SECTION 3. EFFECT OF CERTAIN

ASSET REORGANIZATIONS ON GAIN RECOGNITION AGREEMENTS

.01 Definition of the Terms Asset Reorganization, Consolidated Group, and Common Parent

For purposes of sections 3.02 and 4.02 of this notice, the term asset reorgani- zation means a reorganization described in section 368(a)(1) involving the transfer of assets by a corporation to another corporation pursuant to section 361, except that such term shall include reorganizations described in section 368(a)(1)(D) or (G) only if the requirements of section 354(b)(1)(A) and (B) are met. For purposes of sections 3.03 and 3.04 of this notice, the term asset reorganization has the same meaning as used for sections 3.02 and 4.02 of this notice, except that the following reorganizations are excluded: (1) triangular asset reorganizations described in Treas. Reg. § 1.358–6(b); and (2) asset reorganizations where, after the reorganization, the same corporation is both the transferee foreign corporation (or successor transferee foreign corporation, as applicable) and the transferred corporation (or the successor transferred corporation, as applicable). This may occur, for example, where the transferee foreign corporation transfers all of its assets (including stock of the transferred corporation) to the

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.03 Transfers of Transferred Corporation’s Stock or Securities by Transferee Foreign Corporation to a Foreign Acquiring Corporation

If, during the period a gain recognition agreement is in effect, the original transferee foreign corporation transfers all or a portion of the stock or securities of the transferred corporation to a foreign acquiring corporation (successor transferee foreign corporation) in an asset reorganization, the exchanges made pursuant to such reorganization will trigger the gain recognition agreement, unless the following conditions are satisfied:

(A) The U.S. transferor, U.S. parent corporation or new U.S. parent corporation, as applicable, enters into a new gain recognition agreement pursuant to which it agrees to recognize gain (during the remaining term of the original gain recognition agreement), in accordance with the rules of Treas. Reg. § 1.367(a)–8(b), with respect to the transfer subject to the original gain recognition agreement, substituting the successor transferee foreign corporation in place of the original transferee foreign corporation, and agreeing to treat the successor transferee foreign corporation as the original transferee foreign corporation for purposes of Treas. Reg. § 1.367(a)–8 and this notice; and

(B) The U.S. transferor provides with its next annual certification (described in Treas. Reg. § 1.367(a)–8(b)(5)) the new gain recognition agreement and a notice of the transfer setting forth the following:

(i) A description of the transfer (including the date of such transfer), and the successor transferee foreign corporation’s name, address, and taxpayer identification number (if any); and

(ii) A statement that arrangements have been made, in connection with the asset reorganization, ensuring the U.S. transferor will be informed of any subsequent disposition of property with respect to which recognition of gain would be required under the new gain recognition agreement (and any related information that is necessary to comply with Treas. Reg. § 1.367(a)–8 and this notice).

The following example illustrates the application of this section 3.03.

Example 2 . (i) Facts . USP, a domestic corporation, owns 100% of the stock of three foreign corporations, FC1, FC2 and FC3. In Year 1, USP transfers

transferred corporation pursuant to section 361. However, see section 6 of this notice, requesting comments with respect to those transactions excluded from the definition of an asset reorganization for purposes of sections 3.03 and 3.04 of this notice.

For purposes of this notice, the term consolidated group has the same meaning provided in Treas. Reg. § 1.1502–1(h), and the term common parent has the same meaning as in section 1504.

.02 Transfers of Transferee Foreign Corporation’s Stock by U.S. Transferor

If, during the period a gain recognition agreement is in effect, the original U.S. transferor transfers all or a portion of the stock of the transferee foreign corporation to an acquiring corporation (successor U.S. transferor) pursuant to an asset reorganization, the exchanges made pursuant to such asset reorganization will trigger the gain recognition agreement, unless the following conditions are satisfied:

(A) In the year of the transfer for which the original gain recognition agreement was executed, the U.S. transferor was a member of a consolidated group (original consolidated group), and the common parent of such group (U.S. parent corporation) entered into the original gain recognition agreement pursuant to Treas. Reg. § 1.367(a)–8(a)(3);

(B) Immediately after the asset reorganization, the successor U.S. transferor is a member of the original consolidated group;

(C) The U.S. parent corporation of the original consolidated group (or new U.S. parent corporation, if such corporation became the new common parent of the original consolidated group in a transaction in which the group remained in existence) enters into a new gain recognition agreement pursuant to which it agrees to recognize gain (during the remaining term of the original gain recognition agreement), in accordance with the rules of Treas. Reg. § 1.367(a)–8(b), with respect to the transfer subject to the original gain recognition agreement, modified by substituting the successor U.S. transferor in place of the original U.S. transferor and agreeing to treat the successor U.S. transferor as the original U.S. transferor for purposes of Treas. Reg. § 1.367(a)–8 and this notice; and

(D) The successor U.S. transferor provides with its next annual certification (described in Treas. Reg. § 1.367(a)–8(b)(5)) the new gain recognition agreement and a notice of the transfer setting forth the following:

(i) A description of the transfer (including the date of such transfer), and the successor U.S. transferor’s name, address, and taxpayer identification number; and

(ii) A statement that arrangements have been made, in connection with the asset reorganization, ensuring that the successor U.S. transferor will be informed of any subsequent disposition of property with respect to which recognition of gain would be required under the new gain recognition agreement (and any related information that is necessary to comply with Treas. Reg. § 1.367(a)–8 and this notice).

The following example illustrates the application of this section 3.02.

Example 1 . (i) Facts . USP, a domestic corporation, is the common parent of a consolidated group. USP owns 100% of the stock of two domestic corporations that are members of the USP group, S1 and S2. S1 owns 100% of two foreign corporations, FC1 and FC2. In Year 1, S1 transfers 100% of the stock of FC1 to FC2 in an exchange described in section 351 and, pursuant to Treas. Reg. §§ 1.367(a)–3(b)(1)(ii) and 1.367(a)–8, USP enters into a gain recognition agreement with respect to such transfer. In Year 4, in a reorganization described in section 368(a)(1)(D), S1 transfers all of its assets, including the stock of FC2, to S2 in exchange for S2 stock. S1 transfers the S2 stock to USP in exchange for the S1 stock held by USP and the S1 stock is canceled. No taxable years of the USP group are short taxable years.

(ii) Analysis . Because USP and S2 are, immediately after the reorganization, members of the consolidated group of which S1 was a member, and USP was the common parent which entered into the original gain recognition agreement in year 1 pursuant to Treas. Reg. § 1.367(a)–8(a)(3), the transaction satisfies the requirements of section 3.02(A) and (B) of this notice. As a result, the transfer of the FC2 stock will not trigger the gain recognition agreement if, pursuant to section 3.02 of this notice, USP enters into a new gain recognition agreement, in which it agrees to recognize gain with respect to the transfer subject to the original gain recognition agreement as described in section 3.02(C) of this notice, and S2 complies with the reporting requirements contained in section 3.02(D) of this notice. For purposes of the new gain recognition agreement, Treas. Reg. § 1.367(a)–8, and this notice, S2 is the successor U.S. transferor and is treated as the original U.S. transferor, FC2 continues to be the transferee foreign corporation, and FC1 continues to be the transferred corporation. The new gain recognition agreement applies through the close of Year 6 (the remaining term of the original gain recognition agreement filed by USP).

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of the new gain recognition agreement, Treas. Reg. § 1.367(a)–8, and this notice, USP continues to be the U.S. transferor, FC2 continues to be the transferee foreign corporation, and FC3 is the successor transferred corporation and is treated as the original transferred corporation. The new gain recognition agreement applies through the close of Year 6 (the remaining term of the original gain recognition agreement filed by USP). This transaction is also subject to the provisions of section 367(b), including Treas. Reg. § 1.367(b)–4.