Final Regs on Exchanges Involving Foreign Corporations

 DEPARTMENT OF THE TREASURY

 ACTION: Final and temporary regulations.

 SUMMARY: This document provides final and temporary Income Tax Regulations concerning requirements relating to certain exchanges involving a foreign corporation pursuant to section 367(b) of the Internal Revenue Code, as enacted by the Tax Reform Act of 1976. These regulations provide guidance needed to comply with these requirements.

 DATES: The amendments to the authority citations for parts 1 and 7 and sections 1.367(b)-2 and 7.367(b)-2(d) and (f) are effective on January 1, 1978, and apply to exchanges beginning on or after that date. Sections 1.367(b)-7 through 1.367(b)-9, 7.367(b)-7(c)(1)(ii) and (iii), 7.367(b)-8(c)(2), and 7.367(b)-9(b)(4) are effective on March 3, 1989, and apply to transactions beginning on or after that date.

 FOR FURTHER INFORMATION CONTACT: Irwin Halpern of the Office of Associate Chief Counsel (International), within the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 Attention: CC:CORP:T:R (INTL-988-86) (202-566-3452, not a toll-free call).

SUPPLEMENTARY INFORMATION:

BACKGROUND

On March 6, 1989, the Internal Revenue Service published in the Federal Register proposed Income Tax Regulations [54 FR 9200] under section 367(b) of the Internal Revenue Code. Written comments were received from the public.

EXPLANATION OF PROVISIONS

 The comments received in response to the proposed regulations were favorable. As a result, no substantive changes have been made in the final regulations. However, two examples have been added illustrating the application of the regulations. Specifically, two examples have been added to section 1.367(b)-8(c)(2) (previously section 7.367(b)-8(c)(2)) illustrating the operation of that section in conjunction with section 1.367(b)-7(c)(1)(ii) (previously section 7.367(b)-7(c)(1)(ii)).

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 has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking for the regulations was submitted to the Administrator of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Irwin Halpern of the Office of Associate Chief Counsel (International), within the Office of Chief Counsel, Internal Revenue Service. Other personnel from the Internal Revenue Service and Treasury Department participated in developing these regulations.

LISTS OF SUBJECTS

26 CFR 1.361-1 THROUGH 1.367(e)-2T

 Income taxes, Reporting and recordkeeping requirements.

26 CFR PART 7

 Income taxes, Reporting and recordkeeping requirements.

Treasury Decision 8397

ADOPTION OF AMENDMENTS TO THE REGULATIONS

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

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Paragraph 1. The authority for part 1 is amended by adding the following citations:

Authority: Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805 * * * section 1.367(b)-2 also issued under 26 U.S.C. 367(b). * * * section 1.367(b)-7 also issued under 26 U.S.C. 367(b). * * * section 1.367(b)-8 also issued under 26 U.S.C. 367(b). * * * section 1.367(b)-9 also issued under 26 U.S.C. 367(b). * * *

Par. 2. Section 1.367(b)-2 is added to read as follows:

SECTION 1.367 (b)-2 DEFINITIONS.

(a) through (c) [Reserved].

(d) SECTION 1248 AMOUNT. In the case of an exchange of stock in a first-tier foreign corporation described in section 7.367(b)- (c)(1)(i) of this chapter or a distribution by a foreign corporation described in section 7.367(b)-10(i) of this chapter in which an inclusion in gross income determined by reference to the "section 1248 amount" is required by those provisions, the term "section 1248 amount" means the net positive earnings and profits which would have been attributable under section 1248 and the regulations under that section to the stock of the foreign corporation exchanged if the stock has been sold in a transaction to which section 1248(a) applied. For all other purposes of this section, in the case of an exchange of stock in a first-tier foreign corporation to which section 367(b) applies, the term "section 1248 amount" means the earnings and profits or deficit in earnings and profits which would have been attributable under section 1248 and the regulations under that section to the stock of the foreign corporation exchanged if the stock had been sold in a transaction to which section 1248(a) applied.

(e) [Reserved].

(f) ALL EARNINGS AND PROFITS AMOUNTS. For purposes of asset repatriations covered by sections 7.367(b)-5(b), 7.367(b)-6(c), 7.367(b)-7(c)(2) and 7.367(b)-10(j) of this chapter, the term "all earnings and profits amount" means the net positive earnings and profits, if any, for all taxable years which are attributable to the stock of the foreign corporation exchanged under the principles of section 1246 or 1248 (whichever is applicable) and the regulations under that section. For all other purposes, the term "all earnings and profits amount" means the earnings and profits or deficit in earnings and profits for all taxable years which are attributable to the stock of the foreign corporation exchanged under the principles of section 1246 or 1248 (whichever is applicable) and the regulations under that section. The determination shall be made by applying section 1246 or 1248 as modified by sections 7.367(b)-2 through 7.367(b)-12 of this chapter as if there were no distinction in those sections between earnings and profits accumulated before or after December 31, 1962.

Par. 3. Section 1.367(b)-7 is added to read as follows:

SECTION 1.367(b)-7 EXCHANGE OF STOCK DESCRIBED IN SECTION 354.

(a) [Reserved].

(b) [Reserved].

(c) RECEIPT OF OTHER STOCK.

(1) GENERAL RULE.

(i) [Reserved].

(ii) If an exchanging foreign corporation receives stock of a domestic corporation, or stock of a foreign corporation which is not a controlled foreign corporation, or stock of a controlled foreign corporation as to which any United States shareholder of the exchanging foreign corporation is not a United States shareholder, then there shall be added to the earnings and profits or deficit of the exchanging foreign corporation the section 1248(c)(2) amount and the additional earnings and profits amount of the exchanging foreign corporation, computed as if all stock of the corporation whose stock is exchanged is owned by a United States shareholder. The amount added shall not be considered a dividend. Paragraph (c)(1)(iii) of this section, and not this paragraph (c)(1)(ii), applies if the stock received --

(A) Is of a domestic corporation which is a member of an affiliated group (as defined in section 1504(a), without application of section 1504(b)(3)) that also includes the exchanging foreign corporation as a member; and

(B) Is not received in an exchange pursuant to which the foreign corporation whose stock is exchanged transfers its assets to a domestic corporation.

(iii) For exchanges beginning after March 3, 1989, if the stock received is described in the last sentence of paragraph (c)(1)(ii) of this section, then the foreign corporation whose stock is exchanged will be considered to be a foreign corporation for purposes of section 354 or 356. This paragraph (c)(1)(iii) may be illustrated by the following examples:

EXAMPLE 1. A U.S. parent corporation (USP) owns all of the stock of a foreign corporation (CFC1), which in turn owns all of the stock of a second foreign corporation (CFC2), which in turn owns all of the stock of a third foreign corporation (CFC3). USP also owns all of the stock of a U.S. subsidiary (Subsidiary). CFC2 and CFC3 have accumulated earnings and profits or accumulated deficits in earnings and profits. Subsidiary acquires all of the stock of CFC2 from CFC1 in exchange for stock of Subsidiary in a reorganization described in section 368(a)(1)(B). CFC1 will not recognize gain on the exchange. Moreover, CFC2's and CFC3's accumulated earnings and profits or accumulated deficits in earnings and profits will remain in CFC2 and CFC3, respectively, and will not be added to the earnings and profits or deficits in earnings and profits of CFC1.

EXAMPLE 2. USP owns all of the stock of CFC1, which in turn owns all of the stock of CFC2. USP also owns all of the stock of a U.S. subsidiary (Subsidiary), which in turn owns all of the stock of CFC3. CFC3 acquires the assets of CFC2 in exchange for voting stock of Subsidiary in a reorganization described in section 368(a)(1)(C). Pursuant to the reorganization, CFC2 distributes the stock of Subsidiary to CFC1. CFC1 will not recognize gain on the exchange. In addition, CFC2's accumulated earnings and profits or accumulated deficits in earnings and profits will be added to CFC3's earnings and profits under section 381(c)(2), subject to the limitations contained in section 381 and in the regulations under that section.

(2) [Reserved].

Par. 4. Section 1.367(b)-8 is added to read as follows:

SECTION 1.367(b)-8 TRANSFER OF ASSETS BY A FOREIGN CORPORATION IN AN EXCHANGE DESCRIBED IN SECTION 351.

(a) [Reserved].

(b) [Reserved].

(c) TRANSFER OF STOCK IN A CONTROLLED FOREIGN CORPORATION.

(1) [Reserved].

(2) If the transferor corporation transfers stock in a foreign corporation of which there is a United States shareholder immediately before the exchange, and the transferor receives stock of a domestic corporation, of a foreign corporation which is not a controlled foreign corporation, or of a controlled foreign corporation as to which any United States shareholder of the transferor is not a United States shareholder, paragraph (c)(1)(ii) of section 1.367(b)-7 shall apply. This paragraph (c)(2) may be illustrated by the following examples:

EXAMPLE 1. A U.S. parent corporation (USP) owns all of the stock of a foreign corporation (CFC1), which in turn owns all of the stock of a second foreign corporation (CFC2). CFC1 and CFC2 have accumulated earnings and profits or accumulated deficits in earnings and profits. CFC1 transfers its CFC2 stock to a newly organized foreign corporation (Newco) that is not a controlled foreign corporation, in an exchange described in section 351(a). CFC1 receives 20 percent of the Newco stock in exchange for its CFC2 stock. Persons unrelated to USP and CFC1 receive the remaining 80 percent of the Newco stock. Pursuant to the first sentence of section 1.367(b)-7(c)(1)(ii), CFC2's accumulated earnings and profits or accumulated deficits in earnings and profits will be added to CFC1's earnings and profits or deficits in earnings and profits.

EXAMPLE 2. USP owns all of the stock of CFC1, which in turn owns all of the stock of CFC2. USP also owns all of the stock of a U.S. subsidiary (Subsidiary). Subsidiary has both voting and nonvoting stock outstanding. In a transaction occurring after March 3, 1989, CFC1 transfers its CFC2 stock to Subsidiary in an exchange described in section 351(a). CFC1 receives 80 percent of each class of Subsidiary's stock in exchange for its CFC2 stock. Pursuant to the last sentence of section 1.367(b)-7(c)(1)(ii), CFC2's accumulated earnings and profits or accumulated deficits in earnings and profits will remain in CFC2, and will not be added to the earnings and profits or deficits in earnings and profits of CFC1.

Par. 5. Section 1.367(b)-9 is added to read as follows:

SECTION 1.367(b)-9 ATTRIBUTION OF EARNINGS AND PROFITS ON AN EXCHANGE DESCRIBED IN SECTION 351, 354, OR 356.

(a) [Reserved].

(b) GENERAL RULE.

(1) through (3) [Reserved].

(4) For exchanges beginning on or after March 3, 1989, paragraph (b)(2) and (3) of section 7.367(b)-9 of this chapter will not apply if a U.S. shareholder described in sections 7.367(b)-7(b) or 7.367(b)-8(c)(1) of this chapter owns (applying the attribution rules of section 958) more than 50 percent of either the total voting power or the total value of the stock of both the corporation whose stock is received in the exchange and the corporation whose stock is exchanged. If this paragraph (b)(4) applies, the rules of section 381 (a) and the regulations under that section will determine the extent to which the corporation whose stock is received in the exchange (or other acquiring corporation) will succeed to the earnings and profits or a deficit in earnings and profits of the corporation whose stock is exchanged and of lower-tier corporations. This paragraph (b)(4) may be illustrated by the following examples:

EXAMPLE 1. A U.S. parent owns all of the stock of CFC1 and CFC2. CFC1 has accumulated earnings and profits or an accumulated deficit in earnings and profits. CFC2 acquires all of the stock of CFC1 from the U.S. parent in a reorganization described in section 368(a)(1)(B). CFC2 will not succeed to the earnings and profits or the accumulated deficit in earnings and profits of CFC1.

EXAMPLE 2. A U.S. parent owns all of the stock of CFC1, which in turn owns all of the stock of CFC2. The U.S. parent also owns all of the stock of CFC3. CFC2 has accumulated earnings and profits or an accumulated deficit in earnings and profits. CFC3 acquires all of the assets of CFC1, including the stock of CFC2, in a reorganization described in section 368(a)(1)(D). CFC3 will not succeed to the earnings and profits or the accumulated deficit in earnings and profits of CFC2.

PART 7 -- TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX REFORM ACT OF 1976

Par. 6. The authority for part 7 is revised to read as follows:

Authority: 26 U.S.C. 7805, unless otherwise stated.

Section 7.367(b)-1 also issued under 26 U.S.C. 367(b).

Section 7.367(b)-2 also issued under 26 U.S.C. 367(b).

Section 7.367(b)-3 also issued under 26 U.S.C. 367(b).

Section 7.367(b)-4 also issued under 26 U.S.C. 367(b).

Section 7.367(b)-5 also issued under 26 U.S.C. 367(b).

Section 7.367(b)-6 also issued under 26 U.S.C. 367(b).

Section 7.367(b)-7 also issued under 26 U.S.C. 367(b).

Section 7.367(b)-8 also issued under 26 U.S.C. 367(b).

Section 7.367(b)-9 also issued under 26 U.S.C. 367(b).

Section 7.367(b)-10 also issued under 26 U.S.C. 367(b).

Section 7.367(b)-11 also issued under 26 U.S.C. 367(b).

Section 7.367(b)-12 also issued under 26 U.S.C. 367(b).

Section 7.367(b)-13 also issued under 26 U.S.C. 367(b).

Par. 7. Section 7.367(b)-2, paragraphs (d) and (f) are revised to read as follows:

SECTION 7.367(b)-2 DEFINITIONS.

* * *

(d) SECTION 1248 AMOUNT. See section 1.367(b)-2(d) of this chapter.

* * *

(f) ALL EARNINGS AND PROFITS AMOUNT. See section 1.367(b)-2(f) of this chapter.

* * *

Par. 8. Section 7.367(b)-7, paragraphs (c)(1)(ii) and (iii) are revised to read as follows:

SECTION 7.367(b)-7 EXCHANGE OF STOCK DESCRIBED IN SECTION 354.

* * *

(c) * * *

(1) * * *

(ii) See section 1.367(b)-7(c)(1)(ii) of this chapter.

(iii) See section 1.367(b)-7(c)(1)(iii) of this chapter.

* * *

Par. 9. Section 7.367(b)-8, paragraph (c)(2) is revised to read as follows:

SECTION 7.367(b)-8 TRANSFER OF ASSETS BY A FOREIGN CORPORATION IN AN EXCHANGE DESCRIBED IN SECTION 351.

* * *

(c) * * *

(2) See section 1.367(b)-8(c)(2) of this chapter.

Par. 10. Section 7.367(b)-9, paragraph (b)(4) is revised to read as follows:

SECTION 7.367(b)-9 ATTRIBUTION OF EARNINGS AND PROFITS ON AN EXCHANGE DESCRIBED IN SECTION 351, 354, OR 356.

* * *

(b) * * *

(4) See section 1.367(b)-9(b)(4) of this chapter.

* * * *