SECTION 2. REGULATIONS TO

ADDRESS INVERSION TRANSACTIONS

.01 Regulations under Section 7874 to Disregard Certain Stock Attributable to Passive Assets

(a) Section 7874 Background A foreign corporation (foreign acquiring corporation) generally is treated as a surrogate foreign corporation under section 7874(a)(2)(B) if pursuant to a plan (or a series of related transactions) (i) the foreign acquiring corporation completes after March 4, 2003, the direct or indirect acquisition of substantially all of the properties held directly or indirectly by a domestic corporation (acquisition); (ii) after the acquisition, at least 60 percent of the stock (by vote or value) of the foreign acquiring corporation is held by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation (such stock is referred to at times in this notice as “stock held by reason of”); and (iii) after the acquisition, the expanded affiliated group (EAG) that includes the foreign acquiring corporation does not have substantial business activities in the foreign country in which, or under the law of which, the foreign acquiring corporation is created or organized, when compared to the total business activities of the EAG. Similar provisions apply if a foreign acquiring corporation acquires substantially all of the properties constituting a trade or business of a domestic partnership. The domestic corporation or the domestic partnership described in this paragraph is referred to at times in this notice as the “domestic entity.” For purposes of this notice, a reference to a domestic corpora

tion, a domestic partnership, or a domestic entity includes a successor. Furthermore, the term “EAG” has the meaning provided in § 1.7874–4T(i)(3), and the term “inversion transaction” means an acquisition in which the foreign acquiring corporation is treated as a surrogate foreign corporation under section 7874(a)(2).

Section 7874(a)(1) provides that the taxable income of an “expatriated entity” for any year that includes any portion of the applicable period (as defined in section 7874(d)(1)) shall in no event be less than the inversion gain (as defined in section 7874(d)(2)) of the entity for the taxable year. Pursuant to section 7874(a)(2)(A), the term expatriated entity means a domestic corporation or a domestic partnership referred to in section 7874(a)(2)(B)(i) (in other words, a domestic entity), or any United States person who is related (within the meaning of section 267(b) or 707(b)(1)) to such domestic corporation or domestic partnership.

Under section 7874(c)(4), a transfer of properties or liabilities (including by contribution or distribution) is disregarded if the transfer is part of a plan a principal purpose of which is to avoid the purposes of section 7874. In addition, section 7874(c)(6) grants the Secretary authority to prescribe regulations as may be appropriate to determine whether a corporation is a surrogate foreign corporation, including regulations to treat stock as not stock. Finally, section 7874(g) grants the Secretary authority to provide regulations necessary to carry out section 7874, including regulations adjusting the application of section 7874 as necessary to prevent the avoidance of the purposes of section 7874, including the avoidance of such purposes through (i) the use of related persons, pass-through or other non-corporate entities, or other intermediaries, or (ii) transactions designed to have persons cease to be (or not become) members of expanded affiliated groups or related persons.

Under section 7874(c)(2)(B) (statutory public offering rule), stock of the foreign acquiring corporation that is sold in a public offering related to the acquisition described in section 7874(a)(2)(B)(i) is excluded from the denominator of the fraction used for purposes of calculating

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the ownership percentage described in section 7874(a)(2)(B)(ii) (ownership fraction). The statutory public offering rule furthers the policy that section 7874 is intended to curtail transactions that allow the benefits of an inversion but “permit corporations and other entities to continue to conduct business in the same manner as they did prior to the inversion.” S. Rep. No. 192, 108th Cong., 1st. Sess., at 142 (2003); Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress (JCS–5–05) (May 31, 2005), at 343.

Section 1.7874–4T modifies the statutory public offering rule. The preamble to § 1.7874–4T provides that “the IRS and Treasury Department believe that stock of the foreign acquiring corporation transferred in exchange for certain property in a transaction related to the acquisition, but not through a public offering, presents the same opportunity to inappropriately reduce the ownership fraction.” TD 9654, 2014–6 IRB 461. Accordingly, § 1.7874– 4T(b) provides that, subject to a de minimis exception, “disqualified stock” is not included in the denominator of the ownership fraction. Disqualified stock generally includes stock of the foreign acquiring corporation that is transferred to a person (other than the domestic entity) in exchange for “nonqualified property.” The term nonqualified property means (i) cash or cash equivalents, (ii) marketable securities, (iii) certain obligations, or (iv) any other property acquired in a transaction related to the acquisition with a principal purpose of avoiding the purposes of section 7874.

(b) Transactions at Issue and Regula- tions to be Issued

The Treasury Department and the IRS are aware that taxpayers may be engaging in transactions with a foreign corporation that has substantial cash and other liquid assets in order to facilitate an inversion to avoid the application of section 7874. Although § 1.7874–4T addresses cases in which nonqualified property held directly or indirectly by the foreign acquiring corporation is received in exchange for stock of the foreign acquiring corporation in a transaction related to the acquisition, that regulation will not apply to nonqualified property held directly or indirectly by the foreign acquiring corporation that was not

acquired by the foreign acquiring corporation in a transaction related to the acquisition. As a result of this limitation in the application of § 1.7874–4T, stock of the foreign acquiring corporation may be included in the denominator of the ownership fraction, thereby decreasing the ownership fraction, even though a substantial portion of the value of such stock is attributable to nonqualified property.

The Treasury Department and the IRS intend to issue regulations under section 7874(c)(6) providing that, if more than 50 percent of the gross value of all “foreign group property” constitutes “foreign group nonqualified property,” a portion of the stock of the foreign acquiring corporation will be excluded from the denominator of the ownership fraction, as described below. This 50 percent test is applied after the acquisition and all transactions related to the acquisition, if any, are completed.

For this purpose, foreign group property means any property (including property that gives rise to disqualified stock upon application of § 1.7874–4T) held by the EAG after the acquisition (and all transactions related to the acquisition, if any) are completed, other than the following property: (i) property that is directly or indirectly acquired in the acquisition and that, at the time of the acquisition, was held directly or indirectly by the domestic entity; and (ii) to avoid double counting, stock or a partnership interest in a member of the EAG and an obligation described in § 1.7874–4T(i)(7)(iii)(A) (that is, an obligation of a member of the EAG).

Except as provided in the immediately succeeding sentence, foreign group nonqualified property means foreign group property that is described in § 1.7874– 4T(i)(7) other than property that gives rise to income described in section 1297(b)(2)(A) or section 954(h) or (i) (determined by substituting the term “foreign corporation” for the term “controlled foreign corporation”). Foreign group property that otherwise would not be foreign group nonqualified property nevertheless is treated as foreign group nonqualified property if, in a transaction related to the acquisition, such property (substitute property) is acquired in exchange for other property (transferred property) that would be foreign group nonqualified prop

erty had such transferred property not been exchanged for the substitute property.

If the 50 percent threshold is satisfied, the portion of the stock of the foreign acquiring corporation that will be excluded from the denominator of the ownership fraction is the product of (i) the value of the stock of the foreign acquiring corporation other than (a) stock described in section 7874(a)(2)(B)(ii) (that is, stock held by reason of), and (b) stock excluded from the denominator of the ownership fraction under either § 1.7874–1(b) (because it is held by a member of the EAG) or § 1.7874–4T(b) (because it is disqualified stock); and (ii) a fraction (foreign group nonqualified property fraction), the numerator of which is the gross value of all foreign group nonqualified property, and the denominator of which is the gross value of all foreign group property. Solely for purposes of the preceding sentence, property received by the foreign acquiring corporation that gives rise to disqualified stock (within the meaning of § 1.7874–4T(c)) that is excluded from the denominator of the ownership fraction pursuant to § 1.7874–4T(b) is excluded from both the numerator and the denominator of the foreign group nonqualified property fraction.

The regulations to be issued also will contain a rule that incorporates the principles of § 1.7874–4T(h) (regarding the interaction of the expanded affiliated group rules with the rule that excludes disqualified stock from the denominator of the ownership fraction) with respect to stock of the foreign acquiring corporation that is excluded from the denominator of the ownership fraction under the rules described in this section 2.01(b).

The following example illustrates the regulations described in this section 2.01(b): Example . (i) Facts . FA, a foreign corporation, has 20 shares of a single class of stock outstanding, all of which are owned by Individual A. FA acquires all the stock of DT, a domestic corporation, solely in exchange for 76 shares of newly issued FA stock (DT acquisition). In a transaction related to the DT acquisition, FA issues four shares of stock to Individual A in exchange for $50x of cash. After the DT acquisition, in addition to the DT stock and $50x of cash received from Individual A, FA holds Asset A (gross value of $150x), which is foreign group nonqualified property, and Asset B (gross value of $100x), which is not foreign group nonqualified property.

(ii) Analysis . The four shares of FA stock issued to Individual A in exchange for $50x of cash, which

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is nonqualified property, are disqualified stock and excluded from the denominator of the ownership fraction pursuant to § 1.7874–4T(b). After the DT acquisition, in addition to the DT stock, FA has foreign group property with a gross value of $300x, $200x of which is foreign group nonqualified property (Asset A and cash of $50x). Accordingly, 66.67% of the gross value of all the foreign group property constitutes foreign group nonqualified property ($200x/$300x). Because the 50 percent threshold is satisfied, a portion of the FA stock will be excluded from the denominator of the ownership fraction under this section 2.01(b). Because FA has only one class of stock outstanding, the multiplicand of the computation is 20 shares (100 shares of FA stock outstanding less the 76 shares of FA stock that are held by reason of and the four shares of disqualified stock). Those 20 shares are multiplied by the foreign group disqualified property fraction. The numerator of the fraction is $150x ($200x less $50x of cash that gives rise to disqualified stock) and the denominator is $250x ($300x less the $50x of cash). Thus, the portion of the FA stock that is excluded from the denominator of the ownership fraction under this section 2.01(b), is the product of 20 shares multiplied by $150x / $250x, or 12 shares. As a result, the denominator of the ownership fraction is 84 shares (100 shares reduced by four shares of disqualified stock excluded under § 1.7874–4T(b) and 12 shares excluded under this section 2.01(b)), with the result that the ownership fraction is 90.4 percent (76/84).

.02 Regulations under Sections 7874 and 367 to Disregard Certain Distribu- tions by the Domestic Entity

(a) Section 367(a) Background Subject to certain exceptions, section 367(a)(1) generally provides that if a United States person transfers property to a foreign corporation in an exchange described in section 332, 351, 354, 356, or 361, the foreign corporation shall not be considered a corporation for purposes of determining the extent to which the United States person recognizes gain on such transfer. Section 1.367(a)–3(c) provides an exception to the general rule of section 367(a)(1) for certain transfers by a U.S. person of stock or securities of a domestic corporation (the U.S. target company) to a foreign corporation. This exception only applies, however, if the U.S. target company complies with the reporting requirements in § 1.367(a)– 3(c)(6) and if the four conditions set forth in § 1.367(a)–3(c)(1)(i) through (iv) are satisfied. The condition set forth in § 1.367(a)–3(c)(1)(iv) requires the active trade or business test (as defined in § 1.367(a)–3(c)(3)) to be satisfied, which, in turn, requires the substantiality test (as defined in § 1.367(a)–3(c)(3)(iii)) to be

satisfied (among other requirements). The substantiality test is satisfied if, at the time of the transfer, the fair market value of the transferee foreign corporation is at least equal to the fair market value of the U.S. target company. For this purpose, the fair market value of the transferee foreign corporation generally does not include assets acquired outside the ordinary course of business within the 36-month period preceding the exchange if they produce, or are held for the production of, passive income or are acquired for the principal purpose of satisfying the substantiality test.

(b) Transactions at Issue and Regula- tions to be Issued

The Treasury Department and the IRS are aware that a domestic entity may distribute property to its former shareholders (within the meaning of § 1.7874–2(b)(2)) or former partners (within the meaning of § 1.7874–2(b)(3)), in order to reduce the ownership fraction by reducing the numerator. Similarly, to avoid the application of section 367(a)(1), a U.S. target company may distribute property to its shareholders in contemplation of an acquisition to satisfy the substantiality test. To address these transactions, the Treasury Department and the IRS intend to issue regulations under sections 7874 and 367, as described below. For purposes of applying section 7874(c)(4) (which disregards transfers of properties or liabilities if the transfer is part of a plan a principal purpose of which is to avoid the purposes of section 7874), non-ordinary course distributions (defined below) made by the domestic entity (including a predecessor) during the 36month period ending on the acquisition date (within the meaning of § 1.7874– 3T(d)(1)) will be treated as part of a plan a principal purpose of which is to avoid the purposes of section 7874. Accordingly, such distributions will be disregarded for purposes of section 7874.

For purposes of this notice, nonordinary course distributions mean the excess of all distributions made during a taxable year by the domestic entity with respect to its stock or partnership interests, as applicable, over 110 percent of the average of such distributions during the thirty-six month period immediately preceding such taxable year. A distribution

means any distribution, regardless of whether it is treated as a dividend or whether, for example, it qualifies under section 355. Thus, a distribution includes any distribution made by the domestic entity in redemption of its stock, such as a distribution to which section 302(a) applies. A distribution also includes a transfer of money or other property to the owners of the domestic entity that is made in connection with the acquisition described in section 7874(a)(2)(B)(i) to the extent the money or other property is directly or indirectly provided by the domestic entity. For example, if the acquisition of the domestic entity by the foreign acquiring corporation qualifies as a reorganization under section 368(a) and the shareholders of the domestic entity receive other property or “boot” (within the meaning of section 356) in connection with the reorganization, then, to the extent the boot is directly or indirectly provided by the domestic entity for purposes of section 356, the domestic entity is treated as having made a distribution in the amount of that boot for purposes of this section 2.02(b)).

Section 1.367(a)–3(c) will be modified to include a rule that incorporates the principles described above for purposes of the substantiality test.

.03 Regulations under Section 7874 Regarding Subsequent Transfers of Stock of the Foreign Acquiring Corporation

(a) Section 7874 Background and Transactions at Issue

Section 7874(c)(2)(A) provides that stock of a foreign acquiring corporation that is held by members of the EAG is not included in the numerator or the denominator of the ownership fraction (statutory EAG rule). To illustrate the application of the statutory EAG rule, assume a domestic corporation (DC) is wholly owned by a U.S. parent corporation (USP), and that USP transfers all the DC stock to a newly formed foreign corporation (FA) in exchange for all of the stock of FA. Absent the statutory EAG rule, the ownership fraction would be 100 percent and the foreign acquiring corporation would be treated as a domestic corporation (assuming the EAG does not have substantial business activities in the relevant foreign country). However, under the statutory EAG rule, the stock of FA held by USP is

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excluded from the numerator and the denominator of the ownership fraction, so that the numerator and the denominator of the ownership fraction are zero and FA is respected as a foreign corporation.

However, application of the statutory EAG rule does not always lead to the appropriate result, for example, when a domestic entity has minority shareholders. To illustrate, assume that DC is owned 90 percent by USP and 10 percent by individual A, and that USP and individual A transfer all of their DC stock to newly formed FA in exchange for 90 percent and 10 percent, respectively, of the stock of FA. Absent an exception to the statutory EAG rule, the stock of FA held by USP would be excluded from the numerator and the denominator of the ownership fraction, such that the ownership fraction would be 100 percent (10/10) and FA would be treated as a domestic corporation.

To address this and other inappropriate results, § 1.7874–1 provides two exceptions to the statutory EAG rule: the internal group restructuring exception and the loss of control exception (together with the statutory EAG rule, the EAG rules). See §§ 1.7874–1(c)(2) and 1.7874– 1(c)(3), respectively. When either of these exceptions applies, stock of the foreign acquiring corporation held by members of the EAG is excluded from the numerator but not the denominator of the ownership fraction. Thus, both exceptions have the potential to decrease the ownership fraction. In general, the internal group restructuring exception applies when the domestic entity and the foreign acquiring corporation are members of an affiliated group (membership generally being based on an 80 percent vote and value requirement) with the same common parent both before and after the acquisition. The loss of control exception applies when the former owners of the domestic entity do not hold more than 50 percent of the stock of any member of the EAG after the acquisition.

Section 1.7874–5T addresses the effect on the numerator of the ownership fraction when former shareholders or former partners of the domestic entity receive stock of the foreign acquiring corporation by reason of holding stock or a partnership interest in the domestic entity and then transfer that stock to another person. Specifically, § 1.7874–5T(a) provides that

stock of the foreign acquiring corporation that is described in section 7874(a)(2)(B)(ii) (that is, stock held by reason of) shall not cease to be so described as a result of any subsequent transfer of the stock by the former shareholder or former partner that received the stock, even if the subsequent transfer is related to the acquisition described in section 7874(a)(2)(B)(i). Accordingly, such stock of the foreign acquiring corporation is included in the numerator of the ownership fraction unless the stock is excluded from the ownership fraction under the EAG rules.

The preamble to §§ 1.7874–4T and -5T notes that the Treasury Department and the IRS continue to study the extent to which subsequent transfers of stock of the foreign acquiring corporation should be taken into account in applying the EAG rules. TD 9654. The preamble describes certain divisive transactions under section 355 that involve subsequent distributions by a corporation of the stock of the foreign acquiring corporation. For example, assume a divisive transaction under section 355 in which a publicly traded U.S. parent corporation (USP) contributes all the stock of a domestic corporation (DC) to a newly formed foreign acquiring corporation (FA) (which is an acquisition described in section 7874(a)(2)(B)(i)) followed by a distribution of all of the FA stock to its shareholders. Pursuant to § 1.7874–5T, the FA stock received by USP does not cease to be described in section 7874(a)(2)(B)(ii) (that is, it continues to be treated as stock held by reason of) as a result of USP’s distribution of the FA stock to its shareholders. Accordingly, absent application of the EAG rules, the FA stock is included in the numerator of the ownership fraction. An issue raised by this transaction is the extent to which the distribution should be taken into account in determining whether the FA stock received by USP is treated as stock held by a member of the EAG for purposes of the EAG rules; in other words, the extent to which the EAG should be determined by taking into account any transactions related to the acquisition.

As the preamble further notes, this issue can also arise when the subsequent transfer occurs by reason of a sale or pursuant to a reorganization described in section 368. More specifically, the issue can

arise, for example, if: (i) a corporation receives stock of a foreign acquiring corporation in an acquisition described in section 7874(a)(2)(B)(i) and subsequently sells that stock (or a portion of that stock), or (ii) in connection with an acquisitive asset reorganization described in section 368, a target corporation receives stock of the foreign acquiring corporation in exchange for its assets and subsequently distributes that stock of the foreign acquiring corporation to its shareholders pursuant to the plan of reorganization. Finally, the preamble requests comments on whether different results may be appropriate depending on whether the corporation that receives the stock of the foreign acquiring corporation and only temporarily holds that stock is a foreign or a domestic corporation.

Upon further study, the Treasury Department and the IRS have determined that stock of the foreign acquiring corporation that is received by a former corporate shareholder or a former corporate partner that subsequently is transferred in a transaction related to the acquisition should not be treated as held by a member of the EAG for purposes of applying the EAG rules, subject to two exceptions. As a result, absent an exception, that stock generally will be included in the numerator of the ownership fraction (pursuant to § 1.7874–5T) and the denominator of the ownership fraction. One exception applies to “U.S.-parented groups” and the other exception applies to “foreign-parented groups.” In general, the U.S.-parented group exception applies to transfers of stock of the foreign acquiring corporation that remain within the U.S.-parented group. The foreign-parented group exception is broader, applying not only to transfers of stock of the foreign acquiring corporation that remain within the foreignparented group but also to transfers of stock of the foreign acquiring corporation outside the foreign-parented group, subject to the restriction generally that the EAG rules would have applied had the foreign-parented group not transferred any stock of the foreign acquiring corporation outside the group (including stock of the foreign acquiring corporation received in the acquisition and other stock of the foreign acquiring corporation held by the foreign-parented group).

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(b) Regulations to be Issued (i) In General Except as provided in section 2.03(b)(ii) or (iii) of this notice, if stock of the foreign acquiring corporation described in section 7874(a)(2)(B)(ii) (that is, stock of the foreign acquiring corporation held by reason of) is received by a former corporate shareholder or former corporate partner of the domestic entity (transferring corporation), and, in a transaction (or series of transactions) related to the acquisition, that stock (transferred stock) is subsequently transferred, the transferred stock is not treated as held by a member of the EAG for purposes of applying the EAG rules. Accordingly, the transferred stock is included in the numerator and the denominator of the ownership fraction.

Except as provided in section 2.03(b)(iii) of this notice, all transactions related to the acquisition must be taken into account for purposes of determining an EAG, a U.S.-parented group, and a foreignparented group.

For purposes of this notice, a U.S.parented group means an affiliated group that has a domestic corporation as the common parent corporation, and a foreign-parented group means an affiliated group that has a foreign corporation as the common parent corporation. For this purpose, the term affiliated group means an affiliated group as defined in section 1504(a) but without regard to section 1504(b)(3), except that section 1504(a) is applied by substituting “more than 50 percent” for “at least 80 percent” each place it appears.

For purposes of this section 2.03(b), including for purposes of applying section 1504(a), each partner in a partnership is treated as holding its proportionate share of stock held by the partnership, as determined under the rules and principles of sections 701 through 777.

(ii) Exception for Subsequent Transfers Involving a U.S.-Parented Group

Transferred stock is treated as held by a member of the EAG for purposes of the EAG rules if (i) before and after the acquisition, the transferring corporation (or its successor) is a member of a U.S.parented group; and (ii) after the acquisition, both the person that holds the transferred stock after all related transfers of the transferred stock are completed and

the foreign acquiring corporation are members of the U.S.-parented group. Accordingly, under section 7874(c)(2)(A) and § 1.7874–1(b), such transferred stock is excluded from the numerator of the ownership fraction, and, depending upon the application of § 1.7874–1(c)(2), may be excluded from the denominator of the ownership fraction.

(iii) Exception for Subsequent Trans- fers Involving a Foreign-Parented Group

Transferred stock is treated as held by a member of the EAG for purposes of the EAG rules if (i) before the acquisition, the transferring corporation and the domestic entity are members of the same foreignparented group; and (ii) after the acquisition, the transferring corporation is a member of the EAG or would be a member of the EAG absent the subsequent transfer of any stock of the foreign acquiring corporation by a member of the foreign-parented group in a transaction related to the acquisition (but taking into account all other transactions related to the acquisition). Accordingly, under section 7874(c)(2)(A) and § 1.7874–1(b), such transferred stock is excluded from the numerator of the ownership fraction, and, depending upon the application of § 1.7874–1(c)(2), may be excluded from the denominator of the ownership fraction.

(iv) Examples The following examples illustrate the regulations described in this section 2.03(b): Example 1 . (i) Facts . D, a domestic corporation, owns all of the stock of DT, also a domestic corporation, and stock of other subsidiaries. The DT stock does not represent substantially all of the property of D for purposes of section 7874. Pursuant to a reorganization described in section 368(a)(1)(D), D transfers all the stock of DT to FA, a newly formed foreign corporation, in exchange solely for 100 shares of FA stock (DT acquisition) and distributes all of the FA stock to its shareholders pursuant to section 361(c)(1) (subsequent distribution). D is the common parent of a U.S.-parented group before and after the DT acquisition.

(ii) Analysis . Under § 1.7874–2(f)(1), the 100 shares of FA stock received by D in the DT acquisition is stock of a foreign corporation (FA) that is held by reason of holding stock in a domestic corporation (DT). Accordingly, such stock is described in section 7874(a)(2)(B)(ii). Under § 1.7874–5T(a), all 100 shares of FA stock retain their status as being described in section 7874(a)(2)(B)(ii) even though D subsequently transfers all of the FA stock to its shareholders in the subsequent distribution. Under section 2.03(b)(i) of this notice, the FA stock re

ceived by D is not treated as held by a member of the EAG for purposes of applying the EAG rules. The exception provided in section 2.03(b)(ii) of this notice does not apply because, after the DT acquisition, the shareholders of D and FA are not members of the U.S.-parented group. Accordingly, the ownership fraction is 100/100.

(iii) Alternative facts and analysis . The facts are the same as in paragraph (i) of this example, except that D is a foreign corporation and the common parent of a foreign-parented group. Under section 2.03(b)(iii) of this notice, the FA stock received by D is treated as held by a member of the EAG for purposes of applying the EAG rules because (i) before the DT acquisition, D and DT are members of a foreign-parented group of which D is the common parent, and (ii) D would be a member of the EAG absent the distribution of the FA stock by D to its shareholders in the subsequent distribution. In addition, the DT acquisition qualifies as an internal group restructuring under § 1.7874–1(c)(2). Accordingly, the ownership fraction is 0/100.

Example 2 . (i) Facts . Individual A owns all the stock of FT, a foreign corporation. FT owns all the stock of DT, a domestic corporation. FT does not own any other property and has no liabilities. Pursuant to a reorganization described in section 368(a)(1)(F), FT transfers all of its DT stock to FA, a newly formed foreign corporation, in exchange for 100 shares of FA stock (DT acquisition) and distributes the FA stock to individual A in liquidation pursuant to section 361(c)(1) (subsequent distribution).

(ii) Analysis . Under § 1.7874–2(f)(1), the 100 shares of FA stock received by FT in the reorganization is stock of a foreign corporation (FA) that is held by reason of holding stock in a domestic corporation (DT). Accordingly, such stock is described in section 7874(a)(2)(B)(ii). Under § 1.7874–5T(a), all 100 shares of FA stock retain their status as being described in section 7874(a)(2)(B)(ii) even though FT subsequently transfers all of the FA stock to its shareholder (individual A) in the subsequent distribution. Under section 2.03(b)(iii) of this notice, the FA stock received by FT is treated as held by a member of the EAG for purposes of applying the EAG rules because (i) before the DT acquisition, FT and DT are members of a foreign-parented group (of which FT is the common parent), and (ii) absent the distribution of the FA stock by FT to individual A in the subsequent distribution, FT would be a member of the EAG. In addition, the DT acquisition qualifies as an internal group restructuring under § 1.7874– 1(c)(2). Accordingly, the ownership fraction is 0/100. (iii) Alternative facts and analysis . The facts are the same as in paragraph (i) of this example, except that, in a transaction related to the DT acquisition, FA subsequently issues 200 shares of stock to individual B in exchange for qualified property (within the meaning of § 1.7874–4T(i)(7)). The exception under section 2.03(b)(iii) of this notice does not apply because, taking into account FA’s issuance of 200 shares to individual B, FT would not be a member of the EAG absent the subsequent distribution. Accordingly, the FA stock received by FT is not treated as held by a member of the EAG for

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purposes of the EAG rules. Accordingly, the ownership fraction is 100/300.