SECTION 4. REGULATIONS TO BE

ISSUED

.01 In General

The IRS and the Treasury Department will issue regulations addressing the transfer by a domestic corporation (U.S. transferor) of section 367(d) property in a section 361 exchange to a transferee foreign corporation (outbound section 367(d) transfer) that incorporate the rules described in this notice. The regulations will ensure that, with respect to all outbound section 367(d) transfers, the total income to be taken into account under section 367(d) is either included in income by the U.S. transferor in the year of the reorganization or, where appropriate, over time by one or more qualified successors. Any income taken into account under this notice must be commensurate with the income attributable to the section 367(d) property transferred in the outbound section 367(d) transfer. Section 367(d)(2)(A) (flush language). Except as provided below, the rules described in this notice, rather than §1.367(d)–1T(c), (d), (e), and (g), will govern outbound section 367(d) transfers. For purposes of this notice, references to “stock received” include stock deemed received in a transaction.

.02 U.S. Transferor Takes into Account Income under Section 367(d)(2)(A)(ii)(I)

In an outbound section 367(d) transfer, the U.S. transferor will take into account income under section 367(d)(2)(A)(ii)(I) with respect to each qualified successor, if any, by treating as a prepayment of such income the product of the section 367(d) percentage multiplied by the sum of: (i) the money and fair market value of other property (within the meaning of section 356) received by the qualified successor in exchange for, or with respect to, stock of the U.S. transferor, reduced by the portion of any U.S. transferor distributions received by the qualified successor; and (ii) the product of the qualified successor’s ownership interest percentage multiplied by the amount of non-qualifying liabilities that are either assumed (within the meaning of section 357(d)) by the transferee for

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U.S. transferor to the transferee foreign corporation in the section 361 exchange.

(7) U.S. transferor distributions are any distributions by the U.S. transferor of money or other property (within the meaning of section 356) to shareholders pursuant to the plan of reorganization, but only to the extent such money or other property is not provided by the transferee foreign corporation in exchange for property of the U.S. transferor acquired in the section 361 exchange.

.06 Other Rules

Income taken into account under section 4.02 or 4.03 of this notice is treated as ordinary income and is treated, for purposes of applying section 904(d), in the same manner as if such amount were a royalty.

For purposes of this notice, stock of the U.S. transferor held by a partnership (domestic or foreign) is treated as held proportionately by its partners. Thus, for example, if a partnership is a shareholder of the U.S. transferor and receives qualified stock in the reorganization, the partners in the partnership are treated as receiving the qualified stock for purposes of this notice, including for purposes of identifying a qualified successor.

.07 Example

The following example illustrates the rules and guidance provided in this notice.

Example . (i) Facts . USP, a domestic corporation (that is not a regulated investment company, a real estate investment trust, or an S corporation), owns 100% of the outstanding stock of UST, a domestic corporation, and 100% of the outstanding stock of TFC, a foreign corporation. UST owns a patent with a tax basis of $0x and a value of $60x. UST also owns Asset A, which is section 367(a) property, with a value of $40x. UST has no liabilities. In a reorganization described in section 368(a)(1)(D), UST transfers the patent and Asset A to TFC in exchange for $70x of TFC stock and $30x of cash. In connection with the transfer, UST distributes the $70x of TFC stock and $30x of cash to USP and liquidates. UST’s transfer of the patent and Asset A to TFC qualifies as a section 361 exchange. USP is treated as exchanging its UST stock for $70x of TFC stock and $30x of cash pursuant to section 356.

(ii) Analysis . UST’s transfer of the patent to TFC in the section 361 exchange is an outbound section 367(d) transfer subject to section 367(d) and the regulations thereunder, as modified by this notice. Under section 4.02 of this notice, the income that UST will take into account as a prepayment is $18x, the product of the section 367(d) percentage (60%) multiplied by the amount of cash ($30x) received

A qualified successor may, in accordance with §1.367(d)–1T(g)(1), establish an account receivable for any contingent annual payments included in gross income by the qualified successor under this notice.

Qualified successors are subject to the rules of §1.367(d)–1T, as modified by this paragraph 4.04. Thus, for example, if a qualified successor subsequently transfers qualified stock received in the reorganization to a U.S. person that is related (within the meaning of §1.367(d)–1T(h)) to the qualified successor, §1.367(d)–1T(e) will apply to such transfer. In this case, a proportionate amount of any remaining credit amount attributable to the qualified successor can be taken into account by such related U.S. person in the same manner as it could have been taken into account by the qualified successor. Alternatively, for example, if a qualified successor subsequently transfers qualified stock to a U.S. person that is unrelated to the qualified successor or to a person that is not a U.S. person, §1.367(d)–1T(d) will apply to such transfer. In this case, a proportionate amount of any remaining credit amount attributable to the qualified successor can be taken into account to reduce the amount of gain recognized under §1.367(d)–1T(d).

.05 Definitions

The following definitions apply for purposes of this notice:

(1) Non-qualifying liabilities —(i) In general . Except as provided in paragraph (1)(ii) of this section 5, non-qualifying liabilities include all liabilities of the U.S. transferor other than a liability:

(A) That was incurred in the ordinary course of the U.S. transferor’s active trade or business (within the meaning of section 367(a)(3)), if any, (B) That did not arise in connection with the reorganization, and

(C) That is owed to an unrelated person. For this purpose, an unrelated person is any person that does not have a relationship to the U.S. transferor described in section 267(b) or 707(b) immediately before the reorganization.

(ii) Increase for certain distributions . The amount of non-qualifying liabilities shall be increased (but not in excess of the U.S. transferor’s total liabilities) by an amount equal to the sum of the U.S. trans

feror distributions and any other distributions made by the U.S. transferor (or any predecessor) with respect to its stock, including distributions in redemption of its stock, during the two-year period immediately preceding the reorganization.

(2) Ownership interest percentage is the ratio of the value of the stock in the U.S. transferor owned by a shareholder to the value of all of the outstanding stock of the U.S. transferor. Except as provided in this paragraph, the ownership interest percentage of a shareholder is determined immediately before the reorganization. For purposes of determining the ownership interest percentage with respect to each shareholder, however, the numerator of the fraction is first reduced (but not below zero) by U.S. transferor distributions made to such shareholder, and the denominator is reduced by the total amount of U.S transferor distributions.

(3) Property is defined in §1.367(a)–1T(d)(4). Section 367(d) prop- erty is any property described in section 936(h)(3)(B). Section 367(a) property is any property other than section 367(d) property.

(4) Qualified stock means stock in the transferee foreign corporation, including stock received in the transferee foreign corporation under section 354, 355, or 356 in exchange for, or with respect to, stock of the U.S. transferor.

(5) Qualified successor means a shareholder of the U.S. transferor that is a domestic corporation, other than a regulated investment company (as defined in section 851(a)), a real estate investment trust (as defined in section 856(a)), or an S corporation (as defined in section 1361(a)), provided such shareholder receives qualified stock in the reorganization or immediately after the reorganization owns qualified stock other than qualified stock received in the reorganization. A non-qual- ified successor means a shareholder of the U.S. transferor other than a qualified successor.

(6) Section 367(d) percentage is the ratio of the aggregate value of the section 367(d) property transferred by the U.S. transferor to the transferee foreign corporation in the section 361 exchange to the aggregate value of all property (in other words, all section 367(a) property and section 367(d) property) transferred by the

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§ 417(e)(3)(D) as in effect for plan years beginning after 2007. These rates do not reflect any changes implemented by the Moving Ahead for Progress in the 21st Century Act (MAP–21). MAP–21 provides that for purposes of section 430(h)(2), the segment rates are limited by the applicable maximum percentage or the applicable minimum percentage based on the average of segment rates over a 25 year period. Guidance related to the new legislation will be issued in the future.

CORPORATE BOND WEIGHTED AVERAGE INTEREST RATE

Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the Pension Funding Equity Act of 2004 and by the Pension Protection Act of 2006 (PPA), provide that the interest rates used to calculate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 through 2007 must be within a permissible range based on the weighted average of the rates of interest on amounts invested conservatively in long term investment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year.

Notice 2004–34, 2004–1 C.B. 848, provides guidelines for determining the corporate bond weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corporate bond weighted average is based on the monthly composite corporate bond rate derived from designated corporate bond indices. The methodology for determining the monthly composite corporate bond rate as set forth in Notice 2004–34 continues to apply in determining that rate. See Notice 2006–75, 2006–2 C.B. 366. The composite corporate bond rate for June 2012 is 4.27 percent. Pursuant to Notice 2004–34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month.

The following corporate bond weighted average interest rate was determined for

by USP, a qualified successor. UST must include this amount in income regardless of whether income is being generated by the patent at the time of the outbound section 367(d) transfer. USP is a qualified successor because USP (a domestic corporation) is a shareholder of UST that receives qualified stock (newly issued stock of TFC) under section 356 in exchange for stock of UST. USP is also a qualified successor because USP (a domestic corporation) is a shareholder of UST that owns qualified stock (existing stock in TFC) other than the qualified stock received in the reorganization. Under section 4.05 of this notice, the section 367(d) percentage of 60% is computed as the $60x aggregate value of the section 367(d) property transferred in the section 361 exchange, divided by $100x aggregate value of all property transferred in the section 361 exchange. USP, as a qualified successor to UST, will take into account the income attributable to the contingent annual payments that UST would have received under §1.367(d)–1T(c) over the remaining useful life of the intangible property, determined as if UST had remained in existence and not taken into account the $18x of income. Under §1.367(d)–1T(c)(1), such contingent annual payments must be determined in accordance with section 482 and the regulations thereunder, and therefore must be consistent with the arm’s-length standard. The first $18x of contingent annual payments (if otherwise taken into account by USP under section 4.04 of this notice) are excluded from USP’s gross income under section 4.04 of this notice, and any additional contingent annual payments are included in USP’s gross income. In accordance with §1.367(d)–1T(g)(1), USP may establish an account receivable with respect to any contingent annual payments included in gross income by USP under this notice. For rules applicable to the transfer of Asset A, see section 367(a) and any regulations thereunder.