SECTION 3. REGULATIONS TO BE

ISSUED UNDER SECTION 897

.01 Overview

The Treasury Department and the IRS understand that the current rules described in §§1.897-5T(c)(4) and 1.897-6T(a), as modified by Notice 89-85 and Notice 2006-46, may serve as an impediment to publicly traded foreign corporations redomiciling into the United States. For example, a publicly traded foreign corporation that holds USRPIs may, for valid nontax business reasons, desire to become a publicly traded domestic corporation in a transaction that would otherwise qualify for nonrecognition treatment but that would result in the imposition of tax under section 897(d) or (e). Taxpayers may also face significant compliance burdens in seeking to comply with the application of section 897(d) to these transactions under the current rules because the transactions involve a publicly traded corporation (for example, the filing requirements in §1.897-5T(d)(1)(iii) may require any distributee of stock of a USRPHC to provide a signed declaration that the distributee

will treat any subsequent sale, exchange, or other disposition of the USRPHC stock as a disposition that is subject to U.S. taxation).

The Treasury Department and the IRS are of the view that the redomiciliation transactions described in section 3.02 of this notice do not give rise to policy concerns under section 897 because they do not create a risk of inappropriate avoidance of section 897. Accordingly, the Treasury Department and the IRS have determined that exceptions to the gain recognition rules described in §§1.897-5T(c) (4) and 1.897-6T(a), Notice 89-85, and Notice 2006-46, as set forth in sections 3.03 and 3.04 of this notice, are appropriate in certain limited circumstances.

.02 Scope

(1) Application to covered inbound F reorganizations . Subject to the exception described in section 3.02(3) of this notice, the rules described in sections 3.03 and 3.04 of this notice will apply with respect to transfers or distributions that occur in an F reorganization in which the transferor corporation is a publicly traded foreign corporation and the resulting corporation is a publicly traded domestic corporation ² (a “covered inbound F reorganization”).

(2) Publicly traded requirement . A foreign transferor corporation will be considered a publicly traded foreign corporation only if the principal class of stock of the foreign transferor corporation was regularly traded on an established securities market at all times during the three-year period immediately preceding the completion of the F reorganization. The domestic resulting corporation will be considered a publicly traded domestic corporation only if, at all times during the one-year period immediately following the completion of the F reorganization, the principal class of stock of the domestic resulting corporation is regularly traded on an established securities market.

The term “principal class of stock” will mean the common stock of the foreign transferor corporation or the domestic resulting corporation, as applicable, provided that the class of stock represents the majority of the aggregate vote and value of

2 For this purpose, a domestic corporation does not include a regulated investment company as defined in section 851 or a real estate investment trust as defined in section 856.

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the corporation. If no single class of common stock represents the majority of the aggregate vote and value of the corporation, the principal class of stock will mean those classes of stock that in the aggregate represent a majority of the aggregate vote and value of the corporation. In addition, the term “regularly traded” will have the same meaning provided in §1.897-9T(d) (1) (but without regard to the reporting requirement under §1.897-9T(d)(3)), and the term “established securities market” will have the same meaning provided in §1.897-1(m) (but excluding any over-thecounter market described in §1.897-1(m) (3)).

(3) Exception for subsequent transfers . A transaction that would otherwise qualify as a covered inbound F reorganization will not be a covered inbound F reorganization if, pursuant to a plan (or series of related transactions), the resulting domestic corporation transfers any property ³ (other than money) to any of its shareholders with respect to the shareholder’s stock in the resulting domestic corporation in connection with the F reorganization. For this purpose, a plan is deemed to exist if the resulting domestic corporation transfers any property (other than money) to any of its shareholders with respect to the shareholder’s stock in the resulting domestic corporation within the one-year period beginning on the date that the F reorganization is completed. However, a transaction would not fail to be a covered inbound F reorganization if the fair market value of the aggregate amount of property (other than money) transferred by the resulting domestic corporation to its shareholders (described in the preceding two sentences) is less than one percent of the total fair market value of the assets of the foreign transferor corporation, as determined at the time of the completion of the F reorganization.

.03 Rules under §1.897-5T(c)(4)

(1) Exception in Notice 89-85 and Notice 2006-46 . The proposed regulations will clarify that, in a covered inbound F reorganization, the exception described in Notice 89-85 and Notice 2006-46 to

gain recognition under §1.897-5T(c)(4) (i) takes into account section 897(c)(3) (including constructive ownership as provided in section 897(c)(6)(C)).

Thus, for example, assume a nonresident alien individual disposed of stock of the foreign transferor corporation engaging in a covered inbound F reorganization during the applicable period set forth in Notice 2006-46, but section 897(c)(3), if applied, would have treated the stock of the foreign transferor corporation as not a USRPI (if the foreign corporation were a domestic corporation on the date of the disposition). In this case, the disposition would not give rise to any amount owed by the transferor foreign corporation (assuming the conditions of §1.897-5T(c) (4)(ii)(A) and (C) are met).

The proposed regulations will also provide that, solely for purposes of covered inbound F reorganizations, section 897(c) (3) applies based on whether the foreign transferor corporation knows or has reason to know that a person at some time during the shorter of the periods described in section 897(c)(1)(A)(ii) held more than 5 percent of the class of stock. For purposes of the rule set forth in the preceding sentence, the foreign transferor corporation must make reasonable efforts to know, including researching publicly available information.

(2) Subject to U.S. taxation require- ment . The proposed regulations will provide that in a covered inbound F reorganization, a distributee of the resulting domestic corporation stock that qualifies for the exception in section 897(c)(3) at the time of the distribution is treated as meeting the requirement described in §1.897-5T(c)(4)(ii)(A) of being subject to U.S. taxation. Thus, for example, the subject to U.S. taxation requirement of §1.897-5T(c)(4)(ii)(A) would be met if the foreign transferor corporation in a covered inbound F reorganization distributes stock of the resulting domestic corporation to a distributee shareholder that, at the time of the distribution, is a nonresident alien individual who owned 5 percent or less of the stock of the resulting domestic corporation and, thus, the resulting domestic

corporation stock would not constitute a USRPI under section 897(c)(3).

(3) Filing requirements . The proposed regulations will provide that for purposes of satisfying the filing requirements described in §1.897-5T(c)(4)(ii) (C) for a covered inbound F reorganization, the declaration described in §1.897-5T(d)(1)(iii)(H) is required to be provided only with respect to distributees of resulting domestic corporation stock that the foreign transferor corporation knows or has reason to know (after making reasonable efforts to determine, including researching publicly available information) do not qualify for the exception under section 897(c)(3) at the time of the distribution.

.04 Rules under §1.897-6T(a)

The proposed regulations will revise the rules described in §1.897-6T(a) to provide that, for purposes of section 897(e)(1), nonrecognition treatment under section 361(a) will apply in a covered inbound F reorganization to a foreign transferor corporation’s transfer of a USRPI to a resulting domestic corporation in exchange for stock of the resulting domestic corporation that is not a USRPI. This exception will apply without regard to whether the foreign transferor corporation would be subject to U.S. taxation on its disposition of the stock of the resulting domestic corporation received in the exchange. However, the foreign transferor corporation remains subject to the condition set forth in §1.897-6T(a)(1) that it satisfy the filing requirements described in §1.8975T(d)(1)(iii) (but it is not required to provide the information described in §1.897-5T(d)(1)(iii)(C) and (H)) and, as part of those requirements, must include a statement that any USRPI transferred is pursuant to a covered inbound F reorganization as defined in section 3.02 of this notice and to which the rules in this section 3.04 apply. The foreign transferor corporation may avoid the filing requirements described in §1.8975T(d)(1)(iii) if it satisfies the conditions described in Notice 89-57.

3 For this purpose, property has the meaning provided in section 317(a). The exception described in this section 3.02(3) will apply without regard to the rule in §1.368-2(m)(3)(iii) that dis- tributions from a resulting corporation are treated as unrelated, separate transactions from an F reorganization even if they are connected in a formal sense.

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