Internal Revenue Bulletin 2008-41 (PDF rendition): IRS Notices

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Bulletin No. 200
8-41
October 14, 2008
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Ct. D. 2087, page 845.
Refund of taxes unlawfully assessed; administrative
claim.The Supreme Court holds that the plain language of
26 U.S.C. sections 7422(a) and 6511 requires a taxpayer
seeking a refund for a tax assessed in violation of the export
clause, just as for any other unlawfully assessed tax, to file a
timely administrative refund claim before bringing suit against
the government.United Statesv.Clintwood Elkhorn
Mining Co.et.al.
REG–209006–89, page 867.
Proposed regulations under sections 367(a)(5), 367(b), and
1248(f) of the Code concern certain cross-border asset reorga-
nizations and nonrecognition distributions of the stock of cer-
tain foreign corporations by domestic corporations. The regu-
lations incorporate Notices 2008–10 and 87–64.
Notice 2008–78, page 851.
Section 382.This notice provides guidance regarding capital
contributions under section 382(l)(1) of the Code and requests
comments on the subject.
Notice 2008–81, page 852.
This notice provides guidance relating to a temporary program
being provided by the Treasury Department to enable money
market funds to maintain stable $1.00 per share net asset val-
ues. The notice provides that the Treasury Department and the
Servicewillnotassertthattheprogramviolatestherestrictions
against federal guarantees of tax-exempt bonds with respect
to any tax-exempt bond assets held by tax-exempt money mar-
ket funds participating in the program, and will not impair the
ability of a money market fund participating in the program to
designate exempt interest dividends or of the shareholders of
such a fund to claim the benefits of tax exemption with respect
to such exempt interest dividends.
Notice 2008–82, page 853.
This notice provides guidance on section 114 of the Heroes
Earnings Assistance and Relief Act of 2008, which amended
section 125 of the Code to provide a special rule allowing dis-
tributions of unused amounts in a health Flexible Spending Ar-
rangement (FSA) to reservists called up to active duty.
Notice 2008–84, page 855.
Section 382.This notice provides guidance regarding section
382 of the Code in the case of certain acquisitions made by
the United States.
Rev. Proc. 2008–58, page 856.
This procedure provides federal income tax guidance to tax-
payers for certain settlement offers involving auction rate se-
curities.
EXEMPT ORGANIZATIONS
Announcement 2008–90, page 896.
The IRS has revoked its determination that Heavens Hand Foun-
dation of McCordsville, IN; Airport Working Group of Orange
County of Newport Beach, CA; and Portland Fathering Center
of Portland, OR, qualify as organizations described in sections
501(c)(3) and 170(c)(2) of the Code.
(Continued on the next page)
Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 896.
Finding Lists begin on page ii.

ADMINISTRATIVE
Rev. Proc. 2008–57, page 855.
This procedure publishes the amounts of unused housing
credit carryovers allocated to qualified states under section
42(h)(3)(D) of the Code for calendar year 2008.
Rev. Proc. 2008–59, page 857.
This procedure provides optional rules for deeming substan-
tiated the amount of certain business expenses of traveling
away from home reimbursed to an employee or deductible by
an employee or self-employed individual. Rev. Proc. 2007–63
superseded.
October 14, 20082008–41 I.R.B.

The IRS Mission
Provide Americ
a’s taxpayers top quality service by helping them
understand an
d meet their tax responsibilities and by applying
the tax law with
integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2008–41 I.R.B.October 14, 2008

October 14, 20082008–41 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 42.—L
ow-Income
Housing Credi
t
26 CFR 1.42–14
: Allocation rules for post-1989 state
housing credi
t ceiling amounts.
Guidance is pr
ovided to state housing credit agen-
cies of quali
fied states that request an allocation
of unused hou
sing credit carryover under section
42(h)(3)(D)
of the Internal Revenue Code. See Rev.
Proc. 2008-5
7, page 855.
Section 61.—Gross Income
Defined
A revenue procedure provides federal income tax
guidance to taxpayers for certain settlement offers
involving auction rate securities. See Rev. Proc.
2008-58, page 856.
Section 62.—Adjusted
Gross Incom
eDefined
A revenue pr
ocedure provides optional rules for
deeming su
bstantiated the amount of certain business
expenses o
f traveling away from home reimbursed to
an employe
e or deductible by an employee or self-
employed i
ndividual. See Rev. Proc. 2008-59, page
857.
Section 103.—Interest on
State and Local Bonds
A notice relates to a program being provided by the
United States Department of the Treasury in response
to the credit market instability to make available cer-
tain funds from its Exchange Stabilization Fund on
a temporary basis upon prescribed terms and condi-
tions to money market funds that are regulated under
the Security and Exchange Commission’s Rule 2a-7,
17 C.F.R. 270.2a-7, under the Investment Company
Act of 1940 (“Rule 2a-7”) to enable money market
funds to maintain stable $1.00 per share net asset val-
ues. The program is available to both money market
funds holding assets subject to Federal income tax-
ation and to money market funds holding assets that
include State and local governmental debt obligations
the interest on which is excludable from gross in-
come (“tax-exempt bonds”) under § 103 of the Inter-
nal Revenue Code, as amended. See Notice 2008-81,
page 852.
Section 149.—
Bonds
Must be Regist
ered to
be Tax Exempt: Other
Requirements
A notice relates to a program being provided by the
United States Department of the Treasury in response
to the credit market instability to make available cer-
tain funds from its Exchange Stabilization Fund on
a temporary basis upon prescribed terms and condi-
tions to money market funds that are regulated under
the Security and Exchange Commission’s Rule 2a-7,
17 C.F.R. 270.2a-7, under the Investment Company
Act of 1940 (“Rule 2a-7”) to enable money market
funds to maintain stable $1.00 per share net asset val-
ues. The program is available to both money market
funds holding assets subject to Federal income tax-
ation and to money market funds holding assets that
include State and local governmental debt obligations
the interest on which is excludable from gross in-
come (“tax-exempt bonds”) under § 103 of the Inter-
nal Revenue Code, as amended. See Notice 2008-81,
page 852.
Section 162.—Trade or
Business Expenses
A revenue procedure provides optional rules for
deeming substantiated the amount of certain business
expenses of traveling away from home reimbursed to
an employee or deductible by an employee or self-
employed individual. See Rev. Proc. 2008-59, page
857.
Section 267.—Losses,
Expenses, and Interest With
Respect to Transactions
Between Related Taxpayers
A revenue procedure provides optional rules for
deeming substantiated the amount of certain business
expenses of traveling away from home reimbursed to
an employee or deductible by an employee or self-
employed individual. See Rev. Proc. 2008-59, page
857.
Section 274.—Disallowance
of Certain Entertainment,
etc., Expenses
A revenue procedure provides optional rules fo
r
deeming substantiated the amount of certain bu
siness
expenses of traveling away from home reimburse
dto
an employee or deductible by an employee or self
-
employed individual. See Rev. Proc. 2008-59,
page
857.
Section 1001.
—Determi-
nation of Amou
nt of and
Recognition o
fGainorLoss
A revenue proc
edure provides federal income tax
guidance to ta
xpayers for certain settlement offers
involving au
ction rate securities. See Rev. Proc.
2008-58, pag
e 856.
Section 7422.—Civil
Actions for Refund
Ct. D. 2087
SUPREME COURT OF THE
UNITED STATES
No. 07–308
UNITED STATESv.CLINTWOOD
ELKHORN MINING CO. ET AL.
CERTIORARI TO THE
UNITED STATES COURT
OF APPEALS FOR
THE FEDERAL CIRCUIT
Argued March 24, 2008-Decided
April 15, 2008
Syllabus
The Internal Revenue Code requires
a taxpayer seeking a refund of taxes un-
lawfully assessed to file an administrative
claim with the Internal Revenue Service
(IRS) before filing suit against the Gov-
ernment, see 26 U. S. C. §7422(a). Such
claim must be filed within three years of
the filing of a tax return or two years of
the tax’s payment, whichever is later, see
§6511(a). In contrast, the Tucker Act al-
lows claims to be brought against the Gov-
ernment within six years of the challenged
conduct. Respondent coal companies paid
taxes on coal exports under a portion of
the Code later invalidated under the Ex-
port Clause of the Constitution. They filed
timely administrative claims and recov-
ered refunds of their 1997–1999 taxes, but
sought are fund of their 1994–1996 taxes
in the Court of Federal Claims without
complying with the Code’s refund pro-
cedures. Nevertheless, the court allowed
2008–41 I.R.B.845October 14, 2008

them to proceed directly under the Export
Clause and the Tucker Act. Affirming in
relevant part, the Federal Circuit ruled that
the companies could pursue their Export
Clause claim despite their failure to file
timely administrative refund claims.
Held:Theplainlanguageof26U.S.C.
§§7422(a) and 6511 requires a taxpayer
seeking a refund for a tax assessed in
violation of the Export Clause, just as for
any other unlawfully assessed tax, to file a
timely administrative refund claim before
bringing suit against the Government.
Pp. 4–12.
(a) Because the companies did not
file a refund claim with the IRS for
the 1994–1996 taxes, they may, under
§7422(a), bring “[n]o suit” in “any court”
to recover “any internal revenue tax” or
“any sum” alleged to have been wrong-
fully collected “in any manner.” Moreover,
§6511’s time limits for filing adminis-
trative refund claims-set forth in an “un-
usually emphatic form,”United Statesv.
Brockamp, 519 U. S. 347, 350—apply
to “anytax imposed by [Title 26],”
§6511(a) (emphasis added). Contrary to
the companies’ claim that these statutes
are ambiguous, the provisions clearly
state that taxpayers must comply with the
Code’s refund scheme before bringing
suit, including the filing of a timely
administrative claim.Indeed, this question
was all but decided inUnited Statesv.
A. S. Kreider Co., 313 U. S. 443, where
the Court held that the limitations period
in the Revenue Act then in effect, not the
Tucker Act’s longer period, applied to tax
refund actions. As was the case there,
the current Code’s refund scheme would
have “no meaning whatever,”id.,at 448,
if taxpayers failing to comply with it were
nonetheless allowed to bring suit subject
only to the Tucker Act’s longer time bar.
Pp. 4–6.
(b) The companies nonetheless assert
that their claims are exempt from the
Code provisions’ broad sweep because the
claims derive from the Export Clause. The
principles that a “constitutional claim can
become time-barred just as any other claim
can,”Blockv.North Dakota ex rel. Board
of Univ. and School Lands, 461 U. S. 273,
292, and that Congress has the authority to
require administrative exhaustion before
allowing a suit against the Government,
even for a constitutional violation, see,
e.g., Ruckelshausv.Monsanto Co.,467
U. S. 986, 1018, are fully applicable
to unconstitutional taxation claims.
The companies’ attempt to distinguish
Export Clause claimson the ground that
the Clause is not simply a limitation
on taxing authority but a prohibition
carving particulareconomic activity out
of Congress’s power is without substance
and totally manipulable. There is no basis
for treating taxes collected in violation
of that Clause differently from taxes
challenged on other grounds. Because the
companies acknowledge that their claims
are subject to the Tucker Act’s time bar,
the question is not whether their refund
claim can be limited, but rather which
limitation applies. Their argument that,
despite explicit and expansive statutory
language, the Code’s refund scheme
does not apply to their case as a matter
of statutory interpretation is unavailing.
They claim that Congress could not have
intended it to apply a “constitutionally
dubious” refund scheme to taxes assessed
in violation of the Export Clause, but the
statutory language emphatically covers
the facts of this case. In any event, there
is no constitutional problem. Congress’s
detailed scheme is designed “to advise
the appropriate officials of the demands
or claims intended to be asserted, so as
to insure an orderly administration of the
revenue,”United Statesv.Felt & Tarrant
Mfg. Co., 283 U. S. 269, 272, to provide
that refund claims are made promptly, and
to allow the IRS to avoid unnecessary
litigation by correcting conceded errors.
Even when a tax’s constitutionality is
challenged, taxing authorities have an
“exceedingly strong interest in financial
stability,”McKesson Corp.v.Division
of Alcoholic Beverages and Tobacco,
Fla. Dept. of Business Regulation,496
U. S. 18, 37, that they may pursue through
provisions of the sort at issue. There is no
reason why invoking the Export Clause
would deprive Congress of the power
to protect this interest. The companies’
claim that the Code procedures are
excessively burdensome is belied by their
own invocation of those procedures for
taxes paid within the Code’s limitations
period, which resulted in full refunds with
interest. Pp. 6–10.
(c) The companies’ fallback argu-
ment—that even if the refund scheme
applies to Export Clause cases generally, it
does not apply when taxes are unconstitu-
tional on their face—is rejected.Enochsv.
Williams Packing & Nav. Co.,370U.S.1,
distinguished. Pp. 10–12.
473 F. 3d 1373, reversed.
ROBERTS, C. J., delivered the opinion
for a unanimous Court.
SUPREME COURT OF THE
UNITED STATES
No. 07–308
UNITED STATES, PETITIONER
v.CLINTWOOD ELKHORN
MINING COMPANY ET AL.
ON WRIT OF CERTIORARI TO THE
UNITED STATES COURT
OF APPEALS FOR
THE FEDERAL CIRCUIT
April 15, 2008
CHIEF JUSTICE ROBERTS delivered
the opinion of the Court.
The Internal Revenue Code provides
that taxpayers seeking a refund of taxes un-
lawfully assessed must comply with tax re-
fund procedures set forth in the Code. Un-
der those procedures, a taxpayer must file
an administrative claim with the Internal
Revenue Service before filing suit against
the Government. Such a claim must be
filed within three years of the filing of a
return or two years of payment of the tax,
whichever is later. The Tucker Act, in con-
trast, is more forgiving, allowing claims to
be brought against the United States within
six years of the challenged conduct. The
question in this case is whether a taxpayer
suing for a refund of taxes collected in vi-
olation of the Export Clause of the Consti-
tution may proceed under the Tucker Act,
when his suit does not meet the time limits
for refund actions in the Internal Revenue
Code. The answer is no.
I
A taxpayer seeking a refund of taxes
erroneously or unlawfully assessed or
collected may bring an action against the
Government either in United States dis-
trict court or in the United States Court of
Federal Claims. 28 U. S. C. §1346(a)(1);
EC Term of Years Trustv.United States,
550 U. S.
,, and n. 2 (2007)
(slip op., at 2, and n. 2). The Internal
October 14, 20088462008–41 I.R.B.

Revenue Code specifies that before doing
so, the taxpayer must comply with the tax
refund scheme established in the Code.
United Statesv.Dalm, 494 U. S. 596,
609–610 (1990). That scheme provides
that a claim for a refund must be filed
with the Internal Revenue Service before
suit can be brought, and establishes strict
timeframes for filing such a claim.
In particular, 26 U. S. C. §7422(a)
specifies:
“No suit or proceeding shall be
maintained in any court for the recov-
ery of any internal revenue tax alleged
to have been erroneously or illegally
assessed or collected, or of any penalty
claimed to have been collected with-
out authority, or of any sum alleged to
have been excessive or in any manner
wrongfully collected, until a claim for
refund or credit has been duly filed with
the [IRS].”
TheCodefurtherestablishesatime
limit for filing such a refund claim with
the IRS: To receive a “refund of an over-
payment of any tax imposed by this title
in respect of which tax the taxpayer is re-
quired to file a return,” a refund claim must
be filed no later than “3 years from the time
the return was filed or 2 years from the
time the tax was paid, whichever of such
periods expires the later.” §6511(a). And
§6511(b)(1) mandates that “[n]o credit or
refund shall be allowed or made” if a claim
is not filed within the time limits set forth
in §6511(a). “Read together, the import of
these sections is clear: unless a claim for
refund of a tax has been filed within the
time limits imposed by §6511(a), a suit for
refund . . . may not be maintained in any
court.”Dalm,supra,at602.
In 1978, Congress levied a tax “on
coal from mines located in the United
States sold by the producer,” 26 U. S. C.
§4121(a)(1), and specifically applied this
tax to coal exports, see §4221(a) (1994
ed.) (excepting from the general ban on
taxing exports those taxes imposed un-
der,inter alia, §4121). In 1998, a group
of companies challenged the tax in the
District Court for the Eastern District of
Virginia, contending that it violated the
Export Clause of the Constitution. That
Clause provides that “No Tax or Duty
shallbelaidonArticlesexportedfromany
State.” Art. I, §9, cl. 5. The District Court
agreed and held the tax unconstitutional.
Ranger Fuel Corp.v.United States,
33 F. Supp. 2d 466, 469 (1998). The
Government did not appeal, and the IRS
acquiesced in the District Court’s holding.
See IRS Notice 2000–28, 2000–1 Cum.
Bull. 1116, 1116–1117 (IRS Notice).
The respondents here, three coal com-
panies, had all paid taxes on coal exports
under §4121(a) “[s]ince as early as 1978.”
App. to Pet. for Cert. 36a. After §4121(a)
was held unconstitutional as applied to
coal exports, the companies filed timely
administrative claims in accordance with
the refund scheme outlined above, seeking
a refund of coal taxes they had paid in
1997, 1998, and 1999. The IRS refunded
those taxes, with interest.
The companies also filed suit in the
Court of Federal Claims seeking a refund
of $1,065,936 in taxes paid between 1994
and 1996. They did not file any claim for
those taxes with the IRS; any such claim
would of course have been denied, given
the limits set forth in §6511. See IRS No-
tice, at 1117 (“Claims [for a refund of taxes
paid under §4121] must be filed within
the period prescribed by§6511”). Notwith-
standing the failure of the companies to
file timely administrative refund claims,
the Court of Federal Claims allowed the
companies to pursue their suit directly un-
der the Export Clause. Jurisdiction rested
on the Tucker Act, 28 U. S. C. §1491(a)(1),
and the companies limited their claim to
taxes paid within that statute’s 6-year limi-
tations period, §2501 (2000 ed. and Supp.
V).
In allowing the companies to proceed
outside the confines of the Internal Rev-
enue Code refund procedures, the court re-
lied on the decision of the Court of Appeals
for the Federal Circuit inCyprus Amax
Coal Co.v.United States, 205 F. 3d 1369
(2000).Andalex Resources, Inc.v.United
States, 54 Fed. Cl. 563, 564 (2002). The
Court of Federal Claims did not, however,
allow the companies to recover interest on
the taxes paid under 28 U. S. C. §2411.
That provision requires the Government to
pay interest “for any overpayment in re-
spect of any internal-revenue tax,” but the
court held that the statute applied only to
refund claims brought under the Code, not
to claims brought directly under the Export
Clause. 54 Fed. Cl., at 566.
The Court of Appeals affirmed in part
and reversed in part. It first refused to
revisit its holding inCyprus Amax,and
therefore upheld the ruling that the com-
panies could pursue their claim under the
Export Clause, despite having failed to file
timely administrative refund claims. 473
F. 3d 1373, 1374–1375 (CA Fed. 2007).
The Court of Appeals reversed the Court
of Federal Claims interest holding, how-
ever, finding that the Government was re-
quired to pay the companies interest on the
1994–1996 amounts under §2411.Id.,at
1376.
We granted certiorari, 552 U. S.
(2007), and now reverse.
II
A
The outcome here is clear given the
language of the pertinent statutory provi-
sions. Title 26 U. S. C. §7422(a) states
that “[n]o suit. . . shall be maintained
inany courtfor the recovery ofany inter-
nal revenue taxalleged to have been erro-
neously or illegally assessed or collected,
or ofany penaltyclaimed to have been
collected without authority, or ofany sum
alleged to have been excessive orin any
mannerwrongfully collected, until a claim
for refund . . . has been duly filed with”
the IRS. (Emphasis added.) Here the com-
panies did not file a refund claim with the
IRS for the 1994–1996 taxes, and therefore
may bring “[n]o suit” in “any court” to re-
cover “any internal revenue tax” or “any
sum” alleged to have been wrongfully col-
lected “in any manner.” Five “any’s” in one
sentence and it begins to seem that Con-
gress meant the statute to have expansive
reach.
Moreover, the time limits for filing ad-
ministrative refund claims in §6511—set
forth in an “unusually emphatic form,”
United Statesv.Brockamp, 519 U. S. 347,
350 (1997)-apply to “anytax imposed by
this title,” 26 U. S. C. §6511(a) (emphasis
added). The statute further provides that
“[n]o credit or refund shall be allowed or
made after the expiration of the period
of limitation prescribed in subsection (a)
. . . unless a claim for credit or refund
is filed by the taxpayer within such pe-
riod.Ӥ6511(b)(1). Again, this language
on its face plainly covers the companies’
claim for a “refund” of “tax[es] imposed
by” Title 26, specifically 26 U. S. C.
§4121. The companies argue that these
statutory provisions are ambiguous, Brief
for Respondents 43–45, but we cannot
2008–41 I.R.B.847October 14, 2008

imagine what language could more clearly
state that taxpayers seeking refunds of un-
lawfully assessed taxes must comply with
the Code’s refund scheme before bringing
suit, including the requirement to file a
timely administrative claim.
Indeed, we all but decided the ques-
tion presented over six decades ago in
United Statesv.A. S. Kreider Co.,313
U. S. 443 (1941). Section 1113(a) of the
Revenue Act of 1926, like the refund
claim provision in §7422(a) of the current
Code, prescribed that “[n]o suit or pro-
ceeding shall be maintained in any court
for the recovery of any internal-revenue
tax alleged to have been erroneously or
illegally assessed or collected, or of any
penalty claimed to have been collected
without authority, or of any sum alleged
to have been excessive or in any manner
wrongfully collected until a claim for re-
fund or credit has been duly filed with the
Commissioner of Internal Revenue,”and
established a time limit for bringing suit
once the claim-filing requirement had
been met. 44 Stat. 116. Like the compa-
nies here, A. S. Kreider had failed to file
a tax-refund action within that limitations
period. See 313 U. S., at 446. And, like the
companies here, A. S. Kreider argued that
it was instead subject only to the longer
6-year statute of limitations under the
Tucker Act.Id., at 447.
We rejected the claim, holding that the
Tucker Act limitations period “was in-
tended merely to place an outside limit on
the period within which all suits must be
initiated” under that Act, and that “Con-
gress left it open to provide less liberally
for particular actions which, because of
special considerations, required differ-
ent treatment.”Ibid.We held that the
limitations period in §1113(a) was “pre-
cisely that type of provision,” finding
that Congress createda shorter statute of
limitations for tax claims because “suits
against the United States for the recovery
of taxes impeded effective administration
of the revenue laws.”Ibid.If such suits
were allowed to be brought subject only to
the 6-year limitations period in the Tucker
Act, we explained, §1113(a) would have
“no meaning whatever.”Id.,at448. So
too here. The refund scheme in the current
Code would have “no meaning whatever”
if taxpayers failing to comply with it were
nonetheless allowed to bring suit subject
only to the Tucker Act’s longer time bar.
B
The companies gamely argue for a
different result here because the coal tax
at issue was assessed in violation of the
Export Clause of the Constitution. They
spend much of their brief arguing that the
Export Clause itself creates a cause of
action against the Government, which can
be brought directly under the Tucker Act.
See Brief for Respondents 8–25. We need
not decide this question here, because it
does not matter. If the companies’ claims
are subject to the Code provisions, those
claims are barred whatever the source of
the cause of action. We therefore turn to
the companies’ assertion that their claims
are somehow exempt from the broad
sweep of the Code provisions.
The companies do not argue for such
an exemption simply because their claims
are based on a constitutional violation.
As they acknowledge,id., at 34, a “con-
stitutional claim can become time-barred
just as any other claim can,”Blockv.
North Dakota ex rel. Board of Univ. and
School Lands, 461 U. S. 273, 292 (1983).
Further, Congress has the authority to
require administrative exhaustion before
allowing a suit against the Government,
even for a constitutional violation. See,
e.g., Ruckelshausv.Monsanto Co.,467
U. S. 986, 1018 (1984);Christianv.New
York State Dept. of Labor, 414 U. S. 614,
622 (1974);Aircraft & Diesel Equipment
Corp.v.Hirsch, 331 U. S. 752, 766–767
(1947).
These principles are fully applicable
to claims of unconstitutional taxation, a
point highlighted by what we have said in
other cases about the Anti-Injunction Act.
That statute commands that (absent certain
exceptions) “no suit for the purpose of
restraining the assessment or collection of
any tax shall be maintained in any court.”
26 U. S. C. §7421(a). The “decisions of
this Court make it unmistakably clear that
the constitutional nature of a taxpayer’s
claim...isofnoconsequence”to
whether the prohibition against tax injunc-
tions applies.Alexanderv.“Americans
United” Inc., 416 U. S. 752, 759 (1974).
This is so even though the Anti-Injunc-
tion Act’s prohibitions impose upon the
wronged taxpayer requirements at least as
onerous as those mandated by the refund
scheme—the taxpayer must succumb to
an unconstitutional tax, and seek recourse
only after it has been unlawfully exacted.
We see no reason why compliance with
straightforward administrative require-
ments and reasonable time limits to seek
a refund once a tax has been paid should
lead to a different result.
The companies assert that Export
Clause claims in particular must be treated
differently from constitutional claims in
general. This is so, they argue, because
the Clause is not simply a limitation on
the taxing authority but a prohibition that
“carves one particular economic activ-
ity completely out of Congress’s power.”
Brief for Respondents 11. That distinction
is without substance and totally manipula-
ble: If the pertinent authority is regarded
as the power to tax exports, the Clause is
indeed a complete prohibition on congres-
sional power. But if the pertinent authority
is instead viewed as the “Power To lay and
collect Taxes,” U. S. Const., Art. I, §8,
cl. 1, then the Clause is properly regarded
as a limitation on that power. We do not
question the importance of the Export
Clause to the success of the enterprise in
Philadelphia in 1787, see Brief for Re-
spondents 11–13, but we see no basis for
treating taxes collected in violation of its
terms differently from taxes challenged on
other grounds.
Indeed, the companies more or less
give up the game when they acknowledge
that their claims are subject to the Tucker
Act’s statute of limitations. Seeid., at
34. The question is thus not whether the
companies’ refund claim under the Export
Clause can be limited, but rather which
limitation applies. The companies are
therefore left to argue that, despite the
explicit and expansivestatutory language
described above, the refund scheme in
Title 26 does not apply to their case as a
matter of statutory interpretation. We find
this ambitious argument unavailing.
The companies seek to support it by
characterizing the refund scheme set out
in the Code as “pro-government and rev-
enue-protective,” and therefore “consti-
tutionally dubious” as applied to Export
Clause cases.Id., at 28–29. Given this
potential constitutional infirmity, the com-
panies argue, Congress could not have
intended the refund scheme to apply to
taxes assessed in violation of the Export
Clause. SeeAshwanderv.TVA,297U.S.
288, 341 (1936) (Brandeis, J., concurring).
We disagree. To begin with, any argument
October 14, 20088482008–41 I.R.B.

that Congress did not mean to require
those in the companies’ position to com-
ply with the tax refund scheme runs into
a powerful impediment, for “[t]he ‘strong
presumption’ that the plain language of the
statute expresses congressional intent is
rebutted only in ’rare and exceptional cir-
cumstances.’”Ardestaniv.INS,502U.S.
129, 135 (1991) (quotingRubinv.United
States, 449 U. S. 424, 430 (1981)). As we
have already explained, the language of
the relevant statutes emphatically covers
the facts of this case.
In any event, we see no constitutional
problem at all. Congress has indeed es-
tablished a detailed refund scheme that
subjects complainingtaxpayers to vari-
ous requirements before they can bring
suit. This scheme is designed “to advise
the appropriate officials of the demands
or claims intended to be asserted, so as
to insure an orderly administration of
the revenue,”United Statesv.Felt &
Tarrant Mfg. Co., 283 U. S. 269, 272
(1931), to provide that refund claims are
made promptly, and to allow the IRS to
avoid unnecessary litigation by correcting
conceded errors. Even when the consti-
tutionality of a tax is challenged, taxing
authorities do in fact have an “exceed-
inglystronginterestin financial stability,”
McKesson Corp.v.Division of Alcoholic
Beverages and Tobacco, Fla. Dept. of
Business Regulation, 496 U. S. 18, 37
(1990), an interest they may pursue
through provisions of the sort at issue here.
We do not see why invocation of the
Export Clause would deprive Congress
of the power to protect this “exceedingly
strong interest.” Congress may not impose
a tax in violation of the Export Clause (or
any other constitutional provision, for that
matter). But it is certainly within Con-
gress’s authority to assure that allegations
of taxes unlawfully assessed—whether the
asserted illegality is based upon the Export
Clause or any other provision of law—are
processed in an orderly and timely man-
ner, and that costly litigation is avoided
when possible. The companies’ claim
that the Code procedures are themselves
excessively burdensome is belied by the
companies’ own invocation of those pro-
cedures for taxes paid within the Code’s
limitations period, which resulted in full
refunds with interest.
C
As a fallback argument, the companies
maintain that even if the refund scheme
applies to Export Clause cases generally,
it does not “apply to taxes that are, on their
face, unconstitutional.” Brief for Respon-
dents 39. They rely for this proposition
onEnochsv.Williams Packing & Nav.
Co., 370 U. S. 1 (1962), a case dealing
with the Anti-Injunction Act, 26 U. S. C.
§7421(a). Despite that Act’s broad and
mandatory language, we explained that
“if it is clear that under no circumstances
could the Government ultimately prevail,
. . . the attempted collection may be
enjoined if equity jurisdiction otherwise
exists. In such a situation the exaction
is merely in ‘the guise of a tax.’” 370
U. S., at 7 (quotingMillerv.Standard
Nut Margarine Co. of Fla., 284 U. S. 498,
509 (1932)). See alsoBob Jones Univ.
v.Simon, 416 U. S. 725, 745–746 (1974)
(reaffirming the “under no circumstances”
rule ofWilliams Packing).
On the force ofWilliams Packing,the
companies argue that the refund scheme
should similarly be read as inapplica-
ble to situations in which there are “no
circumstances” under which the tax im-
posed could be held valid under the Export
Clause. The trouble with this is that
§7422, the primary statute governing the
refund process, is written much more
broadly than §7421(a), the statute at issue
inWilliams Packing. Section §7422(a)
statesthat“[n]osuit...shallbemain-
tained in any court for the recovery of
anyinternal revenue taxallegedtohave
been erroneously or illegally assessed or
collected . . . until a claim for refund or
credit has been duly filed with the” IRS.
(Emphasis added.) This language gener-
ally tracks that of the Anti-Injunction Act,
which also applies to suits “restraining
the assessment or collection of anytax.”
§7421(a) (emphasis added). But §7422(a)
goes on to apply its prohibition against suit
absent a proper refund claim to “any sum
alleged to have been excessive or in any
manner wrongfully collected.” (Emphasis
added.) Even if we agreed that a facially
unconstitutional tax for purposes of the
tax refund scheme is “merely in ‘the guise
of a tax,’”Williams Packing,supra,at7
(quotingStandard Nut Margarine,supra,
at 509), and therefore not a “tax alleged
to have been erroneously or illegally as-
sessed or collected,” §7422(a), it would
nevertheless clearly fall into the broader
category of “any sum . . . in any manner
wrongfully collected,”ibid.
Moreover, even if we were to accept the
companies’ argument that the “under no
circumstances” limitation on the Anti-In-
junction Act applies to the refund scheme,
they still would not prevail. We made clear
inWilliams Packingthat “the question of
whether the Government has a chance of
ultimately prevailing is to be determined
on the basis of the information available to
it at the time of suit. Only if it is then ap-
parent that, under the most liberal view of
the law and the facts, the United States can-
not establish its claim, may the suit for an
injunction be maintained.” 370 U. S., at 7.
A tax injunction suit, of course, is brought
at the time the Government attempts to as-
sess a tax on the taxpayer. Thus, if we ap-
plied theWilliams Packing“under no cir-
cumstances” rule to the refund scheme, we
would judge the Government’s chances of
success as of the time the tax was assessed.
In this case, the companies seek refunds
for taxes paid between 1994 and 1996. At
that time, the scope of the Export Clause
was sufficiently debatable that we granted
certiorari in 1996, seeUnited Statesv.
International Business Machines Corp.
,
517 U. S. 843, and again in 1998, see
United Statesv.United States Shoe Corp.,
523 U. S. 360, to clear it up. What is
more, the District Court that struck down
the application of §4121(a) to coal exports
partially relied on these cases in arriving
at its decision,Ranger Fuel Corp.,33
F. Supp. 2d, at 469, and the IRS cited,inter
alia,International Business Machines,
supra, in its acquiescence notice, see
IRS Notice, at 1116. Indeed, we would
think that if the unconstitutionality of the
coal export tax were so obvious that the
Government had no chance of prevailing,
someone paying the tax—such as these
companies—would have successfully
challenged it earlier than 20 years after its
enactment.
We therefore hold that the plain lan-
guage of 26 U. S. C. §§7422(a) and 6511
requires a taxpayer seeking a refund for
a tax assessed in violation of the Export
Clause, just as for any other unlawfully as-
sessed tax, to file a timely administrative
refund claim before bringing suit against
the Government. Because we find that
the Court of Appeals erred in allowing the
2008–41 I.R.B.849October 14, 2008

companies to bring suit seeking a refund
for the 1994–1996 taxes, we do not reach
the question whether the Court of Appeals
also erred in awarding the companies in-
terest on those amounts under 28 U. S. C.
§2411. The judgment of the Court of Ap-
peals is reversed.
It is so ordered.
October 14, 20088502008–41 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Capital Contributions Under
Section 382(l)(1)
Notice 2008–78
This notice provides guidance regard-
ing capital contributions under section
382(l)(1) of the Internal Revenue Code
and requests comments on the subject.
I. Purpose.
The Internal Revenue Service (Ser-
vice) and Treasury Department (Treasury)
intend to issue regulations under section
382(l)(1) as described below. Pending the
issuance of further guidance, taxpayers
mayrelyontherulessetforthinthisnotice
to the extent provided herein.
II. Background.
Section 382(a) of the Internal Revenue
Code (Code), as amended, provides that
the taxable income of a loss corporation
for a year following an ownership change
thatmaybeoffsetbypre-changelosses
cannot exceed the section 382 limitation
for such year. Similarly, section 383 limits
the use of certain credits and net capital
losses based on the principles applicable
under section 382.
The section 382 limitation for a
post-change year is generally equal to
the fair market value of the stock of the
loss corporation immediately before the
ownership change multiplied by the appli-
cable long-term tax-exempt rate. Section
382(l)(1)(A) provides that for purposes
of section 382 any capital contribution
received by a loss corporation as part of
a plan a principal purpose of which is to
avoid or increase anylimitation under sec-
tion 382 is not taken into account. Under
section 382(l)(1)(B), any capital contri-
bution made during the two-year period
ending on the change date (as defined in
section 382(j)) is, except as provided in
regulations, treated as part of a plan de-
scribed in section 382(l)(1)(A). Therefore,
the value of any such capital contribution
is excluded from the computation of the
section 382 limitation.
Section 382(m) provides that the Sec-
retary shall prescribe such regulations as
may be necessary or appropriate to carry
out the purposes of sections 382 and 383.
III. Guidance Under Section 382(l)(1)
Regarding Capital Contributions.
The Service and Treasury intend to is-
sue regulations regarding the application
of section 382(l)(1). These regulations are
expected to set forth the rules described in
this section of this notice.
DEFIN
ITIONS.
Except as otherwise provided, any def-
initions and terms used herein have the
samemeaningastheydoinsection382
and the regulations thereunder.
In addition, any reference herein to
terms and definitions in § 1.355–7 have
the same meaning as they do in § 1.355–7,
taking into account all other terms and
definitions in § 1.355–7, but substituting,
in each instance, “contribution” for “distri-
bution,” “loss corporation” for “Distribut-
ing and/or Controlled,” and “ownership
change” for “acquisition.” For example,
the phrase “agreement, understanding,
arrangement, or substantial negotiations”
as used herein has the same meaning as
it does in § 1.355–7, taking into account
other terms in § 1.355–7 (such as the
definition of “controlling shareholder” in
§ 1.355–7(h)(3)). In addition, for purposes
of substituting “ownership change” for
“acquisition,” any reference in § 1.355–7
to “the acquisition” shall be treated as a
reference to “any acquisition.”
A “related party” is a party related to
the loss corporation (within the meaning
of section 267(b), and determined immedi-
ately after a capital contribution) or one or
more persons that, pursuant to a formal or
informal understanding, would be treated
as becoming a related party under the prin-
ciples of § 1.355–7(h)(4) (i.e., a “coordi-
nating group”). The phrase “capital contri-
bution” includes a series of related capital
contributions.
RULES.
A. Section 382(l)(1)(B).
Notwithstanding section 382(l)(1)(B), a
capital contribution shall not be presumed
to be part of a plan a principal purpose of
which is to avoid or increase a section 382
limitation solely as a result of having been
made during the two-year period ending on
thechangedate.
B. Section 382(l)(1)(A).
(1)In general.A capital contribution
received by an old loss corporation shall
be taken into account (and will not reduce
the value of the old loss corporation for
purposes of section 382(e)(1)) unless the
contribution is part of a plan a principal
purpose of which is to avoid or increase a
section 382 limitation (hereinafter, a plan).
Whether a capital contribution is part of a
plan is determined based on all the facts
and circumstances, unless the contribution
is described in one of the safe harbors in
Section III.B.2 below or section 382(l)(1)
does not apply to the contribution pursuant
to § 1.382–9(k). The fact that a contribu-
tion is not described in a safe harbor does
not constitute evidence that the contribu-
tion is part of a plan.
(2)Safe harbors.A capital contribution
will not be considered part of a plan if —
(a)The contribution is made by a
person who is neither a controlling share-
holder (determined immediately before
the contribution) nor a related party, no
more than 20% of the total value of the
loss corporation’s outstanding stock is is-
sued in connection with the contribution,
there was no agreement, understanding,
arrangement, or substantial negotiations
at the time of the contribution regarding
a transaction that would result in an own-
ership change, and the ownership change
occurs more than six months after the con-
tribution.
(b)The contribution is made by a re-
lated party but no more than 10% of the
total value of the loss corporation’s stock
is issued in connection with the contribu-
tion, or the contribution is made by a per-
son other than a related party, and in ei-
ther case there was no agreement, under-
standing, arrangement, or substantial ne-
gotiations at the time of the contribution
regarding a transaction that would result in
an ownership change, and the ownership
change occurs more than one year after the
contribution.
(c)The contribution is made in ex-
change for stock issued in connection
with the performance of services, or stock
acquired by a retirement plan, under the
2008–41 I.R.B.851October 14, 2008

terms and conditions of § 1.355–7(d)(8)
or (9), respectively.
(d)The contribution is received on the
formation of a loss corporation (not ac-
companied by the incorporation of assets
with a net unrealized built in loss) or it is
received before the first year from which
there is a carryforward of a net operating
loss, capital loss, excess credit, or excess
foreign taxes (or in which a net unrealized
built-in loss arose).
C. Coordination of Sections 382(l)(1)
and 382(l)(4).
If the value of the old loss corporation
is subject to reduction under both sections
382(l)(1) and 382(l)(4), appropriate adjust-
ments must be made to ensure that a reduc-
tion in value is not duplicated.
IV. Reliance on Notice.
The Service and Treasury intend to is-
sue regulations under section 382(l)(1) that
set forth the rules described in Section III
of this notice. Taxpayers may rely on the
rules described in Section III for purposes
of determining whether a capital contribu-
tion is part of a plan with respect to an
ownership change that occurs in any tax-
able year ending on or after September 26,
2008, and these rules will continue to apply
unless and until there is additional guid-
ance.
V. Request for Comments.
The Service and Treasury request com-
ments regarding (i) the appropriate scope
and application of section 382(l)(1) gener-
ally, (ii) the appropriate factors that may
tend to show that a capital contribution is
or is not made as part of a plan, includ-
ing standards for contributions made by re-
lated parties, (iii) the desirability of apply-
ing similar standards in § 1.355–7 as safe
harbors for purposes of section 382(l)(1),
and whether additional safe harbors are
needed, and (iv) the appropriate treatment
under section 382(l)(1) of options and con-
version rights in general, and whether co-
ordinating rules should be issued under
§ 1.382–4(d).
VI. Instructions.
Comments should be submitted on or
before December 22, 2008, and should
include a reference to Notice 2008–78.
Send submissions to CC:PA:LPD:PR
(Notice 2008–78), Room 5203, Internal
Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, D.C.
20044. Submissions may be hand-de-
livered Monday through Friday between
the hours of 8:00 a.m. and 4:00 p.m.
toCC:PA:LPD:PR(Notice
2008–78), Courier’s Desk, Internal
Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC
20224,or sent electronically
via the following email address:
Notice.Comments@irscounsel.treas.gov.
Please include the notice number 2008–78
in the subject line of any electronic
communication. All materials submitted
will be available for public inspection and
copying.
The principal author of this notice is
Michael J. Wilder of the Office of Asso-
ciate Chief Counsel (Corporate). For fur-
ther information regarding this notice, con-
tact Michael J. Wilder at (202) 622–7700
(not a toll-free call).
Tax-Exempt Money Market
Funds-Temporary Treasury
Program to Support Money
Market Funds-No Violation of
Restrictions Against Federal
Guarantees of Tax-Exempt
Bonds Under Section 149(b)
Notice 2008–81
SECTION 1. Purpose
This notice relates to a program being
provided by the United States Department
of the Treasury (the “Treasury Depart-
ment”) in response to the credit market
instability to make available certain funds
from its Exchange Stabilization Fund on
a temporary basis upon prescribed terms
and conditions (as described further be-
low, the “Program”), to money market
funds that are regulated under the Security
and Exchange Commission’s Rule 2a–7,
17 C.F.R. 270.2a–7, under the Investment
Company Act of 1940 (“Rule 2a–7”) to
enable money market funds to maintain
stable $1.00 per share net asset values. The
Program is available to both money mar-
ket funds holding assets subject to Federal
income taxation and to money market
funds holding assets that include State
and local governmental debt obligations
the interest on whichis excludable from
gross income (“tax-exempt bonds”) under
§ 103 of the Internal Revenue Code, as
amended (the “Code”). (Except as noted,
section references herein are to the Code.)
Money market funds that hold a sufficient
portion of their total assets in tax-exempt
bonds to be eligible to pay exempt interest
dividends under § 852(b)(5) are referred
to herein as “tax-exempt money market
funds.” This notice provides guidance to
the effect that the Program will not result
in any violation of the restrictions against
federal guarantees of tax-exempt bonds
with respect to the tax-exempt bond assets
of tax-exempt money market funds which
would impair the tax-exempt status of
dividends received by their shareholders.
SECTION 2. Background
2.1.The Program. In general, under the
Program, the Treasury Department plans
to make available its Exchange Stabiliza-
tion Fund on a temporary basis to assist
participating money market funds in main-
taining $1.00 per share net asset values
and in paying their shareholders $1.00 per
share upon liquidation of shares. The Pro-
gram will be limited to assets in money
market funds as of the close of business
on September 19, 2008, and to investors
of record as of that date. Participating
money market funds are required to make
premium payments to participate in the
Program. Payments to a money market
fund under the Program are tied to the per
share net asset value of the money market
fund itself. Payments to a money market
fund under the Program are not tied to the
terms or performance of any particular as-
sets held by the money market fund, such
as tax-exempt bond assets held by a tax-ex-
empt money market fund. The general de-
scription of certain aspects of the Program
herein is subject fully to the specific terms,
conditions, maximum size limitations, and
other limitations to be set forth in the op-
erative legal documents for the Program.
2.2.The Restrictions Against Federal
Guarantees of Tax-exempt Bonds. Sec-
tion 149(b) provides generally that, sub-
ject to certain specific exceptions, the in-
terest on State or local governmental bonds
is not excludable from gross income under
October 14, 20088522008–41 I.R.B.

§ 103(a) if the bonds are federally guar-
anteed. Section 149(b)(2) provides gen-
erally that a bond is federally guaranteed
if: (A) the payment of principal or inter-
est with respect to such bond is guaran-
teed (in whole or in part) by the United
States (or any agency or instrumentality
thereof)); (B) such bond is issued as part
of an issue and five (5) percent or more
of the proceeds of such issue is to be (i)
used in making loans the payment of prin-
cipal or interest with respect to which are
to be guaranteed (in whole or in part) by
the United States (or any agency or instru-
mentality thereof), or (ii) invested (directly
or indirectly) in federally insured deposits
or accounts; or (C) the payment of princi-
pal or interest on such bond is otherwise
indirectly guaranteed (in whole or in part)
by the United States (or any agency or in-
strumentality thereof).
SECTION 3. Scope and Application
3.1No Violation of Restrictions Against
Federal Guarantees of Tax-exempt Bonds.
The Treasury Department and the Internal
Revenue Service (“IRS”) will not assert
that the Program causes any violation of
the restrictions against Federal guarantees
of tax-exempt bonds under § 149(b) with
respect to any tax-exempt bond assets held
by tax-exempt money market funds partic-
ipating in the Program. In addition, the
Treasury Department and the IRS will not
assert that the Program impairs the abil-
ityeitherofamoneymarketfundpartici-
pating in the Program to designate exempt
interest dividends under § 852(b)(5) or of
the shareholders of such a fund to claim
the benefits of tax exemption with respect
to such exempt interest dividends under
§ 852(b)(5)(B).
3.2No Inferences on Law. This no-
tice provides administrative relief in fur-
therance of public policy to promote stabil-
ityinthemarketformoneymarketfunds.
Except with respect to the administrative
relief expressly provided in this notice, no
inference should be drawn from this notice
regarding any other Federal tax issues af-
fecting tax-exempt bonds, money market
funds, or any other security. In addition,
this notice is not intended to address any
other Federal tax issue implicated in the
described transactions under the Program.
SECTION 4. Effective Date
This notice is effective on September
22, 2008.
Cafeteria Plans
Notice 2008–82
PURPOSE AND BACKGROUND
Section 114 of the Heroes Earnings
Assistance and Relief Tax Act of 2008
(the HEART Act), enacted June 17, 2008,
Pub. L. No. 110–245, amended section
125 of the Internal Revenue Code to pro-
vide a special rule allowing distributions
of unused amounts in a health Flexible
Spending Arrangement (health FSA) to
reservists ordered or called to active duty.
Section 114 of the HEART Act applies
to distributions made on or after June 18,
2008.
Generally, new subsection 125(h) pro-
vides that a plan or other arrangement does
not fail to be a cafeteria plan or health
FSA merely because the arrangement pro-
vides, in certain circumstances, for “qual-
ified reservist distributions” (QRDs) to an
employee of all or a portion of the balance
of the employee’s unused amounts in the
health FSA. This notice provides guidance
on QRDs from health FSAs. It also in-
cludes a transition rule allowing plans to
be retroactively amended for QRDs made
before January 1, 2010.
QUALIFIED RESERVIST
DISTRIBUTION
In general, a QRD is a distribution to
an individual of all or a portion of the
balance in the employee’s health FSA if:
(1) the individual is a member of a re-
serve component ordered or called to ac-
tive duty for a period of 180 days or more
or for an indefinite period and (2) the re-
quest for distribution is made during the
period beginning with the order or call to
active duty and ending on the last day of
the plan year (or grace period, if applica-
ble, under Prop. Treas. Reg. § 1.125–1(e))
that includes the date of the order or call
to active duty. QRDs are an exception to
the rule that a health FSA may not make
distributions other than reimbursements of
substantiated medical expenses. See Prop.
Treas. Reg. § 1.125–6.
QRD OPTIONAL WITH EMPLOYER
A cafeteria plan is not required to pro-
vide for a QRD. The decision of whether
to allow a QRD from a health FSA is op-
tional with the employer.
PLAN MUST BE AMENDED
A QRD may not be made before the
cafeteria plan is amended to provide for
aQRDfromahealthFSA.Pursuantto
the requirements of Prop. Treas. Reg.
§ 1.125–1(c), a plan may be amended at
any time on a prospective basis. The QRD
amendment must apply uniformly to all
participants in the cafeteria plan.
TRANSITION RULE FOR QRDS
MADE BEFORE JANUARY 1, 2010
Notwithstanding the general rule that
amendments to cafeteria plans and health
FSAs may only be effective prospectively
from the date of the plan amendment and
that a QRD may not be made before the
cafeteria plan is first amended to provide
for QRDs, a plan may be amended retroac-
tively to permit QRDs requested on or be-
fore December 31, 2009, provided that the
QRD satisfies the other requirements in
this notice. The retroactive amendment
must be made by December 31, 2009, and
be effective retroactively to the date of the
first QRD paid under the plan, but not prior
to June 18, 2008. This transition rule does
not extend the period during which an em-
ployee may request a QRD. Thus, regard-
less of when the plan is amended, the tran-
sition rule does not allow an employee to
request a QRD with respect to a plan year
after the last day of the plan year (or grace
period, if applicable) during which the or-
der or call to active duty occurred.
EMPLOYEES WHO MAY RECEIVE
QRDs
An employee who is, by reason of be-
ing a member of a reserve component (as
2008–41 I.R.B.853October 14, 2008

definedin37U.S.C.§101
1
), ordered or
called to active duty for a period of 180
days or more or for an indefinite period
may request a QRD. An individual ordered
or called to active duty before June 18,
2008 is eligible for a QRD if the individ-
ual’s period of active duty continues after
June 18, 2008 and meets the duration re-
quirements in this notice. A QRD may not
be made based on an order or call to ac-
tive duty of any individual other than the
employee, including the spouse of the em-
ployee.
After an employee requests a QRD and
before the employer may distribute an
amount, the employer must first receive
a copy of the order or call to active duty.
An employer may rely on the order or call
to determine the period that the employee
has been ordered or called to active duty.
If the order or call specifies that the period
of active duty is for 180 days or more or
is indefinite, the employee is eligible for
a QRD, and the employee’s eligibility is
not affected if the actual period of active
duty is less than 180 days or is otherwise
changed.
If the period specified in the order or
call is less than 180 days, a QRD is not al-
lowed. However, subsequent calls or or-
ders that increase the total period of active
duty to 180 days or more will qualify an
employee for a QRD. Thus, for example,
if an employee is ordered or called to ac-
tive duty for 120 days, and his or her order
or call is subsequently extended for an ad-
ditional 60 days, that individual qualifies
for a QRD.
AMOUNT AVAILABLE AS A QRD
If a cafeteria plan provides for QRDs,
the cafeteria plan amendment should indi-
cate how the plan will determine an em-
ployee’s health FSA balance for purposes
of making QRDs. See uniform coverage
rules in Prop. Treas. Reg. § 1.125–5(d).
The cafeteria plan may provide that the
amount available as a QRD will be:
(1) the entire amount elected for the
health FSA for the plan year minus health
FSA reimbursements received as of the
date of the QRD request;
(2) the amount contributed to the health
FSA as of the date of the QRD request mi-
nus health FSA reimbursements received
as of the date of the QRD request; or
(3) some other amount (not exceeding
the entire amount elected for the health
FSA for the plan year minus reimburse-
ments).
If the cafeteria plan amendment does
not indicate how the plan will determine
the amount available as a QRD, then the
amount available shall be the amount con-
tributed to the health FSA as of the date of
the QRD request minus health FSA reim-
bursements received as of the date of the
QRD request.
A QRD may only be made with respect
to an employee’s health FSA balance in ex-
istence on or after June 18, 2008. A QRD
may not be made with respect to amounts
(1) forfeited on or before June 18, 2008,
(2) attributable to a prior plan year (includ-
ing a plan year ending on or before June
18, 2008), or (3) attributable to non-health
FSAs.
CAFETERIA PLAN QRD
PROCEDURES
The cafeteria plan may specify a
process for employees to request a QRD.
The cafeteria plan may specify how many
QRDs may be made with respect to an em-
ployee during the same plan year. A plan
must permit an employee to submit health
FSA claims for medical expenses in-
curred before the date a QRD is requested
and must pay or reimburse substantiated
claims for those medical expenses. With
respect to medical expenses incurred after
thedateaQRDisrequested,theplanmay
either:
(1) permit employees to continue to
submit health FSA claims incurred before
the end of the health FSA plan year (and
grace period, if applicable); or
(2) terminate an employee’s right to
submit claims.
WHEN TO REQUEST A QRD AND
MAKE A DISTRIBUTION
An employee must request a QRD on
or after the date of the order or call to ac-
tive duty, and before the last day of plan
year (or grace period, if applicable) during
which the order or call to active duty oc-
curred. An employer must pay the QRD to
the employee within a reasonable time, but
not more than sixty days after the request
for a QRD has been made. A QRD may not
be made with respect to a plan year end-
ing before the order or call to active duty.
In addition, a QRD may only be made on
or after the effective date of amendment
of the plan to provide for QRDs. But see
above for a transition rule for QRDs made
before January 1, 2010.
CAFETERIA PLAN
NONDISCRIMINATION RULES
QRDs must be uniformly available to
all plan participants. The QRD amounts
are disregarded for purposes of the cafete-
ria plan nondiscrimination rules.
TAXATION OF A QRD
A QRD is included in the gross income
and wages of the employee, and is sub-
ject to employment taxes. The employer
must report the QRD as wages on the em-
ployee’s Form W–2 for the year in which
the QRD is paid to the employee. The
amount reported as wages is reduced by
any amount in the health FSA representing
after-tax contributions (such as COBRA
continuation premiums).
EFFECTIVE DATE
New section 125(h) is effective for a
QRD made on or after June 18, 2008.
EFFECT ON OTHER DOCUMENTS
Future guidance will amend the § 125
Income Tax Regulations to provide an
exception for QRDs as described in new
§ 125(h).
1
Under paragraph 24 of section 101 of title 37 of the United States Code, the term “reserve component” means—
(A) the Army National Guard of the United States;
(B) the Army Reserve;
(C) the Navy Reserve;
(D) the Marine Corps Reserve;
(E) the Air National Guard of the United States;
(F)theAirForceReserve;
(G) the Coast Guard Reserve; or
(H) the Reserve Corps of the Public Health Service.
October 14, 20088542008–41 I.R.B.

COMMENTS REQUESTED
The IRS and the Treasury Department
request comments on the amendment
made by section 114 of the HEART Act,
including the guidance set forth in this
notice and on any other issues concerning
QRDs.
Comments should be submitted on
or before January 12, 2009, and should
include a referenceto Notice 2008–82.
Send submissions to CC:PA:LPD:PR
(Notice 2008–82), Room 5203, Internal
Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand deliveredMon-
day through Fridaybetween the hours
of8a.m. and4p.m. toCC:PA:LPD:PR
(Notice 2008–82), Courier’s Desk,
Internal Revenue Service, 1111
Constitution Avenue, NW, Washington,
DC 20044, or sent electronically,
via the following e-mail address:
Notice.comments@irscounsel.treas.gov.
Please include “Notice 2008–82”
in the subject line of any electronic
communication. All material submitted
will be available for public inspection and
copying.
DRAFTING INFORMATION
The principal author of this notice is
Mireille Khoury of the Office of Division
Counsel/Associate Chief Counsel (Tax Ex-
empt and Government Entities). However,
other individuals participated in its devel-
opment. For further information regarding
this notice, contact Ms. Khoury at (202)
622–6080 (not a toll-free call).
Application of Section 382
in the Case of Certain
Acquisitions Made by the
United States
Notice 2008–84
SECTION 1. OVERVIEW
This notice announces that the Internal
Revenue Service (IRS) and the Treasury
Department (Treasury) will issue regula-
tions under section 382(m) of the Internal
Revenue Code (Code) that address the ap-
plication of section 382 in the case of cer-
tain acquisitions not described in Notice
2008–76, 2008–39 I.R.B. 768, in which
the United States (or any agency or in-
strumentality thereof) (United States) be-
comes a direct or indirect owner of a more-
than-50-percent interest in a loss corpora-
tion. For this purpose, a “more-than-50-
percent interest” is stock of the loss cor-
poration possessing more than 50 percent
of the total value of shares of all classes of
stock (excluding stock described in section
1504(a)(4)) or more than 50 percent of the
total combined voting power of all classes
of stock entitled to vote, or an option to ac-
quire such stock.
SECTION 2. REGULATIONS TO BE
ISSUED UNDER SECTION 382(m)
The IRS and Treasury will issue reg-
ulations under section 382(m) providing
that notwithstanding any other provision
of the Code or the regulations thereunder,
for purposes of section 382 and the regu-
lations thereunder, with respect to a loss
corporation, the term “testing date” (as de-
fined in § 1.382–2(a)(4)) shall not include
any date as of the close of which the United
States directly or indirectly owns a more-
than-50-percent interest in the loss corpo-
ration. Thus, the loss corporation will be
required to determine whether there is a
testing date and, if so, whether there has
been an ownership change for purposes of
section 382, on any date as of the close of
which the United States does not directly
or indirectly own a more-than-50-percent
interest in the loss corporation.
SECTION 3. EFFECTIVE DATE
The regulations to be issued under sec-
tion 382(m) that are described in section
2 of this notice will apply for any tax-
able year ending on or after September 26,
2008, and will apply unless and until there
is additional guidance.
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I, § 42; 1.42–14.)
Rev. Proc. 2008–57
SECTION 1. PURPOSE
This revenue procedure publishes the
amounts of unused housing credit carry-
overs allocated to qualified states under
§ 42(h)(3)(D) of the Internal Revenue
Code for calendar year 2008.
SECTION 2. BACKGROUND
Rev. Proc. 92–31, 1992–1 C.B. 775,
provides guidance to state housing
credit
agencies of qualified states on the
pro-
cedure for requesting an allocatio
nof
unused housing credit carryovers
under
§ 42(h)(3)(D). Section 4.06 of Rev
.Proc.
92–31 provides that the Internal
Rev-
enue Service will publish in the I
nternal
Revenue Bulletin the amount of un
used
housing credit carryovers alloc
ated to
qualified states for a calendar y
ear from
a national pool of unused credit
authority
(the National Pool). This reven
ue proce-
dure publishes these amounts fo
r calendar
year 2008.
SECTION 3. PROCEDURE
The unused housing credit carryover
amount allocated from the National Pool
by the Secretary to each qualified state for
calendar year 2008 is as follows:
2008–41 I.R.B.855October 14, 2008

QualifiedStateAmountAllocated
Alabama
$ 100,398
Connecticut
75,980
Florida
395,947
Georgia207,066
Idaho
32,528
Indiana
137,656
Kansas60,223
Massachusetts139,923
Michigan
218,501
Minnesota
112,758
Mississippi63,321
Missouri
127,528
Nebraska38,498
New Jersey188,434
New Mexico42,736
New York
418,650
North Dakota13,878
Ohio248,766
Pennsylvania269,720
South Carolina
95,622
South Dakota17,273
Tennessee
133,565
Texas
518,587
Utah
57,388
Vermont13,478
Virginia167,308
Washington140,328
Wisconsin
121,523
EFFECTIVE DATE
This revenue procedure is effective
for allocations of housing credit dollar
amounts attributable to the National Pool
component of a qualified state’s housing
credit ceiling for calendar year 2008.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Christopher J. Wilson of
the Office of Associate Chief Counsel
(Passthroughs and Special Industries). For
further information regarding this revenue
procedure, contact Mr. Wilson at (202)
622–3040 (not a toll-free call).
26 CFR 601.601: Rules and regulations.
(Also Part I, §§ 61, 1001.)
Rev. Proc. 2008–58
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance regarding the treatment of taxpayers
receiving certain offers relating to auction
rate securities.
SECTION 2. BACKGROUND
.01 In general, an auction rate security
is a security in which the payment rate is
reset periodically (typically every seven to
28 days), pursuant to an auction rate-set-
ting process or a similar remarketing agent
rate-setting process that is designed to pro-
duce the minimum payment rate necessary
to enable all interested sellers to sell the se-
curity to willing buyers at a price equal to
the par amount of the security, plus accrued
but unpaid periodic payments. A “failed”
auction or remarketing occurs if the auc-
tion or remarketing fails to produce buy-
ers for all interested sellers at a payment
rate that is at or below the maximum pay-
ment rate specified by the terms of the auc-
tion rate security. Upon a failed auction or
remarketing, the periodic payment rate is
reset at a prescribed maximum rate until
the next auction or remarketing. In addi-
tion, in the case of some issues of auction
rate securities, the periodic payment rate
may escalate further to prescribed increas-
ing maximum rates based on the continued
occurrence of failed auctions or remarket-
ings for increasing periods of time.See,
e.g., Notice 2008–55, 2008–27 I.R.B. 11.
.02 On February 12, 2008, auctions
with respect to auction rate securities
began to fail. Thereafter, as a result of
auction failures, many taxpayers were un-
able to sell auction rate securities for the
par amount of the securities.
.03 Taxpayers may assert legal claims
against another person (hereinafter, “Cor-
porationX”) for its conduct as it relates to
auction rate securities. For example, a tax-
payer might allege that CorporationXim-
properly failed to disclose (1) at the time
of the taxpayer’s purchase, the potential
that the auction rate security could become
illiquid, or (2) subsequent to the taxpayer’s
purchase, information relating to the mar-
ket for auction rate securities which might
have suggested it would soon become illiq-
uid.
.04 CorporationXmaymakeanoffer
(the “Settlement Offer”) to affected tax-
payers. Pursuant to the terms of the Settle-
ment Offer, the taxpayer will have the right
during a specified period (the “Window
Period”) to cause CorporationXto buy the
taxpayer’s auction rate securities for the
par amount of the securities, upon the tax-
payer’s giving notice to CorporationX.If
the taxpayer receives the Settlement Offer,
October 14, 20088562008–41 I.R.B.

subject to the possible existence (and exer-
cise) of the mitigation provision described
in section 2.06 of this revenue procedure,
so long as auctions continue to fail (and
the taxpayer does not direct CorporationX
to purchase the security), the taxpayer will
continue to receive the maximum payment
rate specified by the terms of the auction
rate security.
.05 In the event the auction rate-setting
process begins to succeed during the Win-
dow Period, so long as the taxpayer does
not direct CorporationXto purchase the
security (and the taxpayer does not sell
in the auction), the taxpayer’s return will
fluctuate with that process, such that as the
reset rates go up or down, this variation di-
rectly affects the taxpayer’s economic re-
turn. If the taxpayer continues to hold the
security after the Window Period, the tax-
payer’s entitlements are determined exclu-
sively under the provisions of the auction
rate security (e.g., if rates go up or down,
or the security becomes worthless, the tax-
payer experiences the full economic im-
pact). During the Window Period (and
thereafter, if CorporationXdoes not pur-
chase the security during the Window Pe-
riod), the taxpayer is entitled to (1) exer-
cise all voting rights associated with the
security, and (2) sell the security to a third
party. By its terms, the auction rate secu-
rity is not redeemable on a fixed date (or,
if it is, the redemption date is at least two
years later than the end of the Window Pe-
riod).
.06 The Settlement Offer may also con-
tain a provision which has the effect of al-
lowing CorporationXto mitigate its po-
tential economic losses during the Window
Period. If the taxpayer accepts a Settle-
ment Offer with such a provision, Corpora-
tionXwill be authorized to effect sales or
dispositions of the security to the market
during the Window Period (so long as the
taxpayer receives the par amount of the se-
curity upon the sale or disposition). Thus,
for example, if, during the Window Pe-
riod, CorporationXfinds a person willing
to purchase an auction rate security with a
par amount of $100x for $99x, Corporation
X can purchase the security from the tax-
payer for $100x, sell the security for $99x,
and limit its economic loss to $1x (rather
than risk a larger, or smaller, loss). If Cor-
porationXbuys the security under this pro-
vision, it will not hold the security for in-
vestment purposes.
.07 The Settlement Offer may also per-
mit the taxpayer to elect to “borrow” (in
form) the par amount of the auction rate se-
curity from CorporationXbefore the Win-
dow Period begins (or during the Window
Period). In this case, the taxpayer’s obli-
gationtoreturnthecashamountadvanced
by CorporationXin the form of a “loan” is
secured (in form) by the auction rate secu-
rity. Taxpayers who accept the Settlement
Offer are not required to make this elec-
tion or otherwise participate in this feature
of the Settlement Offer.
SECTION 3. SCOPE
This revenue procedure applies to tax-
payers who, before June 30, 2009, receive
Settlement Offers generally described in
section 2 of this revenue procedure that (1)
include Window Periods that do not ex-
tend beyond December 31, 2012, and (2)
require that the taxpayer deliver an auction
rate security that the taxpayer purchased
on or before February 13, 2008.
SECTION 4. APPLICATION
For taxpayers within the scope of this
revenue procedure, the Internal Revenue
Service will not challenge the following
positions:
.01 The position that the taxpayer con-
tinues to own the auction rate security
upon receiving or accepting (or “opting
into”) the Settlement Offer (but not after
tendering the security).
.02 The position that the taxpayer does
not realize any income as a result of receiv-
ing or accepting (or “opting into”) the Set-
tlement Offer and does not reduce the basis
of the auction rate security from its origi-
nal purchase price.
.03 The position that the taxpayer’s
amount realized from the sale of the auc-
tion rate security during the Window Pe-
riod to the person offering the settlement
(CorporationXin this revenue procedure)
is the full amount of the cash proceeds
received from that person.
SECTION 5. NO INFERENCE
This revenue procedure provides ad-
ministrative guidance in light of the signif-
icant number of taxpayers affected by auc-
tion failures and the potential litigation re-
sulting therefrom. Except with respect to
the administrative guidance expressly pro-
vided in this revenue procedure, no infer-
ences should be drawn from this revenue
procedure in any other context regarding
the ownership of any other security (or
the effect of a loan secured by such secu-
rity), the application of the replacement or
restoration of capital doctrine, or any other
federal tax issues.
SECTION 6. CONTACT
INFORMATION
For further information regard-
ing this revenue procedure, contact
William E. Blanchard of the Office
of Associate Chief Counsel (Financial
Institutions and Products) at (202)
622–3950 or Andrew J. Keyso of the
Office of Associate Chief Counsel
(Income Tax and Accounting) at (202)
622–4800.
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I, §§ 62, 162, 267, 274; 1.62–2, 1.162–17,
1.267(a)–1, 1.274–5.)
Rev. Proc. 2008–59
SECTION 1. PURPOSE
This revenue procedure updates Rev.
Proc. 2007–63, 2007–42 I.R.B. 809, and
provides rules under which the amount of
ordinary and necessary business expenses
of an employee for lodging, meal, and in-
cidental expenses, or for meal and inci-
dental expenses, incurred while traveling
away from home are deemed substantiated
under § 1.274–5 of the Income Tax Reg-
ulations when a payor (the employer, its
agent, or a third party) provides aper diem
allowance under a reimbursement or other
expense allowance arrangement to pay for
the expenses. In addition, this revenue
procedure provides an optional method for
employees and self-employed individuals
who are not reimbursed to use in comput-
ing the amounts paid or incurred for busi-
ness meal and incidental expenses, or for
incidental expenses only if no meal ex-
penses are paid or incurred, while travel-
ingawayfromhome. Useofamethod
described in this revenue procedure is not
mandatory, and a taxpayer may use actual
2008–41 I.R.B.857October 14, 2008

allowable expenses if the taxpayer main-
tains adequate records or other sufficient
evidence for proper substantiation. This
revenue procedure does not provide rules
under which the amount of an employee’s
lodging expenses will be deemed substan-
tiated to a payor when a payor provides
an allowance to pay for those expenses but
not meal and incidental expenses.
SECTION 2. BACKGROUND AND
CHANGES
.01 Section 162(a) of the Internal Rev-
enue Code allows a deduction for all the or-
dinary and necessary expenses paid or in-
curred during the taxable year in carrying
on any trade or business. Under that pro-
vision, an employee or self-employed in-
dividual may deduct expenses paid or in-
curred while traveling away from home in
pursuit of a trade or business. However,
under § 262, no portion of the travel ex-
penses that is attributable to personal, liv-
ing, or family expenses is deductible.
.02 Section 274(n) generally limits the
amount allowable as a deduction under
§ 162 for any expense for food, bever-
ages, or entertainment to 50 percent of
the amount of the expense that otherwise
would be allowable as a deduction. In the
case of any expenses for food or beverages
consumed while away from home (within
the meaning of § 162(a)(2)) by an indi-
vidual during, or incident to, the period of
duty subject to the hours of service limita-
tions of the Department of Transportation,
§ 274(n)(3) provides that, for taxable years
beginning in 2008, the deductible percent-
age for these expenses is 80 percent.
.03 Section 274(d) provides, in part,
that no deduction is allowed under § 162
for any travel expense (including meals
and lodging while away from home) unless
the taxpayer complies with certain sub-
stantiation requirements. Section 274(d)
further provides that regulations may pre-
scribe that some or all of the substantiation
requirements do not apply to an expense
that does not exceed an amount prescribed
by the regulations.
.04 Section 1.274–5(g), in part, grants
the Commissioner the authority to pre-
scribe rules relating to reimbursement
arrangements orper diemallowances for
ordinary and necessary expenses paid
or incurred while traveling away from
home. Pursuant to this grant of authority,
the Commissioner may prescribe rules
under which these arrangements or al-
lowances, if in accordance with reasonable
business practice, are regarded (1) as
equivalent to substantiation, by adequate
records or other sufficient evidence, of the
amount of travel expenses for purposes
of § 1.274–5(c), and (2) as satisfying the
requirements of an adequate accounting
to the employer of the amount of travel
expenses for purposes of § 1.274–5(f).
.05 For purposes of determining ad-
justed gross income,§ 62(a)(2)(A) allows
an employee a deduction for expenses al-
lowedbyPartVI(§161andfollowing),
subchapter B, chapter 1 of the Code, paid
or incurred by the employee in connection
with the performance of services as an em-
ployee under a reimbursement or other ex-
pense allowance arrangement with a payor.
.06 Section 62(c) provides that an ar-
rangement is not treated as a reimburse-
ment or other expense allowance arrange-
ment for purposes of § 62(a)(2)(A) if it—
(1) does not require the employee to
substantiate the expenses covered by the
arrangement to the payor, or
(2) provides the employee with the right
to retain any amount in excess of the sub-
stantiated expenses covered under the ar-
rangement.
Section 62(c) further provides that the sub-
stantiation requirements described therein
do not apply to any expense to the extent
that, under the grant of regulatory authority
prescribed in § 274(d), the Commissioner
has provided that substantiation is not re-
quired for the expense.
.07 Under § 1.62–2(c), a reimburse-
ment or other expense allowance arrange-
ment satisfies the requirements of § 62(c)
if it meets the requirements of business
connection, substantiation, and returning
amounts in excess of expenses as specified
in the regulations. If an arrangement meets
these requirements, all amounts paid under
the arrangement are treated as paid under
an accountable plan and are excluded from
income and wages. If an arrangement does
not meet these requirements, all amounts
paid under the arrangement are treated as
paid under a nonaccountable plan and are
included in the employee’s gross income,
must be reported as wages or compensa-
tion on the employee’s Form W–2, and are
subject to the withholding and payment of
employment taxes. Section 1.62–2(e)(2)
specifically provides that substantiation of
certain business expenses in accordance
with rules prescribed under the authority
of § 1.274–5(g) is treated as substantia-
tion of the amount of the expenses for pur-
poses of § 1.62–2. Under § 1.62–2(f)(2),
the Commissioner may prescribe rules un-
der which an arrangement providingper
diemallowances is treated as satisfying the
requirement of returning amounts in ex-
cess of expenses, even though the arrange-
ment does not require the employee to re-
turn the portion of the allowance that re-
lates to days of travel substantiated and
that exceeds the amountof the employee’s
expenses deemed substantiated pursuant to
rules prescribed under § 274(d), provided
the allowance is reasonably calculated not
to exceed the amount of the employee’s ex-
penses or anticipated expenses and the em-
ployee is required to return within a rea-
sonable period of time any portion of the
allowance that relates to days of travel not
substantiated.
.08 Section 1.62–2(h)(2)(i)(B) pro-
vides that, if a payor pays aper diem
allowance that meets the requirements of
§ 1.62–2(c)(1), the portion, if any, of the
allowance that relates to days of travel sub-
stantiated in accordance with § 1.62–2(e),
that exceeds the amountof the employee’s
expenses deemed substantiated for the
travel pursuant to rules prescribed un-
der § 274(d) and § 1.274–5(g), and that
the employee is not required to return, is
subject to withholding and payment of
employment taxes. See §§ 31.3121(a)–3,
31.3231(e)–1(a)(5), 31.3306(b)–2, and
31.3401(a)–4 of the Employment Tax
Regulations. Because the employee is not
required to return this excess portion, the
reasonable period of time provisions of
§ 1.62–2(g) (relating to the return of ex-
cess amounts) do not apply to this portion.
.09 Under § 1.62–2(h)(2)(i)(B)(4), the
Commissioner has the discretion to pre-
scribe special rules regarding the timing of
withholding and payment of employment
taxes onper diemallowances.
.10 Section 1.274–5(j)(1) grants the
Commissioner the authority to establish
a method under which a taxpayer may
elect to treat a specific amount as paid or
incurred for meals while traveling away
from home in lieu of substantiating the
actual cost of meals.
.11 Section 1.274–5(j)(3) grants the
Commissioner the authority to establish
a method under which a taxpayer may
October 14, 20088582008–41 I.R.B.

elect to treat a specific amount as paid
or incurred for incidental expenses while
travelingawayfromhomeinlieuofsub-
stantiating the actual cost of incidental
expenses.
.12 Sections 3.02(1)(a), 4.04(6), and
5.06 of this revenue procedure provide
transition rules for the last 3 months of
calendar year 2008.
.13 Section 5.02 of this revenue pro-
cedure contains revisions to theper diem
rates for high-cost localities and for other
localities for purposes of section 5.
.14 Section 5.03 of this revenue pro-
cedure contains the list of high-cost lo-
calities, and section 5.04 of this revenue
procedure describes changes to the list of
high-cost localities for purposes of section
5.
.15 Sections 7.10 and 8.06 of this
revenue procedure refer to Rev. Rul.
2006–56, 2006–2 C.B. 874, which de-
scribes circumstances when a payor’s
reimbursement or other expense allowance
arrangement evidences a pattern of abuse
of the rules of § 62(c) and the regulations
thereunder.
SECTION 3. DEFINITIONS
.01Per diem allowance.Theterm“per
diemallowance” means a payment under a
reimbursement or other expense allowance
arrangement that is—
(1) paid with respect to ordinary and
necessary business expenses incurred, or
that the payor reasonably anticipates will
be incurred, by an employee for lodging,
meal, and incidental expenses, or for meal
and incidental expenses, for travel away
from home in connection with the perfor-
mance of services as an employee of the
employer,
(2) reasonably calculated not to exceed
the amount of the expenses or the antici-
pated expenses, and
(3) paid at or below the applicable fed-
eralper diemrate, a flat rate or stated
schedule, or in accordance with any other
Service-specified rate or schedule.
.02Federal per diem rate and federal
M&IE rate.
(1)In general. The federalper diem
rate is equal to the sum of the applicable
federal lodging expense rate and the appli-
cable federal meal and incidental expense
(M&IE) rate for the day and locality of
travel.
(a)CONUS rates.Theratesforlo-
calities in the continental United States
(“CONUS”) are set forth in Appendix A
to 41 C.F.R. ch. 301. However, in apply-
ing section 4.01, 4.02, or 4.03 of this rev-
enue procedure, taxpayers may continue
to use the CONUS rates in effect for the
first 9 months of 2008 for expenses of all
CONUS travel away from home that are
paid or incurred during calendar year 2008
in lieu of the updated GSA rates. A tax-
payer must consistently use either these
rates or the updated rates for the period Oc-
tober 1, 2008, through December 31, 2008.
(b)OCONUS rates. The rates for local-
ities outside the continental United States
(“OCONUS”) are established by the Sec-
retary of Defense (rates for non-foreign lo-
calities, including Alaska, Hawaii, Puerto
Rico, the Northern Mariana Islands, and
the possessions of theUnited States) and
by the Secretary of State (rates for for-
eign localities), and are published in the
Per DiemSupplement to the Standardized
Regulations (Government Civilians, For-
eign Areas) (updated on a monthly basis).
(c)Internet access to the rates.The
CONUS and OCONUS rates may be found
on the Internet atwww.gsa.gov.
(2)Locality of travel. The term “lo-
cality of travel” means the locality where
an employee traveling away from home in
connection with the performance of ser-
vices as an employee of the employer stops
for sleep or rest.
(3)Incidental expenses.Theterm
“incidental expenses” has the same
meaning as in the Federal Travel Reg-
ulations, 41 C.F.R. 300–3.1 (2007).
Thus, based on the current definition of
“incidental expenses” in the Federal Travel
Regulations, “incidental expenses” means
fees and tips given toporters, baggage
carriers, bellhops, hotel maids, stewards
or stewardesses and others on ships,
and hotel servants in foreign countries;
transportation between places of lodging
or business and places where meals are
taken, if suitable meals can be obtained at
the temporary duty site; and the mailing
cost associated with filing travel vouchers
and payment of employer-sponsored
charge card billings.
.03Flat rate or stated schedule.
(1)In general. Except as provided in
section 3.03(2) of this revenue procedure,
an allowance is paid at a flat rate or stated
schedule if it is provided on a uniform
and objective basis with respect to the ex-
pensesdescribedinsection3.01ofthis
revenue procedure. The allowance may be
paid with respect to the number of days
away from home in connection with the
performance of services as an employee
or on any other basis that is consistently
applied and in accordance with reasonable
business practice. Thus, for example, an
hourly payment to cover meal and inciden-
tal expenses paid to a pilot or flight atten-
dant who is traveling away from home in
connection with the performance of ser-
vices as an employee is an allowance paid
at a flat rate or stated schedule. Likewise,
a payment based on the number of miles
traveled (such as cents per mile) to cover
meal and incidental expenses paid to an
over-the-road truck driver who is traveling
away from home in connection with the
performance of services as an employee is
an allowance paid at a flat rate or stated
schedule.
(2)Limitation. An allowance that is
computed on a basis similar to that used
in computing the employee’s wages or
other compensation (such as the number
of hours worked, miles traveled, or pieces
produced) does not meet the business con-
nection requirement of § 1.62–2(d), is not
aper diemallowance, and is not paid at
a flat rate or stated schedule, unless, as
of December 12, 1989, (a) the allowance
was identified by the payor either by mak-
ing a separate payment or by specifically
identifying the amount of the allowance,
or (b) an allowance computed on that ba-
siswascommonlyusedintheindustry
in which the employee is employed. See
§ 1.62–2(d)(3)(ii).
SECTION 4.PER DIEM
SUBSTANTIATION METHOD
.01Per diem allowance.Ifapayorpays
aper diemallowanceinlieuofreimburs-
ing actual lodging, meal, and incidental ex-
penses incurred or to be incurred by an
employee for travel away from home, the
amount of the expenses that is deemed sub-
stantiated for each calendar day is equal to
thelesseroftheper diemallowance for
that day or the amount computed at the
federalper diemrate (see section 3.02 of
this revenue procedure) for the locality of
travel for that day (or partial day, see sec-
tion 6.04 of this revenue procedure).
2008–41 I.R.B.859October 14, 2008

.02Meal and incidental expenses only
per diem allowance. If a payor pays a
per diemallowance only for meal and in-
cidental expenses in lieu of reimbursing
actual meal and incidental expenses in-
curred or to be incurred by an employee
for travel away from home, the amount of
the expenses that is deemed substantiated
for each calendar day is equal to the lesser
of theper diemallowance for that day or
the amount computed at the federal M&IE
rate for the locality of travel for that day
(or partial day). Aper diemallowance
is treated as paid only for meal and inci-
dental expenses if (1) the payor pays the
employee for actual expenses for lodging
based on receipts submitted to the payor,
(2) the payor provides the lodging in kind,
(3) the payor pays the actual expenses for
lodging directly to the provider of the lodg-
ing, (4) the payor does not have a reason-
able belief that lodging expenses were or
will be incurred by the employee, or (5) the
allowance is computed on a basis similar
to that used in computing the employee’s
wages or other compensation (such as the
number of hours worked, miles traveled,
or pieces produced).
.03Optional method for meal and in-
cidental expenses only deduction.Inlieu
of using actual expenses in computing the
amount allowable as a deduction for or-
dinary and necessary meal and inciden-
tal expenses paid or incurred for travel
away from home, employees and self-em-
ployed individuals who pay or incur meal
expenses may use an amount computed at
the federal M&IE rate for the locality of
travel for each calendar day (or partial day)
the employee or self-employed individual
is away from home. This amount will be
deemed substantiated for purposes of para-
graphs (b)(2) and (c) of § 1.274–5, pro-
vided the employee or self-employed indi-
vidual substantiates the elements of time,
place, and business purpose of the travel
for that day (or partial day) in accordance
with those regulations. See section 6.05(1)
of this revenue procedure for rules related
to the application of the limitation under
§ 274(n) to amounts determined under this
section 4.03. See section 4.05 of this rev-
enue procedure for a method for substanti-
ating incidental expenses that may be used
by employees or self-employed individu-
als who do not pay or incur meal expenses.
.04Special rules for transportation in-
dustry.
(1)In general. This section 4.04 ap-
plies to (a) a payor that pays aper diem
allowance only for meal and incidental ex-
penses for travel away from home as de-
scribedinsection4.02ofthisrevenuepro-
cedure to an employee in the transportation
industry, or (b) an employee or self-em-
ployed individual in the transportation in-
dustry who computes the amount allow-
able as a deduction for meal and incidental
expenses for travel away from home in ac-
cordance with section 4.03 of this revenue
procedure.
(2)Transportation industry defined.
For purposes of this section 4.04, an em-
ployee or self-employed individual is in
the transportation industry only if the em-
ployee’s or individual’s work (a) is of the
type that directly involves moving people
or goods by airplane, barge, bus, ship,
train, or truck, and (b) regularly requires
travel away from home which, during
any single trip away from home, usually
involves travel to localities with differ-
ing federal M&IE rates. For purposes
of the preceding sentence, a payor must
determine that an employee or a group of
employees is in the transportation indus-
try by using a method that is consistently
applied and in accordance with reasonable
business practice.
(3)Rates. A taxpayer described in sec-
tion 4.04(1) of this revenue procedure may
treat $52 as the federal M&IE rate for any
CONUS locality of travel, and $58 as the
federal M&IE rate for any OCONUS lo-
cality of travel. A payor that uses either (or
both) of these special rates with respect to
an employee must use the special rate(s)
for all amounts subject to section 4.02 of
this revenue procedure paid to that em-
ployee for travel away from home within
CONUS and/or OCONUS, as the case may
be, during the calendar year. Similarly, an
employee or self-employed individual that
uses either (or both) of these special rates
must use the special rate(s) for all amounts
computed pursuant to section 4.03 of this
revenue procedure for travel away from
home within CONUS and/or OCONUS, as
the case may be, during the calendar year.
See section 4.04(6) of this revenue proce-
dure for transition rules.
(4)Periodic rule. A payor described in
section 4.04(1) of this revenue procedure
may compute the amount of the em-
ployee’s expenses that is deemed substan-
tiated under section 4.02 of this revenue
procedure periodically (not less frequently
than monthly), rather than daily, by com-
paring the totalper diemallowance paid
for the period to the sum of the amounts
computed either at the federal M&IE
rate(s) for the localities of travel, or at the
special rate described in section 4.04(3),
for the days (or partial days) the employee
is away from home during the period.
(5)Examples.
(a)Example 1. Taxpayer, an employee in the
transportation industry, travels away from home on
business within CONUS on 17 days (including par-
tial days) during a calendar month and receives aper
diemallowance only for meal and incidental expenses
from a payor that uses the special rule under sec-
tion 4.04(3) of this revenue procedure. The amount
deemed substantiated undersection4.02ofthisrev-
enue procedure is equal to the lesser of the totalper
diemallowance paid for the month or $884 (17 days
at $52 per day).
(b)Example 2. Taxpayer, a truck driver employee
in the transportation industry, is paid a “cents-per-
mile” allowance that qualifies as an allowance paid
under a flat rate or stated schedule as defined in sec-
tion 3.03 of this revenue procedure. Taxpayer travels
away from home on business for 10 days. Based on
the number of miles driven by Taxpayer, Taxpayer’s
employer pays an allowance of $500 for the 10 days
of business travel. Taxpayer actually drives for 8
days, and does not drive for the other 2 days Taxpayer
is away from home. Taxpayer is paid under the peri-
odic rule used for transportation industry employers
and employees in accordance with section 4.04(4) of
this revenue procedure. The amount deemed substan-
tiated is the full $500 because that amount does not
exceed $520 (ten days away from home at $52 per
day).
(6)Transition rules. Under the calen-
dar-year convention provided in section
4.04(3), a taxpayer who used the federal
M&IE rates during the first 9 months of
calendar year 2008 to substantiate the
amount of an individual’s travel expenses
under sections 4.02 or 4.03 of Rev. Proc.
2007–63 may not use, for that individual,
the special transportation industry rates
provided in this section 4.04 until January
1, 2009. Similarly, a taxpayer who used
the special transportation industry rates
during the first 9 months of calendar year
2008 to substantiate the amount of an in-
dividual’s travel expenses may not use,
for that individual, the federal M&IE rates
until January 1, 2009.
.05Optional method for incidental ex-
penses only deduction. Inlieuofusing
actual expenses in computing the amount
allowable as a deduction for ordinary and
necessary incidental expenses paid or in-
curred for travel away from home, employ-
ees and self-employed individuals who do
October 14, 20088602008–41 I.R.B.

not pay or incur meal expenses for a calen-
dar day (or partial day) of travel away from
home may use, for each calendar day (or
partial day) the employee or self-employed
individual is away from home, an amount
computed at the rate of $3 per day for any
CONUS or OCONUS locality of travel.
This amount will be deemed substantiated
for purposes of paragraphs (b)(2) and (c)
of § 1.274–5, provided the employee or
self-employed individual substantiates the
elements of time, place, and business pur-
pose of the travel for that day (or partial
day) in accordance with those regulations.
See section 4.03 of this revenue procedure
foramethodthatmaybeusedbyem-
ployees or self-employed individuals who
pay or incur meal expenses. The method
authorized by this section 4.05 may not
be used by payors that use section 4.01,
4.02, or 5.01 of this revenue procedure, or
by employees or self-employed individu-
als who use the method described in sec-
tion 4.03 of this revenue procedure. See
section 6.05(5) of this revenue procedure
for rules related to the application of the
limitation under § 274(n) to amounts de-
termined under this section 4.05.
SECTION 5. HIGH-LOW
SUBSTANTIATION METHOD
.01In general. If a payor pays aper
diemallowance in lieu of reimbursing ac-
tual lodging, meal, and incidental expenses
incurred or to be incurred by an employee
for travel away from home and the payor
uses the high-low substantiation method
described in this section 5 for travel within
CONUS, the amount of the expenses that
is deemed substantiated for each calendar
day is equal to the lesser of theper diem
allowance for that day or the amount com-
puted at the rate set forth in section 5.02 of
this revenue procedure for the locality of
travel for that day (or partial day, see sec-
tion 6.04 of this revenue procedure). Ex-
cept as provided in section 5.06 of this rev-
enue procedure, this high-low substantia-
tionmethodmaybeusedinlieuofthe
per diemsubstantiation method provided
in section 4.01 of this revenue procedure,
but may not be used in lieu of the meal and
incidental expenses onlyper diemsubstan-
tiation method provided in section 4.02 of
this revenue procedure.
.02Specific high-low rates. Except as
provided in section 5.06 of this revenue
procedure, theper diemrate set forth in this
section 5.02 is $256 for travel to any “high-
cost locality” specified in section 5.03 of
this revenue procedure, or $158 for travel
to any other locality within CONUS. The
high or low rate, as appropriate, applies
as if it were the federalper diemrate for
the locality of travel. For purposes of ap-
plying the high-low substantiation method
and the § 274(n) limitation on meal ex-
penses (see section 6.05(3) of this revenue
procedure), the amount of the high and low
rates that is treated as paid for meals is
$58 for a high-cost locality and $45 for any
other locality within CONUS.
.03High-cost localities. The following
localities have a federalper diemrate of
$207 or more, and are high-cost localities
for all of the calendar year or the portion of
the calendar year specified in parentheses
under the key city name:
Key CityCounty or other defined location
Arizona
Phoenix/ScottsdaleMaricopa
(January 1-April 30)
SedonaCity Limits of Sedona
(March 1-April 30)
California
NapaNapa
San DiegoSan Diego
(January 1-August 31)
San FranciscoSan Francisco
Sant
aBarbara
Sant
aBarbara
Santa MonicaCity limits of Santa Monica
South Lake TahoeEl Dorado
(December 1-March 31)
Colorado
As
pen
Pi
tkin
(December 1-April 30)
Crested Butte/GunnisonGunnison
(December 1-March 31)
Silverthorne/BreckenridgeSummit
(December 1-April 30)
Steamboat SpringsRoutt
(December 1-March 31)
TellurideSan Miguel
(October 1-March 31)
2008–41 I.R.B.861October 14, 2008

Key CityCounty or other defined location
Colorado (continued)
VailEagle
(December 1-July 31)
District of Columbia
Washington D.
C. (also the cities of Alexandria, Falls Church, and Fairfax, and the counties of Arlington and Fairfax, in
Virginia; and
the counties of Montgomery and Prince George’s in Maryland) (See also Maryland and Virginia)
Florida
Fort LauderdaleBroward
(October 1-April 30)
Fort Walton Beach/De Funiak SpringsOkaloosa and Walton
(June 1-July 31)
Key WestMonroe
MiamiMiami-Dade
(October 1-February 28)
NaplesCollier
(February 1-March 31)
Palm Beach
(Decem
ber 1-April 30)
Boca Raton, Delray Beach, Jupiter, Palm
Beach Gardens, Palm Beach, Palm Beach
Shores, Singer Island and West Palm Beach
Illinois
ChicagoCook and Lake
Maryland
Balt
imore City
Balt
imore City
Cambridge/St. MichaelsDorchester and Talbot
(May 1-August 31)
Ocean CityWorcester
(June 1-September 30)
Washington, DC Metro AreaMontgomery and Prince George=s
Massachusetts
Boston/CambridgeSuffolk, City of Cambridge
Martha’s VineyardDukes
(June 1-August 31)
NantucketNantucket
(June 1-September 30)
New York
Floral Park/Garden City/Glen Cove/Great Neck/RoslynNassau
Manhattan (includes the boroughs of Manhattan, Brooklyn,
the Bronx, Queens and Staten Island)
Bronx, Kings, New York, Queens,
Richmond
Saratoga Springs/SchenectadySaratoga and Schenectady
(July 1-August 31)
Tarrytown/White Plains/New Rochelle/YonkersWestchester
Pennsylvania
PhiladelphiaPhiladelphia
Rhode Island
Jamestown/Middletown/NewportNewport
(June 1-September 30)
October 14, 20088622008–41 I.R.B.

Key CityCounty or other defined location
Utah
Park CitySummit
(January 1-March 31)
Virginia
Washington, D
C Metro Area
Cities of Alex
andria, Fairfax, and Falls
Church; count
ies of Arlington and Fairfax
Washington
SeattleKing
Wyoming
Jackson/P
inedale
Teton and S
ublette
(July 1-August 31)
.04Changes in high-cost localities.
The list of high-cost localities in section
5.03 of this revenue procedure differs from
the list of high-cost localities in section
5.03 of Rev. Proc. 2007–63 (changes
listed by key cities).
(1) The following localities have been
added to the list of high-cost localities:
Jackson/Pinedale, Wyoming.
(2) The portion of the year for which
the following are high-cost localities
has been changed: Phoenix/Scotts-
dale, Arizona; San Diego, California;
Silverthorne/Breckenridge,Colorado;
Steamboat Springs, Colorado; Vail,
Colorado; Palm Beach, Florida; Cam-
bridge/St. Michaels, Maryland; Ocean
City, Maryland; Martha’s Vineyard, Mass-
achusetts; Nantucket, Massachusetts;
Jamestown/Middletown/Newport, Rhode
Island.
(3) The following localities have been
removed from the list of high-cost locali-
ties: Palm Springs, California; Yosemite
National Park, California; Stuart, Florida;
Incline Village/Crystal Bay/Reno/Sparks,
Nevada; Conway, New Hampshire; Prov-
idence, Rhode Island; Loudon County,
Virginia; Virginia Beach, Virginia; Lake
Geneva, Wisconsin.
.05Specific limitation.
(1) Except as provided in section
5.05(2) of this revenue procedure, a payor
that uses the high-low substantiation
method with respect to an employee must
use that method for all amounts paid to
that employee for travel away from home
within CONUS during the calendar year.
See section 5.06 of this revenue procedure
for transition rules.
(2) With respect to an employee de-
scribed in section 5.05(1) of this revenue
procedure, the payor may reimburse ac-
tual expenses or use the meal and inci-
dental expenses onlyper diemsubstan-
tiation method described in section 4.02
of this revenue procedure for any travel
away from home, and may use theper
diemsubstantiation method described in
section 4.01 of this revenue procedure for
any OCONUS travel away from home.
.06Transition rules. A payor who used
the substantiation method of section 4.01
of Rev. Proc. 2007–63 for an employee
during the first 9 months of calendar year
2008 may not use the high-low substanti-
ation method in section 5 of this revenue
procedure for that employee until January
1, 2009. A payor who used the high-low
substantiation method of section 5 of Rev.
Proc. 2007–63 for an employee during the
first 9 months of calendar year 2008 must
continue to use the high-low substantiation
method for the remainder of calendar year
2008 for that employee. A payor described
in the previous sentence may use the rates
and high-cost localities published in sec-
tion 5 of Rev. Proc. 2007–63, in lieu of
the updated rates and high-cost localities
provided in section 5 of this revenue proce-
dure, for travel on or after October 1, 2008,
and before January 1, 2009, if those rates
and localities are used consistently during
this period for all employees reimbursed
under this method.
SECTION 6. LIMITATIONS AND
SPECIAL RULES
.01In general. The federalper diem
rate and the federal M&IE rate described in
section 3.02 of this revenue procedure for
the locality of travel will be applied in the
same manner as applied under the Federal
Travel Regulations, 41 C.F.R. Part 301–11
(2007), except as provided in sections 6.02
through 6.04 of this revenue procedure.
.02Federal per diem rate. A receipt
for lodging expenses is not required in de-
termining the amount of expenses deemed
substantiated under section 4.01 or 5.01 of
this revenue procedure. See section 7.01
of this revenue procedure for the require-
ment that the employee substantiate the
time, place, and business purpose of the
expense.
.03Federal per diem or M&IE rate.A
payor is not required to reduce the federal
per diemrate or the federal M&IE rate for
the locality of travel for meals provided in
kind, provided the payor has a reasonable
belief that meal and incidental expenses
were or will be incurred by the employee
during each day of travel.
.04Proration of the federal per diem or
M&IE rate. Pursuant to the Federal Travel
Regulations, in determining the federalper
diemrate or the federal M&IE rate for
the locality of travel, the full applicable
federal M&IE rate is available for a full
day of travel from 12:01 a.m. to 12:00
midnight. The method described in sec-
tion 6.04(1) of this revenue procedure must
be used for purposes of determining the
amount deemed substantiated under sec-
tion 4.03 or 4.05 of this revenue procedure
for partial days of travel away from home.
For purposes of determining the amount
deemed substantiated under section 4.01,
4.02, 4.04, or 5 of this revenue procedure
for partial days of travel away from home,
either of the following methods may be
used to prorate the federal M&IE rate to
determine the federalper diemrate or the
federal M&IE rate for the partial days of
travel:
2008–41 I.R.B.863October 14, 2008

(1) The rate may be prorated using the
method prescribed by the Federal Travel
Regulations. Currently the Federal Travel
Regulations allow three-fourths of the ap-
plicable federal M&IE rate for each partial
day during which the employee or self-em-
ployed individual is traveling away from
home in connection with the performance
of services as an employee or self-em-
ployed individual. The same ratio may be
applied to prorate the allowance for inci-
dental expenses described in section 4.05
of this revenue procedure; or
(2) The rate may be prorated using any
method that is consistently applied and in
accordance with reasonable business prac-
tice. For example, if an employee travels
away from home from 9 a.m. one day to
5 p.m. the next day, a method of proration
thatresultsinanamountequaltotwotimes
the federal M&IE rate will be treated as
being in accordance with reasonable busi-
ness practice (even though only one and a
half times the federal M&IE rate would be
allowed under the Federal Travel Regula-
tions).
.05Application of the appropriate
§ 274(n) limitation on meal expenses.Ex-
cept as provided in section 6.05(5), all or
part of the amount of an expense deemed
substantiated under this revenue procedure
is subject to the appropriate limitation
under § 274(n) (see section 2.02 of this
revenue procedure) on the deductibility of
food and beverage expenses.
(1) If an amount for meal and incidental
expenses is computed pursuant to section
4.03 of this revenue procedure, the tax-
payer must treat that amount as an expense
for food and beverages.
(2)Ifaper diemallowance is paid only
for meal and incidental expenses, the payor
must treat an amount equal to the lesser of
the allowance or the federal M&IE rate for
the locality of travel for each day (or partial
day, see section 6.04 of this revenue pro-
cedure) as an expense for food and bever-
ages.
(3)Ifaper diemallowance is paid for
lodging, meal, and incidental expenses for
each calendar day (or partial day) the em-
ployee is away from home at a rate equal to
or in excess of the federalper diemrate for
the locality of travel, the payor must treat
an amount equal to the federal M&IE rate
for the locality of travel for each calendar
day (or partial day) as an expense for food
or beverages.
(4) If aper diemallowance is paid for
lodging, meal, and incidental expenses for
each calendar day (or partial day) the em-
ployee is away from home at a rate less
than the federalper diemrate for the lo-
cality of travel, the payor must:
(a) treat an amount equal to the federal
M&IE rate for the locality of travel for
each calendar day (or partial day) or, if
less, the amount of the allowance, as an
expense for food or beverages; or
(b) treat an amount equal to 40 percent
of the allowance as an expense for food or
beverages.
(5) If an amount for incidental expenses
is computed under section 4.05 of this rev-
enue procedure, none of the amount so
computed is subject to limitation under
§ 274(n) on the deductibility of food and
beverage expenses.
.06No double reimbursement or deduc-
tion. If a payor pays aper diemallowance
in lieu of reimbursing actual lodging, meal,
and incidental expenses, or meal and inci-
dental expenses, in accordance with sec-
tion 4 or 5 of this revenue procedure, and
such amounts are treated as paid under an
accountable plan, any additional payment
with respect to those expenses is treated
as paid under a nonaccountable plan, is
included in the employee’s gross income,
is reported as wages or other compensa-
tion on the employee’s Form W–2, and
is subject to withholding and payment of
employment taxes. Similarly, if an em-
ployee or self-employed individual com-
putes the amount allowable as a deduction
for meal and incidental expenses for travel
away from home in accordance with sec-
tion 4.03 or 4.04 of this revenue procedure,
no other deduction is allowed to the em-
ployee or self-employed individual with
respect to those expenses. For example,
assume an employee receives aper diem
allowance from a payor for lodging, meal,
and incidental expenses, or for meal and
incidental expenses, incurred while travel-
ing away from home and such amounts are
treated as paid under an accountable plan.
During that trip, the employee pays for din-
ner for the employee and two business as-
sociates. The payor reimburses as a busi-
ness entertainment meal expense the meal
expense for the employee and the two busi-
ness associates. Because the payor also
pays aper diemallowance to cover the cost
of the employee’s meals, the amount paid
by the payor for the employee’s portion of
the business entertainment meal expense
is treated as paid under a nonaccountable
plan, is reported as wages or other compen-
sation on the employee’s Form W–2, and is
subject to withholding and payment of em-
ployment taxes.
.07Related parties. Sections 4.01 and
5 of this revenue procedure do not apply if
a payor and an employee are related within
the meaning of § 267(b), but for this pur-
pose the percentage of ownership interest
referred to in § 267(b)(2) is 10 percent.
SECTION 7. APPLICATION
.01 If the amount of travel expenses is
deemed substantiated under the rules pro-
vided in section 4 or 5 of this revenue pro-
cedure, and the employee substantiates to
the payor the elements of time, place, and
business purpose of the travel for that day
(or partial day) in accordance with para-
graphs (b)(2) and (c) (other than subpara-
graph (2)(iii)(A) thereof) of § 1.274–5, the
employee is deemed to satisfy the adequate
accounting requirements of § 1.274–5(f)
as well as the requirement to substantiate
by adequate records or other sufficient ev-
idence for purposes of § 1.274–5(c). See
also § 1.62–2(e)(1) for the rule that in order
to satisfy the substantiation requirement of
an accountable plan, an arrangement must
require business expenses to be substanti-
ated to the payor within a reasonable pe-
riod of time.
.02 An arrangement providingper diem
allowances will be treated as satisfying the
requirement of § 1.62–2(f)(2) of return-
ing amounts in excess of expenses if the
employee is required to return within a
reasonable period of time (as defined in
§ 1.62–2(g)) any portion of the allowance
that relates to days of travel not substan-
tiated, even though the arrangement does
not require the employee to return the por-
tion of the allowance that relates to days
of travel substantiated and that exceeds
the amount of the employee’s expenses
deemed substantiated. For example, as-
sume a payor provides an employee an ad-
vanceper diemallowance for meal and in-
cidental expenses of $250, based on an an-
ticipated 5 days of business travel at $50
per day to a locality for which the fed-
eral M&IE rate is $39, and the employee
substantiates 3 full days of business travel.
The requirement to return excess amounts
is treated as satisfied if the employee is
October 14, 20088642008–41 I.R.B.

required to return within a reasonable pe-
riod of time (as defined in § 1.62–2(g)) the
portion of the allowance that is attribut-
able to the 2 unsubstantiated days of travel
($100), even though the employee is not
required to return the portion of the al-
lowance ($33) that exceeds the amount of
the employee’s expenses deemed substan-
tiated under section 4.02 of this revenue
procedure ($117) for the 3 substantiated
days of travel. However, the $33 excess
portion of the allowance is treated as paid
under a nonaccountable plan as discussed
in section 7.04 of this revenue procedure.
.03 An employee is not required to in-
clude in gross income the portion of a
per diemallowance received from a payor
that is less than or equal to the amount
deemed substantiated under the rules pro-
vided in section 4 or 5 of this revenue pro-
cedure if the employee substantiates the
business travel expenses covered by the
per diemallowance in accordance with
section 7.01 of this revenue procedure. See
§ 1.274–5T(f)(2)(i). Assuming that the re-
maining requirements for an accountable
plan provided in § 1.62–2 are satisfied, that
portion of the allowance is treated as paid
under an accountable plan, is not reported
as wages or other compensation on the em-
ployee’s Form W–2, and is exempt from
the withholding and payment of employ-
ment taxes. See § 1.62–2(c)(2) and (c)(4).
.04 An employee is required to include
in gross income only the portion of theper
diemallowance received from a payor that
exceeds the amount deemed substantiated
under the rules provided in section 4 or 5
of this revenue procedure if the employee
substantiates the business travel expenses
coveredbytheper diemallowance in
accordance with section 7.01 of this rev-
enue procedure. See § 1.274–5T(f)(2)(ii).
In addition, the excess portion of the
allowance is treated as paid under a nonac-
countable plan, is reported as wages or
other compensation on the employee’s
Form W–2, and is subject to withholding
and payment of employment taxes. See
§ 1.62–2(c)(3)(ii), (c)(5), and (h)(2)(i)(B).
.05 If the amount of the expenses that
is deemed substantiated under the rules
provided in section 4.01, 4.02, or 5 of this
revenue procedure is less than the amount
of the employee’s business expenses for
travel away from home, the employee
may claim an itemized deduction for the
amount by which the business travel ex-
penses exceed the amount that is deemed
substantiated, provided the employee sub-
stantiates all the business travel expenses
(not just the excess over the federalper
diemrate), includes on Form 2106, “Em-
ployee Business Expenses,” the deemed
substantiated portion of theper diem
allowance received from the payor, and in-
cludes in gross income the portion (if any)
of theper diemallowance received from
the payor that exceeds the amount deemed
substantiated. See § 1.274–5T(f)(2)(iii).
However, for purposes of claiming this
itemized deduction with respect to meal
and incidental expenses, substantiation of
the amount of the expenses is not required
if the employee is claiming a deduction
that is equal to or less than the amount
computed under section4.03ofthisrev-
enue procedure minus the amount deemed
substantiated under sections 4.02 and 7.01
of this revenue procedure. The itemized
deduction is subject to the appropriate
limitation (see section 2.02 of this revenue
procedure) on meal and entertainment
expenses provided in § 274(n) and the
2-percent floor on miscellaneous itemized
deductions provided in § 67.
.06 An employee who pays or incurs
amounts for meal expenses and does not
receive aper diemallowance for meal and
incidental expenses may deduct an amount
computed pursuant to section 4.03 of this
revenue procedure only as an itemized de-
duction. This itemized deduction is sub-
ject to the appropriate limitation on meal
and entertainment expenses provided in
§ 274(n) and the 2-percent floor on miscel-
laneous itemized deductions provided in
§ 67. See section 7.07 of this revenue pro-
cedure for the treatment of an employee
who does not pay or incur amounts for
meal expenses and does not receive aper
diemallowance for incidental expenses.
.07 An employee who does not pay or
incur amounts for meal expenses and does
not receive aper diemallowance for in-
cidental expenses may deduct an amount
computed pursuant to section 4.05 of this
revenue procedure only as an itemized de-
duction. This itemized deduction is sub-
ject to the 2-percent floor on miscellaneous
itemized deductions provided in § 67. See
section 7.06 of this revenue procedure for
the treatment of an employee who pays or
incurs amounts for meal expenses and does
not receive aper diemallowance for meal
and incidental expenses.
.08 A self-employed individual who
pays or incurs meal expenses for a calen-
dar day (or partial day) of travel away from
home may deduct an amount computed
pursuant to section 4.03 of this revenue
procedure in determining adjusted gross
income under § 62(a)(1). This deduction
is subject to the appropriate limitation on
meal and entertainment expenses provided
in § 274(n).
.09 A self-employed individual who
does not pay or incur meal expenses for
a calendar day (or partial day) of travel
away from home may deduct an amount
computed pursuant to section 4.05 of this
revenue procedure in determining adjusted
gross income under § 62(a)(1).
.10 If a payor’s reimbursement or
other expense allowance arrangement ev-
idences a pattern of abuse of the rules of
§ 62(c) and the regulations thereunder,
all payments under the arrangement will
be treated as made under a nonaccount-
able plan. See § 1.62–2(k) and Rev. Rul.
2006–56. Thus, these payments are in-
cluded in the employee’s gross income,
are reported as wages or other compen-
sation on the employee’s Form W–2, and
are subject to withholding and payment
of employment taxes. See § 1.62–2(c)(3),
(c)(5), and (h)(2), and section 8.06 of this
revenue procedure.
SECTION 8. WITHHOLDING AND
PAYMENT OF EMPLOYMENT TAXES
.01Theportionofaper diemal-
lowance, if any, that relates to the days
of business travel substantiated and that
exceeds the amount deemed substantiated
for those days under section 4.01, 4.02, or
5 of this revenue procedure is treated as
paid under a nonaccountable plan and is
subject to withholding and payment of em-
ployment taxes. See § 1.62–2(h)(2)(i)(B).
.02 In the case of aper diemallowance
paid as a reimbursement, the excess de-
scribed in section 8.01 of this revenue pro-
cedure is subject to withholding and pay-
ment of employment taxes in the payroll
period in which the payor reimburses the
expenses for the days of travel substanti-
ated. See § 1.62–2(h)(2)(i)(B)(2).
.03 In the case of aper diemallowance
paid as an advance, the excess described
in section 8.01 of this revenue procedure
is subject to withholding and payment of
employment taxes no later than the first
2008–41 I.R.B.865October 14, 2008

payroll period following the payroll period
in which the days of travel with respect
to which the advance was paid are sub-
stantiated. See § 1.62–2(h)(2)(i)(B)(3). If
some or all of the days of travel with re-
spect to which the advance was paid are
not substantiated within a reasonable pe-
riod of time and the employee does not re-
turn the portion of the allowance that re-
lates to those days within a reasonable pe-
riod of time, the portion of the allowance
that relates to those days is subject to with-
holding and payment of employment taxes
no later than the first payroll period follow-
ing the end of the reasonable period. See
§ 1.62–2(h)(2)(i)(A).
.04 In the case of aper diemallowance
only for meal and incidental expenses for
travel away from home paid to an em-
ployee in the transportation industry by a
payor that uses the rule in section 4.04(4)
of this revenue procedure, the excess of
theper diemallowance paid for the pe-
riod over the amount deemed substanti-
ated for the period under section 4.02 of
this revenue procedure (after applying sec-
tion 4.04(4) of this revenue procedure),
is subject to withholding and payment of
employment taxes no later than the first
payroll period following the payroll pe-
riod in which the excess is computed. See
§ 1.62–2(h)(2)(i)(B)(4).
.05 For example, assume that an em-
ployer pays an employee aper diem
allowance under an arrangement that
otherwise meets the requirements of an
accountable plan to cover business ex-
penses for meals and lodging for travel
away from home at a rate of 120 percent
of the federalper diemrate for the local-
ities to which the employee travels. The
employer does not require the employee
to return the 20 percent by which the re-
imbursement for those expenses exceeds
the federalper diemrate. The employee
substantiates 6 days of travel away from
home: 2 days in a locality in which the
federalper diemrate is $160 and 4 days
in a locality in which the federalper diem
rate is $120. The employer reimburses
the employee $960 for the 6 days of travel
away from home (2 x (120% x $160) + 4
x (120% x $120)), and does not require
the employee to return the excess payment
of $160 (2 days x $32 ($192-$160) + 4
days x $24 ($144-$120)). For the payroll
period in which the employer reimburses
the expenses, the employer must withhold
and pay employment taxes on $160. See
section 8.02 of this revenue procedure.
.06 If aper diemallowance arrange-
ment has no mechanism or process to
determine when an allowance exceeds the
amount that may be deemed substantiated
and the arrangement routinely pays al-
lowances in excess of the amount that may
be deemed substantiated without requiring
actual substantiation of all the expenses or
repayment of the excess amount, the fail-
ure of the arrangement to treat the excess
allowances as wages for employment tax
purposes causes all payments made under
the arrangement to be treated as made un-
der a nonaccountable plan. See Rev. Rul.
2006–56.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective for
per diemallowances for lodging, meal and
incidental expenses, or for meal and inci-
dental expenses only, that are paid to an
employee on or after October 1, 2008, with
respect to travel away from home on or af-
ter October 1, 2008. For purposes of com-
puting the amount allowable as a deduc-
tion for travel away from home, this rev-
enue procedure is effective for meal and
incidental expenses or for incidental ex-
penses only paid or incurred on or after Oc-
tober 1, 2008.
SECTION 10. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2007–63 is superseded.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Stewart H. Brant of the Of-
fice of Associate Chief Counsel (Income
Tax and Accounting). For further infor-
mation regarding this revenue procedure,
contact Mr. Brant at (202) 622–4930 (not
a toll-free call).
October 14, 20088662008–41 I.R.B.

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking
Transfers by D
omestic
Corporations
That are
Subject to Se
ction 367(a)(5);
Distributio
ns by Domestic
Corporatio
ns That are Subject
to Section 1
248(f)
REG–209006
–89
AGENCY: In
ternal Revenue Service
(IRS), Tre
asury.
ACTION: No
tice of proposed rulemaking.
SUMMARY: T
his document contains pro-
posed regu
lations under sections 367(a),
367(a)(5)
, 367(b), 1248(a), 1248(e),
1248(f), a
nd 6038B of the Internal Rev-
enue Code
(Code). The proposed regula-
tions und
er sections 367(a)(5) and 367(b)
apply whe
n a domestic corporation trans-
fers cert
ain property to a foreign corpora-
tion in an
exchange described in section
361(a) o
r (b). The proposed regulations
under se
ction 1248(e) suspend the appli-
cation o
f section 1248(e) when capital
gains ar
e taxed at a rate equal to or greater
than the
rate at which ordinary income
is taxe
d. The proposed regulations under
sectio
n 1248(f) apply when a domestic
corpor
ation distributes stock of certain
foreig
n corporations in a distribution to
which s
ection 337, 355, or 361 applies.
The pr
oposed regulations under section
1248(
f) include regulations described in
Notic
e 87–64, 1987–2 C.B. 375. The
propo
sed regulations under section 6038B
estab
lish reporting requirements for cer-
tain
transfers of property by a domestic
corp
oration to a foreign corporation in
cert
ain exchanges described in section
361(
a) or (b). Finally, the proposed reg-
ulat
ions under section 367(a) include the
reg
ulations described in Notice 2008–10,
200
8–3 I.R.B. 277.
The
proposed regulations included
in t
his document affect domestic corpo-
rat
ions that transfer property to foreign
cor
porations in certain transactions, or
tha
t distribute the stock of certain foreign
cor
porations, and certain shareholders of
su
ch domestic corporations. The proposed
regulations a
re necessary, in part, to pro-
vide guidance
on changes to the law made
by the Technic
al and Miscellaneous Rev-
enue Act of 198
8 (Public Law 100–647,
102 Stat. 3342
).
DATES: Written or electronic comments
and requests for a public hearing must be
received by November 18, 2008.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–209006–89), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
betweenthehoursof8a.m. and4p.m.
to CC:PA:LPD:PR (REG–209006–89),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC 20224, or sent elec-
tronically, via the Federal eRulemak-
ing Portal atwww.regulations.gov(IRS
REG–209006–89).
FOR FURTH
ER INFORMATION
CONTACT:
Concerning the regula-
tions, D
aniel McCall, (202) 622–3860;
concern
ing submissions of comments,
request
s for a public hearing, and/or
to be pla
ced on the building access
list to a
ttend a hearing, Richard Hurst
(Richa
rd.A.Hurst@irscounsel.treas.gov),
or (202
) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The col
lections of information con-
tained
in this notice of proposed rulemak-
ing hav
e been submitted to the Office of
Manag
ement and Budget for review in
accor
dance with the Paperwork Reduc-
tion A
ct of 1995 (44 U.S.C. 3507(d)).
Comme
nts on the collections of infor-
matio
nshouldbesenttotheOffice of
Mana
gement and Budget,Attn: Desk
Offi
cer for the Department of Treasury,
Offi
ce of Information and Regulatory
Affa
irs, Washington, DC 20503, with
copi
es to the Internal Revenue Service,
Attn
: IRS Reports Clearance Officer,
SE:
W:CAR:MP:T:T:SP, Washington, DC
202
24. Comments on the collections of
inf
ormation should be received by Octo-
ber
20, 2008.
Comments are r
equested concerning:
Whether the pro
posed collections of in-
formation are
necessary for the proper per-
formance of th
e functions of the Internal
Revenue Servi
ce, including whether the
information w
ill have practical utility;
The accuracy o
f the estimated burden
associated w
ith the proposed collections of
information
;
How the quali
ty, utility, and clarity of
the informat
ion to be collected may be en-
hanced;
How the burde
n of complying with the
proposed col
lections of information may
be minimized
, including through the appli-
cation or au
tomated collection techniques
or other for
ms of information technology;
and
Estimates o
f capital or start-up costs
and costs of
operation, maintenance, and
purchase of
service to provide information.
The collect
ions of informa-
tion in thes
e proposed regulations
are in §§1.
367(a)–7(c)(4) and (5);
1.1248(f)
–2(b)(1) and (c)(1); and
1.6038B–1
(c)(6). The collections of
informati
on are mandatory. The likely
responden
ts are domestic corporations.
Estimated
total annual reporting bur-
den: 3260.
Estimated
average annual burden hours
per respon
dent: 10.69.
Estimated
number of respondents: 305.
An agency m
ay not conduct or sponsor,
and a perso
n is not required to respond to, a
collecti
on of information unless it displays
a valid co
ntrol number assigned by the Of-
fice of Ma
nagement and Budget.
Books and
records relating to a collec-
tion of in
formation must be retained as
long as th
eir contents may become mate-
rial in th
e administration of any internal
revenue
law. Generally, tax returns and tax
return i
nformation are confidential, as re-
quired b
y 26 U.S.C. 6103.
Backg
round
This
document contains proposed
ame
ndments to 26 CFR part 1 under sec-
tio
ns 367(a), 367(a)(5), 367(b), 1248(a),
124
8(e), 1248(f), and 6038B of the Code.
Sec
tion 367(a)(1) generally provides
tha
t if a United States person transfers
pro
perty to foreign corporation in connec-
tio
n with an exchange described in section
2008–41 I.R.B.867October 14, 2008

332, 351, 354, 356, or 361, then the for-
eign corporation shall not be considered
a corporation for purposes of determin-
ing the extent to which the United States
person recognizes gain on the transfer.
Sections 367(a)(2) and 367(a)(3), respec-
tively, provide exceptions to the general
rule of section 367(a)(1) for transfers of
stock or securities of a foreign corpora-
tion that is a party to the exchange or a
party to the reorganization, and for certain
property used in an active foreign trade or
business. However, section 367(a)(5) pro-
vides that, except to the extent provided
in regulations, the exceptions to the gen-
eral rule of section 367(a)(1) provided by
section 367(a)(2) and (a)(3) do not apply
toatransferofpropertybyadomestic
corporationtoaforeigncorporationinan
exchange described in section 361(a) or
(b).
Section 367(b)(1) provides that in the
case of any exchange described in section
332, 351, 354, 355, 356, or 361 in con-
nection with which there is no transfer of
property described in section 367(a)(1), a
foreign corporation shall be considered to
be a corporation except to the extent pro-
vided in regulations prescribed by the Sec-
retary which are necessary or appropriate
to prevent the avoidance of Federal income
taxes. A fundamental policy of section
367(b) is to preserve the potential appli-
cation of section 1248 following the ac-
quisitionofthestockorassetsofafor-
eign corporation by another foreign cor-
poration. H.R. Rep. No. 94–658, at 242
(1975).
Section 367(c)(1) provides that for pur-
poses of section 367, any distribution de-
scribed in section 355 (or so much of sec-
tion 356 as relates to section 355) shall be
treated as an exchange whether or not it is
an exchange.
Section 1248(a) provides that a United
States person shall include in gross in-
come as a dividend any gain recognized on
the sale or exchange of stock of a foreign
corporation that was a controlled foreign
corporation (CFC) (as defined in section
957(a)) at any time during the five-year pe-
riod ending on the date of the sale or ex-
change but only if the United States person
owned (or is considered to have owned,
within the meaning of section 958) 10 per-
cent or more of the total combined vot-
ing power of the foreign corporation at any
time during that five-year period (a section
1248 shareholder). The amount of the gain
recognized by the United States person on
the sale or exchange that is recharacterized
as a dividend is limited to the earnings and
profits of the foreign corporation, and of
certain foreign subsidiaries of such corpo-
ration, attributable to the stock sold or ex-
changed that were accumulated in taxable
years of the foreign corporation beginning
after December 31, 1962, and during the
period or periods the stock was held by the
United States person while the foreign cor-
poration was a CFC.
Section 1248(e) provides that, except
as provided in regulations, if a United
States person sells or exchanges stock of
a domestic corporation that was formed
or availed of principally for the holding,
directly or indirectly, of stock of one or
more foreign corporations, such sale or
exchange shall be treated for purposes of
section 1248 as a sale or exchange of the
stock of the foreign corporations held by
the domestic corporation.
Section 1248(f)(1) provides that, except
as provided in regulations, a domestic cor-
poration that distributes stock of a foreign
corporation in a distribution to which sec-
tion 311(a), 337, 355(c)(1), or 361(c)(1)
applies, shall include in gross income as
a dividend an amount equal to the excess
of the fair market value of such stock over
its adjusted basis, but only to the extent
of the earnings and profits of the foreign
corporation attributable (under regulations
prescribed by the Secretary) to such stock
which were accumulated in taxable years
of such foreign corporation beginning after
December 31, 1962, and during the period
or periods the stock was held by the do-
mestic corporation while the foreign cor-
poration was a CFC.
Explanation of Provisions
A.Section 367(a)(5)
1.Overview
As noted in the Background part of this
preamble, section 367(a)(2) and (3) pro-
vide exceptions to the general rule of sec-
tion 367(a)(1). Section 367(a)(2) provides
that, except to the extent provided in reg-
ulations, section 367(a)(1) shall not apply
to the transfer of stock or securities of a
foreign corporation that is a party to the
exchange or a party tothe reorganization.
Section 367(a)(3) provides that, except to
the extent provided in regulations, section
367(a)(1) shall not apply to the transfer of
property used in an active foreign trade
or business. Sections 1.367(a)–2T and
§1.367(a)–3, along with other related pro-
visions, implement the exceptions in sec-
tion 367(a)(2) and (a)(3). In addition, sec-
tion 367(a)(6) grants the Secretary author-
ity to promulgate regulations providing ad-
ditional exceptions to the general rule of
section 367(a)(1).
Section 367(a)(5) provides that the
exceptions to the general rule of sec-
tion 367(a)(1) provided under section
367(a)(2) and (3) shall not apply in the
case of a transfer of property by a domestic
corporation (U.S. transferor) to a foreign
corporation (foreign acquiring corpora-
tion) in an exchange described in section
361(a) or (b) (section 361 exchange).
The general rule under section 367(a)(5),
therefore, is that a transfer of property by
a U.S. transferor to a foreign acquiring
corporation in a section 361 exchange
is subject to the general rule of section
367(a)(1). In that case, the U.S. transferor
recognizes gain with respect to the transfer
of appreciated property in the section 361
exchange. See section 367(a)(1) and the
regulations under that section.
Section 367(a)(5), however, further
provides that subject to such basis adjust-
ments and such other conditions as shall
be provided in regulations the general rule
of section 367(a)(5) shall not apply (and
therefore the exceptions to the general rule
of section 367(a)(1) may be available) if
the U.S. transferor is controlled (within
the meaning of section 368(c)), by five
or fewer domestic corporations. For pur-
poses of the control requirement, members
of the same affiliated group (within the
meaning of section 1504) are treated as a
single corporation. The legislative history
to section 367(a)(5) explains that regula-
tions are expected to provide relief from
the general rule only if the “U.S. corpo-
rate shareholders in the transferor agree to
take a basis in the stock they receive in a
foreign corporation that is a party to the
reorganization equal to the lesser of (a) the
U.S. corporate shareholders’ basis in such
stock received pursuant to section 358, or
(b) their proportionate share of the basis
in the assets of the transferor corporation
transferred to the foreign corporation.”
S. Rep. No. 100–445, at 62 (1988).
October 14, 20088682008–41 I.R.B.

The legislative history explains that
“the requirement that five or fewer domes-
tic corporations own at least 80 percent of
the U.S. transferor’s stock assures that the
bulk of the built-in gain [in the transferred
property] remains subject to U.S. tax-
ing jurisdiction.” The legislative history
further states that “it is expected that reg-
ulations [issued undersection 367(a)(5)]
will require the U.S. corporate transferor
to recognize immediately any built-in gain
that does not remain subject to U.S. taxing
jurisdiction by virtue of a substituted stock
basis.” For example, the U.S. transferor
would recognize gain “where 20 percent
or less of the U.S. corporate transferor
is owned by foreign shareholders who
receive substituted basis stock in the trans-
feree corporation, which stock would not
be subject to U.S. taxing jurisdiction on
disposition.” The U.S. transferor would
also recognize gain to the extent each con-
trolling domestic corporate shareholder
does not receive an amount of stock of
the issuing corporation in the reorganiza-
tion sufficient to preserve its share of the
built-in gain in the property transferred
by the U.S. transferor in the section 361
exchange.
2.Explanation of proposed regulations
The proposed regulations confirm the
general rule of section 367(a)(5), but pro-
vide an elective exception to the general
rule pursuant to which the exceptions pro-
vided by section 367(a) and the regulations
under that section may be available.
a)General rule of section 367(a)(5)
Consistent with section 367(a)(5), the
proposed regulations confirm that the ex-
ceptions to the general rule of section
367(a)(1) provided in section 367(a) gen-
erally are not available to a transfer of
property by a U.S. transferor to a foreign
acquiring corporation in a section 361 ex-
change. As noted, under the general rule
of section 367(a)(5), section 367(a)(1)
would require the U.S. transferor to rec-
ognize gain on the transfer of appreciated
property to the foreign acquiring corpo-
ration in the section 361 exchange. This
general rule applies even if the conditions
and requirements for the application of
such exceptions would otherwise be met.
The proposed regulations clarify that the
general rule of section 367(a)(5) applies
to a transfer of property pursuant to an
exchange described in section 351 (sec-
tion 351 exchange) that qualifies as both
a section 351 exchange and a section 361
exchange. See Notice 2008–10, 2008–3
I.R.B. 277.
b)Elective exception to the general rule
The proposed regulations provide an
elective exception to the general rule of
section 367(a)(5) if certain conditions
and requirements are satisfied (discussed
in parts A.2.b.i through v of this pream-
ble). If the exception applies, then the
exceptions to the general rule of section
367(a)(1) provided in section 367(a) and
the regulations under that section are
available to the transfer of property by the
U.S. transferor to the foreign acquiring
corporation in the section 361 exchange,
subject to any conditions and requirements
for the application of such exceptions. In
addition, even if the exception provided
by the proposed regulations applies, the
U.S. transferor may still recognize gain
on the section 361 exchange in certain
circumstances (discussed in part A.2.b.ii
of this preamble), including any gain oth-
erwise required to be recognized under
section 367(a). See, for example, section
367(a)(3)(B) and (C).
The conditions and requirements of
the elective exception carry out the policy
of section 367(a)(5) by ensuring that the
exceptions to the general rule of section
367(a)(1) are available only to the extent
the net built-in gain in certain property
transferred by the U.S. transferor in the
section 361 exchange remains subject to
corporate-level taxation in the hands of
the controlling domestic corporate share-
holders of the U.S. transferor through their
ownership of stock received in the trans-
action. References to “stock received”
in this preamble include stock deemed
received in the transaction.
The proposed regulations apply to all
property transferred by the U.S. trans-
feror in the section 361 exchange, other
than property to which section 367(d)
applies (section 367(d) property). But
see part D.2 of this preamble regarding
proposed regulations under section 367(a)
that require section 367(d) property to
be treated as property to which section
367(a) applies (section 367(a) property)
in transactions that may be eligible for
the exception to the coordination rule
of §1.367(a)–3(d)(2)(vi)(A) provided by
§1.367(a)–3(d)(2)(vi)(B)(1). For purposes
of these proposed regulations, section
367(a) property includes any property
transferred by the U.S. transferor in the
section 361 exchange (other than section
367(d) property), whether the property
is appreciated (built-in gain property) or
depreciated (built-in loss property) at the
time of the section 361 exchange. The
proposed regulations preserve (or require
the recognition of) the net built-in gain
in the section 367(a) property transferred
in the section 361 exchange (generally
defined as “inside gain” by the proposed
regulations). In this regard, a transfer of
section 367(a) property pursuant to a sec-
tion 361 exchange to which the elective
exception applies is treated differently
than a transfer of built-in gain property
and built-in loss property by a U.S. person
to a foreign corporationinasection351
exchange that is not also a section 361 ex-
change. In the latter transaction, only the
built-in gain property would be subject to
section 367(a)(1), and the U.S. transferor
would be required to recognize gain with
respect to such property without offsetting
the gain with losses related to the built-in
loss property.
The proposed regulations contain an
anti-stuffing rule pursuant to which any
property that would otherwise consti-
tute section 367(a) property shall not be
considered section 367(a) property for
purposes of any determination under the
proposed regulations for which the amount
of section 367(a) property is relevant, if the
U.S. transferor acquires such property in
connection with the section 361 exchange
with a principle purpose of affecting any
such determination (for example, inside
gain and inside basis). This rule may
apply, for example, if the U.S. transferor
acquires built-in loss property or cash
proceeds from indebtedness incurred in
connection with the transaction.
The conditions and requirements for
the application of the exception provided
by the proposed regulations ensure that,
in the aggregate, the inside gain is recog-
nized currently by the U.S. transferor or
preserved for future taxation in the stock
received in the transaction by the control-
ling domestic corporate shareholders of
theU.S.transferor. Iftheentireinside
gain is preserved in the stock received by
2008–41 I.R.B.869October 14, 2008

the controlling domestic corporate share-
holders, the basis adjustment required by
the exception (discussed in part A.2.b.iii
of this preamble) effectively results in the
section 361 exchange being treated sim-
ilarly to a transfer of the section 367(a)
property in a section 351 exchange inso-
far as, in the aggregate, the controlling
domestic corporate shareholders’ adjusted
basis in the stock received in the transac-
tion generally would reflect the aggregate
bases of the section 367(a) property and
the net built-in gain in such property on
the date of the section 361 exchange.
The inside gain equals the amount by
which the aggregate gross fair market
value of the section 367(a) property trans-
ferred by the U.S. transferor in the section
361 exchange exceeds the sum of the ag-
gregate bases of such property and a pro-
portionate amount of any liabilities of the
U.S. transferor assumed in the section 361
exchange or satisfied in the reorganization
pursuant to section 361(c)(3), but only to
the extent the payment of any such liability
would give rise to a deduction (deductible
liabilities). For this purpose, gross fair
market value means fair market value
determined without regard to mortgages,
liens, pledges, or other liabilities. How-
ever, the fair market value of any property
subject to nonrecourseindebtedness shall
not be less than the amount of such indebt-
edness. In addition, the aggregate bases of
the section 367(a) property is determined
after taking into account any gain other-
wise required to be recognized by the U.S.
transferor under section 367(a). See, for
example, section 367(a)(3)(B) and (C).
The proposed regulations provide rules
for determining the proportionate amount
of any deductible liabilities taken into ac-
count in determining the inside gain. The
IRS and Treasury Department believe that
taking deductible liabilities into account
in determining inside gain comports with
the policy of section 367(a)(5) to protect
the corporate tax base following the repeal
of the “General Utilities” doctrine, insofar
as the U.S. transferor would have received
the benefit of any deductible liabilities if
it had disposed of its assets in a taxable
transaction in which the deductible liabili-
ties were assumed by the acquirer.
In determining the inside gain, the IRS
and Treasury Department declined to con-
sider attributes (for example, net operating
losses and foreign tax credits) of the U.S.
transferor other than the tax bases of the
section 367(a) property and deductible
liabilities allocable to section 367(a) prop-
erty. These attributes are not considered
for this purpose because of concerns re-
garding the complexity for determining
how any limitations on the use of such
attributes should be taken into account and
the potential for duplicating the benefit of
such attributes. Comments are requested
regarding whether and how other attributes
of the U.S. transferor should be taken into
account for determining inside gain.
If the section 361 exchange is part
of a divisive reorganization described in
section 368(a)(1)(D) in which the U.S.
transferor distributes the stock of the for-
eign acquiring corporation in a distribution
to which section 355 applies (section 355
distribution) and, as part of a plan or se-
ries of related transactions, such stock is
subsequently distributed in one or more
section 355 distributions, in addition to
the conditions discussed in parts A.2.b.i
through v of this preamble, two addi-
tional conditions must be satisfied. First,
each section 355 distribution must be to
a member of the affiliated group (within
the meaning of section 1504) that includes
the U.S. transferor at the time of the 361
exchange. Second, each affiliated group
member that receives stock of the foreign
acquiring corporation in the final section
355 distribution must adjust the basis of
the stock received (as determined under
section 358 and the regulations under that
section) as required by the proposed reg-
ulations (discussed in part A.2.b.iii of this
preamble). These two additional condi-
tions ensure that the amount of inside gain
attributable to the U.S. transferor’s con-
trolling domestic corporate shareholders
remains subject to corporate-level taxation
following the final section 355 distribution
and permit section 355 distributions of the
stock of the foreign acquiring corporation
within an affiliated group.
i)Control requirement
At the time of the section 361 exchange,
the U.S. transferor must be controlled
(within the meaning of section 368(c))
by five or fewer, but at least one, domes-
tic corporations (the control group). For
this purpose, members of the same affili-
ated group (within the meaning of section
1504) are treated as one corporation. If
the U.S. transferor is controlled (within
the meaning of section 368(c)) by more
than five domestic corporations, but some
combination of five or fewer domestic
corporations control the U.S. transferor
within the meaning of section 368(c), the
U.S. transferor must designate the five or
fewer domestic corporations that comprise
the control group on Form 926, “Return by
a U.S. Transferor of Property to a Foreign
Corporation.”
Although a regulated investment com-
pany (as defined in section 851(a)) (RIC),
a real estate investment trust (as defined
in section 856(a)) (REIT), and a subchap-
ter S corporation (as defined in section
1361(a)) is each generally treated as a
domestic corporation for purposes of
the Code, such entities are not generally
subject to corporate-level taxation.
Therefore, the proposed regulations
provide that these entities cannot be
members of the control group.
The proposed regulations confirm that
because the stock ownership threshold for
the control requirement is determined by
reference to section 368(c), only direct
ownership of the stock of the U.S. trans-
feror is taken into account. The IRS and
Treasury Department declined to exercise
the authority under section 367(a)(6) to
permit indirect ownership (through a part-
nership or other entity) to be taken into
account for this purpose, in part, because
of the complexity and administrative dif-
ficulties that would arise from the basis
adjustments (discussed in part A.2.b.iii
of this preamble) that would be needed
to account for the intervening partnership
or other entity. For example, in the case
of indirect ownership through a partner-
ship, basis adjustments would need to
account for differences between a part-
ner’s basis in its partnership interest and
the partnership’s basis in the stock of the
U.S. transferor. Comments are requested
regarding the manner in which indirect
ownership could be taken into account for
this purpose without undue complexity.
ii)Gain recognition by U.S. transferor
Even if the exception provided by the
proposed regulations applies, in two in-
stances the U.S. transferor must recognize
gain on the transfer of section 367(a) prop-
erty in the section 361 exchange. This is
the case even if an exception to the general
October 14, 20088702008–41 I.R.B.

rule of section 367(a)(1) would otherwise
applytosuchtransfer.
First, the U.S. transferor must recog-
nize gain equal to the aggregate amount
of inside gain allocable to non-control
group members. The inside gain is al-
located among control group members
and non-control group members based on
each shareholder’s ownership interest (by
value) in the U.S. transferor at the time of
the section 361 exchange. The U.S. trans-
feror must recognize gain with respect to
non-control group members even if the
entireinsidegaincouldbepreservedin
the stock received by the control group
members as a group.
Second, the U.S. transferor must recog-
nize gain to the extent any control group
member cannot preserve its share of in-
side gain in the stock received that is allo-
cable to the section 367(a) property trans-
ferred in the section 361 exchange. The
amount of a control group member’s share
of inside gain that cannot be preserved in
the stock received is the amount by which
the control group member’s share of in-
side gain exceeds the fair market value of
the stock received by the control group
member that is allocable to section 367(a)
property. Gain is required to be recog-
nized in such a case because the fair mar-
ket value of the stock equals the maxi-
mum amount of the control group mem-
ber’s share of inside gain that can be pre-
served in such stock (if the basis of such
stock were zero). Under this rule, stock
received that is allocable to property other
than section 367(a) property is not avail-
able to preserve any portion of the con-
trol group member’s share of inside gain.
The U.S. transferor may be required to
recognize gain under this rule when, for
example, non-qualifying property (prop-
erty other than stock orsecurities permit-
ted to be received under section 361(a))
is received or when the foreign acquiring
corporation assumes certain liabilities of
the U.S. transferor in the section 361 ex-
change.
The proposed regulations provide rules
for determining the portion of the stock re-
ceived by a control group member that is
attributable to section 367(a) property that
are consistent with general tax principles,
including Rev. Rul. 68–55, 1968–1 C.B.
140, and the authorities cited therein. Un-
der these rules, stock received by a con-
trol group member is allocated between
the aggregate section 367(a) property and
all other property transferredinthesection
361 exchange based on relative gross fair
market value.
The U.S. transferor must recognize gain
with respect to any control group member
that cannot preserve its entire share of in-
side gain in the stock received in the trans-
action even if the control group members’
aggregate share of inside gain can be pre-
served in the stock received by the con-
trol group members as a group. For ex-
ample, assume that the U.S. transferor is
wholly owned by two domestic corpora-
tions (US1 and US2) and that each con-
trol group member’s share of inside gain
is $40x. If in the transaction US1 re-
ceived stock with a value of $30x and $20x
of non-qualifying property, the U.S. trans-
feror would recognize $10x gain with re-
spect to US1, even if US2 received suf-
ficient stock to preserve $50x gain (the
sum of US2’s $40x share of inside gain
and the portion of US1’s share of inside
gain ($10x) that cannot be preserved in the
stock received by US1).
iii)Adjustments to basis of stock received
by control group members
Under the proposed regulations, each
control group member’s basis in the stock
received in the transaction as determined
under section 358 and the regulations un-
der that section (section 358 basis) that
is allocable to the section 367(a) property
transferred by the U.S. transferor in the
section 361 exchange is reduced to the
extent necessary to preserve the control
group member’s share of inside gain. As a
general matter, if the U.S. transferor must
recognize gain with respect to a control
group member because the control group
member’s entire share of inside gain can-
not be preserved in the stock received by
the control group member in the transac-
tion (see part A.2.b.ii of this preamble), the
control group member’s section 358 basis
in the stock received that is attributable to
section 367(a) property is reduced to zero.
Only the basis of stock received by the
control group memberthat is attributable
to section 367(a) property transferred in
the section 361 exchange is reduced (for
example, the basis of stock attributable to
section 367(d) property is not reduced).
The reduction to a control group member’s
section 358 basis in the stock received that
is attributable to section 367(a) property
equals the amount, if any, by which the
control group member’s share of inside
gain (reduced by the amount of any gain
recognized by the U.S. transferor with re-
spect to the control group member (dis-
cussed in part A.2.b.ii of this preamble))
exceeds the built-in gain (or loss) in such
stock, defined as outside gain (or loss) in
the proposed regulations. The outside gain
(or loss) is the amount by which the fair
market value of such stock is greater than
(or less than) the section 358 basis of the
stock (as determined before any required
adjustment to such basis under the pro-
posed regulations). The proposed regu-
lations provide special rules that apply if
the control group member holds more than
one block of stock received in the trans-
action. Comments are requested concern-
ing whether, and the extent to which, an
outside loss should limit the reduction to
a control group member’s section 358 ba-
sis in the stock received that is attributable
to section 367(a) property. Consistent with
the legislative history, the IRS and Trea-
sury Department believe the basis reduc-
tion must be sufficient to preserve the con-
trol group member’s share of inside gain
(to the extent not otherwise recognized by
the U.S. transferor) in the stock received
that is attributable to section 367(a) prop-
erty. The IRS and Treasury Department
believethisruletobeappropriateeven
if a control group member has an outside
loss, in part because a basis reduction is re-
quired only if an election is made to apply
the exception from the general rule of sec-
tion 367(a)(5) provided by the proposed
regulations.
If the section 361 exchange is part of
a divisive reorganization described in sec-
tion 368(a)(1)(D) that is eligible for the ex-
ception (see part A.2.b of this preamble for
additional conditions that must be satisfied
in such a case), each affiliated group mem-
ber that receives stock of the foreign ac-
quiring corporation in the final section 355
distribution must reduce the section 358
basis of such stock to the same extent that
the control group member that initially re-
ceived the stock from the U.S. transferor
would have reduced its section 358 basis
in such stock. In such a case, the control
group member that received the stock of
the foreign acquiringcorporation from the
U.S. transferor is not required to reduce the
section 358 basis of such stock.
2008–41 I.R.B.871October 14, 2008

A section 361 exchange that is subject
to section 367(a)(5) may be part of a trian-
gular reorganization in which the control
group members receive stock of the cor-
poration that controls the foreign acquir-
ing corporation (the controlling corpora-
tion). In such a case, the proposed regu-
lations require the control group members
to adjust (if necessary) the section 358 ba-
sis of the stock of the controlling corpo-
ration (whether foreign or domestic) re-
ceived in the transaction. The IRS and
Treasury Department believe adjusting the
basis of such stock to be appropriate even
if the controlling corporation is domestic
because the control group members’ ag-
gregate share of inside gain may not be
preserved in the stock of the foreign ac-
quiring corporation held by the controlling
corporation in all cases. For example, lia-
bilities assumed or incurred by the foreign
acquiring corporationinconnectionwith
the transaction could reduce the amount of
inside gain preserved in such stock. More-
over, even if the control group members’
aggregate share of inside gain could be
preservedinsuchstock,suchanapproach
would shift the inside gain to the domestic
controlling corporation, rather than to the
control group members as intended by sec-
tion 367(a)(5).
iv)Agreement to recognize gain and file
amended tax return
The proposed regulations require the
U.S. transferor to include a statement with
its U.S. income tax return for the year of
the section 361 exchange certifying that
if the foreign acquiring corporation dis-
poses of a significant amount of the section
367(a) property transferred in the section
361 exchange in one or more related trans-
actions entered into with a principal pur-
pose of avoiding the U.S. tax that would
have been imposed on a sale of such prop-
erty by the U.S. transferor at the time of the
section 361 exchange, then the U.S. trans-
feror (or the foreign acquiring corporation
on behalf of the U.S. transferor) shall file
a U.S. income tax return (or amended U.S.
income tax return, as the case may be)
for the year of the section 361 exchange
reporting the gain realized but not recog-
nized on the section 361 exchange. This
requirement is intended to prevent the po-
tential use of reorganizations subject to
section 367(a)(5) to avoid the repeal of the
“General Utilities” doctrine. Interest must
be paid (determined under section 6621)
on the amount of any additional tax due on
such return. For this purpose, a disposi-
tion of a significant amount of the section
367(a) property occurs if the foreign ac-
quiring corporation disposes of an amount
of the section 367(a) property transferred
in the section 361 exchange that is greater
than forty percent of the fair market value
of the section 367(a) property at the time
of the section 361 exchange. Comments
are requested regarding whether an excep-
tion from this rule should be provided for
dispositions of section 367(a) property oc-
curring in the ordinary course of business.
v)Election and reporting requirements
To elect to apply the exception, the pro-
posed regulations require the U.S. trans-
feror and the control group members to en-
ter into a written agreement to make such
election on or before the due date for the
U.S. transferor’s timely-filed return for the
taxable year in which the section 361 ex-
change occurs. Each party to the writ-
ten agreement must also include a state-
ment with its timely-filed return for the
year of the section 361 exchange reporting
the election and other specified informa-
tion. If the section 361 exchange is part
of a divisive reorganization described in
section 368(a)(1)(D) that is eligible for the
exception (see part A.2.b of this preamble
for additional conditions that must be sat-
isfied in such a case), each affiliated group
member that receives stock of the foreign
acquiring corporation in the final section
355 distribution must enter into the written
agreement and include the reporting state-
ment with its timely-filed return (instead of
the control group member that initially re-
ceived the stock of the foreign acquiring
corporation from the U.S. transferor.) Re-
lief for reasonable cause may be available
for the failure to comply with the election
and reporting requirements.
3.Special entities
The proposed regulations apply to prop-
erty transfers by U.S. transferors, includ-
ing RICs, REITs, and subchapter S corpo-
rations. Comments are requested regard-
ing whether and the extent to which the
IRS and Treasury Department should exer-
cise the authority under section 367(a)(6)
to provide an exception from the general
rule of section 367(a)(5) for a transfer of
property by a RIC, a REIT, or a subchapter
S corporation to a foreign corporation pur-
suant to a section 361 exchange.
B.Section 367(b)
1.Overview
Section 367(b)(1) provides that in the
case of any exchange described in section
332, 351, 354, 355, 356, or 361 in con-
nection with which there is no transfer of
property described in section 367(a)(1), a
foreign corporation shall be considered to
be a corporation except to the extent pro-
vided in regulations prescribed by the Sec-
retary which are necessary or appropriate
to prevent the avoidance of Federal income
taxes.
A fundamental policy of section 367(b)
is to preserve the potential application
of section 1248 following certain section
367(b) exchanges. H.R. Rep. No. 94–658,
at 242 (1975). Thus, if the potential appli-
cation of section 1248 cannot be preserved
immediately following the acquisition of
the stock or assets of a foreign acquired
corporation by a foreign acquiring cor-
poration in a section 367(b) exchange,
the final regulations (T.D. 8862, 2000–1
C.B. 466) under section 367(b) issued on
January 24, 2000 (2000 final regulations)
require certain shareholders of the foreign
acquired corporation to include in income
as a dividend the section 1248 amount
attributable to the stock of the foreign ac-
quired corporation. See §1.367(b)–4(b).
For example, the inclusion in income of
the section 1248 amount is required if the
section 367(b) exchange results in the loss
of section 1248 shareholder status or if the
foreign acquired corporation or foreign
acquiring corporation is not a CFC imme-
diately after the section 367(b) exchange.
See §1.367(b)–4(b)(1)(i).
2.Outbound asset reorganizations—in
general
The 2000 final regulations require a
U.S. transferor that is a section 1248 share-
holder of a foreign acquired corporation
and that transfers the stock of such corpo-
ration to a foreign acquiring corporation
in a section 361 exchange to include in in-
come the section 1248 amount attributable
to the stock of the foreign acquired corpo-
ration. The U.S. transferor must include
October 14, 20088722008–41 I.R.B.

the section 1248 amount in income even
if the foreign acquiring corporation and
the foreign acquired corporation are CFCs
with respect to which the U.S. transferor
is a section 1248 shareholder immedi-
ately after the section 361 exchange. See
§1.367(b)–4(b)(1)(iii),Example 4.More-
over, under section 1248(f)(1) the U.S.
transferor generally would be required to
include in income the section 1248 amount
attributable to the stock of the foreign ac-
quiring corporation distributed under sec-
tion 361(c)(1). The section 1248 amount
attributable to the stock of the foreign
acquiring corporation would generally in-
clude the section 1248 amount attributable
to the stock of the foreign acquired corpo-
ration. See generally §1.1248–8.
The final regulations (T.D. 9243,
2006–1 C.B. 475) under section 367(b)
issued on January 26, 2006 (2006 final
regulations) provided an exception to the
general rule of §1.367(b)–4(b)(1)(i) that
applies in certain triangular reorganiza-
tions where the exchanging shareholder
receives stock of a domestic corporation
that controls the foreign acquiring cor-
poration. This exception only applies,
however, to a shareholder that exchanges
stock of the foreign acquired corporation
for stock of the domestic corporation in
an exchange described under section 354
or 356. Thus, the exception provided by
the 2006 final regulations does not apply
where the U.S. transferor receives stock
of a domestic controlling corporation for
stock of a foreign acquired corporation in
a section 361 exchange.
After studying the issue further and in
response to comments received, the IRS
and Treasury Department have determined
that requiring the U.S. transferor to include
the section 1248 amount in income may
not be necessary in cases where the sec-
tion 1248 amount attributable to the stock
of the foreign acquired corporation can be
preserved. Accordingly, the proposed reg-
ulations under section 367(b) included in
this document provide an additional ex-
ception to the general rule of the 2000 final
regulations that applies to certain transfers
of stock of a foreign acquired corporation
by a U.S. transferor to a foreign acquiring
corporation in a section 361 exchange.
In such a case, the proposed regulations
provide that the U.S. transferor must in-
clude in income the section 1248 amount
attributable to the stock of the foreign
acquired corporation only if immediately
after the section 361 exchange the for-
eign acquiring corporation or the foreign
acquired corporation is not a CFC with
respect to which the U.S. transferor is a
section 1248 shareholder.Example 4in
§1.367(b)–4(b)(1)(iii) is modified accord-
ingly. The proposed regulations under
section 1248(f) included in this document
supplement this exception to ensure that
the section 1248 amount can be preserved
in the hands of a corporate section 1248
shareholder following the distribution of
the stock of the foreign acquiring corpo-
ration by the U.S. transferor. See part C
of this preamble for discussion of the pro-
posed regulations under section 1248(f).
3.Special rules for outbound triangular
asset reorganizations
As noted, the 2000 final regulations
also require the U.S. transferor to include
in income the section 1248 amount attrib-
utable to stock of a foreign acquired cor-
poration transferred to a foreign acquiring
corporation in a section 361 exchange that
is part of triangular asset reorganization,
even if the corporation that controls the
foreign acquiring corporation is domes-
tic. The provisions of §1.367(b)–13 (T.D.
9243) do not apply to preserve the section
1248 amount attributable to the stock of
the foreign acquired corporation in such
a case. The proposed regulations under
section 367(b) included in this document,
however, would provide an exception to
the general rule of the final 2000 regula-
tions in such triangular asset reorganiza-
tions.
If the controlling corporation is foreign,
the exception applies if, immediately after
the section 361 exchange, the foreign con-
trolling corporation,the foreign acquiring
corporation, and the foreign acquired cor-
poration are CFCs with respect to which
the U.S. transferor is a section 1248 share-
holder. If the controlling corporation is
domestic, the exception applies if, imme-
diately after the section 361 exchange, the
foreign acquired corporation is a CFC with
respect to which the domestic controlling
corporation is a section 1248 shareholder.
In addition, in eithercase, the controlling
corporation (foreign or domestic) must
apply the principles of §1.367(b)–13 to
determine the adjustment to the basis of
the stock of the foreign acquiring corpo-
ration (instead of the over-the-top basis
adjustment rules of §1.358–6) to ensure
that the section 1248 amount attributable
to the stock of the foreign acquired cor-
poration at the time of the section 361
exchange is preserved in the stock of the
foreign acquiring corporation immediately
after the section 361 exchange. Under
these principles, each share of stock of
the foreign acquiringcorporation would
generally be divided into the portions
necessary to preserve the pre-exchange
section 1248 amounts attributable to the
stock of the foreign acquired corporation
and the foreign acquiring corporation, re-
spectively. If the controlling corporation
is foreign, the proposed regulations under
section 1248(f) included in this document
supplement this exception to ensure that
the section 1248 amount can be preserved
following the distribution of the stock of
the foreign controlling corporation by the
U.S. transferor to its shareholders.
C.Section 1248(f)
1.Overview
Section 1248(f)(1) provides that, except
as provided in regulations, if a domestic
corporation (domestic distributing corpo-
ration) that is a section 1248 shareholder
with respect to a foreign corporation dis-
tributes the stock of such foreign corpo-
ration in a distribution described in sec-
tion 311(a), 337, 355(c)(1), or 361(c)(1),
then notwithstanding any other provisions
of the Code, the domestic distributing cor-
poration must include in income as a div-
idend the section 1248 amount attribut-
able to such stock. Section 1248(f)(1) re-
quires the inclusion of the section 1248
amount because the section 1248 amount
attributable to the stock distributed may
notbepreservedinthehandsofthedis-
tributee shareholders following the distri-
bution. Section 1248(f)(1) does not apply
to the extent the domestic distributing cor-
poration otherwise recognizes gain on the
distribution, in which case the gain recog-
nized would be recharacterized as a divi-
dend under section 1248(a), as appropri-
ate.
Section 1248(f)(2), however, provides
that section 1248(f)(1) shall not apply to
a domestic distributing corporation’s dis-
tribution of stock of a foreign corporation
to a domestic corporation that is treated
2008–41 I.R.B.873October 14, 2008

as holding the stock for the period during
which the stock was held by the domes-
tic distributing corporation and that, im-
mediately after the distribution, is a section
1248 shareholder with respect to the for-
eign corporation. The legislative history
explains that where “the corporate distrib-
ute[e] does not receive a stepped up ba-
sis as a result of the distribution and...the
potential for the future application of sec-
tion 1248 still exists, it is not necessary
to [apply section 1248(f)(1) to] override
the nonrecognition provisions which oth-
erwise apply to a corporate distribution.”
S. Rep. No. 94–938, at 270 (1976).
The legislative history provides that
the Treasury Department may exercise the
regulatory authority granted under section
1248(f)(1) to provide that, where section
1248(f)(2) does not otherwise apply, “the
recipient corporation may be required to
take a carryover basis in the stock re-
ceived (rather than a substituted basis
under section 358, for example, in the case
of a section 355 or 361 distribution) and
section 1248(f)(1) will not apply to such
distribution.” S. Rep. No. 100–445, at 64
(1988).
In Notice 87–64, 1987–2 C.B. 375, the
IRS and Treasury Department announced
that, in the case of section 355 distribu-
tions of CFC stock, regulations under sec-
tion 1248(f) may limit the application of
section 1248(f)(1) to distributions in which
the CFC is no longer a CFC after the distri-
bution or in which one or more of the dis-
tributees are not United States sharehold-
ers (within the meaning of section 951(b))
of the CFC after the distribution. The
notice further states that the regulations
would ensure that, subsequent to a section
355 distribution of CFC stock that would
not be subject to section 1248(f)(1) un-
der the regulations, the amount of gain
recognized from a disposition of the CFC
stock that would be recharacterized as a
dividend under section 1248(a) would in-
clude the earnings and profits attributable
to the CFC stock under section 1248 as
of the date of the section 355 distribution.
To achieve this result, the notice provides
that the regulations may require appropri-
ate adjustments to the basis and holding
period of the CFC stock received by one
or more of the distributees.
2.General rules
The proposed regulations under section
1248(f) included in this document provide
that a domestic distributing corporation
that is a section 1248 shareholder of a
foreign corporation and that distributes
stock of such foreign corporation in a
distribution to which section 337 applies
(section 337 distribution), shall generally
include in income as a dividend the sec-
tion 1248 amount attributable to the stock
distributed.
The proposed regulations further pro-
vide that a domestic distributing corpora-
tion that is a section 1248 shareholder of
a foreign corporation and that distributes
stock of such foreign corporation in a sec-
tion 355 distribution, other than stock re-
ceived by the domestic distributing cor-
poration in a section 361 exchange, shall
generally include in income as a dividend
the section 1248 amount attributable to the
stock distributed. This rule applies, how-
ever, only to the extent the domestic dis-
tributing corporation does not otherwise
recognize gain on the section 355 distri-
bution, in which case the gain recognized
would be recharacterized as a dividend un-
der section 1248(a), as appropriate.
Finally, the proposed regulations pro-
vide that a domestic distributing corpo-
ration that is a section 1248 shareholder
of a foreign distributed corporation and
that distributes stock of such corporation
received in a section 361 exchange, in a
section 355 distribution or a distribution
to which section 361 applies (section 361
distribution), shall, notwithstanding any
other provision of the Code, include in
income as a dividend the “section 1248(f)
amount” attributable to the stock dis-
tributed. The section 1248(f) amount
equals the aggregate amount that would
be included in income as a dividend by
the foreign distributed corporation under
section 964(e) if, immediately after the
section 361 exchange that preceded the
section 355 distribution or section 361
distribution, the foreign distributed cor-
poration sold the stock of each foreign
corporation received in the section 361
exchange. This rule supplements the pro-
posed regulations under section 367(b)
which provide an exception to the gen-
eral rule of §1.367(b)–4(b)(1)(i) in certain
cases where stock of a foreign acquired
corporation is transferred by a U.S. trans-
feror in a section 361 exchange.
3.Exceptions to the general rules
The proposed regulations incorporate
the statutory exception provided by section
1248(f)(2) for distributions that meet cer-
tain conditions. The proposed regulations
also provide elective exceptions for sec-
tion 355 distributions and section 361 dis-
tributions. The exceptions for such distri-
butions are elective because applying the
exceptions may reduce a corporate dis-
tributee’s section 358 basis in the stock re-
ceived in the distribution. The conditions
of the exceptions carry out the policy of
section 1248(f) by limiting the exceptions
to distributions where the potential appli-
cation of section 1248 and the relevant sec-
tion 1248 amounts can be preserved fol-
lowing the distribution.
a)Section 337 distributions
The general rule will not apply to a sec-
tion 337 distribution of the stock of a for-
eign corporation if immediately after the
distribution the 80-percent distributee (de-
scribed in section 337(c)) is a section 1248
shareholder with respect to the foreign cor-
poration, the 80-percent distributee’s hold-
ing period in the stock received in the dis-
tribution is the same as the domestic dis-
tributing corporation’s holding period in
such stock at the time of the distribution,
and the 80-percent distributee’s basis in
the stock received in the distribution is not
greater than the domestic distributing cor-
poration’s basis in such stock at the time of
the distribution.
The IRS and Treasury Department be-
lieve the conditions should be satisfied in
most section 337 distributions because of
the application of sections 334 and 1223.
However, comments are requested regard-
ing any cases where these conditions may
not be met and whether the 80-percent dis-
tributee should be permitted to adjust the
basis or holding period of the stock re-
ceived so that the conditions can be met.
b)Certain section 355 distributions
The proposed regulations provide an
elective exception to the general rule for a
section 355 distribution of stock of a for-
eign corporation not received by the do-
October 14, 20088742008–41 I.R.B.

mestic distributing corporation in a sec-
tion 361 exchange to a domestic corpo-
ration that is a section 1248 shareholder
with respect to the foreign corporation im-
mediately after the distribution. The elec-
tion to apply the exception is irrevocable
and must be made by the domestic dis-
tributing corporation and all such section
1248 shareholders. If the election is made,
adjustments may be made to each section
1248 shareholder’s section 358 basis and
holding period in the stock received to pre-
serve the section 1248 amount attributable
to such stock at the time of the distribution.
To apply the exception, the proposed
regulations require the domestic distribut-
ing corporation and the section 1248 share-
holders to enter into a written agreement
on or before the due date (including ex-
tensions) of the domestic distributing cor-
poration’s tax return for the taxable year
during which the section 355 distribution
occurs. The proposed regulations also re-
quire the domestic distributing corporation
and each section 1248 shareholder to in-
clude a statement with its tax return for
the taxable year during which the distri-
bution occurs reporting that the election
to apply the exception has been made and
any required adjustments to stock basis or
holding period. Each party to the agree-
ment must retain the original or a copy
of the agreement as part of its records.
The proposed regulations provide relief for
reasonable cause for the failure to com-
ply with the election and reporting require-
ment.
If the exception applies, two adjust-
ments may be required with respect to each
section 1248 shareholder. First, solely for
purposes of section 1248, immediately fol-
lowing the distribution the section 1248
shareholder’s holding period in the stock
received in the distribution shall equal the
domestic distributing corporation’s hold-
ing period in such stock at the time of the
distribution. Second, if the section 1248
amount attributable to the stock of the for-
eign corporation at the time of the dis-
tribution exceeds the section 1248 share-
holder’s postdistribution amount attribut-
able to such stock (excess amount), the
section 1248 shareholder’s section 358 ba-
sis in such stock is reduced by the ex-
cess amount. The postdistribution amount
is the section 1248 shareholder’s section
1248 amount attributable to the stock re-
ceived in the distribution, computed im-
mediately after the distribution and taking
into account the adjustment to the share-
holder’sholdingperiodinsuchstock.
c)Distributionspursuanttoaplanof
reorganization
The proposed regulations provide an
elective exception to the general rule for a
section 355 distribution or section 361 dis-
tribution of stock of a foreign corporation
received by the domestic distributing cor-
poration in the section 361 exchange that
precedes such distribution to a domestic
corporation that is a section 1248 share-
holder with respect to the foreign corpo-
ration immediately after the distribution.
The election to apply the exception is ir-
revocable and must be made by the domes-
tic distributing corporation and all such
section 1248 shareholders. If the excep-
tion applies, adjustments may be made to
each section 1248 shareholder’s section
358 basis (as adjusted under the proposed
regulations under section 367(a)(5)) and
the amount of earnings and profits attrib-
utable to the stock received for purposes
of section 1248 to preserve the section
1248(f) amount attributable to such stock
at the time of the distribution.
To apply the exception, the proposed
regulations require thedomestic distribut-
ing corporation and the section 1248
shareholders to enter into a written agree-
ment on or before the due date (including
extensions) of the domestic distributing
corporation’s tax return for the taxable
year during which the distribution occurs.
The proposed regulations also require
the domestic distributing corporation and
each section 1248 shareholder to include a
statement with its tax return for the taxable
year during which the distribution occurs
reporting that the election to apply the
exception has been made and any required
adjustments to stock basis or the amount
of earnings and profits attributable to the
stock received for purposes of section
1248. Each party to the agreement must
include the original or a copy of the agree-
ment as part of its records. The proposed
regulations provide relief for reasonable
cause for the failure to comply with the
election and reporting requirements.
If the exception applies, two adjust-
ments may be required with respect to
each section 1248 shareholder. First, each
share of stock of the foreign corporation
received by the section 1248 shareholder
is divided into portions attributable to
each block of stock of a foreign acquired
corporation transferred by the domestic
distributing corporation in the section
361 exchange with respect to which the
domestic distributing corporation was a
section 1248 shareholder at the time of
the section 361 exchange, and to all other
property transferred by the domestic dis-
tributing corporation in the section 361
exchange. For example, if in the section
361 exchange the domestic distributing
corporation transfers a block of stock in
each of three foreign corporations with
respect to which it is a section 1248 share-
holder, then each share of stock of the
foreign distributed corporation received
by the section 1248 shareholder must be
divided into three portions. Alternatively,
if multiple blocks of stock in each of the
three foreign corporations were trans-
ferred in the section 361 exchange, then
each share of the stock of the foreign dis-
tributed corporation would be divided into
additional portionsto account for the ad-
ditional blocks of stock transferred. The
proposed regulations further provide that,
for purposes of section 1248, the earnings
and profits attributable to each block of
stock of a foreign acquired corporation
transferred in the section 361 exchange
that results in a divided portion of a share
of stock of the foreign acquiring corpo-
ration (or whole share, if no division is
required) are attributable to such portion
(or whole share, if no division is required)
based on the section 1248 shareholder’s
ownership interest (by value) in the do-
mestic distributing corporation at the time
of the section 361 exchange.
Second, if the section 1248(f) amount
attributable to a portion of a share (or
whole share, if no division is required) of
stock of the foreign distributed corpora-
tion received in the distribution exceeds
the section 1248 shareholder’s postdistri-
bution amount attributable to such portion
(or whole share) (excess amount), then
the section 1248 shareholder’s section 358
basis in such portion (or whole share, if
no division is required), as adjusted under
the proposed regulations under section
367(a)(5) (discussed in part A.2.b.iii of
this preamble), is reduced by such excess
amount. This adjustment ensures that the
section 1248 shareholder’s share of the
section 1248 amount attributable to the
2008–41 I.R.B.875October 14, 2008

stock of each foreign acquired corporation
transferred in the section 361 exchange
is preserved in the stock of the foreign
distributed corporation received by such
shareholder in the distribution.
The IRS and Treasury Department de-
clined to adopt rules that would not require
the division of shares to preserve section
1248 amounts because such rules could in-
appropriately increase or decrease the sec-
tion 1248 amount attributable to the stock
of the foreign distributed corporation re-
ceived by a section 1248 shareholder in
the distribution. For example, if in the
section 361 exchange the domestic dis-
tributing corporationtransferred appreci-
ated tangible property and stock of a CFC
with earnings and profits for purposes of
section 1248(a) in excess of the built-in
gain in such stock, then the appreciation
in the tangible property could inappropri-
ately increase the section 1248 amount at-
tributable to the stock of the foreign dis-
tributed corporation received by a section
1248 shareholder in the distribution (to the
extent the CFC’s earnings and profits ex-
ceed the section 1248 amount attributable
to the CFC stock at the time of the sec-
tion 361 exchange). A similar inappropri-
ate increase would result if the domestic
distributing corporation transferred appre-
ciated stock of two CFCs in the section 361
exchange, one CFC without a section 1248
amount and the other CFC with a section
1248 amount but with earnings and profits
for purposes of section 1248 in excess of
such section 1248 amount.
The IRS and Treasury Department also
declined to adopt rules that would preserve
any reduction to a section 1248 share-
holder’s section 358 basis in a portion of a
share (or whole share, if no division is re-
quired) of stock of the foreign distributed
corporation received in the distribution
by increasing the basis of other portions
of the share (or other whole shares, if no
division is required) of stock or by estab-
lishing a suspended basis account equal to
the basis reduction. Those rules were not
adopted because a capital loss would be
created that could economically offset the
section 1248 amount, which would not be
consistent with the policy underlying sec-
tion 1248(f) and the regulations described
in Notice 87–64. S. Rep. No. 94–938, at
270 (1976).
Comments are requested on how the
rules of the proposed regulations can be
simplified and how the rules should apply
to different classes of stock.
4.Section 964(e) and inclusions under
section 367(b)
Comments are requested regarding
whether the IRS and Treasury Department
should exercise the authority under section
367(b) to apply the principles of section
1248(f)(1) to section 355 distributions
or section 361 distributions of stock of
a foreign corporation by a CFC, to the
extent the transaction does not otherwise
result in an income inclusion to the ex-
changing shareholders of the CFC under
section 367(b) and the regulations under
that section. Comments should consider
the appropriate balance between the pol-
icy of sections 1248(a) and 964(e) and
the associated complexity and compliance
burdens.
D.Changes to Exception to Coordination
Rule of §1.367(a)–3(d)(2)(vi)(A)
1.Overview
Section 1.367(a)–3(d)(2)(vi)(A) (the
coordination rule) provides that if, in con-
nectionwithanindirectstocktransfer,a
U.S. person transfers assets to a foreign
corporation (direct asset transfer) in an ex-
change described in section 351 or section
361, the rules of section 367 and the regu-
lations under that section shall first apply
to the direct asset transfer and then to the
indirect stock transfer. However, an ex-
ception to the coordination rule (coordina-
tion rule exception) provides that section
367(a) and (d) shall not apply to a direct
asset transfer otherwise subject to the co-
ordination rule to the extent that assets
transferred by a domestic acquired corpo-
ration to a foreign acquiring corporation in
an asset reorganization are re-transferred
to a domestic corporation controlled by
the foreign acquiring corporation (domes-
tic controlled corporation), but only if the
domestic controlled corporation’s basis in
the retransferred assets is not greater than
the domestic acquired corporation’s basis
in such assets and other conditions are sat-
isfied. See §1.367(a)–3(d)(2)(vi)(B)(1).
The 2006 final regulations established
the conditions for the application of the co-
ordination rule exception. The preamble to
the notice of proposed rulemaking that pre-
ceded the 2006 final regulations explained
that the conditions were adopted to limit
the use of asset reorganizations subject to
the coordination rule that might facilitate
inversion transactions and certain divi-
sive transactions. See REG–125628–01,
2005–1 C.B. 536 (issued January 5, 2005).
2.Clarification of conditions for
application of the coordination rule
exception
In response to transactions intended
to use the coordination rule exception in-
appropriately to repatriate earnings and
profits of foreign corporations without the
recognition of gain or a dividend inclusion,
the IRS and Treasury Department issued
Notice 2008–10, 2008–3 I.R.B. 277. The
notice announced that the conditions for
the application of the coordination rule
exception would be revised to clarify that
any adjustment to basis required under
section 367(a)(5) must be made to the
basis of stock of the foreign acquiring
corporation received by the control group
members in the asset reorganization such
that the appropriate amount of built-in gain
in the property transferred by the domestic
acquired corporationto the foreign acquir-
ing corporation is reflected in such stock.
The notice clarifies that the control group
members cannot satisfy the basis adjust-
ment requirement by adjusting the basis
of stock of the foreign acquiring corpora-
tion held before the reorganization. The
notice further states that the revised reg-
ulations would confirm that to the extent
the appropriate amount of built-in gain in
the property transferred by the domestic
acquired corporation cannot be preserved
in the stock received by the control group
members in the reorganization, then the
domestic acquired corporation’s transfer
of property to the foreign acquiring cor-
poration shall be subject to section 367(a)
and (d).
The proposed regulations included in
this document incorporate, with modifica-
tions, the clarifications to the conditions
for the application of the coordination rule
exception announcedin the notice. The
proposed regulations also provide that to
the extent any of the re-transferred assets
constitutes section 367(d) property, the co-
ordination rule exception shall apply only
if the section 367(d) property is treated as
section 367(a) property for purposes of sat-
isfying the conditions and requirements of
October 14, 20088762008–41 I.R.B.

section 367(a)(5) and the regulations un-
der that section. Thus, for example, any
gain that the U.S. transferor must recog-
nize on the direct asset transfer or any ad-
justment required to a control group mem-
ber’s section 358 basis in stock received in
the transaction must take into account any
inside gain attributable to section 367(d)
property (treated assection 367(a) prop-
erty for purposes of determining such in-
side gain) that is part of the re-transferred
assets.
The IRS and Treasury Department con-
tinue to study transactions that have the
effect of repatriating earnings and prof-
its of foreign corporations without the
recognition of gain or a dividend inclu-
sion. Temporary regulations were recently
issued (T.D. 9400, 2008–24 I.R.B. 1139,
and T.D. 9402, 2008–31 I.R.B. 254) un-
der sections 367(b) and 956(e) to address
the inappropriate use of certain cross-bor-
der triangular reorganizations and other
nonrecognition transactions to repatriate
earnings and profits of a foreign corpora-
tion without the recognition of gain or a
dividend inclusion. The IRS and Treasury
Department are evaluating other transac-
tions that have a similar effect to determine
whether guidance is appropriate. In partic-
ular, the IRS and Treasury Department are
analyzing whether it isappropriate for the
gain limitation rule of section 356(a)(1) to
apply in an acquisitive asset reorganization
involving a foreign acquiring corporation,
considering that a policy of section 367(b)
is “to protect against tax avoidance in
transfers to foreign corporations and upon
the repatriation of previously untaxed for-
eign earnings.” H.R. Rep. No. 94–658
(1975). Comments are requested in this
regard, including whether the application
of any such guidance should be limited to
cases where section 356(a)(2) would oth-
erwise apply to the shareholder’s receipt
of non-qualifying property.
The IRS and Treasury Department also
continue to study whether appropriate
modifications should be made to the “all
earnings and profits” inclusion require-
ment of §1.367(b)–3(b) when a domestic
corporation acquires the assets of a foreign
corporation pursuant to an acquisitive as-
set reorganization under section 368(a)(1)
and then transfers all or part of the acquired
assets to another foreign corporation in
a transaction described in §1.368–2(k).
Comments are requested in this regard,
including regarding the appropriate adjust-
ment to the domestic corporation’s basis
in the stock of the foreign corporation to
which the acquired assets are transferred
to ensure that the basis of such stock re-
flects an after-tax amount.
E.Other Proposed Regulations Under
Section 367(a)
The proposed regulations under
section 367(a) would revise current
§1.367(a)–1T(b)(4)(i)(B) to provide that
an increase to basis for the amount of gain
recognized by a U.S. person under sec-
tion 367(a) in connection with a transfer
of property to a foreign corporation is
allocated among the transferred property
with respect to which gain is recognized
in proportion to the gain realized by the
U.S. person on the transfer of such prop-
erty. The IRS and Treasury Department
believe the current temporary regulation
may produce inappropriate results because
it allocates the basis increase among the
transferred property with respect to which
gain is recognized in proportion to the
amount realized by the U.S. person on the
transfer of such property.
The proposed regulations also clarify
that a transfer of property by a U.S. per-
son to a foreign corporation that is subject
to section 367(a) is not recharacterized for
U.S. Federal tax purposes merely because
the U.S. person is required to recognize
gain in connection with such transfer under
section 367(a). For example, if a U.S per-
son transfers appreciated stock of a CFC to
another CFC in a section 351 exchange, the
section 351 exchange is not recharacter-
ized as other than a section 351 exchange
for U.S. Federal tax purposes merely be-
cause the U.S. person recognizes gain in
connection with the exchange under sec-
tion 367(a).
F.Other Proposed Regulations Under
Section 1248
The proposed regulations under section
1248(a) remove as deadwood an exception
from the application of section 1248(a)
for gain recognized under section 356. In
addition, consistent with Notice 87–64,
the proposed regulations under section
1248(e) suspend the application of section
1248(e) for periods when capital gains are
taxed at a rate that equals or exceeds the
rate of tax on ordinary income.
G.Effective/Applicability Dates
1.Sections 367(a)(5) and 6038B
Section 1.367(a)–7 and the revisions to
§1.6038B–1 apply to transfers occurring
on or after the date that is 30 days after
the date these regulations are published as
final regulations in theFederal Register.
2.Section 1248(e)
In accordance with Notice 87–64,
1987–2 C.B. 375, §1.1248–6(d) (suspend-
ing application of section 1248(e)) applies
to sales, exchanges, or other dispositions
of stock of a domestic corporation occur-
ring on or after September 21, 1987.
3.Changes to coordination rule exception
The revisions to §1.367(a)–3(d)(2)
(vi)(B)(1)and(2) described in Notice
2008–10, 2008–3 I.R.B. 277, generally
apply to transactions occurring on or after
December 28, 2007. The requirement to
treat section 367(d) property as section
367(a) property for purposes of the
coordination rule exception (as discussed
in part D.2 of this preamble) applies to
transactions occurring on or after August
19, 2008.
4.Sections 1248(f) and 367(b)
Section 1.1248–8(b)(2)(iv), §§1.1248
(f)–1 through 1.1248(f)–3, and the
modifications to §1.367(b)–4 apply to
transfers or distributions occurring on or
after the date that is 30 days after the date
these regulations are published as final
regulations in theFederal Register.
H.Adjustments under Section 367(a)(5)
Before Final Regulations are Published
The general rule of section 367(a)(5)
is that the exceptions to section 367(a)(1)
provided by section 367(a)(2) and (a)(3)
are not available for a transfer of prop-
erty by a domestic corporation to a foreign
corporation in a section 361 exchange, in-
cluding a section 351 exchange that also
qualifies as a section 361 exchange. How-
ever, until the date that is 30 days after the
date these regulations are published as fi-
nal regulations, taxpayers may make rea-
sonable adjustments, as described in the
legislative history to section 367(a)(5), that
are consistent with the policy of section
2008–41 I.R.B.877October 14, 2008

367(a)(5) so that the exceptions provided
by section 367(a)(2) and (a)(3) may apply
to the transfer of property by a U.S. trans-
ferortoaforeigncorporationinasection
361 exchange.
Reasonable adjustments must include
adjusting the basis of the stock received
by the control group members in the trans-
action that is attributable to section 367(a)
property so that each control group mem-
ber’s basis of such stock equals the lesser
of (1) the control group member’s section
358 basis in the stock or (2) the control
group member’s proportionate share of the
basis of the section 367(a) property trans-
ferred by the U.S. transferor in the section
361 exchange. Adjusting the basis of stock
of the foreign acquiring corporation held
by a control group member before the sec-
tion 361 exchange shall not be a reasonable
adjustment.
In addition, the U.S. transferor must
recognize gain to the extent it has share-
holders that are not control group mem-
bersandtotheextentanybuilt-ingainin
the section 367(a) property transferred in
the section 361 exchange cannot be pre-
served in the hands of the control group
members through their ownership of stock
received in the transaction in exchange for
the stock or securities of the U.S. trans-
feror. For example, the U.S. transferor
may recognize gain if the control group
members receive non-qualifying property
in the transaction, if the foreign acquiring
corporation assumes liabilities of the U.S.
transferor in the section 361 exchange, or
if the U.S. transferor distributes the stock
received in the section 361 exchange dis-
proportionately to its shareholders. For
this purpose, the stock or other property re-
ceived by the U.S. transferor in the section
361 exchange must be allocated between
the section 367(a) property and all other
property transferred in the section 361 ex-
change consistent with general tax princi-
ples, including the principles of Rev. Rul.
68–55, 1968–1 C.B. 140, and the authori-
ties cited therein.
Adjustments made in accordance with
the proposed regulations under section
367(a)(5) included in this document shall
be considered reasonable and in accor-
dance with the policy of section 367(a)(5).
Availability of IRS Documents
IRS notices cited in this preamble are
made available by the Superintendent of
Documents, U.S. Government Printing Of-
fice, Washington, DC 20402.
Effect on Other Documents
The following publications are pro-
posed to be obsolete as of the date 30 days
after the date these regulations are pub-
lished as final regulations in theFederal
Register:
Notice 87–64, 1987–2 C.B. 375.
Notice 2008–10, 2008–3 I.R.B. 277.
Special Analyses
It has been determined that this Trea-
sury Decision is not a significant regula-
tory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. 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) apply to these
regulations.
It is hereby certified that the collection
of information contained in this regulation
will not have a significant economic im-
pact on a substantial number of small en-
tities. Accordingly, a regulatory flexibil-
ity analysis is not required. This regulation
primarily will affect large domestic corpo-
rations engaged in cross-border corporate
transactions. Thus, the number of affected
small entities will not be substantial. A
certain number of small domestic corpora-
tions may be shareholders of a larger do-
mestic corporation the stock or assets of
which are acquired by a foreign corpora-
tion in connection with an asset reorgani-
zation, and such shareholders may be re-
quired to make certain adjustments in the
stock of the foreign acquiring corporation.
Nonetheless, the IRS and Treasury Depart-
ment do not anticipate the number of such
shareholders to be substantial. Further-
more, the IRS and Treasury Department
estimate that any small entities that are af-
fected by the regulations will likely face a
burden of approximately ten hours (at an
hourly rate of $200) from the adjustments
made to the basis of the stock received in
the reorganization. Considering that the
collections of information enable taxpay-
ers to defer or avoid the recognition of po-
tentially large amounts of gain, the IRS and
Treasury Department believe that $2000 is
not a significant economic impact. Com-
ments about the accuracy of this certifica-
tion may be submitted to the addresses pro-
vided in the preamble. Pursuant to section
7805(f) of the internal Revenue Code, this
regulation has been submitted to the Ad-
ministratoroftheSmallBusinessAdmin-
istration for comment on their impact on
small business.
Comments and Request for a Public
Hearing
Before these regulations are adopted
as final regulations, consideration will be
given to any written comments (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to
the IRS. The IRS and Treasury Depart-
ment request comments on the clarity of
the proposed rules and how they can be
made easier to understand. All comments
will be available for public inspection and
copying. A public hearing will be sched-
uled if requested in writing by any person
that timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in theFederal Register.
Drafting Information
The principal author of these regula-
tions is Daniel McCall of the Office of
Associate Chief Counsel (International),
within the Office of Chief Counsel, In-
ternal Revenue Service. Other person-
nel from offices of the IRS and Treasury
Department participated in developing the
regulations.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR Part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.367(a)–3(d)(2)(vi)(B)(1)(i)
also issued under 26 U.S.C. 367(d).
Section 1.367(a)–7 also issued under
26 U.S.C. 367(a), (b), (c), and 337(d).
October 14, 20088782008–41 I.R.B.

Section 1.1248–6 also issued under
26 U.S.C. 1248(e).
Section 1.1248–8(b)(2)(iv) also issued
under 26 U.S.C. 1248(a), (c), and (f).
Section 1.1248(f)–1 also issued under
26 U.S.C. 367(b) and 1248(f).
Section 1.1248(f)–2 also issued under
26 U.S.C. 367(b) and 1248(f).
Section 1.1248(f)–3 also issued under
26 U.S.C. 367(b) and 1248(f).* * *
Par. 2. Section 1.358–6 is amended
by adding a new sentence at the end of
paragraph (e) to read as follows:
§1.358–6 Stock basis in certain triangular
reorganizations.
*****
(e)***Forrulesrelatingtocer-
tain triangular reorganizations involving
transfers to whichthe exception pro-
vided in §1.367(a)–7(c) applies, see
§1.367(b)–4(b)(1)(ii)(B).
*****
Par. 3. Section 1.367(a)–1T is amended
by:
1. Revising the second sentence of
paragraph (b)(4)(i)(B).
2. Adding new paragraphs (b)(4)(i)(C)
and (g)(4).
The revision and additions to read as
follows:
§1.367(a)–1T Transfers to foreign
corporations subject to section 367(a): In
general (temporary).
*****
(b) * * *
(4) * * *
(i) * * *
(B) * * * Any increase in the basis of
the property received by the foreign corpo-
ration under section 362(a) or (b) for gain
recognized by a U.S. person due to the ap-
plication of section 367(a) shall be allo-
cated to the transferred property with re-
spect to which gain is recognized in pro-
portion to the gain realized by the U.S. per-
son on the transfer of such property. * * *
(C) A transfer of property by a U.S. per-
son to a foreign corporation shall not be
recharacterized for U.S. Federal tax pur-
poses solely because the U.S. person rec-
ognizes gain in connection with the trans-
fer under section 367(a)(1). For exam-
ple, if a U.S. person transfers appreciated
stock or securities to a foreign corporation
in an exchange described in section 351,
the transfer is not recharacterized as other
than an exchange described in section 351
solely because the U.S. person recognizes
gain in connection with the transfer under
section 367(a)(1).
*****
(g) * * *
(4) The rules in paragraphs (b)(4)(i)(B)
and (C) of this section apply to transfers
occurring on or after the date 30 days af-
ter the date these regulations are published
as final regulations in theFederal Reg-
ister. For guidance with respect to para-
graph (b)(4)(i)(B) of this section before the
date 30 days after the date these regula-
tions are published as final regulations in
theFederal Register, see 26 CFR part 1
revised as of April 1 for the year before the
date these regulations are published as fi-
nal regulations in theFederal Register.
Par. 4. Section 1.367(a)–3 is amended
by:
1. Revising the third to the last sentence
of paragraph (a).
2. Revising paragraphs (b)(1) and
(c)(1).
3. Revising paragraphs (d)(2)(vi)(B)(1)
and (d)(2)(vi)(B)(1)(i).
4. Adding two new sentences at the end
of paragraph (d)(2)(vi)(B)(2).
5. Revising the first and fourth sen-
tences of paragraph (d)(3),Example 6A
(ii).
6. Revising the second and fifth sen-
tences of paragraph (d)(3),Example 6B
(ii), and adding two new sentences after the
fifth sentence.
7. Revising the second and fourth sen-
tences of paragraph (d)(3),Example 6C
(ii).
8. Adding a new sentence between the
second and third sentences of paragraph
(d)(3),Example 8(ii).
9. Revising the first sentence of para-
graph (d)(3),Example 8B(ii).
10. Revising the first sentence of para-
graph (d)(3),Example 8C(ii).
11. Revising the second sentence of
paragraph (d)(3),Example 9(ii), and re-
moving the third sentence.
12. Revising the third sentence of para-
graph (d)(3),Example 10(ii).
13. Revising the second to last sentence
of paragraph (d)(3),Example 11(ii), and
adding a new sentence after the second to
last sentence.
14. Revising the second sentence of
paragraph (d)(3),Example 12(ii), and re-
moving the last sentence.
15. The heading for paragraph (g) is
revised.
16. Paragraph (g)(1)(E) is revised.
The revisions and additions to read as
follows:
§1.367(a)–3 Treatment of transfers of
stock or securities to foreign corporations.
(a) * * * For additional rules regard-
ing a transfer of stock or securities in an
exchange described in section 361(a) or
(b), see section 367(a)(5) and §1.367(a)–7.
***
(b)Transfers by U.S. persons of stock
or securities of foreign corporations to for-
eign corporations—(1)General rule.Ex-
cept as provided in §1.367(a)–7, a transfer
of stock or securities of a foreign corpo-
ration by a U.S. person to a foreign cor-
poration that would otherwise be subject
to section 367(a)(1) under paragraph (a) of
this section shall not be subject to section
367(a)(1) if either—
*****
(c)Transfers by U.S. persons of stock
or securities of domestic corporations to
foreign corporations—(1)In general.Ex-
cept as provided in §1.367(a)–7, a transfer
of stock or securities of a domestic corpo-
ration by a U.S. person to a foreign cor-
poration that would otherwise be subject
to section 367(a)(1) under paragraph (a)
of this section shall not be subject to sec-
tion 367(a)(1) if the domestic corporation
the stock or securities of which are trans-
ferred (referred to as the U.S. target com-
pany) complies with the reporting require-
ments in paragraph (c)(6) of this section
and if each of the following four conditions
is met:
*****
(d) * * *
(2) * * *
(vi)***
(B)Exceptions.(1) If a transaction
is described in paragraph (d)(2)(vi)(A) of
this section, section 367(a) and (d) shall
not apply to the extent a domestic corpora-
tion (domestic acquired corporation) trans-
fers assets to a foreign corporation (foreign
2008–41 I.R.B.879October 14, 2008

acquiring corporation)in an asset reorgani-
zation, and such assets (re-transferred as-
sets) are transferred to a domestic corpo-
ration (domestic controlled corporation) in
a controlled asset transfer, provided that
the domestic controlled corporation’s ba-
sis in the re-transferred assets is not greater
than the domestic acquired corporation’s
basis in such assets and the conditions con-
tained in paragraphs (d)(2)(vi)(B)(1)(i)or
(d)(2)(vi)(B)(1)(ii) of this section are satis-
fied. For purposes of determining whether
the domestic controlled corporation’s ba-
sis in the re-transferred assets is not greater
than the domestic acquired corporation’s
basis in such assets, the domestic acquired
corporation’s basis in the re-transferred as-
sets shall reflect any increase in basis due
to gain recognized by the domestic ac-
quired corporation on the transfer of the
re-transferred assets to the foreign acquir-
ing corporation.
(i) The conditions and requirements
of section 367(a)(5) and §1.367(a)–7(c)
are satisfied with respect to the domestic
acquired corporation’s transfer of assets
to the foreign acquiring corporation. To
the extent any of the re-transferred as-
sets constitutes property to which section
367(d) applies (section 367(d) property),
however, the exception under paragraph
(d)(2)(iv)(B)(1) shall apply only if such
property is treated asproperty subject to
section 367(a) for purposes of satisfying
the conditions and requirements of section
367(a)(5) and §1.367(a)–7(c). The pre-
ceding sentences shall apply before the ap-
plication of the exception under paragraph
(d)(2)(vi)(B)(1) of this section. See para-
graph (g)(1)(E)(3) of this section for rules
under this paragraph (d)(2)(vi)(B)(1)(i)
that apply to transactions that occur on or
after December 28, 2007, and before the
date 30 days after the date these regula-
tions are published as final regulations in
theFederal Register.
*****
(2) * * * This paragraph
(d)(2)(vi)(B)(2) shall not, however, apply
to an exchange described in section 351
that is also an exchange described in sec-
tion 361(a) or (b). An exchange described
in section 351 that is also an exchange
describedinsection361(a)or(b)isonly
eligible for the exception in paragraph
(d)(2)(vi)(B)(1)ofthissection.
*****
(3) * * *
Example 6A.***
(ii)***ThetransferoftheBusinessAassetsby
Z to F does not constitute an indirect stock transfer
under paragraph (d) of this section, and, subject to the
conditions and requirements of section 367(a)(5) and
§1.367(a)–7(c), the Business A assets qualify for the
section 367(a)(3) active trade or business exception
and are not subject to section 367(a)(1). * * *
* * * Subject to the conditions and requirements
of section 367(a)(5) and §1.367(a)–7(c), the Business
B assets qualify for the active trade or business excep-
tionundersection367(a)(3).***
Example 6B.***
(ii) * * * However, subject to the condi-
tions and requirements of section 367(a)(5) and
§1.367(a)–7(c), the Business A assets qualify for the
section 367(a)(3) active trade or business exception
and are not subject to section 367(a)(1). * * *
* * * However, pursuant to paragraph
(d)(2)(vi)(B)(1) of this section and subject to the
conditions and requirements of section 367(a)(5) and
§1.367(a)–7(c), the Business B and C assets are not
subject to section 367(a) or (d), provided that the
basis of the Business B and C assets in the hands of R
is no greater than the basis of the assets in the hands
of Z. If all or a portion of the Business B and C assets
constituted section 367(d) property, as defined in
§1.367(a)–7(f)(10), then paragraph (d)(2)(vi)(B)(1)
of this section would apply to Z’s transfer of such
property only if such property is treated as property
subject to section 367(a) for purposes of satisfying
the conditions and requirements of section 367(a)(5)
and §1.367(a)–7(c). Treating such section 367(d)
property as property subject to section 367(a) for
this purpose could further reduce V’s basis in the F
stock received in the reorganization, or result in the
recognition of additional gain by Z, under section
367(a)(5) and §1.367(a)–7(c). * * *
Example 6C.***
(ii)***However,gainmustberecognizedon
the transfer of such assets under section 367(a)(1)
because the section 367(a)(3) active trade or busi-
ness exception is inapplicable pursuant to section
367(a)(5) and §1.367(a)–7(b). * * *
* * * The transfer of the Business B assets (which
otherwise would satisfy the section 367(a)(3) active
trade or business exception) generally is subject to
section 367(a)(1) pursuant to section 367(a)(5) and
§1.367(a)–7(b). * * *
*****
Example 8.***
(ii) * * * Subject to the conditions and require-
ments of section 367(a)(5) and §1.367(a)–7(c), the
Business B assets qualify for the active trade or busi-
ness exception under section 367(a)(3). * * *
Example 8B.***
(ii)***Undersection367(a)(5)and
§1.367(a)–7(b), the active trade or business excep-
tion under section 367(a)(3) does not apply to Z’s
transfer of assets to R. * * *
Example 8C.***
(ii)***Undersection367(a)(5)and
§1.367(a)–7(b), the active trade or business excep-
tion under section 367(a)(3) does not apply to Z’s
transfer of assets to R. * * *
Example 9.***
(ii) * * * Subject to the conditions and require-
ments of section 367(a)(5) and §1.367(a)–7(c), Z’s
transfer of the Business B assets to R (which are not
re-transferred to M) qualifies for the active trade or
business exception undersection 367(a)(3). * * *
Example 10.***
(ii) * * * Subject to the conditions and require-
ments of section 367(a)(5) and §1.367(a)–7(c), the
Business B assets qualify for the active trade or busi-
ness exception under section 367(a)(3). * * *
Example 11.***
(ii)***BecauseDisownedbyF,aforeigncor-
poration, the control requirement of section 367(a)(5)
and §1.367(a)–7(c)(1) cannot be satisfied. Therefore,
section 367(a)(5) and §1.367(a)–7(b) preclude the ap-
plication of the active trade or business exception
under section 367(a)(3) from applying to any assets
transferredbyDtoZ.***
Example 12.***
(ii) * * * Subject to the conditions and require-
ments of section 367(a)(5) and §1.367(a)–7(c), the
active trade or business exception under section
367(a)(3) applies to E’s transfer of Business X assets.
***
*****
(g)Effective/applicability dates.
(1) * * *
(E)(1) Except as provided in paragraphs
(g)(1)(E)(2) through (g)(1)(E)(4)ofthis
section, the rules of paragraph (d)(2)(vi)
of this section apply only to transactions
occurring on or after January 23, 2006.
See §1.367(a)–3(d)(2)(vi), as contained in
26 CFR part 1 revised as of April 1, 2005,
for transactions occurring on or after July
20, 1998 and before January 23, 2006.
(2) Except to the extent provided in
paragraph (g)(1)(E)(3)ofthissection,
paragraph (d)(2)(vi)(B)(1)(i)ofthissec-
tion applies to transactions occurring on
or after the date 30 days after the date
these regulations are published as final
regulations in theFederal Register.
(3)(i) For purposes of paragraph
(d)(2)(vi)(B)(1) of this section, except as
provided in paragraph (g)(1)(E)(3)(iii)of
this section, the conditions of paragraph
(d)(2)(vi)(B)(1)(i)ofthissectionshallbe
satisfied for transactions occurring on or
after December 28, 2007, and before the
date 30 days after the date these regula-
tions are published as final regulations in
theFederal Register, provided the con-
ditions in paragraph (g)(1)(E)(3)(ii)are
satisfied.
(ii) The domestic acquired corporation
is controlled (within the meaning of sec-
tion 368(c)) by five or fewer (but at least
one) domestic corporations (controlling
domestic corporations) at the time of the
section 361 exchange, appropriate basis
October 14, 20088802008–41 I.R.B.

adjustments under section 367(a)(5) are
made to the stock received (or deemed
received) by the controlling domestic cor-
porations in the reorganization, and any
other conditions as provided in regulations
under section 367(a)(5) are satisfied. For
purposes of determining whether the do-
mestic acquired corporation is controlled
by five or fewer domestic corporations,
all members of the same affiliated group
within the meaning of section 1504 shall
be treated as one corporation. Any ad-
justments to stock basis required under
section 367(a)(5) must be made to the
stock received (or deemed received) by
the controlling domestic corporations
in the reorganization such that the ap-
propriate amount of built-in gain in the
property transferred by the domestic ac-
quired corporation to the foreign acquiring
corporation in the section 361 exchange
is reflected in such stock. The basis ad-
justment requirement cannot be satisfied
by adjusting the basis in stock of the for-
eign acquiring corporation held by the
controlling domestic corporations before
the reorganization. To the extent the ap-
propriate amount of built-in gain in the
property transferred by the domestic ac-
quired corporation to the foreign acquiring
corporation in the section 361 exchange
cannot be preserved in the stock received
(or deemed received) by the controlling
domestic corporations in the reorganiza-
tion, the domestic acquired corporation’s
transfer of property to the foreign acquir-
ing corporation shall be subject to section
367(a) and (d).
(iii) The second sentence of paragraph
(d)(2)(vi)(B)(1)(i) shall apply to trans-
actions occurring on or after August 19,
2008 and before the date 30 days after
the date these regulations are published as
final regulations in theFederal Register.
(4) The last two sentences of paragraph
(d)(2)(vi)(B)(2) shall apply to transactions
occurring on or after December 28, 2007.
*****
Par. 5. Section 1.367(a)–7 is added to
read as follows:
§1.367(a)–7 Rules under section 367(a)(5)
applicable to exchanges described in
section 361(a) or (b).
(a)Scope and purpose. This section
provides rules under section 367(a)(5) that
apply to a transfer of certain property, in-
cluding stock and securities, by a domes-
tic corporation (U.S. transferor) to a for-
eign corporation (foreign acquiring corpo-
ration) in an exchange described in section
361(a) or (b), or in an exchange described
in section 351 that is also described in sec-
tion 361(a) or (b) (collectively, a section
361 exchange). The purpose of this sec-
tion is to ensure that the net gain realized
by the U.S. transferor in connection with
the transfer of certain property to the for-
eign acquiring corporation in the section
361 exchange is, in the aggregate, recog-
nized currently by the U.S. transferor or, to
the extent permitted under the rules of this
section, preserved in the stock received (or
deemed received) in the reorganization by
certain domestic corporate shareholders of
the U.S. transferor in exchange for stock
or securities of the U.S. transferor. This
section applies only to the transfer of sec-
tion 367(a) property in the section 361 ex-
change. See section 367(d) and the regula-
tions under that section for rules applicable
to transfers of section 367(d) property.
(b)General rule. Except as provided
in paragraph (c) of this section, the excep-
tions to section 367(a)(1) provided in sec-
tion 367(a) and the regulations under that
section shall not apply to a transfer of sec-
tion 367(a) property by a U.S. transferor to
a foreign acquiring corporation in a section
361 exchange.
(c)Exception. Except to the extent
provided in paragraph (d) of this section,
paragraph (b) of this section shall not
apply to the transfer of section 367(a)
property in a section 361 exchange if the
conditions of paragraphs (c)(1) through
(c)(4) of this section are satisfied and
an election to apply the exception pro-
vided by this paragraph (c) is made in
the manner provided by paragraph (c)(5)
of this section. If paragraph (b) of this
section does not apply to a section 361 ex-
change, see, for example, §§1.367(a)–2T,
1.367(a)–3, 1.367(a)–4T, or 1.367(a)–5T,
as applicable, for additional requirements
that must be satisfied to avoid the appli-
cation of section 367(a)(1) to the transfer
of section 367(a) property in the section
361 exchange. Nothing in this section
shall permit the nonrecognition of gain
not otherwise permitted under another
provision of the Internal Revenue Code
or the regulations under that section. See,
for example, section 367(a)(3)(B) and
§1.367(a)–5T.
(1)Control. At the time of the sec-
tion 361 exchange, the U.S. transferor is
controlled (within the meaning of section
368(c)) by five or fewer, but at least one,
control group members.
(2)Gain recognition—(i)Gain recog-
nition due to non-control group members.
The U.S. transferor recognizes gain equal
to the product of the inside gain and the
aggregate ownership interest (by value) in
the U.S. transferor by all shareholders of
the U.S. transferor at the time of the section
361 exchange that are not control group
members.
(ii)Gain recognition where control
group member is unable to preserve gain.
With respect to each control group mem-
ber, the U.S. transferor recognizes gain
equal to the amount, if any, by which—
(A) The product of the inside gain and
the control group member’s ownership in-
terest (by value) in the U.S. transferor at
the time of the section 361 exchange; ex-
ceeds
(B) The product of the section 367(a)
percentage and the fair market value of
the stock received (or deemed received) by
the control group member in exchange for
stock or securities of the U.S. transferor
under section 354, 355, or 356. For an
illustration of gain recognition under this
paragraph, see paragraph (g) of this sec-
tion,Example 2.
(3)Basis adjustments—(i)General
rule. Except as provided in paragraphs
(c)(3)(ii)(A) and (C) of this section, each
control group member’s aggregate basis
in the stock received (or deemed received)
in exchange for stock or securities of the
U.S. transferor under section 354, 355, or
356, as determined under section 358 and
the regulations under that section (section
358 basis), is reduced by the amount, if
any, by which—
(A) The product of the inside gain and
the control group member’s ownership
interest (by value) in the U.S. transferor
at the time of the section 361 exchange,
reduced by any gain recognized by the
U.S. transferor with respect to such control
group member under paragraph (c)(2)(ii)
of this section; exceeds
(B) The control group member’s out-
side gain (or loss).
(ii)Special rules—(A)General appli-
cability. Paragraph (c)(3)(i) of this section
shall apply only to stock that was received
by the U.S. transferor in the section 361 ex-
2008–41 I.R.B.881October 14, 2008

change and distributed to the control group
member.
(B)Multiple blocks of stock.Ifacon-
trol group member holds multiple blocks
of stock received (or deemed received) in
the transaction, the section 358 basis of
each block of stock must be reducedpro
ratabased on the relative section 358 ba-
sis of each block of stock.
(C)Successive distributions to which
section 355 applies. Paragraph (c)(3)(i)
of this section shall not apply to a control
group member that distributes the stock of
a foreign acquiring corporation received
from the U.S. transferor in a distribution
to which section 355 applies (section 355
distribution), that is in connection with
a transaction described in paragraph (d)
of this section. If paragraph (c)(3)(i) of
this section does not apply to a control
group member pursuant to the previous
sentence, then paragraph (c)(3)(i) of this
section shall apply to the final distributee
(as defined in paragraph (d) of this section)
that receives the stock of the foreign ac-
quiring corporation in the final section 355
distribution described in paragraph (d) of
this section. If the final distributee holds
multiple blocks of stock of the foreign ac-
quiring corporation after the final section
355 distribution, the rules of paragraph
(c)(3)(ii)(B) of this section shall apply to
reduce the section 358 basis of such blocks
of stock.
(iii)Applicable cross-references.For
illustrations of the adjustment to stock
basis under paragraph (c)(3)(i) of this
section, see paragraph (g) of this sec-
tion,Example 1andExample 2,and
§1.1248(f)–2(d),Example 2.Foranil-
lustration of the adjustment to stock basis
under paragraph (c)(3)(ii)(A) of this sec-
tion, see §1.1248(f)–2(d),Example 4.For
an illustration of the adjustment to stock
basis under paragraph (c)(3)(ii)(B) of this
section, see paragraph (g) of this section,
Example 3.
(4)Agreement to amend or file a
U.S. income tax return—(i)General
rule. Except as provided in paragraph
(c)(4)(ii) of this section, the U.S. trans-
feror complies with the requirements of
§1.6038B–1(c)(6)(iii).
(ii)Exception. Section 1.6038B–1
(c)(6)(iii) shall not apply to the extent
anysection367(a)propertytransferredin
the section 361 exchange is transferred in
connection with a transaction described
in §1.367(a)–3(e) and a gain recognition
agreement is filed pursuant to §1.367(a)–8
with respect to the transfer of such
property.
(5)Election and reporting require-
ments—(i)General rule.TheU.S.trans-
feror and each control group member elect
to apply the provisions of paragraph (c)
of this section in the manner provided
under paragraph (c)(5)(ii) or (iii) of this
section, as applicable, and by entering into
a written agreement described in para-
graph (c)(5)(iv) of this section. If a control
group member distributes the stock of the
foreign acquiring corporation received
from the U.S. transferor in a section 355
distribution that is in connection with a
transaction described in paragraph (d) of
this section, the final distributee that re-
ceives such stock in the final section 355
distribution elects to apply the provisions
of this paragraph (c) and enters into the
written agreement instead of the control
group member.
(ii)Election and reporting by control
group member or final distributee—(A)
Time and manner of making election. Each
control group member (or final distributee)
elects to apply the provisions of paragraph
(c) of this section by including a statement
(in the form and with the content specified
in paragraph (c)(5)(ii)(B) of this section)
on or with its timely-filed return for the
taxable year in which the section 361 ex-
change occurs. If the control group mem-
ber (or final distributee) is a member of
a consolidated group for the taxable year
of the section 361 exchange, the common
parent of the consolidated group makes
the election on behalf of the control group
member (or final distrubutee).
(B)Form and content of election state-
ment. The statement shall be entitled,
STATEMENT TO ELECT TO APPLY
EXCEPTION UNDER §1.367(a)–7(c)
and must set forth:
(1) The name and taxpayer identifica-
tion number of the control group member
(or final distributee);
(2) The name and taxpayer identifica-
tion number of the common parent of the
consolidated group, if any;
(3) The amount of the adjustment (if
any) to stock basis required under para-
graph (c)(3)(i) of this section, the resulting
adjusted basis in such stock, and the fair
market value of such stock; and
(4) The date on which the written agree-
ment described in paragraph (c)(5)(iv) of
this section was entered into.
(iii)Statement by U.S. transferor.
The U.S. transferor elects to apply the
provisions of paragraph (c) of this sec-
tion in the form and manner set forth in
§1.6038B–1(c)(6)(ii).
(iv)Written agreement.TheU.S.trans-
feror and each control group member (or
final distributee) must enter into a writ-
ten agreement on or before the due date
(including extensions) for the U.S. trans-
feror’s tax return for the taxable year dur-
ing which the section 361 exchange oc-
curs. Each party to the agreement must re-
tain the original or a copy of the agreement
in the manner specified by §1.6001–1(e).
Each party to the agreement must provide a
copy of the agreement to the Internal Rev-
enue Service within 30 days of the receipt
of a request for the copy of the agreement
in connection with an examination of the
taxable year during which the section 361
exchange occurs. The written agreement
must—
(A) State the document constitutes an
agreement entered into pursuant to para-
graph (c)(5) of this section;
(B) Identify the U.S. transferor and each
control group member (or final distribu-
tee);
(C) State the amount of gain (if any)
recognized by the U.S. transferor under
paragraph (c)(2) of this section; and
(D) With respect to each control group
member (or final distributee), state the
amount of the adjustment (if any) to stock
basis required under paragraph (c)(3)(i) of
this section, the resulting adjusted basis in
such stock, and the fair market value of
such stock.
(d)Section 361 exchange followed by
successive distributions to which section
355 applies. If the U.S. transferor dis-
tributes stock of the foreign acquiring cor-
poration received in the section 361 ex-
change to a control group member in a
section 355 distribution and, as part of a
plan or series of related transactions, such
stock is further distributed in one or more
successive section 355 distributions, para-
graph (c) of this section shall apply to the
section 361 exchange only to the extent
each subsequent section 355 distribution is
to a member of the affiliated group (within
the meaning of section 1504) that includes
the U.S. transferor at the time of the section
October 14, 20088822008–41 I.R.B.

361 exchange. In such a case, each affili-
ated group member that receives stock of
the foreign acquiring corporation in the fi-
nal section 355 distribution (final distribu-
tee) shall be subject to the requirements of
paragraphs (c)(3) and (c)(5) of this section.
(e)Other rules—(1)Section 367(a)
property on which gain is recognized.
Gain recognized by the U.S. transferor
pursuant to paragraph (c)(2) of this section
shall be treated as recognized with respect
to the section 367(a) property transferred
in the section 361 exchange in proportion
to the amount of gain realized by the U.S.
transferor on the transfer of each item of
section 367(a) property. This paragraph
(e)(1) shall be applied after taking into
account any gain recognized by the U.S.
transferor on the transfer of the section
367(a) property in the section 361 ex-
change pursuant to all other provisions
under section 367(a) and the regulations
under that section. See, for example, sec-
tion 367(a)(3)(B) and §1.367(a)–4T. See
§1.367(a)–1T(b)(4) for additional rules
on the character, source, and adjustments
relating to gain recognized under section
367(a).
(2)Reasonable cause exception for
failure to comply—(i)Request for relief.If
a control group member (or final distribu-
tee) fails to comply with any requirement
of this section, the control group member
(or final distributee)shall be considered
to have complied with such requirement if
it submits a request for relief as provided
under paragraph (e)(2)(ii) of this section
and can demonstrate to the Area Director,
Field Examination, Small Business/Self
Employed or the Director of Field Op-
erations, Large and Mid-Size Business
(Director) having jurisdiction of the con-
trol group member’s (or final distributee’s)
tax return for the taxable year, that such
failure was due to reasonable cause and
not willful neglect. Whether the failure to
comply was due to reasonable cause and
not willful neglect will be determined by
the Director after considering all the facts
and circumstances. The Director shall
notify the control group member (or final
distributee) in writing within 120 days if
it is determined that the failure to com-
ply was not due to reasonable cause, or
if additional time will be needed to make
such determination. For this purpose, the
120-day period shall begin on the date the
Internal Revenue Service notifies the con-
trol group member (or final distributee) in
writing that the request for relief has been
received and assigned for review. Once
such period commences, if the control
group member (or final distributee) is not
again notified within 120 days, then the
control group member (or final distribu-
tee) shall be deemed to have established
reasonable cause.
(ii)Requirements for reasonable cause
relief—(A)Time of submission.Requests
for reasonable cause relief under para-
graph (e)(2)(i) of this section will be
considered only if as soon as the control
group member (or final distributee) be-
comes aware of the failure to comply with
any requirement of this section, the con-
trol group member (or final distributee)
attaches the statements or other documents
that should have been filed, as well as a
complete written statement setting forth
the reasons for the failure to comply, to
an amended return that amends the return
to which the documents should have been
attached pursuant to this section. The
amended return and all required attach-
ments must be filed with the applicable
Internal Revenue Service Center with
which the control group member (or fi-
nal distributee) filed its original return to
which the documents should have been
attached.
(B)Notice requirement. In addition to
the requirement of paragraph (e)(2)(ii)(A)
of this section, the control group member
(or final distributee) must comply with the
requirements of paragraph (e)(2)(ii)(B)(1)
or (2) of this section, as applicable.
(1) If the control group member (or fi-
nal distributee) is under examination for
any taxable year when the request for rea-
sonable cause relief is filed, a copy of the
amended return and attachments must be
provided to the Internal Revenue Service
personnel conducting the examination.
(2) If the control group member (or fi-
nal distributee) is not under examination
for any taxable year when the request for
reasonable cause relief is filed, a copy of
the amended return and attachments must
be provided to the Director having juris-
diction over the return.
(iii)Cross-reference for reasonable
cause relief requests by U.S. transferor.If
the U.S. transferor fails to comply with any
requirement of this section, the U.S. trans-
feror shall be treated as having complied
with such requirementiftheU.S.trans-
feror (or the foreign acquiring corporation
on behalf of the U.S. transferor) complies
with the reasonable cause exception pro-
cedures described in §1.6038B–1(f)(3).
(f)Definitions. The following defini-
tions apply for purposes of this section:
(1)Block of stockis a group of shares
of the same class of stock and that have an
identical basis.
(2)Control group and control group
member—(i)General rule. Except as pro-
vided in paragraph (f)(2)(ii) of this section,
thecontrol groupis the five or fewer, but at
least one, domestic corporations that con-
trol (within the meaning of section 368(c))
the U.S. transferor at the time of the sec-
tion 361 exchange. If the U.S. transferor
is controlled by more than five domestic
corporations at the time of the section 361
exchange, but some combination of five
or fewer domestic corporations control the
U.S. transferor at such time, the U.S. trans-
feror shall designate the five domestic cor-
porations that comprise the control group
on Form 926, “Return by a U.S. Transferor
of Property to a Foreign Corporation.” For
purposes of this paragraph, members of the
same affiliated group (within the meaning
of section 1504) shall be treated as one cor-
poration. Except as provided in paragraph
(f)(2)(ii) of this section, acontrol group
memberis a domestic corporation that is
part of the control group.
(ii)Exception for certain entities.Nei-
ther a regulated investment company (as
defined in section 851(a)), nor a real es-
tate investment trust (as defined in section
856(a)), nor an S corporation (as defined
in section 1361(a)) shall be a control group
member.
(3)Deductible liabilityis any liability
of the U.S. transferor that is assumed in
the section 361 exchange or satisfied in
connection with the reorganization (within
the meaning of section 361(c)(3)), but only
if the payment of such liability would give
rise to a deduction.
(4)Gross fair market valuemeans fair
market value determined without regard to
mortgages, liens, pledges, or other liabili-
ties. The fair market value of any property
subject to a nonrecourse indebtedness shall
not be less than the amount of such indebt-
edness.
(5)Inside basisis the amount equal to
the aggregate bases of the section 367(a)
property transferred by the U.S. transferor
in the section 361 exchange, increased by
2008–41 I.R.B.883October 14, 2008

any gain recognized by the U.S. transferor
onthetransferofsuchpropertyinthesec-
tion 361 exchange, including gain treated
as a dividend under section 1248(a), but
not including any gain recognized under
paragraph (c)(2) of this section (including
any such gain treated as a dividend under
section 1248(a)).
(6)Inside gainis the amount by which
the aggregate gross fair market value of the
section 367(a) property transferred in the
section 361 exchange exceeds the sum of
the inside basis and the product of the sec-
tion 367(a) percentageand the aggregate
deductible liabilities of the U.S. transferor.
(7)Outside gain (or loss)is the product
of the section 367(a) percentage and the
amount by which—
(i) The aggregate fair market value of
the stock received (or deemed received) by
a control group member in exchange for
stock or securities of the U.S. transferor
under section 354, 355, or 356; is greater
than (or less than),
(ii) The control group member’s aggre-
gate section 358 basis of such stock (as
determined without regard to any adjust-
ment to such basis required under para-
graph (c)(3) of this section).
(8)Section 367(a) percentageis the ra-
tio of the aggregate gross fair market value
of the section 367(a) property transferred
by the U.S. transferor in the section 361
exchange to the aggregate gross fair mar-
ket value of all property transferred by
the U.S. transferor in the section 361 ex-
change.
(9)Section 367(a) property—(i)Gen-
eral rule. Except as provided in paragraph
(f)(9)(ii) of this section,section 367(a)
propertyis any property other than section
367(d) property.
(ii)Special rule. Any property that
would otherwise constitute section 367(a)
property under paragraph (f)(9)(i) of this
section shall not constitute section 367(a)
property for purposes of any determination
under this section for which the amount
of section 367(a) property transferred in
the section 361 exchange is relevant, if
such property is acquired by the U.S. trans-
feror in connection with the section 361
exchange with a principal purpose of af-
fecting any such determination, including,
for example, the section 367(a) percent-
age, inside gain, and inside basis.
(10)Section 367(d) propertyis property
to which section 367(d) applies.
(11)Timely-filed returnis a U.S. in-
come tax return filed on or before the
due date set forth in section 6072(b), plus
any extension of time to file such return
granted under section 6081.
(g)Examples. The rules of this sec-
tion are illustrated by the following exam-
ples. The analysis of the following ex-
amples is limited to a discussion of issues
under this section. Unless otherwise in-
dicated, for purposes of the following ex-
amples assume: DP1, DP2, and DC are
domestic corporations that do not join in
the filing of a consolidated return; FP and
FA are foreign corporations that are unre-
lated to DP1, DP2, and DC; each corpora-
tion has a single class of stock outstanding;
each shareholder of DC owns one block of
stock in DC; DC’s Business A constitutes
section 367(a) property that could qualify
for the exception to section 367(a)(1) un-
der §1.367(a)–2T; DC has no liabilities,
and the requirements in paragraph (c)(5) of
this section and §1.6038B–1(c)(6)(ii) are
satisfied.
Example 1.Tainted assets and non-control group
ownership.(i)Facts. DP1, DP2, and FP own 50%,
30%, and 20%, respectively, of the outstanding stock
of DC. DP1’s DC stock has a $120x basis and $100x
fair market value. DP2’s DC stock has a $50x ba-
sis and $60x fair market value. DC owns inventory
with a $40x basis and a $100x fair market value. DC
also owns Business A with a $10x basis and $100x
fair market value. In a reorganization described in
section 368(a)(1)(F), DC transfers the inventory and
Business A to FA, a newly formed corporation, in ex-
change for all of the outstanding stock of FA. DC’s
transfer of the inventory and Business A to FA qual-
ifies as a section 361 exchange. DP1, DP2, and FP
exchange the DC stock for a proportionate amount of
FAstockpursuanttosection354.
(ii)Result. (A) Under section 367(a)(3)(B), DC
must recognize $60x gain on the transfer of the in-
ventory to FA. Under §1.367(a)–1T(b)(4)(i)(B), the
section 362 basis increase is allocated to the inven-
tory such that FA’s basis in the inventory is $100x.
Under section 367(a)(5) and paragraph (b) of this sec-
tion, DC’s transfer of Business A to FA is subject to
the general rule of section 367(a)(1). As a result, DC
must also generally recognize $90x gain on the trans-
fer of Business A to FA notwithstanding the applica-
tion of section 351 or section 361. However, if the
conditions and requirements of paragraph (c) of this
section are met, DC’s transfer of Business A to FA
may be partially eligible for the active foreign trade
or business exception provided by section 367(a)(3)
and §1.367(a)–2T. See §1.367(a)–2T for the require-
ments of the active foreign trade or business excep-
tion.
(B) The requirement of paragraph (c)(1) of this
section is satisfied because DC is controlled (within
the meaning of section 368(c)) by DP1 and DP2 at the
time of the section 361 exchange.
(C) Under paragraph (c)(2)(i) of this section, DC
must recognize $18x gain on the transfer of Business
A with respect to FP, a non-control group member.
The $18x gain equals the product of the inside gain
($90x) and FP’s 20% ownership interest (by value)
in DC at the time of the section 361 exchange. Un-
der paragraph (f)(6) of this section, the $90x inside
gain is the amount by which the aggregate gross fair
market value ($200x) of the section 367(a) property
(the inventory and Business A) exceeds the $110x in-
side basis. Under paragraph (f)(5) of this section, the
inside basis equals the $50x aggregate basis of the
section 367(a) property transferred in the section 361
exchange, increased by the $60x gain recognized by
DC on the transfer of the inventory to FA, but not
by the $18x gain recognized by DC under paragraph
(c)(2)(i) of this section with respect to FP. Under para-
graph (e)(1) of this section, the $18x gain recognized
under paragraph (c)(2)(i) of this section is treated as
recognized with respect to Business A.
(D) DC is not required to recognize gain under
paragraph (c)(2)(ii) of this section with respect to ei-
ther DP1 or DP2. DP1’s share of inside gain ($45x)
does not exceed the product of the section 367(a) per-
centage (100%) and the fair market value of the FA
stock ($100x) received in exchange for its DC stock.
DP1’s share of inside gain is determined based on its
50% ownership interest (by value) in DC at the time
of the section 361 exchange. DP2’s share of inside
gain ($27x) does not exceed the product of the section
367(a) percentage (100%) and the fair market value
of the FA stock ($60x) received in exchange for its
DC stock. DP2’s share of inside gain is determined
based on its 30% ownership interest (by value) in DC
at the time of the section 361 exchange.
(E) Under paragraph (c)(3) of this section, DP1’s
section 358 basis in the FA stock ($120x) received
in exchange for its DC stock must be reduced by
$65x, the amount by which DP1’s share of inside gain
($45x) exceeds DP1’s $20x outside gain. DP1’s share
of inside gain is determined based on its 50% owner-
ship interest (by value) in DC at the time of the sec-
tion 361 exchange. Because DC does not recognize
gain on the section 361 exchange with respect to DP1,
DP1’s share of inside gain is not reduced under para-
graph (c)(3)(i)(A) of this section. DP1’s $20x outside
loss equals the product of the section 367(a) percent-
age (100%) and the amount by which the fair market
value ($100x) of the FA stock received by DP1 in ex-
change for its DC stock is less than the section 358 ba-
sis of such FA stock ($120x). As adjusted, DP1’s ba-
sis in its FA stock is $55x. Similarly, under paragraph
(c)(3) of this section, DP2’s section 358 basis in the
FA stock ($50x) received in exchange for its DC stock
must be reduced by $17x, the amount by which DP2’s
share of inside gain ($27x) exceeds DP1’s $10x out-
side gain. DP2’s share of inside gain is determined
based on its 30% ownership interest (by value) in DC
at the time of the section 361 exchange. Because DC
does not recognize gain on the section 361 exchange
with respect to DP2, DP2’s share of inside gain is not
reduced under paragraph (c)(3)(i)(A) of this section.
DP2’s $10x outside gain equals the product of the
section 367(a) percentage (100%) and the amount by
which the fair market value ($60x) of the FA stock re-
ceived by DP2 in exchange for its DC stock is greater
than the section 358 basis of such stock ($50x). As
adjusted, DP2’s basis in its FA stock is $33x.
October 14, 20088842008–41 I.R.B.

(F) Under paragraph (c)(4) of this sec-
tion, DC must comply with the requirements of
§1.6038B–1(c)(6)(iii).
Example 2.Triangular reorganization involving
the exchange of section 367(d) property for stock and
cash.(i)Facts. (A) DP1 wholly owns DC. DP1
and DC file a consolidated return. DP1’s DC stock
has a $175x basis and $200x fair market value. DC
owns Business A ($10x basis and $150x fair market
value) and a patent ($0x basis and $50x fair market
value). The patent is section 367(d) property. FP
wholly owns FA.
(B) In a triangular reorganization described
in section 368(a)(1)(A) by reason of section
368(a)(2)(D), DC transfers Business A and the patent
to FA in exchange for $180x of FP stock and $20x
cash. DC’s transfer of Business A and the patent to
FA is a section 361 exchange. DP1 exchanges its
DC stock for the $180x of FP stock and the $20x
cash pursuant to section 356. The triangular reorga-
nization constitutes an indirect stock transfer under
§1.367(a)–3(d)(1)(i), and DP1 files a gain recogni-
tion agreement under §1.367(a)–8 with respect to
such transfer.
(ii)Result. (A) Under section 367(a)(5) and
paragraph (b) of this section, DC’s transfer of Busi-
ness A to FA is subject to the general rule of section
367(a)(1). As a result, DC must generally recog-
nize $140x gain on the transfer of Business A to
FA notwithstanding the application of section 361.
However, if the requirements of paragraph (c) of this
section are satisfied, DC’s transfer of Business A to
FA may be eligible for the active foreign trade or
business exception provided by section 367(a)(3) and
§1.367(a)–2T. See §1.367(a)–2T for the requirements
of the active foreign trade or business exception.
For rules applicable to DC’stransfer of the patent to
FA, see section 367(d) and the regulations under that
section.
(B) The requirement of paragraph (c)(1) of this
section is satisfied because DC is controlled (within
the meaning of section 368(c)) by DP1 at the time of
the section 361 exchange.
(C) DC is not required to recognize gain under
paragraph (c)(2)(i) of thissection because at the time
of the section 361 exchange DC is wholly owned
by DP1, a control group member. Under paragraph
(c)(2)(ii) of this section, DC must recognize $5x
gain, the amount by which the product of the inside
gain ($140x) and DP1’s 100% ownership interest (by
value) in DC at the time of the section 361 exchange
exceeds the product of the section 367(a) percentage
(75%) and the fair market value ($180x) of the FP
stock received by DP1 in exchange for DC stock.
The $140x inside gain equals the aggregate gross fair
market value of Business A ($150x) less the inside
basis ($10x). Under paragraph (e)(1) of this section,
the $5x gain recognized is allocated to Business A.
Under §1.1502–32(b)(2), DP1 increases the basis of
its DC stock by $5x.
(D) Under paragraph (c)(3) of this section, DP1’s
section 358 basis ($180x) in the FP stock ($180x ba-
sis of DC stock, decreased by $20x cash received, and
increased by the $20x gain recognized under section
356) is reduced by $135x, the amount by which the
product of the $140x inside gain, reduced by the $5x
recognized by DC under paragraph (c)(2)(ii) ($135x)
and DP1’s 100% ownership interest (by value) in DC
at the time of the exchange exceeds DP1’s outside
gain ($0x). The $0x outside gain equals the prod-
uct of the section 367(a) percentage (75%) and the
amount by which the fair market value of the FP stock
received by DP1 ($180x) is greater than the section
358 basis of such stock ($180x). As adjusted, DP1’s
basis in the FP stock is $45x.
(E) Under paragraph (c)(4)(i) of this sec-
tion, DC must comply with the requirements of
§1.6038B–1(c)(6)(iii).
Example 3.Adjustment to basis of multiple blocks
of stock.(i)Facts. (A) DP1 wholly owns DC. DP1’s
DC stock is divided into two blocks of stock (Block 1
and Block 2). Block 1 has a $60x basis and $100x fair
market value. Block 2 has a $120x basis and $100x
fair market value. DC owns Business A ($15x basis
and $150x fair market value) and a patent ($0x basis
and $50x fair market value). The patent is section
367(d) property.
(B) In a reorganization described in section
368(a)(1)(F), DC transfers Business A and the patent
to FA, a newly-formed corporation, in exchange for
2sharesofFAstock. DC’stransferofBusiness
A and the patent to FA qualifies as a section 361
exchange. DP1 exchanges Block 1 and Block 2 for
the two shares of FA stock pursuant to section 354.
Pursuant to §1.358–2(a)(2)(i), one share of the FA
stock corresponds to Block 1 (Share 1) and the other
share of FA stock corresponds to Block 2 (Share 2).
The basis and holding period of Share 1 and Share 2
correspond to the basis and holding period of Block
1 and Block 2, respectively.
(ii)Result. (A) Under section 367(a)(5) and
paragraph (b) of this section, DC’s transfer of Busi-
ness A to FA is subject to the general rule of section
367(a)(1). As a result, DC must generally recognize
$135x gain on the transfer of Business A to FA
notwithstanding the application of section 351 or sec-
tion 361. However, if the requirements of paragraph
(c) of this section are met, DC’s transfer of Business
A to FA may be eligible for the active foreign trade
or business exception provided in section 367(a)(3).
See §1.367(a)–2T for the requirements of the active
foreign trade or business exception. For rules appli-
cable to DC’s transfer of the patent to FA, see section
367(d) and the regulations under that section.
(B) The requirement of paragraph (c)(1) of this
section is satisfied because DC is controlled (within
the meaning of section 368(c)) by DP1 at the time of
the section 361 exchange.
(C) DC is not required to recognize gain under
paragraph (c)(2)(i) of this section because, at the time
of the section 361 exchange, DC is wholly owned
by DP1. DC is not required to recognize gain un-
der paragraph (c)(2)(ii) of this section because DP1’s
100% share of inside gain ($135x) does not exceed
the product of the section 367(a) percentage (75%)
and the fair market value ($200x) of the FA stock re-
ceived by DP1 in exchange for its DC stock ($150x).
Under paragraph (f)(6) of this section, the $135x in-
side gain equals the aggregate gross fair market value
of the section 367(a) property ($150x) less the inside
basis ($15x).
(D) Under paragraph (c)(3) of this section, DP1’s
aggregate section 358 basis in Share 1 ($60x) and
Share 2 ($120x) must be reduced by $120x, the
amount by which DP1’s 100% share of inside gain
($135x) exceeds DP1’s $15xoutside gain. The $15x
outside gain equals the product of the section 367(a)
percentage (75%) and the amount by which the
fair market value of the FA stock received by DP1
($200x) is greater than the section 358 basis of the
FA stock ($180x) (75% of $20x).
(E) Under paragraph (c)(3)(ii)(B) of this section,
the $120x reduction to basis is allocated between
Share 1 and Share 2 based onthe relative section 358
basis of each share. Therefore, the basis in Share 1 is
reduced by $40x ($120x multiplied by $60x/$180x).
As adjusted, DP1’s basis in Share 1 is $20x. The
basis in Share 2 is reduced by $80x ($120x multiplied
by $120x/$180x). As adjusted, DP1’s basis in Share
2 is $40x.
(F) Under paragraph (c)(4)(i) of this sec-
tion, DC must comply with the requirements of
§1.6038B–1(c)(6)(iii).
(h)Applicable cross-references.For
rules relating to the character, source, and
adjustments resulting from gain recog-
nized by a U.S. transferor under section
367(a), see §1.367(a)–1T(b)(4). For rules
relating to the acquisition of the stock or
assets of a foreign corporation by another
foreign corporation, see §1.367(b)–4. For
rules relating to transfers of section 367(d)
property by a U.S. transferor to a for-
eign corporation, see section 367(d) and
the regulations under that section. For
rules relating to distributions of stock
of a foreign corporation by a domestic
corporation under section 355 or 361,
see §§1.1248(f)–1 through –3. For addi-
tional rules relating to certain reporting
requirements of a U.S. transferor, see
§1.6038B–1.
(i) [Reserved.]
(j)Effective/applicability date.This
section shall apply to transfers occurring
on or after the date 30 days after the date
these regulations are published as final
regulations in theFederal Register.
Par. 6. Section 1.367(b)–4 is amended
by:
1. Revising paragraphs (b)(1)(i)(B)(2),
(b)(1)(ii), and (b)(1)(iii),Example 4(ii).
2. Adding paragraph (b)(1)(iii),Exam-
ple 5.
The revisions and additions to read as
follows:
§1.367(b)–4 Acquisition of foreign
corporate stock or assets by a foreign
corporation in certain nonrecognition
transactions.
*****
(b) * * *
(1)***(i)***
(B) * * *
(2) Immediately after the exchange, the
foreign acquiring corporation or the for-
2008–41 I.R.B.885October 14, 2008

eign acquired corporation (if any, such as
in the case of the acquisition of the stock
of a foreign acquired corporation) is not a
controlled foreign corporation as to which
the United States person described in para-
graph (b)(1)(i)(A) of this section is a sec-
tion 1248 shareholder.
(ii)Special rules for certain triangu-
lar reorganizations—(A)Exception for
receipt of domestic stock. In the case
of a triangular reorganization described
in §1.358–6(b)(2), or a reorganization
described in section 368(a)(1)(G) and
(a)(2)(D), an exchange is not described in
paragraph (b)(1)(i) of this section if—
(1) The stock received in the exchange
is stock of a domestic corporation that im-
mediately after the exchange is a section
1248 shareholder of—
(i) The foreign acquired corporation, in
the case of a triangular B reorganization or
a reorganization in which stock of the for-
eign acquired corporation is acquired pur-
suant to a transfer to which the exception
provided in §1.367(a)–7(c) applies; or
(ii) The surviving corporation, in the
case of a transaction that is not described in
paragraph (b)(1)(ii)(A)(1)(i) of this section
and that is a triangular C reorganization,
a forward triangular merger, a reorganiza-
tion described in section 368(a)(1)(G) and
(a)(2)(D), or a reverse triangular merger;
and
(2) The foreign acquired corporation or
surviving corporation is a controlled for-
eign corporation. See paragraph (b)(1)(iii)
of this section,Example 3Bfor an illustra-
tion of this rule.
(B)Adjustments to basis of stock of for-
eign acquiring corporation—(1)Transfers
to which exception under §1.367(a)–7(c)
applies. If the stock of the foreign ac-
quired corporation is acquired by the
foreign acquiring corporation pursuant
to a triangular reorganization described
in §1.358–6(b)(2)(i) through (iii), or
a reorganization described in section
368(a)(1)(G) and (a)(2)(D), to which the
exception provided in §1.367(a)–7(c) ap-
plies and that is not described in paragraph
(b)(1)(i) of this section, the corporation
(foreign or domestic) that controls the for-
eign acquiring corporation shall apply the
principles of §1.367(b)–13 to adjust the
basis of the stock of the foreign acquir-
ing corporation so that the section 1248
amount attributable to the stock of the
foreign acquired corporation (determined
when the foreign acquiring corporation
acquires such stock) is reflected in the
stock of the foreign acquiring corporation
immediately after the exchange. See para-
graph (b)(1)(iii) of this section,Example
5, for an illustration of this rule.
(2)Other triangular reorganizations.
See §1.367(b)–13(c) for rules regarding
the adjustment to the basis of the stock
of the foreign acquiring corporation in
other triangular reorganizations described
in paragraph (b)(1)(ii)(A)(1)(ii)ofthis
section.
(iii) * * *
Example 4.***
(ii)Result. DC2, the exchanging shareholder, is
aU.S.personandasection1248shareholderwith
respect to FC2, the foreign acquired corporation.
Whether DC2 is required to include in income the
section 1248 amount attributable to the FC2 stock
under paragraph (b)(1)(i) of this section depends on
whether, immediately after DC2’s exchange of the
FC2 stock for FC1 stock (and before the distribution
of the FC1 stock to DC1 under section 361(c)(1)),
FC1 and FC2 are controlled foreign corporations as
to which DC2 is a section 1248 shareholder. If, im-
mediately after the exchange, FC1 and FC2 are both
controlled foreign corporations as to which DC2 is a
section 1248 shareholder, then DC2 is not required
to include in income the section 1248 amount at-
tributable to the FC2 stock under paragraph (b)(1)(i)
because neither condition in paragraph (b)(1)(i)(B) is
satisfied. Alternatively, if immediately after the ex-
change either FC1 or FC2 is not a controlled foreign
corporation as to which DC2 is a section 1248 share-
holder then, pursuant to paragraph (b)(1)(i) of this
section, DC2 must include in income the section 1248
amount attributable to the FC2 stock exchanged. For
the treatment of DC2’s transfer of assets to FC1, see
also section 367(a)(1) and (a)(3) and the regulations
under that section. Because DC2’s transfer of assets
to FC1 is described in section 361(a) or (b), see
section 367(a)(5) and §1.367(a)–7. If any of the
assets transferred are intangible assets, see section
367(d) and the regulations under that section. With
respect to DC2’s distribution of the FC1 stock to
DC1 under section 361(c)(1), see section 1248(f)(1),
§1.1248(f)–1 and §1.1248(f)–2.
Example 5.(i)Facts. DC1, a domestic corpo-
ration, wholly owns DC2, a domestic corporation.
DC1’s DC2 stock has a $30 basis and a $100 fair
market value. DC2’s only asset is all the outstand-
ing stock of FC2, a foreign corporation. DC2’s
FC2 stock has a $30 basis, $100 fair market value
and a $20 section 1248 amount. USP, a domestic
corporation unrelated to DC1, DC2 or FC2, wholly
owns FC1, a foreign corporation. In a triangular
reorganization described in section 368(a)(1)(C),
DC2transfersalltheFC2stocktoFC1inexchange
solely for voting stock of USP and then distributes
the USP stock to DC1 under section 361(c)(1). DC1
exchanges its DC2 stock for the USP stock under
section 354. DC2’s transfer of the FC2 stock to FC1
is described in section 361(a) and therefore, under
section 367(a)(5) and §1.367(a)–7, is generally sub-
ject to section 367(a)(1). However, DC2’s transfer
of the FC2 stock to FC1 qualifies for the exception
provided in §1.367(a)–7(c). DC1 and DC2 elect to
apply the rules of §1.367(a)–7(c) in accordance with
§1.367(a)–7(c)(5). DC1 is not required to adjust the
basis of its USP stock (determined under section
358) under section 367(a)(5) and §1.367(a)–7(c)(3).
(ii)Result. Under paragraph (b)(1)(ii)(A) of
this section, because the stock received by DC2 in
exchange for its FC2 stock is stock of a domestic cor-
poration (USP) and, immediately after the exchange,
USP is a section 1248 shareholder of FC2 (the for-
eign acquired corporation) and FC2 is a controlled
foreign corporation, DC2’s exchange of its FC2 stock
for USP stock is not described in paragraph (b)(1)(i)
of this section. Therefore, DC2 is not required to in-
clude in income the section 1248 amount attributable
to the FC2 stock. Under paragraph (b)(1)(ii)(B)(1)
of this section, USP must apply the principles of
§1.367(b)–13 to adjust the basis of its FC1 stock so
that the $20 section 1248 amount attributable to the
FC2 stock at the time of the exchange is reflected
in the FC1 stock immediately after the exchange.
Under the principles of §1.367(b)–13,each share of
FC1 stock held by USP after the exchange must be
divided into one portion attributable to the FC1 stock
immediately before the exchange and one portion at-
tributable to the FC2 stock acquired in the exchange.
The$30basisintheFC2stockandtheearnings
and profits attributable to the FC2 stock before the
exchange are attributable to the divided portions of
the FC1 stock to which the FC2 stock relates.
*****
Par. 7. Section 1.367(b)–6 is amended
by revising paragraph (a)(1) to read as fol-
lows:
§1.367(b)–6 Effective dates and
coordination rules.
(a)Effective date—(1)In general—(A)
Except as otherwise provided in this para-
graph (a)(1) and paragraph (a)(2) of this
section, §§1.367(b)–1 through 1.367(b)–5,
and this section, apply to section 367(b)
exchanges that occur on or after February
23, 2000.
(B) The rules of §§1.367(b)–3 and
1.367(b)–4, as they apply to reorganiza-
tionsdescribedinsection368(a)(1)(A)
(including reorganizations described in
section 368(a)(2)(D) or (E)) involving a
foreign acquiring or foreign acquired cor-
poration, apply only to transfers occurring
on or after January 23, 2006.
(C) The second sentence of paragraph
(a) in §1.367(b)–4 applies to section
304(a)(1) transactions occurring on or af-
ter February 23, 2006; however, taxpayers
may rely on this sentence for all section
304(a)(1) transactions occurring in open
taxable years.
(D) Section 1.367(b)–1(c)(2)(v),
(c)(3)(ii)(A), (c)(4)(iv),(c)(4)(v),
October 14, 20088862008–41 I.R.B.

§1.367(b)–2(j)(1)(i), (l), and §1.367(b)–
3(e) and (f), apply to section 367(b)
exchanges that occur on or after November
6, 2006. For guidance with respect to
§1.367(b)–1(c)(3)(ii)(A) and (c)(4)(iv)
and (v) and §1.367(b)–2(j)(1)(i) for
exchanges that occur before November
6, 2006, see 26 CFR part 1 revised as of
April 1, 2006.
(E) Section 1.367(b)–4(b)(1)(ii) and
§1.367(b)–4(b)(1)(iii),Examples 4and
5apply to section 367(b) exchanges
that occur on or after the date that is
30 days after the date these regula-
tions are published as final regulations
in theFederal Register. For guidance
with respect to §1.367(b)–4(b)(1)(ii) and
§1.367(b)–4(b)(1)(iii),Example 4,forex-
changes that occur before the date 30 days
after the date these regulations are pub-
lished as final regulations in theFederal
Register, see 26 CFR part 1 revised as of
April 1 for the year before the date these
regulations are published as final regula-
tions in theFederal Register.
*****
Par. 8. For each entry in the table in the
“Section” column, remove the language in
the “Remove” column and add the lan-
guage in the “Add” column in its place.
SectionRemoveAdd
1.1248–1(a)(1), second to last sentence1248(f)1248(g)
1.1248–1(a)(1), last sentence1248(g)1248(h)
1.1248–3(a)(6), first sentence1.1248–41.1248–2
1.1248–3(a)(6), first sentence1.1248–71.1248–8
1.1248–7(a)(1), second to last sentence1248(g)1248(h)
Par. 9. Section 1.1248–1 is amended
by:
1. Revising paragraphs (b) and (e).
2. Revising the second sentence of
paragraph (c).
The revisions to read as follows.
§1.1248–1 Treatment of gain from certain
sales or exchanges of stock in certain
foreign corporations.
*****
(b)Sale or exchange. For purposes
of this section and §§1.1248–2 through
1.1248–8, the termsale or exchangein-
cludes the receipt of a distribution that is
treated as in exchange for stock under sec-
tion 302(a) (relating to distributions in re-
demption of stock) or section 331(a) (relat-
ing to distributions in complete liquidation
of a corporation).
(c) * * * Thus, for example, if a United
States person exchanges stock in a foreign
corporation and no gain is recognized on
such exchange under section 332, 351,
354, 355, or 361, taking into account
the application of section 367, then no
amount is includible in the gross income
of such person as a dividend under section
1248(a).
*****
(e)Exceptions.Under section 1248(g),
this section and §§1.1248–2 through
1.1248–8 shall not apply to:
(1) Distributions to which section 303
(relating to distributions in redemption of
stock to pay death taxes) applies; or
(2) Any amount to the extent that such
amount is, under any other provision of the
Internal Revenue Code (Code), treated as
(i) a dividend, (ii) gain from the sale of an
asset which is not a capital asset, or (iii)
gain from the sale of an asset held for not
more than 1 year.
*****
Par. 10. Section 1.1248–6 is amended
by:
1. Adding a new sentence at the end of
paragraph (a).
2. Adding paragraphs (d) and (e).
The additions to read as follows:
§1.1248–6 Sale or exchange of stock in
certain domestic corporations.
(a)***Seeparagraph(d)ofthissec-
tion for a rule suspending the application
of this section in certain circumstances.
*****
(d)Temporary suspension of section
1248(e). Section 1248(e) and the rules
of this section shall not apply to a sale,
exchange, or other disposition of the stock
of a domestic corporation during a period
when capital gains are taxed at a rate that
equals or exceeds the rate at which ordi-
nary income is taxed.
(e)Effective/applicability date. Para-
graph (d) of this section shall apply to a
sale, exchange, or other disposition of the
stock of a domestic corporation on or after
September 21, 1987.
Par. 11. Section 1.1248–8 is amended
by:
1. Revising paragraphs (a)(3), (b)(1)
(iv)(A), (b)(2)(i), and (d).
2. Adding new paragraph (b)(2)(iv).
The revisions and addition to read as
follows:
§
1.1248–8 Earnings and profits
a
ttributable to stock following certain
n
on-recognition transactions.
(a) * * *
(3)Application of section 381.Stock
of a foreign corporation that receives
assets in a transfer to which section
361(a) or (b) applies in connection with
a reorganization described in section
368(a)(1)(A),(C),(D),(F),or(G),orina
distribution to which section 332 applies,
and to which section 381(c)(2)(A) and
§1.381(c)(2)–1(a) apply. See paragraph
(b)(6) of this section; or
*****
(b) * * *
(1) * * *
(iv)***
(A) In a restructuring transaction qual-
ifying as a nonrecognition transaction
within the meaning of section 7701(a)(45)
and described in section 354, 356, or
361(a) or (b), stock in an acquired corpora-
tion for stock in either a foreign acquiring
corporation or a foreign corporation that
2008–41 I.R.B.887October 14, 2008

is in control, within the meaning of sec-
tion 368(c), of an acquiring corporation
(whether domestic or foreign); or
*****
(2) * * *
(i)Exchanging shareholder exchanges
property that is not stock of a foreign ac-
quired corporation with respect to which
the exchanging shareholder is a section
1248 shareholder or a foreign corporate
shareholder. Except as provided in para-
graph (b)(2)(iv) of this section, where the
exchanging shareholder exchanges in a
restructuring transaction property that is
not stock of a foreign acquired corpora-
tion with respect to which the exchanging
shareholder is a section 1248 shareholder
or a foreign corporate shareholder immedi-
ately before such transaction, the earnings
and profits attributable to the stock that
the exchanging shareholder receives in
the restructuring transaction shall be de-
termined in accordance with §1.1248–2 or
§1.1248–3, whichever is applicable, with-
out regard to any portion of the section
1223(1) holding period in that stock that
is before the restructuring transaction. See
paragraph (b)(7)Example 1of this section.
*****
(iv)Exchanging shareholder exchanges
stock of a domestic acquired corporation
for stock of a foreign corporation with
respect to which the exchanging share-
holder is a section 1248 shareholder
after the exchange.Ifinarestructuring
transaction described in §1.1248(f)–2(c)
and to which the exception provided by
§1.1248(f)–2(c)(1) applies, the earnings
and profits attributable to a portion of a
share of stock of a foreign corporation
created pursuant to §1.1248(f)–2(c)(2) (or
a whole share, if no division is required)
shall be determined pursuant to paragraphs
(b)(2)(iv)(A) and (B) of this section.
(A) The earnings and profits attribut-
able to a portion of ashare of stock cre-
ated pursuant to §1.1248(f)–2(c)(2)(i) (or
a whole share, if no division is required)
shall be the earnings and profits attribut-
able to the stock of the foreign corpora-
tion received by the section 1248 share-
holder under section 354, 355, or 356 de-
termined in accordance with §1.1248–2 or
§1.1248–3, whichever is applicable, with-
out regard to any portion of the section
1223(1) holding period in that stock that is
before the restructuring transaction.
(B) The earnings and profits attribut-
able to a portion of a share of stock created
under §1.1248(f)–2(c)(2)(ii) (or whole
share, if no division is required) shall be
the sum of—
(1) The earnings and profits attribut-
able to the stock of the foreign corporation
transferred in the section 361 exchange
that relates to such portion (or share) mul-
tiplied by the section 1248 shareholder’s
ownership interest (by value) in the do-
mestic distributing corporation at the time
of the restructuringtransaction; and
(2) The earnings and profits attribut-
able to the stock of the foreign corpora-
tion received by the section 1248 share-
holder under section 354, 355, or 356 de-
termined in accordance with §1.1248–2 or
§1.1248–3, whichever is applicable, with-
out regard to any portion of the section
1223(1) holding period in that stock that
is before the restructuring transaction. See
§1.1248(f)–2(d),Examples 2through4.
*****
(d)Effective/applicability dates—(1)
General rule. Except as provided in para-
graph (d)(2) of this section, this section
applies to income inclusions that occur on
or after July 30, 2007.
(2)Exception. Paragraph (b)(2)(iv) of
this section applies to restructuring trans-
actions occurring on or after the date 30
days after the date these regulations are
published as final regulations in theFed-
eral Register.
Par. 12. Section 1.1248(f)–1 is added
to read as follows:
§1.1248(f)–1 Certain nonrecognition
distributions.
(a)Scope and purpose. This section
and §§1.1248(f)–2 and 1.1248(f)–3 pro-
vide rules that apply when a domestic
corporation (domestic distributing cor-
poration) distributes stock of a foreign
corporation (foreign distributed corpora-
tion) in a distribution to which section 337,
355, or 361 applies. The purpose of this
section is to confirm the general rule of
section 1248(f)(1) that requires the domes-
tic distributing corporation to include in
gross income the section 1248 amount or
section 1248(f) amount,as applicable, that
is attributable to the stock of the foreign
distributed corporation distributed under
section 337, 355, or 361, and to provide
exceptions to the general rule to the extent
the section 1248 amount or section 1248(f)
amount, as applicable, can be preserved
immediately following the distribution
in the hands of a distributee that is a do-
mestic corporation. This section provides
the general rule and definitions. Section
1.1248(f)–2 provides the exceptions to the
general rule. Section 1.1248(f)–3 provides
a reasonable cause exception for a failure
to comply with certain requirements of
§1.1248(f)–2. Section 1.1248(f)–3 also
provides the effective dates of this section
and §1.1248(f)–2.
(b)General rule—(1)Section 337
distributions. Except as provided in
§1.1248(f)–2(a), a domestic distributing
corporation that is a section 1248 share-
holder of a foreign distributed corporation
and that distributes stock of such corpo-
rationinadistributiontowhichsection
337 applies (section 337 distribution),
shall, notwithstanding any other provision
of subtitle A, include in gross income as
a dividend the section 1248 amount at-
tributable to the distributed stock. This
paragraph (b)(1) shall apply only to the
extent the domestic distributing corpora-
tion does not recognize gain on the section
337 distribution under any other provision
of subtitle A.
(2)Certain section 355 distributions.
Except as provided in §1.1248(f)–2(b), a
domestic distributing corporation that is
a section 1248 shareholder of a foreign
distributed corporation and that distributes
stock of such corporation, other than stock
received in a section 361 exchange, in a
distribution to whichsection 355 applies
(section 355 distribution), shall, notwith-
standing any other provision of subtitle
A, include in gross income as a dividend
the section 1248 amount attributable to the
distributed stock. This paragraph (b)(2)
shall apply only to the extent the domes-
tic distributing corporation does not rec-
ognize gain on the section 355 distribution
under any other provision of subtitle A.
(3)Distributions pursuant to a plan
of reorganization. Except as provided in
§1.1248(f)–2(c), a domestic distributing
corporation that is a section 1248 share-
holder of a foreign distributed corporation
and that distributes stock of such corpora-
tion received in a section 361 exchange in
a section 355 distribution or a distribution
to which section 361 applies (section 361
distribution), shall, notwithstanding any
other provision of subtitle A, include in
October 14, 20088882008–41 I.R.B.

gross income as a dividend the section
1248(f) amount attributable to the stock
distributed. This paragraph (b)(3) shall
apply without regard to the amount of
gain realized by the domestic distributing
corporation on the distribution.
(c)Definitions. Except as otherwise
provided, the following definitions ap-
ply for purposes of this section and
§§1.1248(f)–2 and 1.1248(f)–3.
(1)80-percent distributeeis a corpora-
tion described in section 337(c).
(2)Block of stockhas the meaning set
forth in §1.1248–2(b).
(3)Distributeeis a shareholder of the
domestic distributing corporation that re-
ceives stock of a foreign distributed corpo-
ration in a section 355 distribution or sec-
tion 361 distribution.
(4)Postdistribution amountis the sec-
tion 1248 amount attributable to the stock
of a foreign distributed corporation re-
ceived (or deemed received) by a distribu-
tee, computed immediately after the distri-
bution but without taking into account any
adjustments to the basis of such stock un-
der §1.1248(f)–2(b)(3) or (c)(3). The post-
distribution amount attributable to stock of
a foreign distributed corporation received
in a section 355 distribution described
in paragraph (b)(2) of this section shall
be determined based on the distributee’s
holding period in such stock as adjusted
under §1.1248(f)–2(b)(2). The postdistri-
bution amount attributable to stock of a
foreign distributed corporation received in
a section 355 distribution or section 361
distribution describedin paragraph (b)(3)
of this section shall be determined after
applying the rules in §§1.1248–8(b)(2)(iv)
and 1.1248(f)–2(c)(2).
(5)Section 358 basisis the basis of
stock determined under section 358 and
the regulations under that section.
(6)Section 361 exchangeis an ex-
change described in section 361(a) or (b).
(7)Section 1248 amountis the net
positive earnings and profits (if any) at-
tributable to the stock of the foreign dis-
tributed corporation under §1.1248–2 or
§1.1248–3 (as adjusted by §1.1248–8) and
that would be included in gross income
as a dividend under section 1248(a) if
the stock were sold by the holder of such
stock.
(8)Section 1248(f) amountis the ag-
gregate amount of the net positive earn-
ings and profits (if any) attributable to the
stock of each foreign corporation, under
§1.1248–2 or §1.1248–3 (as adjusted by
§1.1248–8), transferred by the domestic
distributing corporation to the foreign dis-
tributed corporation in the section 361 ex-
change that precedes the section 355 dis-
tribution or section 361 distribution of the
stock of the foreign distributed corpora-
tion, and that would be included in gross
income as a dividend under section 964(e)
by the foreign distributed corporation if it
sold such stock immediately after the sec-
tion 361 exchange. The section 1248(f)
amount is attributable to the stock of the
foreign distributed corporation received in
the section 361 exchange.
(9)Section 1248 shareholderis a do-
mestic corporation that satisfies the own-
ership requirementsof section 1248(a)(2)
with respect to a foreign corporation.
(10)Timely-filed returnis a U.S. in-
come tax return filed on or before the
due date set forth in section 6072(b), plus
any extension of time to file such return
granted under section 6081.
Par. 13. Section 1.1248(f)–2 is added
to read as follows:
§1.1248(f)–2 Exceptions for certain
distributions.
(a)Section 337 distributions. Section
1.1248(f)–1(b)(1) shall not apply to a sec-
tion 337 distribution of stock of the for-
eign distributed corporation if the condi-
tions of paragraphs (a)(1) through (a)(3) of
this section are satisfied.
(1)80-percent distributee is a section
1248 shareholder. Immediately after the
section 337 distribution, the 80-percent
distributee is a section 1248 shareholder
with respect to the foreign distributed cor-
poration.
(2)Holding period. The 80-percent
distributee is treated as holding the stock
of the foreign distributed corporation re-
ceived in the section 337 distribution for
the period during which the stock was held
by the domestic distributing corporation.
(3)Basis. The 80-percent distributee’s
basis in the stock of the foreign distributed
corporation received in the section 337 dis-
tribution does not exceed the domestic dis-
tributing corporation’s basis in such stock
at the time of the section 337 distribution.
(b)Certain section 355 distributions.
Section 1.1248(f)–1(b)(2) shall not apply
to a section 355 distribution of stock of
the foreign distributed corporation not
received by the domestic distributing
corporation in a section 361 exchange
to a distributee that is a section 1248
shareholder with respect to the foreign
distributed corporation immediately after
the distribution, if the domestic distribut-
ing corporation and all such section 1248
shareholders elect to apply the provisions
of this paragraph (b) in accordance with
paragraph (b)(1) of this section. See para-
graphs (b)(2) and (b)(3) of this section
for adjustments that occur as a result of
electing to apply the provisions of this
paragraph (b).
(1)Election and reporting—(i)State-
mentrequiredbysection1248share-
holders and domestic distributing corpo-
ration—(A)In general. The domestic
distributing corporation and the section
1248 shareholders elect to apply the pro-
visions of paragraph (b) of this section by
each including a statement, described in
paragraph (b)(1)(i)(B) of this section, with
its timely-filed return for the taxable year
during which the section 355 distribution
occurs and by entering into a written agree-
ment described in paragraph (b)(1)(ii) of
this section. If the domestic distributing
corporation or a section 1248 shareholder
is a member of a consolidated group at
the time of the section 355 distribution,
the common parent of the consolidated
group makes the election on behalf of the
domestic distributing corporation or sec-
tion 1248 shareholder. The election made
under this paragraph (b)(1) is irrevocable.
(B)Form and content. The statement of
election must be entitled, STATEMENT
TO ELECT TO APPLY EXCEPTION
UNDER §1.1248(f)–2(b). The statement
must state that the domestic distributing
corporation and each section 1248 share-
holder have entered into a written agree-
ment described in paragraph (b)(1)(ii) of
this section and must set forth the adjust-
ment to each section 1248 shareholder’s
holdingperiodorsection358basis(if
any) in the stock of the foreign distributed
corporation received in the section 355
distribution required under paragraph
(b)(2) or (b)(3) of this section.
(ii)Written agreement.Thedomes-
tic distributing corporation and the section
1248 shareholders must enter into a writ-
ten agreement described in this paragraph
(b)(1)(ii) on or before the due date (includ-
ing extensions) of the domestic distribut-
2008–41 I.R.B.889October 14, 2008

ing corporation’s U.S. income tax return
for the taxable year during which the sec-
tion 355 distribution occurs. Each party to
the agreement must retain the original or a
copy of the agreement as part of its records
in the manner specified by §1.6001–1(e).
Each party to the agreement must provide a
copy of the agreement to the Internal Rev-
enue Service within 30 days of the receipt
of a request for the agreement in connec-
tion with an examination of the taxable
year during which the section 355 distri-
bution occurs. The agreement must—
(A) State the document is an agreement
under paragraph (b)(1)(ii) of this section;
(B) Identify the domestic distributing
corporation and each section 1248 share-
holder;
(C) With respect to each section 1248
shareholder, state the holding period in the
stock of the foreign distributed corporation
received in the section 355 distribution as
adjusted under paragraph (b)(2) of this sec-
tion; and
(D) With respect to each section 1248
shareholder, identify the section 358 basis
of the stock of the foreign distributed cor-
poration received in the section 355 distri-
bution and the adjustment (if any) to such
basis under paragraph (b)(3) of this sec-
tion.
(2)Holding period adjustment.For
purposes of section 1248, immediately af-
ter the section 355 distribution, each sec-
tion 1248 shareholder’s holding period in
the stock of the foreign distributed corpo-
ration received in the section 355 distribu-
tion shall equal the domestic distributing
corporation’s holding period in such stock
at the time of the distribution.
(3)Basis adjustments. If the domes-
tic distributing corporation’s section 1248
amount attributable to the stock of the for-
eign distributed corporation received by
a section 1248 shareholder in the section
355 distribution exceeds the section 1248
shareholder’s postdistribution amount at-
tributable to such stock (excess amount),
the section 1248 shareholder’s section 358
basis in such stock is reduced by such ex-
cess amount. For an illustration of the rule
in this paragraph (b)(3), see paragraph (d)
of this section,Examples 1and4.
(c)Distributionspursuanttoaplanof
reorganization. Section 1.1248(f)–1(b)(3)
shall not apply to a section 355 distribu-
tion or section 361 distribution of stock
of the foreign distributed corporation re-
ceived by the domestic distributing cor-
poration in the section 361 exchange that
precedes the distribution, to a distributee
that is a section 1248 shareholder with re-
spect to the foreign distributed corporation
immediately after the distribution, if the
domestic distributing corporation and all
such section 1248 shareholders elect to ap-
ply the provisions of this paragraph (c) in
accordance with paragraph (c)(1) of this
section. See paragraphs (c)(2) and (c)(3)
of this section for the adjustments that re-
sult from electing to apply the provisions
of this paragraph (c). The adjustments
provided in paragraphs (c)(2) and (c)(3)
of this section shall apply after any ad-
justments required under section 367(a)(5)
and §1.367(a)–7(c). For illustrations of
this exception, see paragraph (d) of this
section,Examples 2through4.
(1)Election and reporting—(i)State-
ment required by section 1248 sharehold-
ers and domestic distributing corpora-
tion—(A)In general. The domestic dis-
tributing corporation and the section 1248
shareholders elect to apply the provisions
of paragraph (c) of this section by each
including a statement, in the form and with
the content listed in paragraph (c)(1)(i)(B)
of this section, with its timely-filed re-
turn for the taxable year during which the
distributionoccursandbyenteringintoa
written agreement described in paragraph
(c)(1)(ii) of this section. If the domestic
distributing corporation or a section 1248
shareholder is a member of a consolidated
group at the time of the distribution, the
common parent of the consolidated group
makes the election on behalf of the domes-
tic distributing corporation or section 1248
shareholder. The election made under this
paragraph (c)(1) is irrevocable.
(B)Form and content. The statement
of election must be entitled, STATE-
MENT TO APPLY EXCEPTION UN-
DER §1.1248(f)–2(c). The statement must
state that the domesticdistributing corpo-
ration and each section 1248 shareholder
have entered into a written agreement
described in paragraph (c)(1)(ii) of this
section and must describe, with respect to
each section 1248 shareholder, the extent
to which the shares of stock of the foreign
distributed corporation received in the
section 361 distribution are divided into
portions under paragraph (c)(2) of this
section and any adjustments to the section
358 basis of such stock under paragraph
(c)(3) of this section.
(ii)Written agreement.Thedomes-
tic distributing corporation and the sec-
tion 1248 shareholders must enter into a
written agreement described in this para-
graph (c)(1)(ii) on or before the due date
(including extensions) of the U.S. trans-
feror’s U.S. income tax return for the tax-
able year during which the distribution oc-
curs. Each party to the agreement must
retain the original or a copy of the agree-
ment as part of its records in the man-
ner specified by §1.6001–1(e). Each party
to the agreement must provide a copy of
the agreement to the Internal Revenue Ser-
vice within 30 days of the receipt of a re-
quest for the agreement in connection with
an examination of the taxable year during
which the distribution occurs. The agree-
ment must—
(A) State the document is an agreement
under paragraph (c)(1)(ii) of this section;
(B) Identify the domestic distributing
corporation and each section 1248 share-
holder;
(C) With respect to each section 1248
shareholder, describe the extent to which
the shares of stock of the foreign dis-
tributed corporation are divided into
portions under paragraph (c)(2) of this
section;
(D) With respect to each section 1248
shareholder, state the amount of any ad-
justment to the section 358 basis of the
stock of the foreign distributed corporation
under paragraph (c)(3) of this section; and
(E) With respect to each section 1248
shareholder, state the amount of earnings
and profits attributable to the stock of the
foreign distributed corporation received in
the distribution. See §1.1248–8(b)(2)(iv).
(2)Portions. If the domestic distribut-
ing corporation transfers property to the
foreign distributed corporation in the sec-
tion 361 exchange that precedes the sec-
tion 355 distribution or section 361 distri-
bution, other than a single block of stock of
a foreign corporation with respect to which
the domestic distributing corporation is a
section 1248 shareholder at the time of the
section 361 exchange, then each share of
stock of the foreign distributed corporation
received by a section 1248 shareholder in
the distribution must be divided into por-
tions as follows:
(i) One portion attributable to all prop-
erty transferred in the section 361 ex-
October 14, 20088902008–41 I.R.B.

change, other than stock of a foreign
corporation with respect to which the do-
mestic distributing corporation is a section
1248 shareholder at the time of the section
361 exchange; and
(ii) One portion attributable to each
block of stock of a foreign corporation
transferred in the section 361 exchange
with respect to which the domestic dis-
tributing corporation is a section 1248
shareholder at the time of the section
361 exchange. For the determination
of the earnings and profits attribut-
able to a portion of a share of stock of
the foreign distributed corporation, see
§1.1248–8(b)(2)(iv).
(3)Basis adjustments. If the section
1248(f) amount attributable to a portion of
a share of stock (or whole share, if no divi-
sion is required) of the foreign distributed
corporation received (or deemed received)
by a section 1248 shareholder in the dis-
tribution exceeds the section 1248 share-
holder’s postdistribution amount attribut-
able to such portion (or whole share, if no
division is required) (excess amount), then
the section 1248 shareholder’s section 358
basis in such portion (or whole share, if
no division is required) as adjusted under
§1.367(a)–7(c)(3), is reduced by such ex-
cess amount. For an illustration of this
rule, see paragraph (d) of this section,Ex-
ample 3.
(4)Rules applicable to divided shares
of stock—(i)Basis. The basis of a por-
tion of a share of stock of the foreign
distributed corporation created under
paragraph (c)(2) of this section is that
amount of the section 1248 shareholder’s
section 358 basis (as adjusted under
§1.367(a)–7(c)(3)) in the share of stock
that bears the same ratio that the fair mar-
ket value of the property received by the
foreign distributed corporation in the sec-
tion 361 exchange to which such portion
relates bears to the aggregate fair market
value of all property received by the for-
eign distributed corporation in the section
361 exchange. For illustrations of this
rule, see paragraph (d) of this section,
Examples 2and3.
(ii)Fair market value.Thefairmar-
ket value of a portion of a share of stock
of the foreign distributed corporation cre-
ated under paragraph (c)(2) of this section
is that amount of the fair market value of
the share of stock of the foreign corpora-
tion that bears the same ratio that the fair
market value of the property received by
the foreign distributed corporation in the
section 361 exchange to which such por-
tion relates bears to the aggregate fair mar-
ket value of all property received by the
foreign distributed corporation in the sec-
tion 361 exchange. For illustrations of this
rule, see paragraph (d) of this section,Ex-
amples 2and3.
(iii)Rules for subsequent exchanges.
For purposes of determining the gain re-
alized on the sale or exchange of a share
of stock of the foreign distributed corpora-
tion that has a divided portion pursuant to
paragraph (c)(2) of this section, the amount
realized on the sale or exchange of such
share shall be allocated to each divided
portion based on the relative fair market
value of the property to which such portion
relates as determined at the time of the sec-
tion 361 exchange.
(iv)Duration of divided shares.Shares
of stock of the foreign distributed corpo-
ration that are divided into portions under
paragraph (c)(2) of this section are not re-
quired to be divided as of the date on which
section 1248(a) would not apply to a sale
or exchange of such shares.
(d)Examples. The rules of this section
areillustratedbythefollowingexamples.
The analysis of the examples is limited to
a discussion of issues under this section.
For purposes of the examples, unless oth-
erwise indicated, assume: DP1, DP2, DP3,
DC, and USD are domestic corporations;
X is a United States resident individual; FP
and FA are foreign corporations that are
not, and have never been, controlled for-
eign corporations; CFC1, CFC2, and FC
are controlled foreign corporations; each
corporation has a single class of stock out-
standing and uses the calendar year as its
taxable year; each shareholder owns a sin-
gle block of stock in each corporation; DC
owns Business A, which consists solely
of section 367(a) property that could sat-
isfy the requirements of the active for-
eign trade or business exception under sec-
tion 367(a)(3) and §1.367(a)–2T; and DC
owns no other assets and has no liabil-
ities. Further assume the requirements
in §1.367(a)–7(c)(5) are satisfied, any re-
quirement to file a gain recognition agree-
ment is satisfied, and no earnings and prof-
its of a foreign corporation are described in
section 1248(d).
Example 1.Section 355 distribution, gain recog-
nition, and adjustment to stock basis—(i)Facts.DP1,
FP, and X own 80%, 10%, and 10%, respectively, of
the outstanding stock of USD. DP1’s USD stock has
a $140x basis, a $160x fair market value, and a 2 year
holding period. USD wholly owns FC. USD’s FC
stock has a $50x basis, a $100x fair market value, a
$25x section 1248 amount, and a 3 year holding pe-
riod. On December 31, Year 3, USD distributes all of
the FC stock to DP1, FP, and X on apro-ratabasis
in a section 355 distribution. The fair market value
of the FC stock received by DP1, FP and X is $80x,
$10x, and $10x, respectively. After the distribution,
DP1’s section 358 basis in its FC stock is $70x.
(ii)Result. (A) Under §1.367(e)–1(b)(1), USD
must recognize $5x gain on the distribution of FC
stock to FP (10% of the $50x gain in the FC stock).
Under §1.367(b)–5(b)(1)(ii), USD must recognize
$5x gain on the distribution of FC stock to X (10%
of the $50x gain in the FC stock). Of the aggregate
$10x gain recognized by USD, $5x is recharacterized
as a dividend under section 1248(a) (20% of the
section 1248 amount ($25x) attributable to the FC
stock). See §1.1248–1 for additional consequences.
(B) USD’s distribution of FC stock to DP1 is de-
scribed in section 1248(f)(1) and §1.1248(f)–1(b)(2).
As a result, USD must generally include in gross
income as a dividend the section 1248 amount at-
tributable to such stock ($20x, or 80% of the $25x
section 1248 amount). However, if DP1 and USD
elect to apply the rules of paragraph (b) of this sec-
tion (as provided in paragraph (b)(1) of this section),
§1.1248(f)–1(b)(2) shall not apply to USD’s distribu-
tion of FC stock to DP1. If DP1 and USD make that
election, then:
(1)Underparagraph(b)(2)ofthissection,forpur-
poses of section 1248, immediately after the distri-
bution DP1 will have a 3 year holding period in the
FC stock received in the section 355 distribution, the
same holding period USD had in such stock at the
time of the distribution.
(2) Under paragraph (b)(3) of this section, DP1’s
section 358 basis in the FCstock ($70x) received in
the distribution is reduced by $10x, the amount by
which USD’s section 1248 amount ($20x) attribut-
able to such FC stock exceeds DP1’s postdistribution
amount ($10x) attributable to such stock. As adjusted
under paragraph (b)(3) of this section, DP1’s basis
in the FC stock is $60x. Under §1.1248(f)–1(c)(4),
DP1’s postdistribution amount ($10x) equals the
amount that DP1 would include in gross income as a
dividend under section 1248(a) if it sold the FC stock
immediately after the distribution ($80x fair market
value, $70x basis, and $20x earnings and profits
attributable to the FC stock for purposes of section
1248 taking into account DP1’s 3-year holding pe-
riod in such stock as required by paragraph (b)(2) of
this section).
Example 2.Section 361 distribution—(i)Facts.
DP1, DP2, and FP own 50, 30, and 20, respectively,
of the 100 outstanding shares of stock of DC. DP1’s
DC stock has a $180x basis and a $200x fair market
value. DP2’s DC stock has a $100x basis and $120x
fair market value. DC owns Business A and wholly
owns CFC1 and CFC2. DC’s Business A has a $10x
basis and a $200x fair market value. DC’s CFC1
stock has a $20x basis, a $40x fair market value, and
$30x of earnings and profits attributable to it for pur-
poses of section 1248(a). DC’s CFC2 stock has a
$30x basis, a $160x fair market value and $150x of
earnings and profits attributable to it for purposes of
2008–41 I.R.B.891October 14, 2008

section 1248(a). On December 31, Year 3, in a re-
organization described in section 368(a)(1)(D), DC
transfers CFC1, CFC2 and Business A to FA in ex-
change for 60 shares of FA stock. DC’s transfer of
CFC1, CFC2 and Business A to FA in exchange for
the 60 shares of FA stock qualifies as a section 361
exchange. DC distributes the FA stock to DP1, DP2
and FP on apro-ratabasis in a section 361 distribu-
tion. DP1, DP2 and FP exchange their DC stock for
30, 18, and 12 shares, respectively, of FA stock pur-
suant to section 354. After the reorganization, FA has
100 shares of stock outstanding. DP3 owns the other
40 shares of FA stock.
(ii)Result. (A) In general, under section 367(a)(5)
and §1.367(a)–7(b), DC’s transfer of the stock of
CFC1andCFC2andBusinessAtoFAissubject
to the general rule of section 367(a)(1). As a result,
DC must generally recognize gain on the transfer
of such property to FA in the section 361 exchange.
However, if the conditions and requirements of
§1.367(a)–7(c) are met (which includes the making
of the election under §1.367(a)–7(c)(5)), DC’s trans-
ferofthestockofCFC1andCFC2andBusinessA
to FA may, in part, be eligible for the exceptions to
section 367(a)(1) provided by §§1.367(a)–2T and –3.
See §§1.367(a)–2T and –3(b) for additional require-
ments. In addition, DC may not be required to include
in income the section 1248 amount attributable to
the CFC1 and CFC2 stock under §1.367(b)–4(b)(1).
However, if the exception provided under para-
graph (c) of this section does not apply, then under
§1.1248(f)–1(b)(3) DC must include in gross income
as a dividend the section 1248(f) amounts attribut-
able to the FA stock distributed. DC must include
in income as a dividend the section 1248(f) amount
attributable to the FA stock distributed to FP even if
the exception provided by §1.367(a)–7(c) applies.
(B) The requirement of §1.367(a)–7(c)(1) is sat-
isfied because DC is controlled (within the meaning
of section 368(c)) by DP1 and DP2 at the time of the
section 361 exchange.
(C) Under §1.367(a)–7(c)(2)(i), DC must recog-
nize $68x gain on the section 361 exchange with re-
spect to FP. The $68x gain equals the product of FP’s
20% ownership interest in DC (by value) at the time
of the section 361 exchange and the $340x inside
gain. The inside gain equals the excess of the ag-
gregate gross fair market value of the section 367(a)
property ($400x) over the $60x inside basis. Under
§1.367(a)–7(e)(1), the $68x gain recognized is allo-
cated among the CFC1 stock, the CFC2 stock and
Business A in proportion to the amount of gain re-
alized by DC on the transfer of such property. The
amount allocated to the CFC1 stock is $4x ($68x gain
multiplied by $20x/$340x). The amount allocated
to the CFC2 stock is $26x ($68x gain multiplied by
$130x/$340x). The amount allocated to Business A
is $38x ($68x gain multiplied by $190x/$340x). Un-
der §1.367(a)–1T(b)(4)(i)(B) and section 362(b), the
basis of each asset is increased by the amount of gain
allocated to such asset. Under section 1248(a), DC
must include in gross income as a dividend the $4x
gain recognized with respect to the CFC1 stock (20%
of the $20x section 1248 amount attributable to such
stock) and the $26x gain recognized with respect to
CFC2 stock (20% of the $130x section 1248 amount
attributable to such stock). If the built-in gain in the
CFC1 stock or CFC2 stock exceeded the section 1248
amount attributable to such stock, the amount of the
gain recognized by DC on the transfer of such stock
in the section 361 exchange recharacterized as a div-
idend under section 1248(a) would be less.
(D)DCisnotrequiredtorecognizegainonthe
section 361 exchange under §1.367(a)–7(c)(2)(ii)
with respect to DP1 or DP2. With respect to DP1,
the product of the inside gain ($340x) and DP1’s
50% ownership interest (by value) in DC at the time
of the section 361 exchange (or $170x) does not
exceed the product of the section 367(a) percentage
(100%) and the fair market value of the FA stock
received by DP1 ($200x). With respect to DP2, the
product of the inside gain ($340x) and DP2’s 30%
ownership percentage (by value) in DC at the time of
the section 361 exchange(or $102x) does not exceed
the product of the section 367(a) percentage (100%)
and the fair market value of the FA stock received by
DP2 ($120x).
(E) Under §1.367(a)–7(c)(3), DP1’s section 358
basis ($180x) in the FA stock received in the section
361 distribution is reduced by $150x, the amount by
which DP1’s 50% share of inside gain ($170x) ex-
ceeds DP1’s $20x outside gain. DP1’s share of in-
side gain is not reduced under §1.367(a)–7(c)(2)(ii)
because DC did not recognize gain with respect to
DP1. DP1’s $20x outside gain equals the product of
the section 367(a) percentage (100%) and the amount
by which the fair market value of the FA stock re-
ceived by DP1 ($200x) is greater than the section 358
basis of such stock ($180x). As adjusted, DP1’s ba-
sis in the FA stock is $30x. Similarly, DP2’s section
358 basis ($100x) in the FA stock received in the sec-
tion 361 distribution is reduced by $82x, the amount
by which DP2’s 30% share of inside gain ($102x) ex-
ceeds DP1’s $20x outside gain. DP2’s share of in-
side gain is not reduced under §1.367(a)–7(c)(2)(ii)
because DC did not recognize gain with respect to
DP2. DP2’s $20x outside gain equals the product of
the section 367(a) percentage (100%) and the amount
by which the fair market value of the FA stock re-
ceived by DP2 ($120x) is greater than the section 358
basis of such stock ($100x). As adjusted, DP2’s basis
in the FA stock is $18x.
(F) Under §1.367(a)–7(c)(4)(i), DC must comply
with the requirements of §1.6038B–1(c)(6)(iii) with
respect to Business A. Under §1.367(a)–7(c)(4)(ii),
DC is not required to comply with the requirements
of §1.6038B–1(c)(6)(iii) with respect to the stock of
CFC1 or CFC2.
(G) DC is not required to include in income as a
dividend the remaining section 1248 amount attribut-
able to the stock of CFC1 ($16x) or CFC2 ($104x) un-
der §1.367(b)–4(b)(1)(i) because immediately after
the section 361 exchange, FA, CFC1, and CFC2 are
controlled foreign corporations with respect to which
DC is a section 1248 shareholder.
(H) Under §1.1248(f)–1(b)(3), DC must gener-
ally include in gross income as a dividend the sec-
tion 1248(f) amount ($120x) attributable to the FA
stock distributed to DP1, DP2 and FP in the section
361 distribution. The section 1248(f) amount equals
the sum of the amounts that FA would include in in-
come as a dividend under section 964(e) if it sold the
CFC1 stock ($16x gain and $26x earnings and prof-
its attributable to such stock—calculated in paragraph
(K)(3) of thisExample) and CFC2 stock ($104x gain
and $124x earnings and profits attributable to such
stock—calculated in paragraph (K)(3) of thisExam-
ple) immediately after the section 361 exchange.
(I) [Reserved.]
(J) However, if DP1, DP2, and DC elect to ap-
ply the provisions of paragraph (c) of this section
(as provided in paragraph (c)(1) of this section), then
§1.1248(f)–1(b)(3) shall not apply to DC’s distribu-
tion of FA stock to DP1 and DP2. Even if such elec-
tion is made, however, DC must include in gross in-
come as a dividend the section 1248(f) amount ($24x)
attributable to the 12 shares of FA stock distributed to
FP (20% of the $120x section 1248(f) amount.)
(K) If DP1, DP2, and DC elect to apply the pro-
visions of paragraph (c) of this section, then under
paragraph (c)(2) of this section each share of FA stock
received by DP1 (30 shares) and DP2 (18 shares) is
divided into portions attributable to the CFC1 stock,
the CFC2 stock and Business A. Under paragraphs
(c)(4)(i) and (ii) of this section, the basis and fair mar-
ket value of each portion of each share of FA stock is
that amount of the total basis and fair market value
of the FA stock that bears the same ratio that the fair
market value of the property (exchanged for such FA
stock) to which such portion relates bears to the ag-
gregate fair market value of all property exchanged
for the FA stock in the section 361 exchange.
(1) With respect to DP1’s 30 shares of FA
stock, the portions attributable to the CFC1 stock
have an aggregate basis of $3x ($30x multiplied by
$40x/$400x) and a fair market value of $20x ($200x
multiplied by $40x/$400x); the portions attributable
to the CFC2 stock have an aggregate basis of $12x
($30x multiplied by $160x/$400x) and a fair market
value of $80x ($200x multiplied by $160x/$400x),
and the portions attributable to Business A have
an aggregate basis of $15x ($30x multiplied by
$200x/$400x) and a fair market value of $100x (50%
of $200x).
(2) With respect to DP2’s 18 shares of FA stock,
the portions attributable to the CFC1 stock have
an aggregate basis of $1.8x ($18x multiplied by
$40x/$400x) and a fair market value of $12x ($120x
multiplied by $40x/$400x); the portions attributable
to the CFC2 stock have an aggregate basis of $7.2x
($18x multiplied by $160x/$400x) and a fair market
value of $48x ($120x multiplied by $160x/$400x);
and the portions attributable to Business A have
an aggregate basis of $9x ($18x multiplied by
$200x/$400x) and a fair market value of $60x ($120x
multiplied by $200x/$400x).
(3) Under §1.1248–8(b)(2)(iv), the earnings and
profits of CFC1 attributable to the portions of DP1’s
30 shares of FA stock attributable to the CFC1 stock
is $13x ($26x earnings and profits amount multiplied
by DP1’s 50% ownership interest (by value) in DC
at the time of the section 361 exchange), and the
earnings and profits of CFC2 attributable to the por-
tions of DP1’s 30 shares of FA stock attributable to
the CFC2 stock is $62x ($124x earnings and profits
amount multiplied by DP1’s 50% ownership interest
in DC at the time of the section 361 exchange). Sim-
ilarly, the earnings and profits of CFC1 attributable
to the portions of DP2’s 18 shares of FA stock at-
tributable to the CFC1 stock is $7.8x ($26x earnings
and profits amount multiplied by DP2’s 30% owner-
ship interest (by value) in DC at the time of the sec-
tion 361 exchange), and the amount of earnings and
profits of CFC2 attributable to the portions of DP2’s
18 shares of FA stock attributable to the CFC2 stock
is $37.2x ($124x earnings and profits amount mul-
tiplied by DP2’s 30% ownership interest (by value)
October 14, 20088922008–41 I.R.B.

in DC at the time of the section 361 exchange). The
$26x earnings and profits with respect to the CFC1
stock equals the $30x earnings and profits amount at-
tributable to the CFC1 stock immediately before the
section 361 exchange reduced by the $4x included in
income by DC as a dividend under section 1248(a)
on the transfer of the CFC1 stock to FA in the section
361 exchange. The $124x earnings and profits with
respect to CFC2 equals the $150x earnings and prof-
its attributable to the CFC2 stock immediately before
the section 361 exchange reduced by the $26x amount
included in income by DC as a dividend under sec-
tion 1248(a) on the transfer of the CFC2 stock to FA
in the section 361 exchange. See sections 959(e) and
1248(d)(1).
(L) Under paragraph (c)(3) of this section, DP1 is
not required to reduce the aggregate section 358 basis
of the portions of its 30 shares of FA stock attributable
to the CFC1 stock or CFC2 stock. DP1’s postdistribu-
tion amount ($13x) attributable to the portions of its
FA shares attributable to the CFC1 stock exceeds its
allocable share of the section 1248(f) amount attribut-
able to the CFC1 stock immediately after the section
361 exchange ($8x, or 50% of $16x). DP1’s postdis-
tribution amount ($62x) attributable to the portions of
its FA shares attributable to the CFC2 stock exceeds
its allocable share of the section 1248(f) amount at-
tributable to the CFC2 stock immediately after the
section 361 exchange ($52x, or 50% of $104x).
(M) Similarly, DP2 is not required to reduce the
aggregate section 358 basis of the portions of its 18
shares of FA stock attributable to the CFC1 stock or
CFC2 stock. DP2’s postdistribution amount ($7.8x)
attributable to the portions of its FA shares attribut-
able to the CFC1 stock exceeds its allocable share of
the section 1248(f) amount attributable to the CFC1
stock immediately after the section 361 exchange
($4.8x, or 30% of $16x). DP2’s postdistribution
amount ($37.2x) attributable to the portions of its
FA shares attributable to the CFC2 stock exceeds
its allocable share of the section 1248(f) amount
attributable to the CFC2 stock immediately after the
section 361 exchange ($31.2x, or 30% of $104x).
Example 3.Section 361 distribution and adjust-
ment to stock basis.(i)Facts. DP1 wholly owns DC.
DP1’s DC stock has a $180x basis and a $200x fair
market value. DC wholly owns CFC1 and CFC2.
DC’s CFC1 stock has a $70x basis, a $100x fair mar-
ket value, and $40x of earnings and profits attribut-
able to it for purposes of section 1248. DC’s CFC2
stock has a $130x basis, a $100x fair market value,
and $80x of earnings and profits attributable to it for
purposes of section 1248. On December 31, Year 1,
in a reorganization described in section 368(a)(1)(F),
DC transfers the CFC1 stock and the CFC2 stock to
FA, a newly formed corporation, in exchange for 100
shares of FA stock. DC distributes the 100 shares of
FA stock to DP1 in a section 361 distribution. DC’s
transfer of the stock of CFC1 and CFC2 to FA in ex-
change for FA stock qualifies as a section 361 ex-
change. DP1 exchanges its DC stock for the 100
shares of FA stock pursuant to section 354. DP1 and
DC elect to apply the rules of §1.367(a)–7(c) in ac-
cordance with §1.367(a)–7(c)(5). DC is not required
to recognize gain under §1.367(a)–7(c)(2), and DP1
isnotrequiredtoreduceitssection358basisinthe
FA shares under §1.367(a)–7(c)(3).
(ii)Result. (A) DC is not required to include in
income as a dividend the section 1248 amount attrib-
utable to the CFC1 stock under §1.367(b)–4(b)(1)(i)
because, immediately after the section 361 exchange,
FAandCFC1arecontrolled foreign corporations
with respect to which DC is a section 1248 share-
holder. At the time of the section 361 exchange the
section 1248 amount attributable to the CFC2 stock
is zero.
(B) Under §1.1248(f)–1(b)(3), DC must gen-
erally include in income as a dividend the section
1248(f) amount ($30x) attributable to the FA stock
upon its distribution of such stock to DP1 in the
section 361 distribution. The section 1248(f) amount
is the amount that FA would include in income as
a dividend under section 964(e) if it sold the CFC1
stock immediately after the section 361 exchange.
Immediately after the section 361 exchange, the sec-
tion 1248(f) amount attributable to the CFC2 stock
is zero.
(C) However, if DP1 and DC elect to apply
the rules of paragraph (c) of this section (as pro-
vided in paragraph (c)(1) of this section), then
§1.1248(f)–1(b)(3) shall not apply to DC’s distribu-
tion of the FA stock to DP1. If that election is made
then:
(1) Under paragraph (c)(2)(ii) of this section each
share of FA stock received by DP1 is divided into one
portion attributable to the CFC1 stock and one por-
tion attributable to the CFC2 stock. Under paragraphs
(c)(4)(i) and (ii) of this section, the basis and fair mar-
ket value of each portion is that amount of the total
section 358 basis and fair market value, respectively,
of the FA stock that bears the same ratio that the fair
market value of the property (the CFC1 stock and
CFC2 stock) to which such portion relates bears to the
aggregate fair market value of all property exchanged
by DC for the FA stock in the section 361 exchange.
Therefore, the portions attributable to the CFC1 stock
have an aggregate basis of $90x ($180x multiplied
by $100x/$200x) and a fair market value of $100x
($200x multiplied by $100x/$200x). The portions at-
tributable to the CFC2 stock also have an aggregate
basis of $90x ($180x multiplied by $100x/$200x) and
a fair market value of $100x ($200x multiplied by
$100x/$200x).
(2) Under §1.1248–8(b)(2)(iv), the $40x earnings
and profits attributable to the CFC1 stock at the time
of the section 361 exchange are attributed to the por-
tions of the shares of FA stock that relate to the CFC1
stock. Similarly, the $80x of earnings and profits at-
tributable to the CFC2 stock are attributed to the por-
tions of the 100 shares of the FA stock that relate to
the CFC2 stock.
(3
) Under paragraph (c)(3) of this section, DP1’s
aggregate section 358 basis in the portions of the 100
shares of FA stock attributable to the CFC1 stock
($90x) is reduced by $20x, the amount by which the
section 1248(f) amount attributable to the CFC1 stock
($30x) exceeds DP1’s postdistribution amount ($10x)
with respect to the portions of the shares of FA stock
attributable to the CFC1 stock. The postdistribution
amount is the section 1248 amount attributable to
the portions of the FA stock attributable to the CFC1
stock immediately after the section 361 distribution
($100x fair market value less $90x basis, and $40x
earnings and profits attributable to such portions). As
adjusted, DP1’s aggregate basis in the portions of the
shares of FA stock attributable to the CFC1 stock is
$70x. No adjustment is required to DP1’s aggregate
basis in the portions of the FA stock attributable to
the CFC2 stock because noportion of the $30x sec-
tion 1248(f) amount is attributable to the CFC2 stock.
Example 4.Section 361 exchange followed by
distribution of stock pursuant to plan of reorganiza-
tion.(i)Facts. DP1 owns all 100 outstanding shares
of stock of DC. DP1’s DC stock has a $180x basis,
$200x fair market value, and 2 year holding period.
DC owns all 60 shares of the outstanding stock of
CFC1. DC’s CFC1 stock has a $50x basis, a $60x
fair market value, $30x of earnings and profits attrib-
utable to it for purposes of section 1248, and a 3 year
holding period. DC also owns all 40 shares of the out-
standing stock of CFC2. DC’s CFC2 stock has a $30x
basis, a $40x fair market value, and $20x of earnings
and profits attributable to it for purposes of section
1248. DC also owns Business A that has a fair market
value of $100x. On December 31, Year 4, in a divi-
sive reorganization described in section 368(a)(1)(D),
DC transfers the CFC2 stock to CFC1 in exchange
for 40 additional shares of CFC1 stock. DC then dis-
tributes the 100 shares of CFC1 stock to DP1. DC’s
transfer of the CFC2 stock to CFC1 qualifies as a sec-
tion 361 exchange. DP1 and DC are eligible to and
make the elections provided in §1.367(a)–7(c)(5) and
paragraphs (b) and (c) of this section.
(ii)Result. (A) DC is not required to recognize
gain under §1.367(a)–7(c)(2).
(B) Under section 358, DP1 must allocate the
$180x pre-distribution section 358 basis in its DC
stock between the shares of DC stock and the shares
of CFC1 stock held after the distribution based on the
relative fair market values of such shares. After the
allocation of the pre-distribution basis, the basis of
DP1’s DC stock is $90x, and the basis of DP1’s CFC1
stock is $90x. With respect to the $90x basis in the
CFC1 stock, $36x is attributable to the 40 shares of
CFC1 stock received by DC in the section 361 ex-
change, and $54x is attributable to the 60 shares of
CFC1 stock owned by DC before the section 361 ex-
change.
(C) Pursuant to §1.367(a)–7(c)(3)(ii)(A), any
adjustment to basis required under §1.367(a)–7(c)(3)
applies only to the 40 shares of CFC1 stock re-
ceived by DC in the section 361 exchange. Under
§1.367(a)–7(c)(3)(i), DP1 must reduce its section
358 basis ($36x) in the 40 shares of CFC1 stock by
$6x, the amount by which DP1’s 100% share of the
inside gain ($10x) exceeds DP2’s outside gain ($4x).
DP1’s share of inside gain is not reduced under
§1.367(a)–7(c)(2)(ii) because DC does not recognize
gain on the transfer of the section 367(a) property in
the section 361 exchange. The outside gain equals
the product of the section 367(a) percentage (100%)
and the amount by which the fair market value
($40x) of the 40 shares of CFC1 stock is greater
than DP1’s section 358 basis of such stock ($36x).
After the $6x reduction to stock basis required un-
der §1.367(a)–7(c)(3), but before the application of
§1.1248(f)–2(c)(2), DP1’s basis in such 40 shares of
CFC1 stock is $30x.
(D) DC is not required to include in income as a
dividend the section 1248 amount attributable to the
CFC2 stock under §1.367(b)–4(b)(1)(i), because im-
mediately after the section 361 exchange CFC1 and
CFC2 are both controlled foreign corporations with
respect to which DC is a section 1248 shareholder.
(E) Because DP1 and DC elect to apply
the rules under paragraph (c) of this section,
§1.1248(f)–1(b)(3) does not apply to DC’s distribu-
2008–41 I.R.B.893October 14, 2008

tion to DP of the 40 shares of CFC1 stock received
in the section 361 exchange.
(1) Under paragraph (c)(2) of this section, the 40
shares of CFC1 stock received by DC in the sec-
tion 361 exchange are attributable to the CFC2 stock.
Thus, the 40 shares are not required to be divided into
portions under paragraph (c)(2) of this section be-
cause DC exchanged a single block of stock of CFC2
for the 40 shares of CFC1 stock in the section 361 ex-
change. The 40 shares of CFC1 stock have an aggre-
gate basis of $30x (after the adjustment described in
paragraph (C) of thisExample) and fair market value
of $40x.
(2) Under §1.1248–8(b)(2)(iv), the $20x of earn-
ings and profits attributable to the CFC2 stock at the
time of the section 361 exchange are attributable to
the40sharesofCFC1stock.
(3) DP1’s basis ($30x) in the 40 shares of CFC1
stock attributable to the CFC2 stock is not required
to be reduced under paragraph (c)(3) of this section
because the section 1248(f) amount ($10x) attribut-
able to the 40 shares of CFC1 stock does not exceed
DP1’s postdistribution amount ($10x) attributable to
such stock. The postdistribution amount equals the
amount that DP1 would be required to include in in-
come as a dividend under section 1248(a) if it sold the
40 shares of CFC1 stock immediately after the distri-
bution ($40x fair market value, $30x basis, and $20x
earnings and profits attributable to such stock for pur-
poses of section 1248). The $10x section 1248(f)
amount equals the amount CFC1 would include in in-
come as a dividend under section 964(e) if it sold the
CFC2 stock received from DC immediately after the
section 361 exchange.
(F) Because DP1 and DC make the elec-
tion provided in paragraph (b)(1) of this section,
§1.1248(f)–1(b)(2) does not apply to DC’s distribu-
tion to DP1 of the 60 shares of CFC1 stock it owned
before the section 361 exchange.
(1) Under paragraph (b)(2) of this section, for pur-
poses of section 1248, DP1 has a 3 year holding pe-
riod in the 60 shares of CFC1 stock immediately after
the distribution, the same holding period that DC had
in such shares at the time of the distribution.
(2) Under paragraph (b)(3) of this section, DP1’s
section 358 basis in the 60 shares of CFC1 stock
($54x) must be reduced by $4x, the amount by which
DC’s section 1248 amount ($10x) attributable to such
shares immediately before the distribution exceeds
DP1’s postdistribution amount ($6x) attributable to
such shares immediately after the distribution. The
$6x postdistribution amount equals the amount that
DP1wouldberequiredtoincludeinincomeasadiv-
idend under section 1248(a) if it sold the 60 shares of
CFC1 stock immediately after the distribution ($60x
fair market value, $54x basis, and $30x earnings and
profits attributable to such stock for purposes of sec-
tion 1248). After the reduction, DP1’s basis in the 60
shares of CFC1 stock is $50x.
(e)Applicable cross-references.For
rules relating to the attribution of earnings
and profits to the stock of a foreign cor-
poration following certain nonrecognition
transactions, see §1.1248–8. For rules re-
lating to a transfer of property by a do-
mestic corporation to a foreign corporation
in a section 361 exchange that precedes a
section 355 distribution or section 361 dis-
tribution to which section 1248(f)(1) ap-
plies, see §1.367(a)–7. For rules relat-
ing to an acquisition of the stock of a for-
eign corporation by another foreign cor-
poration in a section 361 exchange, see
§1.367(b)–4. For rules relating to a sec-
tion 355 distribution of stock of a foreign
corporation by a domestic corporation, see
§§1.367(b)–5(b)(1) and 1.367(e)–1.
Par. 14. Section 1.1248(f)–3 is added
to read as follows:
§1.1248(f)–3 Reasonable cause exception
and effective dates.
(a)Reasonable cause exception for fail-
ure to comply—(1)General rule. If a sec-
tion 1248 shareholder or the domestic dis-
tributing corporation fails to comply with
any requirement under §1.1248(f)–2, the
section 1248 shareholder or the domes-
tic distributing corporation shall be con-
sidered to have complied with such re-
quirement if it submits a request for re-
lief as provided under paragraph (a)(2) of
this section and can demonstrate to the
Area Director, Field Examination, Small
Business/Self Employed or the Director
of Field Operations, Large and Mid-Size
Business (Director) having jurisdiction of
the section 1248 shareholder’s or domes-
tic distributing corporation’s tax return for
the taxable year during which the distri-
bution occurs, that such failure was due
to reasonable cause and not willful ne-
glect. Whether the failure to comply was
due to reasonable cause and not willful
neglect will be determined by the Direc-
tor after considering all the facts and cir-
cumstances. The Director shall notify the
section 1248 shareholder or domestic dis-
tributing corporation in writing within 120
days if it is determined that the failure to
comply was not due to reasonable cause,
or if additional timewill be needed to make
such determination. For this purpose, the
120-day period shall begin on the date
the Internal Revenue Service notifies the
section 1248 shareholder or domestic dis-
tributing corporation in writing that the re-
quest for relief has been received and as-
signed for review. Once such period com-
mences, if the section 1248 shareholder
or domestic distributing corporation is not
again notified within 120 days, then the
section 1248 shareholder or domestic dis-
tributing corporation shall be deemed to
have established reasonable cause.
(2)Requirements for reasonable cause
relief—(i)Time of submission.Requests
for reasonable cause relief will only
be considered if as soon as the section
1248 shareholder or domestic distribut-
ing corporation becomes aware of the
failure to comply with any requirement
of §1.1248(f)–2, the section 1248 share-
holder or domestic distributing corpo-
ration attaches the statements or other
documents that should have been filed,
as well as a complete written statement
setting forth the reasons for the failure
to comply, to an amended return that
amends the return to which the documents
should have been attached pursuant to
§1.1248(f)–2. The amended return and
all required attachments must be filed
with the applicable Internal Revenue Ser-
vice Center with which the section 1248
shareholder or domestic distributing cor-
poration filed its original return to which
the documents should have been attached.
(ii)Notice requirement. In addition to
the requirement of paragraph (a)(2)(i) of
this section, the section 1248 shareholder
or domestic distributing corporation must
comply with the requirements of para-
graph (a)(2)(ii)(A) or (B) of this section,
as applicable.
(A) If the section 1248 shareholder or
domestic distributing corporation is under
examination for any taxable year when the
request for reasonable cause relief is filed,
a copy of the amended return and attach-
ments must be provided to the Internal
Revenue Service personnel conducting the
examination.
(B) If the section 1248 shareholder or
domestic distributing corporation is not
under examination for any taxable year
when the request for reasonable cause re-
lief is filed, a copy of the amended return
and attachments must be provided to the
Director having jurisdiction over the re-
turn.
(b)Effective/applicability date. Sec-
tions 1.1248(f)–1 and 1.1248(f)–2 and this
section shall apply to distributions occur-
ring on or after the date 30 days after the
date these regulations are published as fi-
nal regulations in theFederal Register.
Par. 15. Section 1.6038B–1 is amended
by revising paragraphs (c)(6), (f)(3), and
the heading and the first sentence of para-
October 14, 20088942008–41 I.R.B.

graph (g)(1), and adding paragraph (g)(5),
to read as follows:
§1.6038B–1 Reporting of certain transfers
to foreign corporations.
*****
(c) * * *
(6)Transfers subject to section
367(a)(5)—(i)In general. This paragraph
applies to a domestic corporation (U.S.
transferor) that transfers section 367(a)
property (as defined in §1.367(a)–7(f)(9))
to a foreign corporation in an exchange
described in section 361(a) or (b) or in
an exchange described in section 351 that
is also described in section 361(a) or (b)
(collectively, a section 361 exchange) and
to which the provisions of §1.367(a)–7(c)
apply. Paragraph (c)(6)(ii) of this sec-
tion establishes the time and manner for
the U.S. transferor to elect to apply the
provisions of §1.367(a)–7(c). Paragraph
(c)(6)(iii) of this section establishes the
manner for the U.S. transferor to satisfy
the requirement of §1.367(a)–7(c)(4).
(ii)Election.TheU.S.transferor elects
to apply the provisions of §1.367(a)–7(c)
by including a statement entitled, STATE-
MENT TO ELECT TO APPLY EXCEP-
TION UNDER §1.367(a)–7(c) with its
timely-filed return (within the mean-
ing of §1.367(a)–7(f)(11)) for the tax-
able year during which the section
361 exchange occurs, that includes the
information described in paragraphs
(c)(6)(ii)(A) through (c)(6)(ii)(C) of this
section. See §1.367(a)–7(c)(5)(ii) for
the statement required to be filed by
a control group member, as defined in
§1.367(a)–7(f)(2), or final distributee, as
defined in §1.367(a)–7(d).
(A) The name and taxpayer identifica-
tion number of each control group mem-
ber and final distributee (if any), and the
aggregate ownership interest (by value) in
the U.S. transferor of each control group
member or final distributee.
(B) A calculation of the gain recog-
nized (if any) by the U.S. transferor under
§1.367(a)–7(c)(2)(i) and (ii).
(C) The date on which the U.S.
transferor and each control group mem-
ber or final distributee entered into
the written agreement described in
§1.367(a)–7(c)(5)(iv).
(iii)Agreement to amend U.S. trans-
feror’s tax return.TheU.S.trans-
feror complies with the requirement of
§1.367(a)–7(c)(4)(i)by attaching a state-
ment to its timely-filed return (within the
meaning of §1.367(a)–7(f)(11)) for the
taxable year in which the section 361
exchange occurs, entitled STATEMENT
UNDER §1.367(a)–7(c)(4) FOR TRANS-
FERS OF ASSETS TO A FOREIGN
CORPORATIONINASECTION361
EXCHANGE. The statement must certify
that if the foreign acquiring corporation
disposes of a significant amount (as de-
fined in paragraph (c)(6)(iii)(A) of this
section) of the section 367(a) property
received from the U.S. transferor in the
section 361 exchange in one or more re-
latedtransactionsdescribedinparagraph
(c)(6)(iii)(B) of this section, then the ex-
ception provided in §1.367(a)–7(c) shall
not apply to the section 361 exchange and
the U.S. transferor shall recognize the gain
realized but not recognized in the section
361 exchange. The U.S. transferor (or the
foreign acquiring corporation on behalf
of the U.S. transferor) shall file a U.S. in-
come tax return (or amended U.S. income
tax return, as the case may be) for the year
of the section 361 exchange, reporting
such gain.
(A)Disposition of significant amount.
For purposes of this paragraph (c)(6)(iii), a
disposition of a significant amount occurs
if, in one or more related transactions, the
foreign acquiring corporation disposes of
an amount of the section 367(a) property
received from the U.S. transferor in the
section 361 exchange that is greater than
40 percent of the fair market value of all of
the property transferred in the section 361
exchange.
(B)Gain recognition transaction—(1)
General rule. A transaction is described
in this paragraph (c)(6)(iii)(B) if the trans-
action is entered into with a principal pur-
pose of avoiding the U.S. tax that would
have been imposed on the U.S. transferor
on the disposition of the property trans-
ferred to the foreign acquiring corporation
in the section 361 exchange. A disposition
may have a principal purpose of tax avoid-
ance even if the tax avoidance purpose is
outweighed by other purposes when taken
together.
(2)Presumptive tax avoidance.For
purposes of this paragraph (c)(6)(iii)(B),
the principal purpose of the foreign ac-
quiring corporation’s disposition of a
significant amount of the section 367(a)
property within two years of the section
361 exchange (whether in a recognition
or nonrecognition transaction) shall be
presumed to be the avoidance of the U.S.
tax that would have been imposed on
the U.S. transferor on the disposition of
the property transferred to the foreign
acquiring corporation in the section 361
exchange. However, this presumption
shall not apply if it is demonstrated to the
satisfaction of the Area Director, Field Ex-
amination, Small Business/Self Employed
or the Director of Field Operations, Large
and Mid-Size Business (Director) that the
avoidance of U.S. tax was not a principal
purpose of the disposition.
(3)Interest. If additional tax is required
to be paid as a result of a transaction de-
scribed in paragraph (c)(6)(iii)(B) of this
section, then interest must be paid on that
amount at rates determined under section
6621 with respect to the period between
the date prescribed for filing the U.S. trans-
feror’s income tax return for the year of
the section 361 exchange and the date on
which the additional tax for that year is
paid.
*****
(f) * * *
(3)Reasonable cause exception for
failure to comply—(i)Request for relief.
The provisions of paragraph (f)(1) of this
section shall not apply if the U.S. trans-
feror can demonstrate to the Area Director,
Field Examination, Small Business/Self
Employed or the Director of Field Op-
erations, Large and Mid-Size Business
(Director) having jurisdiction of the U.S.
transferor’s tax return for the taxable year,
that a failure to comply was due to rea-
sonable cause and not willful neglect.
Whether the failure to comply was due
to reasonable cause and not willful ne-
glect will be determined by the Director
after considering all the facts and circum-
stances. The Director shall notify the U.S.
transferor in writing within 120 days if it
is determined that the failure to comply
was not due to reasonable cause, or if
additional time will be needed to make
such determination. For this purpose, the
120-day period shall begin on the date the
Internal Revenue Service notifies the U.S.
transferor in writing that the request for
relief has been received and assigned for
review. Once such period commences, if
the U.S. transferor is not again notified
2008–41 I.R.B.895October 14, 2008

within 120 days, then the U.S. transferor
shall be deemed to have established rea-
sonable cause.
(ii)Requirements for reasonable cause
relief—(A)Time of submission. Requests
for reasonable cause relief will only be
considered if, as soon as the U.S. trans-
feror becomes aware of the failure to com-
ply, the U.S. transferor attaches all the
documents that should have been filed, as
well as a complete written statement set-
ting forth the reasons for the failure to
timely comply, to an amended return that
amends the return to which the documents
should have been attached pursuant to the
rules of section 6038B and the regulations
under that section. The amended return
and all required attachments must be filed
with the applicable Internal Revenue Ser-
vice Center with which the U.S. transferor
filed its original return to which the docu-
ments should have been attached.
(B)Notice requirement. In addition to
the requirement of paragraph (f)(3)(ii)(A)
of this section, the U.S. transferor must
comply with the requirements of para-
graph (f)(3)(ii)(B)(1)or(2), as applicable.
(1) If the U.S. transferor is under ex-
amination for any taxable year when it re-
quests relief, the U.S.transferor must pro-
vide a copy of the amended return and at-
tachments to the Internal Revenue Service
personnel conducting the examination.
(2) If the U.S. transferor is not under ex-
amination for any taxable year when it re-
quests relief, the U.S.transferor must pro-
vide a copy of the amended return and at-
tachments to the Director having jurisdic-
tion over the U.S. transferor’s return.
*****
(g)Effective/applicability dates.(1)
Except as provided in paragraphs (g)(2)
through (5) of this section, this section
applies to transfers occurring on or after
July 20, 1998, except for transfers of cash
made in tax years beginning on or before
February 5, 1999 (which are not required
to be reported under section 6038B), and
except for transfers described in paragraph
(e) of this section, which applies to trans-
fers that are subject to §§1.367(e)–1(f) and
1.367(e)–2(e). * * *
(5) Paragraphs (c)(6) and (f)(3) of this
section shall apply to transfers occurring
on or after the date 30 days after the date
these regulations are published as final
regulations in theFederal Register.For
guidance with respect to paragraphs (c)(6)
and (f)(3) of this section before the date
30 days after the date these regulations are
published as final regulations in theFed-
eral Register, see 26 CFR part 1 revised
as of April 1 for the year before the date
these regulations are published as final
regulations in theFederal Register.
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on August 19,
2008, 8:45 a.m., and published in the issue of the Federal
Register for August 20, 2008, 73 F.R. 49277)
Deletions From Cumulative
List of Organizations
Contributions to Which
are Deductible Under Section
170 of the Code
Announcement 2008–90
The Internal Revenue Service has re-
voked its determination that the organi-
zations listed below qualify as organiza-
tions described in sections 501(c)(3) and
170(c)(2) of the Internal Revenue Code of
1986.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an or-
ganization ceases to qualify under section
170(c)(2) if the organization has not timely
filed a suit for declaratory judgment under
section 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on October 14, 2008,
and would end on the date the court first
determines that the organization is not de-
scribed in section 170(c)(2) as more partic-
ularly set forth in section 7428(c)(1). For
individual contributors, the maximum de-
duction protected is $1,000, with a hus-
band and wife treated as one contributor.
This benefit is not extended to any individ-
ual, in whole or in part, for the acts or omis-
sions of the organizations that were the ba-
sis for revocation.
Heavens Hand Foundation
McCordsville, IN
Airport Working Group of Orange County
Newport Beach, CA
Portland Fathering Center
Portland, OR
Section 7428(c) Validation
of Certain Contributions
Made During Pendency
of Declaratory Judgment
Proceedings
Announcement 2008–93
This announcement serves notice to po-
tential donors that the organization listed
below has recently filed a timely declara-
tory judgment suit under section 7428 of
the Code, challenging revocation of its
status as an eligibledonee under section
170(c)(2).
Protection under section 7428(c) of the
Code begins on the date that the notice
of revocation is published in the Internal
Revenue Bulletin and ends on the date
on which a court first determines that an
organization is not described in section
170(c)(2), as more particularly set forth in
section 7428(c)(1).
In the case of individual contributors,
the maximum amount of contributions
protected during this period is limited to
$1,000.00, with a husband and wife being
treated as one contributor. This protec-
tion is not extended to any individual who
was responsible, in whole or in part, for
the acts or omissions of the organization
that were the basis for the revocation.
This protection also applies (but without
limitation as to amount) to organizations
described in section 170(c)(2) which are
October 14, 20088962008–41 I.R.B.

exempt from tax under section 501(a). If
the organization ultimately prevails in its
declaratory judgment suit, deductibility
of contributions would be subject to the
normal limitations set forth under section
170.
Airport Working Group of Orange County
Newport Beach, CA
2008–41 I.R.B.897October 14, 2008

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
October 14, 2008i2008–41 I.R.B.

Numerical Finding List
1
Bulletins 2008–27 through 2008–41
Announcements:
2008-62, 2008-27 I.R.B.74
2008-63, 2008-28 I.R.B.114
2008-64, 2008-28 I.R.B.114
2008-65, 2008-31 I.R.B.279
2008-66, 2008-29 I.R.B.164
2008-67, 2008-29 I.R.B.164
2008-68, 2008-30 I.R.B.244
2008-69, 2008-32 I.R.B.318
2008-70, 2008-32 I.R.B.318
2008-71, 2008-32 I.R.B.321
2008-72, 2008-32 I.R.B.321
2008-73, 2008-33 I.R.B.391
2008-74, 2008-33 I.R.B.392
2008-75, 2008-33 I.R.B.392
2008-76, 2008-33 I.R.B.393
2008-77, 2008-33 I.R.B.394
2008-78, 2008-34 I.R.B.453
2008-79, 2008-35 I.R.B.568
2008-80, 2008-37 I.R.B.706
2008-81, 2008-37 I.R.B.706
2008-82, 2008-37 I.R.B.708
2008-83, 2008-37 I.R.B.709
2008-84, 2008-38 I.R.B.748
2008-85, 2008-38 I.R.B.749
2008-86, 2008-40 I.R.B.843
2008-87, 2008-40 I.R.B.843
2008-88, 2008-40 I.R.B.843
2008-89, 2008-40 I.R.B.844
2008-90, 2008-41 I.R.B.896
2008-93, 2008-41 I.R.B.896
Court Decisions:
2087, 2008-41 I.R.B.845
Notices:
2008-55, 2008-27 I.R.B.11
2008-56, 2008-28 I.R.B.79
2008-57, 2008-28 I.R.B.80
2008-58, 2008-28 I.R.B.81
2008-59, 2008-29 I.R.B.123
2008-60, 2008-30 I.R.B.178
2008-61, 2008-30 I.R.B.180
2008-62, 2008-29 I.R.B.130
2008-63, 2008-31 I.R.B.261
2008-64, 2008-31 I.R.B.268
2008-65, 2008-30 I.R.B.182
2008-66, 2008-31 I.R.B.270
2008-67, 2008-32 I.R.B.307
2008-68, 2008-34 I.R.B.418
2008-69, 2008-34 I.R.B.419
2008-70, 2008-36 I.R.B.575
Notices— Continued:
2008-71, 2008-35 I.R.B.462
2008-73, 2008-38 I.R.B.717
2008-74, 2008-38 I.R.B.718
2008-75, 2008-38 I.R.B.719
2008-76, 2008-39 I.R.B.768
2008-77, 2008-40 I.R.B.814
2008-78, 2008-41 I.R.B.851
2008-79, 2008-40 I.R.B.815
2008-80, 2008-40 I.R.B.820
2008-81, 2008-41 I.R.B.852
2008-82, 2008-41 I.R.B.853
2008-84, 2008-41 I.R.B.855
Proposed Regulations:
REG-209006-89, 2008-41 I.R.B.867
REG-161695-04, 2008-37 I.R.B.699
REG-164965-04, 2008-34 I.R.B.450
REG-143453-05, 2008-32 I.R.B.310
REG-146895-05, 2008-37 I.R.B.700
REG-155087-05, 2008-38 I.R.B.726
REG-142680-06, 2008-35 I.R.B.565
REG-120476-07, 2008-36 I.R.B.679
REG-120844-07, 2008-39 I.R.B.770
REG-129243-07, 2008-27 I.R.B.32
REG-138355-07, 2008-32 I.R.B.311
REG-140029-07, 2008-40 I.R.B.828
REG-142040-07, 2008-34 I.R.B.451
REG-149404-07, 2008-40 I.R.B.839
REG-149405-07, 2008-27 I.R.B.73
REG-100464-08, 2008-32 I.R.B.313
REG-101258-08, 2008-28 I.R.B.111
REG-102122-08, 2008-31 I.R.B.278
REG-102822-08, 2008-38 I.R.B.744
REG-103146-08, 2008-37 I.R.B.701
REG-106251-08, 2008-39 I.R.B.774
REG-115457-08, 2008-33 I.R.B.390
REG-121698-08, 2008-29 I.R.B.163
Revenue Procedures:
2008-32, 2008-28 I.R.B.82
2008-33, 2008-28 I.R.B.93
2008-34, 2008-27 I.R.B.13
2008-35, 2008-29 I.R.B.132
2008-36, 2008-33 I.R.B.340
2008-37, 2008-29 I.R.B.137
2008-38, 2008-29 I.R.B.139
2008-39, 2008-29 I.R.B.143
2008-40, 2008-29 I.R.B.151
2008-41, 2008-29 I.R.B.155
2008-42, 2008-29 I.R.B.160
2008-43, 2008-30 I.R.B.186
2008-44, 2008-30 I.R.B.187
2008-45, 2008-30 I.R.B.224
2008-46, 2008-30 I.R.B.238
2008-47, 2008-31 I.R.B.272
Revenue Procedures— Continued:
2008-48, 2008-36 I.R.B.586
2008-49, 2008-34 I.R.B.423
2008-50, 2008-35 I.R.B.464
2008-51, 2008-35 I.R.B.562
2008-52, 2008-36 I.R.B.587
2008-53, 2008-36 I.R.B.678
2008-54, 2008-38 I.R.B.722
2008-55, 2008-39 I.R.B.768
2008-56, 2008-40 I.R.B.826
2008-57, 2008-41 I.R.B.855
2008-58, 2008-41 I.R.B.856
2008-59, 2008-41 I.R.B.857
Revenue Rulings:
2008-32, 2008-27 I.R.B.6
2008-33, 2008-27 I.R.B.8
2008-34, 2008-28 I.R.B.76
2008-35, 2008-29 I.R.B.116
2008-36, 2008-30 I.R.B.165
2008-37, 2008-28 I.R.B.77
2008-38, 2008-31 I.R.B.249
2008-39, 2008-31 I.R.B.252
2008-40, 2008-30 I.R.B.166
2008-41, 2008-30 I.R.B.170
2008-42, 2008-30 I.R.B.175
2008-43, 2008-31 I.R.B.258
2008-44, 2008-32 I.R.B.292
2008-45, 2008-34 I.R.B.403
2008-46, 2008-36 I.R.B.572
2008-47, 2008-39 I.R.B.760
2008-48, 2008-38 I.R.B.713
2008-49, 2008-40 I.R.B.811
Treasury Decisions:
9401, 2008-27 I.R.B.1
9402, 2008-31 I.R.B.254
9403, 2008-32 I.R.B.285
9404, 2008-32 I.R.B.280
9405, 2008-32 I.R.B.293
9406, 2008-32 I.R.B.287
9407, 2008-33 I.R.B.330
9408, 2008-33 I.R.B.323
9409, 2008-29 I.R.B.118
9410, 2008-34 I.R.B.414
9411, 2008-34 I.R.B.398
9412, 2008-37 I.R.B.687
9413, 2008-34 I.R.B.404
9414, 2008-35 I.R.B.454
9415, 2008-36 I.R.B.570
9417, 2008-37 I.R.B.693
9418, 2008-38 I.R.B.713
9419, 2008-40 I.R.B.790
9420, 2008-39 I.R.B.750
9421, 2008-39 I.R.B.755
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin
2008–26, dated June 30, 2008.
2008–41 I.R.B.iiOctober 14, 2008

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2008–27 through 2008–41
Announcements:
2008-64
Corrected by
Ann. 2008-71, 2008-32 I.R.B.321
2008-72
Corrected by
Ann. 2008-78, 2008-34 I.R.B.453
Notices:
88-80
Modified by
Notice 2008-79, 2008-40 I.R.B.815
99-48
Superseded by
Rev. Proc. 2008-40, 2008-29 I.R.B.151
2000-9
Obsoleted by
Rev. Proc. 2008-41, 2008-29 I.R.B.155
2004-2
Amplified by
Notice 2008-59, 2008-29 I.R.B.123
2004-50
Amplified by
Notice 2008-59, 2008-29 I.R.B.123
2006-88
Modified and superseded by
Notice 2008-60, 2008-30 I.R.B.178
2007-22
Amplified by
Notice 2008-59, 2008-29 I.R.B.123
2007-36
Clarified, modified, and amplified by
Rev. Proc. 2008-54, 2008-38 I.R.B.722
Proposed Regulations:
REG-129243-07
Corrected by
Ann. 2008-75, 2008-33 I.R.B.392
REG-151135-07
Hearing scheduled by
Ann. 2008-64, 2008-28 I.R.B.114
REG-101258-08
Corrected by
Ann. 2008-73, 2008-33 I.R.B.391
Revenue Procedures:
92-25
Superseded by
Rev. Proc. 2008-41, 2008-29 I.R.B.155
Revenue Procedures— Continued:
92-83
Obsoleted by
Rev. Proc. 2008-37, 2008-29 I.R.B.137
2001-10
Section 6.02(1)(a) modified and amplified by
Rev. Proc. 2008-52, 2008-36 I.R.B.587
2001-42
Superseded by
Rev. Proc. 2008-39, 2008-29 I.R.B.143
2002-9
Clarified, modified, amplified, and superseded by
Rev. Proc. 2008-52, 2008-36 I.R.B.587
Modified and amplified by
Rev. Proc. 2008-43, 2008-30 I.R.B.186
2002-28
Section 7.02(1)(a) modified and amplified by
Rev. Proc. 2008-52, 2008-36 I.R.B.587
2002-64
Superseded by
Rev. Proc. 2008-55, 2008-39 I.R.B.768
2005-29
Superseded by
Rev. Proc. 2008-49, 2008-34 I.R.B.423
2006-27
Modified and superseded by
Rev. Proc. 2008-50, 2008-35 I.R.B.464
2006-29
Superseded by
Rev. Proc. 2008-34, 2008-27 I.R.B.13
2006-34
Superseded by
Rev. Proc. 2008-44, 2008-30 I.R.B.187
2007-14
Superseded by
Rev. Proc. 2008-52, 2008-36 I.R.B.587
2007-19
Superseded by
Rev. Proc. 2008-39, 2008-29 I.R.B.143
2007-42
Superseded by
Rev. Proc. 2008-32, 2008-28 I.R.B.82
2007-43
Superseded by
Rev. Proc. 2008-33, 2008-28 I.R.B.93
2007-44
Modified by
Rev. Proc. 2008-56, 2008-40 I.R.B.826
2007-49
Section 3 modified and superseded by
Rev. Proc. 2008-50, 2008-35 I.R.B.464
Revenue Procedures— Continued:
2007-50
Superseded by
Rev. Proc. 2008-36, 2008-33 I.R.B.340
2007-63
Superseded by
Rev. Proc. 2008-59, 2008-41 I.R.B.857
2007-66
Modified and superseded by
Rev. Proc. 2008-54, 2008-38 I.R.B.722
2007-70
Modified by
Ann. 2008-63, 2008-28 I.R.B.114
2007-72
Amplified and superseded by
Rev. Proc. 2008-47, 2008-31 I.R.B.272
2008-12
Modified and superseded by
Rev. Proc. 2008-35, 2008-29 I.R.B.132
2008-43
Modified by
Rev. Proc. 2008-52, 2008-36 I.R.B.587
2008-52
Modified by
Ann. 2008-84, 2008-38 I.R.B.748
Revenue Rulings:
67-213
Amplified by
Rev. Rul. 2008-40, 2008-30 I.R.B.166
71-234
Modified by
Rev. Proc. 2008-43, 2008-30 I.R.B.186
76-273
Obsoleted by
T.D. 9414, 2008-35 I.R.B.454
77-480
Modified by
Rev. Proc. 2008-43, 2008-30 I.R.B.186
82-105
Obsoleted by
T.D. 9414, 2008-35 I.R.B.454
91-17
Amplified by
Rev. Proc. 2008-41, 2008-29 I.R.B.155
Rev. Proc. 2008-42, 2008-29 I.R.B.160
Superseded in part by
Rev. Proc. 2008-40, 2008-29 I.R.B.151
2005-6
Amplified by
Rev. Proc. 2008-38, 2008-29 I.R.B.139
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin 2008–26, dated June 30, 2008.
October 14, 2008iii2008–41 I.R.B.

Revenue Rulings— Continued:
2006-57
Modified by
Notice 2008-74, 2008-38 I.R.B.718
2008-12
Amplified by
Rev. Rul. 2008-38, 2008-31 I.R.B.249
Clarified by
Ann. 2008-65, 2008-31 I.R.B.279
Treasury Decisions:
9391
Corrected by
Ann. 2008-74, 2008-33 I.R.B.392
2008–41 I.R.B.ivOctober 14, 2008

October 14, 20082008–41 I.R.B.

INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-
tendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
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REVENUE BULLETIN
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