Federal Register: February 11, 2009 (Volume 74, Number 27)
DOCID: fr11fe09-2 FR Doc E9-2835
DEPARTMENT OF THE TREASURY
Internal Revenue Service
CFR Citation: 26 CFR Part 1
RIN ID: RIN 1545-BI42
TD ID: [TD 9444]
NOTICE: RULES
DOCID: fr11fe09-2
DOCUMENT ACTION: Final and temporary regulations.
SUBJECT CATEGORY:
Application of Section 367 to a Section 351 Exchange Resulting From a Transaction Described in Section 304(a)(1); Treatment of Gain Recognized Under Section 301(c)(3) for Purposes of Section 1248
DATES: Effective Date: These regulations are effective on February 11, 2009.
Applicability Date: These regulations apply to acquisitions of stock occurring on or after February 11, 2009.
DOCUMENT SUMMARY:
This document contains final and temporary regulations under sections 367(a), 367(b) and 1248(a) of the Internal Revenue Code (Code). The final regulations under section 367 revise existing final regulations and add crossreferences. The final regulations under section 1248 update an effective/applicability date. The temporary regulations under section 367(a) and (b) revise existing final regulations concerning transfers of stock to a foreign corporation that are described in section 351 by reason of section 304(a)(1). The temporary regulations under section 1248(a) provide that, for purposes of section 1248(a), gain recognized by a shareholder under section 301(c)(3) in connection with the receipt of a distribution of property from a foreign corporation with respect to its stock shall be treated as gain from the sale or exchange of the stock of such foreign corporation. The temporary regulations affect certain persons that transfer stock to a foreign corporation in a transaction described in section 304(a)(1), or certain persons that recognize gain under section 301(c)(3) in connection with the receipt of a distribution of property from a foreign corporation with respect to its stock. The text of the temporary regulations serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject published in the Proposed Rules section in this issue of the Federal Register.
SUMMARY:
Application of Section 367 to a Section 351 Exchange Resulting from a Transaction Described in Section 304(a)(1): ; Treatment of Gain Recognized under Section 301(c)(3) for Purposes of Section 1248,
SUPPLEMENTAL INFORMATION
Background
Section 367(a)(1) generally provides that if a United States person transfers property to a foreign corporation in an exchange described in section 332, 351, 354, 356, or 361, the foreign corporation shall not be considered a corporation for purposes of determining the extent to which the United States person recognizes gain on such transfer. Exceptions to the general rule are provided by section 367(a)(2) and (3), and the Secretary has broad authority under section 367(a)(6) to promulgate regulations providing exceptions for other transactions.
Section 367(b)(1) provides that in the case of an exchange described in section 332, 351, 354, 355, 356, or 361 in connection with which there is no transfer of property described in section 367(a)(1), a foreign corporation shall be considered to be a corporation except to the extent provided in regulations prescribed by the Secretary which are necessary or appropriate to prevent the avoidance of Federal income taxes. Section 367(b)(2) provides that the regulations prescribed pursuant to section 367(b)(1) shall include (but shall not be limited to) regulations dealing with the sale or exchange of stock or securities in a foreign corporation by a United States person, including regulations providing the circumstances under which gain is recognized, amounts are included in gross income as a dividend, adjustments are made to earnings and profits, or adjustments are made to the basis of stock or securities.
Regulations under section 367(b) generally provide that if the potential application of section 1248 cannot be preserved immediately following the acquisition of the stock or assets of a foreign corporation (foreign acquired corporation) by another foreign corporation in an exchange subject to section 367(b), then certain exchanging shareholders of the foreign acquired corporation must include in income as a dividend the section 1248 amount (as defined in Sec. 1.367(b)2(c)) attributable to the stock of the foreign acquired corporation. See Sec. 1.367(b)4(b).
Section 304(a)(1) generally provides that, for purposes of sections 302 and 303, if one or more persons are in control of each of two corporations and in return for property one of the corporations (the acquiring corporation) acquires stock in the other corporation (the issuing corporation) from the person (or persons) so in control, then such property shall be treated as a distribution in redemption of the stock of the acquiring corporation. To the extent section 301 applies to the distribution, the transferor and the acquiring corporation are treated as if (1) the transferor transferred the stock of the issuing corporation to the acquiring corporation in exchange for stock of the acquiring corporation in a transaction to which section 351(a) applies, and (2) the acquiring corporation then redeemed the stock it is deemed to have issued. Under section 304(b)(2), the determination of the amount of the property distribution that is a dividend (and the source thereof) is made as if the property is distributed by the acquiring corporation to the extent of its earnings and profits, and then by the issuing corporation to the extent of its earnings and profits.
On February 21, 2006, the IRS and Treasury Department issued final regulations (TD 9250) providing that section 367(a) and (b) shall not apply to certain transfers of stock of a foreign or domestic corporation to a foreign acquiring corporation to which section 351 applies (deemed section 351 exchange) by reason of section 304(a)(1) (final 2006 regulations). Specifically, Sec. 1.367(a)3(a) provides that if, pursuant to section 304(a)(1), a United States person is treated as transferring stock of a domestic or foreign corporation to a foreign corporation in exchange for stock of such foreign corporation in a deemed section 351 exchange, the deemed section 351 exchange is not a transfer to a foreign corporation subject to section 367(a). Similarly, Sec. 1.367(b)4(a) provides that if, pursuant to section 304(a)(1), a foreign corporation is treated as acquiring the stock of another foreign corporation in a deemed section 351 exchange, the deemed section 351 exchange is not an acquisition subject to section 367(b).
The preamble to the final 2006 regulations explained that the IRS
and Treasury Department determined that the policies underlying section
367(a) and (b) are preserved even if a deemed section 351 exchange is
not subject to section 367(a) and (b) because generally the income
recognized by the transferor in the transaction (dividend income, [[Page 6825]]
capital gain, or both) should equal or exceed the builtin gain in the
transferred stock. Comments were received, however, stating that the
transferor may not recognize income equal to or greater than the built
in gain in the transferred stock if, under section 301(c)(2), the
transferor were permitted to recover the basis of shares of the foreign
acquiring corporation held before (and after) the transaction. For
example, assume a domestic corporation, P, wholly owns F1 and F2, both
foreign corporations. The F1 stock has a $0x basis and $100x fair
market value. The F2 stock has a $100x basis and $100x fair market
value. Neither F1 nor F2 has current or accumulated earnings and
profits. In a transaction subject to section 304(a)(1), P sells the F1
stock to F2 for $100x cash. Under section 304(a)(1), P and F2 are
treated as if P transferred the F1 stock to F2 in exchange for F2 stock
in a transaction to which section 351 applies, and then F2 redeemed its
stock deemed issued to P. Because the redemption of the F2 stock would
be described in section 302(d) and therefore subject to section 301,
the commentators posited that P may not recognize gain under section
301(c)(3) on the receipt of the $100x cash in redemption of the F2
stock if the basis of both the F2 stock that is received by P in the
deemed section 351 exchange ($0x), and of the F2 stock held by P prior
to (and after) the transaction ($100x), is available for reduction
under section 301(c)(2). If that were the case, P would recognize no gain in the transaction.
The preamble to the final 2006 regulations stated, however, that
the IRS and Treasury Department believe current law does not provide
for the recovery of basis of any shares of the acquiring corporation
other than the shares deemed issued to the transferor and redeemed by
the acquiring corporation as provided under section 304(a)(1). Thus, in
the example above, P would recognize $100x gain under section 301(c)(3)
(the builtin gain on the F1 stock), and the basis of the F2 stock held
by P after the transaction would continue to be $100x. The IRS and
Treasury Department continue to study the basis recovery issue as part
of a larger project and have determined that it is necessary to revise
the final 2006 regulations prior to the completion of that project. Explanation of Provisions
A. Modified Application of Section 367(a) to Deemed Section 351 Exchanges
Consistent with the final 2006 regulations, the temporary regulations under section 367(a) generally provide that if, pursuant to section 304(a)(1), a United States person is treated as transferring stock of a domestic or foreign corporation to a foreign corporation in exchange for stock of such foreign corporation in a deemed section 351 exchange, the deemed section 351 exchange is not a transfer to a foreign corporation subject to section 367(a). However, if the distribution received by the United States person in redemption of the foreign acquiring corporation stock received in the deemed section 351 exchange is subject to section 301 (by reason of section 302(d)), the temporary regulations provide an exception to the general rule if the distribution is applied against and reduces (in whole or in part), pursuant to section 301(c)(2), the basis of stock of the foreign acquiring corporation held by the United States person other than the stock deemed issued to the United States person in the deemed section 351 exchange. In such a case, the United States person shall recognize gain under section 367(a)(1) equal to the amount by which the gain realized by the United States person with respect to the transferred stock in the deemed section 351 exchange exceeds the amount of the distribution received by the United States person in redemption of the foreign acquiring corporation stock that is treated as a dividend under section 301(c)(1) and included in gross income by the United States person. Thus, in the hypothetical transaction described above, if any amount of the distribution received by P in redemption of the F2 stock was applied against the basis of the F2 stock held by P before (and after) the transaction, then under the temporary regulations P would recognized $100x gain under section 367(a)(1) in connection with its transfer of the F1 stock to F2 in the deemed section 351 exchange.
The exceptions to the application of section 367(a)(1) for transfers of stock provided in Sec. 1.367(a)3 are not available to transfers covered by the temporary regulations. For example, a United States person cannot avoid gain recognition under the temporary regulations by entering into a gain recognition agreement under Sec. Sec. 1.367(a)3(b)(1)(ii) and 1.367(a)8 with respect to the deemed section 351 exchange.
The temporary regulations provide rules to coordinate the
recognition of gain under the temporary regulations and the
corresponding increase to the basis of the stock of the foreign
acquiring corporation received by the United States person in the
transaction. Under such rules the increase to the basis of the stock of
the foreign acquiring corporation by reason of gain recognized by the
United States person under the temporary regulations would be taken
into account before determining the consequences of the redemption of
the shares of the foreign acquiring corporation. For example, in the
hypothetical transaction described above, the basis of the F2 stock
deemed received by P in exchange for the F1 stock would be increased to
$100x under section 358 before determining the consequences of the
redemption of such stock under section 301. The gain recognized by P
will be treated as recognized with respect to the F1 stock transferred
in the deemed section 351 exchange in proportion to the gain realized with respect to the F1 stock.
B. Modified Application of Section 367(b) to Deemed Section 351 Exchanges
The temporary regulations make similar revisions to the final 2006 regulations under section 367(b). Specifically, the temporary regulations provide that Sec. 1.367(b)4(b) shall apply to a deemed section 351 exchange to the extent the distribution received by the exchanging shareholder in redemption of the stock deemed issued by the foreign acquiring corporation is applied against and reduces, pursuant to section 301(c)(2), the adjusted basis of stock of the foreign acquiring corporation held by the exchanging shareholder before the transaction.
The temporary regulations provide rules to determine the amount of an income inclusion that is attributable to the shares of stock of the foreign acquired corporation transferred in the deemed section 351 exchange when the income inclusion required under the regulations is less than the aggregate section 1248 amount attributable to all of the shares of stock transferred in the deemed section 351 exchange. C. Treatment of Gain Recognized Under Section 301(c)(3) for Purposes of Section 1248(a)
The temporary regulations under section 1248(a) provide that gain
recognized under section 301(c)(3) on the receipt of a distribution of
property from a foreign corporation shall be treated, for purposes of section 1248(a), as gain from the sale or exchange of the
[[Page 6826]]
stock of such corporation. The temporary regulations preserve the
policies underlying section 367(b), are consistent with the premise of
the final 2006 regulations, and ensure that the earnings and profits of
lowertier foreign subsidiaries described in section 1248(c)(2) are taken into account.
D. Effective Dates
The temporary regulations apply to transfers or distributions occurring on or after February 11, 2009.
Availability of IRS Documents
IRS notices cited in this preamble are made available by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. These temporary and final regulations are necessary to ensure that the appropriate amount of income (dividend income, capital gain or both) is recognized currently in the transactions described in the explanation of provisions section in this preamble. Accordingly, good cause is found for dispensing with notice and public comment pursuant to 5 U.S.C. 553(b) and (c) and with a delayed effective date pursuant to 5 U.S.C. 553(d). For applicability of the Regulatory Flexibility Act, see the crossreferenced notice of proposed rulemaking published elsewhere in this Federal Register. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Sean W. Mullaney of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements. Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1INCOME TAXES
Paragraph. 1. The authority citation for part 1 is amended by adding new entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.367(a)9T also issued under 26 U.S.C. 367(a) and (b). * * *
Section 1.367(b)4T also issued under 26 U.S.C. 367(b). * * *
Par. 2. Section 1.367(a)3 is amended by revising the third sentence in paragraph (a) to read as follows:
Sec. 1.367(a)3 Treatment of transfers of stock or securities to foreign corporations.
(a) * * * For rules applicable when, pursuant to section 304(a)(1),
a United States person is treated as transferring stock of a domestic
or foreign corporation to a foreign corporation in exchange for stock
of such foreign corporation in a transaction to which section 351(a) applies, see Sec. 1.367(a)9T. * * *
* * * * *
Par. 3. Section 1.367(a)9T is added to read as follows:
Sec. 1.367(a)9T Treatment of deemed section 351 exchanges pursuant to section 304(a)(1) (temporary).
(a) Scope and general rule. This section applies to the extent
that, pursuant to section 304(a)(1), a United States person is treated
as transferring stock of a domestic or foreign corporation to a foreign
corporation (foreign acquiring corporation) in exchange for stock of
the foreign acquiring corporation in a transaction to which section
351(a) applies (deemed section 351 exchange). Except to the extent
provided in paragraph (b) of this section, a transfer of stock by a
United States person to a foreign acquiring corporation in a deemed section 351 exchange is not subject to section 367(a)(1).
(b) Special rule. Notwithstanding paragraph (a) of this section, if
the distribution received by the United States person in redemption of
the stock of the foreign acquiring corporation deemed issued in the
deemed section 351 exchange is applied against and reduces (in whole or
in part), pursuant to section 301(c)(2), the basis of stock of the
foreign acquiring corporation held by the United States person other
than the stock deemed issued in the deemed section 351 exchange, the
United States person shall recognize gain pursuant to this paragraph
(b). The exceptions described in Sec. 1.367(a)3(b)(1) and (c)(1)
shall not apply to a transfer of stock described in paragraph (a) of
this section. The amount of gain recognized by a United States person
pursuant to this paragraph (b) shall equal the amount, if any, by which
(1) The gain realized by the United States person with respect to
the transferred stock in connection with the deemed section 351 exchange exceeds; and
(2) The amount of the distribution received by the United States
person in redemption of the stock of the foreign acquiring corporation
deemed issued in the deemed section 351 exchange that is treated as a
dividend under section 301(c)(1) and included in gross income by the United States person.
(c) Ordering rule. For purposes of paragraph (b)(1) of this
section, the amount of gain realized by the United States person in
connection with the deemed section 351 exchange shall be determined
without regard to the amount of gain recognized by the United States person under paragraph (b) of this section.
(d) Allocation of recognized gain. Gain recognized by a United
States person pursuant to paragraph (b) of this section shall be
treated as recognized with respect to the stock transferred in the
deemed section 351 exchange in proportion to the amount of gain
realized by the United States person with respect to such stock. See
Sec. 1.367(a)1T(b)(4) for additional rules on the character, source,
and adjustments relating to gain recognized under section 367(a).
(e) Example. The following example illustrates the rules of this section:
Example. (i) Facts. (A) USP, a domestic corporation, wholly owns
FC1 and FC2, each a foreign corporation. USP, FC1 and FC2 use a
calendar taxable year. The FC1 stock has a $40x basis and $100x fair
market value. The FC2 stock has a $100x basis and $100x fair market
value. As of December 31, year 1, FC1 has zero earnings and profits,
and FC2 has $20x earnings and profits. On December 31, year 1, in a
transaction described in section 304(a)(1), USP sells the FC1 stock to FC2 for $100x cash.
(B) Because USP wholly owns FC1 before the transactions and is
treated, under section 318, as indirectly owning 100% of the FC1
stock after the transfer, under section 304(a)(1), USP and FC2 are
treated in the same manner as if USP contributed the FC1 stock to
FC2 in a deemed section 351 exchange in exchange solely for $100x of
FC2 stock, and then FC2 redeemed for $100x cash its stock deemed
issued to USP. Because USP wholly owns FC1 before the sale and is
treated as owning 100% of FC1 after the sale, section 302(a) does
not apply to the redemption. Instead, under section 302(d), the
redemption is treated as a distribution to which section 301
applies. Pursuant to section 304(b)(2), $20x of the distribution is
treated as a dividend from FC2. With respect to the remaining $80x,
USP takes the position that $40x is applied against and reduces the
basis of the FC2 stock issued in the deemed section 351 exchange,
and $40x is applied against and reduces the basis of the FC2 stock [[Page 6827]]
held by USP prior to (and after) the transaction.
(ii) Analysis. Under paragraph (b) of this section, USP must
recognize gain of $40x on its transfer of the FC1 stock to FC2 in
the deemed section 351 exchange (the amount by which the $60x gain
realized by USP on the deemed section 351 exchange with respect to
the F1 stock exceeds the $20x dividend inclusion). Pursuant to
paragraph (b) of this section, the exception under Sec. 1.367(a)
3(b) is not available to the transfer of the FC1 stock by USP to FC2
in the deemed section 351 exchange. Thus, USP cannot avoid gain
recognition under paragraph (b) of this section by entering into a
gain recognition agreement with respect to its transfer of the FC1
stock to FC2 in the deemed section 351 exchange. Under paragraph (d)
of this section, the $40x gain recognized is allocated among the
shares of FC1 stock transferred to FC2 in the deemed section 351
exchange in proportion to the gain realized by USP on the transfer
of such shares. Under paragraph (c) of this section, the application
of paragraph (b) of this section is determined prior to taking into
account the $40x increase to the basis of the FC1 stock transferred
by USP. Under section 362, the basis of the FC1 stock in the hands
of FC2 is increased by $40x, the amount of gain recognized by the
USP on the transfer of the FC1 stock under paragraph (b) of this
section. Under section 358, the basis of the FC2 stock received by
USP in the deemed section 351 exchange is similarly increased by
$40x. See Sec. 1.367(a)1T(b)(4). The $40x increase to the basis of the FC2 stock is taken into account before determining the
consequences of the redemption of such stock under section
304(a)(1).
(f) Effective/applicability date. This section applies to transfers
occurring on or after February 10, 2009. See Sec. 1.367(a)3(a), as
contained in 26 CFR part 1 revised as of April 1, 2008, for transfers
occurring on or after February 21, 2006, and before February 10, 2009.
(g) Expiration date. This section expires on or before February 10, 2012.
Par. 4. Section 1.367(b)4 is amended by revising the second sentence
in paragraph (a) and adding paragraphs (e), (f) and (g) to read as follows:
Sec. 1.367(b)4 Acquisition of foreign corporate stock or assets by a
foreign corporation in certain nonrecognition transactions.
(a) * * * For rules applicable when, pursuant to section 304(a)(1),
a foreign acquiring corporation is treated as acquiring the stock of a
foreign acquired corporation in a transaction to which section 351(a) applies, see Sec. 1.367(b)4T(e). * * *
* * * * *
(e) [Reserved]. For further guidance, see Sec. 1.367(b)4T(e).
(f) [Reserved]. For further guidance, see Sec. 1.367(b)4T(f).
(g) [Reserved]. For further guidance, see Sec. 1.367(b)4T(g). Par. 5. Section 1.367(b)4T is added to read as follows:
Sec. 1.367(b)4T Acquisition of foreign corporate stock or assets by
a foreign corporation in certain nonrecognition transactions (temporary).
(a) through (d) [Reserved]. For further guidance, see Sec. 1.367(b)4(a) through (d).
(e) Application of section 367(b) to transactions described in
section 304(a)(1)(1) Scope and general rule. This section applies to
the extent that, pursuant to section 304(a)(1), an exchanging
shareholder is treated as transferring the stock of a foreign acquired
corporation to a foreign acquiring corporation in a transaction to
which section 351(a) applies (deemed section 351 exchange). Except to
the extent provided in paragraph (e)(2) of this section, a transfer of
stock of a foreign acquired corporation by an exchanging shareholder in
a deemed section 351 exchange shall not be subject to paragraph (b) of this section.
(2) Special rule. Notwithstanding paragraph (e)(1) of this section,
a transfer of stock of a foreign acquired corporation by an exchanging
shareholder to a foreign acquiring corporation in a deemed section 351
exchange shall be subject to paragraph (b) of this section to the
extent the distribution received by the exchanging shareholder in
redemption of the stock of the foreign acquiring corporation is applied
against and reduces, pursuant to section 301(c)(2), the basis of stock
of the foreign acquiring corporation held by the exchanging shareholder
other than the stock deemed issued by the foreign acquiring corporation in the deemed section 351 exchange.
(3) Allocation of income inclusion. If the income inclusion
resulting from the application of paragraph (e)(2) of this section is
less than the section 1248 amount attributable to the shares of stock
of the foreign acquired corporation transferred by the exchanging
shareholder in the deemed section 351 exchange, the amount of the
income inclusion attributable to each share of stock transferred in the
deemed section 351 exchange shall be determined by multiplying the
income inclusion by the percentage that the section 1248 amount
attributable to such share of stock bears to the aggregate section 1248
amount attributable to all of the shares of stock transferred in the deemed section 351 exchange.
(4) Example. The rules of this paragraph (e) are illustrated by the following example:
Example. (i) Facts. (A) FP, a foreign corporation, wholly owns
USP, a domestic corporation. USP wholly owns CFC1, and CFC1 wholly
owns CFC2. CFC2 wholly owns CFC3. CFC1, CFC2 and CFC3 are controlled
foreign corporations within the meaning of section 957(a). USP,
CFC1, CFC2 and CFC3 use a calendar taxable year. CFC1 owns 30% of
the outstanding stock of FS, a foreign corporation. FP owns the
remaining 70% of the outstanding stock of FS. The CFC2 stock has a
$40x basis and $100x fair market value. The FS stock held by CFC1
has a $60x basis and $100x fair market value. As of December 31,
year 1, CFC2 has $20x of section 1248 earnings and profits, CFC3 has
$40x of section 1248 earnings and profits, and FS has zero earnings
and profits. On December 31, year 1, in a transaction described in
section 304(a)(1), CFC1 sells the CFC2 stock to FS for $100x cash.
FS is not a controlled foreign corporation (within the meaning
section 957(a)) either before or after the sale of the CFC2 stock.
(B) Because CFC1 wholly owns CFC2 before the transaction and is
treated, under section 318, as indirectly owning 100% of the CFC2
stock after the transaction, under section 304(a)(1), CFC2 and FS
are treated as if CFC1 contributed the CFC2 stock to FS in a deemed
section 351 exchange in exchange solely for $100x of FS stock, and
then FS redeemed for $100x cash its stock deemed issued to CFC1.
Because CFC1 wholly owned CFC2 before the transaction and is
treated, under section 318, as indirectly owning 100% of CFC2 after
the transaction, section 302(a) does not apply to the redemption.
Instead, under section 302(d), the redemption is treated as a
distribution to which section 301 applies. Pursuant to section
304(b)(2), $20x of the distribution is treated as a dividend from
the earnings and profits of CFC2. With respect to the remaining
$80x, CFC1 takes the position that $40x is applied against and
reduces the basis of the FS stock deemed issued in the transaction,
and $40x is applied against and reduces the basis of the FS stock held by CFC1 prior to (and after) the transaction.
(ii) Analysis. Under paragraph (e)(2) of this section, the
transfer by CFC1 of the CFC2 stock to FS in the deemed section 351
exchange is subject to paragraph (b) of this section to the extent
the distribution received by CFC1 in redemption of the FS stock
issued in the deemed section 351 exchange is applied against and
reduces, under section 301(c)(2), the basis of the FS stock held by
CFC1 before (and after) the transaction. Thus, because $40x of the
distribution received by CFC1 from FS in redemption of the FS stock
issued in the deemed section 351 exchange is applied against and
reduces, under section 301(c)(2), the basis of the FS stock held by
CFC1 before (and after) the transaction, under paragraph (b) of this
section, CFC1 must include $40x in income as a deemed dividend. See
Sec. 1.367(b)2(e) for the treatment of the $40x income inclusion.
In total, CFC1 recognizes dividend income of $60x, $20x from the
application of section 304(a)(1) to the sale of the CFC2 stock to FS
and $40x under paragraph (b) of this section by reason of the application of paragraph (e)(2) of this section.
(f) Effective/applicability date. Paragraph (e) of this section applies to
[[Page 6828]]
transfers occurring on or after February 10, 2009. See Sec. 1.367(b)
4, as contained in 26 CFR part 1 revised as of April 1, 2008, for
transfers occurring on or after February 21, 2006, and before February 10, 2009.
(g) Expiration date. This section expires on or before February 10, 2012.
Par. 6. Section 1.12481 is amended by revising paragraphs (b) and (g) and adding paragraph (h) to read as follows:
Sec. 1.12481 Treatment of gain from certain sales or exchanges of stock in certain foreign corporations.
* * * * *
(b) [Reserved]. For further guidance, see Sec. 1.12481T(b). * * * * *
(g) Effective/applicability date. (1) The third sentence in
paragraph (a)(1), paragraph (a)(4), and paragraph (a)(5), Example 4, of
this section apply to income inclusions that occur on or after July 30,
2007. A taxpayer may elect to apply paragraph (a)(4) of this section to
income inclusions in open taxable years provided that it consistently
applies paragraph (a)(4) of this section for income inclusions in the
first year for which the election is applicable and in all subsequent years.
(2) [Reserved]. For further guidance, see Sec. 1.12481T(g)(2).
(h) [Reserved]. For further guidance, see Sec. 1.12481T(h). Par. 7. Section 1.12481T is added to read as follows:
Sec. 1.12481T Treatment of gain from certain sales or exchanges of stock in certain foreign corporations (temporary).
(a) [Reserved]. For further guidance, see Sec. 1.12481(a).
(b) Sale or exchange. For purposes of section 1248(a), the term
sale or exchange includes the receipt of a distribution which is
treated as in exchange for stock under section 302(a) (relating to
distributions in redemption of stock), section 331(a)(1) (relating to
distributions in complete liquidation of a corporation), or section
331(a)(2) (relating to distributions in partial liquidation of a
corporation). For purposes of section 1248(a), gain recognized by a
shareholder under section 301(c)(3) in connection with a distribution
of property by a corporation with respect to its stock shall be treated
as gain from the sale or exchange of stock of such corporation.
(c) through (f) [Reserved]. For further guidance, see Sec. 1.1248 1(c) through (f).
(g) Effective/applicability dates. (1) [Reserved]. For further guidance, see Sec. 1.12481(g)(1).
(2) Paragraph (b) of this section applies to distributions that occur on or after February 10, 2009.
(h) Expiration date. This section expires on or before February 10, 2012.
Linda M. Kroening,
Acting Deputy Commissioner for Services and Enforcement.
Approved: January 13, 2009.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E92835 Filed 21009; 8:45 am]
BILLING CODE 483001P
FOR FURTHER INFORMATION CONTACT
Sean W. Mullaney, (202) 622-3860 (not a tollfree number).