Bulletin No. 2009-9March 2, 2009

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

T.D. 9444, page 603.REG–147636–08, page 641.Final, temporary, and proposed regulations under section 367of the Code provide rules for the treatment of certain sharehold-ers who transfer stock or securities of controlled corporationsto foreign corporations. The regulations also address certaindistributions shareholders receive with respect to the stock ofcontrolled foreign corporations.

T.D. 9445, page 635.Final regulations under section 6103 of the Code relate to ad-ministrative review procedures for certain government agen-cies and other authorized recipients of returns or return infor-mation whose receipt of returns and return information may besuspended or terminated because they do not maintain propersafeguards.

T.D. 9446, page 607.Final regulations under section 367 of the Code provide rulesfor entering into gain recognition agreements under section367(a). The regulations clarify the effect that various trans-actions have on existing gain recognition agreements. Notice2005–74 obsoleted.

EXEMPT ORGANIZATIONS

Announcement 2009–9, page 643.A list is provided of organizations now classified as private foun-dations.

Announcement 2009–10, page 644.The IRS has revoked its determination that Leszinski FamilySupport Organization of Atlanta, GA; Kuumba Trust of Pitts-burgh, PA; Consumer Debt Management Services of DeerfieldBeach, FL; RealtyAmerica.Org, Inc., of Indian Harbour Beach,FL; Consumer Budget Counseling, Inc., of Port Charlotte, FL; In-novative Womens Network, Inc., of Houston, TX; Ellen StephenHospice & Home Care of Kyle, SD; Starfish Foundation, Inc., ofRichardson, TX; Ronsard Foundation of Statesville, NC; Alter-native Care, Inc., of Gainesville, FL; Credit Counseling, Inc., ofSunrise, FL; A New Goal Credit Counseling Agency of San Fran-cisco, CA; Trans-Atlantic Health Organization, Inc., of Gaithers-burg, MD; and Ammend Credit Counseling and Debt Consoli-dation of Cincinnati, OH, qualify as organizations described insections 501(c)(3) and 170(c)(2) of the Code.

ADMINISTRATIVE

T.D. 9445, page 635.Final regulations under section 6103 of the Code relate to ad-ministrative review procedures for certain government agen-cies and other authorized recipients of returns or return infor-mation whose receipt of returns and return information may besuspended or terminated because they do not maintain propersafeguards.

REG–138326–07, page 638.Proposed regulations under section 6231 of the Code allow theIRS to convert partnership items to nonpartnership items whenthe application of the unified partnership audit and litigationprocedures of sections 6221 through 6234 with respect tocertain tax avoidance transactions interferes with the effectiveand efficient enforcement of the Internal Revenue laws. A publichearing is scheduled for June 4, 2009.

(Continued on the next page)

Finding Lists begin on page ii.

Announcement 2009–6, page 643.New section 6050W of the Code requires information report-ing for payment card and third party payment network trans-actions, effective for returns for calendar years beginning af-ter December 31, 2010. Entities required to report must per-form backup withholding if the payee fails to furnish a correctTaxpayer Identification Number (“TIN”). This announcement willalert 6050W filers that they may now participate in the TINmatching program.

March 2, 2009 2009–9 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helping themunderstand and meet their tax responsibilities and by applying

the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe 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 ofthe 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, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (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 indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished 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.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2009–9 I.R.B. March 2, 2009

March 2, 2009 2009–9 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 367.—ForeignCorporations

26 CFR 1.367(a)–3: Treatment of transfers of stockor securities to foreign corporations.

T.D. 9444

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Application of Section 367to a Section 351 ExchangeResulting from a TransactionDescribed in Section304(a)(1); Treatment of GainRecognized Under Section301(c)(3) for Purposes ofSection 1248

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final and temporary regula-tions.

SUMMARY: This document contains fi-nal and temporary regulations under sec-tions 367(a), 367(b) and 1248(a) of the In-ternal Revenue Code (Code). The finalregulations under section 367 revise ex-isting final regulations and add cross-ref-erences. The final regulations under sec-tion 1248 update an effective/applicabil-ity date. The temporary regulations un-der section 367(a) and (b) revise existingfinal regulations concerning transfers ofstock to a foreign corporation that are de-scribed in section 351 by reason of section304(a)(1). The temporary regulations un-der section 1248(a) provide that, for pur-poses of section 1248(a), gain recognizedby a shareholder under section 301(c)(3) inconnection with the receipt of a distribu-tion of property from a foreign corporationwith respect to its stock shall be treated asgain from the sale or exchange of the stockof such foreign corporation. The tempo-rary regulations affect certain persons thattransfer stock to a foreign corporation in a

transaction described in section 304(a)(1),or certain persons that recognize gain un-der section 301(c)(3) in connection withthe receipt of a distribution of propertyfrom a foreign corporation with respect toits stock. The text of the temporary regu-lations serves as the text of the proposedregulations (REG–147636–08) set forth inthe notice of proposed rulemaking on thissubject published in this issue of the Bul-letin.

DATES: Effective Date: These regulationsare effective on February 10, 2009.

Applicability Date: These regulationsapply to acquisitions of stock occurring onor after February 10, 2009.

FOR FURTHER INFORMATIONCONTACT: Sean W. Mullaney, (202)622–3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Section 367(a)(1) generally providesthat if a United States person transfersproperty to a foreign corporation in an ex-change described in section 332, 351, 354,356, or 361, the foreign corporation shallnot be considered a corporation for pur-poses of determining the extent to whichthe United States person recognizes gainon such transfer. Exceptions to the generalrule are provided by section 367(a)(2) and(3), and the Secretary has broad author-ity under section 367(a)(6) to promulgateregulations providing exceptions for othertransactions.

Section 367(b)(1) provides that in thecase of an exchange described in section332, 351, 354, 355, 356, or 361 in con-nection with which there is no transfer ofproperty described in section 367(a)(1), aforeign corporation shall be considered tobe a corporation except to the extent pro-vided in regulations prescribed by the Sec-retary which are necessary or appropriateto prevent the avoidance of Federal incometaxes. Section 367(b)(2) provides that theregulations prescribed pursuant to section367(b)(1) shall include (but shall not belimited to) regulations dealing with thesale or exchange of stock or securities in a

foreign corporation by a United States per-son, including regulations providing thecircumstances under which gain is recog-nized, amounts are included in gross in-come as a dividend, adjustments are madeto earnings and profits, or adjustments aremade to the basis of stock or securities.

Regulations under section 367(b) gen-erally provide that if the potential applica-tion of section 1248 cannot be preservedimmediately following the acquisition ofthe stock or assets of a foreign corporation(foreign acquired corporation) by anotherforeign corporation in an exchange subjectto section 367(b), then certain exchangingshareholders of the foreign acquired cor-poration must include in income as a divi-dend the section 1248 amount (as definedin §1.367(b)–2(c)) attributable to the stockof the foreign acquired corporation. See§1.367(b)–4(b).

Section 304(a)(1) generally providesthat, for purposes of sections 302 and 303,if one or more persons are in control ofeach of two corporations and in return forproperty one of the corporations (the ac-quiring corporation) acquires stock in theother corporation (the issuing corporation)from the person (or persons) so in control,then such property shall be treated as adistribution in redemption of the stock ofthe acquiring corporation. To the extentsection 301 applies to the distribution, thetransferor and the acquiring corporationare treated as if (1) the transferor trans-ferred the stock of the issuing corporationto the acquiring corporation in exchangefor stock of the acquiring corporation ina transaction to which section 351(a) ap-plies, and (2) the acquiring corporationthen redeemed the stock it is deemed tohave issued. Under section 304(b)(2), thedetermination of the amount of the prop-erty distribution that is a dividend (and thesource thereof) is made as if the propertyis distributed by the acquiring corporationto the extent of its earnings and profits,and then by the issuing corporation to theextent of its earnings and profits.

On February 21, 2006, the IRS andTreasury Department issued final reg-ulations (T.D. 9250, 2006–1 C.B. 588)providing that section 367(a) and (b) shallnot apply to certain transfers of stock of

2009–9 I.R.B. 603 March 2, 2009

a foreign or domestic corporation to aforeign acquiring corporation to whichsection 351 applies (deemed section 351exchange) by reason of section 304(a)(1)(final 2006 regulations). Specifically,§1.367(a)–3(a) provides that if, pursuantto section 304(a)(1), a United States per-son is treated as transferring stock of adomestic or foreign corporation to a for-eign corporation in exchange for stockof such foreign corporation in a deemedsection 351 exchange, the deemed section351 exchange is not a transfer to a for-eign corporation subject to section 367(a).Similarly, §1.367(b)–4(a) provides that if,pursuant to section 304(a)(1), a foreigncorporation is treated as acquiring thestock of another foreign corporation in adeemed section 351 exchange, the deemedsection 351 exchange is not an acquisitionsubject to section 367(b).

The preamble to the final 2006 regu-lations explained that the IRS and Trea-sury Department determined that the poli-cies underlying section 367(a) and (b) arepreserved even if a deemed section 351 ex-change is not subject to section 367(a) and(b) because generally the income recog-nized by the transferor in the transaction(dividend income, capital gain, or both)should equal or exceed the built-in gainin the transferred stock. Comments werereceived, however, stating that the trans-feror may not recognize income equal to orgreater than the built-in gain in the trans-ferred stock if, under section 301(c)(2),the transferor were permitted to recoverthe basis of shares of the foreign acquir-ing corporation held before (and after) thetransaction. For example, assume a do-mestic corporation, P, wholly owns F1 andF2, both foreign corporations. The F1stock has a $0x basis and $100x fair mar-ket value. The F2 stock has a $100x basisand $100x fair market value. Neither F1nor F2 has current or accumulated earningsand profits. In a transaction subject to sec-tion 304(a)(1), P sells the F1 stock to F2for $100x cash. Under section 304(a)(1),P and F2 are treated as if P transferred theF1 stock to F2 in exchange for F2 stock ina transaction to which section 351 applies,and then F2 redeemed its stock deemed is-sued to P. Because the redemption of the F2stock would be described in section 302(d)and therefore subject to section 301, thecommentators posited that P may not rec-ognize gain under section 301(c)(3) on the

receipt of the $100x cash in redemption ofthe F2 stock if the basis of both the F2stock that is received by P in the deemedsection 351 exchange ($0x), and of the F2stock held by P prior to (and after) thetransaction ($100x), is available for reduc-tion under section 301(c)(2). If that werethe case, P would recognize no gain in thetransaction.

The preamble to the final 2006 regu-lations stated, however, that the IRS andTreasury Department believe current lawdoes not provide for the recovery of ba-sis of any shares of the acquiring corpora-tion other than the shares deemed issued tothe transferor and redeemed by the acquir-ing corporation as provided under section304(a)(1). Thus, in the example above,P would recognize $100x gain under sec-tion 301(c)(3) (the built-in gain on the F1stock), and the basis of the F2 stock held byP after the transaction would continue to be$100x. The IRS and Treasury Departmentcontinue to study the basis recovery issueas part of a larger project and have deter-mined that it is necessary to revise the final2006 regulations prior to the completion ofthat project.

Explanation of Provisions

A. Modified Application of Section 367(a)to Deemed Section 351 Exchanges

Consistent with the final 2006 regu-lations, the temporary regulations undersection 367(a) generally provide that if,pursuant to section 304(a)(1), a UnitedStates person is treated as transferringstock of a domestic or foreign corpora-tion to a foreign corporation in exchangefor stock of such foreign corporation in adeemed section 351 exchange, the deemedsection 351 exchange is not a transferto a foreign corporation subject to sec-tion 367(a). However, if the distributionreceived by the United States person inredemption of the foreign acquiring corpo-ration stock received in the deemed section351 exchange is subject to section 301 (byreason of section 302(d)), the temporaryregulations provide an exception to thegeneral rule if the distribution is appliedagainst and reduces (in whole or in part),pursuant to section 301(c)(2), the basis ofstock of the foreign acquiring corporationheld by the United States person otherthan the stock deemed issued to the United

States person in the deemed section 351exchange. In such a case, the United Statesperson shall recognize gain under section367(a)(1) equal to the amount by whichthe gain realized by the United States per-son with respect to the transferred stock inthe deemed section 351 exchange exceedsthe amount of the distribution received bythe United States person in redemptionof the foreign acquiring corporation stockthat is treated as a dividend under section301(c)(1) and included in gross incomeby the United States person. Thus, in thehypothetical transaction described above,if any amount of the distribution receivedby P in redemption of the F2 stock was ap-plied against the basis of the F2 stock heldby P before (and after) the transaction,then under the temporary regulations Pwould recognize $100x gain under section367(a)(1) in connection with its transfer ofthe F1 stock to F2 in the deemed section351 exchange.

The exceptions to the application ofsection 367(a)(1) for transfers of stockprovided in §1.367(a)–3 are not availableto transfers covered by the temporary reg-ulations. For example, a United Statesperson cannot avoid gain recognition un-der the temporary regulations by enteringinto a gain recognition agreement under§§1.367(a)–3(b)(1)(ii) and 1.367(a)–8with respect to the deemed section 351exchange.

The temporary regulations providerules to coordinate the recognition of gainunder the temporary regulations and thecorresponding increase to the basis of thestock of the foreign acquiring corporationreceived by the United States person in thetransaction. Under such rules the increaseto the basis of the stock of the foreignacquiring corporation by reason of gainrecognized by the United States personunder the temporary regulations wouldbe taken into account before determiningthe consequences of the redemption ofthe shares of the foreign acquiring corpo-ration. For example, in the hypotheticaltransaction described above, the basis ofthe F2 stock deemed received by P inexchange for the F1 stock would be in-creased to $100x under section 358 beforedetermining the consequences of the re-demption of such stock under section 301.The gain recognized by P will be treatedas recognized with respect to the F1 stocktransferred in the deemed section 351 ex-

March 2, 2009 604 2009–9 I.R.B.

change in proportion to the gain realizedwith respect to the F1 stock.

B. Modified Application of Section 367(b)to Deemed Section 351 Exchanges

The temporary regulations make sim-ilar revisions to the final 2006 regula-tions under section 367(b). Specifically,the temporary regulations provide that§1.367(b)–4(b) shall apply to a deemedsection 351 exchange to the extent thedistribution received by the exchangingshareholder in redemption of the stockdeemed issued by the foreign acquiringcorporation is applied against and reduces,pursuant to section 301(c)(2), the adjustedbasis of stock of the foreign acquiringcorporation held by the exchanging share-holder before the transaction.

The temporary regulations providerules to determine the amount of an in-come inclusion that is attributable to theshares of stock of the foreign acquiredcorporation transferred in the deemedsection 351 exchange when the incomeinclusion required under the regulationsis less than the aggregate section 1248amount attributable to all of the shares ofstock transferred in the deemed section351 exchange.

C. Treatment of Gain Recognized underSection 301(c)(3) for Purposes of Section1248(a)

The temporary regulations under sec-tion 1248(a) provide that gain recognizedunder section 301(c)(3) on the receipt ofa distribution of property from a foreigncorporation shall be treated, for purposesof section 1248(a), as gain from the saleor exchange of the stock of such corpora-tion. The temporary regulations preservethe policies underlying section 367(b), areconsistent with the premise of the final2006 regulations, and ensure that the earn-ings and profits of lower-tier foreign sub-sidiaries described in section 1248(c)(2)are taken into account.

D. Effective Dates

The temporary regulations apply totransfers or distributions occurring on orafter February 10, 2009.

Availability of IRS Documents

IRS notices cited in this preamble aremade available by the Superintendent ofDocuments, U.S. Government Printing Of-fice, Washington, DC 20402.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Or-der 12866. Therefore, a regulatory as-sessment is not required. These tempo-rary and final regulations are necessary toensure that the appropriate amount of in-come (dividend income, capital gain orboth) is recognized currently in the trans-actions described in the explanation of pro-visions section in this preamble. Accord-ingly, good cause is found for dispensingwith notice and public comment pursuantto 5 U.S.C. 553(b) and (c) and with a de-layed effective date pursuant to 5 U.S.C.553(d). For applicability of the Regula-tory Flexibility Act, see the cross-refer-enced notice of proposed rulemaking pub-lished elsewhere in this Federal Register.Pursuant to section 7805(f) of the Code,these regulations have been submitted tothe Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Drafting Information

The principal author of these regula-tions is Sean W. Mullaney of the Office ofAssociate Chief Counsel (International).However, other personnel from the IRSand the Treasury Department participatedin their development.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

Paragraph. 1. The authority citation forpart 1 is amended by adding new entries innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.367(a)–9T also issued under

26 U.S.C. 367(a) and (b). * * *Section 1.367(b)–4T also issued under

26 U.S.C. 367(b). * * *

Par. 2. Section 1.367(a)–3 is amendedby revising the third sentence in paragraph(a) to read as follows:

§1.367(a)–3 Treatment of transfers ofstock or securities to foreign corporations.

(a) * * * For rules applicable when, pur-suant to section 304(a)(1), a United Statesperson is treated as transferring stock ofa domestic or foreign corporation to aforeign corporation in exchange for stockof such foreign corporation in a transac-tion to which section 351(a) applies, see§1.367(a)–9T. * * *

* * * * *Par. 3. Section 1.367(a)–9T is added to

read as follows:

§1.367(a)–9T Treatment of deemedsection 351 exchanges pursuant to section304(a)(1) (temporary).

(a) Scope and general rule. This sec-tion applies to the extent that, pursuant tosection 304(a)(1), a United States personis treated as transferring stock of a domes-tic or foreign corporation to a foreign cor-poration (foreign acquiring corporation) inexchange for stock of the foreign acquiringcorporation in a transaction to which sec-tion 351(a) applies (deemed section 351exchange). Except to the extent providedin paragraph (b) of this section, a trans-fer of stock by a United States person to aforeign acquiring corporation in a deemedsection 351 exchange is not subject to sec-tion 367(a)(1).

(b) Special rule. Notwithstanding para-graph (a) of this section, if the distributionreceived by the United States person in re-demption of the stock of the foreign ac-quiring corporation deemed issued in thedeemed section 351 exchange is appliedagainst and reduces (in whole or in part),pursuant to section 301(c)(2), the basis ofstock of the foreign acquiring corporationheld by the United States person other thanthe stock deemed issued in the deemed sec-tion 351 exchange, the United States per-son shall recognize gain pursuant to thisparagraph (b). The exceptions described in§1.367(a)–3(b)(1) and (c)(1) shall not ap-ply to a transfer of stock described in para-graph (a) of this section. The amount ofgain recognized by a United States personpursuant to this paragraph (b) shall equalthe amount, if any, by which—

2009–9 I.R.B. 605 March 2, 2009

(1) The gain realized by the UnitedStates person with respect to the trans-ferred stock in connection with the deemedsection 351 exchange exceeds;

(2) The amount of the distribution re-ceived by the United States person inredemption of the stock of the foreignacquiring corporation deemed issued inthe deemed section 351 exchange thatis treated as a dividend under section301(c)(1) and included in gross income bythe United States person.

(c) Ordering rule. For purposes of para-graph (b)(1) of this section, the amount ofgain realized by the United States personin connection with the deemed section 351exchange shall be determined without re-gard to the amount of gain recognized bythe United States person under paragraph(b) of this section.

(d) Allocation of recognized gain. Gainrecognized by a United States person pur-suant to paragraph (b) of this section shallbe treated as recognized with respect tothe stock transferred in the deemed section351 exchange in proportion to the amountof gain realized by the United Statesperson with respect to such stock. See§1.367(a)–1T(b)(4) for additional ruleson the character, source, and adjustmentsrelating to gain recognized under section367(a).

(e) Example. The following exampleillustrates the rules of this section:

Example. (i) Facts. (A) USP, a domestic corpora-tion, wholly owns FC1 and FC2, each a foreign cor-poration. USP, FC1 and FC2 use a calendar taxableyear. The FC1 stock has a $40x basis and $100x fairmarket value. The FC2 stock has a $100x basis and$100x fair market value. As of December 31, year 1,FC1 has zero earnings and profits, and FC2 has $20xearnings and profits. On December 31, year 1, in atransaction described in section 304(a)(1), USP sellsthe FC1 stock to FC2 for $100x cash.

(B) Because USP wholly owns FC1 before thetransactions and is treated, under section 318, as indi-rectly owning 100% of the FC1 stock after the trans-fer, under section 304(a)(1), USP and FC2 are treatedin the same manner as if USP contributed the FC1stock to FC2 in a deemed section 351 exchange in ex-change solely for $100x of FC2 stock, and then FC2redeemed for $100x cash its stock deemed issued toUSP. Because USP wholly owns FC1 before the saleand is treated as owning 100% of FC1 after the sale,section 302(a) does not apply to the redemption. In-stead, under section 302(d), the redemption is treatedas a distribution to which section 301 applies. Pur-suant to section 304(b)(2), $20x of the distribution istreated as a dividend from FC2. With respect to theremaining $80x, USP takes the position that $40x isapplied against and reduces the basis of the FC2 stockissued in the deemed section 351 exchange, and $40x

is applied against and reduces the basis of the FC2stock held by USP prior to (and after) the transaction.

(ii) Analysis. Under paragraph (b) of this section,USP must recognize gain of $40x on its transfer ofthe FC1 stock to FC2 in the deemed section 351 ex-change (the amount by which the $60x gain realizedby USP on the deemed section 351 exchange with re-spect to the F1 stock exceeds the $20x dividend in-clusion). Pursuant to paragraph (b) of this section,the exception under §1.367(a)–3(b) is not availableto the transfer of the FC1 stock by USP to FC2 inthe deemed section 351 exchange. Thus, USP can-not avoid gain recognition under paragraph (b) of thissection by entering into a gain recognition agreementwith respect to its transfer of the FC1 stock to FC2 inthe deemed section 351 exchange. Under paragraph(d) of this section, the $40x gain recognized is allo-cated among the shares of FC1 stock transferred toFC2 in the deemed section 351 exchange in propor-tion to the gain realized by USP on the transfer of suchshares. Under paragraph (c) of this section, the appli-cation of paragraph (b) of this section is determinedprior to taking into account the $40x increase to thebasis of the FC1 stock transferred by USP. Under sec-tion 362, the basis of the FC1 stock in the hands ofFC2 is increased by $40x, the amount of gain recog-nized by the USP on the transfer of the FC1 stock un-der paragraph (b) of this section. Under section 358,the basis of the FC2 stock received by USP in thedeemed section 351 exchange is similarly increasedby $40x. See §1.367(a)–1T(b)(4). The $40x increaseto the basis of the FC2 stock is taken into account be-fore determining the consequences of the redemptionof such stock under section 304(a)(1).

(f) Effective/applicability date. Thissection applies to transfers occurringon or after February 10, 2009. See§1.367(a)–3(a), as contained in 26 CFRpart 1 revised as of April 1, 2008, fortransfers occurring on or after February21, 2006, and before February 10, 2009.

(g) Expiration date. This section ex-pires on or before February 10, 2012.

Par. 4. Section 1.367(b)–4 is amendedby revising the second sentence in para-graph (a) and adding paragraphs (e), (f)and (g) to read as follows:

§1.367(b)–4 Acquisition of foreigncorporate stock or assets by a foreigncorporation in certain nonrecognitiontransactions.

(a) * * * For rules applicable when, pur-suant to section 304(a)(1), a foreign ac-quiring corporation is treated as acquiringthe stock of a foreign acquired corporationin a transaction to which section 351(a) ap-plies, see §1.367(b)–4T(e). * * *

* * * * *(e) [Reserved]. For further guidance,

see §1.367(b)–4T(e).

(f) [Reserved]. For further guidance,see §1.367(b)–4T(f).

(g) [Reserved]. For further guidance,see §1.367(b)–4T(g).

Par. 5. Section 1.367(b)–4T is added toread as follows:

§1.367(b)–4T Acquisition of foreigncorporate stock or assets by a foreigncorporation in certain nonrecognitiontransactions (temporary).

(a) through (d) [Reserved]. For furtherguidance, see §1.367(b)–4(a) through (d).

(e) Application of section 367(b)to transactions described in section304(a)(1)— (1) Scope and general rule.This section applies to the extent that, pur-suant to section 304(a)(1), an exchangingshareholder is treated as transferring thestock of a foreign acquired corporationto a foreign acquiring corporation in atransaction to which section 351(a) applies(deemed section 351 exchange). Except tothe extent provided in paragraph (e)(2) ofthis section, a transfer of stock of a foreignacquired corporation by an exchangingshareholder in a deemed section 351 ex-change shall not be subject to paragraph(b) of this section.

(2) Special rule. Notwithstanding para-graph (e)(1) of this section, a transfer ofstock of a foreign acquired corporation byan exchanging shareholder to a foreign ac-quiring corporation in a deemed section351 exchange shall be subject to paragraph(b) of this section to the extent the distri-bution received by the exchanging share-holder in redemption of the stock of theforeign acquiring corporation is appliedagainst and reduces, pursuant to section301(c)(2), the basis of stock of the for-eign acquiring corporation held by the ex-changing shareholder other than the stockdeemed issued by the foreign acquiringcorporation in the deemed section 351 ex-change.

(3) Allocation of income inclusion. Ifthe income inclusion resulting from the ap-plication of paragraph (e)(2) of this sectionis less than the section 1248 amount attrib-utable to the shares of stock of the foreignacquired corporation transferred by the ex-changing shareholder in the deemed sec-tion 351 exchange, the amount of the in-come inclusion attributable to each shareof stock transferred in the deemed section351 exchange shall be determined by mul-

March 2, 2009 606 2009–9 I.R.B.

tiplying the income inclusion by the per-centage that the section 1248 amount at-tributable to such share of stock bears tothe aggregate section 1248 amount attrib-utable to all of the shares of stock trans-ferred in the deemed section 351 exchange.

(4) Example. The rules of this para-graph (e) are illustrated by the followingexample:

Example. (i) Facts. (A) FP, a foreign corpo-ration, wholly owns USP, a domestic corporation.USP wholly owns CFC1, and CFC1 wholly ownsCFC2. CFC2 wholly owns CFC3. CFC1, CFC2 andCFC3 are controlled foreign corporations within themeaning of section 957(a). USP, CFC1, CFC2 andCFC3 use a calendar taxable year. CFC1 owns 30%of the outstanding stock of FS, a foreign corporation.FP owns the remaining 70% of the outstanding stockof FS. The CFC2 stock has a $40x basis and $100xfair market value. The FS stock held by CFC1 hasa $60x basis and $100x fair market value. As ofDecember 31, year 1, CFC2 has $20x of section 1248earnings and profits, CFC3 has $40x of section 1248earnings and profits, and FS has zero earnings andprofits. On December 31, year 1, in a transactiondescribed in section 304(a)(1), CFC1 sells the CFC2stock to FS for $100x cash. FS is not a controlledforeign corporation (within the meaning section957(a)) either before or after the sale of the CFC2stock.

(B) Because CFC1 wholly owns CFC2 before thetransaction and is treated, under section 318, as in-directly owning 100% of the CFC2 stock after thetransaction, under section 304(a)(1), CFC2 and FSare treated as if CFC1 contributed the CFC2 stock toFS in a deemed section 351 exchange in exchangesolely for $100x of FS stock, and then FS redeemedfor $100x cash its stock deemed issued to CFC1. Be-cause CFC1 wholly owned CFC2 before the transac-tion and is treated, under section 318, as indirectlyowning 100% of CFC2 after the transaction, section302(a) does not apply to the redemption. Instead, un-der section 302(d), the redemption is treated as a dis-tribution to which section 301 applies. Pursuant tosection 304(b)(2), $20x of the distribution is treatedas a dividend from the earnings and profits of CFC2.With respect to the remaining $80x, CFC1 takes theposition that $40x is applied against and reduces thebasis of the FS stock deemed issued in the transac-tion, and $40x is applied against and reduces the ba-sis of the FS stock held by CFC1 prior to (and after)the transaction.

(ii) Analysis. Under paragraph (e)(2) of this sec-tion, the transfer by CFC1 of the CFC2 stock to FS inthe deemed section 351 exchange is subject to para-graph (b) of this section to the extent the distributionreceived by CFC1 in redemption of the FS stock is-sued in the deemed section 351 exchange is appliedagainst and reduces, under section 301(c)(2), the ba-sis of the FS stock held by CFC1 before (and after) thetransaction. Thus, because $40x of the distributionreceived by CFC1 from FS in redemption of the FSstock issued in the deemed section 351 exchange isapplied against and reduces, under section 301(c)(2),the basis of the FS stock held by CFC1 before (andafter) the transaction, under paragraph (b) of this sec-tion, CFC1 must include $40x in income as a deemed

dividend. See §1.367(b)–2(e) for the treatment of the$40x income inclusion. In total, CFC1 recognizesdividend income of $60x, $20x from the applicationof section 304(a)(1) to the sale of the CFC2 stock toFS and $40x under paragraph (b) of this section byreason of the application of paragraph (e)(2) of thissection.

(f) Effective/applicability date. Para-graph (e) of this section applies to transfersoccurring on or after February 10, 2009.See §1.367(b)–4, as contained in 26 CFRpart 1 revised as of April 1, 2008, fortransfers occurring on or after February 21,2006, and before February 10, 2009.

(g) Expiration date. This section ex-pires on or before February 10, 2012.

Par. 6. Section 1.1248–1 is amended byrevising paragraphs (b) and (g) and addingparagraph (h) to read as follows:

§1.1248–1 Treatment of gain from certainsales or exchanges of stock in certainforeign corporations.

* * * * *(b) [Reserved]. For further guidance,

see §1.1248–1T(b).

* * * * *(g) Effective/applicability date. (1) The

third sentence in paragraph (a)(1), para-graph (a)(4), and paragraph (a)(5), Exam-ple 4, of this section apply to income inclu-sions that occur on or after July 30, 2007.A taxpayer may elect to apply paragraph(a)(4) of this section to income inclusionsin open taxable years provided that it con-sistently applies paragraph (a)(4) of thissection for income inclusions in the firstyear for which the election is applicableand in all subsequent years.

(2) [Reserved]. For further guidance,see §1.1248–1T(g)(2).

(h) [Reserved]. For further guidance,see §1.1248–1T(h).

Par. 7. Section 1.1248–1T is added toread as follows:

§1.1248–1T Treatment of gain fromcertain sales or exchanges of stock incertain foreign corporations (temporary).

(a) [Reserved]. For further guidance,see §1.1248–1(a).

(b) Sale or exchange. For purposesof section 1248(a), the term sale or ex-change includes the receipt of a distribu-tion which is treated as in exchange forstock under section 302(a) (relating to

distributions in redemption of stock), sec-tion 331(a)(1) (relating to distributions incomplete liquidation of a corporation), orsection 331(a)(2) (relating to distributionsin partial liquidation of a corporation).For purposes of section 1248(a), gain rec-ognized by a shareholder under section301(c)(3) in connection with a distributionof property by a corporation with respectto its stock shall be treated as gain fromthe sale or exchange of stock of such cor-poration.

(c) through (f) [Reserved]. For furtherguidance, see §1.1248–1(c) through (f).

(g) Effective/applicability dates. (1)[Reserved]. For further guidance, see§1.1248–1(g)(1).

(2) Paragraph (b) of this section appliesto distributions that occur on or after Feb-ruary 10, 2009.

(h) Expiration date. This section ex-pires on or before February 10, 2012.

Linda M. Kroening,Acting Deputy Commissionerfor Services and Enforcement.

Approved January 13, 2009.

Eric Solomon,Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on February 10,2009, 8:45 a.m., and published in the issue of the FederalRegister for February 11, 2009, 74 F.R. 6824)

26 CFR 1.367(a)–3: Treatment of transfers of stockor securities to foreign corporations.

T.D. 9446

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 1 and 602

Gain Recognition AgreementsWith Respect to CertainTransfers of Stock orSecurities by UnitedStates Persons to ForeignCorporations

AGENCY: Internal Revenue Service(IRS), Treasury.

2009–9 I.R.B. 607 March 2, 2009

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains fi-nal regulations under section 367(a) of theInternal Revenue Code (Code) concern-ing gain recognition agreements filed byUnited States persons with respect to trans-fers of stock or securities to foreign cor-porations. The regulations finalize tempo-rary regulations published on February 5,2007 (T.D. 9311, 2007–1 C.B. 635). Theregulations primarily affect United Statespersons that transfer (or have transferred)stock or securities to foreign corporationsand that will enter (or have entered) into again recognition agreement with respect tosuch a transfer.

DATES: Effective Date: These regulationsare effective February 11, 2009.

Applicability Dates: For dates ofapplicability, see §§1.367(a)–3(g) and1.367(a)–8(r).

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–147144–06),room 5203, Internal Revenue Service,PO Box 7604, Ben Franklin Station,Washington, DC 20044. Submissions maybe hand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–147144–06),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC, or sent electronicallyvia the Federal eRulemakingPortal at www.regulations.gov (IRSREG–147144–06).

FOR FURTHER INFORMATIONCONTACT: S. James Hawes, (202)622–3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information inthese regulations have been reviewedand approved by the office of Manage-ment and Budget in accordance withthe Paperwork Reduction Act of 1995(44 U.S.C. 3507(d)) under control number1545–2056.

The collections of information in thesefinal regulations are in §1.367(a)–8(d), (g),(k), and (o). Responses to the collectionsof information are required to avoid recog-

nizing gain under an existing gain recogni-tion agreement and to facilitate electronicfiling. The regulations also require theamount of any gain recognized under again recognition agreement and applicableinterest due with respect to any additionaltax due with respect to such gain to bereflected on a schedule included with theelectronically-filed return of the taxpayer.

An agency may not conduct or sponsor,and a person is not required to respondto, a collection of information, unless thecollection of information displays a validcontrol number.

Books and records relating to these col-lections of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns and taxreturn information are confidential, as re-quired by 26 U.S.C. 6103.

Background

On February 5, 2007, the IRS andTreasury Department issued temporaryand proposed regulations under section367(a) concerning the terms and condi-tions for a gain recognition agreement(GRA) filed by a United States person(the U.S. transferor) in connection with atransfer of stock or securities to a foreigncorporation (transferee foreign corpo-ration) and the impact of certain trans-actions on an existing GRA (the 2007regulations). 72 F.R. 5184 (T.D. 9311,2007–1 C.B. 635). No public hearingon the 2007 regulations was requestedor held; however, numerous commentswere received. After considering thecomments received, the IRS and TreasuryDepartment adopt the 2007 regulations,with modifications, as final regulationsunder section 367(a). This Treasurydecision also removes the temporaryregulations and revises cross-referenceswhere appropriate to reflect the removaland replacement of the temporaryregulations with final regulations.

Summary of Comments andExplanation of Revisions

A. Subsequent NonrecognitionTransfers—In General

The 2007 regulations provide specificexceptions for certain dispositions or otherevents that would otherwise require gain

to be recognized under an existing GRA(triggering event). The exceptions gener-ally apply to dispositions that qualify fornonrecognition treatment under the Codeand require the U.S. transferor to enter intoa new GRA with respect to the initial trans-fer for the remaining term of the existingGRA.

Several commentators asserted that theexceptions provided by the 2007 regu-lations did not literally apply to variousdispositions qualifying for nonrecognitiontreatment because the entity making thetransfer is not described in the relevantexception, thus inappropriately resultingin gain recognition under a GRA. For ex-ample, assume that in year 1 a domesticcorporation, USP, transfers stock of a for-eign corporation, FS1, to another foreigncorporation, FS2, pursuant to an exchangeto which section 351 applies (the initialtransfer). USP files a GRA with respect tothe initial transfer. In year 2, FS2 transfersthe FS1 stock received from USP in year 1to another foreign corporation, FS3, solelyin exchange for stock of FS3 under section351. The year 2 transfer of the FS1 stockby FS2 would constitute a triggering eventfor purposes of the GRA filed by USPwith respect to the initial transfer, but thetransfer qualifies for an exception underthe 2007 regulations. USP complies withthe requirements of the 2007 regulationswith respect to the GRA filed for the initialtransfer. In year 3, FS3 contributes theFS1 stock received from FS2 in year 2 toanother foreign corporation, FS4, solely inexchange for stock of FS4 under section351. The year 3 transfer of the FS1 stockby FS3 is a triggering event with respectto the GRA entered into by USP in con-nection with the initial transfer.

The 2007 regulations provide an ex-ception for certain subsequent transfersof the transferred stock in a transactionto which section 351 applies (section 351exchange), but the exception does notclearly apply when the transferor in thesection 351 exchange is not the transfereeforeign corporation. Commentators ex-pressed similar concerns with respect toother nonrecognition transactions, includ-ing liquidations described in section 332(section 332 liquidation), transactions towhich section 355 applies (section 355transactions), and transactions involvingpartnerships. The commentators sug-gested various alternatives for avoiding

March 2, 2009 608 2009–9 I.R.B.

the inappropriate triggering of a GRA insuch cases.

The IRS and Treasury Departmentagree that certain nonrecognition transac-tions that may not qualify for an exceptionunder the 2007 regulations should nottrigger an existing GRA. Because spe-cific exceptions provide certainty to therelevant transactions, the final regula-tions retain the exceptions of the 2007regulations with modifications so that theexceptions apply to transactions involvingone or more entities not clearly describedin the 2007 regulations. For example,under the final regulations the exceptionfor a section 351 exchange of the trans-ferred stock applies to any transfer of thetransferred stock regardless of the identityof the transferor. The final regulations in-clude additional specific exceptions and ageneral exception for certain transactionsthat cannot be adequately covered by aspecific exception because of the myriadfactual permutations.

The general exception provided by thefinal regulations applies generally to anydisposition or other event that would oth-erwise constitute a triggering event if thedisposition is a nonrecognition transaction(as defined in section 7701(a)(45), but in-cluding an exchange described in section351(b) or 356 even if all gain realized isrecognized); a U.S. transferor retains a di-rect or indirect interest in the transferredstock or securities (or the assets of thetransferred corporation, such as where thetransferred corporation has liquidated inthe interim); and the U.S. transferor that re-tains such direct or indirect interest entersinto a new GRA with respect to the initialtransfer. However, if, as a result of the dis-position or other event, a foreign corpora-tion acquires all or part of the transferredstock or securities (or substantially all theassets of the transferred corporation) thegeneral exception shall apply only if theU.S. transferor owns at least five percent(applying the attribution rules of section318, as modified by section 958(b)) of thetotal voting power and the total value ofthe outstanding stock of such foreign cor-poration immediately after the dispositionor other event. This five percent owner-ship condition is intended to limit the ap-plication of the general exception in trans-actions where the U.S. transferor retains aminimal interest in the transferred stock orsecurities (or substantially all the assets of

the transferred corporation). The final reg-ulations include examples to illustrate theapplication of the general exception.

A disposition or other event to whichthe general exception applies shall besubject to the provisions of the final regu-lations to the same extent and in the samemanner as a disposition or event to whicha specific exception applies. For example,even though a specific exception is gener-ally available for a section 351 exchangeof the transferred stock by the transfereeforeign corporation, the U.S. transferormust still recognize gain under the existingGRA to the extent the transferee foreigncorporation would otherwise recognizegain in the exchange under section 351(b).The U.S. transferor must therefore sim-ilarly recognize gain in connection witha disposition or other event to which thegeneral exception applies to the extent thatthe transferee foreign corporation wouldotherwise recognize gain in the exchangeunder section 351(b).

A new GRA filed under the general ex-ception is generally subject to the sameterms and conditions as the existing GRA,but must also describe the subsequent dis-positions that would constitute triggeringevents (based on the principles of the finalregulations, but not including any trigger-ing event otherwise described in the finalregulations) and include a statement thatthe U.S. transferor agrees to treat such dis-positions as triggering events. In addition,the final regulations provide that, with re-spect to a new GRA filed under the generalexception, a triggering event shall also in-clude any other disposition or event that isinconsistent with the principles of the trig-gering event exceptions including, for ex-ample, an indirect disposition of the trans-ferred stock or securities or of substantiallyall of the assets of the transferred corpora-tion. This additional condition is similar tothe condition applicable to a GRA filed inconnection with an indirect stock transferdescribed in §1.367(a)–3(d).

One commentator requested that an ex-ception be provided for a securities lendingtransaction to which section 1058 applies.The final regulations do not provide suchan exception.

B. Dispositions Pursuant to anIntercompany Transaction

Under the 2007 regulations, a completeor partial disposition by the U.S. transferorof the stock of the transferee foreign corpo-ration received in the initial transfer gen-erally requires the U.S. transferor to rec-ognize gain under the GRA. Exceptionsto this general rule are provided for cer-tain nonrecognition transfers to which sec-tions 351, 354, or 721 applies. As de-scribed further in part D. of this Preamble,the 2007 regulations provide further that aGRA shall instead terminate (in whole orin part) if the U.S. transferor disposes of allor part of the stock of the transferee foreigncorporation received in the initial trans-fer pursuant to a transaction in which allgain realized is recognized currently andincluded in taxable income as a result ofthe disposition, but only if the basis of thestock disposed of (excluding certain ad-justments to such basis) is not greater thanthe basis in the transferred stock or securi-ties at the time of the initial transfer.

If the U.S. transferor disposes of stockof the transferee foreign corporation pur-suant to an intercompany transaction(within the meaning of §1.1502–13) thatis not described in section 351 or 354,the conditions for terminating the exist-ing GRA (in whole or in part) are notsatisfied because, under the provisions of§1.1502–13, the U.S. transferor generallydefers taking into account any gain real-ized and recognized on the disposition.Thus, such a disposition would be a trig-gering event.

Several commentators asserted that itis inappropriate to require the U.S. trans-feror to recognize gain under the GRA insuch cases because the stock of the trans-feree foreign corporation remains withinthe consolidated group of which the U.S.transferor is a member. It is also inap-propriate to terminate the GRA becausethe intercompany item has not been takeninto account. Instead, the commentatorsrecommended that the GRA remain ineffect for its remaining term. The IRSand Treasury Department agree with thisrecommendation, and the final regulationsprovide a specific exception for dispo-sitions of stock of the transferee foreigncorporation pursuant to an intercompanytransaction (intercompany transaction ex-ception) to which a specific triggering

2009–9 I.R.B. 609 March 2, 2009

event exception does not apply. If the in-tercompany transaction exception applies,the U.S. transferor remains subject to theexisting GRA. But see the discussion be-low when the intercompany transaction isa nonrecognition transaction in which anamount of gain is recognized.

The intercompany transaction excep-tion is available if two conditions are sat-isfied. The first condition is that the basisof the stock of the transferee foreign cor-poration disposed of in the intercompanytransaction is not greater than the sumof the aggregate basis in the transferredstock or securities at the time of the initialtransfer, any increase to the basis of thetransferred stock or securities by reasonof gain recognized by the U.S. transferorin connection with the initial transfer, andany increase to the basis of the stock of thetransferee foreign corporation by reason ofincome inclusions by the U.S. transferor(for example, pursuant to section 961).To satisfy this basis condition, the U.S.transferor can elect to reduce the basis ofthe stock of the transferee foreign corpo-ration, effective immediately before theintercompany transaction.

The second condition is that the an-nual certification filed with respect to theexisting GRA for the taxable year duringwhich the intercompany transaction occursincludes a complete description of the in-tercompany transaction and a schedule il-lustrating how the basis condition is satis-fied.

Because the final regulations providespecific exceptions for certain nonrecog-nition transfers of stock of the transfereeforeign corporation (for example, pursuantto a section 351 exchange), the new in-tercompany transaction exception appliesonly to the extent the intercompany trans-action gives rise to an intercompany item(as defined in §1.1502–13(b)(2)). If theintercompany item is a gain, the existingGRA must be divided into two separateagreements — one that remains with theU.S. transferor (of an amount equal tothe intercompany item) and another thatmoves to the acquiring member (of anamount equal to the remaining amount ofthe existing GRA amount). For example,assume the amount of the existing GRAis $100x, the intercompany transactionis described in section 351(b), and theU.S. transferor recognizes $20x gain (theintercompany item) in the intercompany

transaction. The intercompany transactionexception applies to the extent of the $20xintercompany item, and the exception forsection 351 exchanges applies to the re-mainder of the transfer. Thus, the U.S.transferor remains subject to a $20x GRA(to the extent of the $20x intercompanyitem), and the acquiring member becomessubject to an $80x GRA. This result issimilar to that of a transfer of the stock ofthe transferee foreign corporation to a do-mestic acquiring corporation in a section351 exchange that is not an intercompanytransaction but in which the U.S. transferorrecognizes gain under section 351(b). Insuch a case, the amount of the new GRAentered into by the domestic acquiringcorporation is reduced by the amount ofgain recognized by the U.S. transferor onthe transfer under section 351(b). TheU.S. transferor does not remain subject toa GRA because the gain recognized undersection 351(b) is taken into account. Bycontrast, if the section 351 exchange werean intercompany transaction, the U.S.transferor must remain subject to a GRAin an amount equal to the gain recognizedunder section 351(b) because the gain hasnot been taken into account.

If the intercompany item is a loss, how-ever, the U.S. transferor shall remain sub-ject to the entire GRA. In addition, in sucha case, the termination rule that applies todispositions of the stock of the transfereeforeign corporation in which all realizedgain is recognized and included in taxableincome during the taxable year of the dis-position shall not apply.

The final regulations provide rules tocoordinate the subsequent inclusion intaxable income of an intercompany itemand an amount of gain recognized underthe GRA. Generally, under the coordina-tion rule, if subsequent to an intercompanytransaction to which the intercompanytransaction exception applies, a disposi-tion or other event occurs that requiresthe U.S. transferor to take into accountthe intercompany item related to the inter-company transaction (under the provisionsof §1.1502–13), the disposition shall notconstitute a triggering event. Instead theGRA shall terminate without further effector the amount of gain subject to the GRAshall be reduced based on the principles ofthe termination rule that applies to certaindispositions of the stock of the transfereeforeign corporation received in the initial

transfer. The final regulations include anexample illustrating this rule.

C. Divisive Reorganizations

The preamble to the 2007 regulationsrequested comments concerning whetherspecific exceptions should be provided fordivisive reorganizations involving the U.S.transferor, the transferee foreign corpora-tion, or the transferred corporation. Nocomments were received. However, thefinal regulations provide a specific excep-tion for divisive reorganizations involvinga transfer of the stock of the transfereeforeign corporation received in the initialtransfer to a domestic corporation (domes-tic controlled corporation) before the dis-tribution of the stock of the domestic con-trolled corporation. The specific exceptionapplies if the domestic controlled corpora-tion enters into a new GRA with respect tothe initial transfer. The IRS and TreasuryDepartment expect the general exceptionto apply to other divisive reorganizations,as appropriate. The final regulations in-clude examples illustrating the applicationof the general exception to divisive reorga-nizations.

D. GRA Termination Events

If certain conditions are met, under the2007 regulations an existing GRA termi-nates without further effect (terminationrule) if the U.S. transferor (or other spec-ified United States persons) re-acquiresthe transferred stock or securities, or theU.S. transferor disposes of the stock of thetransferee foreign corporation received inthe initial transfer. One condition for theapplication of the termination rule is that,with certain adjustments, the basis of thetransferred stock or securities in the handsof the U.S. transferor (or other specifiedUnited States person) immediately follow-ing the acquisition or the basis of stockof the transferee foreign corporation dis-posed of by the U.S. transferor, as relevant,must not be greater than the basis of thetransferred stock or securities at the timeof the initial transfer. To satisfy this basiscondition, the 2007 regulations generallypermit the U.S. transferor (or other UnitedStates person) to reduce the basis of thetransferred stock or securities (or the stockof the transferee foreign corporation, asapplicable). The 2007 regulations furtherpermit an increase to basis of other stock

March 2, 2009 610 2009–9 I.R.B.

or securities in the transferred corporation(or stock of the transferee foreign corpo-ration, as applicable) by a correspondingamount, but not in excess of fair marketvalue.

The final regulations retain the termina-tion rule and the conditions for its appli-cation, including the option to reduce ba-sis. However, the IRS and Treasury De-partment have determined that it is inap-propriate to permit the shifting of basis toother stock or securities in the case of anelection to reduce the basis of stock or se-curities. The final regulations, therefore,do not permit the U.S. transferor (or otherUnited States person) to increase the ba-sis of other stock or securities of the trans-ferred corporation (or stock of the trans-feree foreign corporation, as applicable).The general exception, however, may ap-ply allowing the U.S. transferor (or otherUnited States person) to enter into a newGRA in connection with a transaction inwhich the transferred stock or securitiesare re-acquired in lieu of reducing the ba-sis of the transferred stock or securities.

One commentator questioned whetherthe termination rule applies in the caseof a downstream asset reorganization ofthe transferee foreign corporation into thetransferred corporation because the U.S.transferor receives newly-issued stock ofthe transferred corporation in the trans-action and not the stock transferred inthe initial transfer. The IRS and TreasuryDepartment believe it is appropriate forthe termination rule to apply in the caseof such downstream asset reorganizations.Accordingly, by revising the location ofa rule contained in the 2007 regulations,the final regulations clarify that the termtransferred stock or securities includes anystock or securities of the transferred cor-poration with a basis determined, in wholeor in part, by reference to the basis of thestock or securities transferred in the initialtransfer. Thus, in the case of a downstreamasset reorganization, for purposes of thetermination rule, the newly-issued stockof the transferred corporation deemeddistributed by the transferee foreign corpo-ration to the U.S. transferor under section361(c) is the stock transferred in the initialtransfer.

The 2007 regulations provide an ex-ception for certain expropriation lossesthat would otherwise constitute triggeringevents. The final regulations modify the

rule to provide instead that the amount ofgain subject to a GRA is reduced to theextent a loss is sustained with respect tostock of the transferee foreign corporation,the transferred stock or securities, or sub-stantially all the assets of the transferredcorporation by reason of an expropriationof such property by the government of aforeign country, any political subdivisionthereof, or any agency or instrumentalityof the foregoing.

E. Transfers by U.S. Transferor Pursuantto an Outbound Asset Reorganization

The 2007 regulations provide an excep-tion for a transfer of stock of the trans-feree foreign corporation by the U.S. trans-feror to a domestic corporation pursuant toan asset reorganization described in sec-tion 368(a)(1). See §1.367(a)–8T(e)(3)(i).The preamble to the 2007 regulations re-quested comments concerning whether anexception should also be provided for anoutbound transfer of the stock of the trans-feree foreign corporation by the U.S. trans-feror to a foreign corporation pursuant toan asset reorganization described in sec-tion 368(a)(1). No comments were re-ceived. However, after studying the is-sue further and considering the principlesof the proposed regulations recently is-sued under sections 367(a)(5), 367(b), and1248(f) (73 FR 49278), the IRS and Trea-sury Department have determined that itis appropriate for an exception to apply tosuch an outbound transfer. The final regu-lations do not include a specific exceptionfor such outbound transfers, but the IRSand Treasury Department expect the gen-eral exception provided by the final reg-ulations to apply to such transfers, as ap-propriate. The final regulations include anexample illustrating the application of thegeneral exception to such a transfer.

F. Ordering Rule if Triggering EventAffects Multiple GRAs

The final regulations provide an order-ing rule to determine the amount of gainrecognized under a GRA when a disposi-tion or other event requires gain to be rec-ognized under more than one GRA. Theordering rule adopts a “first-in-time” ap-proach, providing that gain must first berecognized under the GRA that relates tothe earliest initial transfer, then under the

GRA that relates to the transfer imme-diately following the initial transfer, andso forth until the appropriate amount ofgain under each GRA has been recognized.This ordering rule clarifies that the gainrecognized under a GRA is determined af-ter taking into account any increase to thebasis of the transferred stock or securitiesresulting from gain recognized under an-other GRA that relates to an earlier initialtransfer. The final regulations include anexample to illustrate the ordering rule.

G. Section 301 Distributions

The 2007 regulations define a disposi-tion as any transfer that would constitutea disposition for any purpose of the Codeand the regulations under the Code, butexclude a stock redemption describedunder section 302(d) (dividend equiv-alent redemption) to the extent section301(c)(1) applies. One commentator re-quested that the final regulations clarifywhether the rule for dividend equivalentredemptions applies to redemptions ofstock of the transferee foreign corporation,the transferred corporation, or both. Thecommentator also requested that the finalregulations confirm that a distribution ofproperty to which section 301(c)(2) ap-plies (including in the case of a dividendequivalent redemption) does not constitutea disposition of the relevant stock.

The final regulations provide that a dis-position generally does not include the re-ceipt of a distribution of property with re-spect to stock to which section 301 applies,including by reason of section 302(d). Thefinal regulations provide further that a div-idend equivalent redemption shall consti-tute a disposition if the U.S. transferor doesnot enter into a new GRA that includes ap-propriate provisions to account for the re-demption. The final regulations include anexample illustrating this rule and describ-ing the types of appropriate provisions thatshould be included in the new GRA. Theprovisions to be included in the GRA arenecessary, for example, to account for adividend equivalent redemption that oc-curs pursuant to a transaction to which sec-tion 304(a)(1) applies and in which thetransferor does not retain a direct or indi-rect interest in the acquiring corporation.In such a case, the GRA would need toprovide appropriate provisions to accountfor indirect dispositions of the transferred

2009–9 I.R.B. 611 March 2, 2009

stock that should require gain to be recog-nized under the new GRA.

The final regulations provide that theU.S. transferor must recognize gain undera GRA to the extent gain is recognizedunder section 301(c)(3) with respect to thetransferred stock and that the amount ofgain subject to the GRA is reduced to theextent the U.S. transferor recognizes gainunder section 301(c)(3) with respect to thestock of the transferee foreign corporationreceived in the initial transfer.

H. Elections under Section 338

One commentator requested that thefinal regulations provide an exception fora deemed sale of the assets of the trans-ferred corporation or the transferee foreigncorporation by reason of an election un-der section 338(g). The commentatorposited a fact pattern where the U.S. trans-feror entered into a GRA in connectionwith a transfer of less than 20 percent ofthe outstanding stock of the transferredcorporation to the transferee foreign cor-poration, and, within the GRA term, thetransferee foreign corporation acquiresadditional stock of the transferred cor-poration constituting a qualified stockpurchase (within the meaning of section338(d)(3)) and makes an election undersection 338(g) with respect to such ac-quisition. The deemed asset sale thatresults from the section 338(g) electionis a sale for all purposes of the Code (see§1.338–2(c)(6)) and thus, under the 2007regulations, would require the U.S. trans-feror to recognize the full amount of gainsubject to the GRA. The commentator as-serted that providing an exception for sucha deemed asset sale was consistent withthe policies of the GRA regime becausethe deemed asset sale is not a monetizationof the assets or stock of the transferredcorporation.

The IRS and Treasury Departmentagree with the commentator, and the finalregulations provide that a deemed sale ofassets of the transferred corporation or thetransferee foreign corporation by reasonof an election under section 338(g) shallnot constitute a triggering event for pur-poses of the GRA. However, the sale ofstock of the target corporation pursuantto the qualified stock purchase shall betaken into account for purposes of a GRA.The sale of stock of the transferred or

transferee foreign corporation by the sellershould either require gain to be recognizedunder a GRA or terminate the GRA with-out further effect if the conditions for thetermination rule are satisfied, even if anelection under section 338(g) is made.

By contrast, a deemed sale of assetsof a domestic corporation by reason ofan election under section 338(h)(10) shallcontinue to be taken into account for pur-poses of §1.367(a)–8. Thus, for exam-ple, if an election under section 338(h)(10)were made with respect to the U.S. trans-feror, the deemed sale of the stock of thetransferee foreign corporation held by theU.S. transferor would constitute a disposi-tion of such stock that either requires gainto be recognized under the GRA or termi-nates the GRA if the conditions for the ter-mination rule are satisfied.

On August 22, 2008, the IRSand Treasury Department issued pro-posed regulations under section 336(e)(REG–143544–04, 2008–42 I.R.B. 947)that provide rules generally consistent withthe rules that apply to elections under sec-tion 338(h)(10). The proposed regulationsunder section 336(e) shall be applicableto dispositions occurring on or after theproposed regulations are published as fi-nal regulations in the Federal Register.The proposed regulations do not apply ifthe selling corporation or the target corpo-ration is foreign. When final regulationsunder section 336(e) are promulgated,the IRS and Treasury Department antic-ipate that a deemed asset sale pursuantto a section 336(e) election with respectto a domestic corporation shall be takeninto account for purposes of §1.367(a)–8,similar to a deemed asset sale pursuantto an election under section 338(h)(10).Comments are requested in this regard,including what special rules would be re-quired with respect to an existing GRAif an election under section 336(e) werepermitted if the selling corporation or thetarget corporation were foreign.

I. Expatriation under Section 877A

The 2007 regulations provide that aGRA shall be triggered immediately be-fore the date on which an individual U.S.transferor loses United States citizenshipor ceases to be taxed as a lawful permanentresident (as defined in section 877(e)(2)).This rule applies even if the individual

U.S. transferor would have recognizedgain with respect to the stock of the trans-feree foreign corporation under section877. The final regulations generally retainthis rule, modified for the enactment ofsection 877A. Further, the final regula-tions make clear that the termination rulethat applies in certain cases where theU.S. transferor disposes of the stock ofthe transferee foreign corporation is notapplicable to an individual U.S. transferorthat is subject to section 877A.

J. GRA Content

Comments were received regardingwhether the information required with aGRA could instead be made available bythe U.S. transferor “upon request.” Thefinal regulations confirm that the informa-tion required with a GRA must be includedwith the GRA as filed with the tax returnof the U.S. transferor.

K. Other Changes

Under the 2007 regulations, certaindispositions that qualify for an exceptionnonetheless require the U.S. transferor torecognize gain under the existing GRA.For example, to the extent the transfereeforeign corporation would be required torecognize gain under section 351(b) or356(a)(1) in connection with an exchangeof the transferred stock, the U.S. trans-feror must recognize gain under the GRAnotwithstanding that an exception appliesto the exchange of the transferred stock.The final regulations retain this rule; how-ever, the final regulations refer to anydisposition or event that requires gain tobe recognized under a GRA as a “gainrecognition event.” A gain recognitionevent includes a triggering event, a dis-position that would constitute a triggeringevent but for the application of an excep-tion (such as the section 351(b) or 356exchange described above), and a section301 distribution that would require gainto be recognized under section 301(c)(3)with respect to the transferred stock.

The final regulations clarify the amountof gain subject to a GRA that is filed bya domestic corporate shareholder of a do-mestic corporation (the U.S. transferor)that transfers stock or securities to thetransferee foreign corporation pursuant toan outbound asset reorganization that is

March 2, 2009 612 2009–9 I.R.B.

subject to section 367(a)(5) and the regu-lations under that section.

The final regulations clarify that, if aGRA is entered into in connection with atransfer of a partnership interest, a com-plete or partial disposition of such partner-ship interest shall constitute a triggeringevent for purposes of the GRA.

The 2007 regulations provide excep-tions for certain dispositions of stock ofthe transferee foreign corporation or ofsubstantially all the assets of the trans-ferred corporation that are described insection 351, 354 (but only in the caseof a reorganization described in section368(a)(1)(B)), or 721, if, in addition toother requirements, the U.S. transferorcomplies with requirements similar tothose for the exception that applies to sim-ilar dispositions of the transferred stock orsecurities. See §1.367(a)–8T(e)(1)(ii). Inresponse to comments requesting certaintyconcerning the requirements that must besatisfied, the final regulations identify thespecific requirements that must be satis-fied with respect to such dispositions.

The 2007 regulations provide that, ifthe transferred corporation is domestic andat the time of the initial transfer the U.S.transferor owned stock in the transferredcorporation satisfying the requirements ofsection 1504(a)(2), the GRA shall termi-nate without further effect if the transferredcorporation disposes of substantially all ofits assets in a transaction in which all gainrealized is recognized currently. The finalregulations retain this termination rule butadd, as an additional condition for its ap-plication, that the U.S. transferor and thetransferred corporation were members ofthe same consolidated group on the date ofthe initial transfer. This change was madebecause the IRS and Treasury Departmentexpect a lesser degree of inside and out-side basis disparity within a consolidatedgroup.

The final regulations provide that, if theinitial transfer and one or more disposi-tions or other events (even if an excep-tion applies) that affect the GRA filed bythe U.S. transferor with respect to the ini-tial transfer occur within the same taxableyear of such U.S. transferor, or if multipledispositions or events that affect an exist-ing GRA (even if an exception applies) oc-cur in a taxable year of the U.S. transferorthat does not include the initial transfer,

the U.S. transferor is only required to en-ter into a single GRA for such taxable year.The GRA must describe the initial trans-fer and/or each subsequent disposition orother event that affects the GRA. This ruledoes not apply, however, if a disposition orother event requires a new GRA to be filedby a United States person that was not theU.S. transferor with respect to the existingGRA.

The final regulations provide that thedetermination of whether a disposition ofsubstantially all of the assets of the trans-ferred corporation has occurred shall bemade on the basis of one or more relatedtransactions. The final regulations pro-vide further that the determination shall bemade without regard to a disposition of as-sets described in section 1221(a)(1) in theordinary course of business.

Effective/Applicability Dates

The final regulations generally apply totransfers of stock or securities occurring onor after March 13, 2009. The final regula-tions shall not apply to transfers of stockor securities occurring on or after March13, 2009 that are entered into pursuant toa contract that was binding before Febru-ary 11, 2009 (subject to customary condi-tions) and all times thereafter. However,taxpayers may apply the final regulationsto such transfers provided the final regu-lations are applied consistently to all suchtransfers. Taxpayers may also apply therules of the final regulations that were notalready effective under §1.367(a)–8 (see26 CFR part 1, revised April 1, 2006)and §1.367(a)–8T to any gain recognitionagreement filed with respect to a transferof stock or securities occurring on a datethat is before March 13, 2009 and during ataxable year for which the period of limita-tions on assessments under section 6501(a)of the Code has not closed.

Availability of IRS Documents

IRS documents cited in this preambleare made available by the Superintendentof Documents, U.S. Government PrintingOffice, Washington, DC 20402.

Effect on Other Documents

The following publication is obsoleteas of February 11, 2009: Notice 2005–74,2005–2 C.B. 726.

Special Analyses

It has been determined that this Trea-sury Decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat 5 U.S.C. 553(b) and (d) do not applyto these regulations.

It is hereby certified that the collec-tions of information contained in theseregulations will not have a significanteconomic impact on a substantial numberof small entities. Accordingly, a regula-tory flexibility analysis is not required.These regulations primarily will affectUnited States persons that are large corpo-rations engaged in cross-border corporatetransactions. Thus, the number of af-fected small entities—in whichever of thethree categories defined in the RegulatoryFlexibility Act (small businesses, smallorganizations, and small governmental ju-risdictions)—will not be substantial. TheIRS and Treasury Department estimatethat small organizations and small gov-ernmental jurisdictions are likely to beaffected only insofar as they might holda portfolio interest in stock or securitiesand in the unlikely event that they transfersuch stock or securities to a foreign cor-poration. While a certain number of smallentities may transfer stock or securities toa foreign corporation in connection withan acquisition or reorganization, the IRSand Treasury Department do not anticipatethe number to be substantial. Furthermore,the IRS and Treasury Department estimatethat those small entities that are affected bythe regulations will likely face a burden ofapproximately two hours at an hourly rateof $200. Considering that the collectionsof information enable taxpayers to deferthe current recognition of gain that is sub-ject to a gain recognition agreement, theIRS and Treasury believe that $400 is nota significant economic impact. Pursuantto section 7805(f) of the Internal RevenueCode, this regulation was submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Drafting Information

The principal authors of these regula-tions are Daniel McCall, formerly of theOffice of the Associate Chief Counsel (In-

2009–9 I.R.B. 613 March 2, 2009

ternational), and S. James Hawes, of theOffice of the Associate Chief Counsel (In-ternational). However, other personnelfrom the IRS and the Treasury Departmentparticipated in their development.

* * * * *

Amendments to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by removing the entriesfor §§1.367(a)–3T(e) and 1.367(a)–8T toread in part as follows:

Authority: 26 U.S.C. 7805* * *Par. 2. Section 1.338–1 is amended

by adding a new sentence at the end ofparagraph (a)(2), to read as follows:

§1.338–1. General principles; status ofold target and new target.

(a) * * *

(2) * * * See also §1.367(a)–8(k)(13)for a rule applicable to gain recogni-tion agreements (filed under section§§1.367(a)–3(b)(1)(ii) and 1.367(a)–8)and deemed asset sales as a result of anelection under section 338(g).

* * * * *

§1.367(a)–3 [Amended]

Par. 3. For each entry in the table in the“Section” column, remove the language inthe “Remove” column and add the lan-guage in the “Add” column in its place.

Section Remove Add

1.367(a)–3(c)(3)(iii)(B)(1)(i)(A) 1296(b) 1297(b)

1.367(a)–3(d)(2)(iii) §1.367(a)–8T(b)(3)(i) and (d) §1.367(a)–8(c)(1)(i)

1.367(a)–3(d)(2)(v) §1.367(a)–8T(d)(2) §1.367(a)–8(j)(2)(i)

1.367(a)–3(d)(3), Example 1(ii), fourthsentence

§1.367(a)–8T(d)(1) §1.367(a)–8(j)(1)

1.367(a)–3(d)(3), Example 1(ii), fourthsentence

§1.367(a)–8T(b)(1)(vii) §1.367(a)–8(c)(2)(vi)

1.367(a)–3(d)(3), Example 1(ii), fifthsentence

§1.367(a)–8T(b)(1)(vii) §1.367(a)–8(c)(2)(vi)

1.367(a)–3(d)(3), Example 1A(ii), firstsentence

§1.367(a)–8T(a)(3) §1.367(a)–8(d)(3) and (e)(1)(i)

1.367(a)–3(d)(3), Example 1A(ii), secondsentence

§1.367(a)–8T(d)(4) §1.367(a)–8(j)(5)

1.367(a)–3(d)(3), Example 1A(ii), secondsentence

§1.367(a)–8T(e)(8) §1.367(a)–8(k)(10)

1.367(a)–3(d)(3), Example 4(i), firstsentence

§1.367(a)–8T(d)(2) §1.367(a)–8(j)(2)(i)

1.367(a)–3(d)(3), Example 4(ii), firstsentence

§1.367(a)–8T(d)(2) §1.367(a)–8(j)(2)

1.367(a)–3(d)(3), Example 4(ii), secondsentence

§1.367(a)–8T(g)(2) §1.367(a)–8(o)(4)

1.367(a)–3(d)(3), Example 5A(ii), secondto last sentence

§1.367(a)–8T(g)(2) §1.367(a)–8(o)(4)

1.367(a)–3(d)(3), Example 6(ii), lastsentence

§1.367(a)–8T(d)(2) §1.367(a)–8(j)(2)(i)

1.367(a)–3(d)(3), Example 7(ii), secondsentence

§1.367(a)–8T(g)(2) §1.367(a)–8(o)(4)

1.367(a)–3(d)(3), Example 7(ii), thirdsentence

§1.367(a)–8T(e)(1)(iii) §1.367(a)–8(k)(4)

1.367(a)–3(d)(3), Example 7A(ii), fourthsentence

§1.367(a)–8T(g)(2) §1.367(a)–8(o)(4)

1.367(a)–3(d)(3), Example 7A(ii), lastsentence

§1.367(a)–8T(b)(5) §1.367(a)–8(g)

March 2, 2009 614 2009–9 I.R.B.

Section Remove Add

1.367(a)–3(d)(3), Example 7A(ii), lastsentence

§1.367(a)–8T(e)(1)(iii) §1.367(a)–8(k)(4)

1.367(a)–3(d)(3), Example 8(ii), secondto last sentence

§1.367(a)–8T(d)(2) §1.367(a)–8(j)(2)(i)

1.367(a)–3(d)(3), Example 9(ii), lastsentence

§1.367(a)–8T(d)(2) §1.367(a)–8(j)(2)(i)

1.367(a)–3(d)(3), Example 11(ii), sixthsentence

§1.367(a)–8T(d)(1) §1.367(a)–8(j)(1)

1.367(a)–3(d)(3), Example 11(ii), sixthsentence

§1.367(a)–8T(b)(1)(vii) §1.367(a)–8(c)(2)(vi)

1.367(a)–3(d)(3), Example 12(ii), thirdsentence

§1.367(a)–3T(e) §1.367(a)–3(e)

1.367(b)–4(b)(1)(iii), Example 4(i), lastsentence

§1.367(a)–3T(e) §1.367(a)–3(e)

1.367(b)–13(a)(2)(iii) or (iii) or in sections 368(a)(1)(G) and(a)(2)(D)

(iii), or (v)

Par. 4. For each entry in the table, re-designate the paragraph designated in the“Old Paragraph” column as the new para-

graph designation in the “New Paragraph”column to read as follows:

§1.367(a)–3(g) [Redesignated]

Section 1.367(a)–3(g) is redesignatedas follows:

Old Paragraph New Paragraph

1.367(a)–3(g)(1)(A) 1.367(a)–3(g)(1)(i)

1.367(a)–3(g)(1)(B) 1.367(a)–3(g)(1)(ii)

1.367(a)–3(g)(1)(B)(1) 1.367(a)–3(g)(1)(ii)(A)

1.367(a)–3(g)(1)(B)(2) 1.367(a)–3(g)(1)(ii)(B)

1.367(a)–3(g)(1)(B)(3) 1.367(a)–3(g)(1)(ii)(C)

1.367(a)–3(g)(1)(B)(4) 1.367(a)–3(g)(1)(ii)(D)

1.367(a)–3(g)(1)(B)(5) 1.367(a)–3(g)(1)(ii)(E)

1.367(a)–3(g)(1)(B)(6) 1.367(a)–3(g)(1)(ii)(F)

1.367(a)–3(g)(1)(C) 1.367(a)–3(g)(1)(iii)

1.367(a)–3(g)(1)(D) 1.367(a)–3(g)(1)(iv)

1.367(a)–3(g)(1)(D)(1) 1.367(a)–3(g)(1)(iv)(A)

1.367(a)–3(g)(1)(D)(2) 1.367(a)–3(g)(1)(iv)(B)

1.367(a)–3(g)(1)(D)(3) 1.367(a)–3(g)(1)(iv)(C)

1.367(a)–3(g)(1)(E) 1.367(a)–3(g)(1)(v)

1.367(a)–3(g)(1)(F) 1.367(a)–3(g)(1)(vi)

1.367(a)–3(g)(2)(G) 1.367(a)–3(g)(1)(vii)

Par. 5. Section 1.367(a)–3 is amendedby:

1. In the first sentence of paragraph(b)(1), remove the words “Except as pro-vided in section 367(a)(5)” and add “Ex-

cept as provided in section 367(a)(5) andparagraph (e) of this section” in their place.

2. In the first sentence of paragraph(c)(1), remove the words “Except as pro-vided in section 367(a)(5)” and add “Ex-

cept as provided in section 367(a)(5) andparagraph (e) of this section” in their place.

3. Revising paragraphs (d)(2)(iv).4. Revising the last sentence of para-

graph (d)(3), Example 5(ii).

2009–9 I.R.B. 615 March 2, 2009

5. Removing the last sentence of para-graph (d)(3), Example 5A(ii).

6. Revising paragraph (e).7. Revising and reserving paragraph

(f).8. Revising the heading for paragraph

(g) and adding new paragraph (g)(1)(viii).The revisions and addition read as fol-

lows:

§1.367(a)–3 Treatment of transfers ofstock or securities to foreign corporations.

* * * * *(d) * * *(2) * * *(iv) Gain recognition agreements in-

volving multiple parties. The U.S. per-son’s agreement to recognize gain, as pro-vided in §1.367(a)–8, shall include appro-priate provisions consistent with the prin-ciples of §1.367(a)–8. See Examples 5 and5A of this section and §1.367(a)–8(j)(9).

* * * * *(3) * * *Example 5. * * *(ii) * * * Under §1.367(a)–8(j)(9), the

gain recognition agreement would be trig-gered if F sold all or a portion of the stockof S.

* * * * *(e) Transfers by a domestic corporation

to a foreign corporation in a section 361exchange—(1) General rule. If a domes-tic corporation (U.S. transferor) transfersstock or securities to a foreign corporation(transferee foreign corporation) in an ex-change described in section 361(a) or (b),or in an exchange described in section 351that is also described in section 361(a) or(b) (collectively, a section 361 exchange),such transfer shall be subject to section367(a)(1), unless the conditions of para-graphs (e)(1)(i) through (iv) of this sectionare satisfied.

(i) The conditions set forth in section367(a)(5) and any regulations under thatsection have been satisfied including that:

(A) The U.S. transferor is controlled(within the meaning of section 368(c)) byfive or fewer (but at least one) domesticcorporations (control group members) atthe time of the section 361 exchange;

(B) The U.S. transferor recognizes theamount of the gain realized in the sec-tion 361 exchange that is allocable to anyshareholder that is not a control group

member (based on the value of the owner-ship interest in the U.S. transferor held bythe shareholder at the time of the section361 exchange);

(C) The U.S. transferor recognizes theamount of the gain realized in the section361 exchange allocable to a control groupmember that cannot be preserved in thestock received by the control group mem-ber in the transaction; and

(D) Appropriate adjustments are madeto the basis of the stock received by eachcontrol group member in the transaction.

(ii) If the stock or securities transferredin the section 361 exchange are of a do-mestic corporation, the conditions in para-graphs (c)(1)(i), (ii), and (iv) of this sectionare satisfied.

(iii) Each control group member thatowns five percent or more (applying theattribution rules of section 318, as mod-ified by section 958(b)) of the total vot-ing power or the total fair market value ofthe stock of the transferee foreign corpora-tion immediately after the transaction en-ters into a gain recognition agreement asprovided in §1.367(a)–8. The amount ofgain subject to the gain recognition agree-ment shall equal the amount of the gain re-alized by the U.S. transferor on the transferof the stock or securities in the section 361exchange that is allocable to such controlgroup member (based on the ownership in-terest (by value) in the U.S. transferor heldby the control group member at the time ofthe section 361 exchange) reduced by theamount of such allocable gain that is rec-ognized by the U.S. transferor with respectto the control group member. The gainrecognition agreement shall designate thecontrol group member as the U.S. trans-feror for purposes of paragraphs (b) and (c)of this section and §1.367(a)–8.

(iv) Each control group member thatenters into a gain recognition agreementpursuant to paragraph (e)(1)(iii) of thissection makes the election described in§1.367(a)–8(c)(2)(vi).

(2) Certain triangular asset reorganiza-tions. If a transfer of stock or securitiesdescribed in paragraph (e)(1) of this sec-tion is pursuant to a triangular asset reor-ganization described in §1.358–6(b)(2)(i)through (iii), the gain recognition agree-ment filed by a control group member pur-suant to paragraph (e)(1)(iii) of this sectionshall include provisions consistent with theprinciples of §1.367(a)–8 to account for

all the parties to the reorganization. See§1.367(a)–8(j)(9).

(3) Examples. The following examplesillustrate the provisions of paragraph (e)(1)of this section. Except as otherwise indi-cated, assume US1, US2, USP, and USTare domestic corporations; US1 and US2are not related; CFC1, CFC2, FA, and FCare foreign corporations; the section 1248amount attributable to the stock of a for-eign corporation is zero; and section 7874does not apply to the transaction.

Example 1. Outbound asset reorganization. (i)Facts. US1 and US2 own 60% and 40%, respectively,of the outstanding stock of UST. UST wholly ownsFC. The FC stock held by UST has a $20x basis anda $100x fair market value. UST merges with andinto FC in an asset reorganization described in section368(a)(1)(A). In the section 361 exchange that is partof the reorganization, UST transfers all of its FC stockto FA. UST distributes the FA stock it received in thesection 361 exchange to US1 and US2 pursuant tothe plan of reorganization. The conditions set forthin the second sentence of section 367(a)(5) and theregulations under that section are satisfied, includingadjusting the basis of the FA stock received by US1and US2 in the reorganization, as appropriate. Afterthe reorganization, US1 and US2 own 6% and 4%,respectively, of the outstanding stock of FA.

(ii) Result. If the conditions of paragraph (e)(1)(i)through (iv) of this section are satisfied, the transferof the FC stock by UST to FA in the section 361 ex-change is not subject to section 367(a)(1). BecauseUS1 and US2 complied with the requirements of sec-tion 367(a)(5), the requirement of paragraph (e)(1)(i)of this section is satisfied. Paragraph (e)(1)(ii) of thissection is not applicable because FC is a foreign cor-poration. Pursuant to paragraph (e)(1)(iii) of this sec-tion, US1 enters into a gain recognition agreementwith respect to its share of the gain realized by USTon the transfer of the FC stock to FA in the section361 exchange ($48x, or 60% of $80x). The amountof gain subject to the gain recognition agreement is$48x because UST did not recognize any amount ofsuch gain under section 367(a)(5) or the regulationsunder that section with respect to US1. US1 is des-ignated as the U.S. transferor on the gain recognitionagreement for purposes of paragraph (b) of this sec-tion and §1.367(a)–8. US1 makes the election de-scribed in §1.367(a)–8(c)(2)(vi) with respect to thegain recognition agreement. Because US2 owns lessthan 5% of the stock of FA after the reorganization,US2 is not required to enter into a gain recognitionagreement with respect to its share of the gain real-ized by UST on the transfer of the FC stock to FA inthe section 361 exchange.

(iii) Alternate facts. The facts are the same asin paragraph (i) of this Example, except that, in year4, FA disposes of 25% of the FC stock in a taxableexchange. Under §1.367(a)–8(c)(1)(i) and (j)(1), thepartial disposition of the FC stock requires US1 toinclude in income 25% of the gain subject to the gainrecognition agreement filed in year 1 ($12x, or 25%of $48x) and pay applicable interest on any additionaltax due on such inclusion.

(iv) Alternate facts. The facts are the same asin paragraph (iii) of this Example, except that US1

March 2, 2009 616 2009–9 I.R.B.

and US2 are members of a consolidated group ofwhich USP is the common parent. Because US2 isconsidered to own at least 5% of the stock of FAfollowing the reorganization by reason of the attri-bution rules of section 318, as modified by section958(b), a gain recognition agreement must also beentered into on behalf of US2 with respect to theamount of the gain realized but not recognized byUST on the transfer of the FC stock to FA that isallocable to US2 ($32x, or 40% of $80x). Under§1.367(a)–8(d)(3) and §1.1502–77(a)(1), USP entersinto the gain recognition agreements on behalf of US1and US2. In year 4, US1 and US2 must include inincome 25% of the amount of gain subject to their re-spective gain recognition agreement ($12x for US1and $8x for US2) and pay applicable interest on anyadditional tax due on such inclusion.

Example 2. Divisive reorganization. (i) Facts.US1 wholly owns UST. The UST stock has a $120xbasis and $150x fair market value. UST wholly ownsCFC2. The CFC2 stock has a $20x basis and a $50xfair market value. UST also owns Business A thathas a fair market value of $100x. In a divisive re-organization that satisfies the requirements of section368(a)(1)(D), UST transfers the CFC2 stock to CFC1,a newly-formed corporation, in exchange solely forCFC1 stock. The transfer of the CFC2 stock to CFC1is a section 361 exchange. UST then distributes theCFC1 stock to US1 in a transaction that qualifies un-der section 355. Under section 358, the pre-exchangebasis in the UST stock ($120x) is allocated betweenthe UST stock and the CFC1 stock based on the rela-tive fair market values of such stock. Therefore, im-mediately after the transaction, the basis of the USTstock is $80x ($120x multiplied by $100x/$150x),and the basis of the CFC1 stock is $40x ($120x mul-tiplied by $50x/$150x). The conditions set forth insection 367(a)(5) and the regulations under that sec-tion are satisfied, including reducing the basis of theCFC1 stock received by US1 in the transaction by$20x so that the $30x built-in gain in the CFC2 stocktransferred in the section 361 exchange is preservedin the CFC1 stock received by US1 in the transaction.

(ii) Result. Because US1 complied with the re-quirements of section 367(a)(5) and regulations underthat section, the requirement of paragraph (e)(1)(i) ofthis section is satisfied. Paragraph (e)(1)(ii) of thissection is not applicable because CFC2 is a foreigncorporation. Pursuant to paragraph (e)(1)(iii) of thissection, US1 enters into a gain recognition agree-ment with respect to its share of the gain realizedby UST on the transfer of the CFC2 stock to CFC1in the section 361 exchange ($30x). The amount ofgain subject to the gain recognition agreement is $30xbecause UST did not recognize any amount of suchgain under section 367(a)(5) or the regulations underthat section with respect to US1. US1 is designatedas the U.S. transferor on the gain recognition agree-ment for purposes of paragraph (b) of this section and§1.367(a)–8. US1 makes the election described in§1.367(a)–8(c)(2)(vi) with respect to the gain recog-nition agreement.

(4) Cross-references. For other ex-amples that illustrate the application ofthis paragraph (e), see §1.367(a)–8(q)(2),Examples 6 and 24. For rules relating toan acquisition of the stock of a foreigncorporation by another foreign corpo-

ration in a section 361 exchange, see§1.367(b)–4(b)(1)(iii), Example 4. Forrules relating to certain distributions ofstock of a foreign corporation by a domes-tic corporation, see section 1248(f) andthe regulations under that section.

(f) [Reserved].(g) Effective/applicability date (1) * * *(viii)(A) Except as provided in this

paragraph (g)(1)(viii), the rules of para-graph (e) of this section apply to transfersof stock or securities occurring on or af-ter March 13, 2009. For matters coveredin this section for periods before March13, 2009 but on or after March 7, 2007,the rules of §1.367(a)–3T(e) (see 26 CFRpart 1, revised April 1, 2007) apply. Formatters covered in this section for periodsbefore March 7, 2007, but on or after July20, 1998, the rule of §1.367(a)–8(f)(2)(i)(see 26 CFR part 1, revised April 1, 2006)applies.

(B) Taxpayers may apply the rules of§1.367(a)–3(e) to transfers occurring be-fore March 13, 2009 and during a tax-able year for which the period of limita-tions on assessments under section 6501(a)has not closed, if done consistently to allsuch transfers occurring during each tax-able year. A taxpayer applies the rules of§1.367(a)–3(e) to transfers occurring be-fore March 13, 2009 and during a taxableyear for which the period of limitations onassessments under section 6501(a) has notclosed, by including the gain recognitionagreement, annual certification, or otherinformation filing, that is required as a re-sult of the rules of §1.367(a)–3(e) applyingto such a transfer, with an amended tax re-turn for the taxable year in which the trans-fer occurs that is filed on or before August10, 2009. A taxpayer that wishes to ap-ply the rules of §1.367(a)–3(e) to transfersoccurring before March 13, 2009 and dur-ing a taxable year for which the period oflimitations on assessments under section6501(a) has not closed but that fails to meetthe filing requirement described in the pre-ceding sentence must request relief for rea-sonable cause for such failure as providedin §1.367(a)–8.

* * * * *

§1.367(a)–3T [Removed]

Par. 6. Section 1.367(a)–3T is re-moved.

Par. 7. Section 1.367(a)–8 is revised toread as follows:

§1.367(a)–8 Gain recognition agreementrequirements.

(a) Scope. This section provides theterms and conditions for a gain recognitionagreement entered into by a United Statesperson pursuant to §1.367(a)–3(b) through(e) in connection with a transfer of stockor securities to a foreign corporation pur-suant to an exchange that would otherwisebe subject to section 367(a)(1). Paragraph(b) of this section provides definitions andspecial rules. Paragraphs (c) through (h)of this section identify the form, content,and other conditions of a gain recognitionagreement. Paragraph (i) of this sectionis reserved. Paragraph (j) of this sectionidentifies certain events that may requiregain to be recognized under a gain recogni-tion agreement. Paragraph (k) of this sec-tion provides exceptions for certain eventsthat would otherwise require gain to berecognized under a gain recognition agree-ment. Paragraph (l) of this section is re-served. Paragraph (m) of this section pro-vides rules that require gain to be recog-nized under a gain recognition agreementin connection with certain events to whichan exception under paragraph (k) of thissection otherwise applies. Paragraph (n)of this section provides special rules in thecase of a distribution of property with re-spect to stock to which section 301 applies.Paragraph (o) of this section provides rulesfor certain transactions that terminate orreduce the amount of gain subject to a gainrecognition agreement. Paragraph (p) ofthis section provides relief for reasonablecause for certain failures to comply withthe requirements of this section. Paragraph(q) of this section provides examples thatillustrate the rules of the section. Para-graph (r) of this section provides effectivedates for the provisions of this section.

(b) Definitions and special rules. Thefollowing definitions and special rules ap-ply for purposes of this section.

(1) Definitions—(i) Asset reorgani-zation—(A) General rule. Except asprovided in paragraph (b)(1)(i)(B) of thissection, an asset reorganization is a reor-ganization described in section 368(a)(1)that involves an exchange of property de-scribed in section 361(a) or (b) (a section361 exchange).

2009–9 I.R.B. 617 March 2, 2009

(B) Exceptions. An asset reorganiza-tion does not include the following:

(1) A reorganization described in sec-tion 368(a)(1)(D) or (G) if the require-ments of section 354(b)(1)(A) and (B) arenot met.

(2) For purposes of paragraphs(j)(2)(ii)(B), (k)(6)(ii), and (k)(6)(iii) ofthis section, a triangular asset reorganiza-tion. For rules applicable to a triangularasset reorganization, see paragraph (k)(7)of this section.

(ii) A consolidated group has the mean-ing set forth in §1.1502–1(h).

(iii) Disposition. Except as provided inthis paragraph (b)(1)(iii), a disposition in-cludes any transfer that would constitutea disposition for any purpose of the In-ternal Revenue Code. A disposition in-cludes an indirect disposition of the stockof the transferred corporation as describedin §1.367(a)–3(d). Except as provided inparagraph (n)(1) of this section, a disposi-tion does not include the receipt of a dis-tribution of property with respect to stockto which section 301 applies (including byreason of section 302(d)). See paragraphs(n)(2) and (o)(3) of this section for rulesthat apply if gain is recognized under sec-tion 301(c)(3). A complete or partial dis-position by installment sale (under section453) shall be treated as a disposition in theyear of the installment sale.

(iv) A gain recognition event is an eventdescribed in paragraphs (j) through (o) ofthis section that requires gain to be recog-nized under a gain recognition agreement.

(v) The initial transfer means a trans-fer of stock or securities (transferred stockor securities) to a foreign corporation pur-suant to an exchange that would otherwisebe subject to section 367(a)(1) but with re-spect to which a gain recognition agree-ment is entered into by a United Statesperson pursuant to §1.367(a)–3(b) through(e).

(vi) An intercompany item has themeaning set forth in §1.1502–13(b)(2).

(vii) An intercompany transaction hasthe meaning set forth in §1.1502–13(b)(1).

(viii) A nonrecognition transactionhas the meaning set forth in section7701(a)(45). In addition, a nonrecog-nition transaction includes an exchangedescribed in section 351(b) or 356 even ifall gain realized in the exchange is recog-nized.

(ix) The terms P, S, and T have themeanings set forth in §1.358–6(b)(1)(i),(ii), and (iii), respectively.

(x) The determination of whether sub-stantially all of the assets of the transferredcorporation have been disposed of is basedon all the facts and circumstances.

(xi) A timely-filed return is a Federalincome tax return filed by the due dateset forth in section 6072(a) or (b), plusany extension of time to file such returngranted under section 6081.

(xii) Transferee foreign corporation.Except as provided in this paragraph(b)(1)(xii), the transferee foreign corpora-tion is the foreign corporation to which thetransferred stock or securities are trans-ferred in the initial transfer. In the case ofan indirect stock transfer, the transfereeforeign corporation has the meaning setforth in §1.367(a)–3(d)(2)(i). The trans-feree foreign corporation also includes acorporation designated as the transfereeforeign corporation in the case of a newgain recognition agreement entered intounder this section.

(xiii) Transferred corporation. Exceptas provided in this paragraph (b)(1)(xiii),the transferred corporation is the cor-poration the stock or securities of whichare transferred in the initial transfer. Inthe case of an indirect stock transfer, thetransferred corporation has the meaningset forth in §1.367(a)–3(d)(2)(ii). Thetransferred corporation also includes acorporation designated as the transferredcorporation in the case of a new gainrecognition agreement entered into underthis section.

(xiv) A triangular asset reorgani-zation is a reorganization described in§1.358–6(b)(2)(i), (ii), (iii), or (v).

(xv) The U.S. transferor is theUnited States person (as defined in§1.367(a)–1T(d)(1)) that transfers thetransferred stock or securities to the trans-feree foreign corporation in the initialtransfer. For purposes of determining theU.S. transferor in the case of a transfer bya partnership, see §1.367(a)–1T(c)(3)(i).The U.S. transferor also includes theUnited States person designated as theU.S. transferor in the case of a new gainrecognition agreement entered into underthis section including, for example, underparagraph (k)(14) of this section.

(2) Special rules—(i) Stock deemedreceived or transferred. References to

stock received include stock deemed re-ceived (for example, pursuant to section367(c)(2)). References to a transfer ofstock or securities include a deemed trans-fer of stock or securities.

(ii) Stock of the transferee foreigncorporation. References to stock of thetransferee foreign corporation includesany stock of the transferee foreign corpo-ration the basis of which is determined, inwhole or in part, by reference to the basisof the stock of the transferee foreign cor-poration received by the U.S. transferor inthe initial transfer.

(iii) Transferred stock or securities.References to transferred stock or secu-rities includes any stock or securities ofthe transferred corporation the basis ofwhich is determined, in whole or in part,by reference to the basis of the stock orsecurities transferred in the initial transfer.

(c) Gain recognition agreement—(1)Terms of agreement—(i) General rule.Except as provided in this paragraph(c)(1)(i), if a gain recognition event occursduring the period beginning on the dateof the initial transfer and ending as of theclose of the fifth full taxable year (not lessthan 60 months) following the close of thetaxable year in which the initial transferoccurs (GRA term), the U.S. transferormust include in income the gain realizedbut not recognized on the initial transferby reason of entering into the gain recog-nition agreement. In the case of a gainrecognition event that occurs as a result ofa partial disposition of stock, securities,or a partnership interest, as applicable, theU.S. transferor is required to recognize aproportionate amount of the gain subjectto the gain recognition agreement, deter-mined based on the fair market value ofthe stock, securities, or partnership inter-est, as applicable, disposed of (measuredat the time of the partial disposition) ascompared to the fair market value of all thestock, securities, or partnership interest,as applicable (measured at the time of thepartial disposition). If the U.S. transferormust recognize gain under this paragraphas a result of an event described in para-graph (m) or (n) of this section, see thoseparagraphs to determine the amount of thegain that must be recognized. The amountof gain subject to the gain recognitionagreement shall be reduced by the amountof gain recognized under this paragraph.If the amount of gain subject to the gain

March 2, 2009 618 2009–9 I.R.B.

recognition agreement is reduced to zero,the gain recognition agreement shall ter-minate without further effect.

(ii) Ordering rule for gain recognizedunder multiple gain recognition agree-ments. If a gain recognition event occursthat requires gain to be recognized un-der multiple gain recognition agreements,gain shall first be recognized under thegain recognition agreement that relates tothe earliest initial transfer, then under thegain recognition agreement that relates tothe immediately following initial transferand so forth until the appropriate amountof gain has been recognized under eachgain recognition agreement. The amountof gain recognized under a gain recogni-tion agreement shall be determined aftertaking into account, as appropriate, anyincrease to basis (including the basis ofthe transferred stock or securities) underparagraph (c)(4) of this section resultingfrom gain recognized under another gainrecognition agreement. For an illustrationof this ordering rule, see paragraph (q)(2)of this section, Example 6.

(iii) Taxable year in which gain is re-ported—(A) Year of initial transfer. Ex-cept as provided in paragraph (c)(1)(iii)(B)of this section, the U.S. transferor must re-port any gain recognized under paragraph(c)(1)(i) of this section on an amendedFederal income tax return for the taxableyear of the initial transfer. The amendedreturn must be filed on or before the 90th

day following the date on which the gainrecognition event occurs.

(B) Year of gain recognition event. Ifan election under paragraph (c)(2)(vi) ofthis section is made with the gain recogni-tion agreement or if paragraph (c)(5)(ii) ofthis section applies to the gain recognitionagreement, the U.S. transferor must re-port any gain recognized under paragraph(c)(1)(i) of this section on its Federal in-come tax return for the taxable year duringwhich the gain recognition event occurs.If an election under paragraph (c)(2)(vi) ofthis section is made with the gain recogni-tion agreement or if paragraph (c)(5)(ii) ofthis section applies to the gain recognitionagreement but the U.S. transferor does notreport the gain recognized on its Federalincome tax return for the taxable year dur-ing which the gain recognition event oc-curs, the Commissioner may require theU.S. transferor to report the gain on anamended Federal income tax return for the

taxable year during which the initial trans-fer occurred.

(iv) Offsets. No special limitationsapply with respect to offsetting gain rec-ognized under paragraph (c)(1)(i) of thissection with net operating losses, capitallosses, credits against tax, or similar items.

(v) Payment and reporting of interest.Interest must be paid on any additional taxdue with respect to gain recognized by theU.S. transferor under paragraph (c)(1)(i) ofthis section. Any interest due shall be de-termined based on the rates under section6621 for the period between the date thatwas prescribed for filing the Federal in-come tax return of the U.S. transferor forthe year of the initial transfer and the dateon which the additional tax due is paid. Ifparagraph (c)(1)(iii)(B) of this section ap-plies, any interest due must be includedwith the payment of tax due with the Fed-eral income tax return of the U.S. trans-feror for the taxable year during which thegain recognition event occurs (or shouldreduce the amount of any refund due to theU.S. transferor for such taxable year). Aschedule entitled “Calculation of Section367 Tax and Interest” that separately iden-tifies and calculates any additional tax andinterest due must be included with the Fed-eral income tax return on which any inter-est due is reported.

(2) Content of gain recognition agree-ment. The gain recognition agreementmust be entitled “GAIN RECOGNITIONAGREEMENT UNDER §1.367(a)–8”and include the information described inparagraphs (c)(2)(i) through (viii) of thisparagraph with the corresponding para-graph numbers. The information requiredunder this paragraph (c)(2) and paragraph(c)(3) of this section must be included inthe gain recognition agreement as filed.

(i) A statement that the document con-stitutes an agreement by the U.S. transferorto recognize gain in accordance with therequirements of this section.

(ii) A description of the transferredstock or securities and other informationas required in paragraph (c)(3) of this sec-tion.

(iii) A statement that the U.S. transferoragrees to comply with all the conditionsand requirements of this section, includ-ing to recognize gain under the gain recog-nition agreement in accordance with para-graph (c)(1)(i) of this section, extend thestatute of limitations on assessments of tax

as provided in paragraph (f) of this section,and file the certification described in para-graph (g) of this section.

(iv) A statement that arrangements havebeen made to ensure that the U.S. trans-feror is informed of any events that affectthe gain recognition agreement, includingtriggering events or other gain recognitionevents.

(v) In the case of a new gain recognitionagreement filed under this section—

(A) A description of the event (such asa triggering event) and the applicable ex-ception, if any, that gave rise to the newgain recognition agreement (such as a trig-gering event exception), including the dateof the event and the name, address, andtaxpayer identification number (if any) ofeach person that is a party to the event;

(B) As applicable, a description of theclass, amount, and characteristics of thestock, securities or partnership interest re-ceived in the transaction; and

(C) As applicable, a calculation of theamount of gain that remains subject to thenew gain recognition agreement as a resultof the application of paragraph (m), (n), or(o) of this section.

(vi) A statement whether the U.S. trans-feror elects to include in income any gainrecognized under paragraph (c)(1)(i) ofthis section in the taxable year duringwhich a gain recognition event occurs.See paragraph (c)(5)(ii) of this section fora rule that requires, in certain cases, forthe gain recognized pursuant to a new gainrecognition agreement to be included inincome during the taxable year in whichthe gain recognition event occurs.

(vii) A statement whether a gain recog-nition event has occurred during the tax-able year of the initial transfer.

(viii) A statement describing any dispo-sition of assets of the transferred corpora-tion during such taxable year other than inthe ordinary course of business.

(3) Description of transferred stock orsecurities and other information. The gainrecognition agreement shall include thefollowing:

(i) A description of the transferred stockor securities including—

(A) The type or class, amount, and char-acteristics of the transferred stock or secu-rities;

(B) A calculation of the amount of thebuilt-in gain in the transferred stock or se-curities that are subject to the gain recog-

2009–9 I.R.B. 619 March 2, 2009

nition agreement, reflecting the basis andfair market value on the date of the initialtransfer;

(C) The amount of any gain recognizedby the U.S. transferor on the initial trans-fer; and

(D) The percentage (by voting powerand value) that the transferred stock (ifany) represents of the total stock outstand-ing of the transferred corporation on thedate of the initial transfer.

(ii) The name, address, place of incor-poration, and taxpayer identification num-ber (if any) of the transferred corporation.

(iii) The date on which the U.S. trans-feror acquired the transferred stock or se-curities.

(iv) The name, address and place of in-corporation of the transferee foreign cor-poration, and a description of the stock orsecurities received by the U.S. transferor inthe initial transfer, including the percent-age of stock (by vote and value) of thetransferee foreign corporation received insuch exchange.

(v) If the initial transfer is described in§1.367(a)–3(e), a statement that the con-ditions of section 367(a)(5) and any regu-lations under that section have been satis-fied, and a description of any adjustmentsto the basis of the stock received in thetransaction or other adjustments made pur-suant to section 367(a)(5) and any regula-tions under that section.

(vi) If the transferred corporation isdomestic, a statement describing the appli-cation of section 7874 to the transaction,and indicating that the requirements of§1.367(a)–3(c)(1) are satisfied.

(vii) If the transferred corporation isforeign, a statement indicating whetherthe U.S. transferor was a section 1248shareholder (as defined in §1.367(b)–2(b))of the transferred corporation immediatelybefore the initial transfer, and whether theU.S. transferor is a section 1248 share-holder with respect to the transferee for-eign corporation immediately after theinitial transfer, and whether any reportingrequirements or other rules contained inregulations under section 367(b) are appli-cable, and, if so, whether they have beensatisfied.

(viii) If the initial transfer in-volves a transfer by a partnership (see§1.367(a)–1T(c)(3)(i)) or a transfer of apartnership interest (see section 367(a)(4)and §1.367(a)–1T(c)(3)(ii)) a complete

description of the transfer, including a de-scription of the partners in the partnership.

(ix) If the transaction involved thetransfer of property other than the trans-ferred stock or securities and the trans-action was subject to the indirect stocktransfer rules of §1.367(a)–3(d), a state-ment indicating whether—

(A) The reporting requirements undersection 6038B have been satisfied with re-spect to the transfer of such other property;

(B) Whether gain was recognized undersection 367(a)(1);

(C) Whether section 367(d) applied tothe transfer of such property; and

(D) Whether the other property trans-ferred qualified for the active foreigntrade or business exception under section367(a)(3).

(4) Basis adjustments for gain recog-nized. The following basis adjustmentsshall be made if gain is recognized underparagraph (c)(1)(i) of this section.

(i) Stock or securities of transferee for-eign corporation. The basis of the stock orsecurities, as applicable, of the transfereeforeign corporation received by the U.S.transferor in the initial transfer shall be in-creased as of the date of the initial transferby the amount of gain recognized.

(ii) Transferred stock or securities. Thebasis of the transferred stock or securitiesshall be increased as of the date of the ini-tial transfer by the amount of the gain rec-ognized.

(iii) Other appropriate adjustments.The basis of other stock, securities, or apartnership interest shall be increased, asappropriate, in accordance with the prin-ciples of this paragraph (c)(4). Under nocircumstances shall the basis of stock, se-curities, or of a partnership interest held bya U.S. person that does not recognize gainunder paragraph (c)(1)(i) of this sectionbe increased under this paragraph (c)(4).In addition, under no circumstances shallthe basis of any property be increased bythe amount of any additional tax due orinterest paid with respect to such tax, norshall the basis of the assets of the trans-ferred corporation be increased as a resultof gain recognized by the U.S. transferorunder paragraph (c)(1)(i) of this section.

(iv) Cross-reference. See paragraph(q)(2) of this section, Examples 1, 2, 3, and5 for illustrations of the rules of this para-graph (c)(4). See also §1.367(a)–1T(b)(4)for rules that determine the increase to

basis of property resulting from the appli-cation of section 367(a).

(5) Terms and conditions of a new gainrecognition agreement—(i) General rule.A new gain recognition agreement enteredinto pursuant to this section shall replacethe existing gain recognition agreement,which shall terminate without further ef-fect. The term of the new gain recognitionagreement shall be the remaining term ofthe existing gain recognition agreement.The amount of gain subject to the newgain recognition agreement shall equal theamount of gain subject to the existing gainrecognition agreement, reduced by anygain recognized under paragraph (c)(1)(i)of this section with respect to the existinggain recognition agreement by reason ofthe gain recognition event that gives riseto the new gain recognition agreement.The new gain recognition agreement shall,as applicable, be subject to the conditionsand requirements of this section to thesame extent as the existing gain recogni-tion agreement. For example, a triggeringevent with respect to the new gain recog-nition agreement will generally includea disposition of the transferred stock orsecurities or of substantially all the as-sets of the transferred corporation. If,however, the transferred stock is canceledor redeemed pursuant to the dispositionor other event that gives rise to the newgain recognition agreement (for example,pursuant to a liquidation where the trans-feree foreign corporation is the corporatedistributee (within the meaning of sec-tion 334(b)(2)), or an asset reorganizationwhere the transferee foreign corporation isthe acquiring corporation) the transferredstock is not subject to the new gain recog-nition agreement.

(ii) Special rule for inclusion of gain.If the U.S. transferor with respect to thenew gain recognition agreement is not theU.S. transferor with respect to the exist-ing gain recognition agreement, or a mem-ber of the consolidated group of which theU.S. transferor with respect to the existinggain recognition agreement was a memberon the date of the initial transfer, then anygain recognized under paragraph (c)(1)(i)of this section with respect to the new gainrecognition agreement must be included inincome in the taxable year during whichthe gain recognition event occurs.

(d) Filing requirements—(1) Generalrule. A gain recognition agreement en-

March 2, 2009 620 2009–9 I.R.B.

tered into with respect to an initial transfermust be included with the timely-filed re-turn of the U.S. transferor for the taxableyear during which the initial transfer oc-curs.

(2) Special requirements—(i) New gainrecognition agreement. A new gain recog-nition agreement entered into under thissection must be included with the timely-filed return of the U.S. transferor (as iden-tified in the new gain recognition agree-ment) for the taxable year during which thedisposition or event that requires the newgain recognition agreement occurs. If thenew gain recognition agreement is enteredinto by the U.S. transferor that entered intothe existing gain recognition agreement,the new gain recognition agreement is inlieu of the annual certification otherwiserequired for such taxable year under para-graph (g) of this section with respect to theexisting gain recognition agreement.

(ii) Multiple events within a taxableyear. Except as otherwise provided in thisparagraph (d)(2)(ii), if the initial trans-fer and one or more dispositions or otherevents (even if a triggering event exceptionapplies) that affect the gain recognitionagreement entered into by the U.S. trans-feror with respect to the initial transferoccur within the same taxable year of suchU.S. transferor, or if multiple dispositionsor other events occur in a taxable year ofthe U.S. transferor that does not includethe initial transfer, only one gain recogni-tion agreement is required to be enteredinto and included with the timely-filedreturn of the U.S. transferor for such tax-able year. The gain recognition agreementmust describe the initial transfer and/oreach disposition or other event that affectsthe gain recognition agreement (even if atriggering event exception applies). Thisparagraph does not apply, however, if anysuch disposition or other event requiresa new gain recognition agreement to beentered into by a United States personother than the U.S. transferor with respectto the initial transfer or that entered intothe existing gain recognition agreement,as applicable.

(3) Common parent as agent for U.S.transferor. If the U.S. transferor is amember but not the common parent of aconsolidated group, the common parent ofthe consolidated group is the agent for theU.S. transferor under §1.1502–77(a)(1).Thus, the common parent must file the

gain recognition agreement on behalf ofthe U.S. transferor. References in this sec-tion to the timely-filed return of the U.S.transferor include the timely-filed returnof the consolidated group of which theU.S. transferor is a member, as applicable.

(e) Signatory—(1) General rule. Thegain recognition agreement must be signedunder penalties of perjury by an agent ofthe U.S. transferor that is authorized tosign under a general or specific power ofattorney, or by the appropriate party basedon the category of the U.S. transferor de-scribed in this paragraph (e)(1).

(i) If the U.S. transferor is a corporationbut not a member of a consolidated group,a responsible officer of the U.S. transferor.If the U.S. transferor is a member of aconsolidated group, a responsible officerof the common parent of the consolidatedgroup.

(ii) If the U.S. transferor is an individ-ual, the individual.

(iii) If the U.S. transferor is a trust orestate, a trustee, executor, or equivalentfiduciary of the U.S. transferor.

(iv) In a bankruptcy case under Title 11,United States Code, a debtor in possessionor trustee.

(2) Signature requirement. The inclu-sion of an unsigned copy of the gain recog-nition agreement with the timely-filedreturn of the U.S. transferor shall satisfythe signature requirement of paragraph(e)(1) of this section if the U.S. transferorretains the original signed gain recogni-tion agreement in the manner specified by§1.6001–1(e).

(f) Extension of period of limitations onassessments of tax—(1) General rule. Inconnection with the filing of a gain recog-nition agreement, the U.S. transferor mustextend the period of limitations on assess-ments of tax with respect to the gain real-ized but not recognized on the initial trans-fer through the close of the eighth full tax-able year following the taxable year dur-ing which the initial transfer occurs. TheU.S. transferor extends the period of lim-itations by filing Form 8838 “Consent toExtend the Time to Assess Tax Under Sec-tion 367—Gain Recognition Agreement.”The Form 8838 must be signed by a per-son authorized to sign the gain recognitionagreement under paragraph (e)(1) of thissection.

(2) New gain recognition agreement. Ifa new gain recognition agreement is en-

tered into under this section, the U.S. trans-feror must extend the period of limitationson assessments of tax on the initial trans-fer through the close of the eighth full tax-able year following the taxable year dur-ing which the initial transfer occurs, con-sistent with paragraph (f)(1) of this section,unless the U.S. transferor with respect tothe new gain recognition agreement is theU.S. transferor with respect to the exist-ing gain recognition agreement, or a mem-ber of the consolidated group of which theU.S. transferor with respect to the existinggain recognition agreement was a memberon the date of the initial transfer.

(g) Annual certification. Except as pro-vided in paragraph (d)(2)(i) of this section,the U.S. transferor must include with itstimely-filed return for each of the five fulltaxable years following the taxable year ofthe initial transfer a certification (annualcertification) that includes the informationdescribed in paragraphs (g)(1) through (3)of this section, as appropriate. The annualcertification must be signed by a personauthorized under paragraph (e)(1) of thissection to sign the gain recognition agree-ment for the initial transfer. The inclusionof an unsigned copy of the annual certifi-cation with the relevant timely-filed returnof the U.S. transferor shall satisfy the sig-nature requirement of paragraph (e)(1) ofthis section provided the U.S. transferor re-tains the original signed certification in themanner specified by §1.6001–1(e).

(1) A statement of whether a gain recog-nition event has or has not occurred dur-ing such taxable year. If a gain recognitionevent has occurred during such taxableyear, the annual certification must state:

(i) The amount of gain subject to thegain recognition agreement at the time ofthe gain recognition event;

(ii) The amount of gain recognized un-der the gain recognition agreement by rea-son of the gain recognition event; and

(iii) A calculation of the reduction to theamount of gain subject to the gain recogni-tion agreement by reason of the gain recog-nition event (for example, in the case of again recognition event described in para-graph (n)(2) of this section).

(2) A complete description of any eventoccurring during such taxable year that hasterminated or reduced the amount of gainsubject to the gain recognition agreement(for example, an event described in para-graph (o) of this section), including a cal-

2009–9 I.R.B. 621 March 2, 2009

culation of any reduction to the amount ofgain subject to the gain recognition agree-ment.

(3) A statement describing any disposi-tion of assets of the transferred corporationduring the taxable year not in the ordinarycourse of business.

(h) Use of security. The U.S. transferormay be required to furnish a bond or othersecurity that satisfies the requirements of§301.7101–1 if the Area Director, FieldExamination, Small Business/Self Em-ployed or the Director of Field Operations,Large and Mid-Size Business (Director)determines that such security is necessaryto ensure the payment of any tax on thegain realized, but not recognized, uponthe initial transfer. Such bond or secu-rity generally will be required only if thetransferred stock or securities are a prin-cipal asset of the U.S. transferor and theDirector has reason to believe that a dis-position of the stock or securities may becontemplated.

(i) [Reserved.](j) Triggering events. Except as pro-

vided in this section, if an event describedin paragraphs (j)(1) through (10) of thissection (triggering event) occurs duringthe GRA term, the U.S. transferor mustrecognize gain under the gain recognitionagreement in accordance with paragraph(c)(1)(i) of this section. This paragraph(j) generally requires the U.S. transferorto recognize gain (and pay applicable in-terest with respect to any additional taxdue as provided in paragraph (c)(1)(v) ofthis section) under the gain recognitionagreement to the extent the transferredstock or securities are disposed of, di-rectly or indirectly. This paragraph (j) alsorequires the U.S. transferor to recognizegain under the gain recognition agreementin certain cases where it is not appropri-ate for the gain recognition agreement tocontinue. See paragraph (k) of this sectionfor exceptions available for certain eventsthat would otherwise constitute triggeringevents under this paragraph (j). See para-graph (o) of this section for certain eventsthat terminate or reduce the amount of gainsubject to a gain recognition agreement.

(1) Disposition of transferred stock orsecurities. A complete or partial disposi-tion of the transferred stock or securities.See paragraph (q)(2) of this section, Exam-ple 2 for an illustration of the rule of thisparagraph (j)(1).

(2) Disposition of substantially all ofthe assets of the transferred corpora-tion—(i) General rule. Except as providedin paragraph (j)(2)(ii) of this section, adisposition in one or more related transac-tions of substantially all of the assets of thetransferred corporation (including stockor securities in a subsidiary corporation ora partnership interest). If the transferredcorporation is domestic, see paragraph(o)(4) of this section.

(ii) Exceptions. For purposes of para-graph (j)(2)(i) of this section, the follow-ing dispositions shall be disregarded—

(A) Dispositions of property describedin section 1221(a)(1) occurring in the ordi-nary course of business;

(B) An exchange of stock or securitiesdescribed in section 354 that is pursuant toan asset reorganization; and

(C) An exchange of stock by a cor-porate distributee (as defined in section334(b)(2)) pursuant to a complete liquida-tion to which section 332 applies.

(3) Disposition of certain partnershipinterests. If the initial transfer occurs byreason of the transfer of a partnership in-terest, a complete or partial dispositionof such partnership interest. See section367(a)(4) and §1.367(a)–1T(c)(3)(ii).

(4) Disposition of stock of the transfereeforeign corporation. A complete or par-tial disposition of the stock of the trans-feree foreign corporation received by theU.S. transferor in the initial transfer. Forpurposes of this section, an individual U.S.transferor that loses U.S. citizenship orceases to be a lawful permanent residentof the United States (within the meaningof section 7701(b)(6)) shall be treated asdisposing of all the stock of the transfereeforeign corporation received in the initialtransfer as of the date before the loss ofsuch status.

(5) Deconsolidation. A U.S. transferorthat is a member of a consolidated groupceases to be a member of the consolidatedgroup, other than by reason of an acquisi-tion of the assets of the U.S. transferor ina transaction to which section 381(a) ap-plies, or by reason of the U.S. transferorjoining another consolidated group as partof the same transaction.

(6) Consolidation. A U.S. transferorbecomes a member of a consolidatedgroup, including a U.S. transferor that is amember of a consolidated group and that

becomes a member of another consoli-dated group.

(7) Death of an individual; trust or es-tate ceases to exist. A U.S. transferor thatis an individual dies, or a U.S. transferorthat is a trust or estate ceases to exist.

(8) Failure to comply. The U.S. trans-feror fails to comply in any material re-spect with any requirement of this sectionor with the terms of the gain recognitionagreement, including failure to file an an-nual certification under paragraph (g) ofthis section. If a failure to include infor-mation in a gain recognition agreement asfiled constitutes a failure to comply in amaterial respect, the U.S. transferor can-not avoid the application of this paragraph(j)(8) by subsequently making such infor-mation available. A material failure underthis paragraph (j)(8) shall extend the pe-riod of limitations on assessments of taxuntil the close of the third full taxable yearending after the date on which the Direc-tor of Field Operations or Area Director re-ceives actual notice of the failure to com-ply from the U.S. transferor.

(9) Gain recognition agreement filedin connection with indirect stock transfersand certain triangular asset reorganiza-tions. With respect to a gain recognitionagreement entered into in connection withan indirect stock transfer (as defined in§1.367(a)–3(d)), or a triangular asset re-organization under §1.367(a)–3(e)(2), anindirect disposition of the transferred stockor securities. For example, in the caseof an indirect stock transfer described in§1.367(a)–3(d)(1)(iii)(A), a complete orpartial disposition of the stock of the ac-quiring corporation.

(10) Gain recognition agreement filedpursuant to paragraph (k)(14) of this sec-tion. In the case of a gain recognitionagreement entered into pursuant to para-graph (k)(14) of this section, in addition toany disposition or other event described inparagraphs (j)(1) through (9) of this sec-tion,—

(i) Any disposition or other event iden-tified as a triggering event in a new gainrecognition agreement as required underparagraph (k)(14)(iii) of this section; and

(ii) Any disposition or other event thatis inconsistent with the principles of para-graph (k) of this section including, for ex-ample, an indirect disposition of the trans-ferred stock or securities.

March 2, 2009 622 2009–9 I.R.B.

(k) Triggering event exceptions.Notwithstanding paragraph (j) of this sec-tion, a disposition or other event describedin paragraphs (k)(1) through (14) of thissection shall not constitute a triggeringevent. This paragraph (k) generally pro-vides exceptions for certain dispositionsthat constitute nonrecognition transac-tions but only if, immediately after thedisposition, a U.S. transferor retains, asapplicable, a direct or indirect interest inthe transferred stock or securities, or inthe assets of the transferred corporation,and a new gain recognition agreementis entered into with respect to the initialtransfer in accordance with this paragraph(k). Notwithstanding the application ofthis paragraph (k), if a gain recognitionevent described under paragraphs (m)and (n) of this section occurs during theGRA term the U.S. transferor may be re-quired to recognize gain under the gainrecognition agreement in accordance withparagraph (c)(1)(i) of this section. Seeparagraph (o) of this section which pro-vides that, notwithstanding paragraph (j)of this section, certain dispositions or otherevents shall instead terminate or reducethe amount of gain subject to a gain recog-nition agreement.

(1) Transfers of stock of the transfereeforeign corporation to a corporation orpartnership. A disposition of stock ofthe transferee foreign corporation receivedin the initial transfer pursuant to an ex-change to which section 351, 354 (but onlyin a reorganization described in section368(a)(1)(B) that is not a triangular reor-ganization), 361 (but only in a divisivereorganization to which section 355 ap-plies), or 721 applies, shall not constitute atriggering event if a new gain recognitionagreement is entered into in accordancewith paragraphs (k)(1)(i) through (iv) ofthis section, as applicable. In the case ofan exchange to which section 354 appliesthat is pursuant to a triangular reorganiza-tion described in section 368(a)(1)(B), seeparagraph (k)(14) of this section and para-graph (q)(2) of this section, Example 4.

(i) In the case of an exchange to whichsection 351 or 354 applies in which stockof a foreign acquiring corporation is re-ceived, the U.S. transferor includes withthe new gain recognition agreement astatement that a complete or partial dispo-sition of the stock of the foreign acquiringcorporation received in the exchange shall

constitute a triggering event. The prin-ciples of paragraph (o)(1)(i) or (ii), asappropriate, shall be applied to determinewhether a subsequent complete or partialdisposition of the stock of the foreignacquiring corporation received in the ex-change shall instead terminate or reducethe amount of the new gain recognitionagreement.

(ii) In the case of an exchange to whichsection 351 or 354 applies in which stockof a domestic acquiring corporation is re-ceived, the domestic acquiring corporationenters into the new gain recognition agree-ment, which must designate the domes-tic acquiring corporation as the U.S. trans-feror for purposes of this section. For an il-lustration of the rule provided by this para-graph (k)(1)(ii), see paragraph (q)(2) ofthis section, Example 3.

(iii) In the case of a section 361 ex-change that is pursuant to a divisive re-organization to which section 355 appliesand in which stock of a domestic corpo-ration (domestic controlled corporation) isreceived, the domestic controlled corpora-tion enters into the new gain recognitionagreement, which must designate the do-mestic controlled corporation as the U.S.transferor for purposes of this section. Foran illustration of the rule provided by thisparagraph (k)(1)(iii), see paragraph (q)(2)of this section, Example 11.

(iv) In the case of an exchange to whichsection 721 applies, the U.S. transferorincludes with the new gain recognitionagreement a statement that a completeor partial disposition of the partnershipinterest received in the exchange shallconstitute a triggering event for purposesof the new gain recognition agreement.

(2) Complete liquidation of U.S. trans-feror under sections 332 and 337. A dis-tribution by the U.S. transferor of the stockof the transferee foreign corporation re-ceived in the initial transfer to which sec-tion 337 applies, that is pursuant to a com-plete liquidation under section 332, shallnot constitute a triggering event if the cor-porate distributee (as defined in section334(b)(2)) is a domestic corporation (do-mestic corporate distributee) and the do-mestic corporate distributee enters into anew gain recognition agreement. The newgain recognition agreement must designatethe domestic corporate distributee as theU.S. transferor for purposes of this section.

(3) Transfers of transferred stock or se-curities to a corporation or partnership. Adisposition of the transferred stock or se-curities pursuant to an exchange to whichsection 351, 354 (but only in a reorgani-zation described in section 368(a)(1)(B)),or 721 applies, shall not constitute a trig-gering event if the U.S. transferor entersinto a new gain recognition agreement thatprovides that the dispositions described inparagraphs (k)(3)(i) and (ii) of this sectionshall constitute triggering events for pur-poses of the new gain recognition.

(i) A complete or partial disposition ofthe stock, securities, or partnership interest(as applicable) received in exchange forthe transferred stock or securities.

(ii) Any other event that is inconsis-tent with the principles of this paragraph(k), including the indirect disposition ofthe transferred stock or securities.

(4) Transfers of substantially all of theassets of the transferred corporation. Adisposition of substantially all of the as-sets of the transferred corporation pursuantto an exchange to which section 351, 354(but only in a reorganization described insection 368(a)(1)(B)), or 721 applies, shallnot constitute a triggering event if the U.S.transferor enters into a new gain recogni-tion agreement that provides that a com-plete or partial disposition of the stock, se-curities, or partnership interest (as appli-cable) received in exchange for the assetsshall constitute a triggering event for pur-poses of the new gain recognition agree-ment.

(5) Recapitalizations and section 1036exchanges. A complete or partial disposi-tion of the transferred stock or securities,or of the stock of the transferee foreigncorporation received in the initial transfer,pursuant to a reorganization described un-der section 368(a)(1)(E), or pursuant to atransaction to which section 1036 applies,shall not constitute a triggering event ifthe U.S. transferor enters into a new gainrecognition agreement.

(6) Certain asset reorganizations—(i)Stock of transferee foreign corporation. Ifstock of the transferee foreign corporationreceived in the initial transfer is transferredto a domestic acquiring corporation in asection 361 exchange that is pursuant to anasset reorganization, the exchanges madepursuant to the asset reorganization shallnot constitute triggering events if the do-mestic acquiring corporation enters into a

2009–9 I.R.B. 623 March 2, 2009

new gain recognition agreement that des-ignates the domestic acquiring corporationas the U.S. transferor for purposes of thissection. For an illustration of the rule pro-vided by this paragraph (k)(6), see para-graph (q)(2) of this section, Example 5. Ifthe acquiring corporation is foreign, seeparagraph (k)(14) of this section and para-graph (q)(2) of this section, Example 6.

(ii) Transferred stock or securities. Ifthe transferred stock or securities are trans-ferred to a foreign acquiring corporationin a section 361 exchange that is pursuantto an asset reorganization, the exchangesmade pursuant to the asset reorganizationshall not constitute triggering events ifthe U.S. transferor enters into a new gainrecognition agreement that designates theforeign acquiring corporation as the trans-feree foreign corporation for purposes ofthis section. For an illustration of the ruleprovided by this paragraph, see paragraph(q)(2) of this section, Example 7. If thetransfer is to a domestic acquiring corpo-ration, or is pursuant to a triangular assetreorganization, see paragraph (k)(14) or(o)(5) of this section.

(iii) Assets of transferred corporation.If substantially all of the assets of thetransferred corporation are transferred to aforeign or domestic acquiring corporationin a section 361 exchange that is pursuantto an asset reorganization, the exchangesmade pursuant to the asset reorganizationshall not constitute triggering events ifthe U.S. transferor enters into a new gainrecognition agreement that, unless theacquiring corporation is the transferee for-eign corporation, designates the acquiringcorporation as the transferred corporationfor purposes of this section. Only theassets of the transferred corporation re-ceived by the acquiring corporation shallbe treated as assets of the transferred cor-poration for purposes of this section (forexample, only such assets will be takeninto account for purposes of paragraph(j)(2) of this section). For an illustrationof the rule provided by this paragraph, seeparagraph (q)(2) of this section, Example8. If the transferred corporation is domes-tic, see section 367(a)(1) and (a)(5), andparagraph (o)(4) of this section. If thetransfer is pursuant to a triangular assetreorganization, see paragraph (k)(14) ofthis section.

(7) Certain triangular reorganiza-tions—(i) Transferee foreign corporation.

If substantially all of the assets of the trans-feree foreign corporation are transferred toa foreign acquiring corporation in a section361 exchange that is pursuant to a trian-gular asset reorganization, the exchangesmade pursuant to the reorganization shallnot constitute triggering events if a newgain recognition agreement is entered intoin accordance with paragraphs (k)(7)(i)(A)through (C) of this section. If the acquir-ing corporation is domestic, see paragraph(k)(14) of this section. For rules that applyto gain recognition agreements enteredinto as a result of an indirect stock transfer,see §1.367(a)–3(d)(2)(iv) and paragraph(j)(9) of this section.

(A) If P is foreign, the new gain recog-nition agreement designates P as the trans-feree foreign corporation and includes astatement that the U.S. transferor agrees totreat a complete or partial disposition ofthe S stock held by P as a triggering event.

(B) Except as provided in paragraph(k)(7)(i)(C) of this section, if P is domes-tic, P enters into the new gain recognitionagreement that designates P as the U.S.transferor and S as the transferee foreigncorporation.

(C) If the triangular asset reorganizationis described in section 368(a)(1)(A) by rea-son of section 368(a)(2)(E) and the trans-feree foreign corporation is the mergedcorporation, the U.S. transferor enters intothe new gain recognition agreement anddesignates the surviving corporation as thetransferee foreign corporation.

(ii) Transferred corporation. If sub-stantially all of the assets of the transferredcorporation are transferred in a section361 exchange pursuant to a triangular as-set reorganization, the exchanges madepursuant to the reorganization shall notconstitute triggering events if the U.S.transferor enters into a new gain recogni-tion agreement in accordance with para-graph (k)(7)(ii)(A) of this section and, asapplicable, paragraph (k)(7)(ii)(B) or (C)of this section.

(A) The new gain recognition agree-ment includes a statement that the U.S.transferor agrees to treat a complete or par-tial disposition of the P stock received inthe reorganization as a triggering event.

(B) If the triangular asset reorganiza-tion is described in section 368(a)(1)(C),or section 368(a)(1)(A) or (G) by reason ofsection 368(a)(2)(D), the new gain recog-nition agreement includes a statement that

the U.S. transferor agrees to treat a com-plete or partial disposition of the S stockheld by P as a triggering event.

(C) If the triangular asset reorganizationis described in section 368(a)(1)(A) by rea-son of section 368(a)(2)(E) and the trans-ferred corporation is the merged corpora-tion, the new gain recognition agreementincludes a statement that the U.S. trans-feror agrees to treat a complete or partialdisposition of the stock of the survivingcorporation as a triggering event.

(8) Complete liquidation of transferredcorporation. A distribution of substan-tially all of the assets of the transferredcorporation to which section 337 applies,and the related exchange of the transferredstock to which section 332 applies, shallnot constitute triggering events, if the U.S.transferor enters into a new gain recogni-tion agreement. If the transferred corpora-tion is domestic, see §1.367(e)–2 and para-graph (o)(4) of this section. See paragraph(q)(2) of this section, Example 9 for an il-lustration of the rules provided in this para-graph (k)(8).

(9) Death of U.S. transferor. The deathof a U.S. transferor shall not constitute atriggering event if the person winding upthe affairs of the U.S. transferor—

(i) Retains sufficient assets of the U.S.transferor to satisfy any possible Federaltax liability of the U.S. transferor under thegain recognition agreement for the dura-tion of the extended period of limitationson assessments of tax on the gain realizedbut not recognized in the initial transfer;

(ii) Provides security as required un-der paragraph (h) of this section for anypossible Federal tax liability of the U.S.transferor under the gain recognitionagreement; or

(iii) Obtains a ruling from the Inter-nal Revenue Service providing for one ormore successors to the U.S. transferor un-der the gain recognition agreement.

(10) Deconsolidation. A deconsolida-tion of the U.S. transferor shall not consti-tute a triggering event if the U.S. transferorenters into a new gain recognition agree-ment.

(11) Consolidation. A consolidation ofthe U.S. transferor shall not constitute atriggering event if the U.S. transferor en-ters into a new gain recognition agreement.See paragraph (d)(3) of this section.

(12) Intercompany transactions—(i)General rule. If, pursuant to an inter-

March 2, 2009 624 2009–9 I.R.B.

company transaction, the U.S. transferordisposes of stock of the transferee foreigncorporation received in the initial trans-fer, this paragraph (k)(12) applies to suchdisposition to the extent the intercom-pany transaction creates an intercompanyitem that is not taken into account in thetaxable year during which the intercom-pany transaction occurs. To the extent thisparagraph (k)(12) applies, the dispositionshall not constitute a triggering event, andthe U.S. transferor shall remain subjectto the gain recognition agreement if theconditions of paragraphs (k)(12)(i)(A) and(B) of this section are satisfied. To theextent the intercompany transaction doesnot create an intercompany item see, forexample, paragraph (k)(1) and paragraph(q)(2) of this section, Example 20. Seeparagraph (o)(6) of this section for the ef-fect on a gain recognition agreement whenan intercompany item from an intercom-pany transaction to which this paragraph(k)(12)(i) applies is taken into account.

(A) At the time of the disposition, thebasis of the stock of the transferee foreigncorporation received in the initial trans-fer that is disposed of in the intercom-pany transaction is not greater than the sumof the amounts described in paragraphs(k)(12)(i)(A)(1) through (3) of this section.If only a portion of the stock of the trans-feree foreign corporation received in theinitial transfer is disposed of, then the ba-sis of such stock shall be compared with aproportionate amount (measured by valueas determined at the time of the dispo-sition) of the amounts described in para-graph (k)(12)(i)(A)(1) through (3) of thissection. To satisfy the basis conditionof this paragraph (k)(12)(i)(A), the U.S.transferor may reduce the basis of the stockof the transferee foreign corporation re-ceived in the initial transfer that is disposedof in the intercompany transaction in ac-cordance with the principles of paragraph(o)(1)(iii) of this section.

(1) The aggregate basis of the trans-ferred stock or securities at the time of theinitial transfer;

(2) The amount of any increase to thebasis of the transferred stock or securitiesby reason of gain recognized by the U.S.transferor on the initial transfer; and

(3) The amount of any increase to thebasis of the stock disposed of by reason ofan income inclusion by the U.S. transferor

with respect to such stock (for example,pursuant to section 961(a)).

(B) The annual certification filed withrespect to the existing gain recognitionagreement for the taxable year duringwhich the intercompany transaction oc-curs includes a complete description ofthe intercompany transaction and a sched-ule illustrating how the basis condition ofparagraph (k)(12)(i)(A) of this section issatisfied.

(ii) Certain dispositions following in-tercompany transaction. A subsequentdisposition of stock of the transferee for-eign corporation that is transferred in anintercompany transaction to which the ex-ception provided by paragraph (k)(12)(i)of this section applies shall not constitutea triggering event if—

(A) The stock is transferred to a mem-ber of the consolidated group that includesthe U.S. transferor immediately after thedisposition, and

(B) The annual certification filed withrespect to the existing gain recognitionagreement for the taxable year duringwhich the subsequent disposition occursincludes a complete description of the dis-position.

(13) Deemed asset sales pursuant tosection 338(g) elections. A deemed saleof the assets of the transferred corporationor the transferee foreign corporation as aresult of an election under section 338(g)shall not constitute a triggering event. Thisparagraph does not apply to the sale of thestock of the target corporation (within themeaning of section 338(d)(2)) with respectto which such election is made.

(14) Other dispositions or events. Adisposition or other event that would con-stitute a triggering event, without regard tothis paragraph (k)(14), shall not constitutea triggering event if the conditions of para-graph (k)(14)(i) through (iii) of this sec-tion, as applicable, are satisfied. See para-graph (q)(2), Examples 4, 6, 10, 12, 17, 21,and 23 of this section for illustrations of therules provided by this paragraph (k)(14).

(i) The disposition qualifies as a non-recognition transaction.

(ii) Immediately after the disposition orother event, a U.S. transferor retains a di-rect or indirect interest in the transferredstock or securities or, as applicable, in sub-stantially all of the assets of the transferredcorporation (for example, in a case wherethe transferred corporation has been liq-

uidated pursuant to section 332). If, asa result of the disposition or other event,a foreign corporation acquires the trans-ferred stock or securities or, as applica-ble, substantially all the assets of the trans-ferred corporation, the condition of thisparagraph (k)(14)(ii) shall be satisfied onlyif the U.S. transferor owns at least five per-cent (applying the attribution rules of sec-tion 318, as modified by section 958(b)) ofthe total voting power and the total value ofthe outstanding stock of such foreign cor-poration.

(iii) A new gain recognition agreementis entered into by the U.S. transferor de-scribed in paragraph (k)(14)(ii) of this sec-tion that includes—

(A) An explanation of why this para-graph (k)(14) applies to the disposition orother event; and

(B) A description of each subsequentdisposition or other event that would con-stitute a triggering event, other than thosedescribed in paragraph (j) of this section,with respect to the new gain recognitionagreement based on the principles of para-graphs (j) and (k) of this section including,for example, an indirect disposition of thetransferred stock or securities.

(l) [Reserved.](m) Receipt of boot in nonrecogni-

tion transactions—(1) Dispositions oftransferred stock or securities. Notwith-standing paragraph (k) of this section,if gain is required to be recognized (notincluding any gain that would be treatedas a dividend under section 356(a)(2))in connection with a disposition of thetransferred stock or securities to whichan exception under paragraph (k) of thissection otherwise applies (triggering eventexception), the U.S. transferor shall rec-ognize gain under paragraph (c)(1)(i) ofthis section equal to the amount of gainrequired to be recognized in connectionwith the disposition, but not in excess ofthe amount of gain subject to the gainrecognition agreement. For purposes ofthis paragraph (m)(1), the amount of gainrequired to be recognized in connectionwith the disposition shall be determinedbefore taking into account any increaseto the basis of the transferred stock or se-curities under paragraph (c)(4)(ii) of thissection. See paragraph (q)(2) of this sec-tion, Example 13, for an illustration of therule provided by this paragraph (m)(1).

2009–9 I.R.B. 625 March 2, 2009

(2) Dispositions of assets of transferredcorporation. If gain is required to be rec-ognized (not including any gain that wouldbe treated as a dividend under section356(a)(2)) in connection with a disposi-tion of substantially all of the assets of thetransferred corporation to which a trigger-ing event exception otherwise applies, theU.S. transferor shall recognize gain underparagraph (c)(1)(i) of this section equal tothe amount of gain required to be recog-nized in connection with the disposition,but not in excess of the amount of gainsubject to the gain recognition agreement.

(n) Special rules for distributions withrespect to stock—(1) Certain dividendequivalent redemptions treated as dispo-sitions. A redemption of the transferredstock or of stock of the transferee foreigncorporation received in the initial trans-fer that is treated by reason of section302(d) as a distribution of property towhich section 301 applies shall constitutea disposition for purposes of this sectionunless the U.S. transferor enters into a newgain recognition agreement that includesappropriate provisions to account for theredemption. For an illustration of the ruleof this paragraph (n)(1), see paragraph(q)(2) of this section, Example 14.

(2) Gain recognized under section301(c)(3). If gain is required to be recog-nized under section 301(c)(3) with respectto the transferred stock, the U.S. trans-feror shall recognize gain under the gainrecognition agreement in accordance withparagraph (c)(1)(i) of this section in anamount equal to the gain required to berecognized under section 301(c)(3), butnot in excess of the amount of gain subjectto the gain recognition agreement. For thispurpose, the amount of gain required to berecognized under section 301(c)(3) shallbe determined before taking into accountany increase in the basis of the transferredstock under paragraph (c)(4)(ii) of thissection.

(o) Dispositions or other events thatterminate or reduce the amount of gainsubject to the gain recognition agree-ment. Notwithstanding paragraph (j) ofthis section, the following dispositions orother events shall not constitute trigger-ing events but instead shall terminate orreduce the amount of gain subject to thegain recognition agreement.

(1) Taxable disposition of stock of thetransferee foreign corporation—(i) Com-

plete disposition. Except as otherwiseprovided in this paragraph (o)(1)(i), if theU.S. transferor disposes of all the stockof the transferee foreign corporation re-ceived in the initial transfer in a transactionin which all gain realized is recognizedand included in taxable income duringthe taxable year of the disposition, thegain recognition agreement shall termi-nate without further effect if, at the timeof the disposition, the aggregate basis ofsuch stock is not greater than the sumof the amounts described in paragraphs(o)(1)(i)(A) through (C) of this section.This paragraph shall not apply to a dis-position of stock of the transferee foreigncorporation pursuant to an intercompanytransaction to which paragraph (k)(12)of this section applies. This paragraphshall also not apply to an individual U.S.transferor that loses U.S. citizenship orceases to be a lawful permanent residentof the United States (within the meaningof section 7701(b)(6)).

(A) The aggregate basis of the trans-ferred stock or securities at the time of theinitial transfer;

(B) The amount of any increase to thebasis of the transferred stock or securitiesby reason of gain recognized by the U.S.transferor on the initial transfer; and

(C) The amount of any increase to thebasis of the stock disposed of by reason ofan income inclusion by the U.S. transferorwith respect to such stock (for example,pursuant to section 961(a)).

(ii) Partial dispositions. A partial dis-position by the U.S. transferor of the stockof the transferee foreign corporation re-ceived in the initial transfer in a transactionotherwise described in paragraph (o)(1)(i)of this section shall reduce the amount ofgain subject to the gain recognition agree-ment based on the relative fair marketvalue of the stock disposed of (measuredat the time of the disposition) compared tothe fair market value of all of the stock ofthe transferee foreign corporation receivedin the initial transfer (measured at thetime of the disposition). For determiningwhether the basis condition of paragraph(o)(1)(i) of this section is satisfied in thecase of a partial disposition, the aggregatebasis of the stock disposed of is comparedto a proportionate amount (based on fairmarket value, as measured at the time ofthe partial disposition) of the amounts de-scribed in paragraphs (o)(1)(i)(A) through

(C) of this section. For an illustration ofthe rules of this paragraph (o)(1)(ii), seeparagraph (q)(2), Example 15, of this sec-tion.

(iii) Reduction of stock basis. For pur-poses of satisfying the basis condition ofparagraph (o)(1)(i) or (ii) of this section,the U.S. transferor may reduce the aggre-gate basis of the stock of the transfereeforeign corporation received in the initialtransfer, effective immediately before thedisposition. For an illustration of the rulesof this paragraph (o)(1)(iii), see paragraph(q)(2), Example 16, of this section. TheU.S. transferor reduces the basis of thestock of the transferee foreign corpora-tion by including a statement with thetimely-filed return of the U.S. transferorfor the taxable year in which the disposi-tion occurs, entitled “Election to ReduceStock Basis Under §1.367(a)–8(o)(1)(iii)”and that includes—

(A) A description, including the date, ofthe disposition;

(B) A description of the stock of thetransferee foreign corporation disposed ofand the basis adjustments made under thisparagraph (o)(1)(iii); and

(C) The fair market value of all thestock of the transferee foreign corporationheld by the U.S. transferor at the time ofthe disposition.

(2) Gain recognized in connection withcertain nonrecognition transactions. If theU.S. transferor recognizes gain in connec-tion with a complete or partial dispositionof stock of the transferee foreign corpo-ration received in the initial transfer thatis described in paragraph (k) of this sec-tion, and the basis condition of paragraph(o)(1)(i) or (ii) of this section, as applica-ble, is satisfied with the respect to such dis-position, the amount of gain subject to thenew gain recognition agreement filed un-der paragraph (k) of this section as a resultof such disposition shall equal the amountof gain subject to the existing gain recog-nition agreement reduced by the amount ofgain recognized by the U.S. transferor onthe disposition. If the U.S. transferor rec-ognizes gain in connection with a completeor partial disposition of the stock of thetransferee foreign corporation received inthe initial transfer that is described in para-graph (k) of this section, and the conditionof paragraph (o)(1)(i) or (ii) of this section,as applicable, is satisfied with the respectto the disposition, but a new gain recogni-

March 2, 2009 626 2009–9 I.R.B.

tion agreement is not filed with respect tosuch disposition so that a triggering eventexception does not apply to the disposition,the amount of gain required to be recog-nized by the U.S. transferor under the ex-isting gain recognition agreement shall bereduced by the amount of the gain recog-nized on the disposition.

(3) Gain recognized under section301(c)(3). If the U.S. transferor recognizesgain under section 301(c)(3) with respectto the stock of the transferee foreign cor-poration received in the initial transfer, theamount of gain subject to the gain recog-nition agreement shall be reduced by theamount of such recognized gain.

(4) Dispositions of substantially all ofthe assets of a domestic transferred cor-poration. Except as otherwise providedin this paragraph (o)(4), the gain recogni-tion agreement shall terminate without fur-ther effect if substantially all of the assetsof the transferred corporation are disposedof in a transaction in which all gain re-alized is recognized and included in tax-able income during the taxable year of thedisposition, but only if, at the time of theinitial transfer, the U.S. transferor ownedstock in the transferred corporation satisfy-ing the requirements of section 1504(a)(2)and the U.S. transferor and the transferredcorporation were members of the sameconsolidated group. If the initial transferwas part of an indirect stock transfer, thegain recognition agreement shall terminatewithout further effect if substantially allof the assets of the transferred corporation(taking into account §1.367(a)–3(d)(2)(v))are disposed of in a transaction in which allgain realized is recognized and included intaxable income during the taxable year ofthe disposition, but only if at the time of theinitial transfer the U.S. transferor ownedstock in the transferred corporation satisfy-ing the requirements of section 1504(a)(2)(for example, in the case of a reorgani-zation described in section 368(a)(1)(A)by reason of section 368(a)(2)(E)) and theU.S. transferor and the transferred corpo-ration were members of the same consoli-dated group.

(5) Certain distributions or transfers oftransferred stock or securities to U.S. per-sons. To the extent a distribution or trans-fer of the transferred stock or securities sat-isfies the conditions of paragraphs (o)(5)(i)through (iii) of this section, the gain recog-nition agreement shall terminate without

further effect, or the amount of gain sub-ject to the gain recognition agreement shallbe reduced, as appropriate.

(i) Distributions or transfers describedin section 337, 355, or 361. The trans-ferred stock or securities are distributed ortransferred pursuant to a transaction de-scribed in paragraph (o)(5)(i)(A) through(D) of this section, as appropriate.

(A) A distribution described in section337 that is pursuant to a complete liquida-tion described in section 332. See para-graph (q)(2) of this section, Example 18,for an illustration of the rule provided bythis paragraph (o)(5)(i)(A).

(B) A distribution to which section355 applies. See paragraph (q)(2) of thissection, Example 19, for an illustrationof the rule provided by this paragraph(o)(5)(i)(B).

(C) A section 361 exchange that is pur-suant to an asset reorganization. See para-graph (q)(2) of this section, Example 22,for an illustration of the rule provided bythis paragraph (o)(5)(i)(C).

(D) A distribution to which section361(c) applies that is pursuant to an assetreorganization. See paragraph (q)(2) ofthis section, Example 22, for an illustra-tion of the rule provided by this paragraph(o)(5)(i)(D).

(ii) Qualified recipient. The recipient ofthe transferred stock or securities in the rel-evant transaction described in paragraph(o)(5)(i) of this section (qualified recipi-ent) is—

(A) The U.S. transferor;(B) A member of the consolidated

group that includes the U.S. transferorimmediately after the transaction; or

(C) An individual that is a United Statesperson.

(iii) Basis requirement—(A) Generalrule. Immediately after the relevant trans-action described in paragraph (o)(5)(i) ofthis section, the aggregate basis of thetransferred stock or securities received bythe qualified recipient is not greater thanthe aggregate basis of such stock or secu-rities at the time of the initial transfer (asadjusted for gain recognized by the U.S.transferor on the initial transfer attribut-able to such stock or securities). For thispurpose, the basis of the transferred stockin the hands of the qualified recipient shallbe determined without regard to any ba-sis attributable to income inclusions withrespect to the stock (for example, under

section 961(a)). In the case of a distri-bution to which section 355 applies, anyadjustments to basis under §1.367(b)–5(c)shall be made before determining whetherthe basis condition of this paragraph issatisfied.

(B) Election to reduce basis in trans-ferred stock or securities. If the basiscondition of paragraph (o)(5)(iii)(A) ofthis section is not satisfied, each quali-fied recipient may reduce the basis of thetransferred stock or securities receivedin the transaction to the extent neces-sary to satisfy the basis condition. Aqualified recipient reduces the basis ofthe transferred stock or securities by in-cluding a statement with its timely-filedreturn for the taxable year during whichthe distribution or transfer occurs entitled“Election to Reduce Stock Basis Under§1.367(a)–8(o)(5)(iii)(B)” and that in-cludes—

(1) A complete description and the dateof the distribution or transfer;

(2) The fair market value of the trans-ferred stock or securities received by thequalified recipient in the transaction; and

(3) The basis of the transferred stock orsecurities received by the qualified recipi-ent immediately before and after the basisreduction.

(6) Dispositions or other event follow-ing certain intercompany transactions. If,subsequent to an intercompany transactionto which paragraph (k)(12) of this sectionapplies, a disposition or other event occursthat requires the U.S. transferor to takeinto account the intercompany item relatedto the intercompany transaction (under theprovisions of §1.1502–13), the gain recog-nition agreement shall terminate withoutfurther effect or the amount of gain sub-ject to the gain recognition agreement shallbe reduced based on the principles of para-graph (o)(1)(i) or (ii) of this section, as ap-propriate. For an illustration of the rules ofthis paragraph (o)(6), see paragraph (q)(2)of this section, Example 20.

(7) Expropriations under foreign law.The amount of gain subject to the gainrecognition agreement shall be reduced tothe extent the stock or securities of thetransferee foreign corporation received inthe initial transfer, the transferred stock orsecurities, or substantially all the assets ofthe transferred corporation, are expropri-ated, seized, or subjected to a similar tak-ing of such property by the government

2009–9 I.R.B. 627 March 2, 2009

of a foreign country, any political subdivi-sion thereof, or any agency or instrumen-tality of the foregoing. Principles similarto those of paragraph (o)(1)(i) or (o)(1)(ii)of this paragraph, as relevant, shall be ap-plied to determine the amount of the reduc-tion.

(p) Relief for reasonable cause forfailure to comply—(1) Request for relief.A U.S. transferor that fails to file timelya gain recognition agreement, waiver ofperiod of limitations on assessments oftax, annual certification, or other informa-tion required under this section shall beconsidered to have satisfied the timelinessrequirement with respect to such filing,and a failure to comply in any material re-spect with any requirement of this sectionor with the terms of the gain recognitionagreement that would otherwise constitutea triggering event shall not constitute atriggering event, if a request for relief isfiled as provided under paragraph (p)(2) ofthis section and the U.S. transferor is ableto demonstrate to the Area Director, FieldExamination, Small Business/Self Em-ployed or the Director of Field Operations,Large and Mid-Size Business (Director)having jurisdiction of the tax return ofthe U.S. transferor for the taxable year towhich the failure relates, that such fail-ure was due to reasonable cause and notwillful neglect. Whether the failure wasdue to reasonable cause and not willfulneglect will be determined by the Directorafter considering all the facts and circum-stances. The Director shall notify the U.S.transferor in writing within 120 days if itis determined that the failure was not dueto reasonable cause, or if additional timewill be needed to make a determination.For this purpose, the 120-day period shallbegin on the date the Internal RevenueService notifies the U.S. transferor in writ-ing that the request for reasonable causerelief has been received and assigned forreview. If the U.S. transferor is not againnotified before the close of the 120-dayperiod, the U.S. transferor shall be deemedto have established that the failure to filetimely or comply was due to reasonablecause and not willful neglect.

(2) Procedures for filing requests for re-lief—(i) Time of submission. Requests forrelief under paragraph (p)(1) of this sec-tion shall be considered only if, as soonas the U.S. transferor becomes aware ofthe failure to file timely or comply in any

material respect with any requirement ofthis section, an amended return is filed forthe taxable year to which the failure relatesthat includes the information that shouldhave been included with the original re-turn for such taxable year or otherwisecomplies with the rules of this section andthat includes a written statement explain-ing the reasons for the failure to file timelyor comply. The amended return must befiled with the applicable Internal RevenueService Center with which the U.S. trans-feror filed its original return for such tax-able year.

(ii) Notice requirement. In addition tothe requirement of paragraph (p)(2)(i) ofthis section, the U.S. transferor must com-ply with the requirements of paragraph(p)(2)(ii)(A) or (B) of this section, as ap-plicable.

(A) If any taxable year of the U.S.transferor is under examination when theamended return is filed, a copy of theamended return and any information re-quired to be included with such returnmust be delivered to the Internal RevenueService personnel conducting the exami-nation.

(B) If no taxable year of the U.S.transferor is under examination when theamended return is filed, a copy of theamended return and any information re-quired to be included with such returnmust be delivered to the Director havingjurisdiction over the return.

(q) Examples—(1) Presumed facts andreferences. For purposes of the examplesin paragraph (q)(2) of this section, and ex-cept where otherwise indicated, the fol-lowing is presumed.

(i) UST, USP, and DC are domestic cor-porations that each use a calendar taxableyear.

(ii) USP wholly owns UST and is thecommon parent of the consolidated groupof which UST is a member.

(iii) TFC, TFD, F1, and FA are foreigncorporations.

(iv) UST wholly owns TFD.(v) In a section 351 exchange, UST

transfers all of the stock of TFD (TFDstock) to TFC in exchange solely for stockof TFC (the initial transfer).

(vi) Pursuant to §1.367(a)–3(b)(1)(ii)and this section, UST enters into a gainrecognition agreement in connection withthe initial transfer and makes the electiondescribed under paragraph (c)(2)(vi) of

this section with respect to the gain recog-nition agreement.

(vii) As applicable, the section1248 amount (within the meaning of§1.367(b)–2(c)) or all earnings andprofits amount (within the meaning of§1.367(b)–2(d)) attributable to the stockof a foreign corporation is zero.

(viii) All transactions are respected un-der general principles of tax law, includingthe step transaction doctrine.

(ix) References to a U.S. transferor en-tering into a gain recognition agreementmean, where applicable, that the commonparent of the consolidated group of whichthe U.S. transferor is a member has filedthe gain recognition agreement on behalfof the U.S. transferor in accordance withparagraph (d)(3) of this section.

(x) Taxable years during the GRA termare referred to, for example, as year 1 andyear 2.

(2) Examples. The following examplesillustrate the application of the rules of thissection.

Example 1. Basis adjustments from gain recog-nized under the gain recognition agreement. (i) Facts.TFC wholly owns F1. In year 3, pursuant to a section351 exchange, TFC transfers all of the TFD stock toF1 in exchange solely for voting stock of F1. USTenters into a new gain recognition agreement withrespect to the initial transfer under paragraph (k)(3)of this section, and therefore the transfer by TFC ofthe TFD stock to F1 is not a triggering event. Underparagraph (c)(5)(i) of this section, the existing gainrecognition agreement terminates without further ef-fect. In year 4, in an exchange to which section 721applies, UST contributes the TFC stock received inthe initial transfer to PRS, a domestic partnership,in exchange for a partnership interest. UST entersinto a new gain recognition agreement with respectto the initial transfer under paragraph (k)(1) of thissection, and therefore the transfer by UST of the TFCstock to PRS is not a triggering event. Under para-graph (c)(5)(i) of this section, the new gain recog-nition agreement filed by UST in year 3 terminateswithout further effect. In year 5, TFD disposes ofsubstantially all of its assets in a transaction that con-stitutes a triggering event under paragraph (j)(2)(i) ofthis section. Under paragraph (c)(1)(i) of this section,UST recognizes the gain realized but not recognizedon the initial transfer by reason of entering into thegain recognition agreement.

(ii) Result. Under paragraph (c)(4) of this section,the basis of the PRS interest held by UST, the TFCstock held by PRS that was received from UST inyear 4, the F1 stock held by TFC that was receivedin exchange for the TFD stock in year 3, and the TFDstock held by F1 that was received from TFC in year 3is increased by the amount of gain recognized by UST(but not by the additional tax or interest paid as resultof such gain) with respect to the initial transfer underthe gain recognition agreement. However, the basisof the assets of TFD (including the assets disposed

March 2, 2009 628 2009–9 I.R.B.

of in year 5) is not increased as a result of the gainrecognized by UST.

Example 2. Impact of gain recognition event oncomputation of income. (i) Facts. At the time ofthe initial transfer, the TFD stock has a $50x ba-sis, a $100x fair market value, and a $30x section1248 amount. The amount of gain subject to the gainrecognition agreement is $50x. UST did not makean election under paragraph (c)(2)(vi) of this sectionwith respect to the gain recognition agreement. Inyear 3, TFC disposes of the TFD stock received inthe initial transfer in exchange for $120x cash.

(ii) Result—(A) Gain recognition without anelection. The disposition by TFC of the TFD stockin year 3 is a triggering event under paragraph (j)(1)of this section. As a result, under paragraph (c)(1)(i)of this section, UST must recognize and include inincome $50x gain under the gain recognition agree-ment. Under paragraph (c)(1)(iii)(A) of this section,UST must report the $50x gain on an amended returnfiled for the taxable year of the initial transfer. Underparagraph (c)(1)(v) of this section, UST must payapplicable interest on any additional tax due withrespect to the $50x gain recognized. Under section1248(a), $30x of the gain recognized by UST underthe gain recognition agreement is recharacterized asa dividend. Under paragraph (c)(4) of this section,as of the date of the initial transfer, the basis of theTFC stock received by UST in the initial transfer andthe TFD stock received by TFC in the initial transfer,respectively, is increased by $50x. After taking intoaccount the increase to the basis of the TFD stock,TFC recognizes $20x gain on the disposition of theTFD stock in year 3.

(B) Gain recognition with an election. If USTmade an election under paragraph (c)(2)(vi) of thissection with the gain recognition agreement filed forthe initial transfer, the result would be the same as inparagraph (ii)(A) of this Example 2, except that USTmust include in income the $50x gain recognized un-der the gain recognition agreement on its tax returnfiled for year 3. Any additional tax due with respectto the $50x gain and applicable interest on the addi-tional tax due must be included with such return. Theamount, if any, of the $50x gain recognized by USTunder the gain recognition agreement that is charac-terized as a dividend under section 1248(a) is deter-mined in year 3.

Example 3. Transfer of stock of the transfereeforeign corporation to a domestic corporation in asection 351 exchange. (i) Facts. UST wholly ownsDC. In year 3, pursuant to a section 351 exchange,UST transfers all of the TFC stock received in theinitial transfer to DC in an exchange solely for votingstock of DC.

(ii) Result. The year 3 transfer of the TFC stockby UST to DC constitutes a triggering event underparagraph (j)(4) of this section. However, the trans-fer shall not constitute a triggering event pursuant toparagraph (k)(1)(ii) of this section if DC enters intoa new gain recognition agreement with respect to theinitial transfer that designates DC as the U.S. trans-feror for purposes of this section. Pursuant to para-graphs (c)(4)(i) and (ii) of this section, if DC is re-quired to recognize gain under the new gain recog-nition agreement, the basis of the stock of TFC andTFD would be increased by the amount of gain rec-ognized. However, pursuant to paragraph (c)(4)(iii)of this section, no adjustment would be made to the

basis of the DC voting stock received by UST in year3 as a result of such gain recognition. Alternatively, ifthe conditions for the application of paragraph (k)(14)of this section are satisfied UST could instead enterinto the new gain recognition agreement with respectto the initial transfer.

Example 4. Transfer of stock of the transferee for-eign corporation in a triangular section 368(a)(1)(B)reorganization. (i) Facts. DC wholly owns FA. Inyear 3, pursuant to a triangular reorganization de-scribed in section 368(a)(1)(B), UST transfers all ofthe TFC stock received in the initial transfer to FAin exchange solely for 20% of the outstanding votingstock of DC. At the time of the reorganization, theTFC stock has a basis in excess of fair market value.

(ii) Result. (A) The transfer by UST of theTFC stock to FA is an indirect stock transfer under§1.367(a)–3(d)(1)(iii)(B). Accordingly, to preservenonrecognition treatment, UST must enter into a sep-arate gain recognition agreement under this sectionwith respect to such transfer.

(B) With respect to the gain recognition agree-ment filed for the initial transfer of the TFD stock,the transfer by UST of the TFC stock to FA is a trig-gering event under paragraph (j)(4) of this section.However, the transfer shall not constitute a trigger-ing event if the conditions of the exception providedby paragraph (k)(14) of this section are satisfied.

(1) The condition of paragraph (k)(14)(i) of thissection is satisfied because the transfer qualifies asa nonrecognition transaction (assuming UST entersinto a gain recognition agreement as described inparagraph (ii)(A) of this Example 4).

(2) The condition of paragraph (k)(14)(ii) of thissection is satisfied because immediately after thetransfer DC, a domestic corporation that is eligibleto be a U.S. transferor, owns at least 5% (applyingthe attribution rules of section 318, as modified bysection 958(b)) of the total voting power and totalfair market value of the outstanding stock of FA. Asa result, DC is treated as retaining an indirect interestin the TFD stock immediately following the transfer.

(3) The condition of paragraph (k)(14)(iii) of thissection is satisfied if DC enters into a new gain recog-nition agreement with respect to the initial transfer ofthe TFD stock that, based on the principles of para-graph (j) of this section, describes the subsequent dis-positions or other events that would constitute trig-gering events for purposes of the new gain recogni-tion agreement (other than the dispositions and otherevents described in paragraph (j) of this section). Forexample, a complete or partial disposition of the stockof FA would constitute a triggering event for purposesof the new gain recognition agreement.

Example 5. Transfer of stock of the transferee for-eign corporation to a domestic corporation pursuantto an asset reorganization. (i) Facts. At the time ofthe initial transfer the TFD stock has a $50x basis anda $100x fair market value. Therefore, the amountof gain subject to the gain recognition agreement is$50x. In year 3, pursuant to an asset reorganizationdescribed in section 368(a)(1)(A), UST transfers itsassets to DC in exchange solely for 20% of the out-standing stock of DC. UST distributes the stock ofDC to USP pursuant to the plan of reorganization.

(ii) Result. The transfer by UST of the TFC stockto DC constitutes a triggering event under paragraph(j)(4) of this section. However, pursuant to para-graph (k)(6)(i) of this section, if DC enters into a new

gain recognition agreement with respect to the initialtransfer that designates DC as the U.S. transferor, thetransfer shall not constitute a triggering event.

Example 6. Transfer of stock of the transferee for-eign corporation to a foreign corporation pursuant toan asset reorganization. (i) Facts. The facts are thesame as in Example 5, except the acquiring corpo-ration in the asset reorganization is FA, and, at thetime of the asset reorganization, the TFC stock trans-ferred by UST to FA has a $50x basis and a $150xfair market value. All of the conditions under section367(a)(5) and the regulations under that section aresatisfied, and no adjustment is required to the basisof the FA stock received by USP in the transaction.

(ii) Result. (A) The transfer by UST of the TFCstock to FA is described in section 361(a) and is there-fore subject to section 367(a)(5). In general, USTcannot file a gain recognition agreement with respectto such transfer, and the transfer therefore is subjectto the general rule of section 367(a)(1). However, ifthe conditions of §1.367(a)–3(e)(1)(i) through (iv) aresatisfied, USP can enter into a gain recognition agree-ment with respect to the transfer to avoid the recog-nition of gain by UST on the transfer under section367(a)(1). If the exception provided by paragraph(k)(14) of this section applies so that the transfer byUST of the TFC stock to FA is not a triggering eventwith respect to the gain recognition agreement filedfor the initial transfer (discussed in paragraph (ii)(B)of this Example 6), the amount of gain subject to thegain recognition agreement (if entered into) with re-spect to the transfer by UST of the TFC stock to FAin the asset reorganization is $100x.

(B) Under paragraph (j)(4) of this section, thetransfer of the TFC stock by UST to FA is a trigger-ing event with respect to the gain recognition agree-ment for the initial transfer. The exception providedby paragraph (k)(6)(i) of this section does not applyto such transfer because FA, the acquiring corpora-tion in the asset reorganization, is foreign. However,the transfer shall not constitute a triggering event ifthe conditions of the exception provided by paragraph(k)(14) of this section are satisfied.

(1) The condition of paragraph (k)(14)(i) of thissection is satisfied because the transfer of the TFCstock to FA qualifies as a nonrecognition transaction(assuming USP enters into a gain recognition agree-ment with respect to such transfer).

(2) The condition of paragraph (k)(14)(ii) of thissection is satisfied because immediately after thetransfer USP, a domestic corporation that is eligibleto be a U.S. transferor, owns at least 5% (applyingthe attribution rules of section 318, as modified bysection 958(b)) of the total voting power and totalfair market value of the outstanding stock of FA. As aresult, USP is treated as retaining an indirect interestin the TFD stock immediately following the transfer.

(3) The condition of paragraph (k)(14)(iii) ofthis section is satisfied if USP enters into a newgain recognition agreement with respect to the initialtransfer of the TFD stock that, based on the princi-ples of paragraph (j) of this section, describes thesubsequent dispositions or other events that wouldconstitute triggering events for purposes of the newgain recognition agreement, other than those alreadyprovided in paragraph (j) of this section. For exam-ple, a disposition of the stock of FA would constitutesuch a triggering event for purposes of the new gainrecognition agreement.

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(iii) Alternate facts. Assume the same facts as inparagraph (i) of this Example 6, including that para-graph (k)(14) of this section applies to the year 3 reor-ganization so that USP enters into a new gain recog-nition agreement with respect to the initial transfer ofthe TFD stock that occurred in year 1 (GRA 1), andthat under §1.367(a)–3(e) USP enters into a separategain recognition agreement with respect to the initialtransfer of the TFC stock by UST to FA pursuant tothe year 3 asset reorganization (GRA 2). Assume fur-ther that in year 4 TFC disposes of 10% of the TFDstock pursuant to a transaction that constitutes a trig-gering event with respect to GRA 1. The dispositionof the TFD stock is not a triggering event with respectto GRA 2 because the TFD stock disposed of doesnot constitute substantially all the assets of TFC. Un-der paragraphs (j)(1) and (c)(1)(i) of this section, USPmust recognize $5x gain (10% of $50x) under GRA1. Under paragraph (c)(4)(i) and (ii) of this section,as of the date of the initial transfer (with respect towhich GRA 1 was filed), the basis of the TFC stockand TFD stock, respectively, is increased by $5x. Un-der paragraph (c)(1)(i) of this section, the amount ofgain subject to GRA 1 is reduced from $50x to $45x.Similarly, because the transferred stock for purposesof GRA 2 is the TFC stock, the amount of gain subjectto GRA 2 is reduced from $100x to $95x to reflect theincrease to the basis of the TFC stock.

Example 7. Transfer of transferred stock to a for-eign corporation pursuant to an asset reorganization.(i) Facts. UST wholly owns FA. In year 4, pursuantto a reorganization described in section 368(a)(1)(D),TFC transfers all of the TFD stock to FA in exchangesolely for stock of FA. TFC distributes the FA stockto UST pursuant to the plan of reorganization.

(ii) Analysis. In general, the year 4 transfer byTFC of the TFD stock to FA and the exchange by USTof the TFC stock for FA stock constitute triggeringevents under paragraphs (j)(1) and (4) of this section,respectively. However, under paragraph (k)(6)(ii) ofthis section, the transfers shall not constitute trigger-ing events if UST enters into a new gain recognitionagreement with respect to the initial transfer that des-ignates FA as the transferee foreign corporation.

Example 8. Transfer of substantially all the assetsof the transferred corporation pursuant to an asset re-organization. (i) Facts. In year 4, pursuant to an as-set reorganization described in section 368(a)(1)(C),TFD transfers all of its assets to FA in exchange solelyfor voting stock of FA. TFD distributes the FA votingstock to TFC pursuant to the plan of reorganization.

(ii) Analysis. The year 4 transfer by TFD of allits assets to FA and the exchange by TFC of its TFDstock for FA voting stock pursuant to the reorgani-zation constitute triggering events under paragraphs(j)(2) and (j)(1) of this section, respectively. How-ever, under paragraph (k)(6)(iii) of this section, thetransfers shall not constitute triggering events if USTenters into a new gain recognition agreement withrespect to the initial transfer that designates FA asthe transferred corporation. In addition, under para-graph (k)(6)(iii) of this section only the assets of TFDacquired by FA in the asset reorganization shall betreated as assets of the transferred corporation for pur-poses of the new gain recognition agreement.

Example 9. Complete liquidation of transferredcorporation into transferee foreign corporation. (i)Facts. UST does not make an election under para-graph (c)(2)(vi) of this section in connection with the

gain recognition agreement entered into with respectto the initial transfer. In year 3, TFD distributes all ofits assets to TFC pursuant to a complete liquidationto which sections 332 and 337 apply. Under para-graph (k)(8) of this section, UST enters into a newgain recognition agreement with respect to the initialtransfer such that the liquidation is not a triggeringevent. Under paragraph (c)(5)(i) of this section, thenew gain recognition agreement is subject to the con-ditions and requirements of this section to the sameextent as the existing gain recognition agreement, ex-cept that the transferred stock is no longer subjectto the gain recognition agreement because the trans-ferred stock is cancelled by reason of the liquidation.In year 5 TFC disposes of substantially all of the as-sets received from TFD in the year 3 liquidation.

(ii) Result. The year 5 disposition by TFC ofsubstantially all of the assets received from TFDin the year 3 liquidation is a triggering event underparagraph (j)(2) of this section, and therefore USTmust recognize the gain subject to the gain recogni-tion agreement. UST must report the gain recognizedon an amended return for the taxable year duringwhich the initial transfer occurred. UST must alsopay applicable interest on any additional tax duewith respect to the gain recognized. Under paragraph(c)(4)(i) of this section, the basis of the TFC stockreceived by UST in the initial transfer is increasedas of the date of the initial transfer by the amountof gain recognized under the gain recognition agree-ment. The basis of the assets of TFD, however, isnot increased.

Example 10. Transfer of transferred stock to for-eign corporation in section 351 exchange, followedby a section 332 liquidation of the foreign corpo-ration. (i) Facts. In year 3, pursuant to a section351 exchange, TFC transfers the TFD stock to F1, anewly formed corporation, in exchange solely for vot-ing stock of F1. The transfer by TFC of the TFD stockto F1 is not a triggering event because UST complieswith the conditions of paragraph (k)(3) of this section.In year 5, F1 distributes all of its assets to TFC in acomplete liquidation to which sections 332 and 337apply.

(ii) Result. The distribution of the TFD stock byF1, and the exchange of F1 stock by TFC pursuantto the year 5 liquidation of F1 constitute triggeringevents under paragraphs (j)(1) and (k)(3)(i) of thissection, respectively. However, if paragraph (k)(14)of this section applies, neither the distribution of theTFD stock by F1, nor the exchange by TFC of the F1stock, shall constitute a triggering event.

(A) The condition of paragraph (k)(14)(i) ofthis section is satisfied because the distribution ofthe TFD stock, and the exchange of F1 stock, bothqualify as nonrecognition transactions.

(B) The condition of paragraph (k)(14)(ii) of thissection is satisfied because immediately after the dis-tribution UST, a domestic corporation that is eligibleto be a U.S. transferor, owns at least 5% (applying theattribution rules of section 318, as modified by sec-tion 958(b)) of the stock of TFC. As a result, USTis treated as retaining an indirect interest in the TFDstock following the complete liquidation of F1.

(C) The condition of paragraph (k)(14)(iii) ofthis section is satisfied if UST enters into a new gainrecognition agreement. Because after the completeliquidation of F1, UST wholly owns TFC, whichwholly owns TFD, as was the case immediately after

the initial transfer, UST is not required to describe,with the new gain recognition agreement, other dis-positions or events that would constitute triggeringevents based on the principles of paragraph (j) ofthis section, other than the dispositions or eventsdescribed in paragraph (j) of this section.

Example 11. Disposition of stock of transfereeforeign corporation pursuant to a divisive reorgani-zation. (i) Facts. In year 3, pursuant to a divisive re-organization described in section 368(a)(1)(D), USTtransfers all of the TFC stock to DC, a newly-formedcorporation, in exchange solely for stock of DC. USTthen distributes all of the DC stock to USP in a trans-action to which section 355 applies.

(ii) Result. The transfer of the TFC stock byUST to DC constitutes a triggering event under para-graph (j)(4) of this section. However, under para-graph (k)(1)(iii) of this section, the transfer of theTFC stock shall not constitute a triggering event ifDC enters into a new gain recognition agreement thatdesignates DC as the U.S. transferor for purposes ofthis section.

(iii) Alternate facts. The facts are the same as inparagraph (i) of this Example 11, except that USTtransfers only 90% of the TFC stock to DC. Paragraph(k)(1)(iii) of this section applies only with respect tothe TFC stock transferred to DC. Thus, the conditionsof paragraph (k)(1)(iii) of this section are satisfiedif DC enters into a new gain recognition agreementwith respect to the TFC stock received from UST.The amount of gain subject to the new gain recog-nition agreement entered into by DC equals 90% ofthe amount of gain subject to the gain recognitionagreement entered into by UST with respect to theinitial transfer. The amount of gain subject to the gainrecognition agreement entered into by UST with re-spect to the initial transfer is reduced by the amountof gain subject to the new gain recognition agreemententered into by DC. The gain recognition agreemententered into by UST with respect to the initial transfercontinues to apply to the remaining TFC stock held byUST.

Example 12. Disposition of transferred stock pur-suant to a divisive reorganization. (i) Facts. In year 3,pursuant to a divisive reorganization described in sec-tion 368(a)(1)(D), TFC transfers all of the TFD stockto F1, a newly formed corporation, in exchange solelyfor all of the outstanding stock of F1. TFC then dis-tributes all of the F1 stock to UST in a transaction towhich section 355 applies.

(ii) Result. The transfer by TFC of the TFD stockto F1 constitutes a triggering event under paragraph(j)(1) of this section. However, if paragraph (k)(14)of this section applies, neither the transfer of theTFD stock by TFC to F1, nor the distribution of theF1 stock by TFC to UST, shall constitute triggeringevents.

(A) The condition of paragraph (k)(14)(i) of thissection is satisfied because the dispositions of theTFD stock and F1 stock qualify as nonrecognitiontransactions.

(B) The condition of paragraph (k)(14)(ii) ofthis section is satisfied because immediately afterthe transfer UST, an eligible U.S. transferor, ownsat least 5% (applying the attribution rules of section318, as modified by section 958(b)) of the totalvoting power and the total fair market value of theoutstanding stock of F1. As a result, UST is treated

March 2, 2009 630 2009–9 I.R.B.

as retaining an indirect interest in the TFD stockfollowing the dispositions.

(C) The condition of paragraph (k)(14)(iii) ofthis section is satisfied if UST enters into a newgain recognition agreement with respect to the initialtransfer that describes the subsequent dispositions orother events that would constitute triggering eventsbased on the principles of paragraph (j) of this sec-tion, other than those described in paragraph (j) ofthis section. For example, a complete or partialdisposition of the F1 stock would constitute a trigger-ing event for purposes of the new gain recognitionagreement (subject to the exceptions provided byparagraph (k) of this section).

Example 13. Receipt of boot by the transfereeforeign corporation in a subsequent section 351 ex-change. (i) Facts. At the time of the initial transfer,the TFD stock has a $50x basis and $100x fair marketvalue. The amount of gain subject to the gain recogni-tion agreement is $50x. In year 3, TFC and X, an un-related foreign corporation, form F1. TFC transfersthe TFD stock to F1 in exchange for $35x cash and$65x stock of F1. At the time of the transfer, the TFDstock has a $50x basis and $100x fair market value.The F1 stock received by TFC represents 25% of theoutstanding stock of F1. Without regard to the gainrecognized under the gain recognition agreement andany adjustments to basis under paragraph (c)(4)(ii) ofthis section, under section 351(b) TFC would recog-nize $35x gain in connection with the transfer of theTFD stock to F1. UST complies with the conditionsof paragraph (k)(3) of this section, and therefore thedisposition by TFC of the TFD stock does not consti-tute a triggering event.

(ii) Result. Under paragraph (m)(1) of this sec-tion, UST must recognize $35x gain under the gainrecognition agreement as a result of the year 3 dispo-sition by TFC of the TFD stock. Thus, the amount ofgain subject to the new gain recognition agreemententered into by UST pursuant to paragraph (k)(3) ofthis section is $15x. Under paragraph (c)(4)(ii) ofthis section, as of the date of the initial transfer, thebasis of the TFD stock held by TFC is increased by$35x, the amount of the gain recognized by UST un-der the gain recognition agreement. Under paragraph(c)(4)(i) of this section, the basis of the TFC stock re-ceived by UST in the initial transfer is also increasedby $35x. After taking into account the increase to thebasis of the TFD stock under paragraph (c)(4)(ii) ofthis section, TFC recognizes $15x gain under section351(b) in connection with the year 3 transfer of theTFD stock to F1. Under section 362(a), the basis ofthe TFD stock in the hands of F1 is $100x.

Example 14. Complete disposition of transferredstock pursuant to a section 304(a)(1) transaction. (i)Facts. UST wholly owns FA. In year 3, in a trans-action to which section 304(a)(1) applies, TFC trans-fers all of the TFD stock to FA in exchange for cash.Under section 304(a)(1), TFC and FA are treated asif TFC transferred the TFD stock to FA in a section351 exchange in exchange solely for FA stock, andthen FA redeemed the FA stock deemed issued in ex-change for the cash. Under section 302(d), the re-demption of the FA stock deemed issued by FA toTFC under section 304(a)(1) is treated as a distribu-tion to which section 301 applies.

(ii) Result. (A) In general, the deemed contribu-tion by TFC of the TFD stock to FA in the section 351exchange is a triggering event under paragraph (j)(1)

of this section. However, under paragraph (k)(3) ofthis section the deemed contribution shall not be atriggering event if UST enters into a new gain recog-nition agreement with respect to the initial transfer inwhich it agrees to treat as a triggering event a com-plete or partial disposition of the FA stock deemedreceived by TFC.

(B) Under paragraph (n)(1) of this section, the re-demption of the FA stock deemed received by TFCin exchange for the TFD stock shall not constitutea disposition if UST enters into a new gain recog-nition agreement with respect to the initial transferthat includes appropriate provisions to take into ac-count such redemption. Therefore, under the newgain recognition agreement UST must agree to treatas a triggering event a complete or partial dispositionof the stock of FA. Pursuant to paragraph (d)(2)(ii)of this section, UST is permitted to enter into a singlenew gain recognition agreement in year 3, but the gainrecognition agreement must provide a complete de-scription of the section 304(a)(1) transaction includ-ing the deemed section 351 exchange and redemptionof the FA stock.

Example 15. Reduction in amount of gain sub-ject to gain recognition agreement, followed by trig-gering event. (i) Facts. In year 3, UST disposes of60% of the TFC stock received in the initial trans-fer in a transaction in which the conditions of para-graph (o)(1)(ii) of this section are satisfied. Thus, theamount of gain subject to the gain recognition agree-ment is reduced by 60%. In year 5, TFC disposes of50% of the TFD stock in a transaction that constitutesa triggering event.

(ii) Result. As a result of the year 5 dispositionby TFC of 50% of the TFD stock, under paragraphs(j)(1) and (c)(1)(i) of this section, UST must recog-nize and include in income 50% of the gain subject tothe gain recognition agreement (because of the year3 disposition of TFC stock, the amount of gain sub-ject to the gain recognition agreement equals 40% ofthe gain realized, but not recognized, on the initialtransfer). UST must pay applicable interest on anyadditional tax due with respect to the gain recognized.The amount of gain subject to the gain recognitionagreement is reduced by the amount of gain recog-nized by UST (the remaining gain equals 20% of thegain realized, but not recognized, by UST on the ini-tial transfer).

Example 16. Taxable sale of stock of transfereeforeign corporation and election to reduce stock ba-sis. (i) Facts. UST wholly owns F1 and TFD. The F1stock has a $100x basis and $90x fair market value,and the TFD stock has a $0x basis and $100x fairmarket value. UST also owns real property with a$10x basis and $10x fair market value. In year 1,pursuant to a section 351 exchange, UST transfersthe real property, the TFD stock, and the F1 stock toTFC in exchange solely for 20 shares of TFC stock.UST enters into a gain recognition agreement with re-spect to the transfer of the TFD stock. The amountof the gain recognition agreement is $100x. USTtakes the position that the basis of each share of TFCstock received in the exchange is $5.5x (a proportion-ate amount of the $110x aggregate basis of the trans-ferred property). In year 3, UST disposes of all itsTFC stock in a transaction in which all gain realizedis recognized and included in taxable income.

(ii) Result. The year 3 disposition of the TFCstock is a triggering event under paragraph (j)(4) of

this section. The disposition does not terminate thegain recognition agreement pursuant to paragraph(o)(1)(i) of this section because the basis of eachshare of TFC stock received in exchange for the TFDstock in the initial transfer is $5.5x, which exceedsthe $0x basis of the TFD stock at time of the initialtransfer. However, under paragraph (o)(1)(iii) of thissection, to satisfy the basis condition of paragraph(o)(1)(i) of this section, UST can reduce the basis ofthe 10 shares of the TFC stock received in exchangefor the TFD stock to $0x. If UST reduces the basis ofthe 10 shares of TFC stock to $0x, under paragraph(o)(1)(i) of this section the disposition of the TFCstock shall not constitute a triggering event but in-stead shall terminate the gain recognition agreementwithout further effect.

Example 17. Successive section 351 exchanges,section 301 distributions, and transactions involvingpartnerships. (i) Facts. UST owns a 40 percent capi-tal and profits interest in a foreign partnership (PRS).PRS wholly owns TFD and other assets with basisequal to fair market value. The TFD stock has a $50xbasis and $200x fair market value. TFC wholly ownsF1. On day 1 of year 1, in a section 351 exchange,UST transfers its PRS interest to TFC in exchangesolely for stock of TFC (initial transfer). On that sameday, in a section 351 exchange, TFC transfers the PRSinterest received from UST to F1 in exchange solelyfor stock of F1. In year 3, PRS receives a $150xdistribution from TFD to which section 301 applies.Under section 301(c), $25x of the distribution consti-tutes a dividend, $50x is applied against and reducesthe basis of the TFD stock held by PRS, and the re-maining $75x is treated as gain from the sale or ex-change of property. With respect to the TFD stockdeemed transferred by UST in the initial transfer, un-der section 301(c), $10x (40% of $25x) of the distri-bution constitutes a dividend, $20x (40% of $50x) isapplied against and reduces the basis of TFD stock,and $30x (40% of $75x) is treated as gain from thesale or exchange of property. In year 5, pursuant toa distribution to which section 731 applies, PRS dis-tributes all of the TFD stock to F1.

(ii) Result. (A) Successive section 351 transfers.Under section 367(a)(4) and §1.367(a)–1T(c)(3)(ii),the transfer of the PRS interest by UST to TFC istreated, for purposes of section 367(a), as a transferby UST to TFC of its proportionate share of the TFDstock held by PRS (the initial transfer). The initialtransfer by UST of the TFD stock to TFC is subjectto the general rule of section 367(a)(1), unless USTenters into a gain recognition agreement with respectto such transfer pursuant to §1.367(a)–3(b)(1)(ii) andthis section. Under paragraph (c)(3)(viii) of this sec-tion, the gain recognition agreement must include acomplete description of the transfer, including a de-scription of the partners of PRS. Even if UST entersinto a gain recognition agreement with respect to theinitial transfer, under paragraph (j)(3) of this section,the subsequent transfer by TFC of the PRS interestto F1 is a triggering event unless UST enters into anew gain recognition agreement with respect to theinitial transfer under paragraph (k)(14) that providesthat, in addition to the triggering events provided inparagraph (j) of this section, a complete or partial dis-position of the F1 stock received by TFC in exchangefor the PRS interest shall constitute a triggering eventfor purposes of the gain recognition agreement. Thenew gain recognition agreement must also provide

2009–9 I.R.B. 631 March 2, 2009

that any other disposition that is inconsistent with theprinciples of paragraph (k), including an indirect dis-position of the TFD stock or of substantially all of theassets of TFD, shall constitute a triggering event forpurposes of the new gain recognition agreement. Un-der paragraph (d)(2)(ii) of this section, UST is per-mitted to enter into a single gain recognition agree-ment with respect to the initial transfer and the sub-sequent transfer by TFC of the PRS interest, but theagreement must include a complete description of theinitial transfer and the subsequent transfer of the PRSinterest.

(B) Section 301 distribution from TFD to PRS.Under paragraph (b)(1)(iii) of this section, the section301 distribution received by PRS from TFD is nota disposition (and therefore does not affect the gainrecognition agreement) to the extent it is described insection 301(c)(1) or (2). However, under paragraph(n)(2) of this section, to the extent the distribution isdescribed in section 301(c)(3), UST must recognizegain ($30x) under the gain recognition agreement.For this purpose, the amount of the distribution thatis described in section 301(c)(3) is determined beforetaking into account the increase to the basis of theTFD stock under paragraph (c)(4)(ii) of this section.

(C) Distribution of TFD stock by PRS to F1. Theyear 5 distribution of the TFD stock by PRS to F1 is atriggering event under paragraph (j)(1) of this section,unless paragraph (k)(14) of this section applies.

(1) The condition of paragraph (k)(14)(i) of thissection is satisfied because the distribution qualifiesas a nonrecognition transaction.

(2) The condition of paragraph (k)(14)(ii) of thissection is satisfied because immediately after the dis-tribution UST, a domestic corporation that is eligibleto be a U.S. transferor, owns at least 5% (applying theattribution rules of section 318, as modified by sec-tion 958(b)) of the total voting power and total valueof the outstanding stock of F1. As a result, UST istreated as retaining an indirect interest in the TFDstock following the distribution.

(3) The condition of paragraph (k)(14)(iii) ofthis section is satisfied if UST enters into a newgain recognition agreement with respect to the initialtransfer. The new gain recognition agreement neednot describe additional dispositions or other eventsthat would constitute triggering events because,pursuant to paragraph (c)(5) of this section, the dis-positions or other events described in paragraph (j) ofthis section or in the existing gain recognition agree-ment apply to the new gain recognition agreement.

Example 18. Complete liquidation of transfereeforeign corporation. (i) Facts. TFD has 10 sharesof stock outstanding immediately before the initialtransfer. On the date of the initial transfer, the TFDstock has a $0x basis and $90x fair market value. Inyear 2, in exchange for 1 share of TFD stock TFCtransfers real estate to TFD with a $10x basis and$10x fair market value. In year 4, TFC distributesthe 11 shares of TFD stock to UST in a completeliquidation to which sections 332 and 337 apply.

(ii) Result. In determining whether the gainrecognition agreement entered into by UST withrespect to the initial transfer is terminated underparagraph (o)(5) of this section, or triggered underparagraphs (j)(1) and (j)(4) of this section, only the10 shares of TFD stock transferred by UST in theinitial transfer are considered. Thus, the 1 share of

TFD stock received by TFC in exchange for the realestate in year 2 is not taken into account.

Example 19. Spin-off of transferred corporation.(i) Facts. Before the initial transfer, the TFD stock hasan $80x basis and a $100x fair market value, and theTFC stock has a $100x basis and a $100x fair marketvalue. In year 4, TFC distributes all of the TFD stockto UST in a transaction to which section 355 applies.At the time of the distribution, the TFD stock has a$200x fair market value, and the TFC stock (withoutregard to the value of the TFD stock held by TFC)has a $100x fair market value. At such time, the TFCstock has a $180x basis. As determined under section358, immediately after the distribution, the TFC stockhas a $60x basis, and the TFD stock has a $120x basis.

(ii) Result. The distribution of the TFD stock byTFC in year 4 is a triggering event under paragraph(j)(1) of this section. The distribution does not ter-minate the gain recognition agreement under para-graph (o)(5) of this section because after the distribu-tion, the basis of the TFD stock in the hands of UST($120x) is greater than the basis of the TFD stock atthe time of the initial transfer ($80x). However, ifUST reduces the basis of the TFD stock to $80x (asprovided under paragraph (o)(5)(iii) of this section)the gain recognition agreement will terminate with-out further effect. If UST does not elect to reduce thebasis of the TFD stock, see paragraph (k)(14) of thissection.

Example 20. Intercompany transaction followedby disposition to nonmember. (i) Facts. At the timeof the initial transfer, the TFD stock has a $50x ba-sis and $100x fair market value. The amount of thegain recognition agreement is $50x. In year 3, USTdistributes all of the TFC stock to USP in a trans-action to which section 301 applies. At the time ofthe distribution, the TFC stock has a $50x basis and$90x fair market value. Under section 311(b), USTmust recognize $40x gain (the intercompany item)on the distribution, but because the distribution isan intercompany transaction, under the provisions of§1.1502–13, the $40x gain is not taken into accountin year 3. In year 4, USP sells all of the TFC stockto X, an unrelated corporation. Under the provisionsof §1.1502–13, in year 4 UST takes into account the$40x intercompany item as a result of the sale of theTFC stock to X.

(ii) Result. (A) The year 3 distribution of theTFC stock by UST to USP does not terminate thegain recognition agreement under paragraph (o)(1) ofthis section because UST does not include the $40xgain in taxable income during year 3. Under para-graph (j)(4) of this section, the year 3 distribution ofthe TFC stock by UST to USP is generally a trigger-ing event; however, because the distribution is an in-tercompany transaction that creates an intercompanyitem, the distribution shall not constitute a triggeringevent if the conditions of paragraph (k)(12)(i) of thissection are satisfied.

(1) The condition of paragraph (k)(12)(i)(A) ofthis section is satisfied because the aggregate basis ofthe TFC stock distributed ($50x) is not greater thanthe sum of the aggregate basis of the TFD stock atthe time of the initial transfer ($50x).

(2) The condition of paragraph (k)(12)(i)(B) ofthis section is satisfied if the next annual certificationfor the existing gain recognition agreement includesa complete description of the intercompany transac-

tion and an explanation of how the basis condition ofparagraph (k)(12)(i)(A) of this section is satisfied.

(B) Under paragraph (o)(6) of this section and theprinciples of paragraph (o)(1)(i) of this section, be-cause the year 4 sale of the TFC stock to X requiresUST to take into account the $40x gain (the intercom-pany item) from the year 3 distribution, the year 4sale terminates the gain recognition agreement. If,alternatively, in year 4 USP had sold only 30% of theTFC stock, then under paragraph (o)(6) of this sec-tion and the principles of paragraph (o)(1)(ii) of thissection the amount of gain subject to the gain recog-nition agreement would be reduced by 30%.

(iii) Alternate facts. Intercompany transactionfollowed by sale of transferee foreign corporation tomember. Assume the same facts as in paragraph (i) ofthis Example 20, except that, instead of USP sellingthe TFC stock to X, in year 4 USP sells the TFC stockto USS in exchange for $90x cash. UST and USS aremembers of the USP consolidated group immediatelyafter the sale. The results of the year 3 distributionof the TFC stock by UST to USP are the same as inparagraph (ii) of this Example 20. In addition, underparagraph (k)(12)(ii) of this section, the year 4 saleby USP of the TFC stock to USS is not a triggeringevent, provided UST includes a complete descriptionof the sale with the annual certification filed for thegain recognition agreement in year 4.

(iv) Alternate facts. Intercompany transactionfollowed by complete liquidation of transferee foreigncorporation. Assume the same facts as in paragraph(i) of this Example 20, except that, instead of USPselling the TFC stock to X, in year 4 TFC distributesall of its assets to USP in a complete liquidation towhich sections 332 and 337 apply. The result is thesame as in paragraph (ii) of this Example 20 because,under the provisions of §1.1502–13, in year 4 USTtakes into account the $40x gain (the intercompanyitem) from the year 3 distribution.

(v) Alternate facts. Intercompany transaction fol-lowed by triggering event. Assume the same factsas in paragraph (i) of this Example 20, except thatinstead of USP selling the TFC stock to X, in year4 TFC disposes of all of the TFD stock in a trans-action that constitutes a triggering event under para-graph (j)(1) of this section. Under paragraph (c)(1)(i)of this section UST must recognize $50x gain underthe gain recognition agreement. Under paragraphs(c)(4)(i) and (ii) of this section, as of the date of theinitial transfer the basis of the TFC stock and TFDstock, respectively, is increased by $50x.

(vi) Alternate facts. Intercompany transactionfollowed by section 351 transfer to member. The factsare the same as in paragraph (i) of this Example 20,except that, in year 3, in a section 351 exchange USTtransfers all of the TFC stock to USS in exchange for$10x cash and $80x of stock of USS. USS is a mem-ber of the USP consolidated group immediately afterthe exchange. The transfer of the TFC stock by USTto USS is an intercompany transaction. Under sec-tion 351(b), UST must generally recognize $10x gain(intercompany item) in connection with the transfer;however, under the provisions of §1.1502–13, USTdoes not take the $10x gain into account in year 3.Under paragraph (k)(12) of this section, as result ofthe intercompany transaction creating an intercom-pany item ($10x gain), the existing gain recognitionagreement ($50x gain) must be divided between USTand USS. UST shall remain subject to a gain recog-

March 2, 2009 632 2009–9 I.R.B.

nition agreement of $10x (equal to the amount of theintercompany item). The amount of the gain recogni-tion agreement entered into by USS under paragraph(k)(1) of this section is $40x (equal to the amount ofthe existing gain recognition agreement, reduced bythe amount of the of the gain recognition agreementto which UST remains subject).

Example 21. Transfer of transferred stock toUnited States person other than U.S. transferor. (i)Facts. An individual (A) that is a United Statescitizen wholly owns TFD, TFC, and DC. A transfersthe TFD stock to TFC in a section 351 exchange andenters into a gain recognition agreement with respectto such transfer. In year 5, pursuant to an assetreorganization, TFC transfers all of its assets to DCin exchange solely for DC stock. TFC distributes theDC stock to A pursuant to the plan of reorganization.

(ii) Result. The transfer by TFC of the TFD stockto DC and the exchange by A of the TFC stock for DCstock pursuant to the asset reorganization are trigger-ing events under paragraphs (j)(1) and (j)(4) of thissection, respectively. The gain recognition agreementdoes not terminate under paragraph (o)(5) of this sec-tion because DC is neither the U.S. transferor, noran individual that is a United States person, nor amember of the same consolidated group of which theU.S. transferor is a member. However, if paragraph(k)(14) of this section applies the exchanges shall notconstitute triggering events.

(A) The condition of paragraph (k)(14)(i) of thissection is satisfied because the transfer of the TFDstock to DC qualifies as a nonrecognition transaction.

(B) The condition of paragraph (k)(14)(ii) of thissection is satisfied because immediately after thetransfer DC, a domestic corporation that is eligibleto be a U.S. transferor, retains a direct interest in theTFD stock following the transfer.

(C) The condition of paragraph (k)(14)(iii) of thissection is satisfied if DC enters into a new gain recog-nition agreement with respect to the initial transfer.Under paragraph (k)(14)(iii)(B) of this section, DCis not required to describe any subsequent disposi-tions or other events that (based on the principles ofparagraph (j) of this section) would constitute trigger-ing events for purposes of the new gain recognitionagreement, other than the dispositions or other eventsdescribed in paragraph (j) of this section, because DCholds a direct interest in TFD after the asset reorgani-zation.

Example 22. Transfer of transferred stock to con-solidated group member. (i) Facts. UST wholly ownsDC, a member of the USP consolidated group that in-cludes UST. In year 5, pursuant to an asset reorgani-zation described in section 368(a)(1)(A) TFC mergeswith and into DC. Immediately after the asset reorga-nization, DC wholly owns TFD, and the basis of theTFD stock is not greater than the aggregate basis ofsuch stock at the time of the initial transfer.

(ii) Result. The gain recognition agreement filedby UST with respect to the initial transfer terminateswithout further effect if the conditions of paragraph(o)(5) of this section are satisfied.

(A) The condition of paragraph (o)(5)(i) of thissection is satisfied because the transfer of the TFDstock is a section 361 exchange.

(B) The condition of paragraph (o)(5)(ii) of thissection is satisfied because DC is a member of theconsolidated group that includes UST immediatelyafter the section 361 exchange.

(C) The condition of paragraph (o)(5)(iii) of thissection is satisfied because the aggregate basis ofthe TFD stock immediately after the section 361exchange is not greater than the aggregate basisof the TFD stock at the time of the initial trans-fer (as adjusted for any gain recognized by USTon such transfer). If the basis condition of para-graph (o)(5)(iii) were not satisfied, under paragraph(o)(5)(iii) of this section, DC could reduce the basisof the TFD stock received in the reorganization. Al-ternatively, a new gain recognition agreement couldbe entered into if paragraph (k)(14) of this sectionapplied to the disposition of the TFD stock pursuantto the section 361 exchange.

(iii) Alternate facts. The facts are the same as inparagraph (i) of this Example 22, except that insteadof TFC merging into DC, TFC merges into TFD in areorganization described in section 368(a)(1)(A). Thegain recognition agreement terminates without fur-ther effect if the conditions of paragraph (o)(5) of thissection are satisfied.

(A) The condition of paragraph (o)(5)(i) of thissection is satisfied because the TFD stock issued byTFD to TFC in the reorganization, which is treatedas transferred stock under paragraph (b)(2)(iii) of thissection, is distributed by TFC to UST pursuant to sec-tion 361(c).

(B) The condition of paragraph (o)(5)(ii) of thissection is satisfied because UST is the U.S. transferor.

(C) The condition of paragraph (o)(5)(iii) of thissection is satisfied if the aggregate basis of the TFDstock received by UST from TFC is not greater thanthe aggregate basis of the TFD stock at the time of theinitial transfer (as adjusted for any gain recognized byUST on such transfer). If the basis condition of para-graph (o)(5)(iii) were not satisfied, under paragraph(o)(5)(iii) of this section, UST could reduce the basisof the TFD stock received in the reorganization.

Example 23. Split-off of transferred stock. (i)Facts. X, a domestic corporation that is unrelated toUSP and UST, wholly owns TFC. Pursuant to a re-organization described in section 368(a)(1)(B), USTtransfers all of the TFD stock to TFC in exchange for50% of the outstanding voting stock of TFC. UST en-ters into a gain recognition agreement with respect tosuch transfer. In year 4, in a split-off transaction towhich section 355 applies, TFC distributes all of theTFD stock to X in exchange for all the TFC stock heldby X.

(ii) Result. Under paragraph (j)(1) of this section,the year 4 distribution of the TFD stock to X con-stitutes a triggering event. However, the distributionshall not constitute a triggering event if paragraph(k)(14) of this section applies. The gain recognitionagreement does not terminate under paragraph (o)(5)of this section because X is not a recipient describedin paragraph (o)(5)(ii) of this section.

(A) The condition of paragraph (k)(14)(i) of thissection is satisfied because the distribution of theTFD stock qualifies as a nonrecognition transaction.

(B) The condition of paragraph (k)(14)(ii) of thissection is satisfied because immediately after the dis-tribution X, a domestic corporation that is eligible tobe a U.S. transferor, retains a direct interest in theTFD stock.

(C) The condition of paragraph (k)(14)(iii) of thissection is satisfied if X enters into a new gain recog-nition agreement with respect to the initial transfer.Under paragraph (k)(14)(iii)(B) of this section, X is

not required to describe, with the new gain recogni-tion agreement, any subsequent dispositions or otherevents that (based on the principles of paragraph (j) ofthis section) would constitute triggering events, otherthan the dispositions described in paragraph (j) of thissection, because X directly owns TFD after the distri-bution.

(D) If X were a United States citizen, the gainrecognition agreement would terminate if the condi-tion of paragraph (o)(5)(iii) of this section were sat-isfied. Alternatively, the gain recognition agreementwould continue for its remaining term if the condi-tions for the application of paragraph (k)(14) of thissection were satisfied.

(iii) Alternate facts. Distribution to unrelated for-eign corporation. The facts are the same as in para-graph (i) of this Example 23, except that X is a foreigncorporation wholly owned by DC. DC is unrelated toUST. The results are the same as in paragraph (ii) ofthis Example 23, except as follows.

(A) The condition of paragraph (k)(14)(ii) of thissection is satisfied because immediately after the dis-tribution DC, a domestic corporation that is eligible tobe a U.S. transferor, owns at least 5% (applying the at-tribution rules of section 318, as modified by section958(b)) of the total voting power and total value ofthe outstanding stock of X. As a result, DC is treatedas retaining an indirect interest in the TFD stock im-mediately following the distribution.

(B) The condition of paragraph (k)(14)(iii) of thissection is satisfied if DC enters into a new gain recog-nition agreement with respect to the initial transfer.Under paragraph (k)(14)(iii)(B) of this section, DCmust, in addition to the dispositions described in para-graph (j) of this section, include as a triggering eventa complete or partial disposition of the stock of X.

(iv) Alternate facts. Distribution to nonresidentalien individual. The facts are the same as in para-graph (i) of this Example 23, except that X is a non-resident alien individual. Paragraph (k)(14) of thissection does not apply to the distribution because theconditions of paragraph (k)(14)(ii) and (iii) of thissection cannot be satisfied. Therefore, the distribu-tion is a triggering event, and UST will recognize gainunder the gain recognition agreement as required un-der paragraphs (c)(1)(i) and (v) of this section. Theresult would be the same if X were a foreign corpora-tion and, immediately after the distribution, no UnitedStates person owned at least 5% (applying the attri-bution rules of section 318, as modified by section958(b)) of the total voting power and value of the out-standing stock of X.

Example 24. Applicability of this section to gainrecognition agreements filed before March 13, 2009.(i) Facts. The facts are the same as in paragraph (i) ofExample 6, except that the initial transfer occurred onMarch 7, 2007, and the asset reorganization occurredon July 1, 2008.

(ii) Result. Under paragraph (r)(1)(ii) of this sec-tion, the rules of §1.367(a)–8T (see 26 CFR part 1,revised April 1, 2007) apply to the transfers pursuantto the asset reorganization because the initial transferoccurred on March 7, 2007. As a result of the disposi-tion of the TFC stock pursuant to the asset reorganiza-tion, under §1.367(a)–8T(d), USP is required to rec-ognize the gain subject to the gain recognition agree-ment and pay applicable interest on any additional taxdue with respect to such gain. Because the acquiringcorporation in the asset reorganization is foreign, an

2009–9 I.R.B. 633 March 2, 2009

exception under §1.367(a)–8T(e) is not available forthe exchange of TFC stock by USP. However, pur-suant to paragraph (r)(2)(i) of this section, becausethe exception provided by paragraph (k)(14) of thissection is not included in §1.367(a)–8T, USP mayapply paragraph (k)(14) of this section to such ex-change (provided the conditions of paragraph (k)(14)of this section are satisfied), if the statute of limita-tions on assessments of tax for the 2007 tax year hasnot closed. If USP applies paragraph (k)(14) of thissection to its exchange of the TFC stock pursuant tothe asset reorganization, under paragraph (r)(2)(ii) ofthis section USP must include the new gain recogni-tion agreement required under paragraph (k)(14)(iii)of this section with an amended Federal income taxreturn for its 2008 tax year that is filed before August10, 2009.

Example 25. Applicability of this section to gainrecognition agreements filed before March 13, 2009.(i) Facts. The initial transfer occurs in 2004. In 2005,pursuant to a section 351 exchange, TFC transfersthe TFD stock to F1 in exchange solely for F1 vot-ing stock. UST does not file a new gain recogni-tion agreement under §1.367(a)–8(g)(2) with respectto the exchange.

(ii) Result. Under paragraph (r)(1)(ii) of thissection, the rules of §1.367(a)–8 (see 26 CFR part1, revised April 1, 2006) apply to the year 2005disposition of the TFD stock because UST filed thegain recognition agreement after July 20, 1998, butbefore March 7, 2007. Under §1.367(a)–8(e) (see26 CFR part 1, revised April 1, 2006), as a resultof the disposition of the TFD stock by TFC, USTmust recognize the amount of gain subject to thegain recognition agreement. Paragraph (r)(2)(i) ofthis section does not apply because the rule providedby paragraph (k)(3) of this section was included in§1.367(a)–8(g)(2) (see 26 CFR part 1, revised April1, 2006). However, UST may request relief forreasonable cause under §1.367(a)–8(c)(2) (see 26CFR part 1, revised April 1, 2006) to file a new gainrecognition agreement with respect to the dispositionof the TFD stock by TFC in 2005.

(r) Effective/applicability date—(1)General rule—(i) Transfers occurring onor after March 13, 2009. The rules of thissection apply to gain recognition agree-ments filed with respect to transfers ofstock or securities occurring on or afterMarch 13, 2009. However, the rules ofthis section do not apply to gain recogni-tion agreements filed with respect to anysuch transfer occurring on or after March13, 2009, if such transfer was entered intopursuant to a written agreement that was(subject to customary conditions) bind-ing before February 11, 2009, and at alltimes thereafter. Solely for purposes ofthis paragraph (r), a transfer described inthe preceding sentence shall be deemed tobe a transfer occurring before March 13,2009 to which the rules of §1.367(a)–8(see 26 CFR part 1, revised April 1,2006) apply. See paragraph (r)(2)(iii) ofthis section for the ability to apply the

rules of this section with respect to gainrecognition agreements filed for taxableyears ending before March 13, 2009.

(ii) Transfers occurring before March13, 2009. For matters covered in thissection for periods before March 13,2009 but on or after March 7, 2007,the corresponding rules of §1.367(a)–8T(see 26 CFR part 1, revised April 1,2007) apply. For matters covered inthis section for periods before March 7,2007 but on or after July 20, 1998, thecorresponding rules of §1.367(a)–8 (see26 CFR part 1, revised April 1, 2006)apply. For matters covered in this sectionfor periods before July 20, 1998, thecorresponding rules of §1.367(a)–3T(g)(see 26 CFR part 1, revised April 1, 1998)and Notice 87–85, 1987–2 C.B. 395 apply.In addition, if a U.S. transferor enteredinto a gain recognition agreement fortransfers before July 20, 1998, then therules of §1.367(a)–3T(g) (see 26 CFRpart 1, revised April 1, 1998) continue toapply in lieu of this section in the eventof any direct or indirect nonrecognitiontransfer of the same property. See also,§1.367(a)–3(h).

(2) Applicability to gain recogni-tion agreements filed before March 13,2009—(i) General rule. Taxpayersmay apply the rules of this regulation§1.367(a)–8 that were not included in§1.367(a)–8T (see 26 CFR part 1, revisedApril 1, 2007), to gain recognition agree-ments filed with respect to transfers ofstock or securities for all open taxableyears, if done consistently to all transfers.A U.S. transferor subject to section 877and §1.367(a)–8T(d)(6) shall not apply therules of this regulation to reach a contraryresult. A taxpayer that failed to file a gainrecognition agreement for a transfer, or tocomply materially with any requirementof this section with respect to an existinggain recognition agreement, must obtainrelief for reasonable cause for such failureunder §1.367(a)–8T(e)(10) before apply-ing the rules of this regulation §1.367(a)–8that were not included in §1.367(a)–8Tas permitted by this paragraph (r)(2). Seeparagraph (q)(2) of this section, Examples24 and 25 for illustrations of the rule pro-vided by this paragraph (r)(2)(i).

(ii) Taxable years ending before March13, 2009. Notwithstanding the require-ments of §1.367(a)–8(d), any gain recog-nition agreement or other filing required

by reason of electing to apply the rulesof this regulation §1.367(a)–8 that werenot included in §1.367(a)–8T, as permit-ted by this paragraph (r)(2), for a taxableyear ending before March 13, 2009 shallbe considered filed in accordance withthe requirements of §1.367(a)–8(d), pro-vided the gain recognition agreement orother filing is attached to an original oramended return for such taxable year. Anamended return required to be filed byreason of electing to apply the rules ofthis regulation §1.367(a)–8 that were notincluded in §1.367(a)–8T, as permitted bythis paragraph (r)(2), must be filed on orbefore August 10, 2009. A taxpayer thatwishes to apply the rules of this regula-tion §1.367(a)–8 that were not included in§1.367(a)–8T, as permitted by this para-graph (r)(2), but that fails to meet the filingrequirement described in the precedingsentence must request relief for reasonablecause under paragraph (p) of this section.

(iii) Taxable years ending after effec-tive date. A taxpayer that entered intoa gain recognition agreement to which§1.367(a)–8T (see 26 CFR part 1, revisedApril 1, 2007) applies may apply the rulesof this section in a tax year ending onor after March 13, 2009 by attaching theagreement, certification, or other infor-mation related to such gain recognitionagreement that the rules of this sectionrequire in accordance with the rules of thissection and with the time and manner rulesprovided in §1.367(a)–8(d).

§1.367(a)–8T [Removed]

Par. 8. Section 1.367(a)–8T is re-moved.

PART 602—OMB CONTROLNUMBERS UNDER THE PAPERWORKREDUCTION ACT

Par. 9. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805 * * *Par. 10. In §602.101, paragraph (b)

is amended by removing an entry for§1.367(a)–8T from the table and addingan entry for §1.367(a)–8 to the table innumerical order to read as follows:

§602.101 OMB Control numbers.

* * * * *(b) * * *

March 2, 2009 634 2009–9 I.R.B.

CFR part or section whereidentified and described

Current OMBControl No.

* * * * *

1.367(a)–8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–2056

* * * * *

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

Approved January 16, 2009.

Eric Solomon,Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on February 9,2009, 11:15 a.m., and published in the issue of the FederalRegister for February 11, 2009, 74 F.R. 6951)

Section 3406.—BackupWithholding

Entities required to report under section 6050Wmust perform backup withholding if the payee failsto furnish a correct Taxpayer Identification Number(“TIN”). This announcement alerts 6050W filers thatthey may now partificipate in the TIN matching pro-gram. See Announcement 2009-6, page 643.

Section 6050W.—ReturnsRelating to Payments Madein Settlement of PaymentCard and Third PartyNetwork Transactions

Entities required to report under section 6050Wmust perform backup withholding if the payee failsto furnish a correct Taxpayer Identification Number(“TIN”). This announcement alerts 6050W filers thatthey may now partificipate in the TIN matching pro-gram. See Announcement 2009-6, page 643.

Section 6103.—Confi-dentiality and Disclosureof Returns and ReturnInformation26 CFR 301.6103(p)(7)–1: Procedures for adminis-trative review of a determination that an authorizedrecipient has failed to safeguard returns or return in-formation.

T.D. 9445

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 301

Procedures for AdministrativeReview of a DeterminationThat an Authorized RecipientHas Failed to Safeguard TaxReturns or Return Information

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains fi-nal regulations regarding administrativereview procedures for certain governmentagencies and other authorized recipientsof returns or return information whosereceipt of returns and return informationmay be suspended or terminated becausethey do not maintain proper safeguards.The regulations provide guidance to re-sponsible IRS personnel and authorizedrecipients as to these administrative pro-cedures.

DATES: Effective Date: These regulationsare effective on February 11, 2009.

Applicability Date: These regulationsapply to all authorized recipients of returnsand return information that are subject tothe safeguard requirements set forth in sec-tion 6103(p)(4) on or after February 11,2009.

FOR FURTHER INFORMATIONCONTACT: Wendy L. Kribell, (202)622–4570 (not a toll-free number).

Background

This document contains final regulationsamending the Procedure and Administra-tion Regulations (26 CFR Part 301) un-der section 6103(p)(4), (p)(7), and (q) ofthe Internal Revenue Code (Code). Sec-tion 6103 protects returns and return in-formation from disclosure except to cer-tain government agencies and other autho-rized recipients, including State tax agen-cies as provided in section 6103(d). Sec-tion 6103(p)(4) provides that certain au-thorized recipients must establish proce-dures satisfactory to the IRS for safeguard-ing the returns and return information. TheIRS reviews, on a regular basis, safeguardsestablished by these authorized recipients.If the IRS determines that an authorizedrecipient has failed to maintain adequatesafeguards or has made any unauthorizedinspections or disclosures of returns or re-turn information, section 6103(p)(4) au-thorizes the IRS to terminate or suspenddisclosure of returns and return informa-tion to the authorized recipient until theIRS is satisfied that adequate steps havebeen taken to ensure adequate safeguardsor prevent additional unauthorized inspec-tions or disclosures.

Section 6103(p)(7) requires the Secre-tary to prescribe regulations providing foradministrative review of an IRS determi-nation that a State tax agency has failed tomeet the safeguarding requirements. For-mer §301.6103(p)(7)–1 contained proce-dures to allow State tax agencies, prior to asuspension or termination of disclosure, toappeal a preliminary finding by the IRS ofinadequate safeguards or unauthorized dis-closure, or to establish that the agency hadtaken steps to prevent a recurrence of theviolation. Section 6103(q) further autho-rizes the Secretary to prescribe such otherregulations as are necessary to carry outthe provisions of section 6103 generally.

2009–9 I.R.B. 635 March 2, 2009

On February 24, 2006, the TreasuryDepartment and IRS published in theFederal Register proposed regulations(REG–157271–05, 2006–1 C.B. 652[71 FR 9487]) and temporary regulations(T.D. 9252, 2006–1 C.B. 633 [71 FR9449]) to extend the administrativereview procedure for State tax agenciesto “any” authorized recipient specifiedin section 6103(p)(4), and to includeunauthorized inspection within the IRS’sscope of review (in addition to inadequatesafeguards and unauthorized disclosure).Two written comments were received,and no public hearing was requested orheld. After consideration of the commentsreceived, the proposed regulations areadopted as final regulations, and thecorresponding temporary regulations areremoved. See §601.601(d)(2)(ii)(b).

Explanation and Summary ofComments

The first commentator suggested that thefinal regulations expressly provide that theIRS may give written notice of its intentionto terminate or suspend disclosure via fac-simile or electronic mail. This suggestionwas not adopted because nothing in theregulations precludes a written notice frombeing delivered electronically. Not speci-fying the means by which written notice isconveyed would also afford greater flexi-bility in providing notice as other meansmight evolve.

The second commentator suggestedthat the proposed regulations would le-galize the misuse of returns and returninformation and thereby discourage tax-payers from seeking tax advice. Thissuggestion is unwarranted. Section 6103protects returns and return informationfrom disclosure except to authorized recip-ients. Section 6103(p)(4) requires certainauthorized recipients to establish proce-dures for safeguarding returns and returninformation. If the authorized recipientfails to maintain adequate safeguards orhas made any unauthorized inspections ordisclosures, additional disclosures to thatrecipient may be suspended or terminateduntil the IRS is satisfied that adequatesteps have been taken to ensure adequatesafeguards or prevent additional unautho-rized inspections or disclosures. Prior tothese final regulations, procedures wereavailable pursuant to section 6103(p)(7)

to allow State tax agencies, prior to a sus-pension or termination of disclosure, toappeal a preliminary finding of inadequatesafeguards or unauthorized disclosure, orto establish that the agency had taken stepsto prevent a recurrence of the violation.The purpose of these final regulationsis to extend these administrative reviewprocedures from State tax agencies to allauthorized recipients described in section6103(p)(4) and to include a preliminaryfinding of unauthorized inspection withinthe scope of review. The extension ofthese provisions to all authorized recipi-ents enhances the protections afforded toreturns and return information.

Special Analyses

It has been determined that this Treasurydecision is not a significant regulatory ac-tion as defined in Executive Order 12866.Therefore, a regulatory assessment is notrequired. It also has been determined thatsection 553(b) of the Administrative Pro-cedure Act (5 U.S.C. chapter 5) does notapply to these regulations. Because theregulations do not impose a collection ofinformation on small entities, the Regula-tory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section 7805(f)of the Internal Revenue Code, the notice ofproposed rulemaking preceding these reg-ulations was submitted to the Chief Coun-sel for Advocacy of the Small BusinessAdministration for comment on its impacton small businesses.

Drafting Information

The principal author of these regula-tions is Wendy L. Kribell, Office of the As-sociate Chief Counsel (Procedure & Ad-ministration).

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR Part 301 isamended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

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

Par. 2. Section 301.6103(p)(4)–1 isadded to read as follows:

§301.6103(p)(4)–1 Procedures relatingto safeguards for returns or returninformation.

For security guidelines and other safe-guards for protecting returns and return in-formation, see guidance published by theInternal Revenue Service. For proceduresfor administrative review of a determina-tion that an authorized recipient has failedto safeguard returns or return information,see §301.6103(p)(7)–1.

§301.6103(p)(4)–1T [Removed]

Par. 3. Section 301.6103(p)(4)–1T isremoved.

Par. 4. Section 301.6103(p)(7)–1 isadded to read as follows:

§301.6103(p)(7)–1 Procedures foradministrative review of a determinationthat an authorized recipient has failed tosafeguard returns or return information.

(a) In general. Notwithstanding anysection of the Internal Revenue Code(Code), the Internal Revenue Service(IRS) may terminate or suspend disclosureof returns and return information to anyauthorized recipient specified in section(p)(4) of section 6103, if the IRS deter-mines that:

(1) The authorized recipient has al-lowed an unauthorized inspection or dis-closure of returns or return informationand that the authorized recipient has nottaken adequate corrective action to pre-vent the recurrence of an unauthorizedinspection or disclosure; or

(2) The authorized recipient does notsatisfactorily maintain the safeguards pre-scribed by section 6103(p)(4), and hasmade no adequate plan to improve itssystem to maintain the safeguards satis-factorily.

(b) Notice of IRS’s intention to termi-nate or suspend disclosure. Prior to ter-minating or suspending authorized disclo-sures, the IRS will notify the authorizedrecipient in writing of the IRS’s prelim-inary determination and of the IRS’s in-tention to discontinue disclosure of returnsand return information to the authorizedrecipient. Upon so notifying the autho-rized recipient, the IRS, if it determines

March 2, 2009 636 2009–9 I.R.B.

that tax administration otherwise would beseriously impaired, may suspend furtherdisclosures of returns and return informa-tion to the authorized recipient pending afinal determination by the Commissioneror a Deputy Commissioner described inparagraph (d)(2) of this section.

(c) Authorized recipient’s right to ap-peal. An authorized recipient shall have30 days from the date of receipt of a no-tice described in paragraph (b) of this sec-tion to appeal the preliminary determina-tion described in paragraph (b) of this sec-tion. The appeal shall be made directly tothe Commissioner.

(d) Procedures for administrative re-view. (1) To appeal a preliminary deter-mination described in paragraph (b) of thissection, the authorized recipient shall senda written request for a conference to: Com-missioner of Internal Revenue (Attention:SE:S:CLD:GLD), 1111 Constitution Av-enue, NW, Washington, DC 20224. Therequest must include a complete descrip-tion of the authorized recipient’s present

system of safeguarding returns or returninformation received by the authorized re-cipient (and its authorized contractors oragents, if any). The request must state thereason or reasons the authorized recipientbelieves that such system or practice (in-cluding improvements, if any, to such sys-tem or practice expected to be made in thenear future) is or will be adequate to safe-guard returns or return information.

(2) Within 45 days of the receipt ofthe request made in accordance with theprovisions of paragraph (d)(1) of this sec-tion, the Commissioner or Deputy Com-missioner personally shall hold a confer-ence with representatives of the authorizedrecipient, after which the Commissioner orDeputy Commissioner shall make a finaldetermination with respect to the appeal.

(e) Effective/applicability date. Thissection applies to all authorized recipientsof returns and return information that aresubject to the safeguard requirements setforth in section 6103(p)(4) on or after Feb-ruary 11, 2009.

§301.6103(p)(7)–1T [Removed]

Par. 5. Section 301.6103(p)(7)–1T isremoved.

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

Approved January 13, 2009.

Eric Solomon,Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on February 10,2009, 8:45 a.m., and published in the issue of the FederalRegister for February 11, 2009, 74 F.R. 6829)

Section 6109.—IdentifyingNumbers

Entities required to report under section 6050Wmust perform backup withholding if the payee failsto furnish a correct Taxpayer Identification Number(“TIN”). This announcement alerts 6050W filers thatthey may now partificipate in the TIN matching pro-gram. See Announcement 2009-6, page 643.

2009–9 I.R.B. 637 March 2, 2009

Part IV. Items of General InterestNotice of ProposedRulemaking and Notice ofPublic Hearing

Tax Avoidance Transactions

REG–138326–07

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document contains pro-posed regulations under section 6231 ofthe Internal Revenue Code that allow theIRS to convert partnership items to non-partnership items when the application ofthe unified partnership audit and litigationprocedures of sections 6221 through 6234(TEFRA partnership procedures) with re-spect to certain tax avoidance transactionsinterferes with the effective and efficientenforcement of the internal revenue laws.The regulations affect taxpayers who haveengaged in a listed transaction through anentity subject to the TEFRA partnershipprocedures. This document also providesnotice of a public hearing on these pro-posed regulations.

DATES: Written or electronic commentsmust be received by May 14, 2009. Out-lines of topics to be discussed at the pub-lic hearing scheduled for June 4, 2009, at10 a.m. must be received by May 15, 2009.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–138326–07), room5205, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be handdelivered Monday through Friday be-tween the hours of 8 a. m. and 4 p.m.to: CC:PA:LPD:PR (REG–138326–07),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, N.W.,Washington, DC 20224, or sent elec-tronically via the Federal eRulemakingPortal at http://www.regulations.gov (IRSREG–138326–07). The public hearingwill be held in the Auditorium, InternalRevenue Service Building, 1111 Constitu-tion Avenue, N.W., Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the pro-posed regulations, Robert T. Wearingat (202) 622–4570; concerningsubmissions of comments, the hearing,or to be placed on the buildingaccess list to attend the hearing,Richard.A.Hurst@irscounsel.treas.gov ofthe Publications and Regulations Branchat (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposedamendments to the Procedure and Admin-istration Regulations (26 CFR Part 301)under section 6231(c) of the Internal Rev-enue Code. Section 402 of the Tax Equityand Fiscal Responsibility Act of 1982,Public Law 97–248 (96 Stat. 324) addedsections 6221 through 6231 to the InternalRevenue Code to provide unified audit andlitigation procedures for determining thetax treatment of partnership items at thepartnership level rather than at the partnerlevel. Sections 6233 and 6234 were sub-sequently added by section 714(p)(1) ofthe Tax Reform Act of 1984, Public Law98–369 (98 Stat. 494) and section 1231(a)of the Taxpayer Relief Act of 1997, PublicLaw 105–34 (11 Stat. 788), respectively.

Ordinarily, under the TEFRA partner-ship procedures, the IRS must adjust apartner’s treatment of partnership itemsonly through partnership-level proceed-ings. There are several exceptions thatallow adjustments to be made throughpartner-level proceedings. The smallpartnership exception set forth in section6231(a)(1)(B) provides that partnershipshaving ten or fewer partners, each ofwhom is an individual, a C corporation,or an estate, are not subject to the TEFRApartnership procedures. Section 6231(b)provides that items cease to be partnershipitems subject to the TEFRA partnershipprocedures in several different situations.Section 6231(c) allows the Treasury De-partment and the IRS to determine andprovide by regulations that treating itemsas partnership items in areas that presentspecial enforcement considerations willinterfere with the effective and efficientenforcement of the internal revenue laws

and that, consequently, the items shallbe treated as nonpartnership items. Sec-tion 6231(c) also allows the TreasuryDepartment and the IRS to prescribe byregulations rules necessary to achievethe purposes of the TEFRA partnershipprocedures with respect to special en-forcement areas. Section 6231(c) listsseveral specific special enforcement ar-eas, including criminal investigations andindirect methods of proof of income, andprovides that the Treasury Department andthe IRS may determine others. The Trea-sury Department and the IRS previouslyhave determined and provided by regu-lations that bankruptcy, receivership, andprompt assessment requests interfere withthe effective and efficient enforcement ofthe internal revenue laws and designatedthem as special enforcement areas. See§§301.6231(c)–7 and –8 of the Procedureand Administration Regulations.

Explanation of Provisions

One of the principal purposes behindthe enactment of the TEFRA partnershipprocedures was to provide for the moreefficient use of the IRS’s resources byreducing multiple proceedings with re-spect to partnership items. The abusivetax shelters of the 1970s often used a sin-gle partnership to generate tax benefitsfor dozens, if not hundreds, of investors.Before the enactment of the TEFRA part-nership procedures, the partnership itemsof each investor were subject to separatepartner-level proceedings. The TEFRApartnership procedures effectively broughtthe partnership item components of theseproceedings together in a single pro-ceeding. Unlike the tax shelters of the1970s, however, the recent generationof tax avoidance transactions often usescombinations of trusts, S corporations,limited liability companies, partnerships,and other entities, many times arranged intiers, for the tax benefit of a single investoror a small group of investors. The applica-tion of the TEFRA partnership proceduresto these tax avoidance transactions oftenresults in multiple proceedings that com-plicate the ultimate determination of theinvestors’ tax liabilities and consume sig-nificant administrative resources.

March 2, 2009 638 2009–9 I.R.B.

For example, in a typical transactiondescribed in Notice 2000–44, 2000–2C.B. 255, (September 5, 2000), see§601.601(d)(2)(ii)(b), in which the ulti-mate noneconomic loss or deduction istaken at the partner level by a single indi-vidual, the IRS first needs to initiate timelypartnership-level proceedings to deter-mine, among other things, whether thepartnership is a sham and the amount andcharacter of contributions and partnershipliabilities. Following the partnership-levelproceedings, the IRS often still must issuean affected items notice of deficiency todisallow the noneconomic loss or deduc-tion at the partner level. Conducting bothentity-level and partner-level proceedingsin these cases to determine the tax liabil-ities of only a single individual or smallgroup of related persons places an unnec-essary burden on taxpayers, the IRS, andthe federal courts.

Other tax avoidance transactions usemultiple tiers of partnerships making coor-dinated partnership elections for the bene-fit of a single individual. Two or more sep-arate partnership proceedings, as well as apartner-level proceeding, may need to takeplace before an assessment can be madeagainst the individual. Again, conductingentity-level proceedings in these and sim-ilar cases in which a single individual orsmall group of related persons control mul-tiple entities and receive all the tax benefitsis inefficient and imposes a significant ad-ministrative burden.

The need to conduct partnership-levelproceedings to determine the tax liabilitiesof a single individual or small group of re-lated persons also generates complex andburdensome procedural issues that do notcontribute to the determination of the in-dividuals’ tax liabilities. For example, theapplication of the TEFRA partnership pro-cedures may raise complicated issues con-cerning the segregation and aggregationof partnership items, affected items, andnonpartnership items. Often, the TEFRApartnership procedures make the identifi-cation and examination of the transactionsmore complicated and difficult. As a re-sult, the Treasury Department and the IRShave determined that special enforcementconsiderations, within the meaning of sec-tion 6231(c)(1)(E), are present in the caseof transactions that the Treasury Depart-ment and the IRS have publicly identi-fied as tax avoidance transactions. Specifi-

cally, the Treasury Department and the IRShave determined that treating items relatedto listed transactions within the meaning of§1.6011–4(b)(2) of the Income Tax Regu-lations as partnership items interferes withthe effective and efficient enforcement ofthe internal revenue laws.

The proposed regulations are limited totax avoidance transactions that are pub-licly identified by the Treasury Depart-ment and the IRS as listed transactionsunder §1.6011–4(b)(2) of the Income TaxRegulations. Under the proposed regula-tions, the transaction must be a listed trans-action on the date the IRS sends written no-tification to the partner that the partner’spartnership items will be treated as non-partnership items. Accordingly, the factthat a transaction becomes a listed trans-action after the date on which the tax-payer engages in the transaction does notpreclude the conversion of items underthe proposed regulations. This limitationpromotes taxpayer awareness of the trans-actions that can subject their partnershipitems to removal from the TEFRA part-nership procedures. The Treasury Depart-ment and the IRS also have determinedthat the limitation will provide for the moreefficient use of the IRS’s resources.

Under the proposed regulations, theIRS will make determinations regard-ing whether to convert partnership itemsto nonpartnership items on a partner-ship-by-partnership and partner-by-part-ner basis. Thus, if a taxpayer is a partnerin two partnerships with partnership itemsrelated to listed transactions and a thirdpartnership that has no partnership itemsrelated to listed transactions, the IRS couldconvert the taxpayer’s partnership itemsin either or both of the first two partner-ships but could not convert the taxpayer’spartnership items in the third partnership.Similarly, if a taxpayer engages in a listedtransaction through a tier of TEFRA enti-ties, the IRS could convert the taxpayer’spartnership items in any or all of the tierentities with partnership items related tothe listed transaction.

Although, consistent with section6231(c)(2), the Secretary has determinedthat treating items related to listed trans-actions as partnership items will interferewith the effective and efficient enforce-ment of the internal revenue laws and hasso provided in the proposed regulations,the proposed regulations further provide

that the partnership items related to listedtransactions remain subject to the TEFRApartnership procedures unless and un-til the IRS sends written notification tothe partner that the items will be treatedas nonpartnership items. In this regard,the proposed regulations are consistentwith the rules that are already in placewith respect to sending notices under sec-tion 301.6231(c)–5 of the Procedure andAdministration Regulations relating topartners under criminal investigation. SeePhillips v. Commissioner, 272 F.3d 1172,1176 (9th Cir. 2001). Specifically, the IRSwill send written notification under thecircumstances described in the proposedregulations using procedures similar to theprocedures used under §301.6231(c)–5 ofthe Procedure and Administration Regula-tions, and will make conforming changesto the Internal Revenue Manual and Dele-gation Order 4–19, as necessary.

If the IRS concludes that a particu-lar partner’s partnership items should betreated as nonpartnership items under thecircumstances described in the proposedregulations, the IRS will send written no-tification to the partner identifying eachpartnership for which the partner’s part-nership items will be treated as nonpart-nership items. In the case of an indirectpartner (as defined in section 6231(a)(10))having an interest in a partnership throughone or more pass-thru partners (as definedin section 6231(a)(9)), the IRS may send awritten notification to the indirect partneridentifying only the lower-tier partnershipand not the pass-thru partners. In thosecircumstances, the partnership items at-tributable to the lower-tier partnership thatflow through to the indirect partners willconvert to nonpartnership items of thenotified partner, even though the pass-thrupartners were not identified in the writtennotification. Any partnership items orig-inating with the pass-thru partners, thatis, partnership items that are not attrib-utable to the lower-tier partnership, willnot convert to nonpartnership items unlessthe IRS identifies the pass-thru partner inthe written notification (in which case allthe partnership items directly attributableto the pass-thru partner also will convertto nonpartnership items of the notifiedpartner).

As of the date that the IRS sends writtennotification of the conversion to the part-ner, all of the partner’s partnership items

2009–9 I.R.B. 639 March 2, 2009

attributable to the identified partnershipwill be treated as nonpartnership items forall of the identified partnership’s taxableyears that (1) ended on or before the datewritten notification is sent by the IRS to thepartner and (2) for which the partner hasitems attributable to that partnership thatare related to the listed transaction. Thedeficiency procedures in subchapter B ofchapter 63 will apply, pursuant to section6230(a)(2)(A)(ii), as of the date of the no-tice.

The proposed regulations incorporateexisting rules under §301.6231(c)–3 ofthe Procedure and Administration Regu-lations, which provide that the partnershipitems of a partnership may not be con-verted if a notice of final partnershipadministrative adjustment (FPAA) withrespect to those partnership items hasbeen mailed to the tax matters partner ofthe partnership and either (1) the periodfor bringing an action with respect to theFPAA has expired and no judicial actionhas been brought or (2) the decision ofthe court in an action brought with re-spect to the FPAA has become final. Thisrule allows the IRS to send notificationconverting partnership items to nonpart-nership items after the commencementof a judicial proceeding related to theconverted partnership items. The Trea-sury Department and the IRS recognize,however, that it is not in the best interestof taxpayers, the Treasury Department,the IRS, or the courts to unnecessarilydelay conversion of partnership items tononpartnership items. Consistent with itsexisting practices under section 6231(c),the IRS intends to make a decision regard-ing whether to convert partnership itemsto nonpartnership items before the com-mencement of any judicial proceeding,although on isolated and unusual occa-sions changed circumstances may requirethe IRS to revisit that decision after thecommencement of a judicial proceeding.In addition, judicial doctrines such ascollateral estoppel and res judicata maypreclude litigating issues in a partner-levelproceeding that were previously litigatedin a partnership-level proceeding prior toconversion of partnership items to non-partnership items. Finally, the partnershipitems of any partners to whom the IRSdoes not send written notification will notconvert to nonpartnership items.

Proposed Effective Date

The regulations, when finalized, areproposed to apply to any taxable periodending on or after the date of publicationof these rules as proposed regulations inthe Federal Register.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatoryassessment is not required. It has alsobeen determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regu-lations, and, because these regulations donot impose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the InternalRevenue Code, this notice of proposedrulemaking has been submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (a signed origi-nal and eight (8) copies) or electronic com-ments that are submitted timely to the IRS.The Treasury Department and the IRS re-quest comments on the clarity of the pro-posed rules and how they can be made eas-ier to understand. The Treasury Depart-ment and the IRS also request commentsthat identify additional transactions or ac-tivities that present appropriate groundsfor converting partnership items to non-partnership items. All comments will bemade available for public inspection andcopying.

A public hearing has been scheduled forJune 4, 2009, beginning at 10 a.m. in theAuditorium of the Internal Revenue Ser-vice Building, 1111 Constitution Avenue,N.W., Washington, DC. Due to buildingsecurity procedures, visitors must enter atthe Constitution Avenue entrance. In addi-tion, all visitors must present photo iden-tification to enter the building. Becauseof access restrictions, visitors will not beadmitted beyond the immediate entrance

area more than 30 minutes before the hear-ing starts. For information about havingyour name placed on the building accesslist to attend the hearing, see the “FORFURTHER INFORMATION CONTACT”section of this preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written or electronic comments andan outline of the topics to be discussedand the time to be devoted to each topic(signed original and eight (8) copies) byMay 15, 2009. A period of 10 minutes willbe allotted to each person for making com-ments. An agenda showing the schedulingof the speakers will be prepared after thedeadline for receiving outlines has passed.Copies of the agenda will be available freeof charge at the hearing.

Drafting Information

The principal author of these regula-tions is Robert T. Wearing of the Officeof the Associate Chief Counsel (Procedureand Administration).

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR Part 301 is pro-posed to be amended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 is amended by adding the entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 301.6231(c)–9 is also issued

under 26 U.S.C. 6230(k) and 6231(c)(1)and (c)(3). * * *

Par. 2. Section 301.6231(c)–3 isamended by revising paragraphs (a) intro-ductory text, and (b) to read as follows:

§301.6231(c)–3 Limitation onapplicability of §§301.6231(c)–4through 301.6231(c)–9.

(a) In general. A provision of§§301.6231(c)–4 through 301.6231(c)–9shall not apply with respect to partnershipitems arising in a partnership taxable yearif, as of the date on which those items

March 2, 2009 640 2009–9 I.R.B.

would otherwise begin to be treated asnonpartnership items under that provi-sion—

* * * * *(b) Effective/applicability date. The

rules of this section, when adopted as finalregulations in the Federal Register, willapply to partner taxable years ending on orafter the date of publication of these pro-posed regulations in the Federal Register.

Par. 3. Section 301.6231(c)–9 is addedto read as follows: §301.6231(c)–9 Taxavoidance transactions.

(a) In general. The treatment of itemsthat relate to a listed transaction, as de-fined in §1.6011–4, as partnership itemswill interfere with the effective and effi-cient enforcement of the internal revenuelaws. Accordingly, if a partner has part-nership items that relate to a listed trans-action and are attributable to a partnershipthat is identified in a written notificationdescribed in this paragraph, the partner’spartnership items that are attributable tothe identified partnership shall be treatedas nonpartnership items as of the date onwhich the written notification is sent bythe Internal Revenue Service to the part-ner. The determination whether to treatthe partnership items of a partner as non-partnership items shall be made by the In-ternal Revenue Service on a partnership-by-partnership and partner-by-partner ba-sis. The partnership items of a partner shallnot be treated as nonpartnership items un-der this section unless and until the In-ternal Revenue Service sends the partnerwritten notification that the partner’s part-nership items attributable to the identifiedpartnership will be treated as nonpartner-ship items. The written notification shallidentify each partnership in which the part-ner holds an interest, directly or indirectly,with respect to which all the partner’s part-nership items will be treated as nonpart-nership items. All partnership items of apartner that are attributable to a partner-ship that is identified in a written notifi-cation shall be treated as nonpartnershipitems for all taxable years of the identi-fied partnership ending on or before thedate the Internal Revenue Service sendswritten notification to the partner in whichthe partner has partnership items attribut-able to the identified partnership that re-late to the listed transaction. Partnershipitems of a partner that are attributable to a

partnership that is not identified in a writ-ten notification sent by the Internal Rev-enue Service to that partner shall not betreated as nonpartnership items of the no-tified partner, except that if the notifiedpartner holds an interest in the identifiedpartnership through one or more pass-thrupartners (as defined in section 6231(a)(9)),the partnership items attributable to theidentified partnership that flow through thepass-thru partners to the indirect partners(as defined in section 6231(a)(10)), will betreated as nonpartnership items of the noti-fied partner even if the written notificationdoes not identify the pass-thru partners.

(b) Examples. The provisions of thissection may be illustrated by the followingexamples:

Example 1. PS1 and PS2 are unrelated partner-ships subject to the provisions of subchapter C, chap-ter 63 of the Internal Revenue Code. A is one ofthe partners of PS1 and one of the partners of PS2.PS1 and PS2 have partnership items that relate to alisted transaction, as defined in §1.6011–4(b)(2). TheIRS sends written notification to A that his partner-ship items in PS1 will be treated as nonpartnershipitems, but the IRS does not send written notificationto A that his partnership items in PS2 will be treatedas nonpartnership items. As a result, A’s partnershipitems in PS1 are treated as nonpartnership items as ofthe date that the IRS sent written notification of theconversion to A, and A’s partnership items in PS2 re-main as partnership items.

Example 2. PS3 and PS4 are partnerships sub-ject to the provisions of subchapter C, chapter 63 ofthe Internal Revenue Code. B is one of the partnersof PS3 and PS3 is one of the partners of PS4. B isan indirect partner in PS4 within the meaning of sec-tion 6231(a)(10). Both PS3 and PS4 have partner-ship items related to a listed transaction, as defined in§1.6011–4(b)(2). The IRS sends written notificationto B that his partnership items in PS4 will be treatedas nonpartnership items. As a result, all of B’s part-nership items flowing from PS4 are treated as non-partnership items of B as of the date that the IRS sentwritten notification of the conversion to B. However,since the IRS did not send written notification to Bthat his partnership items in PS3 will be treated asnonpartnership items, B’s partnership items in PS3that are not attributable to PS4 will remain partner-ship items.

(c) Effective/applicability date. Therules of this section, when adopted as finalregulations in the Federal Register, willapply to partner taxable years ending on orafter the date of publication of these pro-posed regulations in the Federal Register.

Linda M. Kroening,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on February 12,2009, 8:45 a.m., and published in the issue of the FederalRegister for February 13, 2009, 74 F.R. 7205)

Notice of ProposedRulemaking byCross-Reference toTemporary Regulations

Application of Section 367to a Section 351 ExchangeResulting from a TransactionDescribed in Section304(a)(1); Treatment of GainRecognized Under Section301(c)(3) for Purposes ofSection 1248

REG–147636–08

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingby cross-reference to temporary regula-tions.

SUMMARY: In this issue of the Bulletin,the IRS and Treasury Department are is-suing temporary regulations (T.D. 9444)under sections 304 and 1248 of the Inter-nal Revenue Code (Code). The tempo-rary regulations provide rules under sec-tion 367(a) and (b) that apply to certaintransfers of stock by a United States personto a foreign corporation described in sec-tion 304(a)(1). The temporary regulationsunder section 1248(a) provide that, for pur-poses of section 1248(a), gain recognizedby a shareholder under section 301(c)(3) inconnection with the receipt of a distribu-tion of property from a foreign corporationwith respect to its stock shall be treated asgain from the sale or exchange of the stockof such foreign corporation. The tempo-rary regulations affect certain shareholdersthat transfer stock in a corporation to a for-eign corporation in a transaction to whichsection 304(a)(1) applies, or that receivea distribution from a foreign corporationdescribed in section 301(c)(3). The textof the temporary regulations also serves asthe text of these proposed regulations. Thepreamble to the temporary regulations ex-plains the temporary regulations and theseproposed regulations.

2009–9 I.R.B. 641 March 2, 2009

DATES: Written or electronic commentsand requests for a public hearing must bereceived by May 11, 2009.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–147636–08),room 5205, Internal Revenue Service,PO Box 7604, Ben Franklin Station,Washington, DC 20044. Submissions maybe hand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–147636–08),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC, or sent electronicallyvia the Federal eRulemakingPortal at www.regulations.gov (IRSREG–147636–08).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Sean W. Mullaney, (202)622–3860; concerning submissions ofcomments or requests for a public hearing,Richard.A.Hurst@irscounsel.treas.gov; at(202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation ofProvisions

Temporary regulations in this issue ofthe Bulletin amend the Income Tax Reg-ulations (26 CFR part 1) relating to sec-tions 304 and 1248 of the Code. The text ofthose regulations also serves as the text ofthese proposed regulations. The preambleto the temporary regulations explains thetemporary regulations and these proposedregulations.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatoryassessment is not required. These reg-ulations are necessary to ensure that theappropriate amount of income (dividendincome, capital gain or both) is recognizedcurrently in the transactions described inthe explanation of provisions section inthis preamble. Accordingly, good cause isfound for dispensing with notice and pub-lic comment pursuant to 5 U.S.C. 553(b)and (c) and with a delayed effective date

pursuant to 5 U.S.C. 553(d). For appli-cability of the Regulatory Flexibility Act,see the cross-referenced notice of pro-posed rulemaking published elsewhere inthis Federal Register. Pursuant to sec-tion 7805(f) of the Code, these regulationshave been submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.

Comments and Requests for a PublicHearing

Comments are also requested regard-ing whether IRS and Treasury Departmentshould exercise the regulatory authorityunder section 304(b)(6) to permit an in-crease to the basis of the transferred stockin a section 304(a)(1) transaction to the ex-tent the distribution in redemption of theshares deemed issued by the acquiring cor-poration is treated as a dividend from theearnings and profits of the issuing corpo-ration.

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments(a signed original and eight (8) copies)or electronic comments that are submittedtimely to the IRS. The IRS and TreasuryDepartment specifically request commentson the clarity of the proposed rules andhow they can be made easier to understand.All comments will be available for publicinspection and copying. A public hearingwill be scheduled if requested in writingby any person that timely submits writtencomments. If a public hearing is sched-uled, notice of the date, time, and place forthe public hearing will be published in theFederal Register.

Drafting Information

The principal author of these proposedregulations is Sean W. Mullaney of the Of-fice of Associate Chief Counsel (Interna-tional). However, other personnel from theIRS and the Treasury Department partici-pated in their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding an entry toread as follows:

Authority: 26 U.S.C. 7805* * *Section 1.367(a)–9 also issued under

26 U.S.C. 367(a) and (b).* * *Par. 2. Section 1.367(a)–9 is added to

read as follows:

§1.367(a)–9 Treatment of deemed section351 exchanges pursuant to section304(a)(1).

[The text of proposed §1.367(a)–9 is thesame as the text of §1.367(a)–9T publishedelsewhere in this issue of the Bulletin].

Par. 3. Section 1.367(b)–4 is amendedby revising paragraphs (e), (f) and (g) toread as follows:

§1.367(b)–4 Acquisition of foreigncorporate stock or assets by a foreigncorporation in certain nonrecognitiontransactions.

* * * * *(e) [The text of proposed

§1.367(b)–4(e) is the same as the text of§1.367(b)–4T(e) published elsewhere inthis issue of the Bulletin].

(f) [The text of proposed §1.367(b)–4(f)is the same as the text of §1.367(b)–4T(f)published elsewhere in this issue of theBulletin].

(g) [The text of proposed§1.367(b)–4(g) is the same as the text of§1.367(b)–4T(g) published elsewhere inthis issue of the Bulletin].

Par. 4. Section 1.1248–1 is amended byrevising paragraphs (b) and (g) to read asfollows:

§1.1248–1 Treatment of gain from certainsales or exchanges of stock in certainforeign corporations.

* * * * *(b) [The text of proposed §1.1248–1(b)

is the same as the text of §1.1248–1T(b)published elsewhere in this issue of theBulletin].

* * * * *(g) [The text of proposed §1.1248–1(g)

is the same as the text of §1.1248–1T(g)published elsewhere in this issue of theBulletin].

March 2, 2009 642 2009–9 I.R.B.

Linda M. Kroening,Acting Deputy Commissionerfor Services and Enforcement.

(Filed by the Office of the Federal Register on February 10,2009, 8:45 a.m., and published in the issue of the FederalRegister for February 11, 2009, 74 F.R. 6840)

Taxpayer IdentificationNumber (“TIN”) MatchingProgram Is Available toPersons Required to MakeReturns Under New Section6050W of the InternalRevenue Code

Announcement 2009–6

The Housing Assistance Tax Act of2008, Div. C of Pub. L. No. 110–289,122 Stat. 2653 (the “Act”), enacted onJuly 30, 2008, added section 6050W to theInternal Revenue Code. This new sectionrequires information returns to be madefor each calendar year by merchant ac-quiring entities and third party settlementorganizations with respect to paymentcard transactions and third party paymentnetwork transactions occurring in thatcalendar year. This requirement to makeinformation returns applies to returns forcalendar years beginning after December31, 2010.

Section 3406(a)(1) requires certainpayors to perform backup withholdingby deducting and withholding income taxfrom a reportable payment if the payeefails to furnish the payee’s taxpayer identi-fication number (“TIN”) to the payor on arequired return, or if the Secretary notifiesthe payor that the TIN furnished by thepayee is incorrect. The Act amended sec-tion 3406(b)(3) by expanding the meaningof “other reportable payments” that aresubject to backup withholding to includepayments that are required to be shownon an information return under section6050W. Backup withholding for amountsreportable under section 6050W appliesto amounts paid after December 31, 2011.The Act also amended section 6724(d) byadding returns required by section 6050Wto the definition of information returns forpurposes of penalties for failure to complywith certain information reporting require-ments.

The Act further provides that, solelyfor purposes of carrying out TIN match-ing under section 3406, section 6050W iseffective on the date of enactment, July30, 2008. The TIN matching programdescribed in Rev. Proc. 2003–9, 2003–1C.B. 516, permits program participantsto verify the payee TINs required to bereported on information returns and payeestatements. Prior to making an infor-mation return, a participant may checkthe TIN furnished by the payee againstthe name/TIN combination contained inthe IRS’s database maintained for theprogram, and the IRS will inform the par-ticipant whether or not the name/TIN com-bination furnished by the payee matchesa name/TIN combination in the database.The matching information provided toparticipants will help avoid TIN errorsand reduce the number of backup with-holding notices required under section3406(a)(1)(B) of the Code. A verifiedTIN/name match will also provide partic-ipants with reasonable cause relief frompenalties under section 6724(a).

Accordingly, persons who will be re-quired to make returns under section6050W may now match TINs under theprocedures established by Rev. Proc.2003–9.

The principal author of this announce-ment is Barbara M. Pettoni of the Officeof Associate Chief Counsel (Procedure& Administration). For further infor-mation regarding this announcement,please contact Barbara M. Pettoni at (202)622–4910 (not a toll-free call). For tech-nical information about, or problems with,the TIN matching program, please call1–866–255–0654.

Foundations Status of CertainOrganizations

Announcement 2009–9

The following organizations have failedto establish or have been unable to main-tain their status as public charities or as op-erating foundations. Accordingly, grantorsand contributors may not, after this date,rely on previous rulings or designationsin the Cumulative List of Organizations(Publication 78), or on the presumptionarising from the filing of notices under sec-tion 508(b) of the Code. This listing does

not indicate that the organizations have losttheir status as organizations described insection 501(c)(3), eligible to receive de-ductible contributions.

Former Public Charities. The follow-ing organizations (which have been treatedas organizations that are not private foun-dations described in section 509(a) of theCode) are now classified as private foun-dations:

Alta Housing Corporation, Granbury, TXAmerican Healthcare Foundation,

Newport Beach, CAArrowhead Center for the Arts,

Eveleth, MNBethel Baptist Economic Development,

Inc., Montgomery, ALBexar County Youth in Action,

San Antonio, TXCalifornia State Youth Empowerment,

Inc., Vacaville, CACaring Community, Inc., Burlington, IACeeatta’s Housing, Inc., Richmond, VACharros La Esperanza, Inc.,

San Marcos, CACity of Marion Recreation Association,

Marion, SCComputer Homework Center,

Ferndale, MICortez Hill Interfaith Housing

Corporation, Lemon Grove, CAEducate for Life, Spring Valley, CAEvolve Project a Nonprofit Public Benefit

Corporation, Los Angeles, CAFirst Family, Inc., Baltimore, MDFreedom in Christ Ministries,

Brooksville, FLFuture Executives, Inc., Brooklyn, NYGlory Ministries, Inc., Romulus, MIGod’s Unique Angels Righteously

Designed, Inc., Arlington, TXGood Neighbor Food Service,

Paulden, AZHeal America, Richmond Heights, OHIn His Name, Justice, Education, and

Social Services, Washington, DCJehovah Adult Daycare, Spartanburg, SCJ E W Ministries, Lake City, SCMawus Mothers and Childrens Home

Carson, CAMen In & Out of Schools, Inc.,

Riverdale, GAMultiple District 19 Lions Service &

Leadership Development Foundation,Bellington, WA

National Land & Wildlife Preservation,Inc., Gilmanton, NH

2009–9 I.R.B. 643 March 2, 2009

Nora’s Vision NFP, Chicago, ILPhilanthropy International, Clarement, CAR & N Adult Daycare & Youth Center,

Hollandale, MSRiver City Small Business Connection,

Sacramento, CASchoolbox Foundation Corp., Atlanta, GASerena Bailey Foundation, Inc.,

Lakeland, FLShannon’s Place, Inc., Non for Profit,

Chicago, ILSturgeon Bay Breakfast Rotary Charitable

Tr, Irving, TXSuccessful Living Services, Westland, MITransition Network, Stafford, TXVida Support Services Parent & Youth

Counseling Organization, Whittier, CAViet Vets Foundation, Inc., Houston, TXZhinga-Wee-Thay, Inc., Irving, TX

If an organization listed above submitsinformation that warrants the renewal ofits classification as a public charity or asa private operating foundation, the Inter-nal Revenue Service will issue a ruling ordetermination letter with the revised clas-sification as to foundation status. Grantorsand contributors may thereafter rely uponsuch ruling or determination letter as pro-vided in section 1.509(a)–7 of the IncomeTax Regulations. It is not the practice ofthe Service to announce such revised clas-sification of foundation status in the Inter-nal Revenue Bulletin.

Deletions From CumulativeList of OrganizationsContributions to Whichare Deductible Under Section170 of the Code

Announcement 2009–10

The Internal Revenue Service has re-voked its determination that the organi-zations listed below qualify as organiza-tions described in sections 501(c)(3) and170(c)(2) of the Internal Revenue Code of1986.

Generally, the Service will not disallowdeductions for contributions made to alisted organization on or before the dateof announcement in the Internal RevenueBulletin that an organization no longerqualifies. However, the Service is notprecluded from disallowing a deductionfor any contributions made after an or-ganization ceases to qualify under section170(c)(2) if the organization has not timelyfiled a suit for declaratory judgment undersection 7428 and if the contributor (1) hadknowledge of the revocation of the rulingor determination letter, (2) was aware thatsuch revocation was imminent, or (3) wasin part responsible for or was aware of theactivities or omissions of the organizationthat brought about this revocation.

If on the other hand a suit for declara-tory judgment has been timely filed, con-tributions from individuals and organiza-tions described in section 170(c)(2) thatare otherwise allowable will continue tobe deductible. Protection under section7428(c) would begin on March 2, 2009,and would end on the date the court first

determines that the organization is not de-scribed in section 170(c)(2) as more partic-ularly set forth in section 7428(c)(1). Forindividual contributors, the maximum de-duction protected is $1,000, with a hus-band and wife treated as one contributor.This benefit is not extended to any indi-vidual, in whole or in part, for the acts oromissions of the organization that were thebasis for revocation.

Leszinski Family Support OrganizationAtlanta, GA

Kuumba TrustPittsburgh, PA

Consumer Debt Management ServicesDeerfield Beach, FL

RealtyAmerica.Org, Inc.Indian Harbour Beach, FL

Consumer Budget Counseling, Inc.Port Charlotte, FL

Innovative Womens Network, Inc.Houston, TX

Ellen Stephen Hospice & Home CareKyle, SD

Starfish Foundation, Inc.Richardson, TX

Ronsard FoundationStatesville, NC

Alternative Care, Inc.Gainesville, FL

Credit Counseling, Inc.Sunrise, FL

A New Goal Credit Counseling AgencySan Francisco, CA

Trans-Atlantic Health Organization, Inc.Gaithersburg, MD

Ammend Credit Counseling and DebtConsolidationCincinnati, OH

March 2, 2009 644 2009–9 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith 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 ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome of casesin litigation, or the outcome of a Servicestudy.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.

ER—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.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.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.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

2009–9 I.R.B. i March 2, 2009

Numerical Finding List1

Bulletins 2009–1 through 2009–9

Announcements:

2009-1, 2009-1 I.R.B. 242

2009-2, 2009-5 I.R.B. 424

2009-3, 2009-6 I.R.B. 459

2009-4, 2009-8 I.R.B. 597

2009-5, 2009-8 I.R.B. 569

2009-6, 2009-9 I.R.B. 643

2009-8, 2009-8 I.R.B. 598

2009-9, 2009-9 I.R.B. 643

2009-10, 2009-9 I.R.B. 644

Notices:

2009-1, 2009-2 I.R.B. 250

2009-2, 2009-4 I.R.B. 344

2009-3, 2009-2 I.R.B. 250

2009-4, 2009-2 I.R.B. 251

2009-5, 2009-3 I.R.B. 309

2009-6, 2009-3 I.R.B. 311

2009-7, 2009-3 I.R.B. 312

2009-8, 2009-4 I.R.B. 347

2009-9, 2009-5 I.R.B. 419

2009-10, 2009-5 I.R.B. 419

2009-11, 2009-5 I.R.B. 420

2009-12, 2009-6 I.R.B. 446

2009-13, 2009-6 I.R.B. 447

2009-14, 2009-7 I.R.B. 516

2009-15, 2009-6 I.R.B. 449

2009-16, 2009-8 I.R.B. 572

2009-17, 2009-8 I.R.B. 575

Proposed Regulations:

REG-144615-02, 2009-7 I.R.B. 561

REG-148568-04, 2009-5 I.R.B. 421

REG-160872-04, 2009-4 I.R.B. 358

REG-158747-06, 2009-4 I.R.B. 362

REG-138326-07, 2009-9 I.R.B. 638

REG-143686-07, 2009-8 I.R.B. 579

REG-150670-07, 2009-4 I.R.B. 378

REG-113462-08, 2009-4 I.R.B. 379

REG-147636-08, 2009-9 I.R.B. 641

REG-150066-08, 2009-5 I.R.B. 423

Revenue Procedures:

2009-1, 2009-1 I.R.B. 1

2009-2, 2009-1 I.R.B. 87

2009-3, 2009-1 I.R.B. 107

2009-4, 2009-1 I.R.B. 118

2009-5, 2009-1 I.R.B. 161

2009-6, 2009-1 I.R.B. 189

2009-7, 2009-1 I.R.B. 226

2009-8, 2009-1 I.R.B. 229

2009-9, 2009-2 I.R.B. 256

Revenue Procedures— Continued:

2009-10, 2009-2 I.R.B. 267

2009-11, 2009-3 I.R.B. 313

2009-12, 2009-3 I.R.B. 321

2009-13, 2009-3 I.R.B. 323

2009-14, 2009-3 I.R.B. 324

2009-15, 2009-4 I.R.B. 356

2009-16, 2009-6 I.R.B. 449

2009-17, 2009-7 I.R.B. 517

Revenue Rulings:

2009-1, 2009-2 I.R.B. 248

2009-2, 2009-2 I.R.B. 245

2009-3, 2009-5 I.R.B. 382

2009-4, 2009-5 I.R.B. 408

2009-5, 2009-6 I.R.B. 432

Tax Conventions:

2009-5, 2009-8 I.R.B. 569

Treasury Decisions:

9434, 2009-4 I.R.B. 339

9435, 2009-4 I.R.B. 333

9436, 2009-3 I.R.B. 268

9437, 2009-4 I.R.B. 341

9438, 2009-5 I.R.B. 387

9439, 2009-5 I.R.B. 416

9440, 2009-5 I.R.B. 409

9441, 2009-7 I.R.B. 460

9442, 2009-6 I.R.B. 434

9443, 2009-8 I.R.B. 564

9444, 2009-9 I.R.B. 603

9445, 2009-9 I.R.B. 635

9446, 2009-9 I.R.B. 607

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2008–27 through 2008–52 is in Internal Revenue Bulletin2008–52, dated December 29, 2008.

March 2, 2009 ii 2009–9 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2009–1 through 2009–9

Notices:

99-35

Obsoleted by

Notice 2009-15, 2009-6 I.R.B. 449

2001-55

Modified by

Notice 2009-1, 2009-2 I.R.B. 250

2002-27

Modified by

Notice 2009-9, 2009-5 I.R.B. 419

2005-74

Obsoleted by

T.D. 9446, 2009-9 I.R.B. 607

2007-26

Modified by

Notice 2009-15, 2009-6 I.R.B. 449

2007-54

Obsoleted by

T.D. 9436, 2009-3 I.R.B. 268

2008-11

Obsoleted by

T.D. 9436, 2009-3 I.R.B. 268

2008-12

Obsoleted by

T.D. 9436, 2009-3 I.R.B. 268Rev. Proc. 2009-11, 2009-3 I.R.B. 313

2008-13

Obsoleted by

T.D. 9436, 2009-3 I.R.B. 268

List of forms modified and superseded by

Rev. Proc. 2009-11, 2009-3 I.R.B. 313

Modified and clarified by

Notice 2009-5, 2009-3 I.R.B. 309

2008-46

Obsoleted by

T.D. 9436, 2009-3 I.R.B. 268Rev. Proc. 2009-11, 2009-3 I.R.B. 313

2008-100

Amplified and superseded by

Notice 2009-14, 2009-7 I.R.B. 516

Proposed Regulations:

REG-149519-03

Withdrawn by

Ann. 2009-4, 2009-8 I.R.B. 597

Revenue Procedures:

2007-17

Superseded by

Rev. Proc. 2009-14, 2009-3 I.R.B. 324

2007-68

Superseded by

Rev. Proc. 2009-17, 2009-7 I.R.B. 517

2007-71

Modified by

Notice 2009-3, 2009-2 I.R.B. 250

2008-1

Superseded by

Rev. Proc. 2009-1, 2009-1 I.R.B. 1

2008-2

Superseded by

Rev. Proc. 2009-2, 2009-1 I.R.B. 87

2008-3

Superseded by

Rev. Proc. 2009-3, 2009-1 I.R.B. 107

2008-4

Superseded by

Rev. Proc. 2009-4, 2009-1 I.R.B. 118

2008-5

Superseded by

Rev. Proc. 2009-5, 2009-1 I.R.B. 161

2008-6

Superseded by

Rev. Proc. 2009-6, 2009-1 I.R.B. 189

2008-7

Superseded by

Rev. Proc. 2009-7, 2009-1 I.R.B. 226

2008-8

Superseded by

Rev. Proc. 2009-8, 2009-1 I.R.B. 229

2008-9

Superseded by

Rev. Proc. 2009-9, 2009-2 I.R.B. 256

2008-61

Superseded by

Rev. Proc. 2009-3, 2009-1 I.R.B. 107

2008-65

Amplified and supplemented by

Rev. Proc. 2009-16, 2009-6 I.R.B. 449

2008-68

Amplified and superseded by

Rev. Proc. 2009-15, 2009-4 I.R.B. 356

Revenue Rulings:

65-286

Obsoleted by

T.D. 9435, 2009-4 I.R.B. 333

Revenue Rulings— Continued:

76-54

Obsoleted by

T.D. 9435, 2009-4 I.R.B. 333

92-19

Supplemented by

Rev. Rul. 2009-3, 2009-5 I.R.B. 382

2008-19

Modified by

Rev. Rul. 2009-3, 2009-5 I.R.B. 382

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–27 through 2008–52 is in Internal Revenue Bulletin 2008–52, dated December 29,2008.

2009–9 I.R.B. iii March 2, 2009

March 2, 2009 2009–9 I.R.B.

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

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sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weeklyBulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of printand are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from theSuperintendent of Documents.

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