Stock Transfer Rules: Supplemental Rules

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8863] RIN 1545-
AX64

TITLE: Stock Transfer Rules: Supplemental Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations that provide
an election for certain taxpayers engaged in certain exchanges
described in section 367(b). These regulations provide guidance for
taxpayers that make the specified election in order to determine the
extent to which income must be included and certain corresponding
adjustments must be made. The text of the temporary regulations also
serves as the text of the proposed regulations set forth in the
notice of proposed rulemaking on this subject in the Proposed Rules
section of this issue of the Federal Register.

DATES: Effective Date. These regulations are effective as of
February 23, 2000.

Applicability Date. These regulations apply to section 367(b)
exchanges that occur on or after February 23, 2000.

FOR FURTHER INFORMATION CONTACT: Mark D. Harris, (202) 622-3860 (not
a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act These

regulations are being issued without prior notice and public
procedure pursuant to the Administrative Procedure Act (5 U.S.C.
553). For this reason, the collection of information contained in
these regulations has been reviewed and, pending receipt and
evaluation of public comments, approved by the Office of Management
and Budget under control number 1545-1666.

Responses to this collection of information is mandatory.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid OMB control number.

For further information concerning this collection of information,
and where to submit comments on the collection of information and
the accuracy of the estimated burden, and suggestions for reducing
this burden, please refer to the preamble to the cross-referencing
notice of proposed rulemaking published in the Proposed Rules
section of this issue of the Federal Register.

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

On December 27, 1977, the IRS and Treasury issued proposed and
temporary regulations under section 367(b) of the Internal Revenue
Code (Code). Subsequent guidance updated and amended the 1977
temporary regulations (the 1977 regulations) several times over the
next 14 years. On August 26, 1991, the IRS and Treasury issued
proposed regulations ��1.367(b)-1 through 1.367(b)-6 (the 1991
proposed regulations). Comments to the 1991 proposed regulations
were received, and a public hearing was held on November 22, 1991.
In June of 1998, the IRS and Treasury issued final regulations under
sections 367(a) and (b) (the 1998 regulations). The 1998 regulations
addressed transactions under section 367(b) only to the extent the
transactions are also subject to the stock transfer rules of section
367(a). Thus, the 1977 regulations have remained in effect to the
extent not superseded by the 1998 regulations. The preamble to the
1998 regulations stated that the IRS and Treasury would issue
guidance at a later date to address the portions of the 1991
proposed regulations related to section 367(b) that were not
addressed in the 1998 regulations.

The IRS and Treasury adopted ��1.367(b)-1 through 1.367(b)-6 as
final regulations under section 367(b) (see final section 367(b)
regulations published elsewhere in this issue of the Federal
Register). These temporary regulations relate to certain provisions
of the 1991 proposed regulations not adopted in the final section
367(b) regulations (published elsewhere in this issue of the Federal
Register).

General Purpose

These temporary regulations address the elimination of an election
available to certain taxpayers under the 1991 proposed regulations
that was not adopted in the final section 367(b) regulations
(published elsewhere in this issue of the Federal Register).

Specific Provisions

A. �1.367(b)-3T(b)(4): Election of taxable exchange treatment
Section 1.367(b)-3 of the 1991 proposed regulations addressed
transactions in which a foreign corporation transfers assets to a
domestic corporation pursuant to a Subchapter C nonrecognition
provision. These transactions include a section 332 liquidation of a
foreign corporation into a domestic parent corporation and an asset
reorganization, such as a C, D or F reorganization, of a foreign
corporation into a domestic corporation. The 1991 proposed
regulations required a U.S.

shareholder of a foreign acquired corporation (or, in certain cases,
a foreign subsidiary of the U.S. shareholder) to currently include
in income the allocable portion of the foreign acquired
corporation's earnings and profits accumulated during the U.S.
shareholder's holding period (all earnings and profits amount).

The final section 367(b) regulations (published elsewhere in this
issue of the Federal Register) adopted this general rule.

Sections 7.367(b)-5(b) and 7.367(b)-7(c)(2)(ii) of the 1977
regulations and �1.367(b)-3(b)(2)(iii) of the 1991 proposed
regulations provided an exception to this rule, which permitted an
exchanging shareholder to elect to recognize the gain (but not the
loss) that it realizes in the exchange (taxable exchange election),
rather than include the all earnings and profits amount in income.
To the extent the all earnings and profits amount exceeds a
shareholder's stock gain, the 1991 proposed regulations further
required the foreign acquired corporation to reduce various tax
attributes that would otherwise carryover to the domestic acquiring
corporation (attribute reduction regime).

The final regulations (published elsewhere in this issue of the
Federal Register) did not adopt the taxable exchange election.

In order to provide taxpayers an opportunity to comment on this
change, these temporary regulations provide the taxable exchange
election in modified form. The modified election permits an
exchanging shareholder to elect to treat a transaction as a taxable
exchange, but limits application of the attribute reduction regime
to a section 332 liquidation or to an inbound asset reorganization
in which the foreign acquired corporation is wholly owned (directly
or indirectly) by one U.S. person.

These temporary regulations apply to section 367(b) exchanges that
occur between February 23, 2000, and February 24, 2001.

Further Explanation

For a more detailed discussion regarding section 367(b), see the
final section 367(b) regulations published elsewhere in this issue
of the Federal Register.

Special Analyses

It has been determined that these Temporary regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. Further it
is hereby certified pursuant to sections 603(a) and 605(b) of the
Regulatory Flexibility Act that the collection of information in
these regulations 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(b) exchanges that
require reporting under these regulations is estimated to be only 20
per year.

Therefore, 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, these temporary regulations
will be submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on their impact.

Drafting Information The principal author of these regulations is
Mark Harris 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 adding
entries in numerical order to read in part as follows: Authority: 26
U.S.C. 7805 * * * Section 1.367(b)-3T also issued under 26 U.S.C.
367(a) and

(b). * * * Par. 2. Section 1.367(b)-3T is added to read as follows:
�1.367(b)-3T Repatriation of foreign corporate assets in certain
nonrecognition transactions (temporary).

(a) through (b)(3). [Reserved]. For further guidance, see
�1.367(b)-3(a) through (b)(3).

(4) Election of taxable exchange treatment--(i) Rules--(A) In
general. In lieu of the treatment prescribed by �1.367(b)-3(b)(3)
(i), an exchanging shareholder described in �1.367(b)-3(b)(1) may
instead elect to recognize the gain (but not loss) that it realizes
in the exchange (taxable exchange election). To make a taxable
exchange election, the following requirements must be satisfied

(1) The exchanging shareholder (and its direct or indirect owners
that would be affected by the election, in the case of an exchanging
shareholder that is a foreign corporation) reports the exchange in a
manner consistent therewith (see, e.g., sections 954(c)(1)(B)(i),
1001 and 1248);

(2) The notification requirements of paragraph (b)(4)(i)(C) of this
section are satisfied; and

(3) The adjustments described in paragraph (b)(4)(i)(B) of this
section are made when the following circumstances are present

(i) The transaction is described in section 332 or is an asset
acquisition described in section 368(a)(1), with regard to which one
U.S. person owns (directly or indirectly) 100 percent of the foreign
acquired corporation; and

(ii) The all earnings and profits amount described in �1.367(b)-3(b)
(3)(i) with respect to the exchange exceeds the gain recognized by
the exchanging shareholder.

(B) Attribute reduction--(1) Reduction of NOL carryovers.

The amount by which the all earnings and profits amount exceeds the
gain recognized by the exchanging shareholder (the excess earnings
and profits amount) shall be applied to reduce the net operating
loss carryovers (if any) of the foreign acquired corporation to
which the domestic acquiring corporation would otherwise succeed
under section 381(a) and (c)(1). See also Rev.

Rul. 72-421 (1972-2 C.B. 166) (see �601.601(d)(2) of this chapter).

(2) Reduction of capital loss carryovers. After the application of
paragraph (b)(4)(i)(B)(1) of this section, any remaining excess
earnings and profits amount shall be applied to reduce the capital
loss carryovers (if any) of the foreign acquired corporation to
which the domestic acquiring corporation would otherwise succeed
under section 381(a) and (c)(3).

(3) Reduction of basis. After the application of paragraph (b)(4)(i)
(B)(2) of this section, any remaining excess earnings and profits
amount shall be applied to reduce (but not below zero) the basis of
the assets (other than dollar-denominated money) of the foreign
acquired corporation that are acquired by the domestic acquiring
corporation. Such remaining excess earnings and profits amount shall
be applied to reduce the basis of such assets in the following
order: first, tangible depreciable or depletable assets, according
to their class lives (beginning with those assets with the shortest
class life); second, other non-inventory tangible assets; third,
intangible assets that are amortizable; and finally, the remaining
assets of the foreign acquired corporation that are acquired by the
domestic acquiring corporation. Within each of these categories, if
the total basis of all assets in the category is greater than the
excess earnings and profits amount to be applied against such basis,
the taxpayer may choose to which specific assets in the category the
basis reduction first applies.

(C) Notification. The exchanging shareholder shall elect to apply
the rules of this paragraph (b)(4)(i) by attaching a statement of
its election to its section 367(b) notice. See �1.367(b)-1(c) for
the rules concerning filing a section 367(b) notice.

(D) Example. The following example illustrates the rules of this
paragraph (b)(4)(i): Example--(i) Facts. DC, a domestic corporation,
owns all of the outstanding stock of FC, a foreign corporation. The
stock of FC has a value of $100, and DC has a basis of $80 in such
stock. The assets of FC are one parcel of land with a value of $60
and a basis of $30, and tangible depreciable assets with a value of
$40 and a basis of $80. FC has no net operating loss carryovers or
capital loss carryovers. The all earnings and profits amount with
respect to the FC stock owned by DC is $30, of which $19 is
described in section 1248(a) and the remaining $11 is not (for
example, because it was earned prior to 1963).

In a liquidation described in section 332, FC distributes all of its
property to DC, and the FC stock held by DC is canceled.

Rather than including in income as a deemed dividend the all
earnings and profits amount of $30 as provided in �1.367(b)-3(b)(3)
(i), DC instead elects taxable exchange treatment under paragraph
(b)(4)(i)(A) of this section.

(ii) Result. DC recognizes the $20 of gain it realizes on its stock
in FC. Of this $20 amount, $19 is included in income by DC as a
dividend pursuant to section 1248(a). (For the source of the
remaining $1 of gain recognized by DC, see section 865.

For the treatment of the $1 for purposes of the foreign tax credit
limitation, see generally section 904(d)(2)(A)(i).) Because the
transaction is described in section 332 and because the all earnings
and profits amount with respect to the FC stock held by DC ($30)
exceeds by $10 the income recognized by DC ($20), the attribute
reduction rules of paragraph (b)(4)(i)(B) of this section apply.
Accordingly, the $10 excess earnings and profits amount is applied
to reduce the basis of the tangible depreciable assets of FC,
beginning with those assets with the shortest class lives. Under
section 337(a) FC does not recognize gain or loss in the assets that
it distributes to DC, and under section 334(b) (which is applied
taking into account the basis reduction prescribed by paragraph (b)
(4)(i)(A)(3) of this section) DC takes a basis of $30 in the land
and $70 in the tangible depreciable assets that it receives from FC.

(ii) Effective date. This paragraph (b)(4) applies for section
367(b) exchanges that occur between February 23, 2000, and February
24, 2001.

(c) and (d) [Reserved]. For further guidance, see �1.367(b)-3(c)
through (d).

Par. 3. The authority citation for part 602 continues to read as
follows: Authority: 26 U.S.C. 7805.

Par. 4. In �602.101, paragraph (b) is amended as follows: 1.
Removing the following entries from the table: �602.101 OMB Control
numbers.

* * * * *

(b) * * *

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

* * * * *

7.367(b)-1..........................................1545-0026

7.367(b)-3..........................................1545-0026

7.367(b)-7..........................................1545-0026

7.367(b)-9..........................................1545-0026

7.367(b)-10.........................................1545-0026

* * * * *

2. Adding the following entry in numerical order to the table to
read as follows: �602.101 OMB Control numbers.

* * * * *.(b) * * *

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

* * * * *

1.367(b)-3T........................................1545-1666

* * * * *

John M. Dalrymple
Acting Deputy Commissioner of Internal Revenue.

Approved:
Jonathan Talisman
Acting Assistant Secretary of the Treasury

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