Treatment of Distributions to Foreign Persons
Under Sections 367(e)(1) & 367(e)

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8834] RIN 1545-
AU22 and 1545-AX30

TITLE: Treatment of Distributions to Foreign Persons Under Sections
367(e)(1) and 367(e)(2)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document amends the Income Tax Regulations by removing
temporary regulations on the treatment of distributions to foreign
persons under section 367(e) of the Internal Revenue Code and adding
final regulations under section 367(e). These final regulations are
necessary to implement section 367(e)(1) and (2), as added to the
Internal Revenue Code by the Tax Reform Act of 1986, which affects
U.S. corporations.

DATES: These regulations are effective August 9, 1999.

FOR FURTHER INFORMATION CONTACT: Guy A. Bracuti, 202-622-3860 (not a
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information in this final rule has been reviewed
and, pending receipt and evaluation of public comments, approved by
the Office of Management and Budget (OMB) under 44 U.S.C. 3507 and
assigned control number 1545-1487.

The collections of information in this regulation are in
��1.367(e)-1(d)(2), 1.367(e)-1(d)(3), 1.367(e)-2(b)(2), and 1.6038B-
1(e). This information is required to obtain certain exemptions from
taxation and to satisfy other information reporting requirements
imposed by the Internal Revenue Code (Code). This information will
be used by the Internal Revenue Service to verify whether a taxpayer
is entitled to an exemption from income tax. The likely respondents
are large corporations.

Comments on the collections of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the
Department Of The Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington,
DC 20224. Comments on the collection of information should be
received by October 8, 1999.

Comments are specifically requested concerning: Whether the
collections of information are necessary for the proper performance
of the functions of the IRS, including whether the information will
have practical utility; The accuracy of the estimated burden
associated with the collection of information (see below); How the
quality, utility, and clarity of the information to be collected may
be enhanced; How the burden of complying with the collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and Estimates of capital or start-up costs and costs of
operation, maintenance, and purchase of services to provide
information. The estimated total annual reporting and/or
recordkeeping burden is 2,471 hours. The estimated average annual
burden hours per respondent and/or recordkeeper is 11 hours. The
estimated number of respondents and/or recordkeepers is 217. The
estimated annual frequency of responses is once.

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.

Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

Section 367(e)(1) amended the Code by providing regulatory authority
to tax gain on a domestic distributing corporation's section 355
distribution of stock or securities to foreign persons. Section
367(e)(2) amended the Code by requiring a liquidating corporation to
recognize gain (or loss) attributable to property distributed in a
section 332 liquidation to a foreign parent corporation, except to
the extent regulations provide otherwise.

On January 16, 1990, temporary regulations under section 367(e)(1)
and (2) were published in the Federal Register (55 FR 1406 [TD 8280,
1990-1 C.B. 80]). A cross-referenced Notice of Proposed Rulemaking
was published on that same date under RIN 1545- AL35 (55 FR 1472
[1990-1 C.B. 678]). The temporary regulations were proposed and
issued to implement section 367(e) of the Internal Revenue Code of
1986 (Code), as amended by sections 631(d)(1) and 1810(g) of the Tax
Reform Act of 1986 (100 Stat. 2085, 2272, Public Law 99-514 [1986-3
C.B.]). On January 25, 1993, final regulations under section 367(e)
(1) were published in the Federal Register (58 FR 5927 [TD 8472,
1993-1 C.B. 51]). RIN 1545-AL35 was thereby closed. The preamble of
TD 8472 stated that final regulations under section 367(e)(2) would
be promulgated in a separate Treasury decision and that taxpayers
could apply the provisions contained in �1.367(e)-2T to
distributions occurring on or after January 16, 1993, and prior to
the date that is 30 days after final regulations under section
367(e)(2) are published in the Federal Register. The final
regulations under section 367(e)(1) were removed and replaced with
temporary regulations that were published in the Federal Register on
August 14, 1996 (61 FR 42165 [TD 8682, 1996-2 C.B.

12]). A cross-referenced Notice of Proposed Rulemaking was published
on August 14, 1996 under RIN 1545-AU22 (61 FR 42217).

A new RIN (RIN 1545-AX30) has been issued under which the section
367(e)(2) proposed regulations will be finalized.

No significant comments were received with respect to the 1996
Notice of Proposed Rulemaking with respect to section 367(e)(1).
Comments were received with respect to the 1990 Notice of Proposed
Rulemaking with respect to sections 367(e)(1) and 367(e)(2). No
hearings were held on either Notice of Proposed Rulemaking.

Explanation of Revisions and Summary of Comments

I. Overview

These final regulations address the tax consequences of a
distribution by a domestic corporation of its subsidiary's stock to
foreign shareholders in a transaction described in section 355
(outbound section 355 distribution), a liquidation of a domestic
corporation into a foreign parent corporation in a transaction
described in section 332 (outbound liquidation), and a liquidation
of a foreign corporation into a foreign parent corporation in a
transaction described in section 332 (foreign-to- foreign
liquidation).

Section 367(e) grants the Secretary authority to provide the extent
to which a distributing corporation in an outbound section 355
distribution or liquidation or foreign-to-foreign liquidation may
obtain the benefit of nonrecognition treatment when it makes the
distribution to a foreign shareholder. The purpose of section 367 is
to prevent the inappropriate avoidance of U.S. tax that can arise
from the application of nonrecognition provisions in the cross-
border context.

A. Outbound section 355 distributions

Section 367(e)(1) provides that a distribution under section 355 (or
so much of section 356 as relates to section 355) by a U.S.
corporation to its foreign shareholders is accorded nonrecognition
treatment except to the extent provided in regulations. Section
1.367(e)-1 provides the circumstances under which such a
distribution is taxable.

The legislative history to section 367(e)(1) provides that A
transfers of stock by domestic corporations to foreign persons
pursuant to Code section 355 . . . will give rise to the recognition
of gain under Code section 367(e), to the extent provided in
regulations. The committee expects that the Secretary will carefully
consider the extent to which it is appropriate, in view of the
purpose of section 367(e), to require the recognition of gain upon
the transfer of the stock of a domestic corporation to foreign
persons under section 355.

@ H.R. Rep. 426, 99 Cong., 1 Sess. 931 (1985); S. Rep. 313, 99 th st
th Cong., 2 Sess. 950 (1986). nd The temporary regulations under
section 367(e)(1) provide a general rule that a domestic
distributing corporation is taxed on a distribution of controlled
stock to foreign shareholders, regardless of whether the controlled
corporation is a domestic corporation or a foreign corporation.
Several exceptions are provided in the current temporary regulations
in the case of an outbound distribution of stock of a domestic
controlled corporation.

Consistent with the legislative history above and the temporary
regulations, the final regulations continue to provide that an
outbound section 355 distribution of a foreign controlled
corporation is taxable to the distributing corporation. See also
sections 367(b) and 1248(f) of the Code. In the case of an outbound
section 355 distribution of a domestic controlled corporation,
however, the final regulations amend the temporary regulations by
providing that the distributing corporation shall obtain the benefit
of nonrecognition treatment. In weighing the administrative burdens
to taxpayers and the Government in connection with rules requiring
gain recognition agreements and similar arrangements, the IRS and
Treasury believe that adequate protections are in place to protect
the policies of section 367(e)(1). Specifically, significant
protections are provided in sections 355(d) and (e) and the device
and continuity of interest requirements of section 355.

B. Outbound and foreign-to-foreign liquidations

Generally, a liquidating corporation does not recognize gain or loss
on a distribution in complete liquidation into a parent corporation
that meets the ownership requirements of section 332(b). See Section
337(a) of the Code. Section 367(e)(2) provides that a section 332
liquidation into a foreign parent is taxed to the liquidating
corporation, except to the extent provided in regulations. Section
1.367(e)-2 provides the circumstances under which gain or loss on
assets distributed in a section 332 liquidation into a foreign
parent is not currently recognized.

Section 332 was enacted in 1935 to encourage the simplification of
corporate structures and was retained in 1986 as an exception to the
repeal of the General Utilities doctrine.

Consistent with the policies of section 332, the final regulations
generally tax the distribution of assets in an outbound liquidation
but provide exceptions for assets over which the United States
retains adequate taxing jurisdiction. The final regulations retain
the exceptions in the proposed regulations for a distribution of
assets used in the conduct of a U.S. trade or business and for a
distribution of a U.S. real property interest (USRPI). In addition,
the final regulations provide a new exception for a distribution of
stock of a domestic subsidiary that is 80 percent owned by vote and
value directly by the liquidating corporation.

In a foreign-to-foreign liquidation, the final regulations generally
adopt the rules provided in the proposed regulations.

Thus, the regulations generally provide that the liquidation is not
taxable, except to the extent that assets used in a U.S. trade or
business are distributed and not used in a U.S. trade or business
over the subsequent ten-year period. The ten-year period (which is
also used in the U.S. trade or business exception for outbound
liquidations) supplements the principles contained in section 864(c)
(7). The regulations also tax a distribution of assets that had
formerly been used in the conduct of a U.S. trade or business by the
liquidating corporation.

II. Details of Provisions

A. Outbound section 355 distributions

The final regulations amend the rule in the temporary regulations
and do not require gain recognition on an outbound section 355
distribution of the stock or securities of a domestic corporation.
The final regulations continue to require gain recognition on an
outbound section 355 distribution of the stock or securities of a
foreign corporation.

Where gain recognition is required, the final regulations amend the
rules for determining the residency status of distributees of stock
or securities in an outbound section 355 distribution. A distributee
is presumed to be a person who is not a qualified U.S. person (i.e.,
a person that is not a U.S. citizen, resident, or corporation),
except to the extent that the distributing corporation certifies
that the distributee is a qualified U.S. person. A publicly traded
distributing corporation may use a reasonable analysis with respect
to distributees who are not five percent shareholders of publicly
traded stock to demonstrate the number of distributees that are
qualified U.S. persons. A reasonable analysis includes a
determination of the actual number of distributees that are
qualified U.S. persons or a reasonable statistical analysis of
shareholder records and other relevant information. The final
regulations also broaden the look-through rule in the temporary
regulations for determining the identity of the distributees of
stock or securities of a controlled corporation received by a
partnership, trust or estate to include stock or securities received
by a disregarded entity.

Section 1.367(e)-1 is applicable to distributions occurring in
taxable years ending after August 8, 1999.

B. Outbound and foreign-to-foreign liquidations

1. General Rule

The final regulations under section 367(e)(2) contain two sets of
rules, depending upon whether the liquidating corporation is
domestic or foreign. The final regulations retain the rules of the
proposed regulations with respect to foreign-to-foreign liquidations
with only minor modification.

In the case of an outbound liquidation, a domestic liquidating
corporation is generally required to recognize gain (or loss) on the
distributed assets. In determining the amount of gain or loss
recognized under the general rule, the proposed regulations contain
an anti-netting rule and an anti-stuffing rule that limit the
domestic liquidating corporation's ability to recognize losses.

Several commentators criticized the anti-netting rule contained in
the proposed regulations as overly broad because the rule prohibits
the netting of ordinary losses against capital gains. The final
regulations take this into account and allow the netting of ordinary
or capital losses against ordinary or capital gains to the same
extent allowed under general rules of the Code, including section
1211.

Commentators also questioned the propriety of the anti-stuffing rule
in the proposed regulations and argued that the anti-stuffing rules
contained in section 336(d) and the loss limitation rules of section
382 should sufficiently address loss trafficking concerns. The anti-
stuffing rule contained in the proposed regulations disallows the
recognition of losses attributable to property acquired in capital
contributions, section 332 liquidations, and exchanges under
sections 351 and 361 within five years of the distribution.

The IRS and Treasury do not believe that sections 336(d) and 382
alone adequately address the Government's loss trafficking concerns.
For example, neither section 336(d) nor 382 would limit a
liquidating corporation's ability to recognize a loss that is
acquired in a reorganization among affiliates even though the loss
could not have been recognized if those corporations were liquidated
individually. The anti-stuffing rule in the proposed regulations
also does not adequately protect against the use of losses to offset
gains where the loss corporation acquires the gain property.

After considering the issue, the Treasury and the IRS have amended
the anti-stuffing rule in the final regulations to limit the
recognition of built-in gains and losses attributable to property
received by the domestic liquidating corporation in a reorganization
or liquidation occurring within two years prior to the distribution.
Sections 336(d) and 382 also limit loss recognition in applicable
circumstances.

Comments also requested clarification on the treatment of a
distribution of an interest in a publicly traded partnership (PTP).
The final regulations provide that an interest in a PTP that is
treated as a corporation under section 7704(a) shall be treated in
the same manner as stock.

The final regulations retain the look-through rule for a domestic
liquidating corporation's distribution of a partnership interest to
its foreign parent. The look-through rule provides that, for
purposes of the regulation, a domestic liquidating corporation is
treated as distributing its proportionate share of the partnership
property. The Treasury and the IRS hereby request comments on the
proper method of calculating such gain or loss and reserve a section
in the final regulations with respect to this issue. Comments should
consider the application of similar rules in other cross-border
contexts, such as Treas. Reg.

�1.367(a)-1T(c)(3).

2. Exceptions to General Rule

The proposed regulations contain exceptions to the general gain
recognition rule for the distribution of property used in a U.S.
trade or business and the distribution of a USRPI. The final
regulations retain the two exceptions with some modifications and
add an additional exception for stock of a domestic subsidiary
corporation.

Under the proposed regulations, a domestic liquidating corporation
does not recognize gain (or loss) on the distribution of property
used in a U.S. trade or business, if: (1) the foreign parent is not
a controlled foreign corporation; (2) the foreign parent continues
to use the property in a U.S. trade or business for a ten-year
period following the distribution of such property; and (3) the
domestic liquidating corporation and the foreign parent attach a
statement to their U.S. income tax returns for the year of
distribution. If within the ten-year period following a
distribution, the property ceases to be used in the foreign parent's
U.S. trade or business other than by a disposition, then the foreign
parent is required to file an amended U.S. income tax return on
behalf of the domestic liquidating corporation and recognize gain
thereon. If the foreign parent disposes of such property, then the
foreign parent recognizes gain (or loss) on its U.S. income tax
return for the year of disposition in lieu of the domestic
liquidating corporation recognizing gain on an amended return for
the year of distribution. Also, under the proposed regulations, gain
recognition is not triggered on involuntary conversions of such
property under section 1033, like-kind exchanges of such property
under section 1031, and the abandonment of obsolete or worthless
property.

The final regulations modify the U.S. trade or business property
exception in response to comments in several respects.

First, the final regulations make the exception available to a
domestic liquidating corporation that liquidates into a controlled
foreign corporation. Second, the final regulations no longer require
that the foreign parent file an amended return on behalf of the
liquidating corporation when property ceases to be used in the
conduct of a U.S. trade or business (whether by disposition or
otherwise), provided that the foreign parent properly recognizes
gain (or loss in the case of a disposition) as if the property had
been sold for fair market value at the time the property ceases to
be used in the conduct of a U.S. trade or business. Third, the final
regulations expand the types of dispositions that will not trigger
gain recognition. U.S. trade or business property may be transferred
to another person without gain recognition, if the transfer is a
disposition normally entitled to nonrecognition under the Code and
the transferor and transferee satisfy various procedural
requirements.

The final regulations retain the exception for a distribution of a
USRPI contained in the proposed regulation with only minor
modification.

The final regulations add a new exception that allows for
nonrecognition of gain on a distribution of stock of a domestic
subsidiary that is 80 percent owned (by vote and value) directly by
the domestic liquidating corporation, provided that the liquidation
does not have as a principal purpose the avoidance of U.S. tax on a
subsequent disposition of the domestic subsidiary.

3. General Anti-abuse Rule

The final regulations contain a new anti-abuse rule that allows the
Commissioner to require the liquidating corporation to recognize
gain (or treat the liquidating corporation as if it had recognized
loss) on the distribution of property pursuant to the liquidation if
a principal purpose of the liquidation is the avoidance of U.S. tax.
The rule would apply, for example, if a principal purpose of a
liquidation is the distribution of a domestic liquidating
corporation's earnings and profits without a U.S. withholding tax.
In certain circumstances, the Service is also concerned about a
liquidation of a domestic corporation into a U.S. branch of a
foreign corporation in a manner that facilitates the avoidance of
U.S. tax, including the inappropriate use of attributes such as net
operating losses.

Liquidations used to facilitate the avoidance of tax may be
challenged under existing law. The Treasury and the IRS hereby
solicit comments, however, as to other measures that should be taken
to adequately address such transactions, including the more specific
identification of the conditions under which liquidated property,
particularly securities and other financial instruments, may be
considered to be used in a U.S. trade or business.

4. Effective Date

Section 1.367(e)-2 is applicable to distributions occurring 30 days
after August 9, 1999 or, if a taxpayer elects, to distributions in
taxable years ending after August 8, 1999. In addition, taxpayers
may rely on the principles contained in the temporary regulations
issued under section 367(e)(2) on January 16, 1990 for distributions
occurring prior to 30 days after August 9, 1999.

C. Section 6038B

The regulations under section 6038B are also revised to require
reporting for transactions described in section 367(e)(1) and (2) in
accordance with the final regulations under section 367(e)(1) and
(2).

Special Analyses

It has been determined that these regulations are not a significant
regulatory action as defined in Executive Order 12866. Therefore, a
regulatory assessment is not required. It is hereby certified that
the collections of information contained in this regulation will not
have a significant economic impact on a substantial number of small
entities. This certification is based upon the fact that the number
of section 367(e) distributions that require reporting under these
regulations is estimated to be only 400 per year. Moreover, because
these regulations will primarily affect large multinational
corporations, it is estimated that out of the 400 transactions very
few, if any, will involve small entities. Thus, a Regulatory
Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required.

Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding these regulations was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for
comment on the impact of the proposed regulations on small business.

Drafting Information

The principal author of these regulations is Guy A. Bracuti of the
Office of Associate Chief Counsel (International).

However, other personnel from the IRS and Treasury Department
participated in their development.

List of Subjects

26 CFR Part 1 Income taxes, Reporting and recordkeeping
requirements. 26

CFR Part 602 Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations Accordingly, 26 CFR parts
1 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by
removing the entry for 1.367(e)-1T and by adding entries in
numerical order to read in part as follows:

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

Section 1.367(e)-1 also issued under 26 U.S.C. 367(e)(1).

Section 1.367(e)-2 also issued under 26 U.S.C. 367(e)(2). * * *

�1.367(e)-0T through �1.367(e)-2T [Removed] Par. 2. Sections
1.367(e)-0T, 1.367(e)-1T, and 1.367(e)-2T are removed.

Par. 3. Sections 1.367(e)-0, 1.367(e)-1, and 1.367(e)-2 are added to
read as follows:

�1.367(e)-0 Outline of ��1.367(e)-1 and 1.367(e)-2.

This section lists captioned paragraphs contained in ��1.367(e)-1
and 1.367(e)-2 as follows:

�1.367(e)-1 Distributions described in section 367(e)(1).

(a) Purpose and scope.

(b) Gain recognition.

(1) General rule.

(2) Stock owned through partnerships, disregarded entities, trusts,
and estates.

(3) Gain computation.

(4) Treatment of distributee.

(c) Nonrecognition of gain.

(d) Determining whether distributees are qualified U.S. persons.

(1) General rule--presumption of foreign status.

(2) Non-publicly traded distributing corporations.

(3) Publicly traded distributing corporations.

(i) Five percent shareholders.

(ii) Other distributees.

(4) Qualified exchange or other market.

(e) Reporting under section 6038B.

(f) Effective date.

�1.367(e)-2 Distributions described in section 367(e)(2).

(a) Purpose and scope.

(1) In general.

(2) Nonapplicability of section 367(a).

(b) Distribution by a domestic corporation.

(1) General rule.

(i) Recognition of gain and loss.

(ii) Operating rules.

(A) General rule.

(B) Overall loss limitation.

(1) Overall loss limitation rule.

(2) Example.

(C) Special rules for built-in gains and losses attributable to
property received in liquidations and reorganizations.

(iii) Distribution of partnership interest.

(A) General rule.

(B) Gain or loss calculation. [Reserved]

(C) Basis adjustments.

(D) Publicly traded partnerships.

(2) Exceptions.

(i) Distribution of property used in a U.S. trade or business.

(A) Conditions for nonrecognition.

(B) Qualifying property.

(C) Required statement.

(1) Declaration and certification.

(2) Property description.

(3) Distributee identification.

(4) Treaty benefits waiver.

(5) Statute of limitations extension.

(D) Failure to file statement.

(E) Operating rules.

(1) Gain or loss recognition by the foreign distributee corporation.

(i) Taxable dispositions.

(ii) Other triggering events.

(2) Gain recognition by the domestic liquidating corporation.

(i) General rule.

(ii) Amended return.

(iii) Interest.

(iv) Joint and several liability.

(3) Schedule for property no longer used in a U.S. trade or
business.

(4) Nontriggering events.

(i) Conversions, certain exchanges, and abandonment.

(ii) Amendment to Master Property Description

(5) Nontriggering transfers to qualified transferees.

(ii) Distribution of certain U.S. real property interests.

(iii) Distribution of stock of domestic subsidiary corporations.

(A) Conditions for nonrecognition.

(B) Exceptions when the liquidating corporation is a U.S. real
property holding corporation.

(C) Anti-abuse rule.

(D) Required statement.

(3) Other consequences.

(i) Distributee basis in property.

(ii) Reporting under section 6038B.

(iii) Other rules.

(c) Distribution by a foreign corporation.

(1) General rule--gain and loss not recognized.

(2) Exceptions.

(i) Property used in a U.S. trade or business.

(A) General rule.

(B) Ten-year active U.S. business exception.

(C) Required statement.

(D) Operating rules.

(ii) Property formerly used in a U.S. trade or business.

(3) Other consequences.

(i) Distributee basis in property.

(ii) Other rules.

(d) Anti-abuse rule.

(e) Effective date.

�1.367(e)-1 Distributions described in section 367(e)(1).

(a) Purpose and scope. This section provides rules for recognition
(and nonrecognition) of gain by a domestic corporation (distributing
corporation) on a distribution of stock or securities of a
corporation (controlled corporation) to foreign persons that is
described in section 355. Paragraph (b) of this section contains the
general rule that gain is recognized on the distribution to the
extent stock or securities of controlled are distributed to foreign
persons. Paragraph (c) of this section provides an exception to the
gain recognition rule for distributions of stock or securities of a
domestic corporation. Paragraph (d) of this section contains rules
for determining whether distributees of stock or securities in a
section 355 distribution are qualified U.S. persons. Paragraph (e)
of this section cross-references section 6038B for certain reporting
obligations. Finally, paragraph (f) of this section specifies the
effective date of this section.

(b) Gain recognition--(1) General rule. If a domestic corporation
makes a distribution of stock or securities of a corporation that
qualifies for nonrecognition under section 355 to a person who is
not a qualified U.S. person, then, except as provided in paragraph
(c) of this section, the distributing corporation shall recognize
gain (but not loss) on the distribution under section 367(e)(1). A
distributing corporation shall not recognize gain under this section
with respect to a section 355 distribution to a qualified U.S.
person. For purposes of this section, a qualified U.S. person is--

(A) A citizen or resident of the United States; or

(B) A domestic corporation.

(2) Stock owned through partnerships, disregarded entities, trusts,
and estates. For purposes of this section, distributing corporation
stock or securities owned by or for a partnership (whether foreign
or domestic) are owned proportionately by its partners. A partner's
proportionate share of the stock or securities of the distributing
corporation shall be equal to the partner's distributive share of
the gain that would have been recognized had the partnership sold
the stock or securities (at a taxable gain) immediately before the
distribution. The partner's distributive share of gain shall be
determined under the rules and principles of sections 701 through
761 and the regulations thereunder. For purposes of this section,
stock or securities owned by or for an entity that is disregarded as
an entity (disregarded entity) under �1.7701-3(b)(1)(ii) or (b)(2)
(i)(C) are owned directly by the owner of such disregarded entity.
For purposes of this section, stock or securities owned by or for a
trust or estate (whether foreign or domestic) are owned
proportionately by the persons who would be treated as owning such
stock or securities under section 318(a)(2)(A) and (B). In applying
section 318(a)(2)(B)(i), if a trust includes interests that are not
actuarially ascertainable, all such interests shall be considered to
be owned by foreign persons. In a case where an interest holder in a
partnership, a disregarded entity, trust, or estate that (directly
or indirectly) owns stock of the distributing corporation is itself
a partnership, disregarded entity, trust, or estate, the rules of
this paragraph (b)(2) apply to such interest holder.

(3) Gain computation. Gain recognized under paragraph (b)(1) of this
section shall be equal to the excess of the fair market value of the
stock or securities distributed to persons who are not qualified
U.S. persons (determined as of the time of the distribution) over
the distributing corporation's adjusted basis in the stock or
securities distributed to such distributees. For purposes of the
preceding sentence, the distributing corporation's adjusted basis in
each unit of each class of stock or securities distributed to a
distributee shall be equal to the distributing corporation's total
adjusted basis in all of the units of the respective class of stock
or securities owned immediately before the distribution, divided by
the total number of units of the class of stock or securities owned
immediately before the distribution.

(4) Treatment of distributee. If the distribution otherwise
qualifies for nonrecognition under section 355, each distributee
shall be considered to have received stock or securities in a
distribution qualifying for nonrecognition under section 355, even
though the distributing corporation may recognize gain on the
distribution under this section. Thus, the distributee shall not be
considered to have received a distribution described in section 301
or a distribution in an exchange described in section 302(b) upon
the receipt of the stock or securities of the controlled
corporation, and the domestic distributing corporation shall have no
withholding responsibilities under section 1441. Except where
section 897(e)(1) and the regulations thereunder cause gain to be
recognized by the distributee, the basis of the distributed domestic
or foreign corporation stock in the hands of the foreign distributee
shall be the basis of the distributed stock determined under section
358 without any increase for any gain recognized by the domestic
corporation on the distribution.

(c) Nonrecognition of gain. A domestic distributing corporation
shall not recognize gain under paragraph (b)(1) of this section on
the distribution of stock or securities of a domestic corporation.

(d) Determining whether distributees are qualified U.S. persons--(1)
General rule--presumption of foreign status. Except as provided in
paragraphs (d)(2) and (3) of this section, all distributions of
stock or securities in a distribution described in paragraph (b)(1)
of this section are presumed to be to persons who are not qualified
U.S. persons, as defined in paragraph (b)(1) of this section.

(2) Non-publicly traded distributing corporations. If the class of
stock or securities of the distributing corporation (in respect to
which stock or securities of the controlled corporation are
distributed) is not regularly traded on a qualified exchange or
other market (as defined in paragraph (d)(4) of this section), then
the distributing corporation may only rebut the presumption
contained in paragraph (d)(1) of this section by identifying the
qualified U.S. persons to which controlled corporation stock or
securities were distributed and by certifying the amount of stock or
securities that were distributed to the qualified U.S. persons.

(3) Publicly traded distributing corporations. If the class of stock
or securities of the distributing corporation (in respect to which
stock or securities of the controlled corporation are distributed)
is regularly traded on a qualified exchange or other market (as
defined in paragraph (d)(4) of this section), then the distributing
corporation may only rebut the presumption contained in paragraph
(d)(1) of this section as described in this paragraph (d)(3).

(i) Five percent shareholders. A publicly traded distributing
corporation may only rebut the presumption contained in paragraph
(d)(1) of this section with respect to distributees that are five
percent shareholders of the class of stock or securities of the
distributing corporation (in respect to which stock or securities of
the controlled corporation are distributed) by identifying the
qualified U.S. persons to which controlled corporation stock or
securities were distributed and by certifying the amount of stock or
securities that were distributed to the qualified U.S. persons. A
five percent shareholder is a distributee who is required under U.S.
securities laws to file with the Securities and Exchange Commission
(SEC) a Schedule 13D or 13G under 17 CFR 240.13d-1 or 17 CFR
240.13d-2, and provide a copy of same to the distributing
corporation under 17 CFR 240.13d-7.

(ii) Other distributees. A distributing corporation that has made a
distribution described in paragraph (d)(3) of this section may rebut
the presumption contained in paragraph (d)(1) of this section with
respect to distributees that are not five percent shareholders (as
defined in this paragraph (d)(3)) by relying on and providing a
reasonable analysis of shareholder records and other relevant
information that demonstrates a number of distributees that are
qualified U.S. persons. Taxpayers may rely on such analysis, unless
it is subsequently determined that there are actually fewer
distributees who are qualified U.S. persons than were demonstrated
in the analysis.

(4) Qualified exchange or other market. For purposes of paragraph
(d) of this section, the term qualified exchange or other market
means, for any taxable year--

(i) A national securities exchange which is registered with the SEC
or the national market system established pursuant to section 11A of
the Securities Exchange Act of 1934 (15 U.S.C. 78f); or

(ii) A foreign securities exchange that is regulated or supervised
by a governmental authority of the country in which the market is
located and which has the following characteristics--

(A) The exchange has trading volume, listing, financial disclosure,
and other requirements designed to prevent fraudulent and
manipulative acts and practices, to remove impediments to and
perfect the mechanism of a free and open market, and to protect
investors; and the laws of the country in which the exchange is
located and the rules of the exchange ensure that such requirements
are actually enforced; and

(B) The rules of the exchange ensure active trading of listed
stocks.

(e) Reporting under section 6038B. See the regulations under section
6038B for reporting requirements for distributions under this
section.

(f) Effective date. This section shall be applicable to
distributions occurring in taxable years ending after August 8,
1999.

�1.367(e)-2 Distributions described in section 367(e)(2).

(a) Purpose and scope--(1) In general. This section provides rules
requiring gain and loss recognition by a corporation on its
distribution of property to a foreign corporation in a complete
liquidation described in section 332.

Paragraph (b)(1) of this section contains the general rule that gain
and loss are recognized when a domestic corporation makes a
distribution of property in complete liquidation under section 332
to a foreign corporation that meets the stock ownership requirements
of section 332(b) with respect to stock in the domestic corporation.
Paragraph (b)(2) of this section provides the only exceptions to the
gain and loss recognition rule of paragraph (b)(1) of this section.
Paragraph (b)(3) of this section refers to other consequences of
distributions described in paragraphs (b)(1) and (2) of this
section. Paragraph (c)(1) of this section contains the general rule
that gain and loss are not recognized when a foreign corporation
makes a distribution of property in complete liquidation under
section 332 to a foreign corporation that meets the stock ownership
requirements of section 332(b) with respect to stock in the foreign
liquidating corporation. Paragraph (c)(2) of this section provides
the only exceptions to the nonrecognition rule of paragraph (c)(1)
of this section. Paragraph (c)(3) of this section refers to other
consequences of distributions described in paragraphs (c)(1) and (
2) of this section. Paragraph (d) of this section contains an anti-
abuse rule. Finally, paragraph (e) of this section specifies the
effective date for the rules of this section. The rules of this
section are issued pursuant to the authority conferred by section
367(e)(2).

(2) Nonapplicability of section 367(a). Section 367(a) shall not
apply to a complete liquidation described in section 332 by a
domestic liquidating corporation into a foreign corporation that
meets the stock ownership requirements of section 332(b).

(b) Distribution by a domestic corporation--(1) General rule--(i)
Recognition of gain and loss. If a domestic corporation (domestic
liquidating) makes a distribution of property in complete
liquidation under section 332 to a foreign corporation (foreign
distributee) that meets the stock ownership requirements of section
332(b) with respect to stock in the domestic liquidating
corporation, then B

(A) Pursuant to section 367(e)(2), section 337(a) and (b)(1) shall
not apply; and

(B) The domestic liquidating corporation shall recognize gain or
loss on the distribution of property to the foreign distributee,
except as provided in paragraph (b)(2) of this section.

(ii) Operating rules--(A) General rule. Except as provided in
paragraphs (b)(1)(ii)(B) and (C) of this section, the rules
contained in section 336 will apply to the gain and loss recognized
pursuant to this section.

(B) Overall loss limitation--(1) Overall loss limitation rule. Loss
in excess of gain from the distribution shall not be recognized. If
realized losses exceed recognized losses, the losses shall be
recognized on a pro rata basis with respect to the realized loss
attributable to each distributed loss asset in the category of
assets (i.e., capital or ordinary) to which the realized but
unrecognized loss relates. For additional limitations on the
recognition of losses, see, e.g., section 1211.

(2) Example. The following example illustrates the overall loss
limitation rule, the pro rata loss allocation method, and the
general capital loss limitation rule in section 1211(a):

Example. F, a foreign corporation, owns all stock of US1, a domestic
corporation. US1 owns the following capital assets:

Asset A, which has a fair market value of $100 and an adjusted basis
of $40; Asset B, which has a fair market value of $60 and an
adjusted basis of $80; and, Asset C, which has a fair market value
of $40 and an adjusted basis of $100. US1 also owns the following
business assets that will generate ordinary income (or loss) upon
disposition: Asset D, which has a fair market value of $100 and an
adjusted basis of $40; Asset E, which has a fair market value of $60
and an adjusted basis of $100; and, Asset F, which has a fair market
value of $40 and an adjusted basis of $80. US1 liquidates into F and
distributes all assets to F in liquidation. None of the assets
qualify for nonrecognition under paragraph (b)(2) of this section.
US1's total realized capital loss is $80, but it may only recognize
$60 of that loss. See section 1211(a). US1's total realized ordinary
loss is $80, but it may only recognize $60 of that loss. See
paragraph (b)(1)(ii)(B)(1) of this section. US1 will allocate $45
(60 X .75) of the recognized capital loss to Asset B and will
allocate the remaining $15 (60 X .25) of recognized capital loss to
Asset C. See paragraph (b)(1)(ii)(B)(1) of this section. US1 will
allocate $30 (60 X .50) of the recognized ordinary loss to Asset E
and will allocate the remaining $30 (60 X .50) to Asset F. See
paragraph (b)(1)(ii)(B)(1) of this section.

(C) Special rules for built-in gains and losses attributable to
property received in liquidations and reorganizations. Built-in
losses attributable to property received in a transaction described
in sections 332 or 361 (during the two-year period ending on the
date of the distribution in liquidation covered by this section)
shall not offset gain from property not received in the same
transaction. Built-in gains attributable to property received in a
transaction described in sections 332 or 361 (during the two-year
period ending on the date of the distribution in liquidation covered
by this section) shall not offset loss from property not received in
the same transaction.

Built-in gain or loss is that amount of gain or loss on property
that existed at the time the domestic liquidating corporation
acquired such property. See sections 336(d) and 382 for additional
limitations on the recognition of losses.

(iii) Distribution of partnership interest--(A) General rule. If a
domestic corporation distributes a partnership interest (whether
foreign or domestic) in a distribution described in paragraph (b)(1)
(i) of this section, then for purposes of applying this section the
domestic liquidating corporation shall be treated as having
distributed a proportionate share of partnership property.
Accordingly, the applicability of the recognition rules of
paragraphs (b)(1)(i) and (ii) of this section, and of any exception
to recognition provided in this section shall be determined with
reference to the partnership property, rather than to the
partnership interest itself. Where the partnership property includes
an interest in a lower- tier partnership, the applicability of any
exception with respect to the interest in the lower-tier partnership
shall be determined with reference to the lower-tier partnership
property.

In the case of multiple tiers of partnerships, the applicability of
an exception shall be determined with reference to the property of
each partnership, applying the rule contained in the preceding
sentence. A domestic liquidating corporation's proportionate share
of partnership property shall be determined under the rules and
principles of sections 701 through 761 and the regulations
thereunder.

(B) Gain or loss calculation. [Reserved]

(C) Basis adjustments. The foreign distributee corporation's basis
in the distributed partnership interest shall be equal to the
domestic liquidating corporation's basis in such partnership
interest immediately prior to the distribution, increased by the
amount of gain and reduced by the amount of loss recognized by the
domestic liquidating corporation on the distribution of the
partnership interest. Solely for purposes of sections 743 and 754,
the foreign distributee corporation shall be treated as having
purchased the partnership interest for an amount equal to the
foreign corporation's adjusted basis therein.

(D) Publicly traded partnerships. The distribution by a domestic
liquidating corporation of an interest in a publicly traded
partnership that is treated as a corporation for U.S. income tax
purposes under section 7704(a) shall not be subject to the rules of
paragraphs (b)(1)(iii)(A) and (B) of this section. Instead, the
distribution of such an interest shall be treated in the same manner
as a distribution of stock. Thus, a transfer of an interest in a
publicly traded partnership that is treated as a U.S. corporation
for U.S. income tax purposes shall be treated in the same manner as
stock in a domestic corporation, and a transfer of an interest in a
publicly traded partnership that is treated as a foreign corporation
for U.S. income tax purposes shall be treated in the same manner as
stock in a foreign corporation.

(2) Exceptions--(i) Distribution of property used in a U.S. trade or
business--(A) Conditions for nonrecognition. A domestic liquidating
corporation shall not recognize gain or loss under paragraph (b)(1)
of this section on its distribution of property (including
inventory) used by the domestic liquidating corporation in the
conduct of a trade or business within United States, if--

(1) The foreign distributee corporation, immediately thereafter and
for the ten-year period beginning on the date of the distribution of
such property, uses the property in the conduct of a trade or
business within the United States;

(2) The domestic liquidating corporation attaches the statement
described in paragraph (b)(2)(i)(C) of this section to its U.S.
income tax returns for the taxable years that include the
distributions in liquidation; and

(3) The foreign distributee corporation attaches a copy of the
property description contained in paragraph (b)(2)(i)(C)(2) of this
section to its U.S. income tax return for the tax year that includes
the date of distribution.

(B) Qualifying property. Property is used by the foreign distributee
corporation in the conduct of a trade or business in the United
States within the meaning of this paragraph (b)(2)(i) only if all
income from the use of the property and all income or gain from the
sale or exchange of the property would be subject to taxation under
section 882(a) as effectively connected income.

Also, stock held by a dealer as inventory or for sale in the
ordinary course of its trade or business shall be treated as
inventory and not as stock in the hands of both the domestic
liquidating corporation and the distributee foreign corporation.

Notwithstanding the foregoing, the exception provided in this
paragraph (b)(2)(i) shall not apply to intangibles described in
section 936(h)(3)(B).

(C) Required statement. The statement required by paragraph (b)(2)
(i)(A) of this section shall be entitled A Required Statement under
�1.367(e)-2(b)(2)(i) @ and shall be prepared by the domestic
liquidating corporation and signed under penalties of perjury by an
authorized officer of the domestic liquidating corporation and by an
authorized officer of the foreign distributee corporation. The
statement shall contain the following items:

(1) Declaration and certification. A declaration that the
distribution to the foreign distributee corporation is one to which
the rules of this paragraph (b)(2)(i) apply and a certification that
the domestic liquidating corporation and the foreign distributee
corporation agree to all of the terms and conditions set forth in
this paragraph (b)(2)(i).

(2) Property description. A description of all property distributed
by the domestic liquidating corporation (irrespective of whether the
property qualifies for nonrecognition). Such description shall be
entitled A Master Property Description @ and shall identify the
property that continues to be used by the foreign distributee
corporation in the conduct of a trade or business within the United
States, including the location, adjusted basis, estimated fair
market value, a summary of the method (including appraisals if any)
used for determining such value, and the date of distribution of
such items of property.

The description shall also identify the property excepted from gain
recognition under paragraphs (b)(2)(ii) and (iii) of this section.

(3) Distributee identification. An identification of the foreign
distributee corporation, including its name and address, taxpayer
identification number, residence, and place of incorporation.

(4) Treaty benefits waiver. With respect to property entitled to
nonrecognition pursuant to this paragraph (b)(2)(i), a declaration
by the foreign distributee corporation that it irrevocably waives
any right under any treaty (whether or not currently in force at the
time of the liquidation) to sell or exchange any item of such
property without U.S. income taxation or at a reduced rate of
taxation, or to derive income from the use of any item of such
property without U.S. income taxation or at a reduced rate of
taxation.

(5) Statute of limitations extension. An agreement by the domestic
liquidating corporation and the foreign distributee corporation to
extend the statute of limitations on assessments and collections
(under section 6501) with respect to the domestic liquidating
corporation on the distribution of each item of property until three
years after the date on which all such items of property have ceased
to be used in a trade or business within the United States, but in
no event shall the extension be for a period longer than 13 years
from the filing of the original U.S. income tax return for the
taxable year of the last distribution of any such item of property.
The agreement to extend the statute of limitation shall be executed
on a Form 8838, A Consent to Extend the Time to Assess Tax Under
Section 367--Gain Recognition Agreement.

@ (D) Failure to file statement. If a domestic liquidating
corporation that would otherwise qualify for nonrecognition on the
distribution of property under this paragraph (b)(2)(i) fails to
file the statement described in paragraph (b)(2)(i)(C) of this
section or files a statement that does not comply with the
requirements of paragraph (b)(2)(i)(C) of this section, the
Commissioner may treat the domestic liquidating corporation as if it
had claimed nonrecognition under this paragraph (b)(2)(i) and met
all the requirements of paragraph (b)(2)(i)(C) of this section, if
such treatment is necessary to prevent the domestic liquidating
corporation or the foreign distributee corporation from otherwise
deriving a tax benefit by such failure.

(E) Operating rules. By the domestic liquidating corporation's
claiming nonrecognition under this paragraph (b)(2)(i) and filing a
statement described in paragraph (b)(2)(i)(C) of this section, the
domestic liquidating corporation and the foreign distributee
corporation agree to be subject to the rules of this paragraph (b)
(2)(i)(E).

(1) Gain or loss recognition by the foreign distributee
corporation--(i) Taxable dispositions. If, within the ten-year
period from the date of a distribution of qualifying property, the
foreign distributee corporation disposes of any qualifying property
in a transaction subject to tax under section 882(a), then the
foreign distributee corporation shall recognize such gain (or loss)
and properly report it on a timely filed U.S. income tax return. If
the foreign distributee corporation recognizes gain (or loss) under
this paragraph (b)(2)(i)(E)(1)(i) and properly reports such gain (or
loss) on its U.S. income tax return, then the domestic liquidating
corporation shall not recognize gain attributable to such property
under paragraph (b)(2)(i)(E)(2) of this section.

(ii) Other triggering events. If, within the ten-year period from
the date of distribution, any qualifying property ceases to be used
by the foreign distributee corporation in the conduct of a trade or
business in the United States (other than by reason of a taxable
disposition described in paragraph (b)(2)(i)(E)(1)(i) of this
section, a nontriggering event described in paragraph (b)(2)(i)(E)
(4) of this section, or a nontriggering transfer described in
paragraph (b)(2)(i)(E)(5) of this section), then the foreign
distributee corporation shall recognize gain (but not loss)
attributable to such property and properly report it on a timely
filed U.S. income tax return. If the foreign distributee corporation
properly reports gain under this paragraph (or if such qualified
property is not gain property on the date that it ceases to be used
in the foreign distributee corporation's U.S. trade or business),
then the domestic liquidating corporation shall not recognize gain
attributable to such property under paragraph (b)(2)(i)(E)(2) of
this section. The gain recognized under this paragraph (b)(2)(i)(E)
(1)(ii) shall be an amount equal to the fair market value of the
property on the date it ceases to be used in the foreign distributee
corporation's U.S. trade or business less the foreign distributee
corporation's adjusted basis in such property.

(2) Gain recognition by the domestic liquidating corporation--(i)
General rule. If, within the ten-year period from the date of
distribution, any qualifying property described in paragraph (b)(2)
(i)(B) of this section ceases to be used by the foreign distributee
corporation (or a qualifying transferee described in paragraph (b)
(2)(i)(E)(5) of this section) in the conduct of a trade or business
in the United States for any reason (including but not limited to
the sale or exchange of such property or the removal of the property
from conduct of the trade or business), then, except to the extent
gain (or loss) is recognized under paragraph (b)(1)(i)(E)(1) of this
section, the domestic liquidating corporation shall recognize the
gain (but not loss) realized but not recognized upon the initial
distribution of such item of property. The domestic liquidating
corporation shall recognize gain pursuant to this paragraph (b)(2)
(i)(E)(2)(i) on the amended U.S. income tax return described in
paragraph (b)(2)(i)(E)(2)(ii) of this section.

(ii) Amended return. If gain recognition is required pursuant to
paragraph (b)(2)(i)(E)(2)(i) of this section, the foreign
distributee corporation shall file an amended U.S. income tax return
on behalf of the domestic liquidating corporation for the year of
the distribution of such item of property. On the amended return,
the domestic liquidating corporation may use any losses (or credits)
existing in the year of the distribution to offset the gain
recognized pursuant to paragraph (b)(2)(i)(E)(2)(i) of this section
(or the tax thereon), provided that the losses (or credits) were
otherwise available in the year distribution and were not used in
another year. The amended return shall be filed no later than the
due date (including extensions) for the return of the foreign
distributee corporation for the taxable year in which the property
ceases to be used by the foreign distributee corporation in the
conduct of a trade or business in the United States.

(iii) Interest. If the domestic liquidating corporation owes
additional tax pursuant to paragraph (b)(2)(i)(E)(2)(i) of this
section for the year of liquidation, then interest must be paid on
that amount at the rates determined under section 6621.

The interest due will be calculated from the due date of the
domestic liquidating corporation's U.S. income tax return for the
year of the distribution to the date on which the additional tax for
that year is paid.

(iv) Joint and several liability. The foreign distributee
corporation shall be jointly and severally liable for any tax owed
by the domestic liquidating corporation as a result of the
application of this section, and shall succeed to the domestic
liquidating corporation's agreement to extend the statute of
limitations on assessments and collections under section 6501.

(3) Schedule for property no longer used in a U.S. trade or
business. If qualifying property (other than inventory) ceases to be
used by the foreign distributee corporation in the conduct of a U.S.
trade or business in the ten-year period beginning on the date of
distribution of such property from the domestic liquidating
corporation to the foreign distributee corporation, then the foreign
distributee corporation shall list on a separate schedule (attached
to its U.S. income tax return for the year of cessation) all such
qualifying property. For purposes of this paragraph (b)(2)(i)(E)(3),
property ceases to be used in a U.S. trade or business whenever such
property is sold, exchanged, or otherwise removed from the U.S.
trade or business, irrespective of whether the domestic liquidating
corporation filed an amended return under paragraph (b)(2)(i)(E)(2)
of this section, and irrespective of whether the property ceases to
be used in the foreign distributee corporation's U.S. trade or
business by virtue of a nontriggering event described in paragraph
(b)(2)(i)(E)(4) of this section or a nontriggering transfer
described in paragraph (b)(2)(i)(E)(5) of this section.

(4) Nontriggering events--(i) Conversions, certain exchanges, and
abandonment. Gain (or loss) under this paragraph (b)(2)(i)(E) shall
not be triggered if qualifying property described in paragraph (b)
(2)(i)(B) of this section is involuntarily converted into, or
exchanged for, similar qualifying property used in the conduct of a
trade or business in the United States, to the extent such
conversion or exchange qualifies for nonrecognition under sections
1033 or 1031. Also, the abandonment or disposal of worthless or
obsolete property shall not trigger gain (or loss) under this
paragraph (b)(2)(i)(E).

(ii) Amendment to Master Property Description. If the foreign
distributee corporation acquires replacement property by virtue of a
conversion or exchange of the qualifying property under this
paragraph (b)(2)(i)(E)(4), then the foreign distributee corporation
shall attach to its U.S. income tax return for the year of the
acquisition such replacement property a schedule entitled A
Amendment to Master Property Description Required by �1.367(e)-2(b)
(2)(i) @ that lists the replacement property and the property being
replaced. ( 5) Nontriggering transfers to qualified transferees.
Gain (or loss) under this paragraph (b)(2)(i)(E) will not be
triggered if qualifying property described in paragraph (b)(2)(i)(B)
of this section is transferred to another person (qualified
transferee) in a transaction qualifying for nonrecognition under the
Internal Revenue Code (other than transactions described in
paragraphs (b)(2)(i)(E)(4)(i) and (c)(1) of this section), if B

(i) The qualified transferee (and all other subsequent qualified
transferees), immediately thereafter and for the ten-year period
beginning on the date of the initial distribution of such qualifying
property from the domestic liquidating corporation to the foreign
distributee corporation, uses the property in the conduct of a trade
or business in the United States;

(ii) The foreign distributee corporation (or its successor in
interest) prepares and attaches to its U.S. income tax return for
the year of transfer a statement entitled A Required Statement under
�1.367(e)-2(b)(2)(i)(E)(5) for Property Transferred to a Qualified
Transferee @ that is signed under penalties of perjury by an
authorized officer of the foreign distributee corporation and by a
person similarly authorized by the qualified transferee;

(iii) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of
this section shall contain a description of all qualifying property
transferred by the foreign distributee corporation (or qualified
transferee) to the qualified transferee (or subsequent qualified
transferee);

(iv) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of
this section shall also contain an identification of the qualified
transferee (or subsequent qualified transferee), including its name
and address, taxpayer identification number, residence, and place of
incorporation (if applicable);

(v) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of this
section shall also contain a declaration by the qualifying
transferee (or subsequent qualifying transferee) that it irrevocably
waives any right under any treaty (whether or not currently in force
at the time of the liquidation) to sell or exchange any item of such
property without U.S. income taxation or at a reduced rate of
taxation, or to derive income from the use of any item of such
qualifying property without U.S. income taxation or at a reduced
rate of taxation; and

(vi) A declaration that the transfer to the qualifying transferee
(or subsequent qualifying transferee) is one to which the rules of
this paragraph (b)(2)(i)(E)(5) apply and a certification that the
foreign distributee corporation (or its successor in interest) and
the qualifying transferee (or subsequent qualifying transferee)
agree to all of the terms and conditions set forth in paragraph (b)
(2)(i)(E)(1) of this section, replacing A foreign distributee
corporation @ with A qualifying transferee @ and replacing
references to A section 882(a) @ with A section 871(b) @ (as the
case may be).

(ii) Distribution of certain U.S. real property interests. A
domestic liquidating corporation shall not recognize gain (or loss)
under paragraph (b)(1) of this section on the distribution of a U.S.
real property interest (other than stock in a former U.S. real
property holding corporation that is treated as a U.S. real property
interest for five years under section 897(c)(1)(A)(ii)). If property
distributed by the domestic liquidating corporation is a U.S. real
property interest that qualifies for nonrecognition under this
paragraph (b)(2)(ii) in addition to nonrecognition provided by
paragraph (b)(2)(i) of this section, then the domestic liquidating
corporation shall secure nonrecognition pursuant to this paragraph
(b)(2)(ii) and not pursuant to the provisions of paragraph (b)(2)(i)
of this section.

(iii) Distribution of stock of domestic subsidiary corporations--(A)
Conditions for nonrecognition. A domestic liquidating corporation
shall not recognize gain or loss under paragraph (b)(1) of this
section on a distribution of stock of an 80 percent domestic
subsidiary corporation, if the domestic liquidating corporation
attaches a statement described in paragraph (b)(2)(iii)(D) of this
section to its U.S. income tax return for the year of the
distribution of such stock. For purposes of this paragraph (b)(2)
(iii), a corporation is an 80 percent domestic subsidiary
corporation, if--

(1) The subsidiary corporation is a domestic corporation (but not a
foreign corporation that has made an election under section 897(i)
to be treated as a U.S. corporation for purposes of section 897);

(2) The domestic liquidating corporation owns (directly) at least 80
percent of the total voting power of the stock of such corporation;
and

(3) The domestic liquidating corporation owns (directly) at least 80
percent of the total value of all stock of such corporation.

(B) Exceptions when the liquidating corporation is a U.S. real
property holding corporation. If the domestic liquidating
corporation is a U.S. real property holding corporation (as defined
in section 897(c)(2)) at the time of liquidation (or was a U.S. real
property holding corporation with respect to the foreign distributee
corporation during the five year period ending on the date of
liquidation), then the exception in paragraph (b)(2)(iii)(A) of this
section shall apply only to the distribution of stock of an 80
percent domestic subsidiary corporation that is a U.S. real property
holding corporation (as defined in section 897(c)(2)) at the time of
the liquidation and immediately thereafter.

(C) Anti-abuse rule. (1) The exception in paragraph (b)(2)(iii)(A)
of this section shall not apply, if a principal purpose of the
distribution of the 80 percent domestic subsidiary corporation's
stock is the avoidance of U.S. tax that would have been imposed on
the domestic liquidating corporation's disposition of such stock
(directly or indirectly) to an unrelated party. A distribution may
have a principal purpose of tax avoidance even though the tax
avoidance purpose is outweighed by other purposes (taken together or
separately).

(2) For purposes of paragraph (b)(2)(iii)(C)(1) of this section, a
distribution of stock of the 80 percent domestic subsidiary
corporation will be deemed to have been made pursuant to a plan, one
of the principal purposes of which was the avoidance of U.S. tax, if
the foreign distributee corporation disposes of any such stock
within two years of such distribution.

The rule in this paragraph (b)(2)(iii)(C)(2) will not apply if the
foreign distributee corporation can demonstrate to the satisfaction
of the Commissioner that a principal purpose of the liquidation was
not the avoidance of U.S. tax.

(D) Required statement. The statement required by paragraph (b)(2)
(iii)(A) of this section shall be entitled A Required Statement
under �1.367(e)-2(b)(2)(iii) for Stock of 80 Percent Domestic
Subsidiary Corporations @ and shall be prepared by the domestic
liquidating corporation and shall be signed under penalties of
perjury by an authorized officer of the domestic liquidating
corporation and by an authorized officer of the foreign distributee
corporation. The required statement shall contain a certification
that states that if the foreign distributee corporation disposes of
any stock subject to paragraph (b)(2)(iii)(A) of this section in a
transaction described in paragraph (b)(2)(iii)(C) of this section,
then the domestic liquidating corporation shall recognize all
realized gain attributable to such stock at the time of
distribution, and the domestic liquidating corporation (or the
foreign distributee corporation on behalf of the domestic
liquidating corporation) shall file a U.S. income tax return (or
amended U.S. income tax return, as the case may be) for the year of
distribution reporting the gain attributable to such stock.

(3) Other consequences--(i) Distributee basis in property.

The foreign distributee corporation's basis in property subject to
this paragraph (b) shall be the same as the domestic liquidating
corporation's basis in such property immediately before the
liquidation, increased by any gain, or reduced by any loss
recognized by the domestic liquidating corporation on such property
pursuant to paragraph (b)(1) of this section. In no case, however,
will the foreign distributee corporation's adjusted basis in
distributed property exceed the fair market value of such property
at the time of liquidation.

(ii) Reporting under section 6038B. Section 6038B and the
regulations thereunder apply to a domestic liquidating corporation's
transfer of property to a foreign distributee corporation under
section 367(e)(2).

(iii) Other rules. For other rules that may be applicable, see
sections 1248, 897, and 381.

(c) Distribution by a foreign corporation--(1) General rule--gain
and loss not recognized. If a foreign corporation (foreign
liquidating) makes a distribution of property in complete
liquidation under section 332 to a foreign corporation (foreign
distributee) that meets the stock ownership requirements of section
332(b) with respect to stock in the foreign liquidating corporation,
then, except as provided in paragraph (c)(2) of this section,
section 337(a) and (b)(1) shall apply and the foreign liquidating
corporation shall not recognize gain (or loss) on the distribution
under section 367(e)(2). If a foreign liquidating corporation
distributes a partnership interest (whether foreign or domestic),
then such corporation shall be treated as having distributed a
proportionate share of partnership property in accordance with the
principles of paragraph (b)(1)(iii) of this section.

(2) Exceptions--(i) Property used in a U.S. trade or business--(A)
General rule. A foreign liquidating corporation (including a
corporation that has made an effective election under section
897(i)) that makes a distribution described in paragraph (c)(1) of
this section shall recognize gain on the distribution of qualified
property, as described in paragraph (b)(2)(i)(B) of this section
(other than U.S. real property interests), that is used by the
foreign liquidating corporation in the conduct of a trade or
business within the United States at the time of distribution.

(B) Ten-year active U.S. business exception. A foreign liquidating
corporation shall not recognize gain under paragraph (c)(2)(i)(A) of
this section, if--

(1) The foreign distributee corporation, immediately thereafter and
for the ten-year period beginning on the date of the distribution of
such property, uses the property in the conduct of a trade or
business in the United States;

(2) The foreign distributee corporation is not entitled to benefits
under a comprehensive income tax treaty (this requirement shall
apply only if the foreign liquidating corporation (or predecessor
corporation) was not entitled to benefits under a comprehensive
income tax treaty); and

(3) The foreign liquidating corporation and foreign distributee
corporation attach the statement described in paragraph (c)(2)(i)(C)
of this section to their U.S. income tax returns for their taxable
years that include the distribution.

(C) Required statement. The statement required by paragraph (c)(2)
(i)(B)(3) of this section shall be entitled A Required Statement
under �1.367(e)-2(c)(2)(i), @ shall be prepared by foreign
liquidating corporation, shall be signed under penalties of perjury
by an authorized officer of the foreign liquidating corporation and
by an authorized officer of the foreign distributee corporation, and
shall be identical to the statement described in paragraph (b)(2)(i)
(C) of this section, except that A �1.367(e)-2(c)(2)(i)(B)" shall be
substituted for references to A �1.367(e)-2(b)(2)(i)" and A foreign
liquidating corporation" shall be substituted for "domestic
liquidating corporation @ each time it appears. References in the
rules of paragraph (b)(2)(i)(C) of this section to various rules in
paragraph (b) of this section shall be applied as if such references
were to this paragraph (c). However, the statement described in this
paragraph (c)(2)(i)(C) shall be modified as follows:

(1) The foreign distributee corporation shall not be required to
waive its income tax treaty benefits as required by �1.367(e)-2(b)
(2)(i)(C)(4), unless--

(i) The foreign liquidating corporation was required to waive its
treaty benefits under paragraph (b)(2)(i)(C)(4) of this section in
connection with the distribution of such property in a prior
liquidation distribution subject to the provisions of this section;
or

(ii) The foreign distributee corporation is entitled benefits under
a treaty to which the foreign liquidating corporation was not
entitled.

(2) If the foreign distributee is required to waive treaty benefits
because of paragraph (c)(2)(i)(C)(1)(ii) of this section, then the
foreign distributee shall only be required to waive benefits that
were not available to the foreign liquidating corporation (or a
predecessor corporation) prior to liquidation.

(3) The property description described in paragraph (b)(2)(i)(C)(2)
of this section shall include only the qualified U.S. trade or
business property described in paragraph (c)(2)(i) of this section.

(D) Operating rules. By the foreign liquidating corporation's
claiming nonrecognition under paragraph (c)(2)(i)(B) of this section
and filing a statement described in paragraph (c)(2)(i)(C) of this
section, the foreign liquidating corporation and the foreign
distributee corporation agree to be subject to the rules of
paragraph (c)(2)(i) of this section, as well as the rules of
paragraphs (b)(2)(i)(D) and (E) of this section. In applying the
rules of paragraphs (b)(2)(i)(D) and (E) of this section, "foreign
liquidating corporation @ shall be used instead of A domestic
liquidating corporation @ each time it appears. References in the
rules of paragraphs (b)(2)(i)(D) and (E) of this section to various
rules in paragraph (b) of this section shall be applied as if such
references were to this paragraph (c).

(ii) Property formerly used in a United States trade or business. A
foreign liquidating corporation that makes a distribution described
in paragraph (c)(1) of this section shall recognize gain (but not
loss) on the distribution of property (other than U.S. real property
interests) that had ceased to be used by the foreign liquidating
corporation in the conduct of a U.S. trade or business within the
ten-year period ending on the date of distribution and that would
have been subject to section 864(c)(7) had it been disposed. Section
864(c)(7) shall govern the treatment of any gain recognized on the
distribution of assets described in this paragraph as income
effectively connected with the conduct of a trade or business within
the United States.

(3) Other consequences--(i) Distributee basis in property.

The foreign distributee corporation's basis in property subject to
this paragraph (c) shall be the same as the foreign liquidating
corporation's basis in such property immediately before the
liquidation, increased by any gain, or reduced by any loss
recognized by the foreign liquidating corporation on such property,
pursuant to paragraph (c)(2) of this section. In no event, however,
will the foreign distributee corporation's adjusted basis in
distributed property exceed the fair market value of such property
at the time of liquidation.

(ii) Other rules. For other rules that may apply, see sections
367(b) and 381.

(d) Anti-abuse rule. The Commissioner may require either a domestic
liquidating corporation or a foreign liquidating corporation to
recognize gain on a distribution in liquidation described in
paragraph (b) or (c) of this section (or treat the liquidating
corporation as if it had recognized loss on a distribution in
liquidation), if a principal purpose of the liquidation is the
avoidance of U.S. tax (including, but not limited to, the
distribution of a liquidating corporation's earnings and profits
with a principal purpose of avoiding U.S. tax). A liquidation may
have a principal purpose of tax avoidance even though the tax
avoidance purpose is outweighed by other purposes (taken together or
separately).

(e) Effective date. This section shall be applicable to
distributions occurring 30 days after August 9, 1999 or, if taxpayer
so elects, to distributions in taxable years ending after August 8,
1999.

Par. 4. Section 1.6038B-1 is amended by revising the fourth sentence
of paragraph (a), the first sentence of paragraph (b)(1)(i), and
paragraphs (d), (e), and (g) to read as follows: � 1.6038B-1
Reporting of certain transactions to foreign corporations.

(a) * * * Section 1.6038B-1(e) describes the filing requirements for
property transfers described in section 367(e). * * *

(b) Time and manner of reporting--(1) In general--(i) Reporting
procedure. Except for stock or securities qualifying under the
special reporting rule of paragraph (b)(2) of this section, or cash,
which is subject to special rules contained in paragraph (b)(3) of
this section, any U.S. person that makes a transfer described in
section 6038B(a)(1)(A), 367(d), or 367(e), is required to report
pursuant to section 6038B and the rules of this section and must
attach the required information to Form 926, A Return by Transferor
of Property to a Foreign Corporation.

@

* * *

* * * * *

(d) [Reserved]. For further guidance, see �1.6038B-1T(d).

(e) Transfers subject to section 367(e)--(1) In general. If a
domestic corporation (distributing corporation) makes a distribution
described in section 367(e)(1) or section 367(e)(2), the
distributing corporation must comply with the reporting requirements
of this paragraph (e). Unless otherwise provided in this section, a
distributing corporation making a distribution described in sections
367(e)(1) or 367(e)(2) must file a Form 926, A Return by a U.S.
Transferor of Property to a Foreign Corporation (under section 367),
@ as amended and modified by this section.

(2) Reporting requirements for section 367(e)(1) distributions of
domestic controlled corporations. A domestic distributing
corporation making a distribution of the stock or securities of a
domestic corporation under section 355 is not required to file a
Form 926, as described in paragraph (e)(1) of this section, and
shall have no other reporting requirements under section 6038B.

(3) Reporting requirements for section 367(e)(1) distributions of
foreign controlled corporations. If the distributing corporation
makes a section 355 distribution of the stock or securities of a
foreign controlled corporation to distributee shareholders who are
not qualified U.S. persons, as defined in �1.367(e)-1(b)(1), then
the distributing corporation shall complete Part 1 of the Form 926
and attach a signed copy of such form to its U.S. income tax return
for the year of the distribution. The distributing corporation shall
also attach to its U.S. income tax return for the year of
distribution a statement signed under the penalties of perjury
entitled, A Addendum to Form 926.

@ The addendum shall contain a brief description of the transaction,
state the number of shares distributed to distributees who are not
qualified U.S. persons (applying the rules contained in
�1.367(e)-1(d)), and state the basis and fair market value of the
distributed stock or securities (including a list stating the
amounts that were distributed to distributees who were not qualified
U.S. persons and distributees who were qualified U.S. persons).

(4) Reporting rules for section 367(e)(2) distributions by domestic
liquidating corporations. If the distributing corporation makes a
distribution of property in complete liquidation under section 332
to a foreign distributee corporation that meets the stock ownership
requirements of section 332(b) with respect to the stock of the
distributing corporation, then the distributing corporation shall
complete a Form 926 and attach a signed copy of such form to its
U.S. income tax return for the year of the distribution. The
property description contained in Part III of the Form 926 shall
contain a description of all property distributed by the liquidating
corporation (regardless of whether the property qualifies for
nonrecognition). The description shall also identify the property
excepted from gain recognition under �1.367(e)-2( b)(2)(ii) and
(iii). If the distributing corporation distributes property that
will be used by the foreign distributee corporation in a U.S. trade
or business and the distributing corporation does not recognize gain
on such distribution under �1.367(e)-2(b)(2)(i), then the
distributing corporation may satisfy the requirements of this
section by completing Part 1 of the Form 926, noting thereon that
the information required by the Form 926 is contained in the
statement required by �1.367(e)-2( b)(2)(i)(C)(2), and attaching a
signed copy of the Form 926 to its U.S. income tax return for the
year of the distribution.

* * * * *

(g) Effective dates. This section applies to transfers occurring on
or after July 20, 1998, except paragraph (e) of this section, which
applies to transfers that are subject to ��1.367(e)-1(f) and
1.367(e)-2(e). See �1.6038B-1T for transfers occurring prior to July
20, 1998. See also �1.6038B-1T(e) in effect prior to August 9, 1999,
(as contained in 26 CFR part 1 revised April 1, 1999) for transfers
described in section 367(e) that are not subject to ��1.367(e)-1(f)
and 1.367(e)-2(e).

Par. 5. Section 1.6038B-1T is amended by revising the section
heading, revising paragraph (e) and revising the first sentence of
paragraph (g), to read as follows.

�1.6038B-1T Reporting of certain transactions to foreign
corporations (temporary).

* * * * *

(e) [Reserved] For further guidance, see �1.6038B-1(e).

* * * * *

(g) Effective date. This section applies to transfers occurring
after December 31, 1984. * * *

PART 602--OMB CONTROL NUMBERS UNDER THE Paperwork Reduction Act

Par. 6. The authority citation for part 602 continues to read as
follows:

Authority: 26 U.S.C. 7805..Par. 7. In �602.101, paragraph (b) is
amended in the table by removing the entries for 1.367(e)-1T and
1.367(e)-2T, revising the entry for 1.6038B-1, and adding entries in
numerical order to read as follows:

�602.101 OMB Control numbers.

* * * * *

(b) * * *

CFR part or section where Current OMB identified and described
control No.

* * * * *

1.367(e)-1..........................................1545-1487

1.367(e)-2..........................................1545-1487

* * * * *

1.6038B-1...........................................1545-1487

1545-1615

* * * * *

Robert E. Wenzel
Deputy Commissioner of Internal Revenue.
Approved: 7/29/1999
Donald C. Lubbick
Assistant Secretary of the Treasury.

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