SECTION 2. BACKGROUND

.01 Issuance of Regulations

On May 27, 2008, the IRS and the Treasury Department published temporary and proposed regulations (T.D. 9400, 2008–1 C.B. 1139 [73 FR 30301]) (2008 regulations) under section 367 that applied to certain triangular reorganizations in which a subsidiary (S) acquires stock of its parent corporation (P) in exchange for property (the P acquisition), and S exchanges the P stock so acquired for stock or property of a target corporation (T), but only if P or S (or both) is a foreign corporation. On May 19, 2011, the IRS and the Treasury Department finalized the proposed 2008 regulations (T.D. 9526,

2011–24 I.R.B. 869 [76 FR 28890]), with certain modifications (final regulations).

.02 Deemed Distribution and Contribution Rules

In the case of a triangular reorganization subject to § 1.367(b)–10, the final regulations require that adjustments be made that are consistent with the adjustments that would have been made if S had in fact distributed property to P under section 301 (deemed distribution). § 1.367(b)–10(b)(1). For this purpose, the amount of the deemed distribution generally is the amount of property that was transferred by S to acquire the P stock and securities in the P acquisition. In addition, the final regulations require that adjustments be made that are consistent with the adjustments that would have been made if P had in fact contributed that same property to S (deemed contribution). § 1.367(b)–10(b)(2). The deemed contribution has the effect of increasing P’s basis in its S stock by the amount of the deemed distribution. § 1.367(b)–10(c)(2). For purposes of making the required adjustments, the deemed distribution and deemed contribution are treated as separate transactions that occur before the P acquisition or, if P does not control S at the time of the P acquisition, immediately after P acquires control of S, but before the triangular reorganization. § 1.367(b)– 10(b)(3). Furthermore, the final regulations provide that P’s adjustment to the basis in its S stock under § 1.358–6 is determined consistent with treating S as having acquired the P stock or securities in exchange for property from P or a person other than P, as the case may be. § 1.367(b)–10(b)(4).

.03 Triangular Reorganizations Exempt from Final Regulations

Under § 1.367(b)–10(a)(2), the final regulations do not apply to a triangular reorganization if:

(i) P and S are foreign corporations and neither P nor S is a controlled foreign corporation (within the meaning of § 1.367(b)–2(a)) immediately before or immediately after the triangular reorganization;

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(ii) S is a domestic corporation, P’s stock in S is not a United States real property interest (within the meaning of section 897(c)), and P would not be subject to U.S. tax on a dividend from S under either section 881 (for example, by reason of an applicable treaty) or section 882 (no-U.S.-tax exception); or (iii) In an exchange under section 354 or 356, one or more U.S. persons exchange stock or securities of T and the amount of gain in the T stock or securities recognized by such U.S. persons under section 367(a)(1) is equal to or greater than the sum of the amount of the deemed distribution that would be treated by P as a dividend under section 301(c)(1) and the amount of such deemed distribution that would be treated by P as gain from the sale or exchange of property under section 301(c)(3) (together, section 367(b) income) if § 1.367(b)–10 would otherwise apply to the triangular reorganization (section 367(a) priority rule).

As the corollary to the section 367(a) priority rule, the final regulations under section 367(a) also provide a priority rule in § 1.367(a)–3(a)(2)(iv) (section 367(b) priority rule). The section 367(b) priority rule turns off the application of section 367(a)(1) to an exchange under section 354 or 356 that occurs in connection with a triangular reorganization described in § 1.367(b)–10 if the amount of gain that would otherwise be recognized under section 367(a)(1) (without regard to any exceptions thereto) is less than the amount of the section 367(b) income recognized under § 1.367(b)–10.

.04 Anti-Abuse Rule

The final regulations provide that appropriate adjustments shall be made if, in connection with a triangular reorganization, a transaction is engaged in with a view to avoid the purpose of § 1.367(b)–10 (antiabuse rule). § 1.367(b)–10(d). One example is given where the earnings and profits of S will be deemed to include the earnings and profits of a corporation related to P or S for purposes of determining the consequences of the adjustments provided in the final regulations, if S is created, organized, or funded to avoid the application of this section with respect to the earnings and profits of that related corporation.