[Federal Register Volume 60, Number 247 (Tuesday, December 26, 1995)]
[Rules and Regulations]
[Pages 66739-66746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30829]
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DEPARTMENT OF THE TREASURY
26 CFR Parts 1 and 602
[TD 8638]
RIN 1545-AT44
Certain Transfers of Domestic Stock or Securities by U.S. Persons
to Foreign Corporations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: These temporary regulations provide the public with guidance
necessary to comply with the Tax Reform Act of 1984. These regulations
amend the Income Tax Regulations with respect to certain transfers of
stock or securities of domestic corporations by United States persons
to foreign corporations pursuant to the corporate organization,
reorganization, or liquidation provisions of the Internal Revenue Code.
This Treasury decision also removes certain of the existing temporary
regulations regarding transfers by U.S. persons of stock or securities
of both domestic and foreign corporations. This action is necessary to
update the existing temporary regulations and to reflect certain of the
changes announced by Notice 87-85 (1987-2 C.B. 395) (with respect to
transfers of both domestic and foreign stock or securities) and by
Notice 94-46 (1994-1 C.B. 356) (with respect to transfers of stock or
securities of a domestic corporation). The text of these temporary
regulations also serves as the text of the proposed regulations set
forth in the notice of proposed rulemaking on this subject in the
Proposed Rules section of this issue of the Federal Register. When
finalized, the regulations under section 367(a) relating to the
transfer of stock or securities will integrate the regulations herein
with the 1991 proposed regulations relating to transfers of stock or
securities (see Proposed Rule Secs. 1.367(a)-3 and 1.367(a)-8,
published at 56 FR 41993, August 26, 1991).
EFFECTIVE DATE: April 17, 1994. For further information, see the
Applicability and Effective Dates section under SUPPLEMENTARY
INFORMATION.
FOR FURTHER INFORMATION CONTACT: Philip L. Tretiak at (202) 622-3860
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Applicability and Effective Dates
These regulations are generally applicable to transfers occurring
after April 17, 1994, the effective date of Notice 94-46. However, the
active trade or business requirement (described in Sec. 1.367(a)-
3T(c)(1)(iii) of the temporary regulations herein), which was not
contained in Notice 94-46, is effective for transfers occurring January
25, 1996. Moreover, these regulations remove as ``deadwood'' paragraphs
(c)(1) through (c)(4), (d), (e), (f), (g)(1)(iii) and (h)(1) of
Sec. 1.367(a)-3T of the existing temporary regulations with respect to
transfers occurring after December 16, 1987, the effective date of
Notice 87-85.
Paperwork Reduction Act
These regulations are being issued without prior notice and public
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553).
For this reason, the collection of information contained in these
regulations has been reviewed and, pending receipt and evaluation of
public comments, approved by the Office of Management and Budget under
control number 1545-1478. Responses to this collection of information
are required in order for U.S. shareholders that transfer stock or
securities in section 367(a) exchanges to qualify for an exception to
the general rule of taxation under section 367(a)(1).
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
For further information concerning this collection of information,
and where to submit comments on the collection of information and the
accuracy of the estimated burden, and suggestions for reducing this
burden, please refer to the preamble to the cross-referencing notice of
proposed rulemaking published in the Proposed Rules section of this
issue of the Federal Register. Books or records relating to a
collection of information must be retained as long as their contents
may become material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On May 16, 1986, temporary and proposed regulations under sections
367 (a) and (d) and section 6038B were published in the Federal
Register (51 FR 17936). These regulations were published to provide the
public with guidance necessary to comply with changes made to the
Internal Revenue Code by the Tax Reform Act of 1984. Included in the
1986 temporary regulations was Sec. 1.367(a)-3T, concerning transfers
of stock or securities of domestic or foreign corporations by U.S.
persons to foreign corporations. Subsequently, the IRS and the Treasury
Department issued Notice 87-85 (1987-2 C.B. 395), which set forth
substantial changes to be made to Sec. 1.367(a)-3T, effective with
respect to transfers occurring after December 16, 1987. A further
notice of proposed rulemaking, containing rules under section 367(a),
as well as under section 367(b), was published in the Federal Register
on August 26, 1991 (56 FR 41993). The 1991 proposed section 367(a)
regulations were generally based upon the positions announced in Notice
87-85, but the regulations made certain modifications to Notice 87-85,
particularly with respect to transfers of stock or securities of
foreign corporations.
Most recently, the IRS and the Treasury Department issued Notice
94-46 (1994-1 C.B. 356), announcing modifications to the positions set
forth in Notice 87-85 (and the 1991 proposed regulations) with respect
to transfers of stock or securities of domestic corporations occurring
after April 17, 1994. The temporary regulations set forth herein
generally incorporate the modifications announced in Notice 94-46. The
notice of proposed rulemaking on this subject in the Proposed Rules
section of this issue of the Federal
[[Page 66740]]
Register supplements and, where inconsistent with, supersedes, the 1991
proposed regulations with respect to transfers of domestic stock or
securities occurring after April 17, 1994.
Notice 94-46 announced that the regulations under section 367(a)
would be amended to deny nonrecognition treatment to the transfer of
stock or securities of a domestic corporation by a U.S. person to a
foreign corporation if all U.S. transferors owned in the aggregate 50
percent or more of either the total voting power or the total value of
the stock of the transferee foreign corporation immediately after the
exchange. (Under the approach taken in Notice 87-85, transfers of
domestic stock or securities occurring prior to April 18, 1994 (and
after December 16, 1987) were generally denied nonrecognition treatment
only in the case of a single U.S. transferor that owned more than 50
percent of the total voting power or the total value of the stock of
the transferee foreign corporation immediately after the transfer or of
a U.S. transferor that held at least 5 percent (but no more than 50
percent) of the total voting power or the total value of the stock of
the transferee foreign corporation immediately after the transfer and
that failed to enter into a gain recognition agreement.)
In Notice 94-46, the IRS and the Treasury Department invited
comments on possible exceptions to the general rule set forth in the
Notice, specifically with respect to cases where (i) a domestic
corporation is acquired by a foreign corporation that is engaged in an
active trade or business and that, prior to the transaction, is
unrelated to the acquired corporation or its shareholders, or (ii) the
transferee foreign corporation is a controlled foreign corporation
(within the meaning of section 957) after the transfer. After
consideration of the comments received, the IRS and the Treasury
Department have concluded that no exceptions to the general rule are
warranted.
In the Notice, the IRS and the Treasury Department also invited
specific comment on whether special rules should be provided to
determine the ownership of the transferee foreign corporation in cases
where the corporation is publicly traded. As described below, in
response to comments received, the ``cross-ownership'' rules of Notice
94-46 have been modified in a way that will ameliorate the burdens of
identifying shareholders of publicly traded (or widely-held)
corporations and that should reduce the impact of the general rule on
business combinations involving unrelated U.S. and foreign corporations
that are engaged in the active conduct of a trade or business.
Need for Temporary Regulations
The rules contained in this Treasury decision provide taxpayers
with guidance necessary to comply with Notice 94-46, which was
effective with respect to transfers of stock or securities of domestic
corporations to foreign corporations occurring after April 17, 1994.
The provisions of Notice 94-46 were made immediately effective to
forestall certain tax-avoidance transfers by U.S. persons of the stock
of U.S.-based multinationals to foreign corporations. Because of the
Notice's immediate effective date, there is a need for implementing
regulations on which both taxpayers and the Service may rely with
respect to current transfers.
Based on these considerations, it is determined that immediate
regulatory guidance will ensure the efficient administration of the tax
laws and that it would be impracticable and contrary to the public
interest to issue this Treasury decision with prior notice under
section 553(b) or subject to the effective date limitation of section
553(d) of title 5 of the United States Code.
Explanation of Provisions
Section 367(a)(1) generally treats a transfer of property
(including stock or securities) by a U.S. person to a foreign
corporation in connection with an exchange described in section 332,
351, 354, 356 or 361 as a taxable exchange unless the transfer
qualifies for an exception to this general rule. Temporary regulations
published on May, 16, 1986 (TD 8087) provided exceptions in the case of
certain transfers of stock or securities of domestic and foreign
corporations (see Sec. 1.367(a)-3T). Notice 87-85 announced
modifications to those exceptions for transfers of domestic or foreign
stock or securities occurring after December 16, 1987. Proposed
regulations issued on August 26, 1991 largely incorporated the
positions set forth in Notice 87-85, and expanded the application of
section 367(a) with respect to certain transfers of stock or securities
of foreign corporations. Notice 94-46 announced modifications to the
exceptions originally announced in Notice 87-85, effective with respect
to certain transfers of stock or securities of domestic corporations
occurring after April 17, 1994.
Both the temporary regulations herein and the notice of proposed
rulemaking on this subject in the Proposed Rules section of this issue
of the Federal Register generally incorporate the positions taken in
Notice 94-46, with modifications as described below. As indicated
previously, Notice 94-46 did not modify the positions taken in Notice
87-85 governing the transfer of stock or securities of a foreign
corporation. Until the 1991 proposed regulations are finalized, the
positions originally announced in Notice 87-85 will continue to govern
the availability of section 367(a) exceptions for transfers of stock or
securities of foreign corporations.
In addition to implementing the positions announced in Notice 94-
46, this Treasury decision removes those portions of Sec. 1.367(a)-3T
of the 1986 temporary regulations that Notice 87-85 announced would no
longer be applicable with respect to stock transfers occurring after
December 16, 1987. This includes removal of the exceptions in
paragraphs (c) (1) through (4) (providing exceptions for certain
transfers of domestic stock or securities); of paragraph (d) (providing
exceptions for certain transfers of foreign stock or securities,
including an exception for transfers to a foreign corporation organized
in the same foreign country as the corporation the stock of which is
being transferred); of paragraph (e) (involving exceptions where stock
is an operating asset or where there is a consolidation of an
integrated business); and of paragraph (f) (exceptions where U.S.
transferors obtain a limited interest in the transferee foreign
corporation).
The temporary regulations herein also incorporate (in paragraph
(a)) the 1991 proposed regulations' restatement of the general rule
applicable to outbound stock transfers (see Prop. Reg. Sec. 1.367(a)-
3(a)). This restatement revises the general rule contained in the 1986
temporary regulations to reflect changes to section 367 made by
Congress after promulgation of those regulations. For example, the 1986
temporary regulations' statement of the general rule included transfers
of stock or securities in section 332 liquidations as one of the
transactions covered by section 367(a) (see Sec. 1.367(a)-3T(a)). The
restatement of the general rule in the temporary regulations herein
removes the reference to section 332 because an outbound transfer of
stock or securities pursuant to a section 332 liquidation is now
covered by section 367(e)(2) and the regulations under Sec. 1.367(e)-
2T. Even though the temporary regulations under Sec. 1.367(e)-2T have
sunset (because they were promulgated as temporary regulations on
January 12, 1990 (TD 8280) and were not finalized within three years of
that date), the Service announced its
[[Page 66741]]
intention to follow the principles of those regulations in the preamble
to the final regulations under section 367(e)(1) (see the preamble to
the final section 367(e)(1) regulations in TD 8472, adopted January 15,
1993).
The revised statement of the general rule herein refers explicitly
to transfers that may be indirect or constructive. Thus, transactions
that are recharacterized as indirect or constructive stock transfers
will be subject to the section 367(a) stock transfer regulations and
will be taxable unless an exception applies.
The restatement of the general rule herein is not intended to
change the 1986 temporary regulations' treatment of a case in which
stock or securities of a foreign corporation are transferred pursuant
to a reorganization described in section 368(a)(1)(B), including a
transaction that is described in both section 368(a)(1)(B) and section
351. It is anticipated, however, that the final regulations issued with
respect to an outbound transfer of foreign stock or securities will
incorporate the principles of the 1991 proposed regulations, and thus,
for example, a transaction described in both section 368(a)(1)(B) and
section 351 will be subject to section 367(a).
Notice 87-85 and the 1991 Proposed Regulations
Under Notice 87-85 and the 1991 proposed regulations, a U.S.
transferor of stock or securities that owns five percent or more of
either the total voting power or the total value of the transferee
foreign corporation immediately after the transfer generally is not
subject to current taxation under section 367(a)(1) if that transferor
enters into a gain recognition agreement (GRA). The term of the GRA is
five years if all U.S. transferors, in the aggregate, own less than 50
percent of both the total voting power and the total value of the stock
of the transferee foreign corporation immediately after the transfer,
or ten years if the U.S. transferors, in the aggregate, own 50 percent
or more of either the total voting power or the total value of the
stock of the transferee foreign corporation immediately after the
transfer. U.S. transferors that own an interest of less than 5 percent
in the transferee foreign corporation immediately after the transfer
are not taxable under section 367(a)(1) and are not required to enter
into a GRA. If a single U.S. transferor transfers stock or securities
of a domestic corporation and owns directly or by attribution more than
50 percent of either the total voting power or the total value of the
stock of the transferee foreign corporation immediately after the
transfer, gain is recognized on the exchange.
The determination whether (i) a U.S. transferor owns five percent
or more of the transferee foreign corporation immediately after the
transfer, (ii) U.S. transferors own in the aggregate 50 percent or more
of the transferee foreign corporation (and, thus, whether a 10-year GRA
is required), or (iii) a single U.S. transferor owns more than 50
percent of the transferee foreign corporation (and, thus, whether gain
is recognized) takes into account both stock of the transferee foreign
corporation received by the U.S. transferor(s) in the exchange and
stock in the transferee foreign corporation owned by the U.S.
transferor(s) independent of the exchange (referred to as cross-
ownership).
Notice 87-85 and the 1991 proposed regulations presume that U.S.
transferors own in the aggregate 50 percent or more of the total voting
power or the total value of the transferee foreign corporation
immediately after the transfer (and thus a ten-year GRA is required),
unless U.S. transferors can demonstrate otherwise (referred to as the
ownership presumption). The ownership presumption contained in both the
Notice and the 1991 proposed regulations actually consists of two
rebuttable presumptions, one relating to ownership of stock in the U.S.
corporation the stock or securities of which are transferred (referred
to as the U.S. target company) and the other relating to ownership of
stock in the transferee foreign corporation.
Under the first presumption, all persons that exchange U.S. target
company stock (or other property) for stock of the transferee foreign
corporation in the exchange are presumed to be U.S. persons. Thus, if
shareholders of the U.S. target company receive 50 percent or more of
the stock of the transferee foreign corporation in the exchange, U.S.
transferors are presumed to own 50 percent or more of the stock of the
transferee foreign corporation immediately after the transfer. Even if
application of this first presumption does not result in U.S.
transferors being deemed to own at least 50 percent of the total voting
power or the total value of the transferee foreign corporation
immediately after the transfer, the second presumption may do so. The
second presumption is that U.S. transferors also own stock of the
transferee foreign corporation independent of the exchange in an amount
sufficient to bring their total ownership immediately after the
exchange up to 50 percent. This second component of the ownership
presumption is referred to as the cross-ownership presumption.
Notice 94-46
Notice 94-46 modified the exceptions set forth in Notice 87-85 with
respect to post-April 17, 1994 transfers of stock or securities of
domestic corporations. The purpose of Notice 94-46 was to forestall
outbound transfers that are structured to avoid or that lay a
foundation for future avoidance of the Internal Revenue Code anti-
deferral regimes by imposing a shareholder-level tax on such transfers.
Notice 94-46 stated that regulations would provide that the transfer of
stock or securities of a domestic corporation by a U.S. person to a
foreign corporation described in section 367(a) would be taxable if all
U.S. transferors owned, in the aggregate, 50 percent or more of either
the total voting power or the total value of the stock of the
transferee corporation immediately after the exchange. All U.S.
transferors, regardless of their level of ownership, would be subject
to tax in such a case.
The rules of Notice 94-46 incorporated the ownership presumption of
Notice 87-85. As a result of the cross- ownership aspect of that
presumption, even if U.S. shareholders receive significantly less than
50 percent of the stock of a transferee foreign corporation in an
exchange described in section 367(a), the transaction could still be
taxable. If, for example, U.S. shareholders of a U.S. target company
received 30 percent of the stock of a transferee foreign corporation in
an exchange described in section 367(a)(1), those shareholders would be
presumed to own independently at least an additional 20 percent of the
stock of the transferee foreign corporation immediately after the
transfer, with the result that the exchange would be taxable (unless
the cross-ownership presumption were rebutted). Commentators argued
that where a U.S. target company and a foreign acquirer were publicly
traded or widely-held, taxpayers' ability to rebut the cross-ownership
aspect of the ownership presumption was limited. As a result, Notice
94-46 potentially had the effect of forestalling acquisitions of U.S.
public companies by larger foreign corporations in cases where they
were unrelated and both engaged in the active conduct of a trade or
business.
In response to comments received from taxpayers, and in particular
with respect to the difficulties of rebutting the cross-ownership
presumption, these temporary regulations modify positions taken in
Notice 94-46 in two significant ways. First, the regulations shift the
ownership threshold from ``50 percent
[[Page 66742]]
or more'' to ``more than 50 percent'' so that a U.S. transferor may
qualify for an exception to section 367(a) in cases where U.S.
transferors, in the aggregate, receive exactly 50 percent of the stock
of the transferee foreign corporation in the exchange. The relaxation
of the ownership threshold was intended to give 50-50 joint ventures
involving unrelated U.S. and foreign corporations that are engaged in
active businesses the option of using a foreign transferee corporation.
Where a foreign corporation is smaller than a U.S. corporation that it
acquires, the transaction will still generally be taxable; it would not
be taxable if the U.S. participant were the acquiring corporation in
the transaction (or if another U.S. holding company were the acquiring
corporation). Second, although the regulation retains the presumption
that shareholders of the U.S. target company are U.S. persons, it does
not, in general, retain the cross-ownership presumption and no longer,
as a general matter, takes cross-ownership into account. The regulation
counts cross-ownership only in the limited circumstance where U.S.
officers, directors, and 5-percent or greater shareholders of the U.S.
target company own, in the aggregate, more than 50 percent of the total
voting power or the total value of the transferee foreign corporation
immediately after the transfer (a control group case). In such a case,
the exchange is taxable to all U.S. transferors. The regulation allows
taxpayers to rely on Schedule 13-D or 13-G filings made under the
Securities Exchange Act of 1934 (15 U.S.C. 78m) to identify 5-percent
shareholders of public companies for this purpose.
Although cross-ownership does not count toward the 50 percent
ownership threshold (unless the control group case applies), it is
still relevant in determining whether a U.S. transferor owns five
percent or more of the transferee foreign corporation under the rules
originally announced in Notice 87-85. Moreover, cross-ownership
continues to be relevant for determining whether a 5-year or 10-year
GRA is required under the rules originally announced in 87-85, and, for
these purposes, there continues to be a rebuttable presumption.
In addition to the two modifications described above that were made
in response to comments received with respect to Notice 94-46, these
regulations contain a new active trade or business requirement not
contained in Notice 94-46, which taxpayers must meet in order to
qualify for an exception to the general rule of taxation under section
367(a). The IRS and the Treasury Department added the active trade or
business requirement to address abuse potential, in particular, in a
case in which a U.S. target company is smaller than a foreign acquirer
that was formed and capitalized with a view to enabling the smaller
U.S. company to move offshore. The IRS and the Treasury Department
believe that this type of transaction presents an inappropriate
opportunity for avoiding the anti-deferral regime without payment of
the tax envisioned by Notice 94-46. The IRS and the Treasury Department
believe that an exception to taxation is proper only in cases where a
combination of two active businesses is contemplated and that the
opportunity for tax avoidance is ameliorated when such businesses have
been conducted for a period of at least 36 months prior to the
exchange. Under the requirement contained in the regulations, no
exception to taxation is available unless either the transferee foreign
corporation or an affiliate of that corporation was engaged in the
active conduct of a trade or business for the entire 36-month period
prior to the exchange, and unless such business is substantial in
relation to the business conducted by the U.S. target company. For this
purpose, an affiliate is generally defined by reference to the rules in
section 1504(a) (without the exclusion of foreign corporations), and
generally includes a parent, subsidiary or brother-sister corporation
of the transferee foreign corporation.
To summarize, under the temporary regulations, a U.S. person that
exchanges stock or securities in a U.S. corporation for stock of a
foreign corporation in an exchange described in section 367(a) will be
taxable in cases where:
(i) The 50 percent ownership threshold is exceeded;
(ii) The control group case applies;
(iii) The active trade or business requirement is not met; or
(iv) The exchanging U.S. shareholder owns five percent or more of
the stock of the transferee foreign corporation and fails to enter into
a GRA and/or satisfy the requirements of section 6038B.
The duration of the GRA in case (iv) is 5 years if the transferor
can demonstrate that all U.S. transferors in the aggregate own less
than 50 percent of the total voting power or the total value of the
stock of the transferee foreign corporation immediately after the
transfer or 10 years if U.S. transferors own exactly 50 percent (or
more than 50 percent as a result of cross-ownership) of the transferee
foreign corporation immediately after the transfer. In all cases other
than those enumerated in (i) through (iv) above, a U.S. person that
transfers stock or securities of a domestic corporation in exchange for
stock of a transferee foreign corporation will not be taxable under
section 367(a) if certain reporting requirements described in the
regulations are met.
Final regulations under section 367(a) are expected to address the
transfer of stock or securities of foreign corporations and other
matters contained in the 1991 proposed regulations that are not
addressed herein.
Special Analyses
It has been determined that this temporary regulation is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that this regulation does not have a significant impact on a
substantial number of small entities. Thus, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply to these regulations, and
therefore, a Regulatory Flexibility Analysis is not required. Pursuant
to section 7805(f) of the Internal Revenue Code, a copy of these
temporary regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business.
Drafting Information
The principal author of these regulations is Philip L. Tretiak of
the Office of Associate Chief Counsel (International), within the
Office of Chief Counsel, Internal Revenue Service. However, other
personnel from the IRS and Treasury Department participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and Recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are 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 * * *
[[Page 66743]]
Par. 2. Section 1.367(a)-3T is amended by revising paragraphs (a),
(c), (d), (e), (f), (g)(1) and (h)(1) to read as follows:
Sec. 1.367(a)-3T Treatment of transfers of stock or securities to
foreign corporations (temporary).
(a) In general. This section provides rules concerning the transfer
of stock or securities by a U.S. person to a foreign corporation in an
exchange described in section 367(a). In general, a transfer of stock
or securities by a U.S. person (directly, indirectly or constructively)
to a foreign corporation that is described in section 351, 354
(pursuant to a reorganization described in section 368(a)(1)(B)) or
section 361(a) or (b) is subject to section 367(a)(1) and, therefore,
is treated as a taxable exchange, unless one of the exceptions set
forth in paragraph (b), (c) or (d) of this section applies. For
additional rules relating to an exchange involving a foreign
corporation in connection with which there is a transfer of stock, see
section 367(b) and the regulations under that section. For additional
rules regarding a transfer of stock or securities in an exchange
described in section 361(a) or (b), see section 367(a)(5) and any
regulations under that section.
* * * * *
(c) Transfers by U.S. persons of stock or securities of domestic
corporations to foreign corporations--(1) In general. Except as
provided in section 367(a)(5), a transfer of stock or securities of a
domestic corporation by a U.S. person to a foreign corporation that
would otherwise be subject to section 367(a)(1) under paragraph (a) of
this section shall not be subject to section 367(a)(1) if the domestic
corporation the stock or securities of which are transferred (referred
to as the U.S. target company) complies with the reporting requirements
in paragraph (c)(4) of this section and if each of the following four
conditions is met:
(i) Fifty percent or less of both the total voting power and the
total value of the stock of the transferee foreign corporation is
received in the transaction, in the aggregate, by U.S. transferors
(i.e., the amount of stock received does not exceed the 50 percent
threshold).
(ii) No more than 50 percent of each of the total voting power and
the total value of the stock of the transferee foreign corporation is
owned, in the aggregate, immediately after the transfer by U.S. persons
who are either officers or directors of the U.S. target company or who
are five-percent target shareholders (as defined in paragraph
(c)(6)(iii) of this section) (i.e., there is no control group). For
purposes of this paragraph (c)(1)(ii), any stock of the transferee
foreign corporation owned by U.S. persons immediately after the
transfer will be taken into account, whether or not it was received in
the exchange for stock or securities of the U.S. target company.
(iii) In the case of a transfer occurring after January 25, 1996,
the transferee foreign corporation or an affiliate of the transferee
foreign corporation has been engaged in the active conduct of a trade
or business, within the meaning of Sec. 1.367(a)-2T(b)(2) and (3), that
is substantial in comparison to the trade or business of the U.S.
target company, for the entire 36-month period immediately preceding
the date of the transfer.
(iv) Either--
(A) The U.S. person is not a five-percent transferee shareholder
(as defined in paragraph (c)(6)(ii) of this section); or
(B) The U.S. person is a five-percent transferee shareholder and
enters into an agreement to recognize gain with respect to the U.S.
target company stock or securities it exchanged in the form provided in
paragraph (g) of this section, as modified by paragraph (c)(3) of this
section (setting the duration of the gain recognition agreement).
(2) Ownership Presumption. For purposes of paragraph (c)(1) of this
section, persons who transfer stock or securities of the U.S. target
company or other property in exchange for stock of the transferee
foreign corporation are presumed to be U.S. persons. This presumption
may be rebutted in accordance with paragraph (c)(4)(ii) of this
section.
(3) Term of the gain recognition agreement. If, immediately after
the transfer described in section 367(a)(1), all U.S. transferors own
in the aggregate less than fifty percent of both the total voting power
and the total value of the stock of the transferee foreign corporation
(counting both stock of the transferee foreign corporation owned as a
result of the exchange as well as stock of the transferee foreign
corporation owned independently by such U.S. transferors), the
agreement to recognize gain shall be in the form specified in paragraph
(g)(3) of this section. The term of the agreement shall be ten years,
rather than the five years specified in paragraph (g)(3) of this
section, the waiver described in paragraph (g)(4) of this section shall
extend the period for assessment of tax for an additional five years,
and the certification and waiver described in paragraph (g)(5) of this
section must be filed for an additional five years if--
(i) The five-percent transferee shareholder cannot determine
whether the condition in the preceding sentence is satisfied; or
(ii) Immediately after the transfer, all U.S. transferors own in
the aggregate fifty percent or more of either the total voting power or
the total value of the stock of the transferee foreign corporation
(counting both stock of the transferee foreign corporation owned as a
result of the exchange, as well as stock of the transferee foreign
corporation owned independently by such U.S. transferors).
(4) Reporting requirements of U.S. target company. (i) In order for
a U.S. person that transfers stock or securities of a domestic
corporation to qualify for the exception to the general rule under
section 367(a)(1) provided by this paragraph (c), the U.S. target
company must comply with the reporting requirements contained in this
paragraph (c)(4). The U.S. target company must attach to its timely
filed U.S. income tax return (or a subsequent, timely filed amended
return) for the taxable year in which the transfer occurs a statement
titled ``Section 367(a)--Reporting of Cross-Border Transfer Under Reg.
Sec. 1.367(a)-3T(c)(4),'' signed under penalties of perjury by an
officer of the corporation, disclosing the following information--
(A) A description of the transaction in which a U.S. person or
persons transferred stock or securities in the U.S. target company to
the transferee foreign corporation in a transfer otherwise subject to
section 367(a)(1);
(B) The amount (specified as to the percentage of the total voting
power and the total value) of stock of the transferee foreign
corporation received in the transaction, in the aggregate, by persons
who transferred stock or securities of the U.S. target company or other
property. For additional information that may be required to rebut the
ownership presumption of paragraph (c)(2) of this section in cases
where more than 50 percent of either the total voting power or the
total value of the stock of the transferee foreign corporation is
received in the transaction, in the aggregate, by persons who
transferred stock or securities of the U.S. target company or other
property, see paragraph (c)(4)(ii) of this section;
(C) The amount (if any) of transferee foreign corporation stock
owned directly or indirectly (applying the attribution rules of
sections 267(c)(1) and (5)) immediately after the exchange by the U.S.
target company;
[[Page 66744]]
(D) A statement that there is no control group within the meaning
of paragraph (c)(1)(ii) of this section;
(E) A list of U.S. persons who are officers, directors or five-
percent target shareholders and the percentage of the total voting
power and the total value of the stock of the transferee foreign
corporation owned by such persons both immediately before and
immediately after the transaction; and
(F) A statement that the active trade or business test described in
paragraph (c)(1)(iii) of this section is satisfied by the transferee
foreign corporation or an affiliate and a description of such business.
(ii) To rebut the ownership presumption of paragraph (c)(2) of this
section, the U.S. target company must obtain ownership statements
(described in paragraph (c)(6)(i) of this section) from a sufficient
number of persons that transfer U.S. target company stock or securities
(or other property) in the transaction that are not U.S. persons to
demonstrate that the 50 percent threshold is not exceeded. In addition,
the U.S. target company must attach to its timely filed U.S. income tax
return (or a subsequent, timely filed amended return) for the taxable
year in which the transfer occurs a statement, titled ``Section
367(a)--Compilation of Ownership Statements under Reg. Sec. 1.367(a)-
3T(c),'' signed under penalties of perjury by an officer of the
corporation, disclosing the following information:
(A) The amount (specified as to the percentage of the total voting
power and the total value) of stock of the transferee foreign
corporation received, in the aggregate, by U.S. transferors;
(B) The amount (specified as to the percentage of total voting
power and total value) of stock of the transferee foreign corporation
received, in the aggregate, by foreign persons that filed ownership
statements;
(C) A summary of the information tabulated from the ownership
statements, including--
(1) The names of the persons that filed ownership statements
stating that they are not U.S. persons;
(2) The countries of residence and citizenship of such persons; and
(3) The ownership of such persons (by voting power and by value) in
the U.S. target company prior to the exchange and the amount of stock
of the transferee foreign corporation (by voting power and value)
received by such persons in the exchange.
(iii) For purposes of paragraph (c)(4), an income tax return
(including an amended return) will be considered timely filed if it is
filed prior to the time that the Internal Revenue Service discovers
that the reporting requirements of this paragraph have not been
satisfied.
(5) Special Rules--(i) Treatment of partnerships. For purposes of
paragraph (c), if a partnership (whether domestic or foreign) owns or
transfers stock or securities or other property in an exchange
described in section 367(a), each partner in the partnership, and not
the partnership itself, is treated as owning and as having transferred
a proportionate share of the stock or securities or other property. See
Sec. 1.367(a)-1T(c)(3).
(ii) Treatment of options. For purposes of paragraph (c) of this
section, one or more options (or an interest similar to an option) will
be treated as exercised and thus will be counted as stock for purposes
of determining whether the 50 percent threshold is exceeded or whether
a control group exists if a principal purpose of the issuance or the
acquisition of the option (or other interest) was the avoidance of the
general rule contained in section 367(a).
(iii) U.S. target has a vestigial ownership interest in transferee
foreign corporation. In cases where, immediately after the transfer,
the U.S. target company owns, directly or indirectly (applying the
attribution rules of sections 267(c) (1) and (5)) stock of the
transferee foreign corporation, that stock will not in any way be taken
into account (and, thus, will not be treated as outstanding) in
determining whether the 50 percent threshold under paragraph (c)(1)(i)
of this section is exceeded or whether a control group under paragraph
(c)(1)(ii) of this section exists.
(iv) Attribution rule. The rules of section 958 shall apply for
purposes of determining the ownership of stock, securities or other
property under this paragraph (c).
(6) Definitions--(i) Ownership statement. An ownership statement is
a statement, signed under penalties of perjury, stating--
(A) The identity and taxpayer identification number, if any, of the
person making the statement;
(B) That the person making the statement is not a U.S. person (as
defined in paragraph (c)(6)(iv) of this section);
(C) That the person making the statement is not related to any U.S.
person to whom the stock or securities owned by the person making the
statement are attributable under the rules of section 958, or, if stock
or securities are so attributable, the identity and taxpayer
identification number of the relevant U.S. person;
(D) The citizenship, permanent residence, home address, and U.S.
address, if any, of the person making the statement; and
(E) The ownership such person has (by voting power and by value) in
the U.S. target company prior to the exchange and the amount of stock
of the transferee foreign corporation (by voting power and value)
received by such person in the exchange.
(ii) Five-percent transferee shareholder. A five-percent transferee
shareholder is a person that owns at least five percent of either the
total voting power or the total value of the stock of the transferee
foreign corporation immediately after the transfer described in section
367(a)(1). For special rules involving cases in which stock is held by
a partnership, see paragraph (c)(5)(i) of this section.
(iii) Five-percent target shareholder. A five-percent target
shareholder is a person that owns at least five percent of either the
total voting power or the total value of the stock of the U.S. target
company immediately prior to the transfer described in section
367(a)(1). If the stock of the U.S. target company is described in Rule
13d-1(d) of Regulation 13D (17 CFR 240.13d-1(d)) (or any rule or
regulation to generally the same effect), promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934 (15
USC 78m), the existence or absence of filings of Schedule 13-D or 13-G
(or any similar schedules) may be relied upon for purposes of
identifying five-percent target shareholders. For special rules
involving cases in which U.S. target company stock is held by a
partnership, see paragraph (c)(5)(i) of this section.
(iv) U.S. Person. For purposes of this section, a U.S. person is
defined by reference to Sec. 1.367(a)-1T(d)(1). For application of the
rules of this section to stock or securities owned or transferred by a
partnership that is a U.S. person, however, see paragraph (c)(5)(i) of
this section.
(v) U.S. Transferor. A U.S. transferor is a U.S. person (as defined
in paragraph (c)(6)(iv) of this section) who transfers directly,
indirectly or constructively stock or securities of the U.S. target
company or other property in exchange for stock of the transferee
foreign corporation in an exchange described in section 367.
(vi) Transferee foreign corporation. A transferee foreign
corporation is the foreign corporation whose stock is received in the
exchange by U.S. persons.
[[Page 66745]]
(vii) Affiliate. An affiliate is a corporation that is a member of
the same affiliated group (as defined in section 1504(a), without
regard to section 1504(b)(3)) as the transferee foreign corporation.
(7) Certain transfers in connection with performance of services.
Section 367(a)(1) shall not apply to a domestic corporation's transfer
of its own stock or securities in connection with the performance of
services, if the transfer is considered to be to a foreign corporation
solely by reason of Sec. 1.83-6(d)(1).
(8) Examples. This paragraph (c) may be illustrated by the
following examples:
Example 1. Ownership presumption. (i) FC, a foreign corporation,
issues 51 percent of its stock to the shareholders of S, a domestic
corporation, in exchange for their S stock, in a transaction
described in section 367(a)(1).
(ii) Under paragraph (c)(2) of this section, all shareholders of S
who receive stock of FC in the exchange are presumed to be U.S.
persons. Unless this ownership presumption is rebutted, the condition
set forth in paragraph (c)(1)(i) of this section will not be satisfied,
and the exception in paragraph (c)(1) of this section will not be
available. As a result, all U.S. persons that transferred S stock will
recognize gain on the exchange. To rebut the ownership presumption, S
must comply with the reporting requirements contained in paragraph
(c)(4)(ii) of this section, obtaining ownership statements (described
in paragraph (c)(6)(i) of this section) from a sufficient number of
non-U.S. persons who received FC stock in the exchange to demonstrate
that the amount of FC stock received by U.S. persons in the exchange
does not exceed 50 percent.
Example 2. Filing of Gain Recognition Agreement. (i) The facts are
the same as in Example 1, except that FC issues only 40 percent of its
stock to the shareholders of S in the exchange. FC satisfies the active
trade or business test (described in paragraph (c)(1)(iii) of this
section). A, a U.S. person, owns 10 percent of S's stock immediately
before the transfer. All other shareholders of S own less than five
percent of its stock. None of S's officers or directors owns any stock
in FC immediately after the transfer. A will own 15 percent of the
stock of FC immediately after the transfer, 4 percent received in the
exchange, and the balance being stock in FC that A owned prior to and
independent of the transaction. No S shareholder besides A owns five
percent or more of FC immediately after the transfer. The reporting
requirements under paragraph (c)(4)(i) of this section are satisfied.
(ii) The condition set forth in paragraph (c)(1)(i) of this
section is satisfied because, even after application of the
presumption in paragraph (c)(2) of this section, U.S. transferors
could not receive more than 50 percent of FC's stock in the
transaction. There is no control group because five-percent target
shareholders and officers and directors of S do not, in the
aggregate, own more than 50 percent of the stock of FC immediately
after the transfer (A, the sole five-percent target shareholder,
owns 15 percent of the stock of FC immediately after the transfer,
and no officers or directors of S own any stock of FC immediately
after the transfer). Therefore, the condition set forth in paragraph
(c)(1)(ii) of this section is satisfied (and A's cross-ownership of
FC stock is not taken into account). The facts assume that the
condition set forth in paragraph (c)(1)(iii) of this section is
satisfied. Thus, U.S. persons that are not five-percent transferee
shareholders will not recognize gain on the exchange of S shares for
FC shares. A, a five-percent transferee shareholder, will not be
required to include in income any gain realized on the exchange in
the year of the transfer if he files a gain recognition agreement
(GRA) and complies with section 6038B. The duration of the GRA is
five years if all U.S. transferors own in the aggregate less than 50
percent of the total voting power and the total value of FC
immediately after the transfer, and ten years if this condition is
not satisfied. If A lacks the information to determine whether he is
eligible to file a five-year GRA (because the determination includes
a cross-ownership inquiry for all U.S. transferors), he is required
to file a ten-year GRA.
Example 3. Control Group. (i) The facts are the same as in Example
2, except that B, another U.S. person, is a 5- percent target
shareholder, owning 25 percent of S's stock immediately before the
transfer. B owns 40 percent of the stock of FC immediately after the
transfer, 10 percent received in the exchange, and the balance being
stock in FC that B owned prior to and independent of the transaction.
(ii) A control group exists because A and B, each a five-percent
target shareholder within the meaning of paragraph (c)(6)(iii) of this
section, together own more than 50 percent of FC immediately after the
transfer (counting both stock received in the exchange and stock owned
prior to and independent of the exchange). As a result, the condition
set forth in paragraph (c)(1)(ii) of this section is not satisfied, and
all U.S. persons (not merely A and B) who transferred S stock will
recognize gain on the exchange.
Example 4. Partnerships. (i) The facts are the same as in
Example 3, except that B is a partnership (domestic or foreign) that
has five equal partners, only two of whom, X and Y, are U.S.
persons. X and Y are treated as the owners and transferors of 5
percent each of the S stock owned and transferred by B and as owners
of 8 percent each of the FC stock owned by B immediately after the
transfer. Five-percent target shareholders thus own a total of 31
percent of the stock of FC immediately after the transfer (A's 15
percent, plus X's 8 percent, plus Y's 8 percent).
(ii) Because no control group exists, the condition in paragraph
(c)(1)(ii) of this section is satisfied. The conditions in paragraphs
(c)(1) (i) and (iii) of this section also are satisfied. Thus, U.S.
persons that are not five- percent transferee shareholders will not
recognize gain on the exchange of S shares for FC shares. A, X, and Y,
each a five-percent transferee shareholder, will not be required to
include in income in the year of the transfer any gain realized on the
exchange if they file GRAs and comply with section 6038B. The duration
of the GRA is five years if all U.S. transferors own in the aggregate
less than 50 percent of the total voting power and the total value of
FC immediately after the transfer, and ten years if this condition is
not satisfied. If A, X, and Y lack the information to determine whether
they are eligible to file five-year GRAs (because the determination
includes a cross- ownership inquiry for all U.S. transferors), they are
required to file ten-year GRAs.
(9) Effective date. This paragraph (c) applies to transfers
occurring after April 17, 1994. However, paragraph (c)(1)(iii) of this
section applies only to transfers occurring after January 25, 1996. For
transfers occurring before December 17, 1987, see Sec. 1.367(a)-3T(c)
(1) through (4) as contained in 26 CFR Part 1 revised April 1, 1995.
(d) Transfers of stock or securities of foreign corporations. For
guidance, see Notice 87-85 (1987-2 C.B. 395). See Sec. 601.601(d)(2) of
this chapter.
(e) [Reserved.] For transfers occurring before December 17, 1987,
see Sec. 1.367(a)-3T(e) as contained in 26 CFR Part 1 revised April 1,
1995.
(f) [Reserved.] For transfers occurring before December 17, 1987,
see Sec. 1.367(a)-3T(f) as contained in 26 CFR Part 1 revised April 1,
1995.
(g) Transferor's agreement to recognize gain upon later disposition
by transferee--(1) In general. A transfer of stock or securities shall
not be subject to section 367(a)(1) if--
(i) The transferor complies with the reporting requirements of
section 6038B and any regulations thereunder; and
(ii) The transferor files a binding agreement to recognize gain
upon the transferee corporation's later disposition of the transferred
stock or securities, in
[[Page 66746]]
accordance with the rules of this section.
* * * * *
(h) Anti-abuse rules.
(1) [Reserved.] For transfers occurring before December 17, 1987,
see Sec. 1.367(a)-3T(h)(1) as contained in 26 CFR Part 1 revised April
1, 1995.
* * * * *
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 3. The authority for citation for part 602 continues to read
as follows:
Authority: 26 U.S.C. 7805.
Par. 4. In Sec. 602.101, paragraph (c) is amended by revising the
entry in the table for ``1.367(a)-3T'' to read as follows:
``1.367(a)-3T.............................. 0026
1478''.
Dated: December 13, 1995.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved:
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-30829 Filed 12-22-95; 8:45 am]
BILLING CODE 4830-01-U
