SECTION 4. REGULATIONS TO BE

ISSUED

.01 Deemed Distribution and Contribution Rules

The rules in § 1.367(b)–10(b)(2) and –10(c)(2) (regarding deemed contributions) will be removed. Conforming changes will be made to other parts of the

Bulletin No. 2014–20 1007 May 12, 2014

final regulations. For example, the rule in § 1.367(b)–10(b)(3) will be modified so that it refers only to a deemed distribution occurring as a separate transaction. In addition, the rule in § 1.367(b)–10(b)(4) will be modified to provide that P’s adjustment to the basis in its S stock under § 1.358–6 will be determined as if P provided the P stock or securities pursuant to the plan of reorganization, notwithstanding that S in fact acquired the P stock or securities in exchange for property in the P acquisition.

.02 Triangular Reorganizations Exempt from the Final Regulations

The section 367(a) priority rule under § 1.367(b)–10 will be modified by adjusting the amount of income or gain that is considered section 367(b) income for this purpose. Regulations will provide that section 367(b) income includes a section 301(c)(1) dividend or section 301(c)(3) gain that would arise if § 1.367(b)–10 applied to the triangular reorganization only to the extent such dividend income or gain would be subject to U.S. tax or would give rise to an income inclusion under section 951(a)(1)(A) that would be subject to U.S. tax. A conforming change will be made to the section 367(b) priority rule under § 1.367(a)–3(a)(2)(iv).

In addition, the no-U.S.-tax exception will be modified to provide that the exception will not be available if P is a controlled foreign corporation. Furthermore, where P is not a controlled foreign corporation, S is a domestic corporation, and P’s stock in S is not a United States real property interest, the regulations will clarify that the no-U.S.-tax exception will apply if the deemed distribution that would result from application of § 1.367(b)–10 to the triangular reorganization would not be treated as a dividend under section 301(c)(1) that would be subject to U.S. tax (for example, by reason of an applicable treaty or by reason of an absence of earnings and profits).

.03 Anti-Abuse Rule

The anti-abuse rule in § 1.367(b)–10(d) will be clarified to provide that S’s acquisition of P stock or securities in exchange for a note may invoke the anti-abuse rule. In addition, § 1.367(b)–10(d) will be clar

ified to provide that the earnings and profits of a corporation (or a successor corporation) may be taken into account for purposes of determining the consequences of the adjustments provided in the final regulations, as modified by the rules announced in this notice, regardless of whether such corporation is related to P or S before the triangular reorganization. Thus, the earnings and profits of T (or a successor to T) or a subsidiary of S or T may be taken into account for purposes of determining the consequences of the adjustments provided in the final regulations, as modified by the rules announced in this notice. Section 1.367(b)–10(d) also will be clarified to provide that a funding of S may occur after the triangular reorganization and that a funding of S includes capital contributions, loans, and distributions.

.04 Example

The following example illustrates certain clarifications and modifications to the final regulations announced in section 4 of this notice:

(i) Facts . FP is a foreign corporation that wholly owns USS, a domestic corporation with no assets and no earnings and profits. FP transfers $100x of newly issued FP stock to USS in exchange for $10x of USS stock and a $90x note issued by USS. FP would be subject to U.S. tax under section 881 on a distribution from USS if, contrary to the facts here, USS had earnings and profits for purposes of applying section 301(c)(1) to the distribution. USS acquires all the stock of UST, an unrelated domestic corporation that is wholly owned by a foreign person, in exchange for the $100x of FP stock in a triangular reorganization described in section 368(a)(1)(B). At the time of the acquisition, UST has $100x of earnings and profits. USS’s purchase of the FP stock for its note in connection with the triangular reorganization is engaged in with a view to avoid the purpose of § 1.367(b)–10 because the parties seek to transfer property to FP without incurring U.S. tax.

(ii) Analysis . The triangular reorganization is described in § 1.367(b)–10(a) of the final regulations. Pursuant to § 1.367(b)–10(b)(1) of the final regulations, as modified by the rules announced in this notice, adjustments must be made that are consistent with the adjustments that would have been made if USS had in fact distributed the $90x note to FP in a distribution to which section 301 would apply. Because USS’s purchase of the FP stock for its note is engaged in with a view to avoid the purposes of § 1.367(b)–10, the anti-abuse rule applies and therefore appropriate adjustments are made. In particular, for purposes of determining the consequences of the adjustments provided in the final regulations, as modified by the rules announced in this notice, the earnings and profits of USS are deemed to include the earnings and profits of UST. The $90x deemed distribution is treated as separate from, and occurring

immediately before, USS’s acquisition of the FP stock used in the triangular reorganization. Pursuant to this notice, § 1.367(b)–10(b)(2) and –10(c)(2) of the final regulations (regarding a deemed contribution) are removed. Therefore, no adjustments are made by FP to its USS stock except as provided in § 1.358–6. Pursuant to this notice, FP’s adjustment to the basis in its USS stock under § 1.358–6 is determined as if FP provided the FP stock pursuant to the plan of reorganization.