Notice 2014-32 — Internal Revenue Bulletin 2023-44

designed to avoid the application of the no-U.S.-tax exception in §1.367(b)-10(a) (2)(ii) and also expressed a concern that taxpayers may attempt to interpret that exception in a narrower manner than was intended or is appropriate. Notice 201432 accordingly announced that future regulations would modify the no-U.S.tax exception, in part to clarify its scope. The proposed regulations would adopt the modifications to the no-U.S.-tax exception described in Notice 2014-32. See proposed §1.367(b)-10(a)(2)(ii).

As noted above in Part I.F of the Explanation of Provisions section of this preamble, Notice 2016-73 announced that the definition of “property” in §1.367(b)-10(a)(3)(ii) would be modified to include nonqualified preferred stock of S. The proposed regulations would adopt this rule without modification. See proposed §1.367(b)-10(a)(3)(ii)(C).

Section 1.367(b)-10(b)(3) provides that the deemed distribution is generally treated as occurring immediately before the P acquisition, and Notice 2016-73 requested comments on whether this rule should be modified in light of the modifications announced in the notice. The comment suggested that the current rule be retained because no reason has been identified to warrant its modification. The Treasury Department and the IRS agree with the comment and therefore no changes would be made with respect to this rule.

The proposed regulations also would modify the reporting requirements under §1.367(b)-1(c) to require corporations that acquire stock or securities of P in a transaction described in the Final Regulations to disclose such acquisitions by attaching a section 367(b) notice (within the meaning of §1.367(b)-1(c)) to the corporation’s tax return (or Form 5471, as applicable) for the year in which the stock or securities of P are acquired. See proposed §1.367(b)-1(c)(2)(vi). Under the proposed regulations, corporations would be required to describe the circumstances of the acquisition of stock or securities of P, any related transactions involving the acquired stock or securities, and whether any adjustments were made pursuant to §1.367(b)-10. See proposed §1.367(b)-1(c)(4)(viii). The information required to be disclosed would supplement (rather than replace) any information already required to be disclosed in the section 367(b) notice.

IV. Applicability Dates

With respect to those rules described in Notice 2014-32, the proposed regulations generally would be applicable to transactions completed on or after April 25, 2014, subject to limited exceptions. See proposed §§1.367(a)-3(g)(1)(viii) and 1.367(b)-10(e)(2).

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With respect to those rules described in Notice 2016-73, the proposed regulations generally would be applicable to transactions completed on or after December 2, 2016. See proposed §§1.367(a)-3(g)(1) (viii), 1.367(b)-3(g)(7)(i), 1.367(b)-4(i), and 1.367(b)-10(e)(3). To the extent the proposed regulations contain rules not previously announced in Notice 2016-73, the proposed regulations would be applicable to transactions completed on or after the date the proposed regulations are filed in the Federal Register . See proposed §§1.367(b)-3(g)(7)(i), 1.367(b)-6(a)(1) (v) and (vi), and 1.1411-10(i); see also proposed §1.367(b)-3(g)(7)(ii) for transition rules for certain transactions completed before the issuance of the proposed regulations.

Taxpayers and their related parties (within the meaning of sections 267(b) and 707(b)(1)) may choose to apply the rules of Notice 2014-32 and Notice 2016-73 or the proposed regulations to any open taxable year beginning before the date the proposed regulations are filed as final regulations in the Federal Register, provided that taxpayers and their related parties consistently apply either the entirety of Notice 2014-32 and Notice 2016-73 or the entirety of the proposed regulations for such years and each subsequent taxable year beginning before the date the proposed regulations are filed as final regulations in the Federal Register .

The comment requested that the Treasury Department and IRS reconsider the December 2, 2016, applicability date given that Notice 2016-73 proposed to apply the EAB rules to all inbound nonrecognition transactions, regardless of whether the taxpayer had previously effected an applicable triangular reorganization. The comment did, however, recognize the immediate need for the EAB rules to apply to already-completed applicable triangular reorganizations where the taxpayer did not apply the Final Regulations. Because the proposed regulations would apply the EAB rules only to those inbound nonrecognition transactions that follow certain triangular reorganizations and other transactions designed to create EAB, the Treasury Department and IRS maintain that the December 2, 2016, effective date is appropriate.

No inference is intended regarding the treatment of applicable triangular reorganizations, transactions undertaken with a principal purpose of creating EAB, or subsequent inbound nonrecognition transactions completed before the applicability date of the proposed regulations. Such transactions may be subject to challenge before the applicability dates, for example, under the anti-abuse rule in §1.367(b)-10(d), applicable Code provisions, or judicial doctrines.

Effect on Other Documents

The proposed regulations would, as of the date they are filed as final regulations with the Federal Register, obsolete Notice 2014-32 and Notice 2016-73. Until such time, taxpayers may continue to rely on Notice 2014-32 and Notice 2016-73 as noted in Part IV of the Explanation of Provisions section of this preamble.

Special Analyses

I. Regulatory Planning and Review – Economic Analysis

Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required.

II. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) requires that a Federal agency obtain the approval of the OMB before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit.

The collections of information in the proposed regulations are in proposed §1.367(b)-1(c)(4)(viii) and (ix) and apply to taxpayers that engage in transactions described in §1.367(b)-3(g) or §1.367(b)-10. This information is necessary for the IRS’s audit and examination purposes, and in particular to

identify transactions that should be subject to the proposed regulations. The proposed information collection is a statement by corporations attached to their timely filed Federal tax returns (or Form 5471, as applicable) that describes certain transactions and computations relevant to the proposed regulations. Because such statements have not been required for transactions that predate the proposed regulations, the Treasury Department and the IRS are limited in their ability to estimate how many taxpayers are likely to be affected by the proposed information collection. Based on available data and the profile of taxpayers that have historically undertaken the types of transactions at issue (large, publicly traded corporations), it is estimated that no more than 50 taxpayers would be affected by the proposed information collection in a given year. The likely respondents are foreign and domestic corporations.

Because the collections of information in proposed §1.367(b)-1(c)(4)(viii) and (ix) are proposed to apply to taxable years ending on or after the date the proposed regulations are filed with the Federal Register, the Treasury Department and the IRS have submitted the collection of information in proposed §1.367(b)-1(c) (4)(viii) and (ix) to the OMB for review in accordance with the PRA and requested a temporary OMB control number (1545NEW). After the rulemaking is finalized, burdens associated with the proposed information collection will be incorporated into OMB control number 15450123. OMB control number 1545-0123 represents a total estimated burden time for all forms and schedules and regulations for corporations. REG-117614-14 will be included in the future; however, the burden estimates in 1545-0123 will not isolate the estimated burden for the information collection contained in these proposed, and subsequent final, regulations. The Treasury Department and the IRS estimate burdens based on a taxpayer-type basis rather than a provision-specific basis.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

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Commenters are strongly encouraged to submit public comments electronically. Comments and recommendations for the proposed information collection should be sent to www.reginfo.gov/public/do/ PRAMain, with electronic copies to the IRS at pra.comments@irs.gov (indicate “REG-117614-14” on the subject line). This particular information collection can be found by selecting “Currently under Review - Open for Public Comments” then by using the search function. Comments can also be mailed to OMB, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies mailed to the IRS, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be received by December 5, 2023.

III. Regulatory Flexibility Act

When an agency issues a rulemaking proposal, the Regulatory Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the agency “to prepare and make available for public comment an initial regulatory flexibility analysis” that will “describe the impact of the proposed rule on small entities.” See 5 U.S.C. 603(a). Section 605 of the RFA provides an exception to this requirement if the agency certifies that the proposed rulemaking will not have a significant economic impact on a substantial number of small entities. A small entity is defined as a small business, small nonprofit organization, or small governmental jurisdiction. See 5 U.S.C. 601(3) through (6).

The Treasury Department and the IRS do not have data readily available to assess the number of small entities potentially affected by the proposed regulations. However, the taxpayers affected by the proposed regulations would generally be domestic and foreign corporations that participate in certain triangular reorganizations. The triangular reorganizations at issue represent a narrow set of abusive transactions that have typically been engaged in by large, publicly traded corporations. Such transactions are highly sophisticated and are thus unlikely to involve small domestic entities. Therefore, the Treasury Department and the IRS certify that the proposed regulations would

not have a significant economic impact on a substantial number of small entities. The Treasury Department and the IRS invite the public to comment on the impact of these regulations on small entities.

IV. Section 7805(f)

Pursuant to section 7805(f) of the Internal Revenue Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

V. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. This proposed rule does not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

VI. Executive Order 13132: Federalism

Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. This proposed rule does not have federalism implications, does not impose substantial direct compliance costs on State and local governments, and does not preempt State law within the meaning of the Executive order.

Comments and Requests for Public Hearing

Before the proposed regulations are adopted as final regulations, consideration

will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed rules. The Treasury Department and the IRS also invite comments on section 367(b) more generally, including whether, and if so, how, any of the existing regulations issued under section 367(b) should be modified in light of the Tax Cuts and Jobs Act. Any electronic or paper comments submitted will be made available at www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register .

Statement of Availability of IRS Documents

IRS Revenue Procedures, Revenue Rulings, Notices, and other guidance cited in this document are published in the Internal Revenue Bulletin or Cumulative Bulletin and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov .

Drafting Information

The principal author of the proposed regulations is Brady Plastaras of the Office of the Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

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PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry for §1.1411-10 in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.1411-10 also issued under 26 U.S.C. 367(b).

Par. 2. Section 1.367(a)-3 is amended by revising paragraphs (a)(2)(iv) and (g) (1)(viii) to read as follows:

§1.367(a)-3 Treatment of transfers of stock or securities to foreign corporations.

(a) * * * (2) * * * (iv) Certain triangular reorganiza- tions described in §1.367(b)-10 . If, in an exchange under section 354 or 356, one or more U.S. persons exchange stock or securities of T (as defined in §1.367(b)-10(a) (3)(i)) in connection with a transaction described in §1.367(b)-10 (applying to certain acquisitions of parent stock or securities for property in triangular reorganizations), section 367(a)(1) does not apply to such U.S. persons with respect to the exchange of the stock or securities of T if the condition in paragraph (a)(2)(iv) (A) or (B) of this section is satisfied. See §1.367(b)-10(a)(2)(iii) (providing a similar rule that excludes certain transactions from the application of §1.367(b)-10).

(A) The amount of gain in the T stock or securities that would otherwise be recognized under section 367(a)(1) (without regard to any exceptions thereto) pursuant to the indirect stock transfer rules of paragraph (d) of this section is less than the sum of the amount of the deemed distribution under §1.367(b)-10 that would be treated and subject to U.S. tax as a dividend under section 301(c)(1) (or would give rise to an inclusion under section 951(a)(1)(A) or 951A(a) that would be subject to U.S. tax) and the amount of such deemed distribution that would be treated and subject to U.S. tax as gain from the sale or exchange of property under section 301(c)(3) (or would give rise to an inclusion under section 951(a)(1)(A) or 951A(a) that would be subject to U.S. tax) if §1.367(b)-10

would otherwise apply to the triangular reorganization.

(B) T is a foreign corporation, but only to the extent that the stock or securities of T are exchanged for stock or securities of P that were acquired by S in exchange for property in the P acquisition (as the terms P, S, property, and P acquisition are defined in §1.367(b)-10(a)). Such exchange of T stock or securities is subject to the rules under §1.367(b)-4(g). Section 367(a) applies to the exchange of T stock or securities to the extent that such stock or securities are exchanged for P stock or securities that were not acquired by S in exchange for property in the P acquisition.

(g) * * * (1) * * * (viii) Except as provided in this paragraph (g)(1)(viii), paragraph (a)(2) (iv) of this section applies to exchanges occurring on or after May 17, 2011. For exchanges that occur prior to May 17, 2011, see §1.367(a)-3T(b)(2)(i)(C) as contained in 26 CFR part 1 revised as of April 1, 2011. Paragraph (a)(2)(iv)(A) of this section, to the extent it relates to amounts that would be subject to U.S. tax or give rise to an inclusion under section 951(a)(1)(A) that would be subject to U.S. tax, applies to triangular reorganizations that are completed on or after April 25, 2014, unless T was not related to P or S (within the meaning of section 267(b)) immediately before the triangular reorganization; the triangular reorganization was entered into either pursuant to a written agreement that was (subject to customary conditions) binding before April 25, 2014, and at all times afterwards, or pursuant to a tender offer announced before April 25, 2014, that is subject to section 14(d) of the Securities and Exchange Act of 1934 (15 U.S.C. 78n(d)(1)) and Regulation 14(D) (17 CFR 240.14d-1 through 240.14d-101) or that is subject to comparable foreign laws; and to the extent the P acquisition that occurs pursuant to the plan of reorganization is not completed before April 25, 2014, the P acquisition was included as part of the plan before April 25, 2014. Paragraph (a)(2)(iv)(B) of this section applies to transactions completed on or after December 2, 2016. Paragraph (a)

(2)(iv)(A) of this section, to the extent it relates to amounts that would give rise to an inclusion under section 951A(a) that would be subject to U.S. tax, applies to triangular reorganizations that are completed on or after October 5, 2023.

Par. 3. Section 1.367(b)-1 is amended by:

Removing the language “and” at the end of paragraph (c)(2)(iv)(B);
Removing the period at the end of paragraph (c)(2)(v) and adding the language “; and” in its place;
Adding paragraph (c)(2)(vi);
In paragraph (c)(3)(ii)(A), removing the language “paragraph (c)(2)(i) or (v)” and adding in its place the language “paragraph (c)(2)(i), (v), or (vi)”;
Revising paragraph (c)(4)(v);
Removing the language “and” at the end of paragraph (c)(4)(vi);
Removing the period at the end of paragraph (c)(4)(vii)(B) and adding a semicolon in its place; and
Adding paragraphs (c)(4)(viii) and (ix).

The additions and revision read as follows:

§1.367(b)-1 Other transfers.

(c) * * * (2) * * * (vi) A domestic or foreign corporation (S) that acquires stock or securities of another corporation (P) in a transaction described in §1.367(b)-10(a)(1), without regard to the exceptions in §1.367(b)-10(a) (2).

(4) * * * (v) Any information that is or would be required to be furnished with a Federal income tax return pursuant to regulations or other guidance under section 332, 351, 354, 355, 356, 361, 368, or 381 (whether or not a Federal income tax return is required to be filed), if such information has not otherwise been provided by the person filing the section 367(b) notice;

(viii) In the case of a corporation (S) described in paragraph (c)(2)(vi) of this section, the rules of this paragraph (c)(4) apply by treating the acquisition of the

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stock or securities of P in exchange for property as the section 367(b) exchange referred to in paragraph (a) of this section. The section 367(b) notice must also include a complete description of the acquisition of the stock or securities of P in exchange for property, including a description of the property provided in exchange for the stock or securities and any related transactions involving the acquisition of the stock or securities. The section 367(b) notice must describe any adjustments made pursuant to §1.367(b)-10 or, if no adjustments are made, explain why no such adjustments were made; and

(ix) In the case of an exchange to which §1.367(b)-3(g) applies, a statement describing how any excess asset basis (as defined in §1.367(b)-3(g)(2)(i)) arose, the amount of excess asset basis, and a description of the computation of the amount of excess asset basis.

Par. 4. Section 1.367(b)-2 is amended by:

In paragraph (c)(1), adding a sentence after the current first sentence;
Adding a sentence to the end of paragraph (d)(2)(ii);
In paragraph (d)(3)(ii), removing the language “subsidiaries of” and adding in its place the language “corporations owned by”;
Adding a sentence to the end of paragraph (d)(3)(ii);
In paragraph (e)(4) Example 2, removing the language “foreign subsidiary” and adding in its place the language “foreign corporation”; and
In paragraphs (j)(2)(i) and (ii), removing the language “is required to include in income either the all earnings and profits amount or the section 1248 amount under the provisions of §1.367(b)-3 or 1.367(b)-4” and adding in its place the language “exchanges stock pursuant to a transaction described in §1.367(b)-3 or §1.367(b)-4(b)(1)(i), (b) (2)(i), (b)(3), (e), or (g)”.

The additions read as follows:

§1.367(b)-2 Definitions and special rules.

(1) * * * But see §1.1411-10(c)(3)(ii), which for certain exchanges modifies the section 1248 amount for purposes of section 1411. * * *

(d) * * * (2) * * * (ii) * * * But see §1.1411-10(c)(3)(ii), which for certain exchanges modifies the all earnings and profits amount for purposes of section 1411.

(3) * * * (ii) * * * But see §1.367(b)-3(g)(1), which adjusts the all earnings and profits amount through a deemed distribution of certain earnings and profits of foreign subsidiaries owned by the foreign acquired corporation.

Par. 5. Section 1.367(b)-3 is amended by adding paragraph (g) to read as follows:

§1.367(b)-3 Repatriation of foreign corporate assets in certain nonrecognition transactions.

(g) All earnings and profits amount adjusted for excess asset basis —(1) General rule . If there is excess asset basis with respect to a foreign acquired corporation and the condition described in paragraph (g)(1)(i) or (ii) of this section is satisfied, then, except as provided in paragraph (g)(5) of this section, an exchanging shareholder to which paragraph (b)(3) (i) of this section applies must compute the all earnings and profits amount with respect to its stock in the foreign acquired corporation as if the foreign acquired corporation had received a distribution of property from a foreign subsidiary under section 301 in an amount equal to the specified earnings, immediately before the inbound nonrecognition transaction. The deemed distribution described in the preceding sentence is treated as occurring for all purposes of the Internal Revenue Code. For purposes of this paragraph (g) (1), the amount of the distribution from a foreign subsidiary is equal to the amount of earnings and profits of that foreign subsidiary that is designated as specified earnings under paragraph (g)(3) of this section. In the case of a foreign subsidiary the stock of which is not held directly by

the foreign acquired corporation, the distribution is treated as being made through any intermediate owners. For purposes of this paragraph (g)(1), references to the foreign acquired corporation, S, and a foreign subsidiary include any predecessor corporation.

(i) S previously acquired in exchange for property stock or securities of the foreign acquired corporation in connection with a triangular reorganization described in §1.358-6(b)(2), and the foreign acquired corporation and S did not make adjustments that have the effect of a distribution of property from S to the foreign acquired corporation under §1.367(b)-10(b)(1).

(ii) The excess asset basis is attributable, directly or indirectly, to property previously provided by a foreign subsidiary of the foreign acquired corporation in connection with a transaction not described in paragraph (g)(1)(i) of this section and undertaken with a principal purpose to create such excess asset basis.

(2) Definitions . The following definitions apply for purposes of this paragraph (g).

(i) Excess asset basis . The term excess asset basis means, with respect to a foreign acquired corporation, the amount by which the inside asset basis of that corporation exceeds the sum of the following amounts:

(A) The earnings and profits of the foreign acquired corporation attributable to its outstanding stock. For purposes of paragraph (g)(2)(i) of this section, such earnings and profits are determined under the principles of §1.367(b)-2(d) but without regard to whether the exchanging shareholder is described in paragraph (b) (1) of this section or whether the exchanging shareholder is a U.S. person or a foreign person; and such earnings and profits include amounts described in section 1248(d)(3) or (4). (B) The aggregate basis in the outstanding stock of the foreign acquired corporation determined immediately before the nonrecognition transaction described in paragraph (a) of this section (the inbound nonrecognition transaction) and therefore without regard to any basis increase described in §1.367(b)-2(e)(3)(ii) resulting from such inbound nonrecognition transaction.

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(C) The aggregate amount of liabilities of the foreign acquired corporation that are assumed (determined under the principles of section 357(d)) by the domestic acquiring corporation in the inbound nonrecognition transaction.

(ii) Foreign subsidiary . The term for- eign subsidiary means, with respect to a foreign acquired corporation, a foreign corporation with respect to which the foreign acquired corporation satisfies the ownership requirements of section 1248(c)(2)(B) but for this purpose treating the foreign acquired corporation as the United States person referred to in section 1248(c)(2)(B). (iii) Inbound nonrecognition transac- tion . The term inbound nonrecognition transaction has the meaning set forth in paragraph (g)(2)(i)(B) of this section.

(iv) Inside asset basis . The term inside asset basis means, with respect to a foreign acquired corporation, the aggregate of the adjusted basis of all the assets of that corporation in the hands of the domestic acquiring corporation determined immediately after the inbound nonrecognition transaction.

(v) Lower-tier earnings . The term low- er-tier earnings means, with respect to a foreign acquired corporation, the sum of the earnings and profits (including deficits) of each foreign subsidiary.

(vi) S . The term S has the same meaning as in §1.367(b)-10(a)(3)(i).

(vii) Specified earnings . The term spec- ified earnings means, with respect to a foreign acquired corporation, the lesser of the following amounts:

(A) Lower-tier earnings; and (B) The excess asset basis of the foreign acquired corporation.

(viii) Property . The term property has the same meaning as in §1.367(b)-10(a) (3)(ii).

(3) Designation of specified earnings . If lower-tier earnings exceed specified earnings, then the portion of lower-tier earnings that is designated as specified earnings is determined by reference to the earnings and profits of each foreign subsidiary on a pro rata basis in proportion to each subsidiary’s share of lower-tier earnings.

(4) Anti-abuse rule . Appropriate adjustments are made pursuant to this section if a transaction is engaged in with a view to

avoid the purposes of this paragraph (g). For example, if a transaction is engaged in with a view to reduce excess asset basis, including by increasing the basis in the stock of the foreign acquired corporation without a corresponding increase in the basis of the assets of the foreign acquired corporation, that increase in the basis in the stock of the foreign acquired corporation will be disregarded for purposes of computing excess asset basis.

(5) Prohibition against affirmative use . This paragraph (g) does not apply to an inbound nonrecognition transaction if a transaction described in paragraph (g)(1) of this section was entered into with a principal purpose of subjecting the inbound nonrecognition transaction to this paragraph (g). For example, this paragraph (g) will not apply to an inbound nonrecognition transaction if a taxpayer engaged in a transaction described in paragraph (g)(1) of this section with a principal purpose of accessing tax attributes of lower-tier foreign subsidiaries by reason of a deemed distribution of lower-tier earnings of the foreign acquired corporation.

(6) Examples . The application of this paragraph (g) is illustrated by the examples in this paragraph (g)(6). In each example, all corporations have a calendar year-end and use the United States dollar as their functional currency.

(i) Example 1 —(A) Facts . USP, a domestic corporation, owns all of the stock of USS, also a domestic corporation, and 80 percent of the stock of FP, a foreign corporation. USS owns the remaining 20 percent of the stock of FP. FP owns all of the stock of FS1, which in turn owns all of the stock of FS2. Both FS1 and FS2 are foreign corporations. In a reorganization described in section 368(a)(1)(F) (F reorganization), US Newco, a newly formed domestic corporation, acquires all of the assets of FP solely in exchange for stock of US Newco, which FP distributes to USP and USS in liquidation. Immediately before the F reorganization, the stock of FP owned by USP has a fair market value of $80x and an adjusted basis of $4x. The stock of FP owned by USS has a fair market value of $20x and an adjusted basis of $1x. The all earnings and profits amounts with respect to USP’s stock of FP and USS’s stock of FP, determined before any adjustments required by paragraph (g) of this section, are $32x and $8x, respectively. FP holds assets with an adjusted basis of $95x, has no liabilities, and has $40x of earnings and profits attributable to its outstanding stock. FS1 and FS2 have $30x and $70x of earnings and profits, respectively, all of which are described in section 959(c)(3). Dividends paid by FS2 to FS1, and by FS1 to FP, would qualify for the exception to foreign personal holding company income under section 954(c)(6). Before the applicability date described in

paragraph (g)(7)(i) of this section, and separate from the F reorganization, FS1 provided property to FP in exchange for stock of FP in connection with a triangular reorganization described in §1.358-6(b)(2), and neither FP nor FS1 made adjustments that had the effect of a distribution of property from FS1 to FP under §1.367(b)-10(b)(1).

(B) Analysis —( 1 ) All earnings and profits amount . The F reorganization is an asset acquisition described in section 368(a)(1) and is thus subject to section 367(b) and this section. Under paragraph (b) (3) of this section, USP and USS each must include in income as a deemed dividend the all earnings and profits amount with respect to their stock of FP. Because there is excess asset basis with respect to FP (as determined in paragraph (g)(6)(i)(B)( 2 ) of this section), USP and USS must compute the all earnings and profits amounts attributable to their stock of FP as if FP had received a distribution of specified earnings, immediately before the F reorganization. Because the stock of FS2 is indirectly owned by FP, to the extent the specified earnings are determined by reference to the earnings and profits of FS2, FS2 is treated as making a distribution to FS1 under section 301, and FS1 is then treated as making a distribution to FP under section 301 in an amount equal to the sum of the amount of specified earnings determined by reference to the earnings and profits of FS1 (determined without regard to the deemed distribution from FS2) and the amount of the deemed distribution received from FS2.

( 2 ) Excess asset basis . The amount of excess asset basis is $50x, calculated as the amount by which FP’s inside asset basis ($95x) exceeds the sum of FP’s earnings and profits ($40x), the aggregate basis in the outstanding stock of FP ($5x), and the amount of liabilities of FP assumed by US Newco in the F reorganization ($0).

( 3 ) Deemed distribution of specified earnings . The amount of specified earnings equals $50x, the lesser of the following amounts: $100x, the sum of the earnings and profits of FS1 and FS2; and $50x, the amount of excess asset basis with respect to FP. FP is accordingly treated as receiving a distribution of $50x from FS1. Under paragraph (g)(3) of this section, $15x ($50x x ($30x / $100x)) of FS1’s earnings and profits and $35x ($50x x ($70x / $100x)) of FS2’s earnings and profits are designated as specified earnings. FS2 is treated as distributing $35x to FS1. Under sections 301(c)(1) and 954(c)(6), the $35x deemed distribution from FS2 to FS1 is treated as a dividend that does not give rise to foreign personal holding company income. FS1 must accordingly increase its earnings and profits described in section 959(c)(3) by $35x to $65x, and FS2 must decrease its earnings and profits described in section 959(c)(3) by the same amount. FS1 is then treated as making a distribution of $50x to FP. Under sections 301(c)(1) and 954(c)(6), the $50x deemed distribution is also treated as a dividend that does not give rise to foreign personal holding company income. FP must accordingly increase its earnings and profits described in section 959(c)(3) by $50x to $90x, and FS1 must decrease its earnings and profits described in section 959(c)(3) by the same amount. ( 4 ) Adjusted all earnings and profits amount attributable to USP’s FP stock . Under paragraph (g)(1) of this section, USP must compute the all

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earnings and profits amount attributable to its stock of FP after taking into account the $50x increase to FP’s earnings and profits that resulted from the deemed distribution of specified earnings. Because USP owns 80% of the stock of FP, $40x (calculated as 80% of $50x) of the specified earnings are attributable to USP’s stock of FP and are included in the all earnings and profits amount attributable to USP’s stock of FP. The all earnings and profits amount that USP must include in income as a deemed dividend is therefore $72x ($32x + $40x).

( 5 ) Adjusted all earnings and profits amount attributable to USS’s FP stock . Under paragraph (g) (1) of this section, USS must compute the all earnings and profits amount attributable to its stock of FP after taking into account the $50x increase to FP’s earnings and profits that resulted from the deemed distribution of specified earnings. Because USS owns 20% of the stock of FP, $10x (calculated as 20% of $50x) of the specified earnings are attributable to USS’s stock of FP and are included in the all earnings and profits amount attributable to USS’s stock of FP. The all earnings and profits amount that USS must include in income as a deemed divided is therefore $18x ($8x + $10x).

(ii) Example 2 —(A) Facts . USP, a domestic corporation, owns all of the stock of FP, which in turn owns all of the stock of FS. Both FP and FS are foreign corporations. The all earnings and profits amount with respect to USP’s stock of FP, determined before any adjustments required by paragraph (g) of this section, is $50x. FP has no other earnings and profits other than the $50x that reflect USP’s all earnings and profits amount. FS has $200x of earnings and profits, all of which are earnings and profits described in section 959(c)(2) (PTEP) because those earnings and profits gave rise to an earlier income inclusion under section 951 with respect to USP. Increases in stock basis were made under section 961 by reason of USP’s section 951 inclusion. FP has excess asset basis of $100x as a result of a previous transaction that was undertaken with a principal purpose of creating excess asset basis in which FS provided $100x of property to FP. In a liquidation described in section 332, FP distributes all of its assets to USP and the stock of FP is cancelled (the FP liquidation).

(B) Analysis —( 1 ) All earnings and profits amount . The FP liquidation is subject to section 367(b) and this section. Under paragraph (b)(3) of this section, USP must include in income as a deemed dividend the all earnings and profits amount with respect to its stock of FP. Because there is excess asset basis with respect to FP, USP must compute the all earnings and profits amount attributable to its stock of FP as if FP had received a distribution of specified earnings immediately before the FP liquidation.

( 2 ) Deemed distribution of specified earnings . The amount of specified earnings equals $100x, the lesser of the following amounts: $200x, the earnings and profits of FS; and $100x, the amount of excess asset basis with respect to FP. FS is accordingly treated as making a distribution of $100x to FP. Under sections 301(c)(1) and 959(b), the $100x deemed distribution from FS to FP is treated as a distribution of PTEP that is not included in the gross income of FP for purposes of section 951. The distribution reduces FS’s

earnings and profits and PTEP with respect to USP by $100x and increases FP’s earnings and profits and PTEP with respect to USP by $100x. Furthermore, appropriate adjustments are made under section 961 for the distribution of PTEP.

( 3 ) Adjusted all earnings and profits amount attributable to USP’s stock of FP . Under paragraph (g)(1) of this section, USP must compute the all earnings and profits amount attributable to its stock of FP after taking into account the $100x increase to FP’s earnings and profits that resulted from the deemed distribution of specified earnings. Because the deemed distribution consisted entirely of PTEP with respect to USP, the deemed distribution does not affect USP’s all earnings and profits amount of $50x. See §1.367(b)-2(d)(2)(ii). USP must therefore include $50x in income as a deemed dividend under this section. USP must also recognize any foreign currency gain or loss under section 986(c) with respect to the $100x of PTEP of FP. See §1.367(b)-2(j)(2).

(7) Applicability date —(i) In general . Paragraph (g) of this section (other than paragraphs (g)(2)(vii), (g)(3), and (5) of this section) applies to transactions completed on or after December 2, 2016, and to any transactions treated as completed before December 2, 2016, as a result of an entity classification election made under §301.7701-3 of this chapter that is filed on or after December 2, 2016. Paragraphs (g)(2)(vii), (g)(3), and (5) of this section apply to transactions completed on or after October 5, 2023.

(ii) Transactions completed (or elec- tions made) on or after December 2, 2016, and before October 5, 2023. Except as provided in paragraph (g)(7)(iii) of this section, the following definitions (in lieu of the corresponding definitions or in addition to the definitions in paragraph (g)(2) of this section) and rules apply with respect to transactions completed on or after December 2, 2016, and to any transactions treated as completed before December 2, 2016, as a result of an entity classification election made under §301.7701-3 of this chapter that is filed on or after December 2, 2016, but before October 5, 2023:

(A) The term specified earnings means, with respect to the stock of a foreign acquired corporation that is exchanged by an exchanging shareholder, the lesser of the following amounts (but not below zero):

( 1 ) The sum of the earnings and profits (including a deficit) with respect to each foreign subsidiary of the foreign acquired corporation that are attributable under

section 1248(c)(2) to the stock of the foreign acquired corporation exchanged (lower-tier earnings). For purposes of the preceding sentence, the modifications described in §1.367(b)-2(d)(2) and (d)(3) (i) apply. Thus, for example, the amount of the earnings and profits of a foreign subsidiary that are attributable to stock of the foreign acquired corporation is determined without regard to whether the foreign subsidiary was a controlled foreign corporation at any time during the five years preceding the inbound nonrecognition transaction.

( 2 ) The product of the excess asset basis of the foreign acquired corporation, multiplied by the exchanging shareholder’s specified percentage.

( 3 ) The amount of gain that would be realized by the exchanging shareholder if, immediately before the inbound nonrecognition transaction, the exchanging shareholder had sold the stock of the foreign acquired corporation for fair market value, reduced by the exchanging shareholder’s all earnings and profits amount (for this purpose, determined without regard to the modifications described in this paragraph (g)) (specified stock gain).

(B) The term specified percentage means, with respect to an exchanging shareholder, a fraction (expressed as a percentage), the numerator of which is the sum of the aggregate of the specified stock gain with respect to all exchanging shareholders to which §1.367(b)-3(b) (3) applies and the aggregate of the gain realized (regardless of whether such gain is recognized) with respect to the stock exchanged by all other exchanging shareholders.

(C) If there is excess asset basis with respect to a foreign acquired corporation, as determined under paragraph (g)(2)(i) of this section, a taxpayer may reduce the excess asset basis to the extent that the excess asset basis is not attributable, directly or indirectly, to property provided by a foreign subsidiary of the foreign acquired corporation. For example, if there was a transfer of property to the foreign acquired corporation described in section 362(e)(2), and the election described in section 362(e)(2)(C) was made to limit the basis in the stock received in the foreign acquired corporation to its fair market value, then, for purposes of determining

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excess asset basis, the basis in the stock of the foreign acquiring corporation may be determined without regard to the application of section 362(e)(2).

(iii) Early application . A taxpayer and its related parties (within the meaning of sections 267(b) and 707(b)(1)) may choose to apply paragraphs (g)(1) through (6) of this section to all open taxable years beginning before the date these regulations are filed as final regulations in the Federal Register, provided that the taxpayer and its related parties consistently apply paragraphs (g)(1) through (6) of this section and §1.367(b)-1(c)(4)(ix) for such years.

Par. 6. Section 1.367(b)-4 is amended by:

In paragraph (a), adding a sentence after the fifth sentence;
In paragraph (a), removing the language “paragraph (g)” in the current sixth sentence and adding in its place the language “paragraph (h)” and removing the language “paragraph (h)” in the current seventh sentence and adding in its place the language “paragraph (i)”;
In paragraph (e)(5) Example 2 (ii) (B), removing the language “paragraph (g)(1)” wherever it appears and adding in its place the language “paragraph (h)(1)”;
In paragraph (f)(3) Example 2 (ii), removing the language “paragraph (g)(1)” wherever it appears and adding in its place the language “paragraph (h)(1)”;
Redesignating paragraph (h) as paragraph (i);
Redesignating paragraph (g) as paragraph (h) and adding a new paragraph (g);
Adding a sentence to the end of newly redesignated paragraph (i); and
In newly redesignated paragraph (i), removing the language “paragraph (h)” and adding in its place the language “paragraph (i)”, and removing the language “paragraphs (f) and (g)(5)” and adding in its place the language “paragraphs (f) and (h)(5)”.

The additions read as follows:

§1.367(b)-4 Acquisition of foreign corporate stock or assets by a foreign corporation in certain nonrecognition transactions.

(a) * * * Paragraph (g) of this section provides rules regarding exchanges that

occur pursuant to a transaction described in §1.367(b)-10(a)(1), without regard to the exceptions in §1.367(b)-10(a)(2). * * *

(g) Income inclusion and gain recogni- tion in exchanges occurring in connection with certain triangular reorganizations (1) Rule . If, in an exchange under section 354 or 356 that occurs in connection with a transaction described in §1.367(b)-10, an exchanging shareholder exchanges stock or securities of a foreign acquired corporation, then, to the extent that the exchanging shareholder receives stock or securities of P acquired by S in exchange for property in the P acquisition, the shareholder must:

(i) Include in income as a deemed dividend the section 1248 amount attributable to the stock that the shareholder exchanges; and

(ii) After taking into account the increase in basis in the stock provided in §1.367(b)-2(e)(3)(ii) resulting from the deemed dividend (if any), recognize all realized gain with respect to the stock or securities that would not otherwise be recognized.

(2) Special rules and definitions . For the purposes of this paragraph (g), an exchanging shareholder is a United States person or foreign person that exchanges stock of a foreign acquired corporation in a prescribed exchange, regardless of whether such United States person is a section 1248 shareholder or such foreign person is a foreign corporation in which a United States person is a section 1248 shareholder. As used in this paragraph (g), the terms P, S, property, and P acquisition have the meanings provided in §1.367(b)-10(a), and the term foreign per- son means a person that is not a United States person.

(3) Example . The following example illustrates the rules of this paragraph (g):

(i) Facts . USP, a domestic corporation, owns all of the stock of FP and USS. FP is a foreign corporation that owns all of the stock of FS, a foreign corporation. USS is a domestic corporation that owns all of the stock of FT, a foreign corporation. USS owns 100 shares of stock of FT, which constitutes a single block of stock with a fair market value of $100x, an adjusted basis of $20x, and a section 1248 amount of $50x. FS has earnings and profits of $60x. A dividend from FS to FP would qualify for the exception to foreign personal holding company income under section 954(c)(6). FP issues 100 shares of voting stock with a fair market value of $100x

to FS, $40x of which (the 40-percent FP block) is issued in exchange for $40x of newly issued common stock of FS and $60x of which (the 60-percent FP block) is issued in exchange for $60x of cash. FS acquires all of the stock of FT held by USS solely in exchange for the $100x of voting stock of FP (that is, FS exchanges both the 40-percent FP block and the 60-percent FP block) in a triangular reorganization described in section 368(a)(1)(B) (triangular B reorganization).

(ii) Analysis —(A) Application of §1.367(b)- 10 . The triangular B reorganization is described in §1.367(b)-10, and the $60x of cash constitutes property under §1.367(b)-10(a)(3)(ii). Pursuant to §1.367(b)-10(b)(1), adjustments must be made that have the effect of a distribution of property in the amount of $60x from FS to FP under section 301. The $60x deemed distribution is treated as separate from, and occurring immediately before, FS’s acquisition of the 60-percent FP block used in the triangular B reorganization. The $60x deemed distribution from FS to FP results in $60x of dividend income to FP under section 301(c)(1) that is not foreign personal holding company income under section 954(c) (6).

(B) Application of paragraph (g) of this section . Pursuant to §1.367(a)-3(a)(2)(iv)(B), paragraph (g) of this section applies to $60x of the stock of FT (the 60-percent FT block) exchanged for the 60-percent FP block. Thus, under paragraph (g)(1) (i) of this section, USS must include in income a $30x deemed dividend (representing 60 percent of USS’s $50x section 1248 amount) with respect to the 60-percent FT block exchanged for the 60-percent FP block. In addition, under paragraph (g)(1) (ii) of this section, USS must recognize its realized gain that would not otherwise be recognized with respect to the 60-percent FT block. USS’s fair market value and adjusted basis in the 60-percent FT block are $60x (60 percent of the $100x fair market value of the stock of FT) and $12x (60 percent of the $20x adjusted basis of the stock of FT), respectively. USS’s initial built-in gain with respect to the 60-percent FT block is accordingly $48x ($60x fair market value less $12x adjusted basis). The $30x deemed dividend increases USS’s basis in the 60-percent FT block to $42 ($12x + $30x), leaving $18x ($60x - $42x) of built-in gain. USS must therefore recognize the remaining $18x of gain with respect to the 60-percent FT block.

(C) Application of paragraph (b) of this section and regulations under section 367(a) . USS has $32x of built-in gain in the remaining $40x of stock of FT (the 40-percent FT block) that USS exchanged for the 40-percent FP block, calculated as USS’s initial $80 of built-in gain in all of its stock of FT less the $48x of initial built-in gain attributable to the 60-percent FT block. USS’s section 1248 amount in the 40-percent FT block is $20x, calculated as 40 percent of USS’s $50x section 1248 amount. USS does not recognize a deemed dividend of the $20x section 1248 amount under paragraph (b) of this section because FT remains a controlled foreign corporation with respect to which USS is a section 1248 shareholder immediately after the triangular B reorganization. Unless USS properly files a gain recognition agreement pursuant to §§1.367(a)-3(b) and 1.367(a)-8, USS recognizes the $32x of built-in gain

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corporation. See §1.367(a)-3(a)(2)(iv) (providing a similar rule that excludes certain transactions from the application of section 367(a)(1)).

(3) * * * (ii) * * * (C) Stock of S that is nonqualified preferred stock (as defined in section 351(g) (2)).

(b) * * * (2) Timing of deemed distribution . If P controls (within the meaning of section 368(c)) S at the time of the P acquisition, the adjustments described in paragraph (b)(1) of this section are made as if the deemed distribution is a separate transaction occurring immediately before the P acquisition. If P does not control (within the meaning of section 368(c)) S at the time of the P acquisition, the adjustments described in paragraph (b)(1) of this section are made as if the deemed distribution is a separate transaction occurring immediately after P acquires control of S, but before the reorganization.

(3) * * * Thus, P’s adjustment to the basis in its S stock under §1.358-6 is determined as if P provided the P stock or securities pursuant to the plan of reorganization, notwithstanding that S acquired the P stock or securities in exchange for property in the P acquisition. See also §1.367(b)-13.

(4) * * * (ii) * * * Pursuant to paragraph (b)(2) of this section, the adjustment described in paragraph (b)(1) of this section is made as if the deemed distribution is a separate transaction occurring immediately before FS’s purchase of the P stock on the open market. *

- US1’s transfer of its FT stock in exchange for P stock is subject to §1.367(b)-4(g). If, contrary to the facts in this paragraph (b)(4), US1 had built-in gain with respect to its FT stock, then such gain would be recognized in accordance with §1.367(b)-4(g).

(c) Collateral adjustments . This paragraph (c) provides additional rules that apply by reason of the deemed distribution described in paragraph (b)(1) of this section. A deemed distribution described in paragraph (b)(1) of this section is treated as occurring for all purposes of the Internal Revenue Code. Thus, for example, the ordering rules of section 301(c) apply to characterize the deemed distribution to P as a dividend from the earnings and profits of S, return of stock basis, or gain from the sale or exchange of property, as the case may be. Furthermore, section

under section 367(a)(1) with respect to the 40-percent FT block.

(i) * * * Paragraph (g) of this section applies to transactions completed on or after December 2, 2016.

Par. 7. Section 1.367(b)-6 is amended by adding paragraphs (a)(1)(v) and (vi) to read as follows:

§1.367(b)-6 Effective/applicability dates and coordination rules.

(a) * * * (1) * * * (v) Section 1.367(b)-2(j)(2) applies to transactions completed on or after October 5, 2023 and to any transactions treated as completed before October 5, 2023 as a result of an entity classification election made under §301.7701-3 of this chapter that is filed on or after October 5, 2023.

(vi) Section 1.367(b)-1(c)(2)(vi), (c) (4)(viii), and (c)(4)(ix) apply to taxable years ending on or after October 5, 2023. However, a taxpayer and its related parties (within the meaning of sections 267(b) and 707(b)(1)) may choose to apply the rules referred to in the preceding sentence to all open taxable years ending before October 5, 2023, provided that the taxpayer and its related parties consistently apply such rules and §1.367(b)-3(g) for such years.

Par. 8. Section 1.367(b)-10 is amended by:

Adding two sentences to the end of paragraph (a)(1);
Revising paragraphs (a)(2)(ii) and (iii);
Removing the language “and” at the end of paragraph (a)(3)(ii)(A), removing the period at the end of paragraph (a)(3) (ii)(B) and adding the language “; and” in its place;
Adding paragraph (a)(3)(ii)(C);
Removing paragraph (b)(2);
Redesignating paragraphs (b)(3), (4), and (5) as paragraphs (b)(2), (3), and (4), respectively;
Revising newly redesignated paragraph (b)(2);
Adding two sentences to the end of newly redesignated paragraph (b)(3);
In newly redesignated paragraph (b)(4)(ii), removing the sixth sentence, revising the current seventh sentence, and

adding two sentences at the end of the paragraph; and

Revising paragraphs (c), (d), and (e).

The revisions and additions read as follows:

§1.367(b)-10 Acquisition of parent stock or securities for property in triangular reorganizations.

(a) * * * (1) * * * See §1.367(b)-3(g) for the treatment of certain inbound nonrecognition transactions following transactions described in this section. See §1.367(b)-4(g) for rules applicable to certain exchanging shareholders that exchange stock of T in connection with a transaction described in this section.

(2) * * * (ii) S is a domestic corporation, P is not a controlled foreign corporation (within the meaning of §1.367(b)-2(a)), P’s stock in S is not a United States real property interest (within the meaning of section 897(c)), and the deemed distribution that would result from the application of this section would not be treated as a dividend under section 301(c)(1) that would be subject to U.S. tax under either section 881 (for example, by reason of an applicable treaty or by reason of an absence of earnings and profits) or section 882; 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 that would otherwise be recognized under section 367(a)(1) is equal to or greater than the sum of the amount of the deemed distribution under this section that would be treated and subject to U.S. tax as a dividend under section 301(c)(1) (or would give rise to an inclusion under section 951(a)(1)(A) or 951A(a) that would be subject to U.S. tax) and the amount of such deemed distribution that would be treated and subject to U.S. tax as gain from the sale or exchange of property under section 301(c)(3) (or would give rise to an inclusion under section 951(a) (1)(A) or 951A(a) that would be subject to U.S. tax) if this section would otherwise apply to the triangular reorganization. The exception provided in this paragraph (a)(2)(iii) does not apply if T is a foreign

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959 may apply to the deemed distribution if S is a foreign corporation, and sections 881, 882, 897, 1442, or 1445 may apply to the deemed distribution if S is a domestic corporation. Appropriate corresponding adjustments must be made to S’s earnings and profits consistent with the principles of section 312.

(d) Anti-abuse rule —(1) Rule . Appropriate adjustments must be made pursuant to this section if, in connection with a triangular reorganization, a transaction is engaged in with a view to avoid the purpose of this section. For example, if S is created, organized, or funded to avoid the application of this section with respect to the earnings and profits of another corporation, the earnings and profits of S (or any successor corporation) may be deemed to include the earnings and profits of such other corporation (or any successor corporation) for purposes of determining the consequences of the adjustments provided in this section, and appropriate corresponding adjustments may be made to account for the application of this section to the earnings and profits of such other corporation (or any successor corporation). Adjustments may be made under this paragraph (d) whether S is funded before or after a triangular reorganization, and such funding may include capital contributions, loans, and distributions. The following examples illustrate the application of this paragraph (d), the application of which is not limited to the particular situations described in the examples.

(2) Example 1: Deemed increase to S’s earnings and profits —(i) Facts . FP is a foreign corporation that owns all of the stock of USS, a domestic corporation. USS has no assets, liabilities, or earnings and profits. FP issues $10x of voting stock to USS in exchange for $10x of newly issued stock of USS, and FP also issues $90x of voting stock to USS in exchange for a note newly issued by USS with a fair market value of $90x (USS note). FP would be subject to U.S. tax under section 881 on a distribution from USS if, contrary to the facts, USS had earnings and profits for purposes of applying section 301(c) to the distribution. USS acquires all the stock of UST, a domestic corporation that is unrelated to FP and USS, from a foreign person in exchange for the $100x of voting stock of FP in a triangular reorganization described in section 368(a)(1)(B) (triangular B reorganization). UST has $100x of earnings and profits. USS’s purchase of the $90x of stock of FP in exchange for the USS note in connection with the triangular B reorganization is engaged in with a view to avoid the purpose of this section.

(ii) Analysis . Because USS’s purchase of the $90x of stock of FP in exchange for the USS note is engaged in with a view to avoid the purpose of this section, the anti-abuse rule applies and appropriate adjustments are made. In particular, for purposes of determining the consequences of the deemed distribution provided for in paragraph (b)(1) of this section, the earnings and profits of USS are deemed to include the earnings and profits of UST. USS is therefore treated as having made a deemed distribution equal to $90x, which reflects the portion of the stock of FP that USS acquired in exchange for property (the USS note). Because USS is deemed to have $100x of earnings and profits, the entire $90x deemed distribution is treated as a dividend under section 301(c)(1). The deemed distribution is treated as separate from, and occurring immediately before, USS’s acquisition of the stock of FP used in the triangular B reorganization. No adjustments are made by FP to the basis in its stock of USS except as provided in §1.358-6. Under paragraph (b)(3) of this section, FP’s adjustment to the basis in its stock of USS under §1.358-6 is determined as if FP provided all $100x of the stock of FP pursuant to the plan of reorganization.

(3) Example 2: Downstream property trans- fer —(i) Facts . USP is a domestic corporation that owns all of the stock of FS1, a foreign corporation, FS1 holds a note receivable issued by USP with a fair market value of $100x (USP note), and FS1 has more than $100x of earnings and profits. USP has no income inclusion under section 951(a)(1)(B) with respect to the USP note after the application of §1.956-1(a)(2). FS1 forms USS Newco, a domestic corporation, to which it transfers the USP note in exchange for voting stock of USS Newco. USS Newco then forms FS2 Newco, a foreign corporation, and FS1 transfers all of its remaining assets (except for its stock in USS Newco) to FS2 Newco in exchange for additional voting stock of USS Newco in a transaction intended to qualify as a triangular reorganization described in section 368(a) (1)(C) (triangular C reorganization). FS1 liquidates into USP pursuant to the triangular C reorganization, and USP receives the stock of USS Newco held by FS1. FS1’s transfer of the USP note to USS Newco in connection with the intended triangular C reorganization is engaged in with a view to avoid the purpose of this section.

(ii) Analysis . Because FS1’s transfer of the USP note to USS Newco is in connection with a triangular reorganization and is engaged in with a view to avoid the purpose of this section, the anti-abuse rule applies and appropriate adjustments are made. FS1’s formation of USS Newco and transfer of the USP note to USS Newco, together with the distribution of the shares of USS Newco pursuant to the liquidation of FS1, is treated under the anti-abuse rule as a distribution of $100x, consistent with its substance. Accordingly, adjustments are made consistent with there having been such a distribution. Because FS1 has more than $100x of earnings and profits, the adjustments made are consistent with USS Newco having received a $100x dividend from FS1 separate from, and immediately before, the triangular C reorganization. USS Newco must therefore include $100x in gross income as if it had received that amount as a dividend and increase its

earnings and profits by the same amount. FS1 must decrease its earnings and profits by $100x. For purposes of determining USS Newco’s basis in its stock of FS2 Newco, §1.367(b)-13 applies by treating USS Newco as P (within the meaning of §1.367(b)-13(a) (2)(ii)). Under paragraph (b)(3) of this section, USS Newco’s adjustment to the basis in its FS2 Newco stock under §1.367(b)-13 is determined as if USS Newco provided the stock of USS Newco stock pursuant to the plan of reorganization.

(4) Example 3: Taxable debt exchange —(i) Facts . USP is a domestic corporation that owns all of the stock of FP, a foreign corporation, and USS, a domestic corporation. Furthermore, FP owns all of the stock of FS, a foreign corporation, and USS owns all of the stock of UST, a domestic corporation. FP has no earnings and profits, and FS has more than $100x of earnings and profits. USP has held its stock in FP for fewer than 365 days and thus does not satisfy the requirements of sections 245A and 246(c) with respect to dividends received from FP. FS transfers a note issued by FS with a fair market value of $100x (FS note) to FP in exchange for $100x of voting stock of FP, and FS then uses the stock of FP to acquire all of the stock of UST held by USS in a triangular reorganization described in section 368(a) (1)(B) (triangular B reorganization). Because a dividend from FS to FP would not constitute foreign personal holding company income under section 954(c)(6), the taxpayer asserts that the exception in paragraph (a)(2)(iii) of this section applies and therefore does not make any adjustments pursuant to this section. FP then transfers the FS note to USP in exchange for a note issued by USP with a fair market value of $100x (USP note). The USP note constitutes United States property within the meaning of section 956(c), and USP would otherwise have an inclusion under section 951(a)(1)(B) and §1.956-1(a)(2) if FP had earnings and profits. FS’s transfer of the FS note to FP, and FP’s subsequent transfer of the FS note to USP in connection with the triangular B reorganization, are engaged in with a view to avoid the purpose of this section.

(ii) Analysis . Because the transfers of the FS note are in connection with a triangular reorganization and are engaged in with a view to avoid the purpose of this section, the anti-abuse rule applies and appropriate adjustments are made. FS is therefore treated as having made a distribution to FP of $100x, reflecting the value of the stock of FP that FS acquired in exchange for property (the FS note). The deemed distribution is treated as separate from, and occurring immediately before, FS’s acquisition of the stock of FP stock used in the triangular B reorganization. Because FS has more than $100x of earnings and profits, the entire deemed distribution is treated as a dividend under section 301(c) (1). The deemed dividend causes FP to increase its earnings and profits by $100x but does not constitute foreign personal holding company income to FP under section 954(c)(6). FP thus has $100x of earnings and profits available to support inclusions under section 951(a)(1)(B) in connection with FP’s subsequent acquisition of the USP note. No adjustments are made by FP to the basis in its stock of FS except as provided in §1.358-6. Under paragraph (b)(3) of this section, FP’s adjustment to the basis in its stock of FS under §1.358-6 is determined as

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§1.1411-10 Controlled foreign corporations and passive foreign investment companies.

(c) * * * (3) Application of sections 1248 and 367(b) . * * * (i) In determining the amount of gain recognized on the sale or exchange of stock of a foreign corporation under section 1248(a) or the amount of gain realized on the exchange of stock of a foreign corporation under §1.367(b)-4 or 1.367(b)-5, basis is determined in accordance with the provisions of paragraph (d) of this section; and (ii) Section 1248(a), and §1.367(b)-2(c)(1) and (d) (2)(ii) apply without regard to the exclusions for certain earnings and profits under section 1248(d)(1) and (d)(6), except that those exclusions will apply with respect to the earnings and profits of a foreign corporation that are attributable to:

(d) * * * (5) Basis adjustments under section 367(b) . With respect to stock of a foreign corporation that is exchanged in a transaction subject to section 367(b), the portion of the basis increase provided by §1.367(b)-2(e)(3)(ii) by reason of paragraph (c)(3)(ii) of this section is made solely for purposes of section 1411.

(i) * * * Paragraph (c)(3) of this section, to the extent it references regulations issued under section 367(b), and paragraph (d)(5) of this section, apply to transactions completed on or after October 5, 2023 and to any transactions treated as completed before October 5, 2023 as a result of an entity classification election made under §301.7701-3 of this chapter that is filed on or after October 5, 2023.

Douglas W. O’Donnell, Deputy Commissioner for Services and

Enforcement.

(Filed by the Office of the Federal Register October 5, 2023, 8:45 a.m., and published in the issue of the Federal Register for October 6, 2023, 88 FR 69559)

if FP provided the stock of FP pursuant to the plan of reorganization.

(e) Applicability dates —(1) General rule . This section applies to triangular reorganizations occurring on or after May 17, 2011. For triangular reorganizations that occur before May 17, 2011, see §1.367(b)-14T as contained in 26 CFR part 1 revised as of April 1, 2011.

(2) Triangular reorganizations com- pleted on or after April 25, 2014 . The following paragraphs apply to triangular reorganizations that are completed on or after April 25, 2014, unless T was not related to P or S (within the meaning of section 267(b)) immediately before the triangular reorganization; the triangular reorganization was entered into either pursuant to a written agreement that was (subject to customary conditions) binding before April 25, 2014, and at all times afterwards, or pursuant to a tender offer announced before April 25, 2014, that is subject to section 14(d) of the Securities and Exchange Act of 1934 (15 U.S.C. 78n(d)(1)) and Regulation 14(D) (17 CFR 240.14d-1 through 240.14d-101) or that is subject to comparable foreign laws; and to the extent the P acquisition that occurs pursuant to the plan of reorganization is not completed before April 25, 2014, the P acquisition was included as part of the plan before April 25, 2014:

(i) Paragraph (a)(2)(ii) of this section, to the extent it does not apply where P is a controlled foreign corporation, and to the extent it relates to dividends that would be subject to U.S. tax;

(ii) Paragraph (a)(2)(iii) of this section, to the extent it relates to amounts that would be subject to U.S. tax or give rise to an inclusion under section 951(a)(1)(A) that would be subject to U.S. tax;

(iii) Paragraph (b)(3) of this section, to the extent it relates to P’s provision of its stock or securities pursuant to the plan of reorganization; and

(iv) Paragraphs (b) and (c) of this section, to the extent they do not reference the rule described in former paragraph (b) (2) of this section (relating to the deemed contribution), as contained in 26 CFR part 1 revised as of April 1, 2021. (3) Transactions completed on or after December 2, 2016 . The following

paragraphs apply to transactions completed on or after December 2, 2016:

(i) Paragraph (a)(2)(iii) of this section, to the extent it does not apply where T is a foreign corporation; and

(ii) Paragraph (a)(3)(ii)(C) of this section.

(4) Deemed distributions that occurred in taxable years ending before November 2, 2020 . Former paragraph (c)(1) of this section, as contained in 26 CFR part 1 revised as of April 1, 2021, to the extent it references section 902, applies to deemed distributions that occur in taxable years ending before November 2, 2020.

(5) Triangular reorganizations com- pleted on or after October 5, 2023. Paragraph (a)(2)(iii) of this section, to the extent it relates to amounts that would give rise to an inclusion under section 951A(a) that would be subject to U.S. tax, applies to triangular reorganizations that are completed on or after October 5, 2023. Par. 9. Section 1.1248-1 is amended by adding a sentence to the end of paragraph (a)(1) to read as follows:

§1.1248-1 Treatment of gain from certain sales or exchanges of stock in certain foreign corporations.

(a) * * * (1) * * * See §1.1411-10(c)(3) for additional rules concerning the application of section 1248 for purposes of section 1411.

Par. 10. Section 1.1411-10 is amended by:

Revising the heading of paragraph (c)(3);
In paragraph (c)(3), removing the language “With respect to stock of a CFC” and adding in its place “With respect to stock of a foreign corporation that is a CFC (or that was a CFC at any time during the 5-year period ending on the date of sale or exchange)”;
Revising paragraph (c)(3)(i) and the introductory text of paragraph (c)(3)(ii);
Adding paragraph (d)(5); and
Adding a sentence to the end of paragraph (i).

The revisions and additions read as follows:

Bulletin No. 2023–44 1213 October 30, 2023

the property to be sold and the time, place, manner, and conditions of the sale.

Section 6335(c) provides that if seized property is not divisible in a way that would allow for a sale of part of the property to fully satisfy the whole amount of the tax and expenses, the Secretary is to sell the whole property.

Section 6335(d) requires that the time of sale be not less than 10 days nor more than 40 days from the time public notice of the sale is provided under section 6335(b). The place of sale must be within the county in which the property is seized except by special order of the Secretary.

Section 6335(e) specifies the manner and conditions of sale. Section 6335(e) (1) provides general rules about determinations relating to the minimum price, a sale being made to the highest bidder at or above the minimum price, the instances in which property will be deemed sold to the United States at the minimum price, and the instances in which the property will be released to the owner. Section 6335(e)(2) further directs the Secretary to prescribe by regulation the following additional rules applicable to the manner and other conditions of sale: requiring the sale not to be conducted in any manner other than by public auction or by public sale under sealed bids; in the case of the seizure of several items of property whether the property is to be offered separately, in groups, or in the aggregate, and sold under whichever method produces the highest aggregate amount; whether the announcement of the minimum price may be delayed until the receipt of the highest bid; whether payment in full is to be required at the time of acceptance of a bid or whether a part of such payment may be deferred for a period not to exceed one month; the extent to which additional methods (including advertising) may be used in giving notice of a sale; and under what circumstances the Secretary may adjourn a sale from time to time not to exceed in all one month. Congress delegated this authority to allow the IRS “latitude to provide modern rules for selling property in the best manner possible.” H.R. Rep. No. 83-1337, at 410 (1954); S. Rep. No. 83-1622, at 578 (1954). Section 6335(e)(3) specifies what is to occur if a winning bidder fails to pay the bid amount.

Notice of Proposed Rulemaking

Modernizing Regulations on Sales of Seized Property

REG-127391-16

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed amendments to modernize regulations regarding the sale of a taxpayer’s property that the IRS seizes by levy. The proposed amendments would allow the IRS to maximize sale proceeds for the benefit of the taxpayer whose property the IRS has seized and the public fisc. The proposed regulations would affect all sales of property the IRS seizes by levy.

DATES: Electronic or written comments and requests for a public hearing must be received by December 15, 2023.

ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-127391-16). Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish any comments submitted electronically, and on paper, to the public docket. Paper submissions may be sent to: CC:PA:LPD:PR (REG-127391-16), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Micah A. Levy, (202) 3176832; concerning the submission of comments or requests for a public hearing, Vivian Hayes (202) 317-6901 (not tollfree numbers) or by sending an email to publichearings@irs.gov.

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Procedure and Administration Regulations (26 CFR part 301) under section 6335 of the Internal Revenue Code (Code) relating to the sale of property that is seized by levy (seized property).

I. Statutory Background

Section 6335 of the Code governs how the IRS sells seized property. It was enacted as part of the Internal Revenue Code of 1954, Public Law 83–591, ch. 736, 68A Stat. 3, 785–86 (1954), though many of its provisions date back to 1866. See Act of July 3, 1866, ch. 184, 14 Stat. 106, 107–110 (1866). Section 6335(a) requires the Secretary of the Treasury or her delegate (Secretary), as soon as practicable after a seizure, to give written notice of the seizure to the owner of the property that was seized (or, in the case of personal property, to the property’s possessor). The notice must specify the sum demanded and contain, in the case of personal property, an account of the property seized and, in the case of real property, a description with reasonable certainty of the seized property. Notice must be given to the owner (or possessor) either in person, by leaving it at the owner’s (or possessor’s) usual place of abode or business, or, in certain instances, by mail.

Section 6335(b) requires the Secretary, as soon as practicable after a seizure, to give the property’s owner written notice of the forthcoming sale. The notice must be provided in the same manner prescribed in section 6335(a) for the notice of seizure. Section 6335(b) also requires that the Secretary publicize the sale to the general public by publishing notice “in some newspaper published or generally circulated within the county wherein such seizure is made,” or if such a newspaper does not exist, by posting “notice at the post office nearest the place where the seizure is made and in not less than two other public places.” The notice of sale must specify

October 30, 2023 1214 Bulletin No. 2023–44

the place of sale for such online sales would be considered to be within the county in which the property was seized, and no special order would be needed. However, in the unusual situation in which an online sale deviates from current practice, such as if the seized property is moved out of the county for storage and remains out of the county during any allowable period for pre-sale inspection or if the Internet is not generally available within the county, then proposed §301.6335-1(d)(1) would require that such sale may be conducted on the Internet only by special order when doing so would be more efficient or would likely result in more competitive bids.

B. Offering of Property

In the case of the seizure of several items of property, section 6335(e)(2)(B) of the Code allows the IRS to choose how to group the property for sale. In general, the property may be sold as separate items, as groups of items, or in the aggregate. Section 6335(e)(2)(B) of the Code also permits the IRS to offer property both separately (or in groups) and in the aggregate during the same sale, provided that the IRS sells the property “under whichever method produces the highest aggregate amount.”

Section 301.6335-1(c)(5) currently restricts the situations in which both real and personal property may be grouped. This limits the IRS’s ability to determine on a case-by-case basis how to group property to produce the highest sale price. Proposed §301.6335-1(d)(5) would provide that the IRS will choose the method of grouping property (or selling items separately) that will likely produce that highest overall sale amount and is most feasible.

C. Terms of Payment

Section 6335(e)(2)(D) of the Code states that regulations are to provide whether payment in full is required at the time of acceptance of the bid, or whether a part of such payment may be deferred for a period, not to exceed one month, as may be determined by the Secretary to be appropriate. In section 301.6335-1, paragraphs (c)(5)(iv) and (c)(7) are proposed to be amended to allow for payment terms

Section 6335(f) provides that the owner of seized property may request the Secretary to sell the property within 60 days after such request (or within a longer period as may be specified by the owner). The Secretary must comply with the request unless the Secretary determines (and thereafter notifies the owner within the period) that doing so would not be in the best interests of the United States.

II. Regulatory Background

The current regulations implementing section 6335 are set forth in §301.6335‑1. Section 301.6335-1, which dates to 1954, has not been revised except to incorporate minor statutory changes. See T.D. 6119, 20 FR 28 (Jan. 4, 1955) (initial publication); T.D. 7180, 37 FR 7316 (Apr. 13, 1972) (amending §301.6335-1(b) to conform to an amendment to section 6335(b) made by section 104(d) of the Federal Tax Lien Act of 1966, Public Law 89-719, 80 Stat. 1137 (1966), by expanding notice of sale publication to include newspapers that are “generally circulated” within the county); T.D. 8398, 57 FR 7545 (Mar. 3, 1992) (implementing section 6236(g) of Technical and Miscellaneous Revenue Act of 1988, Public Law 100-647, 102 Stat. 3342 (1988), which enacted section 6335(f), by adding §301.6335-1(d) to address the right of the owner of any seized property to request sale within 60 days); T.D. 8691, 61 FR 66217 (Dec. 17, 1996) (revisions to reflect amendment of section 6335(e) concerning the setting of a minimum price for seized property made by section 1570 of the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2764 (1986)); and T.D. 8939, 66 FR 2821 (Jan. 12, 2001) (adding a cross-reference in §301.6335-1(b) to §301.6212-2 regarding the definition of “last known address”). Some provisions of §301.6335-1 are dated, while others do not accommodate technological advances such as the advent of the Internet and electronic payment processing. These proposed amendments would conform the prescribed manner and conditions of sales of seized property with modern practices. In comparison to the existing procedures, the proposed amendments would benefit taxpayers by making the sales process both more efficient and more likely to produce higher sales prices.

Explanation of Provisions

A. Place of Sale

Section 6335(d) of the Internal Revenue Code (Code) requires that the place of sale be “within the county” in which the seizure of the subject property took place, “except by special order of the Secretary.” Section 301.6335-1(c)(1) currently requires that the place of sale be within the county in which the seizure took place unless “substantially higher bids” can be obtained by holding the sale elsewhere, in which case the district director may order that the sale be held in that other place. Section 6335(d) and current §301.6335-1(c)(1) do not expressly contemplate online sales. But online sales can attract a wider range of potential purchasers, and thus potentially higher bids, while conserving IRS resources. Given that section 6342(a) of the Code provides that money realized by the sale of seized property is applied against the expenses of the levy and sale before any remaining amount is made available to satisfy the liability of the taxpayer, taxpayers whose seized property is being sold benefit both when the IRS realizes more money from a sale and when the IRS incurs less expense in conducting the sale.

Proposed §301.6335-1(d)(1) would provide that the sale will be held at the time and place stated in the notice of sale. Proposed §301.6335-1(d)(1) would further provide that the place of an in-person sale must be within the county in which the property is seized, except the sale may be held in a different county if the IRS determines, by special order, that substantially higher bids may be obtained by holding the sale in that different county. For online sales, proposed §301.63351(d)(1) would provide that the place of sale will generally be within the county in which the property is seized such that a special order is not needed. For example, under the IRS’s current practice for online sales (which uses the special-order process), bids are solicited from in-county bidders, there is in-county advertising, the property is stored in the county, inspection of the property (when permitted) occurs in the county, and the winning bidder must retrieve the property from within the county. Under the proposed regulations,

Bulletin No. 2023–44 1215 October 30, 2023

that may specifically accommodate the different types of property offerings and methods of sale. For example, in the context of an online sale, the notice of sale may specify the time period in which the winning bidder must submit payment after being notified of the bid’s acceptance. Allowing such a period, which is consistent with the IRS’s current sales practice, allows time for the winning bidder to be notified of the accepted bid and to remit payment.

Currently, §301.6335-1(c)(5)(iv)(b) provides that if the aggregate price of all property purchased by a successful bidder at a sale is more than $200, the bidder must make an initial payment of $200 or 20 percent of the purchase price, whichever is greater. These thresholds are not required by statute. To give the IRS greater flexibility to set the terms for payment, §301.6335-1(c)(5)(iv)(b), which is proposed to be redesignated as §301.6335-1(d)(5)(iv)(B), is proposed to be amended to remove the $200 or 20 percent requirements, and provide that the public notice of sale, or the instructions referenced in the notice, will specify the amount of the initial payment that must be made when full payment is not required upon acceptance of the bid.

D. Method of Sale

Section 6335(e)(2)(A) of the Code specifies that sales of seized property cannot be conducted in any manner other than by public auction or by public sale under sealed bids. Sections 301.6335-1(c) (6)(i) and (ii) reiterate that rule. Section 301.6335-1(c)(6)(ii) provides procedures applicable to public sales under sealed bids. Some of those procedures apply to public auctions. For example, under current IRS practice, in a public auction sale, the IRS may accept mail-in bids, so long as the form of payment, the amount of the bid, and the location and time for a bid’s submission comply with the terms in the public notice of sale. I.R.M. 5.10.4.4.1 (Aug. 29, 2017). Those rules closely align with the procedures for submitting bids for sealed bid sales. Accordingly, in §301.6335-1, paragraphs (c)(6)(i) and (ii) are proposed to be collapsed into one paragraph, proposed (d)(6), and, except where specifically noted, the provisions

under §301.6335-1(c)(6)(ii) are proposed to be revised (and redesignated as provisions under §301.6335-1(d)(6)) as follows to apply to all sales under section 6335 of the Code.

Form for Use by Bidders

Section 301.6335-1(c)(6)(ii)(b) currently requires that bidders use the form provided by the IRS upon the bidder’s request. The provision, which is proposed to be redesignated §301.6335-1(d)(6)(ii), is proposed to be amended to provide that the bidder should use the form or submission method specified in the notice of sale or in instructions referenced by the notice. For example, the notice of sale may direct bidders to a specific website for the form or method of bid submission.

Remittance and Payment Methods

In section 301.6335-1, paragraphs (c) (6)(ii)(c) and (c)(7) currently specify how bid remittances and payments of bid prices are to be made. Those sections require that remittances and payments be made by check or money order. This requirement precludes other commercially acceptable payment options—such as electronic payments, credit or debit card payments, or any other commercially acceptable means authorized by the IRS—even though section 6335 of the Code does not limit the methods by which bidders can make remittances or pay the bid price. Section 301.6335-1(c)(6)(ii)(c), which is proposed to be redesignated §301.6335-1(d)(6)(iii), and §301.6335-1(c)(7), which is proposed to be redesignated §301.6335-1(d)(7), are thus proposed to be amended to provide that remittances and payments are to be made in the manner specified in the notice of sale or in instructions referenced by the notice. For example, the public notice of sale or its instructions could specify that all remittances or payments for a particular sale must be made by check, credit or debit card, or a particular form of electronic payment.

Amount of Remittance with Bid

Section 301.6335-1(c)(6)(ii)(c) currently specifies the amount of money a bidder must remit with a sealed bid. Under

that section, if the total bid is $200 or less, then the bidder must remit the full amount and, if the total bid is more than $200, then the bidder must remit the greater of $200 or 20 percent of the bid.

Section 6335 of the Code does not specify any amount that must be remitted with a bid except where full payment is required. Additionally, as previously stated, the amounts currently required by §301.6335-1(c)(6)(ii)(c) have never been updated. To give the IRS flexibility to set the terms for bidding, §301.6335-1(c)(6) (ii)(c), which is proposed to be redesignated §301.6335-1(d)(6)(iii), is proposed to be amended by removing the specific $200 threshold. This provision is proposed to provide that the public notice of sale, or instructions referenced in the notice, will specify the amount, if any, required as a remittance with a bid.

Method of Submitting and Withdrawing Bids

Section 301.6335-1(c)(6)(ii)(d) specifies the manner for submitting sealed bids. The provision requires that sealed bids be submitted in a sealed envelope. That requirement precludes electronic submission of sealed bids. The provision also does not address how bidders in a public auction should submit bids. The provision, which is proposed to be redesignated §301.6335-1(d)(6)(iv), is proposed to provide that bids for a particular sale—whether public auction or public sale under sealed bids and whether online or not—be submitted in the manner prescribed by the IRS in the notice of sale or in instructions referenced by the notice.

Section 301.6335-1(c)(6)(ii)(f) specifies that sealed bids may be withdrawn in writing or by telegraphic request before the time fixed for the opening of bids. To permit electronic bid withdrawals, the provision, which is proposed to be redesignated §301.6335-1(d)(6)(vi), is proposed to be amended to provide that bid withdrawals may be made in any manner that is specified in the notice of sale or in instructions referenced by the notice.

Consideration of Bids

Section 301.6335-1(c)(6)(ii)(e) currently provides that if, at a public sale

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under sealed bids, there is a tie amongst bids for the highest amount the IRS will determine the successful bidder by drawing lots. The provision, which is proposed to be redesignated §301.6335-1(d)(6)(v), is proposed to be amended to provide that the IRS will reopen the bidding until a highest bid is submitted without any ties. This change is consistent with the IRS’s current practice.

E. Personnel Involved in Sale

Section 3443 of the Internal Revenue Service Restructuring and Reform Act (Act), Public Law No. 105-206, 112 Stat. 685, 762 (1998), requires the IRS to “implement a uniform asset disposal mechanism for sales under section 6335” that “should be designed to remove any participation in such sales by revenue officers.” Section 3443 of the Act does not apply to sales of perishable goods under section 6336 of the Code.

To implement section 3443 of the Act, the IRS created the position of Property Appraisal and Liquidation Specialist (PALS). A PALS conducts sales of property seized under section 6335 of the Code. In doing so, they often receive assistance from other IRS employees in performing certain ministerial activities, such as delivering notices of sale and logging the receipt of sealed bids. Revenue officers have long been called on to assist an assigned PALS with those ministerial activities.

In enacting section 3443 of the Act, Congress sought to address a lack of uniformity and fairness in the sales process, such as that caused by potential bias of the revenue officer who seized the property to be sold. In the Conference Report to the Restructuring and Reform Act, the conferees recognized that tax sales were “often conducted by the revenue officer charged with collecting the tax liability.” H.R. Rep. No. 105-559, at 284 (1998). Additionally, the Senate Report accompanying the Restructuring and Reform Act stated that the Finance Committee “believes that it is important for fairness and the appearance of propriety that the revenue officers charged with collecting unpaid tax liability are not personally involved with the sale of seized property.” S. Rep. No. 105174, at 85 (1998). Those statements reflect

the concern that the revenue officer who seized the property does not participate in the property’s sale.

New proposed §301.6335-1(d)(11) would address that concern by precluding any revenue officer who participated in the seizure of the property to be sold from participating in the sale. This proposed amendment is intended to provide clarity to the IRS in making decisions about which employees will be assigned to conduct sales or perform related ministerial duties and that the restriction on participation in sales does not apply to sales of perishable goods conducted under section 6336 of the Code.

F. Other Changes

This proposed regulation would also make non-substantive updates throughout §301.6335-1. First, current §301.63351(a) is proposed to be redesignated and divided into two paragraphs, §301.63351(b)(1) and (2). Second, current §301.6335-1(a) and (b)(1) use the term “internal revenue district.” The usage matches that in sections 6335(a) and (b) of the Code. But changes to the IRS’s organizational structure following the Internal Revenue Service Restructuring and Reform Act eliminated “internal revenue districts.” See section 1001(a), 112 Stat. at 689; Grunsted v. Commissioner, 136 T.C. 455, 461 (2011). The current analogous successor to an internal revenue district is a field collection territory. See I.R.M. 1.1.16.3.1.1.1 (June 1, 2016); I.R.M. 5.10.3.9 (May 23, 2016); I.R.M. 5.10.4.9 (Aug. 29, 2017). Proposed §301.6335-1(b)(1) would thus provide that the term “internal revenue district” includes a field collection territory or other successor IRS subdivision or office. Third, where the current regulation refers to various job titles within the IRS, some of which no longer exist, the references have been replaced with more general references to territories or to the IRS or to its employees. Fourth, where the current regulation, in §301.6335-1(a) and (b), refers to giving a notice of seizure or sale to an individual (in their role as owner or possessor), the references are proposed to be replaced with references to the owner or possessor because an entity could also be an owner or possessor. Fifth, this

proposed regulation would also eliminate §301.6335-1(c)(3)(iii) and (c)(4) (iv), which deal with effective dates of the current regulation for sales made after December 17, 1996. Since all sales going forward will occur after that date, those provisions are no longer necessary. Sixth, some four-level headings in the current regulation have differing capitalization in their numbering. Compare §301.63351(c)(3)(ii)(a) and (d)(2)(ii)(A). This proposed regulation would align the capitalization of those headings by, for example, redesignating §301.6335-1(c) (3)(ii)(a) as §301.6335-1(d)(3)(ii)(A) and §301.6335-1(c)(5)(ii)(a) as §301.63351(d)(5)(ii)(A). And seventh, cross-references to entries that are proposed to be redesignated would be revised to match the redesignations.

Proposed Applicability Date

The proposed rules are proposed to apply to sales of property seized on or after the date of publication of the Treasury decision adopting the proposed rules as final regulations in the Federal Register .

Special Analyses

I. Regulatory Planning and Review

Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6(b) of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required.

II. Regulatory Flexibility Act

It is hereby certified that these proposed regulations will not have a significant economic impact on a substantial number of small entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6). This certification is based on the fact that the proposed regulations solely conform the prescribed manner and conditions of sales of seized property with modern practices. In comparison to the existing procedures, the proposed regulations benefit taxpayers by making the sales process both

Bulletin No. 2023–44 1217 October 30, 2023

more efficient and more likely to produce higher sales prices.

Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking has been submitted to the Chief Counsel of the Office of Advocacy of the Small Business Administration for comment on its impact on small businesses.

III. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. This rule does not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

IV. Executive Order 13132: Federalism

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. These proposed regulations do not have federalism implications and do not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive Order.

Comments and Requests for Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the Treasury Department and the IRS as prescribed in the preamble under the “ ADDRESSES ” section. The Treasury Department and the IRS request comments on all aspects

of the proposed regulations. Any electronic and paper comments submitted will be available at www.regulations. gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register . Announcement 2023-16, 2023-20 I.R.B. 854 (May 15, 2023), provides that public hearings will be conducted in person, although the IRS will continue to provide a telephonic option for individuals who wish to attend or testify at a hearing by telephone. Any telephonic hearing will be made accessible to people with disabilities.

Drafting Information

The principal author of this regulation is Micah A. Levy, Office of the Associate Chief Counsel (Procedure and Administration). However, other personnel from the IRS and Treasury Department participated in the development of this regulation.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 301 as follows:

Part 301—PROCEDURE AND ADMINISTRATION

The authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805. 2. Amend § 301.6335-1 by: a. Redesignating paragraphs (a) through (d) as paragraphs (b) through (e), respectively.

b. Adding a new paragraph (a); c. Revising newly designated paragraphs (b) and (c)(1) and (2);

d. Adding a subject heading to newly redesignated paragraph (c)(3);

e. Revising newly redesignated paragraphs (d)(1) and (2) and (d)(3)(i) and (ii);

f. Removing newly redesignated paragraph (d)(3)(iii);

g. Revising newly redesignated paragraph (d)(4)(iii);

h. Removing newly redesignated paragraph (d)(4)(iv);

i. Revising newly redesignated paragraphs (d)(5)(i), (ii), and (iv), (d)(6), (7), and (9);

j. Adding paragraph (d)(11); k. Revising newly redesignated paragraphs (e)(1) and (3); and

l. Adding paragraph (f). The revisions and addition read as follows:

§301.6335-1 Sale of seized property.

(a) In general . Section 6335 of the Internal Revenue Code (Code) and this section provide the rules under which the Internal Revenue Service (IRS) conducts sales of property seized by levy.

(b) Notice of seizure –(1) Issuance and delivery . As soon as practicable after seizure of property, the IRS must give written notice to the property’s owner (or, in the case of personal property, to the property’s possessor). The written notice must be delivered to the owner (or to the possessor, in the case of personal property) or left at the owner’s usual place of abode or business if there is such within the internal revenue district in which the seizure is made. If the owner cannot be readily located or has no dwelling or place of business within such district, the notice may be mailed to the owner’s last known address. For purposes of this section, the term internal revenue district means an internal revenue district within the meaning of section 7621 of the Code and includes an IRS field collection territory or other successor IRS subdivision or office.

(2) Contents . The notice of seizure must specify the sum demanded and contain, in the case of personal property, a list sufficient to identify the property seized and, in the case of real property, a description with reasonable certainty of the property seized.

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(1) In general . As soon as practicable after seizure of the property, the IRS must give notice of sale in writing to the owner. Such notice will be delivered to the owner or left at the owner’s usual place of abode or business if located within the internal revenue district in which the seizure is made. If the owner cannot be readily located or has no dwelling or place of business within such district, the notice may be mailed to the owner’s last known address. For further guidance regarding the definition of last known address, see §301.6212–2. The notice must specify the property to be sold, and the time, place, manner, and conditions of the sale thereof, and must expressly state that only the right, title, and interest of the delinquent taxpayer in and to such property is to be offered for sale. The notice will also be published in some newspaper published in the county wherein the seizure is made or in a newspaper generally circulated in that county. For example, if a newspaper of general circulation in a county but not published in that county will reach more potential bidders for the property to be sold than a newspaper published within the county, or if there is a newspaper of general circulation within the county but no newspaper published within the county, the IRS may publish the notice of sale in the newspaper of general circulation within the county. If there is no newspaper published or generally circulated in the county, the notice will be posted at the post office nearest the place where the seizure is made, to the extent authorized under law, and in not less than two other public places.

(2) Alternative methods . The IRS may use other methods of giving notice of sale and of advertising seized property, in addition to those referred to in paragraph (c)(1) of this section, if the IRS believes that the nature of the seized property to be sold is such that a wider or more specialized advertising coverage will enhance the possibility of obtaining a higher price for the seized property.

(3) Exception . * * * (d) * * * (1) Time and place of sale . The sale will be held at the time and place stated in the notice of sale. The time of sale will not be less than ten days nor more than 40 days from the time of giving public

notice under section 6335(b) of the Code and paragraph (c) of this section. The place of an in-person sale will be within the county in which the property is seized, except such sale may be held at a place outside that county if the IRS determines, by special order of a delegated official, that substantially higher bids may be obtained for the property by holding the sale in such other county. The place of an online sale will generally be the county in which the property is seized. If, based on the facts and circumstances, the IRS determines that the place of an online sale is not within the county in which the property is seized, the sale may be conducted online by special order when doing so would be more efficient or would likely result in more competitive bids.

(2) Adjournment of sale . When it appears that an adjournment of the sale will best serve the interest of the United States or that of the taxpayer, the IRS may adjourn the sale from time to time, but the date of the sale will not be later than one month after the date fixed in the original notice of sale.

(3) * * * (i) Minimum price . Before the sale of property seized by levy, the IRS will determine a minimum price, taking into account the expenses of levy and sale, for which the property must be sold. The IRS will either announce the minimum price before the sale begins or defer announcement of the minimum price until after the receipt of the highest bid, in which case, if the highest bid is greater than the minimum price, no announcement of the minimum price will be made.

(ii) Purchase by the United States . Before the sale of seized property, the IRS will determine whether the purchase of the property by the United States at the minimum price would be in the best interest of the United States. In determining whether the purchase of the property would be in the best interest of the United States, the IRS may consider all relevant facts and circumstances including, for example—

(A) Marketability of property; (B) Cost of maintaining the property; (C) Cost of repairing or restoring the property;

(D) Cost of transporting the property; (E) Cost of safeguarding the property;

(F) Cost of potential toxic waste cleanup; and

(G) Other factors pertinent to the type of property.

(4) * * * (iii) Release to owner . If the property is not declared to be sold under paragraph (d)(4)(i) or (ii) of this section, the property will be released to the owner of the property and the expense of the levy and sale will be added to the amount of tax for the collection of which the United States made the levy. Any property released under this paragraph (d)(4)(iii) will remain subject to any lien imposed by subchapter C of chapter 64 of subtitle F of the Code.

(5) * * * (i) Sale of indivisible property . If any property levied upon is not divisible, so as to enable the IRS by sale of a part thereof to raise the whole amount of the tax and expenses of levy and sale, the whole of such property will be sold. For application of surplus proceeds of sale, see section 6342(b) of the Code. (ii) Separately, in groups, or in the aggregate . The IRS, in selecting how seized property will be offered for sale, will consider which method is likely to produce the highest total sales price as well as which method is most feasible. The seized property may be offered for sale—

(A) As separate items, (B) As groups of items, (C) In the aggregate, or (D) Both as separate items (or in groups) and in the aggregate, in which case, the property will be sold under the method that produces the highest aggregate amount.

(iv) Terms of payment . The property will be offered for sale in accordance with whichever of the following terms is fixed by the IRS in the public notice of sale:

(A) Payment in full upon acceptance of the highest bid, or

(B) An initial payment upon acceptance of the highest bid if the payment is in the amount (either the dollar amount or the percentage of the purchase price) specified in the notice of sale and followed by payment of the balance (including all costs incurred for the protection or preservation of the property subsequent to the

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sale and prior to final payment) within a specified period, not to exceed one month from the date of the sale.

(6) Method of sale and sale procedures . The IRS will sell the property either at a public auction (at which open competitive bids will be received) or at a public sale under sealed bids.

(i) Invitation to bidders . Bids will be solicited through a public notice of sale.

(ii) Form for use by bidders . A bid must be submitted in the manner specified by the IRS in the notice of sale or in instructions referenced by that notice.

(iii) Remittance with bid . The notice of sale, or instructions referenced in the notice, will specify the initial payment amount, acceptable forms of the remittance (such as check, credit or debit card, electronic payment, or other means), and the address (physical or online) at which the bid and remittance must be submitted.

(iv) Time for receiving bids . A bid will not be considered unless it is received in the manner and before the time specified in the notice of sale, instructions referenced in the notice, or in the announcement of the adjournment of the sale.

(v) Consideration of bids . The public notice of sale will specify whether the property is to be sold separately, by groups, or in the aggregate, or by a combination of these methods, as provided in paragraph (d)(5)(ii) of this section. If the notice, or instructions referenced in the notice, specifies an alternative method, bidders may submit bids under one or more of the alternatives. In case of error in computing the total price of a group of property in any bid, the unit price of each piece of property will control. The IRS has the right to waive any technical defects in a bid. A technical defect in a bid is deemed waived if the IRS treats it as the winning bid. In the event two or more highest bids are equal in amount, the IRS will reopen the bidding until a high bid is submitted without any ties. After the opening, examination, and consideration of all bids, the IRS will announce the amount of the

highest bid or bids and the name of the successful bidder or bidders. Any remittance submitted in connection with an unsuccessful bid will be returned at the conclusion of the sale.

(vi) Withdrawal of bids . A bid may be withdrawn only in the manner specified in the notice of sale or in instructions referenced in the notice. A technical defect in a bid confers no right on the bidder for the withdrawal of the bid after it has been opened or accepted.

(7) Payment of bid price . All payments for property sold under this section must be made in the form and manner (whether by check, credit or debit card, electronic payment, or other means) specified by the IRS in the public notice of sale or in instructions referenced in the notice. If payment in full is required upon acceptance of the highest bid, the payment must be made at the time and in accordance with the terms specified in the notice of sale. If deferred payment is permitted, the initial payment must be made upon acceptance of the bid at the time and in accordance with the terms specified in the notice of sale, and the balance must be paid on or before the date fixed for payment thereof. Any remittance submitted with a successful bid will be applied toward the purchase price.

(9) Default in payment . If payment in full is required upon acceptance of the bid and is not paid when due, the IRS will proceed again to sell the property in the manner provided in section 6335(e) of the Code and this section. If the conditions of the sale permit part of the payment to be deferred, and if such part is not paid within the prescribed period, suit may be instituted against the purchaser for the purchase price or such part thereof as has not been paid, together with interest at the rate of six percent per annum from the date of the sale; or, in the discretion of the IRS, the sale may be declared null and void for failure to make full payment of the purchase price and the property may again be advertised and sold as provided

in subsections (b), (c), and (e) of section 6335 of the Code and this section. In the event of such readvertisement and sale, any new purchaser will receive such property or rights to property free and clear of any claim or right of the former defaulting purchaser, of any nature whatsoever, and the amount paid upon the bid price by such defaulting purchaser will be forfeited to the United States.

(11) Participation in sale by revenue officers . No revenue officer who seized the property to be sold at a sale conducted under section 6335 of the Code and this section may participate in the sale of that seized property. This restriction does not apply to sales of perishable goods conducted under section 6336 of the Code.

(e) * * * (1) In general . The owner of any property seized by levy may request that the IRS sell such property within 60 days after such request, or within any longer period specified by the owner. The IRS must comply with such a request unless it determines that compliance with the request is not in its best interests. If the IRS decides not to comply with the request, it must notify the owner of the determination within the 60-day period, or any longer period specified by the owner.

(3) Notification to owner . The IRS will respond in writing to a request for sale of seized property as soon as practicable after receipt of such request and in no event later than 60 days after receipt of the request, or, if later, the date specified by the owner for the sale.

(f) Applicability date . The rules of this section apply to sales of property seized on or after [DATE OF PUBLICATION OF FINAL RULE].

(Filed by the Office of the Federal Register October 13, 2023, 8:45 a.m., and published in the issue of the Federal Register for October 16, 2023, 88 FR 71323)

Douglas W. O’Donnell, Deputy Commissioner for Services and

Enforcement.

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