SECTION 3. REVISED APPROACH TO

SECTION 304 TRANSACTIONS

After consideration of the comments received and the underlying policies of section 367(a) and (b), the IRS and the Treasury Department believe that the amount of income taken into account as a result of a section 304 distribution generally should not affect the application of section 367 to the deemed section 351 exchange. Furthermore, in the case of a transfer of stock by a U.S. person to a foreign corporation, the revised GRA regulations should substantially reduce the complexity and uncertainty resulting from the filing of a GRA in connection with a deemed section 351 exchange. Accordingly, the IRS and the Treasury Department believe it is appropriate to revise the approach to the interaction of sections 367 and 304 under the 2006 regulations and 2009 regulations by providing that section 367(a) and (b) apply fully to the deemed section 351 exchange.

the sale or exchange of stock or securities in a foreign corporation by a United States person, including regulations providing the circumstances under which gain is recognized or deferred, amounts are included in gross income as a dividend, adjustments are made to earnings and profits, or adjustments are made to the basis of stock or securities.

Regulations under section 367(b) generally provide that if the potential application of section 1248 cannot be preserved following the acquisition of the stock or assets of a foreign corporation (foreign acquired corporation) by another foreign corporation in an exchange subject to section 367(b), including an exchange described in section 351, then certain exchanging shareholders of the foreign acquired corporation must include in income as a dividend the section 1248 amount (as defined in § 1.367(b)–2(c)) attributable to the stock of the foreign acquired corporation. See § 1.367(b)–4(b).

.03 Section 304

Section 304(a)(1) generally provides that, for purposes of sections 302 and 303, if one or more persons are in control of each of two corporations and in return for property one of the corporations (the acquiring corporation) acquires stock in the other corporation (the issuing corporation) from the person (or persons) so in control, then such property shall be treated as a distribution in redemption of the stock of the acquiring corporation. To the extent section 301 applies to the distribution, the transferor and the acquiring corporation are treated as if (1) the transferor transferred the stock of the issuing corporation to the acquiring corporation in exchange for stock of the acquiring corporation in a transaction to which section 351(a) applies, and (2) the acquiring corporation then redeemed the stock it is deemed to have issued in the transaction.

.04 Application of Section 367 to Section 304 Transactions

On February 21, 2006, the IRS and the Treasury Department issued final regulations (T.D. 9250, 2006–1 C.B. 588) providing that section 367(a) and (b) shall not apply to certain transfers of stock of a foreign or domestic corporation to a foreign

acquiring corporation to which section 351 applies (deemed section 351 exchange) by reason of section 304(a)(1) (2006 regulations).

The preamble to the 2006 regulations stated that the policies underlying section 367(a) and (b) are preserved even if a deemed section 351 exchange is not subject to section 367(a) and (b) because generally the income recognized by the transferor in the transaction (dividend income, capital gain, or both) should equal or exceed the built-in gain in the transferred stock. The preamble further explained that the application of section 367 to deemed section 351 exchanges results in complexity and uncertainty.

Comments were received, however, stating that the transferor may not recognize income equal to or greater than the built-in gain in the transferred stock if, under section 301(c)(2), the transferor is permitted to recover the basis of shares of the foreign acquiring corporation held before (and after) the transaction. In response to these comments, temporary regulations were published on February 11, 2009 (T.D. 9444, 2009–1 C.B. 603) (2009 regulations), which modified the treatment of section 304 transactions provided by the 2006 regulations. The 2009 regulations retain the general rule that the deemed section 351 exchange will not be a transfer to a foreign corporation subject to section 367(a). However, the 2009 regulations provide an exception if a U.S. person reduces its basis under section 301(c)(2), in whole or in part, in its stock of the foreign acquiring corporation other than the stock deemed issued to the U.S. person in the deemed section 351 exchange. In such case, the U.S. person recognizes gain under section 367(a)(1) equal to the amount by which the gain realized by the U.S. person exceeds the amount of the distribution that is treated as a dividend under section 301(c)(1) and included in gross income of the U.S. person. Furthermore, the 2009 regulations provide that a U.S. person cannot avoid such gain by entering into a GRA.

The 2009 regulations made similar revisions to the 2006 regulations under section 367(b). Specifically, the 2009 regulations provide that § 1.367(b)–4(b) applies to a deemed section 351 exchange only to the extent the distribution received by the

2012–9 I.R.B. 425 February 27, 2012

GRA be filed for the deemed section 351 exchange and a new GRA be filed by reason of the deemed redemption will be satisfied if USP files a single GRA pursuant to § 1.367(a)–8(d)(2)(ii).

(iv) Application of section 367(b) . Under section 4.02 of this notice, § 1.367(b)–4 applies to USP’s transfer of the FT stock to FA in exchange for FA stock. Under § 1.367(b)–2(a) and (b), USP is a section 1248 shareholder with respect to FT, a controlled foreign corporation, immediately before the exchange. Section 1.367(b)–4(b)(1)(i) does not apply to require USP to include in income the $10x section 1248 amount with respect to the FT stock because each of FA and FT is a controlled foreign corporation as to which USP is a section 1248 shareholder immediately after the exchange.