SECTION 2. BACKGROUND

Section 367(a)(1) provides that if, in connection with any exchange described in section 332, 351, 354, 356, or 361, a United States person (U.S. transferor) transfers property to a foreign corporation (transferee foreign corporation), such foreign corporation shall not, for purposes of determining the extent to which gain shall be recognized on such transfer, be considered to be a corporation. Section 367(a)(2), (3) and (6) provides certain exceptions to this general rule and grants regulatory authority to provide additional exceptions and to limit the statutory exceptions.

Exceptions to the general rule of section 367(a)(1) for certain transfers of the stock or securities of a corporation

(transferred corporation) are provided in Treas. Reg. § 1.367(a)–3. In some cases, these exceptions require, among other things, the filing of a gain recognition agreement, as provided in Treas. Reg. § 1.367(a)–8, by the U.S. transferor. Treas. Reg. § 1.367(a)–3(b)(1)(ii) and (c)(1)(iii)(B). Pursuant to a gain recognition agreement, the U.S. transferor agrees, among other things, to include in income the gain realized but not recognized on the initial transfer of the stock or securities, plus interest, upon certain events (triggering events) that occur prior to the close of the fifth full taxable year following the year of the transfer. Treas. Reg. § 1.367(a)–8(b)(1)(iii) and (3)(i).

Treasury Regulation § 1.367(a)–8(e)(1) and (2) provides that dispositions of the stock or securities of the transferred corporation are generally triggering events. Similarly, Treas. Reg. § 1.367(a)–8(e)(3) provides that dispositions of substantially all (within the meaning of section 368(a)(1)(C)) of the assets of the transferred corporation are generally treated as deemed dispositions of the stock or securities of the transferred corporation and therefore are also triggering events. Finally, dispositions of stock of the transferee foreign corporation can also be triggering events. See, e.g., Treas. Reg. § 1.367(a)–8(f)(2)(ii).

Notwithstanding these rules, Treas. Reg. § 1.367(a)–8 provides that certain nonrecognition transactions are not triggering events, if certain requirements are satisfied. For example, Treas. Reg. § 1.367(a)–8(g) provides exceptions for certain transactions involving the U.S. transferor, the transferee foreign corporation, and the transferred corporation. In addition, Treas. Reg. § 1.367(a)–8(f)(2)(i) provides rules to allow taxpayers to enter into a gain recognition agreement in connection with certain transactions, including asset reorganizations, in which the U.S. transferor goes out of existence as a result of a transaction in which the transferor’s gain would have qualified for nonrecognition treatment under Treas. Reg. § 1.367(a)–3(b) or (c), had the U.S. transferor remained in existence and entered into a gain recognition agreement. Commentators have stated that although these exceptions clearly contemplate certain nonrecognition transactions, it is not clear whether, and if so how, the exceptions

apply to various asset reorganizations involving the U.S. transferor, the transferee foreign corporation, and the transferred corporation.

Treasury Regulation § 1.367(a)–8 also provides that certain nonrecognition transactions are not triggering events because the gain recognition agreement is terminated and has no further effect. For example, Treas. Reg. § 1.367(a)–8(h)(3) lists certain nonrecognition transactions that terminate the gain recognition agreement, provided that immediately after the transaction the basis in the transferred stock is not greater than the U.S. transferor’s basis in the stock that, immediately prior to the initial transfer, necessitated the gain recognition agreement.

Finally, many of the transactions described above may be subject to the provisions of section 367(b) and the regulations thereunder.