Corporate Distributions to Foreign Corporations--Temporary and Proposed Regulations Under Section 367(e)

 [4830-01]

 ACTION: Temporary regulation.

 SUMMARY: This document provides temporary Income Tax Regulations relating to the distribution of stock end securities under section 355 and section 367(e)(1) by a domestic corporation to a person who is not a United States person, and also relating to a liquidating distribution of property under section 332 and section 367(e)(2) by a domestic or foreign corporation to a foreign corporation. These regulations are necessary to implement section 367(e)(1) and (2) as added by the Tax Reform Act of 1986. These provisions affect the taxability of the corporation making the distribution as well as its shareholders receiving the distribution. This document also provides temporary regulations under section 367(a) and (b) relating to the closing of the taxable year and to the application of sections 354 and 361 in certain reorganizations under section 368(a)(1)(F). The text of the temporary regulations set forth in this document also serves as the text of the proposed regulations cross-referenced in the notice of proposed rulemaking in the Proposed Rules section of this issue of the Federal Register.

EFFECTIVE DATES: Except as set forth below, these regulations are effective with respect to distributions after July 31, 1986. The following provisions have the following special effective dates:

      Section 1.367(a)-1T(e)             April 1, 1987

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

This regulation is 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 this regulation has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget OMB) under control number 1545-1124. The estimated average burden associated with the collection of information in this regulation is 8 hours per respondent or recordkeeper.

 These estimates are an approximation of the average time expected to be necessary for a collection of information. They are based on such information as is available to the Internal Revenue Service. Individual respondents/recordkeepers may require greater time, depending upon their particular circumstances.

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

BACKGROUND

 This document contains temporary regulations (26 CFR Parts 1, 7 and 602) under section 367(a), section 367(b) and section 367(e)(1) and (2) of the Internal Revenue Code of 1986, as revised by sections 631(d)(1) and 1810(g) of the Tax Reform Act of 1986 (100 Stat. 2085, 2272, Pub. L. 99-514). Section 1006(e)(13) of the Technical and Miscellaneous Revenue Act of 1988 (102 Stat. 3342, Pub. L. 100-647) provided an amendment to the effective date for certain liquidations under section 367(e)(2) before June 10, 1987. The regulations are issued under the authority contained in section 367(a)(6), section 367(b)(1), section 367(e)(1) and (2) and section 7805(a).

NEED FOR TEMPORARY REGULATIONS

 The regulations under section 367(a)(6) and (b)(1) that close the taxable year of the transferor corporation in certain inbound and outbound reorganizations under section 368(a)(1)(F) will apply to certain reorganizations occurring after March 30, 1987. This guidance, which effectuates prior announcements, is necessary so that taxpayers will know when to file the appropriate tax returns. The regulations under section 367(b)(1) that close the taxable year of the transferor corporation in certain foreign to foreign reorganizations under section 368(a)(1)(F) will generally apply to certain reorganizations occurring in a taxable year beginning after February 15, 1990. Taxpayers may choose to apply this rule to such reorganizations occurring in taxable years beginning after December 31, 1986.

 The regulations under section 367(a)(6) and (b)(1) that clarify that there are exchanges under sections 354(a) and 361(a) in all inbound, outbound, and foreign to foreign reorganizations under section 368(a)(1)(F) will apply to reorganizations after December 31, 1984 (for temporary regulations under section 367(a)), and December 31, 1977 (for temporary regulations under section 367(b)). This guidance is being provided to apprise taxpayers of the transfers occurring in a reorganization and to prevent tax avoidance in these transactions.

 The regulations under section 367(e)(1) will apply to distributions occurring after February 15, 1990. The regulations under section 367(e)(2) will generally apply to distributions after July 31, 1986. The temporary regulations under section 367(e)(1) and (2) will clarify the law in these areas and provide taxpayers with needed immediate guidance. Many taxpayers have not been able to effectuate distributions or liquidations. Furthermore, there is some uncertainty as to the tax consequences and reporting obligations with respect to such transactions. These effective dates are also necessary to prevent avoidance of tax and to provide regulatory relief in certain instances.

 Accordingly, these regulations are not subject to the public notice requirements of 5 U.S.C. section 553(b) or to the effective date limitation of subsection (d) of that section.

EXPLANATION OF PROVISIONS

CLOSING OF THE TAXABLE YEAR AND THE APPLICATION OF SECTIONS 354 AND 361 IN CERTAIN REORGANIZATIONS UNDER SECTION 368(a)(1)(F)

  Rev. Rul. 87-27, 1987-1 C.B. 134, and Rev. Rul. 88-25, 1988-1 C.B. 116, indicate that a reorganization can qualify under section 368(a)(1)(F) where the transferor corporation or the acquiring corporation is a foreign corporation. In such a reorganization, the taxable year of the transferor corporation did not close under section 381(b). Notice 87-29, 1987-1 C.B. 474, and Notice 88-50, 1988-1 C.B. 535, state that the regulations under section 367 would be revised to require the closing of the taxable year in a reorganization under section 368(a)(1)(F) of a domestic corporation into a foreign corporation (or vice versa). These regulations provide for the closing of the taxable year in certain instances.

  Rev. Rul. 87-27 and Rev. Rul. 88-25 also reiterate that an exchange of stock for stock under section 354(a), and an exchange of assets for stock under section 361(a), occur in a reorganization under section 368(a)(1)(F) where the transferor or the acquiring corporation is a foreign corporation. This states existing law. Notice 87-29 and Notice 88-50 state that the regulations would be revised to clarify that there is an actual or constructive transfer of assets and an exchange of stock in all inbound, outbound, and foreign to foreign reorganizations under section 368(a)(1)(F). These regulations provide for such transfers and exchanges. Although the temporary regulations under section 367(a) relating to exchange under sections 354 and 361 in certain reorganizations under section 368(a)(1)(F) are effective for reorganizations occurring after December 31, 1989, the Internal Revenue Service considers that the same rule would apply with respect to former regulations issued under the Tax Reform Act of 1976.

DISTRIBUTIONS DESCRIBED IN SECTION 367(e)(1)

 The distributing corporation in a distribution described in section 355(a) normally does not recognize gain or loss on the distribution of the stock of a controlled corporation to the distributing corporation's shareholders. However, gain may be recognized by a distributing domestic corporation in a section 355 distribution to a person who is not a United States person if and to the extent regulations issued under section 367(e)(1) so provide. In addition, gain may be required to be recognized pursuant to regulations to be issued under section 337(d).

 Section 367(e)(1) specifically provides that, in the case of any distribution described in section 355 (or so much of section 356 as relates to section 355) by a domestic corporation to a person who is not a United States person, to the extent provided in regulations, gain shall be recognized under principles similar to the principles of section 367. Section 367(a) provides for the recognition of gain upon the transfer of property by a United States person to a foreign corporation in certain nonrecognition exchanges, unless an exception provided under section 367(a) or the regulations issued thereunder is applicable.

GENERAL RULE FOR DISTRIBUTIONS DESCRIBED IN SECTION 367(e)(1)

The regulations provide, in general, that a distributing domestic corporation shall recognize gain upon the distribution of stock or securities of a domestic or foreign corporation to its shareholders who are not United States persons. An anti-abuse rule is included to prevent the distributing domestic corporation from selectively distributing high-basis blocks of controlled corporation stock to shareholders who are not United States persons in order to reduce the gain recognized on the distribution. The anti-abuse rule provides that, for purposes of determining the gain to be recognized by the distributing domestic corporation on the distribution of stock or securities to shareholders who are not United States persons, the basis of the stock or securities distributed to shareholders who are not United States persons is considered to be the average basis of all of the particular class of stock or securities (as the case may be) owned by the distributing domestic corporation.

 There are three exceptions to the general rule of gain recognition. The first exception applies to distributions where the distributing domestic corporation and the domestic controlled corporation are United States real property holding corporations immediately after the distribution. The second exception applies to certain distributions of stock of a domestic controlled corporation where five or fewer individuals or corporations directly own all of the outstanding stock (exclusive of directors' qualifying shares) of the distributing domestic corporation immediately before the distribution. The third exception applies to certain distributions of stock of a domestic controlled corporation by a domestic distributing corporation that is publicly traded where the foreign distributee owns five percent or less of the class of stock with respect to which the distribution is being made. A rule for determining the distributee's basis in the stock received is also included.

 Distributions of the stock of a passive foreign investment company (as defined in section 1296(a)) will be subject to regulations to be issued under section 1291(f). Distributions of the stock of a passive foreign investment company before the effective date of those regulations are subject to the provisions of section 1.367(e)-1T, and any gain recognized is subject to the provisions of section 1291 et seq.

DISTRIBUTIONS DESCRIBED IN SECTION 367(e)(2)

 The distributing corporation in a complete liquidation described in section 332(a) normally does not recognize gain or loss under section 337(a) on the distribution of property to a corporation that meets the eighty percent stock ownership requirements of section 332(b). However, gain may be recognized pursuant to section 367(e)(2) by the distributing corporation in a section 332 distribution to which section 337 would otherwise apply if the parent corporation is a foreign corporation. Section 367(e)(2) specifically provides that, in the case of any liquidation to which section 332 applies, subsections (a) and (b)(1) of section 337 shall not apply where the eighty percent distributee is a foreign corporation. Thus, gain recognition is required by the distributing domestic or foreign corporation. However, section 367(e)(2) also provides that subsections (a) and (b)(1) of section 337 may apply to a distribution to a foreign corporation if and to the extent regulations so provide.

GENERAL RULE FOR DISTRIBUTIONS BY A DOMESTIC CORPORATION DESCRIBED IN SECTION 367(e)(2)

The regulations provide, in general, that a distributing domestic corporation in a section 332 liquidation shall recognize gain upon the distribution of property to a foreign parent corporation that owns at least eighty percent of the distributing domestic corporation. The regulations then specify the instances in which the distributing domestic corporation is not required to recognize gain on the distribution. These instances include the distribution of certain property which continues to be used in the conduct of a trade or business within the United States, the distribution of U.S. real property interests, and the distribution of property to certain foreign parent corporations covered by a transitional treaty rule. A rule for determining the distributee's basis in the property distributed is also included.

GENERAL RULE FOR DISTRIBUTION BY A FOREIGN CORPORATION DESCRIBED IN SECTION 367(e)(2)

 The regulations provide, in general, that a distributing foreign corporation in a section 332 liquidation shall not recognize gain (or loss) upon the distribution of property to a foreign parent corporation that owns at least eighty percent of the stock of the distributing foreign corporation. However, recognition of gain is required on the distribution of property formerly or then used in the conduct of a trade or business within the United States by the distributing foreign corporation if the distributee foreign parent corporation will not continue to use the property in the conduct of a trade or business within the United States. A cross-reference is made to the regulations under section 897 for the treatment of the distribution or exchange of U.S. real property interests. Rules for determining the distributee's basis in the property are also provided.

 Distributions of the stock of a passive foreign investment company (as defined in section 1296(a)) will be subject to regulations to be issued under section 1291(f). Distributions of the stock of a passive foreign investment company before the effective date of those regulations are subject to the provisions of section 1.367(e)-2T, and any gain recognized is subject to the provisions of section 1291 et seq.

 It is noted that this regulation does not impose a filing requirement under section 6038B for distributions under section 367(e).

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It is hereby certified that these rules will not have a significant impact on a substantial number of small entities. Few small entities would be affected by these regulations. A regulatory flexibility analysis, therefore, is not require under the Regulatory Flexibility Act (5 U.S.C. chapter 6).

DRAFTING INFORMATION

 The principal author of these regulations is Charles P. Besecky of the Office of Associate Chief Counsel (International), within the Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations on matters of substance and style.

LIST OF SUBJECTS IN 26 CFR sections 1.301-1 to 1.385-6

 Income taxes, Corporations, Corporate Distributions, Corporate Adjustments and Reorganizations.

LIST OF SUBJECTS IN 26 CFR Part 7

Income taxes, Tax Reform Act of 1976

LIST OF SUBJECTS IN 26 CFR Part 602

Reporting and recordkeeping requirements.

Treasury Decision 8280

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR Parts 1, 7 and 602 are amended as follows:

INCOME TAX REGULATIONS

Paragraph 1. The authority for Part 1 continues to read in part:

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

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

SECTION 1.367(a)-1T TRANSFERS TO FOREIGN CORPORATIONS SUBJECT TO SECTION 367(a): IN GENERAL (TEMPORARY).

* * * * *

(e) CLOSE OF TAXABLE YEAR IN CERTAIN SECTION 368(a)(1)(F) REORGANIZATIONS. If a domestic corporation is the transferor corporation in a reorganization described in section 368(a)(1)(F) after March 30, 1987, in which the acquiring corporation is a foreign corporation, then the taxable year of the transferor corporation shall end with the close of the date of the transfer and the taxable year of the acquiring corporation shall end with the close of the date on which the transferor's taxable year would have ended but but for the occurrence of the transfer. With regard to the consequences of the closing of the taxable year, see section 381 and the regulations thereunder.

(f) EXCHANGES UNDER SECTIONS 354(a) AND 361(a) IN CERTAIN SECTION 368(a)(1)(F) REORGANIZATIONS. In every reorganization under section 368(a)(1)(F), where the transferor corporation is a domestic corporation and the acquiring corporation is a foreign corporation, there is considered to exist --

(1) A transfer of assets by the transferor corporation to the acquiring corporation under section 361(a) in exchange for stock of the acquiring corporation and the assumption by the acquiring corporation of the transferor corporation's liabilities;

(2) A distribution of the stock (or stock and securities) of the acquiring corporation by the transferor corporation to the shareholders (or shareholders and security holders) of the transferor corporation; and

(3) An exchange by the transferor corporation's shareholders (or shareholders and security holders) of the stock of the transferor corporation for stock (or stock and securities) of the acquiring corporation under section 354(a).

For this purpose, it shall be immaterial that the applicable foreign or domestic law treats the acquiring corporation as a continuance of the transferor corporation.

Par. 3. The following new sections 1.367(e)-0T, 1.367(e)-1T, and 1.367(e)-2T are added immediately after section 1.367(d)-1T:

SECTION 1.367(e)-0T TREATMENT OF DISTRIBUTIONS OR LIQUIDATIONS UNDER SECTION 367(e); TABLE OF CONTENTS (TEMPORARY).

This section lists captioned paragraphs contained in sections 1.367(e)-1T through 1.367(e)-2T, temporary regulations under section 367(e) of the Internal Revenue Code.

 SECTION 1.367(e)-1T DISTRIBUTIONS DESCRIBED IN SECTION 367(e)(1) (TEMPORARY).

(a) PURPOSE AND SCOPE. This section provides rules concerning the recognition of gain by a domestic corporation (the "distributing corporation") on a distribution of stock or securities in a domestic or foreign corporation (the "controlled corporation") under section 355 to a person who is not a United States person. Paragraph (b) of this section states as a general rule that gain recognition is required on the distribution. Paragraph (c) of this section provides exceptions to the gain recognition rule of paragraph (b). Paragraph (d) of this section refers to other consequences of distributions described in this section. Paragraph (e) of this section provides examples of the rules of paragraphs (b), (c) and (d). Finally, paragraph (f) 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)(1).

(b) RECOGNITION OF GAIN REQUIRED -- (1) GENERAL RULE. If a domestic corporation makes a distribution of stock or securities of a domestic or foreign corporation to a person who is not a United States person as defined in section 1.367(a)-1T(d)(1) (the "foreign distributee") in a distribution that qualifies under section 355(a), 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). The gain recognized by the distributing domestic corporation shall be equal to the excess of the fair market value of the stock or securities distributed to the foreign distributee (as of the time of the distribution) over such corporation's adjusted basis in the stock or securities distributed to the foreign distributee. For purposes of the preceding sentence, the distributing domestic corporation's adjusted basis in each unit of each class of stock or securities distributed to a foreign distributee shall be equal to the corporation's total adjusted basis in all of the units of the respective class of stock or securities held immediately before the distribution, divided by the total number of units of such class of stock or securities held immediately before the distribution. If the distribution otherwise qualifies under section 355, each distributee of the distributing domestic corporation shall be considered to have received the distributed stock in such a distribution even though the distributing corporation recognizes gain on the distribution. Thus, the distributee does not receive a dividend upon the receipt of the stock of the controlled corporation.

(2) NONAPPLICATION OF SECTION 367 PRINCIPLES THAT PROVIDE FOR EXCEPTIONS TO GAIN RECOGNITION. The rule of paragraph (b)(1) of this section requires recognition of gain notwithstanding the application of any principles contained in section 367 or the regulations thereunder that provide for exceptions to gain recognition. The only exceptions to the rule of paragraph (b)(1) of this section are contained in paragraph (c) of this section.

(c) NONRECOGNITION OF GAIN -- (1) DISTRIBUTION OF CERTAIN U.S. REAL PROPERTY HOLDING CORPORATION STOCK. Gain shall not be recognized under paragraph (b)(1) of this section by a domestic corporation making a distribution of stock or securities of a domestic controlled corporation to a foreign distributee in a distribution that qualifies under section 355(a) if, immediately after the distribution, both the distributing and the controlled corporations are U.S. real property holding corporations (as defined in section 897(c)(2)). For the treatment of the distribution under section 897, see section 897(e) and section 1.897-6T(a)(1) and (4).

(2) DISTRIBUTION OF CERTAIN DOMESTIC STOCK -- (i) CONDITIONS FOR NONRECOGNITION. Gain shall not be recognized under paragraph (b)(1) of this section by a domestic corporation making a distribution of stock or securities of a domestic controlled corporation to a foreign distributee in a distribution that qualifies under section 355(a) if each of the following conditions is satisfied:

(A) Five or fewer persons, each of whom is either an individual or a corporation (or an entity treated as a corporation for U.S. tax purposes), directly own 100 percent of the outstanding stock (exclusive of directors' qualifying shares) of the distributing corporation immediately before the distribution.

(B) Immediately before the distribution, at least ninety percent (by value) of the aggregate outstanding stock of the distributing corporation has a holding period of at least two years in the hands of the persons described in paragraph (c)(2)(i)(A). Such holding period shall be determined under section 1223, except that for this purpose section 1223(2) shall only apply if such person acquired such stock in a transaction described in section 381.

(C) If the subject foreign distributee is a foreign corporation, the stock of the distributing corporation held by such foreign distributee immediately before the distribution has a fair market value that is less than 50 percent of the total fair market value of all of the outstanding stock of such foreign distributee immediately before the distribution. For purposes of the preceding sentence, the fair market value of the stock of the foreign distributee shall be determined without regard to any cash, cash items (such as bank deposits or receivables), or marketable securities held by the foreign distributee.

(D) Immediately before the distribution, all of the stock of the distributing corporation owned by the subject foreign distributee has a holding period of at least two years. Such holding period shall be determined under section 1223, except that for this purpose section 1223(2) shall only apply if such person acquired such stock in a transaction described in section 381.

(E) After the distribution, the subject foreign distributee is and continues to be a resident of (if such foreign distributee is an individual), or is incorporated in and continues to be incorporated in (if such foreign distributee is a corporation), a foreign country that maintains an income tax treaty with the United States that contains an information exchange provision.

(F) Immediately after the distribution, the stock of the distributing corporation has a fair market value that is at least equal to the fair market value of the distributed stock (or if stock and securities are distributed, the fair market value of the distributed stock and securities) of the controlled corporation immediately before the distribution.

(G) The separate corporate existence of the distributing corporation (or its domestic successor in a reorganization described in section 368(a)(1)(F)) is maintained for a period of five full taxable years (excluding short taxable years) beginning with the taxable year following the year of the distribution. A domestic successor shall be treated as the distributing corporation for purposes of this paragraph (c)(2) and shall, therefore, succeed to all of the responsibilities of the distributing corporation thereunder.

(H) No later than the last day of each of the five full taxable years of the distributing corporation (excluding short taxable years) after the taxable year of the distribution, the subject foreign distributee provides to the distributing corporation the certificate described in paragraph (c)(2)(ii)(F).

(I) The distributing and controlled corporations attach the statement described in paragraph (c)(2)(ii) of this section to their U.S. income tax returns for the taxable year that includes the distribution.

(ii) REQUIRED STATEMENT. The statement required by paragraph (c)(2)(i)(I) of this section shall be prepared by or on behalf of the distributing corporation and signed under penalties of perjury by an authorized officer of each of the distributing corporation and the controlled corporation, and by each foreign shareholder of the distributing corporation that receives a distribution with respect to which nonrecognition is claimed under paragraph (c)(2). The statement shall set forth the following items:

(A) A declaration that the distribution is one to which the provisions and rules of section 1.367(e)-1T(c)(2) apply.

(B) A description of each shareholder of the distributing corporation (without regard to whether such shareholder is a United States person) including such shareholder's name, address, taxpayer identification number (if any), and residence and citizenship (in the case of an individual) or place of incorporation (in the case of a corporation). Such description must identify the shareholders that are foreign distributees of controlled corporation stock with respect to which there is a claim of nonrecognition under paragraph (c)(2).

(C) A description of the stock in the distributing corporation directly owned immediately before the distribution by each shareholder described in paragraph (c)(2)(ii)(B), including the number or amount of shares, the type of stock, the percentage (by value) that such stock represented of the total stock of the distributing corporation outstanding immediately before the distribution, the date on which such stock was directly acquired by such shareholder, and such shareholder's holding period in respect of such stock (determined according to the provisions of paragraph (c)(2)(i)(B)).

(D) A description of the stock of the distributing and controlled corporations directly owned immediately after the distribution by each shareholder described in paragraph (c)(2)(ii)(B), including the number or amount of shares, the type of stock, and the percentage (by value) that such stock represents of the total stock of the distributing or controlled corporation immediately after the distribution. In the case of the distribution to a foreign distributee of controlled corporation stock with respect to which there is a claim of nonrecognition under paragraph (c)(2), the description must also include the fair market value of such stock at the time of its distribution, a summary of the method (including appraisals, if any) used for determining such value, and the distributing corporation's adjusted basis in such stock immediately prior to the distribution (computed according to the provisions of paragraph (b)(1) of this section).

(E) A declaration of the total fair market value of the stock of the distributing corporation immediately after the distribution, the total fair market value of the distributed stock (or, if stock and securities are distributed, the fair market value of the distributed stock and securities) of the controlled corporation immediately before the distribution, and a summary of the method (including appraisals, if any) used for determining such values.

(F) A declaration by the distributing corporation and each foreign distributee of controlled corporation stock with respect to which nonrecognition is claimed under paragraph (c)(2) that, no later than the last day of each of the five full taxable years of the distributing corporation after the taxable year of the distribution, such distributee will certify to the distributing corporation, in writing and under penalties of perjury, that as of the certification date (1) such shareholder directly owns all of the stock of the distributing and controlled corporations directly owned by such person immediately after the distribution and all of the stock of the distributing and controlled corporations acquired from either of the corporations since the distribution, and (2) such shareholder has directly owned all of such stock without interruption since the date of the distribution or acquisition.

(G) A declaration by the distributing corporation that it shall attach the annual certifications described in the preceding subdivision (F) to its U.S. income tax return for each year during the prescribed five full taxable year period.

(H) A declaration that the distributing corporation agrees to extend the statute of limitations on assessments and collections (under section 6501) with respect to the distribution of the stock and securities of the controlled corporation until 3 years after the filing of its return for the fifth full taxable year following the taxable year that includes the distribution.

(iii) EFFECT OF SUBMITTING STATEMENT. By claiming nonrecognition under this paragraph (c)(2), the distributing corporation agrees to be subject to the rules of this paragraph (c)(2)(iii).

(A) If (1) a foreign distributee with respect to whose stock there is a claim of nonrecognition under paragraph (c)(2) does not provide to the distributing corporation an annual certificate described in paragraph (c)(2)(ii)(F), or (2) the distributing corporation knows or has reason to know that such foreign distributee has ceased to own directly (other than by reason of an individual foreign distributee's death) all of the stock or securities in the distributing and controlled corporations described in the certificate prior to the end of the fifth full taxable year of the distributing corporation following the distribution, then the distributing corporation shall file an amended U.S. income tax return for the year of the distribution and recognize all of the gain realized on the distribution of stock and securities to such foreign distributee. Such amended return shall be filed no later than 60 days after the failure to file a certificate, or 60 days after the distributing corporation knows or has reason to know that the requisite direct ownership has ceased.

(B) If the separate corporate existence of the distributing corporation is not maintained as provided in paragraph (c)(2)(i)(G), then the distributing corporation shall file an amended U.S. income tax return for the year of the distribution and shall recognize the gain realized on the distribution of all of the controlled corporation stock or securities with respect to which there was a claim of nonrecognition under paragraph (c)(2) and with respect to which an amended return has not previously been filed under paragraph (c)(2)(iii)(A). Such amended return shall be filed no later than 60 days after adoption of a resolution or agreement providing for the liquidation or other termination or dissolution of the distributing corporation.

(C) If additional tax is required to be paid by the distributing corporation for the year of the distribution, then interest must be paid by the distributing corporation on that amount at the rates determined under section 6621 with respect to the period between the date that was prescribed for filing the distributing corporation's original U.S. income tax return for the year of the distribution and the date on which the additional tax for that period is paid.

(iv) PRIORITY OF FIRTPA NONRECOGNITION. If the distribution of the stock and securities of the controlled corporation also qualifies for nonrecognition under paragraph (c)(1), then the distributing corporation shall be entitled to nonrecognition under paragraph (c)(1) and not under this paragraph (c)(2).

(3) DISTRIBUTION OF STOCK BY A PUBLICLY TRADED CORPORATION -- (i) CONDITIONS FOR NONRECOGNITION. Gain shall not be recognized under paragraph (b)(1) of this section by a domestic corporation making a distribution of stock or securities of a domestic controlled corporation to a foreign distributee in a distribution that qualifies under section 355(a) if each of the following conditions is satisfied:

(A) Classes of stock of the distributing corporation that are regularly traded on an established securities market, as defined in section 1.897-1(m)(1) and (3), located in the United States represent at least 80 percent of the total value of all classes of outstanding stock of the distributing corporation. Stock is considered to be regularly traded if it is regularly quoted by brokers or dealers making a market in such interests. A broker or dealer is considered to make a market only if the broker or dealer holds himself out to buy or sell interests in the stock at the quoted price.

(B) Stock of the domestic controlled corporation with a value of more than 80 percent of the outstanding stock of such corporation is distributed with respect to one or more of the classes of the outstanding stock of the distributing corporation that are regularly traded on an established securities market.

(C) The distributing corporation does not know or have reason to know that the subject foreign distributee owns, directly or indirectly, more than five percent (by value) of the shares in the class of the distributing corporation stock with respect to which the stock of the domestic controlled corporation is distributed. For example, a corporation that has received a notice pursuant to the rules or regulations of the Securities and Exchange Commission that a foreign shareholder owns six percent of the class of its stock, with respect to which there is a distribution, knows that such foreign distributee owns more than five percent of such class of stock.

(ii) RELATION TO OTHER NONRECOGNITION PROVISIONS. If the distribution of the stock and securities of the controlled corporation also qualifies for nonrecognition under paragraph (c)(1), then the distributing corporation shall be entitled to nonrecognition under paragraph (c)(1) and not under this paragraph (c)(3).

(d) OTHER CONSEQUENCES -- (1) DISTRIBUTEE BASIS IN STOCK. Except where section 1.897-6T(a)(4) causes gain recognition by the distributee, the basis of the distributed domestic or foreign corporation stock in the hands of the distributee who is not a United States person 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.

(2) DIVIDEND TREATMENT UNDER SECTION 1248. With respect to the treatment as a dividend of a portion of the gain recognized by the domestic corporation on the distribution of the stock of certain foreign corporations, see section 1248(a) and the regulations thereunder.

(3) EXCHANGE UNDER SECTION 897(e)(1). With respect to the treatment under section 897(e)(1) of a foreign distributee on the receipt of stock or securities in a domestic or foreign corporation where the foreign distributee's interest in the distributing domestic corporation is a United States real property interest, see section 897(e)(1) and section 1.897-6T(a)(1) and (4).

(4) DISTRIBUTION OF STOCK OF A PASSIVE FOREIGN INVESTMENT COMPANY. [RESERVED]

(e) EXAMPLES. The rules of paragraphs (b), (c), and (d) of this section may be illustrated by the following examples.

EXAMPLE (1). (i) FC, a Country X corporation, owns all of the outstanding stock of DC1, a domestic corporation, that owns all of the outstanding stock of DC2, a domestic corporation. The fair market value of the DC1 stock is 300x, and FC has a basis in the DC1 stock of 100x. The fair market value of the DC2 stock is 180x, and DC1 has a basis in the DC2 stock of 40x. Neither DC1 nor DC2 is a U.S. real property holding corporation. Country X does not maintain an income tax treaty with the United States.

(ii) In a transaction qualifying as a distribution of stock of a controlled corporation under section 355(a), DC1 distributes all of the stock of DC2 to FC. After the distribution, the DC1 stock has a fair market value of 120x.

(iii) Under paragraph (b)(1) of this section, DC1 recognizes gain of 140x, which is the difference between the fair market value (180x) and the basis (40x) of the stock distributed. Under paragraph (d)(1) of this section and section 358, FC takes a basis of 40x in the DC1 stock, and a basis of 60x in the DC2 stock.

EXAMPLE (2). (i) C, a citizen and resident of Country F, owns all of the stock of DC, a U.S. real property holding corporation. The fair market value of the DC stock is 500x, and C has a basis in the DC stock of 100x.

(ii) In a transaction qualifying as a distribution of stock of a controlled corporation under section 355(a), DC distributes to C all of the stock of FC, a foreign corporation that is not a passive foreign investment company. FC is not a U.S. real property holding corporation and has not made an election under section 897(i) to be treated as a domestic corporation for purposes of section 897. The FC stock has a fair market value of 200x, and DC has a basis in the FC stock of 180x. After the distribution, the DC stock has a fair market value of 300x.

(iii) Under paragraph (b) of this section, DC recognizes gain of 20x which is the difference between the fair market value (200x) and the basis (180x) of the stock distributed. In regard to the treatment of DC under section 1248, see section 1248(a) and the regulations thereunder.

(iv) Under section 897(e) and section 1.897-6T(a) (4), C is considered to have exchanged DC stock with a fair market value of 200x and an adjusted basis of 40x for FC stock with a fair market value of 200x. Because FC is not a U.S. real property holding corporation, and its stock is not a U.S. real property interest, C must recognize gain of 160x under section 897(a) on the distribution. C takes a basis of 200x in the FC stock because there is a recognition exchange under the rules of section 1.897-6T(a)(4). C's basis in the DC stock is reduced to 60x pursuant to section 358.

EXAMPLE (3). (i) Assume the same facts as in Example (2), except that (instead of FC stock) stock of DC2, a domestic corporation, is distributed to C, and that DC and DC2 are U.S. real property holding corporations immediately after the distribution.

(ii) Under paragraph (c)(1) of this section, DC does not recognize gain on the distribution of the DC2 stock because DC and DC2 are U.S. real property holding corporations immediately after the distribution.

(iii) Under section 897(e) and section 1.897-6T(a)(4), C is considered to have exchanged DC stock with a fair market value of 200x and an adjusted basis of 40x for DC2 stock with a fair market value of 200x. Because DC2 is a U.S. real property holding corporation, and its stock is a U.S. real property interest, C does not recognize any gain under section 897(e) on the distribution. C takes a basis of 40x in the DC2 stock, and its basis in the DC stock is reduced to 60x pursuant to section 358.

EXAMPLE (4). (i) C a citizen and resident of Country F, has owned all of the stock of DC1, a domestic corporation, for six years. The fair market value of the DC1 stock is 800x, and C has a basis in the DC1 stock of 600x. Country F maintains an income tax treaty with the United States that includes an information exchange provision.

(ii) In a transaction qualifying as a distribution of stock of a controlled corporation under section 355(a), DC1 distributes to C all of the stock of DC2, a domestic corporation. The DC2 stock has a fair market value of 200x, and DC1 has a basis in the DC2 stock of 100x. After the distribution, the DC1 stock has a fair market value of 600x. C will continue to be a resident of Country F after the distribution. The separate corporate existence of DC1 will be maintained for a period of at least five full taxable years beginning with the taxable year following the year of the distribution, with C as the sole shareholder.

(iii) Under paragraph (c)(2) of this section, DC1 does not recognize gain on the distribution of the DC2 stock if DC1, DC2, and C comply with all of the provisions of paragraph (c)(2) of this section. C takes a basis of 150x in the DC2 stock, and C's basis in the DC1 stock is reduced to 450x pursuant to section 358.

EXAMPLE (5). (i) All of the outstanding common stock of DC, a domestic corporation, is regularly traded on an established securities market located in the United States. No other stock of DC is outstanding. None of the foreign shareholders of DC, directly or indirectly, owns more than five percent of the common stock of DC.

(ii) In a transaction qualifying as a distribution of stock of a controlled corporation under section 355(a), DC distributee's all of the stock of DC, a domestic corporation, to the common shareholders of DC. The stock of DS has appreciated in the hands of DC.

(iii) Under paragraph (c)(3) of this section, DC does not recognize gain on the distribution of the DS stock to any foreign distributee because the requirements of that paragraph have been met. The basis of the shareholders in the DC and DS stock is determined pursuant to section 358.

(f) EFFECTIVE DATE. This section shall be effective for distributions occurring after February 5, 1990 section 1.367(e)-2T Distributions described in section 367(e)(2) (Temporary).

(a) PURPOSE AND SCOPE -- (1) IN GENERAL. This section provides rules concerning the recognition of gain by a corporation on its distribution to a foreign corporation of property in a complete liquidation to which section 332 applies. Paragraph (b)(1) of this section states as a general rule that gain recognition is required 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 recognition rule of paragraph (b)(1). Paragraph (b)(3) of this section refers to other consequences of distributions described in paragraphs (b)(1) and (2). Paragraph (c)(1) of this section states as a general rule that gain recognition is not required when a foreign corporation makes a distribution of property in complete liquidation under section 332 to another foreign corporation that meets the stock ownership requirements of section 332(b) with respect to stock in the distributing foreign corporation. Paragraph (c)(2) of this section provides exceptions to the nonrecognition rule of paragraph (c)(1). Paragraph (c)(3) of this section refers to other consequences of distributions described in paragraphs (c)(1) and (2). Examples of the rules of this section are provided in paragraphs (b)(4) and (c)(4) of this section. Finally, paragraph (d) 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 corporation into a foreign corporation that meets the stock ownership requirements of section 332(b) and that is subject to section 367(e)(2) or is described in paragraph (b)(2)(ii) of this section.

(b) DISTRIBUTION BY A DOMESTIC CORPORATION -- (1) RECOGNITION OF GAIN REQUIRED -- (i) GENERAL RULE. If a domestic corporation makes a distribution of property in a 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, then, except as provided in paragraph (b)(2) of this section, section 337(a) and (b)(1) shall not apply and the distributing domestic corporation shall recognize gain on the distribution of the item of property under section 367(e)(2). The gain recognized by the domestic corporation shall be equal to the excess of the fair market value of each such item of property distributed over its adjusted basis. Except as provided in paragraphs (b)(2)(iii) and (d) of this section, the recognition of gain required under this paragraph is not prohibited by any treaty to which the United States is a party.

(ii) RECOGNITION OF LOSSES. If paragraph (b)(1) (i) of this section would apply to a distribution of an item of property but for the fact that the distributing domestic corporation realizes a loss on the distribution of such item of property, then the distributing domestic corporation shall recognize the loss realized on such distribution. However, such loss shall be recognized only to the extent that (A) the total amount of capital losses recognized on such distributions does not exceed the total amount of capital gains recognized by the distributing domestic corporation pursuant to paragraph (b)(1)(i), and (B) the total amount of ordinary losses recognized on such distributions does not exceed the total amount of ordinary income recognized by the distributing domestic corporation pursuant to paragraph (b)(1)(i). Notwithstanding any other provision of this paragraph, losses shall be recognized under this section only on property that the distributing domestic corporation did not acquire within the five year period ending on the date of the liquidation through a capital contribution, a liquidation under section 332, or an exchange under section 351(a) or 361(a). If, pursuant to the rules of this paragraph (b)(1)(ii), only a portion of the capital loss or ordinary loss on the property distributed is recognized because the aggregate capital loss exceeds the aggregate capital gain or the aggregate ordinary loss exceeds the aggregate ordinary gain of the distributing corporation, then the capital loss (and the ordinary loss) recognized shall be treated as being recognized on a pro rata basis with respect to each such capital or ordinary property distributed.

(iii) DISTRIBUTION OF PARTNERSHIP INTEREST -- (A) IN GENERAL. If a domestic corporation distributes an interest as a partner in a partnership (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 corporation shall be treated as having distributed a proportionate share of the property of the partnership. Accordingly, the applicability of the nonrecognition rules of paragraph (b)(1)(i) and (ii) and of any exception to recognition provided in this section shall be determined with reference to the property of the partnership rather than to the partnership interest itself. Where the property of the partnership 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 property of the lower-tier partnership. In the case of multiple tiers of partnerships, the applicability of an exception shall be determined with reference to the property of the lowest-tier partnership in the partnership chain. A domestic 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) BASIS ADJUSTMENTS. The foreign corporation's basis in the distributed partnership interest shall be equal to the distributing domestic 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 corporation on the distribution of the partnership interest. Solely for purposes of sections 743 and 754, the foreign corporation shall be treated as having purchased the partnership interest for an amount equal to the foreign corporation's adjusted basis therein.

(C) LIMITED PARTNERSHIP INTEREST. The distribution by a domestic corporation of a limited partnership interest that is regularly traded on an established securities market shall not be subject to the rules of this paragraph (b)(1)(iii). Instead, the distribution of such an interest shall be treated in the same manner as a distribution of stock. For purposes of this section, a limited partnership interest is an interest as a limited partner in a partnership that is organized under the laws of any state of the United States or the District of Columbia. Whether such an interest is regularly traded on an established securities market shall be determined under the provisions of section 1.367(a)-1T(c)(3)(ii)(D).

(2) RECOGNITION OF GAIN OR LOSS NOT REQUIRED -- (i) DISTRIBUTION OF PROPERTY USED IN A UNITED STATES TRADE OR BUSINESS -- (A) CONDITIONS FOR NONRECOGNITION. The domestic corporation shall not recognize gain or loss under paragraph (b)(1) f this section on its distribution of property (including inventory) used by the domestic corporation in the conduct of a trade or business within the United States if --

(1) The distributee foreign corporation is not a controlled foreign corporation, as defined in section 957(a) or section 953(c) (including a corporation that would be treated as a controlled foreign corporation under section 953(c) but for the provisions of section 953(c)(3)), at the time of the distribution of property;

(2) The distributee foreign corporation, 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 (or, in the case of inventory, continues to hold the property for sale to customers until disposed of); and

(3) The domestic and foreign corporations attach the statement described in paragraph (b) (2)(i)(B) to their U.S. income tax returns for the year of the distribution (or to an amended return filed no later than July 16, 1990.

This nonrecognition rule does not apply to the distribution of intangibles described in section 936(h)(3)(B). Property is considered used by a foreign corporation in the conduct of a trade or business in the United States only if any income from the use of the property and any income or gain from the sale or exchange of the property would be subject to taxation under section 882(a) as effectively connected income. For purposes of this paragraph (b)(2)(i)(A), 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 corporation and the distributee foreign corporation. If a distributing domestic corporation that would otherwise qualify for nonrecognition on the distribution of such property under this paragraph (b)(2)(i) fails to file the statement properly or files a statement that does not comply with the requirements of paragraph (b)(2)(i) (B) of this section, the Commissioner may, nevertheless, in his discretion treat the distributing domestic corporation as if it had, in fact, met all the requirements of paragraph (b)(2)(i)(B) if such treatment is necessary to prevent the taxpayer from otherwise deriving a tax benefit by such failure.

(B) REQUIRED STATEMENT. The statement required by paragraph (b)(2)(i)(A) shall be prepared by the distributing domestic corporation and signed under penalties of perjury by an authorized officer of each of the distributing domestic and distributee foreign corporations. The statement shall set forth the following items:

(1) A declaration that the distribution to the foreign corporation is one to which the rules of 1.367(e)-2T(b)(2)(i) apply.

(2) A description of all of the property distributed by the domestic corporation (whether or not the property qualifies for nonrecognition). Such description shall identify the property that continues to be used by the distributee foreign corporation in the conduct of a trade or business within the United States, including the location, adjusted basis, estimated fairmarket 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.

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

(4) With respect to property entitled to nonrecognition pursuant to paragraph (b)(2)(i), a declaration by the distributee foreign 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) An agreement by the distributing domestic corporation and the distributee foreign corporation to extend the statute of limitations on assessments and collections (under section 6501) with respect to 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 pursuant to paragraph (b)(2)(i)(C)(1), 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. If, however, the distributing domestic corporation files an amended return pursuant to the provisions of paragraph (b)(2)(i)(C), other than an amended return filed for the substitution of property exchanged under section 1031 or converted under section 1033, the agreement to extend the statute of limitations on assessments and collections as to the property with respect to which gain is included on the amended return will not extend beyond three years (except as otherwise provided by section 6501) after the filing of the amended tax return.

(C) EFFECT OF SUBMITTING STATEMENT. By the distributing domestic corporation's claiming nonrecognition under this paragraph (b)(2)(i), the distributing domestic corporation and the distributee foreign corporation agree to be subject to the rules of this paragraph (b)(2)(i)(C).

(1) If, within the ten year period from the date of distribution, any item of property entitled to nonrecognition under paragraph (b)(2)(i)(A) ceases to be used by the distributee foreign corporation 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 as provided in paragraph (b)(2)(i)(C)(3), the distributee foreign corporation shall cause to be filed on behalf of the domestic corporation an amended U.S. income tax return for the year of the distribution of such item of property, in which return the domestic corporation recognizes the gain (but not loss) realized but not recognized upon the initial distribution of such item of property. On the amended return filed pursuant to paragraph (b)(2)(i)(C)(1), the distributing domestic corporation may use any losses (or credits) existing in the year of the distribution, that were otherwise available in that year and not used in another year, to offset the gain (or tax thereon) required to be recognized under such paragraph.

(2) The amended return required by paragraph (b)(2)(i)(C)(1) shall be filed no later than the due date (including extensions) for the return of the distributee foreign corporation for the taxable year in which the property ceases to be used by the distributee foreign corporation in the conduct of a trade or business in the United States.

(3) If property ceases to be used by the distributee foreign corporation in the conduct of a trade or business in the United States by reason of a disposition of such property, and either (i) a loss is recognized in whole on such disposition, or (ii) a gain is recognized in whole and the distributee foreign corporation reports the full amount of such gain on its timely filed U.S. tax return for the year of the disposition, then the distributing domestic corporation shall not be required to recognize any gain in respect of the distribution of such property on an amended return for the year of the distribution. If a gain is recognized in whole on the disposition of the property and the distributee foreign corporation does not report the full amount of such gain on a timely filed U.S. tax return for the year of the disposition, then the distributing domestic corporation shall be required to recognize and include in income on an amended return for the year of the distribution the full amount of gain realized by such domestic corporation on the distribution of such property. If the domestic corporation is required to recognize gain in the year of the distribution, the foreign corporation shall, nonetheless, be required to recognize any gain realized on the disposition of the property according to generally applicable principles, but the basis of the property in the hands of the foreign corporation shall be adjusted to reflect the recognition of gain by the domestic corporation. Thus, if the property ceases to be used in the active conduct of a trade or business in the United States in a transaction in which gain is recognized, and the distributee foreign corporation includes in income the full amount of such gain on a timely filed return for the taxable year in which gain is recognized, then no amended return shall be required to be filed in respect of such property by the distributing domestic corporation.

(4) For purposes of this paragraph (b)(2)(i)(C), property shall not be considered as no longer used in the conduct of a trade or business in the United States if exchanged for, or involuntarily converted or business in the United States, to the extent such exchange or conversion qualifies for nonrecognition under section 1031 or 1033, or distributed to another foreign corporation in a liquidation distribution under section 337(a) qualifying for nonrecognition under paragraph (c)(2)(i) of this section. Further, a cessation of use of property in the conduct of a trade or business in the United States shall not include the abandonment or disposal of essentially worthless or obsolete property. If the distributee foreign corporation exchanges the property under section 1031 for, or converts the property under section 1033 into similar property used in the conduct of a trade or business in the United States, then the domestic corporation and the distributee foreign corporation must file amended returns for the year of the distribution of such property from the domestic corporation to the distributee foreign corporation, in order to substitute on the statement that was required by paragraph (b)(2)(i)(B) the property received in place of the property exchanged or converted. If the distributee foreign corporation distributes the property in a liquidation distribution under section 337(a) qualifying for nonrecognition under paragraph (c)(2)(i), then the rules of such paragraph shall apply to the distribution.

(5) If additional tax is required to be paid by the distributing corporation for the year of a liquidating distribution, then interest must be paid on that amount at the rates determined under section 6621 with respect to the period between the date that was prescribed for filing the distributing domestic corporation's U.S. income tax return for the year of the distribution and the date on which the additional tax for that year is paid.

(6) The distributee foreign corporation, as successor in interest and liability to the distributing domestic corporation, shall be jointly and severally liable for any tax owed by the distributing domestic corporation as a result of the application of paragraph (b)(2)(i), and shall succeed to the distributing domestic corporation's agreement to extend the statute of limitations and collections under section 6561.

(7) The distributee foreign corporation shall attach a statement to its U.S. income tax return for each year after the liquidation of the distributing domestic corporation. The statement shall identify the distributed property that ceased to be used by the distributee foreign corporation in the conduct of a trade or business within the United States during that year (without regard to whether the distributing domestic corporation was required to file an amended return as a result of such disposition pursuant to paragraph (b)(2)(i)(C)(3) of this section). The requirement to attach such statement to the return shall not apply to any taxable year of the distributee foreign corporation after the final taxable year in which any distributed property is used by such corporation in the conduct of a trade or business within the United States, and in no event shall the requirement apply to a taxable year later than 13 years from the filing of the original U.S. income tax return for the taxable year of the distribution.

(ii) DISTRIBUTION OF U.S. REAL PROPERTY INTERESTS. The domestic corporation shall not recognize gain 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 which is treated as a U.S. real property interest for five years under section 1.897-5T(c)(1)) in a complete liquidation under section 332(a) to the distributee foreign corporation that meets the stock ownership requirements of section 332(b) with respect to stock in the distributing domestic corporation. See section 1.897-5T(b)(3)(iv)(A). If property distributed by the domestic 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 distributing domestic corporation shall secure nonrecognition pursuant to this paragraph (b)(2)(ii) and not pursuant to the provisions of paragraph (b)(2)(i).

(iii) TRANSITIONAL RULE FOR CERTAIN TREATY PROVISIONS. A distributing domestic corporation shall not recognize gain or loss under paragraph (b)(1) of this section on the distribution of property in a complete liquidation under section 332(a) to a foreign corporation that meets the stock ownership requirements of section 332(b) with respect to stock in the domestic corporation if --

(A) Such property was distributed by the domestic corporation and received by the foreign corporation after July 31, 1986, and before September 29, 1987 in a distribution that would have been subject to section 367(e)(2) (as enacted by the Tax Reform Act of 1986) but for the provisions of Notice 87-5, 1987-1 C.B. 416, and

(B) The foreign corporation is a resident of a foreign country which had an income tax treaty with the United States in force at the time of the distribution which contained a provision barring discrimination based on capital ownership and the corporation is not denied the benefit of nondiscrimination under that treaty.

See Notice 87-66, 1987-2 C.B. 376.

(3) OTHER CONSEQUENCES -- (i) DISTRIBUTEE BASIS IN PROPERTY. The basis of property distributed pursuant to paragraph (b) of this section in the hands of the distributee foreign corporation shall be the basis of such property in the hands of the distributing domestic corporation, increased by the amount of gain (if any), or reduced by the amount of loss (if any), recognized by the domestic corporation on the distribution of each of the respective properties pursuant to paragraph (b)(1) of this section.

(ii) DIVIDEND TREATMENT UNDER SECTION 1248. With respect to the treatment as a dividend of a portion of the gain recognized by the domestic corporation on the distribution of the stock of certain domestic and foreign corporations, see section 1248(a) and (e) and the regulations thereunder. With respect to the treatment as a dividend of a portion of the gain realized but not otherwise recognized under paragraph (b)(1) of this section by the domestic corporation on the distribution of the stock of a foreign corporation (including a foreign corporation, the stock of which is a U.S. real property interest, because such corporation has in effect a valid election under section 897(i)), see section 1248(f) and the regulations thereunder.

(iii) EXCHANGE UNDER SECTION 897(e)(1). With respect to the treatment under section 897(e)(1) of a distributee foreign corporation whose interest in the distributing domestic corporation is a U.S. real property interest, see section 1.897-5T(b)(3)(iv)(A).

(iv) DISTRIBUTION OF STOCK OF A PASSIVE FOREIGN INVESTMENT COMPANY. [RESERVED]

(v) CARRYOVER OF TAX ATTRIBUTES. In regard to the carry-over of certain tax attributes from the domestic corporation to the distributee foreign corporation, see section 381 and the regulations thereunder.

(4) EXAMPLES. The rules of this paragraph (b) may be illustrated by the following examples.

EXAMPLE (1). (i) FC, a Country X corporation, owns all of the outstanding stock of DC, a domestic corporation. All of the property of DC has appreciated in value and is used in the conduct of a trade or business in Country X. None of the DC property is used in connection with the conduct of a trade or business within the United States. In a liquidation under section 332, DC distributes all of its property to FC.

(ii) Under paragraph (b)(1) of this section, DC recognizes gain on the distribution of its property to FC. FC takes a basis in each property equal to DC's basis in the property increased by the amount of any gain recognized by DC on the distribution of the property.

EXAMPLE (2). (i) FC, a Country X corporation that is not a controlled foreign corporation, owns all of the outstanding stock of DC, a domestic corporation. DC owns Parcel P (a U.S. real property interest), equipment used in the conduct of a trade or business in the United States, and all of the stock in DC1, a domestic corporation, and FS, a foreign corporation that is not a passive foreign investment company. All of the property has appreciated in value since acquired by DC. DC, DC1, and FS have never been U.S. real property holding corporations.

(ii) DC distributes all of its property to FC in complete liquidation under section 332 on March 1, 1988. Beginning immediately after the distribution of the equipment, FC uses the equipment in the conduct of a trade or business in the U.S.

(iii) Under paragraph (b)(2)(ii) of this section, DC does not recognize gain on the distribution of Parcel P. If DC and FC comply with the requirements of paragraph (b)(2)(i) of this section, DC will not recognize gain on the distribution of the equipment, because FC uses the equipment in the conduct of a U.S. trade or business immediately after the distribution. DC must recognize gain pursuant to paragraph (b)(1) of this section on the distribution of the stock of DC1 and FS because there is no exception from gain recognition for the liquidating distribution of stock that is not held by the distributing corporation for sale to customers in the ordinary course or as inventory unless the corporation the stock of which is being distributed is a U.S. real property holding corporation. In regard to the treatment of DC under section 1248, see, however, section 1248(a) and (e) and the regulations thereunder.

(iv) FC takes DC's basis under paragraph (b)(3)(i) of this section in Parcel P and the equipment because no gain is recognized by DC on the distribution of that property. Under paragraph (b)(3)(i) of this section, FC takes DC's basis in the stock of DC1 and FS, increased by the amount of the gain recognized by DC on the respective stocks.

(c) DISTRIBUTION BY A FOREIGN CORPORATION -- (1) RECOGNITION OF GAIN GENERALLY NOT REQUIRED. If a foreign corporation makes a distribution of property in complete liquidation under section 332 to another foreign corporation that meets the stock ownership requirements of section 332(b) with respect to stock in the distributing foreign corporation, then, except as provided in paragraph (c)(2) of this section, section 337(a) and (b)(1) shall apply and the distributing foreign corporation shall not recognize gain (or loss) on the distribution under section 367 (e)(2). If a distributing foreign corporation distributes an interest as a partner in a partnership (whether foreign or domestic), then such corporation shall be treated as having distributed a proportionate share of the property of the partnership in accordance with the principles of paragraph (b)(1)(iii) of this section.

(2) RECOGNITION OF GAIN REQUIRED -- (i) PROPERTY USED IN A UNITED STATES TRADE OR BUSINESS -- (A) IN GENERAL. A foreign corporation (including a corporation that has made an effective election under section 897(i)) that makes a distribution of property in complete liquidation under section 332 to another foreign corporation that meets the stock ownership requirements of section 332(b) with respect to the stock in the distributing foreign corporation shall recognize gain on the distribution of any property (other than U.S. real property interests) used by the distributing foreign corporation at the time of the liquidation in the conduct of a trade or business within the United States unless the distributee foreign corporation for a ten-year period continues to use such property in the conduct of a trade or business within the United States, and the distributing and distributee foreign corporations attach the statement described in paragraph (c)(2)(i)(B) to their U.S. income tax returns for their taxable years that include the distribution, However, this paragraph (c)(2)(i)(A) shall not apply if all of the following conditions exist.

(1) At the time of the distribution, the distributing and the distributee foreign corporations are controlled foreign corporations as defined in section 957(a) or (b) or section 953(c) (including a corporation that would be treated as a controlled foreign corporation under section 953(c) but for the provisions of section 953(c)(3));

(2) The distributee foreign corporation uses such property in the conduct of a trade or business within the United States immediately after the distribution;

(3) There was no prior liquidation subject to section 367(e)(2) of a corporation into the distributing corporation (or a predecessor corporation) under paragraph (b)(2)(i) or this paragraph (c)(2)(i) (other than a controlled foreign corporation into another controlled foreign corporation); and

(4) The distributee foreign corporation is not entitled to benefits under a comprehensive income tax treaty, but if the distributing foreign corporation (or predecessor corporation) was entitled to benefits under a comprehensive income tax treaty, then the distributee foreign corporation may (but need not) be entitled to benefits under a comprehensive income tax treaty.

(B) REQUIRED STATEMENT. The statement required by paragraph (c)(2)(i)(A) shall be prepared by or on behalf of the distributing foreign corporation and signed under penalties of perjury by an authorized officer of each of the distributing and distributee foreign corporations, and shall be identical to the statement described in paragraph (b)(2)(i)(B), except that "section 1.367(e)- 2T(c)(2)(i)" shall be substituted for references to "section 1.367(e)-2T(b)(2) (i)" and the term "distributing foreign corporation" shall be substituted for either the term "domestic corporation" or the term "distributing domestic corporation" each time it appears. References in the rules of paragraph (b)(2)(i)(B) to various rules in paragraph (b) shall be applied as if such references were to this paragraph (c). However, the distributee foreign corporation shall not be required to waive its income tax treaty benefits as required by section 1.367 (e)-2T(b)(2)(i)(B)(4) unless the distributing foreign corporation was required to waive its treaty benefits under paragraph (b)(2)(i)(B)(4) of this section in connection with the distribution of such property in a prior liquidation distribution subject to the provisions of this section; the distributee foreign corporation is entitled to benefits under a treaty to which the distributing foreign corporation was not entitled; or the distributee foreign corporation is incorporated in a country different from the country in which the distributing foreign corporation is incorporated.

(C) EFFECT OF SUBMITTING OR FAILING TO SUBMIT A STATEMENT. By the distributing foreign corporation's claiming nonrecognition under this paragraph (c)(2)(i), the distributing foreign corporation and the distributee foreign corporation agree to be subject to the rules of this paragraph (c)(2)(i) and the rules of paragraph (b)(2)(i)(C). In applying the rules of paragraph (b)(2)(i)(C), the term "distributing foreign corporation" shall be substituted for either the term "domestic corporation" or the term "distributing domestic corporation" each time it appears. References in the rules of paragraph (b)(2)(i)(C) to various rules in paragraph (b) shall be applied as if such references were to this paragraph (c). However, if a distributing foreign corporation that would otherwise qualify for nonrecognition on the distribution of such property under this paragraph (c)(2)(i) fails to file the statement properly or files a statement that does not comply with the requirements of this paragraph, the Commissioner may, nevertheless, in his discretion treat the distributing foreign corporation as if it had, in fact, met all the requirements of this paragraph if such treatment is necessary to prevent the taxpayer from otherwise deriving a tax benefit by such failure.

(ii) PROPERTY FORMERLY USED IN A UNITED STATES TRADE OR BUSINESS. A foreign corporation making a distribution of property in complete liquidation under section 332 to another foreign corporation that meets the stock ownership requirements of section 332(b) with respect to stock in the distributing foreign corporation shall recognize gain (but not loss) on the distribution of any property (other than U.S. real property interests) that ceased, in a taxable year beginning after December 31, 1986, and within ten years prior to the date of liquidation, to be used in connection with the conduct of a trade or business within the United States. 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 basis of distributed property in the hands of the distributee foreign corporation shall be the basis of the distributed property in the hands of the distributing foreign corporation, increased by the amount of gain (if any) recognized by the distributing foreign corporation on the distribution of the property. However, the basis of the distributed property in the hands of the distributee foreign corporation shall not exceed the fair market value of such property where the distributing foreign corporation recognizes gain on the distribution under this section and the distributee foreign corporation recognizes gain under section 897(e) or the regulations thereunder. See section 1.897-5T(b)(3)(iv)(B).

(ii) DISTRIBUTION UNDER SECTION 367(b). With respect to the treatment of certain distributee foreign corporations under section 367(b), see section 7.367(b)-5(c).

(iii) DISTRIBUTION OR EXCHANGE OF U.S. REAL PROPERTY INTERESTS. With respect to the treatment under section 897(d) of a distributing foreign corporation on the distribution of a U.S. real property interest, see section 1.897-5T(c)(2)(i) and (ii). With respect to the treatment under section 897(e) of the distributee foreign corporation where the distributing foreign corporation has made an election under section 897(i) and the stock of such corporation is treated as a U.S. real property interest, see section 1.897-5T(b)(3)(iv)(B).

(iv) DISTRIBUTION OF STOCK OF A PASSIVE FOREIGN INVESTMENT COMPANY. [RESERVED]

(v) CARRYOVER OF TAX ATTRIBUTES. In regard to the carryover of certain tax attributes from the distributing foreign corporation to the distributee foreign corporation, see section 381 and the regulations thereunder.

(4) EXAMPLES. The rules of this paragraph (c) may be illustrated by the follow examples.

EXAMPLE (1). (i) FX1, a Country Y corporation, owns all of the outstanding stock of FX2, a Country Y corporation that is not a passive foreign investment company. FX2 owns Parcel P (a U.S. real property interest), Asset # 1 that formerly was used by FX2 in its U.S. trade or business, and Asset # 2 currently used by FX2 in its U.S. trade or business. Asset # 1 ceased to be used in a U.S. trade or business on September 31, 1987. All of the property has appreciated in value since acquired by FX2.

(ii) In a liquidation under section 332, FX2 distributes all of its property to FX1 on December 31, 1989. FX1 uses Asset # 2 in the conduct of a trade or business in the United States immediately after the distribution.

(iii) Under paragraphs (c)(1) and (2) of this section, FX2 does not recognize gain under section 367(e)(2) on the distribution of Parcel P. Any gain realized on Parcel P may be subject to taxation under section 897(d) if certain procedural requirements contained in section 1.897-5T(d)(1)(iii) are not followed. FX2 must recognize gain on the distribution of Asset # 1 under paragraph (c)(2)(ii) of this section. Section 864(c)(7) shall govern the treatment of the gain recognized by FX2 on Asset # 1 as income effectively connected with a trade or business in the United States. Because FX2 used and FX1 uses Asset # 2 in the conduct of a trade or business in the United States, FX2 will not recognize gain under paragraph (c)(2)(i) of this section on the distribution of Asset # 2 if FX1 and FX2 comply with the requirements of that paragraph.

(iv) Under paragraph (c)(3)(i) of this section, FX1 takes FX2's basis in Parcel P and Asset # 2 if there is compliance with the requirements. Under paragraph (c)(3)(i) of this section, FX1 takes FX2's basis in Asset # 1 increased by the gain recognized.

EXAMPLE (2). (i) FY1, a Country F corporation, owns all of the outstanding stock of FY2, a Country F corporation that is not a passive foreign investment company. FY2 owns Parcel P (a U.S. real property interest held for investment) and machinery used in its U.S. trade or business. FY2 has made an effective election under section 897(i), and the FY2 stock is treated as a U.S. real property interest.

(ii) In a liquidation under section 332, FY2 distributes all of its property to FY1. FY1 will use the machinery in the conduct of a trade or business in the United States immediately after the distribution.

(iii) Under paragraphs (c)(1) and (2) of this section, FY2 does not recognize gain under section 367(e)(2) on the distribution of Parcel P. Any gain realized on Parcel P may be subject to taxation under section 897(d) if certain procedural requirements contained in section 1.897-5T(d)(1)(iii) are not followed. Because FY2 used and FY1 continues to use the machinery in the conduct of a trade or business in the United States, FY2 does not recognize gain on the distribution of the machinery under paragraph (c)(2)(i) of this section if FY1 and FY2 comply with the requirements of that paragraph.

(iv) Under paragraph (c)(3)(i) of this section, FY1 takes FY2's basis in Parcel P. Under paragraph (c)(3)(i) of this section, FY1 takes FY2's basis in the machinery. See section 1.897-5T(b)(3)(iv)(B) for the treatment of FY1 under section 897(e).

(d) EFFECTIVE DATE. This section shall be effective for distributions after July 31, 1986, pursuant to section 337(a) as in effect after the effective dates of the amendments of section 631 of the Tax Reform Act of 1986, except that it shall not apply in the case of any corporation completely liquidated before June 10, 1987, into a corporation organized in a country which then had an income tax treaty with the United States. See section 1006(e)(13) of the Technical and Miscellaneous Revenue Act of 1988 (102 Stat. 3342, Pub. L. 100-647).

Par. 4. Section 1.381(b)-1(a)(1) is revised to read as follows.

SECTION 1.381(b)-1 OPERATING RULES APPLICABLE TO CARRYOVERS IN CERTAIN CORPORATE ACQUISITIONS.

(a) CLOSING OF TAXABLE YEAR -- (1) IN GENERAL. Except in the case of certain reorganizations qualifying under section 368(a)(1)(F), the taxable year of the distributor or transferor corporation shall end with the close of the date of distribution or transfer. With regard to the closing of the taxable year of the transferor corporation in certain reorganizations under section 368(a)(1)(F) involving a foreign corporation after December 31, 1986, see sections 1.367(a)-1T(e) and 7.367(b)-1(e).

TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX REFORM ACT of 1976

Par. 5. The authority for Part 7 continues to read as follows: Authority: 26 U.S.C. 7805.

Par. 6. Section 7.367(b)-1 is amended by adding the following paragraphs as new paragraphs (e) and (f).

SECTION 7.367(b)-1 OTHER TRANSFERS.

* * * * *

(e) CLOSE OF TAXABLE YEAR IN CERTAIN SECTION 368(a)(1)(F) REORGANIZATIONS. If a foreign corporation is the transferor corporation in a reorganization described in section 368(a)(1)(F) after March 30, 1987, in which the acquiring corporation is a domestic corporation, then the taxable year of the transferor corporation shall end with the close of the date of the transfer and the taxable year of the acquiring corporation shall end with the close of the date on which the transferor's taxable year would have ended but for the occurrence of the transfer. If a foreign corporation, with effectively connected earnings and profits or non- previously taxed accumulated effectively connected earnings and profits (as defined in the regulations under section 884), is the transferor corporation in a reorganization described in section 368(a)(1)(F) in a taxable year beginning after February 15, 1990 (or in a taxable year beginning after December 31, 1986, and on or before February 15, 1990 to which the transferor corporation chooses to apply this rule), in which the acquiring corporation is a foreign corporation, then the taxable year of the transferor corporation shall end with the close of the date of the transfer and the taxable year of the acquiring corporation shall end with the close of the date on which the transferor's taxable year would have ended but for the occurrence of the transfer. With regard to the consequences of the closing of the taxable year, see section 381 and the regulations thereunder.

(f) EXCHANGES UNDER SECTIONS 354(a) AND 361(a) IN CERTAIN SECTION 368(a)(1)(F) REORGANIZATIONS. In every reorganization under section 368(a)(1)(F), where the transferor corporation is a foreign corporation, there is considered to exist --

(1) A transfer of assets by the transferor corporation to the acquiring corporation under section 361(a) in exchange for stock of the acquiring corporation and the assumption by the acquiring corporation of the transferor corporation's liabilities;

(2) A distribution of the stock (or stock and securities) of the acquiring corporation by the transferor corporation to the shareholders (or shareholders and security holders) of the transferor corporation; and

(3) An exchange by the transferor corporation's shareholders (or shareholders and security holders) of the stock (or stock and securities) of the transferor corporation for stock (or stock and securities) of the acquiring corporation under section 354(a).

For this purpose, it shall be immaterial that the applicable foreign or domestic law treats the acquiring corporation as a continuance of the transferor corporation.

OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 7. The authority citation for Part 602 continues to read as follows: Authority: 26 U.S.C. 7805.

Par. 8. Section 602.101(c) is amended by inserting in the appropriate place in the table "section 1.367(e)-1T . . . 1545-1124". "Section 1.367(e)-2T . . . 1545-1124".