SECTION 4. OTHER MODIFICATIONS

.01 Modification of Treas. Reg. § 1.367(a)–8(f)(2)(i)

For purposes of determining, under Treas. Reg. § 1.367(a)–8(f)(2)(i), whether a U.S. transferor corporation is owned by a single U.S. parent corporation, all members of the U.S. parent corporation’s consolidated group for the taxable year that includes the transfer shall be treated as a single corporation.

.02 Certain Nonrecognition Transfers of Stock of the Transferee Foreign Corporation by the U.S. Transferor under Treas. Reg. § 1.367(a)–8(g)(1)

If a U.S. transferor disposes of any stock of the transferee foreign corporation in a nonrecognition transfer, other than pursuant to an asset reorganization, the gain recognition agreement will be triggered, unless the U.S. transferor satisfies the requirements of Treas. Reg. § 1.367(a)–8(g)(1), in which case the U.S. transferor will continue to be subject to the terms of the original gain recognition agreement as provided under Treas. Reg. § 1.367(a)–8(g)(1). See section 3.02 of this notice providing rules for asset reorganizations.

.03 Basis of Transferred Stock for Purposes of Treas. Reg. § 1.367(a)–8(h)(3)

For purposes of determining whether, immediately following a transaction described in Treas. Reg. § 1.367(a)–8(h)(3), the U.S. transferor’s basis in the transferred stock is less than or equal to the basis that it had in the transferred stock immediately prior to the original transfer that necessitated the gain recognition agreement, only the basis in the stock transferred shall be taken into account. Thus, for example, the basis of stock that

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, enters into a gain recognition agreement with respect to such transfer. In Year 4, in a reorganization described in section 368(a)(1)(D), FC2 transfers all of its assets, including the stock of FC1, to FC3 in exchange for FC3 stock. FC2 transfers the FC3 stock to USP in exchange for FC2 stock held by USP and the FC2 stock is canceled. No taxable years of USP are short taxable years.

(ii) Analysis . Pursuant to section 3.03 of this notice, the transfer of the FC1 stock to FC3 in exchange for FC3 stock and the exchange of the FC2 stock for FC3 stock will not trigger the gain recognition agreement if, in addition to complying with the reporting requirements of section 3.03(B) of this notice, USP enters into a new gain recognition agreement pursuant to which it agrees to recognize gain with respect to the transfer subject to the original gain recognition agreement, substituting FC3 as the successor transferee foreign corporation in place of FC2, and treating FC3 as the original transferee foreign corporation for purposes of Treas. Reg. § 1.367(a)–8 and this notice. Thus, for purposes of the new gain recognition agreement, Treas. Reg. § 1.367(a)–8, and this notice, USP continues to be the U.S. transferor, FC3 is the successor transferee foreign corporation and is treated as the original 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). This transaction is also subject to the provisions of section 367(b), including Treas. Reg. § 1.367(b)–4.

.04 Transfers of Substantially All of Transferred Corporation’s Assets

If, during the period a gain recognition agreement is in effect, the original transferred corporation transfers substantially all of its assets to an acquiring corporation (successor transferred corporation) 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) 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, modified by:

(i) Substituting the successor transferred corporation in place of the original transferred corporation and agreeing to treat the successor transferred corporation

as the original transferred corporation for purposes of Treas. Reg. § 1.367(a)–8 and this notice; and

(ii) Treating only the assets acquired by the successor transferred corporation from the original transferred corporation pursuant to the asset reorganization as the assets subject to the deemed disposition of stock rules under Treas. Reg. § 1.367(a)–8(e)(3)(i); 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 transferred 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 3.04.

Example 3 . (i) Facts . USP, a domestic corporation, owns 100% of the stock of two foreign corporations, FC1 and FC2. In Year 1, USP 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, enters into a gain recognition agreement with respect to such transfer. In Year 4, in a reorganization described in section 368(a)(1)(C), FC1 transfers all of its assets to FC3, an unrelated foreign corporation, in exchange for FC3 stock. FC1 transfers the FC3 stock to FC2 in exchange for the FC1 stock held by FC2 and the FC1 stock is canceled. No taxable years of USP are short taxable years.

(ii) Analysis . Pursuant to section 3.04 of this notice, the transfer of the FC1 assets to FC3 in exchange for FC3 stock and the exchange of the FC1 stock for FC3 stock will not trigger the gain recognition agreement if, in addition to complying with the reporting requirements of section 3.04(B) of this notice, USP enters into a new gain recognition agreement pursuant to which it agrees to recognize gain with respect to the transfer subject to the original gain recognition agreement, substituting FC3 as the successor transferred corporation in place of FC1, treating FC3 as the original transferred corporation for purposes of Treas. Reg. § 1.367(a)–8 and this notice, and treating only the assets acquired by FC3 from FC1 pursuant to the section 368(a)(1)(C) reorganization as assets subject to the deemed disposition of stock rules under Treas. Reg. § 1.367(a)–8(e)(3)(i). Thus, for purposes

2005–42 I.R.B. 728 October 17, 2005