Internal Revenue Bulletin 2016-15 (PDF rendition): IRS Notices

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

# INTERNAL REVENUE BULLETIN

IRS

Bulletin No. 2016-15
April 11, 2016

## 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

### Rev. Rul. 2016-10, page 545.

Fringe benefits aircraft valuation formula. For purposes of
section 1.61-21(g) of the Income Tax Regulations, relating to
the rule for valuing non-commercial flights on employer-
provided aircraft, the Standard Industry Fare Level (SIFL) cents-
per-mile rates and terminal charge in effect for the first half of
2016 are set forth.

### Notice 2016-27, page 576.

This notice provides that statements required under section
6035, regarding the basis of property distributed from the
estate of a decedent, need not be filed or furnished until June
30, 2016, rather than the current March 31, 2016 deadline.

### Notice 2016-28, page 576.

Notice 2016-28 explains how a State or local government
amends the nomination of an empowerment zone to provide
for a new termination date of December 31, 2016.

### T.D. 9759, page 545.

These regulations apply when a corporation that is subject to
U.S. income tax acquires loss property tax-free from a liquidat-
ing subsidiary, from shareholders or others in a capital contri-
bution, or from another corporation or person in a reorganiza-
tion, and the loss in the acquired property accrued outside the
U.S. tax system. The regulations provide guidance for prevent-
ing the importation of loss in such cases by requiring the bases
of the assets received to be equal to value.

### T.D. 9760, page 564.

These regulations finalize without substantive change tempo-
rary and proposed regulations promulgated in 2013 that ad-
dress outbound transfers of stock or securities in certain
nonrecognition transactions. First, the regulations finalize mod-
ifications to the indirect stock transfer coordination rule, which
generally provides that section 367(a) and (d) apply to any

assets transferred in an outbound reorganization before the
indirect stock transfer rules. The modifications finalize changes
to the exceptions to the coordination rule by providing that -
under certain conditions - section 367(a) and (d) will not apply
to the transferred assets to the extent those assets are re-
transferred to a domestic corporation. Second, these regula-
tions finalize rules governing transfers of stock or securities by
a domestic corporation to a foreign corporation in a section
361 exchange. Finally, these regulations finalize modifications
to the procedures for obtaining relief for failures to satisfy
certain reporting requirements.

## ESTATE TAX

### Notice 2016-27, page 576.

This notice provides that statements required under section
6035, regarding the basis of property distributed from the
estate of a decedent, need not be filed or furnished until June
30, 2016, rather than the current March 31, 2016 deadline.

## ADMINISTRATIVE

Rev. Proc. 2016-22, page 577.

This revenue procedure updates Rev. Proc. 87.24, 1987-1
C.B. 720, which describes the practices for the administrative
appeals process in cases docketed in the United States Tax
Court.

### Notice 2016-27, page 576.

This notice provides that statements required under section
6035, regarding the basis of property distributed from the
estate of a decedent, need not be filed or furnished until June
30, 2016, rather than the current March 31, 2016 deadline.

Finding Lists begin on page ii.

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## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the 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.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal 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, identify-
ing 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 .- 1986 Code.

This part includes rulings and decisions based on provisions of
the Internal 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, Legisla-
tion 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 Sec-
retary (Enforcement).

### Part IV .- Items of General Interest.

This part includes notices of proposed rulemakings, disbar-
ment and 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 contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

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# Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

## Section 61. Gross Income Defined

26 CFR 1.61-21: Taxation of fringe benefits.

## Rev. Rul. 2016-10

For purposes of the taxation of fringe
benefits under section 61 of the Internal
Revenue Code, section 1.61-21(g) of the

Income Tax Regulations provides a
rule for valuing noncommercial flights on
employer-provided aircraft. Section 1.61-
21(g)(5) provides an aircraft valuation
formula to determine the value of such
flights. The value of a flight is determined
under the base aircraft valuation formula
(also known as the Standard Industry Fare
Level formula or SIFL) by multiplying the
SIFL cents-per-mile rates applicable for

the period during which the flight was
taken by the appropriate aircraft multiple
provided in section 1.61-21(g)(7) and
then adding the applicable terminal
charge. The SIFL cents-per-mile rates in
the formula and the terminal charge are
calculated by the Department of Transpor-
tation and are reviewed semi-annually.

The following chart sets forth the ter-
minal charge and SIFL mileage rates:

Period During Which the Flight Is Taken

Terminal Charge

SIFL Mileage Rates

1/1/16 - 6/30/16

$39.19

Up to 500 miles = $.2144 per mile 501-1500 miles = $.1635 per mile Over 1500 miles = $.1572 per mile

## DRAFTING INFORMATION

The principal author of this revenue
ruling is Kathleen Edmondson of the Of-
fice of Associate Chief Counsel (Tax Ex-
empt/Government Entities). For further
information regarding this revenue ruling,
contact Ms. Edmondson at (202) 317-6798
(not a toll-free number).

26 CFR 1.334-1: Basis of property received in liq-
uidations; 26 CFR 1.362-3: Basis of importation
property acquired in a loss importation transaction

## T.D. 9759

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

## Limitations on the Importation of Net Built-In Losses

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Final Regulations

SUMMARY: This document contains final
regulations under sections 334(b)(1)(B) and
362(e)(1) of the Internal Revenue Code of
1986 (Code). The regulations apply to cer-
tain nonrecognition transfers of loss prop-
erty to corporations that are subject to cer-

tain taxes under the Code. The regulations
affect the corporations receiving such loss
property. This document also amends final
regulations under sections 332 and 351 to
reflect certain statutory changes. The regu-
lations affect certain corporations that trans-
fer assets to, or receive assets from, their
shareholders in exchange for the corpora-
tion's stock.

DATES: Effective Date: These final reg-
ulations are effective on March 28, 2016.

FOR FURTHER INFORMATION
CONTACT: John P. Stemwedel (202)
317-5363 or Theresa A. Abell (202) 317-
7700 (not toll free numbers).

SUPPLEMENTARY INFORMATION:

### Paperwork Reduction Act

The collection of information con-
tained in these final regulations revises a
collection of information that has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545-2019. The revised collec-
tion of information in these final regula-
tions is in §§ 1.332-6, 1.351-3, and
1.368-3. By requiring that taxpayers sep-
arately report the fair market value and
basis of property (including stock) de-
scribed in section 362(e)(1)(B) and in

362(e)(2)(A) that is transferred in a tax-
free transaction, this revised collection of
information aids in identifying transac-
tions within the scope of sections
334(b)(1)(B), 362(e)(1), and 362(e)(2)
and thereby facilitates the ability of the
IRS to verify that taxpayers are complying
with sections 334(b)(1)(B), 362(e)(1), and
362(e)(2). The respondents will be corpo-
rations and their shareholders.

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less the collection of information displays
a valid control number.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103.

#### Background

Sections 334(b)(1)(B) and 362(e)(1)
(the anti-loss importation provisions)
were added to the Code by the American
Jobs Creation Act of 2004 (Pub. L.
108-357, 188 Stat. 1418) to prevent ero-
sion of the corporate tax base when a
person (Transferor) transfers property to a
corporation (Acquiring) and the result
would be an importation of loss into the
federal tax system. Proposed regulations

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under sections 334(b)(1)(B) and 362(e)(1)
were published in the Federal Register
(78 FR 54971) on September 9, 2013 (the
2013 NPRM). Three written comments
were submitted on the 2013 NPRM; no
public hearing was requested or held. Ad-
ditionally, on March 10, 2005, the Trea-
sury Department and the IRS published in
the Federal Register (70 FR 11903-01) a
notice of proposed rulemaking (the 2005
NPRM) that, among other things, pro-
posed amendments to the regulations un-
der sections 332 and 351 to reflect statu-
tory changes. No comments were received
with respect to the amendments reflecting
statutory changes to section 332 and 351,
although several comments were received
with respect to other aspects of the 2005
NPRM. The 2005 NPRM's proposed
amendments that reflect statutory changes
are included in this final rule.

The comments with respect to the 2013
NPRM, and the respective responses of
the Treasury Department and the IRS, are
described in the Summary of Comments
and Explanation of Provisions that fol-
lows the Summary of the 2013 NPRM.

## Summary of the 2013 NPRM

### 1. General Application of Sections and Interaction with Other Law

The 2013 NPRM provided specific
rules to implement the statutory frame-
work of the anti-loss importation provi-
sions, such as rules for identifying “im-
portation property" and for determining
whether the transfer of that property oc-
curs in a transaction subject to the anti-
loss importation provisions (designated a
"loss importation transaction" under the
2013 NPRM and these final regulations).

### a. Importation property

The 2013 NPRM used a hypothetical
sale analysis to identify importation prop-
erty. Under this approach, the actual tax
treatment of any gain or loss that would be
recognized on a sale of an individual
property, first by the Transferor immedi-
ately before the transfer and then by Ac-
quiring immediately after the transfer, de-
termined whether that individual property
was importation property. If a Transfer-
or's gain or loss on a sale of an individual
property immediately before the transfer

would not be subject to any tax imposed
under subtitle A of the Code (federal in-
come tax), the first condition for classifi-
cation as importation property would be
satisfied. If Acquiring's gain or loss on a
sale of the transferred property immedi-
ately after the transfer would be subject to
federal income tax, the second condition
for classification as importation property
would be satisfied. If both of these condi-
tions would be satisfied, the property
would be importation property.

In general, this determination was
made by reference to the tax treatment of
the Transferor(s) or Acquiring as hypo-
thetical sellers of the transferred or ac-
quired property, that is, whether the hypo-
thetical seller would take the gain or loss
into account in determining its federal in-
come tax liability. This determination had
to take into account all relevant facts and
circumstances. The 2013 NPRM included
a number of examples illustrating this ap-
proach. Thus, in one example, a tax-
exempt entity transferred property to a
taxable domestic corporation, and the de-
termination took into account whether the
transferor, though generally tax-exempt,
would nevertheless be required to include
the amount of the gain or loss in unrelated
business taxable income (UBTI) under
sections 511 through 514 of the Code. In
other examples, a foreign corporation
transferred property to a taxable domestic
corporation and the determination took
into account whether the foreign corpora-
tion would be required to include the
amount of gain or loss under section 864
or 897 as income effectively connected
with, or treated as effectively connected
with, the conduct of a U.S. trade or busi-
ness. Although the examples assumed that
there was no applicable income tax treaty,
in the case of an applicable income tax
treaty, the determination of whether prop-
erty is importation property would take
into account whether the Transferor
would be taxable under the business prof-
its article or gains article of the income tax
treaty.

### i. Property Acquired from Grantor Trusts, Partnerships, and S Corporations

Although the general rule in the 2013
NPRM looked solely to the tax treatment
of the Transferor(s) and Acquiring as hy-

pothetical sellers, a look-through rule ap-
plied if a Transferor was a grantor trust, a
partnership, or a small business corpora-
tion that elected under section 1362(a) to
be an S corporation. In these cases, the
determination of whether gain or loss
from a hypothetical sale was subject to
federal income tax was made by reference
to the tax treatment of the gain or loss in
the hands of the grantors, the partners, or
the S corporation shareholders.

If an organizing instrument allocated
gain or loss in different amounts, includ-
ing by reason of a special allocation under
a partnership agreement, the determina-
tion of whether gain or loss from a hypo-
thetical sale by the entity was subject to
federal income tax would be made by
reference to the person to whom, under
the terms of the instrument, the gain or
loss on the entity's hypothetical sale
would actually be allocated, taking into
account the entity's net gain or loss actu-
ally recognized in the tax period in which
the transaction occurred.

### ii. Anti-Avoidance Rule for Certain Entities

In certain circumstances, the Code per-
mits an entity that would otherwise be
subject to federal income tax to shift the
incidence of federal income taxation to
the entity's owners. For example, under
sections 651 and 652, and sections 661
and 662, distributions made by a trust are
deducted from the trust's income for fed-
eral income tax purposes and included in
the beneficiary's (or beneficiaries') gross
income. Certain domestic corporations,
including regulated investment companies
(RICs, as defined in section 851(a)), real
estate investment trusts (REITs, as defined
in section 856(a)), and domestic corpora-
tions taxable as cooperatives (Coopera-
tives; see section 1381) are also able to
shift the incidence of federal income tax-
ation by distributing income or gain.

The Treasury Department and the IRS
were concerned that disregarding the abil-
ity of these entities to shift the incidence
of federal income taxation could under-
mine the anti-loss importation provisions.
However, the Treasury Department and
the IRS were also concerned that applying
a look-through rule in all of these cases

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would impose a significant administrative
burden.

Accordingly, the 2013 NPRM included
an anti-avoidance rule that applied to do-
mestic trusts, estates, RICs, REITs, and
Cooperatives that directly or indirectly
transferred property (including through
other such entities) in a transaction de-
scribed in section 362(a) or 362(b) (a Sec-
tion 362 Transaction). The rule applied if
the property had been directly or indi-
rectly transferred to or acquired by the
entity as part of a plan to avoid the appli-
cation of the anti-loss importation provi-
sions. When the look-through rule ap-
plied, the entity was presumed to
distribute the proceeds of its hypothetical
sale and the tax treatment of the gain or
loss in the distributees' hands would de-
termine whether the gain or loss was taken
into account in determining a federal in-
come tax liability. If the distributee were
also such an entity, the principles of this
rule applied to look to the ultimate owners
of the interests in the entity.

### iii. Gain or Loss Affecting Certain Income Inclusions

Prior to the publication of the 2013
NPRM, questions were raised regarding
the treatment of property transferred by or
to a controlled foreign corporation (CFC),
as defined in section 957 (taking into ac-
count section 953(c)). The general rules of
the 2013 NPRM would not treat gain or
loss recognized on a hypothetical sale by a
CFC as subject to federal income tax;
however, because practitioners raised con-
cerns prior to the publication of the 2013
NPRM, the 2013 NPRM expressly pro-
vided that gain or loss recognized on a
hypothetical sale by a CFC is not consid-
ered subject to federal income tax solely
by reason of an income inclusion under
section 951(a). The 2013 NPRM similarly
provided that gain or loss recognized by a
passive foreign investment company, as
defined in section 1297(a), was not subject
to federal income tax solely by reason of
an inclusion under section 1293(a).

### iv. Gain or Loss Taxed to More than One Person

If gain or loss realized on a hypotheti-
cal sale would be includible in income by

more than one person, the 2013 NPRM
treated such property, solely for purposes
of the anti-loss importation provisions, as
tentatively divided into separate portions
in proportion to the allocation of gain or
loss from a hypothetical sale to each
person. Tentatively divided portions
were treated and analyzed in the same
manner as any other property for pur-
poses of applying the anti-loss importa-
tion provisions.

#### b. Loss importation transaction

Under the 2013 NPRM, once property
had been identified as importation prop-
erty, Acquiring would determine its basis
in the importation property under gener-
ally applicable rules (disregarding sec-
tions 362(e)(1) and 362(e)(2)) and, if that
aggregate basis exceeded the aggregate
value of all importation property trans-
ferred in the Section 362 Transaction, the
transaction was a loss importation trans-
action subject to the anti-loss importation
provisions. If the aggregate basis of the
importation property did not exceed such
property's value, the anti-loss importation
provisions had no further application.

### i. Aggregate, Not Transferor-by- Transferor, Approach

By their terms, section 362(e)(1) and
the provisions of the 2013 NPRM apply in
the aggregate to all importation property
acquired in a transaction, regardless of the
number of transferors in the transaction.
This rule differs from the transferor-by-
transferor approach of section 362(e)(2),
which is concerned with whether a trans-
feror would otherwise duplicate loss by
retaining loss in stock and transferring
property with a net built-in loss.

### ii. Valuing Partnership Interests

In response to concerns raised by prac-
titioners prior to the publication of the
2013 NPRM, a special valuation rule for
transfers of partnership interests was in-
cluded in the 2013 NPRM. Under that
rule, the value of a partnership interest
would be determined in a manner that
takes partnership liabilities into account.
Specifically, the 2013 NPRM provided
that the value of a partnership interest

would be the sum of cash that Acquiring
would receive for such interest, increased
by any § 1.752-1 liabilities (as defined in
§ 1.752-1(a)(4)) of the partnership that
were allocated to Acquiring with regard to
such transferred interest under section
752. The 2013 NPRM included an exam-
ple that illustrated the application and ef-
fect of this rule. The 2013 NPRM also
clarified that any section 743(b) adjust-
ment to be made as a result of the trans-
action was made after any section 362(e)
basis adjustment.

### c. Acquiring's basis in acquired property

If a transaction was a loss importation
transaction under the 2013 NPRM, Ac-
quiring's basis in each importation prop-
erty received (including the tentatively di-
vided portions of property determined to
be importation property) was an amount
equal to the value of that property, not-
withstanding the general rules in sections
334(b)(1)(B), 362(a), and 362(b). This
rule applied to all importation property,
regardless of whether the property's value
was more or less than its basis prior to the
loss importation transaction.

Immediately following the application
of the anti-loss importation provisions
(and prior to any application of section
362(e)(2)), any property that was treated
as tentatively divided for purposes of ap-
plying the anti-loss importation provisions
ceased to be treated as divided and was
treated as one undivided property (re-
constituted property) with a basis equal to
the sum of the bases of the portions deter-
mined under the anti-loss importation pro-
vision, and the bases of all other portions
determined under generally applicable pro-
visions (other than section 362(e)(2)).

If the transaction was described in sec-
tion 362(a), the transferred property was
then aggregated on a transferor-by-
transferor basis to determine whether fur-
ther adjustment would be required to the
bases of loss properties under section
362(e)(2). The 2013 NPRM included a
cross-reference to section 362(e)(2) as
well as examples illustrating the applica-
tion of both section 362(e)(1) and (e)(2) to
situations involving multiple transferors
and multiple properties that were not all
importation properties.

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### 2. Filing Requirements

To facilitate the administration of both
the anti-loss importation provisions and
the anti-duplication provisions in section
362(e)(2), the 2013 NPRM modified the
reporting requirements applicable in all
affected transactions (section 332 liqui-
dations and transactions described in
section 362(a) or section 362(b)) to re-
quire taxpayers to identify the bases and
values of properties subject to those
sections.

### 3. Modifications to Liquidation Regulations

The 2013 NPRM also included sev-
eral modifications to the regulations ap-
plicable to corporate liquidations. These
modifications were not substantive
changes to the law; they were solely to
update the regulations to reflect certain
statutory changes, including the repeal
of the General Utilities doctrine (re-
flected in the modification of sections
334(a) and 337(a), and the repeal of
sections 333 and 334(c)), the removal of
former section 334(b)(2) (replaced by
section 338), and the relocation of for-
mer section 332(c) (subsidiary indebted-
ness) to current section 337(b). In re-
sponse to certain regulatory changes, the
2013 NPRM also added several cross-
references to regulations under section
367 and 897 to highlight the treatment
of certain transfers between foreign cor-
porations.

## Summary of Comments and Explanation of Provisions

In general, the commenters agreed with
the general framework prescribed in the
2013 NPRM and the positions taken
therein by the Treasury Department and
the IRS. Accordingly, the final regulations
generally adopt the provisions of the 2013
NPRM. However, the final regulations
also adopt certain modifications and in-
clude certain clarifications in response to
comments. These comments, and the re-
spective responses of the Treasury De-
partment and the IRS, are described in the
following paragraphs.

### 1. Comments Related to Partnership Matters

The majority of comments received in
response to the 2013 NPRM related to
issues involving partnerships.

a. Items taken into account to determine
treatment of hypothetical sale

As described previously, under the 2013
NPRM, the determination of whether gain
or loss on property transferred by a partner-
ship is subject to federal income tax would
be made by reference to the treatment of the
partners, taking into account all partnership
items for the year of the Section 362 Trans-
action. One commenter suggested a closing-
of-the-books rule instead, asserting such an
approach would be more administrable for
transferor partnerships. The Treasury De-
partment and the IRS are concerned that the
allocation of partnership items as of the date
of the transfer could differ from the alloca-
tion of such items at the end of the partner-
ship tax year. In such a case, the partner to
whom gain or loss on the hypothetical sale
of the transferred property would be allo-
cated as of the transfer date (using a hypo-
thetical closing-of-the-books method) may
not be the partner to whom the allocation
would be made as of the end of the year,
taking all items for the year into account.
The Treasury Department and the IRS be-
lieve that the latter approach more accu-
rately identifies the partner to whom the
gain or loss on a sale of the property would
be allocated, and thus more accurately de-
termines whether such amounts would be
subject to federal income tax. Accordingly,
these final regulations do not permit using a
closing-of-the-books method.

In response to questions about how to
determine to which partner an item would
be allocated, and thus its federal income
tax treatment, the final regulations clarify
that the partnership agreement as well as
any applicable rules of law are taken into
account.

### b. Widely-held partnerships and publicly traded partnerships

Another commenter requested that
widely held partnerships (WHPs) and
publicly traded partnerships (PTPs) not be
subject to the look-through rule applicable
to all partnerships for determining

whether gain or loss on a hypothetical sale
is subject to federal income tax. Instead,
the commenter requested these entities be
afforded treatment similar to that of do-
mestic estates, trusts, RICs, REITs, and
Cooperatives (and therefore be subject to
look-through treatment only in abusive
situations). The commenter's reasons for
this suggested modification included that
look-through treatment would impose a
substantial administrative burden on
WHPs and PTPs and that these entities are
not generally vehicles for abuse. How-
ever, the statute explicitly contemplates
that partners, not partnerships, are the fo-
cus of the inquiry under section 362(e)(1).
WHPs and PTPs are already required to
apply a look-through approach to track
and report information to their partners.
For purposes of determining whether
there is an importation of loss for PTPs,
the Treasury Department and the IRS will
respect determinations derived by applying
generally accepted conventions in determin-
ing allocable income. See, for example, the
conventions set forth in § 1.706-4(c)(3)(ii).
Accordingly, the Treasury Department and
the IRS do not believe it is necessary or
appropriate to treat these partnerships as
other than partnerships, and the final regu-
lations retain the approach used in the 2013
NPRM.

### c. Interactions of sections 362(e) and 704(c)(1)(C)

Commenters also requested clarifica-
tion of the interaction of the regulations
proposed under section 362(e)(1), the regu-
lations under section 362(e)(2), and regula-
tions proposed under section 704(c)(1)(C)
(79 FR 3041 (January 16, 2014)). The Trea-
sury Department and the IRS agree that
such clarification would be appropriate.
However, the interaction of these provisions
cannot be addressed independently of the
promulgation of final regulations under sec-
tion 704(c)(1)(C). Accordingly, these issues
will be addressed as part of the finalization
of regulations under that section.

### d. Partnership allocations in the case of

a section 362(e)(2)(C) election

The 2013 NPRM, like the final regula-
tions under section 362(e)(2), included ex-
amples involving partnership transferors

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and allocation to partners of resulting ad-
justments under section 362(e)(1) and (2),
including adjustments in the case of a
section 362(e)(2)(C) election. The exam-
ples direct allocations to the partners that
contributed the property transferred by the
partnership in order to comply with the
legislative purpose of section 362(e)(1)
and (2) and to prevent distortions. Com-
menters agreed with the results provided
in the examples but requested a clarifica-
tion of the authority on which the analyses
were based. The analysis reflected in the
examples is based on general aggregate and
entity principles of partnership tax law, tak-
ing into account the aggregate approach re-
flected in the statutory language of section
362(e)(1), and the purposes and principles
of section 362(e)(1) and (2). The rule ap-
plying an aggregate approach to partner-
ships is set forth in § 1.362-3(d)(2) and is
illustrated in Example 5 of § 1.362-3(f).

### e. Rev. Rul. 84-111 and Rev. Rul. 99-6

One commenter requested that the final
regulations clarify the effect of Rev. Rul.
84-111 (1984-30 IRB 6, 1984-2 CB 88)
and Rev. Rul. 99-6 (1999-6 IRB 6,
1999-1 CB 432) on a transfer of all the
interests in a partnership to a single
transferee in a loss importation transac-
tion. The Treasury Department and the
IRS recognize that guidance would be
helpful in this area but have concluded
that resolution of the complex issues
implicated by those rulings is beyond
the scope of this project. Accordingly,
these final regulations do not address
this issue.

### 2. Comments Related to Other Special Entities

#### a. Anti-avoidance rule

As previously described, the 2013
NPRM would only subject domestic es-
tates, trusts, RICs, REITs, and Coopera-
tives to look-through treatment in certain
abusive situations. One comment sug-
gested that the anti-avoidance rule would
be strengthened if the final regulations
provided certain operating presumptions
or factors to be applied in determining
whether the rule would apply. The Trea-
sury Department and the IRS have con-

sidered this suggestion but determined
that the approach of the 2013 NPRM,
focusing on the existence of a plan to
avoid the anti-loss importation provisions,
is appropriate and administrable. Accord-
ingly, the final regulations do not adopt
this suggestion.

### b. Foreign non-grantor trusts

Another modification suggested by a
commenter would allow a foreign non-
grantor trust to prove that its beneficiaries
were not foreign, in order to avoid treating
gain or loss from its hypothetical sale as
being treated as not subject to federal in-
come tax. The Treasury Department and
the IRS considered the suggestion and de-
termined that such an approach is incon-
sistent with the anti-loss importation pro-
visions and the general approach of the
regulations because, subject to the anti-
abuse rule, all non-grantor trusts, not their
beneficiaries, are treated as transferors for
purposes of the anti-loss importation pro-
visions. In addition, adopting the com-
menter's suggestion would lead to inap-
propriate electivity with respect to the
application of the anti-loss importation
provisions because such an approach
would depend on the identity of the for-
eign non-grantor trust's beneficiaries
rather than a determination of whether the
foreign non-grantor trust is subject to fed-
eral income tax. Accordingly, the final
regulations do not adopt this suggestion.

### c. Trusts with no distributable net income

Another commenter suggested that a
domestic trust should be excepted from
look-through treatment under the anti-
abuse rule if it has no distributable net
income within the meaning of section
643(a) in the taxable year of the transac-
tion. The Treasury Department and the
IRS considered this suggestion and deter-
mined that it could lead to inappropriate
electivity and abuse because the existence
of distributable net income is not control-
ling in determining whether a transfer fur-
thers a plan to avoid the anti-loss impor-
tation provisions. The existence of such a
plan is controlling for determining that the
transfer is subject to the anti-abuse rule.

Accordingly, the final regulations do not
adopt this suggestion.

### d. Tax-exempt transferors of debt- financed property

Under the 2013 NPRM, if a tax-exempt
entity transferred debt-financed property
(as defined in section 514), the disposition
of such property would be subject to fed-
eral income tax and thus the property
could not be importation property. This
rule applied even if there was only a de
minimis amount of indebtedness and so
only a small portion of any gain or loss
would be subject to federal income tax.
Commenters noted the cliff effect and re-
sulting potential for avoidance of the anti-
loss importation provisions. The Treasury
Department and the IRS agree, and the
final regulations adopt an approach that
treats debt-financed property as subject to
federal income tax in proportion to the
amount of such gain or loss that would be
includible in the transferor's UBTI on a
sale under sections 511-514. The final
regulations provide that portions of prop-
erty determined under this rule are gener-
ally treated under the anti-loss importation
provisions in the same manner as portions
of property tentatively divided to reflect
multiple owners of gain or loss on the
property (for example, when a partnership
transfers property to Acquiring).

#### 3. Interaction with Regulations Under Section 367(b)

The proposed regulations requested
comments on the appropriate treatment of
transactions subject to section 367(b) and to
either section 334(b)(1)(B) or 362(e)(1).
Comments were also specifically requested
on what effect a basis reduction required
under section 334(b)(1)(B) or 362(e)(1)
should have on earnings and profits and any
inclusion required under § 1.367(b)-3. One
comment suggested that if an inbound liq-
uidation or inter-group asset reorganization
gives rise to an inclusion of the all earnings
and profits amount under § 1.367(b)-3, the
basis reduction under section 334(b)(1)(B)
or 362(e)(1), respectively, should be re-
duced to allow the transferee corporation to
preserve an amount of built-in loss equal to
the all earnings and profits amount. The
comment suggested that this reduction is

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appropriate because the inclusion of the all
earnings and profits amount is intended, in
part, as a toll charge for importing basis into
the U.S. tax system. However, the comment
acknowledged that if such a rule was ad-
opted, anti-abuse rules would be needed to
address stuffing transactions and consider-
ation should be given to adjusting the re-
duction for foreign tax credits associated
with the inclusion of the all earnings and
profits amount.

The Treasury Department and the IRS
have determined that the basis reduction
should not be affected by an inclusion of
the all earnings and profits amount. First,
there is no indication in section 334(b) or
362(e), or their legislative history, that the
basis reduction should be reduced or oth-
erwise affected by an inclusion of the all
earnings and profits amount. Second, such
a reduction may be contrary to the policies
underlying these provisions. For example,
the built-in loss may have arisen before a
domestic corporation acquires all the
stock of a foreign corporation such that
the built-in loss bears no relation to the all
earnings and profits amount. Finally, de-
termining the extent to which the built-in
loss relates to the all earnings and profits
amount would involve undue complexity.
Accordingly, the final regulations do not
adopt this suggestion. Furthermore, the
final regulations affirmatively state that
the basis reduction does not affect the
calculation of the all earnings and profits
amount.

#### 4. Transferred Basis Transaction

Commenters requested clarification of
whether a transferee's basis in property
continued to be considered determined by
reference to its transferor's basis, notwith-
standing the application of section
334(b)(1)(B) or section 362(e)(1). One
comment specifically related to the appli-
cation of regulations under section 755;
other comments related to the treatment of
the transaction more generally, including
under sections 1223 (holding periods) and
7701(a)(4) (definition of transferred basis
transaction). The Treasury Department
and the IRS have concluded that the ap-
plication of the anti-loss importation pro-
visions to section 332 liquidations or Sec-
tion 362 Transactions should not be
viewed as altering the fundamental nature

of the transactions to which section 334(b),
or section 362(a) or (b), apply. Similarly, the
Treasury Department and the IRS have con-
cluded that the anti-duplication provisions
in section 362(e)(2) and § 1.362-4 should
not be viewed as altering the fundamental
nature of the transactions to which they ap-
ply. Accordingly, the final regulations ex-
pressly provide that, notwithstanding the ap-
plication of the anti-loss importation or anti-
duplication provisions to a transaction, the
transferee's basis is generally considered
determined by reference to the transferor's
basis for federal income tax purposes.

However, solely for purposes of deter-
mining the adjustment to the basis of part-
nership property under section 755 when a
partnership interest is transferred in a loss
importation transaction, the transferee's
basis in the interest will be treated as not
determined by reference to the transfer-
or's basis. The reason for this exception
under section 755 is that the treatment
prescribed under § 1.755-1(b)(2) and (3)
(generally applicable to non-substituted
basis transactions and providing for basis
increases to built-in gain property and ba-
sis decreases to built-in loss property)
mirrors that prescribed under the anti-loss
importation provisions. Accordingly, in
order to align the adjustments to partner-
ship property under § 1.755-1 with those
made under the anti-loss importation pro-
visions, the final regulations provide that,
solely for purposes of applying section
755, a determination of basis under the
anti-loss importation provisions is treated
as not made by reference to the transfer-
or's basis.

#### 5. Applicability of Other Provisions for Determining Basis

A commenter noted that certain lan-
guage in the 2013 NPRM could be read in
a way that was not intended. The 2013
NPRM states the general rule that Acquir-
ing's basis in importation property in a
loss importation transaction is equal to the
value of the property immediately after
the transaction, "[n]otwithstanding any
other provision of law[.]" The comment
indicated that this language could be read
to mean that, if the anti-loss importation
provisions applied to a transaction, the
transaction would not be subject to other
provisions of law, such as section 482,

that could further affect basis. Any such
implication was wholly unintended and
would be inappropriate. Accordingly, the
final regulations clarify that other provi-
sions of law do in fact continue to apply.

#### 6. Miscellaneous

Immediately following the publication
of the 2013 NPRM, a number of questions
were raised regarding cross-references to
the anti-loss importation and anti-
duplication provisions that were proposed
to be included in § 1.358-6 (basis in
triangular reorganizations). Those cross-
references were included solely to put tax-
payers on notice that the anti-loss impor-
tation and anti-duplication provisions
could modify the application of the trian-
gular basis regulations to a transaction
subject to those regulations. No substan-
tive rule was intended or effected by the
proposed cross-references. However, to
clarify the purpose and scope of the cross-
references, the final regulations do not
include the individual cross-references in-
cluded in the 2013 NPRM. Instead, the
final regulations combine these multiple
cross-references into one cross-reference
that is included in the general statement of
scope in § 1.358-6(a).

Commenters also noted a number of
nonsubstantive corrections and clarifica-
tions that have been adopted.

Finally, commenters suggested a num-
ber of issues that could be the subject of
further study, such as the effect of tax
treaties, nonfunctional currency, and the
application of section 7701(g) (clarifica-
tion of fair market value in the case of
non-recourse indebtedness). These issues
are beyond the scope of this project and
are therefore not addressed in these final
regulations. The Treasury Department and
the IRS are considering whether further
study of those issues should be under-
taken.

In addition, nonsubstantive changes to
conform nomenclature with that adopted
in these final regulations, as well as to
correct obvious errors and clarify cross-
references, are made to final regulations
under sections 362(e)(2), 705, and 1367
published under TD 9633.

Finally, these final regulations include
modifications to §§ 1.332-2 and 1.351-1
that reflect certain statutory changes under

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sections 332 (relating to ownership of
subsidiary stock) and 351 (relating to
property permitted to be received by a
transferor without recognition of gain or
loss) proposed by the Treasury Depart-
ment and the IRS in the 2005 NPRM (the
statutory modifications). As no comments
were received with respect to the statutory
modifications, the statutory modifications
are adopted as final regulations without
change.

## Effective/Applicability Date

The final regulations under sections
334(b)(1)(B) and 362(e)(1) generally
adopt the proposed effective date and thus
are applicable to transactions occurring on
or after March 28, 2016, unless completed
pursuant to a binding agreement that was
in effect prior to March 28, 2016, and all
times afterwards. The final regulations also
apply to transactions occurring before March
28, 2016 resulting from entity classification
elections made under § 301.7701-3 that are
filed on or after March 28, 2016. In addi-
tion, the final regulations provide that tax-
payers may apply these rules to any trans-
action occurring after October 22, 2004.

## Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory impact assessment
is not required. It has also been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations.
Further, it is hereby certified that these
final regulations will not have a significant
economic impact on a substantial number
of small entities. This certification is
based on the fact that the collection of
information requirement in these regula-
tions modifies an existing collection of
information by requiring that certain in-
formation be reported separately instead
of in the aggregate. Although there should
be an actual decrease in reporting burden,
since taxpayers would no longer be re-
quired to aggregate the data they collect,
any change is expected to be minimal.
Accordingly, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Code,
the proposed regulations preceding these
final regulations were submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business, and no
comments were received.

## Drafting Information

The principal author of these regula-
tions is John P. Stemwedel of the Office of
Associate Chief Counsel (Corporate),
IRS. However, other personnel from the
Treasury Department and the IRS partic-
ipated in their development.

** * * *

Adoption of Amendments to the Reg-
ulations

Accordingly, 26 CFR part 1 is amended
as follows:

### PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Section 1.334-1 also issued under 26
U.S.C. 367(b).

* * * * *

Section 1.362-3 also issued under 26
U.S.C. 367(b).

* * * * *

Par. 2. Section 1.332-2 is amended by
revising the first sentence of paragraph (a)
and adding paragraph (f) to read as fol-
lows:

#### § 1.332-2 Requirements for nonrecognition of gain or loss.

(a) The nonrecognition of gain or loss
under section 332 is limited to the receipt
of property by a corporation that is the
actual owner of stock (in the liquidating
corporation) meeting the requirements of
section 1504(a)(2). * * *
* * * * *

(f) Applicability date. The first sen-
tence of paragraph (a) of this section ap-
plies to plans of complete liquidation ad-
opted after March 28, 1985, except as
specified in section 1804(e)(6)(B)(ii) and
(iii) of Pub. L. 99-514.

Par. 3 Section 1.332-6 is amended by
revising paragraph (a)(3) and adding a

sentence at the end of paragraph (e) to
read as follows:

§ 1.332-6 Records to be kept and
information to be filed with return.

(a) * * *

(3) The fair market value and basis of
assets of the liquidating corporation that
have been or will be transferred to any
recipient corporation, aggregated as fol-
lows:

(i) Importation property distributed in a
loss importation transaction, as defined in
§ 1.362-3(c)(2) and (3) (except that “sec-
tion 332 liquidation" is substituted for
"section 362 transaction"), respectively;

(ii) Property with respect to which gain
or loss was recognized on the distribution;

(iii) Property not described in para-
graph (a)(3)(i) or (ii) of this section;
* * * * *

(e) Effective/applicability date.
Paragraph (a)(3) of this section applies
with respect to liquidations under section
332 occurring on or after March 28, 2016,
and also with respect to liquidations under
section 332 occurring before such date as
a result of an entity classification election
under § 301.7701-3 of this chapter filed
on or after March 28, 2016, unless such
liquidation is pursuant to a binding agree-
ment that was in effect prior to March 28,
2016 and at all times thereafter.

Par. 4. Section 1.332-7 is amended by
adding a sentence after the first sentence
of the paragraph to read as follows:

§ 1.332-7 Indebtedness of subsidiary to
parent.

See section 337(b)(1).

Par. 5. Section 1.334-1 is revised to
read as follows:

§ 1.334-1 Basis of property received in
liquidations.

(a) In general. Section 334 sets forth
rules for determining a distributee's basis
in property received in a distribution in
complete liquidation of a corporation. The
general rule is set forth in section 334(a)
and provides that, if property is received
in a distribution in complete liquidation of
a corporation and if gain or loss is recog-
nized on the receipt of the property, then
the distributee's basis in the property is

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the fair market value of the property at the
time of the distribution. However, if prop-
erty is received in a complete liquidation
to which section 332 applies, including
property received in satisfaction of an in-
debtedness described in section 337(b)(1),
see section 334(b)(1) and paragraph (b) of
this section.

(b) Liquidations under section 332-
(1) General rule. Except as otherwise pro-
vided in paragraph (b)(2) or (3) of this section,
if a corporation (P) meeting the ownership
requirements of section 332(b)(1) receives
property from a subsidiary (S) in a com-
plete liquidation to which section 332 ap-
plies (section 332 liquidation), including
property received in a transfer in satisfac-
tion of indebtedness that satisfies the re-
quirements of section 337(b)(1), P's basis
in the property received is the same as S's
basis in the property immediately before
the property was distributed. However,
see § 1.460-4(k)(3)(iv)(B)(2) for rules
relating to adjustments to the basis of cer-
tain contracts accounted for using a long-
term contract method of accounting that
are acquired in a section 332 liquidation.

(2) Basis in property with respect to
which gain or loss was recognized. Except
as otherwise provided in Subtitle A of the
Internal Revenue Code (Code) and this
subchapter of the Income Tax Regula-
tions, if S recognizes gain or loss on the
distribution of property to P in a section
332 liquidation, P's basis in that property
is the fair market value of the property at
the time of the distribution. Section
334(b)(1)(A) (certain tax-exempt distribu-
tions under section 337(b)(2)); see also,
for example, § 1.367(e)-2(b)(3)(i).

(3) Basis in importation property re-
ceived in loss importation transaction-
(i) Purpose. The purpose of section
334(b)(1)(B) and this paragraph (b)(3) is
to modify the application of this section to
prevent P from importing a net built-in
loss in a transaction described in section
332. See paragraph (b)(3)(iii)(A) of this
section for definitions of terms used in this
paragraph (b)(3).

(ii) Determination of basis. Notwith-
standing paragraph (b)(1) of this section,
if a section 332 liquidation is a loss im-
portation transaction, P's basis in each
importation property received from S in
the liquidation is an amount that is equal
to the value of the property. The basis of

property received in a section 332 liqui-
dation that is not importation property re-
ceived in a loss importation transaction is
determined under generally applicable ba-
sis rules without regard to whether the
liquidation also involves the receipt of
importation property in a loss importation
transaction.

(iii) Operating rules-(A) In general.
For purposes of section 334(b)(1)(B) and
this paragraph (b)(3), the provisions of
§ 1.362-3 (basis of importation property
received in a loss importation transaction)
apply, adjusted as appropriate to apply to
section 332 liquidations. Thus, when used
in this paragraph (b)(3), the terms "impor-
tation property," "loss importation trans-
action," and "value" have the same mean-
ing as in § 1.362-3(c)(2), (3), and (4),
respectively, except that "the section
332(b)(1) distributee corporation" is sub-
stituted for "Acquiring" and "section 332
liquidation" is substituted for "section 362
transaction." Similarly, when gain or loss
on property would be owned or treated as
owned by multiple persons, the provi-
sions of § 1.362-3(d)(2) apply to tenta-
tively divide the property in applying
this section, substituting "section 332
liquidation" for "section 362 transac-
tion" and making such other adjust-
ments as necessary.

(B) Time for making determinations.
For purposes of section 334(b)(1)(B) and
this paragraph (b)(3)-

(1) P's basis in distributed property.
P's basis in each property S distributes to
P in the section 332 liquidation is deter-
mined immediately after S distributes
each such property;

(2) Value of distributed property. The
value of each property S distributes to P in
the section 332 liquidation is determined
immediately after S distributes the prop-
erty;

(3) Importation property. The determi-
nation of whether each property distrib-
uted by S is importation property is made
as of the time S distributes each such
property;

(4) Loss importation transaction. The
determination of whether a section 332
liquidation is a loss importation transac-
tion is made immediately after S makes
the final liquidating distribution to P.

(C) Effect of basis determination under
this paragraph (b)(3)-(1) Determination

by reference to transferor's basis. A de-
termination of basis under section
334(b)(1)(B) and this paragraph (b)(3) is a
determination by reference to the transfer-
or's basis, including for purposes of sec-
tions 1223(2) and 7701(a)(43). However,
solely for purposes of applying section
755, a determination of basis under this
paragraph (b)(3) is treated as a determina-
tion not by reference to the transferor's
basis.

(2) Not tax-exempt income or noncapi-
tal, nondeductible expense. The applica-
tion of this paragraph (b)(3) does not give
rise to an item treated as tax-exempt in-
come under § 1.1502-32(b)(2)(ii) or as a
noncapital, nondeductible expense under
§ 1.1502-32(b)(2)(iii).

(3) No effect on earnings and profits.
Any determination of basis under this
paragraph (b)(3) does not reduce or oth-
erwise affect the calculation of the all
earnings and profits amount provided in
§ 1.367(b)-2(d).

(iv) Examples. The examples in this
paragraph (b)(3)(iv) illustrate the applica-
tion of section 334(b)(1)(B) and the pro-
visions of this paragraph (b)(3). Unless
the facts indicate otherwise, the examples
use the following nomenclature and as-
sumptions: USP is a domestic corporation
that has not elected to be an S corporation
within the meaning of section 1361(a)(1);
FC, CFC1, and CFC2 are controlled for-
eign corporations within the meaning of
section 957(a), which are not engaged in a
U.S. trade or business, have no U.S. real
property interests, and have no other rela-
tionships, activities, or interests that
would cause their property to be subject to
any tax imposed under subtitle A of the
Code (federal income tax); there is no
applicable income tax treaty; and all per-
sons and transactions are unrelated. All
other relevant facts are set forth in the
examples:

Example 1. Basic application of this paragraph
(b)(3). (i) Distribution of importation property in a
loss importation transaction. (A) Facts. USP owns
the sole outstanding share of FC stock. FC owns
three assets, A1 (basis $40, value $50), A2 (basis
$120, value $30), and A3 (basis $140, value $20).
On Date 1, FC distributes A1, A2, and A3 to USP in
a complete liquidation that qualifies under section
332.

(B) Importation property. Under § 1.362-3(d)(2),
the fact that any gain or loss recognized by a CFC
may affect an income inclusion under section 951(a)
does not alone cause gain or loss recognized by the

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CFC to be treated as taken into account in determin-
ing a federal income tax liability for purposes of this
section. Thus, if FC had sold either A1, A2, or A3
immediately before the transaction, no gain or loss
recognized on the sale would have been taken into
account in determining a federal income tax liability.
Further, if USP had sold A1, A2, or A3 immediately
after the transaction, USP would take into account
any gain or loss recognized on the sale in determin-
ing its federal income tax liability. Therefore, A1,
A2, and A3 are all importation properties. See para-
graph (b)(3)(iii)(A) of this section and § 1.362-
3(c)(2).

(C) Loss importation transaction. Immediately
after the distribution, USP's aggregate basis in the
importation properties, A1, A2, and A3, would, but
for section 334(b)(1)(B) and this section, be $300
($40 + $120 + $140) and the properties' aggregate
value would be $100 ($50 + $30 + $20). Therefore,
the importation properties' aggregate basis would
exceed their aggregate value and the distribution is a
loss importation transaction. See paragraph
(b)(3)(iii)(A) of this section and § 1.362-3(c)(3).

(D) Basis of importation property distributed in
loss importation transaction. Because the importa-
tion properties, A1, A2, and A3, were transferred in
a loss importation transaction, the basis in each of
the importation properties received is equal to its
value immediately after FC distributes the property.
Accordingly, USP's basis in A1 is $50; USP's basis
in A2 is $30; and USP's basis in A3 is $20.

(ii) Distribution of both importation and non-
importation property in a loss importation transac-
tion. (A) Facts. The facts are the same as in para-
graph (i)(A) of this Example 1 except that FC is
engaged in a U.S. trade or business and A3 is used in
that U.S. trade or business.

(B) Importation property. A1 and A2 are impor-
tation properties for the reasons set forth in para-
graph (i)(B) of this Example 1. However, if FC had
sold A3 immediately before the transaction, FC
would take into account any gain or loss recognized
on the sale in determining its federal income tax
liability. Therefore, A3 is not importation property.
See paragraph (b)(3)(iii)(A) of this section and
§ 1.362-3(c)(2).

(C) Loss importation transaction. Immediately
after the distribution, USP's aggregate basis in the
importation properties, A1 and A2, would, but for
section 334(b)(1)(B) and this section, be $160 ($40
\+ $120). Further, the properties' aggregate value
would be $80 ($50 + $30). Therefore, the importa-
tion properties' aggregate basis would exceed their
aggregate value and the distribution is a loss impor-
tation transaction. See paragraph (b)(3)(iii)(A) of
this section and § 1.362-3(c)(3).

(D) Basis of importation property distributed in
loss importation transaction. Because the importa-
tion properties, A1 and A2, were transferred in a loss
importation transaction, the basis in each of the
importation properties received is equal to its value
immediately after FC distributes the property. Ac-
cordingly, USP's basis in A1 is $50 and USP's basis
in A2 is $30.

(E) Basis of other property. Because A3 is not
importation property distributed in a loss importation
transaction, USP's basis in A3 is determined under
generally applicable basis rules. Accordingly, USP's

basis in A3 is $140, the adjusted basis that FC had in
the property immediately before the distribution. See
section 334(b)(1).

(iii) FC not wholly owned. The facts are the same
as in paragraph (i)(A) of this Example 1 except that
USP owns only 80% of the sole outstanding class of
FC stock and the remaining 20% is owned by indi-
vidual X. Further, on Date 1 and pursuant to the plan
of liquidation, FC distributes A1 and A2 to USP and
A3 to X. A1 and A2 are importation properties, the
distribution to USP is a loss importation transaction,
and USP's bases in A1 and A2 are equal to their
value ($50 and $30, respectively) for the reasons set
forth in paragraphs (ii)(C) and (D) of this Example 1.
Under section 334(a), X's basis in A3 is $20.

(iv) Importation property, no net built in loss.
(A) Facts. The facts are the same as in paragraph
(i)(A) of this Example 1 except that the value of A2
is $230.

(B) Importation property. A1, A2, and A3, are
importation properties for the reasons set forth in
paragraph (i)(B) of this Example 1.

(C) Loss importation transaction. Immediately
after the distribution, USP's aggregate basis in the
importation properties, A1, A2, and A3, would, but
for section 334(b)(1)(B) and this section, be $300
($40 + $120 + $140). However, the properties'
aggregate value would also be $300 ($50 + $230 +
$20). Therefore, the importation properties' aggre-
gate basis would not exceed their aggregate value and
the distribution is not a loss importation transaction.
See paragraph (b)(3)(iii)(A) of this section and
§ 1.362-3(c)(3).

(D) Basis of importation property not distributed
in loss importation transaction. Because the impor-
tation properties, A1, A2, and A3, were not distrib-
uted in a loss importation transaction, the basis of
each of the importation properties is determined un-
der the generally applicable basis rules. Accordingly,
immediately after the distribution, USP's basis in A1
is $40, USP's basis in A2 is $120, and USP's basis
in A3 is $140, the adjusted bases that FC had in the
properties immediately before the distribution. See
section 334(b)(1).

(v) CFC stock as importation property distrib-
uted in loss importation transaction. (A) Facts. USP
owns the sole outstanding share of FC stock. FC
owns the sole outstanding share of CFC1 stock (ba-
sis $80, value $100) and the sole outstanding share
of CFC2 stock (basis $100, value $5). On Date 1, FC
distributes its shares of CFC1 and CFC2 stock to
USP in a complete liquidation that qualifies under
section 332.

(B) Importation property. No special rule applies
to the treatment of property that is the stock of a
CFC. Thus, if FC had sold either the CFC1 share or
the CFC2 share immediately before the transaction,
no gain or loss recognized on the sale would have
been taken into account in determining a federal
income tax liability. Further, if USP had sold either
the CFC1 share or the CFC2 share immediately after
the transaction, USP would take into account any
gain or loss recognized on the sale in determining its
federal income tax liability. Thus, the CFC1 share
and the CFC2 share are importation property. See
paragraph (b)(3)(iii)(A) of this section and
§ 1.362-3(c)(2).

(C) Loss importation transaction. Immediately
after the distribution, USP's aggregate basis in im-
portation property (the CFC1 share and the CFC2
share) would, but for section 334(b)(1)(B) and this
section, be $180 ($80 + $100) and the shares' ag-
gregate value is $105 ($100 + $5). Therefore, the
importation property's aggregate basis would exceed
their aggregate value and the distribution is a loss
importation transaction. See paragraph (b)(3)(iii)(A)
of this section and § 1.362-3(c)(3).

(D) Basis of importation property distributed in
loss importation transaction. Because the importa-
tion property (the CFC1 share and the CFC2 share)
was transferred in a loss importation transaction,
USP's basis in each of the shares received is equal to
its value immediately after FC distributes the shares.
Accordingly, USP's basis in the CFC1 share is $100
and USP's basis in the CFC2 share is $5.

Example 2. Multiple step liquidation. (i) Facts.
USP owns the sole outstanding share of FC stock.
On January 1 of year 1, FC adopts a plan of liqui-
dation. FC makes the following distributions to USP
in a transaction that qualifies as a complete liquida-
tion under section 332. In year 1, FC distributes A1
and, immediately before the distribution, FC's basis
in Al is $100 and Al's value is $120. In Year 2, FC
distributes A2, and, immediately before the distribu-
tion, FC's basis in A2 is $100 and A2's value is
$120. In year 3, in its final liquidating distribution,
FC distributes A3 and, immediately before the dis-
tribution, FC's basis in A3 is $100 and A3's value is
$120. As of the time of the final distribution, USP
had depreciated the bases of A1 and A2 to $90 and
$95, respectively; the value of A1 had appreciated to
$160; and, the value of A2 has declined to $0.

(ii) Importation property. If FC had sold either
A1, A2, or A3 immediately before it was distributed,
no gain or loss recognized on the sale would have
been taken into account in determining a federal
income tax liability. Further, if USP had sold either
A1, A2, or A3 immediately after it was distributed,
USP would take into account any gain or loss rec-
ognized on the sale in determining its federal income
tax liability. Therefore, A1, A2, and A3 are all
importation properties. See paragraph (b)(3)(iii)(A)
of this section and § 1.362-3(c)(2).

(iii) Loss importation transaction. Immediately
after it was distributed, USP's basis in each of the
importation properties, A1, A2, and A3, would, but
for section 334(b)(1)(B) and this section, have been
$100. Further, immediately after each such property
was distributed, its value was $120. Thus, the prop-
erties' aggregate basis, $300, would not have ex-
ceeded the properties' aggregate value, $360. Ac-
cordingly, the distribution is not a loss importation
transaction irrespective of the fact that, when the
liquidation was completed, the properties' aggregate
basis was $285 and the properties' aggregate value
was $280. See paragraph (b)(3)(iii)(B) of this section
and § 1.362-3(c)(3).

(iv) Basis of importation property not distributed
in loss importation transaction. Because the impor-
tation properties, A1, A2, and A3, were not distrib-
uted in a loss importation transaction, the basis of
each of the importation properties is determined un-
der the generally applicable basis rules. Accordingly,
USP takes each of the properties with a basis of $100
and, immediately after the final distribution, has an

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adjusted basis of $90 in A1 (USP's $100 basis less
the $10 depreciation), $95 in A2 (USP's $100 basis
less the $5 depreciation), and $100 in A3. See sec-
tion 334(b).

(c) Applicability date. This section ap-
plies with respect to liquidations occur-
ring on or after March 28, 2016, and also
with respect to liquidations occurring be-
fore such date as a result of an entity
classification election under § 301.7701-3
of this chapter filed on or after March 28,
2016, unless such liquidation is pursuant
to a binding agreement that was in effect
prior to March 28, 2016 and at all times
thereafter. In addition, taxpayers may ap-
ply this section to any section 332 liqui-
dation occurring after October 22, 2004.

Par. 6. Section 1.337-1 is added to read
as follows:

§ 1.337-1 Nonrecognition for property
distributed to parent in complete
liquidation of subsidiary.

(a) General rule. If sections 332(a) and
337 are applicable with respect to the re-
ceipt of a subsidiary's property in com-
plete liquidation, no gain or loss is recog-
nized to the liquidating subsidiary with
respect to such property (including prop-
erty distributed with respect to indebted-
ness, see section 337(b)(1) and § 1.332-7),
except as provided in section 337(b)(2)
(distributions to certain tax-exempt distribu-
tees), section 367(e)(2) (distributions to
foreign corporations), and section 897(d)
(distributions of U.S. real property inter-
ests by foreign corporations).

(b) Aplicability date. This section ap-
plies to any taxable year beginning on or
after March 28, 2016.

Par. 7. Section 1.351-1 is amended by:

1\. Adding headings for paragraphs (a)
and (a)(1) and revising the first sentence
of paragraph (a)(1) introductory text.

2\. Adding a sentence after the fifth
sentence in paragraph (a)(1) introductory
text and removing the phrase "For pur-
poses of this section" at the end of para-
graph (a)(1) introductory text and adding
in its place the phrase "In addition, for
purposes of this section".

3\. Revising paragraphs (a)(1)(i) and (ii).

4\. Removing the undesignated para-
graph immediately following paragraph
(a)(1)(ii).

5\. Adding a heading for paragraph (a)(2).

6\. Adding a heading for paragraph (b)
and revising paragraph (b)(1).

7\. Adding a heading for paragraph
(b)(2).

8\. Adding paragraph (d).

The additions and revisions read as fol-
lows:

§ 1.351-1 Transfer to corporation
controlled by transferor.

(a) In general-(1) Nonrecognition of
gain or loss. Section 351(a) provides, in
general, for the nonrecognition of gain or
loss upon the transfer by one or more
persons of property to a corporation solely
in exchange for stock of such corporation
if, immediately after the exchange, such
person or persons are in control of the
corporation to which the property was
transferred. * * * For purposes of this
section, stock rights and stock warrants
are not included in the term stock. * * *

(i) Stock will not be treated as issued
for property if it is issued for services
rendered or to be rendered to or for the
benefit of the issuing corporation; and

(ii) Stock will not be treated as issued
for property if it is issued for property
which is of relatively small value in com-
parison to the value of the stock already
owned (or to be received for services) by
the person who transferred such property
and the primary purpose of the transfer is
to qualify under this section the exchanges
of property by other persons transferring
property.

(2) Application. * * *

* * * * *

(b) Multiple transferors-(1) Dispro-
portionate transfers. When property is
transferred to a corporation by two or
more persons in exchange for stock, as
described in paragraph (a) of this section,
and the stock received is disproportionate
to the transferor's prior interest in such
property, the entire transaction will be
given tax effect in accordance with its true
nature, and the transaction may be treated
as if the stock had first been received in
proportion and then some of such stock
had been used to make gifts (section 2501
and following), to pay compensation (sec-
tions 61(a)(1) and 83(a)), or to satisfy
obligations of the transferor of any kind.

(2) Application.

* * * * *

(d) Applicability date. Paragraphs
(a)(1) and (b)(1) of this section apply to
transfers after October 2, 1989, for tax
years ending after such date, except as
specified in section 7203(c)(2) and (3) of
Pub. L. 101-239.

Par. 8. Section 1.351-3 is amended by
revising paragraphs (a)(3) and (b)(3), and
adding a sentence at the end of paragraph
(f) to read as follows:

§ 1.351-3 Records to be kept and
information to be filed.

(a) * * *

(3) The fair market value and basis of
the property transferred by such transferor
in the exchange, determined immedi-
ately before the transfer and aggregated
as follows:

(i) Importation property transferred in
a loss importation transaction, as defined
in § 1.362-3(c)(2) and (3), respectively;

(ii) Loss duplication property as de-
fined in § 1.362-4(g)(1);

(iii) Property with respect to which any
gain or loss was recognized on the transfer
(without regard to whether such property
is also identified in paragraph (a)(3)(i) or
(ii) of this section); and

(iv) Property not described in para-
graph (a)(3)(i), (ii), or (iii) of this section.
* * * * *

(b) * * *

(3) The fair market value and basis of
property received in the exchange, deter-
mined immediately before the transfer and
aggregated as follows:

(i) Importation property transferred in
a loss importation transaction, as defined
in § 1.362-3(c)(2) and (3), respectively;

(ii) Loss duplication property as de-
fined in § 1.362-4(g)(1);

(iii) Property with respect to which any
gain or loss was recognized on the transfer
(without regard to whether such property
is also identified in paragraph (b)(3)(ii) of
this section);

(iv) Property not described in para-
graph (b)(3)(i), (ii), or (iii) of this section;
and

* * * * *

(f) Effective/applicability date.
Paragraphs (a)(3) and (b)(3) of this sec-
tion apply with respect to exchanges un-
der section 351 occurring on or after
March 28, 2016, and also with respect to

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exchanges under section 351 occurring
before such date as a result of an entity
classification election under § 301.7701-3
of this chapter filed on or after March 28,
2016, unless such exchange is pursuant to
a binding agreement that was in effect
prior to March 28, 2016 and at all times
thereafter.

Par. 9. Section 1.358-6 is amended by
adding a sentence at the end of paragraph
(a), revising paragraphs (c)(4) introduc-
tory text, (e), and the first sentence of
paragraph (f)(3), and adding paragraph
(f)(4) to read as follows:

§ 1.358-6 Stock basis in certain
triangular reorganizations.

(a) Scope. * * * See also sections
362(e)(1) and 362(e)(2) for further adjust-
ments to basis that may be necessary un-
der either or both of those sections.

* * * * *

(c) * * *

(4) Examples. The rules of this para-
graph (c) are illustrated by the following
examples. For purposes of these exam-
ples, P, S, and T are domestic corpora-
tions, the property transferred is not im-
portation property within the meaning of
§ 1.362-3(c)(2) or loss duplication property
within the meaning of § 1.362-4(g)(1), P
and S do not file consolidated returns, P
owns all of the shares of the only class of S
stock, the P stock exchanged in the transac-
tion satisfies the requirements of the appli-
cable triangular reorganization provisions,
and the facts set forth the only corporate
activity.

* * * * *

(e) Cross-references-(1) Triangular
reorganizations involving members of a
consolidated group. For rules relating to
stock basis adjustments made as a result
of a triangular reorganization in which P
and S, or P and T, as applicable, are, or
become, members of a consolidated
group, see § 1.1502-30. However, if a
transaction is a group structure change,
stock basis adjustments are determined
under § 1.1502-31 and not under
§ 1.1502-30, even if the transaction also
qualifies as a reorganization otherwise
subject to § 1.1502-30.

(2) Triangular reorganizations involv-
ing certain foreign corporations. For rules
relating to stock basis adjustments made

as a result of triangular reorganizations
involving certain foreign corporations, see
§§ 1.367(b)-4(b), 1.367(b)-10, and
1.367(b)-13.

(f) * * *

(3) Triangular G reorganization and
special rule for triangular reorganiza-
tions involving members of a consolidated
group. Paragraph (e)(1) of this section
shall apply to triangular reorganizations
occurring on or after September 17, 2008.
* * *

(4) Triangular reorganizations involv-
ing importation property acquired in loss
importation transaction or loss duplica-
tion transaction; triangular reorganiza-
tions involving certain foreign corpora-
tions. Paragraphs (a) and (e)(2) of this
section apply to triangular reorganizations
occurring after October 22, 2004 unless
effected to a binding agreement that was
in effect prior to that date and at all times
thereafter.

Par. 10. Section 1.362-3 is added to
read as follows:

§ 1.362-3 Basis of importation property
acquired in loss importation transaction.

(a) Purpose. The purpose of section
362(e)(1) and this section is to modify the
application of section 362(a) (section 351
transfers, contributions to capital, or
paid-in surplus) and section 362(b) (reor-
ganizations) to prevent a corporation (Ac-
quiring) from importing a net built-in loss
in a transaction described in either section.
See paragraph (c) of this section for def-
initions of terms used in this section.

(b) Basis determinations under this
section-(1) Basis of importation prop-
erty received in loss importation transac-
tion. Notwithstanding the general rules of
section 362(a) and (b), Acquiring's basis
in importation property (as defined in
paragraph (c)(2) of this section) acquired
in a loss importation transaction (as de-
fined in paragraph (c)(3) of this section) is
equal to the value of the property imme-
diately after the transaction.

(2) Adjustment to basis of subsidiary
stock in triangular reorganizations. If a
corporation (P) computes its basis in stock
of a subsidiary (whether S or T) under
§ 1.358-6 (stock basis in certain triangu-
lar reorganizations), P's basis in property
treated as acquired by P in § 1.358-6(c) is

determined under section 362(e)(1) and
this section to the extent such property, if
actually acquired by P, would be importa-
tion property acquired in a loss importation
transaction. See § 1.358-6(c)(1)(i)(A),
(c)(2)(ii)(B), and (c)(3)(i). The subsidiary's
basis in the property actually acquired in the
transaction is determined under applicable
law (including this section), without regard
to the amount of any adjustment to P's basis
in the subsidiary's stock. Thus, the basis of
the property in S's or T's hands may differ
from the amount of the adjustment to P's
basis in its stock of S or T.

(3) Acquiring's basis in other property
transferred. In general, Acquiring's basis
in property received in a section 362
transaction (as defined in paragraph (c)(1)
of this section) that is not determined un-
der section 362(e)(1) and this section is
determined under section 362(a) or sec-
tion 362(b). However, if the transaction is
described in section 362(a) (without re-
gard to whether it is also described in any
other section), further adjustment may be
required under section 362(e)(2). See
§ 1.362-4.

(4) Other effects of basis determination
under this section-(i) Determination by
reference to transferor's basis. A determi-
nation of basis under this section is a
determination by reference to the transfer-
or's basis, including for purposes of sec-
tions 1223(2) and 7701(a)(43). However,
solely for purposes of applying section
755, a determination of basis under this
section is treated as a determination not by
reference to the transferor's basis.

(ii) Not tax-exempt income or noncapi-
tal, nondeductible expense. The applica-
tion of this section does not give rise to an
item treated as tax-exempt income under
§ 1.1502-32(b)(2)(ii) or as a noncapital,
nondeductible expense under § 1.1502-
32(b)(2)(iii).

(iii) No effect on earnings and profits.
Any determination of basis under this sec-
tion does not reduce or otherwise affect the
calculation of the all earnings and profits
amount provided in § 1.367(b)-2(d).

(c) Definitions. For purposes of this
section, the following definitions apply:

(1) Section 362 transaction. The term
section 362 transaction means any trans-
action described in section 362(a) or in
section 362(b).

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(2) Importation property-(i) General
rule. The term importation property
means any property (including separate
portions determined under paragraph
(d)(4) of this section and separate portions
of property tentatively divided under para-
graph (e)(2) of this section) with respect
to which-

(A) Any gain or loss that would be
recognized on its sale by the transferor
immediately before the transaction (the
transferor's hypothetical sale) would not
be subject to tax imposed under any pro-
vision of subtitle A of the Internal Reve-
nue Code (federal income tax) (taking into
account the provisions of paragraph (d) of
this section); and

(B) Any gain or loss that would be
recognized on its sale by Acquiring im-
mediately after the transaction (Acquir-
ing's hypothetical sale) would be subject
to federal income tax (taking into account
the provisions of paragraph (d) of this
section).

(ii) Special rules for applying this
paragraph (c)(2). See paragraph (d) of
this section for rules for determining
whether gain or loss on a hypothetical sale
would be taken into account in determin-
ing a federal income tax liability and para-
graph (e) of this section for rules applica-
ble when more than one person would
take such gain or loss into account.

(3) Loss importation transaction. The
term loss importation transaction means
any section 362 transaction in which Ac-
quiring's aggregate basis in all importa-
tion property received from all transferors
in the transaction would exceed the aggre-
gate value of such property immediately
after the transaction. For this purpose, Ac-
quiring's basis in property received is de-
termined without regard to this section or
section 362(e)(2).

(4) Value-(i) General rule. The term
value means fair market value.

(ii) Special rule for transfers of part-
nership interests. Notwithstanding the
general rule in paragraph (c)(4)(i) of this
section, when referring to a partnership
interest, for purposes of this section, the
term value means the sum of the cash that
Acquiring would receive for the interest,
assuming an exchange between a willing
buyer and a willing seller (neither being
under any compulsion to buy or sell and
both having reasonable knowledge of rel-

evant facts), increased by any § 1.752-1
liabilities (as defined in § 1.752-1(a)(4))
of the partnership allocated to Acquiring
with regard to such transferred interest
under section 752 immediately after the
transfer to Acquiring. If a partnership
has elected under section 754, or if sec-
tion 743(b) would require a downward
basis adjustment to the partnership
property, the partnership must apply
the rules of § 1.743-1 to determine the
amount of the basis adjustment to the
partnership property.

(d) Rules for determining whether gain
or loss would be taken into account in
determining a federal income tax liabili-
ty-(1) General rule. In general, any gain
or loss that would be recognized on a
hypothetical sale described in paragraph
(c)(2) of this section is considered to be
subject to federal income tax if, taking
into account all relevant facts and circum-
stances, such gain or loss would affect or
be taken into account in determining the
federal income tax liability of the trans-
feror or Acquiring, respectively. This de-
termination is made without regard to
whether such person has or would have
any actual federal income tax liability for
the taxable year of the transaction.

(2) Look-through rule in the case of
certain pass-through entities. Notwith-
standing the general rule in paragraph
(d)(1) of this section, the determination of
whether any gain or loss on a hypothetical
sale would be treated as subject to federal
income tax is made by reference to the
person that would be required to include
such gain or loss in its taxable income if
the hypothetical seller is-

(i) A trust treated as owned by its
grantors or others (see section 671);

(ii) A partnership (see section 701); or

(iii) An S corporation (see sections
1363 and 1366).

(3) Controlled foreign corporation
(CFC), passive foreign investment com-
pany (PFIC). For purposes of this section,
gain or loss that would be recognized by a
CFC (as defined in section 957(a)) or a
PFIC (as defined in section 1297(a)) is not
deemed taken into account in determining
a federal income tax liability solely be-
cause it could affect an inclusion under
section 951(a) or section 1293(a).

(4) Special rule for debt-financed prop-
erty subject to section 512. If property is

debt-financed property (as defined in sec-
tion 514(b)) owned by an organization
subject to the unrelated business income
tax described in section 511(a)(2) and, as
a result, a portion of any gain or loss on a
sale of the property would be included in
unrelated taxable business income (UBTI)
under section 512, such property is treated
as divided into separate portions in pro-
portion to the amount of such gain or loss
that would be includible in UBTI. The
rules of paragraph (e) of this section apply
to determine the characterization of such
portions (as includible in the determina-
tion of a federal income tax liability or
not), and the tax treatment and conse-
quences of the transaction in which such
portions are transferred.

(5) Look-through treatment in the case
of certain avoidance transactions-(i)
Application of this paragraph (d)(5). This
paragraph (d)(5) applies if-

(A) The transferor is a domestic entity
that is a trust (other than a trust described
in paragraph (d)(2)(i) of this section), es-
tate, regulated investment company (as
defined in section 851(a)), a real estate
investment trust (as defined in section
856(a)), or a cooperative (as described in
section 1381); and

(B) The transferor transfers, directly or
indirectly, property that was transferred to
or acquired by it as part of a plan (whether
of transferor, Acquiring, or any other per-
son) to avoid the application of section
362(e)(1) and this section to a section 362
transaction.

(ii) Effect of application of this para-
graph (d)(5). Notwithstanding paragraph
(d)(1) of this section, if a transferor is
described in both paragraphs (d)(5)(i)(A)
and (B) of this section-

(A) The transferor is treated as though
it distributes the proceeds of the hypothet-
ical sale (which, for this purpose, are pre-
sumed to be an amount greater than zero);

(B) To the fullest extent possible under
the transferor's organizing instrument, the
deemed distribution is treated as made to a
distributee or distributees that would not
take distributions from the transferor into
account in determining a federal income
tax liability; and

(C) The determination of whether the
gain or loss on the hypothetical sale is
treated as subject to federal income tax is

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made by reference to the deemed distrib-
utee or distributees.

(iii) Tiered entities. If a deemed distrib-
utee is an entity described in paragraph
(d)(5)(i)(A) of this section, the determina-
tion of whether gain or loss on the hypo-
thetical sale is taken into account in de-
termining a federal income tax liability is
made by treating the deemed distributee,
and any successive such deemed distribu-
tees, as a transferor and applying the rules
in paragraphs (d)(5)(i) and (ii) of this sec-
tion to its deemed distribution (and to all
successive deemed distributions), until no
deemed distributee or successive deemed
distributee is an entity described in para-
graph (d)(5)(i)(A) of this section.

(e) Special rules for gain or loss that
would be taken into account by multiple
persons-(1) In general. If gain or loss
from a disposition of property would be
includible in income by more than one
person, the property is treated as tenta-
tively divided into separate portions in
proportion to the amount of gain or loss
recognized with respect to the property
that would be allocated to each such per-
son. If an entity's organizing instrument
specially allocates gain and loss, the ten-
tative division of property under this para-
graph (e) must reflect the manner in which
gain or loss on the disposition of such
property would be allocated under the
terms of the organizing instrument and
any applicable rules of law, taking into
account the net gain or loss actually rec-
ognized by the entity in that tax year.

(2) Application of section. The rules of
this section apply independently to each
tentatively divided portion to determine if
the portion is importation property. Each
tentatively divided portion that is deter-
mined to be importation property is in-
cluded with all other importation property
in the determination of whether the trans-
action is a loss importation transaction.

(3) Acquiring's basis in property ten-
tatively divided into separate portions.
Immediately after the application of sec-
tion 362(e)(1) and this section and before
the application of section 362(e)(2), each
property treated as tentatively divided into
separate portions for purposes of applying
section 362(e)(1) and this section ceases
to be treated as tentatively divided and
Acquiring has a single, undivided basis in
such property that is equal to the sum of-

(i) The value of each tentatively di-
vided portion that is importation property,
if the transaction is a loss importation
transaction; and

(ii) Acquiring's basis in each tenta-
tively divided portion that is not importa-
tion property received in a loss importa-
tion transaction, as determined under
section 362(a) or section 362(b), as appli-
cable, and without regard to any potential
application of section 362(e)(2).

(f) Examples. The examples in this
paragraph (f) illustrate the application of
section 362(e)(1) and the provisions of
this section. Unless otherwise indicated,
the examples use the following nomencla-
ture and assumptions: A and B are U.S.
citizens. DC, DC1, and P are domestic
corporations that have not elected to be S
corporations within the meaning of sec-
tion 1361(a)(1) and that are not members
of a consolidated group. F is a foreign
individual. FP is a foreign partnership.
FC, FC1, and FC2 are foreign corpora-
tions. Unless the facts indicate otherwise,
the foreign individuals, corporations, and
partnerships are not engaged in a U.S.
trade or business, have no U.S. real prop-
erty interests, and have no other relation-
ships, activities, or interests that would
cause them, their shareholders, their part-
ners, or their property to be subject to
federal income tax. There is no applicable
income tax treaty, all persons' tax years
are calendar years, and all persons and
transactions are unrelated unless the facts
indicate otherwise.

Example 1. Basic application of section. (i) Sec-
tion 351 transfer of importation property in a loss
importation transaction. (A) Facts. FC owns three
assets, A1 (basis $40, value $150), A2 (basis $120,
value $30), and A3 (basis $140, value $20). On Date
1, FC transfers A1, A2, and A3 to DC in a transac-
tion to which section 351 applies.

(B) Importation property. If FC had sold A1, A2,
or A3 immediately before the transaction, no gain or
loss recognized on the sale would have been taken
into account in determining a federal income tax
liability. Further, if DC had sold A1, A2, or A3
immediately after the transaction, DC would take
into account any gain or loss recognized on the sale
in determining its federal income tax liability. There-
fore, A1, A2, and A3 are all importation properties.
See paragraph (c)(2) of this section.

(C) Loss importation transaction. FC's transfer
of A1, A2, and A3 is a section 362 transaction.
Furthermore, but for section 362(e)(1) and this sec-
tion and section 362(e)(2), DC's aggregate basis in
the importation properties, A1, A2, and A3, would
be $300 ($40 + $120 + $140) under section 362(a)
and the properties' aggregate value would be $200

($150 + $30 + $20). Therefore, the importation
properties' aggregate basis would exceed their ag-
gregate value and the transaction is a loss importa-
tion transaction. See paragraph (c)(3) of this section.

(D) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erties, A1, A2, and A3, were transferred in a loss
importation transaction, paragraph (b)(1) of this sec-
tion applies and DC's basis in A1, A2, and A3 will
each be equal to the property's value ($150, $30, and
$20, respectively) immediately after the transfer.

(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section, DC's
aggregate basis in the transferred properties would
not exceed their aggregate value immediately after
the transfer. Therefore, FC does not have a net
built-in loss, FC's transfer is not a loss duplication
transaction, and section 362(e)(2) does not apply to
this transaction. DC's bases in A1, A2, and A3, as
determined under paragraph (i)(D) of this Example
1, are $150, $30, and $20, respectively. Under sec-
tion 358(a), FC receives the DC stock with a basis of
$300 (the sum of FC's bases in A1, A2, and A3
immediately before the exchange).

(ii) Reorganization. The facts are the same as in
paragraph (i)(A) of this Example 1 except that, in-
stead of transferring property to DC in a section 351
exchange, FC merges with and into DC in a trans-
action described in section 368(a)(1)(A). The analy-
sis and results are the same as set forth in paragraphs
(i)(B), (C), and (D) of this Example 1. However, the
analysis in paragraph (i)(E) of this Example 1 does
not apply to these facts because the transaction is not
subject to 362(e)(2) and § 1.362-4. Under section
358(a), FC's shareholders will take the DC stock
with a basis determined by reference to their FC
stock basis.

(iii) FC's property used in U.S. trade or busi-
ness. (A) Facts. The facts are the same as in para-
graph (i)(A) of this Example 1, except that FC is
engaged in a U.S. trade or business and uses all the
properties in that U.S. trade or business. In this case,
none of the properties would be importation property
because FC would take any gain or loss on the
disposition of the properties into account in deter-
mining its federal income tax liability. Accordingly,
this section does not apply to the transaction.

(B) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC's aggregate basis in the transferred
properties would be $300 ($40 + $120 + $140)
under section 362(a) and the properties' aggregate
value immediately after the transfer would be $200
($150 + $30 + $20). Therefore, FC has a net
built-in loss and FC's transfer of A1, A2, and A3 is
a loss duplication transaction. Accordingly, under
the general rule of section 362(e)(2), FC's $100 net
built-in loss ($300 aggregate basis over $200 aggre-

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gate value) would be allocated proportionately (by
the amount of built-in loss in each property) to
reduce DC's basis in the loss properties, A2 and A3.
See § 1.362-4. As a result, DC's basis in A2 would
be $77.14 ($120 basis under section 362(a) reduced
by $42.86, A2's proportionate share of FC's net
built-in loss, computed as $90/$210 x $100) and
DC's basis in A3 would be $82.86 ($140 basis under
section 362(a) reduced by $57.14, A3's proportion-
ate share of FC's net built-in loss, computed as
$120/$210 x $100). However, if FC and DC were to
elect under section 362(e)(2)(C) to apply the $100
basis reduction to FC's basis in the DC stock re-
ceived in the transaction, DC's bases in A2 and A3
would remain their section 362(a) bases of $120 and
$140, respectively. Under section 362(a), DC's basis
in A1 is $40 (irrespective of whether the section
362(e)(2)(C) election is made). If FC and DC do not
make a section 362(e)(2)(C) election, FC's basis in
the DC stock received in the exchange will be $300;
if FC and DC do make the election, FC's basis in the
DC stock will be $200 ($300 - $100 net built-in
loss). See § 1.362-4(b).

Example 2. Multiple transferors. (i) Facts. The
facts are the same as in paragraph (i)(A) of Example
1 of this paragraph (f), except that FC only owns A1
(basis $40, value $150) and A2 (basis $120, value
$30) and F owns A3 (basis $140, value $20). On
Date 1, FC transfers A1 and A2, and F transfers A3,
to DC in a single transaction described in section
351.

(ii) Importation property. A1 and A2 are impor-
tation properties for the reasons set forth in para-
graph (i)(B) of Example 1 of this paragraph (f). A3 is
also an importation property because, if F had sold
A3 immediately before the transaction, no gain or
loss recognized on the sale would have been taken
into account in determining a federal income tax
liability, and, further, if DC had sold A3 immediately
after the transaction, DC would take into account any
gain or loss recognized on the sale in determining its
federal income tax liability.

(iii) Loss importation transaction. The transfers
by FC and F are a section 362 transaction. The
transaction is a loss importation transaction for the
reasons set forth in paragraph (i)(C) of Example 1 of
this paragraph (f) (notwithstanding that one of the
transferors, FC, did not transfer a net built-in loss).
See paragraph (c)(3) of this section.

(iv) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erties, A1, A2, and A3, were transferred in a loss
importation transaction, paragraph (b)(1) of this sec-
tion applies and DC's basis in A1, A2, and A3 will
each be equal to the property's value ($150, $30, and
$20, respectively) immediately after the transfer.

(v) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. The application of section
362(e)(2) is determined separately for each trans-
feror. See § 1.362-4(b). Taking into account the
application of section 362(e)(1) and this section,
neither DC's aggregate basis in FC's properties nor
DC's basis in F's property would exceed the prop-
erties' respective values immediately after the trans-

action. Therefore neither FC nor F has a net built-in
loss, neither transfer is a loss duplication transaction,
and section 362(e)(2) does not apply to either trans-
fer. DC's bases in A1, A2, and A3, as determined
under paragraph (iv) of this Example 2, are $150,
$30, and $20, respectively. Under section 358(a),
FC's basis in the DC stock received is $160 ($40 +
$120) and F's basis in the DC stock received in the
exchange is $140.

Example 3. Transfer of importation and non-
importation property. (i) Facts. As in paragraph (i)
of Example 2, FC owns A1 (basis $40, value $150)
and A2 (basis $120, value $30), and F owns A3
(basis $140, value $20). In addition, A2 is a U.S. real
property interest as defined in section 897(c)(1). On
Date 1, FC transfers A1 and A2, and F transfers A3, to
DC in a single transaction described in section 351.

(ii) Importation property. A1 and A3 are impor-
tation properties for the reasons set forth in para-
graph (i)(B) of Example 1 and paragraph (ii) of
Example 2 of this paragraph (f), respectively. How-
ever, A2 is not importation property because, if FC
had sold A2 immediately before the transaction, FC
would take into account any gain or loss recognized
on the sale in determining its federal income tax
liability.

(iii) Loss importation transaction. FC's and F's
transfer is a section 362 transaction. Furthermore,
but for section 362(e)(1) and this section and section
362(e)(2), DC's aggregate basis in the importation
properties, A1 and A3, would be $180 ($40 + $140)
and the properties' aggregate value would be $170
($150 + $20) immediately after the transaction.
Therefore, the importation properties' aggregate ba-
sis would exceed their aggregate value immediately
after the transaction, and the transfer is a loss im-
portation transaction.

(iv) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erties, A1 and A3, were transferred in a loss impor-
tation transaction, paragraph (b)(1) of this section
applies and DC's basis in A1 and in A3 will each be
equal to the property's value ($150 and $20, respec-
tively) immediately after the transfer.

(v) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. The application of section
362(e)(2) is determined separately for each trans-
feror. See § 1.362-4(b).

(A) FC's transfer. Taking into account the ap-
plication of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC would have an aggregate basis of
$270 in the transferred properties ($150 in A1, as
determined under paragraph (iv) of this Example 3,
plus $120 in A2, determined under section 362(a)),
and the properties would have an aggregate value of
$180 ($150 + $30) immediately after the transfer.
Therefore, FC has a net built-in loss and FC's trans-
fer of A1 and A2 is a loss duplication transaction.
Accordingly, under the general rule of section
362(e)(2), FC's $90 net built-in loss ($270 aggregate
basis to DC over $180 aggregate value) would be
allocated proportionately to reduce DC's basis in the
loss property transferred by FC. As a result, FC's

entire net built-in loss would be allocated to A2, the
only loss property transferred by FC, and DC's basis
in A2 would be $30 ($120 basis under section 362(a)
reduced by $90 net built-in loss). However, if FC
and DC were to elect under section 362(e)(2)(C) to
apply the $90 basis reduction to FC's basis in the DC
stock received in the transaction, DC's basis in A2
would remain its section 362(a) basis of $120. DC's
basis in A1 is $150 as determined under paragraph
(iv) of this Example 3 (irrespective of whether the
section 362(e)(2)(C) election is made). If FC and DC
do not make a section 362(e)(2)(C) election, FC's
basis in the DC stock received in the exchange will
be $160; if FC and DC do make the election, FC's
basis in the DC stock will be $70 ($160 - $90 net
built-in loss). See § 1.362-4.

(B) F's transfer of A3. Taking into account the
application of section 362(e)(1) and this section,
DC's basis in A3, the property transferred by F,
would not exceed its value immediately after the
transfer. Therefore, F does not have a built-in loss,
F's transfer is not a loss duplication transaction, and
section 362(e)(2) does not apply to F's transfer.
DC's basis in A3, as determined under paragraph
(iv) of this Example 3, is $20. Under section 358(a),
F receives the DC stock with a basis of $140.

Example 4. Multiple transferors of non-
importation properties. (i) Facts. DC1 owns A1 (ba-
sis $40, value $150). In addition, as in Example 3 of
this paragraph (f), FC owns A2 (basis $120, value
$30), a U.S. real property interest as defined in
section 897(c)(1), and F owns A3 (basis $140, value
$20). On Date 1, DC1 transfers A1, FC transfers A2,
and F transfers A3, to DC in a single transaction
described in section 351.

(ii) Importation property. A2 is not importation
property and A3 is importation property for the rea-
sons set forth in paragraph (ii) of Example 3 and
paragraph (i)(B) of Example 1 of this paragraph (f),
respectively. A1 is not importation property because,
if DC1 had sold A2 immediately before the transac-
tion, DC1 would take into account any gain or loss
recognized on the sale in determining its federal
income tax liability.

(iii) Loss importation transaction. The transfer of
A1, A2, and A3 is a section 362 transaction. Fur-
thermore, but for section 362(e)(1) and this section
and section 362(e)(2), DC's basis in importation
property, A3, would be $140 and the value of the
property would be $20 immediately after the trans-
action. Therefore, the importation property's basis
would exceed value and the transfer is a loss impor-
tation transaction.

(iv) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, A3, was transferred in a loss importation trans-
action, section 362(e)(1) and paragraph (b)(1) of this
section apply and DC's basis in A3 will be equal to
A3's $20 value immediately after the transfer.

(v) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. The application of section
362(e)(2) is determined separately for each trans-
feror. See § 1.362-4.

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(A) DC1's transfer. Taking into account the ap-
plication of section 362(e)(1) and this section, DC's
basis in A1 ($40 under section 362(a)) would not
exceed its value immediately after the transfer.
Therefore, DC1 does not have a net built-in loss,
DC1's transfer is not a loss duplication transaction,
and section 362(e)(2) does not apply to DC1's trans-
fer. DC's basis in A1, determined under section
362(a), is $40. Under section 358(a), DC1 receives
the DC stock with a basis of $40.

(B) FC's transfer. Taking into account the appli-
cation of section 362(e)(1) and this section, but with-
out taking into account the provisions of section
362(e)(2), DC would have a section 362(a) basis of
$120 in A2, which would exceed A2's $30 value
immediately after the transfer. Therefore, FC has a
net built-in loss and FC's transfer of A2 is a loss
duplication transaction. Accordingly, under the gen-
eral rule of section 362(e)(2), FC's $90 net built-in
loss (DC's $120 basis in A2 over A2's $30 value)
would be applied to reduce DC's basis in A2, the only
loss property transferred by FC. As a result, DC's basis
in A2 would be $30 ($120 basis under section 362(a),
reduced by the $90 net built-in loss). However, if FC
and DC were to elect under section 362(e)(2)(C) to
apply the $90 basis reduction to FC's basis in the DC
stock received in the transaction, DC's basis in A2
would be its $120 basis determined under section
362(a). If FC and DC do not make a section
362(e)(2)(C) election, FC's basis in the DC stock re-
ceived in the exchange will be $120; if FC and DC do
make the election, FC's basis in the DC stock will be
$30 ($120 - $90). See § 1.362-4.

(C) F's transfer. F's transfer of A3 is a transac-
tion described in section 362(a). However, taking
into account the application of section 362(e)(1) and
this section, DC's basis in A3 ($20) would not ex-
ceed its value immediately after the transfer. There-
fore, F does not have a built-in loss, F's transfer is
not a loss duplication transaction, and section
362(e)(2) does not apply to F's transfer. DC's basis
in A3, as determined under paragraph (iv) of this
Example 4, is $20. Under section 358(a), F receives
the DC stock with a basis of $140.

Example 5. Partnership transactions. (i) Trans-
fer by foreign partnership, foreign and domestic
partners. (A) Facts. A and F are equal partners in
FP. FP owns A1 (basis $100, value $70). Under the
terms of the FP partnership agreement, FP's items of
income, gain, deduction, and loss are allocated
equally between A and F. Section 704(c) does not
apply with respect to the partnership property. FP
transfers A1 to DC in a transfer to which section 351
applies. No election is made under section 362(e)(2)(C).

(B) Importation property. If FP had sold A1
immediately before the transaction, any gain or loss
recognized on the sale would be allocated to and
includible by A and F equally under the partnership
agreement. Thus, under paragraph (d)(2) of this sec-
tion, A1 is treated as tentatively divided into two
equal portions, one treated as owned by A and one
treated as owned by F. If FP had sold A1 immedi-
ately before the transaction, any gain or loss recog-
nized on the portion treated as owned by A would
have been taken into account in determining a fed-
eral income tax liability (A's); thus A's tentatively
divided portion of A1 is not importation property.
However, no gain or loss recognized on the tenta-

tively divided portion treated as owned by F would
have been taken into account in determining a fed-
eral income tax liability. Further, if DC had sold A1
immediately after the transaction, any gain or loss
recognized on the sale would have been taken into
account in determining a federal income tax liability
(DC's); thus, F's tentatively divided portion of A1 is
importation property.

(C) Loss importation transaction. FP's transfer
of A1 is a section 362 transaction. Furthermore, but
for section 362(e)(1) and this section and section
362(e)(2), DC's basis in the importation property,
F's portion of A1, would be $50 under section 362(a)
and the property's value would be $35 immediately
after the transaction. Therefore, the importation
property's basis would exceed its value and the
transfer is a loss importation transaction.

(D) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, F's tentatively divided portion of A1, was trans-
ferred in a loss importation transaction, section
362(e)(1) and paragraph (b)(1) of this section apply
and DC's basis in F's portion of Al will be equal to
its $35 value.

(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC's aggregate basis in A1 would be $85
(the sum of the $35 basis in F's tentatively divided
portion of A1, as determined under paragraph (i)(D)
of this Example 5, and the $50 basis in A's tenta-
tively divided portion of A1, determined under sec-
tion 362(a), see paragraphs (d)(2) and (e)(3) of this
section) and Al's value immediately after the trans-
fer would be $70. Therefore, FP has a net built-in
loss and FP's transfer of Al is a loss duplication
transaction. Accordingly, under the general rule of
section 362(e)(2), FP's $15 net built-in loss ($85
basis over $70 value) would be allocated to reduce
DC's basis in the loss asset, A1, the only loss prop-
erty transferred by FP. As a result, DC's basis in A1
would be $70 ($85 basis under section 362(a) and
this section, reduced by the $15 net built-in loss).
Under section 358, FP's basis in the DC stock re-
ceived in the exchange will be $100. See § 1.362-4.

(ii) Transfer with election to apply section
362(e)(2)(C). The facts are the same as in paragraph
(i)(A) of this Example 5, except that FP and DC elect
to apply section 362(e)(2)(C) to reduce FP's basis in
the DC stock received in the exchange. The analysis
and results are the same as in paragraphs (i)(B), (C),
(D), and (E) of this Example 5, except that the $15
reduction to DC's basis in A1 is not made and, as a
result, DC's basis in A1 remains $85, and FP's basis
in the DC stock received in the exchange is reduced
from $100 to $85. The $15 reduction to FP's basis in
DC stock reduces A's basis in its FP interest under
section 705(a)(2)(B). See § 1.362-4(e)(1).

(iii) Transfer by domestic partnership. The facts
are the same as in paragraph (i)(A) of this Example
5 except that FP is a domestic partnership. The
analysis and results are the same as in paragraphs
(i)(B), (C), (D), and (E) of this Example 5.

(iv) Transfer of interest in partnership with lia-
bility. (A) Facts. F and two other individuals are
equal partners in FP. F's basis in its partnership
interest is $247. F's share of FP's § 1.752-1 liabil-
ities (as defined in § 1.752-1(a)(4)) is $150. F trans-
fers his partnership interest to DC in a transaction to
which section 351 applies. If DC were to sell the FP
interest immediately after the transfer, DC would
receive $100 in cash or other property. In addition,
taking into account the rules under § 1.752-4, DC's
share of FP's § 1.752-1 liabilities (as defined in
§ 1.752-1(a)(4)) is $145 immediately after the transfer.

(B) Importation property. If F had sold his part-
nership interest immediately before the transaction,
no gain or loss recognized on the sale would have
been taken into account in determining a federal
income tax liability. Further, if DC had sold the
partnership interest immediately after the transac-
tion, any gain or loss recognized on the sale would
have been taken into account in determining a fed-
eral income tax liability. Therefore, F's partnership
interest is importation property.

(C) Loss importation transaction. F's transfer is
a section 362 transaction. However, but for section
362(e)(1) and this section and section 362(e)(2),
DC's basis in the importation property, the partner-
ship interest, determined under section 362(a) and
taking into account the rules under section 752,
would be $242 (F's $247 basis reduced by F's $150
share of FP liabilities and increased by DC's $145
share of FP liabilities) and, under paragraph (c)(4)(ii)
of this section, the value of the FP interest would be
$245 (the sum of $100, the cash DC would receive if
DC immediately sold the partnership interest, and
$145, DC's share of the § 1.752-1 liabilities (as
defined in § 1.752-1(a)(4)) under section 752 imme-
diately after the transfer to DC). Therefore, the im-
portation property's basis ($242) would not exceed
its value ($245), and the transfer is not a loss impor-
tation transaction.

(D) Basis in property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. As described in paragraph
(iv)(C) of this Example 5, taking into account the
application of section 362(e)(1) and this section,
DC's basis in the partnership interest would not
exceed its value. Therefore, under § 1.362-4, F does
not have a net built-in loss, the transfer is not a loss
duplication transaction, and section 362(e)(2) does
not apply to the transfer. DC's basis in F's partner-
ship interest is $242, determined under sections
362(a) and 752. Under section 358, taking into ac-
count the rules under section 752, F's basis in the DC
stock received in the exchange is $97 ($247 reduced
by F's $150 share of FP liabilities). If FP had elected
under section 754, or if section 743(b) required a
downward basis adjustment to the partnership prop-
erty, FP would apply the rules of § 1.743-1 to
determine the amount of the basis adjustment to the
partnership property.

Example 6. Transactions involving tax-exempt
entities. (i) Exempt transferor. (A) Facts. InsCo is a
benevolent life insurance association of a purely
local character exempt from federal income tax un-
der section 501(a) because it is described in section
501(c)(12). InsCo owns shares of stock of DC1

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(basis $100, value $70) for investment purposes,
which are not debt-financed property (as defined in
section 514). On December 31, Year 1, InsCo trans-
fers the DC1 stock to DC in exchange for DC stock
in a transaction to which section 351 applies. No
election is made under section 362(e)(2)(C).

(B) Importation property. If InsCo had sold the
DC1 stock immediately before the transaction, any
gain or loss realized would be excluded from UBTI
under section 512(b)(5), and thus no gain or loss
recognized on the sale would have been taken into
account in determining federal income tax liability.
Further, if DC had sold the DC1 stock immediately
after the transaction, any gain or loss recognized on
the sale would have been taken into account in
determining federal income tax liability. Therefore,
the DC1 stock is importation property.

(C) Loss importation transaction. InsCo's trans-
fer is a section 362 transaction. Furthermore, but for
section 362(e)(1) and this section and section
362(e)(2), DC's basis in importation property, the
DC1 stock, would be $100, and the stock's value
would be $70 immediately after the transaction.
Therefore, the importation property's basis would
exceed its value and the transfer is a loss importation
transaction.

(D) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, the DC1 stock, was transferred in a loss impor-
tation transaction, paragraph (b)(1) of this section
applies and DC's basis in the stock will be equal to
its $70 value.

(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section, DC's
basis in the DC1 stock does not exceed its value
immediately after the transaction. Therefore, InsCo
does not have a net built-in loss, InsCo's transfer is
not a loss duplication transaction, and section
362(e)(2) has no application to the transaction. DC's
basis in the DC1 stock, as determined under para-
graph (i)(D) of this Example 6, is $70. Under section
358, InsCo's basis in the DC stock received in the
exchange will be $100.

(ii) Transferor loses tax-exempt status. (A)
Facts. The facts are the same as in paragraph (i)(A)
of this Example 6 except that InsCo fails to be
described in section 501(c)(12) in Year 1.

(B) Importation property. If InsCo had sold the
DC1 stock immediately before the transaction, any
gain or loss recognized on the sale would have been
taken into account in determining a federal income
tax liability. Therefore, the DC1 stock is not impor-
tation property and this section does not apply to the
transaction.

(C) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC would have a section 362(a) basis of
$100 in the stock, which would exceed its value of

$70 immediately after the transfer. Therefore, InsCo
has a net built-in loss and InsCo's transfer of the
DC1 stock is a loss duplication transaction. Accord-
ingly, under the general rule of section 362(e)(2),
InsCo's $30 net built-in loss ($100 basis over $70
value) would be allocated to reduce DC's basis in the
loss asset, the DC1 stock, the only loss property
transferred by InsCo. As a result, DC's basis in the
DC1 stock would be $70 ($100 basis under section
362(a), reduced by the $30 net built-in loss). Under
section 358, InsCo's basis in the DC stock received
in the exchange will be $100.

(iii) Transfer of property that is subject to unre-
lated business tax. (A) Facts. The facts are the same
as in paragraph (i)(A) of this Example 6 except that,
on December 31, Year 1, instead of the DC1 stock,
InsCo transfers A1 (basis $200, value $150) to DC.
A1 is real property that InsCo owned from January 1
to December 31 of Year 1. During the entirety of this
period, Al's basis was $200, and in the twelve
months prior to December 31, Year 1, the highest
amount of outstanding principal indebtedness on A1
was $40. For purposes of the UBTI rules under
section 512, A1 is debt-financed property within the
meaning of section 514(b).

(B) Importation property. If InsCo had sold A1
immediately before the transaction, 20 percent of
any gain or loss recognized on that sale (that is, $40
of acquisition indebtedness on A1 divided by Al's
$200 basis in Year 1) would, under sections 512 and
514, be includible in UBTI at the end of Year 1, and
80 percent would not. Thus, under paragraph (d)(4)
of this section, A1 is treated as tentatively divided
into two portions, one reflecting the gain or loss that
would be taken into account in determining a federal
income tax liability in InsCo's hands immediately
before the transfer (the 20 percent portion) and one
that would not (the 80 percent portion). Further, if
DC sold A1 immediately after the transfer, any gain
or loss on both portions would be taken into account
in determining a federal income tax liability. Ac-
cordingly, the 20 percent portion is not importation
property, but the 80 percent portion is.

(C) Loss importation transaction. InsCo's trans-
fer of A1 is a section 362 transaction. Furthermore,
but for section 362(e)(1) and this section and section
362(e)(2), DC's basis in the importation property,
the 80 percent portion of A1, would be $160 (80
percent of InsCo's $200 basis) under section 362(a)
and the property's value would be $120 (80% of
Al's $120 value) immediately after the transaction.
Therefore, the importation property's basis would
exceed its value and the transfer is a loss importation
transaction.

(D) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, the 80 percent portion of A1, was transferred in
a loss importation transaction, section 362(e)(1) and
paragraph (b)(1) of this section apply and DC's basis
in that portion of A1 will be equal to its $120 value.

(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section but
without taking into account the provisions of section

362(e)(2), DC's aggregate basis in A1 would be
$160 (the sum of the $120 basis in the 80 percent
importation portion of A1, as determined under para-
graph (iii)(D) of this Example 6, and the $40 basis in
the 20 percent portion of A1 that is not importation
property, determined under section 362(a). See para-
graph (e)(3) of this section). Further, Al's value
immediately after the transfer would be $150. There-
fore, InsCo has a net built-in loss in A1, and InsCo's
transfer of A1 is a loss duplication transaction. Ac-
cordingly, under the general rule of section
362(e)(2), InsCo's $10 net built-in loss ($160 basis
over $150 value) would be allocated to reduce DC's
basis in the loss asset, A1, the only loss property
transferred by InsCo. As a result, DC's basis in A1
would be $150 ($160 basis under section 362(a) and
this section, reduced by the $10 net built-in loss).
Under section 358, InsCo's basis in the DC stock
received in the exchange will be $200. See
§ 1.362-4.

(iv) Transfer with election to apply section
362(e)(2)(C). The facts are the same as in paragraph
(iii)(A) of this Example 6, except that InsCo and DC
elect to apply section 362(e)(2)(C) to reduce InsCo's
basis in the DC stock received in the exchange. The
analysis and results are the same as in paragraphs
(iii)(B), (C), (D), and (E) of this Example 6, except
that the $10 reduction to DC's basis in Al is not
made and, as a result, DC's basis in A1 remains
$160; however, InsCo's basis in the DC stock re-
ceived in the exchange is reduced from $200 to
$190.

Example 7. Transactions involving CFCs. (i)
Transfer by CFC. (A) Facts. FC is a CFC with 100
shares of stock outstanding. A owns 60 of the shares
and F owns the remaining 40 shares. FC owns two
assets, A1 (basis $70, value $100), which is used in
the conduct of a U.S. trade or business, and A2 (basis
$100, value $75), which is not used in the conduct of
a U.S. trade or business. FC transfers both assets to
DC in a transaction to which section 351 applies.

(B) Importation property. If FC had sold A1
immediately before the transaction, any gain or loss
recognized on the sale would have been taken into
account in determining a federal income tax liability
(FC's). See section 882(a). Therefore, A1 is not
importation property. If FC had sold A2 immediately
before the transaction, FC would not take the gain or
loss recognized into account in determining its fed-
eral income tax liability, but the gain or loss could be
taken into account in determining a section 951
inclusion to FC's U.S. shareholders. However, under
paragraph (d)(3) of this section, gain or loss is not
deemed taken into account in determining a federal
income tax liability solely because it could affect an
inclusion under section 951(a). Further, if DC had
sold A2 immediately after the transaction, any gain
or loss recognized on the sale would have been taken
into account in determining a federal income tax
liability. Therefore, A2 is importation property.

(C) Loss importation transaction. FC's transfer
is a section 362 transaction. Furthermore, but for
section 362(e)(1) and this section and section
362(e)(2), DC's basis in the importation property,
A2, would be $100 and the property's value would
be $75 immediately after the transaction. There-
fore, the importation property's basis would ex-

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ceed its value and the transfer is a loss importation
transaction.

(D) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, A2, was transferred in a loss importation trans-
action, paragraph (b)(1) of this section applies and
DC's basis in A2 will be equal to A2's $75 value
immediately after the transfer.

(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC would have an aggregate basis of
$145 in the transferred properties ($70 in A1, deter-
mined under section 362(a), plus $75 in A2, deter-
mined under this section) and the properties would
have an aggregate value of $175 ($100 + $75)
immediately after the transfer. Therefore, FC does
not have a net built-in loss, FC's transfer is not a loss
duplication transaction, and section 362(e)(2) does
not apply to the transaction. DC's basis in Al will be
$70, determined under section 362(a), and DC's
basis in A2 will be $75, as determined under para-
graph (i)(D) of this Example 7. Under the general
rule in section 358(a), FC receives the DC stock with
a basis of $170 ($70 attributable to A1 plus $100
attributable to A2).

(ii) Transfer of CFC stock. (A) Facts. The facts
are the same as in paragraph (i)(A) of this Example
7, except that A transfers its 60 shares of FC stock
(basis $80, value $105) and F transfers its 40 shares
of FC stock (basis $100, value $70) to DC in an
exchange that qualifies under section 351.

(B) Importation property. If A had sold its FC
shares immediately before the transaction, any gain
or loss recognized on the sale would have been taken
into account in determining a federal income tax
liability (A's). Therefore, A's FC shares are not
importation property. However, if F had sold its FC
shares immediately before the transaction, no gain or
loss recognized on the sale would have been taken
into account in determining a federal income tax
liability. Further, if DC had sold F's FC shares
immediately after the transaction, any gain or loss
recognized on the sale would have been taken into
account in determining a federal income tax liability.
Therefore, F's FC shares are importation property.

(C) Loss importation transaction. The transfer of
the FC shares is a section 362 transaction. Further-
more, but for section 362(e)(1) and this section and
section 362(e)(2), DC's aggregate basis in the im-
portation property, F's shares of FC stock, would be
$100 under section 362(a) and the shares' aggregate
value would be $70. Therefore, the importation
property's aggregate basis would exceed its aggre-
gate value, and the transfer is a loss importation
transaction.

(D) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, F's shares of FC stock, was transferred in a loss
importation transaction, paragraph (b)(1) of this sec-
tion applies and DC's aggregate basis in the shares

will be equal to their $70 aggregate value immedi-
ately after the transfer.

(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. The application of section
362(e)(2) is determined separately for each trans-
feror. See § 1.362-4(b).

(1) A's transfer. Taking into account the appli-
cation of section 362(e)(1) and this section, DC's
aggregate basis in the shares ($80 under section
362(a)) would not exceed the shares' value ($105)
immediately after the transaction. Therefore A does
not have a built-in loss, A's transfer is not a loss
duplication transaction, and section 362(e)(2) does
not apply to A's transfer. DC's aggregate basis in
A's shares, determined under section 362(a), is $80.
Under section 358(a), A receives the DC stock with
a basis of $80.

(2) F's transfer. Taking into account the appli-
cation of section 362(e)(1) and this section, DC's
aggregate basis in the shares would not exceed their
value immediately after the transaction. Therefore, F
does not have a built-in loss, F's transfer is not a loss
duplication transaction, and section 362(e)(2) does
not apply to F's transfer. DC's aggregate basis in F's
shares, as determined under paragraph (ii)(D) of this
Example 7, is $70. Under section 358(a), F receives
the DC stock with a basis of $100.

Example 8. Property subject to withholding tax.
(i) Facts. FC owns a share of DC1 stock (basis $100,
value $70) as an investment. FC receives dividends
on the share that are subject to federal withholding
tax of 30 percent of the amount received under
section 881(a); under section 1442(a), DC1 must
withhold tax on the dividends paid. FC transfers the
DC1 share to DC in a transaction to which section
351 applies.

(ii) Importation property. Although any divi-
dends received with respect to the DC1 stock were
subject to withholding tax, if FC had sold the share
of stock of DC1, no gain or loss recognized on the
sale would have been taken into account in deter-
mining a federal income tax liability. See section
865(a)(2). Further, if DC had sold the share of DC1
stock immediately after the transaction, any gain or
loss recognized on the sale would be taken into
account in determining federal income tax liability.
Therefore, the share of DC1 stock is importation
property.

(iii) Loss importation transaction. FC's transfer
is a section 362 transaction. Furthermore, but for
section 362(e)(1) and this section and section
362(e)(2), DC's basis in the importation property,
the share of DC1 stock, would be $100 and the
share's value would be $70 immediately after the
transaction. Therefore, the share's basis would ex-
ceed its value and the transfer is a loss importation
transaction.

(iv) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, the DC1 share, was transferred in a loss impor-
tation transaction, paragraph (b)(1) of this section
applies and DC's basis in the share will be equal to
the share's $70 value.

(v) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section, DC's
basis in the DC1 share would not exceed the share's
value immediately after the transaction. Therefore,
FC does not have a net built-in loss, FC's transfer is
not a loss duplication transaction, and section
362(e)(2) does not apply to the transaction. DC's
basis in the DC1 share, as determined under para-
graph (iv) of this Example 8, is $70. Under section
358, FC's basis in the DC stock received in the
exchange will be $100.

Example 9. Property transferred in triangular
reorganization. (i) Foreign subsidiary. (A) Facts. P
owns the sole outstanding share of stock of FC (basis
$1), FC1 owns the sole outstanding share of FC2
(basis $100), and FC2 owns one asset, A1 (basis
$100, value $20). In a forward triangular merger
described in § 1.358-6(b)(2)(i), FC2 merges with
and into FC, and FC1 receives shares of P stock in
exchange for its FC2 stock. The forward triangular
merger is a transaction described in section
368(a)(2)(D) and, therefore, in section 362(b).

(B) Determining P's basis in its FC share. Pur-
suant to § 1.358-6, for purposes of determining the
adjustment to P's basis in its FC shares, P is treated
as though it first received A1 in a transaction in
which its basis in A1 would be determined under
section 362(b) and then it transferred A1 to FC in a
transaction in which P's basis in its FC stock would
be determined under section 358.

(1) P's deemed acquisition and transfer of A1. If
FC2 had sold A1 for its value immediately before the
deemed transaction, no gain or loss recognized on
the sale would have been taken into account in
determining a federal income tax liability. If P had
sold A1 immediately after the deemed transaction,
any gain or loss recognized on the sale would have
been taken into account in determining a federal
income tax liability (P's). Therefore, with respect to
P's deemed acquisition, A1 is importation property.
Furthermore, immediately after the deemed transac-
tion, P's basis in A1, but for section 362(e)(1) and
this section and section 362(e)(2), would be $100
and Al's value is $20. Therefore, the importation
property's basis would exceed its value and the
transfer is a loss importation transaction. Accord-
ingly, P's deemed basis in A1 will be equal to Al's
$20 value.

(2) P's FC stock basis. As a result of P's deemed
transfer of A1 to FC (and applying the principles of
§ 1.367(b)-13), P's basis in its FC stock is increased
by its $20 deemed basis in A1. Accordingly, follow-
ing the transaction, P's basis in its share of FC stock
will be $21 (the sum of its original $1 basis and the
$20 adjustment for the deemed transfer of A1).

(C) FC's basis in A1. FC's basis in Al is deter-
mined under the rules of this section without regard
to the determination of P's adjustment to its basis in
FC stock. If FC2 had sold A1 for its value immedi-
ately before the transaction, no gain or loss recog-
nized on the sale would have been taken into account
in determining a federal income tax liability. How-
ever, if FC had sold A1 immediately after the trans-
action, no gain or loss recognized on the sale would

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have been taken into account in determining a fed-
eral income tax liability, so A1 is not importation
property. Accordingly, this section will not apply to
the transaction. Although there is a net built-in loss
in A1, the transaction is not described in section
362(a), and so section 362(e)(2) and § 1.362-4 will
not apply to the transaction. Thus, under section
362(b), FC's basis in Al will be $100.

(D) FCI's basis in P stock. Under section 358,
FC1's basis in the P stock it receives in the exchange
will be $100.

(ii) Property transferred to U.S. subsidiary in
triangular reorganization. (A) Facts. The facts are
the same as in paragraph (i)(A) of this Example 9,
except that P also owns the sole outstanding share of
DC (basis $1) and, instead of merging into FC, FC2
merged into DC.

(B) Determining P's basis in its DC share. As
determined under paragraph (i)(B)(2) of this Exam-
ple 9, P's basis in its DC share is $21, the sum of its
original $1 basis plus the $20 adjustment for the
deemed transfer of A1.

(C) DC's basis in A1. If FC2 had sold Al for its
value immediately before the transaction, no gain or
loss recognized on the sale would have been taken
into account in determining a federal income tax
liability. However, if DC had sold A1 immediately
after the transaction, any gain or loss recognized on
the sale would have been taken into account in
determining a federal income tax liability, so A1 is
importation property with respect to DC. Further-
more, immediately after the transaction, DC's basis
in A1, but for section 362(e)(1) and this section and
section 362(e)(2), would be $100 and Al's value is
$20. Therefore, the importation property's basis
would exceed its value and the transfer is a loss
importation transaction. Accordingly, DC's basis in
Al will be $20, Al's value immediately after the
transaction.

(D) FCI's basis in P stock. Under section 358,
FC1's basis in the P stock it receives in the exchange
is $100.

(g) Applicability date. This section ap-
plies with respect to any transaction oc-
curring on or after March 28, 2016, and
also with respect to any transaction occur-
ring before such date as a result of an
entity classification election under
§ 301.7701-3 of this chapter filed on or
after March 28, 2016, unless such trans-
action is pursuant to a binding agreement
that was in effect prior to March 28, 2016
and at all times thereafter. In addition,
taxpayers may apply this section to any
transaction occurring after October 22,
2004.

Par. 11. Section 1.362-4 is amended
by:

1\. Revising the heading to paragraph
(c) and adding paragraph (c)(3).

2\. Revising the introductory text in
paragraph (h).

3\. Revising the third sentence of para-
graph (h) Example 4 paragraph (iv)(B).

4\. Revising paragraph (h) Example 11.
5\. Adding a sentence to the end of
paragraph (j).

The revisions and additions read as fol-
lows:

§ 1.362-4 Basis of loss duplication
property.

* * * * *

(c) Exceptions and special rules.
* * * * *

(3) Other effects of basis determination
under this section-(i) Determination by
reference to transferor's basis. A determi-
nation of basis under this section is a
determination by reference to the transfer-
or's basis, including for purposes of sec-
tions 755, 1223(2), and 7701(a)(43).

(ii) Treatment as tax-exempt income or
noncapital, nondeductible expense. A de-
termination of basis under paragraph (b)
of this section does not give rise to an item
treated as a noncapital, nondeductible ex-
pense under § 1.1502-32(b)(2)(iii). How-
ever, a determination of basis under para-
graph (d) of this section does give rise to
an item treated as a noncapital, nonde-
ductible expense under § 1.1502-
32(b)(2)(iii).

* * * * *

(h) Examples. The examples in this
paragraph (h) illustrate the application of
section 362(e)(2) and the provisions of
this section. Unless the facts otherwise
indicate, the examples use the following
nomenclature and assumptions: X, Y, P,
S, S1, and S2 are domestic corporations;
A and B are U.S. individuals; FC1 and
FC2 are foreign corporations and are not
engaged in a U.S. trade or business, have
no U.S. real property interests, and have
no other relationships, activities, or inter-
ests that would cause them, their share-
holders, or their property to be subject to
tax imposed under any provision of sub-
title A of the Internal Revenue Code (fed-
eral income tax); there is no applicable
income tax treaty; PRS is a domestic part-
nership; no election is made under section
362(e)(2)(C); and the transferred property
is not importation property (as defined in
§ 1.362-3(c)(2)) and the transfers are not
loss importation transactions (as defined
in § 1.362-3(c)(3)), so that the basis of no
property is determined under section
362(e)(1). All persons and transactions are

unrelated unless the facts indicate other-
wise, all taxpayers are on a calendar tax
year, and all other relevant facts are set
forth in the examples. See § 1.362-3(f) for
additional examples illustrating the appli-
cation of section 362(e)(2) and this sec-
tion, including to transactions that are sub-
ject to section 362(e)(2), and section
362(e)(1).

* * * * *

Example 4. * * *

(iv) * * *

(B) Analysis. * * * For the reasons set forth in
paragraph (iii)(B) of this Example 4, Y would have
been required to reduce its basis in the transferred
assets by $1.60. * * *

* * * * *

Example 11. Transfers of importation property
with non-importation property. (i) Single transferor,
loss importation transaction. (A) Facts. FC1 trans-
fers Asset 1 (basis $80, value $50), Asset 2 (basis
$120, value $110), and Asset 3 (basis $32, value
$40) to DC in a transaction to which section 351
applies. Asset 1 is not importation property within
the meaning of § 1.362-3(c)(2). Asset 2 and Asset 3
are importation property within the meaning of
§ 1.362-3(c)(2).

(B) Application of section 362(e)(1). Immedi-
ately after the transfer, and without regard to sec-
tion 362(e)(1) or section 362(e)(2) and this sec-
tion, DC's aggregate basis in importation property
(Asset 2 and Asset 3) would be $152. The aggre-
gate value of the importation property immedi-
ately after the transfer is $150. Accordingly, the
transaction is a loss importation transaction within
the meaning of § 1.362-3(c)(3) and, under section
362(e)(1), DC's bases in Asset 2 and Asset 3
would equal the value of each, $110 and $40,
respectively.

(C) Application of section 362(e)(2) and this
section. (1) Analysis. (i) Loss duplication transac-
tion. FC1's transfer of Asset 1, Asset 2, and Asset 3
is a transaction described in section 362(a). But for
section 362(e)(2) and this section, DC's aggregate
basis in those assets would be $230 ($80 under
section 362(a) + $110 +$40 under section
362(e)(1)), which would exceed the aggregate value
of the assets $200 ($50 + $110 +$40) immediately
after the transaction. Accordingly, the transfer is a
loss duplication transaction and FC1 has a net
built-in loss of $30 ($230 - $200).

(ii) Identifying loss duplication property. But for
section 362(e)(2) and this section, DC's basis in
Asset 1 would be $80, which would exceed Asset 1's
$50 value immediately after the transaction. Accord-
ingly, Asset 1 is loss duplication property. But for
section 362(e)(2) and this section, DC's basis in
Asset 2 would be $110, which would not exceed
Asset 2's $110 value immediately after the transac-
tion. Accordingly, Asset 2 is not loss duplication
property. But for section 362(e)(2) and this section,
DC's basis in Asset 3 would be $40, which would
not exceed Asset 3's $40 value immediately after the
transaction. Accordingly, Asset 3 is not loss dupli-
cation property.

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(D) Basis in loss duplication property. DC's
basis in Asset 1 is $50, computed as its $80 basis
under section 362(a) reduced by FC1's $30 net
built-in loss.

(E) Basis in other property. Under section
362(e)(1), DC's basis in Asset 2 is $110 and DC's
basis in Asset 3 is $40. Under section 358(a), FC1
has an exchanged basis of $232 in the DC stock it
receives in the transaction.

(ii) Multiple transferors, no importation of loss.
(A) Facts. The facts are the same as paragraph (i)(A)
of this Example 11, except that, in addition, FC2
transfers Asset 4 (basis $100, value $150) to DC as
part of the same transaction. Asset 4 is importation
property within the meaning of § 1.362-3(c)(2).

(B) Application of section 362(e)(1). Immedi-
ately after the transfer, and without regard to section
362(e)(1) or section 362(e)(2) and this section, DC's
aggregate basis in importation property (Asset 2,
Asset 3, and Asset 4) would be $252 ($120 + $32 +
$100). The aggregate value of the importation prop-
erty immediately after the transfer is $300 ($110 +
$40 + $150). Accordingly, the transaction is not a
loss importation transaction within the meaning of
§ 1.362-3(c)(3) and DC's bases in the importation
property is not determined under section 362(e)(1).

(C) Application of section 362(e)(2) and this
section. Notwithstanding that the transfers by FC1
and FC2 are pursuant to a single plan forming one
transaction, section 362(e)(2) and this section apply
to each transferor separately.

(1) Application of section to FC1. (i) Loss dupli-
cation transaction. FC1's transfer of Asset 1, Asset
2, and Asset 3 is a transaction described in section
362(a). But for section 362(e)(2) and this section,
DC's aggregate basis in those assets would be $232
($80 + $120 +$32), which would exceed the aggre-
gate value of the assets $200 ($50 + $110 + $40)
immediately after the transaction. Accordingly, the
transfer is a loss duplication transaction and FC1 has
a net built-in loss of $32 ($232 - $200).

(ii) Identifying loss duplication property. But for
section 362(e)(2) and this section, DC's basis in
Asset 1 would be $80, which would exceed Asset 1's
$50 value immediately after the transaction. Accord-
ingly, Asset 1 is loss duplication property. But for
section 362(e)(2) and this section, DC's basis in
Asset 2 would be $120, which would exceed Asset
2's $110 value immediately after the transaction.
Accordingly, Asset 2 is also loss duplication prop-
erty. But for section 362(e)(2) and this section, DC's
basis in Asset 3 would be $32, which would not
exceed Asset 3's $40 value immediately after the
transaction. Accordingly, Asset 3 is not loss dupli-
cation property.

(iii) Basis in loss duplication property. DC's
basis in Asset 1 is $56, computed as its $80 basis
under section 362(a) reduced by $24, its allocable
portion of FC1's $32 net built-in loss ($30/40 x $32).
DC's basis in Asset 2 is $112, computed as its $120
basis under section 362(a) reduced by $8, its alloca-
ble portion of FC1's $40 net built-in loss ($10/$40 x
$32).

(iv) Basis in other property. Under section
358(a), FC1 has an exchanged basis of $232 in the
DC stock it receives in the transaction.

(2) Application of section to FC2. FC2's transfer
of Asset 3 is not a loss duplication transaction be-

cause Asset 3's value exceeds its basis immediately
after the transaction. Accordingly, under section
362(a), DC's basis in Asset 3 is $100.
* * * * *

(j) Effective/applicability date.
The introductory text and Example 11 of
paragraph (h) of this section apply with
respect to transactions occurring on or af-
ter March 28, 2016, and also with respect
to transactions occurring before such date
as a result of an entity classification elec-
tion under § 301.7701-3 of this chapter
filed on or after March 28, 2016, unless
such transaction is pursuant to a binding
agreement that was in effect prior to
March 28, 2016 and at all times thereafter.
In addition, taxpayers may apply such
provisions to any transaction occurring af-
ter October 22, 2004.

Par. 12. Section 1.368-3 is amended
by revising paragraphs (a)(3) and (b)(3)
and adding a sentence to the end of para-
graph (e) to read as follows:

§ 1.368-3 Records to be kept and
information to be filed with returns.

(a) * * *

(3) The value and basis of the assets,
stock or securities of the target corpora-
tion transferred in the transaction, deter-
mined immediately before the transfer and
aggregated as follows-

(i) Importation property transferred in
a loss importation transaction, as defined
in § 1.362-3(c)(2) and (3), respectively;

(ii) Loss duplication property as de-
fined in § 1.362-4(g)(1);

(iii) Property with respect to which any
gain or loss was recognized on the transfer
(without regard to whether such property
is also identified in paragraph (a)(3)(i) or
(ii) of this section);

(iv) Property not described in para-
graph (a)(3)(i), (ii), or (iii) of this section;
and

* * * * *

(b) * * *

(3) The value and basis of all the stock
or securities of the target corporation held
by the significant holder that is transferred
in the transaction and such holder's basis
in that stock or securities, determined im-
mediately before the transfer and aggre-
gated as follows-

(i) Stock and securities with respect to
which an election is made under section
362(e)(2)(C); and

(ii) Stock and securities not described
in paragraph (b)(3)(i) of this section.
* * * * *

(e) Effective/applicability date.
Paragraphs (a)(3) and (b)(3) of this sec-
tion apply with respect to reorganizations
occurring on or after March 28, 2016, and
also with respect to reorganizations occur-
ring before such date as a result of an
entity classification election under
§ 301.7701-3 of this chapter filed on or
after March 28, 2016, unless such reorga-
nization is pursuant to a binding agree-
ment that was in effect prior to March 28,
2016 and at all times thereafter.

Par. 13. Section 1.705-1 is amended by
revising paragraph (a)(9) to read as fol-
lows:

### § 1.705-1 Determination of basis of partner's interest.

(a) * * *

(9) For basis adjustments necessary to
coordinate sections 705 and 362(e)(2), see
§ 1.362-4(e)(1).

* * * * *

Par. 14. Section 1.755-1 is amended by
adding a sentence after the second sen-
tence of paragraph (b)(1)(i) to read as
follows:

§ 1.755-1 Rules for allocation of basis.

* * * * *

(b) * * *

(1) * * *

(i) Application. * * * For transfers sub-
ject to section 334(b)(1)(B), see § 1.334-
1(b)(3)(iii)(C)(1) (treating a determination
of basis under § 1.334-1(b)(3) as a deter-
mination not by reference to the transfer-
or's basis solely for purposes of applying
section 755); for transfers subject to sec-
tion 362(e)(1), see § 1.362-3(b)(4)(i)
(treating a determination of basis under
§ 1.362-3 as a determination not by ref-
erence to the transferor's basis solely for
purposes of applying section 755); for
transfers subject to section 362(e)(2), see
§ 1.362-4(c)(3)(i) (treating a determina-
tion of basis under § 1.362-4 as a deter-
mination by reference to the transferor's
basis for all purposes). * * *

* * * * *

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Par. 15. Section 1.1367-1 is amended
by revising the last sentence of paragraph
(c)(2) to read as follows:

§ 1.1367-1 Adjustments to basis of
shareholder's stock in an S corporation.

* * * * *

(c) * * *

(2) Noncapital, nondeductible expenses.
*
*
\* For basis adjustments necessary to
coordinate sections 1367 and 362(e)(2), see
§ 1.362-4(e)(2).

* * * * *

John M Dalrymple,
Deputy Commissioner for
Services and Enforcement.

Approved: February 16, 2016.

Mark J. Mazur,
Assistant Secretary of the
Treasury (Tax Policy).

(Filed by the Office of the Federal Register on March 25,
2016, 8:45 a.m., and published in the issue of the Federal
Register for March 28, 2016, 81 F.R. 17066)

26 CFR 1.367(a)-3: Treatment of Transfers of Stock
or Securities to Foreign Corporations

### T.D. 9760

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

Indirect Stock Transfers and
the Coordination Rule
Exceptions; Transfers of
Stock or Securities in
Outbound Asset
Reorganizations

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations and removal
of temporary regulations.

SUMMARY: This document contains fi-
nal regulations under sections 367, 1248,
and 6038B of the Internal Revenue Code
(Code). These regulations finalize the
elimination of one of two exceptions to

the coordination rule between asset trans-
fers and indirect stock transfers for certain
outbound asset reorganizations. The regu-
lations also finalize modifications to the
exception to the coordination rule for sec-
tion 351 exchanges so that it is consistent
with the remaining asset reorganization
exception. In addition, the regulations fi-
nalize modifications to the procedures for
obtaining relief for failures to satisfy cer-
tain reporting requirements. Finally, the
regulations finalize certain changes with
respect to transfers of stock or securities
by a domestic corporation to a foreign
corporation in a section 361 exchange.
These regulations primarily affect domes-
tic corporations that transfer property to
foreign corporations in certain outbound
nonrecognition exchanges.

DATES: Effective Date: These regula-
tions are effective on March 22, 2016.

Applicability Dates: For dates of appli-
cability, see §§ 1.367(a)-3(g)(1)(vii),
1.367(a)-3(g)(1)(ix), 1.367(a)-6(e)(4),
1.1248(f)-3(b)(1), and 1.6038B-1(g)(5).

FOR FURTHER INFORMATION
CONTACT: Joshua G. Rabon at (202)
317-6937 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

#### Background and Explanation of Provisions

On August 20, 2008, the Department
of the Treasury (Treasury Department)
and the IRS published proposed regula-
tions (REG-209006-89) under sections
367, 1248, and 6038B of the Code (2008
proposed regulations) in the Federal Reg-
ister (73 FR 49278) concerning transfers
of property by a domestic corporation to a
foreign corporation in an exchange de-
scribed in section 361(a) or (b) and certain
nonrecognition distributions of stock of a
foreign corporation by a domestic corpo-
ration. The 2008 proposed regulations
were substantially finalized on March 19,
2013, when the Treasury Department and
the IRS published final regulations (TD
9614) in the Federal Register (78 FR
17024). However, the Treasury Depart-
ment and the IRS simultaneously pub-
lished the temporary regulations (TD
9615) in the Federal Register on March
19, 2013 (78 FR 17,053) (2013 temporary
regulations) eliminating one of the two

exceptions to the coordination rule be-
tween asset transfers and indirect stock
transfers for certain outbound asset reor-
ganizations, as well as modifying the one
exception to the coordination rule for sec-
tion 351 exchanges so that it is consistent
with the remaining outbound asset reorga-
nization exception. The 2013 temporary
regulations also addressed the transfer of
stock or securities by a domestic corpora-
tion to a foreign corporation in a section
361 exchange, as well as modified, in vari-
ous contexts, procedures for obtaining relief
for failures to satisfy certain reporting re-
quirements. A notice of proposed rulemak-
ing (REG-132702-10) cross-referencing
the 2013 temporary regulations and incor-
porating the text of the 2013 temporary
regulations was also published in the Fed-
eral Register on March 19, 2013 (78 FR
17066). A portion of the 2013 temporary
regulations modifying the procedures for
obtaining relief for failures to satisfy cer-
tain reporting requirements was amended
and removed by final regulations (TD
9704) that were published in the Federal
Register on November 19, 2014 (79 FR
68763). No requests for a public hearing
were received regarding the 2013 tempo-
rary regulations, and accordingly no hear-
ing was held. The text of these regulations
is substantially identical to to the 2013
temporary regulations.

The Treasury Department and the IRS
received one comment regarding the re-
maining exceptions to the coordination
rule. In general, the coordination rule pro-
vides that if, in connection with an indi-
rect stock transfer, a U.S. person (U.S.
transferor) transfers assets to a foreign
corporation (foreign acquiring corpora-
tion) in an exchange described in section
351 or 361, section 367 applies first to the
asset transfer and then to the indirect stock
transfer. Pursuant to the exceptions to the
coordination rule, sections 367(a) and (d)
will not apply to the outbound transfer of
assets by the U.S. transferor to the foreign
acquiring corporation to the extent those
assets (re-transferred assets) are trans-
ferred by the foreign acquiring corpora-
tion to a domestic corporation in certain
nonrecognition transactions, provided cer-
tain conditions are satisfied. Both of the
remaining exceptions require that the
transferee domestic corporation's adjusted
basis in the re-transferred assets not be

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greater than the U.S. transferor's adjusted
basis in those assets, disregarding any ba-
sis increase attributable to gain or income
recognized by the U.S. transferor on the
outbound asset transfer (basis comparison
test).

The commenter first inquired whether
the remaining coordination rule exceptions
apply on a transaction-by-transaction basis
such that the conditions of an exception,
including the basis comparison test, must be
satisfied with respect to all the re-transferred
assets, or, alternatively, whether the excep-
tions apply on an asset-by-asset basis such
that the conditions of an exception may be
satisfied with respect to a portion of the
re-transferred assets. The Treasury Depart-
ment and the IRS have determined that the
regulations clearly provide that the coordi-
nation rule exceptions apply to a transaction
in its entirety and not on an asset-by-asset
basis. See, for example, paragraph (d)(3) of
Example 6C of the 2013 temporary regula-
tions, illustrating the application of the co-
ordination rule and the relevant exception
using a transaction-based analysis. Thus, the
2013 temporary regulations are not clarified
in response to this comment.

Given this transaction-based treatment,
the commenter then requested a modifica-
tion to the aspect of the basis comparison
test that disregards an increase in basis in
the re-transferred assets in the hands of
the transferee domestic corporation that is
attributable to gain or income recognized
by the U.S. transferor on the outbound
transfer of the re-transferred assets to the
foreign acquiring corporation. The com-
ment requested that the rule be extended
to disregard a basis increase in the re-
transferred assets that is attributable to
gain or income recognized by the foreign
acquiring corporation on the transfer of
the re-transferred assets to the transferee
domestic corporation when that gain or
income is subject to U.S. tax (such as gain
recognized by the foreign acquiring cor-
poration with respect to U.S. real property
that is subject to U.S. tax under section
897). These regulations do not provide for
such an extension.

The coordination rule exceptions were
first introduced in proposed regulations
(INTL-54-91) published in the Federal
Register on August 26, 1991 (56 FR
41993). The basis comparison test was
introduced later, in final regulations

(TD 8770) published in the Federal Reg-
ister on June 19, 1998 (63 FR 33550).
Proposed regulations (REG-125628-01)
published in the Federal Register on Jan-
uary 5, 2005 (70 FR 746) proposed further
revisions to the coordination rule excep-
tions in response to concerns "that asset
reorganizations subject to this coordina-
tion rule may be used to facilitate corpo-
rate inversion transactions." Those 2005
proposed regulations were finalized on
January 26, 2006, when the Treasury De-
partment and the IRS published final reg-
ulations (TD 9243) in the Federal Regis-
ter (71 FR 4276). Although the 2008
proposed regulations included a proposal
to further refine one of the coordination
rule exceptions in response to transactions
utilizing that exception to inappropriately
repatriate earnings and profits of foreign
corporations, the proposed refinement was
not included in the final regulations pub-
lished on March 19, 2013. Instead, the
2013 temporary regulations eliminated
this particular exception to the coordina-
tion rule and noted that the "Treasury De-
partment and the IRS have, over time,
clarified and modified the coordination
rule exceptions to address various trans-
actions that give rise to policy concerns."

The Treasury Department and the IRS
remain concerned that the coordination
rule exceptions may be utilized to inap-
propriately reduce U.S. tax, and therefore
decline to liberalize the basis comparison
test. The basis comparison test ensures
preservation of the gain realized but not
recognized by a U.S. transferor in re-
transferred assets in the hands of a trans-
feree domestic corporation by ensuring
that the assets re-transferred into U.S. cor-
porate solution retain identical tax attri-
butes to the assets transferred to the for-
eign acquiring corporation. To the extent
such assets do not have the same basis in
the hands of the transferee domestic cor-
poration and the basis adjustment is not
attributable to gain recognized by the U.S.
transferor, then the basis adjustment pre-
sumably results from transactions occur-
ring in foreign corporate solution (includ-
ing gain recognized under section 897).
The Treasury Department and the IRS be-
lieve the coordination rule exceptions
should not permit shifting of gain or in-
come to a foreign corporation (even when
the gain or income is subject to U.S. tax)

as it may permit the U.S. transferor to
inappropriately utilize the foreign corpo-
ration's favorable tax attributes available
to offset the gain or income.

Accordingly, the text of the 2013 tem-
porary regulations is adopted without sub-
stantive revision. The text is updated
where appropriate for ministerial pur-
poses. For example, the appropriate title
for the LB&I officer responsible for de-
termining whether a failure to comply
with the reporting requirements was due
to reasonable cause and not willful neglect
is "Director of Field Operations, Cross
Border Activities Practice Area of Large
Business & International." It is expected
that future guidance projects will update
titles in other sections of the existing
regulations as appropriate. The corre-
sponding 2013 temporary regulations
are removed.

## Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory assessment is not
required. It is hereby certified that the
collections of information contained in
these regulations will not have a signifi-
cant economic impact on a substantial
number of small entities. Accordingly, a
regulatory flexibility analysis is not re-
quired. These regulations primarily will
affect United States persons that are large
corporations engaged in corporate trans-
actions among their controlled corpora-
tions. Thus, the number of affected small
entities-in any of the three categories
defined in the Regulatory Flexibility Act
(small businesses, small organizations,
and small governmental jurisdictions)-
will not be substantial. The Treasury De-
partment and the IRS estimate that small
organizations and small governmental ju-
risdictions are likely to be affected only
insofar as they transfer the stock of a
controlled corporation to a related corpo-
ration. While a certain number of small
entities may engage in such transactions,
the Treasury Department and the IRS do
not anticipate the number to be substan-
tial. Pursuant to section 7805(f) of the
Code, the NPRM preceding this regula-
tion was submitted to the Chief Counsel
for Advocacy of the Small Business

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Administration for comment on its impact
on small business.

## Drafting Information

The principal author of these regula-
tions is Joshua G. Rabon of the Office of
Associate Chief Counsel (International).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.

* * * * *

## Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended
as follows:

## PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Section 1.367(a)-3 is also issued under
26 U.S.C. 367(a).

* * * * *

Par. 2. Section 1.367(a)-3 is amended
by:

1\. Revising paragraph (d)(2)(vi)(B).

2\. Revising paragraph (d)(3), Examples
6B, 6C, and 9.

3\. Revising paragraph (e).

4\. Revising paragraph (g)(1)(vii)(A).

5\. Adding paragraph (g)(1)(ix).

The revisions and addition read as fol-
lows:

§ 1.367(a)-3 Treatment of transfers of
stock or securities to foreign
corporations.

* * * * *

(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) will
not apply to the extent a domestic corpo-
ration (domestic acquired corporation)
transfers assets to a foreign corporation
(foreign acquiring corporation) in an asset
reorganization, and those assets (re-
transferred assets) are transferred to a do-
mestic corporation (domestic controlled
corporation) in a controlled asset transfer,
provided that each of the following con-
ditions is satisfied:

(i) The domestic controlled corpora-
tion's adjusted basis in the re-transferred
assets is not greater than the domestic
acquired corporation's adjusted basis in
those assets. For this purpose, any in-
crease in basis in the re-transferred assets
that results because the domestic acquired
corporation recognized gain or income
with respect to the re-transferred assets in
the transaction is not taken into account.

(ii) The domestic acquired corporation
includes a statement described in para-
graph (d)(2)(vi)(C) of this section with its
timely filed U.S. income tax return for the
taxable year of the transfer; and

(iii) The requirements of paragraphs
(c)(1)(i), (ii), and (iv) and (c)(6) of this
section are satisfied with respect to the
indirect transfer of stock in the domestic
acquired corporation.

(2) Sections 367(a) and (d) shall not
apply to transfers described in paragraph
(d)(1)(vi) of this section if a U.S. person
transfers assets to a foreign corporation in
a section 351 exchange, to the extent that
such assets are transferred by such foreign
corporation to a domestic corporation in
another section 351 exchange, but only if
the domestic transferee's adjusted basis in
the assets is not greater than the adjusted
basis that the U.S. person had in such
assets. Any increase in adjusted basis in
the assets that results because the U.S.
person recognized gain or income with
respect to such assets in the initial section
351 exchange is not taken into account for
purposes of determining whether the do-
mestic transferee's adjusted basis in the
assets is not greater than the U.S. person's
adjusted basis in such assets. This para-
graph (d)(2)(vi)(B)(2) will not, however,
apply to an exchange described in section
351 that is also an exchange described in
section 361(a) or (b). An exchange de-
scribed in section 351 that is also an ex-
change described in section 361(a) or (b)
is only eligible for the exception in para-
graph (d)(2)(vi)(B)(1) of this section.

* * * * *

(3) * * *

Example 6B. Section 368(a)(1)(C) reorganiza-
tion followed by a controlled asset transfer to a
domestic controlled corporation-(i) Facts. The
facts are the same as in paragraph (d)(3), Example
6A, of this section, except that R is a domestic
corporation.

(ii) Result. As in paragraph (d)(3), Example 6A,
of this section, the outbound transfer of the Business A

assets to F is not affected by the rules of § 1.367-3(d)
and is subject to the general rules under section 367.
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 busi-
ness exception and are not subject to section
367(a)(1). The Business B and C assets are part of an
indirect stock transfer under § 1.367-3(d), but must
first be tested under section 367(a) and (d). The
Business B assets qualify for the active trade or
business exception under section 367(a)(3); the
Business C assets do not. However, pursuant to
paragraph (d)(2)(vi)(B)(1) of this section, the Busi-
ness 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 not greater than the
basis of the assets in the hands of Z, the requirements
of paragraphs (c)(1)(i), (ii), and (iv) and (c)(6) of this
section are satisfied, and Z attaches a statement de-
scribed in paragraphs (d)(2)(vi)(C) of this section to
its U.S. income tax return for the taxable year of the
transfer. V also is deemed to make an indirect trans-
fer of Z stock under the rules of paragraph (d) of this
section to the extent the assets are transferred to R.
To preserve non-recognition treatment, and assum-
ing the other requirements of paragraph (c) of this
section are satisfied, V must enter into a gain recog-
nition agreement in the amount of $50, which equals
the aggregate gain in the Business B and C assets,
because the transfer of those assets by Z was not
taxable under section 367(a)(1) and constitute an
indirect stock transfer.

Example 6C. Section 368(a)(1)(C) reorganiza-
tion followed by a controlled asset transfer to a
domestic controlled corporation-(i) Facts. The
facts are the same as in paragraph (d)(3), Example
6B, of this section, except that Z is owned by U.S.
individuals, none of whom qualify as five-percent
target shareholders with respect to Z within the
meaning of paragraph (c)(5)(iii) of this section. The
following additional facts are present. No U.S. per-
sons that are either officers or directors of Z own any
stock of F immediately after the transfer. F is en-
gaged in an active trade or business outside the
United States that satisfies the test set forth in para-
graph (c)(3) of this section.

(ii) Result. The Business A assets transferred to F
are not re-transferred to R and therefore Z's transfer
of these assets is not subject to the rules of paragraph
(d) of this section. However, gain must be recog-
nized on the transfer of those assets under section
367(a)(1) because the section 367(a)(3) active trade
or business exception is inapplicable pursuant to
section 367(a)(5) and § 1.367(a)-7(b). The Business
B and C assets are part of an indirect stock transfer
under paragraph (d) of this section, but must first be
tested with respect to Z under section 367(a) and (d),
as provided in paragraph (d)(2)(vi) of this section.
The transfer of the Business B assets (which other-
wise 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). The transfer of the Business C as-
sets generally is subject to section 367(a)(1) because
these assets do not qualify for the active trade or
business exception under section 367(a)(3). How-
ever, pursuant to paragraph (d)(2)(vi)(B) of this sec-
tion, the transfer of the Business B and C assets is

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not subject to sections 367(a)(1) and (d), provided
the basis of the Business B and C assets in the hands
of R is no greater than the basis in the hands of Z and
certain other requirements are satisfied. Z may avoid
immediate gain recognition under section 367(a) and
(d) on the transfers of the Business B and Business C
assets to F if, pursuant to paragraph (d)(2)(vi)(B) of
this section, the indirect transfer of Z stock satisfies
the requirements of paragraphs (c)(1)(i), (ii), and (iv)
and (c)(6) of this section, and Z attaches a statement
described in paragraph (d)(2)(vi)(C) of this section
to its U.S. income tax return for the taxable year of
the transfer. In general, the statement must contain a
certification that, if F disposes of the stock of R (in
a recognition or nonrecognition transaction) and a
principal purpose of the transfer is the avoidance of
U.S. tax that would have been imposed on Z on the
disposition of the Business B and C assets trans-
ferred to R, then Z (or F on behalf of Z) will file a
return (or amended return as the case may be) rec-
ognizing gain ($50), as if, immediately prior to the
reorganization, Z transferred the Business B and C
assets to a domestic corporation in exchange for
stock in a transaction treated as a section 351 ex-
change and immediately sold such stock to an unre-
lated party for its fair market value. A transaction is
deemed to have a principal purpose of U.S. tax
avoidance if F disposes of R stock within two years
of the transfer, unless Z (or F on behalf of Z) can
rebut the presumption to the satisfaction of the Com-
missioner. See paragraph (d)(2)(vi)(D)(2) of this sec-
tion. With respect to the indirect transfer of Z stock,
assume the requirements of paragraphs (c)(1)(i), (ii),
and (iv) of this section are satisfied. Thus, assuming
Z attaches the statement described in paragraph
(d)(2)(vi)(C) of this section to its U.S. income tax
return and satisfies the reporting requirements of
paragraph (c)(6) of this section, the transfer of Busi-
ness B and C assets is not subject to immediate gain
recognition under section 367(a) or (d).

* * * * *

Example 9. Indirect stock transfer by reason of a
controlled asset transfer-(i) Facts. The facts are the
same as in paragraph (d)(3), Example 8, of this
section, except that R transfers the Business A assets
to M, a wholly owned domestic subsidiary of R, in a
controlled asset transfer. In addition, V's basis in its
Z stock is $90.

(ii) Result. Pursuant to paragraph (d)(2)(vi)(B) of
this section, sections 367(a) and (d) do not apply to
Z's transfer of the Business A assets to R if M's
basis in the Business A assets is not greater than the
basis of the assets in the hands of Z, the requirements
of paragraphs (c)(1)(i), (ii), and (iv) and (c)(6) of this
section are satisfied, and Z includes a statement
described in paragraph (d)(2)(vi)(C) of this section
with its U.S. income tax return for the taxable year of
the transfer. 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 under section 367(a)(3). Pursuant
to paragraphs (d)(1) and (d)(2)(vii)(A)(1) of this
section, V is generally deemed to transfer the stock
of a foreign corporation to F in a section 354 ex-
change subject to the rules of paragraphs (b) and (d)
of this section, including the requirement that V
enter into a gain recognition agreement and comply

with the requirements of § 1.367(a)-8. However,
pursuant to paragraph (d)(2)(vii)(B) of this section,
paragraph (d)(2)(vii)(A) of this section does not ap-
ply to the extent of the transfer of business A assets
by R to M, a domestic corporation. As a result, to the
extent of the business A assets transferred by R to M,
V is deemed to transfer the stock of Z (a domestic
corporation) to F in a section 354 exchange subject
to the rules of paragraphs (c) and (d) of this section.
Thus, with respect to V's indirect transfer of stock of
a domestic corporation to F, such transfer is not
subject to gain recognition under section 367(a)(1) if
the requirements of paragraph (c) of this section are
satisfied, including the requirement that V enter into
a gain recognition agreement (separate from the gain
recognition agreement described above with respect
to the deemed transfer of stock of a foreign corpo-
ration to F) and comply with the requirements of
§ 1.367(a)-8. Under paragraphs (d)(2)(i) and (ii) of
this section, the transferee foreign corporation is F
and the transferred corporation is R (with respect to
the transfer of stock of a foreign corporation) and M
(with respect to the transfer of stock of a domestic
corporation). Pursuant to paragraph (d)(2)(iv) of this
section, a disposition by F of the stock of R would
trigger both gain recognition agreements. In addi-
tion, a disposition by R of the stock of M would
trigger the gain recognition agreement filed with
respect to the transfer of the stock of a domestic
corporation. To determine whether there is a trigger-
ing event under § 1.367(a)-8(j)(2)(i) for the gain
recognition agreement filed with respect to the trans-
fer of stock of the domestic corporation, the Business
A assets in M must be considered. To determine
whether there is such a triggering event for the gain
recognition agreement filed with respect to the trans-
fer of stock of the foreign corporation, the Business
B assets in R must be considered.

* * * * *

(e) Transfers of stock or securities by a
domestic corporation to a foreign corpo-
ration in a section 361 exchange-(1)
Overview-(i) Scope and definitions. This
paragraph (e) applies to a domestic corpo-
ration (U.S. transferor) that transfers stock
or securities of a domestic or foreign cor-
poration (transferred stock or securities)
to a foreign corporation (foreign acquiring
corporation) in a section 361 exchange.
Except as otherwise provided in this para-
graph (e), paragraphs (b) and (c) of this
section do not apply to the U.S. transfer-
or's transfer of the transferred stock or
securities in the section 361 exchange. For
purposes of this paragraph (e), the defini-
tions of control group, control group
member, and non-control group member
in § 1.367(a)-7(f)(1), ownership interest
percentage in § 1.367(a)-7(f)(7), section
361 exchange in § 1.367(a)-7(f)(8), and
U.S. transferor shareholder in § 1.367(a)-
7(f)(13), apply.

(ii) Ordering rules. Except as other-
wise provided, this paragraph (e) applies
to the transfer of the transferred stock or
securities in the section 361 exchange
prior to the application of any other pro-
vision of section 367 to such transfer.
Furthermore, any gain recognized (includ-
ing gain treated as a deemed dividend
pursuant to section 1248(a)) by the U.S.
transferor under this paragraph (e) shall be
taken into account for purposes of apply-
ing any other provision of section 367
(including §§ 1.367(a)-6, 1.367(a)-7, and
1.367(b)-4) to the transfer of the trans-
ferred stock or securities.

(2) General rule. Except as provided in
paragraph (e)(3) of this section, the trans-
fer by the U.S. transferor of the trans-
ferred stock or securities to the foreign
acquiring corporation in the section 361
exchange shall be subject to section
367(a)(1), and therefore the U.S. trans-
feror shall recognize any gain (but not
loss) realized with respect to the trans-
ferred stock or securities. Realized gain is
recognized pursuant to the prior sentence
notwithstanding that the transfer is de-
scribed in any other nonrecognition pro-
vision enumerated in section 367(a)(1)
(such as section 351 or 354).

(3) Exception. The general rule of para-
graph (e)(2) of this section shall not apply
if the conditions of paragraphs (e)(3)(i),
(ii), and (iii) of this section are satisfied.

(i) The conditions set forth in
§ 1.367(a)-7(c) are satisfied with respect
to the section 361 exchange.

(ii) If the transferred stock or securities
are of a domestic corporation, the U.S.
target company (as defined in paragraph
(c)(1) of this section) complies with the
reporting requirements of paragraph (c)(6)
of this section, and the conditions of para-
graphs (c)(1)(i), (ii), and (iv) of this sec-
tion are satisfied with respect to the trans-
ferred stock or securities.

(iii) If the U.S. transferor owns (apply-
ing the attribution rules of section 318, as
modified by section 958(b)) five percent
or more of the total voting power or the
total value of the stock of the transferee
foreign corporation immediately after the
transfer of the transferred stock or securi-
ties in the section 361 exchange, then the
conditions set forth in paragraphs
(e)(3)(iii)(A), (B), and (C) of this section
are satisfied.

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(A) Except as otherwise provided in
this paragraph (e)(3)(iii)(A), each U.S.
transferor shareholder that is a qualified
U.S. person (as defined in paragraph
(e)(6)(vii) of this section) owning (apply-
ing the attribution rules of section 318, as
modified by section 958(b)) five percent
or more of the total voting power or the
total value of the stock of the transferee
foreign corporation immediately after the
reorganization enters into a gain recogni-
tion agreement that satisfies the conditions
of paragraph (e)(6) of this section and
§ 1.367(a)-8. A U.S. transferor share-
holder is not required to enter into a gain
recognition agreement pursuant to this
paragraph if the amount of gain that
would be subject to the gain recognition
agreement (as determined under para-
graph (e)(6)(i) of this section) is zero.

(B) With respect to non-control group
members that are not described in para-
graph (e)(3)(iii)(A) of this section, the
U.S. transferor recognizes gain equal to
the product of the aggregate ownership
interest percentage of such non-control
group members multiplied by the gain re-
alized by the U.S. transferor on the trans-
fer of the transferred stock or securities.

(C) With respect to each control group
member that is not described in paragraph
(e)(3)(iii)(A) of this section, the U.S.
transferor recognizes gain equal to the
product of the ownership interest percent-
age of such control group member multi-
plied by the gain realized by the U.S.
transferor on the transfer of the transferred
stock or securities.

(4) Application of certain rules at U.S.
transferor-level. For purposes of para-
graphs (c)(5)(iii) and (e)(3)(ii) and (iii) of
this section, ownership of the stock of the
transferee foreign corporation is deter-
mined by reference to stock owned by the
U.S. transferor immediately after the
transfer of the transferred stock or securi-
ties to the foreign acquiring corporation in
the section 361 exchange, but prior to and
without taking into account the U.S. trans-
feror's distribution under section
361(c)(1) of the stock received.

(5) Transferee foreign corporation-
(i) General rule. Except as provided in
paragraph (e)(5)(ii) of this section, the
transferee foreign corporation for pur-
poses of applying paragraph (e) of this
section and § 1.367(a)-8 shall be the for-

eign corporation that issues stock or secu-
rities to the U.S. transferor in the section
361 exchange.

(ii) Special rule for triangular asset
reorganizations involving the receipt of
stock or securities of a domestic corpora-
tion. In the case of a triangular asset reor-
ganization described in § 1.358-
(6)(b)(2)(i), (ii), or (iii) or (b)(2)(v)
(triangular asset reorganization) in which
the U.S. transferor receives stock or secu-
rities of a domestic corporation that is in
control (within the meaning of section
368(c)) of the foreign acquiring corpora-
tion, the transferee foreign corporation
shall be the foreign acquiring corporation.

(6) Special requirements for gain rec-
ognition agreements. A gain recognition
agreement filed by a U.S. transferor share-
holder pursuant to paragraph (e)(3)(iii)(A)
of this section is, in addition to the terms
and conditions of § 1.367(a)-8, subject to
the conditions of this paragraph (e)(6).

(i) The amount of gain subject to the
gain recognition agreement shall equal the
product of the ownership interest percent-
age of the U.S. transferor shareholder
multiplied by the gain realized by the U.S.
transferor on the transfer of the transferred
stock or securities, reduced (but not below
zero) by the sum of the amounts described
in paragraphs (e)(6)(i)(A),(B), (C), and
(D) of this section.

(A) Gain recognized by the U.S. trans-
feror with respect to the transferred stock or
securities under section 367(a)(1) (including
any portion treated as a deemed dividend
under section 1248(a)) that is attributable to
such U.S. transferor shareholder pursuant to
§ 1.367(a)-7(c)(2) or (e)(5).

(B) A deemed dividend included in the
income of the U.S. transferor with respect
to the transferred stock under § 1.367(b)-
4(b)(1)(i) that is attributable to such
U.S. transferor shareholder pursuant to
§ 1.367(a)-7(e)(4).

(C) If the U.S. transferor shareholder is
subject to an election under § 1.1248(f)-
2(c)(1), a deemed dividend included in the
income of the U.S. transferor pursuant to
§ 1.1248(f)-2(c)(3) that is attributable to
the U.S. transferor shareholder.

(D) If the U.S. transferor shareholder is
not subject to an election under § 1.1248(f)-
2(c)(1), the hypothetical section 1248
amount (as defined in § 1.1248(f)-1(c)(4))
with respect to the stock of each foreign

corporation transferred in the section 361
exchange attributable to the U.S. transferor
shareholder.

(ii) The gain recognition agreement
shall include the election described in
§ 1.367(a)-8(c)(2)(vi).

(iii) The gain recognition agreement
shall designate the U.S. transferor share-
holder as the U.S. transferor for purposes
of § 1.367(a)-8.

(iv) If the transfer of the transferred stock
or securities in the section 361 exchange is
pursuant to a triangular asset reorganization,
the gain recognition agreement shall include
appropriate provisions that are consistent
with the principles of § 1.367(a)-8 for gain
recognition agreements involving multiple
parties. See § 1.367(a)-8(j)(9).

(v) The gain recognition agreement shall
not be eligible for termination upon a tax-
able disposition pursuant to § 1.367(a)-
8(o)(1) unless the value of the stock or se-
curities received by the U.S. transferor
shareholder in exchange for the stock or
securities of the U.S. transferor under sec-
tion 354 or 356 is at least equal to the
amount of gain subject to the gain recogni-
tion agreement filed by such U.S. transferor
shareholder.

(vi) Except as otherwise provided in this
paragraph (e)(6)(vi), if gain is subsequently
recognized by the U.S. transferor share-
holder under the terms of the gain recogni-
tion agreement pursuant to § 1.367(a)-
8(c)(1)(i), the increase in stock basis
provided under § 1.367(a)-8(c)(4)(i) with
respect to the stock received by the U.S.
transferor shareholder shall not exceed the
amount of the stock basis adjustment made
pursuant to § 1.367(a)-7(c)(3) with respect
to the stock received by the U.S. transferor
shareholder. This paragraph (e)(6)(vi) shall
not apply if the U.S. transferor shareholder
and the U.S. transferor are members of the
same consolidated group at the time of the
reorganization.

(vii) For purposes of this section, a
qualified U.S. person means a U.S. per-
son, as defined in § 1.367(a)-1T(d)(1), but
for this purpose does not include domestic
partnerships, regulated investment com-
panies (as defined in section 851(a)), real
estate investment trusts (as defined in sec-
tion 856(a)), and S corporations (as de-
fined in section 1361(a)).

(7) Gain subject to section 1248(a). If
the U.S. transferor recognizes gain under

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paragraphs (e)(3)(iii)(B) or (C) of this sec-
tion with respect to transferred stock that
is stock in a foreign corporation to which
section 1248(a) applies, then the portion
of such gain treated as a deemed dividend
under section 1248(a) is the product of the
amount of the gain multiplied by the sec-
tion 1248(a) ratio. The section 1248(a)
ratio is the ratio of the amount that would
be treated as a deemed dividend under
section 1248(a) if all the gain in the trans-
ferred stock were recognized to the
amount of gain realized in all the trans-
ferred stock.

(8) Examples. The following examples
illustrate the provisions of paragraph (e)
of this section. Except as otherwise indi-
cated: US1, US2, and UST are domestic
corporations that are not members of a
consolidated group; X is a United States
citizen; US1, US2, and X are unrelated
parties; CFC1, CFC2, and FA are foreign
corporations; each corporation described
herein has a single class of stock issued
and outstanding and a tax year ending on
December 31; the section 1248 amount
(within the meaning of § 1.367(b)-2(c))
with respect to the stock of CFC1 and
CFC2 is zero; Asset A is section 367(a)
property that, but for the application of
section 367(a)(5), would qualify for the
active foreign trade or business exception
under § 1.367(a)-2T; the requirements of
§ 1.367(a)-7(c)(2) through (5) are satis-
fied with respect to a section 361 ex-
change; the provisions of § 1.367(a)-6T
(regarding branch loss recapture) are not
applicable; and none of the foreign corpo-
rations in the examples is a surrogate for-
eign corporation (within the meaning of
section 7874) as a result of the transac-
tions described in the examples because
one or more of the conditions of section
7874(a)(2)(B) is not satisfied.

Example 1. U.S. transferor owns less than 5% of
stock of transferee foreign corporation-(i) Facts.
US1, US2, and X own 80%, 5%, and 15%, respec-
tively, of the stock of UST with a fair market value
of $160x, $10x, and $30x, respectively. UST has two
assets, Asset A and 100% of the stock of CFC1. UST
has no liabilities. Asset A has a $150x basis and $100x
fair market value (as defined in § 1.367(a)-7(f)(3)), and
the CFC1 stock has a $0x basis and $100x fair market
value. UST transfers Asset A and the CFC1 stock to
FA solely in exchange for $200x of FA voting stock in
a reorganization described in section 368(a)(1)(C).
UST's transfer of Asset A and the CFC1 stock to FA
qualifies as a section 361 exchange. UST distributes the
FA stock received in the section 361 exchange to US1,
US2, and X pursuant to the plan of reorganization, and

liquidates. US1 receives $160x of FA stock, US2 re-
ceives $10x of FA stock, and X receives $30x of FA
stock in exchange for the UST stock. Immediately after
the transfer of Asset A and the CFC1 stock to FA in the
section 361 exchange, but prior to and without taking
into account UST's distribution of the FA stock pursu-
ant to section 361(c)(1), UST does not own (applying
the attribution rules of section 318, as modified by
section 958(b)) five percent or more of the total voting
power or the total value of the stock of FA.

(ii) Result-(A) UST's transfer of the CFC1
stock to FA in the section 361 exchange is subject to
the provisions of this paragraph (e), and this para-
graph (e) applies to the transfer of the CFC1 stock
prior to the application of any other provision of
section 367 to such transfer. See paragraphs (e)(1)(i)
and (ii) of this section. Pursuant to the general rule of
paragraph (e)(2) of this section, UST must recognize
the gain realized of $100x on the transfer of the
CFC1 stock (computed as the excess of the $100x
fair market value over the $0x basis) unless the
requirements for the exception provided in para-
graph (e)(3) of this section are satisfied. In this case,
the requirements of paragraph (e)(3) of this section
are satisfied. First, the requirement of paragraph
(e)(3)(i) of this section is satisfied because the con-
trol requirement of § 1.367(a)-7(c)(1) is satisfied,
and a stated assumption is that the requirements of
§ 1.367(a)-7(c)(2) through (5) will be satisfied. The
control requirement is satisfied because US1 and
US2, each a control group member, own in the
aggregate 85% of the stock of UST immediately
before the reorganization. Second, the requirement
of paragraph (e)(3)(ii) of this section is not applica-
ble because that paragraph applies to the transfer of
stock of a domestic corporation and CFC1 is a for-
eign corporation. Third, paragraph (e)(3)(iii) of this
section is not applicable because immediately after
the section 361 exchange, but prior to and without
taking into account UST's distribution of the FA
stock pursuant to section 361(c)(1), UST does not
own (applying the attribution rules of section 318, as
modified by section 958(b)) 5% or more of the total
voting power or the total value of the stock of FA.
See paragraph (e)(4) of this section. Accordingly,
UST does not recognize the $100x of gain realized in
the CFC1 stock pursuant to this section.

(B) In order to meet the requirements of
§ 1.367(a)-7(c)(2)(i), UST must recognize gain equal
to the portion of the inside gain (as defined in
§ 1.367(a)-7(f)(5)) attributable to non-control group
members (X), or $7.50x. The $7.50x of gain is com-
puted as the product of the inside gain ($50x) multi-
plied by X's ownership interest percentage in UST
(15%). Pursuant to § 1.367(a)-7(f)(5), the $50x of
inside gain is the amount by which the aggregate fair
market value ($200x) of the section 367(a) property (as
defined in § 1.367(a)-7(f)(10), or Asset A and the
CFC1 stock) exceeds the sum of the inside basis
($150x) of such property and the product of the section
367(a) percentage (as defined in § 1.367(a)-7(f)(9), or
100%) multiplied by UST's deductible liabilities (as
defined in § 1.367(a)-7(f)(2), or $0x). Pursuant to
§ 1.367(a)-7(f)(4), the inside basis equals the aggregate
basis of the section 367(a) property transferred in the
section 361 exchange ($150x), increased by any gain or
deemed dividends recognized by UST with respect to
the section 367(a) property under section 367 ($0x), but

not including the $7.50x of gain recognized by UST
under § 1.367(a)-7(c)(2)(i). Pursuant to § 1.367(a)-
7(e)(1), the $7.50x of gain recognized by UST is
treated as recognized with respect to the CFC1 stock
and Asset A in proportion to the amount of gain real-
ized in each. However, because there is no gain realized
by UST with respect to Asset A, all $7.50x of the gain
is allocated to the CFC1 stock. Furthermore, FA's basis
in the CFC1 stock, as determined under section 362 is
increased by the $7.50x of gain recognized by UST.
See § 1.367(a)-1(b)(4)(i)(B).

(C) The requirement to recognize gain under
§ 1.367(a)-7(c)(2)(ii) is not applicable because the por-
tion of the inside gain attributable to US1 and US2
(control group members) can be preserved in the stock
received by each such shareholder. As described in
paragraph (ii)(B) of this Example 1, the inside gain is
$50x. US1's attributable inside gain of $40x (equal to
the product of $50x inside gain multiplied by US1's
80% ownership interest percentage, reduced by $0x,
the sum of the amounts described in § 1.367(a)-
7(c)(2)(ii)(A)(1) through (3)) does not exceed $160x
(equal to the product of the section 367(a) percentage
of 100% multiplied by $160x fair market value of FA
stock received by US1). Similarly, US2's attributable
inside gain of $2.50x (equal to the product of $50x
inside gain multiplied by US2's 5% ownership interest
percentage, reduced by $0x, the sum of the amounts
described in § 1.367(a)-7(c)(2)(ii)(A)(1) through (3)
does not exceed $10x (equal to the product of the
section 367(a) percentage of 100% multiplied by $10x
fair market value of FA stock received by US2).

(D) Each control group member (US1 and US2)
must separately compute any required adjustment to
stock basis under § 1.367(a)-7(c)(3).

Example 2. U.S. transferor owns 5% or more of
the stock of the transferee foreign corporation-(i)
Facts. The facts are the same as in paragraph (e),
Example 1, of this section except that immediately
after the section 361 exchange, but prior to and
without taking into account UST's distribution of the
FA stock pursuant to section 361(c)(1), UST owns
(applying the attribution rules of section 318, as
modified by section 958(b)) 5% or more of the total
voting power or value of the stock of FA. Further-
more, immediately after the reorganization, US1 and
X (but not US2) each own (applying the attribution
rules of section 318, as modified by section 958(b))
five percent or more of the total voting power or
value of the stock of FA.

(ii) Result-(A) As is the case with paragraph
(e), Example 1, of this section, UST's transfer of the
CFC1 stock to FA in the section 361 exchange is
subject to the provisions of this paragraph (e), and
this paragraph (e) applies to the transfer of the CFC1
stock prior to the application of any other provision
of section 367 to such transfer. See paragraphs
(e)(1)(i) and (ii) of this section. In addition, UST
must recognize the gain realized of $100x on the
transfer of the CFC1 stock (computed as the excess
of the $100x fair market value over the $0x basis)
unless the requirements for the exception provided in
paragraph (e)(3) of this section are satisfied. For the
same reasons provided in Example 1, the require-
ment in paragraph (e)(3)(i) of this section is satisfied
and the requirement of paragraph (e)(3)(ii) of this
section is not applicable.

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(B) Unlike paragraph (e), Example 1, of this sec-
tion, however, UST owns 5% or more of the voting
power or value of the stock of FA immediately after the
transfer of the CFC1 stock in the section 361 exchange,
but prior to and without taking into account UST's
distribution of the FA stock under section 361(c)(1). As
a result, paragraph (e)(3)(iii) of this section is applica-
ble to the section 361 exchange of the CFC1 stock.
Accordingly, in order to meet the requirements of para-
graph (e)(3)(iii)(A) of this section US1 and X must
enter into gain recognition agreements that satisfy the
requirements of paragraph (e)(6) of this section and
§ 1.367(a)-8. See paragraph (ii)(G) of this Example 2
for the computation of the amount of gain subject to
each gain recognition agreement.

(C) In order to meet the requirements of paragraph
(e)(3)(iii)(C) of this section, UST must recognize $5x
of gain attributable to US2 (computed as the product of
the $100x of gain realized with respect to the transfer of
the CFC1 stock multiplied by the 5% ownership inter-
est percentage of US2). The $5x of gain recognized is
not included in the computation of inside basis (see
§ 1.367(a)-7(f)(4)(i)), but reduces (but not below zero)
the amount of gain recognized by UST pursuant to
§ 1.367(a)-7(c)(2)(ii) that is attributable to US2. Fur-
thermore, FA's basis in the CFC1 stock as determined
under section 362 is increased for the $5x of gain
recognized. See § 1.367(a)-1(b)(4)(i)(B). Assuming
US1 and X enter into the gain recognition agreements
described in paragraph (ii)(B) of this Example 2, and
UST recognizes the $5x of gain described in this ex-
ample, the requirements of paragraph (e)(3) of this
section are satisfied and, accordingly, UST does not
recognize the remaining $95x of gain realized in the
CFC1 stock pursuant to this section.

(D) As described in paragraph (ii)(B) of Example 1
of this paragraph (e), UST must recognize $7.50x of
gain pursuant to § 1.367(a)-7(c)(2)(i), the amount of
the $50x of inside gain attributable to X. Pursuant to
§ 1.367(a)-7(e)(1), the $7.50x of gain recognized by
UST is treated as recognized with respect to the CFC1
stock and Asset A in proportion to the amount of gain
realized in each. However, because there is no gain
realized by UST with respect to Asset A, all $7.50x of
the gain is allocated to the CFC1 stock. Furthermore,
FA's basis in the CFC1 stock as determined under
section 362 is increased for the $7.50x of gain recog-
nized. See § 1.367(a)-1(b)(4)(i)(B).

(E) As described in paragraph (ii)(C) of Example
1 of this paragraph (e), the requirement to recognize
gain pursuant to § 1.367(a)-7(c)(2)(ii) is not appli-
cable because the attributable inside gain of US1 and
US2 can be preserved in the stock received by each
shareholder. However, if UST were required to rec-
ognize gain pursuant to § 1.367(a)-7(c)(2)(ii) for
inside gain attributable to US2 (for example, if US2
received solely cash rather than FA stock in the
reorganization), the amount of such gain would be
reduced (but not below zero) by the amount of gain
recognized by UST pursuant to paragraph
(e)(3)(iii)(C) of this section that is attributable to
US2 (computed as $5x in paragraph (ii)(C) of this
Example 2). See § 1.367(a)-7(c)(2)(ii)(A)(1).

(F) Each control group member (US1 and US2)
must separately compute any required adjustment to
stock basis under § 1.367(a)-7(c)(3).

(G) The amount of gain subject to the gain recog-
nition agreement filed by each of US1 and X is deter-

mined pursuant to paragraph (e)(6)(i) of this section.
With respect to US1, the amount of gain subject to the
gain recognition agreement is $80x. The $80x is com-
puted as the product of US1's ownership interest per-
centage (80%) multiplied by the gain realized by UST
in the CFC1 stock as determined prior to taking into
account the application of any other provision of sec-
tion 367 ($100x), reduced by the sum of the amounts
described in paragraphs (e)(6)(i)(A) through (D) of this
section attributable to US1 ($0x). With respect to X, the
amount of gain subject to the gain recognition agree-
ment is $7.50x. The $7.50x is computed as the product
of X's ownership interest percentage (15%) multiplied
by the gain realized by UST in the CFC1 stock as
determined prior to taking into account the applica-
tion of any other provision of section 367 ($100x),
reduced by the sum of the amounts described in
paragraphs (e)(6)(i)(A) through (D) of this section
attributable to X ($7.50x, as computed in paragraph
(ii)(D) of this Example 2).

(H) In order the meet the requirements of para-
graph (e)(6)(ii) of this section, each gain recognition
agreement must include the election described in
§ 1.367(a)-8(c)(2)(vi). Furthermore, pursuant to para-
graph (e)(6)(iii) of this section, US1 and X must be
designated as the U.S. transferor on their respective gain
recognition agreements for purposes of § 1.367(a)-8.

Example 3. U.S. transferor owns 5% or more of
the stock of the transferee foreign corporation; in-
teraction with section 1248(f)-(i) Facts. US1, US2,
and X own 50%, 30%, and 20%, respectively, of the
stock of UST. The UST stock owned by US1 has a
$180x basis and $200x fair market value; the UST
stock owned by US2 has a $100x basis and $120x fair
market value; and the UST stock owned by X has a
$80x fair market value. UST owns Asset A, and all the
stock of CFC1 and CFC2. UST has no liabilities. Asset
A has a $10x basis and $200x fair market value. The
CFC1 stock is a single block of stock (as defined in
§ 1.1248(f)-1(c)(2)) with a $20x basis, $40x fair mar-
ket value, and $30x of earnings and profits attributable
to it for purposes of section 1248 (with the result that
the section 1248 amount (as defined in § 1.1248(f)-
1(c)(9) is $20x). The CFC2 stock is also a single block
of stock with a $30x basis, $160x fair market value,
and $150x of earnings and profits attributable to it for
purposes of section 1248 (with the result that the sec-
tion 1248 amount is $130x). On December 31, Year 3,
in a reorganization described in section 368(a)(1)(D),
UST transfers the CFC1 stock, CFC2 stock, and Asset
A to FA in exchange for 60 shares of FA stock with a
$400x fair market value. UST's transfer of the CFC1
stock, CFC2 stock, and Asset A to FA in exchange for
the 60 shares of FA stock qualifies as a section 361
exchange. UST distributes the FA stock received in the
section 361 exchange to US1, US2, and X pursuant to
section 361(c)(1). US1, US2, and X exchange their
UST stock for 30, 18, and 12 shares, respectively, of
FA stock pursuant to section 354. Immediately after the
reorganization, FA has 100 shares of stock outstanding,
and US1 and US2 are each a section 1248 shareholder
with respect to FA.

(ii) Result-(A) UST's transfer of the CFC1
stock and CFC2 stock to FA in the section 361
exchange is subject to the provisions of this para-
graph (e), and this paragraph (e) applies to the trans-
fer of the CFC1 stock and CFC2 stock prior to the
application of any other provision of section 367 to

such transfer. See paragraphs (e)(1)(i) and (ii) of this
section. Pursuant to the general rule of paragraph
(e)(2) of this section, UST must recognize the gain
realized of $20x on the transfer of the CFC1 stock
(the excess of $40x fair market value over $20x
basis) and the gain realized of $130x on the transfer
of the CFC2 stock (the excess of $160x fair market
value over $30x basis), subject to the application of
section 1248(a), unless the requirements for the ex-
ception provided in paragraph (e)(3) of this section
are satisfied. In this case, the requirement of para-
graph (e)(3)(i) of this section is satisfied because the
control requirement of § 1.367(a)-7(c)(1) is satis-
fied, and a stated assumption is that the requirements
of § 1.367(a)-7(c)(2) through (5) will be satisfied. The
control requirement is satisfied because US1 and US2,
each a control group member, own in the aggregate
80% of the UST stock immediately before the reorga-
nization. The requirement of paragraph (e)(3)(ii) of this
section is not applicable because paragraph (e)(3)(ii)
applies to the transfer of stock of a domestic corpora-
tion, and CFC1 and CFC2 are foreign corporations.
UST owns 5% or more of the total voting power or
value of the stock of FA (60%, or 60 of the 100 shares
of FA stock outstanding) immediately after the transfer
of the CFC1 stock and CFC2 stock in the section 361
exchange, but prior to and without taking into account
UST's distribution of the FA stock under section
361(c)(1). As a result, paragraph (e)(3)(iii) of this sec-
tion is applicable to the section 361 exchange of the
CFC1 stock and CFC2 stock. US1, US2, and X each
own (applying the attribution rules of section 318, as
modified by section 958(b)) 5% or more of the total
voting power or value of the FA stock immediately
after the reorganization, or 30%, 18%, and 12%, re-
spectively. Accordingly, in order to meet the require-
ments of paragraph (e)(3)(iii)(A) of this section, US1
and US2 must enter into gain recognition agreements
with respect to the CFC1 stock and CFC2 stock that
satisfy the requirements of paragraph (e)(6) of this
section and § 1.367(a)-8. X is not required to enter into
a gain recognition agreement because the amount of
gain that would be subject to the gain recognition
agreement is zero. See paragraph (ii)(J) of this Example
3 for the computation of the amount of gain subject to
each gain recognition agreement. Assuming US1 and
US2 enter into the gain recognitions agreements de-
scribed above, the requirements of paragraph (e)(3) of
this section are satisfied and accordingly, UST does not
recognize the gain realized of $20x in the stock of
CFC1 or the gain realized of $130x in the stock of
CFC2 pursuant to this section.

(B) UST's transfer of the CFC1 stock and CFC2
stock to FA pursuant to the section 361 exchange is
subject to § 1.367(b)-4(b)(1)(i), which applies prior to
the application of § 1.367(a)-7(c). See paragraph (e)(1)
of this section. UST (the exchanging shareholder) is a
U.S. person and a section 1248 shareholder with re-
spect to CFC1 and CFC2 (each a foreign acquired
corporation). However, UST is not required to include
in income as a deemed dividend the section 1248
amount with respect to the CFC1 stock ($20x) or CFC2
stock ($130x) under § 1.367(b)-4(b)(1)(i) because, im-
mediately after UST's section 361 exchange of the
CFC1 stock and CFC2 stock for FA stock (and before
the distribution of the FA stock to US1, US2, and X
under section 361(c)(1), FA, CFC1, and CFC2 are
controlled foreign corporations as to which UST is a

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section 1248 shareholder. See § 1.367(b)-
4(b)(1)(ii)(A). However, if UST were required to in-
clude in income as a deemed dividend the section 1248
amount with respect to the CFC1 stock or CFC2 stock
(for example, if FA were not a controlled foreign cor-
poration), such deemed dividend would be taken into
account prior to the application of § 1.367(a)-7(c).
Furthermore, because US1, US2, and X are all persons
described in paragraph (e)(3)(iii)(A) of this section, any
such deemed dividend would increase inside basis. See
§ 1.367(a)-7(f)(4).

(C) In order to meet the requirements of
§ 1.367(a)-7(c)(2)(i), UST must recognize gain
equal to the portion of the inside gain attributable to
non-control group members (X), or $68x. The $68x of
gain is computed as the product of the inside gain
($340x) multiplied by X's ownership interest percent-
age in UST (20%), reduced (but not below zero) by
$0x, the sum of the amounts described in § 1.367(a)-
7(c)(2)(i)(A) through (C). Pursuant to § 1.367(a)-
7(f)(5), the $340x of inside gain is the amount by which
the aggregate fair market value ($400x) of the section
367(a) property (Asset A, CFC1 stock, and CFC2
stock) exceeds the sum of the inside basis ($60x) and
$0x (the product of the section 367(a) percentage
(100%) multiplied by UST's deductible liabilities
($0x)). Pursuant to § 1.367(a)-7(f)(4), the inside basis
equals the aggregate basis of the section 367(a) prop-
erty transferred in the section 361 exchange ($60x),
increased by any gain or deemed dividends recognized
by UST with respect to the section 367(a) property
under section 367 ($0x), but not including the $68x of
gain recognized by UST under § 1.367(a)-7(c)(2)(i).
Under § 1.367(a)-7(e)(1), the $68x gain recognized is
treated as being with respect to the CFC1 stock, CFC2
stock, and Asset A in proportion to the amount of gain
realized by UST on the transfer of the property. The
amount treated as recognized with respect to the CFC1
stock is $4x ($68x gain multiplied by $20x/$340x).
The amount treated as recognized with respect to the
CFC2 stock is $26x ($68x gain multiplied by $130x/
$340x). The amount treated as recognized with respect
to Asset A is $38x ($68x gain multiplied by $190x/
$340x). Under section 1248(a), UST must include in
gross income as a dividend the $4x gain recognized
with respect to the CFC1 stock and the $26x gain
recognized with respect to CFC2 stock. Furthermore,
FA's basis in the CFC1 stock, CFC2 stock, and Asset
A, as determined under section 362, is increased by the
amount of gain recognized by UST with respect to such
property. See § 1.367(a)-1(b)(4)(i)(B). Thus, FA's ba-
sis in the CFC1 stock is $24x ($20x increased by $4x
of gain), the CFC2 stock is $56x ($30x increased by
$26x of gain), and Asset A is $48x ($10x increased by
$38x of gain).

(D) The requirement to recognize gain under
§ 1.367(a)-7(c)(2)(ii) is not applicable because the
portion of the inside gain attributable to US1 and US2
(control group members) can be preserved in the stock
received by each such shareholder. As described in
paragraph (ii)(C) of this Example 3, the inside gain is
$340x. US1's attributable inside gain of $170x (equal
to the product of $340x inside gain multiplied by US1's
50% ownership interest percentage, reduced by $0x,
the sum of the amounts described in § 1.367(a)-
7(c)(2)(ii)(A)(1) through (3)) does not exceed $200x
(equal to the product of the section 367(a) percentage
of 100% multiplied by $200x fair market value of FA

stock received by US1). Similarly, US2's attributable
inside gain of $102x (equal to the product of $340x
inside gain multiplied by US2's 30% ownership inter-
est percentage, reduced by $0x, the sum of the amounts
described in § 1.367(a)-7(c)(2)(ii)(A)(1) through (3))
does not exceed $120x (equal to the product of the
section 367(a) percentage of 100% multiplied by $120x
fair market value of FA stock received by US2).

(E) Each control group member (US1 and US2)
separately computes any required adjustment to
stock basis under § 1.367(a)-7(c)(3). US1's section
358 basis in the FA stock received of $180x (equal to
US1's basis in the UST stock exchanged) is reduced
to preserve the attributable inside gain with respect
to US1, less any gain recognized with respect to US1
under § 1.367(a)-7(c)(2)(ii). Because UST does not
recognize gain on the section 361 exchange with
respect to US1 under § 1.367(a)-7(c)(2)(ii) (as de-
termined in paragraph (ii)(D) of this Example 3), the
attributable inside gain of $170x with respect to US1
is not reduced under § 1.367(a)-7(c)(3)(i)(A). US1's
outside gain (as defined in § 1.367(a)-7(f)(6)) in the
FA stock is $20x, the product of the section 367(a)
percentage (100%) multiplied by the $20x gain
(equal to the difference between $200x fair market
value and $180x section 358 basis in the FA stock).
Thus, US1's $180x section 358 basis in the FA stock
must be reduced by $150x (the excess of $170x
attributable inside gain, reduced by $0x, over $20x
outside gain) to $30x. Similarly, US2's section 358
basis in the FA stock received of $100x (equal to
US2's basis in the UST stock exchanged) is reduced
to preserve the attributable inside gain with respect
to US2, less any gain recognized with respect to US2
under § 1.367(a)-7(c)(2)(ii). Because UST does not
recognize gain on the section 361 exchange with
respect to US2 under § 1.367(a)-7(c)(2)(ii) (as de-
termined in paragraph (ii)(D) of this Example 3), the
attributable inside gain of $102x with respect to US2
is not reduced under § 1.367(a)-7(c)(3)(i)(A). US2's
outside gain in the FA stock is $20x, the product of
the section 367(a) percentage (100%) multiplied by
the $20x gain (equal to the difference between $120x
fair market value and $100x section 358 basis in FA
stock). Thus, US2's $100x section 358 basis in the
FA stock must be reduced by $82x (the excess of
$102x attributable inside gain, reduced by $0x, over
$20x outside gain) to $18x.

(F) UST's distribution of the FA stock to US1,
US2, and X under section 361(c)(1) (new stock
distribution) is subject to § 1.1248(f)-1(b)(3). Ex-
cept as provided in § 1.1248(f)-2(c), under
§ 1.1248(f)-1(b)(3) UST must include in gross in-
come as a dividend the total section 1248(f) amount
(as defined in § 1.1248(f)-1(c)(14)). The total sec-
tion 1248(f) amount is $120x, the sum of the section
1248(f) amount (as defined in § 1.1248(f)-1(c)(10))
with respect to the CFC1 stock ($16x) and CFC2
stock ($104x). The $16x section 1248(f) amount
with respect to the CFC1 stock is the amount that
UST would have included in income as a dividend
under § 1.367(b)-4(b)(1)(i) with respect to the
CFC1 stock if the requirements of § 1.367(b)-
4(b)(1)(ii)(A) had not been satisfied ($20x), reduced
by the amount of gain recognized by UST under
§ 1.367(a)-7(c)(2) allocable to the CFC1 stock and
treated as a dividend under section 1248(a) ($4x, as
described in paragraph (ii)(C) of this Example 3).

Similarly, the section 1248(f) amount with respect to
the CFC2 stock is $104x ($130x reduced by $26x).

(G) If, however, UST along with US1 and US2
(each a section 1248 shareholder of FA immediately
after the distribution) elect to apply the provisions of
§ 1.1248(f)-2(c) (as provided in § 1.1248(f)-
2(c)(1)), the amount that UST is required to include
in income as a dividend under § 1.1248(f)-1(b)(3)
($120x total section 1248(f) amount as computed in
paragraph (ii)(F) of this Example 3) is reduced by the
sum of the portions of the section 1248(f) amount
with respect to the CFC1 stock and CFC2 stock that
is attributable (under the rules of § 1.1248(f)-2(d)) to
the FA stock distributed to US1 and US2. Assume
that the election is made to apply § 1.1248(f)-2(c).

(1) Under § 1.1248(f)-2(d)(1), the portion of the
section 1248(f) amount with respect to the CFC1
stock that is attributed to the 30 shares of FA stock
distributed to US1 is equal to the hypothetical sec-
tion 1248 amount (as defined in § 1.1248(f)-1(c)(4))
with respect to the CFC1 stock that is attributable to
US1's ownership interest percentage in UST. US1's
hypothetical section 1248 amount with respect to the
CFC1 stock is the amount that UST would have
included in income as a deemed dividend under
§ 1.367(b)-4(b)(1)(i) with respect to the CFC1 stock
if the requirements of § 1.367(b)-4(b)(1)(ii)(A) had
not been satisfied ($20x) and that would be attribut-
able to US1's ownership interest percentage in UST
(50%), reduced by the amount of gain recognized by
UST under § 1.367(a)-7(c)(2) attributable to US1 and
allocable to the CFC1 stock, but only to the extent such
gain is treated as a dividend under section 1248(a)
($0x, as described in paragraphs (ii)(C) and (D) of this
Example 3). Thus, US1's hypothetical section 1248
amount with respect to the CFC1 stock is $10x ($20x
multiplied by 50%, reduced by $0x). The $10x hypo-
thetical section 1248 amount is attributed pro rata
(based on relative values) among the 30 shares of FA
stock distributed to US1, and the attributable share
amount (as defined in § 1.1248(f)-2(d)(1)) is $.33x
($10x/30 shares). Similarly, US1's hypothetical section
1248 amount with respect to the CFC2 stock is $65x
($130x multiplied by 50%, reduced by $0x), and the
attributable share amount is $2.17x ($65x/30 shares).
Similarly, US2's hypothetical section 1248 amount
with respect to the CFC1 stock is $6x ($20x multiplied
by 30%, reduced by $0x), and the attributable share
amount is also $.33x ($6x/18 shares). Finally, US2's
hypothetical section 1248 amount with respect to the
CFC2 stock is $39x ($130x multiplied by 30%, re-
duced by $0x), and the attributable share amount is also
$2.17x ($39x/18 shares). Thus, the sum of the portion
of the section 1248(f) amount with respect to the CFC1
stock and CFC2 stock attributable to shares of stock of
FA distributed to US1 and US2 is $120x ($10x plus
$65x plus $6x plus $39x).

(2) If the shares of FA stock are divided into
portions, § 1.1248(f)-2(d)(2) applies to attribute the
attributable share amount to portions of shares of
FA stock distributed to US1 and US2. Under
§ 1.1248(f)-2(c)(2) each share of FA stock received
by US1 (30 shares) and US2 (18 shares) is divided
into three portions, one attributable to the single
block of stock of CFC1, one attributable to the single
block of stock of CFC2, and one attributable to Asset
A. Thus, the attributable share amount of $.33x with
respect to the CFC1 stock is attributed to the portion

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of each of the 30 shares and 18 shares of FA stock
received by US1 and US2, respectively, that relates
to the CFC1 stock. Similarly, the attributable share
amount of $2.17x with respect to the CFC2 stock is
attributed to the portion of each of the 30 shares and
18 shares of FA stock received by US1 and US2,
respectively, that relates to the CFC2 stock.

(3) The total section 1248(f) amount ($120x) that
UST is otherwise required to include in gross income
as a dividend under § 1.1248(f)-1(b)(3) is reduced
by $120x, the sum of the portions of the section
1248(f) amount with respect to the CFC1 stock and
CFC2 stock that are attributable to the shares of FA
stock distributed to US1 and US2. Thus, the amount
DC is required to include in gross income as a
dividend under § 1.1248(f)-1(b)(3) is $0x ($120x
reduced by $120x).

(H) As stated in paragraph (ii)(G)(2) of this
Example 3, under § 1.1248(f)-2(c)(2) each share of
FA stock received by US1 (30 shares) and US2 (18
shares) is divided into three portions, one attributable
to the CFC1 stock, one attributable to the CFC2
stock, and one attributable to Asset A. Under
§ 1.1248(f)-2(c)(4)(i), the basis of each portion is
the product of US1's and US2's section 358 basis in
the share of FA stock multiplied by the ratio of the
section 362 basis of the property (CFC1 stock, CFC2
stock, or Asset A, as applicable) received by FA in
the section 361 exchange to which the portion re-
lates, to the aggregate section 362 basis of all prop-
erty received by FA in the section 361 exchange.
Under § 1.1248(f)-2(c)(4)(ii), the fair market value
of each portion is the product of the fair market value
of the share of FA stock multiplied by the ratio of the
fair market value of the property (CFC1 stock, CFC2
stock, or Asset A, as applicable) to which the portion
relates, to the aggregate fair market value of all
property received by FA in the section 361 ex-
change. The section 362 basis of the CFC1 stock,
CFC2 stock, and Asset A is $24x, $56x, and $48x,
respectively, for an aggregate section 362 basis of
$128x. See paragraph (ii)(C) of this Example 3. The
fair market value of the CFC1 stock, CFC2 stock,
and Asset A is $40x, $160x, and $200x, for an
aggregate fair market value of $400x. Furthermore,
US1's 30 shares of FA stock have an aggregate fair
market value of $200x and section 358 basis of $30x
(resulting in aggregate gain of $170x), and US2's 18
shares of FA stock have an aggregate fair market
value of $120x and section 358 basis of $18x (re-
sulting in aggregate gain of $102x). See paragraph
(ii)(E) of this Example 3.

(1) With respect to US1's 30 shares of FA stock,
the portions attributable to the CFC1 stock have an
aggregate basis of $5.63x ($30x multiplied by $24x/
$128x) and fair market value of $20x ($200x multi-
plied by $40x/$400x), resulting in aggregate gain in
such portions of $14.38x (or $.48x gain in each such
portion of the 30 shares). The portions attributable to
the CFC2 stock have an aggregate basis of $13.13x
($30x multiplied by $56x/$128x) and fair market
value of $80x ($200x multiplied by $160x/$400x),
resulting in aggregate gain in such portions of
$66.88x (or $2.23x in each such portion of the 30
shares). The portions attributable to Asset A have an
aggregate basis of $11.25x ($30x multiplied by
$48x/$128x) and fair market value of $100x ($200x
multiplied by $200x/$400x), resulting in aggregate

gain in such portions of $88.75x (or $2.96x in each
such portion of the 30 shares). Thus, the aggregate
gain in all the portions of the 30 shares is $170x
($14.38x plus $66.88x plus $88.75x).

(2) With respect to US2's 18 shares of FA stock,
the portions attributable to the CFC1 stock have an
aggregate basis of $3.38x ($18x multiplied by $24x/
$128x) and fair market value of $12x ($120x multi-
plied by $40x/$400x), resulting in aggregate gain in
such portions of $8.63x (or $.48x in each such por-
tion of the 18 shares). The portions attributable to the
CFC2 stock have an aggregate basis of $7.88x ($18x
multiplied by $56x/$128x) and fair market value of
$48x ($120x multiplied by $160x/$400x), resulting
in aggregate gain of $40.13x (or $2.23x in each such
portion of the 18 shares). The portions attributable to
Asset A have an aggregate basis of $6.75x ($18x
multiplied by $48x/$128x) and fair market value of
$60x ($120x multiplied by $200x/$400x), resulting
in aggregate gain of $53.25x (or $2.96x in each such
portion of the 18 shares). Thus, the aggregate gain in
all the portions of the 18 shares is $102x ($8.63x
plus $40.13x plus $53.25x).

(3) Under § 1.1248-8(b)(2)(iv), the earnings and
profits of CFC1 attributable to the portions of US1's
30 shares of FA stock that relate to the CFC1 stock
is $15x (the product of US1's 50% ownership inter-
est percentage in UST multiplied by $30x of earn-
ings and profits attributable to the CFC1 stock before
the section 361 exchange, reduced by $0x of divi-
dend included in UST's income with respect to the
CFC1 stock under section 1248(a) attributable to
US1). The earnings and profits of CFC2 attributable
to the portions of US1's 30 shares of FA stock that
relate to the CFC2 stock is $75x (the product of
US1's 50% ownership interest percentage in UST
multiplied by $150x of earnings and profits attribut-
able to the CFC2 stock before the section 361 ex-
change, reduced by $0x of dividend included in
UST's income with respect to the CFC2 stock under
section 1248(a) attributable to US1). Similarly, the
earnings and profits of CFC1 attributable to the por-
tions of US2's 18 shares of FA stock that relate to
the CFC1 stock is $9x (the product of US2's 30%
ownership interest percentage in UST multiplied by
$30x of earnings and profits attributable to the CFC1
stock before the section 361 exchange, reduced by
$0x of dividend included in UST's income with
respect to the CFC1 stock under section 1248(a)
attributable to US2). Finally, the earnings and profits
of CFC2 attributable to the portions of US2's 18
shares of FA stock that relate to the CFC2 stock is
$45x (the product of US2's 30% ownership interest
percentage in UST multiplied by $150x of earnings
and profits attributable to the CFC2 stock before the
section 361 exchange, reduced by $0x of dividend
included in UST's income with respect to the CFC2
stock under section 1248(a) attributable to US2).

(I) Under § 1.1248(f)-2(c)(3), neither US1 nor
US2 is required to reduce the aggregate section 358
basis in the portions of their respective shares of FA
stock, and UST is not required to include in gross
income any additional deemed dividend.

(1) US1 is not required to reduce the aggregate
section 358 basis of the portions of its 30 shares of
FA stock that relate to the CFC1 stock because the
$10x section 1248(f) amount with respect to the
CFC1 stock attributable to the portions of the shares

of FA stock received by US1 (as computed in para-
graph (ii)(G) of this Example 3) does not exceed
US1's postdistribution amount (as defined in
§ 1.1248(f)-1(c)(6), or $14.38x) in those portions.
The $14.38x postdistribution amount equals the
amount that US1 would be required to include in
income as a dividend under section 1248(a) with
respect to such portion if it sold the 30 shares of FA
stock immediately after the distribution in a transac-
tion in which all realized gain is recognized, without
taking into account basis adjustments or income in-
clusions under § 1.1248(f)-2(c)(3) ($20x fair market
value, $5.63x basis, and $15x earnings and profits
attributable to the portions for purposes of section
1248). Similarly, US1 is not required to reduce the
aggregate section 358 basis of the portions of its 30
shares of FA stock that relate to the CFC2 stock
because the $65x section 1248(f) amount with re-
spect to the CFC2 stock attributable to the portions
of the shares of FA stock received by US1 (as
computed in paragraph (ii)(G) of this Example 3)
does not exceed US1's postdistribution amount
($66.88x) in those portions. The $66.88x postdistri-
bution amount equals the amount that US1 would be
required to include in income as a dividend under
section 1248(a) with respect to such portion if it sold
the 30 shares of FA stock immediately after the
distribution in a transaction in which all realized gain
is recognized, without taking into account basis ad-
justments or income inclusions under § 1.1248(f)-
2(c)(3) ($80x fair market value, $13.13x basis, and
$75x earnings and profits attributable to the portions
for purposes of section 1248).

(2) US2 is not required to reduce the aggregate
section 358 basis of the portions of its 18 shares of
FA stock that relate to the CFC1 stock because the
$6x section 1248(f) amount with respect to the CFC1
stock attributable to the portions of the shares of FA
stock received by US2 (as computed in paragraph
(ii)(G) of this Example 3) does not exceed US2's
postdistribution amount ($8.63x) in those portions.
The $8.63x postdistribution amount equals the
amount that US2 would be required to include in
income as a dividend under section 1248(a) with
respect to such portion if it sold the 18 shares of FA
stock immediately after the distribution in a transac-
tion in which all realized gain is recognized, without
taking into account basis adjustments or income in-
clusions under § 1.1248(f)-2(c)(3) ($12x fair market
value, $3.38x basis, and $9x earnings and profits
attributable to the portions for purposes of section
1248). Similarly, US2 is not required to reduce the
aggregate section 358 basis of the portions of its 18
shares of FA stock that relate to the CFC2 stock
because the $39x section 1248(f) amount with re-
spect to the CFC2 stock attributable to the portions
of the shares of FA stock received by US2 (as
computed in paragraph (ii)(G) of this Example 3)
does not exceed US1's postdistribution amount
($40.13x) in those portions. The $40.13x postdistri-
bution amount equals the amount that US2 would be
required to include in income as a dividend under
section 1248(a) with respect to such portion if it sold
the 18 shares of FA stock immediately after the
distribution in a transaction in which all realized gain
is recognized, without taking into account basis ad-
justments or income inclusions under § 1.1248(f)-
2(c)(3) ($48x fair market value, $7.88x basis, and

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$45x earnings and profits attributable to the portions
for purposes of section 1248).

(J) The amount of gain subject to the gain rec-
ognition agreement filed by each of US1 and US2 is
determined pursuant to paragraph (e)(6)(i) of this
section. The amount of gain subject to the gain
recognition agreement filed by US1 with respect to
the stock of CFC1 and CFC2 is $10x and $65x,
respectively. The $10x and $65x are computed as the
product of US1's ownership interest percentage
(50%) multiplied by the gain realized by UST in the
CFC1 stock ($20x) and CFC2 stock ($130x), respec-
tively, as determined prior to taking into account the
application of any other provision of section 367,
reduced by the sum of the amounts described in
paragraphs (e)(6)(i)(A) through (D) of this section
with respect to the CFC1 stock and CFC2 stock
attributable to US1 ($0x with respect to the CFC1
stock, and $0x with respect to the CFC2 stock). The
amount of gain subject to the gain recognition agree-
ment filed by US2 with respect to the stock of CFC1
and CFC2 is $6x and $39x, respectively. The $6x
and $39x are computed as the product of US2's
ownership interest percentage (30%) multiplied by
the gain realized by UST in the CFC1 stock ($20x)
and CFC2 stock ($130x), respectively, as determined
prior to taking into account the application of any
other provision of section 367, reduced by the sum of
the amounts described in paragraphs (e)(6)(i)(A)
through (D) of this section with respect to the CFC1
stock and CFC2 stock attributable to US2 ($0x with
respect to the CFC1 stock, and $0x with respect to
the CFC2 stock). X is not required to enter into a
gain recognition agreement because the amount of
gain that would be subject to the gain recognition
agreement is $0x with respect to the CFC1 stock, and
$0x with respect to the CFC2 stock, computed as X's
ownership percentage (20%) multiplied by the gain
realized in the stock of CFC1 ($20x multiplied by
20%, or $4x) and CFC2 ($130x multiplied by 20%,
or $26x), reduced by the amount of gain recognized
by UST with respect to the stock of CFC1 and CFC2
that is attributable to X pursuant to § 1.367(a)-
7(c)(2) ($4x and $26x, respectively, as determined in
paragraph (ii)(C) of this Example 3). Pursuant to
paragraph (e)(6)(ii) of this section, each gain recog-
nition agreement must include the election described
in § 1.367(a)-8(c)(2)(vi). Furthermore, pursuant to
paragraph (e)(6)(iii) of this section, US1 and US2
must be designated as the U.S. transferor on their
respective gain recognition agreements for purposes
of § 1.367(a)-8.

(9) Illustration of rules. For rules relat-
ing to certain distributions of stock of a
foreign corporation by a domestic corpora-
tion, see section 1248(f) and §§ 1.1248(f)-1
through 1.1248(f)-3.

** * * *

(g) * * *

(1) * * *

(vii) * * *

(A) Except as provided in this para-
graph (g)(1)(vii), the rules of paragraph
(e) of this section apply to transfers of
stock or securities occurring on or after
April 17, 2013. For matters covered in this

section for periods before April 17, 2013,
but on or after March 13, 2009, see
§ 1.367(a)-3(e) as contained in 26 CFR
part 1 revised as of April 1, 2012. For
matters covered in this section for periods
before March 13, 2009, but on or after
March 7, 2007, see § 1.367(a)-3T(e) as
contained in 26 CFR part 1 revised as of
April 1, 2007. For matters covered in this
section for periods before March 7, 2007,
but on or after July 20, 1998, see
§ 1.367(a)-8(f)(2)(i) as contained in 26
CFR part 1 revised as of April 1, 2006.
* * * * *

(ix) Paragraphs (d)(2)(vi)(B)(1)(i) and
(iii), (d)(2)(vi)(B)(2), and (d)(3), Exam-
ples 6B, 6C, and 9 of this section apply to
transfers that occur on or after March 18,
2013. See paragraphs (d)(2)(vi)(B)(1)(i)
and (iii), (d)(2)(vi)(B)(2), and (d)(3), Ex-
amples 6B, 6C, and 9 of this section, as
contained in 26 CFR part 1 revised as of
April 1, 2012, for transfers that occur on or
after January 23, 2006, and before March
18, 2013. Paragraph (d)(2)(vi)(B)(1)(ii) of
this section applies to statements that are
required to be filed on or after November
19, 2014. See paragraph (d)(2)(vi)(B)(1)(ii)
of this section, as contained in 26 CFR part
1 revised as of April 1, 2014, for statements
required to be filed on or after March 18,
2013, and before November 19, 2014.

* * * * *

§ 1.367(a)-3T [Removed]

Par. 3. § 1.367(a)-3T is removed.

Par. 4. Section 1.367(a)-6 is added to
read as follows:

§ 1.367(a)-6 Transfer of foreign branch
with previously deducted losses.

(a) through (e)(3) [Reserved]. For fur-
ther guidance, see § 1.367(a)-6T(a)
through (e)(3).

(4) Gain recognized under section
367(a). The previously deducted branch
losses shall be reduced by any gain rec-
ognized pursuant to section 367(a)(1)
(other than by reason of the provisions of
this section) upon the transfer of the assets
of the foreign branch to the foreign cor-
poration. For transactions occurring on or
after April 17, 2013, notwithstanding the
prior sentence, this paragraph (e)(4) shall
apply before the rules of § 1.367(a)-7(c).

(e)(5) through (i) [Reserved]. For fur-
ther guidance, see § 1.367(a)-6T(e)(5)
through (i).

§ 1.367(a)-6T [Amended]

Par. 5. Section 1.367(a)-6T is
amended by removing and reserving para-
graph (e)(4) and removing paragraph (j).

Par. 6. Section 1.1248(f)-3 is revised
by adding paragraph (a) and adding a sen-
tence at the end of paragraph (b)(1) to
read as follows:

§ 1.1248(f)-3 Reasonable cause and
effective/applicability dates.

(a) Reasonable cause for failure to
comply-(1) Request for relief. If an 80-
percent distributee, a distributee that is a
section 1248 shareholder, or the domestic
distributing corporation (reporting person)
fails to timely comply with any require-
ment under § 1.1248(f)-2, the failure shall
be deemed not to have occurred if the
reporting person is able to demonstrate
that the failure was due to reasonable
cause and not willful neglect using the
procedure set forth in paragraph (a)(2) of
this section. Whether the failure to timely
comply was due to reasonable cause and
not willful neglect will be determined by
the Director of Field Operations, Cross
Border Activities Practice Area of Large
Business & International (Director) based
on all the facts and circumstances.

(2) Procedures for establishing that a
failure to timely comply was due to rea-
sonable cause and not willful neglect-(i)
Time of submission. A reporting person's
statement that the failure to timely comply
was due to reasonable cause and not will-
ful neglect will be considered only if,
promptly after the reporting person be-
comes aware of the failure, an amended
return is filed for the taxable year to which
the failure relates that includes the infor-
mation that should have been included
with the original return for such taxable
year or that otherwise complies with the
rules of this section, and that includes a
written statement explaining the reasons
for the failure to timely comply.

(ii) Notice requirement. In addition to
the requirements of paragraph (a)(2)(i) of
this section, the reporting person must
comply with the notice requirements of

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this paragraph (a)(2)(ii). If any taxable
year of the reporting person is under ex-
amination when the amended return is
filed, a copy of the amended return and
any information required to be included
with such return must be delivered to the
Internal Revenue Service personnel con-
ducting the examination. If no taxable
year of the reporting person is under ex-
amination when the amended return is
filed, a copy of the amended return and
any information required to be included
with such return must be delivered to the
Director.

(b) * * *

(1) * * * The provisions of
§ 1.1248(f)-3(a) apply to distributions oc-
curring on or after April 17, 2013.
* * * * *

§ 1.1248(f)-3T [Removed]

Par. 7. § 1.1248(f)-3T is removed.
Par. 8. Section 1.6038B-1 is amended
by:

1\. Removing "or § 1.367(a)-3T" from
paragraph (c)(4)(ii); and

2\. Revising paragraph (f)(3).

The revision reads as follows:

§ 1.6038B-1 Reporting of certain
transfers to foreign corporations.

* * * * *

(f) * * *

(3) Reasonable cause for failure to
comply-(i) Request for relief. If the U.S.
transferor fails to comply with any re-
quirement of section 6038B and this sec-
tion, the failure shall be deemed not to
have occurred if the U.S. transferor is able
to demonstrate that the failure was due to
reasonable cause and not willful neglect
using the procedure set forth in paragraph
(f)(3)(ii) of this section. Whether the fail-
ure to timely comply was due to reason-
able cause and not willful neglect will be
determined by the Director of Field Op-
erations, Cross Border Activities Prac-
tice Area of Large Business & Interna-
tional (Director) based on all the facts
and circumstances.

(ii) Procedures for establishing that a
failure to timely comply was due to rea-
sonable cause and not willful neglect-
(A) Time of submission. A U.S. transfer-
or's statement that the failure to timely
comply was due to reasonable cause and
not willful neglect will be considered only
if, promptly after the U.S. transferor be-
comes aware of the failure, an amended
return is filed for the taxable year to which
the failure relates that includes the infor-
mation that should have been included
with the original return for such taxable
year or that otherwise complies with the
rules of this section, and that includes a
written statement explaining the reasons
for the failure to timely comply.

(B) Notice requirement. In addition to
the requirements of paragraph
(f)(3)(ii)(A) of this section, the U.S. trans-
feror must comply with the notice require-
ments of this paragraph (f)(3)(ii)(B). If
any taxable year of the U.S. transferor is
under examination when the amended re-
turn is filed, a copy of the amended return
and any information required to be in-
cluded with such return must be delivered
to the Internal Revenue Service personnel
conducting the examination. If no taxable
year of the U.S. transferor is under exam-
ination when the amended return is filed,
a copy of the amended return and any
information required to be included with
such return must be delivered to the
Director.

* * * * *

§ 1.6038B-1T [Amended]

Par. 9. Section 1.6038B-1T is
amended by removing and reserving para-
graphs (c)(4)(ii)(B) and (f)(3).

§§ 1.367(a)-2T, 1.367(a)-3, 1.367(a)-
4T, 1.367(a)-7, 1.367(a)-8, 1.367(b)-4,
1.367(e)-1, 1.1248(f)-1, 1.1248(f)-2,
1.6038B-1, 1.6038B-1T [Amended]

Par. 10. For each section listed in the
table, remove the language in the "Re-
move" column and add in its place the
language in the "Add" column as set forth
below:

Section

Remove

Add

§ 1.367(a)-2T(a)(2), fourth sentence

§ 1.367(a)-3T

§ 1.367(a)-3

§ 1.367(a)-3(d)(3), Example 12(ii), third sentence

§ 1.367(a)-3T(e)(3)

§ 1.367(a)-3(e)(3)

§ 1.367(a)-4T(d), first sentence

§ 1.367(a)-3T

§ 1.367(a)-3

§ 1.367(a)-7(c) introductory text, second sentence

§ 1.367(a)-3T

§ 1.367(a)-3

§ 1.367(a)-7(c)(2)(i)(A), first sentence

§ 1.367(a)-3T(e)(3)(iii)(B)

§ 1.367(a)-3(e)(3)(iii)(B)

§ 1.367(a)-7(c)(2)(ii)(A)(1), first sentence

§ 1.367(a)-3T(e)(3)(iii)(C)

§ 1.367(a)-3(e)(3)(iii)(C)

§ 1.367(a)-7(c)(3)(v), first sentence

§ 1.367(a)-3T(e)(8)

§ 1.367(a)-3(e)(8)

§ 1.367(a)-7(c)(4)(ii), first sentence

§ 1.367(a)-3T(e)

§ 1.367(a)-3(e)

§ 1.367(a)-7(e)(1), third sentence

§ 1.367(a)-3T(e)

§ 1.367(a)-3(e)

§ 1.367(a)-7(e)(1), fourth sentence

§ 1.367(a)-3T(e)(3)(iii)(B)

§ 1.367(a)-3(e)(3)(iii)(B)

§ 1.367(a)-7(e)(4)(i), paragraph heading

§ 1.367(a)-3T(e)(3)(iii)(A)

§ 1.367(a)-3(e)(3)(iii)(A)

§ 1.367(a)-7(e)(4)(i), first sentence

§ 1.367(a)-3T(e)(3)(iii)(B)

§ 1.367(a)-3(e)(3)(iii)(B)

§ 1.367(a)-7(e)(4)(i), first sentence

§ 1.367(a)-3T(e)(3)(iii)(A)

§ 1.367(a)-3(e)(3)(iii)(A)

§ 1.367(a)-7(e)(4)(i), last sentence

§ 1.367(a)-3T(e)(3)(iii)(A)

§ 1.367(a)-3(e)(3)(iii)(A)

§ 1.367(a)-7(e)(4)(ii), first sentence

§ 1.367(a)-3T(e)(3)(iii)(B)

§ 1.367(a)-3(e)(3)(iii)(B)

§ 1.367(a)-7(e)(4)(ii), last sentence

§ 1.367(a)-3T(e)(7)

§ 1.367(a)-3(e)(7)

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Section

Remove

Add

§ 1.367(a)-7(e)(4)(ii), last sentence

§ 1.367(a)-3T(e)(3)(iii)(B)

§ 1.367(a)-3(e)(3)(iii)(B)

§ 1.367(a)-7(e)(5)(i), paragraph heading

§ 1.367(a)-3T(e)(3)(iii)(A)

§ 1.367(a)-3(e)(3)(iii)(A)

§ 1.367(a)-7(e)(5)(i), first sentence

§ 1.367(a)-3T(e)(3)(iii)(B)

§ 1.367(a)-3(e)(3)(iii)(B)

§ 1.367(a)-7(e)(5)(i), first sentence

§ 1.367(a)-3T(e)(3)(iii)(A)

§ 1.367(a)-3(e)(3)(iii)(A)

§ 1.367(a)-7(e)(5)(i), last sentence

§ 1.367(a)-3T(e)(3)(iii)(A)

§ 1.367(a)-3(e)(3)(iii)(A)

§ 1.367(a)-7(e)(5)(ii), first sentence

§ 1.367(a)-3T(e)(3)(iii)(B)

§ 1.367(a)-3(e)(3)(iii)(B)

§ 1.367(a)-7(e)(5)(ii), first sentence

§ 1.367(a)-3T(e)(7)

§ 1.367(a)-3(e)(7)

§ 1.367(a)-7(f)(4), last sentence

§ 1.367(a)-3T(e)(3)(iii)(B)

§ 1.367(a)-3(e)(3)(iii)(B)

§ 1.367(a)-7(f)(4)(i), first sentence

§ 1.367(a)-3T(e)(3)(iii)(B)

§ 1.367(a)-3(e)(3)(iii)(B)

§ 1.367(a)-7(f)(4)(ii), first sentence

§ 1.367(a)-3T(e)(3)(iii)(A)

§ 1.367(a)-3(e)(3)(iii)(A)

§ 1.367(a)-7(f)(4)(iii), first sentence

§ 1.367(a)-3T(e)(3)(iii)(A)

§ 1.367(a)-3(e)(3)(iii)(A)

§ 1.367(a)-7(g) introductory text, second sentence

§ 1.367(a)-3T(e)(8)

§ 1.367(a)-3(e)(8)

§ 1.367(a)-7(h), second sentence

§ 1.367(a)-3T(e)

§ 1.367(a)-3(e)

§ 1.367(a)-8(c)(6), first sentence

§ 1.367(a)-3T(e)(6)

§ 1.367(a)-3(e)(6)

§ 1.367(a)-8(j)(9), first sentence

§ 1.367(a)-3T(e)(6)(iv)

§ 1.367(a)-3(e)(6)(iv)

§ 1.367(b)-4(b)(1)(iii) Example 4(i), ninth sentence

§ 1.367(a)-3T(e)(6)

§ 1.367(a)-3(e)(6)

§ 1.367(b)-4(b)(1)(iii), Example 4(i), tenth sentence

§ 1.367(a)-3T(e)

§ 1.367(a)-3(e)

§ 1.367(b)-4(b)(1)(iii), Example 5(i), penultimate sentence

§ 1.367(a)-3T(e)(6)

§ 1.367(a)-3(e)(6)

§ 1.367(b)-4(b)(1)(iii) Example 5(i), last sentence

§ 1.367(a)-3T(e)

§ 1.367(a)-3(e)

§ 1.367(e)-1(e), first sentence

§ 1.367(a)-3T(e)

§ 1.367(a)-3(e)

§ 1.1248(f)-1(c)(4)(i), first sentence

§ 1.367(a)-3T(e)(3)(iii)(A)

§ 1.367(a)-3(e)(3)(iii)(A)

§ 1.1248(f)-2(e) introductory text, second sentence

§ 1.367(a)-3T(e)(8), Example 3

§ 1.367(a)-3(e)(8), Example 3

§ 1.1248(f)-2(e), Example 2(i), last sentence

§ 1.367(a)-3T(e)(3)(iii)(A)

§ 1.367(a)-3(e)(3)(iii)(A)

§ 1.1248(f)-2(e), Example 2(i), last sentence

§ 1.367(a)-3T(e)(6)

§ 1.367(a)-3(e)(6)

§ 1.1248(f)-2(e), Example 2(ii)(A), first sentence

§ 1.367(a)-3T(e)(2)

§ 1.367(a)-3(e)(2)

§ 1.1248(f)-2(e), Example 2(ii)(A), first sentence

§ 1.367(a)-3T(e)(3)(i)

§ 1.367(a)-3(e)(3)(i)

§ 1.1248(f)-2(e), Example 2(ii)(A), second sentence

§ 1.367(a)-3T(e)(3)(i)

§ 1.367(a)-3(e)(3)(i)

§ 1.1248(f)-2(e), Example 2(ii)(A), third sentence

§ 1.367(a)-3T(e)(3)(ii)

§ 1.367(a)-3(e)(3)(ii)

§ 1.1248(f)-2(e), Example 2(ii)(A), fourth sentence

§ 1.367(a)-3T(e)(3)(iii)

§ 1.367(a)-3(e)(3)(iii)

§ 1.1248(f)-2(e), Example 2(ii)(A), fourth sentence

§ 1.367(a)-3T(e)(6)

§ 1.367(a)-3(e)(6)

§ 1.1248(f)-2(e), Example 3(i), penultimate sentence

§ 1.367(a)-3T(e)(6)

§ 1.367(a)-3(e)(6)

§ 1.1248(f)-2(e), Example 3(ii)(A), first sentence

§ 1.367(a)-3T(e)(2)

§ 1.367(a)-3(e)(2)

§ 1.1248(f)-2(e), Example 3(ii)(A), first sentence

§ 1.367(a)-3T(e)(3)(i)

§ 1.367(a)-3(e)(3)(i)

§ 1.1248(f)-2(e), Example 3(ii)(A), second sentence

§ 1.367(a)-3T(e)(3)(i)

§ 1.367(a)-3(e)(3)(i)

§ 1.1248(f)-2(e), Example 3(ii)(A), third sentence

§ 1.367(a)-3T(e)(3)(ii)

§ 1.367(a)-3(e)(3)(ii)

§ 1.1248(f)-2(e), Example 3(ii)(A), fourth sentence

§ 1.367(a)-3T(e)(3)(iii)

§ 1.367(a)-3(e)(3)(iii)

§ 1.1248(f)-2(e), Example 3(ii)(A), fourth sentence

§ 1.367(a)-3T(e)(6)

§ 1.367(a)-3(e)(6)

§ 1.1248(f)-2(e), Example 3(ii)(G), first sentence

§ 1.367(a)-3T(e)(6)

§ 1.367(a)-3(e)(6)

§ 1.1248(f)-2(e), Example 3(ii)(G), first sentence

§ 1.367(a)-3T(e)(6)(i)(A)

§ 1.367(a)-3(e)(6)(i)(A)

§ 1.1248(f)-2(f), third sentence

§ 1.367(a)-3T(e)

§ 1.367(a)-3(e)

§ 1.6038B-1T(c)(4)(ii)(A), second sentence

§ 1.367(a)-3T(d)(2)

§ 1.367(a)-3(d)(2)

John Dalrymple,
Deputy Commissioner for Services
and Enforcement.

Approved: March 11, 2016.

Mark J. Mazur,
Assistant Secretary of the Treasury
(Tax Policy).

(Filed by the Office of the Federal Register on March 18,
2016, 4:15 p.m., and published in the issue of the Federal
Register for March 22, 2016, 81 F.R. 15159)

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# Part III. Administrative, Procedural, and Miscellaneous

Date for Compliance with
Consistent Basis Reporting
Between Estate and Person
Acquiring Property from
Decedent

Notice 2016-27

## SECTION 1: PURPOSE

On July 31, 2015, the President of the
United States signed into law the Surface
Transportation and Veterans Health Care
Choice Improvement Act of 2015, Public
Law 114-41, 129 Stat. 443 (Act). Section
2004 of the Act added new sections
1014(f) and 6035. On August 21, 2015,
the Treasury Department and the IRS is-
sued Notice 2015-57, 2015-36 IRB 294.
That notice delayed until February 29,
2016, the due date for any statements re-
quired under section 6035(a)(3)(A) to be
provided before February 29, 2016. On
February 11, 2016, the IRS issued Notice
2016-19, 2016-09 IRB 362, to provide
that executors and other persons required
to file or furnish a statement under section
6035(a)(1) or (a)(2) before March 31,
2016, need not do so until March 31,
2016. On March 4, 2016, the Treasury
Department and the IRS published tempo-
rary and proposed regulations under sec-
tions 1014(f) and 6035. TD 9757, 81 FR
11431; REG-127923-15, 81 FR 11486.
This notice provides that executors and
other persons required to file or furnish a
statement under section 6035(a)(1) or
(a)(2) before June 30, 2016, need not do
so until June 30, 2016.

## SECTION 2: BACKGROUND

Section 1014(f) provides rules requir-
ing that the basis of certain property ac-
quired from a decedent, as determined
under section 1014, may not exceed the
value of that property as finally deter-
mined for federal estate tax purposes, or if
not finally determined, the value of that
property as reported on a statement made
under section 6035.

Section 6035 imposes new reporting
requirements with regard to the value of
property included in a decedent's gross
estate for federal estate tax purposes.

Section 6035(a)(1) provides that the
executor of any estate required to file a
return under section 6018(a) must furnish,
both to the Secretary and to the person
acquiring any interest in property included
in the decedent's gross estate for federal
estate tax purposes, a statement identify-
ing the value of each interest in such prop-
erty as reported on such return and such
other information with respect to such in-
terest as the Secretary may prescribe.

Section 6035(a)(2) provides that each
person required to file a return under sec-
tion 6018(b) must furnish, both to the
Secretary and to each other person who
holds a legal or beneficial interest in the
property to which such return relates, a
statement identifying the information de-
scribed in section 6035(a)(1).

Section 6035(a)(3)(A) provides that
each statement required to be furnished
under section 6035(a)(1) or (a)(2) is to be
furnished at such time as the Secretary
may prescribe, but in no case at a time
later than the earlier of (i) the date which
is 30 days after the date on which the
return under section 6018 was required to
be filed (including extensions, if any) or
(ii) the date which is 30 days after the date
such return is filed.

Section 6035(b) authorizes the Secre-
tary to prescribe such regulations as nec-
essary to carry out section 6035. Section
7805(a) provides generally that the Secre-
tary shall prescribe all needful rules and
regulations for the enforcement of this
title, including all rules and regulations as
may be necessary by reason of any alter-
ation of law in relation to internal revenue.
Section 7805(b)(2) provides that regula-
tions may apply retroactively if they are
issued within 18 months of the date of the
enactment of the statutory provision to
which they relate.

## SECTION 3: GUIDANCE

The Treasury Department and the IRS
have received numerous comments that
executors and other persons have not had
sufficient time to adopt the systemic
changes that would enable the filing of an
accurate and complete Form 8971 and
Schedule A. Accordingly, statements re-
quired under sections 6035(a)(1) and

(a)(2) to be filed with the IRS or furnished
to a beneficiary before June 30, 2016,
need not be filed with the IRS and fur-
nished to a beneficiary until June 30,
2016.

## SECTION 4: EFFECTIVE DATE

This notice is effective on March 23,
2016. This notice applies to executors of
the estates of decedents and to other per-
sons who are required under section
6018(a) or (b) to file a return if that return
is filed after July 31, 2015.

## DRAFTING INFORMATION

The principal author of this notice is
Eliezer Mishory of the Office of the As-
sociate Chief Counsel (Procedure & Ad-
ministration). For further information re-
garding this notice, please contact Theresa
Melchiorre at (202) 317-6859 (not a toll-
free number).

## Empowerment Zone Designation Extension Notice 2016-28

### I. PURPOSE

This notice provides the manner in
which a State or local government may
amend an empowerment zone nomination
to provide for a new termination date of
December 31, 2016. This notice is issued
pursuant to § 1391 of the Internal Reve-
nue Code, as amended by § 171(a) of the
Protecting Americans from Tax Hikes Act
of 2015 (PATH Act), enacted as part of the
Consolidated Appropriations Act, 2016, Di-
vision Q, Pub. L. 114-113, _Stat.
(December 18, 2015).

# II. BACKGROUND

Section 1391 was enacted in 1993
to allow a State or local government
("entity") to nominate an area or areas in
its jurisdiction for designation as an em-
powerment zone. The Secretary of Hous-
ing and Urban Development, in the case
of any nominated area that is located in an
urban area, and the Secretary of Agricul-
ture, in the case of any nominated area

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that is located in a rural area, have since
designated which of the nominated areas
are empowerment zones. Unless an earlier
termination date was provided by the
nominating entity, a designation was orig-
inally effective for the period beginning
on the date of designation and ending on
the close of the 10th taxable year begin-
ning on or after the date of designation.
Section 112 of the Community Renewal
Tax Relief Act of 2000, Pub. L. No. 106-
554, 114 Stat. 2763A-587 (December 21,
2000) (CRTRA), amended § 1391(d)(1) to
extend the designation period for all em-
powerment zones through December 31,
2009, regardless of the original termina-
tion date. Subsequent amendments to
§ 1391(d)(1)(A) further extended the des-
ignation period through December 31,
2014. See § 753(a) of the Tax Relief,
Unemployment Insurance Reauthoriza-
tion, and Job Creation Act of 2010, Pub.
L. No. 111-312, 124 Stat. 3296 (Decem-
ber 17, 2010) (TRUIRJCA), § 327(a) of
the American Taxpayer Relief Act of
2012, Pub. L. 112-240, 126 Stat. 2313
(January 2, 2013) (ATRA), and § 139(a)
of the Tax Increase Prevention Act of
2014, Pub. L. 113-295, 128 Stat. 4010
(December 19, 2014) (TIPA).

In 2013, the Treasury Department and
the Internal Revenue Service (IRS) issued
Notice 2013-38, 2013-25 I.R.B. 1251,
pursuant to § 753(c) of TRUIRJCA and
§ 327(c) of ATRA. Notice 2013-38 pro-
vided that any nomination for an empow-
erment zone that was in effect on Decem-
ber 31, 2009, is deemed to be amended
to provide for a new termination date of
December 31, 2013, unless the nominat-
ing entity declined the extension in a
written notification to the IRS. In 2015,
the Treasury Department and the IRS
issued Notice 2015-26, 2015-13 I.R.B.
814, pursuant to § 139(b) of TIPA. No-
tice 2015-26 provided that any nomina-
tion for an empowerment zone that was
in effect on December 31, 2013, is
deemed to be amended to provide for a
new termination date of December 31,
2014, unless the nominating entity de-
clined the extension in a written notifi-
cation to the IRS. No written requests
were received under either Notice
2013-28 or Notice 2015-26. Accord-
ingly, the designations of all empower-

ment zones currently have a termination
date of December 31, 2014.

In 2015, Congress further amended
§ 1391(d)(1) to extend the period for
which an empowerment zone designation is
in effect by an additional two years. As
amended by § 171(a)(1) of the PATH Act,
§ 1391(d)(1) provides that any designation
of an empowerment zone ends on the earli-
est of (A) December 31, 2016, (B) the ter-
mination date designated by the State and
local governments as provided for in their
nomination, or (C) the date the appropriate
Secretary revokes the designation. Section
171(a)(2) of the PATH Act provides that
where a nomination of an empowerment
zone included a termination date of Decem-
ber 31, 2014, § 1391(d)(1)(B) shall not ap-
ply with respect to such designation if, after
the date of the enactment of the PATH Act,
the entity that made such nomination
amends the nomination, in such manner as
the Secretary of the Treasury may provide,
to provide for a new termination date. The
amendments made by § 171(a) of the PATH
Act apply to taxable years beginning after
December 31, 2014.

Thus, pursuant to the PATH Act, an
entity must amend its nomination to pro-
vide for a new termination date of De-
cember 31, 2016, in order to retain an
empowerment zone designation that is
effective through that date. Section III
of this notice provides the procedures
that an entity must follow to amend its
termination date.

## III. AMENDMENT OF A NOMINATION TO EXTEND EMPOWERMENT ZONE DESIGNATION THROUGH DECEMBER 31, 2016

Any nomination for an empowerment
zone with a current termination date (as
amended by CRTRA, Notice 2013-38,
and Notice 2015-26) of December 31,
2014, is deemed to be amended to provide
for a new termination date of December
31, 2016, unless the nominating entity
sends written notification to the IRS by
May 24, 2016. The written notification
must affirmatively decline extension of
the empowerment zone nomination
through December 31, 2016. If the United
States mail is used, the notification should
be sent to the following address:

Internal Revenue Service
Attn: Charles Magee, CC:ITA:7,
Room 4136
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

If a private delivery service is used, the
notification should be sent to the follow-
ing address:

Internal Revenue Service
Attn: Charles Magee, CC:ITA:7,
Room 4136
1111 Constitution Ave., NW
Washington, DC 20224

If the entity that nominated an empow-
erment zone does not send written notifi-
cation, the nomination of that empower-
ment zone will be deemed extended from
December 31, 2014, through December
31, 2016. Accordingly, § 1391(d)(1)(B)
does not apply and, pursuant to
§ 1391(d)(1)(A)(i), the designation of that
empowerment zone ends on December 31,
2016.

## IV. DRAFTING INFORMATION

The principal author of this notice is
Charles Magee of the Office of Associate
Chief Counsel (Income Tax & Account-
ing). For further information regarding
this notice contact Mr. Magee at (202)
317-7005 (not a toll-free number).

26 CFR 601.106: Appeals Functions

## Rev. Proc. 2016-22 SECTION 1. PURPOSE

This revenue procedure updates Rev.
Proc. 87-24, 1987-1 C.B. 720, to clarify
and describe the practices for the admin-
istrative appeals process in cases docketed
in the United States Tax Court (Tax
Court). The purpose of this revenue pro-
cedure is to facilitate effective utilization
of administrative appeals and achieve ear-
lier development and disposition of Tax
Court cases.

## SECTION 2. BACKGROUND

.01 The Office of Chief Counsel
(Counsel) is charged with the responsibil-
ity of representing the Commissioner of

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Internal Revenue in cases docketed in the
Tax Court. I.R.C. §§ 7452, 7803(b)(2)(D).

.02 The Internal Revenue Service Re-
structuring and Reform Act of 1998, Pub.
L. 105-206, § 1001(4), 112 Stat. 685, 689,
requires the Internal Revenue Service
(IRS) to "ensure an independent appeals
function" within the IRS.

.03 Under Rev. Proc. 2012-18, 2012-1
C.B. 455, for cases docketed in the Tax
Court, the rules prohibiting ex parte com-
munications continue to apply to commu-
nications between the Office of Appeals
(Appeals) and the originating function,
but do not apply to communications be-
tween Counsel and Appeals. However,
Counsel and Appeals share a responsibil-
ity to interact - in all circumstances - in a
manner that preserves and promotes Ap-
peals' independence. See Rev. Proc. 2012-
18, § 2.02(2), (3), 2012-1 C.B. 455, 457.

.04 On October 15, 2015, the Depart-
ment of Treasury and the Service pub-
lished Notice 2015-72, 2015-44 I.R.B.
613, which released a proposed revenue
procedure that would update Rev. Proc.
87-24, 1987-1 C.B. 720. Notice 2015-72
invited public comment regarding the pro-
posed revenue procedure. The IRS re-
ceived a total of four comments, one of
which contained a general objection to the
proposed revenue procedure. The three
substantive comments ranged from seek-
ing clarification on some of the terms used
in the proposed revenue procedure to
seeking expansion of the scope of the pro-
posed revenue procedure to cover other
areas. Treasury and the Service consid-
ered all comments received and adopted
several of the suggestions by making clar-
ifying modifications. A number of the
suggestions that were not adopted in the
revenue procedure may be addressed in
the Internal Revenue Manual, the Chief
Counsel Directives Manual, or in training.

## SECTION 3. PROCEDURES

Cases docketed in the Tax Court will be
processed under the following procedures:
.01 Except as set forth in section 3.03
and section 4 of this Revenue Procedure,
Counsel will refer docketed cases to Ap-
peals for settlement consideration unless
1\) Appeals issued the notice of deficiency
or made the determination that is the basis
of the Tax Court's jurisdiction or 2) the
taxpayer notifies Counsel that the tax-

payer wants to forego settlement consid-
eration by Appeals.

.02 If Appeals issues a notice of defi-
ciency, or makes a determination, without
having fully considered one or more is-
sues because of an impending expiration
of the statute of limitations on assessment,
Appeals may include a request in the ad-
ministrative case file for Counsel to return
the case to Appeals for full consideration
of the issue or issues once the case is
docketed in the Tax Court. If Appeals
includes such a request in the administra-
tive case file, the case will be treated as if
Appeals did not issue the notice of defi-
ciency or make the determination.

.03 Counsel will not refer to Appeals
any docketed case or issue that has been
designated for litigation by Counsel. In
limited circumstances, a docketed case or
issue that has not been designated for lit-
igation will not be referred to Appeals if
Division Counsel or a higher level Coun-
sel official determines that referral is not
in the interest of sound tax administration.
For example, Counsel may decide not to
refer a docketed case to Appeals in cases
involving a significant issue common to
other cases in litigation for which it is
important that the IRS maintain a consis-
tent position or in cases related to a case
over which the Department of Justice has
jurisdiction. If Counsel determines that a
docketed case or issue will not be referred
to Appeals, Counsel will notify the tax-
payer that the case will not be referred to
Appeals.

.04 For cases not covered by the ex-
ceptions in section 3 or the exclusions in
section 4, Counsel will refer a docketed
case to Appeals within 30 calendar days
of the case becoming "at issue in the Tax
Court" (as defined by Tax Ct. R. 38).
Counsel may, with manager approval, de-
lay forwarding a docketed case to Appeals
if Counsel identifies a need for additional
time. A delay of more than 90 calendar
days (120 calendar days from when the
case is at issue) requires approval of a
Counsel executive. If a delay of more than
90 calendar days is approved, Counsel
will discuss with Appeals the need for the
delay and when Counsel expects to for-
ward the case to Appeals for settlement
consideration. Examples of when Counsel
may delay forwarding a docketed case to
Appeals include, but are not limited to,

cases in which Counsel determines a need
to retain the administrative file for early
trial preparation or when new facts, is-
sues, or items are raised in the pleadings.
Counsel may also delay forwarding a
docketed case to Appeals when Counsel
anticipates filing a dispositive motion, in
which case Counsel will retain the case
until the Tax Court rules on the motion. If
a delay of more than 90 calendar days is
approved by a Counsel executive, Counsel
will promptly notify the taxpayer that re-
ferral of the case to Appeals will be de-
layed.

.05 When a docketed case is forwarded
to Appeals for consideration, Appeals has
the sole authority to resolve a docketed
case through settlement until the case is
returned to Counsel.

.06 To the extent feasible, Counsel will
alert Appeals about limits on the amount
of time that Appeals may have the case for
settlement consideration. In such cases,
Counsel and Appeals shall then agree
upon the time when the case will be re-
turned to Counsel.

.07 A docketed case proceeding as a
small tax case under the provisions of
section 7463, or as a regular case in which
the amount at issue for each year is
$50,000 or less, that has been forwarded
to Appeals for consideration may be re-
called by Counsel after six months. If not
recalled, Appeals will return the case so
that it is received by Counsel no later than
30 calendar days prior to the date of the
calendar call. In all other docketed cases,
Appeals will return the case to Counsel
when Appeals concludes that the case is
not susceptible to settlement or within 10
calendar days after the case appears on a
trial calendar, whichever is sooner. In all
cases, Counsel and Appeals may agree to
extend the time for Appeals to consider a
case if settlement appears reasonably
likely.

.08 If Counsel determines that the case
is needed for trial preparation, Counsel
may request that Appeals return the case
(including settlement authority) to Coun-
sel before Appeals has completed its con-
sideration of the case.

.09 Notwithstanding any other provi-
sion in this revenue procedure, any dock-
eted case may be transferred from Coun-
sel to Appeals or from Appeals to Counsel
by agreement between Appeals and Coun-

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sel. This authority will be used when such
transfer may promote a more efficient dis-
position of the case.

.10 Upon request, Appeals will make
the administrative case file, or a copy,
readily available to Counsel when needed
for trial preparation. A request for the
administrative case file by Counsel will
not transfer settlement authority back to
Counsel. Counsel will promptly return the
administrative file to Appeals on request,
or when it is no longer needed by Counsel
for trial preparation.

.11 When transferring a docketed case
to Appeals, Counsel may request to be
included in a settlement conference with
the taxpayer. Appeals may, with manager
approval, decline to include Counsel in
the settlement conference if, after consid-
ering the views of both Counsel and the
taxpayer, Appeals determines that Coun-
sel's participation in the settlement con-
ference will not further settlement of the
case. Whether or not Counsel participates
in the settlement conference, Counsel will
continue with trial preparation, which may
include, but is not limited to, asking the
taxpayer to participate in informal discov-
ery conferences with Counsel only.

.12 Appeals will provide Counsel with
access to any documents received by Ap-
peals in a settlement conference with re-
spect to the docketed case.

.13 If a taxpayer or the taxpayer's rep-
resentative raises an issue for the first time

while the docketed case is with Appeals
for settlement consideration, Appeals will
advise Counsel as soon as the new issue is
identified. Appeals or Counsel will coor-
dinate with the examination function as
appropriate to obtain the IRS's views on
the new issue, and in docketed cases con-
taining an issue that was not previously
examined, Appeals or Counsel will coor-
dinate with the examination function of
the relevant operating division, as needed,
to develop the material facts relating to
the new issue prior to Appeals' consider-
ation of the issue.

.14 In evaluating the merits of a dock-
eted case that has been referred to Appeals
for settlement consideration, Appeals may
obtain advice from Counsel and consider
it in conjunction with other factors to
reach a basis for settlement.

.15 If Appeals reaches a settlement
with the taxpayer in the docketed case, a
stipulated decision document reflecting
the proposed resolution will be prepared
and forwarded to the taxpayer. When Ap-
peals prepares the decision document,
Counsel may assist with drafting, as
needed. By signing the proposed stipu-
lated decision document and returning the
document to the IRS, the taxpayer makes
an offer to settle the case. Counsel will
review the decision document for accu-
racy and completeness, sign the decision
document on behalf of the Commissioner,
and file the document with the Tax Court.

## SECTION 4. EXCLUSIONS

.01 Section 3 does not apply to cases
docketed under section 6015(e)(1)(A)(i)(II),
section 6110, sections 6320 and 6330, sec-
tion 6404, section 7428, section 7476, sec-
tion 7477, section 7478, section 7479, and
section 7623 of the Internal Revenue Code.
For cases docketed under section 6213(a),
section 3 does not apply to section 6015
relief raised for the first time in the petition.

## SECTION 5. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 87-24, 1987-1 C.B. 720, is
superseded.

## SECTION 6. EFFECTIVE DATE

This revenue procedure is applicable to
all docketed Tax Court cases pending on
or after March 23, 2016.

## SECTION 7. DRAFTING INFORMATION

The principal author of this revenue
procedure is Jenni Black of the Office of
Associate Chief Counsel (Procedure &
Administration). For further information
regarding this revenue procedure contact
Jenni Black on (202) 317-6834 (not a toll
free number).

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## 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
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the 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 with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is 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
with amplified and clarified, above).

Obsoleted describes 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.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes 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
published ruling is first modified and then,
as modified, is superseded.

Supplemented is 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
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is 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 following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

GE-Grantee.

TFE-Transferee.

TFR-Transferor.

CI-City.

GR-Grantor.

IC-Insurance Company.

TP-Taxpayer.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

TR-Trust.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

U.S.C .- United States Code.

DC-Dummy Corporation.

X-Corporation.

DE-Donee.

Del. Order-Delegation Order.

Nonacq .- Nonacquiescence.

O Organization.

DR-Donor.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

T-Target Corporation.

T.C .- Tax Court.

C-Individual.

T.D .- Treasury Decision.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

GP-General Partner.

T.I.R .- Technical Information Release.

COOP-Cooperative.

LR-Lessor.

M-Minor.

Y-Corporation.

Z-Corporation.

DISC-Domestic International Sales Corporation.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

BK-Bank.

B.T.A .- Board of Tax Appeals.

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### Numerical Finding List1

Bulletins 2016-1 through 2016-15

#### Announcements:

2016-1, 2016-3 I.R.B. 283
2016-2, 2016-3 I.R.B. 283
2016-3, 2016-4 I.R.B. 294
2016-4, 2016-6 I.R.B. 313
2016-5, 2016-8 I.R.B. 356
2016-6, 2016-10 I.R.B. 409
2016-7, 2016-8 I.R.B. 356
2016-8, 2016-9 I.R.B. 367
2016-9, 2016-9 I.R.B. 367
2016-10, 2016-9 I.R.B. 367
2016-11, 2016-10 I.R.B. 411
2016-13, 2016-13 I.R.B. 514
2016-14, 2016-14 I.R.B. 535

#### Notices:

2016-1, 2016-2 I.R.B. 265
2016-2, 2016-2 I.R.B. 265
2016-3, 2016-3 I.R.B. 278
2016-4, 2016-3 I.R.B. 279
2016-5, 2016-6 I.R.B. 302
2016-6, 2016-4 I.R.B. 287
2016-7, 2016-5 I.R.B. 296
2016-8, 2016-6 I.R.B. 304
2016-9, 2016-6 I.R.B. 306
2016-10, 2016-6 I.R.B. 307
2016-11, 2016-6 I.R.B. 312
2016-12, 2016-6 I.R.B. 312
2016-13, 2016-7 I.R.B. 314
2016-14, 2016-7 I.R.B. 315
2016-15, 2016-13 I.R.B. 486
2016-16, 2016-7 I.R.B. 318
2016-17, 2016-9 I.R.B. 358
2016-18, 2016-9 I.R.B. 359
2016-19, 2016-9 I.R.B. 362
2016-20, 2016-9 I.R.B. 362
2016-21, 2016-12 I.R.B. 465
2016-22, 2016-13 I.R.B. 488
2016-23, 2016-13 I.R.B. 490
2016-24, 2016-13 I.R.B. 492
2016-25, 2016-13 I.R.B. 493
2016-26, 2016-14 I.R.B. 533
2016-27, 2016-15 I.R.B. 576
2016-28, 2016-15 I.R.B. 576

Proposed Regulations:

REG-118867-10, 2016-10 I.R.B. 411
REG-147310-12, 2016-7 I.R.B. 336
REG-150349-12, 2016-11 I.R.B. 440
REG-138344-13, 2016-4 I.R.B. 294
REG-123867-14, 2016-12 I.R.B. 484
REG-125761-14, 2016-7 I.R.B. 322
REG-100861-15, 2016-8 I.R.B. 356
REG-109822-15, 2016-14 I.R.B. 535

Proposed Regulations :- Continued

REG-127923-15, 2016-12 I.R.B. 473
REG-129067-15, 2016-10 I.R.B. 421
REG-134122-15, 2016-7 I.R.B. 334
REG-101701-16, 2016-9 I.R.B. 368

### Revenue Procedures:

2016-1, 2016-1 I.R.B. 1
2016-2, 2016-1 I.R.B. 102
2016-3, 2016-1 I.R.B. 126
2016-4, 2016-1 I.R.B. 142
2016-5, 2016-1 I.R.B. 188
2016-6, 2016-1 I.R.B. 200
2016-7, 2016-1 I.R.B. 239
2016-8, 2016-1 I.R.B. 243
2016-10, 2016-2 I.R.B. 270
2016-11, 2016-2 I.R.B. 274
2016-13, 2016-4 I.R.B. 290
2016-14, 2016-9 I.R.B. 365
2016-15, 2016-11 I.R.B. 435
2016-16, 2016-10 I.R.B. 394
2016-17, 2016-11 I.R.B. 436
2016-19, 2016-13 I.R.B. 497
2016-20, 2016-13 I.R.B. 499
2016-21, 2016-14 I.R.B. 533
2016-22, 2016-15 I.R.B. 577

### Revenue Rulings:

2016-1, 2016-2 I.R.B. 262
2016-2, 2016-4 I.R.B. 284
2016-3, 2016-3 I.R.B. 282
2016-4, 2016-6 I.R.B. 299
2016-5, 2016-8 I.R.B. 344
2016-6, 2016-14 I.R.B. 519
2016-7, 2016-10 I.R.B. 391
2016-8, 2016-11 I.R.B. 426
2016-9, 2016-14 I.R.B. 530
2016-10, 2016-15 I.R.B. 545

### Treasury Decisions:

9745, 2016-2 I.R.B. 256
9746, 2016-14 I.R.B. 515
9748, 2016-8 I.R.B. 347
9749, 2016-10 I.R.B. 373
9750, 2016-10 I.R.B. 374
9751, 2016-10 I.R.B. 379
9752, 2016-10 I.R.B. 385
9753, 2016-11 I.R.B. 426
9754, 2016-11 I.R.B. 432
9755, 2016-12 I.R.B. 442
9756, 2016-12 I.R.B. 450
9757, 2016-12 I.R.B. 462
9759, 2016-15 I.R.B. 545
9760, 2016-15 I.R.B. 564

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015-27 through 2015-52 is in Internal Revenue Bulletin
2015-52, dated December 28, 2015.

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### Finding List of Current Actions on Previously Published Items1

Bulletins 2016-1 through 2016-15

#### Announcements:

2007-21
Modified by
Ann. 2016-1, 2016-3 I.R.B. 283

Notices:

2005-50
Modified by
Notice 2016-2, 2016-2 I.R.B. 265

2007-59
Revoked by
Notice 2016-16, 2016-7 I.R.B. 318

2013-54
Supplemented by
Notice 2016-17, 2016-9 I.R.B. 358

2014-79
Superseded by
Notice 2016-1, 2016-2 I.R.B. 265

2015-52
Supplemented by
Notice 2016-17, 2016-9 I.R.B. 358

2015-87
Supplemented by
Notice 2016-17, 2016-9 I.R.B. 358

#### Revenue Procedures:

1987-24
Superseded by
Rev. Proc. 2016-22, 2016-15 I.R.B. 577

2003-36
Superseded by
Rev. Proc. 2016-19, 2016-13 I.R.B. 497

2014-56
Superseded by
Rev. Proc. 2016-20, 2016-13 I.R.B. 499

2015-1
Superseded by
Rev. Proc. 2016-2, 2016-1 I.R.B. 1

2015-2
Superseded by
Rev. Proc. 2016-2, 2016-1 I.R.B. 102

2015-3
Superseded by
Rev. Proc. 2016-3, 2016-1 I.R.B. 126

### Revenue Procedures :- Continued

2015-5
Superseded by
Rev. Proc. 2016-5, 2016-1 I.R.B. 142

2015-7
Superseded by
Rev. Proc. 2016-7, 2016-1 I.R.B. 188

2015-8
Superseded by
Rev. Proc. 2016-8, 2016-1 I.R.B. 200

2015-9
Superseded by
Rev. Proc. 2016-5, 2016-1 I.R.B. 239

2015-10
Superseded by
Rev. Proc. 2016-10, 2016-2 I.R.B. 270

2015-22
Superseded by
Rev. Proc. 2016-8, 2016-01 I.R.B. 243

2015-53
Modified by
Rev. Proc. 2016-11, 2016-2 I.R.B. 274

#### Revenue Rulings:

2005-3
Modified by
Rev. Rul. 2016-8, 2016-11 I.R.B. 426

2008-15
Revoked by
Rev. Rul. 2016-3, 2016-3 I.R.B. 282

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015-27 through 2015-52 is in Internal Revenue Bulletin
2015-52, dated December 28, 2015.

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# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
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