SECTION 2. REGULATIONS TO BE

ISSUED UNDER SECTION 367(b)

The definitions provided in section 1 of Notice 2006–85 also apply for purposes of this notice.

The regulations will apply to triangular reorganizations where P or S (or both) is foreign and, pursuant to the reorganization, S acquires from one or more P shareholders, in exchange for property, all or a portion of the P stock that is used to acquire the stock or assets of T (T could be either related or unrelated to P and S before the transaction). In such a case, the

regulations under section 367(b) will make adjustments with respect to P and S that will have the effect of a distribution of property from S to P under section 301(c). The amount of the distribution shall equal the amount of money plus the fair market value of other property transferred from S to P’s shareholders in exchange for the P stock used to acquire the stock or assets of T. Therefore, the regulations will require, as appropriate, an inclusion in P’s gross income as a dividend, a reduction in P’s basis in its S stock (or, as appropriate, T stock), and the recognition of gain by P from the sale or exchange of property.

The adjustments also will provide, as appropriate, that the amount of property deemed distributed to P is considered to be contributed by P to S immediately thereafter and therefore increases P’s basis in S. See, e.g., Treas. Reg. § 1.367(b)–2(e)(3)(ii).

Finally, the regulations will provide for appropriate corresponding adjustments to be made, such as a reduction of S’s earnings and profits as a result of the distribution (consistent with the principles of section 312).

The section 367(b) adjustments described above shall be made prior to the application of other provisions. For example, after giving effect to the 367(b) adjustments, S’s purchase and transfer of P stock will then be taken into account under generally applicable rules, including sections 304, 358, and 368.

The regulations will address similar transactions in which S acquires the P stock used in the reorganization from a related party that purchased the P stock in a related transaction. The regulations also will include a rule that takes into account the earnings and profits of other corporations, as appropriate, if one of the principal purposes of creating, organizing, or funding S is to avoid the adjustments described in this notice or Notice 2006–85. See, e.g., Treas. Reg. §§ 1.304–4T and 1.956–1T(b)(4).