40x).
(5) Adjusted all earnings and profits amount attributable to USS's
FP stock. Under paragraph (g)(1) of this section, USS must compute the
all earnings and profits amount attributable to its stock of FP after
taking into account the $50x increase to FP's earnings and profits that
resulted from the deemed distribution of specified earnings. Because
USS owns 20% of the stock of FP, $10x (calculated as 20% of $50x) of
the specified earnings are attributable to USS's stock of FP and are
included in the all earnings and profits amount attributable to USS's
stock of FP. The all earnings and profits amount that USS must include
in income as a deemed divided is therefore $18x ($8x + $10x).
(ii) Example 2--(A) Facts. USP, a domestic corporation, owns all of
the stock of FP, which in turn owns all of the stock of FS. Both FP and
FS are foreign corporations. The all earnings and profits amount with
respect to USP's stock of FP, determined before any adjustments
required by paragraph (g) of this section, is $50x. FP has no other
earnings and profits other than the $50x that reflect USP's all
earnings and profits amount. FS has $200x of earnings and profits, all
of which are earnings and profits described in section 959(c)(2) (PTEP)
because those earnings and profits gave rise to an earlier income
inclusion under section 951 with respect to USP. Increases in stock
basis were made under section 961 by reason of USP's section 951
inclusion. FP has excess asset basis of $100x as a result of a previous
transaction that was undertaken with a principal purpose of creating
excess asset basis in which FS provided $100x of property to FP. In a
liquidation described in section 332, FP distributes all of its assets
to USP and the stock of FP is cancelled (the FP liquidation).
(B) Analysis--(1) All earnings and profits amount. The FP
liquidation is subject to section 367(b) and this section. Under
paragraph (b)(3) of this section, USP must include in income as a
deemed dividend the all earnings and profits amount with respect to its
stock of FP. Because there is excess asset basis with respect to FP,
USP must compute the all earnings and profits amount attributable to
its stock of FP as if FP had received a distribution of specified
earnings immediately before the FP liquidation.
(2) Deemed distribution of specified earnings. The amount of
specified earnings equals $100x, the lesser of the following amounts:
$200x, the earnings and profits of FS; and $100x, the amount of excess
asset basis with respect to FP. FS is accordingly treated as making a
distribution of $100x to FP. Under sections 301(c)(1) and 959(b), the
$100x deemed distribution from FS to FP is treated as a distribution of
PTEP that is not included in the gross income of FP for purposes of
section 951. The distribution reduces FS's earnings and profits and
PTEP with respect to USP by $100x and increases FP's earnings and
profits and PTEP with respect to USP by $100x. Furthermore, appropriate
adjustments are made under section 961 for the distribution of PTEP.
(3) Adjusted all earnings and profits amount attributable to USP's
stock of FP. Under paragraph (g)(1) of this section, USP must compute
the all earnings and profits amount attributable to its stock of FP
after taking into account the $100x increase to FP's earnings and
profits that resulted from the deemed distribution of specified
earnings. Because the deemed distribution consisted entirely of PTEP
with respect to USP, the deemed distribution does not affect USP's all
earnings and profits amount of $50x. See Sec. 1.367(b)-2(d)(2)(ii).
USP must therefore include $50x in income as a deemed dividend under
this section. USP must also recognize any foreign currency gain or loss
under section 986(c) with respect to the $100x of PTEP of FP. See Sec.
1.367(b)-2(j)(2).
(7) Applicability date--(i) In general. Paragraph (g) of this
section (other than paragraphs (g)(2)(vii), (g)(3), and (5) of this
section) applies to transactions completed on or after December 2,
2016, and to any transactions treated as completed before December 2,
2016, as a result of an entity classification election made under Sec.
301.7701-3 of this chapter that is filed on or after December 2, 2016.
Paragraphs (g)(2)(vii), (g)(3), and (5) of this section apply to
transactions completed on or after October 5, 2023.
(ii) Transactions completed (or elections made) on or after
December 2, 2016, and before October 5, 2023. Except as provided in
paragraph (g)(7)(iii) of this section, the following definitions (in
lieu of the corresponding definitions or in addition to the definitions
in paragraph (g)(2) of this section) and rules apply with respect to
transactions completed on or after December 2, 2016, and to any
transactions treated as completed before December 2, 2016, as a result
of an entity classification election made under Sec. 301.7701-3 of
this chapter that is filed on or after December 2, 2016, but before
October 5, 2023:
(A) The term specified earnings means, with respect to the stock of
a foreign acquired corporation that is exchanged by an exchanging
shareholder, the lesser of the following amounts (but not below zero):
(1) The sum of the earnings and profits (including a deficit) with
respect to each foreign subsidiary of the foreign acquired corporation
that are attributable under section 1248(c)(2) to the stock of the
foreign acquired corporation exchanged (lower-tier earnings). For
purposes of the preceding sentence, the modifications described in
Sec. 1.367(b)-2(d)(2) and (d)(3)(i) apply. Thus, for example, the
amount of the earnings and profits of a foreign subsidiary that are
attributable to stock of the foreign acquired corporation is determined
without regard to whether the foreign subsidiary was a controlled
foreign corporation at any time during the five years preceding the
inbound nonrecognition transaction.
(2) The product of the excess asset basis of the foreign acquired
corporation, multiplied by the exchanging shareholder's specified
percentage.
(3) The amount of gain that would be realized by the exchanging
shareholder if, immediately before the inbound nonrecognition
transaction, the exchanging shareholder had sold the stock of the
foreign acquired corporation
[[Page 69574]]
for fair market value, reduced by the exchanging shareholder's all
earnings and profits amount (for this purpose, determined without
regard to the modifications described in this paragraph (g)) (specified
stock gain).
(B) The term specified percentage means, with respect to an
exchanging shareholder, a fraction (expressed as a percentage), the
numerator of which is the sum of the aggregate of the specified stock
gain with respect to all exchanging shareholders to which Sec.
1.367(b)-3(b)(3) applies and the aggregate of the gain realized
(regardless of whether such gain is recognized) with respect to the
stock exchanged by all other exchanging shareholders.
(C) If there is excess asset basis with respect to a foreign
acquired corporation, as determined under paragraph (g)(2)(i) of this
section, a taxpayer may reduce the excess asset basis to the extent
that the excess asset basis is not attributable, directly or
indirectly, to property provided by a foreign subsidiary of the foreign
acquired corporation. For example, if there was a transfer of property
to the foreign acquired corporation described in section 362(e)(2), and
the election described in section 362(e)(2)(C) was made to limit the
basis in the stock received in the foreign acquired corporation to its
fair market value, then, for purposes of determining excess asset
basis, the basis in the stock of the foreign acquiring corporation may
be determined without regard to the application of section 362(e)(2).
(iii) Early application. A taxpayer and its related parties (within
the meaning of sections 267(b) and 707(b)(1)) may choose to apply
paragraphs (g)(1) through (6) of this section to all open taxable years
beginning before the date these regulations are filed as final
regulations in the Federal Register, provided that the taxpayer and its
related parties consistently apply paragraphs (g)(1) through (6) of
this section and Sec. 1.367(b)-1(c)(4)(ix) for such years.
0
Par. 6. Section 1.367(b)-4 is amended by:
0
1. In paragraph (a), adding a sentence after the fifth sentence;
0
2. In paragraph (a), removing the language ``paragraph (g)'' in the
current sixth sentence and adding in its place the language ``paragraph
(h)'' and removing the language ``paragraph (h)'' in the current
seventh sentence and adding in its place the language ``paragraph
(i)'';
0
3. In paragraph (e)(5) Example 2 (ii)(B), removing the language
``paragraph (g)(1)'' wherever it appears and adding in its place the
language ``paragraph (h)(1)'';
0
4. In paragraph (f)(3) Example 2 (ii), removing the language
``paragraph (g)(1)'' wherever it appears and adding in its place the
language ``paragraph (h)(1)'';
0
5. Redesignating paragraph (h) as paragraph (i);
0
6. Redesignating paragraph (g) as paragraph (h) and adding a new
paragraph (g);
0
7. Adding a sentence to the end of newly redesignated paragraph (i);
and
0
8. In newly redesignated paragraph (i), removing the language
``paragraph (h)'' and adding in its place the language ``paragraph
(i)'', and removing the language ``paragraphs (f) and (g)(5)'' and
adding in its place the language ``paragraphs (f) and (h)(5)''.
The additions read as follows:
Sec. 1.367(b)-4 Acquisition of foreign corporate stock or assets by
a foreign corporation in certain nonrecognition transactions.
(a) * * * Paragraph (g) of this section provides rules regarding
exchanges that occur pursuant to a transaction described in Sec.
1.367(b)-10(a)(1), without regard to the exceptions in Sec. 1.367(b)-
10(a)(2). * * *
* * * * *
(g) Income inclusion and gain recognition in exchanges occurring in
connection with certain triangular reorganizations--(1) Rule. If, in an
exchange under section 354 or 356 that occurs in connection with a
transaction described in Sec. 1.367(b)-10, an exchanging shareholder
exchanges stock or securities of a foreign acquired corporation, then,
to the extent that the exchanging shareholder receives stock or
securities of P acquired by S in exchange for property in the P
acquisition, the shareholder must:
(i) Include in income as a deemed dividend the section 1248 amount
attributable to the stock that the shareholder exchanges; and
(ii) After taking into account the increase in basis in the stock
provided in Sec. 1.367(b)-2(e)(3)(ii) resulting from the deemed
dividend (if any), recognize all realized gain with respect to the
stock or securities that would not otherwise be recognized.
(2) Special rules and definitions. For the purposes of this
paragraph (g), an exchanging shareholder is a United States person or
foreign person that exchanges stock of a foreign acquired corporation
in a prescribed exchange, regardless of whether such United States
person is a section 1248 shareholder or such foreign person is a
foreign corporation in which a United States person is a section 1248
shareholder. As used in this paragraph (g), the terms P, S, property,
and P acquisition have the meanings provided in Sec. 1.367(b)-10(a),
and the term foreign person means a person that is not a United States
person.
(3) Example. The following example illustrates the rules of this
paragraph (g):
(i) Facts. USP, a domestic corporation, owns all of the stock of FP
and USS. FP is a foreign corporation that owns all of the stock of FS,
a foreign corporation. USS is a domestic corporation that owns all of
the stock of FT, a foreign corporation. USS owns 100 shares of stock of
FT, which constitutes a single block of stock with a fair market value
of $100x, an adjusted basis of $20x, and a section 1248 amount of $50x.
FS has earnings and profits of $60x. A dividend from FS to FP would
qualify for the exception to foreign personal holding company income
under section 954(c)(6). FP issues 100 shares of voting stock with a
fair market value of $100x to FS, $40x of which (the 40-percent FP
block) is issued in exchange for $40x of newly issued common stock of
FS and $60x of which (the 60-percent FP block) is issued in exchange
for $60x of cash. FS acquires all of the stock of FT held by USS solely
in exchange for the $100x of voting stock of FP (that is, FS exchanges
both the 40-percent FP block and the 60-percent FP block) in a
triangular reorganization described in section 368(a)(1)(B) (triangular
B reorganization).
(ii) Analysis--(A) Application of Sec. 1.367(b)-10. The triangular
B reorganization is described in Sec. 1.367(b)-10, and the $60x of
cash constitutes property under Sec. 1.367(b)-10(a)(3)(ii). Pursuant
to Sec. 1.367(b)-10(b)(1), adjustments must be made that have the
effect of a distribution of property in the amount of $60x from FS to
FP under section 301. The $60x deemed distribution is treated as
separate from, and occurring immediately before, FS's acquisition of
the 60-percent FP block used in the triangular B reorganization. The
$60x deemed distribution from FS to FP results in $60x of dividend
income to FP under section 301(c)(1) that is not foreign personal
holding company income under section 954(c)(6).
(B) Application of paragraph (g) of this section. Pursuant to Sec.
1.367(a)-3(a)(2)(iv)(B), paragraph (g) of this section applies to $60x
of the stock of FT (the 60-percent FT block) exchanged for the 60-
percent FP block. Thus, under paragraph (g)(1)(i) of this section, USS
must include in income a $30x deemed dividend (representing 60 percent
of USS's $50x section 1248 amount) with
[[Page 69575]]
respect to the 60-percent FT block exchanged for the 60-percent FP
block. In addition, under paragraph (g)(1)(ii) of this section, USS
must recognize its realized gain that would not otherwise be recognized
with respect to the 60-percent FT block. USS's fair market value and
adjusted basis in the 60-percent FT block are $60x (60 percent of the
$100x fair market value of the stock of FT) and $12x (60 percent of the
$20x adjusted basis of the stock of FT), respectively. USS's initial
built-in gain with respect to the 60-percent FT block is accordingly
$48x ($60x fair market value less $12x adjusted basis). The $30x deemed
dividend increases USS's basis in the 60-percent FT block to $42 ($12x
+ $30x), leaving $18x ($60x-$42x) of built-in gain. USS must therefore
recognize the remaining $18x of gain with respect to the 60-percent FT
block.
(C) Application of paragraph (b) of this section and regulations
under section 367(a). USS has $32x of built-in gain in the remaining
$40x of stock of FT (the 40-percent FT block) that USS exchanged for
the 40-percent FP block, calculated as USS's initial $80 of built-in
gain in all of its stock of FT less the $48x of initial built-in gain
attributable to the 60-percent FT block. USS's section 1248 amount in
the 40-percent FT block is $20x, calculated as 40 percent of USS's $50x
section 1248 amount. USS does not recognize a deemed dividend of the
$20x section 1248 amount under paragraph (b) of this section because FT
remains a controlled foreign corporation with respect to which USS is a
section 1248 shareholder immediately after the triangular B
reorganization. Unless USS properly files a gain recognition agreement
pursuant to Sec. Sec. 1.367(a)-3(b) and 1.367(a)-8, USS recognizes the
$32x of built-in gain under section 367(a)(1) with respect to the 40-
percent FT block.
* * * * *
(i) * * * Paragraph (g) of this section applies to transactions
completed on or after December 2, 2016.
0
Par. 7. Section 1.367(b)-6 is amended by adding paragraphs (a)(1)(v)
and (vi) to read as follows:
Sec. 1.367(b)-6 Effective/applicability dates and coordination
rules.
(a) * * *
(1) * * *
(v) Section 1.367(b)-2(j)(2) applies to transactions completed on
or after October 5, 2023 and to any transactions treated as completed
before October 5, 2023 as a result of an entity classification election
made under Sec. 301.7701-3 of this chapter that is filed on or after
October 5, 2023.
(vi) Section 1.367(b)-1(c)(2)(vi), (c)(4)(viii), and (c)(4)(ix)
apply to taxable years ending on or after October 5, 2023. However, a
taxpayer and its related parties (within the meaning of sections 267(b)
and 707(b)(1)) may choose to apply the rules referred to in the
preceding sentence to all open taxable years ending before October 5,
2023, provided that the taxpayer and its related parties consistently
apply such rules and Sec. 1.367(b-3(g) for such years.
* * * * *
0
Par. 8. Section 1.367(b)-10 is amended by:
0
1. Adding two sentences to the end of paragraph (a)(1);
0
2. Revising paragraphs (a)(2)(ii) and (iii);
0
3. Removing the language ``and'' at the end of paragraph (a)(3)(ii)(A),
removing the period at the end of paragraph (a)(3)(ii)(B) and adding
the language ``; and'' in its place;
0
4. Adding paragraph (a)(3)(ii)(C);
0
5. Removing paragraph (b)(2);
0
6. Redesignating paragraphs (b)(3), (4), and (5) as paragraphs (b)(2),
(3), and (4), respectively;
0
7. Revising newly redesignated paragraph (b)(2);
0
8. Adding two sentences to the end of newly redesignated paragraph
(b)(3);
0
9. In newly redesignated paragraph (b)(4)(ii), removing the sixth
sentence, revising the current seventh sentence, and adding two
sentences at the end of the paragraph; and
0
10. Revising paragraphs (c), (d), and (e).
The revisions and additions read as follows:
Sec. 1.367(b)-10 Acquisition of parent stock or securities for
property in triangular reorganizations.
(a) * * *
(1) * * * See Sec. 1.367(b)-3(g) for the treatment of certain
inbound nonrecognition transactions following transactions described in
this section. See Sec. 1.367(b)-4(g) for rules applicable to certain
exchanging shareholders that exchange stock of T in connection with a
transaction described in this section.
(2) * * *
(ii) S is a domestic corporation, P is not a controlled foreign
corporation (within the meaning of Sec. 1.367(b)-2(a)), P's stock in S
is not a United States real property interest (within the meaning of
section 897(c)), and the deemed distribution that would result from the
application of this section would not be treated as a dividend under
section 301(c)(1) that would be subject to U.S. tax under either
section 881 (for example, by reason of an applicable treaty or by
reason of an absence of earnings and profits) or section 882; or
(iii) In an exchange under section 354 or 356, one or more U.S.
persons exchange stock or securities of T and the amount of gain in the
T stock or securities that would otherwise be recognized under section
367(a)(1) is equal to or greater than the sum of the amount of the
deemed distribution under this section that would be treated and
subject to U.S. tax as a dividend under section 301(c)(1) (or would
give rise to an inclusion under section 951(a)(1)(A) or 951A(a) that
would be subject to U.S. tax) and the amount of such deemed
distribution that would be treated and subject to U.S. tax as gain from
the sale or exchange of property under section 301(c)(3) (or would give
rise to an inclusion under section 951(a)(1)(A) or 951A(a) that would
be subject to U.S. tax) if this section would otherwise apply to the
triangular reorganization. The exception provided in this paragraph
(a)(2)(iii) does not apply if T is a foreign corporation. See Sec.
1.367(a)-3(a)(2)(iv) (providing a similar rule that excludes certain
transactions from the application of section 367(a)(1)).
(3) * * *
(ii) * * *
(C) Stock of S that is nonqualified preferred stock (as defined in
section 351(g)(2)).
* * * * *
(b) * * *
(2) Timing of deemed distribution. If P controls (within the
meaning of section 368(c)) S at the time of the P acquisition, the
adjustments described in paragraph (b)(1) of this section are made as
if the deemed distribution is a separate transaction occurring
immediately before the P acquisition. If P does not control (within the
meaning of section 368(c)) S at the time of the P acquisition, the
adjustments described in paragraph (b)(1) of this section are made as
if the deemed distribution is a separate transaction occurring
immediately after P acquires control of S, but before the
reorganization.
(3) * * * Thus, P's adjustment to the basis in its S stock under
Sec. 1.358-6 is determined as if P provided the P stock or securities
pursuant to the plan of reorganization, notwithstanding that S acquired
the P stock or securities in exchange for property in the P
acquisition. See also Sec. 1.367(b)-13.
(4) * * *
(ii) * * * Pursuant to paragraph (b)(2) of this section, the
adjustment described in paragraph (b)(1) of this section is made as if
the deemed distribution is a separate transaction occurring immediately
before FS's purchase of the P stock on the open market. * * *
[[Page 69576]]
US1's transfer of its FT stock in exchange for P stock is subject to
Sec. 1.367(b)-4(g). If, contrary to the facts in this paragraph
(b)(4), US1 had built-in gain with respect to its FT stock, then such
gain would be recognized in accordance with Sec. 1.367(b)-4(g).
(c) Collateral adjustments. This paragraph (c) provides additional
rules that apply by reason of the deemed distribution described in
paragraph (b)(1) of this section. A deemed distribution described in
paragraph (b)(1) of this section is treated as occurring for all
purposes of the Internal Revenue Code. Thus, for example, the ordering
rules of section 301(c) apply to characterize the deemed distribution
to P as a dividend from the earnings and profits of S, return of stock
basis, or gain from the sale or exchange of property, as the case may
be. Furthermore, section 959 may apply to the deemed distribution if S
is a foreign corporation, and sections 881, 882, 897, 1442, or 1445 may
apply to the deemed distribution if S is a domestic corporation.
Appropriate corresponding adjustments must be made to S's earnings and
profits consistent with the principles of section 312.
(d) Anti-abuse rule--(1) Rule. Appropriate adjustments must be made
pursuant to this section if, in connection with a triangular
reorganization, a transaction is engaged in with a view to avoid the
purpose of this section. For example, if S is created, organized, or
funded to avoid the application of this section with respect to the
earnings and profits of another corporation, the earnings and profits
of S (or any successor corporation) may be deemed to include the
earnings and profits of such other corporation (or any successor
corporation) for purposes of determining the consequences of the
adjustments provided in this section, and appropriate corresponding
adjustments may be made to account for the application of this section
to the earnings and profits of such other corporation (or any successor
corporation). Adjustments may be made under this paragraph (d) whether
S is funded before or after a triangular reorganization, and such
funding may include capital contributions, loans, and distributions.
The following examples illustrate the application of this paragraph
(d), the application of which is not limited to the particular
situations described in the examples.
(2) Example 1: Deemed increase to S's earnings and profits--(i)
Facts. FP is a foreign corporation that owns all of the stock of USS, a
domestic corporation. USS has no assets, liabilities, or earnings and
profits. FP issues $10x of voting stock to USS in exchange for $10x of
newly issued stock of USS, and FP also issues $90x of voting stock to
USS in exchange for a note newly issued by USS with a fair market value
of $90x (USS note). FP would be subject to U.S. tax under section 881
on a distribution from USS if, contrary to the facts, USS had earnings
and profits for purposes of applying section 301(c) to the
distribution. USS acquires all the stock of UST, a domestic corporation
that is unrelated to FP and USS, from a foreign person in exchange for
the $100x of voting stock of FP in a triangular reorganization
described in section 368(a)(1)(B) (triangular B reorganization). UST
has $100x of earnings and profits. USS's purchase of the $90x of stock
of FP in exchange for the USS note in connection with the triangular B
reorganization is engaged in with a view to avoid the purpose of this
section.
(ii) Analysis. Because USS's purchase of the $90x of stock of FP in
exchange for the USS note is engaged in with a view to avoid the
purpose of this section, the anti-abuse rule applies and appropriate
adjustments are made. In particular, for purposes of determining the
consequences of the deemed distribution provided for in paragraph
(b)(1) of this section, the earnings and profits of USS are deemed to
include the earnings and profits of UST. USS is therefore treated as
having made a deemed distribution equal to $90x, which reflects the
portion of the stock of FP that USS acquired in exchange for property
(the USS note). Because USS is deemed to have $100x of earnings and
profits, the entire $90x deemed distribution is treated as a dividend
under section 301(c)(1). The deemed distribution is treated as separate
from, and occurring immediately before, USS's acquisition of the stock
of FP used in the triangular B reorganization. No adjustments are made
by FP to the basis in its stock of USS except as provided in Sec.
1.358-6. Under paragraph (b)(3) of this section, FP's adjustment to the
basis in its stock of USS under Sec. 1.358-6 is determined as if FP
provided all $100x of the stock of FP pursuant to the plan of
reorganization.
(3) Example 2: Downstream property transfer--(i) Facts. USP is a
domestic corporation that owns all of the stock of FS1, a foreign
corporation, FS1 holds a note receivable issued by USP with a fair
market value of $100x (USP note), and FS1 has more than $100x of
earnings and profits. USP has no income inclusion under section
951(a)(1)(B) with respect to the USP note after the application of
Sec. 1.956-1(a)(2). FS1 forms USS Newco, a domestic corporation, to
which it transfers the USP note in exchange for voting stock of USS
Newco. USS Newco then forms FS2 Newco, a foreign corporation, and FS1
transfers all of its remaining assets (except for its stock in USS
Newco) to FS2 Newco in exchange for additional voting stock of USS
Newco in a transaction intended to qualify as a triangular
reorganization described in section 368(a)(1)(C) (triangular C
reorganization). FS1 liquidates into USP pursuant to the triangular C
reorganization, and USP receives the stock of USS Newco held by FS1.
FS1's transfer of the USP note to USS Newco in connection with the
intended triangular C reorganization is engaged in with a view to avoid
the purpose of this section.
(ii) Analysis. Because FS1's transfer of the USP note to USS Newco
is in connection with a triangular reorganization and is engaged in
with a view to avoid the purpose of this section, the anti-abuse rule
applies and appropriate adjustments are made. FS1's formation of USS
Newco and transfer of the USP note to USS Newco, together with the
distribution of the shares of USS Newco pursuant to the liquidation of
FS1, is treated under the anti-abuse rule as a distribution of $100x,
consistent with its substance. Accordingly, adjustments are made
consistent with there having been such a distribution. Because FS1 has
more than $100x of earnings and profits, the adjustments made are
consistent with USS Newco having received a $100x dividend from FS1
separate from, and immediately before, the triangular C reorganization.
USS Newco must therefore include $100x in gross income as if it had
received that amount as a dividend and increase its earnings and
profits by the same amount. FS1 must decrease its earnings and profits
by $100x. For purposes of determining USS Newco's basis in its stock of
FS2 Newco, Sec. 1.367(b)-13 applies by treating USS Newco as P (within
the meaning of Sec. 1.367(b)-13(a)(2)(ii)). Under paragraph (b)(3) of
this section, USS Newco's adjustment to the basis in its FS2 Newco
stock under Sec. 1.367(b)-13 is determined as if USS Newco provided
the stock of USS Newco stock pursuant to the plan of reorganization.
(4) Example 3: Taxable debt exchange--(i) Facts. USP is a domestic
corporation that owns all of the stock of FP, a foreign corporation,
and USS, a domestic corporation. Furthermore, FP owns all of the stock
of FS, a foreign corporation, and USS owns all of the stock of UST, a
domestic corporation. FP has no earnings and profits, and FS has more
than $100x of earnings and
[[Page 69577]]
profits. USP has held its stock in FP for fewer than 365 days and thus
does not satisfy the requirements of sections 245A and 246(c) with
respect to dividends received from FP. FS transfers a note issued by FS
with a fair market value of $100x (FS note) to FP in exchange for $100x
of voting stock of FP, and FS then uses the stock of FP to acquire all
of the stock of UST held by USS in a triangular reorganization
described in section 368(a)(1)(B) (triangular B reorganization).
Because a dividend from FS to FP would not constitute foreign personal
holding company income under section 954(c)(6), the taxpayer asserts
that the exception in paragraph (a)(2)(iii) of this section applies and
therefore does not make any adjustments pursuant to this section. FP
then transfers the FS note to USP in exchange for a note issued by USP
with a fair market value of $100x (USP note). The USP note constitutes
United States property within the meaning of section 956(c), and USP
would otherwise have an inclusion under section 951(a)(1)(B) and Sec.
1.956-1(a)(2) if FP had earnings and profits. FS's transfer of the FS
note to FP, and FP's subsequent transfer of the FS note to USP in
connection with the triangular B reorganization, are engaged in with a
view to avoid the purpose of this section.
(ii) Analysis. Because the transfers of the FS note are in
connection with a triangular reorganization and are engaged in with a
view to avoid the purpose of this section, the anti-abuse rule applies
and appropriate adjustments are made. FS is therefore treated as having
made a distribution to FP of $100x, reflecting the value of the stock
of FP that FS acquired in exchange for property (the FS note). The
deemed distribution is treated as separate from, and occurring
immediately before, FS's acquisition of the stock of FP stock used in
the triangular B reorganization. Because FS has more than $100x of
earnings and profits, the entire deemed distribution is treated as a
dividend under section 301(c)(1). The deemed dividend causes FP to
increase its earnings and profits by $100x but does not constitute
foreign personal holding company income to FP under section 954(c)(6).
FP thus has $100x of earnings and profits available to support
inclusions under section 951(a)(1)(B) in connection with FP's
subsequent acquisition of the USP note. No adjustments are made by FP
to the basis in its stock of FS except as provided in Sec. 1.358-6.
Under paragraph (b)(3) of this section, FP's adjustment to the basis in
its stock of FS under Sec. 1.358-6 is determined as if FP provided the
stock of FP pursuant to the plan of reorganization.
(e) Applicability dates--(1) General rule. This section applies to
triangular reorganizations occurring on or after May 17, 2011. For
triangular reorganizations that occur before May 17, 2011, see Sec.
1.367(b)-14T as contained in 26 CFR part 1 revised as of April 1, 2011.
(2) Triangular reorganizations completed on or after April 25,
2014. The following paragraphs apply to triangular reorganizations that
are completed on or after April 25, 2014, unless T was not related to P
or S (within the meaning of section 267(b)) immediately before the
triangular reorganization; the triangular reorganization was entered
into either pursuant to a written agreement that was (subject to
customary conditions) binding before April 25, 2014, and at all times
afterwards, or pursuant to a tender offer announced before April 25,
2014, that is subject to section 14(d) of the Securities and Exchange
Act of 1934 (15 U.S.C. 78n(d)(1)) and Regulation 14(D) (17 CFR 240.14d-
1 through 240.14d-101) or that is subject to comparable foreign laws;
and to the extent the P acquisition that occurs pursuant to the plan of
reorganization is not completed before April 25, 2014, the P
acquisition was included as part of the plan before April 25, 2014:
(i) Paragraph (a)(2)(ii) of this section, to the extent it does not
apply where P is a controlled foreign corporation, and to the extent it
relates to dividends that would be subject to U.S. tax;
(ii) Paragraph (a)(2)(iii) of this section, to the extent it
relates to amounts that would be subject to U.S. tax or give rise to an
inclusion under section 951(a)(1)(A) that would be subject to U.S. tax;
(iii) Paragraph (b)(3) of this section, to the extent it relates to
P's provision of its stock or securities pursuant to the plan of
reorganization; and
(iv) Paragraphs (b) and (c) of this section, to the extent they do
not reference the rule described in former paragraph (b)(2) of this
section (relating to the deemed contribution), as contained in 26 CFR
part 1 revised as of April 1, 2021.
(3) Transactions completed on or after December 2, 2016. The
following paragraphs apply to transactions completed on or after
December 2, 2016:
(i) Paragraph (a)(2)(iii) of this section, to the extent it does
not apply where T is a foreign corporation; and
(ii) Paragraph (a)(3)(ii)(C) of this section.
(4) Deemed distributions that occurred in taxable years ending
before November 2, 2020. Former paragraph (c)(1) of this section, as
contained in 26 CFR part 1 revised as of April 1, 2021, to the extent
it references section 902, applies to deemed distributions that occur
in taxable years ending before November 2, 2020.
(5) Triangular reorganizations completed on or after October 5,
2023. Paragraph (a)(2)(iii) of this section, to the extent it relates
to amounts that would give rise to an inclusion under section 951A(a)
that would be subject to U.S. tax, applies to triangular
reorganizations that are completed on or after October 5, 2023.
0
Par. 9. Section 1.1248-1 is amended by adding a sentence to the end of
paragraph (a)(1) to read as follows:
Sec. 1.1248-1 Treatment of gain from certain sales or exchanges of
stock in certain foreign corporations.
(a) * * *
(1) * * * See Sec. 1.1411-10(c)(3) for additional rules concerning
the application of section 1248 for purposes of section 1411.
* * * * *
0
Par. 10. Section 1.1411-10 is amended by:
0
1. Revising the heading of paragraph (c)(3);
0
2. In paragraph (c)(3), removing the language ``With respect to stock
of a CFC'' and adding in its place ``With respect to stock of a foreign
corporation that is a CFC (or that was a CFC at any time during the 5-
year period ending on the date of sale or exchange)'';
0
3. Revising paragraph (c)(3)(i) and the introductory text of paragraph
(c)(3)(ii);
0
4. Adding paragraph (d)(5); and
0
5. Adding a sentence to the end of paragraph (i).
The revisions and additions read as follows:
Sec. 1.1411-10 Controlled foreign corporations and passive foreign
investment companies.
* * * * *
(c) * * *
(3) Application of sections 1248 and 367(b). * * *
(i) In determining the amount of gain recognized on the sale or
exchange of stock of a foreign corporation under section 1248(a) or the
amount of gain realized on the exchange of stock of a foreign
corporation under Sec. 1.367(b)-4 or 1.367(b)-5, basis is determined
in accordance with the provisions of paragraph (d) of this section; and
(ii) Section 1248(a), and Sec. 1.367(b)-2(c)(1) and (d)(2)(ii)
apply without regard to the exclusions for certain
[[Page 69578]]
earnings and profits under section 1248(d)(1) and (d)(6), except that
those exclusions will apply with respect to the earnings and profits of
a foreign corporation that are attributable to:
* * * * *
(d) * * *
(5) Basis adjustments under section 367(b). With respect to stock
of a foreign corporation that is exchanged in a transaction subject to
section 367(b), the portion of the basis increase provided by Sec.
1.367(b)-2(e)(3)(ii) by reason of paragraph (c)(3)(ii) of this section
is made solely for purposes of section 1411.
* * * * *
(i) * * * Paragraph (c)(3) of this section, to the extent it
references regulations issued under section 367(b), and paragraph
(d)(5) of this section, apply to transactions completed on or after
October 5, 2023 and to any transactions treated as completed before
October 5, 2023 as a result of an entity classification election made
under Sec. 301.7701-3 of this chapter that is filed on or after
October 5, 2023.
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-22061 Filed 10-5-23; 8:45 am]
BILLING CODE 4830-01-P
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</html>Indexed from Federal Register on October 6, 2023.
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